Materialising Municipal Bonds

What is the issue?

Beyond focussing on national and State budgets, forward planning is important at the municipal level as well.

What are the recent developments in this regard?

• Pune Municipal Corporation raised Rs.200 crore in June 2017 for a water supply project.
• Greater Hyderabad Municipal Corporation raised Rs.200 crore recently to fund their road project.
• Municipal bond market has seen an issuance of around Rs.2,000 crore since the first bond issue two decades ago.
• While regulators and the Government are keen on more such bonds, the markets are yet to share the enthusiasm.

Why is the municipal bond market unattractive?

• Information - Among the many factors withholding the development of municipal bonds market is the lack of information infrastructure.
• The RBI publishes annually a report on the State budgets analysing the fiscal position of State governments based on primary data.
• But notably, there is no such compendium on the budgets of local bodies giving real data on the overall receipts or expenditure.
• Reports - The available data if any comes from the Comptroller and Auditor General (CAG) audit reports.
• These give a consolidated picture of the municipal finances.
• However, even the latest available CAG reports on local bodies date as far back as 2014-15.
• Primary Source - The primary source of data is the website of the municipal corporation.
• But the governance of the local bodies in some states leads to doubting the credibility of such reports.
• The details of service delivery or the properties assessed for tax are not published in the budget.

What are the concerns with municipal bodies?

• Accounting - Very few municipalities adhere to the national/State municipal accounting manual (NMAM/SMAM).
• Even among the mega cities, Bengaluru and Kolkata present budgets that are not compliant with the NMAM.
• NMAM mandates presenting budget information both function-wise (type of service rendered) and account code-wise (nature of revenue or expenditure item).
• However, most municipal corporations present the data only account code-wise.
• Also, the chart of accounts is fluid in many municipalities as they are still transitioning to the accounting manual.
• Accounting quality - The accounting quality largely varies and is not linked to the size of the corporation.
• The most common errors are the confusion between revenue and capital items, and wrong account coding in the budget document.
• Disparities - The reporting units are not the same in the budget data of various corporations.
• Most municipal bodies present it in rupees lakh, and some in rupees thousands and rupees.
• The differences in data from the municipal budget documents make it hard to compare data across municipals.

What is the way forward?

• Building a national municipal data base ought to be a priority.
• Integrated database with operational, economic data and financial data is essential.
• Making it user-friendly is the first step to building an information infrastructure for the municipal bonds market.
• It facilitates analytics on the operational efficiency of the corporation, the potential for revenue growth, the debt bearing capacity, etc.
• Presently, the lender weighs in the tacit or explicit support of the state government while lending to a municipal corporation.
• A national database can promote a culture of credit analysis among lenders to municipalities, to make informed decisions.
• The increased levels of transparency will attract public private partnerships in infrastructure delivery and improve ease of doing business.

Source: BusinessLine