Fixing Karachi: Unlocking the Gridlock

If there is one thing that repeated financial crises, whether domestic or international, have taught us, it is that financial independence is crucial for the survival of all levels of government. If financial stability does not exist, or if it exists but each level of government is not financially independent, then there lies little possibility for the respective government to continue doing its job. The era of financial dependence has long gone.

While one of the largest revenues of the local governments is property taxes or municipal taxes, there is yet another substantial way of generating funds for meeting the needs at the grassroot level. In the financial world, such instruments are called "munis", the short form for municipal bonds. The idea behind municipal bonds is that they provide funds to local governments for development projects at a rate lower than banks would. Essentially, municipal bonds operate very similarly to government bonds (commonly called treasuries) wherein the municipality utilizes its good name as well as its credibility to seek funds from financial institutions as well as the public, who in turn are provided a fixed rate of return with the surety that there is minimal (practically zero) risk of default.

Municipal bonds come in two broad types: secured and unsecured. Secured bonds are when an asset of a municipality is pledged for raising funds. Unsecured munis are what they appear to be; that is, they are unsecured to the extent that no specific asset is pledged. However, they do have the guarantee of the municipal government ensuring that the interest payments on the bond will be made and eventually the principal will be returned.

Karachi is a humongous city with exceptional potential. It has become a common political comment in drawing rooms and dinner parties that Karachi generates the highest amount of revenue, yet the same is not being spent on the city. I would argue that there is more to this calculation than meets the eye. Suffice it to say at this stage that Karachi does not have the funds at the municipal level to ensure its development and the city is not financially independent.

A ray of hope that appeared on the horizon is by virtue of MUCT (Municipal Utility Charges and Taxes) collection through K-Electric bills. This has resulted in a monthly revenue of nearly Rs 200 Million. In the 10 months of the last financial year, KMC received an amount of more than Rs 1.9 Billion as opposed to the previous annual collection of only Rs 155 Million. One must remember that MUCT is not a new tax and had always been in existence. However, there has never been a mechanism to properly collect this levy and realize its potential. The Karachi Metropolitan Corporation, through out-of-the-box thinking and keeping in view the ground realities of the city, partnered with a utility company to ensure recovery of MUCT. This has resulted in major financial gain for KMC, and the results of it can be seen every day around the city in the form of its development projects. Though one may question the quantum of development by KMC compared to the gigantic size of our city, however, after a long time KMC's presence in terms of development as well as rehabilitation appears to be visible and one is hopeful that the same will continue fairly, transparently and equitably.

With that being said, the money recovered through MUCT is certainly not enough. Even otherwise, a lot of times money is needed now, whereas the revenue is likely to come in the next 5 to 10 years. That is where the concept of municipal bonds can be a game changer for the city of Karachi. Essentially, what is being proposed is the issuance of bonds to investors. Initially, these may be Pakistani investors. However, subject to regulatory approval, foreign investors may also be included. This will help raise money for funding development projects at very low rates, thereby ensuring financial viability and independence for the city of Karachi.

Municipal bonds are utilized across the world in cities like New York, London, Ahmedabad and Pune, among others, to borrow money and fund development projects. India's municipal bond market, although nascent, has raised INR 5000 Crores which have directly translated into development works. Likewise, New York City has for decades funded subway expansions, schools and bridges through muni bonds. Municipal bonds have achieved the same feat for all such cities which have issued them. The precedent is clear. On state level, in Pakistan, the Government of Pakistan regularly issues bonds to local and foreign investors for the purpose of funding its development and day-to-day needs. Hence, while this is a novel idea from the perspective of a local government in Pakistan, it certainly is not new to the financial world. The only differentia between municipal bonds and those issued by the state will be the level of government backing it. They would operate in a similar manner.

At its core, this structure would empower Karachi to raise capital independently, enabling it to fund critical infrastructure and development projects without being reliant on federal or provincial handouts. The advantages will be far reaching: fiscal autonomy, timely project execution, public trust of Karachiites, and urban renewal. Bringing such a structure to Karachi through KMC is not just about finance. It is about redefining the city's capacity to shape its own future. The time for bold and systemic solutions is now.

While nay sayers may question it by arguing that the Federal Government should be contributing or the Government of Sindh should be funding it since Karachi is the biggest contributor to the national or provincial exchequer, the argument would be futile since nay sayers have to just say "nay" and not account for their sayings. As Mayor, though with some effort, I am able to get funding from the Provincial Government, Federal Government is completely apathetic to the needs of our city and I don't see that lax attitude changing. With such a predicament staring me straight in the eye, one is left with two options: first is to fight incessantly throughout the term and hope for handouts, or secondly to take the driving seat and enhance KMC's own revenue base. Needless to say, that the latter is a more solution oriented approach.

It is my firm belief that the only way for the city of Karachi to progress and come at par with international municipalities is by way of financial independence. The concept of municipal bonds as proposed will be a major step in this direction not only for the city of Karachi. But it will also prove to be a benchmark for all other big cities of Pakistan and municipalities. Let us hope that this time around we will not get stuck in petty politics but will rather focus on the bigger picture. This city belongs to all of us, and I hope that people from all quarters will support in this endeavour—so that we, Karachites, can realize the immense potential of this unique metropolis. Let me conclude by drawing influence from a Chinese proverb which I am rephrasing as "the best time to act was yesterday, the second-best time is TODAY". It is time we ACT.

Writer is serving as the 28th Mayor of Karachi