Krzysztof S. Cichocki, Ph.D.[1], Michal Bitner, Ph.D.[2]
Abstract
JEL: D61, E62, G10;
The objective of the paper is to analyze and assess level of efficiency of debt management by local governments. We present a model for debt management efficiency and case study statistical analysis based on data from local governments in Poland. The model is a novelty in municipal debt literature.
We develop standards for measuring debt management efficiency in three areas: long – term financial planning, organizational and institutional procedures technical tools and methods of debt management enhancement.
The standards include development of long – term financial plans, debt strategy, possessing department for debt management, transparency for bond and bank loan pricing, efficient timing of debt issue, elimination of negative arbitrage risk, selection of debt with the lowest possible true cost.
A system of assigning a number of points to each standard is developed. The system was consulted with International Fitch Rating Agency and banks in Poland.
We have examined financial reports of 92 local governments (Lg) in Poland over 2004-2006 and questionnaires from these Lg. Local governments were selected which simultaneously financed infrastructure projects from European money and from debt (credit exceeding 2 million PLN, or municipal bond).
Five types of local government were analysed: large cities (lc), small cities (sc), rural Lg (rg), districts (d) and regions (r). 
The best results were observed for standards in the area of long–term financial planning. Average score for all Lg was 63,8% of the maximum score to be achieved in this category. The best performers were lc (average – 73%). Regions, rural Lg, and sc scored below average - 53% of maximum score. In the area of organizational and institutional procedures an average score equalled 42% of the maximum score. The best performers were lc, the poorest - rural Lg. The sc and districts also scored poorly, about 30% of the maximum. In the area of technical tools and methods, the score is low for all Lg, about 30% of the maximum. The best performers are regions, the poorest - districts (below 25% of the maximum score). Some standards in the area of technical tools are not observed at all. For example, to reduce debt issue risk, derivatives were implemented only by one lc.
Malfunctions are identified in the existing system in Poland and recommendations are formulated to facilitate improvement of debt and financial management. Recommendations are addressed separately to central government and to local governments.
We discuss changes in law, and development of institutions and procedures connected with the municipal capital market in Poland.
Implementation of these recommendations will help increase access of Lg to municipal capital market and improve debt management efficiency in all three areas. They do not require major costs.
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