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International Conference on Financing Muncipalities and Sub-National Governments, Washington October 1, 2004
Executive Director & Chief Rating Officer, CRISIL Limited, India
Introduction to CRISIL Credit Rating : Definition Urban Infrastructure in India ± A snapshot Benefits of Credit Rating of Urban Local bodies CRISIL Ratings for borrowing programmes of Urban Local bodies Credit enhancement mechanisms and illustration Conclusion
First and the largest credit rating agency in India 4th Largest Rating Agency in the World Affiliation with Standard & Poor¶s (USA) The first to rate a state government in India ± Gujarat The first municipal bond rating in Asia ± Ahmedabad Credit assessment of all the major state governments and more than 100 urban local bodies in the country. This also includes:
5 municipal corporations 2 Water and Sewerage Service providers
management & economics. not a recommendation Relative degree of safety vis-a-vis other debt instruments Timeliness is key Instrument-specific ± could be different for a structured instrument and stand-alone Assigned by a committee of experts in finance.What is Credit Rating? Credit Rating is an opinion on the relative degree of safety regarding debt obligations being met on time. after a detailed and in-depth discussion 4 . It is an opinion.
CRISIL¶s Rating Scale Rating S In AAA AA A BBB Sp BB B S u A M G d q H S bol n G d H H q S S S S e inition 5 .
Current status of urban infrastructure Current availability of urban infrastructure is inade uate: ost of the ULBs do not meet the W O water supply (140 LPCD) and sewerage services norms (80% of the water supplied) Solid waste management services need modernization Though roads are mostly available their uality is poor 6 .
Current status of urban infrastructure Sharply growing urban population is putting pressure on already stretched urban infrastructure: Census Year 1971 (actual) 1981 (actual) 1991 (actual) 2001 (actual) 2011 (projected) Rural Population (millions) 439.12 1.69 741.34 377.85% 0.02 1178.32% 3.11 159.05% 1.06% 3.87% 4.16 683.89 Rural: Urban 80:20 77:23 74:26 72:28 68:32 Source: Census of India 2001 and 1991 7 .46 217.66 801.05 523.3 1027.51% 3.86 628.32 846.15% Total Population (millions) 548.61 285.77 CAGR Urban Population CAGR (millions) 109.98% 2.
Capital Expenditure Requirement Estimates of capex on urban civic services show significant expenditure re uirements er i e / n ra tru ture ered t e rep rt ur e ndia n ra tru ture Rep rt Vari u ur an in ra tru ture ± 1996 (Rake an Capital t a ell a perati nal C mmittee) and maintenan e need Zakaria C mmittee N rm (1963) updated t 1997 98 Water uppl e era e/ e a e t rm ater draina e di p al n tru ti n r ad pat treet li tin ele tri it di tri uti n ± perati n and maintenan e. ini tr Ur an Re enue ap r perati n e el pment and p ert maintenan e requirement relatin Alle iati n t i i er i e Re ur e Peri d requirement re mmendati n ($ illi n) 2000 2005 27 2000 2005 16 2000 2005 4 8 .
Sources to fund urban infrastructure Fund and non-fund based support from the state government Capital grants Direct project specific loans Support to borrowing programmes through guarantee Project specific/reform oriented assistance from the central government ega city scheme City Challenge fund National slum development programmes Projects to be under taken in accordance with the planning commission recommendation Internal sources 9 .
results in lowering of fund based support ounting guarantee levels limit the non fund based support Abolition of octroi has impacted buoyancy in the revenues This necessitates the use of market borrowing for funding the urban infrastructure projects. Credit rating is vital for market borrowing 10 . owever. this source is declining: Strained fiscal position.Growing importance of mar et borrowing Pressure on funding sources Traditionally. most projects have been funded through state government support.
Credit Rating of rban Local Bodies Benefits Use of market borrowings to bridge gap in critical infrastructure can accelerate economic growth in the service area Increased accessibility to funds from the capital markets Improved visibility .facilitates flow of international capital Potential for creation of a municipal bonds market 11 .
Credit Rating of rban Local Bodies Benefits Helps benchmarking with other urban local bodies unicipal corporations like Ahmedabad. Nashik & Thane have used market borrowings to part fund their projects Helps in monitoring overall debt level & finances Provides investors an independent and unbiased evaluation of credit uality Helps investors in pricing the debt offer 12 .
