!

“ASSIGNMENT 08”

FACULTY: Dr. Yagna S Mukkamala

Slot: TF2
MEE 3999 TARP

Urban Infrastructure in India and its Developments.

SUBMITTED BY
ASHWIN DINESHBABU
16BME0855

Introduction
The development pressure on cities is increasing in India, as elsewhere in the world, with the rising
urban population and growth of urban areas. The development of cities in itself is dependent upon the
public infrastructure services. The creation of urban infrastructure is expensive and time consuming.
Therefore it requires the Government to play a major role in making lumpy investments. This reviews
the current patterns and trends of urbanization in India and the resource requirements of sustaining
urban development through infrastructure creation and maintenance. Given the local and national
importance of cities, it is argued that the Urban Local Bodies (ULBs) need to play a major role in
mobilizing resources for infrastructure development in cities. However, as most of the cities have low
revenue base for spending on provision of basic infrastructure services, it is suggested that the cities
have to exploit the potential non-conventional means of resource mobilization, apart from reforming
and strengthening the conventional means of resource mobilization. The avenues of such hitherto
underutilized methods of resource mobilization have been discussed.

Urban Infrastructure in India

Urban Infrastructure sector is a key driver for the Indian economy. The sector is highly responsible for
propelling India’s overall development and enjoys intense focus from Government for initiating
policies that would ensure time-bound creation of world class infrastructure in the country.
Infrastructure sector includes power, bridges, dams, roads and urban infrastructure development. In
2018, India ranked 44th out of 167 countries in World Bank's Logistics Performance Index (LPI) 2018.

According to the Ministry of Urban Development, ‘Urban Infrastructure’ should be equipped with
all the necessary facilities. It should give a decent quality of life to its residents, promising clean and
sustainable environment by applying smart solutions in the domain of sanitation, waste management,
public transport and governance.

Nearly 31% of India’s current population lives in urban areas contributing to 63% of India’s GDP
(Census 2011) and with increasing urbanisation, urban areas are expected to house 40% of India’s
population and contribute to 75% of India’s GDP by 2030.1 India’s urban growth is largely
concentrated in large cities with a population of 100,000 or more, the number of cities with a
population exceeding 1 million has increased from 35 in 2001 to 53 in 2011, accounting for 43% of
India’s urban population, and is expected to be 87 by 2030.

In 2001, about 286 million persons were living in urban areas of India and it was the second largest
urban population in the world. According to the Registrar General & Census Commissioner of India,
the urban population in India over the next 25 years is 1 expected to grow 38% and become 534 million
in 2026 . Furthermore, as per the Census of India, 2001, 640 cities/towns in 26 States/Union territories
have reported slum populations. Andhra Pradesh has the largest number of towns (77) reporting slums
followed by Uttar Pradesh (69), Tamil Nadu (63) and Maharashtra (61). 42.6 million population lived
in slums in 2001. This constitutes 15 percent of the total urban population of the country and 22.6
percent of the urban population of the states/union territories reporting slums. 11.2 million of the total
slum population of the country is in Maharashtra followed by Andhra Pradesh 5.2, Uttar Pradesh 4.4
and West Bengal 4.1 million.
The need for up-gradation and development of urban infrastructure and urban services cannot be
overstated. The present levels of urban infrastructure are grossly inadequate to meet the demand of the
existing urban population. To provide some perspective, it is estimated that India's population will
grow to 1.7 billion by 2050 and that rapid urbanization will add nearly 900 million people to Indian
cities. City capacity will need to grow nearly 400% in less than 50 years.

The inexorable demographic surge in urban India is fueled by the growing disparity between rural and
urban per capita income. From near parity in 1950, in the 1990's the ratio of urban per capita income
to rural per capita income was nearly 4:1. As per the th 66 round of National Sample Survey (NSS)
for the period July 2009 - June 2010, the divide has accentuated to approx 9:1.

Given this scenario, the present infrastructure and amenities in cities and towns are not adequate to
address the expanding urbanization process. Several initiatives were launched by the government to
promote urban infrastructure in the country. Major initiative is the twin effort of Smart Cities Mission
and the AMRUT scheme.

