South Asia Regional Conference on Urban Infrastructure: Key takeaways from the NITI Aayog conference

Key takeaways from the NITI Aayog conference

November 2018

The South Asia Regional Conference on “Urban Infrastructure: New Approaches to Public-Private Partnerships and Municipal Finance Innovations” was held in New Delhi on November 15-16, 2018.  The conference was organised by NITI Aayog in partnership with the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) and the Asian Development Bank (ADB). India Infrastructure Publishing Private Limited was the Media Partner for the event.

INAUGURAL SESSION

AMITABH KANT, CHIEF EXECUTIVE OFFICER, NITI AAYOG

  • Urbanisation is inevitable.
  • Globally, cities account for 82% of global GDP, 3% of landmass but 76% of CO2
  • Economies such as America, Europe expanded when land, gas were cheap and easily available. This luxury is not available to us anymore.
  • By 2030, India’s urban population will reach to about 700 million.
  • We need innovative and sustainable model of urban development. We need compact, dense, vertical cities with world class infrastructure facilities.
  • This would require huge expenditure. And government will find it extremely difficult to finance these on its own.
  • If we have to attract PPP, we have to de-risk infrastructure.
  • Government must focus on structuring projects, create SPVs and ensure all approvals are in place to bring in privatisation.

 OTHER SPEAKERS

  • Issues faced in the urban infrastructure in India today have their genesis in the mega trend of migration from an agricultural to non-agricultural economy of the cities. South Asia needs $300 billion for development of Infrastructure. However, only half of it is currently available.
  • In India, the urban population has increased from 377 million in 2011 to 675 million in 2017. Now, with the growing influence of digitalisation, it is easy to conceive that infrastructure services can now be catered to a distributed population, thereby resulting in disbursed urbanisation rather than concentrated centralised cities.
  • Today, there is a need for a cascaded approach wherein whatever services can be provided by the private sector must go to them and government should only perform what can’t be done by the private parties.
  • Raising financing for infrastructure projects is still a difficult premise in India. About $40 trillion is locked in pension and sovereign funds. However, they don’t invest in emerging markets as these are perceived as high risk and low return investments. Today, investors need to coordinate on a national level to provide funds for infrastructure projects.
  • Going ahead, projects must be conceptualised, prepared and designed in a way to make them investible for these funds. Brownfield projects could be a good start for this, gradually moving towards investments in Greenfield projects.

 SESSION –I: IMPLEMENTING URBAN INFRASTRUCTURE 

  • The level of innovation happening across India is extra-ordinary. A number of projects such as smart cities, AMRUT, Delhi Mumbai Industrial Corridor (DMICDC), housing for all etc. are under execution.
  • The (DMICDC) currently has 57,000 acres under it. The project has seen significant investment as the authorities had de-risked upto 99% of the investment before inviting players. The program also saw the appointment of program managers who managed cities from concept to commissioning. This brought in a lot of innovative thinking to the project.
  • Other projects have also shown considerable progress in the country. Under Housing for All, India aims to provide 10 million houses by 2022. 100 cities are also being developed as light-house cities under the smart cities mission, for which an investment of over Rs 2,000 billion has been envisaged.
  • There are two major issues being faced for infrastructure development at present. These are getting finance and subsequently utilising it. Therefore, a new approach is required for which the private sector needs to step up their game. Alternative sources of financing such as municipal bonds are also coming up. 161 cities in India have been rated credit worthy. Other alternate mechanisms such as user fees are also being leveraged.
  • However, currently the infrastructure development schemes launched in India are very top-down in nature. The time has now come to reduce centre allocation to states and urban local bodies for urban infrastructure projects. All stakeholders and people need to come together as partners to create more sustainable cities.

 SESSION –II: PARTNERSHIP – PRIVATE & PUBLIC (THE NEW APPROACH)

  • There is a need to look at PPP models as a service governance tool and not just a financing tool.
  • Equal emphasis has to be laid on asset creation and O&M
  • There is an urgent need to bring in the 4rth P in the PPP framework – People
  • There is a need to develop both public and private sector capacity
  • Empowerment of ULBs through proper capacity building programme is needed.
  • It is important to bring in all stakeholders at the early stage of project implementation to identify risk and formulate mitigation measures.
  • There is a need to redevelop PPP model based on best practices
  • There is a need for consumer-centric approach to derive a model where in consumers can also play the role of a contributor/investor/lender.
  • We need to establish a PPP institute at the national level. This will help us usher PPP 2.0

SESSION –III-A: ALTERNATIVE SOURCES FOR INFRASTRUCTURE FINANCING

  • Growth of capital market in India has been impressive but its role in infrastructure financing has been limited due to weak arbitration mechanism, high risk perception by investors and under-developed bond market.
  • Municipal bond market is at a nascent stage. This is because of lack of expertise in raising funds from the market and delays in approvals.
  • TOT is a good option for attracting private sector capital. However, it is not an appropriate model for bringing in private sector expertise.

