India’s Urban Infrastructure
#GS-03 Infrastructure, Investment
The Need for investment in Urban infrastructure:
- World Bank in its recent report ‘Financing India’s Urban Infrastructure Needs: Constraints to Commercial Financing and Prospects for Policy Action’ has commented on the need for investment in infrastructure.
- 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.
Source of these funds:
- Financing on a repayable basis can be done either through debt, private lending or public-private partnership investments.
- This requires a recurrent source of revenue to meet obligations, thus, mandating raising adequate resources.
How funding is done currently:
- Most of the funding for infrastructure development currently comes from the government through various schemes to meet 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%).
- Only a handful of large cities have accessed institutional banks and/or loans.
The constraints for fundraising:
- 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.
- Low service charges for municipal services undermine financial sustainability and viability.
- Urban bodies are unable to recover operations and maintenance costs, thus, constraining their ability to further execute projects.
- 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.
- Revenue sharing designs between public-private partnership is not particularly viable for private investors and does not fully account for risk-sharing or risk-transfer mechanisms for project risks.
What can be done:
- The central idea is to increase cities’ fiscal base and creditworthiness.
- Cities must institute a buoyant revenue base and be able to recover the cost of providing its services.
- This could be attained by revising property taxes, user fees and service charges, among other streams, from the current low base.