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Access of smaller urban local bodies (ULBs) to the capital market can be enhanced through pooled financing, under which a common bond is issued by pooling the resources of several local bodies, according to RBI’s maiden report on municipal finances.
The aforementioned suggestion comes as the initial cost of bond issuance can be prohibitively high for India’s 200 plus municipal corporations and many smaller ULBs.
Creation of SPFE
The experience of the past two decades shows that only large ULBs with good technical competencies can meet the necessary requirements of bond issuance. Pooled financing essentially involves the creation of a State Pooled Finance Entity (SPFE), which can be registered either as a trust or a Special Purpose Vehicle (SPV). “The SPFE issues bonds and debt servicing is financed through the pooled revenue stream of the participating municipal bodies. Creating an SPFE lowers the cost of bond issuance for individual local bodies and enhances the creditworthiness of the bond issued, as the risk gets hedged over all participating municipal bodies,” the report said.
Precedence
The report noted that pooled financing mechanism has precedence in India, with Andhra Pradesh, Maharashtra, Karnataka and Tamil Nadu issuing bonds serviced from the pooled revenues of multiple ULBs/ MCs (Municipal Corporations).
The Tamil Nadu Urban Development Fund (TNUDF) issued bonds on behalf of 14 municipalities through a Water and Sanitation Pooled Fund in 2003.
Similarly, Karnataka created a debt fund — Karnataka Water and Sanitation Pooled Fund (KWSPF) — to raise money for the Greater Bangalore Water and Sanitation Project (GBWASP) in 2005. “Both the funds were rated AA, reflecting their creditworthiness, which was achieved by pledging a tenth of the revenue from individual participating municipalities to service the bond.
“As a backup, State devolution was pledged for debt servicing in case of a shortfall in revenue,” the report said.
The Centre also provided a thrust to pooled financing by launching the Pooled Finance Development Fund (PFDF) Scheme in 2006 to provide credit enhancement to ULBs through a State-level pooled finance mechanism.
Additionally, income tax exemptions were granted in the past to bondholders to boost the demand for municipal/pooled bonds.
Recent instances of bond issuances have demonstrated that bond financing can be a viable alternative for raising resources for MCs, according to the report.
With provisions relating to exchange listings in place, involvement of major credit rating agencies in the municipal rating space and push from the Centre in the form of reform-linked financial incentives, the municipal bond market in India can witness significant growth in the coming years, it added.
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