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

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

3. I. Context: Country, State, City
Country: INDIA State: TAMIL NADU
A federal democracy
Rule based fiscal transfers from Centre to State (in contrast with State to City)
Rapidly urbanizing – urban share 32%
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

4. 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

5. Municipal Finance: Key facts
Pre- and Post- 1996
For eight years ( ) a Municipal Fund (MUDF) located in govt lent to munis based on principles of open access and clear lending criteria (INR 2000 m, high repayment rates)
In 1996 Govt introduced 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
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

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

7. II. Capital Structure and Policies TNUDF
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

8. 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

9. 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.

10. 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

11. 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

12. Eligibility Criteria For ULBs etc. For private sector borrowers
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

13. 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

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

15. III. Performance Lending 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)

16. Systemic access to market finance for small and medium cities
Umbrella Credit
Enhancements
Sov.Grant
Sov. Govt.
Transfer
Payments
MLA
WSPF
Reserve
Account
Revenue
Intercept
Partial Credit Guarantee
Technical Assistance
Investors
Bonds
Trustee
Local
Govt.
Project
Funds
Market Rate
Long term
Principal & Interest payments
If necessary

17. The Pooled Bond
The terms of issue

18. The Cities and the investmentsY

19. Water and sanitation pooled fund
The Investors
Water and sanitation pooled fund

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

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

22. IV. Assessment and Lessons Enabling Factors
Eight years ( ) 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

23. 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?

24. THANK YOU FOR LISTENING ALL QUESTIONS AND COMMENTS WELCOME