Municipal Bonds as a Source of Finance for Urban Infrastructure Development in India

Abstract

Municipal bonds are an option available to the large cities to raise resources for financing long term projects such as infrastructure development. Countries like the USA have had a long experience of using municipal bonds to finance the development of cities and their infrastructure. Indian cities also have taken the route of raising financial resources through bond markets in the past (until 2004), especially few large cities have taken active interest in it. This article discusses first the salient features of municipal bonds in terms of their characteristics, advantages and risks in the present scenario. The experience of municipal bonds in India
during the period of 1997-2007 under the NDA regime is analysed subsequently so as to understand their success and limitations. With the NDA government coming back into power in 2014, it is hoped there will be scope for re-introduction of them. The current NDA government has already declared Municipal bonds as a
feasible tool for financing urban infrastructure projects, especially in the development of ‘Smart Cities’, thereby bringing back favourable prospects for them. The article concludes that municipal bonds may play a role in smart city development provided that some changes are made in the operation of finances of ULBs and enable them to move towards raising resources.

Full text

#The article was earlier presented at Thinkers and Writers Forum, Skoch
Development Foundation which shared it for publication.
*Associate Professor, School of Projects, Real Estate and Infrastructure
Management, National Institute of Construction Management and Research, Baner,
Pune. e-mail: ramanallathiga@yahoo.co.uk
Municipal Bonds as a Source of
Finance for Urban Infrastructure
Development in India#
RAMAKRISHNA NALLATHIGA*
ABSTRACT
Municipal bonds are an option available to the large cities to raise
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BACKGROUND
INDIA HAS been on urbanisation path for more than three decades
and it is expected that about 590 million people would live in cities by
2030 AD, which is more than double that of urban population in 2001
(MGI, 2010). The economic importance of urban India is also on the rise
with: (i) an increase in the share of urban population in total population,
which is expected to attain the level of 50 per cent by 2020 and 70 per
cent by 2030, as well as (ii) the rising concentration of economic activities
in cities, which are increasingly becoming urban footed with the rapid
rise of services sector and manufacturing. It is estimated that about
$1.2 trillion capital investments are required in infrastructure services
like roads, mass rapid transport, water and sanitation, housing, power
and educational facilities, in order to meet the requirements of rapidly
expanding urban population (GoI, 2011).
RBI-DRG (2008) was the rst report to examine the municipal
nances in details and work on the aspect of resource requirements of
urban infrastructure based on the pre-set norms of service provision
including backlogs. It estimated that investment requirement for urban
infrastructure including basic civic amenities, mass urban transport and
road infrastructure (at 2004-05 prices) has been estimated at about Rs.
63,000 crore per annum for the 10-year period (2004-05 to 2013-14), which
forms about 2.2 per cent of GDP. The report also noted several anomalies
in municipal nance in India — low level in terms of share in the GDP
when compared to others (less than 3 per cent), high dependency on
grant based nance, stagnant tax revenue, not fully exploited non-tax
revenue, unhealthy expenditure structure and low debt utilisation. The
report emphasized on undertaking a series of reform measures at ULB
level to improve the situation.
The recently appointed High Powered Expert Committee (HPEC)
has estimated that the urban infrastructure investments requirement
in India is to the tune of Rs. 391,870 crore at 2009-10 prices, which is
equal to 48 per cent of national GDP (GoI, 2011). On the contrary, the
municipal expenditure on infrastructure services is less than two per cent
and only a third of it is coming from own revenues, which implies the
need for tectonic shifts in the current allocation of inter-governmental
nances. At the macro level, the economy has not been growing as much
as it used to, i.e., levels of eight per cent growth, and there is a lot of
pressure on public exchequer to reduce the public spending so that the
scal decit is manageable. With the lesser scope for additional funds
at Central Government and weaker nances of state governments, the
likely funding support from these tiers of government is on decline.

