The Financial Express ($)

Over the last month, two important reports on urban India came out in quick succession: The World Bank’s report on “Financing India’s urban infrastructure needs” and the Reserve Bank of India’s “Report on Municipal Finances”. The World Bank report peers into the future to detail the quantum of investments required in urban India over the next decade and a half; the RBI report gives a current view of the financials of India’s largest urban local bodies (ULBs). Building a bridge into the future requires strengthening and augmenting the present resources and capabilities.

Future: The World Bank report projects USD 840 bn investment over the next 15 years in urban infra (largely in transport and water; it does not include housing, education, health, etc.). Using the exchange rate that they have in the report of INR73/USD, the total investment expected is close to INR 61 trillion over the next 15 years (in 2020 prices). This implies an average of INR 4 trillion a year: if we assume that the investments start small and grow linearly, this is a requirement of say INR 2 trillion a year going up to INR 6 trillion by the end of the fifteenth year. Note that this is only part of the investment required in urban India.

Present: The RBI report is instructive in setting the foundations of where the finances of urban Indian authorities stand. This report is, by definition, backward looking/historical. The FY2020 (budget) numbers are the latest data points that this report has – a lot has changed, and not necessarily positively for the finances of ULBs, over the two years of Covid-19 pandemic. The report notes that the total revenue collection is INR 1.4 trillion across all municipal corporations, total revenue expenditure is INR 1.2 trillion, and capital outlay is INR 0.9 trillion. Revenue includes both own source revenues (OSR, like property taxes, etc.) and grants/devolutions from the states or Centre.

Gap: Municipal corporations, hence, face a large gap between their revenue surpluses and the expected capital outlay, even in a situation where their planned capital outlay annually is less than Rs 1.0 trillion. To put this in context of the World Bank report, what is required is close to Rs 2.0 trillion (and even that covers only a few sectors). This difference of a trillion rupees (USD 12.5 billion) annually, and rising, will need to be covered by increasing devolutions and OSRs. These revenue numbers are pre-pandemic: it will be instructive to see how the situation has evolved since then. Janagraha, a think-tank, recently released a Toolkit for Property Tax Reforms which detailed how municipal corporations can possibly double the property tax collections from the current Rs 200 billion annually. However even this doubling will still not cover the requirement for capital outlay by cities which is going to be significantly larger than the available funds.

Financial capacity: Bringing in external providers of capital can help bridge this gap. Equity investors or debt financiers look for well-structured public private partnerships (PPPs) that offer a reasonable business case for investment. Many urban infrastructure projects have a large element of social benefits: a low-cost public transport infrastructure, for example, improves social and economic mobility of citizens by allowing them to access distant opportunities. From a PPP perspective, structuring the risk and returns from the project such that private capital can come in is important. Many levers for bringing in external capital exist, including: (some) pricing freedom, reasonable certainty on revenue (on price, or quantity offtake, or both), low-cost financing support or guarantees by governments, etc. The type of capital that comes in can range from the yield-seeking long-term patient capital (long-term bank debt, pension funds, sovereign funds) to more risk-taking equity investors (who may expect to gain from the upside that urban growth offers).

Structuring capability: Structuring projects and building a pipeline of such projects that continue to engage investor interest and capital commitment is a specialised skill. Over the last many years, the Central government has also incentivised the building of this skill by making ULBs ready to access the municipal bond “market”. Engaging with disaggregated external providers of capital (whether debt or equity) requires creating specialized structures for project financing (defining the project sharply, pooling in revenues in an escrow, maintaining contingency balances, disseminating credible and timely financial statements, etc.) Accessing bond markets is also an acknowledgement that the sources of debt capital have increased from just bank financing to funds being managed by insurance, pension, mutual funds, etc. Engaging with such wide array of investors also requires considering their needs, largely around security, liquidity, and exit. As projects mature, equity investors can invest larger sums in urban sectors.

Playbook for key sectors: Cities of different sizes (by population and/or area) have different requirements of investments and concomitant complexity. However, across the cities, it is clear that a few key sectors (housing, transport, water and sanitation) require bulk of the investments in the urban sector. Developing specific toolkits for these three segments can help create specific projects for investors and financiers to consider. Once there is a toolkit for a segment that works for one or two cities, this can be quickly replicated by cities in similar situations/category.

“Urban SECI”: A regulatory innovation that has worked very well in attracting private capital is the creation of the Solar Energy Corporation of India (SECI) in the renewables sector. At its core is the tripartite agreement between the centre, the state, and the power generator which assures the generator that payments due to them will come through and on time. Creating a similar independent intermediary to act as a financial middleman at the level of the Central Government for urban investments can help catalyse private investments, for example, by ‘securitizing’ a part of the Central Government’s grants to ULBs and states.

With India urbanizing at a rapid pace, the development of urban infrastructure is a sine qua non for ensuring a better ease of life for citizens. Building and financing this infrastructure requires innovation in imagining the roles and responsibilities of the ULBs and co-opting investors and financiers who can be partners in progress.

The author is with the National Investment and Infrastructure Fund Limited. Views are personal.

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