New bid for urban transformation through municipal bonds
In this context, the government has rightly made raising funds through municipal bonds a major theme in the Union Budget.
With India taking up the presidency of the G-20 nations, urban transformation is back on the national agenda. The Union government has decided to identify 30 cities with good performance ratings and help them issue municipal bonds (muni) to raise capital for infrastructure projects.
City and municipal governments do not have a great track record of financial skills or discipline, which makes it difficult for them to raise money in the debt market. Without an assured flow of finance, how do cities bankroll essential projects like housing, sewerage, and mass transportation which are so crucial to making urban life easier?
So far they have been dependent on development handouts by the Union or state governments. The Centre is hoping to change that by helping them raise money through the issue of municipal bonds. The Indore Municipal Corporation recently raised Rs 122 crore through its green bonds targeted at retail investors and listed on the NSE.
News reports say Surat and Visakhapatnam have specific projects being dressed up and Chennai is also in the pipeline to become the first megacity to issue muni bonds this year. Both Surat and Vizag have developed a revenue stream via the supply of treated wastewater to industries. The issue of bonds will help enlarge these projects.
Building ‘smart’ cities
Those with short memories need to be reminded that urban transformation has always been high on the priority list of the BJP government. At least on paper! The two big clarion calls after the BJP-led government was voted in 2014 were ‘Housing for All by 2022’ – the 75th year of India’s Independence; and the Smart City Mission that sought to modernize 100 cities.
Over the years set targets have faltered, and discussions on these subjects have gradually disappeared.
Looking back, the government set up the ‘Urban Renewal Mission’ and launched the Pradhan Mantri Awas Yojna – Urban (PMAY-U) on 25th June 2015 with an initial outlay of Rs 48,000 crore and with the target of providing houses for all by 2022.
However, in its reply to questions in the Rajya Sabha last December, the government admitted that only 51% of the target had been achieved. Against a sanction for 12.5 million units, on ground, just 612,000 homes had actually been built. Seeing the 2022 target could not be met, the PMAY-U scheme was extended to December 2024. Meanwhile, government targets had become outdated as the urban housing shortage had increased by 54%, from 18.8 million units in 2012 to 29 million in 2018.
The ‘Smart Cities Mission’ too was formally launched along with the ‘Housing-for-all’ on 25th June 2015 by the Prime Minister, with an allocation of Rs 98,000 crore. Then 3 years went by choosing the 100 cities.
The ‘smart’ projects, aimed at mainly ramping up communication and technology, were supposed to be completed within 5 years; but tardy implementation then forced the government to extend the deadline to June 2023.
The latest data shows that of the work orders for 7,799 projects worth Rs 1.80 lakh crore issued so far, 5,399 projects worth Rs 1.02 lakh crore have been completed. Only 20 cities are likely to meet the June deadline; the rest will need more time. Most of the cities have achieved only 44-46% of the target projects launched.
Fall back on grant-in-aid
There are very few planned cities in India. Most of them have mushroomed as a result of rural migration and piecemeal industrialization. With soaring real estate prices, most of urban India still lives in slums or other informal housing where basic civic amenities like water and transportation are an everyday struggle. In this context, the government has rightly made raising funds through municipal bonds a major theme in the Union Budget.
That’s the way planned cities in developed economies raise capital, and they don’t need government handouts. For instance, in the US, municipal government debt stands at $ 4 trillion, and accounts for nearly 16% of the country’s GDP. However, muni bonds never caught on in India as the municipal bodies had little to show by way of stable revenue streams and efficient management. Between 1997 and 2022, municipal bonds have barely raised Rs 6,250 crores.
Grant-in-aid, therefore, has remained the main form of funding for urban transformation. The big initiative we saw in the past was the Jawahar Lal Nehru National Urban Renewal Mission (JnNRUM) launched in 2005 which allocated Rs 66,000 crore over 7 years to improve urban infrastructure in 65 cities. Grants were sanctioned on the condition that municipalities adopt a set of 11 reforms aimed at financial efficiency. On this front, it was a failure.
Today, the cost of urban renewal is humungous. An old McKinsey report projects India will require $1.2 trillion (or about Rs 100 lakh crore) in capital expenditure by 2030 to transform her urban landscape to modern, livable levels.
While municipal bonds will be a new source of revenue, it will be a considerable time before municipal bodies can evolve into autonomous, financially stable entities capable of raising funds in the market. Given this scenario, central grant-in-aid will continue to be the main driver for some time to come.