Constraints and prospects of Financing via Municipal Bonds in India: An analysis with case Studies

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In order to meet challenges created by growing urbanization, Municipal Corporations in India need to incur huge expenditure to support urban infrastructure in the coming decades. In this study we conduct case studies with two major municipal corporations, Kolkata Municipal Corporation (KMC) and Bruhat Bangalore Mahanagar Palike (BBMP) to draw lessons for other municipal Corporations for both efficient implementation of infrastructure projects and means to finance such activities via multitude of platforms including placement of municipal bonds. Our study reveals that in spite of recent revenue augmenting or cost saving reforms (like e-governance or Accrual based accounting for ward level), constraints on municipal financing in both places emerge due to poor debt capacity resulting from incomplete devolution of power, inadequate collection of revenues and presence of multitude of decision making bodies that often lead to project delays and cost over runs. The establishment expenditure of KMC is relatively higher but its per capita indebtedness is lower compared to BBMP due to smaller capital expenditure on infrastructure. The Bangalore had better records in devolution of power and has a higher frequency of going to capital markets than Kolkata and relatively higher per capita indebtedness due to greater frequency of outside financing for its infrastructure. Based on comparative studies, we suggest further reforms based on incentive schemes, appropriate of uses of technology and charging of fees based on bundling of municipal services in specific areas like property taxes and parking fees. These reforms augment revenues with unchanged status quo and hence are politically feasible as well. Finally, based on Bangalore’s experience, we suggest creation of an augmented version of Special Purpose Vehicle that can act as a facilitator between projects and co-co-ordinate both operations (replacing multitude of bodies) and issue external financial claims via proper credit enhancements by ring fencing projects in priority areas of infrastructure.