MUNICIPAL BONDS AS A SOURCE OF FINANCE /59
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The state of municipal nances being not in a good shape, is not
a new story; rather, it has been the case for long time, e.g., Mathur
(2006), CGG (2006), Pethe and Lalvani (2006). The scal and revenue
base of municipal bodies has not been in line with the requirements of
growing urban population. With the patronage of state governments,
the institutional capacity of municipal bodies has progressively declined
and they have been dependent upon state and Central Government
grants rather than expanding their tax and non-tax revenue (Nallathiga,
2010). This situation has been aggravated by the 74th Constitutional
Amendment Act, 1992 which rightly devolved funds directly to the
urban local bodies but wrongly burdened them with 18 more functions
to be performed. The result is an accentuation of scal (revenue) decit at
local government level (Garg, 2008). The municipal bodies required some
major overhaul in order to meet the rising challenges of urbanisation
in India.
Given this situation of little scope for improvement, borrowing
from market came to fore in mid -1990s as source of funds required for
urban infrastructure projects and continued to play the role until mid-
2000s. Thereafter, the UPA government announced National Urban
Renewal Mission (NURM) by setting aside Rs 50,000 crore as support
for the urban local bodies towards urban infrastructure creation, which
was designed with mandates to ULBs to: (a) reform their nances and
systems (b) reform planning, engineering and procurement processes
(c) preparing city development plans and identifying investment
requirements based on the same. The municipal bodies have stopped
thinking anything else other than NURM as a source of funds for the
urban infrastructure projects.
The sustainability of funding from Central government is under
question now with the end of NURM, which is a time-bound programme
that would actually have ended by 2012. Certainly, grant based support
from the Central and state governments cannot be expected as they are
themselves under pressure to cut down scal decit while performing
well on economic growth. Debt nancing is once again coming up as an
option for the ULBs in India. Bonds are better instruments for raising
nance rather than private or institutional debt, which come with the
risks of high cost and withdrawal any time by the issuers. Therefore,
municipal bonds and bond markets have a greater role to play in the
current circumstances. In fact, municipal bonds are touted as the best
instrument for nancing projects with long gestation period like urban
infrastructure projects in theory (Bahl and Linn, 1995). Even in practice,
several noteworthy experts e.g., Rakeshmohan (1996), Ravindra (2004),
(Vaidya, 2008), and Sheikh and Asher (2012), have advocated tapping
bond markets for raising nancial resources required for executing
urban infrastructure projects in India.

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In the next section, the author discusses the feature of municipal
bonds as a source of nance for urban local bodies. We will then discuss
the experience of municipal bonds during the period of 1997-2007 as well
as recent experiences of other types of bonds that came into vogue. Based
on the learnings from it and assessment of current resource requirements,
the broad agenda for revival of municipal bonds will be nally set,
especially on the requirements on the part of various stakeholders of
the municipal bonds. He concludes with some optimism sensing an
opportunity in the wake of developing smart cities, which would require
them to be sourcing funds for investing on development and maintenance
of infrastructure services required for the development of smart cities.
INTRODUCTION
Bonds are a popular nancial instrument to raise nancial resources
with the view of deploying them into long term projects or investing
into companies that are engaged in businesses that hold promise. Bonds
therefore can be for either nancing development or for investment.
Bonds are a convenient instrument for retail, business and institutional
investors as they promise assured return over the period of bond (also,
called as tenure). Apart from the income yield from bond, it is the ‘yield-
to-maturity (YTM)’ which holds more importance while assessing a
bond’s total returns on investment. Only those rms that are already
doing business and have a good history of nancial management are
allowed to oat bonds and mobilise money from domestic investors so
that it remains in safe hands.
Bond oating requires regulatory approvals such as that from the
Reserve Bank of India (RBI) and the Securities Exchange Board of India
(SEBI). An important aspect of bond subscription is the nancial strength
of the oating rm to do business and pay promised interest as well as
re-pay the borrowed capital, which is assessed by the rating of a bond
using the nancial performance track record of the company as well
as other factors. Independent agencies rate the bonds based on the set
criteria that help the investors in deciding upon whether to subscribe
the bonds or not. Bonds can also serve as useful instruments for raising
nancial resources for development activities such as infrastructure
development. Sovereign governments (including India) encourage
oatation of infrastructure bonds by authorised nancial institutions
towards meeting the nancial requirement of economic infrastructure.
Municipal bonds are one such option available to the Municipal
corporations of the large cities in India in order to raise funds towards
the development of urban infrastructure. Technically, ‘a municipal
bond is an evidence of the obligation of a ULB to repay a specied

