Financing Urban Development in India

Financing Urban
Development in India

Relevant Sustainable Development Goal
Goal 7: Ensure access to affordable, reliable, sustainable and modern energy for all
Goal 8: Promote sustained, inclusive and sustainable economic growth, full and productive
employment, and decent work for all
Goal 9: Build resilient infrastructure, promote inclusive and sustainable industrialisation, and
foster innovation
Goal 10: Reduce inequality within and among countries
Goal 11: Make cities and human settlements inclusive, safe, resilient and
sustainable
Goal 12: Ensure sustainable consumption and production patterns
Goal 13: Take urgent action to combat climate change and its impacts (taking note of agreements
made by the UNFCCC forum)
Goal 14: Conserve and sustainably use the oceans, seas and marine resources for sustainable
development

Key Objectives of Goal No 11
Ensure access for all to adequate, safe and affordable housing and basic services, and upgrade slums
Provide access to safe, affordable, accessible and sustainable transport systems for all, improving road
safety, notably by expanding public transport
enhance inclusive and sustainable urbanisation and capacities for participatory, integrated and sustainable
human settlement planning and management in all countries
reduce the adverse per capita environmental impact of cities, including by paying special attention to air
quality, municipal and other waste management
provide universal access to safe, inclusive and accessible, green and public spaces, particularly for women
and children, older persons and persons with disabilities
support positive economic, social and environmental links between urban, peri-urban and rural areas by
strengthening national and regional development planning
support least developed countries, including through financial and technical assistance, for sustainable
and resilient buildings utilising local materials

Overview of India’s Urban Sector

Some Useful Statistics
Urban Population in India
Urban Local Bodies in India
Year Urban Population- million % of total Population
2001 (Census) 286 28%
2011 (Census) 377 31%
2030 (World bank estimate) 600 39%
Type of Urban Units 2011 Census 2001 Census Addition in 2001-11
1. Towns: 7,935 5,161 2,774
(a) Statutory Towns 4,041 3,811 242
(b) Census Towns 3,894 1,350 2,532
2. Urban Agglomerations 475 384 91
3. Out Growths (OGs) 981 962 19
Both the numbers of Urban Areas and Urban Population have grown significantly in the past
and will continue to grow in the future
1 Source: Census of India 2011

Conventional Sources of Income for Urban Local Bodies
Tax
• Property Tax
• Entertainment
Tax
• Tax on Animal
• Local Excise
• Advertisement/
Hoarding Tax
Non Tax
• User Charges
and Fees
• Rents
• Return on
Investment
• Profits
Transfers/ Grants
• Formulae based
devolution or
share in
resource of
higher govts.
• Adhoc grants
• Special purpose
grants
Government
Loans
• From higher
governments
• Government
agencies
• Municipal
development
funds
Own Sources

Expenditure on Urban Services
Source: McKinsey Global Institute
India Spends only $50
per capita per annum
on urban services
which is only 14% of
China’s and 3% of UK’s
investment on same
purpose

Urban Service Delivery Performance
Water Supply-
litres per
capita per day
Source: United Nations- Handbook of Benchmarks; Ministry of Urban Development; W Smith; Transport Policies and Strategies in Urban India; McKinsey Global Institute
Sewage
treated (% of
generated)
Solid waste
collected (%
of generated)
Parks and
Open Spaces-
sq.m per
capita
Share of
public
transport trips
%
Slum
Population
(% of total
Population)

The Additional Demand for Urban Services (2030)
106 billion
litres water
per day
85 billion
litres sewage
per day
306 million
tons solid
waster per
annum
48 million
cars on urban
roads
208 million
public
transport trips
per day
13 million
affordable
housing
units
Source: United Nations- Handbook of Benchmarks; Ministry of Urban Development; W Smith; Transport Policies and Strategies in Urban India; McKinsey Global Institute

Investment Required to Meet the Demand (2030)
Current
Backlog- $20 b
Future
Requirement-
$76 b
Current Backlog-
$22 b
Future
Requirement-
$31 b
Current Backlog-
$0.5 b
Future
Requirement-
$14.5 b
Current Backlog-
$21 b
Future
Requirement-
$11 b
Current Backlog-
$151 b
Future
Requirement-
$48 b
Current Backlog-
$98 b
Future
Requirement-
$294 b
Current Backlog-
$243 b
Future
Requirement-
$152 b
Total Requirement: $2.2 Trillion
Per Capita Annual Spending- $250 (Current- $50)
Source: Indian Urbanization Funding Model, JuNURM, Ministry of Urban Development & McKinsey Global Institute
Water
Supply $96 b
Sewage
$53 b
Solid
Waste
$15 b
Storm
Water
Drain $32
b
Urban
Roads
$199 b
Mass
Transit
$392 b
Affordable
Housing
$395 b
Operational
Exp. $1040 b
Capital Expenditure: $1182 billion [Current (2010)Backlog: $555.5 b, Future Requirement: $626.5 b)
Operational Expenditure: $1040 billion

How to Mobilize Finance to Meet the
Demand and Fulfil SDG Requirement?

Increase Income from Taxation
Main Source: Property Tax
Accounts for 30% of Municipal Own Revenue Source
Contributes only 0.24% to GDP as compared to 0.6% in Developing and 0.68% Transitional
Economies
Potential: Can provide $15 billion annually (Current- $3 billion) or $36 per capita per annum1
Steps to be undertaken
 Improved coverage and collection
 Removal of exemptions
 Market linked assessment of property tax
1 Source: McKinsey Global Institute

Increase Income from Non Tax Resources
User Charges
 Meter water connections
 Progressive rate slabs
 Improved recovery of user charges
Monetize Land Assets
 Identify land assets
 Auction greenfield sites
 Increase floor area ratio (FAR)
1 & 2 Source: McKinsey Global Institute

Income from Own Sources (Tax + Non Tax)
Therefore, $77 Billion annually or $170 per capita per annum can be
mobilized annually from the Municipalities’ existing sources
In addition to above, some income will also come from other Tax
and Non Tax Sources
Still there is a shortfall of approximate $70-$80 per capita per
annum- a substantial portion of this amount can be generated from
nonconventional sources

Mobilize Investment from Nonconventional Sources
Debt and PPP
At present only 5% investment comes from these two sources
 Adapt enabling policy to encourage private investors
 Identify bankable projects
 Viability gap funding from higher level governments
 Create project specific SPVs (special purpose vehicle)
 Guarantee from higher level governments to ensure access to debt market (including loans
from multi and bilateral agencies)
1 Source: McKinsey Global Institute

Mobilize Investment from Nonconventional Sources
Municipal Bond
So far only 14 ULBs have issued municipal bond
Potential: Can provide $7 billion (Rs 450,000 million)
 Reform policies and procedures to get good a Credit rating
 Issue tax free municipal bond to attract private investors
 Guarantee from higher level governments
 Municipalities with small revenue base can jointly issue pooled bond
Source: National Institute of Public Finance and Policy, India & McKinsey Global Institute

What is Expected from Higher Level Governments
Devolution of powers and function to urban local bodies in accordance with the 74 th
amendment of the Constitution
Reform policies and regulatory laws to attract investment for urban local bodies
Provide technical assistance to prepare municipal plans and budgets
Build capacity of municipal staff to empower them to adapt new techniques and process of day-
to-day functioning of the municipalities
Help urban local bodies to identify projects, carryout project feasibility studies and design
funding framework
Provide guarantee for municipal bonds and external loans
Fund the financial gap to make PPP projects viable

Financing Urban Development in India

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Financing Urban Development in India