Urban Governance and Finance

1
Urban Governance and Finance

• M. Govinda Rao

2
Urban Governance and Finance

• Introduction.
• Why is urban governance and finance a serious
  issue?
• What do we learn from fiscal federalism theories?
• Urban Governance in India.
• Expenditure assignment and financial management
  un urban local bodies.
• Financing Urban services Own revenues.
• Financing urban services Intergovernmental
  transfers.
• Financing Infrastructure spending.
• Concluding Remarks

3
Introduction

• Need to study the issue of urban governance and
  public service delivery for a number of reasons
• Innovation is the key to prosperity and most
  innovations occur in large cities due to
  interaction and exchange of ideas.
• Cities provide a critical mass to support high
  degree of division of labour, knowledge, business
  services, infrastructure, institutions and media.
  
• Globally competitive cities should provide a wide
  range of services to attract human capital
  transportation, water, sewers garbage collection
  and disposal, police, fire protection, parks,
  recreation and culture, affordable housing and
  social assistance.
• Enabling the cities to be sources of dynamism is
  going to be the most important challenge. This
  requires examination of their governance
  structure and finance.

4
Why Urban Governance and Finance is a Serious
Issue in India?

• There are 139 municipal corporations, 1595
  municipalities and 2108 Nagar panchayats. 3 of
  the 10 largest metropolises are in India (Mumbai,
  Delhi and Kolkata). Over 330 million people live
  in urban areas 35 cities have over a million
  population Contributes over two-thirds of GDP.
  
• Demand for services is large and growing.
  Resources inadequate Actual spending (1999-2004)
  in 30 large cities was just about 24 per cent of
  the requirements. Under-spending was over 75 in
  17 municipal corporations. Under spending was
  over 50 in all except three.
• Poor coverage of urban amenities is recorded in
  the draft 11th Plan document as well.

5
What do we learn from theories of fiscal
federalism?

• Clarity in assignments and assignments should be
  according to comparative advantage Objective is
  responsiveness and accountability Depends on
  benefit span, diversity in demand, technology,
  capacity of the jurisdiction.
• Systems and institutions are necessary to
  effectively deal with overlapping assignments.
• Assigning responsibilities to different
  functionaries Need to make the elected
  executive responsible for decision making. Need
  to separate the functions of the bureaucrat from
  the executive. Importance of governance
  systems.
• Finances should follow functions. Wicksellian
  link - Matching revenue expenditure decisions.
  Local governments should have productive tax
  handles.

6
What do we learn from theories?

• Accountability requires that local services
  should be paid for locally and services with
  spillovers should receive matching transfers.
• Intergovernmental transfers are inevitable even
  as they soften the budget constraint. Need to
  design them properly to avoid perverse
  incentives.
• Ensuring a common market is at the heart of
  creating dynamism in fiscal federalism. Removal
  of impediments to mobility in factors and
  products and trade impediments to trade
  Efficient factor (land, labour and capital) and
  product markets including credit and debt
  markets, institutional factors.
• Hard budget constraint is critical for efficiency
  and accountability This requires clarity in
  assignments, avoidance of bail outs, avoidance of
  transfer dependency development of markets
  transparency in decision making.

7
Governance Systems in India

• Four governance systems one tier, two tier,
  voluntary cooperation and special purpose
  districts.
• Distinguish large from small metropolitan areas.
• Large metropolis convert them into city-states
  to avoid restrictive protectionist policies
  (restrictions on factor and product markets for
  partisan reasons). Special capital districts
  City States for large cities (Germany Berlin,
  Munich and Frankfurt China Shanghai, Tianjin
  and Chongqing).
• Need to separate the roles of elected executive
  (Mayor) from the administrative head
  (Commissioner) need to make the officials
  accountable to the elected municipal government.
  
