2
Aug

The Urban Organism – Cities as living beings

By Vishnu Prasad, IFMR Finance Foundation

For the first time in the history of the world, more than half of the world’s population live in urban areas. In the next 13 years, a billion people are expected to migrate to cities, twice as fast as the rate just 30 years ago. Yet, as William Solecki1 argues in a recent article our understanding of the process of urbanization remains fragmented at best. This can partly be attributed to the fact that each academic discipline approaches the study of cities using a narrow analytical lens that precludes a holistic understanding of the process of urbanization and how it interacts with other systems like the environment for instance.

Some recent work has tried to bridge this gap in our understanding by looking at cities as complex adaptive systems. This perspective has been in vogue since the advent of cybernetics, which inspired a study of cities as machines or engineering systems. However, what these studies lacked was a scientific basis as theories of cities. With the increased availability of data on cities, research has now been able to move towards a science of urbanization2.

Biological Metaphor of the city

Researchers have long applied the biological metaphor to the city and likened them to living systems, organisms and eco-systems. In a recent paper, Bettencourt et al argue that this biological or evolutionary comparison cannot be dismissed as just a qualitative metaphor for the city3.

It is well established that almost all physiological characteristics (like metabolic rate, heart rate) of biological organisms scale with the body mass of the organism. As the authors note, “Conceptually, the existence of such universal scaling laws implies, for example, that in terms of almost all biological rates, times, and internal structure, an elephant is approximately a blown-up gorilla, which is itself a blown-up mouse, all scaled in an appropriately nonlinear, predictable way. This concept means that dynamically and organizationally, all mammals are, on the average, scaled manifestations of a single idealized mammal, whose properties are determined as a function of its size.

The authors examine whether similar scaling relationship can be found between cities and its social and material resources using data on cities in US, China and Europe. Using population as the measure of city size, the study finds three categories of scaling:

i. Linear scaling: Parameters of individual need like total housing in the city, total employment, electrical consumption and water consumption scale linearly with city size.

ii. Sub-linear scaling: Parameters of material resources or infrastructure scale sub-linearly. This means that doubling the population of any city requires only about an 85% increase in infrastructure like total road surface, length of electrical cables, water pipes or number of petrol stations. The 15% savings happens due to economies of scale, which enable more efficient and economically viable provision of services.

iii. Super-linear scaling: Social and economic parameters like GDP, total wages, new patents, number of inventors, R&D employment all increase by approximately 15% more than the expected linear growth. The same holds true of instances of crime and new cases of diseases like AIDS.

The most striking result of the study is that social and economic variables show super-linear scaling with respect to city population. However, it is pertinent to note that population size must be seen not as a causal force, but rather as a proxy variable that captures a set of diverse socio-economic mechanisms made possible by the co-location and intense interaction of people. As the paper argues, “these indicators reflect unique social characteristics with no equivalent in biology and are the quantitative expression that knowledge spillovers drive growth that such spillovers in turn drive urban agglomeration, and that larger cities are associated with higher levels of productivity.” Thus, the central idea is that cities are large social networks, not merely a large collection of people. The complex web of social interactions makes the city more than just a sum of its constituent parts.

Extending the biological metaphor, Bettencourt and West argue that cities are approximately scaled up versions of one another4. This is shown for 360 US Metropolitan areas in Figure 1 below.


Source: Luis Bettencourt & Geoffrey West. A unified theory of urban living. Volume 467. Nature. October 2010. Pp 912-13

These results present the first steps towards creating a scientific theory of cities and understanding the process of urbanization in greater depth. Although the theories we have discussed may not be prescriptive for policy-makers, “a new quantitative understanding of cities may well be the choice between creating a ‘planet of slums’ or finally achieving a sustainable, creative, prosperous, urbanized world expressing the best of the human spirit.

