Financing Of Urban Infrastructure Financing Urban .
Financingof UrbanInfrastructureFinancingUrban InfrastructureFor ImplementingUrban ResilienceDevelopmentAlok ShiromanyExpert In Urban Finance
Contents IntroductionUrbanization and Economic GrowthStatus of Urban Services in IndiaService Level GapsGround Issues & Key ChallengesUrban Investment Requirement Sources of funding for ULBsInfrastructure Financing optionsMunicipal Bonds ProcessPublic Private Partnership (PPP)Multilateral Financing Institution (MFIs) JnNURM- A CatalystMunicipal Finance agenda & JnNURMJnNURM – Financial ReformsCredit ratings of ULBsOverall Financial PerformanceJnNURM & LeveragingAction Taken by MinistryWay Forward
Introduction Rapid urbanisation - tremendous pressure on urbaninfrastructure and its delivery system. Fast economic growth and growing population have ledto huge demand-supply infrastructure deficit Lack of adequate and quality infrastructure is proving tobe a binding constraint in sustaining, deepening andexpanding India’s economic growth and globalcompetitiveness
Urbanization & Economic Growth 31% of Indian’s Population lives inurban areas. Cities with population of 1million are increasing - 35 in2001 to 50 in 2011 and is expectedto increase further to 87 by 2031. Cities and towns of India aredeficient in the quality of services. Investment for urban infrastructureover the 20 year period – INR 39.2lakh crore at 2009 – 10 prices(HPEC) McKinsey Report (2010) hasestimated an investmentrequirement of INR. 53.1 lakh crore.Urban population likely to increasefrom present 377 million to 600million by 2030 & 900 million by205053 Million Plus cities
Status of Urban Services in India Drinking Water availability within the premises is 71.2%; 32.7% of the urban population has access to piped sewersystem; Average duration of water supplyhours; 21% of waste water is treated ; Waste collection efficiency ranges between 70% and 90%in major Metro cities; Segregation of solid waste is around 30%; Organized public transport system operational in morethan 65 class-I cities; and BRTS and Metro projects are operational in various Megaand Metropolitan cities.ranges from 1 - 65
Service Level GapsNationalBenchmarkIndiaStatus135 lpcd69 lpcdExtent of metering of water connections100%13%Extent of non revenue water ( NRW)20%32%Cost recovery in water supply services100%39%Coverage of toilets100%70%Collection efficiency of the sewage network100%10%100%35%100%10%100%46%Service IndicatorsWater SupplyPer Capita supply of waterSewerageSWMHousehold level coverageExtent of scientific disposal of municipal solidwasteStorm Water DrainageCoverage of storm water drainage networkSource: Service Levels in Urban Water and Sanitation Sector-Status Report(2010-2011)Ministry of Urban Development6
Ground Issues & Key ChallengesCities are not selfreliant Depend on grants from Central/State Governments, whichare reducing ULBs need to be provided 3Fs (Funds, Functions &Functionaries) Devolution of funds is not predictable and timelyULBs caught in a lowequilibrium cycle Generating less revenues and spending even less on servicesand infrastructure. Lack of Regulator & Std. Concession agreementLack financialviability Cities lack financial viability and internal accruals areinsufficient. ULBs should be strengthened in financial management toenable own-source revenue generation.Inadequateinfrastructure in cities Inadequate infrastructure in cities; Cities unable to meetrising demand for services and unable to raise resources.Weak creditworthinessPlanningLack of Private Investors ULBs’ revenue sources inadequately capture the economicbuoyancy in the local area - leading to overall weak creditworthiness. Absence of financial investment plans Lack of stakeholder consultation Weak Asset Management Absence of data availability and mapping Lack of Regulator Lack of Standard Concessionaire Agreement
Other Constrains Inadequate availability of long term finance (10 year plus tenor)both equity and debt Availability of Information - While plain service contracts mayrequire limited information on an existing system and minimalmonitoring capacity; whereas, options such as BOOT and concessionrequire high political support, a good information base about theexisting system and a strong regulatory framework; Concerns on low user charges recovery remain high; Inadequate shelf of bankable infrastructure projects that can be bidout to the private sector; Inadequate advocacy to create greater acceptance of PPPs by thepublic; and Lack of clarity during project planning and execution by the ULBs.
