Transcript CREDIT EVALAUATION AND RATING OF URBAN LOCAL BODIES ( ULBs) AND IMPLICATIONS FOR THE URBAN REFORM AGENDA A PRESENTATION BY: SUJATHA SRIKUMAR SENIOR VICE PRESIDENT IL&FS.

CREDIT EVALAUATION
AND RATING OF URBAN
LOCAL BODIES ( ULBs)
AND IMPLICATIONS FOR
THE URBAN REFORM
AGENDA
A PRESENTATION BY:
SUJATHA SRIKUMAR
SENIOR VICE PRESIDENT
IL&FS
ABOUT IL&FS
 Incorporated in 1987 with primary objectives of
– Commercialisation of infrastructure projects in India,
and
– Offering comprehensive range of financial services to
the infrastructure sector
 Shareholders include :
– HDFC, CBI, UTI (promoters), SBI
– IFC (W), Orix Japan, Govt. of Singapore, Credit
Commercial de France
 Pioneer in infrastructure financing and project
development in India
– project sponsor, developer, advisor, financier, operator
and manager for variety of infrastructure projects
ABOUT IL&FS
Uniquely positioned to provide end-to-end project development
and financing solutions from conceptualization to
implementation in urban infrastructure sector
Financial advisors and investment bankers to first municipal
bond issue - Ahemdabad Municipal Bond Issue
Project Developer of first private sector water sector project
in the country- New Tirupur Area Development Corporation
MUNICIPAL BONDS (MBs)
 Concept of MBs as an additional mechanism for
raising resources for urban infrastructure sector
first presented at an USAID seminar in 1995
 MBs have played a key role in the creation of
urban infrastructure assets in United States and
Canada
 Later recommended for Commercialization of
Urban Infrastructure in India by the Rakesh
Mohan Committee
 Would open new vistas for attracting private
capital to the urban infrastructure sector
WHAT ARE MUNICIPAL BONDS
 MBs are debt obligations issued by cities, and urban sector
related governmental entities to raise money in order to
finance urban infrastructure
 Through MBs, investors lend money to an issuer who
promises to pay the investors a specified amount of interest
(usually paid semiannually) and return the principal on a
specific maturity date
TYPES OF MUNICIPAL BONDS
 General obligation bonds. Principal and interest are
secured by the full faith and credit of the issuer and usually
supported by either the issuer's unlimited or limited taxing
power. General obligation bonds are also voter-approved.
 Revenue bonds. Principal and interest are secured by
revenues derived from tolls, charges or rents paid by users
of the facility built with the proceeds of the bond issue.
Public projects financed by revenue bonds include toll
roads, bridges, airports, water and sewage treatment
facilities, hospitals and housing for the poor.
MUNICIPAL FINANCING IN INDIA
 Traditionally financed through mix of
– budgetary allocations from Municipality’s own revenues
– grants from state government
– borrowing from insurance companies and specialised national level
institutions like HUDCO and state level financial institutions
– limited borrowings from banks/FIs
 Capital Market access yet at a nascent stage – only 4 years since first
municipal bond issue
 Total Value of Municipal Bonds so far - Rs 7.5 bn
 Strong interest from several municipal bodies to issue similar bonds
– a dozen have already accessed capital markets
– 40 Urban Local Bodies have sought rating
Bond Issuance provide alternate sources of Institutional finance not
conventionally available to municipalities
MUNICIPAL BOND ISSUANCES THUS
FAR
Municipality / Local Body
Year
Rating
Amount
Coupon 10 yr G(Rs crore)
(%)
Sec yield
Ahmedabad
Jan 1998 AA(SO)
100.00
14.00
13.3
Bangalore
Nov 1998 A(SO)
125.00
13.00
12.2
Ludhiana
Sept 1999 LAA(SO)
17.80
14.00
11.6
Nashik
May 1999 AA(SO)
100.00
14.75
11.7
Bangalore Water Supply Bd.
