DESPITE being the financial capital and backbone of Pakistan’s economy, Karachi remains a city of never-ending problems. Unfortunately the city that earns enough to contribute more or less 60 per cent to the national exchequer has no funds for its own development.
Being Pakistan’s most populated and prosperous city, it definitely demands extra care and planning which it is unfortunately missing out owing to a lack of funds.
The Rs27.14 billion budget of the Karachi Metropolitan Corporation (KMC) unveiled by Mayor Wasim Akhtar for this fiscal year shows a deficit of Rs300.084 million. The budget also includes Rs12.78bn grant which the federal government may or may not release depending on its own financial health.
The problem of the paucity of funds will remain until the mayor looks at options to generate the city’s own funds instead of depending on grants.
One option of course is to go for public-private partnership, and the mayor is rightly thinking on these lines. But then there are other alternatives too — and the most common is a municipal bond, commonly known as a Muni Bond.
These bonds are generally used to finance public projects such as roads, schools, bridges and various other infrastructure-related repairs which come under the preview of the municipality.
The problem of the paucity of funds will remain until the mayor looks at options to generate the city’s own funds instead of depending on grants
The term Muni Bond is most commonly used in the United States, which has the largest market of such tradable securities in the world. It is encouraging to know that wherever this bond has been introduced defaults are rare.
Local government bodies in Bangladesh were facing a similar problem. To address the issue, financial managers working in the Dhaka Metropolitan Corporation worked out a plan to issue Muni Bond to raise money.
The objective, according to the initiators behind floating the proposed bond was to help local government bodies carry out necessary development projects and infuse dynamism into the country’s declining bond market.
Meanwhile, the Bangladeshi government, in collaboration with the United Nations Capital Development Fund (UNCDF), made substantial progress in preparing a tool catering to the needs of urban local government institutions and selecting potential municipalities fit enough to offer the bond for subscription through the country’s capital market.
Bangladesh investors have hailed the government decision to use a new securities tool to mobilise resources for the urban local government bodies, while to further study the proposal the Bangladesh government appointed a credit rating agency to identify at least nine municipalities strong enough to offer this kind of investment.
The plan is to begin with one municipality to see investors’ response before authorising all the eligible municipalities that have reportedly submitted development project proposals worth over 9bn taka.
During the launch of the bond for one municipality on a pilot basis, its initiators are giving special emphasis on attractive returns and state guarantee, as the fate of the remaining bonds would largely depend on the investors’ response to the maiden one.
The Muni Bond, which has been introduced in a number of countries, has been successful since a major benefit of this bond is that it is free from federal taxes. Additionally, the purchase of a tax-exempt bond from the investor’s own state makes the investment free from state taxes as well.
Astonishingly, since its inception in 1970 there has hardly been a default on AAA-rated Muni Bonds. So municipal bonds are tax-exempt, excellent diversifiers for any portfolio and are relatively risk-free.
In the current interest rate scenario, Muni bonds would be similar to Wapda bonds as the latter are perceived to be a more secure investment due to the government guarantee provided to them.
Keeping in view the results of Wapda bonds, one can safely predict that a bond issued for the development of Karachi will be welcomed by all those who are doing business in Karachi and are fed up with the city’s dilapidated condition.
There is no denying of the fact that the bond market is of vital importance for a country like Pakistan that faces large budget deficits. Financial planners agree that a well developed bond market is important for increasing the competitiveness and efficiency of the financial system, especially in a country which is dominated by large banks.
At a microeconomic level, development of the securities market helps transform the financial system from bank-oriented to multi-layered, where capital markets can match bank financing to provide an alternative for domestic funding and budget deficits other than federal grants.
When all is said and done, if the Muni Bond is floated after careful planning and scheduling there cannot be any doubt that this bond will be able to meet the KMC budget target very quickly. However, the bond’s introduction needs to be put in place taking all precautionary measures.
The writer is a freelance contributor and a former CAA employee
Published in Dawn, The Business and Finance Weekly, January 8th,2018