Step forward for cities

Municipal bonds can help push local development

The decision to issue Rs 200 crore worth of bonds in the name of the Lucknow Municipal Corporation (LMC) is the right one, and will hopefully help kick-start attempts by multiple other urban local bodies in relatively under-developed states to find alternative ways of financing infrastructure by tapping the capital markets. The bonds, for which the coupon rate settled at 8.5 per cent, are being partly subsidised by the Union ministry of housing and urban affairs, to the tune of Rs 26 crore, which helped make their pricing more competitive. The issue is supposed to finance a series of infrastructure developments in the city, including a project to improve water supply and some affordable housing. The Uttar Pradesh government hopes that several other municipal corporations will follow in Lucknow’s footsteps.

This Rs 200-crore issue adds to the more than Rs 3,500 crore worth of municipal bonds that are currently in issuance from eight urban local bodies. However, the lion’s share of this is, in fact, for the project to build a capital city for Andhra Pradesh at Amaravathi, a project that is facing its share of hurdles. Large multilateral lenders, including the Asian Infrastructure Investment Bank, withdrew some of their funding of the project, but the bonds were still bought last year by debt-focused mutual funds. A more sustainable example for Lucknow to follow is, perhaps, Ahmedabad, which first issued municipal bonds in the late 1990s and early in 2019 made its fifth such issuance. Thanks to the urban local body being in surplus for some years prior to 2018, and because of its history of repayment, the pricing on the Ahmedabad bonds was quite attractive. Further, the bonds were carefully structured in that all the projects that they were due to finance could count as “green” projects, including river cleaning and waste management. This allowed a wider placement of the bonds, and greater interest from investors. Other municipalities should also be careful to tailor their bond issuances to the nature of the demand in the market; currently the demand is high for bonds that meet suitable characteristics in terms of environmental, social and governance (ESG) norms.

Both the Union ministry through the Atal Mission for Rejuvenation and Urban Transformation programme and the markets regulator have attempted in recent times to make it more attractive to issue such municipal bonds. That said, there are multiple ways in which governance must be strengthened at the local bodies to make the most of this possibility. Urban local bodies should have access to the sort of resources that allow them to create and structure attractive financial instruments for the sort of projects that will meet the objectives of efficiency or sustainability. In this case, Lucknow was one of six cities identified by the US treasury department over the past year for help in issuing bonds, which explains how the capacity constraint was overcome. In future, this hand-holding must be performed by an indigenous institution; perhaps one can be created at the Union level that lends out expertise where needed. Further, their adherence to prudent financial management principles must be ensured, if necessary by check-ups by the state government. After all, in many cases it is the state government that is eventually on the line for these municipal bonds. Overall, this is a useful way in which to try and expand the financing options for urban infrastructure in India — and to introduce some market discipline into urban governance and revenue generation.