Aug 2000 Not Avail.
10.00
12.90
11.4
Kanpur
Dec 2000 LA+(SO)
50.00
13.50
10.9
Madurai
Mar 2001 LA+(SO)
30.00
12.25
10.3
Ludhiana
Jun 2001 LAA-(SO)
2.00
13.50
9.3
Tamil Nadu Urban Dev. Fund
Aug 2001 LAA+(SO)
106.10
11.85
8.9
Nagpur
Nov 2001 LAA-(SO)
31.10
13.00
7.8
Ahmedabad
Mar 2002 AA(SO)
100.00
9.00
7.4
Hyderabad
Mar 2002 AA+(SO)
82.50
8.50
7.4
KEY FEATURES OF AMC BOND
ISSUANCE
 First Municipality Bond Issuance in India
 Issue Size of Rs 1000 mn
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• Rs 750 mn privately placed with 13 banks and institutional
investors
• Balance Rs 250 mn by way of public issue in January 1998
Standalone rating of A+ enhanced to AA(SO) based on Escrow of
Octroi collections from 10 identified points (nakas)
Credit enhancement (escrow) provided prioritisation of cash flows for
payments to bondholders
No State / Local Government Guarantee / Support for debt servicing
Funds utilised for pre-identified Water Supply and Sewerage Schemes
Process took over a year to develop and deliver “first time in India”
KEY TERMS OF ISSUE
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Issue Size : Rs 1000 mn
Purpose
: To part finance Water and Sewerage projects
Interest
: 14% p.a. (G-Sec yield 13.35%)
Tenor
: 8 years
Redemption
: At end of 6, 7 and 8th years
Security
: - First mortgage and charge on corporations
property subject to minimum 1.25 times
cover
- Structured Payment Mechanism by way of
Escrow
 Listing
: National Stock Exchange
 Credit Rating: CRISIL AA(SO)
AHMEDABAD MUNICIPAL
CORPORATION BOND – 2ND ISSUE
 Arranger for AMC City 2002 Tax-free Bonds in March 2002
Issuer
Ahmedabad Municipal Corporation
Instrument
Tax Free Bonds
Rating
AA(SO) by Crisil
Yield
9% payable semi-annual (10 yr G-Sec yield 7.45%)
Tenor
10 years with put/call at end of the 5th Year
Issue Size
Rs 50 Crore, greenshoe option to retain additional Rs
50 Crore
Issue Open &
Close
March 16, 2002 & March 31, 2002
Amount Mobilised Rs 108 Crore
Amount Retained
Rs 100 Crore
KEY HIGHLIGHTS
 Nashik – AA(SO)
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– Escrow of octroi
– Inability to implement security structure led to rating downgrade subsequently restored
Ludhiana – LAA-(SO)
– Escrow of non-tax revenues like water charges
Hyderabad – AA+ (SO)
– Combination of escrow and cash collateral
– Replicable model for corporations with substantial revenue
surpluses
Bangalore - Guaranteed by State Government; Rated A+(SO)
– Non-utilisation of proceeds resulted in negative carry on bond
interest
Madurai – LA+(SO) credit enhancement by GoTN’s guarantee
– Escrow of Toll collections on Madurai Inner Ring Road
Nagpur – LAA-(SO)
– Escrow of property tax and water charges
MUNICIPAL BOND ISSUES - KEY
LEARNINGS SO FAR
 Implementation of commercial accounting framework
 Institutional preparedness to identify, implement and
profitability operate projects and schemes
 Important to position municipality on stand alone basis
without state government cover
 Development of appropriate payment security mechanisms
to raise investor confidence and rating
 Stagger resource raising to align with projected spend
profile and in present context also take advantage of
softening interest regime
WHAT IS CREDIT RATING?