1. The Smart Cities Mission

The Smart Cities Mission is a major urban renewal program launched by the Government to develop
and upgrade living conditions and infrastructure in selected 100 cities all over the country.

Objective of the programme is to modernize cities by providing core infrastructure and give a decent
quality of life to its citizens, a clean and sustainable environment and application of ‘Smart’ Solutions.
The programme was officially launched on 25th of June 2016 and in the first phase, 20 cities will get
funding for converting them into smart cities. In the next two years, the remaining cities will also
participate in the project. Ministry of Urban Development is the anchoring agency for the
implementation of the project.

The main focus of the project is the area based development of cities by transforming existing areas
through retrofitting and redevelopment. Another component of the smart cities project is the
development of new areas or greenfield areas. Similarly, adoption of Smart Solutions with the use
technology, information and data are expected to improve infrastructure and services under the project.

Financing of smart cities mission

Financing of the mission will be collaboratively done by the Centre, state and local bodies. Fund from
the private sector will be invited and Public Private Partnerships will support the project financially.

The most vital contribution will be provided by the centre as it will provide Rs. 48,000 crores over five
years i.e. on an average Rs. 100 crore per city per year. Matching the center’s contribution, an equal
amount will be made by the State/ULBs. Altogether nearly one lakh crore rupees from government
sources will be available for Smart Cities Project. For the implementation of the project each city
should form a dedicated Special Purpose Vehicle (SPV).
2. Atal Mission for Rejuvenation and Urban Transformation (AMRUT) Project

Atal Mission for Rejuvenation and Urban Transformation (AMRUT) along with smart cities were
jointly planned and launched by the government to transform urban living conditions through
infrastructure upgradation. AMRUT is aimed at transforming 500 cities and towns into efficient urban
living spaces over a period of five years. Ministry of Urban Development has selected the five hundred
cities with the help of state governments.

A project oriented development approach is adopted under the scheme in contrast to the area based
approach of Smart Cities Mission. The Cabinet approved Rs 50,000 crore for this mission which is to
be spent over a period five years. This is a centrally sponsored scheme with 80% budgetary support
from the Centre.

Mission of AMRUT is to (i) ensure that every household has access to a tap with assured supply of
water and a sewerage connection; (ii) increase the amenity value of cities by developing greenery and
well maintained open spaces (e.g. parks); and (iii) reduce pollution by switching to public transport or
constructing facilities for non-motorized transport (e.g. walking and cycling).

3. Pradhan Mantri Awas Yojana (Urban) or Housing for All by 2022 Mission

The ‘Housing for All by 2022’ under the scheme of “Pradhan Mantri Awas Yojana – Housing for All
(Urban)” launched by the central government aims to provide housing to all urban people by 2022. It
provides central assistance to States and UTs for constructing houses to all eligible sections by
concentrating on urban slums and economically weaker sections. Hence, slum rehabilitation and
affordable housing to Economically Weaker Sections are the major features of the project.

The programme has following components: –

a) Slum rehabilitation of Slum Dwellers with participation of private developers using land as
a resource;

b) Promotion of Affordable Housing for weaker section through credit linked subsidy;

c) Affordable housing in partnership with Public & Private sectors and

d) Subsidy for beneficiary-led individual house construction or enhancement.

4. Heritage City Development and Augmentation Yojana (HRIDAY)

The HRIDAY scheme is launched fro the holistic development of heritage cities. It amis to preserve
and revitalize the unique character of heritage cities in India. for the first phase of the programme Rs ,
500 crore is allocated with full funding by the central government. Twelve cities—including Ajmer,
Amaravati, Amritsar etc are identified for the project.
5. Jawaharlal Nehru National Urban Renewal Mission

JNNURM was launched in 2005 as the flagship scheme for urban development. The programme had
two components viz., Basic Services for Urban poor (BSUP) and Integrated Housing and Slum
Development Programme (IHSDP). Civic amenities were improved under the programme including
urban transportation. The programme aimed at integrated development of slums through projects for
providing shelter, basic services and other related civic amenities.

6. Urban transportation

Several initiatives were taken to enhance public transport system including the Bus Rapid Transit
Systems (BRTS) approved for 11 cities under the Jawaharlal Nehru National Urban Renewal Mission
(JNNURM). The transportation system will be equipped with Intelligent Transport System (ITS) and
Metro Rail Projects.

