This presentation narrates various capital financing instrument which are available and utilised by Indian Municipal Bodies.

1. Capital Finance at the
Local Level: Borrowing,
Debt Management and
Bankruptcy Provisions
Dr. Ravikant Joshi
Advisor – CRISIL Risk & Infrastructure Solutions Ltd - Mumbai
Chair Professor – Urban Management - St. Joseph’s College of Business
Administration - Bangalore
Workshop on Fiscal Decentralization and Local Governance in India
Organized by
The Indian Institute of Public Administration in partnership with the
Government of Japan and the World Bank Institute
December 11-15, 2006 Goa

2. Capital Finance at Local
Level – Ways and Means
Own Capital Resources – revenue surplus +
capital cost recovery + betterment charges +
sale of assets
Capital Grants
Equity
Debt (municipal bonds)
Borrowings – from DFIs (HUDCO, LIC), FIs,
Commercial Banks, special intermediaries –
KUIDFC, MMRDA, TNUDF
Project Financing
Public Private Partnership

3. There exist some common
views…
In Post Reforms Era -
Economic and structural reforms have opened up
plethora of capital financing options like - project
financing, market borrowing (municipal bonds),
PPP etc and now there are no supply side
constraints
Some ULBs/Utilities are successfully financing UI
using these options and very soon others will
adopt
The problem is with ULBs/Utilities which lack
financial health, credibility, bankable projects are
responsible for non-development of urban
infrastructure services
There is a distinct credit averseness at local level
……Some are correct, some are incorrect

4. Capital Finance at Local
Level in Pre-reform Era
Capital rationing – everything was part of plan alloc.
Govt. Guaranteed bond qualifying for SLR.
Loans from LIC, HUDCO on the basis of government
guarantee
Bank’s term loan was the only source partially out of planning
mechanism.
But was not much of use to municipal bodies as it was
characterised by –
– High interest cost.
– Short to medium term.
– Excessive demand from each sector of economy as equity and debt
market were not developed.

5. Capital Finance at Local
Level in Pre-reform Era
Was confined to
Revenue surplus and own capital income of ULBs
Paltry Capital grants from higher level
government
Borrowings administered through capital rationing
mechanism, carrying administered negative (lower
than market rate) interest rates supported by
government guarantee

6. Capital Finance at Local Level –
Key Question
Have Capital finance options really opened up
in last decade?
Are the issues only on the supply or also on
the demand side?
Are ULBs/Utilities resorting to capital finance?
If so, is it mainly from DFIs? Or from market
(equity & bonds) or from banks or from higher
governments? Or from Multilaterals?
If no, Why?
Will supply side measures help weak ULBs?

7. Yes, ULBs/utilities are not
resorting to capital finance
No corporatisation of UIS, no equity raising
A mere 16 bond issues by 13 agencies in 8
years and raised only Rs. 14491 million
including 2 pooled finance initiatives
ULBs are borrowing on basis of balance
sheet strength and not on strength of project
As a result all bonds raised have been
general obligation bonds and not revenue
bonds. Also the bonds were ‘SO’
Tax Free Status has not motivated them to
issue bonds and now in 2006 budget tax free
status has been withdrawn
Capital Financing - Not Explored, Not Preferred, Not Adopted….

8. Capital Financing - Not
Explored, Not Preferred, Not
Adopted….
Demand for DFI lending is low:
Only 33 loan proposals from 28 agencies to HUDCO in
past three years: urban sector lending amounted 8% of
HUDCO’s lending
No borrowing from LIC in last five years as LIC has
stopped lending to ULBs/Utilities
No project finance via IDFC, IL&FS
Except one or two no Real PPP initiatives
Even investment grade capacity has not necessarily
increased the appetite for capital financing (borrowings)
May be preferred in future because of JNNURM….

9. Seems Less likely …….
Against the total CAPEX of Rs. 92321 crores
proposed by 32 cities under JNNURM only Rs.
6880 crore borrowing is envisaged (7.45%)
Envisaged borrowing is not examined from
capacity to borrow and service debt aspect
Only 9 out of total 79 sanctioned DPRs indicates
plan and probability of borrowing
Only 3 out of 79 sanctioned DPRs show
probability of PPP
In sum it means….

10. Capital Finance at Local Level
in post-reform Era is confined
to
Revenue surplus and own capital income of ULBs
Borrowing from Banks and calibrating their borrowing (short
term) to what banks can provide
Forced top down lending to local bodies by state government
though LBs are non-investment grade
Paltry Capital grants from higher level government till today,
In future, to sizeable JNNURM Grant
But not to –
Equity or debt financing
Borrowings from DFIs – HUDCO, LIC
Borrowings from SFIs
Project financing or PPP
Why….

