Urban Local bodies (ULBs) & Municipal Bonds

POLITY/ GOVERNANCE/ ECONOMY

Topic: General Studies 2,3:

• Issues and challenges pertaining to the federal structure, Devolution of powers and finances up to local levels and challenges therein.
• Indian Economy and issues relating to planning, mobilization, of resources, growth, development 

Urban Local bodies (ULBs) & Municipal Bonds

Context: The inability of urban local bodies (ULBs) to raise resources has limited the growth of municipal income and led to a fiscal crisis.

What are the key financial issues plaguing ULBs?

• Decline in Municipal Revenue: Although it is envisaged that municipal revenue should be 1% of GDP, between 2010 and 2018 revenues declined from 0.48% to 0.43%. This reduction came on the back of a decline in own-source revenue from 56 to 44%.
• Delay in Salaries: Low municipal incomes affects the low-levels of municipal services and translates into salary delays for employees.
• Low Property Tax Collection: Property taxes only account for 0.15% of GDP, whereas in developing economies they account for 0.6% and the global average is 1.04%.

Way Ahead

• Property tax base needs to be expanded using GIS mapping, cross-checking with building licenses, ration cards, mutations, electricity/gas accounts, and review of exemptions. This also needs to cover government properties as per GoI circular 2009 and the SC judgement in Rajkot Corporation vs Railways.
• The value capture taxes need to include upward revision of building license fee and new sources like impact fee, as imposed in Telangana, exactions and betterment levy like the one imposed in Gujarat.
• Local fee/charges – An advertisement fee needs to be levied as there are large number of Unauthorized boards. Recovery on user charges (water, etc) which is only 20%, Right of way from gas/electricity and fibre optic lines, Cell tower, Leasing electricity poles and giving maintenance of parks to RWAs.
• Potential of participatory funding (private sector, CSR and local community) needs to be tapped as has been done by Bengaluru, Ahmedabad, Mathura (Hybrid Annuity project), Indore and Pune.
• Article 243X needs suitable revision to allow larger inclusion of fiscal instruments above within the scope of a municipality’s own sources.
• Municipal Bonds can be tapped into by ULBs to raise their revenues and reduce the dependence on Government support.

What is Municipal Bond?

• A municipal bond is a kind of debt instrument where investors offer loans to local governments. They are issued by civic bodies for specific projects and usually have a 10-year tenure. The ULB pays the annual interest on the bonds to the investor at the decided rate
• Benefits of Municipal Bonds: The bond helps raise funds from the stock market. The bond also increases the number of investors available to the civic body, as compared to a loan from a single bank. Bonds help ensure improved credit profiles, direct transfer of funds by the Centre, transparency and efficient revenue generation
• Support from Centre: Under AMRUT (ULBs) are encouraged to tap the bond market. Union government also pays ULBs Rs 13 crore for every Rs 100 crore raised via bonds, subject to a ceiling of Rs 26 crore for each. According to the Ministry of Housing and Urban Affairs, in 2018-19, eight ULBs issued bonds and were incentivised with Rs 181.33 crore by the ministry
• The difference between a bank loan and a municipal bond is that any institution can secure a bond only if it has favourable credit ratings. The interest rates for the bond is usually market determined, where Bank Loans are much more opaque and politicised in nature
• Fair Process: The bidding for Bonds takes place on an electronic trading platform after the bond is listed on the exchange. The bidding is open to all investors and is facilitated by the transaction agent appointed by the ULB, who usually gets a commission of 0.10% after the money is transferred to the account of the ULB.
• There could be a single investor as in the case of Ahmedabad and Surat, where Gujarat State Financial Services (GSFS) picked the entire bond of Rs 200 crore each, or there could be multiple investors, who can bid for any number of slots having a value of Rs 10 lakhs each

Value Addition

• Ahmedabad was the first city in south Asia to launch a municipal bond of Rs 100 crore in 1998, which was completely subscribed.
• Surat Municipal Corporation was the second city in Gujarat to announce bonds in 2018, to fund a sewage treatment project worth Rs 450 crore
• Vadodara Municipal Corporation (VMC) is expected to launch municipal bonds in January, and will become the third Urban Local Body (ULB) in Gujarat to use this method to raise money to fund development work sanctioned under AMRUT Scheme.