7. Swachh Bharat Mission (SBM)

A major associated urban development programme is making India’s urban centres clean. For this, the
SBM targets to achieve 100 per cent scientific management of municipal solid waste in 4041 statutory
towns/ cities in the country by 2019.

Besides the above initiatives, several associated development programmes like industrial corridors,
NHDP, Jawaharlal Nehru National Urban Renewal Mission, National Urban Livelihood Mission etc.,
aims to add infrastructure and other amenities to the urban areas.

8. Atal Mission For Rejuvenation And Urban Transformation (AMRUT)

The purpose of (AMRUT) is to:

Ensure that every household has access to a tap with assured supply of water and a sewerage
connection
• Increase the amenity value of cities by developing greenery and well maintained open spaces (e.g.
parks)
• Reduce pollution by switching to public transport or constructing facilities for non-motorized
transport (e.g. walking and cycling)

The total outlay for AMRUT is USD 7.77 billion for five years from FY 2015-16 to FY 2019-
204 and 500 towns will receive benefits.5 The scheme based on Public Private Partnership (PPP)
model will be integrated with Housing for All by 2022.

9. Pradhan Mantri Awas Yojana- Housing For All (URBAN):

The Mission is being implemented during 2015-2022 and provides central assistance to Urban Local
Bodies (ULBs) and other implementing agencies through States/UTs for:

1. In-situ rehabilitation of existing slum dwellers using land as a resource through private participation
2. Credit-Linked Subsidy
3. Affordable housing in partnership
4. Subsidy for beneficiary-led individual house construction/enhancement.

Total housing shortage envisaged to be addressed through the New Mission is 20 million. This
scheme will be implemented across 4041 statutory towns with the initial focus on 500 Class I
cities in India. 3 phases of the PMAY will cover 500 cities around the country by 2022, in Phase-I
 (April 2015 – March 2017), 100 Cities will be selected from States/UTs, in Phase – II (April
2017–March 2019) PMAY will be implemented in additional 200 Cities and in Phase-III (April
2019–March 2022) other remaining cities will be covered. The government has approved USD 6.7
billion for the implementation of the scheme.

10. Foreign Direct Investment (FDI) Policy:

Construction Development: Townships, Housing, Built-Up Infrastructure Sector:

• 100 % FDI through automatic route is allowed in construction-development projects (which would
include development of townships, construction of residential/commercial premises, roads or
bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional
level infrastructure, townships)
• Each phase of the construction development project would be considered as a separate project for the
purposes of FDI policy. Investment will be subject to the following conditions:
• The investor will be permitted to exit on completion of the project or after development of trunk
infrastructure i.e. roads, water supply, street lighting, drainage and sewerage. a foreign investor will
be permitted to exit and repatriate foreign investment before the completion of project under
automatic route, provided that a lock-in-period of three years.
• The project shall conform to the norms and standards, including land use requirements and provision
of community amenities and common facilities, as laid down in the applicable building control
regulations, bye-laws, rules, and other regulations of the State Government/Municipal/Local Body
concerned.
• The Indian investee company will be permitted to sell only developed plots and shall be responsible
for obtaining all necessary approvals.
• The State Government/Municipal/Local Body concerned, which approves the building/development
plans, will monitor compliance of the above conditions by the developer.
• No minimum land area requirement in case of development of serviced plots.
• In case of construction-development projects, minimum floor area of 20,000 sq. mts.
• 100% FDI is allowed under the automatic route for urban infrastructure areas like urban transport,
water supply, sewerage and sewage treatment subject to relevant rules and regulations.

(Note: FDI is not permitted in an entity which is engaged or proposes to engage in real estate
business, construction of farm houses and trading in transferable development rights (TDRs).
Condition of lock-in period at above will not apply to Hotels &Tourist Resorts, Hospitals, Special
Economic Zones (SEZs), Educational Institutions, Old Age Homes and investment by NRIs. It is
clarified that 100% FDI under automatic route is permitted in completed projects for operation and
management of townships, malls/ shopping complexes and business centres.)

