A Business Standard op-ed has this paragraph, which could be taken as a balance sheet of two decades of the pursuit of innovative municipal financing in India.
The 2015 Smart Cities Mission mobilised local innovation but saw limited private participation — only 6 per cent of projects used PPPs, and by 2023, just 12 per cent had achieved financial closure, far short of the 21 per cent target. The viability gap funding scheme, despite offering up to 80 per cent support for social infrastructure, saw only 71 projects approved over two decades — hindered by bureaucratic delays, opaque contracting, and poor lifecycle oversight. Municipal bonds remain underused as most urban local bodies (ULBs) lack creditworthiness.
It’s not incorrect to say that we have a misguided prioritisation of policy focus in municipal financing, driven mostly by ideologies peddled by multilateral institutions, financial market participants, and experts in general.
Given its very low baseline, increasing municipal revenues should be the primary focus of municipal governments in India for the foreseeable future. This would primarily involve revenues from two sources - property tax and the use of urban planning instruments.
The former would involve expanding the tax base (especially by detecting under-assessed properties), shifting to capital value-based taxation (if not already done), and increasing property tax rates. This would require the pursuit of good governance practices - survey and analyse locality-wise data, identify leakages, review for follow-up actions, rigorous monitoring, enforce, and repeat. They should be coupled with rationalisation and simplification of the assessment processes and rates themselves. These basic plumbing actions are especially important, also since they get marginalised as officials pursue innovations and technologies (GIS mapping, etc.). Increasing property tax revenues should form the primary focus of municipal governments across the country.
Urban planning instruments are a much under-utilised source of local government revenues. They range from the commonly used fees for various planning permissions (layout development, build permission, land-use change, etc.) to the scarcely used instruments of purchasable Floor Area Ratios (FARs) and land value capture (LVC). On the former, it may be useful to shift from a flat fee to an ad valorem (percentage of the property's basic value) basis.
Currently, purchasable FARs are in the form of sales of transferable development rights (TDR) certificates issued in lieu of land lost to road widenings and other public purpose acquisitions. See this post on operationalising TDRs. This must be expanded in scope to include the purchase of FARs beyond the permissible limit on payment of a defined fee. In this regime, property rights come with a basic building right, beyond which the building rights must be purchased. This can be operationalised in several ways. Two methods are discussed in the paper here.
The first is a ‘choose your FAR’ system which dispenses with administratively fixed FAR and replaces it with market-based model where unlimited FAR can be purchased. The second is an FAR trading model where the municipality fixes the permissible additional FAR and periodically auctions them.
Mumbai already has a purchasable FAR regime where the government has defined a basic FAR that goes with property rights, and any further FAR (up to the Master Plan-defined limit for the area) must be purchased on payment of a percentage of the basic value (which varies depending on the land-use). The zoning regulations of Amaravathi, the capital of Andhra Pradesh, mandate that “wherever FSI exceeds 1.75, the applicant has to pay impact fee as levied by APCRDA from time to time” (Section 210.5 of AMRDA Zoning Regulations). More Indian cities must adopt similar policies.
LVC instruments are a very powerful but severely underused planning tool to mobilise municipal revenues. Examples include betterment levy, impact fees, tax increment financing (TIF), etc. There’s a Government of India policy on LVC, which can form the basis for its widespread adoption. I have blogged here, here, here, here, and here exploring the LVC idea, including specific suggestions on the operationalisation of LVC policy.
Apart from a few cases, despite being discussed for nearly two decades, LVC (outside of some small betterment levy) has struggled for adoption by Indian cities. Hyderabad’s transformational Outer Ring Road (ORR) is a good example of how impact fees levied on land development within a band on both sides of the 160 km road were escrowed to partially finance its construction. The National Highways Authority of India (NHAI) could adopt this for all its greenfield roads and widenings. Also, all metro railway projects. A few cities under the Smart Cities project used TIF, where the municipality raises resources to finance an infrastructure investment in a locality by levying an increment on the property tax on properties in that locality for a defined period.
It’s not an exaggeration to argue that even if a small share of the high-level focus and efforts expended on PPPs, VGF and municipal bonds could have been spent on the boring issues of increasing property taxes and adoption of LVC instruments, Indian cities could significantly increase their revenue base.
Cities, as those in developing countries like India, with a low baseline of property tax and LVC revenues, would benefit disproportionately from focusing on property taxes and LVC. As the financial strength of the cities improves and average incomes rise, innovative financing tools like municipal bonds and PPP would assume greater relevance.
A complement to this on the debt raising side, of greater relevance than municipal bonds, is to focus on plain bank loans through a project finance route. In other words, raise debt on revenue-generating municipal assets like water and sewerage, mass transit etc., without any recourse to the municipal general funds. A proposal in this regard is here.
No comments:
Post a Comment