 SESSION –III-B: URBAN SOCIAL INFRASTRUCTURE (HEALTH & EDUCATION)

  • Identification for viable PPPs for healthcare is important
  • A strengthened institutional structure needs to be created to manage healthcare PPPs
  • States need to more actively take up PPPs to avoid regulatory delays involved with central level procedures.
  • Robust process to identify right candidature for PPP projects and selection of advisors is required.

 SESSION –III-C: SMART CITIES: EASE OF LIVING

  • There is a need to create infrastructure which is demand responsive and promote ease of living.
  • There is a need to look at smart ways of financing – new and innovative funding models (such as land monetisation, recycle and reuse, advertisement, etc.)
  • Transit oriented development is the need of the hour.
  • There is an urgent need to create a bond and subordinate debt market.
  • Ease of living concept should be at the core of the planning process for smart cities.
  • There is a need to create a credible database at the city level.
  • Urban innovation hubs should be created.

 SOUTH ASIA REGIONAL CONFERENCE ON URBAN INFRASTRUCTURE – DAY 2

 OPENING PLENARY SESSION ON MUNICIPAL FINANCING

  • Total infrastructure investment requirement in Asia Pacific from 2016 to 2030 is $22.6 trillion. Sector-wise gap in the region is as follows: Water and Sanitation ($800 billion), Transport ($8.3 trillion) and Energy ($14.3 trillion).
  • There are a number of financial instruments available for municipal financing. These include financial decentralisation, debt financing, PPP and land value capture (LVC).
  • In the past 3-4 years, the bond market has geared up. Most of the bonds issuances were through private placement. However, lack of liquidity in the secondary market is a key impediment. Between June 2017 and September 2018, five municipal bonds were floated in India for raising Rs 8.7 billion. The municipal bond market also offers opportunity to mutual funds to invest.
  • Of the 500 cities in developing countries, only 94 are investment grade rated. Only 32 of the 500 cities have issued municipal bonds thus far.
  • Municipal corporations in South Asia should consider REITs for fully operational revenue-generating properties. Further, InvITs could also be tapped for water supply and sewage projects.
  • Going forward, the paradigm needs to change from grant-based financing to commercial sources of municipal finance. Further, municipal accounts should be written in a manner such that investor confidence is enhanced.

PANEL – I: URBAN UTILITIES

  • Water sector is unique among infrastructure sectors. About 85 per cent of the water utilities are publically owned and operated.
  • The autonomy of urban local bodies (ULBs) is closely linked to the political economy of that country. In the sector, economic regulation should be secondary, while performance regulation ought to come first and fast.
  • The deterrent to fresh investment in water and sewerage sector is cost recovery which is due to the high investment failure rate (16 per cent) in the sector, which is significantly higher than the overall failure rate of 4 per cent in infrastructure sector.
  • During 1990-2018, India undertook 980 PPP projects with an investment of about $260 billion. However, of this, PPP investment in water and sewerage sector was very low.
  • In terms of financing, the preoccupation with equity in water and sanitation is the issue. There is a dichotomy between equity and debt.
  • One of the most celebrated PPP water projects in the developing countries is in Manila, Philippines. Prior to privatisation, the water utility and its assets were owned by Metropolitan Waterworks and Sewerage System. In 1997, the private concessionaire was chosen through competitive bidding, where lowest initial tariff was the bidding parameter. The concession period is for 25 years. Post 1997, there has been an improvement in service coverage, reduction in non-revenue water from 63 per cent (1997) to 11 per cent (2014), and the volume of water delivered to customers per day has also increased from 440 million litres (1997) to 1.2 billion litres (2014), among others.
  • The issue remains that in the three-tier system of governance comprising of central government, state government and ULBs, the weakest link is the ULB, which are entrusted with water and sanitation. Besides, customer orientation has been missing in water and sewerage sector.
  • There is a need for structuring PPPs in the sector through development of MCA at central level. Besides, there should be state coverage targets and performance standards in order to hold the PPP operator accountable. Moreover, investment driven metrics should be replaced by service delivery metrics to improve customer delivery.