It has been estimated that by 2025 i.e. in 14 years, nearly half a billion Indians will need new, urban
homes. This is equal to the needs of China, North America and Western Europe put together. In this
context, the rationale for an aggressive and ambitious policy of affordable housing cannot be over
emphasized. This aspect is elaborated elsewhere in the report. There is a tremendous pressure on civic
infrastructure systems like water supply, sewerage and drainage, solid waste management, etc. Recent
data suggest that water supply is available for 2.9 hours per day across cities and towns. The non-
revenue water that includes physical and revenue losses, accounts for 40-60 percent of total water
supply. About 30 to 50 percent households do not have sewerage connections and less than 20 percent
of total waste water is treated. Solid waste systems are severely stressed. The state of services reflects
the deterioration in the quality of city environments.

As per 54th round of National Sample Survey, 70% of urban households are being served by tap and
21% by Tube well or hand pump. 66% of urban households reported having their principal source of
water within their premises while 32% had it within 0.2 Km. 41% had sole access to their principal
source of drinking water and 59% were sharing a public source. As per the 54th round of NSS, 26%
of households had no latrines, 35% were using septic tank and 22% were using sewerage system.
Sewerage connections varied from 48% to 70%. It is estimated that about 1,15,000 MT of Municipal
Solid Waste is generated daily in the country. Per capita waste generation in cities varies between 0.2
- 0.6 kg per day and it is increasing by 13% per annum. In contrast, per capita waste generation in the
OECD is approximately 1.5 kg per day. The current waste generation in Delhi is approximately 8000
MT/day and on current trends will reach 15000 MT/day by 2020. It is estimated that Delhi will have
scientific waste management facilities for only 6000 MT by 2012.

According to the Economic Survey of India 2011, The Eleventh Five Year Plan had estimated the total
fund requirement for implementation of the target for urban water supply, sewerage and sanitation,
drainage, and solid waste management to be Rs. 1,29,237 crore and that for urban transport to be Rs.
1,32,590 crore. According to estimates based on the City Development Plans (CDPs) prepared by the
States under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) launched in 2005-
06, the requirements for both urban infrastructure services and urban transport were estimated to be as
high as Rs. 8,00,000 crore.

The development of India's infrastructure presents a huge task as well as a huge opportunity. The
previous sections have raised some of the key issues that will need to be addressed for a major step-up
in infrastructure development. But there are other challenges too. It is important to draw attention to
some of them in particular. The first concerns the environment. Building good quality infrastructure is
integral to the development of a competitive Indian economy that is expected to play a larger role in
the world economy. And building it rapidly with the least damage to the environment is important.
How the huge growth in power generation, transportation and urbanization can be managed is therefore
especially important. A second issue is the importance of transparent processes of bidding and
procurement if a PPP is to play a major role. Fairness and a level playing field must be firmly
established and not perceived to be compromised at any stage. There is no doubt that India's
infrastructure is a growth sector: it is clearly recognized as a national priority.
Challenges in Achieving Infrastructural Goals in India
There are various factors which are responsible for poor infrastructure growth. Major ones are
enumerated below:

1) Financing: The infrastructure projects are highly capital intensive and funding had been one of
the major impediments in achieving the infrastructure goals. The infrastructure broadly can be
divided into two types, one which is very essential for the public at large and have no or very little
revenue potential and other which has handsome revenue potential. The first kind of infrastructure
must be totally government financed whereas the later can be developed on PPP mode. Since
resource constraints will continue to limit public investment in infrastructure, PPP-based
development needs to be encouraged wherever feasible. In view of this, one can say that there is
an over dependence on the private sector for developing and maintaining the infrastructure. The
private sector, however, needs funds to develop infrastructure projects that are capital intensive
and have a large gestation period. Typically, private investments in infrastructure projects are
mainly in the form of debt raised by developers.
Fact of the matter is that many PPP projects are waiting for the financial closure to happen and are
inordinately getting delayed.

