[Urbanstudy] Financing urban development

Vinay Baindur yanivbin at gmail.com
Fri Jun 30 13:27:10 CDT 2017


http://www.prsindia.org/theprsblog/?p=3806
Financing urban development <http://www.prsindia.org/theprsblog/?p=3806>
June 30th, 2017Prachee Mishra
<http://www.prsindia.org/theprsblog/?author=57>

India’s urban population has grown by 32% from 2001 to 2011 as compared to
18% growth in total population of the country.[1]
<http://www.prsindia.org/theprsblog/#_edn1>  As per Census 2011, 31% of the
country’s population (377 million people) live in cities, and contribute to
63% of the country’s GDP.[2] <http://www.prsindia.org/theprsblog/#_edn2>
The urban population is projected to grow up to 600 million by 2031.2  With
increasing urban population, the need for providing better infrastructure
and services in cities is increasing.[3]
<http://www.prsindia.org/theprsblog/#_edn3>  The government has introduced
several schemes to address different urban issues.  These include the Atal
Mission for Rejuvenation and Urban Transformation (AMRUT), Smart Cities
Mission, Heritage City Development and Augmentation Yojana (HRIDAY),
Pradhan Mantri Awas Yojana – Housing for All (Urban) (PMAY-U), and Swachh
Bharat Mission (Urban).

Last week the Ministry of Urban Development released the next batch of
winners under the Smart Cities Mission.[4]
<http://www.prsindia.org/theprsblog/#_edn4>  This takes the number of smart
cities to 90.  The government has also announced a few policies and
released data indicators to help with the implementation of the urban
schemes.  In light of all this, we discuss how the new schemes are changing
the mandate of urban development, the fiscal challenge of implementing such
schemes, and the policies that are trying to address some of these
challenges.

*Urbanisation in India*

The Jawaharlal Nehru National Urban Renewal Mission (JnNURM), launched in
2005, was one of the first urban development schemes implemented by the
central government.  Under JnNURM, the central government specified certain
mandatory and optional reforms for cities, and provided assistance to the
state governments and cities that were linked to the implementation of
these reforms.  JnNURM focused on improving urban infrastructure and
service delivery, community participation, and accountability of city
governments towards citizens.

In comparison, the new urban schemes move beyond the mandate that was set
by JnNURM.  While AMRUT captures most of the objectives under JnNURM, the
other schemes seek to address issues around sanitation (through Swachh
Bharat), affordable housing (through PMAY-U), and technology innovation
(through Smart Cities).  Further, the new schemes seek to decentralize the
planning process to the city and state level, by giving them more decision
making powers.2  So, while earlier, majority of the funding came from the
central and state governments, now, a significant share of the funding
needs to be raised by the cities themselves.

For example, under the Smart Cities Mission, the total cost of projects
proposed by the 60 smart cities (winners from the earlier rounds) is Rs 1.3
lakh crore.[5] <http://www.prsindia.org/theprsblog/#_edn5>  About 42% of
this amount will come from central and state funding towards the Mission,
and the rest will be raised by the cities.[6]
<http://www.prsindia.org/theprsblog/#_edn6>

The new schemes suggest that cities may raise these funds through: (i)
their own resources such as collection of user fees, land monetization,
property taxes, etc., (ii) finance mechanisms such as municipal bonds,
(iii) leveraging borrowings from financial institutions, and (iv) the
private sector through Public Private Partnerships (PPPs).[7]
<http://www.prsindia.org/theprsblog/#_edn7>

In 2011, an Expert Committee on Indian Urban Infrastructure and Services
(HPEC) had projected that creation of the required urban infrastructure
would translate into an investment of Rs 97,500 crore to Rs 1,95,000 crore
annually.[8] <http://www.prsindia.org/theprsblog/#_edn8>  The current urban
schemes are investing around Rs 32,500 crore annually.

