Shared by Vinika Kaul, PRIA
Article by PSN Rao, a Professor at SPA, New Delhi
India’s cities are growing in size and so are the numbers of inhabitants. The demands on the urban envelope are only increasing by the day and in terms of sheer numbers, it is quite mind boggling. While cities contribute greatly to the growth of the economy, they receive little attention in terms of financial allocation.
Cities are cared for by municipal bodies, who provide for and maintain public goods and services that cater to the needs of the urban dwellers. Municipal functions cost money, which for municipalities is always limited and results in poor upkeep of the city and also do not provide adequately for future development.
FINANCES, THEN & NOW
Traditionally, municipal taxes have been the mainstay of finances for cities. One of the primary methods of mobilising revenues is levying property tax, along with other taxes. Even today, property tax happens to be the chief source of finance. There are, however, issues with it. One, determining the amount of tax to be collected is a vexatious issue and often attracts a high volume of litigation. Two, a large number of properties get exempted on account of the populist nature of the organisation; it is an elected local government where the municipal councillors do not want to become unpopular with the vote bank. Three, the collection machinery is far from efficient and taxes are not collected properly. Four, buoyancy is absent and tax rates do not increase with time and are not linked with increase in the cost of service provision.
The revenues collected as property taxes are just not sufficient to meet the costs of service provision, particularly given the increased standards demanded by citizens. The result is deficiency of performance and poor delivery.
Thanks to the finance commissions, both at the central and state levels, there is an alternative channel of fund flow. But here again, there are limitations on the amount of money that can be shared by the national and state governments with the local government. Often, fund allocations are politically coloured and not always in the best interest of municipal bodies. While this source has certainly added to the coffers of the municipal bodies, their pockets continue to be shallow and money is still a problem.
Recently, municipal bodies have also issued bonds to raise capital. While it is easy to raise money from deep discount bonds, the challenge is to invest it in commercially viable projects so that after returning the money with interest to the investors, the municipal bodies have a neat profit. Only then will this model work.
At this point, it is premature to evaluate municipal bonds as a revenue resource for a lot of them issued by various municipalities are yet to reach the maturity period. Only a few cities such as Bangalore, Ahmedabad and a cluster of smaller cities such as Tiruppur in Tamil Nadu have gone in for this route.
The bond market appears to be a rather difficult route for mobilising resources as it demands a high degree of financial acumen on the part of a municipal body to implement this.
Using the private sector is yet another way for municipal bodies to effectively use resources. Instead of increasing staff salaries and perks, one can hive off certain activities to the private sector. Examples of this abound in various cities and towns of India. Chennai and Bangalore have outsourced garbage collection and disposal to private companies. Traffic islands and median dividers on roads are being beautified and maintained by large corporations as part of social responsibility initiatives. Several cities have outsourced street light maintenance. In some parts of Bangalore, Infosys Foundation is also contributing to the maintenance of public toilets.
Several international donor agencies have been giving grants to municipal bodies for the last several decades. A lot of money has been pumped in to civic infrastructure and slum development. Unfortunately, either these efforts are too little, or the end products are of poor quality with little attention given to maintenance. Therefore, one may quite end up from where one started.
The central government decided to bring about a quantum leap in the situation by providing huge grants under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), which was to have been implemented in 65 cities. While the period of implementation is complete, the story leaves many gaping holes within. Huge amounts of funds that were actually available were not accessed by the municipal bodies for a variety of reasons: lack of capacities in preparation of required documentation, inability to progress on funds already accessed and thereby not being able to get further instalments of promised grants.
Often, we find that money is spent on the same project multiple times. This is primarily because of lack of proper quality management in the projects. What is built today is broken soon and a lot is spent in repairing it. In a proper system, once infrastructure is put in place, it should last over its life cycle with minimal maintenance. This never happens. Further, we have situations like a road is first laid, and no sooner the tar gets dry, than it is dug up to repair the sewer line or the water line.
Technology is another area where municipal bodies are very weak and most of them invariably lag behind. For instance, the mere replacing of old water pumps by modern power saving pumps can result in huge savings in electricity bills.
Staffing is a critical area where a lot of money can be saved. Municipal bodies usually have a large number of personnel on their salary rolls, many of them hardly contributing. The right kind of human resource, rather than numbers, is what is needed.
One of the oft voiced complaints from municipal finance analysts is that land development has been kept out of the purview of municipal bodies and that it is the development authorities who make all the money at their expense. What they do not realise is that municipal bodies have a huge portfolio of properties which are of very high value. All they need is to unlock the potential of their real estate portfolio and they will have all the finances they need for a long time to come.
For instance, most of the shopping malls in Hong Kong are owned not by private entrepreneurs but by the Hong Kong Housing Development Authority. Municipal property portfolio management holds a huge potential for financial re-engineering so that not only does the city get good quality infrastructure, the municipal body also gets a steady source of income which is also buoyant and can budget for inflation.
What is woefully lacking is that both at the elected as well as the executive level, is vision, financial planning and management skills, corporate management capabilities and appreciation of technology to change ways of orthodox working. Wherever municipal bodies have attempted reform in this direction, they have seen that efficiencies improve and it is a win-win for all.
Mere infusion of funds, without work culture churn, overhaul of systems, procedures and practices and structured and strategised financial management, will do more harm than good and can never solve problems of the citizens.