8 11 156 AA+(so) AA (so) AA(so) AA (so) A+(so) AA (so) A tstanding or of credit en ance ent Cash collateral and scrow of Municipal corporation various municipal taxes Property Tax scrow. Octroi Municipal corporation scrow Property Tax scrow.CRISIL ratings for Cor oration a e Municipal Corporation of yderabad Ahmedabad Municipal Corporation Nasik Municipal Corporation Thane Municipal Corporation Bangalore City Corporation Chennai Metro Water Supply and Sewarage Boards yderabad Metro Water Supply and Sewarage Boards T e rban Local Bodies o nt rated S n Ratings 22 22+22+22 22+11 22 27. Octroi Municipal corporation scrow Municipal corporation Octroi Collections Property tax collections + State Municipal corporation government guarantee Service provider Service provider scrow of water charges 13 .
CRISIL rating methodology for rban Local Bodies CRISIL¶s Rating ethodology involves an in-depth assessment of the following factors Legal and Administrative framework Economic base of the service area. unicipal finances Existing operations of the municipal body anagerial Assessment Project specific issues Credit Enhancement Structure 14 .
15 .Need for credit enhancement Relatively low standalone credit uality of most local bodies/water boards necessitates credit enhancement. Rating can be enhanced to a target rating through credit enhancement mechanisms.
Credit enhancement alternatives Escrowing of dedicated revenue streams Full guarantee from an entity with superior credit profile Partial guarantee mechanism Pledging of cash collateral Partial amount guarantee Partial tenor guarantee Partial interest guarantee Pool financing 16 .
Rating approach to structured Bonds Full guarantee ± Rating of the guarantor Cash Collateral ± Coverage of debt and stand alone rating Partial guarantee ± Credit view on issuing entity and guarantor Escrow structures / Interception grants Separately identifiable cash flow stream Quality and sustainability of the cash flow stream Pool Financing Smaller Urban local bodies aggregating to raise funds Useful for Urban local bodies with weaker credit profile as pooling leads to diversification of Risk 17 .
Pool Financing ULB 1 SPV INVESTORS Legend ULB 10 Structured Bonds Issue Proceeds Bonds Subscriptions Subsequent Repayments 18 .
Pool Financing cont Advantages Diversification of risk Structuring possible to enhance credit uality Optimum use of credit enhancement Credit enhancement by multilaterals or Government 19 .
Rating approach for pool financing Credit analysis of the pool of assets (Urban local bodies) Cash flow analysis Sizing credit enhancement Payment structure analysis Legal analysis 20 .
Illustrations of credit enhanced ratings Nashi Municipal Corporation: Size of the bond programme ± USD 22 mn Salient features of the credit enhancement Escrow of Octroi receivable No lien period commence from 360 and 180 days prior to the principal and interest payment respectively onthly annuity payment Rating Assigned AA(So 21 .
Illustrations of credit enhanced ratings Chennai Metropolitan Water and Sewerage Board : Size of the bond programme ± USD 22 mn Salient features of the credit enhancement Escrow of water charges receivable No lien period commence from 360 and 180 days prior to the principal and interest payment respectively onthly annuity payment Rating Assigned AA(So 22 .
Illustrations of credit enhanced ratings A group of LBs (a pool financing case : Size of the bond programme ± USD 22 mn Salient features of the credit enhancement State government guarantee ± 35% Cash collateral ± 35.9% Bond would be floated by a SPV Target Rating A (so 23 .
Conclusion Significant need for capital expenditure Growing population has intensified the need to improve the existing services Limited funding support from traditional sources Already high level of state government guarantees The relatively low credit uality of many state governments restricts any meaningful credit enhancement Increasing use of market borrowing as a funding option 24 .
Conclusion Most of the ULBs¶ borrowing programme would necessarily re uire a credit enhancement due to their weak credit profiles Market discipline will have a beneficial impact on the reforming ULB¶s systems and process User charges would be rationalized to attain project viability 25 .
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Annexure: CRISIL¶s criteria for rating urban local bodies Legal & Administrative Framewor 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 27 .
2. Economic Base of the Service Area 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 28 .
systems. coll. Municipal Finances Accounting uality Overall surplus/deficit on revenue account Profile and trends in tax and non tax revenues Property tax effort: Demand raised. tenure. coverage Future sources of revenue growth Measures to curtail revenue expenditure 29 . rates.3. eff.Trends Debt profile: Cost. Dependence on SG transfers: Stability & transparency Expenditure profile: Head wise & activity wise Capital receipts and expenditures .
etc. Systems in place for delivery of these services Level and trend of past expenditure on these services. sewerage facilities. Existing Operations Range of services: obligatory/discretionary functions. Proposed level of service enhancement Major projects undertaken 30 .4. Core services: Water. primary education & health.
Managerial Assessment Linkage between financial health & initiatives taken by a proactive management.5. Organizational structure Administrative systems and procedures Project management skills Level of control on expenditure Initiatives taken to enhance resources and improve collection mechanisms 31 .
6. Project Details Proposed projects Project tenure and funding patterns Debt servicing re uirements due to new projects Existing level of service & improvements envisaged 32 .
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