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Fire D

An Indo-US Programme to Develop Viable Urban Infrastructure Finance System

The Indo-USAID programme on Financial Institutions Reform and Expansion (FIRE-D) for developing a long-term debt market for viable urban infrastructure projects was launched in 1994.  The programme envisages development of a viable urban infrastructure finance system that could support development of debt market in India by using the Housing Guarantee (HG) funds for contemplating the issuing of debt instruments to finance urban infrastructure projects. 

In the first phase of the programme (1994-98), the USAID provided the HG funds of US $125 million for a period of 30 years to develop an urban infrastructure finance system.  HUDCO and IL&FS acted as the financial intermediaries to channel the funds along with a matching amount of locally raised funds to municipalities or private sector entities to finance selected commercially viable urban infrastructure projects relating to water supply, sewerage, solid waste management and area development.

The second phase of the FIRE (D) programme was for the period 1998-2003. It was to give a wider spread to the programme with focused attention on citywide infrastructure projects and accessibility of the urban poor to urban infrastructure. The programme has been further extended by five years to be called FIRE (D)-III for the period 2003-2008, to work with an extended range of Indian partner institutions including state level entities, financial institutions, private sector, and NGOs to develop and support capacity building for commercially viable water sanitation project development with market based financing.

The National Institute of Urban Affairs (NIUA) was assigned by Government of India the nodal role and responsibility to promote, analyse and disseminate the policy change agenda and also to coordinate and conduct capacity building training workshops in the demonstration cities.  An expatriate group of two American Consulting Companies - Technical Support Service (TSS) and Community Consulting International (CCI) - provided project management support services, technical assistance and participant training to the working partners, viz. NIUA, ILFS, HUDCO, and the project cities.

In addition to strengthening the National Institute of Urban Affairs (NIUA) in terms of its technical and management capacity, this cooperative agreement between NIUA and USAID will support GOI’s efforts i) in promoting decentralization as an efficient mechanism for good urban management through implementation by the states of the 74^th constitution amendment, ii) capacity building of state level entities for development of commercially viable water sanitation projects with market base financing, iii) development and expansion of an efficient urban management training network in the country and iv) support the GOI’s efforts in dissemination of reforms.

FIRE-D Phase III’s overarching purpose will be “Capacity Building for Commercially Viable Water and Sanitation Project Development with Market Based Financing”. 

The project will test two hypotheses.  First, the central and state governments will create policy frameworks and incentives sufficient to permit strengthened state level intermediaries and municipal governments to access market based financing for improved water and sanitation services.  These services will benefit, among others, low-income households. Second, while FIRE-D Phase III will directly support up to 25 municipalities and up to six state governments and state-level intermediaries, the project presumes this will constitute a “critical mass” capable of inducing replication of similar activities in municipalities and states not directly assisted by FIRE (D) programme.

The purpose of extending the programme is to strengthen NIUA in terms of technical and management capacity, while at the same time providing a mechanism, working with USAID and FIRE (D) partners to promote, analyse and disseminate the lessons learned and the policy promotion and urban reform agenda and to coordinate the training and capacity building, through expanded training network, with the selected states and urban local bodies.  At the national level FIRE (D)-III will support GOI’s efforts to create a legal and regulatory framework and financial incentives which facilitate the formulation and implementation of commercially viable water and sanitation projects.

Concepts and Tools

FIRE (D) used new concepts, unconventional vocabulary and novel tools, not put to trial in the past, in the country.  Commercial viability of urban infrastructure projects, financing by accessing the debt market, credit rating of municipal and urban infrastructure entities, private participation in its provision were, by all means, unconventional concepts and tools.  Yet, within a short span since it’s launching, the FIRE concepts and tools acquired currency in policy formulation at the state and city levels.  Interesting projects have been identified, developed and structured in Tiruppur, Ahmedabad, Vijayawada and Pune with alternative modes of financing urban infrastructure projects which as commercially viable or bankable projects.

Novel Financing Mechanisms

FIRE (D) kick-started and demonstrated novel ways of financing urban infrastructure in India.  Projects in Tiruppur, Ahmedabad and Pune  proved catalytic in developing new financing techniques, which differ from each other and hence serve as alternative models in urban infrastructure financing.  Whereas the Tiruppur project is "commercially viable", being pursued under the aegis of an SPV, the Ahmedabad project is being part financed through municipal bond.  Though it is not "commercially viable" in true sense of the term, it is nevertheless "bankable".  The gap in the stream of revenue is to be filled through escrow accounting of revenues from two of the Ahmedabad Municipal Corporation's Octroi check-posts.

