Growing Needs: Higher fund requirement with increasing urbanization

Higher fund requirement with increasing urbanization

Urbanisation is inevitable. Globally, cities account for 82 per cent of the global GDP, and 3 per cent of the land mass but 76 per cent of carbon dioxide emissions. Economies such as the US and Europe expanded when land and gas were cheap and easily available. This luxury is not available to India. The country’s urban population has increased from 377 million in 2011 to 675 million in 2017. The country needs innovative and sustainable models of urban development. Also, there is a need to develop compact, dense, vertical cities with world-class infrastructure facilities. This requires a huge expenditure and the government will find it extremely difficult to finance these on its own. Therefore, private participation must be encouraged. In order to attract public-private partnerships (PPPs), it is crucial to de-risk infrastructure. The government must focus on structuring projects, setting up special purpose vehicles and ensuring all approvals are in place to bring in private players.

Financing needs

South Asia needs $300 billion for infrastructure development. However, only half of it is currently available. With respect to urban needs, the population in South Asia is expected to grow by around 250 million by 2030. Issues faced in the urban infrastructure sector in India today have their genesis in the mega trend of migration from an agricultural rural economy to a non-agricultural economy in the cities. In India alone, until 2040, estimated investments of around $4.5 trillion are required in the infrastructure space. Considering the quantum deficit in infrastructure financing today vis-à-vis demand, focusing on newer means of implementing and financing urban infrastructure is an imperative. However, limitation of municipalities to raise resources from the local capital markets is a key challenge. Most of them struggle to meet even their current operational requirements. In light of this, regulatory reforms have been introduced to encourage large urban local bodies (ULBs) to raise funds via bonds. Smaller ULBs have raised funds through other means such as the Tamil Nadu Urban Development Fund set up by the Tamil Nadu government.

Urban infrastructure development can be accelerated by mobilising municipal finance. A high-powered committee set up by the government in 2012-13 estimated that India requires Rs 39 trillion of investment in urban areas till 2031-32. Nearly Rs 20 trillion is required for operations and maintenance of all cities and towns. Further, the 100 smart cities selected under the Smart Cities Mission have indicated a total investment requirement of Rs 2.05 trillion.

The Asian Development Bank (ADB) has partnered with key states across the country for implementing urban infrastructure projects. The bank has commitments of about $2.5 trillion, of which about $1.3 billion has not yet been disbursed while $300 billion-$400 billion is disbursed annually.

The 74th Constitutional Amendment Act has given clear responsibilities to ULBs. Urban infrastructure requires complex coordination between multiple stakeholders. Except for very large municipalities, capacity constraint is a significant challenge for most ULBs. Nevertheless, progress has been observed in some states, particularly those that have partnered with ADB. On the financial front, there is high dependence on transfers from the central and state governments, with limited resources being mobilised by the municipalities themselves. With respect to funds from the central government, India ranks low vis-à-vis its peers and transfers are mostly for specific schemes. The picture, however, is changing with flagship schemes such as the Smart Cities Mission and the Atal Mission for Rejuvenation and Urban Transformation, providing greater funds to the municipalities. The 14th Finance Commission has also increased the grants for ULBs substantially. In India, municipalities’ own resource mobilisation is about 1 per cent of the GDP, which is abysmally low. This is also low in comparison to its BRICS (Brazil, Russia, India, China and South Africa) peers. The country hopes to augment this by:

  • Securitising future stream of transfers by making them predictable with clear transfer rules. Tamil Nadu is a case in point.
  • Pursuing land mobilisation value capture by systematic land use planning and investment as seen in Mumbai and Gujarat.

Key issues and challenges

Most economists believe that money is not the problem. There are plenty of resources and investors are looking for bankable projects. There are other areas which need attention. The first issue revolves around the fact that most of the countries in South Asia were rural economies till about two decades ago. The political system and the municipal governance system are still tied to this fact. Urban governance relies on central and state governments. In contrast to India, urban governance in developed economies is a key pivot of the political system. In the coming decade, India needs to improve urban governance to meet the challenges of the twenty-first century. For cities such as Delhi and Mumbai with huge populations, fully elected and empowered city legislations are required. The second issue pertains to transparency of city governance. For investors to invest in city infrastructure, the cities should be rated investment grade both nationally and internationally and be qualified to issue bonds. In India, 93 cities have credit ratings and around 55 cities have received investment grade ratings. Although this is a good beginning, municipal bonds still account for a small proportion of urban finance in the country due to lack of transparency in governance. Third, there is an issue of footprint. Urban sprawl has become the name of the game in South Asia. With 300-350 million people moving to urban areas in the coming decades, the cost of building and maintaining infrastructure will be very high. With such a high footprint, ensuring efficient public transport systems, providing services to citizens and ensuring that cities are liveable has become crucial.

One of the many issues constraining urban infrastructure development is the availability of investment proposals. There is much scope for undertaking holistic city-level planning covering land use, infrastructure investment, and land value capture. ADB is in discussions with several states, including Tamil Nadu, to explore this approach. Resilience to climate shocks, another key challenge, needs to be taken into account as part of city planning.

The way forward

With the growing influence of digitalisation, it is easy to conceive that infrastructure services can now cater to a distributed population, thereby resulting in disbursed urbanisation rather than concentrated centralised cities. Today, there is a need for a cascade approach wherein whichever services can be provided by the private sector must be provided by them and the government should only undertake what cannot be done by private players. Raising financing for infrastructure projects is still a difficult task in India. About $40 trillion is locked in pension and sovereign funds. However, they do not invest in emerging markets as these are perceived to be high-risk and low-return investments. Investors also need to coordinate at a national level to provide funds for infrastructure projects.

In order to address the financing challenges, there must be efficient use of city resources such as property tax which can fund about 28 per cent of the revenue expenditure. Akin to green bonds, water bonds too can be raised for financing urban infrastructure. There is a need to look at ways of financing the circular economy (in which resources are kept in use for as long as possible to extract the maximum value from them whilst in use, and then recover and regenerate products and materials at the end of their service life) and waste management. The circular economy, worth around $700 billion-$800 billion in India, has huge potential. Further, there is a need to decentralise urbanisation, with porous boundaries between urban and rural areas as the key to sustainable urbanisation. The future areas of growth and development are infrastructure and digitalised delivery of goods and services. Going forward, projects must be conceptualised, prepared and designed in such a way as to make them investible for sovereign wealth funds and pension funds. Brownfield projects could be a good start to this, with a gradual move towards investments in greenfield projects. w

Based on remarks by Amitabh Kant, CEO, NITI Aayog; Dr Nagesh Kumar, Director and Head, UNESCAP SSWA Office; Yuri Afanasiev, UN Resident Coordinator, India; Kenichi Yokoyama, Country Director, ADB, India; and Subhash Chandra Garg, Secretary, Department of Economic Affairs, Ministry of Finance, Government of India, at a recent NITI Aayog conference