Federation of Indian Chambers of Commerce and Industry
Ministry of Urban Development Govt. of India
Cityscapes 2006
URBAN INFRASTRUCTURE FINANCING
April 7th, 2006
Mr. C.K.Mohan Director, A. F. Ferguson & Co
Structure of the Presentation
» Current Status of Urban Infrastructure
» Requirements for accessing finances
» Conclusion
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Current Status of Urban Infrastructure
Urban Sector in India
» Second largest urban system in the world
» Comprises of over 3700 urban local entities (municipal corporations,
councils, city-rural bodies, etc.)
» About 30% of the total population resides in Urban areas
– Two-thirds of the above live in Class I (lakh plus) cities
» Metropolitan (million plus) cities have increase from 5 in 1951 to 27 cities
in 2001
– About 1/3rd of the urban population lives in these cities
» Engine of productivity and growth in the country
– Contributes about 60% of the national income
Urban Sector plays a vital role in the overall development of the nation AFF-MC
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Urban Infrastructure – Key Issues
» About 15% of the urbanites do not have access to safe drinking water
» About 50% do not have adequate sanitary facilities » Traffic congestion has assumed critical dimension
– Increase in vehicles, inadequate road space & lack of public transport
» Acute water and power shortages
– Perpetual and common problem almost among all Urban Local Bodies
» Inadequate medical and health facilities
– Appx. 26 beds per 10000 population in Public Hospitals
» Lack of adequate housing facilities
– About 1/3rd of Urban dwellers live in slums – Proliferation of slums has resulted in decay of urban environment
Urban Infrastructure Services have not responded to meet the growing demand for quantity and quality of service AFF-MC
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Main causes of Poor Urban Infrastructure
DEMAND SIDE FACTORS
SUPPLY SIDE FACTORS Poor Financial position of ULBs
Increase in Urbanisation
CAUSES OF POOR URBAN INFRASTRUCTURE
Gradual reduction in State/ Central Government grants
Increase in Urban income levels
Limited access to borrowed funds
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Urbanisation in India
Composition of Urban & Rural Population (%)
» Urban population has grown at
about 4% p.a. vis-à-vis 1.5% growth in rural areas
– Level of urbanisation increased from 23% in 1981 to 29% in 2001 – Expected to reach about 36% by 2011
100
80
60
40
20
– Pace of urbanisation has rapidly increased in the last 2 decades
0 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Urban
Rural
» Increase in Urban incomes also having an impact on the demand for urban
infrastructure
– Share of service sector in the Indian GDP has increased significantly
– Has resulted in increase in income levels in the Urban areas
Infrastructure requirement for current population levels not met…… Increase in urbanisation & income levels putting additional pressure AFF-MC
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Poor Financial Position of Urban Local Bodies
» Decentralisation has significantly
increased pressure on local governments and utilities
Internal Sources Land-based Non-land-based User Charges revenues revenues Taxes on Service Charges households, Property Taxes (Water, Sewerage, vehicles, animals, Parking, etc.) etc. License fees for Administrative fees such Land Fees various businesses as building permits and occupations registration, etc.
