Smart Cities by the dozen, new projects in the hundreds, investment requirements in billions but innovative ways to fund projects? Well, nothing much to write home about. This might change if the Securities and Exchange Board of India’s (SEBI’s) clearance for Muni Bonds a year ago elicits a good response. In a first for Smart Cities, responding to the urban development ministry’s push for generation of funds through the route, the financially secure Pune Municipal Corporation (PMC) has announced its intention to tap the market with its Muni Bonds. If Pune does so, it would encourage other cities to follow suit.
For those who came in late, the city made it to the list of the first 20 Smart Cities released by the Centre. And it has lined up a host of projects as part of the Smart Cities Mission. Most important of all, it has got itself rated, securing an AA ratings from Fitch, now India Ratings, that is sure to interest investors. If there is uncertainty, it is regarding when the city would manage to put the pieces together and make its maiden Muni issue.
Vijay Sarma, senior expert, McKinsey & Company, the consultant for implementing the Smart City plan for Pune Smart City Development Corporation, says that with there having been no major municipal bonds issue in the last six years, the market is still evolving. “The intention is there but there is the question of the right timing”. For the smart city SPV, this could take place when revenues flow in from the projects and there is security of the interest and the principal being serviced, he adds. There are other issues to be considered like whether it is the PMC or the smart city SPV that should go in for bond issue. It would be easier for the PMC to do so given its track record and assured revenues and a part of the money raised could then be used for Smart City projects. At the same time, Sarma points out that there are other sources of funds at present which would work out cheaper than a bond issue: government funds, development finance banks and institutions, PPP and land monetisation.
According to PMC commissioner, Kunal Kumar, the corporation has a capital expenditure programme of R31,000 crore over the next five years. The Pune Smart City projects alone would need R3,000 crore. “Our strong financial position — as evidenced by a AA rating from Fitch — gives us a great staring point. We will certainly look to tap the bond market for funds but given the appetite for municipal bonds, this would account for only a part of our funding needs,” Kumar had said in an earlier interaction.
According to the PMC Fiscal Capacity report, PMC’s revenue surplus went up from R961.25 crore in FY10 to R1,342.03 crore in FY15 and is projected to be R2,015.94 crore in FY17, indicating a strong revenue pipeline and capacity for financial leveraging—the total revenues are estimated at R4,500.17 crore in FY20. Property tax collection is growing in high double digits while Local Body Tax, which has replaced octroi as the most significant contributor and accounts for a third of the total revenues, is growing at 20%. Interest payments are in low single digits with scope for raising fresh debt. India Ratings had assigned the PMC a Long-Term Issuer Rating of ‘IND AA’ with a Stable Outlook. Ind-Ra also assigned PMC’s R2,114.06 million bank loans a ‘IND AA’ rating with a Stable Outlook in its November 2015 report.
If PMC were to come up with Muni bonds, how would the market respond? Dr Sunil Kumar Sinha, principal economist, India Ratings and Research Pvt Ltd, says that to create an appetite for these bonds the government should allow insurance companies, pension schemes, and infrastructure funds that have huge corpuses to invest in them. Highlighting the benefits of such bonds, he points out that municipal corporations would have to generate funds to service them and this would mandate greater responsibility and accountability. They could look at newer revenue sources and focus on user charges to expand their revenue base. Smart City SPVs could tap bond markets if the parent municipal corporation stands guarantee to pay investors in case of any issues.
Sinha says the municipal corporations of Mumbai, Pune, Bengaluru and Ahmedabad are presently capable of tapping the bond market on account of better ratings. “But otherwise there is limited capacity and capability, so going to the market would be a big challenge.” He suggests that an alternative could be a Pool Fund, with states putting together the requirements of 8-10 municipal bodies into an SPV to enlarge the quantum before tapping the market. All in all, it would mark a good beginning if some municipal corporations took the plunge, especially given the shallow bond market in the country, he says.