Financing Urban Infrastructure

1
Financing Urban Infrastructure Service
DeliveryImplications for Pragmatic Policy
Reform

• Anand Sahasranaman

2
Current Scenario

• How are cities funded?
• Own sources Primarily Property Tax
• 25-35 of revenues for Class IB and below
• Assigned Sources SFC Devolutions
• 65-75 of revenues for Class IB and below
• Apart from the larger cities, most Indian cities
  have not accessed commercial debt
• Subsidised lending by HUDCO backed by government
  guarantees
• Bond market and the larger cities
• 10 issues
• No government guarantees
• Pooled Finance and smaller cities
• Impact of JNNURM Inadvertent crowding out of
  debt?

3
Objective

• Objective Function
• Maximise Commercial Debt as a funding source
• Constraints
• Lack of power to control own income sources
• Culture of dependence on grants neither stable
  nor timely
• Institutional design for service delivery
• Poor incentives for ongoing repair and
  maintenance
• Conditions of market access
• Lack of accountability to citizens
• Information and citizen participation

4
Property Tax

• Current Property Valuation
• No consistency in property tax valuation
  methodology
• Annual Rental Value, Modified ARV
• Not representative of actual values of property
  (including new infrastructure and services)
• Not vibrant
• Why is it important?
• Valuation of a city ? Property Values
• Can be the largest source of revenue if values
  are linked to land market realities
• Vibrant because land values increase with
  economic growth
• Captures the value derived due to infrastructure
  and service delivery
• Value derived due to otherwise difficult-to-moneti
  ze assets such as roads, street lights, garbage
  collection etc. captured through increased land
  values

5
Property Tax Reform

• Graded Reform Measures
• Uniform Property Valuation methodology across
  India
• South Africas Municipal Properties Rates Act
  2004
• Implemented the Capital Value System across the
  country
• ULBs have power to set rates, within reasonable
  limits
• Broadened tax base and reduced exemptions
• Moving towards a more market based valuation
• The Area Based System- Location Usage
• Bangalore 62 jump in property taxes
• The Capital Value System- Land Improvements
• Bangalore 33 increase in property taxes was
  expected
• Building comprehensive property databases
• Using GIS to map cities
• Hyderabad 50 increase in property tax
  collections
• Update database every 3-5 years
• Property Values and Rates reviewed every 3 years

6
Service Delivery Model

• Poor service delivery in almost all Indian cities
  
• For eg., cities lack 24/7 water supply and have
  inadequate sewerage
• Different cities, different models
• In some cases, the city is responsible for
  service provision
• In others, there are separate utilities for water
  supply, sewerage etc
• How independent are the utilities?
• Sustainability
• Rate setting, Balance sheet
• City policy on rates
• Metering
• Subsidy
• OM coverage
• Overall low quality service due to lack of
  independence and skewed incentives

7
The Case of Johannesburg Water

• iGoli 2002 transformation plan after Johannesburg
  bankruptcy in 01
• Sell non-core assets, restructure utilities
  making them self-sufficient
• Johannesburg Water (JW) formed in 2002
• Responsible for provision of water and sewerage
  services in Johannesburg
• Corporate entity, owned by the CoJ
• 3 million citizens, 650,000 connections
• Repair and upgradation of network, greater
  efficiency in water usage and customer
  responsiveness
• Reduced unaccounted for water
• Regular planned OM maintenance of water
  infrastructure
• Metering 78.24 in 04 to 95.40 in 08
• Queries Resolved / Queries Logged 100
• Has become a finally sustainable entity as of
  06, no subsidy from CoJ since
• After the iGoli restructuring, CoJ has had 4
  municipal bond issues

8
Corporatisation of Service Delivery

• Separation of policy and regulation from service
  delivery
• Political oversight as opposed to political
  interference
• City sets out policy
• Standards and timeframe of service delivery
• Reporting requirements and mechanisms of
  accountability
• Separate independent entity (public utility) with
  mandate for providing service delivery
• Public utility will be responsible for service
  provision
• Professional, autonomous and flexible management
• Separate ring fenced budgets
• Utility will charge the city for service
  provision at rates that can keep it going
  sustainably
• To be agreed upon periodically between the city
  and utility
• Any subsidies the city decides to give
  beneficiaries on the service will impact the
  citys financials, not the utilitys

9
Standards Competition lt-gt Citizen Participation

• Standards for service delivery
• Transparent, publicly available standards like
  the proposed MoUD criteria
• Measured annually and disseminated
• Benchmarking cities to compete on service
  provision
• Comparative city rankings can be made public on
  an annual basis
• eGovernments rankings of Karnataka ULBs
• All benchmarking exercises to be publicised
  widely radio, TV, print, internet
• All approved projects under JNNURM can be
  extensively publicised in respective benefit
  areas
• Purpose and targets population coverage,
  expected benefits, service delivery standard
  improvements etc.
• Citizen participation and activism
• Lack of awareness about responsibility of city
• Standards, benchmarking and compulsory
  information dissemination
• Greater awareness could lead to greater
  accountability
• Anti-corruption drive in Brazil and impact on
  municipal governments

10
Access to Debt Markets

• Role of HUDCO as lender
• Subsidised lending backed by government
  guarantees
• Lack of incentives to ULBs to improve systems,
  processes
• Pooled Finance Bonds
• Smaller ULBs pooled together to raise funds from
  market
• WSPF I Rs 30 cr and 13 ULBs
• Current investor profile Provident Funds
• PFDF guidelines
• Interest rate cap 8 tax free
• WSPF II Rs 45 cr, unsubscribed and shelved
• Investor interest
• Tenor and interest rate issues
• Insurance Companies Risk averse to new asset
  classes
• Provident Funds Already tax exempt
• Banks Tenor

11
Access to Debt Markets

• HUDCO reform
• HUDCO as market maker
• Guarantees
• Mezzanine Investments
• Incentivises commercial investors
• Leverage allows for greater private debt
  participation
• Reveals true ULB creditworthiness, improving
  their incentives to reform
• Pooled Finance bonds
• Removal of hard interest rate cap
• Cap could be spread over benchmark
• Regulation
• Include municipal debt investments under RBIs
  priority sector and IRDAs social sector
  investments
• Citizen participation
• Part of municipal and pooled bond issues
  earmarked for local citizens
• Increases demands for transparency and
  accountability

12

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