• Municipal Commissioner should be appointed by the
  municipal government (Expert Committee
  Bangalore). Dual subordination does not work.
  Political interference by State and Central
  politicians.
• Planning for local governments
• 243ZE MPC.
• 243ZD DPC
• Ward sabhas Not implemented in many states.
  Planning Commission mandated DPCs based on the
  recommendations of the Grassroots Planning
  Committee.
• 243S Ward Committees in municipalities with
  more than 300000.
• The Report on Grassroots Planning has made useful
  recommendations. Need to Act on them.

8
Expenditure Assignments and Financial Management

• Assignment Issues
• Article 243 (W) devolves ULBs the powers.
• Twelfth Schedule lists 18 functions which are
  either in the state or concurrent list to be
  devolved at the discretion of the State
  government. Concurrency and overlapping.
• Omnibus list and one size fits all approach to
  ULBs irrespective of the size. Still large
  corporations have been assigned more functions.
• Need for clear activity mapping exercises.
• States reluctance to transfer functions
• Independent service providers lack of
  accountability.
• Responsibility is looked at independently from
  revenue sources.
• Public Financial Management
• Comprehensive, comprehensible, verifiable,
  participatory and transparent municipal budget
  formulation, implementation and monitoring
  systems.
• Municipal control over revenues and expenditures
  allocative autonomy.
• Capacity and incentives to operative efficiently.
• Improving local finance information system
• The system of financial oversight.
• Dealing with mistakes in autonomous
  municipalities.

9
Municipal Revenues in India

• Reliable data are not available.
• Poor revenue collections 12th FC (2001-02)
  Total revenue 0.67 GDP Own revenue 0.38 GDP.
  (0.76 -NIPFP Own revenue 0.50 - tax 0.38
  user charges 0.12).
• (Brazil Revenue 7.4 Own revenue 2.6.)
• No separate tax schedule.
• Not surprising that there is large dependence on
  states and public service delivery is abysmal.

10
Criteria for Tax Assignment

• Principles Local governments should have
  revenue powers to finance public goods and levy
  user charges to finance merit goods.
• What is a local tax? Local governments should
  have powers to levy, collect and appropriate.
• Characteristics
• Tax Base should be relatively immobile
• Should be adequate and sufficiently buoyant
• Tax yield should be stable and predictable
• The tax should be borne by local residents
• If mobile bases are to be taxed it should be
  according to benefits received.
• It should to reasonably fair
• Relatively easy to administer.

11
User Charges

• Local governments of all sizes should charge for
  services (water, sewers, transit, recreation)
  ignored in practice More important in large
  metropolitan areas.
• Charges should be according to marginal cost and
  not average cost unless, there is a specific
  objective.

12
Some Commonly Assigned Taxes

• Residential Property Tax
• Appropriate because (i) real property is
  immovable and (ii) there is a link between
  services provided and value of property.
• Non-residential property tax may be shifted to
  non-residents - reduces accountability.
• Relatively costly to administer
• Base - Capital value or rental value? Presumptive
  tax Problem of administration periodic
  valuation of properties
• Patna model is recommended recent reform in
  Bangalore has several desirable features.
• Most property tax systems are antiquated. Low
  revenue productivity poor incentives. Reforms
  on the lines of BBMP could triple the revenues.

13
Some Commonly Assigned taxes

• Income tax levied in 13 OECD countries
  Piggybacking is the way forward.
• Payroll taxes (Mexico and South Africa)
• Vehicle and Fuel taxes (Bahl and Linn) more
  suited at regional level.
• Sales Tax GST a separate surcharge. 1
  additional rate could increase revenue by about
  0.5 of GDP.
• Business taxes distrotionary.

