What does the World Bank report say about India’s cities? Premium

Which entities are funding urban infrastructure in the country? What are the reasons, according to the global financial institution, for low private and commercial investments?

Image for representation only | Photo Credit: PICHUMANI K

The story so far: According to the World Bank, India would need to invest $840 billion over the next 15 years, that is, an average of $55 billion each year, to meet the demands of its fast-growing urban population. Its latest report, titled ‘Financing India’s Urban Infrastructure Needs: Constraints to Commercial Financing and Prospects for Policy Action’, puts forth the urgent requirement to leverage greater private and commercial investments to meet the emerging financial gaps.

Who provides finances to build cities?

Financing on a repayable basis can be done either through debt, private lending or public-private partnership investments. These require a recurrent source of revenue to meet obligations, thus, mandating raising adequate resources.

Much of the urban infrastructure in India is financed by tied intergovernmental fiscal transfers, that is, vertical and horizontal transfer of finance for attaining certain objectives sub-nationally. Of the finances needed to fund capital expenditures for Indian cities, 48% is derived from State governments, 24% from the Central government and 15% from urban local bodies’ own surplus. The rest includes public-private partnership (3%), commercial debt (2%) and loans from Housing and Urban Development Corporation, or HUDCO (8%).

As for private debt, the World Bank observed, that only a handful of large cities have accessed institutional banks and/or loans. In fact, the volume of commercial debt financing might not be an accurate indicator, for States might accord loans to their entities via their self-regulated financial institutions at concessional terms. For example, Tamil Nadu Urban Development Fund and Tamil Nadu Urban Finance and Infrastructure Development Company provide loans on concessional terms.

What are some of the constraints?

The report argues that the overall funding base to raise commercial revenues “appears to be low” owing to weak fiscal performance of cities and low absorptive capacity for execution of projects.

Broadly, the global financial institution has argued that low service charges for municipal services undermine financial sustainability and viability. It goes to the extent that urban bodies are unable to recover operations and maintenance costs, thus, constraining their ability to further execute projects. In a related context, the report states that city agencies have been unable to expand their resource and funding base to support private financing for services such as water supply, sewerage networks and bus services, as they are highly subsidised. These are sourced from either their general revenues, own-source revenues (such as house tax, professional tax, property tax among others) or fiscal transfers.

Additionally, as for private-public partnerships, it states that revenue sharing designs between the two entities is not particularly viable for private investors and does not fully account for risk-sharing or risk-transfer mechanisms for project risks. Thus, problems arise during unanticipated demand shocks alongside legal and technical challenges that require restructuring to an entire public ownership.

Does the report propose solutions?

The central idea is to increase cities’ fiscal base and creditworthiness. For improving their fiscal base, it states, cities must institute a buoyant revenue base and be able to recover the cost of providing its services. The latter could be attained by revising property taxes, user fees and service charges, among other streams, from the current low base.

It states that the idea should be to double own-services revenues of urban bodies and parastatal agencies every five years, for that level of growth would be adequate to support a funding base sufficient enough to balance its commercial financing ability with its investment needs in future.

The fiscal transfer system, and thus potential commercial sector investments, must also move towards a formula-based and unconditional (meant for general and not project-specific purposes) regime.Presently, the fact that around half of fiscal transfers are related to tied funds paves the way for accountability and incentive issues. Thus, result/performance-based financing can also improve institutional outcomes more than investments for specific projects.

Separately, the report also suggests accounting, auditing and financial disclosure standards for urban bodies.

It also indicates that the moves would boost further investor confidence and incentive.