Financing Municipalities and relevance of

Credit Rating - the Indian experience

International Conference on Financing Muncipalities and Sub-National
Governments, Washington
October 1, 2004

Roopa Kudva
CRISIL Limited Executive Director & Chief Rating Officer,
CRISIL Limited, India
 Presentation flow

 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

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 About CRISIL
 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

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 What is Credit Rating?
Credit Rating is an opinion on the relative degree of
safety regarding debt obligations being met on time.
 It is an opinion, 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, management &
economics, after a detailed and in-depth discussion
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 CRISIL’s Rating Scale

Rating Sym bol Definition

Investm ent Grades
AAA Highest Safety
AA High Safety
A Adequate Safety
BBB Moderate Safety
Speculative Grades
BB Inadequate Safety
B High Risk
C Substantial Risk
D Default
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 Current status of urban infrastructure

Current availability of urban infrastructure is inadequate:

Most of the ULBs do not meet the WHO 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 quality is poor

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 Current status of urban infrastructure

Sharply growing urban population is putting pressure on already

stretched urban infrastructure:

Census Year Rural CAGR Urban Population CAGR Total Rural:

Population (millions) Population Urban
(millions) (millions)
1971 (actual) 439.05 109.11 548.16 80:20
1981 (actual) 523.86 1.98% 159.46 4.32% 683.32 77:23
1991 (actual) 628.69 2.05% 217.61 3.51% 846.3 74:26
2001 (actual) 741.66 1.85% 285.34 3.06% 1027.02 72:28
2011 (projected) 801.77 0.87% 377.12 3.15% 1178.89 68:32

Source: Census of India 2001 and 1991

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 Capital Expenditure Requirement
 Estimates of capex on urban civic services show significant
expenditure requirements
Resource
Services/Infrastructure covered by Period of requirement
Source the report recommendation ($ billion)
India Infrastructure Report, Various urban infrastructure –
1996 (Rakesh Mohan Capital costs as well as operational
2000-2005 27
Committee) and maintenance needs

Zakaria Committee Norms Water supply, sewerage/sewage

(1963) updated to 1997-98 disposal, storm water drainage,
construction of roads & paths, 2000-2005 16
street lighting & electricity
distribution – operations and
Ministry of Urban maintenance.
Revenue gap for operation &
Development and poverty maintenance requirements relating
2000-2005 4
Alleviation to civic services

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 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

 Mega city scheme
 City Challenge fund
 National slum development programmes
 Projects to be under taken in accordance with the planning commission
recommendation

 Internal sources
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 Growing importance of market borrowing

 Pressure on funding sources

 Traditionally, most projects have been funded through state
government support. However, this source is declining:
 Strained fiscal position, results in lowering of fund based support
 Mounting 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

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 Credit Rating of Urban 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

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Credit Rating of Urban Local Bodies– Benefits

 Helps benchmarking with other urban local bodies

 Municipal 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 quality

 Helps investors in pricing the debt offer

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 CRISIL ratings for Urban Local Bodies

Amount rated
Corporation Name Type Form of credit enhancement (USD mn) Ratings Outstanding
Cash collateral and Escrow of
Municipal Corporation of Hyderabad Municipal corporation various municipal taxes 22 AA+(so)
Property Tax Escrow, Octroi
Ahmedabad Municipal Corporation Municipal corporation Escrow 22+22+22 AA (so)
Property Tax Escrow, Octroi
Nasik Municipal Corporation Municipal corporation Escrow 22+11 AA(so)

Thane Municipal Corporation Municipal corporation Octroi Collections 22 AA (so)

Property tax collections + State
Bangalore City Corporation Municipal corporation government guarantee 27.8 A+(so)
Chennai Metro Water Supply and
Sewarage Boards Service provider Escrow of water charges 11 AA (so)
Hyderabad Metro Water Supply and
Sewarage Boards Service provider 156 A

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 CRISIL rating methodology for
Urban Local Bodies

CRISIL’s Rating Methodology involves an in-depth assessment of the

following factors
 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

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 Need for credit enhancement

 Relatively low standalone credit quality of most local

bodies/water boards necessitates credit enhancement.

 Rating can be enhanced to a target rating through credit

enhancement mechanisms.

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 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
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 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
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 Pool Financing

ULB 1

 
SPV INVESTORS

Legend
ULB 10 Structured Bonds
Issue Proceeds
Bonds
Subscriptions
Subsequent Repayments

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 Pool Financing (cont.)

Advantages

 Diversification of risk

 Structuring possible to enhance credit quality

 Optimum use of credit enhancement

 Credit enhancement by multilaterals or Government

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 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

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 Illustrations of credit enhanced ratings

Nashik 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
 Monthly annuity payment
Rating Assigned – AA(So)
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 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
 Monthly annuity payment

Rating Assigned – AA(So)

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 Illustrations of credit enhanced ratings

A group of 116 ULBs (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)

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 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 quality of many state governments
restricts any meaningful credit enhancement

 Increasing use of market borrowing as a funding option

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 Conclusion
 Most of the ULBs’ borrowing programme would necessarily
require 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

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 Thank You

Contact Details:
Phone: +91 (22) 5691 3001- 09
CRISIL Limited Fax: +91 (22) 5691 3000
www.crisil.com
 Annexure: CRISIL’s criteria for rating urban local bodies
1. Legal & Administrative Framework
 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

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 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

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 3. Municipal Finances

 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

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 4. Existing Operations

 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

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 5. 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

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 6. Project Details

 Proposed projects

 Project tenure and funding patterns

 Debt servicing requirements due to new projects

 Existing level of service & improvements envisaged

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