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Municipal bonds pave way for cities to develop civic amenities
A 2022 World Bank estimate said India needs to invest $55 billion per annum for 15 years to build the necessary urban infrastructure
On October 16, Rajkot became the first city in the country to issue municipal bonds for the current financial year and only the 17th city in the country to raise money through bonds to fund eight water and sanitation projects.
While the civic body will pay an interest of 7.9% over a five-year tenure for a loan of ₹100 crore, it will get a central government incentive of ₹13 crore under Centre’s Atal Mission for Rejuvenation and Urban Transformation (AMRUT).
CK Nandani, the deputy municipal commissioner, told HT that over the past two years, streamlining accounting processes and improving its revenue collection has improved credit ratings from A- to AA (the second-best rating). For issuing bonds, cities must get investment-grade ratings; good ratings usually translate to cheaper loans.
In 2021, only 95 of 226 cities had investment-grade ratings, according to a compilation by Janaagraha, a non-profit working on municipal reforms. An older compilation by the ministry of housing and urban affairs (MoHUA) in 2017 found only three municipalities—New Delhi Municipal Council, Navi Mumbai, and Pune—had better ratings (of AA+) and only civic bodies of Ahmedabad, Visakhapatnam, and Hyderabad had the AA rating of a total 94 major cities.
The central government, multilateral agencies and policy observers have been advocating cities to explore the bond route as one of the many options to bridge the funding gap required to provide civic amenities, especially as urbanisation picks up pace and India aims to be a developed country by 2047.
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A 2022 World Bank estimate said India needs to invest $55 billion per annum for 15 years to build the necessary urban infrastructure against the 2018 figure of $16 billion.
Debarpita Roy, a fellow at the think-tank Centre for Social and Economic Progress, said raising capital through bonds is necessary to build basic services infrastructure at scale in our big cities. “Since there will always be competing demands for government funds, bonds are a source of additional funds and should continue to be encouraged,” Roy said.
Shreshtha Saraswat, senior manager of municipal finance at Janaagraha, views the Rajkot issuance as another positive development in creating financially self-reliant cities. She said the Centre’s incentives for municipal bonds, and subsequent green bonds under AMRUT and SEBI’s regulatory framework have been successful in nudging larger urban local governments to tap the bond market and enhance fiscal transparency and accountability. However, she said cities need to look at municipal bonds as one of several avenues to raise debt to bridge the funding gap in infrastructure projects—instead of an end goal.
Notably, a majority of municipal bond issuances, including that of Rajkot, have been reserved for institutional players and not the public. The first such public issue was by Indore, which leveraged its tag of being the cleanest city.
Speaking about Vadodara’s issuance of such a public bond at the lowest interest rate of 7.15% in 2022, Shalini Agarwal, who was then the municipal commissioner of Vadodara (currently in Surat), said the success was dependent on reforms that improved the city’s revenues, financial management, transparency, e-governance, and bankability of the project itself. She also said that over the past few years, there has been a conducive regulatory atmosphere, which will see further issuance of such municipal bonds.
Agarwal said this will soon change as the public perception of India’s municipal governance improves with more cities going the public route, adding Surat will soon issue such a green bond.
Notably, only smaller cities and cities from Gujarat have been at the forefront in leveraging the bond route to raise funds.
Agarwal said that in most states, especially for large capital cities, parastatal bodies, such as water boards, transport corporations or development agencies, divide municipal functions. In contrast, in Gujarat, urban governance is done under a single authority of municipal corporations through which coordination and planning become easy. “Because of this experience over the years, these cities have skilled human resources and better financial governance structures.”
Milind Mhaske, CEO of Praja Foundation, said that currently, most Indian cities are not empowered according to the 74th Amendment of the Constitution and often, cities do not even have the power to plan and carry out fundamental functions as it lies with the state government’s parastatal agencies.
“So nudging cities to arrange their books to issue small-ticket funds of a few 100 crores is myopic without solving the greater governance mess of our cities. The only way to compete with global cities would be to empower democracy in our cities with due governance and financial powers,” Mhaske said.
He said a good credit rating was not necessarily a reflection of the budgeting or accounting practice of a city corporation, but the bankability of the said projects, citing the huge grant dependency of cities. He further suggested for the municipal bond markets to mature in India, there was a need for a longer tenure of 20-30 years. “Both regulators and market players have to work on this, which, in turn, will form a secondary market,” he said.
Ravikanth Joshi, an urban finance specialist, said cities motivated by AMRUT incentives to raise funds through municipal bonds are a positive trend. “It is hoped that these successful cities and remaining investment-grade cities will raise funds from municipal bonds of appropriate terms in future, in accordance with their investment needs and their capacity to borrow,” Joshi said.
He said that currently considering investment needs and the capacity to borrow, bond issuances are insignificant. “The day municipal bodies start raising adequate funds through municipal bodies on their own initiative without incentive support, that day, this reform initiative of GOI will achieve complete success,” he said.
Notably, 12 cities have utilised the bond market only after the AMRUT incentive, until Rajkot’s issuance.
Globally, both among developed and developing nations, the municipal bond market is comparatively larger. Notably, in the US, an international city/county management association and government finance officers association White Paper in 2015 found that about 90% of state and local capital infrastructure spending is financed with debt, such as municipal bonds.
