By Meghna Mittal

New Delhi, May 26 (IANS): Breaking new ground in a bid to help civic bodies raise capital for financing infrastructure projects, three such entities will soon issue bonds on a pilot basis, according to a top finance ministry official.

"The framework and guidelines on municipal bonds are already in place. And now we have three projects that are going through. This will have to be done by the Ministry of Urban Development. They are taking up three cities. If the pilot succeeds, then it gets rolled out (on a wider scale)," the finance ministry official told IANS on condition of anonymity.

Market watchdog SEBI's regulations for municipal bonds have been in place for one-and-a-half years, but there's been no further traction beyond that. The pilot in three cities is being seen as an effort to encourage local bodies to sell bonds to the public.

One other intention is to reduce the reliance of civic bodies on banks, which have largely become risk-averse in view of their rising non-performing assets (NPAs).

Speaking on the size of the bonds, the official said that the pilot issue will be sufficiently large as the overheads involved are high.

A conducive bond market and supportive private sector will support the pilot, he said.

Though the cities chosen for the pilot have not been disclosed, a source in the finance ministry spelt out the criteria: "The municipal bodies should have (a sufficient) budget in hand and the capacity to do this (execute large projects). It could be (through) a special purpose vehicle (SPV) kind of arrangement that is commercially viable, preferably through PPP (public private partnership) mode."

The official said that since all municipalities may not have the do-it-all strength on their balance sheets, the guidelines offer various options in structuring.

As for the modalities, an escrow account will be created for a particular infrastructure project. Some of the municipal taxes may be earmarked for a particular project or cross subsidy may be given for taking up a project in a slum area, the official said.

"Most important, they have to decide for which project it (the money) is going to be," he said.

A credit rating system for infrastructure projects is also being worked upon, which will be in place this year, the finance ministry official said.

"We are working on the rating project. The system will be in place this year. We are in discussion with credit rating agencies for a new system," he said.

Credit rating agencies like Crisil and India Ratings are collectively working on a new system for infrastructure projects that will use a different methodology than for corporate ratings.