Municipalities will have to tap Capital markets

Mumbai, Aug 24 (UNI) With more than 285 million people living in 4,000 towns and cities, the country's municipalities and Urban Local Bodies (ULBs) are looking at the capital market to raise resources for providing the necessary services.

According to an ongoing study by Fitch Ratings, the traditional source of fundings for municipalities and ULB-subsidized funds, have come under heavy pressure as USD 229 billion was estimated to be required for infrastructure building projects from 2007-2012. This investment will be a necessity as the urban areas provide 60 per cent of the country's GDP and more than 90 per cent of the government's revenues.

The urban population, which is expected to grow at 3 per cent over the next few years, will constitute 41 per cent of the country's population by 2030.

''The growing urban population is outstripping the ability of municipalities to meet the demands of basic services like water and sanitation,'' the study stated.

To meet the challenge, the only way out seems to be entering the capital market to raise funds. There is already a provision under the 74th Amendment to the Constitution (1992) which allows local bodies to mobilize resources (from within and outside the state), independent of the state governments for operation and maintenance of urban services.

Though sound on paper there is a catch. Entry into the capital market will invariably rake up issues of liquidity and credit qualities putting municipalities of smaller towns at a disadvantage.

Their weaker credit profiles and less recurring financial needs would restrict their options for raising capital.

''Small towns lack technical and financial resources to attract investors. Investors will also have to be weary when checking the profiles and books of municipalities as none of them maintain a Balance Sheet,'' cautions R Venkataraman, Fitch Ratings.

''However, capital markets are the best options, as banks will only give short to medium term loans with floating rates of interest. The nature of ULBs demand long term investments at fixed rates,'' Mr Venkataraman said.

The feasibility of raising capital from the markets was proved when in 2002 the Water and Sanitation Pooled Fund (WSPF) in Tamil Nadu successfully raised capital from the domestic debt market to refinance high-cost loans or finance new projects in 13 ULBs.

However, this was more of a flash in a pan as only West Bengal has followed suit. The best option could be to adopt the Pooled Finance Development Fund (PFDF) scheme launched by the Ministry of Urban Development (MoUD) that would allow municipalities and ULBs to access bond markets and improve the country's shallow municipal debt markets.

The scheme could also develop into creation of large infrastructure banks that can issue debt that is secured by pooled repayment streams, lowering default risks and strengthening credit.

Such an infrastructure bank could also be in a position to address the markets' concerns about liquidity and access to lower-cost, longer-term financing to members.

This scheme could also enable smaller municipalities to tap in the capital markets as they would gain access to the capital and financial markets that would facilitate development of projects.

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