» Resource envelop available has
remained stagnant
– Limited fiscal powers to establish tax base, rate structure & enforcement procedures – Lack of capability to bill and collect revenue
» Property tax remains the main source of income for an ULB
– Lack of buoyancy – rise in property value not captured immediately with a tax increase since properties revalued every few years
» User Charges for services provided do not cover the cost of providing the
services
Most ULBs incur revenue deficit/ generate marginal revenue surplus…….Not in a position to independently undertake new projects AFF-MC
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Gradual reduction in Capital Grants
» Central Government outlay on Housing and Urban Development sector has
remained stagnant at about 2%-3% of the plan expenditure
» Substantial reduction in budgetary allocations for infrastructure
development during the 9th Five Year Plan
» State Governments also not in a position to adequately fund Urban
Infrastructure due to their fiscal health
» General government fiscal deficit has been about 10% of the GDP for many
years
– Revenue deficit more than 2/3rd of the total fiscal deficit
» Large accumulated debts and liabilities further constraint governments
abilities to scale up infrastructure financing
ULBs expected to make capital investments in Urban Infrastructure on their own AFF-MC
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Limited access to borrowed funds
» HUDCO is the primary national financing agency in urban infrastructure
– Other agencies include LIC, IDFC and IL&FS
» Multi-lateral funding agencies such as World Bank, ADB, JBIC, etc., are
also active in financing urban infrastructure
– Subject to reforms; currently routed through central government
» Banks reluctant to participate in Urban Infrastructure lending
» Poor fiscal state of the State Governments resulting in they not being able
to provided guarantees to meet all requirements
» Central Government and Reserve Bank of India have imposed restrictions
on giving guarantees to local bodies
» Cap imposed on the amount of borrowings of the State Government » Infrastructure financing agencies channeling more funds to the private
sector due to poor credit quality of public sector borrowers
Larger demand chasing limited funds …….. Lack of credit enhancement mechanisms restricting ability to borrow AFF-MC
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Impact of Poor Urban Infrastructure
Hampers Economic Growth
Affects the profitability of production, levels of income, output and employment
Poor Urban Infrastructure
Lower Corporate Investments
Hinders expansion in areas with poor infrastructure and lesser developed areas
Affects Country’s Global Competitiveness
Slows down the pace with which a country can integrate its’ economy into the global system
Poor urban service coverage is the main hindrance to a city’s ability to attract investments which in turn promotes economic development AFF-MC
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Funding needs for Urban Infrastructure
» 'India Infrastructure Report, 1996' estimated annual investment need for
urban water supply, sanitation and roads at about Rs. 28,035 crore for the next ten years
» The Central Public Health Engineering (CPHEEO) has estimated fund
requirement of Rs. 172,905 crore for 100% coverage of the urban population under safe water supply and sanitation services by 2021
» Rail India Technical & Economic Services (RITES) has estimated fund
requirement for Urban Transport Infrastructure at Rs. 207,000 crores over the next 20 years
Comparing the demand with the estimated annual institutional finance flow of about Rs. 5,000 crores leaves a huge gap in Infrastructure funding requirements AFF-MC
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Huge and widening gap between the demand
and supply of funds for financing Urban
Infrastructure Projects
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Requirements for Accessing Finances
Requirements for Accessing Finances 1
» Finance is not a constraint any more
– For a sound institution
– For good projects
» Demand for ‘finances’ through well planned projects is a larger
issue
If local bodies are prepared Finance will flow
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Requirements for Accessing Finances 2
» Internal sources are the starting point for improving the
financial position
» That becomes the basis for accessing finances
ULB needs strong financial position
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Requirements for Accessing Finances 2
ISSUES
» In one state the last revision in property tax - was done around 10 years
ago. Escaped assessments, Annual value has remained same
» In one state the ULB’s recover only 10% of the cost of water supply and
sanitation (over all state picture); 90% subsidised by the state; this also crowds out capital expenditure
» One ULB - the number of unauthorised water connection is said to be
around 25 - 30%
» In one state the entire power charges for water sector paid directly by
the Government to the EB – Not reflected in the ULB accounts
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Requirements for Accessing Finances 2
» In one state we found that industrial / commercial consumers enjoy
significant subsidy on water supply
» Some ULB don’t even send bills for certain services; expect the citizens
to pay
» Some ULB don’t show arrear demand in the bills » User charges / fees not revised for many years ……...
Will any of you lend to such institutions
Look Internal first
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Requirements for Accessing Finances 2
Besides borrowed funds and private sector participation, ULBs need to explore avenues for
raising funds from own sources with the ultimate
long term objective of achieving Self-sustenance
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Requirements for Accessing Finances 2
INTERNAL SOURCES
» Effective Asset Management and utilisation » Frequent but small revision in property tax » Full cost recovery over time » Expenditure control / management
– power charges
– employee productivity
Improved financial position AFF-MC
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Requirements for Accessing Finances 3
SYSTEMS
» Accounting
– Up-to-date – Accrual / Double Entry
» Audit
– Pre-audit
– Statutory Audit
» Information Systems / MIS » GIS
» Up-to-date Records
– Demand Registers
» Budgetary Control » Liability Management
– Pensions
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Requirements for Accessing Finances 4
PUBLIC CONTRIBUTION
» Key to build ownership of assets / systems
– Connection Deposits – Contribute ‘debt’ to a project for a return
– Need for SPV
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Requirements for Accessing Finances 5
LEVERAGE IS A CRUCIAL TOOL
» PPP
» Bonds » Pooled Finance » Funds
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Requirements for Accessing Finances 5
PPP
» Private sector participation in Urban Infrastructure sector yet to take-off in a
big way
» Water supply seems to be the main sector which has managed to attract
private sector participation
– Two large projects implemented/ under implementation (Tiruppur and Visakhapatanam)
» Select cases of Public-Private-Partnership in development and maintenance
of commercial infrastructure such as commercial/ shopping complexes, etc.