What are the other sources of funding forULBs?State finance commission (SFC) fundCentral finance commission (CFC) fundPool finance development fundState level urban infrastructure fundInstitutional fundMunicipal bondsPublic private partnership (PPP)10
Institutional Finance- Avenues &SuitabilityNational/State levelinfrastructure fundsMunicipalBondsBi-Lateral ionSuitability of funding from various avenues ofInstitutional FinanceAvailability of funding for capital projectsLHHHHGetting interest rates lower than commercial borrowingsMHHHHLoan term commensurate with gestation periodMHHHHEase of procedures in accessing financeMMLLMNeed for escrow accountHHLHHNeed for credit ratingHHMHHFunding for project preparatory expenseLMHLMAvailability of grant component for capacity buildingLLHLMRequirement of Techno Economic Feasibility ReportHHHHHClose monitoring fund utilization & project implementationHHHMHSource: Toolkit for Accessing Institutional Finance, Jan 2011L Low, M Medium, H High
Process for Institutional FinanceInternal Decision of ULBAccessing Institutional Finance Purpose of loan Amount of loan Preferred model of execution- PPP,Govt.: http://jnnurm.nic.in/wp- Credit rating Approaching financing institution Preparing Techno Economic FeasibilityReport: .ToolkitPP.pdf Loan preparation expenses Tentative time for repayment Person authorized to represent the ULB,negotiate & sign Time limit for closing deal Necessary approvals from State Govt. &other authoritiescontent/uploads/2011/01/JNNURM Toolkit DPRs.pdf Appraisal of project Negotiation Signing agreement Funding Implementation of loan covenantsescrow account, SPV etc.
Infrastructure FinancingSources of Infrastructure Financing:Local governmentcapital budgetallocationBank andInstitutional loansGrants from Stateand CentralGovernmentLong-term municipalfunds/BondsLeveraging municipalassets and privateequityPooled bonds issued byurban infrastructurefunds
Infrastructure Financing OptionsMunicipal BondsInfrastructureFinancePublic Private PartnershipPublic Financing Institution/BankFinanceMultilateral Financial Institutions
Municipal BondsProcessPrivate InstitutionalInvestorsPrincipal &InterestMarketSupplySideBondSubscriptionULB BondsCreditEnhancementsBondProceedsPrincipal &InterestULB InfrastructureProjectsULB Revenue/ProjectCash FlowsEscrow AccountMarketDemandSide
Municipal Bonds Municipal Bonds issued by the ULBs,are redeemable after a specificperiod and have a definite rate ofinterest. Municipal bonds are appropriateinstruments-raisingresources,channeling funds from the capitalmarketintoMunicipal Bond Issues in IndiaType ofNo. of nce (onetax-free)Total25 Long term in nature, unlike bankloans that are of shorter tenure.Provides opportunities for longgestation infrastructuredevelopment ment. Amount (inRs. Crore)437.84 About 11 ULBs out of 65 continuedtheir reliance on institutionaland bank borrowings to financeurban infrastructure projects fromcommercial banks.Agra , Allahabad, Lucknow , Varanasi,Kanpur, Meerut are using JnNURMrevolving fund to fund the capex fortheir projects.
Public Private Partnership (PPP)ExperiencePrivate PartnerPublic Sector Facilitator Enabler Concessioning Monitoring and Supervision Management and Technical Skills/InnovativeTechnologies Operational Efficiency Financing Builder/OperatorCollaboration Public funding with private service delivery and private management. Public as well as private funding with private service delivery and private management. Public as well as private funding with public/private service delivery and public/private/jointmanagement.The Public-Private Partnership (PPP) Project means a project based on contract orconcession agreement between a Government or statutory entity on the one side and aprivate sector company on the other side, for delivering an infrastructure service onpayment of user charges.
Infrastructure Financing OptionsPublic Private PartnershipExperience Nearly 48 projects have reportedly been supported through PPP with almost 19% of theproject-cost been leveraged through private sector participation under JnNURM ;SWM, Water Supply and Transportation sectors have been found to be most amenable sectorsrelated to ntsCapacityConstraintsFinancialConstraints No tariff regulatory mechanism for determining the principles of tarifffixation, regulate service delivery standards and implementation of reformsunder PPP. No framework for evaluating the revenue and return of the project. Need for long-term funding at concessional rates/or provide creditenhancements for the urban PPP projects. Lack of capacity at the State and city levels to engage with Department ofEconomic Affairs (DEA), shortlist transaction advisors and manage them. Need for rules and standardized procedures to regulate and guide PPPprojects and an enabling provision for PPP in the General Financial Rules.
Public Financing Institution/Bank Financing These Institutions provide short term, mediumterm and long term credit. Banks are permitted to finance SPVs,registered under the Companies Act, set up forfinancing infrastructure projects .
