Massive investments are needed for improving the infrastructure facilities at the level of urban local bodies (ULBs); and the funds may have to come from the capital markets, public savings and foreign sources. But, a key hurdle is in the form of restrictions placed by many Municipal Acts on the ULBs to borrow funds and access debt capital, says M. Ramachandran in ‘ Urban Renewal: Policy and response ,’ edited by Sameer Kochhar (www.academicfoundation.com).
The conditions set by state governments cover security to be provided, rate of interest, repayment of principal and interest, and time schedule for loan repayment, he adds. It may be time, the author argues, for the concerned authorities to revisit and ease these conditions in order to enable ULBs to access debt capital while at the same time ensuring sufficient fiscal discipline.
“Today, various avenues of institutional finance are available to ULBs, including regular banking channels and other financial institutions, infrastructure funds, international development and donor agencies, and in certain cases, from highly specialised markets through instruments such as municipal bonds.”
Mentioning how the concept of municipal bonds as an instrument for raising resources for urban infrastructure projects has had a successful history in the US and Canada, Ramachandran observes that while the bond market in India has grown significantly in recent years, in terms of issuers and investors, instruments, trading volume and market awareness, there have been some drawbacks as it did not use trading as an exchange and featured a bilateral negotiation between dealers.
“Currently, the municipal bond market in India has only 13 issues (from 9 municipalities) amounting to approximately Rs 733 crore. This represents just 0.1 per cent of the Indian bond market (non-SLR) as compared to 10 per cent in the US.”
The author, therefore, urges the SEBI (Securities and Exchange Board of India) to take a lead in developing India’s municipal bond market for enabling the financing of projects of urban and local bodies. “Until now, the tenure of municipal bonds has been confined to a maximum of seven years. Attempts at floating municipal bonds with longer tenure have been perceived as too risky and thus unviable for receiving acceptable pricing.”
Exhorting ULBs to look beyond their current sources of revenue and explore new, innovative and buoyant sources of finance within the overall purview of the revenue assignments made to them, he mentions the example of ‘impact fee,’ the one-time charges levied by local governments to pay for public infrastructure required by new developments. “They are imposed as a condition for approval to proceed with development and are used for financing infrastructure such as water supply and sewerage networks, roads and social infrastructure.”
Since the long-term debt financing needs of ULBs will demand tenures of at least 15 years, competitive interest rates and a moratorium which covers the construction period, banks and financial institutions should develop innovative products, Ramachandran reasons.
“International finance institutions should be encouraged to participate in the investment process at the municipal level without recourse to sovereign guarantees. Such participation can be in the form of risk sharing facilities, partial credit guarantees, senior as well as subordinated loans and hybrid instruments such as convertibles.”
Important read.
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