Policymakers in the government acknowledge the fact that budgetary allocations wont be enough to undertake such a huge task and that private participation will be required for financing and setting up the infrastructure needed to develop such smart cities from existing mid-sized cities and satellite towns.
Apart from existing models like public-private partnership and infrastructure bonds, the government is also considering giving a boost to a dormant municipal bond market to finance urban development. Finance and urban development ministries are discussing the issue among themselves though a decision on how to revive the market has not been taken yet.
The market for such bonds have existed in India from 1998, when Ahmedabad became the first Indian city to issue municipal bonds. However, in the past 16 years, 25 municipal bond issues in the country have garnered about $300 million, according a report by Prof Mukul Asher of National University of Singapore and Shahana Sheikh of the Centre for Policy Research, New Delhi. The amount is just a fraction of what it is in developed markets like the US, where the municipal bond market is worth more than $3 trillion.
Analysts and policy watchers say the market for such bonds has not picked up in India for various reasons, including lack of interest amongst investors, the sorry state of finances of many urban local bodies (ULBs), shoddy accounting of the ULBs books, bureaucratic hurdles and lack of interest at the central and state levels, and the issue of who will guarantee the bonds.
There is a certain level of mismanagement in these municipal corporations (which issue the bonds). They are influenced by local politics, said Ajay Manglunia, who heads fixed income at Edelweiss Securities. There are issues to be sorted out, including cleaning
up of the accounting, getting them
audited, getting such bonds rated, Manglunia said.
The last conventional municipal bond issue was by the Nagpur Municipal Corporation in 2007 for R21.2 crore and the last pooled financing of a municipal bond issue was by the Tamil Nadu Urban Development Fund in 2010 worth R83.1 crore. Both the issues were for water supply and sewerage infrastructure.
Government officials acknowledge the hindrances to developing a healthy municipal bond market and say that eliminating them will require coordination with the states and municipal bodies.
Edelweiss Manglunia says that if hitches are sorted out, there will be substantial investor interest for municipal bonds. ULBs essentially have healthy cash flows because of the local taxes and allocations by state and central governments. That makes municipal bonds a good investment if political interference is removed from the equation. Such bonds can meet the requirements for financing large infrastructure projects, he said.