Smart Approach For Financing Smart Cities

Every aspect of smart city programme is now shared in all parts of the country, from Kashmir to Kanyakumari- literally. But the dream needs to be matched with adequate financial resources too. Municipalities need to make a thorough analysis of the costs and benefits of the development projects and determine the framework of cost recovery.

Sudhir Krishna

The Smart Cities Mission has already taken off, with 33 cities already selected in the first two rounds of selection. The financing pattern indicated by the Mission Guidelines proposed a Central Grant of Rs. 500 crore for each selected city, provided the City or the State concerned raise at least an equal amount. Thus, the first 20 cities selected in January 2016, were to propose projects worth at least Rs. 10,000 crore. However, these 20 selected cities proposed a slew of infrastructure projects that would cost close to Rs. 50,000 crore. That showed the enthusiasm of the cities. However, the smart city saga has only just begun. All the 4,041 statutory towns and cities in the country have started dreaming of becoming smart, sooner than later. That vision has percolated even among many villages. 

Thanks to the growing outreach of the information & communication technology, efficiently harnessed by the media, every aspect of smart city programme is now shared in all parts of the country, from Kashmir to Kanyakumari- literally. But the dream needs to be matched with adequate financial resources too. 

The investment required for bringing the urban infrastructure and services to the levels set by the Bureau of India Standards and similar other expert bodies is to the tune of Rs. 40 lakh crore spread over the period of 20 year, as estimated a Committee appointed by MoUD during 2011. The requirements for maintenance of these assets would be about half of that. For an urban population of about 40 crore, this would work out, in per capita terms, to Rs. 1 lakh, spread over 20 years, with operating cost estimated at Rs. 50,000 per head. In per annum terms, these figures would convert to Rs. 5000 per year for capex and Rs 2500 per year for opex. Breaking down further, these figures come to Rs. 400 and 200 per head per month, respectively. At per day level, these are mere Rs. 13 and Rs. 7, respectively. For the statutory minimum daily wages of Rs. 200, a family would earn at least Rs. 200 a day, or Rs. 400, if both partners work, which most do.

Therefore, people can contribute directly to meet the investment targets, while getting improved water supply and other civic services. The key question is as to how to convince people to make such contribution, for capital investments and for The investment required for bringing the urban infrastructure and services is Rs. 40 lakh crore spread over 20 years operation & maintenance of the basic civic services. In the ensuing paragraphs, commencing from the JNNURM experience, the possible options for raising the financial resources for urban services would be presented.

The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was the first major programme launched to promote investment in urban sector. During its effective implementation period of 7 years (20072014), the Mission induced investment of about Rs. 80,000 crore in the 65 bigger (Mission) cities and about Rs. 20,000 crore in the smaller cities. The Mission encountered serious bottlenecks in implementation, commencing with inadequately staffed municipalities, with weak financial resources and with decision-making authority lying effectively with State level agencies. 

Despite such handicaps, the JNNURM succeeded in containing the drinking water problem significantly and the sewage and city transport problems, moderately, though in solid waste management, it could not make any significant impact. Despite the partial success of the JNNURM, a key outcome has been the realisation that even with less than 5 per cent of the required level of investment, the quality of urban services could be improved significantly. That too, when the Central and the State Governments contributed the investments almost entirely, with very little contribution made either by the municipalities or the users. Most cities could not enforce user charges effectively, even though they swore to do so as required under the JNNURM Guidelines.

The Fourteenth Central Finance Commission (CFC) has recommended grants of the order of Rs. 84,000 crore to be made available to the 4,000 and odd municipalities for the 5-year period 2015-2020. Municipalities could deploy this grant to part-fund their infrastructure projects. This would be in addition to the grants made available by the State Governments under the awards of their respective State Finance Commissions, which could be of even a higher order than the CFC grants.

Most municipalities treat the waste as a conventional burden, which is fit only for landfill. In the process, they are not only missing on the economic returns that the waste could offer, but are also letting the waste become an environmental hazard. The green waste can be converted into fuel or manure, household kitchen waste into manure, plastic waste into oil and methane, construction & demolition waste into bricks, while paper and most metals can be recycled. Sewage can be recycled into water fit for safe use for non-potable purposes such as horticulture, industrial use or in construction activities. In all such cases, as a thumb rule, at least 40 per cent of operations and maintenance costs can be recovered.

Until about 10 years ago, city managers used to worry about popular resistance to levy of user charges. Pursuantly, most cities did not levy water or waste management charges or levied it at nominal rates. The JNNURM insisted on 100 percent cost recovery of operational expenses as a pre-condition for sanction of central grants, which led not only to imposition of user charges, but also to the astonishing realisation that people were willing to pay for services. As a thumb rule, imposition of Rs. 200 per month on a household of modest means of, say, 1,000 square ft and proportionately higher amounts for more affluent units, would be enough to recover around 60 per cent of the operational costs for water supply, sewage management and solid waste management, each.

Any infrastructure project enhances the economic prospects of the land and buildings in its influence zone. Accordingly, it would be fully justified for the local bodies to impose betterment levy or impact fee to recover the costs incurred in development of the project that led to the economic growth.

Most cities have valuable lands owned by the city or state governments, housing old structures such as office complexes or staff residences. Redevelopment of such lands in PPP mode has been tried out successfully in case of New Moti Bagh and East Kidwainagar areas in Delhi. In both cases, public sale of just 5 to 10 percent of the residential layouts for government staff generated enough resources to redevelop 5 to 10 times the original spaces, but also the grants for maintenance of the redeveloped structures for 30 years. This model can be replicated to create modern built spaces and generate revenue for the local governments, preferably in public-private partnership mode.

Some municipalities have undertaken geo-spatial mapping of the built spaces and after on-ground verification, updated the records of taxable properties, leading to rise in collections from property taxes by few hundred per cent. This is an example of garnering higher revenues in an equitable manner without raising the tax rates. Municipalities may also levy tax on applicable Floor Area Ratio (FAR) rather than on availed FAR. This would in effect be an equitable model of taxation on vacant land and unutilised FAR and lead to enhanced revenue mobilization on a sustained basis.

Urbanisation creates wealth. Therefore any investment in urban development is a source of richness. The public financial policies need to identify the contours of wealth that such investments create and aim at collecting a part, say, 10 per cent, of that wealth by way of taxation, fees and user charges. That should be adequate to fund the infrastructure that goes to create such wealth. Municipalities need to make a thorough analysis of the costs and benefits of the development projects and determine the framework of cost recovery in terms of “Beneficiary pays” principle. With such analysis in hand, they can secure loans to launch the projects and pay back through the slice carved out of the wealth that the project would generate. That would give a financially viable model for investment in urban development. Of course, other dimensions of viability, such as social, environmental, technological and managerial, would also have to be worked on simultaneously.

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