2) Land Acquisition: One of the significant challenges in achieving the infrastructure goal is the way
land acquisition is done for infrastructure projects. Compensation fixed in terms of registered value
is always the bone of contention. There is always a substantial difference between the
compensation offered and the actual value of the land. The land owners always feel aggrieved
which results in dispute and litigation. The Land Acquisition and Rehabilitation & Resettlement
Bill (LARR) which came into force from 1st June 2014, though defines the process of land
acquisition and will lead to systematic settlement yet it makes the land acquisition costlier. This
could be detrimental to private investments in the long term, since viability of projects may be
affected.
3) Clearances from numerous agencies: Most of the infrastructure projects in India suffer from
delays in completion. This is mainly due to an inadequate regulatory framework and inefficiency
in the approval process. Infrastructure projects require multiple sequential clearances at various
levels of government. As an illustration, more than two years were needed for the Gujarat Pipavav
port project to receive the necessary clearances after achieving financial closure. Moreover, most
of the large projects involve dealings with various ministries. Often, the perspectives of the
different ministries/departments vary and co-ordination remains inefficient.

The various categories of approvals are required across the project cycle at every stage, right from
the pre-tendering stage to post construction. While it is important to have a rigorous procedure that
ensure transparency and quality, bureaucratic complexities and the protracted procedure for
securing approvals are often considered serious disincentives for developers and contractors.
Environmental safeguards and guidelines have proven to be one of the major reasons for delay in
infrastructure projects, especially in the power sector. While new projects need to comply with
these regulations, even a project under construction may need to comply with revised standards
midway through the execution stage. While the concerned Ministry states that the delays are
primarily due to non-compliance with the procedures of Environment Impact Assessment (EIA)
notifications and circulars issued, the terms of compliance involve a complex and time consuming
procedure.

4) Poor pre-construction planning: Due to the adverse effect of various impediments like land
acquisition, statutory approvals, delayed financial closure, etc. the pre-construction phase of
infrastructure projects is pretty long drawn. In spite of having substantial time for meticulous
planning, we often do not focus on this most important aspect of the project which led to the
suffering during execution phase and hence delayed commissioning/completion. Tendering/
bidding are also an important part of pre-construction phase, which is invariably found to be
mishandled and often non-transparent. The tenders for the selection of PPP developers/ partners
are also prepared in a routine manner as if we are hiring some execution agency meaning thereby
they are largely one-sided (major risk are allocated to potential PPP agency) favoring the
government.

Way to surpass these challenges on India

We have seen that India's Infrastructure, which is an essential and most important component of Urban
Development, is in a poor shape and needs an immediate attention and redress both from Government
and Industry. Following are the suggestive ways to surpass the challenges faced by infrastructure
development:

i. Land acquisition being a sensitive issue cannot be handled by the private investors and it must
be exclusively handled by government and the project either as cash contract (EPC) or PPP
should not be awarded unless the land acquisition (>90%) is done.
ii. More conducive environment for potential concessionaire. Improvements in the investment
climate are vital. India needs to expand dramatically the sources and volume of available
infrastructure financing. This will not be possible without private-sector participation, which in
turn requires a business environment that ensures adequate return on investment, transparency
in procurement, and high-quality governance and regulation. The termination of agreement by
the private developer for the country's largest highway project, Kishangarh-Udaipur-
 Ahmedabad route of 555 km, has raised serious concerns over the other on-going projects in
Rajasthan. Concessionaires and authorities concerned claim that clearances even for small
issues are now getting stuck in the bureaucratic cycle.
iii. We all know that there is rapid urbanization which is posing many challenges. Migration of
large population to urban centres is causing new cities to emerge and existing ones to expand.
India must seize the opportunity to adopt green urban planning early on: mass-transport systems
should link satellite cities to ports and megacities, and new cities should be eco-friendly and
energy-conserving. The Indian government's recent promotion of dynamic economic corridors
between major cities is a step in the right direction but its moving at snail pace. Government
needs to expedite the process by cutting short the long bureaucratic cycle.
iv. By boosting the credit ratings of infrastructure projects via credit enhancements, this facility
will allow pension funds and insurers to invest in infrastructure projects. ADB and IIFCL are
already jointly working on it.
v. Implementable regulations with regard to sustainable infrastructure. We need not make the long
drawn bureaucratic regulatory routes but to make it extremely friendly. The agencies which are
resorted to something like this must be incentivised.
vi. More grant to state/city authorities through JNNURM along with better regulatory system to
avoid any possible misuse.
vii. Single window statutory clearance (inclusive of MoEF) to projects.
viii. There are good competent people working in different departments of government, however
they are working in silos, we need better and effective coordination for a fast project roll out.
ix. The government has targeted to attract at least half of the $1-trillion investment envisaged in
the infrastructure sector during the 12th plan period (2012-17) from the private sector. To
achieve the same, government has to provide the provision in PPP contract for re-negotiation in
case of drastic change in the ground situation due to unforeseen factors. Private developers have
been demanding a renegotiation provision in PPP contracts because they cannot foresee all the
events and contingencies during the entire contract period, which is typically 20 years or more.
The time has come to give a heed to these demands to boost the private participation. There is
a need to spell out a clear and well-defined treatment of contingent liabilities, including the
extent to which they can be undertaken and the process of authorising the same.