The Programme Impact

Positive spin-offs of FIRE (D) have been substantial even in the non-project cities.  The most important impact is the motivation and interest created in other cities in different states to think of alternative ways of financing urban infrastructure other than the traditional methods of plan and budgetary allocations which have built-in aberrations hindering effective and efficient management.  Equally important impact of the programme is the interest created amongst the financial institutions for funding urban infrastructure projects.  ICICI, which used to be confined to funding only the industrial projects in the past, have started taking keen interest in urban infrastructure financing after its interface with the Pune project. 

The programme has also led to innovative urban management practices in some of the cities in terms of public-private partnerships (PPP), accessing the capital market and sprucing up of financial management practices. The Institute of Chartered Accountants of India (ICAI) has prepared guidelines for financial reporting standards. A Committee appointed by the State of Tamil Nadu prepared a Manual for a new accrual based accounting system and financial reporting. The new accounting system has finally been implemented in all the municipal bodies in Tamil Nadu.

Examples of PPP are now abounding in the spheres of solid waste collection and disposal, street light maintenance, maintenance of parks, collection of octroi, construction of toll roads and bridges etc.  Municipal bodies have started accessing the capital market on their own.  The Municipal Corporation of Bangalore, for example, accessed the capital market to raise Rs. 1.25 billion through municipal bonds on the basis of "A (SO)" rating by CRISIL.  Calcutta, Surat, Mumbai have issued municipal bonds.  Most municipal bodies and water authorities have already been credit rated.  The legitimacy of Municipal Credit rating is now not only accepted but some of the municipal entities have gone for credit rating not for any specific debt instrument but as a device to look inwardly at their own management system.  The Municipal Corporation of Coimbatore is a case in point. Till now the cities of Ahmedabad, Nagpur, Surat, Ludhiana, Nasik, Madurai and Bangalore among others have raised funds from the capital market through Municipal Board.

Another substantive impact of the programme has been in changing the mind-set of planners, urban managers and policy makers relating to commercial viability of infrastructure and services like water supply, sewerage and solid waste management.  It has now been demonstrated that it is feasible to develop commercially viable and bankable projects for such urban infrastructures.  It is now increasingly realised that these infrastructure have costs of production like any other economic goods and hence the costs have to be recovered through ingenious project structuring, development, targeted subsidy and effective financial administration.

An important contribution of FIRE (D) has been that the FIRE (D) concepts and tools have attracted other international donor agencies, financial institutions, project development boards and the private sector. One of the spin-offs of FIRE (D) has been the partnerships with other donor agencies like the World Bank (TNUDP-II), DFID (Chennai Metro Water Authority’s corporatisation, HRD for water and sanitation sector), ADB (Karnataka), and GTZ (Nagpur slum improvement project). Even the Institute of Chartered Accountants, India has associated with developing guidelines for preparation of manuals for switching over to a new system of accounting and financial reporting based on double entry accrual system. This has already made headway in the state of Tamil Nadu.

Extended Phase of FIRE-D Programme

In the extended phase, NIUA is helping achieve the FIRE (D-II) vision by pursuing activities in the areas of (i) Policy promotion, (ii) Training and capacity building activities, (iii) Impact analysis of the programmes and the projects, and (iv) Information dissemination. With an objective of pursuing policy advocacy for implementing the FIRE agenda in the selected demonstration states, policy promotion is being carried out through policy promotion meetings with state governments, policy seminars, research studies and case studies and documentation of best practices in municipal management. Capacities building training workshops are being conducted through a potentially sustainable network of urban management training institutions spread across the country.  As of now there are 18 Training Network Institutions (TNIs) on the FIRE (D) Training Network.  In the sphere of impact analysis, NIUA has developed benchmark data on the level of services, access of urban poor to them in two project cities, preparing case studies of Ahmedabad, Nagpur and Surat.  An initiative to provide access of the urban poor to basic urban services has been started in Ludhiana and Shangli. Under dissemination, the NIUA work plan focuses on dissemination of information for advocating the FIRE policy objectives and the lessons learned. This is being accomplished by strengthening NIUA’s capacity for developing and sustaining an urban information system, setting up an information dissemination center as a clearing house of information at NIUA, developing a website named indiaurbaninfo.com, sustaining the publication of the Urban Finance Newsletter, bringing out publications of FIRE project activities and participation in national and international seminars and conferences for dissemination of FIRE (D) outputs.