» Significant Private Sector participation has taken place to fund projects
relating to roads, sea ports and power
» Recently, lot of initiatives seen in the area of developing Special Economic
Zones, Industrial parks, etc.
» Parallels can be drawn from the telecom sector and the urban housing
sectors where Private Sector Participation has proved beneficial
Public Private Partnerships in Urban Infrastructure, though having immense potential, is yet in a nascent stage AFF-MC
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Requirements for Accessing Finances 5
» Public Private Participation is gaining increased prominence in developing
countries
» Investments flows to infrastructure projects with private participation in
developing countries grew by 12% to US$ 64 billion
» China has executed around 406 infrastructure projects during the period
1990-2004 with a cumulative investment of US$ 67 billion
» Greenfield projects (i.e., BOO, BLO, BOT, BOOT) most common format of
Public Private Partnerships
Indian Urban Infrastructure sector needs to learn from and build upon the international experience to harness the potential of PPP AFF-MC
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Requirements for Accessing Finances 5
» Inadequate legal frameworks may not permit Private Sector Participation
in a few Sectors
» Determining Service Ownership » Protection against Political Risk » Creation of Dependable Project Revenue Streams » Difficulty in raising finance from the capital markets » Lack of regulatory framework that provides for agreed service standards
and consumer rights
» Politicisation of Tariff Setting » Mitigation of voluntary/ involuntary bankruptcy of the private player
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Requirements for Accessing Finances 5
FUNDS
» Urban infrastructure Development Funds act as financial intermediaries to
raise funds for funding infrastructure projects
» Infrastructure development Funds could be created for a specific city,
state or for the country as a whole
» Can be promoted by the Public sector or through a Public-PrivatePartnership
» Need to operate on a commercial basis and managed in a professional
manner
» Play a prominent role in raising funds for Urban Infrastructure
» Provide expertise to the Urban Local Bodies in designing and structuring
commercially viable projects and preparing detailed project reports
Urban Infrastructure Development Fund can also act as a catalyst to attract and channelise Private Sector Participation in Urban Infrastructure.…..Also provide credit enhancement facilities AFF-MC
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Requirements for Accessing Finances 5
» Most of the states in India have constituted their own Urban Infrastructure
Financing Institutions
– Level of activities and role played by these institutions vary across the state
» State specific funds in Kerala, Karnataka and Tamilnadu have aggressively
pursued raising funds for Urban Infrastructure
» Tamilnadu has created an Urban Development Fund, which is managed as
an asset management company
– Managed in collaboration with leading non-banking financial institutions like HDFC, IL&FS and ICICI – Looking at the success of the arrangement, other states are looking at replicating the model
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Requirements for Accessing Finances 5
» Ho Chi Minh City, with a population of about 6 million people, is the largest
city and one of biggest economic centers of Vietnam
– City’s GDP accounted for 40% of the GDP of the whole country
» Socio – economic development process of the City caused a huge and
urgent demand for developing the City’s infrastructure
– Approximate needs of around USD 3 billion every year
» To meet the increasing funds requirement, Vietnamese Government
established Ho Chi Minh City Investment Fund for Urban Development (HIFU) in 1997
» State-owned Financial Institution, directed by Ho Chi Minh City People’s
Committee
» Established as a pilot model to increase effectiveness in utilising state
budget and non-state mobilised funds for developing urban infrastructure
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Requirements for Accessing Finances 5
» Established with an equity capital of USD 12.84 million at the its
foundation (1997), which increased to USD 39.75 million at the end 2003
» Operations mainly focus on:
– Disbursement and repayment management of trusted fund
– Lending to urban infrastructure projects of transportation, treated water, health, education, resident areas, and industrial parks
– Direct investment through founding and managing joint-stock companies operating in socio-economic infrastructure aspects
» Disbursement from trusted fund to the extent of USD 77.33 million up to
2003
» Also lent to about 155 projects (by HIFU’s capital and syndicated loans
with banks) with total disbursed amount of USD 115.46 million
» Projects funded in transportation, water treatment, residential areas/