The rationale of such a provision can be explained by the following examples. A large number of
existing infrastructure projects in sectors such as highways, power, airports and ports had run into
rough weather because of unforeseen circumstances, and the lack of provision for renegotiating the
contracts has made them unviable for investors. Last year GMR and GVK walked out of mega-
highway projects worth Rs.10,700 crore, while most recently Reliance Infrastructure pulled out of the
Rs.5,800-crore Airport Express line of the Delhi Metro. We witnessed the problems in Gurgaon
expressway. There are problems brewing in the Delhi-Noida-Delhi (DND) Expressway project, while
Tata Power and Reliance Power are struggling to transform their ultra-mega power projects powered
by imported coal into profit-making ventures due to changes in input costs. This could signal the end
of Public Private Partnerships (PPP) in India, with some even changing the definition of PPP to
perennially posing problems.

Urbanization in India: Challenges

The Report outlines the following challenges for urbanization in India:

• Agglomeration vs. Congestion: Cities tend to exhibit agglomeration economies due to close
proximity of firms to skilled labour, informational spillovers between individuals and firms,
access to institutions and localization externalities. On the other hand, in the absence of robust
urban infrastructure, congestion diseconomies in the form of traffic congestion, pollution and
environmental degradation, deterioration in civil services etc. set in. India needs to tackle the
challenge of maximizing agglomeration economies while minimizing the impact of congestion
diseconomies.
• Creating synergy with rural development: In 2009-10, cities and towns are estimated to have
contributed 62% to total GDP. As this growth continues, India needs to ensure that there are
synergetic linkages with the rural economy, particularly agriculture. With boundaries of urban
settlements being increasingly blurred and technology bridging the rural-urban divide, policies
must aid rural poor in accessing the fruits of urban growth.
• Small cities and towns: India’s urban growth has been largely concentrated in ‘big cities’ (50
cities with population over 1 million account for 42.3% of urban population). The period of
growth of big cities has also witnessed the slowing down of India’s towns. The slower growth
of towns has “implications for how the urbanization challenge needs to be managed. The 3984
Class II and smaller towns with population of less than 100,000 in India also have very different
levels of managerial and governance systems compared to larger Class I and metropolitan
cities. Hence, interventions for preparing our cities will need to distinguish between the
challenges and capacities of larger cities versus the smaller towns in the country.

How can India finance urban infrastructure?

The investment required for bringing the urban infrastructure and services to the levels set by the
Bureau of India Standards is of the order of rupees (Rs) 40 lakh crore (USD 700 billion) spread over
a 20-year period. Another 50% of that figure is required for maintenance of such assets. For an urban
population of about 40 crore, this would work out to RS one lakh per capita for 20 years or Rs. 5000
per year for capex and Rs 2500 for opex.

Breaking down further, these figures come to Rs 400 and 200 per month, and at per diem level, merely
Rs 13 and Rs 7, respectively. For the statutory minimum daily wages of Rs 200, a working couple
would earn Rs 400. Therefore, people can pay for the investment required for providing services or
infrastructure.
1. The JNNURM experience

The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was the first major programme
to promote investment in the urban sector. During its effective implementation period of seven years
(2007-2014), the Mission induced investment of about Rs 80,000 crore in the 65 bigger (Mission)
cities and about Rs 20,000 crore in the smaller cities.