Rating agency’s opinion on relative degree of safety
regarding debt obligations being met on time
 Its an opinion not a recommendation
 Relative degree of safety vis-a-vis other debt
instruments
 Timeliness in meeting debt obligation
 Instrument specific - could be different for a
structured instrument and stand-alone
 Assigned by a committee of experts in finance,
management & economics, after a detailed and indepth discussion
CREDIT RATING - WHY?
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Independent & unbiased evaluation of credit quality
Increased accessibility to funds from the capital
markets for infrastructure projects
- Helps the investors in pricing the debt offer
Increased marketability of debt issues by municipal
entities
Improved visibility - facilitate flow of international
capital
Indicative of transparency
CREDIT RATING - WHY?
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Benchmarking with other municipal entities and
corporate entities - highlights strengths and
weaknesses
Use of market borrowings to bridge demand-supply
gap in critical infrastructure can accelerate economic
growth in the municipal area
Municipal corporations like Ahmedabad, Bangalore &
Nasik have used market borrowings to fund capital
expenditure
Helps in monitoring overall debt level & finances
RATING METHODOLOGY FOR MUNICIPAL
BONDS
CRISIL’s Rating Methodology involves an in-depth
assessment of the following factors
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Legal 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
LEGAL AND ADMINISTRATIVE FRAMEWORK
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Municipal functional domain as defined by the
relevant act
Decision making process
State government transfers
Tax rates & basis of assessment
Borrowing powers & ability to pledge revenues
State government & municipal linkages
ECONOMIC BASE OF THE SERVICE AREA
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Population base and growth rate
Level of industrial and commercial activity
Diversity and elasticity of tax base
Per capita income levels
Prospects for widening of tax base
MUNICIPAL FINANCES
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Accounting quality
Overall surplus/deficit on revenue account
Profile and trends in tax and non tax revenues
Property tax effort: Demand raised, rates, systems, coll.
eff.
Dependence on SG transfers: Stability & transparency
Expenditure profile: Head wise & activity wise
Capital receipts and expenditures - Trends
Debt profile: Cost, tenure, coverage
Future sources of revenue growth
Measures to curtail revenue expenditure
EXISTING OPERATIONS
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Range of services: obligatory/discretionary
functions.
Core services: Water, sewerage facilities, primary
education & health, etc.
Systems in place for delivery of these services
Level and trend of past expenditure on these
services.
Proposed level of service enhancement
Major projects undertaken
MANAGERIAL ASSESSMENT
Linkage between financial health & initiatives taken
by a proactive management.
 Organizational structure
 Administrative systems and procedures
 Project management skills
 Level of control on expenditure
 Initiatives taken to enhance resources and improve
collection mechanisms
PROJECT DETAILS
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Proposed projects
Project tenure and funding patterns
Debt servicing requirements due to new projects
Existing level of service & improvements
envisaged
CREDIT ENHANCEMENT STRUCTURE
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Escrow of specific tax revenues:
Ensure non co-mingling of cash flows
Level of collateralisation
Reliability of source (e.g. octroi)
SG guarantee
Credit quality of guarantor
Legal validity
Conditional/unconditional
Irrevocability
Trustee’s powers to invoke guarantee
CARE’S CRITERIA FOR
EVALUATING MUNICIPAL
BONDS
Considers the following parameters:
 Fiscal profile of the bond issuing municipal
body
 Project being financed and its related risk
factors
 Economic Factors
