NEW DELHI: India needs to increase the investment in urban infrastructure by more than three-fold for the next 15 years to to meet the needs of a fast growing urban population. A new World Bank report has estimated the need for annual investment of $55 billion (Rs 4.46 lakh crore) compared to the current rate of $16 (Rs 1.3 lakh crore)underlining the urgent need to leverage more private and commercial investments to meet emerging financial gaps.
According to estimates, 600 million people will be living in cities in India, representing 40% of the population and this is set to put additional pressure on the already stretched urban infrastructure and services. Currently, the central and state governments finance over 75% of city infrastructure, while urban local bodies (ULB) finance barely 15% through their own revenues. The World Bank report says only 5% of the infrastructure needs of Indian cities are currently being financed through private sources.
The new report has recommended 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 adds 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 undermines their financial viability and attractiveness to private investment,” the report said.
The report has brought out how policy decisions to keep tariffs and service charges below levels required for cost recovery and financial sustainability are contributing to low revenue. ULBs and utilities are generally unable to recover operations and maintenance (O&M) costs, let alone capital costs, of providing services such as water supply and sewerage.
The report referred to data for 14 large and medium-sized cities which show that they recovered less than half of O&M costs pertaining to water supply on average in recent years.
It said, “Cities’ fiscal base and creditworthiness will be improved by addressing revenue constraints through increasing property taxes, user fees and service charges from the current low bases substantially in real terms. Doubling the own source revenue of key ULBs and parastatal agencies every five years can support a funding base sufficient enough to mobilize substantial commercial financing to contribute to meeting investment needs.”
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 report said the current level of debt financing in many large metropolitan cities is well below their existing debt servicing potential. It is estimated that 27 of the largest ULBs (excluding Mumbai) which received an investment grade credit rating under AMRUT can currently borrow and service an additional $7.7 to 8.4 billion in debt based on their prevailing financial indicators and this more than 20 times their existing level of debt stock.
Mumbai alone can currently borrow an additional $5 billion given its current estimated debt servicing capacity.
“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 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.
According to estimates, 600 million people will be living in cities in India, representing 40% of the population and this is set to put additional pressure on the already stretched urban infrastructure and services. Currently, the central and state governments finance over 75% of city infrastructure, while urban local bodies (ULB) finance barely 15% through their own revenues. The World Bank report says only 5% of the infrastructure needs of Indian cities are currently being financed through private sources.
The new report has recommended 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 adds 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 undermines their financial viability and attractiveness to private investment,” the report said.
The report has brought out how policy decisions to keep tariffs and service charges below levels required for cost recovery and financial sustainability are contributing to low revenue. ULBs and utilities are generally unable to recover operations and maintenance (O&M) costs, let alone capital costs, of providing services such as water supply and sewerage.
The report referred to data for 14 large and medium-sized cities which show that they recovered less than half of O&M costs pertaining to water supply on average in recent years.
It said, “Cities’ fiscal base and creditworthiness will be improved by addressing revenue constraints through increasing property taxes, user fees and service charges from the current low bases substantially in real terms. Doubling the own source revenue of key ULBs and parastatal agencies every five years can support a funding base sufficient enough to mobilize substantial commercial financing to contribute to meeting investment needs.”
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 report said the current level of debt financing in many large metropolitan cities is well below their existing debt servicing potential. It is estimated that 27 of the largest ULBs (excluding Mumbai) which received an investment grade credit rating under AMRUT can currently borrow and service an additional $7.7 to 8.4 billion in debt based on their prevailing financial indicators and this more than 20 times their existing level of debt stock.
Mumbai alone can currently borrow an additional $5 billion given its current estimated debt servicing capacity.
“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 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.