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principal amount on a certain maturity date along with the interest at a
stated or formula-based rate (Dirie, 2005: 273). Financing infrastructure
development using borrowings from capital markets has advantage of
bringing in discipline on the issuers of bond as they are bound to perform
in order to pay the interest to investors (Mehta and Satyanarayana 1999).
Municipal bonds, like other bonds, have the advantage of borrowing
on long-term basis (about 10-20 years) while paying for short-term
infrastructure project requirements that give rise to revenue. The tax
advantages of municipal bonds, i.e., non-taxing of interest income, in
particular, make them popular with investors. Countries like the USA
have had a long experience of using municipal bonds to nance the
development of cities and their infrastructure (Fahim, 2010).
Operationalisation of Municicpal Bonds
The operationalisation of municipal bonds follows certain processes
and structures that are described in the sub-sections below:
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Municipal bonds can be oated/issued by the municipal bodies
with a high revenue base, i.e., large municipal corporations, which also
need to obtain the permission of respective state governments in order
to be able to oat municipal bond. The bond has to be oated with some
specic objectives or projects that improve urban infrastructure. The
proposal for oatation of bond has to be approved by the executive body,
i.e., commissioner, as well as legislative body, i.e., municipal council. It
is expected that the ULB has done some preliminary feasibility of the
project to be undertaken using the proceedings from bond and will be
able to take up the project clearances from concerned authorities. A
detailed reference document has to be prepared on the municipal bond
with the details of objective/ purpose, size, unit value, interest rate,
tenure, issuers, rating and past nancial record.

Municipal bonds in general are of two types:
(i) General Obligation (GO) Bonds, wherein borrowing is made
while using the overall nancial strength of ULB so as to make
use of the money by municipal body. Interest and principal
payments are made from the general revenue account of the
municipal body.
(ii) Structured Obligation (SO) bonds, wherein borrowing is made
while emphasising on the urban infrastructure project for which

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it is done while pledging the repayment of interest and capital
through a structured payment mechanism. However, no such
distinction is made of municipal bonds in India, which follows
structured debt obligation mechanism for making payments
and enhancing the same.
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Securitisation of bond payment obligations is achieved through
funds ow arrangements and other mechanisms. Figure 1 shows one
such securitisation mechanism. An escrow account is established and
contributions to it are made by the ULB from: (i) its own and grant
resources, (ii) the revenue arising from infrastructure project. Debt
Service Reserve Fund is established to make contributions in the event
of shortfall between payments and receipts and therefore serves as a
credit enhancement mechanism. Interest and capital payments are made
through escrow accounts to the bond investors.

One important aspect of the municipal or any other bond is
attractiveness to customer. Investors not only compare the returns across
various investment vehicles to make decision but also would like to
understand the risk associated with bond investment. However, they
cannot assess the same themselves as they cannot perform an analysis of
nances and other conditions of the issuing ULB. Ratings come handy
Source: based on Pradhan (2003)
Fig. 1: Flow of Funds under Municipal Bonds

MUNICIPAL BONDS AS A SOURCE OF FINANCE /63

to assess risk and express it in understandable terms to investors such
that they can make decisions with regard to subscription. Rating of
bonds is a specialised job done by consultants based on the nancial
and other data of the oating urban local body.

