Mumbai: Prime Minister Narendra Modi’s pledge to enhance the quality of urban life for millions of Indians is driving local city governments to resuscitate the municipal bond market.
The city of Pune is looking to tap the bond market to finance a project that plans to provide round-the-clock metered water to more than 3 million in the state of Maharashtra. Greater Hyderabad Municipal Corp, the local government for the southern Indian city of Hyderabad, plans to sell debt to fund road projects and build apartments for the poor.
That takes the pipeline for municipal bond sales to more than Rs56 billion ($825 million) since the regulator unveiled rules for such debt last year, lifting expectations for an expansion of the moribund market. Municipalities in Asia’s third-largest economy are accessing the bond market as Modi seeks financial and technical cooperation from the US to Singapore for his “Smart Cities” initiative. Under the plan, the infrastructure of 100 cities across the country will be upgraded by 2020 to provide facilities such as adequate and clean water supply, sanitation and public transportation.
“Such sales can help finance the government’s smart city development plan and also reduce municipalities’ dependence on grants and local tax revenues to fund projects,” said Rajeev Radhakrishnan, head of fixed income at SBI Funds Management Pvt., India’s fifth-biggest money manager. “The rush in issuance by local civic bodies could be because of the push from the government to develop the municipal bond market.”
The government plans to spend about Rs480 billion over five years to improve public services and infrastructure under the smart city programme. An equal amount of money has to be contributed by either the state or the local government, creating a fund of about Rs1 trillion for developments modelled after Singapore and Seoul.
“There are no official orders from the central or the state governments for local bodies to tap the bond market,” said T. Vijay Kumar, financial adviser at Greater Hyderabad, which plans to raise Rs33 billion via municipal bonds over a period of three years. “But, they want more and more decentralisation of power and want local authorities to be financially independent.”
Local authorities are weighing both bonds and loans to fund projects, says Kumar, adding that the advantage of selling bonds is that tenures are typically longer than bank loans and don’t require physical collateral or guarantees.
Pune Municipal Corp has already got in-principle approval for a loan of Rs22.7 billion to finance a five-year water project, Ulka Kalaskar, chief accounting and finance officer at the municipality, said.
Bhopal Municipal Corp, Greater Visakhapatnam Municipal Corp, and Imagine Panaji Smart City Development Ltd are among others that plan to appoint a consultant to get technical assistance on issuing municipal notes. With the supply pipeline building, the cost to sell municipal bonds may climb.
“There will definitely be pressure on the pricing of municipal bonds if more and more local bodies decide to tap the market,” said Greater Hyderabad’s Kumar. “That’s why we are trying to finalise the deal quickly so that we get the funds at competitive rates.”