Transcript Raising finance for a ULB Strengthening Urban Management ASCI / WBI Workshop, January 21, 2003

Raising finance for a ULB
Strengthening Urban Management
ASCI / WBI Workshop, January 21, 2003
Structure of the presentation
Issues in flow of private capital
Reform Agenda
Raising private capital
Conclusions
Issues in flow of private capital
Flow of private capital faces
many hurdles
Complex
institutional
structure and high
political risk
Inability of ULBs to
structure bankable
projects
Urban Sector
Inadequate
accounting
practices and poor
financial mgmt.
Inadequate cost
recovery and poor
credit-worthiness
Risk Mitigation
Limited private capital mobilized so far:
– Some bond issues
– Select bank / FI financing
Restricted to larger ULBs with relatively good financial
position - revenue surplus
Funding only by way of structured finance (“insulation
from risks”)
– Escrow of revenue streams
– Cash collateral
Financing has been usually preceded by reform actions
in ULBs
Financing Scenario
Risk appetite in Municipal Financing
Only government
F
u
n
d
i
n
g
Project Risk
General Obligation
ULB risk
Private Financing
till date
Structured Obligations
Level of Risk
1
1
Reform Agenda
ULBs need to undertake reform…
ULBs need to develop “commercial orientation” and be
managed as self-sustaining “viable” entities:
– Accounting systems
– Revenue enhancement thru tariff rationalization & new
sources, distribution / collection efficiencies, cost control
– Long-term masterplans (CDS) and project preparation for
creating project pipeline
– PSP for various urban sub-sectors
– Better financial discipline to enhance creditworthiness and
access private financing
– Building awareness for “pay-for-use” principle while
addressing concerns of urban poor
…with support from state
governments
State governments to facilitate reforms and private
sector participation through:
– Predictable devolution of funds
– “Incentivizing” performance in service delivery
– Enabling framework for private financing / PSP (Clarity in
regulation, model contracts, etc.)
– Supporting project development
– Capacity building of ULBs
– Credit enhancement
Raising private capital
Financing process
Identify
Projects
CDS
Evaluate and
Prioritize
projects
Advisors
Raising
finance
Improve
revenues
Financing options include...
Rupee debt from Banks / FIs
– Need to look at banks / FIs as well
– May offer advantages over bonds in select cases
Bond issuances by ULBs
– Structured obligations secured through escrow of specified
receivables of the municipal corporation
– Recently government has allowed tax-free bonds, subject to
stringent criteria
Non recourse : Project finance for BOT projects
“Financial engineering” is not a substitute for cash-flows
Issues for consideration
In evaluating financing options, ULBs need to be aware of
“hidden costs”
Hidden costs:
– All monies received up-front
– Lower flexibility vis-à-vis project requirements
– Higher carrying cost for bonds due to sinking fund
creation
Cost vs Tenure : tenure is important in urban projects
Issues for consideration…(cont’d)
Security:
– ULBs should explore land as a security mechanism
– Bond guarantees, not yet developed
ULBs need to look at “financial closure”
Finally, maintaining “creditworthiness”:
– Consistent operating surpluses
– Comfortable ratio of annual Debt Service to Operating
Pooled Finance
– Modeled on the U.S. pooled finance experience
– Key benefits include credit enhancement, economies
of scale in:
• In financing costs
• Transactions costs
– Credit enhancement usually through DSRF
– In India, ULBs have much lower creditworthiness
– DSRF alone may not be sufficient for financing
Layers of Credit Enhancement
State Government
Support
Lenders
Credit
Credit
Support
Support
Credit Enhancement
•Aid Intercept
•Guarantees
•Reserves
Pooled
Finance
Entity
Individual Project Loans
• Tariff
• Municipal revenues
• Subsidy
Credit Enhancement
Building layers of credit enhancement:
– Initial project user fees or taxes
– Portfolio cash flow supplemented by Debt Service
reserves
– Reserve supplemented by intercepts
– Partial Guarantees
Conclusions
Conclusions
In the short to medium term, ability to access private
capital will be limited
Besides creditworthiness, capacity of ULBs to manage
reforms, plan and execute projects, and raise finance
will be a key issue
State governments need to play a key role in fostering
reforms and help raise capital
World Bank seeks to assist the urban reform agenda in
terms of helping ULBs make the transition to become
creditworthy and access domestic financial markets
Thank you