Additional resources on the subject can be found at http://www.santafe.edu/research/cities-scaling-and-sustainability/papers/

An interesting TED talk on the subject titled ‘The surprising math of cities and corporations’ can be seen here: http://www.ted.com/talks/geoffrey_west_the_surprising_math_of_cities_and_corporations.html


  1. William Solecki is the Director of City University of New York’s Institute for Sustainable Cities. The article is available at: http://www.environmentmagazine.org/Archives/Back%20Issues/2013/January-February%202013/urbanization-full.html
  2. The Kind of problem a city is. Available at: http://www.santafe.edu/media/workingpapers/13-03-008.pdf
  3. Growth, innovation, scaling, and the pace of life in cities. Available at: http://www.pnas.org/content/104/17/7301.abstract
  4. A unified theory of urban living. Available at: http://www.cabdyn.ox.ac.uk/complexity_PDFs/Publications%202010/Nature_Cities.pdf

23
Jul

Analysing a city’s finances – Example of Srirangapatna TMC, Karnataka

By Vishnu Prasad, IFMR Finance Foundation

Continuing our focus on Municipal Finance, we look at the financial statements of Srirangapatna TMC in Karnataka in this post. We are currently working with the town of Srirangapatna as a part of IFMR Finance Foundation’s Financial Access for Small Cities initiative. In this post, we examine the town’s finances over the past ten years and find similarities to national trends.

The financial books of Srirangapatna Town Municipal Council (TMC) comprise three accounts- revenue receipts/payments, capital receipts/payments and extra-ordinary receipts/payments. Table 1 presents an overview of heads that are classified under each account.

The key findings from our analysis are summarized below2:

i. Dramatic Increase in Total Income and Expenditure: The finances of Srirangapatna TMC have witnessed dramatic growth over the past decade. For instance, total Income has increased from Rs. 4.22 million in FY 2000-01 to Rs. 141 million in FY 2010-11 (see Figure 1). The city ran a surplus budget for most of the previous decade, except FYs 2007-08 and 2009-10 when the city ran a deficit budget3. This seems to be part of a wider trend in Karnataka, where 90% of the TMCs have surplus budgets4.

The last FY (2010-11) saw a large increase in both total Income and total expenditure; total Income doubled over the previous FY. This large spike is explained by two items in the city’s accounts. First, the city’s capital receipts account shows a deferred income of Rs, 39.5 million received under the head of public works. Second, the city received a development grant of Rs. 33.3 million under extra-ordinary receipts.

On average, the city’s income has exceeded its expenditure by a factor of 1.23. According to the Third Karnataka State Finance Commission (SFC), on average a TMC’s income exceeds its expenditure by a factor of 1.78. (For a deeper analysis of Kanataka’s third SFC, refer to our blog post on Funds devolution from state governments to ULBs)

ii. Increasing share of devolved revenue: Table 2 shows how the share of own and devolved revenue has changed over the past five years. In FY 2010-11, devolved revenue formed 74% of total revenue. The table shows that the proportion of devolved revenue saw a rapid increase in FY 2006-07; it rose from 35% in FY 2005-06 to 70% in FY 2006-07. This rise can be attributed to an untied SFC grant of Rs. 10 million that the TMC received in FY 2006-07.

Since 2006-07, the TMC has received an average of Rs. 15.61 million as untied SFC grants each year, which explains the increasing share of devolved revenue. This is similar to the trend seen across smaller ULBs in Karnataka. For instance, on average devolved revenue forms 71% of a TMC’s total income in Karnataka. This trend is also seen nationally where the share of own revenue in the income of ULBs has declined from 63.48% in 2002-03 to 54.94% in 2007-085. (For a detailed discussion on national level trends, refer to our blog post on Municipal Finance-Funds)

iii. Declining revenue from property tax: Table 3 shows the mean composition of own revenue over the past five years. Property Tax, Water Charges and Fees collected form 76% of own revenue. As the third SFC notes, property taxes form the largest source of own revenue for TMCs in Karnataka, forming 12% of total revenue (as of 2007). However, over the past five years, the share of property taxes in Srirangapatna’s total revenue has reduced to 7.5% in 2010-11 from 11% in 2005-06. The own revenue of the city is heavily reliant of a variety of fees that are collected; in 2010-11 total fees collected formed a third of own revenue.

iv. Administrative expenses forms 35% of total expenditure: Administrative expenses make up a large portion of the TMC’s total expenditure. Salaries, Allowances and collection of taxes form 41.69% of total expenditure of TMCs in Karnataka. This true of larger ULBs as well, for instance, Mohanty (2007)6 finds that establishment and administrative expenditure make up 36% of total expenditure in a study of 35 Municipal Corporations.

