Lec 27

Dr. Uttam K.
Roy Urban Governance and

Department of Architecture and Planning Development Management (UGDM)
Lecture 27:
Alternate sources of Municipal
Finance
1
Contents
Alternative sources of Municipal finance
Bonds
Borrowings
Example of financing public infrastrcutures
2
Revenue Generation
Augmenting sources Saving of

of revenue expenditure
Reduction of Reduction of Expenditure

Expenditure in indirectly by improving
straightforward services without upward
manner change of expenditure
Lessons Learned
• Emergence of municipal bonds and pooled financing as a viable
option for infrastructure finance.
• Municipal bonds and pooled financing only for the financially
stronger municipal bodies
• Dearth of bankable projects.
• GOI incentive funds are just now taking off.
• Continued requirement for state/central grants to make project
financing plans commercially viable.
• Users willing to contribute if project implementation guaranteed.
• Local reforms
Why alternative sources of financing?
– Inadequacy of conventional sources.
– Bridging of resource gap.
– Improving the financial and project
management capabilities.
– Inculcating financial discipline.
– Attaining objectives of accountability,
transparency and efficiency.
Alternative Methods of Financing Infrastructure - I
Private Sector Pricing
Loan Financing Participation
Banks Specialized Service / User

Intermediaries Charges
Leasing Contracting Franchising

• Commercial Banks
• Infrastructure Banks
• Municipal Development Funds Concession Service Management BOO
BOOT
BOLT
BOST
Alternative Methods of Financing Infrastructure - I
Capital GOI Incentive Funds Upfront User

Market Contributions
Equity Bonds CSS etc PFDF Projects
Int’l. Developers
Special Infrastructure Funds Municipal
Pooled
Financing
AHMEDABAD MUNICIPAL BONDS
• The Ahmedabad Municipal Corporation (AMC) was the first

ULB to access the Indian capital market
• First municipal credit rating in 1996
• First municipal bond without state government guarantee in
1998 (Rs. 100 crore)
• Annual interest of 14% and 7 year tenure
• Private placement: 75%
MUNICIPAL BONDS
• Since 1997, several cities have issued municipal bonds
without state government guarantees are Nashik (Rs. 100
crore), Nagpur (Rs. 50 crore), Ludhiana (Rs. 10 crore), and
Madurai (Rs. 30 crore)
• The bond issued by the Municipal Corporation of Madurai
was issued to refinance an existing project
• In most cases, bond proceeds were used to fund water and
sewerage schemes
TAX FREE MUNICIPAL BONDS
• To boost the municipal bond market, the Government of India
decided to provide tax-free status to municipal bonds.
• Ahmedabad is first to issue a tax-free bond (Rs. 100 crore)
• Hyderabad (Rs. 82 crore),Vizag (Rs. 50 crore), and Nasik (Rs. 50
crore) issued tax-free bonds
• Eight MCs, and Utility boards issued Rs. 120 crore tax-free
bonds
• Municipal bond annual interest rates are 1.5 to 2% less than
other loans for same credit enhancement structures
Pooled Finance Development Scheme
• Only financially strong, large municipal corporations are in a
position to directly access capital markets
• Most small and medium ULBs are not able to access capital
markets simply on the strength of their balance sheets
• The cost of the transaction is a significant barrier
• KUIDFC accessed the capital market by pooling 8 municipalities
around Bangalore
• Pooled Finance Development Scheme (PFDS) has been
designed to facilitate access to capital market by smaller urban
local bodies.
Borrowing From Commercial Banks/FIs
• Urban Local Bodies have also started financing their
urban infrastructure projects through commercial bank
loans.
• The Vadodara Municipal Corporation obtained loans
totaling Rs. 700 million from the commercial banks.
• The Thane Municipal Corporation obtained ICICI a loan
of Rs. 500 million in October 2001.
Example:
Resource Mobilisation and Management of
Urban Water Supply
ISSUES FOR CONSIDERATION
• Given the fund constraint, what should be the service delivery
norm ?
• Should cost be the only consideration for selecting ground
source as the source of supply?
• What about a rational water tariff policy ?
• Should we go for 24 hours supply from contamination point of
view.
• Should ground water recharging, rain water harvesting and
water body preservation be mandatory for every ground water
based water supply scheme?
PREREQUISITE FOR PRIVATISATION
• Projects sustaining on stand alone basis.

• Return on investments comparable to market expectations.
• Deployment of fund / debt commercially acceptable.
• Effective cost recovery measures Environment friendly projects.
MANAGEMENT ISSUES IN THE PLANNING PROCESS
• To have a development perspective for different time
horizons.
• Stabilising existing system to sustain the service level.
• Developing additional source and transmission arrangement.
• Better water resource management through safeguarding of
water source.
• Analysis of existing distribution system and arranging for
addition / alternation.
•Better quality surveillance.
MANAGEMENT ISSUES
• Operation and Maintenance.

• Water pricing policy.
• Unaccounted for water.
• Ground water.
• Land and Technology.
• Financial and Institutional Management.
• Resource Mobilisation.
RESOURCE MOBILISATION
• Water Supply as per standard norms require large capital
investment.
• Cost of production is dependent on - (1) O&M Cost. (2) Capital
Cost.
• Capital Cost is again dependent on - (1) Loan repayment; (2)
Replacement of plant and machinery.
• In our country sizable part of City / Town population live in
slums and belong to EWS category.
• Provision of potable water as public good is required to be
continued with government - be it state or local.
POSSIBLE WAYS
• Adoption of a tariff policy to cover O & M charges
•Allowing 10 to 20% of the produced water to be sold to industries at
industrial rates.
• Making provision of annual O & M cost of 5 years after commissioning in
the project estimate at planning stage.
• Collecting advance registration change as community contribution to
capital cost.
• Tax free municipal bonds.
• Institutional finance.
Next LECTURE
28. Municipal Accounts
20
Thank You
21

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Dr. Uttam K.

Roy Urban Governance and

Augmenting sources Saving of

Reduction of Reduction of Expenditure

Banks Specialized Service / User

Leasing Contracting Franchising

Capital GOI Incentive Funds Upfront User

Equity Bonds CSS etc PFDF Projects

• The Ahmedabad Municipal Corporation (AMC) was the first

• Projects sustaining on stand alone basis.

• Operation and Maintenance.

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