Municipal Bond Market to Reach INR450bn; Some Regulations Require Fine Tuning - India Ratings

New Delhi, April 29, 2015: India Ratings and Research (Ind-Ra) believes municipal bonds are of crucial importance for uplifting India’s urban infrastructure. They may act as an alternative to the central and state government grants to urban local bodies (ULBs), whose quantum is likely to be reduced in the near future.   

Ind-Ra believes adopting an innovative mode of financing in the form of ‘Government Citizen Partnership (GOCIP) Bonds’ where citizens invest in the bonds floated by ULBs to improve urban infrastructure and urban civic services is one such option. This will make the development process participatory as it will enable citizens to be a part of the city improvement process. Citizens as investors of ‘GOCIP Bonds’ can keep a tab on ULBs’ performance and on their use of resources as well. 

Ind-Ra believes the municipal bond market in India has the potential to reach a size of INR450bn in near future. Pooled finance entities and specialised entities in the line of National Capital Region Planning Board and Mumbai Metropolitan Region Development Authority can be floated at state level, which can leverage their balance sheet strength to raise money from capital markets at competitive rates. Such entities are better placed than individual ULBs as they are managed by professionals and subsequently have an edge in terms of governance, transparency and information disclosure. 

Although forming a new regulatory framework for municipal bonds is a step in the right direction, Ind-Ra believes some regulations need some fine tuning/a re-look, which can help in the broadening of the municipal bond market. Public issuance of revenue bonds will be supported by revenue from specific projects and ease the debt servicing process. However, the recovery of user charges for water and sanitation or for any public or social goods provided by the government is low and there is a wide-spread leakage. As a matter of fact, user charges are not even sufficient to recover O&M expenditure. Hence, municipal bonds can take off, if user charges on assets are revised at regular intervals and in right amounts. 

The urban civic service delivery mechanism in Indian cities needs a complete overhaul. While ULBs are mandated to provide a large number of services, their revenue base is low. The huge resource gap (annual income of municipalities: INR125.97bn and expenditure: INR139.97bn in FY03) between revenue and expenditure is mainly responsible for the dismal delivery of urban civic services. 

(Source: Senior Manager - Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company)