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INNOVATIVE FINANCING OPTIONS FOR URBAN WATER SUPPLY AND SANITATION IN INDIA: 

INNOVATIVE FINANCING OPTIONS FOR URBAN WATER SUPPLY AND SANITATION IN INDIA CITYSCAPE 2006 Hyderabad Chetan Vaidya Indo-US FIRE Project April 7-8, 2006

OUTLINE OF PRESENTATION: 

OUTLINE OF PRESENTATION FIRE Project India Urban Context Municipal Bond Pooled Financing Borrowing from Banks/FI Lessons Learned and Way Forward

FIRE (D) BACKGROUND : 

FIRE (D) BACKGROUND Started in 1994; continues through 2008. Sector focus: water, sewerage and solid waste. Works with central, state and local governments. Institutional partners: GOI (DEA, MoUD, NIUA), HUDCO, IL&FS, USAID, plus numerous state WSS and UD Dep’ts. and local governments, and MSS contractors.

FIRE (D) GOAL AND OBJECTIVES: 

FIRE (D) GOAL AND OBJECTIVES Goal – work at center, state and local government levels to create livable cities through sustainable delivery of water and sanitation services. Objectives (4) Development and management of commercially viable (i.e., bankable) urban infrastructure projects. Mobilization of sustainable infrastructure finance. Execute complementary policy, institutional, legal and regulatory reforms. Capacity building of urban sector professionals.

Slide5: 

INDIA URBAN CONTEXT Existing Situation -Low access and level of services -Low tariff and cost recovery -Low customer satisfaction/ supply side orientation Possible options for high investments needs -Accessing capital markets - municipal bond/tax free municipal bonds/pooled financing -Borrowing from commercial banks/financial institutions -Private sector participation

COMMERCIALLY VIABLE URBAN PROJECTS : 

COMMERCIALLY VIABLE URBAN PROJECTS Market rate of return Appropriate institutional structure Risk management plan Resources to be raised from the market on revenue streams from specific user charges and dedicated sources (Octroi, Property Tax)

MUNICIPAL BONDS INDIA: 

MUNICIPAL BONDS INDIA Taxable municipal bonds: Rs. 540 crore Tax free municipal bonds: Rs. 660 crore Pooled finance: Rs. 130 crore TOTAL: Rs. 1200 crore

AHMEDABAD MUNICIPAL BONDS : 

AHMEDABAD MUNICIPAL BONDS The Ahmedabad Municipal Corporation (AMC) was the first ULB to access the Indian capital market First municipal credit rating in 1996 First municipal bond without state government guarantee in 1998 (Rs. 100 crore) Annual interest of 14% and 7 year tenure Private placement: 75% Credit enhancement measures included: Escrow account for octroi revenues (entry tax), a sinking fund for principal payment, and DSR of 1.5 for principal repayment

SALIENT FEATURES OF AMC BOND : 

SALIENT FEATURES OF AMC BOND Transaction costs high (2.8%) due to public placement Debt utilized to implement a bulk water supply project and helped 60% city’s of population (including low-income settlements) AMC took two years to use the proceeds. However, tenders were 10-15% below estimated costs

MUNICIPAL BONDS: 

MUNICIPAL BONDS Since 1997, seven cities have issued taxable municipal bonds without state government guarantees are Nashik (Rs. 100 crore), Nagpur (Rs. 50 crore), Ludhiana (Rs. 10 crore), and Madurai (Rs. 30 crore) The bond issued by the Municipal Corporation of Madurai was issued to refinance an existing project In most cases, bond proceeds were used to fund water and sewerage schemes

TAX FREE MUNICIPAL BONDS: 

TAX FREE MUNICIPAL BONDS To boost the municipal bond market, the Government of India decided to provide tax-free status to municipal bonds. Ahmedabad is first to issue a tax-free bond (Rs. 100 crore) Hyderabad (Rs. 82 crore),Vizag (Rs. 50 crore), and Nasik (Rs. 50 crore), and HMWSSB (Rs. 50 crore) issued tax-free bonds Eight MCs, and Utility boards issued Rs. 120 crore tax-free bonds Municipal bond annual interest rates are 1.5 to 2% less than other loans for same credit enhancement structures

POOLED FINANCING I: 

POOLED FINANCING I Only financially strong, large municipal corporations are in a position to directly access capital markets Most small and medium ULBs are not able to access capital markets simply on the strength of their balance sheets The cost of the transaction is a significant barrier USAID/FIRE project assisted the Tamil Nadu Water and Sanitation Pooled Fund (WSPF) to structure a bond issue

POOLED FINANCING II: 

POOLED FINANCING II The Tamil Nadu WSPF, a trust, set by state government and Tamil Nadu Urban Development Fund WSPF issued a tax-free bond (Rs. 30 crore) by pooling 14 municipalities’ proposals for infrastructure projects Annual interest 9.2% and 15-year tenure Private placement Proceeds financed water supply and sanitation projects Credit enhancements measures included: escrow accounts funded by municipal revenues, state-funded debt service reserve service fund, and USAID guarantee 50% of principal

