Hasten slowly

Municipal bonds are welcome, but there are risks too

The unveiling of the first-ever credit rating for urban local bodies (ULBs) last week is a welcome step. Twelve cities have been awarded such ratings and a total of 85 cities will be rated by the end of the financial year. It is hoped that ratings will revive the dormant municipal bonds market and help plug the massive funding gap facing Indian cities. According to a report on Indian Urban Infrastructure and Services (2011), India will need to invest $835 billion (at 2009–10 prices) between 2012 and 2031 to meet its urban infrastructure requirements. That is roughly 48 per cent of India’s 2010 gross domestic product, while the country’s municipal expenditure, as of 2011-12, was only about 1.6 per cent of GDP. Worse still, less than a third of this expenditure was financed by the ULB’s own revenue sources.

Municipal bonds were introduced in India in 1998 when Ahmedabad issued them. Since then, 25 municipal bonds have been issued, but the overall amount tapped is just $300 million, a fraction of what a well-developed municipal bond market can raise. But there may be a case for hastening slowly on this front, as the history of municipal bonds is a chequered one, especially in the US  (the municipal bond market in that country is worth $3 trillion) where things once went badly wrong. That should be a warning for emerging markets such as India. It can happen here, too, since city governments usually don’t have financial expertise. In India, there are several other constraints. Lack of skills and accounting preparedness, for example, are glaring inadequacies. On the demand side, investors are not too enthused because of the lack of credible information about ULBs, especially their accounts. Another hurdle is the lack of a secondary market, which makes such bonds rather illiquid.

Addressing India’s top policymakers during NITI Aayog's inaugural annual lecture last month, Tharman Shanmugaratnam, the deputy prime minister of Singapore, underscored the importance of cities to achieve the task of transforming India. “Cities are the crucibles of innovation and inclusivity,” he said, and that is why their development is at the heart of achieving higher economic growth. Improving the cities has been a key agenda of Prime Minister Narendra Modi since he took over. He has already announced the target of developing 100 smart cities with world-class amenities. However, the ground reality of Indian cities is far removed from such ambitious targets — a look at congestion in Mumbai’s local trains or Delhi’s poor state of sanitation or the condition of roads in Gurgaon are good starting points. More often than not it is the lack of finance that is blamed for the shoddy state of city infrastructure.

But while credit rating of ULBs is a necessary step, it is far from being a sufficient one. Cities that have no control over their own fate can hardly be expected to compete with each other in the market. India needs to redefine urban governance by empowering city administrations to use resources, while making them accountable to the people of the city. From the US to China, there are several lessons that can be learnt for effective city governance, but the central aspect is treating ULBs as the third rung (after central and state) of governance.