Bonding with the Best

With 89 Smart Cities having initiated the credit rating process for municipal bonds, and instruments worth Rs.3,000 crore on the issue horizon, the fiscal future looks ideal for these prime urban spaces.

Last fall, Prime Minister Narendra Modi asked bureaucrats to do more to deepen India’s municipal bond market. This was perhaps the first time he publicly discussed the concept of municipal bonds. These comments were intentional, and a recognition that local debt markets will ease the Central government’s fiscal strain.

The Bengaluru Mahanagara Palike was the first urban local body (ULB) to have raised resources through private placement of municipal bonds in 1997 and Ahmadabad Municipal Corporation was the first to make a public offering in January 1998. It issued Rs 100 crore in bonds to partially finance Rs 439 crore worth of water supplies and a sewerage project.

Since then, other cities that have accessed the capital markets through municipal bonds without state government guarantee include Nashik, Nagpur, Ludhiana and Madurai. In most cases, the bond proceeds have been used to fund water and sewerage schemes or road projects. Till 2010, only 28 municipal bond issues have taken place in India, which have included both taxable and tax-free bonds and pooled financing issues. Most of these have been private placements rather than public offers.

A look at the trend in the value of municipal bond issues (Refer to ‘Successive Municipal Bonds by ULBs’ on page no 64) since 1997 suggests that the value of municipal bond issuances that were on a rise till 2005 has seen a sharp fall since then, and there have been very few issuances since 2007 and practically no issue after 2010. Since 1999-2000, for further growth of the municipal bond market, the Government of India allowed ULBs to issue tax-free municipal bonds. In view of this, the Central government amended the Income-Tax Act (1961) vide the Finance Act (2000), whereby interest income from bonds issued by local authorities was exempted from income tax.

The GOI issued guidelines for issue of tax-free municipal bonds in February 2001. Tax-free status provided a motivation to local governments to improve their fiscal management sufficient enough to meet the demands of the investment community.

Is the present perfect?
In July 2015, the Securities and Exchange Board of India (SEBI) came out with guidelines allowing municipalities to go in for private placement as well as public issues. Both ministries – Urban Development and Finance – along with SEBI are working towards creating a framework to ensure an active municipal bond market in India. With strong municipal corporations like Pune and Ahmedabad, these initiatives would gain momentum to develop the much-awaited municipal bond market which is critical for financing of urban infrastructure.

Therefore, moving away from archaic ways of urban governance, cities are now vying for credit ratings for mobilisation of resources through municipal bonds, reflecting on their keenness to think and act differently. Eight cities viz., Ahmedabad, Bhopal, Indore, Jaipur, Kakinada, Pune, Rajkot and Visakhapatnam, have already appointed Transactional Advisors for issuing municipal bonds.

To begin with, in the current financial year, municipal corporations such as Pune, Vishakhapatnam and Ahmedabad will raise Rs 3,200 crore to fund their Smart City projects. All three municipal corporations have confirmed this development to INFRASTRUCTURE TODAY.

Kunal Kumar, Commissioner, Pune Municipal Corporation (PMC) says that the corporation will raise Rs 2,200 crore municipal bonds which will hit the market in the month of March. For this, PMC has received a long-term credit rating of AA and plans to utilise the funds for the 24×7 clean potable water supply project for the city. This will be the country’s largest municipal bond issue till date, and it will be issued in four tranches depending on the municipal corporation’s requirement. For this, PMC has appointed SBI Capital as the merchant banker.

Ahmedabad Municipal Corporation (AMC) will raise Rs 200 crore municipal bonds to fund its Smart City project. Ramya Bhatt, Assistant Municipal Commissioner, says that the funds would be utilised for water supply, sewage treatment, wastewater and city upgradation projects that fall under the Smart City plans submitted to the government. AMC has received a long-term credit rating of AA-.

Similarly, Visakhapatnam will raise Rs 200 crore and according to M Hari Narayanan, Commissioner, Greater Visakhapatnam Municipal Corporation, the civic body is yet to identify the projects.

The Ministry of Urban Development (MoUD) is keen that besides Pune and Ahmedabad, other rated municipal corporations should also prepare for bond offerings and tap the bond market to sustain development. Of the 97 Smart Cities, 89 have initiated the credit rating process of which 70 have completed it, and 26 have already been given credit ratings. A total of 44 cities including 25 Atal Mission for Rejuvenation and Urban Transformation (AMRUT) cities have so far got credit ratings.

In all, there are only a handful of double-A rated municipalities at the moment. Due to the push from the Smart City and AMRUT) programmes, there is an increasing trend of urban local bodies (ULB) getting themselves rated. (See ‘Credit Ratings of Smart Cities and AMRUT Cities’ on page no 62 & 65)

The push came in 2015 after the government said it would spend Rs 48,000 crore towards the Smart Cities and AMRUT programmes. In order to be able to qualify for their respective portion of these funds, ULBs would have to raise an equivalent amount to finance their city development plans.

Make corporations stronger
It is a well-known fact that municipal corporations in India have limited sources of income or fund generation. The present fund structure of ULBs suggests that a major chunk of their revenue is from property tax.

But considering the growing need for better infrastructure, water & sewage management, waste management, smart transportation, etc., funds accumulated from just one source tightens the financial capabilities of these civic bodies.

The committee on urban infrastructure headed by Isher Judge Ahluwalia had estimated in its 2011 report that Indian cities would collectively need to invest around Rs 40 trillion at constant prices in the two decades to 2031. Some 600 million Indians will be living in cities by then. The inability of cities to meet their growing needs will not only throw the economy off the rails, but also create social tensions.

Indian cities, rather, the municipal corporations, do not have the financial capability to build this infrastructure. That is because city revenue is less than 1 per cent of gross domestic product. And the share of own revenue in city budgets has been declining consistently. The net result is that cities do not have adequate financial autonomy – a flaw that can be traced back to the landmark 74th Constitutional amendment that empowered local governments. Cities depend heavily on money passed to them from either the national or the state governments.

– RAHUL KAMAT