A new World Bank report estimates that India will need to invest $840 billion over the next 15 years— that is an average investment of $55 billion per annum— into urban infrastructure to effectively meet the needs of its fast-growing urban population.
This is at a time when Public Private Partnership (PPP) transactions for urban infrastructure in India have registered a marked decline in the last decade both in monetary value and transaction volume and amid “slow implementation performance” by States and Urban Local Bodies (ULBs) on several of the Centre’s flagship Urban Missions such as Smart Cities and the Pradhan Mantri Awas Yojana (PMAY).
Titled “Financing India’s Infrastructure Needs: Constraints to Commercial Financing and Prospects for Policy Action”, the report underlines an urgent need to leverage more private and commercial investments to meet emerging financial gaps.
While policy decisions to keep tariffs and service charges below levels required for cost recovery and financial sustainability are contributing to low revenue were also flagged by the report, there has also, the report noted, been slow implementation performance by states and Urban Local Bodies (ULBs) on several of the Centre’s flagship Urban Missions— such as the Smart Cities Mission (SCM) and the Pradhan Mantri Awas Yojana (PMAY) for instance— due to constraints on implementation capacity at the city level.
ULBs across India, according to the report, have so far executed only about one-fifth of the cumulative cost or outlay of approved projects under SCM and AMRUT over the last six financial years.
The total cost of projects approved under these missions is $27 billion and $10 billion for SCM and AMRUT respectively which ULBs have been able to execute only to the extent of 22% (SCM) and 18% (AMRUT), respectively, the report noted.
Under most of these programs, only the first release of funds has been made upfront by the Centre since the subsequent release of funds to states/ULBs is contingent on the implementation progress of the missions at the project level which “has clearly lagged.”
Public Private Partnership (PPP) transactions for urban infrastructure in India, the report also noted, registered a marked decline in the last decade both in monetary value and transaction volume— 124 PPP projects have been awarded in the urban sector since the year 2000 worth a total cost of $5.5 billion.
However, the report noted, PPP project awards have declined substantially after a “brief but substantial spike” between the years 2007 and 2012 when most of these projects were awarded. Only one-third of all PPP investments awarded since 2000 came in the last decade— including 55 projects worth $17 billion, the report stated.
By 2036, according to the report, 600 million people will be living in urban cities in India, representing 40% of the population which is likely to put additional pressure on the already stretched urban infrastructure and services of Indian cities— with more demand for clean drinking water, reliable power supply, efficient and safe road transport amongst others.
Currently, the central and State governments finance over 75% of city infrastructure, while ULBs finance 15% through their own surplus revenues.
Only 5% of the infrastructure needs of Indian cities are currently being financed through private sources. With the government’s current (2018) annual urban infrastructure investments topping at $16 billion, much of the gap will require private financing.
“Cities in India need large amounts of financing to promote green, smart, inclusive, and sustainable urbanization. Creating a conducive environment for ULBs, especially large and creditworthy ones, to borrow more from private sources will therefore be critical to ensuring that cities are able to improve the living standards of their growing populations in a sustainable manner,” said Auguste Tano Kouamé, Country Director, World Bank, India.
The report recommends expanding the capacities of city agencies to deliver infrastructure projects at scale. Currently, the 10 largest ULBs were able to spend only two-thirds of their total capital budget over three recent fiscal years.
A “weak regulatory environment” and weak revenue collection also add to the challenge of cities accessing more private financing.
Between 2011 and 2018, urban property tax stood at 0.15% of GDP compared to an average of 0.3-0.6% of GDP for low- and middle-income countries. Low service charges for municipal services also undermine their financial viability and attractiveness to private investment, the report stated.
Over the medium term, the report suggests a series of structural reforms including those in the taxation policy and fiscal transfer system - which can allow cities to leverage more private financing. In the short term, it identifies a set of large high-potential cities that have the ability to raise higher volumes of private financing.
“The Government of India can play an important role in removing market frictions that cities face in accessing private financing. The World Bank report proposes a range of measures that can be taken by the city, State, and federal agencies to bend the arc towards a future in which private commercial finance becomes a much bigger part of the solution to India’s urban investment challenge,” said Roland White, Global Lead, City Management and Finance, World Bank, and co-author of the report.