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The Warsaw Voice » Business » June 29, 2015
Business & Economy
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New Forms of Supporting Municipal Companies and Hospitals
June 29, 2015   
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A recent amendment to the law on public finances has significantly limited the range of borrowing opportunities for local government authorities in Poland. The new regulations introduced a special “debt service ratio” that local government authorities must comply with. Exceeding a specific level of debt—calculated using special methodology defined in the new regulations—results in sanctions for a given local government authority. Many are having trouble keeping the ratio at the desired level.

Local government authorities exceeding a specific debt level cannot incur any new liabilities, and they cannot guarantee loans granted to companies they own—for example, municipal companies or hospitals operating in the form of companies.

Such guarantees were common practice until recently. This is because municipal companies most often provide services to the public—such as public transportation, heat supply, municipal housing, water supply, sewage collection, and healthcare—but their operations often generate losses. Despite this, banks were eager to grant funding to such companies, against collateral in the form of guarantees from local government authorities. However, such guarantees are ceasing to be popular under the new regulations, leading to decreased interest among banks in providing financing to municipal companies.

However, the market is not standing still. An alternative has appeared in the form of so-called support agreements. These are used as a new form of collateral for loans as well as security for bonds issued by local government-owned companies. In the support agreement, the owner undertakes to inject extra funds into a company having difficulty servicing its liabilities (including bond redemption).

It seems that this new form of guarantee is the happy medium in the current situation in which many local government authorities tend to transfer debt burdens onto companies they own. Some banks specialized in providing services to local government authorities treat support agreements as a full-fledged alternative to traditional guarantees and rank them highly among other forms of collateral. Local government authorities, in turn, treat this form of injecting extra funds into municipal companies as an expense that does not add to their overall debt level and consequently does not affect the service ratio defined in Article 243 of the law on public finances.

Maciej Soroko, an expert at DNB Bank Polska’s Public Sector Office
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