Some of the municipal bonds come with advantages of no tax
implications and guarantees. Tax concession when applied to municipal
bond gives rise to interest income going tax free and non-deductible
at the source, which increases the bond yield and YTM thereby
make it attractive. Guarantees by the state governments or any other
government agency also improve the credibility of instrument, as in
the event of default on payment of interest and capital the guarantor
will make payment of the same. Guarantees and tax concession also
strengthen the case of bond as investors perceive it to be more secure
instrument.
Experience of Municipal Bonds in India
Indian cities have also taken the route of raising nancial resources
by tapping bond markets in the past (beginning in 1997, the last being
in 2010), especially few large cities have taken active interest in it.
Good ratings of nancial conditions of some municipal corporations
also helped some of the cities to become interested in municipal bonds.
The municipal corporations in India oated taxable as well as tax free
bonds to the tune of about Rs. 1, 095 crore during the period of 1997-
2007, which is relatively small when compared to the market potential
for bonds in India.
Taxable Municipal Bonds in India
Eight municipal corporations in India had mobilised an amount of
Rs 445 crore through the oatation of taxable municipal bonds during
the period of 1997-2004. The size of these bonds varied a lot between Rs.
10 – 125 crore (average size of Rs. 55.6 crore) and so also the interest rate
offered on them which varied from 7.75-14.75 per cent. Further, most of
the bonds were privately placed with only a few of them making use
of State government guarantee. The objective/purpose of bond was
either water supply and sanitation or roads. Escrow account was well
designed in most of the bonds.
It may be noted the National Democratic Alliance (NDA)
Government was ruling the nation during most of the period of
bonds oatation. It was the NDA Government that emphasised
upon harnessing private sector participation in public infrastructure

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TABLE 1: TAXABLE MUNICIPAL BONDS IN INDIA
City Amount
(in Rs.
crore)
Placement Guarantee Annual
Interest
Escrow Purpose Rating
Bangalore (1997) 125 Private State Govt. 13% State Govt grants and
property tax
City roads/
street drains
A-(SO)
Ahmedabad(1998) 100 Public &
Private
No 14% Octroi from 10
collection points
Water &
sewerage
AA- (SO)
Ludhiana (1999) 10 Private No 13.5% to
14%
Water & sewerage
taxes and charges
Water &
sewerage
LAA- (SO)
Nagpur (2001) 50 Private No 13% Property tax and water
charges
Water Supply LAA- (SO)
Nashik (1999) 100 Private No 14.75% Octroi from four
collection points
Water &
sewerage
AA- (SO)
Indore (2000) 10 Private State Govt 13.0% Grants/property tax Improvement
of city roads
A (SO)
Madurai (2001) 30 Private No 12.25% Toll tax collection City roads LA+(SO)
Visakhapatnam
(2004)
20 Private No 7.75% Property tax Water supply AA-(SO)
Source: Based on Vaidya and Vaidya (2008).

MUNICIPAL BONDS AS A SOURCE OF FINANCE /65

development, especially through PPPs, especially in roads/highway
development. Table 1 shows the municipal corporations of the cities
that tapped bond markets along with details/ characteristics of each
such bond.
The interest in taxable municipal bonds went on decline after
2005 for a variety of reasons. First, with the high levels of taxation
and existence of competitive xed and small scale deposits in market,
municipal bonds were not attractive to investors. As macroeconomic
scenario had improved after 2004, the newly elected United Progressive
Alliance (UPA) government laid down a different approach towards
country’s scal management. By taking advantage of the buoyant tax
revenue due to rise in GDP, the UPA government came out with an
urban renewal mission (known as JNNURM) to aid the municipal
bodies with nance. A sizeable amount of funds were made available
to urban local bodies (ULBs) of mission cities through grants and loans
under the JNNURM. The ULBs also found that accessing funds from
JNNURM was more attractive when compared to hard work required
in the case of municipal bonds.
Non-taxable Municipal Bonds in India
The Government of India took the decision to give tax-free status
to municipal bonds in the year 2000 by making amendments to Income
Tax Act 1961, which made the interest income from them non-taxable.
This Act has led to a spate of non-taxable municipal bonds. As a result,
11 municipal corporations in India mobilised an amount of Rs. 650 crore
by issuing non-taxable municipal bonds during the period of 2002-2007.
The size of these bonds was higher than that of taxable bonds (comparing
the average bond size of Rs. 59.4 crore vs Rs. 54.5 crore of taxable bonds)
and it varied between Rs 21.2 – 100 crore per bond. Further, most of
these bonds were placed with multiple objectives/ purposes than one
objective/purpose.
It may be noted again that the National Democratic Alliance (NDA)
Government was ruling the nation during most of the period of bonds
oatation. Only three bonds were oated when the UPA government
was ruling, which would have been cleared by the NDA government.
The interest in non-taxable municipal bonds also went on decline
after 2007 for a variety of reasons. First, with the bonds in general were
losing sheen with the rise of equity markets municipal bonds were
not attractive to investors as they were illiquid. The UPA government
had come out with JNNURM to aid all the eligible municipal bodies
in India with nance rather than leaving each city to look after itself.

