How can India finance urban infrastructure?

The investment required for bringing the urban infrastructure and services to the levels set by the Bureau of India Standards is of the order of rupees (Rs) 40 lakh crore (USD 700 billion) spread over a 20-year period.

Another 50% of that figure is required for maintenance of such assets. For an urban population of about 40 crore, this would work out to RS one lakh per capita for 20 years or Rs. 5000 per year for capex and Rs 2500 for opex.

Breaking down further, these figures come to Rs 400 and 200 per month, and at per diem level, merely Rs 13 and Rs 7, respectively. For the statutory minimum daily wages of Rs 200, a working couple would earn Rs 400. Therefore, people can pay for the investment required for providing services or infrastructure.

The JNNURM experience

The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was the first major programme to promote investment in the urban sector. During its effective implementation period of seven years (2007-2014), the Mission induced investment of about Rs 80,000 crore in the 65 bigger (Mission) cities and about Rs 20,000 crore in the smaller cities.

JNNURM encountered serious holdups in implementation, commencing with poorly staffed municipalities, and without sufficient financial resources and decision-making authority.

Yet, the JNNURM succeeded in containing the drinking water problem significantly. As well as the sewage and city transport problems, although in solid waste management it could not succeed as much.

Despite its partial success, a key outcome of JNNURM is the realisation that even with small investment, the quality of urban services can be improved significantly, with the investments funded almost entirely by the Central and State Governments and very little by the municipalities or the users.

Finance Commission Grants

The Fourteenth Central Finance Commission (CFC) has recommended grants of the order of Rs 87,000 crore to be made available to the 4,000+ municipalities for the five-year period 2015-2020.

Municipalities could deploy this grant to part-fund their infrastructure projects. This would be in addition to the grants made available by the State Governments under the awards of their respective State Finance Commissions.

Sale of recycled waste

Most municipalities treat the city waste as a burden, fit only for landfill. In the process, they not only miss on the economic returns that the waste could provide, but also let the waste become an environmental hazard.

Green waste and kitchen waste can be converted into fuel or manure, plastic waste into oil and methane, construction & demolition waste into bricks, while paper and most metals can be recycled.

Sewage can be recycled into water fit for non-potable purposes in horticulture, industry or in construction activities. In all such cases, around 40% of operations and maintenance costs can be recovered.

User charges

Until about 10 years ago, most city managers worried about popular resistance to a levy of user charges and would avoid imposing it.

The JNNURM insisted on 100% recovery of operational expenses as a pre-condition for sanction of central grants, which led not only to imposition of user charges, but also to the realisation that people were willing to pay for services.

Imposition of Rs 200 per month on a household of 1,000 sqft, and higher amounts for more affluent ones, would suffice to recover around 60 per cent of the operational costs for water supply and waste management, each.

Betterment levies

Any infrastructure project enhances the economic prospects of the land and buildings in its influence zone.

Therefore it would be justified for the local body to impose betterment levy, or impact fees to recover the costs incurred in development of the project that led to the economic growth.

Land monetization

Most cities have valuable land owned by the city or state governments, with old structures such as office complexes or staff residences.

Redevelopment of such lands in PPP mode has been tried out successfully in the case of New Moti Bagh and Kidwainagar in Delhi.

In both cases, public sale of just five to 10% of the government land/built space generated enough resources to redevelop five to 10 times the original spaces.

This model can be replicated to create modern built spaces and generate revenue for the local governments in public-private partnership mode.

Property taxes

Some municipalities have undertaken geo-spatial mapping of the built spaces and, after on-ground verification, updated the records of taxable properties, leading to substantial rise in collections from property taxes without raising the tax rates.

Municipalities may also levy tax on applicable land use rather than on availed one. This would be an equitable model of vacant land taxation and lead to enhanced and sustained revenue mobilization.

Conclusion

Urbanization creates wealth. Any investment in urban development generates prosperity.

Public financial policies need to identify the contours of wealth that such investments create, and aim at collecting a part of that wealth through taxation, fees and user charges in a manner that should be adequate to fund the infrastructure that goes to create such wealth.

Municipalities need to analyse the costs and benefits of the development projects and determine the framework of cost recovery in terms of ‘beneficiary pays’ principle. With such analysis, they can secure loans to launch the projects and pay back through the ‘tax increment financing’.

That would give a financially viable model for investment in urban development. Of course, other dimensions of viability, such as social, environmental, technological and managerial, would also need to be worked on simultaneously.

Our report, Reforms to Accelerate the Development of India’s Smart Cities, is available here.