Urban infrastructure bonds to ride on the back of policy push. And if you’re looking for the coming rail boom, it’s already here.
The Indian green bond market is growing rapidly. India is among the top 10 green issuers in the world with issuances at USD 6.1 billion, a third of which hit the market in 2017 alone. We expect this volume to increase with new regulatory and policy measures providing a positive nudge to the market.
Regulation and markets are evolving fast, both geared to unlocking private capital at scale to finance India’s clean energy targets, national development goals and climate plans.
Two recent events in Mumbai illustrate the evolution at a national, city and municipal level.
Roll out of SEBI’s Green Bonds Guidelines
India has now joined the handful of countries where regulation on green bonds is in place. The Security and Exchange Board of India (SEBI) guidelines released in May this year are a timely signal to market participants to scale up issuances across sectors, improve reporting, disclose the impact of green bonds funded projects, and catalyse broader investor interest in the local green bond market.
The first interaction between SEBI and market players following the launch of the guidelines was held on 27th July at the National Stock Exchange in Mumbai.
(Middle photo, from left to right: Rita Roy Choudhry (FICCI), Ishita Vora (NSE) and Barnali Mukherjee (SEBI))
The “Roundtable on SEBI Green Bonds Guidelines: Scope and Perspectives” organised by the India Green Bonds Council (IGBC) saw the regulator and major stakeholders discussing the new framework.
IGBC is hosted by FICCI in India and co-chaired by Climate Bonds.
Focus on disclosure and transparency:
The Guidelines are an overarching and enabling instrument and define what can be included as green. SEBI looks at regular reporting as an important measure for the regulator to track deployment of capital to green projects and their impact. Suffice to add that market transparency is vital to its growth and important to attract and retain investor interest.
The Guidelines keep the third party assurance optional.
One of the suggestions was to release an FAQ on the Guidelines, which SEBI has taken on board for active consideration. Besides clarification on the provisions, many suggestions came forth on the adoption of the Guidelines by issuers. We expect many of these to be clarified in the proposed FAQ.
Munis and cities: Big to get bigger
It’s sometimes overlooked that India’s population will overtake that of China before 2050. India’s major urban areas increasingly figure in lists of the world’s largest cities and megacities by 2030 and 2050. They are also among the fastest growing top 10 cities in terms of their GDP.
However, it will not be possible to fully fund the clean, green infrastructure needed to match this population surge without attracting increased private capital. There is a huge need for financing sustainable development of cities with an assessment of INR 2 trillion needed just out to 2020.
Rebooting municipal bonds
The Ministry of Urban Development (MoUD) has prioritized action on municipal bonds under its Smart City Mission launched in 2015. In a recent announcement, it has granted two percent (2%) interest subsidy to incentivise municipal issuers.
Combined with SEBI regulation on municipal issuance released in 2015, a reboot of this class of bonds is underway.
It’s against this backdrop of enormous urban growth and financing needs that, Climate Bonds and its event partner GIZ organized a high level workshop in Mumbai attended by municipal issuers, rating agencies, investors, leading issuers, bilateral agencies and SEBI.
(Green urban infrastructure workshop)
The main conclusion from “Mobilizing Finance for Green Urban Infrastructure: Green Municipal Bonds Market in India,” was that the municipal bond market, which has remained rather sluggish in the last two decades, is on the cusp of change.
Dependence on state grants and institutional finance has traditionally resulted in little incentive for municipalities to mobilise capital from the domestic market. Even less so from international markets.
Consequently, only a few municipalities have governance and management systems in synch with the level of disclosure & reporting increasingly demanded by investors in global capital markets.
Municipalities, even the more conservative and cash rich entities, agreed that tapping the bond market will not only help them access new sources of funds, but will also trigger reform in organisational processes and improvement in their service delivery.
Municipalities pointed out that areas that need immediate and ongoing support include building general capacities, including data capture and consistency for reporting, project management expertise, exploring pooled fund bond issuance, and creating credit enhancement agencies.
All these measures are important for upward migration of ratings for municipalities to attract investment.
The experience of the Pune Municipal Corporation (PMC) June bond issuance shows that a high credit rating of AA+ is possible despite the challenges. PMC achieved it based on an agreed tax structure that envisions a 30 year forward looking tax rate and an escrow mechanism of certain taxes that will service the bonds.
The PMC Chief Accounts Officer, Ulka Salaskar said “Governance and discipline will be much better after the bond issuance.”
Muni Project Aggregation into Pooled Trusts?
SEBI is actively considering the option of pooled financing for smaller municipalities which will allow them to pool specific projects in a trust which will then issue bonds.
Coming Up - Muni Bonds from Smart Cities
At least 10 proposed smart cities are slated to issue muni bonds by the end of this year. Pune already has, and at least three major municipal corporations (Hyderabad, Ahmedabad, Delhi) are close on their heels.
Pune’s municipal bond in June raised INR 200 crore. In the next five years, it plans to issue INR 22.62bn (USD 350m) of bonds to help fund an INR 32 billion 24x7 water supply project for the city.
The Metro Rail Boom
As many as 30 cities in the country have ongoing and planned metro projects. A slew of announcements by MoUD in the last couple of months indicate that this sector is set to surge further.
A Metro Rail Policy for India is on the agenda to enable innovative finance such as land value capture, Transit-Oriented Development (TOD) for new Metro Rail projects.
TOD has been formulated and approved by the Government of India. In addition, the government is planning to roll out a ‘green mobility scheme’ to improve travel facilities at the last mile.
The Indian Credit Rating Agency estimates the cost of expansion to hover over INR 2.5 lakh crore in the next three to five years.
As of May 2017, over 529 km of metro lines were under construction in Delhi, Mumbai, Chennai, Jaipur, Kochi, Kolkata, Ahmedabad and Bengaluru and 341 km operational.
Given these developments, we expect urban infrastructure to emerge as an active sector for green bonds issuance in India in the near future.
Policy support and incentives by the government, as well as commensurate ground-up work by current and prospective issuers will continue to remain important in the near to mid-term to attract investment at scale.
The Last Word
The carbon intensity of India’s development path out to 2050 and global climate outcomes are intertwined and cannot easily be separated. Low carbon growth on this scale cannot be achieved without sustained green investment including increased offshore capital.
Two years on from Paris, it's evident plans are being made, potential investment pipelines (and they are huge pipelines) in green energy, cities and transport can be discerned and regulators and policy makers are playing a more active role.
The India story is growing. Can the India green finance story keep pace?
'Till next time,
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