JNNURM encountered serious holdups in implementation, commencing with poorly staffed

municipalities, and without sufficient financial resources and decision-making authority. Yet, the
JNNURM succeeded in containing the drinking water problem significantly. As well as the sewage
and city transport problems, although in solid waste management it could not succeed as much.

Despite its partial success, a key outcome of JNNURM is the realisation that even with small
investment, the quality of urban services can be improved significantly, with the investments funded
almost entirely by the Central and State Governments and very little by the municipalities or the users.

2. Finance Commission Grants

The Fourteenth Central Finance Commission (CFC) has recommended grants of the order of Rs 87,000
crore to be made available to the 4,000+ municipalities for the five-year period 2015-2020.
Municipalities could deploy this grant to part-fund their infrastructure projects. This would be in
addition to the grants made available by the State Governments under the awards of their respective
State Finance Commissions.

3. Sale of recycled waste

Most municipalities treat the city waste as a burden, fit only for landfill. In the process, they not only
miss on the economic returns that the waste could provide, but also let the waste become an
environmental hazard. Green waste and kitchen waste can be converted into fuel or manure, plastic
waste into oil and methane, construction & demolition waste into bricks, while paper and most metals
can be recycled.
Sewage can be recycled into water fit for non-potable purposes in horticulture, industry or in
construction activities. In all such cases, around 40% of operations and maintenance costs can be
recovered.

4. User charges

Until about 10 years ago, most city managers worried about popular resistance to a levy of user charges
and would avoid imposing it.

The JNNURM insisted on 100% recovery of operational expenses as a pre-condition for sanction of
central grants, which led not only to imposition of user charges, but also to the realisation that people
were willing to pay for services. Imposition of Rs 200 per month on a household of 1,000 sqft, and
higher amounts for more affluent ones, would suffice to recover around 60 per cent of the operational
costs for water supply and waste management, each.

5. Betterment levies

Any infrastructure project enhances the economic prospects of the land and buildings in its influence
zone. Therefore it would be justified for the local body to impose betterment levy, or impact fees to
recover the costs incurred in development of the project that led to the economic growth.

6. Land monetization

Most cities have valuable land owned by the city or state governments, with old structures such as
office complexes or staff residences. Redevelopment of such lands in PPP mode has been tried out
successfully in the case of New Moti Bagh and Kidwainagar in Delhi.

In both cases, public sale of just five to 10% of the government land/built space generated enough
resources to redevelop five to 10 times the original spaces. This model can be replicated to create
modern built spaces and generate revenue for the local governments in public-private partnership
mode.

7. Property taxes

Some municipalities have undertaken geo-spatial mapping of the built spaces and, after on-ground
verification, updated the records of taxable properties, leading to substantial rise in collections from
property taxes without raising the tax rates. Municipalities may also levy tax on applicable land use
rather than on availed one. This would be an equitable model of vacant land taxation and lead to
enhanced and sustained revenue mobilization.

Urbanization creates wealth. Any investment in urban development generates prosperity. Public
financial policies need to identify the contours of wealth that such investments create, and aim at
collecting a part of that wealth through taxation, fees and user charges in a manner that should be
adequate to fund the infrastructure that goes to create such wealth.

Municipalities need to analyse the costs and benefits of the development projects and determine the
framework of cost recovery in terms of ‘beneficiary pays’ principle. With such analysis, they can
secure loans to launch the projects and pay back through the ‘tax increment financing’.
That would give a financially viable model for investment in urban development. Of course, other
dimensions of viability, such as social, environmental, technological and managerial, would also need
to be worked on simultaneously.

Bridging The Investment Gap : Issues, Challenges and Options

India annually invests approximately Rs. 1,75,000-2,00,000 crore for the development of urban water
supply, wastewater disposal services, solid waste management, roads and other ancillary infrastructure.
Forming just about 1.5-1.7 per cent of the country’s GDP compared with the Asia’s average of 5.7 per
cent, it grossly falls short of requirements and explains the persistence of huge infrastructure shortages
across cities and towns despite infrastructure development being central to Mission such as the Smart
Cities and AMRUT. It is evident that this pace of infrastructure financing will not be able to either
bridge the existing gap or meet the continuing increase in the demand for infrastructural services.
While successive plans and the Niti Aayog’s three year Action Plan underline the importance of
urbanization to the Indian economy, financial provisions are not proportionate to the importance
embodied in the public policies , nor is it clear if additional fiscal space is available to finance urban
infrastructure demanded by urbanization and economic growth, or how much budget expenditure are
necessary to addressing infrastructure needs stemming from urbanization . Public financing continues
to be the principal mode of financing urban infrastructure.

