The Union finance ministry’s domain expertise and leverage with states and regulators can get them to take off
With cumulative issuance of less than Rs 2,000 crore since the first issue in 1997, the municipal bonds market in India is virtually non-existent. Making municipal bonds work is a dark-horse reform for Indian public policy. Cities in India were estimated to require over Rs 40 lakh crore during 2011-2031 for capital infrastructure, whereas the aggregate annual revenues of municipalities are likely to be less than Rs 1.2 lakh crore (of which Mumbai alone accounts for Rs 30,000 crore). Municipal bonds can quite obviously play a pivotal, singular role in funding this gap. Countries like South Africa and Vietnam are leveraging municipal bonds to fund large urban infrastructure development, with Johannesburg alone having issued bonds of $400 million (40% higher than cumulative issuances in India).
Additionally, there are two other reasons that make municipal bonds a potential game-changer for India. First, municipal bonds can simultaneously deepen the long-term infrastructure financing market in India as well as redirect retail investments into liquid securities (by city residents) away from real estate and gold. Second, by creating opportunities for citizens (as retail investors) to invest in tangible public causes in their cities, it can build strong bonds of trust between municipalities and citizens; bonds of trust that can galvanise citizen participation in cities at historic scale and to mutual financial benefit.
What is critical to question, however, is what needs to be done to jumpstart the municipal bonds market in India. The Rs 50,000-crore Smart Cities Mission envisages creation of special purpose vehicles in cities that would raise monies from the capital markets. Sebi issued guidelines earlier this year for issuance of municipal bonds. Both of these are steps in the right direction, but do not cover the required distance. There are three principal policy reforms that are needed to make municipal bonds work.
First, a long-term roadmap to financial self-sufficiency of municipalities needs to be drawn up covering powers over revenues and borrowings, efficiency of revenue administration (both assessments and collections) and systematic measurement, reporting and review of revenue performance. Such a roadmap will require collaborative effort between the Centre and the states. Though local self-government is a state subject, the Centre has a crucial role to play in addressing the infrastructure deficit in our cities, for which municipal bonds will be highly significant.
Second, there is a crying need to professionalise financial management in municipalities. While it is true, and rightfully so, that municipalities are non-profit public institutions, large amounts of money are required to meet their service obligations. The scale of funding required for public expenditure in our cities cannot be met with the human resources (both in terms of numbers and skills and competencies) that they currently possess. The revenue and finance departments of municipalities need to be urgently professionalised and made market-oriented. The Institute of Chartered Accountants of India can play a significant role here. Third, and most important, there needs to be a deliberate creation and positioning of the municipal bond brand to make it popular among citizens, and a slew of enabling measures to make them attractive.
Individual investors hold 50% of the $3.7-trillion US municipal bond market. The public good that municipal bonds can accomplish, and the personal connect that city residents have with individual projects they finance is a story that needs to be told loudly by governments across levels. Enabling measures such as making all municipal bond issuances tax-free, making investments in muni bonds by banks part of their priority sector lending and actively encouraging pension funds and insurance companies to participate in municipal bond issuances need to be put into place by respective regulators. These are presently crucial missing links.
In the public policy discourse in India, “how will it get done” (implementation) and “who will do it” (ownership) are often more important than what needs to be done as the latter is generally discovered and discussed for several years before being implemented. The same is true of municipal bonds as two decades have elapsed since the first issuance.
The Union finance ministry alone is capable of making municipal bonds work, because this requires serious domain expertise and leverage with states and regulatory institutions. SEBI, the RBI, the CBDT and the ICAI are all institutions that have roles to play and all of them fall under the broad umbrella of the Union Finance Ministry. The urban development ministry can only play a supporting role by facilitating appropriate provisions in urban schemes and shepherding State municipal administration departments. Similarly, there is a clear definitive answer to the “how will it get done” question too. Municipalities need to produce audited balance sheets each financial year and get themselves credit-rated so that they are able to access the municipal bond market in a credible and sustained manner.
Muthuchamy is senior vice-president (Public Finance) at Janalakshmi Financial Services and Viswanathan
is coordinator (Advocacy and Reforms) at Janaagraha Centre for Citizenship and Democracy