Shoring Up Revenues

Looking at new ways of municipal financing

Municipal financing in India has not been defined in a holistic manner. This is impeding municipal corporations from tapping the huge potential of wealth generation in cities. The fundamental approach towards cities has to change. There is a need to set up a system that creates value in cities through proper urban planning and efficient land usage. To this end, land parcels can be sold to people to bring money that is lying with banks into circulation.

Innovative funding

The High Powered Expert Committee (HPEC) on Indian Urban Infrastructure and Services was formed in 2008 for estimating the investment requirements for urban infrastructure services. The HPEC made recommendations on how to deal with the challenges of urbanisation. It projected huge investment requirements for providing public services in keeping with specified norms for the period 2012-31. It was estimated that the initial years would need higher levels of support from the centre until the time states and urban local bodies (ULBs) are able to use public-private partnerships (PPPs) and land-based instruments for financing urban infrastructure. In the past few years, about 2 per cent of all urban infrastructure projects, amounting to Rs 12 billion, have been implemented in PPP mode during the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). With the right conditions, it is possible to tap the private sector for financing, capacity expansion and efficiency gains.

The hybrid annuity model (HAM) has been successful in the urban infrastructure sector. In Haridwar, two major sewage treatment plants (STPs) having a combined capacity of 82 million litres per day (mld) have been completed under HAM. Besides, work is progressing on a few other projects under this mode. So far, land monetisation has been less tapped by ULBs for raising funds. There is a need to rationalise and streamline the land monetisation process to create value. To this end, the land pooling model pioneered by Gujarat can be replicated and adopted across states. Under the Gujarat Land Pooling Scheme, the unutilised land of individuals is used for the construction of government projects.

Another funding source for the urban infrastructure sector is the municipal bond market, which has seen limited activity. The poor financial health of municipal corporations has impacted the repayment capabilities of municipal corporations. In order to revive the bonds, guidelines for the issue of these securities were released in 2015. In 2017, Pune became the first city to raise Rs 2 billion via municipal bonds after a hiatus of 14 years since the first such bond issuance. The plan was to raise over Rs 22 billion in five years through this instrument for financing a 24×7 water supply project. So far, nine ULBs in India have raised around Rs 36 billion through this avenue. In India, the share of municipal bonds in the total debt market is insignificant; only 1 per cent of ULB’s financial needs are met through municipal bonds as opposed to 10 per cent in the US. This is primarily because municipal bonds in the debt market have poor ratings. The low creditworthiness of ULBs is on account of poor accounting standards, low institutional capacities and slow governance reforms. The guidelines for the issuance of municipal bonds are too stringent for a few ULBs, thus limiting the use of this funding source. The municipal bond market has not garnered interest from banks or foreign portfolio investors. The demand for such securities even among local investors has dampened due to lack of adequate disclosure among Indian municipalities. Ensuring transparency within ULBs will increase their creditworthiness, thereby improving their prospects of floating municipal bonds.

Apart from central and state grants, other sources of revenue for municipal corporations are the goods and services tax, local body tax, property tax and development charges (such as building permission fees). Property tax constitutes 30-35 per cent of the total revenue of ULBs. Reforms aimed at rationalising and bringing efficiency in property tax must be introduced to improve the financial condition of ULBs. Apart from property tax, charges on urban services can become a potential revenue source for ULBs. The securitisation of user charges could also be explored. Further, land-based instruments can shore up the revenues of ULBs. However, there are a number of challenges associated with municipal financing. The rate of revenue generation of ULBs is not commensurate with the rate of urbanisation. The lack of trained manpower for revenue collection poses another challenge. Further, traditional ways and the slow adoption of technology for revenue collection has affected the realisation of revenues.

The way forward

As far as PPP options for urban infrastructure are concerned, there is still a long way to go. There needs to be a balanced system of risk sharing in debt contracts. The mindset of the government must change so as to treat private players as partners. The legal framework must be fair for all stakeholders and new sources need to be looked at by ULBs for augmenting revenues. Green bonds are gaining traction and thus must be explored for urban infrastructure projects too. PPPs and land-based financing instruments must be actively promoted. Land value-delinked tax increment financing could also be considered. A framework for revenue shared taxes needs to be put in place. While these options are more viable for cities generating surplus revenues, their use  has been limited due to the lack of a robust policy framework. The failure to raise capital through these sources would mean an additional burden on the public exchequer or a deferment of investments.

Based on a panel discussion among D. Thara, Joint Secretary, Ministry of Housing and Urban Affairs; Palash Srivastava, Deputy CEO, India Infrastructure Finance Company Limited; Ulka Kalaskar, Chief Accounts and Finance Officer, Pune Municipal Corporation; Arun Lakhani, CMD, Vishvaraj Infrastructure Limited; and Dr Sandeep Thakur, Associate Professor, National Institute of Urban Affairs, at a recent India Infrastructure Forum event

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