AP mulls community finance

Calls on big companies to contribute from its CSR funds

Where there is a will, there is a way. What, if the union government or RBI finding it difficult to finance the residuary Andhra Pradesh, the state government is discovering newer paths of financing.

At a time when the apex bank has refused to come helping the state as the later wanted to keep its election promise of ‘loan waiver’, the AP Chief Minister has ventured, in a way, to pledge the future earnings of the state. Thus the promise is maintained as per the satisfaction of the central bank.

Now, again in building the ‘capital city’, the state is coming up with a novel scheme of floating ‘Build Andhra’ bonds, thus becoming the first state to float such bonds. According to the officials, the bonds will be issued by the Vijayawada Municipal Corporation after taking the prior approvals from the Reserve Bank. Further, the government is now contemplating to allow the Visakhapatnam Municipal Corporation also to issue such bonds for reconstructing cyclone-hit Vizag city.

It is more surprising that the path breaking announcement was made during the RBI Governor Raghuram Rajan’s meeting with the state’s finance minister and the team in Hyderabad.

The proposal is part of the proposal to augur the funds for construction of the new capital city of Andhra Pradesh. The funds are expected to be mobilised from Centre, State, private participants under PPP route and other ways.

What is a Social impact Bond (SIB)?
These bonds are known as ‘social impact bonds’, also called as Pay for Success Bonds or Social Benefit Bonds. It is a contract with the public sector in which a commitment is made to pay for improved social outcomes resulting in public sector savings. And the expected public sector savings are used as a basis for raising investment for prevention and early intervention services that improve social outcomes. SIBs derive their name from the fact that their investors are typically those who are interested in not just the financial return on their investment, but also in its social impact.

SIB is just like a venture funding as they encourage innovation and tackle challenging social issues but have trouble sourcing government funding even though the new and innovative programs have potential for success. The first SIB was launched by Social Finance UK in September 2010. In Australia, Social Impact Bonds have been called Social Benefit Bonds. In developing countries, it is titled a Development Impact Bond (DIB).

SIBs are not the most common type of bonds as they operate over a fixed period of time, they do not offer a fixed rate of return. In most cases, these bonds will attract corporate social responsibility funds from corporate power houses as they too stand a chance to benefit from the state’s industrial policies particularly in the IT sector.

Repayment to investors is contingent upon specified social outcomes being achieved and therefore in terms of investment risk SIBs are more similar to equity investment, say market analysts.

A role model in SIBs
The proposal got attention of RBI Governor Raghuram Rajan who asked the officials to come with detailed presentation. Besides he also made certain suggestions to include, says the officials who are privy to the meeting. He felt the state government may come up with tax rebates and announce awards with star rating to attract big investors.

Appeared to have been convinced, the RBI Governor, that the state’s capability to use technology to streamline its internal resources with its Comprehensive Financial Management System, the officials are optimistic that the banking sector will come forward to back the State’s reconstruction plans and even take a stake in the SIBs.

The new capital will be developed in phases. In the first phase, covering about 25,000 acres between Vijayawada and Guntur cities, though the exact location is yet to be specified, says the government sources.
Coming to financial nitty-gritty, over 40 big corporate hailing from Andhra Pradesh are spending around Rs 4,000 crore towards CSR activities like adoption of schools, orphanages, villages, and their own pet programs. The officials contend that these companies expected to come forward and buy these bonds would be a boon. The government is planning to approach them with a request, they said.

In a way, they can become partners in the ongoing restoration task at both Visakhapatnam and also the conceptual new capital for residuary state of Andhra Pradesh.

Andhra Pradesh state planning board chairman C Kutumba Rao says that the money raised through SIBs could be used for any project, right from building the capital to reconstructing cyclone-hit Visakhapatnam, and for developing infrastructure elsewhere in AP.

SIB mode can also help in raising enough funds for the programs like Swatch Bharat, Indian toilets campaign and also the program close to home, Janmabhumi - Maavuru, a brain child of AP CM Chandrababu Naidu.The most important factor in SIB is that the tax payers’ money is not wasted on failed programmes or projects. SIB's are a common feature of community oriented and CSR projects in UK and US where in multinational companies are keen to invest to get in line with society and also authorities.