[Editorial Analysis] Financing urban infrastructure

Mains Paper 3: Economy
Prelims level: Urban infrastructure
Mains level: Steps towards financing urban infrastructure

Context:

• Indian has between a-third and-a-half of its population already living in high-density areas. The trend towards urbanisation will continue as the economy moves towards becoming more connected with global ecosystems in manufacturing and services.

Background:

• According to various estimates, urban India contributes to ~70% of India’s GDP.

• The poor quality of India’s urban infrastructure means that the need to invest in it is well recognised.

• Indian cities will have to improve their rankings in the surveys of the best cities in the world.

• Current rankings are largely driven by poor infrastructure of travel, water and sanitation, and air quality.

• The High-Powered Expert Committee for Estimating the Investment Requirements for Urban Infrastructure Services estimated the investment required to finance urban infrastructure and services at Rs 39.2 trillion during 2011-2031.

Accessing the market for urban financing will require:

(a) ULBs to have predictable revenue streams,
(b) capacity building, and
(c) innovation in financial products to attract investors.

Predictable ULB revenues:

• Revenues or inflows for the ULBs comprise tax and non-tax sources. Taxes include those on property and vehicles or levied by the local body on goods.

• User charges for services like water, fire, permissions, etc, account for the non-tax sources. ULBs also get some income from rentals of its properties.

• UBLs are, hence, dependent on devolution and grants from the Centre and respective states. These grants and devolutions are sometimes committed, but in most cases, are discretionary or tied to specific projects.

• Converting grants that Centre and the states give to ULBs to committed devolutions will allow for better leveraging.

Capacity building:

• ULBs need to get their accounting and financial reporting in order so that external investors have higher confidence in their numbers and prospects.

• A rigorous and timely system of accounting will also lead to the identification of new revenue sources, plugging of leakages in current sources, improvement of collections, optimisation of their assets, etc.

• Currently, the market is shallow with few investors participating, and those who come in, tend to hold the bonds issued by ULBs to maturity.

• Creating a wider pool of investors will require having a predictable and large pool of supply of bonds and an active secondary market.

• This will generate interest amongst various long-term fund managers in insurance, pension funds, mutual funds, and others.

• One way in which the municipal debt can be analysed and tracked is if such issuances become part of an ETF like ‘Bharat Bond’ ETF that currently is only for central government and PSU debt.

Creating innovative products:

• Structuring debt issued by ULBs requires considerable skill. While 35 ULBs have been rated AA and above, only a few have been able to access the market due to the challenges outlined above.

• Structuring debt will require addressing concerns on availability, predictability, and fulsomeness of the cashflows to meet debt obligations.

• Many ULBs have escrowed their expected collection of property taxes to give comfort to the investors.

Way forward:

• Multiple ULBs can come together to pool their resources to reach out to the market—this will create a larger issuance and give investors comfort over the combined credit risk.

• Having a credit guarantee fund could allay some of the concerns. Innovation is also required in pooling together a wider variety of state and municipal bond issues and creating appropriate tranches with suitable risk-return trade-offs.

• Unlocking urban financing is the key to getting the urban investment story kick-started: it will significantly improve the ‘ease of living’.

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Prelims Question:

Q.1) With reference to the New START (Strategic Arms Reduction Treaty), consider the following statements:

1. United States has extended the New START (Strategic Arms Reduction Treaty) nuclear arms control treaty with Russia for five years.

2. The treaty, which first went into effect in 2011, limits the United States and Russia to deploying no more than 1,550 strategic nuclear warheads each and imposes restrictions on the land- and submarine-based missiles and bombers to deliver them.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C

Mains Question:

Q.1) ULBs need to get their accounting and financial reporting in order so that external investors have higher confidence in their numbers and prospects. Comment.

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