Sector based Pooled Finance Mechanisms for Urban Infra Financing

Background:

The urbanisation process in India is the defining trend of the economic growth and there is an associate rising demand for investments in urban infrastructure. However, the urban infrastructure in India is facing chronic shortages in investments and inadequate Operation and Maintenance (O&M), which has led to problems such as inadequate service coverage, inequitable access, deteriorating infrastructure and environmental un-sustainability. The service levels in Indian cities indicate that the state of service delivery is far worse than what is expected of an economy which is one of the fastest in the world (HPEC, 2011)

McKinsey& Co estimated the urban infrastructure requirement at $ 1.2 trillion over 20 years. The High-Powered Expert Committee (HPEC) Report on Indian Urban Infrastructure and Services estimated that the investment requirement for Urban Infrastructure is about Rs. 39.2 lakh crore (at 2009-10 prices) for the next two decades to meet the basic minimum requirements. In addition, an amount of Rs. 20 lakh crore (at 2009-10 prices) is required for Operation and Maintenance (O&M) of assets. It is also clear from these estimates that given the high capital costs of infrastructure, limited traditional budgetary sources cannot meet the large requirements.

The Session:

Considering the scale of investment required for urban infrastructure, it is imperative to explore innovative models to implement infrastructure projects. Public-Private Partnerships (PPPs), Project Bonds, Value Capture Financing have been some of the options, which enables governments to optimally share the risks associated with a project during its lifecycle and in the process, extend the reach and the scope of the public delivery systems.

Many countries have tapped into capital markets to meet the investment requirements of urban infrastructure. The route taken by countries in bond financing are based on various factors such as maturity of the capital markets, the extent of devolution of power to the ULBs etc. While some countries have created specialized institutions to facilitate bond financing by ULBs, countries like USA and South Africa enabled bond financing by individual ULBs on the balance sheet strength of the cities.

In India, over the years, cities have issued bonds to mobilise finances. However, small and medium cities faced difficulties in raising resources from the market due to various factors. Pooled Finance structure has enabled a number of ULBs to barrow the money from the capital markets at lower cost due to the economies of scale and credit enhancement. Tamil Nadu Urban Development Fund (TNUDF) and Karnataka Water and Sanitation Pooled Fund (KWSPF) have demonstrated that grouped finance vehicles can play a crucial role in enabling smaller municipalities to access capital market funds at competitive rates. However, a host of issues still remain to be addressed for a sustainable issuance of the bonds for longevity of the instrument.

Within the context, WRI India and Habitat Forum (INHAF), proposes to organise a brainstorming session to deliberate on key issues, options & way forward on creating sector based Pooled Finance Mechanisms.

The objectives of the workshop include:

1.  What have been the lessons from the Pooled Finance Mechanisms (PFMs) from India and other countries?
a)    What have been the outcomes of the PFMs?

b)    Were the bonds attractive to secondary investors?

c)    How appropriate was the pricing of bonds?

2.  How can an overall structure be created in which incentives are not unduly distorted?

3.  Why have municipal bonds not taken off in a significant way?

4.  Is there a merit in creating a sector based pooled financing facility? If yes, what is the appropriate framework for sector based pooled financing?

5.  What design approaches can ensure projects are well conceived, designed and be made marketworthy?