Urbanisation – A Global Context

Successful developed and emerging nations have implemented an economic model of massive industrialisation with focus on technology and innovation, productivity and economies of scale to cater to domestic and international markets. Simultaneously, large investments were made in human capital through education and upgradation of skills of its citizens, resulting in rising employability and absorption of the migrating workforce from rural centric sectors like Agriculture and Allied sectors to urban centric economic sectors like Industry and Services. Simultaneously large investments were made, both from public and private sources, to develop urban infrastructure to handle the increasing levels of urbanisation commensurate with the expansion of Industry and Services sector. To give a perspective, the current outstanding in the US municipal bond market is about USD 3.6 trillion (20% of its GDP) and growing at the rate of about USD 170 billion annually (about 1.0% of the annual GDP). In China, the total debt and guarantees issued by the local governments at the end of 2013 was about USD 2.8 trillion (28% of its GDP). On an average, China’s average annual investment in urban infrastructure was about 2.7% of its GDP in a 7 year period from year 2000. In contrast, India spends an average of only 0.7% of its GDP on urban infrastructure.

Some of the developed nations / continents like US (82% urbanisation), Europe (73% urbanisation), South Korea (82% urbanisation), Japan (93% urbanisation) etc. have shown strong co-relationship between degree of urbanisation and contribution to GDP from Industry and Services sectors, resulting in higher per capita incomes. Amongst emerging nations, China with 45% urbanisation is another such example.

Urbanisation in India has an inverse co-relationship with growth in Industry and Services, leading to a “lower-middle income” trap

India, contrary to the experience of developed nations, has demonstrated an inverse co-relationship between degree of urbanisation and contribution to GDP from Industry and Services.  Approximately, only 32% of the urban population in India gets an opportunity to participate in 63% of the national wealth (GDP) comprising of the Industry and Services sectors. The remaining 68% of the population is largely dependent on rural centric economic activities which contribute to  only 37% of the GDP.  This has put India in a “lower-middle income” trap with a current per capita income of INR 88,000 per annum approximately in nominal terms. This manifests itself in stark levels of income inequalities in India. To claim the status of a developed nation, India has to escape this lower-middle income trap through a combination of increasing the share of manufacturing in the GDP and enabling a meaningful migration of a larger population to participate in the national wealth generated by Services and Manufacturing sectors. This is probably the most feasible way to achieve a far higher degree of income equality.

Urbanisation is an inevitability but a paradigm shift required to handle consequences of the same

The process of urbanisation in India looks irreversible which has been manifesting itself with 32% of the country's population residing in urban areas in 2014 as against 28% in 2001 on an increasing population base. This is expected to increase to 600 million i.e. 40% of the population by 2030.  Another manifestation  of the pace of urbanisation is the increase in the number of metropolitan Cities with population of 1 million from 35 in 2001 to 50 in 2011 and is expected to increase further to 87 by 2030. As per the census of 2011, the Metropolitan Cities accounted for about 43% of India’s urban population.

Growing urbanisation will lead to increasing pressure on an already stretched infrastructure. Pressures on key civic infrastructure like power, roads, water, waste management systems, housing, public transportation etc. will come under unprecedented levels of pressure and will test the skills of politicians, governments, and all urban infrastructure managers in both the public and private domains to come together to find sustainable solutions to the problem of our inadequate urban infrastructure and its management.

Governments have responded but much more is needed

In response to increasing urbanization, Government of India (GOI) initiated the first set of serious infrastructure and institutional reforms in 1992, with the 74th Constitutional Amendment Act. It accorded formal recognition to Urban Local Bodies (ULBs) to carry out various functions like public health, regulatory functions,public, safety, infrastructure, works, and development activities as a independent and autonomous body. To discharge these functions, the Constitution empowered ULBs to levy taxes and enjoined State Government to review and make recommendations regarding distribution of taxes, revenue-sharing and grant-in-aid system. Efforts were also made by the central and state governments to develop habitable urban centres in various pockets through policy interventions like development of industrial estates, SEZs and industrial corridors / belts. Another attempt to invigorate the urban centres on a nation-wide basis was made through the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) to develop 63 cities. It envisaged a total investment of Rs. 1 lakh crore during a period of 7 years (2005-06 to 2011-12).