POOLED FINANCING III: 

POOLED FINANCING III The GOI decided to create a market-based vehicle that facilitates capital market access to small and medium size ULBs GOI budget proposed setting up a Pooled Finance Development Fund (PFDF) The objective of this fund is to support state initiatives to establish pooled financing structures, provide technical support and credit enhancements, and leverage urban reforms Karnataka UIDFC issued pooled bonds for 8 municipalities around Bangalore

GREATER BANGALORE: 

GREATER BANGALORE Rapid growth, home for many Fortune 500 companies 1.5M people, 8 Urban Local Bodies (ULBs) 7 City Municipal Councils and One Town Municipal Council 30% poor living in 60,000 households Property tax is the main source of revenue Dependent on fast depleting ground water sources Local resident owned supply systems

GWASP PROJECT COST: 

GWASP PROJECT COST

FEATURES OF THE BOND: 

FEATURES OF THE BOND Karnataka Water and Sanitation Pooled Fund (KWSPF) Trust set up KWSPF borrows from capital market and lends to ULBs Tax free status from Government of India ICRA credit rating LAA(SO) Bonds of Rs. 100 crore 15-year tenure at 5.95% coupon rate USAID DCA guarantee for credit enhancement

BOND STRUCTURE: 

BOND STRUCTURE Debt Service Payments (Semi - annual Interest and Annual Principal) Water & Sanitation Pooled Fund (WSPF) Managed by KUIDFC Funds from bond issue Ž Third - Party Guarantees • USAID provides 50% guarantee of principal. Private Placement Bondholders Œ Escrow Account (Water Project Account) • Funded up - front by the ULBs from general funds (Current Account) and State Annual Operating Grants to cover 1.5 times annual debt service requirements on market borrowing as well as the debt service requirements on state borrowing. • Held in secure, short - term fixed deposit investments or other liquid instrument. • Replenished by ULBs’ Current Accounts and State Annual Operating Grants , and an intercept of SFC devolution funds.  Bond Service Fund • Established by separate funds of GoK contributed up - front. May be reimbursed by PFDF of GOI as per its guidelines • Maintained to Rs 255 million at any given time. • Held in secure, short - term fixed deposit investments or other liquid instrument in the name of WSPF. • GOK, via a government order, may divert transfer payments (intercept) to replenish BSF in case of shortfall. Ž Loan/Bond Disbursement Debt Service Payments Œ  BWSSB for Implementation of Water Supply Projects Urban Local Bodies (ULBs) ULB Cash Flows

CAPACITY BUILDING: 8 ULBs in GB : 

CAPACITY BUILDING: 8 ULBs in GB Support for improving resource mobilization in 8 project ULBs Property survey efforts to be consolidated with improving tax collections Assessment and improving systems of procedures in tax administration in 8 ULBs Implementation of measures for improving property tax and advertisement tax revenues in a pilot ULB Upscaling into 7 ULBs by leveraging other resources

PROVISION OF WATER SERVICES TO POOR: 

PROVISION OF WATER SERVICES TO POOR Bangalore core city has 368 slums 100,000 urban poor households 3 slums tested under AusAID pilot studies Lessons learnt and solutions extended to another 43 slums Up-scaling to all the slums now planned Infrastructure funding from JBIC USAID support in packaging the social intermediary needs Cities Alliance agreed to fund the soft costs WATERAID to be the lead NGO for implementation and would partner with credible local NGOs Pilot testing Pro-Poor Policy

THANE SEWERAGE PROJECT : 

THANE SEWERAGE PROJECT

BORROWING FROM COMMERCIAL BANKS/FIs: 

BORROWING FROM COMMERCIAL BANKS/FIs Urban Local Bodies have also started financing their urban infrastructure projects through commercial bank loans. The Vadodara Municipal Corporation obtained loans totaling Rs. 70 crore from the commercial banks. The Thane Municipal Corporation obtained ICICI a loan of Rs. 50 crore in October 2001.

KEY CONSTRINTS: 

KEY CONSTRINTS Insufficient political consensus at state and municipal levels for the reform agenda for water and sanitation, particularly regarding private sector participation and proper pricing of water. Few examples of comprehensive state-level policy, institutional and legal frameworks for sustainable replication of commercially viable projects. Constant transfers of administrative “champions” undermine promising reform initiatives. Limited project successes to lead reform movement. Poor and deteriorating position of municipal finances. Thin staff capacity, particularly at municipal level. Inability to deliver urban services citywide to the poor.

LESSONS LEARNED: 

LESSONS LEARNED Local reforms Project development Project implementation Improvement in debt instrument State debt limitation policy for ULBs Credit enhancement for pooled financing Guidelines for tax-free bonds

WAY FORWARD: 

WAY FORWARD About 60 cities in India under Phase I JNNURM are preparing City Development Plans, Timeline for Reforms and Detailed Project Reports Reforms include State and City level mandatory and optional reforms These cities could undertake commercially viable projects The reform linked JNNURM project will help to improve infrastructure and make our cities more efficient

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