24 Apr 2018 18:47 IST

Indian cities should exploit the municipal bond market

It could potentially change the quality of life in our major cities

The municipal governments of Hurst, Euless and Bedford in Texas will hold a school bond election on May 5. The bond package totals $199 million (nearly ₹13,000 crore) and is designed to improve elementary, middle and high school infrastructure.

Why is such a large amount needed? The prospectus says nearly two-thirds of the money will go towards building two new elementary schools — the cities are investing ahead of time to meet an expected population growth which could see 2,600 children in school over the next 10 years.

The balance of the money will be used for interior improvements at two junior high schools and for upgrades, such as new classroom technology and portable devices for students.

‘Yes’ or ‘No’?

Voters go to the polls to answer ‘Yes’ or ‘No’ to a simple question on a ballot — are they fine with giving permission to the municipalities to take out a loan and pay it back over an extended period of time, much like a family takes out a mortgage loan for their home, to pay for these improvements?

If the ballot measure wins, the cities will work with a Wall Street bank to immediately lend them about $150 million after fees. The improvement project will begin almost as soon as the money is received.

The lending bank then ‘sells’ this bond on the municipal bond market to investors around the world who crave for a guaranteed high-return for their hard-earned dollars. This is what all investors ultimately want — a steady, reliable stream of annuity income.

Capital improvements

Armed with the ballot’s results, the municipalities will then have the power to tax each home an extra amount — averaging about $165 for each household a year for the next 20 years. The bond taxes are directly paid to the bank, which in turn pays its investors the annuity.

Welcome to the municipal bond market in America, the most advanced in the world. The State of Texas is the second largest when it comes to exploiting this public-private partnership vehicle for capital improvements. State law is clear for school projects. Bond funds cannot be used for salaries or operating costs such as utility bills, supplies, building maintenance, fuel and insurance.

The win-win-win-win situation

Municipal bonds are a win-win-win-win.

~ Residents enjoy better infrastructure in their localities for a very small monthly ‘tax’. There are tangible benefits because better public infrastructure will improve home values — the goal of every home-owner. Also, the spending is targeted towards a specific cause such as school construction, something that is not possible with general tax revenues, according to the priorities of city leaders.

~ The school district gets an immediate injection of funds for improvements which help teachers, students and staff.

~ Banks get to earn sizeable fees to package and sell the bonds, plus commissions on the annuities.

~ Investors benefit because they get a steady income stream.

There are, however, a few problems too. Older residents who have no school-going children at home get no direct benefit from a school bond proposal. These relatively wealthy individuals will then have to vote with their conscience and see if providing better facilities for teachers and children would help the larger societal goals of the community.

Taking a leaf

In India, the best example of this kind of public-private partnership can be seen each time we drive on our nation’s highways, which today are safe and world-class. Every user — with the exception of two-wheelers riders — pays for these highways with tolls. Even buses belonging to State governments are not exempt from this. The National Highways Authority of India acts as the ‘municipality’ collecting toll taxes and paying the private construction companies which build and maintain the highways.

India could never have built these major roadways with general tax revenues alone. Nor would it be fair to crores of taxpayers to subsidise road construction and maintenance if they never used the roads in the first place. Why should a taxpayer in Chennai help pay for a highway between Delhi and Mumbai? Toll highways extract a price from those who directly benefit from the investment.

Large Indian cities should begin to employ the municipal bond market strategy for regional development because local residents stand to gain the most. Imagine how city infrastructure — such as parks, a water treatment facility or a recycling plant — could be improved if funded, built and operated using targeted municipal bonds rather than general municipal house tax revenues.

The project management could be outsourced to a private company, which will be answerable to the mayor — and the company would be required by law to be fully transparent with its books so that the paying public can scrutinise all its actions.

Such an arrangement could potentially change the quality of life in our major cities. And because voters would have a say in the entire process — approving or rejecting individual projects — the system would be a lot more democratic than the current state of affairs.

If you have any doubts about the feasibility of such a project, just travel a few miles on the Chennai-Bengaluru highway this weekend.

Recommended for you