Why India needs a robust municipal bonds market

Why India needs a robust municipal bonds market

As cities across the country battle the pandemic, the discussion has moved to streams of finance. World over the Municipal bonds markets are doing well with insurers securing returns and principal amounts for the investor. Muni bonds in India are still few and far between. The biggest chall...

As cities across the country battle the pandemic, the discussion has moved to streams of finance. World over the Municipal bonds markets are doing well with insurers securing returns and principal amounts for the investor. Muni bonds in India are still few and far between. The biggest challenge is to make the underlying projects financially viable, says E Jayashree Kurup During the COVID-19 period, Ghaziabad Municipal Corporation issued its first green bond in India on April 08, 2021 to raise ₹150 crore with a coupon rate of 8.10 per cent for a tertiary water treatment plant to benefit industries in Ghaziabad. The important thing is that the GMC created a project, assessed the investment required and closed the loop with paying users at the end of the cycle, contributing to long-term viability of the project. By now issuing green bonds, the Municipal Corporation could actually stand guarantee to investors that their investment was safe and would yield the promised returns. The Securities and Exchange Boards of India (SEBI) first circulated detailed guidelines in 2015 for urban local bodies (ULBs) to issue municipal bonds to raise money for city management. There are stringent conditions for the municipalities before they are eligible to raise bonds. They must not have a negative net worth They must not have defaulted on debt interest or principal repayments They must not be in the wilful defaulters list published by the Reserve Bank of India Issuance of bonds evolved as a good means of raising funds. In the RBI State Finance 2021 document ‘Coping with the Pandemic: A third-tier Dimension’, “In the pre-COVID period, municipal corporations had issued municipal bonds at different points of time to finance their infrastructure. Bangalore was the first corporation to issue municipal bonds. Five other municipal corporations in India issued bonds to finance COVID-related expenditure. “For instance, Ahmedabad Municipal Corporation issued a ‘muni bond’ worth ₹200 crore in 2019 (maturity of 5-years and 8.7 per cent coupon), to fund urban infrastructure development. Centre driven schemes like AMRUT were used to incentivise bond issuances by ULBs, resulting in fresh issuances of around ₹1,800 crore worth of municipal bonds by nine municipal corporations.” While the civic bodies needed the money to manage the crisis, many retail and bulk investors were looking for avenues to invest their resources. Globally, these bonds are sought after as the yields and principal is insured. Insuring municipal bonds is big business in countries like the US and Germany and the instrument is much sought after. In India, however, these bonds and their returns are not secured or insured. In fact, to make municipal projects commercially viable enough to raise public money, there have to be viable user charges. “There are a whole lot of risks in this,” says RV Verma, former CMD of the National Housing Bank. However, he says Surat, Ahmedabad, Baroda and Maharashtra did a good job of managing the municipal bonds. Currently, municipal finances are heavily dependent on State and Central grants and allocations. As a result, the city’s capacity to raise and manage resources has never really evolved. This time under the Atmanirbhar packages, the cities were allowed to borrow from the market to meet their shortfalls, if they executed some reforms. This ranged from linking Aadhar to Public Distribution Systems to power and civic infrastructure reforms. Verma feels this is a good time to push municipal bonds. However, there is a whole chain that needs to evolve. Bonds need to be rated by rating agencies. The concept of service related returns has to evolve. With all these measures, India has managed to cope with the pandemic burden. However, with such a huge burden of borrowing and not enough demonstrated expertise by states and cities to manage borrowed finances, India needs to consider medium term risks and strategies to cope with reducing this debt. Success of innovative means of financing such as raising municipal bonds lies in being able to make them high-yielding assets and therefore attract deposits. For this the quality of the long-term municipal assets they are invested in and the efficient operation and maintenance in the short and medium term becomes critical. Private and non-governmental participation in pandemic management also helped ease the financial burden on municipal corporations. About “22 per cent of surveyed corporations said they availed help from these institutions in different forms such as quarantining, treatment, ambulances, sanitisation, oxygen concentrators, food and shelter. Other sources of funding were District Mineral Funds, SDRF, contributions from the public, municipal staff and other donations, and additional revenue generated through better tax compliance by providing incentives to taxpayers. Cities too had to tighten their belts. Among the 141 municipal corporations surveyed by the RBI, 18 per cent reported expenditure cuts relating to nonessential areas. Guidelines were issued to head of departments to restrict expenditure to a certain proportion of budgeted allocations till a specific month. They were directed to incur only essential spending like establishment expenses, spending for COVID prevention, electric charges, payment of property tax, water tax, and urgent repair and maintenance works. Discretionary spending like expenditure on renovation and decoration of office premises, purchase and hiring of additional vehicles except for health, sanitation work, or carrying emergency staff and withdrawal from the general provident fund (GPF) except for urgent treatment, education, and marriage-related expenditure were restricted. Even with all this, unlike globally, it will be a long time before investors queue up to invest in Muni bonds in India. Assessment of the underlying project and its viability as well as the capacity to manage funds is critical. Rating agencies need to get their act together to fund the municipality and the project that the resources are being raised for. Insurers need to de-risk it for consumers and retail investors need to be educated about the viability and returns that Muni bonds generate. While it sounds daunting, more difficult is the situation where municipalities struggle to pay back their borrowings and are unable to raise resources to fix civic problems. With Maharashtra having declared a third wave of the pandemic in Mumbai, it is important that the 74th Amendment to the Constitution that stressed on better management and capacity at the level of the third tier of government, the cities, becomes a reality sooner than later. E Jayashree Kurup is Director Wordmeister Editorial Services, Real Estate & Cities. She is also Advisor Communications at the National Institute of Urban Affairs.Image Source: Google Images

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