Home

CASE STUDIES

Title
ISSUING MUNICIPAL BONDS FOR FINANCING INFRASTRUCTURE PROJECTS, AHMEDABAD (GUJARAT)

Sector
Financing

Summary
In January 1998, the Ahmedabad Municipal Corporation issued municipal bonds for Rs. 1000 million. The issue was designed to partially finance a Rs. 4890 million water supply and sewerage program. This was a remarkable achievement as it was the first municipal bond issue in India without a state government guarantee and it represented the first step towards fully market-based system of local government finance. A 75 per cent private and 25 per cent public issue rated AA(SO) by Credit Rating Information Services of India Ltd. (CRISIL), indicating a high degree of certainty about timely repayment, gave momentum to a growing national consensus that municipal bonds provide a promising alternative for financing urban infrastructure.


Location
Ahmedabad, the commercial capital of Gujarat, is the largest city of the state and the seventh largest city in India. It is situated on the banks of river Sabarmati and is 35 km. away from Gandhinagar, the capital of Gujarat.

Situation
Before 1993-94, Ahmedabad Municipal Corporation was a loss-making urban local body with accumulated cash losses of Rs. 350 million.

The Ahmedabad Municipal Corporation (AMC) improved its fiscal profile from 1993 to 1996 by introducing significant fiscal and management reforms, with technical assistance from United States Agency for International Development (USAID). These reforms included improving tax collection (octroi and property tax), introducing a computerized double entry accounting system, upgrading its workforce and financial management, developing a comprehensive capital management program, and obtaining a credit rating from the Credit Rating Information Services of India, Ltd. (CRISIL). These innovations laid the groundwork for issuing a municipal bond.

The above measures bought about a turnaround in AMC's financial situation. AMC had a closing cash surplus of Rs. 2142 million in March 1999.

Lead
Ahmedabad Municipal Corporation (AMC)

Strategy
In 1996, the city took a decision to develop a capital investment plan for five years (1996-97 to 2000-01) for investing Rs. 5947 million in water supply, sewerage, roads, bridges, and solid waste management projects. AMC allocated a major part, Rs. 4890 million, of its capital investment plan to address water supply and sewerage needs.

AMC proposed to meet 30 percent of the total investment requirement from internal accruals, while mobilizing the remaining amount through municipal bonds and loans from financial institutions.

Process
The following steps were taken in order to issue the bonds:
1. AMC got the corporation credit rated by a leading financial institution. It received a credit rating of AA(SO) from CRISIL.
2. Octroi collection from ten designated points were earmarked for servicing the bond and kept in an Escrow account.
3. The credit rating was able to build confidence in favour of AMC. This coupled with the good work done by the corporation successively for three years helped AMC in marketing its financial strategy to mop up public money through the bond issue for infrastructure projects. The USAID and HUDCO also participated in preparing documents for raising the bond issue.
4. The corporation very successfully held road shows and created a mechanism to ensure the returns on the money invested. This was done through an 'Escrow account'.
5. The AMC went to SEBI for the registration of the city bonds. AMC has the distinction of issuing first public municipal bond in India without a state government guarantee.

Ahmedabad Municipal Corporation took out the public issue of 10,00,000 secured redeemable bonds in 1998. City bonds, as it is popularly known, were of a face value Rs. 1000 each (for cash at par) aggregating to a total of Rs. 100 crores. The issue opened on 16th January 1998 and closed on 27th January 1998. The issue was oversubscribed as applications were received for Rs. 104.67 crores, the allotment was made by 24th January 1998.

The bonds were privately placed, allotted to a dozen Indian financial institutions, including the State Bank of India, the Unit Trust of India, Housing Development Finance Corporation, commercial banks and mutual funds.

In the first year, the bond proceeds were not used since project designs and tenders were not ready. The second year saw the commencement of construction and by March 31,2000 AMC was able to spend Rs. 915 million of total bond proceeds.

Financing
The Ahmedabad water supply and sewerage project is being financed from number of sources, including the internal accruals of AMC, debt from capital markets, a loan from USAID Urban Environmental (UE) program and loan from financial institutions such as Housing and Urban Development Corporations (HUDCO).

Lessons
1. Municipal bonds mechanism can work in India for raising finances for infrastructure projects.
2. For mopping up funds through a bond issue, the corporation should have credit rating done to project its financial soundness before the investors.
3. The local body must have detailed project proposals ready for implementation to ensure quick utilisation of funds.
All the urban local bodies, whose financial position is good, and who have a good credibillity and a sound track record, can go for municipal bonds to raise money for infrastructure development.

Contact


Designation
Municipal Commissioner

Organisation
Ahmedabad Municipal Corporation
Address: Sardar Patel Bhawan
Ahmedabad
City: 380001
State: Gujarat
Pin:
Phone: 91-79-5352828/539181
Fax: 91-79-5354638
Email: mail@ahmedabadcity.org
Web: www.ahmedabadcity.org