As part of its move towards self-reliance, Dhaka North City Corporation has taken initiatives to issue Tk1,000 crore city bonds to raise funds for constructing a multi-storey commercial building in the capital's Gulshan.
This will be the first bond of its kind in Bangladesh for urban or infrastructure development, officials have said.
Dhaka North says it wants to achieve self-sufficiency with the income from rents and sales of spaces in the building by raising capital through these bonds.
It is also planning to issue bonds for the construction of its other commercial buildings in the future. It will spend the earnings from these buildings on civic services.
Municipal bond is a debt security issued by a state or a municipality to finance its capital expenditures, including the construction of highways, bridges, schools and markets. They can be thought of as loans that investors give to local governments.
Officials at the Bangladesh Securities and Exchange Commission (BSEC) say Dhaka North's proposal to collect money from the capital market by issuing city bonds is awaiting the final approval.
In September, Mayor Md Atiqul Islam wrote a letter to the local government ministry, seeking approval for the bonds.
Finance Minister AHM Mustafa Kamal has already given the nod to the application after the local government ministry sent it to the finance ministry last month.
Dhaka North preparing final proposal
BSEC Chairman Professor Shibli Rubayat-Ul-Islam has told The Business Standard that the commission discussed Dhaka North's application for issuing city bonds.
He said the commission would approve it, and institutional and individual investors would be eligible to invest in the bonds.
"The Dhaka North City Corporation will issue city bonds for the construction of Gulshan Super Market 2. It is preparing the final proposal after discussions with us. The proposal will mention the amount of money to be collected from the market as well as the coupon rate.
"The rate for such bonds is usually set at 6-7%," the BSEC boss elaborated.
Shibli said the government was focusing on the bond market to create long-term financing opportunities, and the issuance of bonds would play an important role in developing infrastructure.
This will expand the scope of the bond market as well as help overcome infrastructure crisis, he added.
A test case
Talking about the project, Dhaka North Mayor Md Atiqul Islam said, "To build a multi-storey market or commercial building, the city corporation needs to take money from the government. This means we have to wait long.
"Now we will raise money from the stock market to become self-sufficient. City bonds have the assurance that we will not run away with the money collected from investors."
Atiqul described the issuance of city bonds as a test case.
If it succeeded, investment funds would be raised through city bonds to build other markets as well, he said.
"Dhaka North does not want to be dependent on the government," the mayor said.
A Dhaka North official, preferring anonymity, has told The Business Standard that the city corporation's commercial buildings are usually large and it takes a lot of money to build such multi-storey structures. The city corporation was planning to raise around Tk1,000 crore initially through bonds.
In the city bond application, Mayor Atiqul wrote that the income of the city corporation is spent on various regular activities, including constructing roads in the 18 wards of Dhaka North, ensuring citizen services, conducting clean-up programmes, and eradicating mosquitoes. Therefore, it is not possible for the corporation to build a multi-storey commercial building with its own income, and it is necessary to raise funds by issuing city bonds.
Experts emphasise transparency
India and Pakistan have municipal bonds and those are popular there. Capital market analysts believe investors will be interested in investing in such bonds in Bangladesh as well.
Former finance adviser AB Mirza Azizul Islam told TBS that it would certainly be a good initiative if the city corporation raised money by issuing bonds.
"But the approval must consider where the money invested in the bonds will be spent and how much the return will be. In this case, what the rate of profit will be is also important," he said.
The earnings of the country's municipalities and city corporations are very low, said Azizul, also a former chairman of the BSEC.
Protecting the interests of investors should be a priority in approving bonds, he added.
Local government expert Professor Tofail Ahmed said the initiative to meet development expenditure by issuing bonds was undoubtedly commendable, but good governance and transparency in spending the money collected from the capital market must be ensured.
Generally, municipal bonds are exempt from taxes, which makes them especially attractive to people in high income tax brackets.
Municipal bond market is the largest and most important means for state and municipal finance in the US capital market, with about $4 trillion in market capitalisation, 55,000 issuers, 1.5 million bond issues, and 100,000-200,000 new bonds issued every year.
Municipal bonds have less risk than any other corporate bond. As a fixed-income security, the market price of a municipal bond fluctuates with changes in interest rates. Bond prices decline when interest rates rise and vice versa.
Established in 1864, Dhaka Municipality was transformed into a city corporation after 112 years. In 2011, Dhaka city was divided into two parts and two city corporations – Dhaka North and Dhaka South – were formed. The revenue of the Dhaka North City Corporation is comparatively high.
In the fiscal 2019-20, Dhaka North's budget was Tk3,057 crore. Of this, income was Tk1,115 crore, bulk allocation from government grants was Tk100 crore and special government grants amounted to Tk50 crore.
Besides, revenue from government- and foreign-aided projects was Tk1,565 crore.