However, all of the above initiatives met with limited success due to the following factors:-

  • Lack of financial resources and innovative methods to raise capital instead of relying on the traditional sources of finance for ULBs like grants, soft loans from GOI, states and multi-lateral agencies
  • Lack of managerial and project execution capabilities in the ULBs to implement city wide improvements in core infrastructure areas
  • Lack of political and bureaucratic will to make ULBs as sustainable commercial entities which could raise capital to fund development through levy of taxes, levies and other user charges
  • Undermining the autonomy of ULBs despite constitutional provisions.

Retrofitting current basic Infrastructure is the smartest thing to do for now under the “Smart City Mission”

Smart City Mission and AMRUT Mission were launched in June 2015 with an allocation of Rs. 98,000 crore over 5 year period. Out of the 98 identified Smart Cities, the first batch of 20 cities have been selected on the basis of the feasibility of the proposal, cost-effectiveness, result orientation, citizen participation and strategic plan, vision and goals. The estimated investment of Rs 50,802 crore is proposed to be made in these 20 cities over a period of five years. However, given the current state of core infrastructure facilities in various cities, retrofitting of the existing infrastructure is the ‘smart’ approach, wherein the city authorities focus on addressing the infrastructure and other deficiencies to upgrade existing infrastructure.

Funding for Urban Infrastructure Development; Structural Reforms is the key

The Report on Indian Urban Infrastructure and Services (2011) estimated the investment for urban infrastructure over a 20-year period (2012 to 2031) to be Rs 39.2 lakh crore (at 2009-10 prices). This necessitates increase of investments from current levels of 0.7% of GDP in 2011-12 to 1.1% of GDP by 2031-32. There has traditionally been a high level of dependence on state and central government grants and soft loans from bi-lateral and multi-lateral lending agencies. This has made the ULBs complacent and dis-incentivized them from generating sufficient revenue streams for part funding of projects. However, due to budgetary constraints imposed at the Central and State Government levels, there are limits to funding using traditional forms of grant finance and soft loans. Hence, a thorough overhaul of the funding mechanism is required from a wider investor base and innovative financial instruments and structures. However, to attract investors seeking a return on their investments, some specific reforms need to be carried out as enunciated below.

Creating Government Owned Infrastructure Development Funds

Recent initiatives of setting up infrastructure development funds at both the central and a few state governments demonstrates a serious intent and purpose by the Executive for taking up the challenge of working out financing solutions for urban infrastructure development. The proposed Funds, due to their sovereign nature, are designed to be leveraged with debt based on the initial contribution from the government and other long term investors like multi-laterals and bi-lateral agencies, overseas sovereign wealth funds (SWFs), pension and insurance funds. These Funds are intended to provide the equity/quasi equity contribution to projects. A recent initiative of Government of India is the setting up of the National Investment and Infrastructure Fund (NIIF) which has identified urban Infrastructure development as one of its focus areas. Similarly, there are signs of Funds with only urban infrastructure development as its focus in states like Tamil Nadu, A.P., Rajasthan etc.

Need for Robust Public Private Partnership (PPP) Frameworks

Public Private Partnerships (PPP) have not matured in the Urban Infrastructure sector relative to the PPP frameworks in power, roads and the oil & gas sectors. The experience in these sectors also offer the benefit of learnings from the past and also the suggestions by expert committees based on these learnings like the recent report by the committee headed by Dr. Kelkar on Revitalisation of PPP projects in India etc. Adoption of the same with some degree of customization to the urban infrastructure projects will go a long way in establishing a robust PPP framework.

Structural Reforms required in Urban Local Bodies

Urban local bodies (ULBs) need to carry out reforms in the areas of public financial management, capacity building, widening the revenue base of the ULBs; increasing the coverage of various revenue sources; improving the collection efficiency; and revising the rates and tariff for various utilities and services provided) and capacity building (including institutional, human resources, technical, financial, management and governance practices. These will be pre-requisites for accessing commercial funding and private investor interest.

