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					 The Challenge of Urban Finance
    and Governance in India:
Findings from Three Indian States
                  Presentation to
         South Asia Decentralization Series
                  27 January 2005


  Dana Weist, Lead Public Sector Specialist, PRMPS
              (dweist@worldbank.org)

                                                     Page 1
                         Context
• 74th Constitutional Amendment envisioned
  “institutions of self government” and decentralization
  of functions, finances and functionaries to urban local
  bodies (ULBs)
• Cities play a critical role in India’s development
   – Urban population over 300 million, expected to double in 30
     years; 35 cities with population over 1 million
   – Severe infrastructure shortages in urban water supply and
     sanitation, roads, transportation, housing and waste
     management
• Widespread state fiscal crises
• Growing demands for better governance

                                                               Page 2
                   Approach

• Case studies of Karnataka, Maharashtra and
  Tamil Nadu
  – High urban populations
  – Different intergovernmental and institutional
    arrangements
  – Pursuing various urban reforms
• Collected data and visited sample of ULBs
  – ULB definition varies across states
  – Poor fiscal data: inaccessible, unaudited,
    inaccurate, late
• Reviewed various urban reforms underway
                                                    Page 3
                Limited Functions
• CAA lists 18 illustrative functions; states define
    – Expenditure assignment relatively similar
    – Maharashtra ULBs responsible for educ.+ health
    – ULBs generally confined to providing infrastructure
• State boards and authorities retain critical roles in
  planning, financing and managing infrastructure and
  services
    – Overlapping responsibilities
    – ULBs bear financial responsibility without input in decisions,
      resulting in limited maintenance, non-repayment
•   ULBs have limited scope in managing assets
    – Land is over-regulated and land markets distorted



                                                                  Page 4
           Very Limited Financing
       Country/Local           Expenditures per   Revenue per Capita
        Government      Year      Capita ($)             ($)

     KARNATAKA          2001         $24                 $20

     MAHARASHTRA        2000         58                  45

     TAMIL NADU         2000         30                  26

     Poland LGs         1998         358                 355

     Russia LGs         1995         349                 347

     Brazil LGs         1994         149                 140

     Mexico LGs         1997         51                  50

     South Africa LGs   1998         125                 125

     Source: IMF GFS



• ULBs represent 3% of total expenditures (0.8% of GDP)
                                                                       Page 5
       Limited Financing (cont’d)

• Low revenue effort in property taxes and user
  charges
• ULBs highly dependent on state transfers
  –   Unpredictable and unstable
  –   Do not equalize fiscal disparities
  –   Local arrears intercepted from transfers
  –   Discourage ULB revenue mobilization in
      Maharashtra



                                                 Page 6
         Limited Functionaries

• ULBs face numerous layers of oversight and
  regulation
  – States determine staffing (e.g., recruitment,
    staffing levels, pay scales) and ULBs have limited
    ability to hire/fire staff
  – Senior ULB officials appointed from IAS/SAS
  – States oversee ULB budget preparation
  – Low limits for ULB approval authority (technical
    and administrative sanction)


                                                     Page 7
                  Property Taxes
• Mainstay of ULB finance, accounts for about half of
  own-source revenues
• Generally based on annual rental value of property
• Not used to full potential
   – Unproductive and inequitable property tax structure
   – Weak administration and enforcement
   – Distortions in land and property markets (I.e., rent control)
     limit potential tax base
   – Unwillingness to assess property at current market value
• Some promising reforms underway



                                                                     Page 8
 Bangalore’s Property Tax Reform
• Historically poor performance
• Major reforms began in 2000
  – Area based, unit value assessment method
  – New methods of payment and determination of tax
    liability
  – Adopted (but hasn’t implemented) a capital value
    system of property taxation
  – Adopted a new valuation roll
• Revenues increased by 1/3 in first year


                                                  Page 9
      Bangalore’s Reform (cont’d)
• Key success factors
  –   General revaluation
  –   Linked payment to benefits received
  –   Limited overall increase
  –   Intensive citizen outreach and transparency
  –   Reduced compliance costs
• Challenges remain
  – Base isn’t bouyant; growth unlikely to be sustained
    without indexation or revaluation
  – System is complex

                                                    Page 10
  Other Promising Developments

• Accounting reforms in Tamil Nadu and
  Karnataka
• Increasing use of citizen report cards, citizen
  charters and citizen participation in Bangalore
  and Mumbai
• Electronic one-stop shops in Tamil Nadu
• TNUDF as a means to build capacity and
  promote responsible ULB borrowing


                                               Page 11
                  Reform Agenda

• Systematic approach needed over medium to long-
  term
• State and local actions required to enhance fiscal
  sustainability and strengthen institutional
  arrangements
   –   Restrain growth in spending
   –   Enhance local revenue mobilization
   –   Revise intergovernmental transfer system
   –   Promote responsible local borrowing
   –   Clarify expenditure authority
   –   Improve information and performance monitoring


                                                        Page 12