11. Obvious cause….. lack of
financial health
NIPFP study for 12th CFC and 12 CFC:
Per capita total revenue of ULBs was Rs. 706 in
2001-02, less than Rs. 2 per day
Average per capita expenditure ranges from Rs.
0.20 to Rs. 2.25
Poor credit ratings
No AAA rated ULB/Parastatal till date
Highest rating by any ULB or Utility so far AA+(SO)
Except HMWSSB & NMC who got ‘A’ rating all live
ratings are ‘SO’
Not more than 40 ULBs have investment grade
But issues go deeper….

12. And are complex too….
Even investment grade capacity has not
necessarily increased the appetite for capital
financing (borrowing)
High credit averseness among most ULBs
Local bodies adopt incremental approach towards
capital investment due absence of long tenure loan
products.
No compulsion to give first try to other options of
capital finance
High cost loans make borrowing unviable for weal
ULBs
Lack of debt management capabilities
No debt limitation & bankruptcy Provisions in law
Contrary to belief issues exist on supply side too……….

13. And are really overarching
Market players are unable to offer/to provide
A cost competitive long tenure loan product because of
Asset-liability mismatch (in case of banks),
Government regulations (insurance funds and pension funds),
Business focus (IDFC, IL&FS)
Cost of funds (HUDCO)
A competitive product for low investment grade ULBs
Funds to speculative grade ULBs due to lack of risk
appetite
Absence of Credit enhancement mechanism
Inadequate legal framework for risk mitigation

14. Flow of funds provide skewed
incentives
CRISIL Infac Research RBI Data
1
0
4
0.
5
3
.
9
1
7.
7
1
4.
9
1
3
0
%
1
0
%
2
0
%
3
0
%
4
0
%
5
0
%
6
0
%
7
0
%
8
0
%
9
0
%
10
0%
Pension
Funds
Insurance
funds
Government
bondsand saving
schemes
Shares
anddebent
ures
Depo
sits
C
a
s
h
Household
savings
Mode of
Savings
Invested
in
Govern
ment
P
S
E
s
Guarant
eed
AAA
, AA
A,
BB
B
Non
investment
Investment
grade
Pattern of
investments

15. Gaps in UI & UWSS Sector Financing
System
IIFC?
3
5
1
0
High
Investment
gra
de
Tenurein
Years
Ri
sk
Low
Investment
gra
de
Speculative
grade
Competitive bank
loans
Bond
Markets,
HUD
CO
High cost
loans from
LIC, HUDCO
with
guaranteed
by State
Government
s
High
cost
bank
loans
Cre
dit
enhancem
ent
Bond
Markets,
ID
FC
Urban Local
Bodies
Project
Vehicles
PossibleStatelevelpool
product

16. The deepest root causes are
outside the capital finance
system
Lack of fiscal responsibility and budgetary norms
for ULBs/Utilities – inadequate but free/easy funds
are made available to ULBs/Utilities
Lack of development or performance
accountability to people – even ULBs with
resources sit on funds rather than carrying
development
People fail to convert their needs in to real
demands, fail to pressurise ULBs/utilities to
perform or to deliver
People fail to own responsibility of paying right
price and demanding right service

17. Capital Finance at Local Level –
In sum
Contrary to general belief supply side (availability) of capital
finance has not increased or opened up in post reform era
Short term cost effective funds are available to investment grade
ULBs which are less than 50 in numbers in the country
Long term cost competitive funds are not available even for
financially healthy ULBs
Market players are ready to lend to investment grade ULBs but
they are not ready to borrow –credit averseness
Market players lack risk appetite to lend to low or no investment
grade ULBs
Most of the ULBs lack financial capacity – no capital financing
through own sources or other sources – only through capital grants
and through the loans thrust by state governments

18. Capital Finance at Local Level –
In sum
ULBs having investment grade find most of the market
players and their products non-cost competitive
No efforts by ULBs to improve their financial health
Local bodies adopt short term and incremental
approach towards capital investment
High averseness for alternative sources among most
ULBs as they involve decision making
Lack of capacity, lack of knowledge
ULBs/Utilities are not under pressure to improve, there is
lack of performance and development accountability

19. Capital Finance at the
Local Level: Borrowing,
Debt Management and
Bankruptcy Provisions
Thank You