Market access for utilities
Is a decade of Indian experience useful
S.R. RamanujamDirector – Urban Infrastructure
10th June 2008
2.
• Its ten years since India’s first municipal bond issue
• The results are mixed
– Select agencies have benefited
– It has not impacted the sector in a meaningful way
• What can we conclude from this history?
3.
Utility – Local Government structure in India
• Water and sanitation delivered at
– Regional Government level by both parastatals and departments
– City level by local bodies as well as city utilities
• Regional Government investments are largely budget led
– Very little commercial borrowing
• Local Governments account for almost all market financing of water and sanitation projects
– 2/3rds of market borrowing at city level is for water and sanitation projects
4.
Data and analytical sources
• Market finance for local delivery – WSP – SA
• CRISIL Research
5.
History of market borrowing in India
Ahmedabad
1998 1999-01 2002- 2006
NashikLudhianaTNUDF
Bangalore WSSBNagpur
Kanpur DAMadurai
HyderabadVishakapatnamJaipurKolkottaPimpri-ChinchwadThaneChennai WSSBChennaiHyderabad WSSB
$ 20 Mn
$ 100 Mn-
Proof of
Concept
Adoption
Tax free status and expansion
$ 275 MN
2007 till date
The Ahmedabad bond issue broke a myth,
created tremendous interest
7.
Ahmedabad experience was a precursor to several other innovations in urban infrastructure financing
ProjectFinance
NOIDAIdeal Toll RoadsCoimbatore Bye PassMadurai
Donor projects
KarnatakaRajasthanTamil Nadu
Commercial Borrowings
Muni Bonds (16)Bank borrowingsTNUDF ++
Pooled Finance
Tamil NaduKarnataka
Consumerfinancing
AlandurKarnatakaIndore
Grants and own revenue,Cess
Surat, Bangaore, Mumbai
Before credit rating and
commercial borrowing
After credit rating and
commercial borrowing
Note: A cause-effect relation is weak for project finance initiatives
However, scaling up is yet to happen
9.
• Less than 20 agencies have issued bonds
– Almost all of them are large cities with one million plus population
– Proceeds of USD 400 mn till date compares poorly with need of USD 25 bn
– Momentum has slowed down
• Many bond issues have been for demonstration
– Not as a meaningful contribution to investment needs
– Only Ahmedabad and Nashik have repeat issues
– Ahmedabad and Nashik account for 42% of the borrowing
Depth of bond market access is low
10.
Around USD 400 mn total issue proceeds
- 50,000 100,000 150,000 200,000 250,000 300,000
Commercial borrowingsin the last decade
Projected investments
Actual needs
Rs Crores
Source: Compiled from city documents, Projected investments are as per DPR submitted till March 31, 2008 under JnNURM
However, planned investments are 24.7 bn USD just for the
63 largest cities (40% of urban population)
11.
0 10,000 20,000 30,000 40,000 50,000 60,000
Actual Borrowing
Demand
Need
Rs Crores
Right now, the borrowing momentum is weak
?
Source: Need – Working Group for leveraging institutional financingDemand – Based on JNNURM project approvals in first two years
Minimum Maximum
What have been the reasons?
13.
Market access needs
.…“a good market” and “ability to access”
Existing products in bond market
Optimum products in bond market
Strong local bodydemand
Weak local body demand
Current Zone
Not enough efforts to create a systemic strong demandModerate efforts to develop products
Correct zone
14.
The focus has been on rapid access
ProjectPreparation Credit Rating Market access
15.
1991
Deficit
1996-97
Surplus USD 20 mn
2002 onwards
Multiples bond issues
1998
First bond issue USD 25 mn
Ahmedabad has been an exception
Revenue improvementsand accounting reforms
Capital investment plans
Replicatingsuccess
Its bond issue for water projects followed sustained revenue reforms
Multi sector investments followed the bond issue
16.
0%
20%
40%
60%
80%
100%
1998 2002 2004 2005 2007
Water & San Bridges Roads Transport Urban poor
Its investments have become multi-sectoral in the recent years
Source: AMC presentation on Commercial borrowing – USAID, Indonesia
Sectoral share of capital investments
17.
And therefore, Ahmedabad has been able to increase its investments by commercial borrowing
Compared to Hyderabad, a similar size city, Ahmedabad does not limit its investmentsto current surpluses
Share of commercial borrowing in capital expenditure
0%
20%
40%
60%
80%
100%
Hyderabad Ahmedabad
% o
f cap
ital e
xpen
ditu
re
Commercial borrowings Current surplus
18.
The effect of postponing revenue reforms and multi-year plans is visible now
A grant funding window required them to prepare investment plans.They have to part fund the investments.Many cities have secured grant approvals, but their share of investment is high compared to their revenue base.
0.00 5.00 10.00 15.00 20.00 25.00
Chennai
MaduraiAsansolVaranasi
RaipurKolkata
BubaneshwarJaipurIndore
BhopalCoimbatore
NandedAmristar
Bangalore
Vizag
Own share as a multiple of Revenue Surplus
The need is to pause
ProjectPreparation Credit Rating Market access
20.
and create the necessary internal conditions
ProjectPreparation Initial credit rating
Investment plan and final credit rating
Multi yearinvestment plan
Internal improvements
Create effective demand for market borrowing
21.
Credit rating methodology provides an acceptable market feedback to policy makers
• CRISIL’s Rating Methodology involves an in-depth assessment of the following factorsLegal and Administrative framework
Economic base of the service area.
Municipal finances
Existing operations of the municipal body
Managerial Assessment
Project specific issues
Credit Enhancement Structure
22.
Rating feedback – Legal and administrative framework
The corporation’s legal and administrative framework is superior …. It not only permits levy of octroi but also
provides flexibility to annually revise the annual letting value…
23.
Rating feedback – Revenue model
The rating strength is constrained by JMC’s inadequate tax revenue raising powers, due to its inability to levy octroi and property tax, the two largest sources of revenue for municipal
corporations. The corporation’s financial flexibility is also limited by the high share of salary-related expenditure…
24.
Rating feedback – Service levels
These rating strengths are, however, partly tempered by the inadequate level of service
arrangements in Thane. TMC’s current sewerage coverage and road network are low and does not compare well with other CRISIL
rated municipal corporations.
25.
There are good examples of this approach
• PPIAF initiative for a water utility in Indonesia
• Ongoing Initial credit rating activities for water utilities in Africa
• Metropolitan development strategic plans in Ghana
– “Determine what is entailed in international financial grading and ensure that the metropolitan plans sufficiently address this aspect”
26.
The flagship investment fund has enabled investment plans and credit ratings
ProjectPreparation
Shadow credit rating
Investment plan and final credit rating
Multi yearinvestment plan
Internal improvements
Create effective demand for market borrowing
About seventy ratings have beenCommissioned through four nationalcredit rating agencies
About thirty five ratings have beenIssued
Internal improvements can nowbe focussed on
27.
In summary
• A catalyst is necessary
– It creates aspiration
– It makes the sector visible to financiers
• The next steps should focus on creating systemic demand for market access
• Poor focus on internal actions can limit access to a few strong utilities
28.
What are the necessary internal actions
Financial management reforms
Long term investment planning
Revenue improvement
Necessary steps
29.
What are the next challenges
• Technical capacity to spend
– Should move from build contracts to output based contracts
– Should increase depth of PPP
• Current revenue models may not fund the second generation of infrastructure
– To move from taxes to user charges
– To supplement user charges to city level revenue base
31.
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