The CW team recently met Ashish Sable, Senior Vice President & Group Head, Debt Capital Markets, SBI Capital Markets, at the Smart Urbanation Summit held in Hyderabad, organised by Smart Cities Council India. In an exclusive conversation with SHRIYAL SETHUMADHAVAN and RAHUL KAMAT, Sable talks about the fund-raising scenario in smart cities and how ULBs can strengthen their position. Excerpts:
How are the selected smart cities likely to mitigate funding issues? What are the various sources that these smart cities can explore?
There are many sources to fund projects envisaged by selected smart cities. One of the important means is grants by governments: Central and state. In fact, the smart cities can structure themselves to monetise some of the assets under their possession and identify revenue-generating projects. However, an area of interest that is gaining traction these days is municipal bonds, which are issued by urban local bodies (ULBs).
For funding, these smart cities must look beyond Central and state grants and opt for market borrowings. That said, it is a slow process and a number of regulations are stipulated by the Security Exchange Board of India (SEBI) and others. To streamline the initial process, SEBI has created a new set of guidelines other than that of disclosure. We have already tasted the success of these guidelines when we partnered with Pune Municipal Corporation and Greater Hyderabad Municipal Corporation for raising municipal bonds.
Will fund-raising make ULBs more accountable and transparent?
The process of raising funds through municipal bonds will make ULBs accountable for being transparent. This is because with bonds being listed, investors in the capital market are looking for transparency. This will compel the ULBs to meet the investors' requirement in terms of disclosure, discipline, etc. This financial instrument will also push ULBs for audited finance on a regular basis.
I think the success of both Pune and Hyderabad will be repeated not only by the other ULBs, but by themselves in the coming future.
Over the years, how can change in rating parameters help ULBs strengthen their position?
Earlier, most state-level borrowings were through a guaranteed structure. The bonds were guaranteed by the state government. Over time, when rating agencies started rating the state, it came to notice that the ratings were below AA. This was a big setback for ULBs, because if a state is rated below AA, on what basis would the ULB match AA+ or a minimum of AA?
Now the rating parameters have changed and are based on the cash flow of the state or ULBs. As many of the ULBs have a fixed cash flow from sources, including property tax, water tax, etc, their complete reliance on state or Central grants or funding is averted. A case in point is Pune. Almost 90 per cent of the funds are from its own sources. Importantly, Pune has the ability to collect taxes from citizens and can generate revenues on its own. Commercial entities do not have this kind of fixed source of income, as they are prone to the business cycle.
By receiving ratings of AA+ and AA respectively, Pune and Hyderabad show that they are creditworthy today.