Municipal bonds, a virtually untapped debt instrument in India until now, is likely to come into the spotlight in the coming years as a few dozen Indian municipalities and corporation bodies float such bonds to finance about Rs1 trillion of investments such as urban infrastructure projects in water supply, sewage and drainage, urban development experts said here.

Some 63 cities and towns are set to hit the debt market to raise Rs46,000 crore before 2012, to part-finance such projects under a Union government-sponsored programme. The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) has promised between 50% and 90% funds to municipal bodies for the projects to upgrade urban infrastructure.

Big move: About 63 cities and towns are set to hit the debt market to raise Rs46,000 crore before 2012.

Under the scheme, Rs50,000 crore will be available for various infrastructure projects including water supply, sewage, drainage, urban transport and solid waste management over a seven-year period starting 2005 to towns and cities with a population of 500,000 and above. The scheme will fund up to 90% of the expenditure on approved projects depending on population in the municipalities, with the state government, corporations and other sources having to raise the rest.

It is this 10-50% financing share that is expected to charge up the Indian bond market, analysts said. “The issuance of these bonds will facilitate the creation of a vibrant municipal bond market. It will provide an alternative form of intermediation, wherein both banks and fixed-income markets compete for funds," said Akash Deep Jyoti, head of corporate and infrastructure ratings at Crisil, a Standard & Poor’s company, ahead of an urban infrastructure event in Mumbai.

Thirty-three city administrators are in Mumbai to attend the India Urban Space 2007 seminar—organized by the Bangalore-based not-for-profit organization Janaagraha—that runs between Thursday and Sunday.

The seminar will address two crucial areas for the participating urban local bodies: fund raising, and capacity building for deploying the funds effectively.

“Most local bodies have two major issues—one is raising the 30% funds that they need to finance their projects. The other is, having raised the funds, how do they deploy it. Most city administrations do not have the capacity to implement projects effectively," said Swati Ramanathan, co-founder, Janaagraha. The seminar plans to address these issues through a series of workshops and networking opportunities where the city administrators can meet and interact with service providers in the infrastructure sector. “One of the key takeaways for participating cities would be a network of service providers that would allow them to find the right partners for their urban infrastructure creation plans," said Ramanathan.

To date, a few municipalities such as Ahmedabad, Chennai and Nagpur have raised money through bonds, with just Rs850 crore being raised over the last decade, according to data from Fitch Ratings, an international credit rating agency that is rating a third of the 63 municipalities that are eligible for JNNURM funds. The last municipal bond issue was a Rs120 crore issue by the Nagpur Municipal Corporation in March this year.

In comparison, the US municipal bond market is worth an estimated 9% of the total market value of outstanding debt in that country. “Municipal bonds are yet to play the kind of role in urban infrastructure financing that they hold potential for. We expect the scenario to change, given more than Rs1 trillion of urban infrastructure investment estimated over the next five years," said Jyoti.

Another expert said demand for such bonds would depend on the financial health of the municipality. “Whether the market actually shows an appetite for these municipal bonds will depend on the municipality or the project under consideration," said S. Nandakumar, head of public finance and infrastructure at Fitch Ratings. “If a city has a good rating, it may also have enough funds to finance itself for a year or two. It is the really cash-strapped cities that will be eager to come to the market, but they may not be very attractive to investors."