According to a new World Bank report, India needs to increase the annual investment in urban infrastructure by over 300% in the next 15 years to cater to the needs of the growing urban population. As per the report released on November 15, 2022, an investment of $55 billion per annum has been estimated compared to the current rate of $16 billion, highlighting the urgent demand to leverage increased private and commercial investments to address emerging financial gaps.
As per the estimates, around 600 million people, which account for 40% of the population, will be living in cities in India, adding more pressure on the already strained urban infrastructure and services. At present, the central and state governments fund over 75% of city infrastructure whereas urban local bodies (ULBs) finance just 15% through their revenues. Only 5% of the infrastructure needs of cities in India are being financed through private sources.
The report suggested expanding the potential of city agencies to deliver infrastructure projects at scale. At present, the ten largest ULBs were able to spend only two-thirds of their overall capital budget over three recent financial years. A weak regulatory environment and weak revenue collection increases the challenge of cities accessing more private financing. As per the report, between 2011 and 2018, urban property tax was at 0.15% of GDP compared to an average of 0.3-0.6% of GDP for low-and-middle-income countries. Low service charges for municipal services also weaken the financial viability and attractiveness to private investment.
The report highlighted how policy decisions to keep tariffs and service charges below levels required for cost recovery and financial sustainability result in low revenue. ULBs and utilities are mostly unable to recover operations and maintenance costs, let alone capital costs, of providing services like water supply and sewerage. The report said that cities’ fiscal base and creditworthiness would be enhanced by addressing revenue constraints by increasing property taxes, user fees and services charges from the existing low bases substantially in real terms.
Doubling the source revenue of key ULBs and parastatal agencies every five years can support a sufficient funding base to mobilise sustainable commercial financing for fulfilling investment needs.
Over the medium term, the report recommends structural reforms, including those in the taxation policy and fiscal transfer system, to enable cities to leverage more private financing. In the short term, it identified large high-potential cities that can raise higher volumes of private financing.
According to the report, the current level of debt financing in large metropolitan cities is well below their existing debt servicing potential. It is estimated that as many as 27 of the largest ULBs, excluding Mumbai, which achieved an investment grade credit rating under AMRUT, can currently borrow on their prevailing financial indicators. This is over 20 times their existing level of debt stock. Mumbai alone can currently borrow an additional $5 billion, considering the current estimated debt servicing capacity.
The government can play a crucial role in removing market frictions cities experience in accessing private financing. The report proposes a range of measures for the city, state, and federal agencies to bend the arc towards a future where private commercial finance becomes a much bigger part of the solution to India’s urban investment challenge, Roland White, global lead, city management and finance, World Bank, and co-author of the report said.