CHENNAI: The Urban Local Bodies (ULBs) may soon issue bonds and other debt instruments for augmenting resources for capital projects, thanks to the recommendation made by the Sixth State Finance Commission (SFC). Since the state government has accepted this recommendation, it will issue detailed guidelines for all ULBs.The government also accepted the recommendation that it should make comprehensive efforts for credit rating of ULBs through specialised agencies to enable them to raise infrastructure bonds.
“Given the funding requirements of ULBs, and given the fact that the other two tiers of the government are allowed deficit financing of their budgets, the condition that ULBs must be surplus for three consecutive years for issuing bonds seems onerous. Efforts need to be taken by the government to modify the conditions for issuing bonds in consultation with appropriate regulatory authorities,” the commission said in its recommendations tabled in the Assembly on Friday.
Recently, the RBI, in its advisory under the topic—Alternative Sources of Financing Municipal Corporations, said: “Local governments can also tap the capital market by issuing municipal bonds. In addition, MCs can choose to finance through special purpose vehicles (SPVs) and state-pooled finance entities. For example, China’s Local Government Financing Vehicle (LGFV) is an investment company that sells bonds in the bond markets for financing real estate development and other local infrastructure projects. Another variant is the practice followed by South Africa.”
Besides, the SFC has made numerous recommendations on various topics: Sharing of the State’s Own Tax Revenue, income from assets, capital grant fund, vertical sharing between tiers of RLBs and ULBs, non-tax revenue, innovative financing mechanisms, human resource management, etc.
The SFC said statutory fiscal reforms and budgetary management compliance have helped state governments discipline their accounts and deficits. It is high time that the need for such discipline, at least for corporations, is recognised. The state government should try to introduce statutory provisions in the existing acts or enact new legislations to ensure fiscal discipline among municipal corporations.
A state-wide capacity Building and Training Policy and a Capacity Building and Training Programme (CBTP) should be formulated with appropriate funding provisions for both urban and rural local bodies, the commission said.Capacity building should also be imparted to the elected representatives of local bodies to ensure they have the knowledge and behavioural competencies required to discharge their roles effectively.
Administrative Reform Commission/Committee should be constituted to study and report the measures to be followed for good governance at grassroot levels in local bodies (rural and urban).Such a commission may also assess and recommend modifications to the organisational structure and service rules to balance autonomy with accountability at the last mile.
The Tamil Nadu government has accepted another recommendation of the State Finance Commission to introduce service-level benchmarking for all ULBs annually with the help of third-party professional agencies. Better performing ULBs and wards within ULBs can be rewarded with additional resource allocation.
A state-level cell should be created to support local bodies in mapping properties, suggesting value capture options, reviewing contracts, and support on auction processes. This cell would also maintain a repository of successful monetisation projects and relevant connections for other local bodies.