Public work expenses form about 41% (see Table 4) and hence, the largest expenditure item for the TMC. Public works comprises work undertaken on roads, pavements, footpaths, drains and street lights. Although their mean shares are small, expenditure on sanitation, water supply and urban poverty alleviation have increased. For instance, the TMC spent 17%, 16% and 10% of the total budget on sanitation, water supply and urban poverty alleviation respectively in 2010-11.

v. Sound fiscal health and High level of under-spending: The TMC seems to have been in sound fiscal health over the past decade. Even in years where the city’s budget ran a deficit, it had closing balances of Rs. 27.14 million (2007-08) and Rs. 44.17 million (2009-10). In FY 2010-11, the city had a surplus of Rs. 49.1 million, resulting in a closing balance of about Rs. 95.73 million.

As we found in our State of Srirangapatna report 20127, the city has many areas of opportunity that require spending from the TMC. For instance, the city has a serious sanitation issue- 39% of the households surveyed reported that they defecated in the open. 50% cited the lack of availability of public toilets as the reason for defecating in the open. As Table 4 shows, the city spends only 7.5% of its budget on sanitation and solid waste management combined.

This reflects a broader trend that is seen across ULBs in India. For example, Mohanty (2007) finds that municipal corporations in India are characterized by sound fiscal health and high levels of under-spending. The study finds that the level of under-spending on core services (as compared to the norms set by the Zakaria Committee) is 76%. Heavy dependence on upper tier of government (as seen by the over-whelming share of devolved revenue) and inability to raise revenues on their own hamper delivery of basic services.

Note: Budget Statements of the last three years are available on the TMC’s official website: http://www.srirangapatnatown.gov.in/

 

  1. Total fees comprises fees charged under the head of planning and regulation; these include building regulation fees, town planning fees, jatra/urs fees, development charges, parking fees and fees collected from grounds rented out for civic purposes
  2. Data for FY 2008-09 is missing from the analysis
  3. The city had a deficit of Rs. 3.14 lacs in 2007-08 and Rs. 25.09 lacs in 2009-10.
  4. Source: Report of the Third State Finance Commission, Government of Karnataka. Available at: http://www.finance.kar.nic.in/others/TSFC%20Report-English-Full.pdf
  5. Report of the Thirteenth Finance Commission (2010-2015). Finance Commission, India. December 2009
  6. Mohanty, P.K et al. Municipal Finance in India: An Assessment. Development Research Group, Reserve Bank of India. December 2007
  7. A summary is available here: http://financingcities.ifmr.co.in/SOS_Summary.pdf

 

5
Jul

Pragmatic Municipal Finance Reform in India: Lessons from policy in South Africa & Brazil

By Vishnu Prasad, IFMR Finance Foundation

As a part of our series on Municipal Finance, we present a summary of Anand Sahasranaman’s paper on Pragmatic Municipal Finance Reforms in India, published in the November 2012 edition of Environment and Urbanisation Asia. The paper draws out the lessons that the South African and Brazilian experiences in property tax reform, institutional reform for effective service delivery, market making institutions for municipal debt and participatory budgeting hold for India. A working paper version may be accessed here.

South African Policy and relevance for India

In South Africa, the Municipal Systems Act (2000) requires each local government to prepare a holistic development plan, which is a long term (8-10 year) plan for provision of social and infrastructure services to the municipality. Financial planning forms a critical part of this plan as the municipality’s proposed infrastructure program must be supported by a sustainable financing structure. The Act also envisages the participation of the community as an equal partner in local government by requiring participatory and transparent budget practices, participatory decision making in pursuing municipal service partnerships and a public process of policy development in setting municipal tax rates and tariffs. In this section, we look at relevant features of South African policy.

