Indo-US Financial Institutions Reform and Expansion Project - Debt Market Component FIRE(D) FIRE Project Notes Compilation February 2004 INTRODUCTION The Indo-USAID Financial Institutions Reform and Expansion (FIRE-D) project, a joint initiative of the United States Agency for International Development and the Government of India, assists municipal and state governments in India to develop safe and sustainable urban environmental services (water, sewerage, and solid waste) and to ensure that the poor have access to them. Based in New Delhi, the project aims to achieve this goal in three ways. First, by increasing participation of municipalities, the private sector, and community organizations in the development and delivery of commercially viable urban infrastructure services. Secondly, by improving the ability of municipal and state agencies and other urban professionals to manage urban growth, mobilize resources, and improve environmental services. Thirdly, by supporting the development of a market-based urban infrastructure finance system. page 1 Called the FIRE-D project – the “D” refers to “debt” – the project helps cities mobilize resources by issuing bonds, obtaining loans from financial institutions, or using other debt financing mechanisms for urban infrastructure. The project staff, primarily Indian professionals, assists central, state and local government officials. Partner organizations also provide technical assistance, financing, training, and policy advocacy. The policy advocacy work with central and state agencies aims to create a supportive environment for cities to make vital reforms. The project assists Indian cities with project development and financing, resource mobilization, decentralization, and capacity building. The project has achieved significant results in the ten years since its beginning in 1994. Some of these successes, as well as much work that remains to be done, are described in this compilation of selected Project Notes. This compilation groups the Notes by three closely related themes: municipal finance; policy framework for municipal finance; and commercial viability of urban services. Each Project Note captures lessons learned from specific FIRE-D project activities. Comparing Project Notes on one theme provides a view, over time, of how critical issues related to urban infrastructure have been identified and addressed in India. By distributing the Notes to urban officials throughout India, the project helps disseminate key lessons learned. This is one small way to enable urban policy makers and mangers to better understand what works and what does not. This compilation includes 14 of the 31 Project Notes published to date. All Project Notes are available on- line at www.indiaurbaninfo.com under newsletters, www.dec.org under title search “FIRE(D) Project Note,” and www.tcginternational.net under documents. FIRE Project Notes MUNICIPAL FINANCE TOOLS Each Project Note captures lessons learned from specific FIRE(D) project activities. Comparing Project Notes for one theme provides a view, over time, of how critical issues related to urban infrastructure have been identified and addressed in India. One theme, municipal finance tools, focuses on issuing municipal bonds to finance urban water and sanitation projects. The Municipal Corporation of Ahmedabad was the first city in India to issue a municipal bond, without a state warranty, in 1998. Subsequently, seven other Indian cities have issued bonds for infrastructure development. page 2 In April 2002, Ahmedabad issued India’s first tax-exempt municipal bond to complete its water and sewerage plan, extending these services to all its 4.5 million residents. Project Note No. 2, Ahmedabad Water Supply and Sewerage Project, written in January 1998, describes the project and how the investment would be financed by the municipal bond. The Note then shows how the issuance of the bond is the culmination of a progressive program of administrative and financial reform within the Corporation itself as well as of a partnership with the US Agency for International Development (USAID) and the FIRE project. Project Note No. 17, Ahmedabad Municipal Bond Issue: India’s First Without a Guaranty, written in July 1999, examines the city’s bond issue and the evolving municipal bond system in India. It then identifies issues that must be addressed to facilitate other municipalities’ tapping the capital markets via municipal bonds. These issues encompass system development, capacity building, and support for instrument development. Project Note No. 25, Lessons Learned from the Ahmedabad Municipal Bond summarizes an evaluation of the municipal bond issuance to identify lessons for other municipalities considering using this means of resource mobilization. The FIRE project funded the evaluation, conducted in 2000. The Note summarizes the evaluation’s findings about obtaining a credit rating, structuring the bond and transaction documents, and using the bond proceeds. Ahmedabad used the bond proceeds and a loan from the financial intermediary, Housing and Urban Development Corporation, guaranteed by USAID, to build the Raska Water Supply system that serves 60 percent of the city’s people. Project Note No. 31, Pooled Finance Model for Water and Sanitation Projects: The Tamil Nadu Water and Sanitation Pooled Fund. Pooled financing allows smaller and mid sized cities to access domestic capital markets to finance infrastructure projects. The FIRE project supported the state of Tamil Nadu’s Water and Sanitation Pooled Fund to develop such a mechanism and issue a bond in December 2002that is financing water and sanitation projects in 14 small and medium sized towns. This note describes the background of US bond banks, the objectives and structure of the mechanism, the first example in India (and outside the United States), and the roles of the Government of India and USAID’s Development Credit Authority. FIRE Project Notes Project Note No. 2 Ahmedabad Water Supply and Sewerage Project The Ahmedabad Municipal Corporation plans to undertake a major investment program for water supply and sewerage services which will address existing deficiencies as well as the demand for services in the future. The Corporation also plans to undertake a capital investment program for other services including solid waste management, roads, bridges and slum improvement. And it will finance these investments, in part, through India’s first municipal bond issue. This investment program is the culmination of a progressive program of administrative and financial reform within the Corporation itself, and a partnership developed between the United States Agency for International Development (USAID), the FIRE Project, and the Ahmedabad Municipal Corporation. page 3 Project Profile The water and sewerage project is positioned within an Urban Finance Framework. The The proposed investment program includes project will receive significant transfers from general expansion and improvement of water supply and sources of the corporation such as octroi and property sewerage services within the old city limits as well taxes. Cost recovery for water supply and sewerage as newer areas that have been added in recent services will also be enhanced by revision in taxes, years. The main components of the water supply connection charges and other fees related to these project include: services. In April of 1997, the AMC revised taxes and • Source Development through a series of two french charges in the water supply and sewerage sectors by wells and sixty bore wells between 15 and 100% depending upon the user group. As a result of these revisions, revenue is expected to • Conveyance System increase by Rs. 500 million ($15 million) during the • Additional underground storage and 1997/98 fiscal year and by 10 percent per annum in future pumping stations years. Collection performance is also expected to improve • Transmission Lines in seven new areas by approximately 25 percent. Connection charges were • Augmentation of the existing distribution system in also revised in 1997, and the minimum connection charge fourteen areas. was raised to Rs. 300 for a half inch pipe. The AMC projects 51,000 and 35,495 new connections for water The plan proposes to allocate water to and sewerage services, respectively, by the year 2001. customers at 180 lpcd in the AMC/West, and 150 lpcd in the AMC/East. With these allocations, the present Ahmedabad Municipal Corporation: supply shall be ensured to the old AMC limits, and A Progressive Record of Reform in the case of the recently extended East, the supply would be enhanced. During 1992-93, the AMC’s financial and liquidity position was under a severe strain. But during The proposed sewerage project will provide the next year, the AMC achieved a relatively low sewage collection, treatment and disposal facilities to a revenue surplus of Rs. 58 million ($1.7 million). part of East Ahmedabad which is currently unserviced. And by 1994-95, the AMC had reached a revenue A sewerage project in the developed part of East surplus of Rs. 490 million ($14 million). This success Ahmedabad will be implemented under Phase II, a short gave the city a momentum which allowed it to focus term plan, between 1997 and 2001. on investments in Ahmedabad’s urban infrastructure and environment through innovative The total cost of investment in water supply partnerships with other institutions who have a stake and sewerage services is estimated to be Rs. 4890 in the future of the city. million ($140 million).