Over 140 Indian cities can raise development capital through Municipal Bonds: JLL
Over 140 Indian cities can raise development capital through the issuance of Municipal Bonds, property consultant JLL has said in their latest report titled ‘Municipal Finance: Funding urban development in India’.
The report highlights that the Ministry of Housing and Urban Affairs has actioned a Credit Rating System – one of the transformational reforms under which 500 cities and towns have been given credit ratings to ensure investments. The other revenue sources for urban centres are user charges for specific services, taxes and non-tax revenues, grants, loans and other receipts. The report also estimates that as much as INR 25 crore can be raised annually through advertising fees by municipal bodies of metropolitan cities of India.
Advertising fees are trending as a key instrument for revenue augmentation in the urban centres of India. The advertising fee, or revenue collected through the leasing of advertisement rights on assets owned by various government agencies, have the potential to be a game changer in the near future. It is to be noted that many Indian cities are now focusing on developing, planning and expanding this opportunity to assets that present an advertisement fee opportunity including public convenience facilities, lamp posts, public parks an open spaces, and government buildings.
The report notes that metropolitan cities (population of 1 million and over) have a potential to attract average revenues of over INR 25 crore per year through out-of-home advertising. Cities that have a population of up to 1 million, revenue from out-of-home advertising is estimated in the range of INR 75 lac to 1 crore per annum. For smaller municipalities and town panchayats, the estimated revenue generation potential through advertising is estimated in the range of INR 10 to 25 lac per annum. Mega cities have an even higher potential of generating revenue through advertisements revenue and tax and can be in the range of INR 75 to100 crore depending on the availability of space in their assets.
Municipal bonds are financial instruments issued by urban local bodies to raise money for specific infrastructure projects. SEBI regulations (2015) regarding municipal bonds states that municipalities must: (i) not have negative net worth in any of the three preceding financial years, and (ii) not have defaulted in any loan repayments in the last one year. Therefore, a city’s performance in the bond market depends on its fiscal performance. One of the ways to determine a city’s financial health is through credit ratings. The government has initiated credit ratings to evaluate the credit worthiness of every possible local town.
Of the total 20 ratings ranging from AAA to D, BBB (-) is the ‘Investment Grade’ ratings and cities rated below BBB (-) need to undertake necessary interventions to improve their ratings for obtaining positive response to the Municipal Bonds to be issued.
Shankar Arumugham, Chief Operating Officer, Strategic Consulting, India and Sri Lanka, JLL said, “Non-traditional forms of raising capital including Municipal Bonds and alternate revenue streams such as advertisement tax and user fees can provide additional capital up to 30% of the total requirement in various urban centres in the future. While smaller centres can generate a greater percentage of their requisite capital through alternate funding methods, larger metropolitan cities can also receive significant contributions that can be used for development purposes.”