Market access for utilities

Is a decade of Indian experience useful

S.R. RamanujamDirector – Urban Infrastructure

10th June 2008

2.

• Its ten years since India’s first municipal bond issue

• The results are mixed

– Select agencies have benefited

– It has not impacted the sector in a meaningful way

• What can we conclude from this history?

3.

Utility – Local Government structure in India

• Water and sanitation delivered at

– Regional Government level by both parastatals and departments

– City level by local bodies as well as city utilities

• Regional Government investments are largely budget led

– Very little commercial borrowing

• Local Governments account for almost all market financing of water and sanitation projects

– 2/3rds of market borrowing at city level is for water and sanitation projects

4.

Data and analytical sources

• Market finance for local delivery – WSP – SA

• CRISIL Research

5.

History of market borrowing in India

Ahmedabad

1998 1999-01 2002- 2006

NashikLudhianaTNUDF

Bangalore WSSBNagpur

Kanpur DAMadurai

HyderabadVishakapatnamJaipurKolkottaPimpri-ChinchwadThaneChennai WSSBChennaiHyderabad WSSB

$ 20 Mn

$ 100 Mn-

Proof of

Concept

Adoption

Tax free status and expansion

$ 275 MN

2007 till date

The Ahmedabad bond issue broke a myth,

created tremendous interest

7.

Ahmedabad experience was a precursor to several other innovations in urban infrastructure financing

ProjectFinance

NOIDAIdeal Toll RoadsCoimbatore Bye PassMadurai

Donor projects

KarnatakaRajasthanTamil Nadu

Commercial Borrowings

Muni Bonds (16)Bank borrowingsTNUDF ++

Pooled Finance

Tamil NaduKarnataka

Consumerfinancing

AlandurKarnatakaIndore

Grants and own revenue,Cess

Surat, Bangaore, Mumbai

Before credit rating and

commercial borrowing

After credit rating and

commercial borrowing

Note: A cause-effect relation is weak for project finance initiatives

However, scaling up is yet to happen

9.

• Less than 20 agencies have issued bonds

– Almost all of them are large cities with one million plus population

– Proceeds of USD 400 mn till date compares poorly with need of USD 25 bn

– Momentum has slowed down

• Many bond issues have been for demonstration

– Not as a meaningful contribution to investment needs

– Only Ahmedabad and Nashik have repeat issues

– Ahmedabad and Nashik account for 42% of the borrowing

Depth of bond market access is low

10.

Around USD 400 mn total issue proceeds

- 50,000 100,000 150,000 200,000 250,000 300,000

Commercial borrowingsin the last decade

Projected investments

Actual needs

Rs Crores

Source: Compiled from city documents, Projected investments are as per DPR submitted till March 31, 2008 under JnNURM

However, planned investments are 24.7 bn USD just for the

63 largest cities (40% of urban population)

11.

0 10,000 20,000 30,000 40,000 50,000 60,000

Actual Borrowing

Demand

Need

Rs Crores

Right now, the borrowing momentum is weak

?

Source: Need – Working Group for leveraging institutional financingDemand – Based on JNNURM project approvals in first two years

Minimum Maximum

What have been the reasons?

13.

Market access needs

.…“a good market” and “ability to access”

Existing products in bond market

Optimum products in bond market

Strong local bodydemand

Weak local body demand

Current Zone

Not enough efforts to create a systemic strong demandModerate efforts to develop products

Correct zone

14.

The focus has been on rapid access

ProjectPreparation Credit Rating Market access

15.

1991

Deficit

1996-97

Surplus USD 20 mn

2002 onwards

Multiples bond issues

1998

First bond issue USD 25 mn

Ahmedabad has been an exception

Revenue improvementsand accounting reforms

Capital investment plans

Replicatingsuccess

Its bond issue for water projects followed sustained revenue reforms

Multi sector investments followed the bond issue

16.

0%

20%

40%

60%

80%

100%

1998 2002 2004 2005 2007

Water & San Bridges Roads Transport Urban poor

Its investments have become multi-sectoral in the recent years

Source: AMC presentation on Commercial borrowing – USAID, Indonesia

Sectoral share of capital investments

17.

And therefore, Ahmedabad has been able to increase its investments by commercial borrowing

Compared to Hyderabad, a similar size city, Ahmedabad does not limit its investmentsto current surpluses

Share of commercial borrowing in capital expenditure

0%

20%

40%

60%

80%

100%

Hyderabad Ahmedabad

% o

f cap

ital e

xpen

ditu

re

Commercial borrowings Current surplus

18.

The effect of postponing revenue reforms and multi-year plans is visible now

A grant funding window required them to prepare investment plans.They have to part fund the investments.Many cities have secured grant approvals, but their share of investment is high compared to their revenue base.

0.00 5.00 10.00 15.00 20.00 25.00

Chennai

MaduraiAsansolVaranasi

RaipurKolkata

BubaneshwarJaipurIndore

BhopalCoimbatore

NandedAmristar

Bangalore

Vizag

Own share as a multiple of Revenue Surplus

The need is to pause

ProjectPreparation Credit Rating Market access

20.

and create the necessary internal conditions

ProjectPreparation Initial credit rating

Investment plan and final credit rating

Multi yearinvestment plan

Internal improvements

Create effective demand for market borrowing

21.

Credit rating methodology provides an acceptable market feedback to policy makers

• CRISIL’s Rating Methodology involves an in-depth assessment of the following factorsLegal and Administrative framework

Economic base of the service area.

Municipal finances

Existing operations of the municipal body

Managerial Assessment

Project specific issues

Credit Enhancement Structure

22.

Rating feedback – Legal and administrative framework

The corporation’s legal and administrative framework is superior …. It not only permits levy of octroi but also

provides flexibility to annually revise the annual letting value…

23.

Rating feedback – Revenue model

The rating strength is constrained by JMC’s inadequate tax revenue raising powers, due to its inability to levy octroi and property tax, the two largest sources of revenue for municipal

corporations. The corporation’s financial flexibility is also limited by the high share of salary-related expenditure…

24.

Rating feedback – Service levels

These rating strengths are, however, partly tempered by the inadequate level of service

arrangements in Thane. TMC’s current sewerage coverage and road network are low and does not compare well with other CRISIL

rated municipal corporations.

25.

There are good examples of this approach

• PPIAF initiative for a water utility in Indonesia

• Ongoing Initial credit rating activities for water utilities in Africa

• Metropolitan development strategic plans in Ghana

– “Determine what is entailed in international financial grading and ensure that the metropolitan plans sufficiently address this aspect”

26.

The flagship investment fund has enabled investment plans and credit ratings

ProjectPreparation

Shadow credit rating

Investment plan and final credit rating

Multi yearinvestment plan

Internal improvements

Create effective demand for market borrowing

About seventy ratings have beenCommissioned through four nationalcredit rating agencies

About thirty five ratings have beenIssued

Internal improvements can nowbe focussed on

27.

In summary

• A catalyst is necessary

– It creates aspiration

– It makes the sector visible to financiers

• The next steps should focus on creating systemic demand for market access

• Poor focus on internal actions can limit access to a few strong utilities

28.

What are the necessary internal actions

Financial management reforms

Long term investment planning

Revenue improvement

Necessary steps

29.

What are the next challenges

• Technical capacity to spend

– Should move from build contracts to output based contracts

– Should increase depth of PPP

• Current revenue models may not fund the second generation of infrastructure

– To move from taxes to user charges

– To supplement user charges to city level revenue base

Thank You

Phone: +91 99202 28448+91 22 66441801

sramanujam@crisil.com

31.

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