1. Property Tax reform

Property taxes and user charges form the bulk of a municipality’s own sources of revenue and understanding the significance of uniform property taxes policy, South Africa passed the Municipal Property Rates Act in 2004. The act allows municipalities to set their own tax rates and requires them to conduct an annual review of the rates. The act specifies that valuations of property must be based on market value and done once every five years. As a note of caution, the act also mentions ‘constitutionally impermissible rates’, which it defines as rates that would unduly bias national economic policies, and free national movement of capital labour, goods and services

2. Definition of Minimum Service Levels

Under the Free Basic Services policy, water supply, electricity, sanitation and waste removal services of a stipulated minimum quality and quantity are to be provided by local governments to all households free of cost. A minimum level of service is also explicitly defined. For example, it is stipulated that each household should have access to 50 kwH of electricity per month, which is the amount of energy necessary for a month of basic lighting, small black and white TV, small radio, basic ironing and basic water boiling through an electric kettle

3. Corporatisation for efficient service delivery

Corporatisation refers to the separation of service delivery from policy and regulation, with the objective of providing for greater accountability and countering overt political interference in the day-to-day provision of services. It allows the municipality to set policy and service standards and hold the entity accountable for meeting these standards. It also offers greater autonomy and flexibility to the management of the corporatized entity to introduce commercial management practices.

Johannesburg Water (JW) was formed in 2002 as a corporate entity, wholly owned by the City of Johannesburg, and was mandated the responsibility of providing water and sanitation to the three million residents of the City of Johannesburg. In the subsequent years, JW introduced a slew of projects including repairing and upgrading water networks, installing prepaid meters to ensure more efficient use of water and carrying out capital works. The important thing to note is that JW has been able to provide affordable, clean water to Johannesburg while remaining a financially sustainable entity.

4. Creating a market maker for debt capital access

Activity in the South African municipal debt market ceased after the government stopped providing guarantees. Currently, the Municipal Finance Management Act (2003) shapes and directs the basis for municipal borrowing. There are two important players in the municipal debt market: Development Bank of Southern Africa (DBSA) which has moved away from being a lender to the larger municipalities to supporting market development through lending to smaller municipalities and introducing new financial instruments (such as partial credit guarantees); and the Infrastructure Finance Corporation (INCA), a private sector player, which has become a source of funding to many municipalities by swapping the municipal investment portfolios of insurance companies and pension funds for INCA bonds

5. Incentivising cities to compete on service provision

Once the minimum service levels have been met by cities, they must be incentivised to provide higher level services, while not compromising on fiscal discipline. One such incentive for performance can be competition between cities on better quality and level of services through an annual benchmarking exercise, where the service provision status of different cities is compared. In South Africa, this has resulted in a situation where cities such as Johannesburg and Durban compete with each other to provide better services.

Brazilian Policy and Relevance for India

After the financial crisis in the early 1990’s, Brazil pushed through a process of fiscal reform, holding local governments accountable for their revenue transfers. This resulted in much better outcomes in local government service delivery, especially in education and health, where service delivery showed a marked improvement once their funding was tied to achievement of service levels. Further, the Fiscal Responsibility Law (2000) aimed at creating greater stability, sustainability and transparency in municipal financing. The important tenets of the law included limitations on payroll expenditures and ability of the central government to block automatic transfers if a state spent itself into a deficit. Relevant features of Brazilian policy are outlined below.