Municipal bond market has not shown any vibrancy and is encountering on the demand aside issues
of collaterals and of statutory liquidity ratio on the supply side. Private sector participation in urban
infrastructure development in thus far anecdotal, even as public policies recognize its potential that it
has in the context of the current approach to urbanization. What then are the options ? International
practices focus on developing sound project pipelines to secure a flow of financing institutional
investors, elimination: of regulatory impediments, 15 review of risk characteristics and development
of adequate responses, and promotion of credit enhancement among others. For India, where the gaps
are substantial and credit markets for urban infrastructure still in an early stages of development, there
are several imperatives for opening up of the sector urban infrastructure to accelerated investments,
one being an explicit recognition that the current levels are significantly lower compared to what are
needed, and importantly, higher allocation are necessary for growth, poverty reduction, and basic
quality of life. Secondly, urban infrastructure is as much an issue of private finance as of public finance
even if the current role of private finance may be anecdotal. Thirdly, given the primate role of
municipal governments in urban infrastructure development, their fiscal empowerment is a necessary
condition for accelerating investment in urban infrastructure.

For this imperative to be taken forward, it is essential to –

• bring in some form of fiscal responsibility at the level of municipalities. Brazilian experience
of a Constitutional amendment which provides for a withholding of grant –in –aid for
municipalities in case they fail to raise revenues may serve as a case in point.

• reform the existing practices of credit rating in ways that formula- based transfers and
compensatory grants are treated as a part of own revenues rather than as transfer.

• alternatives to ‘ escrowing’ as a collateral are essential to instil confidence among investors

in municipal bonds. The current position where municipal assets can not be put as collateral
has a dampening effect on the debt market.

• Private finance is not meant to neutralize the inefficiencies of the public sector institutions,
nor is it a substitute for public finance. For private finance to serve as a viable source of finance,
it is essential to impart efficiency in the use of public finance.

• A strong database on urban infrastructural development is essential to determining the

investment policy for infrastructure development. Several countries have developed
comprehensive physical reporting system which make it possible to track urban infrastructure
along various dimensions.
The importance of land as a source of financing urban development has been underlined internationally
and in India. The example of China which has made use of land leasing to finance its urban
infrastructure has been widely used to underline the potential of land. Also, a number of land-based
instruments such as development charges, betterment levis, land leasing, land monetization, tax
increment have been cited as possible instruments for raising resources and using them for
infrastructure development. Land leasing has enabled municipalities in China gain control over a
revenue source which is within their control. India has also made use of the land-based resources for
real estate development ; their use for infrastructure development has, however been limited.

Conclusion
In India, with the rising urban population and the growth of urban areas, the development pressure on
cities is increasing and particularly metros are sharing more burden. The development of cities itself
is critically dependent upon the availability and the delivery of good urban infrastructure services.
However, the resource requirements of urban infrastructure services are quite large and hence pose a
great challenge. Also, the creation of urban infrastructure—basic civic amenities and other support
services—is itself expensive and time consuming. In other words, infrastructural investments are
essentially lumpy in nature that require investments primarily by the government. While the Central
Government has given priority to the problem and allocated one time support from its budget by the
creation of JNNURM, it is the state and urban local governments that have to take a lead role in
increasing the resource base available for urban development. Unfortunately, as the state governments
have other priorities and functions, cities have to show a resolve to increase their contribution to the
overall resources for urban infrastructure development through their own revenue resources. Given
that, most of the cities show little or no revenue surplus to match the capital expenditure required for
the provision of basic infrastructure services, it has been argued that the cities have to exploit the
potential non-conventional means of resource mobilization, apart from reforming and strengthening
the conventional means of resource mobilization.

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