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As sizeable amount of funds were made available to the ULBs through
grants and loans under JNNURM, the ULBs found that accessing funds
from JNNURM was more attractive option when compared to hard
work required in the case of issuing and servicing municipal bonds.
Transition Path of Municipal Bodies in India
It can be observed from the experience of the municipal bonds in
India during the decade of 1998-2007 that they played an important
role in terms of nancing urban infrastructure projects in large cities
TABLE 2: NON-TAXABLE MUNICIPAL BONDS IN INDIA
  

Ahmedabad (2002) Water supply and
sewerage
100
Hyderabad (2003) Road construction and
widening
82.5
Nashik (2002) Underground sewerage
scheme and storm water
drainage system
50
Visakhapatnam (2004) Water supply system 50
Hyderabad* (2003) Drinking water supply 50
Ahmedabad (2004) Water supply, storm
water drainage, roads,
bri dg es an d yovers
58
Chennai* (2003) Chennai water supply
augmentation
42
Chennai* (2005) Chennai water supply
project
50
Chennai (2005) Roads 45.8
Ahmedabad (2005) Roads and water supply 100
Nagpur (2007) Nagpur water supply
and sewerage
21.2
Source: Based on Vaidya and Vaidya (2008) (*oated by City Water and Sewerage
Bodies)
NB: Excludes the latest bond of Rs 30 crore oated by Vizag Municipal Corporation
in 2010.

MUNICIPAL BONDS AS A SOURCE OF FINANCE /67

only that too not in a big way. Further, the higher interest rate offered
on these bonds would have had a drag effect on the nances of these
ULBs. The past experience of municipal bonds in India also shows that
accessing funds through municipal bonds is not possible in the case of
small and medium sized ULBs, which lack institutional capacity to issue
bonds and utilise the proceedings for the purpose of urban infrastructure
development. The bonds had also come out due to general monetary
tight conditions and dry up of funds with government. There was also
some kind of reluctance on the part of ULBs to go hard in accessing
funds; this is evident from the failure of Urban Reforms Incentive Fund
(URIF) window of the NDA Government, which was accessed by a few
ULBs.
With the JNNURM coming to end, there are lots of questions on
how the large amount of funds would ow into the ULBs in India. As
mentioned earlier, several ULBs have been dependent upon grants
from Central and state governments for a long time. During the last
two decades, the state governments stopped giving any major grants to
ULBs unless they are required for running the state government schemes
implemented at the hands of ULBs. That leaves Central government as
a major provider of grants through direct devolution. The quantum of
devolutions is determined by Finance Commission, whereas most of
the devolutions were made by the Planning Commission through plan
and non-plan grants.
With the abolition of Planning Commission and formulaic method
of allocation and transfer of funds, it is not as how much and when the
funds will be allocated. Certainly, the fund allocation will follow political
bargain principle in a federal structure of government. This leaves some
cities as the benefactors (those that are ruled by NDA) and others may
end up as losers. Therefore, a case emerges for the municipal bonds now
viewed as a potential source of nance for municipal corporations in
India in order to raise funds. However, greater preparedness is required
now on part of the ULBs to brace up the challenges in oating the
municipal bonds and continue to perform so that they can be serviced
as well.
Smart Cities and Infrastructure Financing
However, there is some optimism established now with the current
NDA government emphasising on creating space for urbanisation
through Smart Cities. Box 1 shows the key features of ‘Smart Cities’
programme.

