Urban Local Bodies
The term ‘municipal bodies’ is generic, used to describe local administrations or statutory undertakings providing civic or infrastructural services. Financial instruments issued by municipal bodies to raise resources from capital markets are commonly known as municipal bonds. Municipal bonds may be of many types, with varying duration's and for different purposes, with fixed or variable interest rates. Municipal debt may be raised for project financing, equipment financing, or to meet cash flow requirements. Such debt may also be raised to meet extraordinary expenses of a nonrecurring nature. However, the most common objective for issuing municipal bonds is to raise capital for infrastructure projects, the benefits of which accrue for several generations.
In India, municipal bodies are the main providers of key urban services like water supply and sewerage. According to the Thirteenth Finance Commission (TFC), there are 3,723 ULBs in India, of which 109 are Municipal Corporations, 1,432 are Municipalities and 2,182 are Nagar Panchayats, for a population of 1.15 billion, which is growing at a rate of 1.47% as on 2009.
Total revenue of municipal sector accounts for about 0.75% of GDP of the country. While the same stands at 4.5% for Poland, 5% for Brazil and 6% for South Africa. In terms of total expenditure, the municipal sector accounts for about 0.79% of the GDP of the country. Further the municipal revenue and expenditure accounts for a little over 2% of the combined state and central governments. This is in contrast to the situation obtained in advanced countries, where local bodies account for 20-35% of the total government expenditure.
Despite increasing urbanization and the consequent pressure on urban services, the financial powers and responsibilities of municipal bodies have undergone negligible changes. This has rendered municipal bodies unable to garner the resources required to meet the demands of growing urbanization.
Municipal bodies need to identify sources of funds, such as municipal bonds, for financing their schemes.
There are mainly two types of municipal bonds viz., general obligation bonds and revenue bonds:
a) General Obligation Bonds (GOBs)These bonds are backed by a pledge of the full faith and revenue raising powers (mainly taxing powers) of the municipal corporation. The use of General Obligation bonds may be appropriate for financing general municipal functions, where it may not be possible to ensure direct cost recovery from specific projects [like roads, street lighting, public health, etc.] Through a GOB issue, a municipal corporation with a good financial position can use its overall credit worthiness for raising finance for projects, each of which may not be commercially viable, on its own.
b) Revenue BondsThese are primarily backed by the user fees or service charges paid by the users of a particular service. Revenue bonds are normally off-balance sheet liabilities of municipal corporations. They are used primarily for funding revenue producing public services such as housing, water supply, toll highways, ports, airports etc.
The municipal bond market is a specialized segment of the debt market. In the US, most urban infrastructural projects like water supply and sewerage are funded through issue of municipal bonds. Also, the secondary market for municipal bonds is active, with sufficient liquidity. Some municipal bonds are tax exempt, thereby lowering the cost of borrowing of the issuer. In India also, some measures have been introduced to attract investments in infrastructural projects which include a five year tax holiday to BOOT operators in infrastructure projects, tax benefits to financial institutions on interest and dividend income earned from financing infrastructure projects and tax benefits on investments in infrastructure. However, until recently, municipal bodies in India did not attempt to tap the capital markets. The reasons for this include poor credit quality of municipal bodies, nature of projects being funded (long gestation period, erratic revenue flows etc.), availability of alternate sources of finance and lack of liquidity in the secondary debt market.