Attracting Commercial Debt Financing

Historically, commercial debt financing by domestic Schedule Commercial Banks (SCBs) and domestic financial institutions (FIs) to the urban infrastructure sector has been negligible compared to the commercial debt capital invested in other infrastructure sectors by these entities. However, the recent experience of these entities in infrastructure space has been beset with challenges with a sizable proportion of their exposures to the infrastructure sector being under stress. Hence these institutions will apply stringent credit norms while extending finance.

The key factors for facilitating a robust investor interest in urban infrastructure development will be for ULBs to carry out reforms in management, accounting and governance practices; be empowered to run as autonomous bodies; and retain the flexibility to do prudent revenue and expenditure management for generating surpluses for capital expenditure. Offering a mature and stable PPP framework for enabling private sector participation will also enable higher investor participation

 

 

This article is authored by Mr. Ravi Unni. IUIML is the Asset Manager for a consortium of 16 banks and domestic financial institutions focused on funding for development of urban infrastructure sector. Mr. Ravi Unni is an AVP with IL&FS Urban Infrastructure Managers Limited (IUIML), based in Chennai

Urban Infrastructure Development….
Web links to data points
US municipal bond market is about USD 3.6 trillion (20% of its GDP) and growing at the rate of about USD 170 billion annually (about 1.0% of the annual GDP). In China, the total debt and guarantees issued by the local governments at the end of 2013 was about USD 2.8 trillion (28% of its GDP). On an average, China’s average annual investment in urban infrastructure was about 2.7% of its GDP in a 7 year period from year 2000. In contrast, India spends an average of only 0.7% of its GDP on urban infrastructure.

 

Some of the developed nations / continents like US (82% urbanisation), Europe (73% urbanisation), South Korea (82% urbanisation), Japan (93% urbanisation) etc. have shown strong co-relationship between degree of urbanisation and contribution to GDP from Industry and Services sectors, resulting in higher per capita incomes. Amongst emerging nations, China with 45% urbanisation is another such example.

 

India, on the contrary to the experience of developed nations, has demonstrated an inverse co-relationship between degree of urbanisation and contribution to GDP from Industry and Services.  Approximately, only 32% of the urban population in India gets an opportunity to participate in 63% of the national wealth (GDP) comprising of the Industry and Services sectors. The remaining 68% of the population is largely dependent on rural centric economic activities which contribute to  only 37% of the GDP. This has put India in a “lower-middle income” trap with a current per capita income of INR 88,000 per annum approximately in nominal terms.

 

The process of urbanisation in India looks irreversible which has been manifesting itself with 32% of the country's population residing in urban areas in 2014 as against 28% in 2001 on an increasing population base. This is expected to increase to 600 million i.e. 40% of the population by 2030.  Another manifestation  of the pace of urbanisation is the increase in the number of metropolitan Cities with population of 1 million from 35 in 2001 to 50 in 2011 and is expected to increase further to 87 by 2030. As per the census of 2011, the Metropolitan Cities accounted for about 43% of India’s urban population.

 

 

Another attempt to invigorate the urban centres on a nation-wide basis was made through the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) to develop 63 cities. It envisaged a total investment of Rs. 1 lakh crore during a period of 7 years (2005-06 to 2011-12).

 

Smart City Mission and AMRUT Mission were launched in June 2015 with an allocation of Rs. 98,000 crore over 5 year period. Out of the 98 identified Smart Cities, the first batch of 20 cities have been selected on the basis of the feasibility of the proposal, cost-effectiveness, result orientation, citizen participation and strategic plan, vision and goals. The estimated investment of Rs 50,802 crore is proposed to be made in these 20 cities over a period of five years.

 

The Report on Indian Urban Infrastructure and Services (2011) estimated the investment for urban infrastructure over a 20-year period (2012 to 2031) to be Rs 39.2 lakh crore (at 2009-10 prices). This necessitates increase of investments from current levels of 0.7% of GDP in 2011-12 to 1.1% of GDP by 2031-32.


As shared with IFIN Panorama Editorial Team




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