Gaining momentum: ULB bonds get traction, 29 cities to hit market in 2 years

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Published: October 28, 2019 12:58:20 AM

The sources added that the hosuing and urban affairs ministry wrote to ULBs last week, asking them to seize the opportunity to introduce the much-needed governance reforms in municipalities by tapping the market

India’s municipal bonds market has been shallow, with a total of 42 issuances to amounting to about Rs 3,200 crore to date. India’s municipal bonds market has been shallow, with a total of 42 issuances to amounting to about Rs 3,200 crore to date.

It was only last year that urban local bodies (ULBs) started tapping the bond market in a meaningful manner and the process is going to gather further momentum in the current fiscal. Thanks to their improved credit profiles, which are in part attributable to direct transfer of funds by the Centre and more efficient revenue-generating measures, as many as 29 ULBs with ratings of A and above are firming up plans to raise close to Rs 6,000 crore via bonds in FY20-FY21 period.

What is going to give the bond issuances further impetus is the interest subvention being given by the Centre under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme run by the ministry of housing and urban affairs. Under AMRUT, ULBs are being paid Rs 13 crore for every Rs 100 crore raised via bonds, subject to a ceiling of Rs 26 crore for each ULB.

According to official sources, a total of 12 ULBs will be given the interest incentive for tapping the bond market in the current fiscal. Lucknow, which has plans to raise Rs 200 crore, and Ghaziabad (Rs 150 crore) will be among the frontrunners this fiscal and the funds raised by these two ULBs in Uttar Pradesh will be used for improving drinking water supplies, sewage systems and tertiary treatment of water.

India’s municipal bonds market has been shallow, with a total of 42 issuances to amounting to about Rs 3,200 crore to date. While a third of such bonds were issued before 2006, eight ULBs including Pune, Ahmedabad and Hyderabad raised Rs 1,400 crore in 2018-19, thanks mainly to AMRUT incentives.

The sources added that the hosuing and urban affairs ministry wrote to ULBs last week, asking them to seize the opportunity to introduce the much-needed governance reforms in municipalities by tapping the market . “Municipalities which have ‘A-’ or ‘A+’ ratings are improving their processes, accounting systems and undertaking other reforms to upgrade the ratings to ‘AA’ to attract investors as well as keep interest costs low,” a ministry official told FE. A rating of ‘A’ refers to ‘adequate safety’ while ‘AA’ denotes ‘high safety’ from the point of view of investors. Urban infrastructure services were estimated to need investments of mammoth Rs 40 lakh crore between FY16 and FY31. The NITI Aayog have long pitched for ULBs raising the taxes that have not been subsumed in the goods and services tax (GST) and the GST Council earmarking a certain part of the GST proceeds for these organisations, the third administrative layer, but the most proximate to the city dwellers.

These urban bodies are also being nudged to take steps to increase their own revenue by tapping other sources like trade licences, taxes on entertainment, mobile towers, solid waste user charges, water charges and parking fees etc, without fail. Efficient water-metering systems for residences (which will reduce pilferage that is above 50% in majority of Indian cities/towns) is seen to be a revenue stream that holds great potential.

Currently, roughly 60% of the revenue of municipal bodies in the country — about 8,000 in number — comes from devolution by the Centre and states.

In FY15, the latest year for which data is available, the combined annual ‘own revenue’ of urban bodies in the country was Rs 1.2 lakh crore, or 1% of the country’s gross domestic product. The corresponding figures for comparable countries were much higher — 6% in both Brazil and South Africa.

The NITI Aayog as well as recent Finance Commissions have been of the view that the municipal bodies should tap debt market to finance projects and the user charges collected from the projects should be used to service the debt.

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