3 ways India can fund urban development

As the world hurtles towards reaching a two-thirds urban population by 2050, many eyes will be on India. That’s not because it has the second highest urban population in the world, but because, today, such a small proportion of its people live in cities. While the pace of urban growth places intense pressures on the environment and the well-being of citizens, the Indian policy-makers recognize that it also offers one of the greatest chances for the economy to become more competitive.

The new Indian government has sought to encourage further urban development through various initiatives, such as the creation of five industrial corridors and, more recently, the launching of the Make in India and the 100 Smart Cities programmes. But as these and other strategies are realized, the government will need to take a more holistic approach to planning and find new ways to attract private investment.

India’s urban population has increased from 222 million (26% of the population) in 1990 to 410 million (32%) in 2014 and is expected to reach 814 million (50%) by 2050. Three of India’s cities are among the most populous in the world: Delhi (25 million), Mumbai (21 million) and Kolkata (15 million) ranking 2nd, 6th and 14th, respectively. The government knows that, although India’s current urban population makes it the second-largest urban community in the world, the proportion of Indian citizens living in cities is still comparatively low. An urbanization rate of 32% in India compares to a rate of 54% (758 million) in China, 53% (134 million) in Indonesia and a whopping 85% (173 million) in Brazil.

Moreover, India’s urban growth is largely concentrated in large cities with a population of 100,000 or more. As a result, the number of cities with a population exceeding 1 million has increased from 35 in 2001 to 53 in 2011, accounting for 43% of India’s urban population, and is expected to be 87 by 2030. Conversely, population growth in smaller towns and cities (of below 100,000 people) has tended to stagnate, with the share of the population in towns decreasing from 31% in 2001 to 28% in 2015.

Overall, the provision of basic urban services is still poor and the investment gap between the levels of investment needed and the business-as-usual scenario is estimated to be around $80-$110 billion. So how does India achieve its ambitions and raise the $640 billion of investment it needs between now and 2031? The government’s own ambition in the 12th Five Year Plan is to raise infrastructure investment as a proportion of GDP to 9% by 2017. But clearly the state will be unable to finance all of this investment on its own, so the core question now is how India can attract the requisite amount of private-sector funding for urban projects.

In an attempt to answer this question, the World Economic Forum, in collaboration with Accenture, has been engaging with business leaders and conducting extensive research as part of the Forum’s Future of Urban Development and Services initiative. In a first survey, the Forum’s Global Competiveness team interviewed 211 business leaders to identify the most problematic factors involved in doing business in India.

In the second survey, the Forum’s Investors Industry team interviewed 10 major international and Indian investors, representing $1.7 trillion in assets under management, to better understand how they assess the current investment environment in India and what reforms could be most effective in attracting additional capital for infrastructure investment. These studies revealed that both groups consider funding and financing as well as policy and regulation as the main obstacles to engaging and investing in India.

In light of this research, this recent report makes three key recommendations to the Government of India.

The first recommendation is to integrate spatial planning at all governmental levels. Spatial planning is a key instrument for establishing long-term, sustainable frameworks for social, territorial and economic development both within and between countries[1]. For India, the advantages of developing an integrated national spatial strategy would have numerous benefits. Chief among them would be the promotion of territorial cohesion and balanced social and economic development as well as easing the flow of know-how and expertise.

In practice, this would involve regional, national and municipal governments coming together to allocate powers, establish frameworks, develop 15-20 year economic strategies and devise the right fora for the plans to be delivered. As ever, these will require a range of complementary skills. It is generally the case that the national government needs to take the lead in setting the framework, but the key is always to set clear objectives for private investment to latch onto. Again, political leadership is crucial at all levels of government, but it is often best for competencies to rest at the lowest level of government possible.

The second recommendation, flowing from the first, is to create a stable policy framework for private investment. A key component of this is for the government to develop a strong investor value proposition on a project-by-project basis. The government should not expect investors to accept a lower return simply because a project has significant social benefit.

To manage financing risk, the government could consider alternative approaches to incentivizing transactions, such as credit guarantees. For demand uncertainty, risk-mitigation options could include availability-based payments and risk sharing. Finally, market sounding with potential investors should be interactive and undertaken early to generate feedback on a project.

The third recommendation from the report is for India to create new institutions to stimulate extra capacity building and attract top talent. India needs to increase the number of white-collar jobs to ensure it attracts and retains talent. It needs “lighthouse” projects with the potential for interdisciplinary collaboration on urban development. Although the service sector now accounts for the largest single share of GDP, most of the jobs in the service sector are low-skilled and poorly paid.

There are a good number of examples – some surprising – from around the world where this has been done successfully. Guadalajara, in Mexico, is a good example of where authorities from various levels of government jointly created an environment to attract and retain talent serving the digital services market that otherwise would have gone to the United States. Likewise, the “Future Cities Catapult” in the UK shows how a stimulating environment can bring officials, local authorities, businesses, researchers and academics together to cross-fertilize each other’s ideas.

Of course, there are no easy options. But a collaborative and systematic approach is the best way for India’s new government to achieve its ambitious urbanization goals – securing economic competitiveness in tandem with more advanced stewardship of resources, the environment and the well-being of its people.

The authors would like to thank Alice Charles (World Economic Forum, Head of Urban Development), Jens Plambeck (Accenture Strategy; secondee to the World Economic Forum) and Serge Younes (Accenture Strategy) for their support and contribution.

Authors: Peter Lacy and Vishvesh Prabhakar, Accenture Strategy

Image: A worker stacks steel pipes in the western Indian city of Ahmedabad November 4, 2014. REUTERS/Amit Dave

The Future of Urban Development & Services initiative serves as a partner in the sustainable transformation of cities as they address major urban challenges. It brings together business leaders from the infrastructure, urban development, mobility, ICT, energy and health sectors, government representatives and leading built environment and cities experts, to help cities adopt innovative urban development models. In its third term, the initiative is seeking to assist the Government of India in the development of its planned 100 Smart Cities.

[1] UN Economic Commission for Europe (UN ECE). Spatial Planning – Key Instrument for Development and Effective Governance with Special Reference to Countries in Transition. 2008. Geneva: United Nations.