New Delhi: Municipal corporations of four tier-2 cities in Uttar Pradesh – Agra, Kanpur, Prayagraj and Varanasi – will issue municipal bonds by the end of this year to raise funds from the market for infrastructure development projects.
With this, Uttar Pradesh will become one of the few states in India and the only northern state with six cities – the other two being Lucknow and Ghaziabad that issued municipal bonds in 2020 and 2021 – will raise funds from the market through bonds.
Municipal bonds are debt instruments issued by municipal corporations to raise funds from the market for building sewer systems, water supply systems, schools and other civic infrastructure.
While issuing bonds, the civic body promises investors a specified rate of interest and a time period when the principal will be returned with interest. For this, civic agencies will have to create an account for payment of money to investors or block a part of their regular revenue source.
UP government officials told ThePrint that the bond initiative has led to major financial reforms in municipal corporations, bringing transparency and accountability.
“Till a few years ago, one could not even think of these cities raising money from the market. We were always dependent on the state government for funds,” said a senior Kanpur Municipal Corporation official.
According to UP government officials, the state’s focus is on urban development, infrastructure development and upgradation, and addressing basic civic administration and service-related issues.
“The UP government believes that municipal bonds will emerge as a reliable source of funding for innovative infra projects and for long-term planning,” Amrit Abhijat, principal secretary, urban development, told ThePrint.
“We are not just going for the money. The most important thing is to set up a structure that is streamlined and the ledger is rational. To have a good credit rating, you have to be financially prudent,” he said.
While the amount the civic body plans to raise is not huge – between Rs 50 crore and Rs 100 crore for water supply and other essential service projects – government officials said the exercise has marked a change in the way finances are managed. Have brought
“For issuing bonds, all annual accounts and balance sheets have to be audited, asset-valuation done and service level benchmarks and bank balances put in order. This improves municipal administration,” said Abhijat.
“Till now, asset mapping was not being done by the urban local bodies. Once the exercise is completed, the corporations will be in a better financial position.
The UP government is also exploring the possibility of setting up a financial intermediary, which can assist other urban local bodies, especially smaller cities and towns, in raising funds from the market.
“We are exploring the possibility of setting up a UP Finance Authority or a similar body, based on the work done by states like Gujarat, Tamil Nadu, etc., to help cities issue municipal bonds,” Abhijat said.
The development of civic infrastructure in most cities, especially Tier-2 and Tier-3 cities, has not kept pace with the rapid urbanization in India.
Municipal finance and governance experts told ThePrint that the renewed focus on urban development will help cities in the long run.
“In large and rapidly urbanising states like UP, it is a positive sign that they have started paying attention to urban development, which was not the case earlier. In the last few years, we have seen the state taking urbanization and urban development more seriously,” pointed out Srikanth Viswanathan, chief executive officer of Janagraha, a Bengaluru-based think-tank that works extensively on the financial health of municipalities. impression.
The downside of bond initiatives
The Agra Municipal Corporation (AMC) has identified properties worth Rs 5,000 crore in the last one year during an asset valuation exercise as part of preparations to issue green municipal bonds (to finance eco-friendly projects) by September. Commissioner.
The AMC plans to raise Rs 50 crore from the market through bonds for its Rs 270 crore water supply-cum-solar power project. AMC commissioner Ankit Khandelwal told ThePrint that the exercise has brought in financial transparency and accounts are being audited by a third party.
“The preparation of municipal bonds has helped the corporation to streamline its accounting system and bring financial transparency, as we had to get our accounts audited. This has helped us to identify and rectify the deficiencies. Valuation of municipal property, which has never been determined before, will play a big role in how we plan our future projects and look for ways to boost our revenue,” he said.
Senior officials of the corporations told ThePrint that like Agra, Kanpur and Prayagraj will mobilize Rs 100 crore and Rs 50 crore, respectively, for water supply projects.
“We had to change the way we kept our accounts as they had to be audited by a third party. It was a difficult process. Since we have a water supply project, we also had to settle the accounts of the water department. It has made the system more accountable and transparent,” a Kanpur Municipal Corporation official had said earlier.
Prayagraj has also proposed two solar power projects along with plans to lay a water supply pipeline in the city.
Officials said the Varanasi Municipal Corporation, which has an annual budget of around Rs 700 crore, has sent proposals for three projects, including the construction of a budget hotel, to the state government for approval.
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Warning
While experts say municipal bonds are a good way to raise funds, it is not the only way to improve the financial health of municipal corporations, which are largely dependent on state governments for funds.
“Once the municipal corporations start participating in the market, it makes them more accountable. But municipal bonds aren’t the only way to fix the accounting system. They should not issue bonds just for the sake of it. This must be because municipal bonds are best suited for financing a particular project,” Viswanathan told ThePrint.
Presenting the Union Budget for 2023-24, Finance Minister Nirmala Sitharaman had said that the Center would encourage cities to issue municipal bonds. He had said, “Cities will be encouraged to improve their creditworthiness for municipal bonds, through property tax administration reforms and ring-fencing user fees on urban infrastructure.”
Professor Debolina Kundu of the National Institute of Urban Affairs gave a message of caution.
Kundu told ThePrint that municipalities “have an obligation to return the principal to investors, for which their most lucrative source of revenue is linked to repaying bonds”. “It can pose a huge challenge to a city, especially a Tier-II or Tier-III city, in case of a natural calamity or a pandemic-like situation,” he said.
Kundu pointed out that in the long run, issuing bonds could “jeopardize the financial health of corporations”, which generally have a low share of their own resources and a high dependence on state funds, which “makes municipal affects the overall situation”.
According to experts, the state governments need to play an active role, as the amount to be mobilized for a sustainable bond market would be huge.
This requires a state-level urban infrastructure financing entity that can issue bonds on behalf of these cities. “It would be better to have a specialist body to assist cities in raising money from the market, as tier-2 and tier-3 cities will not be able to do so on a sustainable basis,” Vishwanathan told ThePrint.
Kundu pointed out that states such as Tamil Nadu and Karnataka have formed pooled financing and financial intermediaries that facilitate smaller cities to access the capital market by providing some leeway at low interest rates.
(Editing by Nida Fatima Siddiqui)