1. Participatory Budgets

The Participatory Budget (PB) is a process of consultation and debate between citizens, civil society groups (labour unions, community organisations), technocrats and local government officials to decide on the priorities, plans and actions that need to be undertaken by local government to improve infrastructure and service delivery. Porto Allegre was the first city in Brazil to experiment with the concept of PBs. A World Bank case study indicates that after introduction of PBs, coverage of water supply and sewerage connections went up from 75% in 1988 to 98% in 1997, number of schools quadrupled with enrolments doubling, and health and education budgets increased from 13% to 40%. Citizens are also increasingly involved in decision making, participation going up from a mere 1000 in 1990 to about 40,000 at the end of the millennium

2. Property Taxes

Property taxes and tax on services constitute the bulk of the municipality’s own source revenues, about 60% (17% of total revenues). Municipalities in Brazil use the Capital Value method to assess the value of all land and buildings in urban areas. The tax is administered by each municipality and like in South Africa, all municipalities enjoy the freedom to set the tax rate and collect the tax. Property tax rates in Brazilian municipalities vary between 0.2% and 1.5% and valuations are adjusted each year for inflation.

Recommendations for Policy Reform in India

Based on lessons from South African and Brazilian policies, the paper lays out four sets of policy reform for India.

I. Constitutional Reforms

1. Municipalities should be empowered to set tax rates and levy user charges within reasonable limits so that they can plan effectively for infrastructure service provision. However, like in the case of South African policy, there must be restrictions on misuse of these. This can be achieved by requiring the State Finance Commissions to provide the limits within which the municipality can fix tax rates and charges every 5 years.

2. A uniform Property Taxation code should mandate a move towards a uniform method of property valuation across the country. The paper suggests that an Area based system can be adopted initially across the country as this tends to be an improvement over the current ARV system in terms equity as well as an increase in the property tax base.

3. Minimum service quality and quantity levels for basic infrastructure services need to be enumerated. While the enumeration of benchmarks will be an essential step forward, we need to ensure that ULBs are appropriately incentivised to meet these targets. This can be achieved by tying the achievement of minimum service delivery targets to accessing funds from central infrastructure grant programs.

II. Innovative Service Delivery

4. As the Johannesburg Water example showed, corporatisation of water supply or electricity supply entities as service providers under the ownership of the city with a clear mandate on providing quality and affordable services, can serve large cities well. While the corporatised entity remains focused on service delivery, all equity concerns are handled by the ULB on its own balance sheet. A direct link between the service provider and citizens can be designed through the sale of a stake in the corporatised entity to citizens of the ULB.

III. Vibrant Municipal Debt Market

5. In India, HUDCO could play the role of market maker rather than subsidised lender. The municipal debt market can be expanded if HUDCO took on the role of a market development through providing financial guarantees, rather than being the sole financier backed by state government guarantees The municipal debt market can also be a source of citizen participation in governance and the demand for accountability.

IV. Citizen Participation and Activism

6. Ward Committees and Area Sabhas need to be invigorated to become vehicles of participatory democracy, as envisioned by 74th CAA. This could be achieved through choosing a few cities that have a history of citizen activism and actively pushing the formation and functioning of these committees. The positive outcomes from these initial cities could be publicised widely to incentivise other municipalities to follow suit and make participatory democracy a reality.

7. Information dissemination can be used effectively as a tool of citizen participation. When information is available publicly, citizens can hold local governments responsible for delivery of services For example, the national government in Brazil launched an anti-corruption drive in 2003 which involved the random audit of municipal government budgets by an independent public agency and releasing these results to the public. This disclosure of information led to a significant reduction the re-election rates of mayors found to be corrupt.

19
Jun

So what is a Smart City?

By Dinesh Lodha, IFMR Finance Foundation

For urban planners and city officials “Smart City” seems to be the buzzword that they believe will prepare them for the increasing urbanization that cities will be witnessing in years ahead. With around 75 percent of the world’s population expected to live in cities by 2050, such belief and concern seems justified, but the direction taken towards this end needs critical thinking. The definition of “Smart City” seems fluid and the contours aren’t clearly drawn.

In January 2012, a 20-story office building in downtown Rio, Brazil, collapsed. The city’s Operations Center got into action and coordinated a quick response across different departments (Fire, Electric, Civil, Traffic, Subways and others). Such coordination and quick response time would not have been possible but for the Operations Center.

The Operations Center built by IBM, integrates data from 30 agencies and video streams that it has implanted across the city. All the data and streams are reflected on a giant display from which city officials can get a real-time view of what’s happening across the city.

