Summary of Report on Indian Urban Infrastructure and Services (2011) – Part II

By Vishnu Prasad, IFMR Finance Foundation

As part of our series on Municipal Finance, in this concluding part of our two part review of the Report on Indian Urban Infrastructure and Services (2011), we look at the Report’s recommendations on urban governance reform and financing urban infrastructure.

Urban governance reforms

The Report identifies three broad areas of reforms in urban governance- administrative reforms, service delivery reforms and fiscal reforms1.

Administrative Reforms

The Report suggests major administrative reforms “for bringing about greater efficiency in the management of infrastructure assets, delivery of urban services, and improvement in conditions for the poor so that Indian cities can provide a better quality of life, generate a better environment for growth, and be inclusive.2

i. Autonomy in city management
The Report recommends greater functional and fiscal autonomy for Urban Local Bodies (ULBs) so that they can effectively carry out the functions mandated under the 74th Constitution Amendment Act (CAA). It also recommends strengthening capacity at the ULB level by creating a municipal cadre and lateral hiring of professionals to the cadre.

ii. Empowered mayors with effective devolution
The executive head of a city is the Municipal Commissioner, who is deputed by and accountable to the state government. As a part of increasing autonomy of cities, the report recommends creation of single-point accountability through direct election of the mayor by residents of the city and creation of a unified command structure under the Mayor.

iii. One Ministry for Urban Affairs and Housing
The problem of urban poverty and housing for low-income households is closely interlinked to the problem of urban development. Solutions to these problems lie in an integrated planning framework which focuses on building urban infrastructure for all and ensures delivery of urban services of the same standard to all. City plans cannot be developed in isolation of the transport, housing needs of low-income households and planning through different departments under two ministries can be inefficient.

iv. Convergence of institutional responsibilities
One of key reasons for poor urban service delivery in India is the fragmented institutional set-up of cities. The report recommends convergence of responsibilities (intra-departmental responsibilities and coordination with a state and central governments) under an empowered mayor. This will lead to a holistic approach in infrastructure building and service delivery.

Service Delivery Reforms

i. Corporatization of urban services
Corporatization of services helps in ring-fencing the finances of an entity which is responsible for the delivery of specific services and protecting it from multiple populist demands3 ” In this institutional framework, the corporatized entity can follow modern management practices while being accountable to the ULB. The Nagpur Municipal Corporation has made a start by creating a dedicated company for overseeing its water provision, waste water treatment and disposal functions.

ii. Coming together to deliver
In certain situations, it might be optimal for smaller ULBs to come together and provide services. The report envisions the creation of joint entities involving multiple ULBs for discharge of such functions. However, such entities must be made accountable to the ULBs through service level agreements.

iii. Public-Private Partnerships
The report recommends using PPPs as an effective instrument to deliver better services. Well-structured PPPs can provide both efficiency and financial gains for ULBs. However, there are a number of deterrents to the entry of private firms in urban service provision- commercial non-viability of projects, inability of ULBs to generate a robust internal revenue base, inertia to move towards new ways of service delivery etc.

iv. Regulatory regime for urban services
The report recommends setting up of urban utility regulators for all urban services to monitor progress of plans, recommend tariff structures, monitor quality of services and advise the state government. The report also suggests a benchmarking exercise to compare municipal performance indicators, done by a Reform and Performance Management Cell (RPMC) at the state and central government levels.

v. Accountability and Citizen participation
Citizen Participation needs to be strengthened to create ‛citizen owned, citizen paid, and citizen managed’ cities. Setting up of Ward Committees and AreaCommittees is an important first step. The Public Disclosure Law and Community Participation Law are important tools for driving transparency and accountability in governance. Additionally, the report endorses setting up of a Local Body Ombudsman that addresses corruption and efficiency issues and State Councils of Local Self-government headed by the Chief Minister of each state with Mayors and Municipal Chairpersons as members to discuss issues of local self-government.

vi. E-governance
By doing away with the discretionary powers vested in a few officials, e-Governance cuts at the roots of corruption and inefficiency. For example, geographical information system (GIS) can be used to improve urban land management and make it more transparent. The report suggests development of an IT cadre at the ULB level and appointment of a Chief Information Officer for larger cities for strengthening capacity.

Fiscal Reforms

i. Financial reporting, disclosures, and audits
ULBs must adopt transparent budgeting practices based on double-entry bookkeeping, performance reporting, cost accounting and auditing in order to be accountable to their citizens and also to become market-worthy so as to attract capital for investment. The Report also proposes a Market Worthiness Disclosure Standard (MWDS), which should require cities to report data in a regular and timely manner. MWDS envisages the following reports to be prepared by ULBs and made available on their websites over time:

• Cash flow statement, and key financial ratios;
• Net revenue dynamics including economic data for predicting expenditures and institutional arrangements that affect both revenue prospects and expenditure commitments; and
• City management capacity covering aspects like staff, institutional framework, and information flow.

ii. Fiscal devolution
The 74th Constitutional Amendment Act did not provide for a ‛municipal finance list’ in the Constitution to match the municipal functions listed, thereby signaling an incomplete devolution package and leaving the issue of financial devolution to state governments. It only envisaged State Finance Commissions (SFCs) to devolve funds from state to local governments. Table 1 provides a more detailed discussion on fiscal devolution.

Financing Urban Infrastructure

In the previous post, we noted that the Report estimates investment for urban infrastructure over the 20-year period from 2012 to 2031 to be Rs 39.2 lakh crore (at 2009-10 prices). It proposes a three pillar framework for financing this expenditure:

i. Securing the revenue base of ULBs through ‛exclusive taxes’ and a guaranteed and predictable share of ULBs in tax revenue of state governments
ii. New Improved JNNURM (Jawaharlal Nehru National Urban Renewal Mission) from the Government of India
iii. External Sources of Finance: Through reforms in governance and financing ULBs can begin to move away from a weak financial base towards a framework which enhances the creditworthiness of the ULBs and improves their ability to generate and leverage revenue surpluses for accessing market funds.

Table 1 captures some of the important aspects of the proposed funding framework.

The projected Municipal Revenue and Expenditure (as a percentage of GDP) over the proposed 20 year period is given in Table 2 below:

In order to finance their deficits, ULBs will have to resort to market borrowings (pooled finance, municipal bonds, institutional finance, etc.) and new project execution mechanisms like PPP, and land-based financing instruments.

1 – For a detailed discussion on problems of urban governance and service delivery in India, see the first part of this review and our post on Municipal functionaries. The Municipal Functionaries post also discusses capacity strengthening reforms.
2 – Page 92, Chapter 4, Report on Indian Urban Infrastructure and Services (2011)
3 – Page 98, Chapter 4. Report on Indian Urban Infrastructure and Services (2011)