Multilateral Financing Institution (MFIs) MFIs refers to World Bank and regional development bank such as ADB.InstituteType of FinancingType of BorrowerWorld Bank GroupInternational Bank forReconstruction andDevelopment (IBRD)Non-concessional loans and loanguaranteesPrimarily middle-incomegovernments, also somecreditworthy low-incomecountriesInternational DevelopmentAssociation (IDA)Concessional loans and grantsLow-income governmentsInternational FinanceCorporation (IFC)Non concessional loans, equityinvestments, and loan guaranteesPrivate sectors firms indeveloping countriesAsian Development Bank Concessional and Non-concessional loans, equityinvestment, grants and loanguaranteesMiddle-income governments,some creditworthy low incomegovernments, andprivate sector firms in theRegion.
JnNURM – A CatalystJawaharlal Nehru National Urban Renewal Mission(JnNURM) was launched by the Government of India on 3rdDecember 2005PolicyFrameworkInstitutionalFrameworkTo encourage reforms and fasttrack planned development ofidentified cities as prioritized byStatesFocus is to create economicallyproductive, efficient, equitableand responsive citiesFinancialFrameworkProjectDevelopmentThe program was planned to operate on a mission mode by facilitatinglarge scale investments in the urban sector, policy change andinstitutional reforms for strengtheningMonitoring &Evaluation
Municipal Finance agenda & JnNURM Essential to expand the investment envelope by mobilizing longterm debt financing from the financial markets; Improved credit-worthiness shall help create interface betweencapital market/FIs and municipal finance; Need to develop bankable projects and leverage from market; Need for better expenditure management; Urgent need for improving revenue mobilization/ innovative useof assets; and There is an urgent need for supplementing institutional capacityby capacity building measures.Several JnNURM reforms, such as accounting reforms, property taxsystem, user charges on basic services and reengineering andcomputerization (e-Governance) of key municipal functions are importantinitiatives that will help enable the local bodies to access the capitalmarket.
JnNURM Financial ReformsMunicipal Accounting ReformPreparation of State Municipal Accounting ManualManual Approval & Adoption by the Local BodyListing the Assets and Liabilities at ULB levelValuation of AssetsPreparation of Opening Balance SheetMigration to DEASAppointment of Audit Officers/CA/Cadre
JnNURM Financial ReformsProperty Tax ReformNotification/Amendment of Act on Collection of PropertyTaxExtending of property tax to all propertiesPosting of tax details in the public domain & migration tostandardized self-assessment system of property taxationon the basis of periodic revisions and review of ratesSetting up non-discretionary method for determination ofproperty tax (unit area method or capital value method)Coverage (85%)Collection Efficiency (90%)
JnNURM Financial ReformsO&M Cost Recovery 100% O&M cost recovery is one of the ULB level reforms; 40 UIG cities are collecting more than 50% O&M cost recovery inwater supply; 23 UIG cities are collecting more than 50% O&M cost recovery inSWM; 758 water supply projects have been sanctioned under the Mission ofwhich 344 have been completed; 108 Solid waste management projects have been sanctioned of which30 have been completed; Some of the completed projects: Kanpur, Nashik, Madurai, NaviMumbai, Asansol, Durgapur, Surat, Pune ,etc; Impact of service levels yet to be seen as projects are yet to becompleted; More cities are introducing water meters;
Need for Credit Rating Independentquality;and credibleevaluation of credit Independent financial analysis of city finances; Benchmarking/Comparative analysis with other municipal entities -highlights strengths and weaknesses; and External credit assessment encourages financialamongst rated cities.Access to wider set of investors:1.2.3.4.disciplineIncreased accessibility to capital markets-helpsinvestors in pricing the debt offer;Increased marketability of debt issues by municipalentities;Improved visibility-attracts international capital; andEases risk identification and diversification forinvestors.
