Cities need sustainable business model

There is no such thing as a free lunch. The saying fits in the case of cities too. If our cities have to perform better on various indexes relating to livability, sustainability, and efficiency, they have to build a sustainable business model for service and infrastructure projects to ensure long-term viability, and for moving the projects beyond trials to full city roll-outs

Indian cities, after 70 years of independence, have not been able to develop a financial model that can take care of their operational expenses; forget about generating additional revenue for investing in the new infrastructure or projects for improving service delivery and city management system. Almost all municipal bodies in India are facing funds crunch.

 

Financial source from ULB’s activities

As per the 12th schedule, municipal functions include urban planning including town planning; regulation of land-use and construction of buildings; planning for economic and social development; roads and bridges, water supply for domestic, industrial and commercial purposes; public health, sanitation conservancy and solid waste management; fire services; urban forestry, protection of the environment and promotion of ecological aspects; safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded; slum improvement and upgradation; urban poverty alleviation; provision of urban amenities and facilities such as parks, gardens, playgrounds; promotion of cultural, educational and aesthetic aspects; burials and burial grounds; cremations, cremation grounds and electric crematoriums; cattle pounds and prevention of cruelty to animals; vital statistics including registration of births and deaths; public amenities including street lighting, parking lots, bus stops and public conveniences; regulation of slaughter houses and tanneries.

Out of these functions, less than half have a supporting financing source. The corporation is responsible for taking care of stray animals but there is no income involved in the activity. Similarly, many of these works such as fire services, maintenance of parks have no or very little source of income.

 

State of financial affairs

A recent survey, in March this year, by a non-government organization Jaanagraha Centre for Citizenship and Democracy, revealed that cities do not earn enough to pay the salaries of their employees. The survey states that the salary component of employees of Patna Municipal Corporation is 320% more than its total earnings. In the other five cities surveyed, which fall in this category, the salary expense is in the range of 128-199% of the total income of the municipalities.

Indian urban space is expanding. There are 52 urban agglomerations with populations of over a million and cities generate 63 per cent of nation’s GDP. The government estimates that 70 per cent net new employment will be generated in cities by 2030. This further expansion would require focused investment in civic services and urban infrastructure. The critical question is not where will money come from because there are national and international financial institutions which can offer financial assistance to urban local bodies to plan and implement the projects of public welfare but it is the responsibility of urban local bodies to present a viable business model to sustain the projects and achieve the break-even in a stipulated time period. The new development schemes are targeted to bring in financial reforms in ULBs through accounting reforms and introducing enhanced financial understanding for generating more revenue through existing resources and create new sources of income.Infrastructure is an enormous challenge for urbanization. A report by McKinsey Global Institute estimates that between 2013 and 2030, US$57 trillion of investment will be needed globally, mainly in Roads, Power, Water and Telecom technologies.The Report on Indian Urban Infrastructure and Services (2011) estimates that Indian cities need to invest Rs 40 lakh crore (at 2009-10 prices) on urban infrastructure over the 20-year period from 2012 to 2031.

Municipal corporations, despite as many as 18 roles assigned to them in the 12th Schedule after the implementation of 74th Constitutional Amendment Act, have not been able to develop any sustainable revenue generating tool to meet their expenditure requirements. Out of these functions performed by municipal bodies under the 74th CAA, less than half have a supporting financing source

Can running cities be profitable?

Why not. Cities can earn money. Smart City Mission is an initiative that is targeted to bring in a financial reform in urban local bodies and make them financially self-reliant. These missions not just look at how can ULBs generate more revenue but also look at how corporations can fill gaps to ensure efficient utilization of resources.

Municipal corporations can generate revenue through internal and external sources. At present, internal revenue sources like the property tax and user charges are the most important funding levers available to a municipality because without effective, predictable generation of internal revenues, it will be a tremendous challenge to attract new, external sources of funding. Municipal bond market is at a nascent stage and has not been explored well as only a couple of cities have come up with municipal bonds. According to a research paper published by IFMR Finance Foundation on Sustaining Finances for Indian Cities, “the municipal bond market has also seen some very valuable innovation in the form of the pooled bond mechanism to enable small and medium sized cities that lack the requisite credit worthiness and expertise to access the capital market on their own.” Union government is gradually moving in the direction and has introduced credit rating for cities that will be useful in launching of municipal bonds for
the corporations.

The government has engaged many institutions and consultants for improving the financial health of urban local bodies. A couple of years ago, introduction of double entry accounting reform to bring transparency, was such a step. AIILSG played an important role in rolling out the reform in many Indian states including in the North East region of the country. Cities can also be enabled and empowered to tap their unused potential and increase and diversify own-source revenues in innovative ways such as land-based finance.

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