Changing Dynamics: Capacity building and strengthening municipal finance key to effective urban management

Capacity building and strengthening municipal finance key to effective urban management

The urban infrastructure sector plays a crucial role in sustaining high economic growth rates. While updated data on the share of urban areas in GDP for the Indian economy is not available, industry experts peg the current estimate at around 65 per cent. This share is expected to increase to 75 per cent by 2030. However, the provision of basic civic services is insufficient and infrastructure maintenance continues to be poor. It is, therefore, critical to manage this rapid urbanisation efficiently, through increased investments, effective capacity-building programmes and strong institutional reforms.

Trends in urbanisation

About 31 per cent of the country’s population currently resides in urban areas (Census 2011), up from 28 per cent in 2001. In absolute terms, the urban population increased from 286 million in 2001 to 377 million in 2011. The past decade (2001-11) also witnessed an increase in the number of cities with population in excess of 1 million, from 35 then to 53 now. This trend is expected to continue, and the urban population in India is expected to reach 40 per cent by 2031. The number of million-plus cities is also likely to increase to 87 by then.

Rising populations and rapid urbanisation have increased water consumption and hence sewage generation. Efforts to address these issues started back in the late 1990s and major initiatives are being taken since 2014. Various schemes and programmes have been launched such as the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), the Swachh Bharat Mission, Housing for All, the Deendayal Antyodaya Yojana – National Urban Livelihoods Mission, and the Smart Cities Mission (SCM). All these schemes aim at transforming the urban landscape. The SCM has infused a wave of competitiveness among the cities. This has encouraged the cities to become better and set up their own special purpose vehicle (SPVs) for project execution. For instance, the state of Chhattisgarh has undergone a complete transformation in terms of door-to-door collection and scientific management of waste. Besides, competent project management consultants from within and outside the country have been engaged for project management and implementation.

Investment requirements

Given the current urban infrastructure backlog, the investment requirements for the sector are huge. The SCM has a total investment requirement of about Rs 2.05 trillion. Other schemes such as AMRUT and Housing for All have also proposed huge investment requirements. The bulk of these investments are expected to come in the form of budgetary and plan allocations of the central and state governments. Multilateral agencies will also play a crucial role in funding urban infrastructure projects. Besides, a small portion will be mobilised through public-private partnership projects.

Private sector participation

With regard to private sector participation (PSP), there have not been many positive developments. Though the scope of PSP has expanded and evolved over the years, there has been a rising resistance from the private sector to invest in urban infrastructure projects, particularly due to lack of stable revenue streams and uneven risk allocation. Of late, urban local bodies (ULBs) are exploring innovative funding methods by roping in the private sector in the solid waste management, housing and public transportation spaces.

New financial instruments

  • Municipal bonds: The government has been encouraging ULBs to raise funds through instruments such as municipal bonds. According to India Infrastructure Research, India has seen 33 municipal bond issues (till May 2018) from 17 ULBs. Only Rs 35 billion has been raised through such issues. Under AMRUT, credit rating for 463 cities has been carried out. Of these, 161 cities are creditworthy while 35 cities are A minus and above. In the past 12-15 months, five cities – Pune, Hyderabad, Indore, Bhopal and Amaravati – have raised more than Rs 9.8 million through municipal bonds.
  • User charges: Urban water pricing continues to be highly subsidised and has resulted in low cost recovery. The latter is attributable to the poor collection efficiency and high incidence of illegal connections. Under the SCM, steps are being taken to raise funds through user fees. Globally, financing models based on user charges have been successful, especially in Colombia (Bogota) and some Southeast Asian countries.
  • Land value capture: Innovative options such as land-based financing have so far remained unexplored. Efficient land use planning is also important to reduce dependence on public funds. The government has issued a land value capture framework to leverage increased land value.

Key challenges

The issues faced by urban India today can be categorised into two – structural and technical. Over the years, a number of initiatives have been taken to deal with and address structural issues. First, there is a need to set up metropolitan committees and district planning committees for better coordination with state- and central-level agencies. Second, there is a need to set up finance commissions at the state level. For this purpose, Article 280 needs to be amended to empower these state finance commissions to augment the resources of ULBs.

Further, there is a need to undertake initiatives to address urban governance issues. In this regard, the Securities and Exchange Board of India notification for setting up corporate municipal entities is a step in the right direction. Following this, 97 SPVs have been set up under the SCM. Besides, the Income Tax Act, 1961, has also been amended to allow the issuance of tax-free bonds by municipalities. All these steps have helped ULBs to improve governance as well as municipal financing. Finally, ULBs too have taken extensive project-driven initiatives to improve governance and financing. They have enacted disclosure laws to ensure transparency and accountability in operations. Besides, several e-governance modules have been implemented such as the provision of online birth and death certificates, online bill payments and adoption of double-entry accounting systems.


Given the continuing expansion of city limits, the challenge of delivering basic services in Indian cities is growing rapidly. To reduce the increasing gap between demand and supply of basic services, there is an urgent need to build the capacity of ULBs and ensure effective utilisation of funds and resources. There are five essential elements for effective urban management – proper urban plans, effective rules and regulations, national urban policies, financially sound municipal bodies, and citizen engagement and participation of local communities. The lack of awareness among the masses about the benefits of good quality civic services such as 24×7 water supply, last-mile connectivity, door-to-door waste segregation, etc., has also resulted in poor service delivery. At this juncture, empowering local governments is of critical importance.

Further, there is an urgent need to engage the private sector in not only construction but also maintenance of urban infrastructure facilities. To encourage PSP, the government should formulate favourable policies and regulations. There is a need to clearly define the roles and responsibilities of the multiple stakeholders involved in PPP projects.

That said, the customer base of ULBs is expanding at a rapid pace. The government, particularly at the local level, is undertaking several projects to improve service delivery. The success of these projects will, however, depend on project structuring, political support, updated database of current infrastructure facilities, tariffs and revenue streams, and the financial health of ULBs. Unless these are taken care of, progress in the urban infrastructure sector will continue to be impeded.

Based on a panel discussion among D.S. Mishra, Secretary, Ministry of Housing and Urban Affairs; Junaid Ahmed, Country Director, World Bank; Marco Kamiya, Coordinator, UE&F, UN-Habitat; Om Prakash Mathur, Senior Fellow, Institute of Social Sciences; and Dr Rana Hasan, Director, ADB, at a recent NITI Aayog conference