JnNURM Financial ReformsCredit Rating of ULBs MoUD commissioned 4 agencies to rate the JnNURMcities (general obligation debt and not any specificbond/issue); Initial credit rating exercise completed for 65cities (8 UIG cities not rated); Surveillance rating undertaken for 63 ULBs* Initial Ratings were assigned during January 2008February 2011, and Surveillance Ratings were assignedduring January 2010-February 2012; Ratings are generally live for 12-15 months from the date on whichrating is assigned; 35 ULBs have received investment grade rating (BBB- andabove)*Jamshedpur & Panaji
Overall Financial PerformanceLess financiallyburdened and positiveprogressStability shown bySlow progress andfinancially burdened ULBs10 Cities7 Cities12 Cities ULBs with octroi income have achieved investment grade rating Only 55% of ULBs without octroi income made it to investment grade category. Revenue expenditure was dominated by establishment expenditure (salary, pension, etc.) followed byspending on operations and maintenance For BB and B category rated municipalities, establishment and O&M expenditure together accountedfor more than 95% of the total revenue expenditure. Income from own sources contributes approximately 59% on average across all ULBs. ULBs in metro cities generate over 70% of their revenue income from own sources ULBs with population lesser or closer to a million only generate slightly more than half of theirrevenue income from own sourcesSlide 28
JnNURM and LeveragingMunicipal Borrowings About 11 ULBs out of 65 continued their relianceon institutional and bank borrowings to financeurban infrastructure projects from commercial banks Agra , Allahabad, Lucknow , Varanasi , Kanpur, Meerutare using JnNURM revolving fund to fund the capex fortheir projects
Key Highlights – Municipal Borrowings World Bank Survey conducted for 19 cities for report on ‘Developing aRegulatory Framework for Municipal Borrowing in India’, reveals:» Rajkot, Nanded, Bhopal, and Madurai have alreadyexhausted their borrowing limits assessed on the basis ofpast financial performance;» Since Nanded, Bhopal and Madurai have low investmentgrade ratings they might struggle to service the existingdebt in a timely manner;» Cities such as Chennai, Coimbatore, Jabalpur, KalyanDombivili, Nanded and Nagpur may be burdened tomeet their commitments on projects already approved underJNNURM through borrowings; and» Data for ULBs such as MCGM, Navi Mumbai, Pune,Nashik, Vadodara and Surat reveals that they have theability to fund the ULB ikKalyan DombivilliThanePuneNavi-MumbaiM.C. of Madurai
Overall Financial Performance (1/2)Progressing ULBand not burdenedwith OutstandingDebtCitiesTrendULB is stable interms of revenues,expenditure andrepaying the oreAjmerChennaiBhopalFaridabadGr. lhiJaipurNavi MumbaiAsansolULB notprogressing welland burdenedwith debtTrend
Overall Financial Performance (2/2)Progressing ULBand not burdenedwith OutstandingDebtCitiesTrendULB is stable interms of revenues,expenditure andrepaying the gpurLucknowNandedVijaywadaULB notprogressing welland burdenedwith debtTrend Less financially burdened and positive progress : Coimbatore, Amritsar,Chandigarh, Chennai, Greater Mumbai, Indore, Delhi, Ahmedabad, Surat andVijayawada. Stability shown by: Ajmer, Guwahati, Jaipur, Srinagar, Navi Mumbai, Pune, Vadodaraand Kolkata. Slow progress and financially burdened ULBs: Bangalore, Faridabad, Mysore,Shimla, Cochin, Bhopal, Jabalpur, Asansol, Rajkot, Nagpur, Nanded and Lucknow
Issues Volatility in assigned credit rating 22 cities had proposed market borrowing in their CDPssubmitted to JnNURM. However, availability of grants hasreduced incentive for borrowing Credit worthy ULBs are usually cash rich; hence, reluctant toborrow Theoretically inv. grade entities may not find investors till theyattain good rating on specific issue; requires commercially viableprojectsWay Forward: Need to assess willingness to borrow by ULBs and lend to ULBs Cash rich entities should be encouraged to develop good projects& meet funding requirements from accessing institutionalfinance Setting up of specialized state level urban financingintermediaries such as TNUDF, KUIDFC- provides comfort tolenders that municipal borrowing will not exceed prudent limits
Action Taken by Ministry New insights in Municipal debt market and thePooled Finance Development Fund (PFDF) Scheme– Removal of 8% cap on tax free instruments;– Separate regulatory and disclosure requirements for ULBsmay be made by SEBI;– Allow credit enhancement of Municipalities by Multilateralagencies;– JnNURM and other Central schemes to be linked withraising resources from the market;– Simplify Pooled Finance Development Fund (PFDF)requirements to enable utility and implementation of thescheme.
Action Taken by Ministry Model Concession Agreement for SWM; A set of guidelines regarding solid waste managementproject development with several case studies; PPP in Solid Waste Management - ProcurementGuideline; and Capacity Building programme through Regional CapacityBuilding Hubs (RCBH’s).
Way Forward(1/3) Resources are available in the capital market and FIs.– Essential to expand the investment envelope by mobilizing long-term debtfinancing from the financial markets. Need to increase the overall funding forinfrastructure by leveraging varied sources against one another.– Improved credit-worth
Investment for urban infrastructure over the 20 year period – INR 39.2 lakh crore at 2009 – 10 prices (HPEC) McKinsey Report (2010) has estimated an investment requirement of INR. 53.1 lakh crore. Urban population likely to increase from present 377 million to 600 million by 2030 & 900 million by 2050 53 Million Plus cities
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