New Delhi: To resolve a cash crunch at urban local bodies (ULBs) for development of infrastructure in the cities, the ministry of housing and urban affairs is working on a plan to provide an ecosystem in which they can raise money through municipal bonds.
The contours of the scheme, under which ULBs will be able to raise money through 10-year municipal bonds backed by land holdings and infrastructure projects, are being worked out, urban development minister Hardeep Singh Puri said in an interview.
“Land is a state subject and no state wants centre to come in and design their cities. So, we are working on an ecosystem based on a number of features, which will result in local bodies or municipal corporations raising money through bonds," said Puri.
The minister cited Delhi’s Khan Market, which is the world’s 20th most expensive market, as an example. Shopkeepers in the area pooled money and concealed open drains, built a nice pavement, and erected nice backgrounds to hide electric power lines. The area turned into a prime location. Municipal corporation can follow the example with the real estate they hold.
“You can either make it a slum or the most happening place of the city," the minister said.
The government’s move to develop civic infrastructure across the country through the Atal Mission for Rejuvenation and Urban Transformation (AMRUT 1) and the Smart Cities Mission requires significant capital spending by ULBs. These will have to be funded by market borrowings in addition to government grants.
There has been no issuance of municipal bonds between fiscal years 2011 and 2017. Before that, too, in the past 20 years, only Rs1,550 crore had been raised by the municipal bodies through municipal bond sales. Globally, the US has the largest municipal bond market with $3.8 trillion in outstanding issuances (or 10% of its overall debt capital market), and a broad investor base.
Rating agency Crisil, in a report in November, said that municipal bonds worth Rs6,000 crore are expected to be issued over the next three fiscal years.
ULBs will have to borrow around Rs15,000 crore to fund projects under AMRUT and the Smart Cities Mission through fiscal 2023. Given the large requirement, the government and the Securities and Exchange Board of India (Sebi) have been working to improve the access of ULBs to the capital markets. In June 2017, Sebi notified guidelines on disclosure of financial information by ULBs at regular intervals to improve the prospects for municipal bond issuances. On its part, the government has also announced an interest subsidy scheme to make issuances competitive.
Several ULBs have initiated bond issuance process by appointing transaction advisers. In June, the Pune Municipal Corporation raised Rs200 crore by issuing 10-year bonds. “More such issuances are in the offing," said Subodh Rai, senior director, Crisil Ratings. “That’s because bonds offer ULBs structuring flexibility through longer tenures, annual interest payments, and fixed coupon rates compared with bank loans. Further, the capital market also has a large investor base, and can turn out to be more competitive than bank borrowing."