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The ‘Smart Cities’ were one of the main promises made by
Prime Minister Narendra Modi in the run-up to Lok Sabha elections.
Upon coming to the power, the National Democratic Alliance (NDA)
Government led by him has been talking about the development of
smart cities as one solution to the problem of urban areas in India. The
government formed a ‘Smart Cities Mission’ and prepared a blueprint
to dene the key elements of the mission. It is proposed to develop
about 100 smart cities across the nation at a cost of Rs 50,000 crore in
ve years time span. The government proposes to allocate roughly Rs
100 crore for each selected ‘Smart City’, which becomes double when
State/Local government also contributes equal amount. However, it is
also important for the ULBs to access debt from market for this purpose
( 2015).
According to the initial scheme, eight cities with more than four
million people were identied and they would have a satellite smart city.
Forty ve cities with one to four million people were to be upgraded
to a smart city. Seventeen capital cities also qualify as smart cities,
irrespective of their population. There would be at least 10 other smart
cities with tourist and religious signicance. After a lot of consultation
with the States and internal discussions, it proposed a different scheme.
The main elements of the proposed ‘Smart Cities’ include:
• 24×7 availability of high quality utility services like water
and power;
• Robust transport system that emphasises on public transport;
• Digitalised data system and smart e-governance system;
• State- of-the-art health, safety and education facilities; and
• Waste minimisation by increasing energy efciency, water
conservation, recycling of waste materials.
The Central Government proposes to select 100 smart cities
according to urban population and number of urban bodies in a state.
Accordingly, the Central Government asked the state governments
to identify the eligible cities to be developed as ‘Smart Cities’ which
will be based on the city population. Apart from population criteria,
it also proposes to make sure adequate representation from each state,
especially from small states.
Source:  (2014).
BOX 1: SMART CITIES PROGRAMME

MUNICIPAL BONDS AS A SOURCE OF FINANCE /69

Tapping the Potential of Municipal Bonds in India: Some Issues
There are some issues that form constraints to the development
of municipal bond markets in India, given the inherent situation of the
ULBs and the characteristics of markets. They can be discussed under
demand side and supply side issues below. A more detailed discussion
of the same can be found in Sheikh and Asher (2012).

The nancial market has a diverse range of players with different
investment objectives and approaches. Large amount of funds are with
public agencies like LIC, EPFO, PPF and Pension Funds, which only
invest in government bonds and securities. They have not yet opened
up their investment to reach out the alternate debt instruments like
NCDs and municipal bonds. Institutional investors also have large
funds but they shun bonds other than government bonds due to
regulatory constraints and long waiting period for maturity. Individual
retail investors also reach out the convenient instruments like term
deposits, small savings schemes and provident funds. Only public sector
institutions and individuals with large money nd it attractive to put
their money into bonds without any expectations. However, they form
small minority of investment market in terms of size.
The lack of secondary market for the municipal bonds is a
major constraint that makes them almost illiquid. The experience of
infrastructure bonds also implies that this constraint can also impact
on the trade price when put/call option is given. Bringing the bonds
on market exchange platform requires regulatory requirements of the
agencies like SEBI. This requires sizeable amount of bonds issued and
traded on the platform so that the trading is efcient and reective of
scarcity conditions rather than manipulatable at the hands of greedy
investors. The distributor channel has to be wide and depository house
has to come in place to clear trades.
The issuing municipal bodies have to improve their transparency
and reporting. Most of the cities do not have audited accounts in place
and few of them publish annual reports and nancial statements. This
renders an opaqueness of the performance of ULBs to the investors.
In fact, accounts in some of the ULBs are in bad shape as they did not
migrate to the double entry based account system and there is non-
uniformity due to not following the NMAM accounting standards.
Also, this renders interpreting municipal nances not an easy task but
requires sector understanding/ knowledge.
Lastly, the status of bonds is not known in the eventuality of the

