Need smooth process to fund municipal bonds: Experts

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In March 2022, the Vadodara Municipal Corporation’s municipal bond to raise 100 crore for a water supply project was oversubscribed more than 10 times, attracting over 1,000 crore. This was despite the economic slowdown due to the Covid-19 pandemic and geopolitical tensions because of the Russia-Ukraine war. The municipal bond attracted a low coupon rate — the annual income an investor can expect to receive while holding a particular bond — of 7.15%, which is the lowest in India since 2016.

In March 2022, the Vadodara Municipal Corporation’s municipal bond to raise <span class=
In March 2022, the Vadodara Municipal Corporation’s municipal bond to raise 100 crore for a water supply project was oversubscribed more than 10 times, attracting over 1,000 crore. (HT PHOTO)

Thereafter, in February this year, the Indore Municipal Corporation became India’s first civic body to launch a public issue of municipal bonds, with the corporation aiming to raise 244 crore for a solar power project. The green bond was oversubscribed nearly six times, raising 721 crore.

While presenting the 2023-24 Budget, finance minister Nirmala Sitharaman had said that the Centre will incentivise cities to improve their finances and make them ready for municipal bonds. “Through property tax governance reforms and ring-fencing user charges on urban infrastructure, cities will be incentivised to improve their creditworthiness for municipal bonds,” she said in her Budget speech.

The Reserve Bank of India, in its report on municipal finance released in November 2022, said, “As the demand for infrastructure grows among Indian cities, municipal corporations must further explore ways to reinvigorate and foster alternative and sustainable resource mobilisation through municipal bonds.”

Civic bodies are largely dependent on grants from the Centre and state governments. According to Nilachala Acharya, from Delhi-based Centre for Budget and Governance Accountability, close to 90% of corporations, especially smaller ones with annual budgets of less than 3,000-4,000 crore, are heavily dependent on grants from the state and the Centre.

To meet the growing expenditure on a wide range of public services such as education, healthcare and public transportation, many corporations are looking to borrow money from the government or look for options to raise money from the market. For example, the corporations of Surat and Pimpri Chinchwad are working on proposals to issue municipal bonds this year.

“A lot of Central or state grants are conditional, as the fund can be used only for a specified purpose or under certain conditions. This is not very helpful… Municipal bonds must be treated as one of the other few avenues for municipal corporations to raise debt. We need to raise awareness of possibilities with municipal bonds among civic bodies, as it is not very high. The idea is to use this money to invest in better infrastructure and services. The conversation on municipal bonds should be broad-based to include various kinds of municipal borrowings,” said Srikanth Viswanathan, chief executive officer, of Janaagraha, a Bengaluru-based think-tank that has worked extensively on the financial health of municipalities.

Viswanathan said, “Municipal bonds must be treated as one among other few avenues for municipal corporations to raise debt. They could raise debt through term loans, they can avail of normal term loans from banks. They can avail of cash credit or overdraft facilities etc. They can enter finance lease agreements. They can do many things to raise debt on the strength of their balance sheet.”

However, experts say the lack of transparency in the functioning of civic bodies is one of the biggest hurdles in the way. “Municipal bonds are a good option for corporations for raising funds from the market. But transparency and trustworthiness are essential for civic bodies to raise money from the market through bonds. The big corporations still can manage, but it is difficult for municipalities and small corporations. Corporations should work towards becoming more transparent and accountable and reduce the dependency on the state and Centre for funds,” Acharya said.

According to the ministry of housing and urban affairs, 11 urban local bodies have raised 3,940 crore through municipal bonds since 2015. Under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), 227 crore has been released as an incentive to these urban local bodies for bond issuance.

For example, last year, the Ghaziabad Municipal Corporation raised 150 crore to set up a sewage treatment plant to provide treated water to industries in the Sahibabad industrial area after the National Green Tribunal imposed a ban on the use of groundwater for industrial use.

To raise the debt through bonds, the corporation took some serious measures to strengthen its balance sheets.

Anurag Arun, the municipal bonds consultant with the Ghaziabad Municipal Corporation, said, “Improving the balance sheet is the most important thing for a corporation when it comes to raising debt from the market. In the case of Ghaziabad Municipal Corporation, we scrutinised the balance sheet in detail and plugged the gaps. We also hired an agency to do the revaluation of the assets. This greatly improved the corporation’s net worth.”

He added, “To get the desired credit rating of ‘AA’, we had to ensure that revenue from property tax will be first used to pay the municipal bond liability and then used for any other civic purpose.”

The Vadodara Municipal Corporation, which was not in a very good financial position in 2019, is a case in point. The corporation took some crucial measures to strengthen its balance sheet and in two years, it streamlined the system, ensured greater transparency in its functioning, took measures to increase its revenue by restricting property tax and increasing service charges, and better management of its land bank.

“Vadodara Municipal Corporation was not in good condition, but we worked towards improving the functioning and strengthening our balance sheet to get a high credit rating of AA+, which is given to very few corporations in the country. There were a lot of administrative and other challenges, but we overcame all the hurdles. We implemented the project within two months after the issuance of the municipal bonds. This helps in building credibility and trust among investors for future projects,” said Shalini Agarwal, a former Vadodara municipal commissioner under whose watch the civic body improved its credit rating.

Agarwal, currently the commissioner of the Surat Municipal Corporation, has written a book titled ‘All About Municipal Bonds’, detailing her experience.

The Pimpri Chinchwad Municipal Corporation (PCMC) in Maharashtra hopes to raise 200 crore through municipal bonds for its riverfront development along the Mula river. PCMC municipal commissioner Shekhar Singh said, “We have recently got an AA+ rating. We will come out with the municipal bond soon. As part of the riverfront project, we plan to clean the river by setting up STP and ensuring that untreated water is not released into it. We will also take up flood protection measures, creation of green spaces and walkways etc on our side of the riverfront.”

Experts said that corporations need good credit ratings for municipal bonds. For this, they need to identify the right credit rating agency, and undertake an audit of its audited accounts, among other steps. While larger municipal corporations are able to do it, most of the municipalities in India don’t have these capacities.

“The Centre or the state governments will have to provide targeted capacity-building support to cities to prepare them to participate in the municipal borrowing market. The government should put in place technical support units which can work with the cities in preparing high-quality accounts, audit the accounts, identify a good credit rating agency and assist cities in getting good credit ratings,” said Viswanathan.

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