14
Intergovernmental Transfers

• Own revenues hardly sufficient to finance local
  public services. Unavoidable.
• Unconditional grants Given to enable adequate
  level of services at reasonable tax rates based
  on capacities and needs. Most countries do not
  have such equalization grants.
• Specific purpose grants are given to finance the
  portion of local public service spilling over the
  boundaries.
• In India, the system varies from place to place.
  They are neither rational not adequate.
• Functioning of State Finance Commissions leaves
  much to be desired. Central finance commissions
  have largely confined themselves to giving lip
  service.
• Central finance Commission grants 12th FC gave
  Rs. 4500 Crore during 2005-10 (of which Rs.
  475.46 was not drawn). (Grants to augment water
  supply required covering 50 of maintenance
  through user charges).
• 13th FC Giving a share in central taxes of the
  previous year varying from 1.5 to 2.5 .
• Basic Grant 1.5 every year- Exclude special
  areas ( Rs. 20 per capita) - all states eligible.
  (population 50 area 10 Distance 20
  Index of devolution 15 Sc/St pop 5)
• Performance grant effective 2011-12 - 0.5 to 1
  if they fulfil 9 conditions (i) (Supplement to
  the budget document on for local bodies and PRI s
  and urban local bodies should maintain accounts
  (as suggested in the National Municipal Accounts
  Manual). (ii) audit system for all local bodies
  (iii) Ombudsman for local bodies (iv) Electronic
  fund transfer to local bodies within 5 days of
  receiving the money from the central government
  (v) Specifying the qualifications of the members
  of SFC (vi) enable local bodies to levy property
  tax (vii) property tax board (viii) prescription
  of standards of essential services for local
  bodies (ix) fire hazard response and mitigation
  plan for MCs with more than 1 million people.
  

15
Specific Purpose Transfers JNNURM and UIDSSMT

• Financing pattern smaller cities - larger grant
  component.
• Reform component particularly those relating to
  the freeing of land, labour and capital markets
  in JNNURM needs to be emphasized.
• Utilization rate is not encouraging Need to
  provide publicity to create interest groups to
  demand funds from JNURM.

16
Financing Infrastructure

• JNNURM Important source of financing
  infrastructure.
• Services with nation-wide externalities should be
  financed from the Centre. Prevention of
  pollution to river water systems from the
  untreated sewerage discharge from municipal
  bodies on the banks of rivers.
• Borrowing
• Is a good way to finance infrastructure.
  However, municipal bond markets have hardly
  developed in most developing countries. Even
  where it is developed, State government
  guarantees may be needed.
• Latin American countries have faced difficulties
  with imprudent borrowing. In the long run, it is
  necessary to loosen the restrictions on the,
  institute checks and balances and subject the
  municipalities to market disciple.
• Larger municipalities should be allowed to access
  markets with sufficient safeguards.
• Development Charges
• Development charges collected by the developers.
  Growth should pay for itself can act as
  marginal cost pricing.
• What about renewal?
• Proceeds from the sale of land and housing

17
Financing Infrastructure

• Public Private partnerships.
• Advantages No upfront spending by municipal
  bodies greater efficient and implementation
  capacity (lower unit costs)
• Models
• Private sector invests and collects charges on it
  over a specified time span.
• Both make investments and acquire rights for
  future income streams.
• Examples in India
• Municipal solid waste management in Chennai
  ONYX.
• Water supply in Hubli Dharwar, Gulbarga and
  Belgaum by Veolia Water.

18
Concluding Remarks

• The issue of urban governance and finance are
  paramount They determine how the cities can
  accelerate the growth process as growth engines.
• The issues are complex and we can not find a
  solution for all systems.
• Both governance and finance issues will differ
  depending on different sizes of ULBs, different
  regions of the country. What is important is
  that broad principles should be kept in view in
  reform efforts.
• No one system of governance is universally
  applicable. The problems is with implementation.
• Need for clarity in functional assignment to
  local bodies and functionaries. Need to keep
  independent service providers with the overall
  control of executive.
• The paper explores several ways to augment
  revenues at the local level.
• Planning urban infrastructure and services
  requires compilation of considerable information.
  Karnataka is taking some lead in purring
  together the GIS. This is useful not only for
  planning but also to administer the taxes
  effectively.