Financing India's Urban Development

Rapid urbanisation has the potential of becoming a major engine of India’s economic growth and improvement in the quality of life.It is estimated that by 2021, urban agglomerations will contribute nearly 75% of the country’s gross domestic product (GDP). By 2010, about 30% of India’s population will be urban. This ratio will exceed 50% by 2045, when over 700 million Indians are expected to be living in urban areas. Enormous investment in urban infrastructure and amenities will be needed to realise the growth potential and improve the lives of an increasing number of urban Indians. The estimates of annual investment vary widely (from Rs 17,000 crore to Rs 60,000 crore) depending on methods and scope.There is unanimity among the experts that governments cannot finance the needed investments through even reformed conventional tax and non-tax sources (such as property tax, reasonable cost recovery fees and user charges), and from traditional loans, grants and statutory transfers. This does not imply that reforms should not be undertaken to increase revenue from conventional sources. These reforms are necessary but will not be sufficient. There are at least four major unconventional sources of revenue available to the urban local bodies (ULBs). The first concerns more productive use of the assets of ULBs. This will require constructing a detailed and accurate list of all assets owned by them. Land and real estate are likely to constitute a major proportion of such assets. Property rights associated with airspace and underground space and other regulatory procedures are also an important part of total assets. But these must be created to ensure lower transaction costs and improve economic efficiency and not become a means of political or economic rent seeking and misuse of public office.A good example of creation of property rights, which are efficient and equitable, is provided by the Karnataka government. It has permitted the Bruhat Bangalore Mahanagara Palike (BBMP) to grant transferable development rights (TDRs) to property owners and leaseholders who were affected by a planned road widening scheme. As a result, BBMP could acquire land without paying compensation and the owners had the option to either undertake construction or sell the TDR to builders in specified zones. This suggests there are a variety of ways such revenue-generation initiatives can be structured.The second avenue concerns revenue generation from switching to more efficient technology and service delivery structures. For example, replacing existing street lights with less energy consuming lights (as Mumbai is reportedly considering) could generate carbon credits and save on operating costs. More efficient fuel for transport and power generation could also lead to similar outcomes. The third revenue generating option for the ULBs is to access capital market funding through the issuance of municipal bonds. Since municipal bonds need to be rated by a credit rating agency, their issuance is likely to indirectly lead to better budgeting and accounting systems; and to monitoring of local finances by bond rating agencies and investors. Smaller ULBs can access such funds through pooled financing, as has been the case with Tamil Nadu.Fourth, public transport and public space can be efficiently utilised to generate advertising revenue. This would, however, require proper auction mechanisms and the contract drawing and implementing skills. An interesting example of such an initiative is provided by the Pune Mahanagar Parivahan Mahamandal Ltd, a public transport body. It has reportedly awarded advertising rights at its 2,600 bus shelters and on all its buses to a Malaysian company for 15 years in return for 2,300 air-conditioned buses. The contract design details and the ability of both sides to implement the contract as envisaged will, however, determine the actual outcome.Public-private partnership (PPP) arrangements can also be utilised for delivery of basic urban infrastructure; social amenities (health, education, old age care); as well as for providing expertise in urban management and policy implementation. Several ULBs in India have benefited from PPP contracts in areas ranging from sweeping of streets to partnerships in building large roads and highways. A creative example of PPP for greater youth employability is provided by the Gujarat government programme for building functional English language proficiency needed by businesses. The target is to train 3.5 million young people over four years in more than 1,000 centres across the state. The assessment partner in this programme is the Cambridge University of the UK. For any PPP to be successful, each partner must bring something of real economic value to the project or to an activity, while exhibiting organisational structures and attitudes which are consistent with the creation of public or social value. The resources brought to the PPP may be in the form of money, land, regulatory facilitation, technical expertise, and management know-how and know-why. The PPPs should be evaluated on the basis of overall resource cost savings to the society (or the taxpayers) that they generate in achieving desired outcomes. It is clear that for the ULBs to access unconventional sources of finance, they will have to become more adept at initiating and sustaining the PPPs. In addition to domain or technical expertise, government officials will need to develop soft skills such as networking abilities and proficiency in communication techniques. The transformation of policy initiatives concerning unconventional sources and the PPPs into tangible outcomes should not depend solely on the efforts of an implementing officer in a local authority. Continuity of purpose and commitment should be an integral part of the organisation culture of the ULBs. There is recognition in official circles that this will require fundamental reforms in the governance structure of the ULBs. The Second Administrative Reform Commission, for example, has recommended an elected mayor who essentially acts as a chief executive officer (CEO) of a municipal body. The mayor should have an accountable cabinet. As urban agglomerations involving several ULBs are becoming more important in the country, regional planning and coordination have become increasingly essential. Thus, development of appropriate organisations, which make such planning feasible, should also receive priority. Rapid urbanisation and rising incomes are increasingly leading to demand for better quality of urban services and amenities. Those who meet this demand are likely to reap rich electoral dividends. Managing rapid urbanisation with competence and outcome orientation is essential if India is to emerge as a successful and respected major power in the 21st century.