 Revenue streams for repayment of Bonds
 Level of local government autonomy
 Administrative Capability of the officials at
the local government level
ICRA’S CRITERIA FOR
EVALUATING MUNICIPAL
BONDS
 ICRA looks at the overall profile of the
issuer municipality in terms of
– Service area and extension
– Demographic profile within the municipal
limits
– Social economic indicators in the district in
which the municipality is situated
– Detailed financial assessment of the past
financial performance
CRITERIA USED BY THE
INTERNATIONAL CREDIT
RATING AGENCIES
STANDARD AND POOR’S CREDIT
RATING METHODOLOGY
 The analytical methodology focuses on :
– Range of economic system and administrative
factors
– Budgetary performance and flexibility
– Entities own financial position
– Evaluates Sovereign related factors and credit
profile of local governments
KEY HIGHLIGHTS AND
LEARNINGS
 Few municipal entities with high stand alone credit quality
 Declining operating surpluses on account of rising revenue
expenditures due to 5th pay commission impact
 Pressing need for creating urban infrastructure assets to
improve quality of civic services
 Administrative reforms are the key to improving overall
profile and credit quality of local bodies
Credit rating has now become widely accepted as a self
evaluation tool and a feedback for reform initiatives
undertaken
FINANCIAL
BENCHMARKING OF
MUNICIPAL ENTITIES
COMPARISON OF REVENUE SOURCES
Figure based on
99-00 actual
results
Surat
Nasik
Vadodara
Ahmdabad
Bangalore
Hyderabad
Valsad
Anklswr
Revenue
Receipts(RR) (Rs
Crore)
5 yr CAGR of RR
OWN TAXES(%
of RR)
% of Income
through SG ( % of
RR)
OCTROI ( % of
RR)
PROPERTY
TAX(% of RR)
Revenue
Expenditue (Rs
Cr)
5 yr CAGR of Rev
Exp
SALARY EXP (
% OF RE)
377
169
205
566
300
195
7
5
15%
79%
14%
75%
15%
72%
12%
69%
16%
41%
18%
43%
17%
12%
14%
8%
6%
17%
22%
36%
39%
65%
74%
59%
64%
47%
48%
COMPENSATION FOR OCTROI
20%
11%
24%
21%
40%
40%
17%
14%
263
113
173
442
296
167
5
4
19%
19%
18%
14%
19%
27%
59%
36%
57%
53%
50%
51%
Category 1
Surat, Nasik
Category 2
Ahemdabad, Vadodara
Category 3
Category 4
Hyderabad, Bangalore
Valsad, Ankleshwar
19%
71%
Very High Own Income ( > 80% high collection
efficiency)
Fairly High own income ( 65-70%)
Moderate dependence on SG
Very high dependence on SG for RR
High dependence coupled with small size
45%
CAPITAL EXPENDITURE / TOTAL EXPENDITURE
Nasik
Surat
Bangalore
Hyderabad
Ahemdabad
Vadodara
Ankhleshwar
Valsad
Category 1
Category 2
Category 3
96-97
54%
47%
11%
18%
20%
4%
38%
26%
97-98
98-99
46%
48%
38%
38%
17%
23%
25%
22%
17%
18%
10%
13%
30%
33%
25%
13%
Surat, Nasik
Hyd, Ahmd, Ban, Ank
Vadaodara, Valsad
99-00
43%
43%
33%
21%
30%
17%
33%
15%
>40%
20-40%
<20%
COST RECOVERY ON KEY SERVICE
Cost Recovery
Water
Sewarage
Ahmdabad
Vadodara
Surat
Ankleshwar
Valsad
55%
120%
60%
150%
85%
170%
20%
20%
50%
15%
DSCR : Operating surplus / debt service ( int, sink fund)
DSCR
96-97
97-98
98-99 99-00 ORS/Debt
Nasik
47.5
57.3
33.0
3.7
52.5%
Surat
8.7
6.7
4.6
3.6
88.4%
Hyderabad
208.2
201.6
423.9 21.9
27.8%
Ahemdabad
2.9
1.7
1.8
1.5
37.5%
Bangalore
1.9
1.5
2.8
0.1
2.1%
Vadodara
1.8
2.0
0.9
0.7
32.4%
Ankhleshwar 8.7
4.5
7.3
11.7
25.7%
Valsad
8.1
11.6
6.5
10.2
51.8%
Category 1
Surat, Nasik, Ank,Val
DSCR > 3, OS / D>50%
Category 2
Hyderabad, Ahemdabad
DSCR 2-3, OS/D 30-50%
Category 3
Bangalore, Vadodara
DSCR < 2, OS/D < 30%
* ORS/D BASED ON 100 CRORE DEBT PLANNED, PREVIOUS DEBT=0
#DSCR CALC ON BASIS OF Rs 15 cr ANNUAL DEBT SERVICE, 99-00=1.85
Curr Debt ( Mn)
1062
1285.7
0/1000*#
3308.8
2003.4
983
14.62
36.5
EMERGING TRENDS IN
URBAN SECTOR
 Urban sector is at the cross roads
 Availability of resources in the financial sector is not a
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constraint
Channeling these resources to the urban sector is crucial
Flow of resources to the urban sector will be facilitated by
enhanced perception of credit quality of these entities in
the financial markets and well structured projects
Few municipal entities with high stand alone credit quality
Sharp distinctions in credit quality between octroi and non
- octroi levying bodies.
