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The Subnational DeMPA is a methodology for assessing subnational debt management performance at the level of local government through a comprehensive set of indicators spanning the full range of subnational debt management functions. The SN DeMPA methodology was revised and aligned to the updates of the sovereign DeMPA during 2015. The objective of the 2016 update of Subnational DeMPA methodology is to revise the evaluation criteria in line with the changing practices for subnational government debt management and requirements of the client countries, as well as to take into account revised criteria of the sovereign DeMPA methodology which took place in 2015. The revised methodology combines the original SN DeMPA Tool and Guide into one unified methodological framework. Substantial revisions and additions are made in order to address the issues that arose during the earlier assessments. A revised Subnational DeMPA tool (2016) comprises of five core areas, 13 DPIs and 31 dimensions, which are applied to evaluate the capacity of the subnational borrower to manage the debt portfolio. This methodology is applied starting September 2016. For any additional information or questions, please contact: Lilia Razlog, Senior Debt Specialist, E-mail: lrazlog@worldbank.org

Decentralization of responsibility for finance and growing infrastructure needs are two trends that are expected to stimulate a growth in government borrowing at the sub-national level. Statistics for the first half of 2000 show a significant increase in sub-national debt volume, with global public finance, excluding Canada and the United States, more than doubling that of the first half of 1999.

In the aftermath of the global financial crisis, policymakers around the world are focusing once again on government debt sustainability. In China, subnational government debt is an important part of total government debt, and therefore deserves the attention that policymakers have paid to the topic. Subnational debt has played an important role in financing China's impressive infrastructure that is the envy of the world. And subnational debt was instrumental in the economic stimulus that China so effectively staged after the global financial crisis, through which China maintained high levels of economic activity. This e-book starts with a summary and presentation of the Chinese perspective on this subject of subnational debt in session one. Session two introduced some international cases which are highly relevant to the current situation in China. Session three brought these international case studies and experts' perspectives together to arrive at syntheses that narrowed down key issues which China needs to consider going forward in subnational debt management and restructuring. The roundtable discussion among international and Chinese experts on the way forward for China in session four provided an illuminating discussion of this issue. The author hope that this will inform specific policies that will be formulated to help local governments in China manage their subnational debts.

Research and practice with derivative instruments by States and Municipalities in Mexico are virtually unexplored. This paper investigates the effect of interest rate jumps and financial contagion on the risk exposure of Subnational Government debt swaps in Mexico. Unconditional risk exposure measures of debt swaps are obtained by simulating a set of stochastic processes with jumps. Simulation results confirm that risk exposure of local debt swaps increases with Poisson discontinuities while a significant effect is observed after crisis contagion is accounted for.

Local government units (LGUs) in the Philippines are authorized to borrow or incur debts to finance development, but with certain limitations provided by the Local Government Code of 1991. The main controlling statutory requirement is for provinces, cities, municipalities, and villages not to exceed 20% of their annual regular income going into debt servicing. The range of purposes for which local governments are allowed to borrow are tied up with their expenditure responsibilities, and this varies according to the type and level of LGU, and their capacity to access financing. These commonly include capital investment projects, socioeconomic enterprises, and self-liquidating and income-generating projects. This paper describes the experiences of the Philippines after close to three decades of fiscal decentralization in the country, presents trends and patterns of local debt management practices, highlights the roles of national government agencies and regulatory policies, and proposes emerging ideas and recommendations on how to improve debt management as an important pillar in local finance and decentralization.

Globally, as national governments continue to decentralize fiscal and governmental responsibility, the sound facilitation of subnational debt markets will play a critical role in the construction of infrastructure. However, sparse scholarship exploring the optimal legal and financial frameworks for encouraging the construction of infrastructure at the subnational level has left a number of open questions. This Note primarily provides a basic overview of subnational debt trends and policies. It first reviews subnational debt regimes, comparing market-oriented regimes with regimes with varying levels of involvement by central governments. Though not always possible, the Note concludes that market-driven incentives generally produce the best subnational debt regimes. Though it has faced some struggles historically, as the largest and most liquid subnational debt market in the world, the United States' municipal bond framework can provide a useful model. The Note then presents a market-oriented proposal for U.S. policy makers. By extending tax-exempt status to the public debt instruments of select subnational entities abroad, the United States could provide a promising investment opportunity for U.S. financial institutions and citizens, facilitate the construction of infrastructure in some of the most desperate areas of the world, and encourage sound international municipal finance practices through the extension of a largely self-regulated system. This market-enabling tax exemption could prove to be far more effective than any sort of direct spending. Finally, the Note argues that a fluid and competitive subnational debt market in developing countries is in the best interest of both investors and humanitarians alike.

SummaryThis paper examines the important challenge to effective public financial management (PFM) of fiscal risk. In the case of China, a middle‐income country with space to borrow, a major source of risk to the central government is exposure from subnational government debts. In order to control this exposure and manage it properly, it is important that the level of debt be included in consolidated balance sheets and that liabilities be recognized. This is important not only for narrow maintenance of financial position (or PFM discipline) purposes but also to increase national welfare. Managing fiscal risks from this broader perspective suggests that governments may want to absorb particular risks for purposes such as: unemployment, old age, and poverty spending. Governments often need to cost‐effectively bear some of these risks in order lower social costs and maximize national well‐being. But to do this properly, the government must know first the stock and flow of its total debt. To date, subnational debts in China have not been properly quantified, and available donor tools such as the Public Expenditure and Financial Accountability (PEFA) framework are weak. Copyright © 2015 John Wiley & Sons, Ltd.