Vadodara Municipal Corporation is preparing to raise Rs 200 crore via issue of blue bonds to fund sustainable water-resource projects. Unlike most urban local bodies, it has shown fiscal prudence — it has very little debt and its asset base is large— making it well-placed to raise money from the market, writes Sebastian Morris
What are blue bonds?
A blue bond is issued to raise capital for initiatives such as clean water infrastructure, sustainable fisheries, marine biodiversity conservation, and coastal resilience. Blue bonds are issued by a wide range of organisations – governments, development banks, financial institutions, corporates and urban local bodies, as in the case of Vadodara Municipal Corporation (VMC).
These bonds appeal to investors seeking both environmental impact and portfolio diversification. While green bonds are used to fund climate change-related projects, blue bonds are aimed at raising funds for ocean- and water-related projects.
Why is VMC proposing a blue bond issue?
The Vadodara Municipal Corporation (VMC) has received approval from its Standing Committee for a Rs 200-crore blue bond public issue. The proceeds are proposed to be used in water management projects including waste treatment, schemes under the government of India’s Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme to help urban local bodies in improving their infrastructure, service provision and climate resilience.
For green investors, this bond issue should be worth their while since studies show that green investors are willing to take returns that are about 50 basis points lower.
Climate-related bonds from VMC earlier
VMC’s first bond issue in 2022 (Rs 100 crore, 7.15% coupon, 5-year, private placement) was the first Climate Bonds Initiative (CBI) Certified green municipal bond in India and Asia. Its second bond issue was also for Rs 100 crore with a 7.90% coupon and a 5-year tenor in March 2024 and was oversubscribed 14.6 times, with 44 bidders placing bids worth Rs 1,460 crore, making it perhaps the most subscribed municipal bond in India’s history.
The latest Rs 200-crore issue will be VMC’s and India’s first formal blue bond issue. Sagarmala Finance Corporation, a state-owned maritime-focused lender, is also planning to go for a blue bond this year.
Trends in bond financing for ULBs
Bengaluru (1995) and Ahmedabad (1998) were the first urban local bodies (ULB) to issue bonds. But these had government guarantees, were tax exempt and gave away much, with the effective cost being much higher than what the state governments could have borrowed at.
Bond issues have not had a steady growth despite the growth of public investments in infrastructure and public-private partnerships. Urban infrastructure has typically been financed by state and central government support, Hudco, banks and multilateral agencies, besides by their own revenues.
Even today bonds require much comfort from the structured payment mechanism, which restrict their use. Since 2017, all issues have been taxable. Borrowings from financial institutions have never constituted more than 5% of the total receipts of ULBs, more typically 3-4%.
Revenues have been roughly a third each of own tax, non-tax and transfers from central and state governments. FI borrowings have been about `6,000 crore in 2022-23 but rose sharply to about `13,000 by 2023-24. Bonds therefore have been puny relative to other borrowings.
Muted market for municipal bonds
The market for bond issuances is puny largely because the urban local bodies are not yet seen as an autonomous level of government. Most funds are tied to projects and programmes of the central government. More importantly, there is little accountability of their performance on public service delivery, these being inadequate and of very poor quality.
Hence, these are unable to raise revenue for independent operations. Professionalism is almost entirely absent, and accounting processes and internal management poor. Project implementation has typical delays and cost overruns.
There are a few exceptions with partial professionalism. These are mostly in Gujarat.
Pooling could have helped a little. Similarly, an urban development financial institution like Hudco, could have created liquidity in the market to enable a lot more participants.
What makes VMC a strong player
VMC is well-placed to make this issuance, since it has very little debt (under Rs 300 crore), and its asset base is around Rs 10,000 crore, and unlike so many ULB, it has been fiscally prudent. The issue would be beneficial for VMC since it would be able to access Rs 26 crore as incentive under the AMRUT Scheme.
The security requirement is less than in the case of bank finance, and the coupon rate when considered along with the subsidy (effectively 7-7.5 %) is lower for VMC than either the bank rates or the rates from Hudco.
The maturity period for the bonds is yet to be finalised but is likely to be 5-7 years. Retail subscription is likely, since the individual bond is of Rs 10,000 denomination. The rate is not yet known but would be 8.25-8.5%, with the coupons being paid semi-annually.
The writer is a professor, Goa Institute of Management, and chair, Centre for Public Policy and Governance