PUBLIC GOOD: Cities need to be empowered to maintain urban vote banks

K Yatish Rajawat

urban_poorSwachh Bharat Abhiyan has completed one year and the government is gearing towards selecting city plans for smart city projects. These two completely different things on the surface are closely intertwined with each other. A dirty city cannot be smart, but the Ministry of Urban Development has not atleast yet linked these two projects together.

The role of the city has to be re-examined in the current paradigm. Traditionally every central scheme has approached cities as a part of the state government. The central government as the source of fund is expected to be the driver of urban infrastructure. Unfortunately this model has really not functioned well as we have seen in the poor development of the cities.

Therefore the question to ask is who is responsible for the development of the urban infrastructure? And who is expected to fund it? These two questions are inter-related and needs a clear answer. Approximately $ 827 billion is required to bridge the gap in infrastructure investment over the next 20 years, two thirds of this is required for urban roads and traffic support. This is not something that can be funded by the budget or with a top down approach. Though Indian cities generate two third of the GDP and 90 per cent of the tax revenues they are not deployed in these cities.

There are sporadic outbursts by citizens of cities about this warped deployment of their tax rupees. It has never been addressed as the Indian state has always looked at overall deployment of resources. Every government stated goal has been poverty reduction and as a result tax rupees are deployed more in rural areas than in urban. This may not change very soon but the government can either lead the change or be swept away by the change.

Funding has to be more local and not central, not just because of the size of the funding needed. But the expectations of the citizens have been raised by the ambitious plans and mission of the government. Whether it be the Swachh Bharat Abhiyan or the Smart city program. The government does not have the funds to meet the expectation of urban voters. The biggest challenge with such overtly ambitious plans if they do not meet the expectation is that the voters are unforgiving during elections.

Therefore, a strategic review is needed both at the Prime Minister’s Office and the Ministry of Urban Development. There needs to be a frank review of the impact of these initiatives and what happens if they do not meet the expectation of urban voters. It will be a mistake to wait for four years and realize the failure of these initiatives.

At least one third of the population is directly influenced by these initiatives. The easiest answer and a pat one from consultants is privatization or PPP models. Unfortunately, these consultants do not tell the flip side that the private sector will also have to raise funds. Private sector can execute but it does not have funding. It raises these funds from the banking sector or public markets. Either way these projects are funded by people. But considering the situation that public sector banks are in, it would be difficult to expect to fund any more PPP project.

If urban projects are to be funded then the government should look at private activity bonds as an instrument. But even before the government gets excited about these funds, control over planning and funding of urban infrastructure has to shift from central to city level. The role of the central government has to shift from financier to facilitator, aggregator, best practice developer and conceptualizer.

Facilitator is an important shift. Take UK for instance — last year the Infrastructure UK (IUK) government guarantee scheme was deployed to support the financing of the Mersey Gateway $ 896 million road project. The project was led by the local development authority and not by the central government. IUK structured the debt guaranteed but the payment is local. This may be an advanced model but it is the only way forward for urban projects to be funded.

Almost every private company in the construction or road building business is reeling under debts. They have overstretched balance sheets and are unable to take on even the new round of highway projects. Therefore small urban projects need to be aggregated and funds raised via debt by an institution akin to IUK like Urban Infrastructure Investment Corporation (UIIC). As urban projects are small it does not attract large corporation therefore they are neither conceptualized properly nor executed properly. Only an institution like UIIC can aggregate projects, build parameters for their execution and get them funded.

The government has just concluded devolution of higher portion of the centralized taxation to the states and GST is under way. It is also time to begin the debate and discussion on regional and municipal taxation to enable the cities to have more control over their destiny. If cities have to develop infrastructure they need more control over financial resources. Of course this can only happen if the state government allows it, and this is where the biggest challenge for Indian cities remain.

State governments control and restrict cities by keeping elected officials out of the deployment of financial resources for the city. This is a bureaucratic hurdle that will hurt the political class and has to be part of the national debate.

K Yatish Rajawat is a columnist and a policy commentator based in Delhi, he tweets @yatishrajawat