One of the few viable ULBs, can issue bonds freely
Though state governments are yet to devolve enough financial powers to urban local bodies (ULBs), if more were to take a leaf out of the Pune Municipal Corporation’s (PMC) books, India’s urban landscape would improve that much faster—as FE reported on February 13, PMC is planning a R2,300-crore bond offering and, since it is confident of it being subscribed, the bond has not been guaranteed by the Maharashtra government. When Bangalore issued a R125 crore municipal bond in 1997 and Ahmedabad issued a R100 crore bond in 1998, many hoped this was the beginning of more responsible budgeting in ULBs—how else could they hope to service municipal bonds on a regular basis? The market, however, remain largely untapped.
In the two decades since 1997, close to 30 municipalities have raised just R1,350 crore via taxable bonds while six municipal bodies raised just R680 crore in tax-free bonds between 1999 when these were first permitted and 2010; the Fourteenth Finance Commission (FFC) estimates just 1.4% of cities’ total revenue came from market borrowings. Juxtapose this against the urban development ministry’s estimate of R39 lakh crore (at 2009-10 prices) being needed for infrastructure development—20% of this is needed for essential services like water, sewerage systems, solid waste management, etc, in cities over the next 20 years. Even the FFC-recommended grant amount, R87,000 crore over 2015-20, pales in comparison with the need.
Pune stands out as shining example since its revenue surplus rose by over 18% in FY16 to touch R2,000 crore—the operating surplus in that year was 50% of operating income; as compared to this, the ULB’s debt was a mere R122 crore. PMC’s own-revenue-to-total-revenue-income ratio stood at a 88% on average in FY15 and FY16 while property tax collections and local body tax, as an Ind-Ra analysis shows, grew at a CAGR of 10% and 7.7%, respectively, over FY12-FY16. The Fourteenth Finance Commission (FFC) found that the per capita revenue from property taxes are as low as R1,680, falling to even R40 in many cases. Add to this, the populist propensity to keep user charges for most ULB-run facilities and utilities low, and it is not surprising the own-revenue of most city governments are marginal. Right now, while OECD countries manage to average property tax collections of around 1.9% of GDP, India’s is a much lower 0.2%. The Economic Survey quotes a study for Bengaluru and Jaipur that estimates how much more taxes could be collected. Using satellite data it found nearly half of Bengaluru was built-upon and, once this was super-imposed on circle rates in each area, the study found Bengaluru could collect four to seven times its current property taxes. In the case of Jaipur, where 39% of area was built-up, collection levels could rise by between 10 and 20 times. Based on a similar assessment of 36 cities, the Thirteenth Finance Commission had found increasing property tax compliance to even 80-85% would raise the property tax revenues from R4,400 crore to as much as R22,000 crore. Given 40% of India’s population could be in urban areas by 2030, it is critical ULBs get their act together at the earliest.