Not Many Takers

Needless to say, only three municipalities like those at Ahmedabad, Pune and Calcutta, ""which have high revenue flows""have been able to consider this funding route, at all. One way of doing it is on a general obligation basis, where the bonds would be issued on the strength of the issuers themselves. This would imply that the financiers would be taking a direct credit risk on the issuers. So, only top quality municipalities will find it possible to enter the markets.

And so far, only Ahmedabad Municipal Corporation has actually been able to do so. Ahmedabad Municipal Corporation, a revenue-surplus municipality which received an A+ rating from CRISIL, has managed to raise Rs 20 crore of its targeted Rs 100 crore issue through a private placement.

Other municipal corporations, like those of Pune and Calcutta which have not been so fortunate, are looking at the revenue obligation route. Issuers, which prefer to take this route, would be securitising future receivables, using an escrow accounting mechanism. But even such mechanisms can be used only by municipalities having a consistent source of revenues, either in the form of octroi or in the form of tax revenues.

So consequently, alternative mechanisms have to be developed, especially for municipalities having extremely low revenue inflows. This is especially for those that have to incur large capital expenditure either for water supply or sewerage disposal systems in the small urban localities.

One mechanism is being tried at Tiruppur, where the entire water supply project has been completely converted into a private sector initiative. The Tiruppur water supply project is expected to generate an internal rate of return (IRR) of 18 per cent. The entire cost of this project has been worked out to Rs 600 crore using a 4:1 debt equity ratio. Yet, this is an isolated instance and is difficult to replicate elsewhere.