Global agency Fitch Ratings has given a thumbs up to the Pooled Finance Development Fund (PFDF) guidelines announced by the Ministry of Urban Development. Releasing a report titled Pooled Municipal Finance: Time for Spirited Action in India the rating agency said that the scheme would encourage the funding and reform efforts of the small and medium sized urban local bodies (ULBs) in India.

“Fitch views the announcement of the PFDF guidelines by the Ministry of Urban Development as a major step that will provide a significant window of opportunity to several small and medium ULBs to access the bond markets, and also provide a shot in the arm for the development of India’s shallow municipal debt markets, “ said Fitch Managing Director William Streeter.

At a time when most Indian cities are crying for civic amenities and urban infrastructure, finance for these projects is a major concern. While municipal corporations of large cities have many revenue sources like property tax, octroi and state government grants, small ULBs are grappling with a severe shortage of funds for implementation of projects.

Due to a lack of stable revenue sources, small ULBS do not have strong credit profiles that would enable them to borrow. It was to address this problem that the government looked at alternate sources of finances and launched the PFDF scheme with an allocation of Rs 400 crore during the 10th Five Year Plan period. Under this scheme, states are required to set up a State Pooled Finance Entity (SPFE) which will aggregate the ULBs and raise money for them through bonds in the capital market. The question remains whether citizens would get free rides on civic amenities. Asked how these projects would generate revenues, Fitch Director and Head (Public Finance) S Nanda Kumar said, “Empirical evidence suggests that citizens are willing to pay for services of a project they require and that is completed on time. SPFEs have to pick projects that fit the criteria suggested by the ministry.”