PANEL – II: HOUSING AND COMMUNITY-BASED FINANCING

  • Housing is a cyclical activity which makes assessment of demand and supply difficult.
  • Around 30-70 per cent of people living in large, medium and small towns are living informally and are not part of the infrastructure development projects. These projects are unable to cater to the bottom 50-60 per cent strata of the society.
  • Another major factor responsible for depleting the potential and capacity of the lowest strata of the population is their inability to upgrade their homes through available financial institutions.
  • For affordable housing projects, capacity building of municipalities is the starting point. There is a need to switch from 3P (public-private partnerships) approach to a 4P approach involving people participation as well.
  • Given the humongous need for affordable housing, there is a need for both public and private sectors to collaborate. Due diligence needs to be undertaken for identifying the project site as well.
  • Well-defined bidding documents and concession agreements as well as a strong regulator are needed to drive the success of PPPs in the affordable housing segment.
  • Streamlining procedures for permits, effective site selection, access to finance both for developer and EWS, and a transparent mechanism for allocating housing units.

 PANEL – III: LAND-LINKED FINANCING

  • There is a major infrastructure backlog in Asia and funds amounting to $22 trillion will be needed to address this. Besides, India currently needs $540 billion for infrastructural development till 2021.
  • Land value capture (LVC) is a 3-pronged public financing and urban planning tool. Governments make regulatory decisions and infrastructure investments that trigger an increase in land values; institute a process to share additional land value by capturing all or part of the change in value; and use the captured proceeds to finance infrastructure investments, offset negative impacts and implement public policies to promote equity.
  • User benefits of LVC: Travel time savings, reliability and frequency, seat availability/reduction in crowding, safety, station amenities, etc.
  • Non-user benefits of LVC: Reduced road congestion; increased ticket sales/revenue; environmental, social and health benefits; etc.
  • Five ways to implement LVC:
    • Maintenance taxation
    • Special fees and levies
    • Auction of development rights
    • Transit-oriented development and urban renewal agency
    • Rail + property (East Asian Model)
  • However, there are a number of constraints to implement LVC model. These includes difficulties of attributing land value increases, inconsistent legislative/ policy framework, conflicting goals of revenue generation and urban planning, separation of tax collection agency and infrastructure development agency, etc.
  • The way forward
    • Transparent data is needed on land transactions. If the government is able to understand the changes in land prices, they will be able to better negotiate with the private developers.
    • Historically, acquisition price of land has been based on the prevalent market price. However, in India, there has always been an under reporting land transactions.
    • Many countries which have faced challenges in land acquisition are now using innovative ways to overcome them. For e.g. land trusts have been started in Japan. The land owners lease their lands to the government and infrastructure companies and receive a yearly rent for the same. This, in a way, retains the sense of ownership among the land owners.

 

PANEL – IV: ENVIRONMENTAL EXTERNALITY FINANCING

  • There is a need to capture inter-generation effect in financing. An important step in this direction has been road pricing, wherein, every user is charged for use of the road asset. It has already been adopted by Singapore, London and Stockholm. Further, 16 other cities are in the process of adopting it.
  • A major barrier in the implementation of road pricing is the high investment cost involved. However, IT costs are coming down making congestion schemes possible for secondary cities.
  • There are several benefits associated with externality financing. These include ease of implementation, reduction in congestion, fewer road accidents, and economic benefits such as revenue raising, etc. Around $350 million have been generated in London by imposing congestion fee. Of this, one-third is the operation cost.
  • Prices of services actually double if values of externalities are added. Fiji has decided to levy a climate adaption fee, wherein tax will be levied on services related to tourism.
  • Taking Nepal as a case in point, there exist four mechanisms through which municipalities can get grants – fiscal equalisation grant, conditional grant, supplementary grant and specific grant. However, land development, dual governance due to safeguard policies are some of the key concerns.
  • Way forward:
    • Willingness to pay and charge needs to be there
    • Strict implementation of by-laws
    • Government has to help in enhancing municipal capacity
    • A certain percentage of funds needs to be allocated specifically for environment
    • Once the capacity building has been achieved, PPP projects can be taken up