industrial parks, health & education
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Requirements for Accessing Finances 5
• Assignment of a part of state capital to HIFU’s management by City’s government • Mechanism of thorough lending and disbursement and repayment management has partly helped transform state – subsidized mechanism into budget lending with full repayment • Ability of raising a large amount of fund for longterm financing of revenue-backed projects • Risk sharing • Applied to finance many big infrastructure development projects in the City • HIFU contributes 20% as the syndication leader
Trusted State Fund Management
Loan Syndication with Banks
Fund Raising Experiences
Foundation of Joint Stock Companies
• Focusing on companies investing in infrastructure fields • Typical model of public – private partnership • Successful applying through foundation of Ho Chi Minh City Infrastructure Investment Company (CII) in 2001 • HIFU contributes about 15%-20% of the capital
Municipal Bond Issuance
• HIFU empowered by City Government to raise bonds • Opened up a new fund raising channel with advantages of longer term & stable financing, reasonable cost & suitable to infrastructure projects • HIFU has issued municipal bonds worth USD 127 million in 2003 and 2004
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Requirements for Accessing Finances 5
» Founded by HIFU in 2001, CII operates in concession contracts of
operating transportation projects; investing in revenue infrastructure projects under various forms of BOT,... back budget resource for other projects – backed
» The city has transferred to CII the entitlement of operating 2 roads to take » Based on this concession contract and contributing 15% of equity to CII,
HIFU publicly mobilised capital to set up an initial USD 20-million registered capital
» CII then has multiplied this model by participating in other urban
infrastructure projects
– Phu My Bridge BOT Project with total investment capital of USD 101.60 million – Thu Duc Water Treatment Plant Project with the capacity of 300,000 m3/day and total investment capital of USD 101.60 million
HIFU’s strategy is putting in seed capital (about 20% of registered capital) to attract other public financial resources to invest in City’s infrastructure projects …….. Each capital unit invested by HIFU mobilises 10 – 15 capital units from public for investment
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Requirements for Accessing Finances 6
INSTITUTIONAL CAPACITY
» Biggest challenge
» Human Resource Capacity
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Requirements for Accessing Finances 6
» City vision » Organisation structure
» Job Descriptions for positions
» Performance orientation » Capacity Building / Training » Delegation » Capacity to Train itself ….
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Requirements for Accessing Finances 6
Some Examples London Borough
Population of around 1.60 lacs
Its medium term fiscal strategy is sound financial management and efficiency gains It has ISO 9000 certification for most services It works on the concept of 5 E: (Economy, Efficiency, Effectiveness, Equality and Environment) It does an annual resident survey to check quality of services
» It publishes an annual report of its performance against defined
parameters
–
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Requirements for Accessing Finances 6
Lessons Learned from one ULB project in India
People will flood you with ideas if you let them
Government employees are actually capable of doing wonders given the training and right environment Civic services cannot be improved unless citizens are involved Systems improvements can succeed only if the users are involved Politicians will always support the executives if it delivers the goods and presents the facts and analysis
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Requirements for Accessing Finances 6
MAJOR CHALLENGE
» Political commitment to decentralisation
– Fiscal
– Authority – Control
» Decentralisation within a city
– Wards - effective?
» Demand led projects not supply led ….. » User charges reform
» Quality of citizen service
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Conclusion
Conclusion
» Finance is not a constraint; Good projects are
» Internal improvements are key; sound financial position » Improved Systems » Public contribution
» Leverage
– PPP – City Specific Funds Institutional Capacity Focus on Quality of Service Effective Decentralisation (State and City Level)
Increasing user fees to economically efficient levels should be the first priority of any infrastructure financing strategy AFF-MC
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Indian Urban Sector competing with the best cities in the developing countries to attract investment
Urgent need to invest in creating world class urban
infrastructure to increase India’s competitiveness
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Thank You