*Financial capacity of cities*

Currently, the different sources of revenue that municipal corporations
have access to include: (i) tax revenue (property tax, tax on electricity,
toll tax, entertainment tax), (ii) non-tax revenue (user charges, building
permission fees, sale and hire charges), (iii) grants-in-aid (from state
and central governments), and (iv) debt (loans borrowed from financial
institutions and banks, and municipal bonds).

While cities are now required to raise more financing for urban projects,
they do not have the required fiscal and technical capacity.8,[9]
<http://www.prsindia.org/theprsblog/#_edn9>  The HPEC had observed that
cities in India are among the weakest in the world, both in terms of
capacity to raise resources and financial autonomy.  Even though cities
have been getting higher allocations from the centre and states, their own
tax bases are narrow.8  Further, several taxes that cities can levy are
still mandated by the state government.  Because of their poor governance
and financial situation, cities also find it difficult to access external
financing.8,7

In order to help cities improve their finances, the government has
introduced a few policies, and released a few indicators.  Some of these
are discussed below:

*Policy proposals and data indicators*

*Value Capture Financing (VCF):*  The VCF policy framework was introduced
by the Ministry of Urban Development in February 2017.[10]
<http://www.prsindia.org/theprsblog/#_edn10>  VCF is a principle that
states that people benefiting from public investments in infrastructure
should pay for it.  Currently when governments invest in roads, airports
and industries in an area, private property owners in that area benefit
from it.  However, governments recover only a limited value from such
investments, constraining their ability to make further public investments
elsewhere.  VCF helps in capturing a part of the increment in the value of
land due to such investments, and use it to fund new infrastructure
projects.

The different instruments of VCF include: land value tax, fee for changing
land use, betterment levy, development charges, transfer of development
rights, and land pooling systems.10  For example, Karnataka uses certain
value capture methods to fund its mass transit projects.  The Mumbai
Metropolitan Region Development Authority (MMRDA), and City and Industrial
Development Corporation Limited (CIDCO) have used betterment levy (tax
levied on land that has gained in value because of public infrastructure
investments) to finance infrastructure projects.

*Municipal bonds:  *Municipal bonds are bonds issued by urban local bodies
(municipal corporations or entities owned by municipal bodies) to raise
money for financing specific projects such as infrastructure projects.  The
Securities and Exchange Board of India regulations (2015) regarding
municipal bonds provide that, to issue such bonds, municipalities must: (i)
not have negative net worth in any of the three preceding financial years,
and (ii) not have defaulted in any loan repayments in the last one year.[11]
<http://www.prsindia.org/theprsblog/#_edn11>  Therefore, a city’s
performance in the bond market depends on its fiscal performance.  One of
the ways to determine a city’s financial health is through credit ratings.

*Credit rating of cities:  *In September 2016, the Ministry of Urban
Development started assigning cities with credit ratings.[12]
<http://www.prsindia.org/theprsblog/#_edn12>  These credit ratings were
assigned based on assets and liabilities of the cities, revenue streams,
resources available for capital investments, accounting practices, and
other governance practices.

Of the total 20 ratings ranging from AAA to D, BBB– is the ‘Investment
Grade’ rating and cities rated below BBB– need to undertake necessary
interventions to improve their ratings for obtaining positive response to
the Municipal Bonds to be issued.  By March 2017, 94 cities were assigned
credit ratings, 55 of which got ‘investment grade’ ratings.[13]
<http://www.prsindia.org/theprsblog/#_edn13>

Credit ratings indicate what projects might be more lucrative for
investments.  This, in turn, helps investors decide where to invest and
determine the terms of such investments (based on the expected returns).

Earlier this month, the Pune Municipal Corporation raised Rs 200 crore
through the sale of municipal bonds, to finance water supply projects under
the Smart Cities Mission.[14] <http://www.prsindia.org/theprsblog/#_edn14>
The city had received an AA+ credit rating (second highest rating) in the
recent credit rankings assigned by the central government.