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issuant ULB becoming bankrupt or defaults on payment of interest
and principal. This gives rise to the risk to investors of losing not only
interest but also principal amount. Given the past experience of one
such PSU agency in India (Krishna Valley Development Corporation)
going bankrupt and not been able to make promised payments, it cannot
be ruled out that the ULBs also go in that way. It is not clear who will
have the residual liability in such situation. If neither Central nor state
government bail out the ULB, the investors are denitely at the risk of
losing their capital as well as interest.

The status of nances of ULBs needs signicant improvement
in order to issue bonds. They need to rst move towards becoming
revenue/operating surplus so that the capital account imbalances due
to debt servicing can be met with. Revenue has to grow in line with
population growth and income levels rise and revenue mobilisation
has to be foolproof. The expenditure structure of ULBs also has to be
streamlined, which requires setting the house in order whereas it lacks in
many ULBs. Overall, there has to be a lot of overhauling of organisation
at the ULB level — both functions and nances in order to be able to
issue bonds and service the payment obligations arising from them.
Several ULBs have stagnant tax and non-tax revenues for several
years, a condition with which they cannot service the bonds. The ULBs
need to vamp their revenue billing and collection systems. The ULBs
need to maximise revenue from all sources in order to show good growth
performance, which requires undertaking reforms and innovative
thinking. They need to resort to continuous tax and non-tax revenue
improvements by expanding the base as well as revising the rateable
value of properties.
The ULBs are in the “lower level equilibrium traps” whereby they
do very little to improve service, to raise resources and to enhance the
asset life. This ‘nonchalant’ attitude has to go away and they need to rise
up and perform so that they can service the debt obligations arising from
bonds. Some major reforms are required to give a push in that direction
so that the performance gets a kick-up. Capacity building of individuals
and organisation is required for long term performance improvement.
Lastly, for a long time, the ULBs are used to the ‘soft money’ inow
under NURM without any obligation of repayment of it, leaving aside
any interest payments. The ULBs will nd it hard to earn enough to meet
interest and principal repayment of municipal bonds. Therefore, project
and area specic investments may have to nd place in the objectives
of municipal bond issuance. Municipalities also have to borrow these

MUNICIPAL BONDS AS A SOURCE OF FINANCE /71

services from private sector while building their capacity to formulate,
appraise, plan, procure and execute urban infrastructure projects.
Conclusion
With rapid urbanisation of the population and economic
activities, urban infrastructure challenges are also on rise in India.
Urban infrastructure is traditionally provided by the ULBs, whose
status of nances is not very strong for a variety of reasons. One way
of continuing with infrastructure services delivery without getting
nancially hampered is the adoption of market instruments like
municipal bonds, which give rise to resources to undertake projects
and project revenues can be used to make repayments.
The past experience with municipal bonds in India shows they
served the purpose until the regime change in 2004. Municipal bonds
had lost the momentum after 2004 with the set up of new regime of
UPA led government. There were very few bond issues during 2005-
2014. With the NDA government coming back into power in 2014, it is
hoped there will be scope for re-introduction of them. The current NDA
government has already declared Municipal bonds as a feasible tool for
nancing urban infrastructure projects, especially in the development
of ‘Smart Cities’, thereby bringing back favourable prospects for them.
Therefore, it can be concluded that municipal bonds can play
the role of nancing the development of infrastructure in smart cities
and contribute towards the new development agenda of creating ‘100
Smart Cities’. However, in order to be able to service bond borrowings,
some changes have to come in the ULBs especially in their institutional
capacity towards the management of nances, projects, organisation
and people, so that the delivery side improvement will drive results.
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