Only financially strong, large municipal corporations are in a position to directly access capital markets. Most small and medium ULBs are not able to directly access capital markets on the strength of their own balance sheets. Also, the cost of the transaction is another barrier. In the United States and elsewhere, small local bodies pool their resources and jointly access the capital market. Based on this model, the Governments of Tamil Nadu and Karnataka issued municipal bonds by pooling municipalities.
Pooled financing, also known as collective financing, is a financing mechanism in which multiple entities, such as local governments or municipalities, pool their financial resources to undertake a joint project or initiative. This approach can help to reduce the costs associated with borrowing funds, as it allows participants to access lower interest rates and fees than they might individually. Pooled financing can be used for a range of purposes, such as infrastructure projects, public services, or economic development initiatives.
One example of pooled financing is a municipal bond bank, which is a public entity that issues bonds on behalf of multiple local governments. The bond bank then uses the funds raised to lend money to the local governments for infrastructure projects or other initiatives. This approach can help smaller municipalities or local governments access financing that might otherwise be difficult or expensive to obtain.
Another example of pooled financing is a revolving loan fund, which is a pool of money that is continually replenished as loans are repaid. These funds can be used to finance a range of activities, such as energy efficiency improvements or environmental projects.
Pooled financing can offer several benefits, including reduced borrowing costs, access to larger amounts of financing, and increased efficiency in project management and implementation. However, it can also have drawbacks, such as the need for coordination among participants, and the potential for disagreements over project priorities or funding allocations.
Government of India to create a central fund that enables capital investments to be pooled under one state borrowing umbrella. The objective is to provide a cost-effective and efficient approach for smaller- and medium-sized ULBs and to reduce the cost of borrowing. FIRE-D project supported GoI’s MOUD in formulating the Pooled Finance Development Fund (PFDF) Guidelines to help small- and medium-sized ULBs access market funds for their infrastructure projects and to encourage municipalities undertake fiscal, financial and institutional reforms required to create efficient and equitable urban centers.
Overall, pooled financing can be a useful tool for municipalities and other entities seeking to undertake joint initiatives or projects. However, it’s important to carefully evaluate the costs and benefits of this approach and to ensure that all participants have a clear understanding of their roles and responsibilities.
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FD Planning Community Forum Discussion
- State Finance Commissions and Rural Local Bodies Devolution of Resources
- Interview with B K Sinha – The Municipal midas
- Municipal bond in India
- Bilateral and Multi-lateral Financial Institutions
- Cost recovery
- Investment needs and Budgeting for Infrastructure and Service in Metro towns
- Subsidy Reduction
- Revenue Sources of Controlling Authorities
- Public Private partnership
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