EMERGING TRENDS IN
URBAN SECTOR
 Improving the credit/fiscal profile of Urban
Local Bodies in the crux of Urban Sector
Reforms
– Financially sound entities would be in a
position to invest in civic infrastructure
– They would also be in a position to attract
private sector capital - both through capital
markets as well as PSP
LESSONS FROM MUNICIPAL
BOND EXPERIENCE
 Urban local bodies are open to new concepts and ideas
 Number of Local bodies have attempted to improve their
finances and quality of civic services through
administrative measures
– Ahemdabad, Surat, Ludhiana, Vijaywada, Vizag………
While initiative for these administrative reforms may
have come from pro - active CEO’s there is a broad
based acceptance at both political and employee level
of the need to change
LESSONS FROM MUNICIPAL
BOND EXPERIENCE
 Ahemdabad, Surat have had a demonstrative effect on
other cities, this competitive spirit needs to be encouraged
 While actual number of municipal bond issuances have
been few, credit rating has now become widely accepted as
a self evaluation tool and a feedback for reform initiatives
taken
 Credit rating, fiscal incentives now offered on municipal
bonds, Proposed “Challenge Fund” need to be judiciously
used to sustain the momentum of reforms in the urban
sector
IMPLICATIONS FOR THE URBAN
SECTOR REFORM AGENDA
 Administrative reforms at the local level need to be pushed
to improve financial profile under existing legal framework
– Accounting and MIS improvement
– Tax assessment and collection processes
– Enhancing own revenue base in existing tax structure
– Expenditure control, manpower rationalization need to
be looked into
– Norms for expenditure also need to be evolved,
particularly R&M
– Commercialization of operations
– Professionalism in management
IMPLICATIONS FOR THE URBAN
SECTOR REFORM AGENDA
 Training and technical assistance should focus on
the following to maximize the impact of reforms
– Project conceptualization and development,
financing and management
– Financial Accounting and MIS,
Computerization
– Treasury management
– Costing and pricing of services
– Public Private Partnerships including
familiarity with Bid Evaluation, Bid process
management
IMPLICATIONS FOR THE URBAN
SECTOR REFORM AGENDA
 Policy level issues
– Is municipal bond driven financing of urban projects
more workable than private sector investments in
projects at this juncture
– Should smaller private sector projects be encouraged
first?
– Improving creditworthiness hinges on enhancing
revenues through property tax reforms, levy of user
charges, rationalizing costs, improving MIS and
facilitating private investment, wherever feasible
POLICY ISSUES
 While some municipal entities may be able to achieve an
improvement in financial profile, structural changes
involving higher levels of government may be necessary in
other cases
 The City Challenge Fund seeks to provide incentives to
cities to embank on reforms that will lead to sustainable
improvement in financial profile and quality of services
delivered to the residents
 In order to ensure sustainability of municipal finances and
service delivery, cities would need to choose a
comprehensive and far reaching reform agenda which
needs to be developed to meet specific local requirements.
Further, local ownership of the same is critical in order to
facilitate its implementation
THANK YOU