New Delhi: Barely 163 out of over 4,000 urban local bodies (ULBs) have investment grade credit rating — an assessment of creditworthiness and ability to repay — to raise funds from the market through municipal bonds for infrastructure projects, according to a report on urban planning and development released Monday.
Citing the Ministry of Housing and Urban Affairs (MoHUA) data, the India Infrastructure Report 2023 said the credit rating of 467 ULBs under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) programme was completed of which “163 ULBs are investment grade and only 36 have A- and above Credit Rating”.
Municipal bonds are debt instruments issued by ULBs to build urban infrastructure such as sewer systems, water supply systems, school and other civic amenities.
Low creditworthiness of ULBs, lack of political will to improve service delivery and systemic absence of timely audited accounts, easy availability of funds from central government through various schemes are some of the reasons for the municipal bonds market not taking off in a major way, the report said.
“The limited revenue base of ULBs in terms of low property tax base and inadequate user charges has translated into a high level of dependence on fiscal transfers (from the central and state govts) and poor credit quality across the majority of ULBs,” it said.
This is impacting the municipal bond market’s development as most of ULBs will need suitable credit enhancements to take “credit rating up to ‘AA’ (high safety category) that most investors require as per regulatory guidelines (of Insurance Regulatory Development Authority of India) or credit preferences of institutional investors such as exempted PF Trusts, pension funds, insurance companies, mutual funds etc”, the report said.
In India, the municipal bond market is yet to take off in a major way even as the Ahmedabad Municipal Corporation issued the first such bond way back in 1998.
As per the report, around Rs 1,075 crore was raised during the 13-year period from 1997 to 2010. But, in the six-year period between 2017 and 2023, around Rs 4,184 crore were secured by 10 ULBs and one development authority with 14 such municipal bonds, the report said.
Call for complete overhaul
One of the major reasons that pose a hurdle in improving ULB credit rating to raise funds from the market, it said, is the “implicit lack of political and managerial incentives for improving service delivery and reluctance to leverage their own resources without being pushed by higher levels”.
“The legacy culture of institutional grant dependency and preference for working within the confines of grant receipts remains a serious challenge.”
Another factor is the way the ULB accounts are maintained and lack of routine audits, despite successive finance commissions, highlighting the issue of “data gaps and inconsistencies and the systemic absence of timely updated and audited annual accounts in the urban context”. “As per a recent RBI report (as also our direct experience in supporting municipalities for their bond issuances), the accounting codes across municipalities are not standardised leading to difficulties in financial data analysis,” the report said.
Flagging the high dependence on central and state grants, it said, “Subsequent to the launch of JNNURM in December 2005 with generous direct grant support, the quantum of municipal bond issuances reduced barring a few from Tamil Nadu Water & Sanitation Pooled Fund.”
The ULBs are reluctant to go for municipal bonds as it involves a lot of effort to put their books in order, urban finance experts hinted.
“When they are getting easy money in the form of grants from the central and state governments, why will they make an effort to raise money from the market? The lack of initiative is also due to the fact that ULBs are largely dependent on grants and don’t have complete powers despite the 74th Constitutional Amendment under which 18 functions were to be transferred to the ULBs by the states,” Praja Foundation CEO Milind Mhakse told ThePrint.
Nilachala Acharya, an economist and public policy analyst, said that municipal bonds can play a crucial role, especially for the small municipalities, to fill the resource gap and address infrastructure requirements. However, there are reasons for which they have not picked up in recent years by the small municipalities.
“First, many of these small municipalities lack minimum standards of fiscal transparency and have weak accountability systems. Second, they are happy with the amount of grants they receive and managing things within these resources to provide basic needs as mandated. Third, and an important one, is that there are no such strong demands coming from the citizens as well for improving and addressing infrastructure needs because of the weak voices. So, inadequate civic action results in inactive municipal governance,” Acharya said.
Under the AMRUT initiative, the Centre provides a grant of Rs 13 crore for every Rs 100 crore raised through municipal bonds in order to promote them.
National Institute of Urban Affairs director Debolina Kundu called for a review to ascertain why ULBs are not opting for such bonds. “It is a good instrument to raise funds. But we need to look into the reasons why the ULBs don’t have the appetite for municipal bonds. The process of issuing a bond has helped ULB streamline their accounting system. The ULBs have an obligation to pay back the amount for which their property tax, which is the most important source of revenue, is blocked as an escrow fund is created. This can sometimes pose a huge challenge for a city,” she said.
‘Hand-holding needed to help ULBs’
Lack of institutional capacity is another major reason for the poor response to the debt instrument, according to the report.
Many ULBs not only don’t have the capacity to do the preparatory work for assessing the bond market but also in identifying the right projects which can help pay off the debt, it said, adding this “leads to a reluctance to borrow either from the term loan market or the municipal bond market”.
“…It takes at least two years of handholding support to facilitate capital market readiness on the part of ULBs, particularly with respect to meeting the stringent due diligence requirements specified by SEBI. It may be worthwhile for state governments to support this hand holding exercise by appointing experienced transaction advisors,” the report said.
The way forward
To improve the creditworthiness of ULBs, the report said, a “paradigm shift” is needed in the way the cities are managed and financed.
“The creditworthiness is based on an assessment of an entity’s ability to make timely payments of interest and principal. This in turn hinges on the strength of the municipal revenue base in terms of buoyancy of property tax collections, recovery of user charges, timely fiscal transfers from state government, sound expenditure management, superior project execution capabilities, sound governance framework, and a responsive political and executive leadership,” it said.
The report recommends a few measures such as strengthening municipal accounting systems, professionalising municipal cadres to improve managerial efficiency, recovery of user charges and targeted subsidies.
“The future policy pathways may build on recent experiences and include a more relentless and systemic focus on strengthening creditworthiness—the underlying core foundation for attracting, leveraging, and efficient usage of finance,” it said.
(Edited by Tony Rai)
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