Many people might ask themselves what are government bonds that could create or have created controversy as development mechanisms in some states, such as Nuevo Leon, where the subway expansion project will be carried out by using this financing mechanism. Nowadays, their use in Mexico after the amendments to the Stock Exchange Law only two years ago is, and will be, more and more frequent as an element and development means.

But the question is: What are these government bonds? They are debt instruments backed by a given government´s future income and used to finance investment projects. The essential priority upon establishing this kind of strategy is to predict or calculate the capital flow into government´s treasury and channel said capital flow to feasible and useful projects that are a real priority among the government´s plans.

Government bonds is a financial strategy that offer profitability (given levels) and attractive safety to investors, allowing self-financing to governments - whether federal, state or local. In Mexico there is a ruling framework that allows acquiring this kind of debt in the Mexican Stock Exchange; debt that must be rated by financial and/or rating institutions such as Standard & Poors, Fitch, J.P. Morgan among others. State governments and municipalities have a limitation, namely they can only issue debt or government bonds in the Mexican Stock Exchange and not abroad, due to an express limitation stated in Mexican Constitution, even if some guarantees could be located abroad.

The stage that is considered the most complicated one is precisely the first issue of this kind of bonds, because rating institutions perform exhaustive analyses including audits, human development, infrastructure, among many other determining factors that output in a rating of the kind of debt issued by the state or municipality and therefore imply a limitation to the amount of the debt to be issued. This is a common practice in developed countries, mainly the USA, where there has even been chaos, as happened in Orange County in the State of California that was unfortunately forced to file for bankruptcy. As any investment in the world, there are risks; however, on the other hand, municipalities and states enjoy more self-sufficiency and are less dependent on federal or, whenever applicable, state funds.

The procedure to issue bonds must have not only the approval of State Congress, but also of institutions and experts specialized in the issue, who will also have the corresponding public information that must obviously be available to rating institutions and later to potential investors.

There are nowadays states and municipalities that already have a debt rating and very interesting projects, such as the State of Nuevo Leon, where bonds will be issued to expand the subway in Monterrey metropolitan area. The fact that this development mechanism is so rare may lead to think that states in Mexico are not ready to handle this kind of financing, in virtue of the problems that ail every developing country´s government (corruption, lack of professionalism, transparency, etc.). However it is to be mentioned that due to the development and infrastructure in North of Mexico States, unlike many other not only in Mexico but in all of Latin America, I am convinced that bonds issuance is feasible as a mechanism to carry out the subway expansion project, in this case in the State of Nuevo Leon.

I think both state and municipal governments, as well as community in general, must be aware of the importance to develop new financing sources that allow for profitable projects.

State and local authorities should not rely only in federal transferences participations or in increasing taxes to sustain their investment projects.


On the other hand, I think that even if there were some kind of internal savings to avoid this kind of development mechanisms, said savings could be in risk of being consumed by current expenses that increases day after day due to current needs in the entities that could lead to failing to complete a given project.

In conclusion, I think the importance of government bonds must be measured not only as financing means, but also as the opportunity it represents for the autonomous management of income, whether state or municipal, and that represent an income redistribution that fosters a more efficient use of resources available in the capitals market, not to mention the political autonomy granted to governors.