Other than credit ratings, the Ministry of Urban Development has also come
up with other data indicators around cities such as the Swachh Bharat
rankings, and the City Liveability Index (measuring mobility, access to
healthcare and education, employment opportunities, etc).  These rankings
seek to foster a sense of competition across cities, and also help them map
their performances year on year.

Some financing mechanisms, such as municipal bonds, have been around in
India for the last two decades, but cities haven’t been able to make much
use of them.  It remains to be seen whether the introduction of indicators
such as credit ratings helps the municipal bond market take off.  While
these mechanisms may improve the finances of cities, the question is would
more funding solve the cities’ problems.  Or would it require municipal
government to take a different approach to problem solving.

[1] <http://www.prsindia.org/theprsblog/#_ednref1> Census of India, 2011.

[2] <http://www.prsindia.org/theprsblog/#_ednref2> Mission Statement and
Guidelines, Smart Cities, Ministry of Urban Development, June 2015,
http://smartcities.gov.in/writereaddata/SmartCityGuidelines.pdf.

[3] <http://www.prsindia.org/theprsblog/#_ednref3> Report on Indian Urban
Infrastructure and Services, March, 2011, The High Powered Expert Committee
for estimating the investment requirements for urban infrastructure
services, http://icrier.org/pdf/FinalReport-hpec.pdf.

[4] <http://www.prsindia.org/theprsblog/#_ednref4> “30 more smart cities
announced; takes the total to 90 so far”, Press Information Bureau,
Ministry of Urban Development, June 23, 2017.

[5] <http://www.prsindia.org/theprsblog/#_ednref5>  Smart Cities Mission,
Ministry of Urban Development, last accessed on June 30, 2017,
http://smartcities.gov.in/content/.

[6] <http://www.prsindia.org/theprsblog/#_ednref6> Smart City Plans, Last
accessed in June 2017.

[7] <http://www.prsindia.org/theprsblog/#_ednref7> “Financing of Smart
Cities”, Smart Cities Mission, Ministry of Urban Development,
http://smartcities.gov.in/upload/uploadfiles/files/Financing%20of%20Smart%20Cities.pdf
.

[8] <http://www.prsindia.org/theprsblog/#_ednref8> “Report on Indian Urban
Infrastructure and Services”, March, 2011, The High Powered Expert
Committee for estimating the investment requirements for urban
infrastructure services, http://icrier.org/pdf/FinalReport-hpec.pdf.

[9] <http://www.prsindia.org/theprsblog/#_ednref9> Fourteenth Finance
Commission, Ministry of Finance, February 2015,
http://finmin.nic.in/14fincomm/14fcrengVol1.pdf.

[10] <http://www.prsindia.org/theprsblog/#_ednref10> Value Capture Finance
Policy Framework, Ministry of Urban Development, February 2017,
http://smartcities.gov.in/upload/5901982d9e461VCFPolicyFrameworkFINAL.pdf.

[11] <http://www.prsindia.org/theprsblog/#_ednref11> Securities and
Exchange Board of India (Issue and Listing of Debt Securities by
Municipalities) Regulations, 2015, Securities and Exchange Board of India,
July 15, 2015, http://www.sebi.gov.in/sebi_data/attachdocs/1436964571729.pdf
.

[12] <http://www.prsindia.org/theprsblog/#_ednref12> “Credit rating of
cities under urban reforms begins”, Press Information Bureau, Ministry of
Urban Development, September 6, 2016.

[13] <http://www.prsindia.org/theprsblog/#_ednref13> “Credit Rating of
Urban Local Bodies gain Momentum”, Press Information Bureau, Ministry of
Urban Development, March 26, 2017.

[14] <http://www.prsindia.org/theprsblog/#_ednref14> “Pune civic body
raises Rs200 crore via municipal bonds”, LiveMint, June 19, 2017,
http://www.livemint.com/Money/JOOzaSTKnC6k1EZGeFh8LJ/Pune-civic-body-raises-Rs200-crore-via-municipal-bonds.html
.
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