Raising Funds: Debt financing and municipal bonds to play a key role

Debt financing and municipal bonds to play a key role

There is an urgent need to develop infrastructure in the South Asian region. As per the Asian Development Bank (ADB), the Asia-Pacific region currently faces an infrastructure gap of $330 billion and South Asia accounts for nearly half this gap. The gap in the energy sector is the largest and as per ADB this is expected to reach $14.3 trillion by 2030. Other sectors where a considerable lacuna in infrastructure is forecasted are the transport and water and sanitation sectors where gaps of $8.3 trillion and $800 billion, respectively, are expected by 2030 (after adjusting for climate change). (These numbers might not add up to $22.6 trillion for South Asia as these have been adjusted for climate change).

Key ways to leverage municipal finance

In order to tap municipal financing, the authorities need to actively take pragmatic steps such as de-risking private investments and developing policies that empower local municipalities through rationalising intergovernmental flows and strengthening revenue sources. This will help municipalities leverage municipal finance, which can be raised in multiple ways. One such way is fiscal decentralisation, where local taxes are increased, thus facilitating revenue generation by municipal corporations. Further, municipalities need to be made more accountable while spending these funds for planning infrastructure development.

Another way to leverage municipal financing is through debt financing, where national governments collaborate with cities to identify potential investment priorities and leverage the creditworthiness of cities to raise development funds from external lenders. Public-private partnerships can also be leveraged as a source of municipal financing. A creative way to raise municipal finance is through land value capture, wherein revenue is generated either by selling the land or collecting increased taxes as the land value appreciates over time as a result of development.

Country focus: Bangladesh

Bangladesh, with a GDP growth of over 6 per cent in the past 20 years, has shown considerable progress. However, maintaining this growth is now becoming a challenge for the country as there is a huge population influx into the cities. For example, in Dhaka there are 20 million people living in an area of 30 square km. This is a problem which needs to be dealt with urgently.

At present, there are 332 municipalities and city corporations in Bangladesh that have the ability to raise revenue for public services. However, the challenge faced by them is that their powers are limited and revenue collection is implemented in a rather confusing manner. Two-thirds of their revenue comes from the taxes collected, while non-tax revenue (from 29 different sources) forms the remaining portion. The government also provides direct and indirect block grants through various ministries.

An emerging case for bonds in South Asia

The bond market in South Asia has developed in the past three to four years. Most of the bond issues in the region have been through private placement. For instance, between June 2017 and September 2018, five municipal bonds were floated in India raising Rs 8.7 billion.

While much has been done to develop the bond market in South Asia, still more remains to be done. Of the 500 cities in the developing countries only 94 are rated as investment grade. Further, only 32 cities of the 500 have issued municipal bonds so far. Going forward, a paradigm shift is needed from grant-based financing to bond-based sources of municipal financing where cities are made creditworthy and attract funds from investors.

Next steps  

Going forward, the infrastructure gap in South Asia is expected to reach $22.6 trillion by 2030. Through reforms, the public sector can cover 46 per cent of this gap. However, for the rest, the private sector needs to step up. Private players need to increase investments and in tandem the cities need to encourage this by derisking investments, assisting the private players with all necessary clearances and approvals, and enhancing investor confidence. Further, municipal corporations should consider alternative financing mechanisms such as real estate investment trusts for fully operational revenue-generating properties and infrastructure investment trusts for water supply and sewage projects. This synchronised approach will be imperative to bridge the enormous gap in infrastructure finance in the South Asian region.

Based on a panel discussion among Natalja Wehmer, Sustainable Urban Development Section, UNESCAP; Dr Sultan Hafeez Rahman, Professorial Fellow and Head, Governance & Politics Cluster, BRAC Institute of Governance andDevelopment, BRAC University; U.K. Sinha, Former Chairman SEBI; Marco Kamiya, Coordinator, UE&F, UN-Habitat; at a recent NITI Aayog conference