Linking Cities With Domestic Markets: The Tamil Nadu Experience

Linking Cities With Domestic Markets: The Tamil Nadu Experience New Delhi, November 2016

Outline • Context: Country, State, City • Capital and Policies: TNUDF • Performance • Assessment and Lessons

I. Context: Country, State, City • Afederal democracy • Rule based fiscal transfers from Centre to State (in contrast with State to City) • Rapidly urbanizing – urban share 32% Country: INDIA State: TAMIL NADU • Urbanized – 53.9% population in towns • 60% of urban population live in Class I Towns & 15% in the single metropolitan city of Chennai • Urban poor constitute about 30% of this population

Urban Quality of Life • Water supplies vary from 50 lpcd in Town Panchayats to 74 lpcd in Corporations, significantly below the norm of 70 lpcd for Town Panchayats and 110 lpcd for Corporations. • Only 57% of population in Corporation areas, 32% in Municipalities and 16% in Town Panchayats have access to treated sanitation • Although 70% of solid waste generated is collected, most local bodies do not have organized disposal facilities • Less than 50% of the roads are provided with storm water drains

Municipal Finance: Key facts Pre- and Post- 1996 • Municipals subsistence level institutions, headed by bureaucrats dependant on state for capital grants, usually tied • Majority of the debt from State raised on guarantees • Debt passed on to municipals but projects executed by parastatals – huge defaults –INR 5000 million had to be written off • For eight years (1988-96) a Municipal Fund (MUDF) located in govtlent to munisbased on principles of open access and clear lending criteria (INR 2000 m, high repayment rates) • In 1996 Govtintroduced major reforms: rational devolution, elections • MUDF restructured to a corporate entity, TNUDF, in partnership with three major FIs to lend and raise resources for municipal infrastructure

II. Capital Structure and PoliciesTNUDF • Registered as a Trust under the Indian Trust Act – GoTN and 3 All India Financial Institutions – ICICI. HDFC, and IL & FS (initially 65% GoTN, 35% FI’s) • Managed by an Asset Management Company under the Indian Companies Act on basis of Performance Contract • Complementary Grant Fund fully owned by GOTN

Fund Objectives • Finance urban infrastructure with focus on environmental; • Facilitate private sector participation in infrastructure through joint venture and public-private partnerships; • Raise domestic finance for municipal investments • Work with a Complementary Government owned Grant Fund that finances project development

TNUDF- Asset Types • One, assets such as stand alone commercial complexes and office space which rarely recover debt service from rentals are not worth investing in and do not constitute infrastructure in any real sense. • Two, environmental infrastructure namely water supply, sanitation and solid waste need a mixture of debt and grant financing and should attempt to recover appropriate user charges • Three, other municipal infrastructure such as internal roads, parks, crematoriums etc would have to rely solely on general revenues to service debt.

Eligible borrowers and sectors • Eligible borrowers: municipalities, statutory boards, public sector undertakings and private corporate • Eligible sectors: water supply, sanitation, solid waste management, roads and drains, energy efficiency

Lending policies and procedures • Eligible items for TNUDF funding Only for capital expenditure • Civil works • Services • Goods / Materials • TNUDF will not fund • Land acquisition costs • O&M expenditure

Eligibility Criteria • For ULBs etc. • TE / TR < 1 • Annuity / Total revenue < 30% • For private sector borrowers • Long term debt < 1.5 Net worth • Net fixed assets > 1.5 Long term debt • Average DSCR > 1.5

Security and Provisioning • Special recovery mechanism such as escrow accounts of property tax, water charges etc. • Provisioning policies based on Central Bank guidelines for Non Bank Financial Institutions • Annual loan balance confirmations with municipalities

III. PerformanceLending and Resources • Profitable with high (100%) ULB loan repayment till date • Raised nearly US$ 140 million in private finance • Focus on financial sustainability, entity based appraisals and escrow as securities Over 380 sub-projects with US$ 500 million in lending • Transactions: municipal PPPs, first pooled bond issue, capital contributions from beneficiaries, sewerage DBOTs, etc. • TNUDP-III (US $ 300 million) focused on sewerage compared to roads in TNUDP-II (US 60 million)

Partial Credit Guarantee MLA Umbrella Credit Enhancements Technical Assistance Sov. Govt. Transfer Payments Sov.Grant Bonds WSPF Investors Funds MarketRate Longterm Reserve Account Local Govt. Project Local Govt. Project Local Govt. Project Revenue Intercept Trustee Principal& Interestpayments Ifnecessary If necessary Systemic access to market finance for small and medium cities

The Pooled Bond The terms of issue

Y The Cities and the investments

The Investors Water and sanitation pooled fund

Beginnings of a new market… WSPF bonds have created an active secondary market Bonds sold by original holders mainly to private pension funds

IV. Assessment and LessonsEnabling Factors • Eight years (1988-96) of successful credit history, - lending based on municipal financial operating plans • Accompanied by major reforms transferring authority to municipalities and backed by statutory devolutions • 15 years of partnering with Multilaterals, allowing gradual blending of longer term finance with domestic sources – financing systems rather than projects

Lessons and an Agenda? • Stable revenue streams – hence work on demand side to strengthen Fiscal Transfers – IGFR in South Africa, Green Light in Columbia • Strong Intermediation – hence work on supply side – Debt Markets, Intermediation...PCG in Joburg, Tamilnadu • In S Asia LLDF, TDF, KUDIFC etc., EA – MDFO, DFV, LADF • Partnerships with Multilaterals – Finance systems rather than projects?

THANK YOU FOR LISTENING ALL QUESTIONS AND COMMENTS WELCOME rajivan.k@gmail.com

Linking Cities With Domestic Markets: The Tamil Nadu Experience