Ashish Sable, Sr Vice President & Group Head, Debt Capital Markets, SBI Capital Markets
How are the selected smart cities likely to mitigate funding issues? What are the various sources that these smart cities can explore?
There are many sources to fund projects envisaged by selected smart cities. One of the important means is grants by governments-state and central. In fact, the smart cities can structure themselves to monetise some of the assets under their possession and identify revenue-generating projects. However, an area of interest that is gaining traction these days is municipal bonds, which are issued by urban local bodies (ULBs). For funding, these smart cities must look beyond central and state grants and opt for market borrowings. That said, it is a slow process and a number of regulations are stipulated by Security Exchange Board of India (SEBI) and others. To streamline the initial process, SEBI has created a new set of guidelines other than that of disclosure. We have already tasted the success of these guidelines when we partnered with Pune Municipal Corporation and Greater Hyderabad Municipal Corporation for raising municipal bonds.
Will it [fund raising] make ULBs more accountable and transparent?
I think the process of raising funds through municipal bonds will make ULBs accountable for being transparent. This is because with bonds being listed, investors in the capital market are looking for transparency. This will compel the ULBs to meet the investors' requirement in terms of disclosure, discipline, etc. This financial instrument will also push ULBs for audited finance on a regular basis. I think the success of both-Pune and Hyderabad-will be repeated not only by the other ULBs, but also by themselves in the coming future.
Over the years, how can change in rating parameters help the ULBs to strengthen their position?
Earlier, most of the state-level borrowings were through guaranteed structure. The bonds were guaranteed by the state government. Over time, when rating agencies started rating the state, it came to notice that the ratings were below AA. This was a big setback on ULBs, because if a state is rated below AA, then on what basis will the ULB match AA+ or a minimum of AA.
Now the rating parameters have changed and are based on cash flow of state or ULBs. Since many of the ULBs have a fixed cash flow from sources, including property tax, water tax, etc., their complete reliance on state or central grants or funding is averted. A case of instance is Pune. Almost 90 per cent of the funds are from its own sources. Importantly, Pune has the ability to collect taxes from citizens and can generate revenues on its own. Commercial entities do not have this kind of fixed source of income, as they are prone to business cycle. By receiving ratings of AA+ and AA respectively, Pune and Hyderabad show that they are creditworthy today.