Modi Drives India Muni Bond Surge to Bring Water to Millions

  • Modi plans to improve infrastructure in 100 cities by 2020
  • Greater Hyderabad plans sale to build apartments for poor

Prime Minister Narendra Modi’s pledge to enhance the quality of urban life for millions of Indians is driving local city governments to resuscitate the municipal bond market.

The city of Pune is looking to tap the bond market to finance a project that plans to provide around-the-clock metered water to more than 3 million in the western state of Maharashtra. Greater Hyderabad Municipal Corp, the local government for the southern Indian city of Hyderabad, plans to sell debt to fund road projects and build apartments for the poor. That takes the pipeline for municipal bond sales to more than 56 billion rupees ($825 million) since the regulator unveiled rules for such debt last year, lifting expectations for an expansion of the moribund market.

Municipalities in Asia’s third-largest economy are accessing the bond market as Modi seeks financial and technical co-operation from the U.S. to Singapore for his so-called Smart Cities initiative. Under the plan, the infrastructure of 100 cities across the country will be upgraded by 2020 to provide facilities such as adequate and clean water supply, sanitation and public transportation.

“Such sales can help finance the government’s smart city development plan and also reduce municipalities dependence on grants and local tax revenues to fund projects,” said Rajeev Radhakrishnan, head of fixed income at SBI Funds Management Pvt., India’s fifth-biggest money manager with 1.3 trillion rupees of assets as of Sept. 30. “The rush in issuance by local civic bodies could be because of the push from the government to develop the municipal bond market.”

The government plans to spend about 480 billion rupees over five years to improve public services and infrastructure under the smart city program, according to guidelines from the Ministry of Urban Development. An equal amount of money has to be contributed by either the state or the local government, creating a fund of about 1 trillion rupees for developments modeled after Singapore and Seoul.

“There are no official orders from the central or the state governments for local bodies to tap the bond market,” said T. Vijay Kumar, financial adviser at Greater Hyderabad, which plans to raise 33 billion rupees via municipal bonds over a period of three years. “But, they want more and more decentralization of power and want local authorities to be financially independent.”

Local authorities are weighing both bonds and loans to fund projects, says Kumar, adding that the advantage of selling bonds is that tenors are typically longer than bank loans and don’t require physical collateral or guarantees.

Pune Municipal Corp. has already got in-principle approval for a loan of 22.7 billion rupees to finance a five-year water project, Ulka Kalaskar, chief accounting and finance officer at the municipality said last month. The body will announce a banker to manage its bond sale in a week’s time as it looks to diversify borrowing sources, she said Monday.

Supply Pipeline

Bhopal Municipal Corp., Greater Visakhapatnam Municipal Corp., and Imagine Panaji Smart City Development Ltd. are among others that plan to appoint a consultant to get technical assistance on issuing municipal notes. With the supply pipeline building, the cost to sell municipal bonds may climb.

“There will definitely be pressure on the pricing of municipal bonds if more and more local bodies decide to tap the market,” said Greater Hyderabad’s Kumar. “That’s why we are trying to finalize the deal quickly so that we get the funds at competitive rates.”

The average yield on top-rated five-year corporate bonds slumped 100 basis points this year to 7.40 percent, headed for biggest annual decline since 2002, according to data compiled by Bloomberg. The rate on 10-year securities declined 87 basis points to 7.55 percent.

Long-term investors like insurance and pension companies could be the first buyers for municipal bonds followed by mutual funds, said SBI Funds’ Radhakrishnan, adding that factors like the municipality’s financial health, credit rating and pricing of the bond will decide if the asset management company will invest in such debt.

“Local bodies have access to several funding sources but they are still unable to meet the requirements that arise from the increasing number of projects,” said G. Anand Rao, an urban planner at Greater Visakhapatnam Municipal, a city governing authority located on the Bay of Bengal. “Bonds serve as an additional option for the local bodies to raise funds.”

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