Songdo in South Korea, the much-trumpeted ‘Smart City’, is being built from ground-up on a reclaimed land near the Yellow Sea. The $35 billon dollar project has technology embedded in its genes. From schools powered by Telepresence to sensor-equipped elevators that move only when it detects humans nearby to homes powered by Smart Meters; the city is intended to be a model ‘Smart City’, and has Cisco as its digital architect.

There is great merit in seeing corporations investing their resources in making cities better and it’s obvious that they see a lucrative market that they wish to tap. However it begs the question are city mayors and officials right in handing over corporations such over-arching control and deploying what these companies call off-the-shelf solutions and computer models to a system as complex as a city?

Smart enough?

While technology certainly will play a crucial role in building smarter systems that makes the lives of citizens better, its integration and application needs to be well thought out. Deployment should not translate into wide-eyed optimism.

As Greg Lindsay, co-author of “Aerotropolis: The Way We’ll Live Next“, puts it in this opinion piece:

“The bias lurking behind every large-scale smart city is a belief that bottom-up complexity can be bottled and put to use for top-down ends — that a central agency, with the right computer program, could one day manage and even dictate the complex needs of an actual city.”

Further accentuating this argument is a forecast study “The Future of Cities, Information, and Inclusion,” commissioned by the Rockefeller Foundation, where it argues:

“Global technology companies are offering “smart city in a box” solutions. Governments are responding to their pitch: a smarter, cleaner, safer city. But there is no guarantee that technology solutions developed in one city can be transplanted elsewhere. As firms compete to corner the government market, cities will benefit from innovation. But if one company comes out on top, cities could see infrastructure end up in the control of a monopoly whose interests are not aligned with the city or its residents.”

There is merit in the argument but one cannot discount the fact that large corporations bring their vast resources, expertise and not to mention scale in addressing problems as disparate as that of a city.

The need therefore is for an intersection point where corporations and grassroots innovations can flourish – something that should form the genesis of a “Smart City”.

Getting Smart

While “Smart City” tag is largely labeled to cities that have adopted or implemented new mash-ups of technology in their day-to-day context, the term should mean more than that.

It should originate from a city’s desire to make best use of its existing resources and an identification of a clear roadmap as to where does the city see itself 5 to 10 years down the line. Such futuristic roadmap, developed in consultation with the local citizens, should be the fundamental guide in planning any technological deployment or otherwise that the city undertakes.

Though valuable as a guide, such planning should be fluid enough to take shape as things emerge, which is essential in the context of complex city systems, the behavioral aspects of which cannot be accurately modeled.

With a clear direction in place, the role of a city mayor or city officials is crucial. It is essential that they create a fertile ground for innovation (Read: Standard data sets, APIs etc.) that sees them making best use of this intersection point involving corporates, academic researchers and the local community of entrepreneurs, hackers, and other urban enthusiasts.

While they can engage the corporations on one hand to create applications or procure devices, they also have to encourage citizen innovation by way of organizing challenges, crowdsourcing solutions, hackathons, unconferences etc. Something folks at World Bank call “Co-Creating Solutions”. Such co-creation would allow citizens to have a stake in the city’s development and can be a source of rich dialog between them and city planners, resulting in interesting innovations and continuous loop of feedback.

In her book ‘The Death and Life of Great American Cities’ Jane Jacobs wrote “Cities have the capability of providing something for everybody only because and only when they are created by everybody”. As with any urban planning exercise or civic engagement, this quote could hold true for any smart city initiative too.

8
Jun

“Triumph of the City” – Why cities are our greatest invention

By Vishnu Prasad, IFMR Finance Foundation

This post is a continuation of our blog series on “Cities in Books“. In this seres we put across posts that reflect on how cities are portrayed in books and relate them from an urbanisation perspective.

Edward Glaeser’s compelling book “Triumph of the city” is part-history of cities and why they thrive or decline and part-travelogue that takes us through urban streetscapes around the world; but above all, it’s a personal ode to the city.

The book’s central point is that humans are an urban species who do wonders when they collaborate. Cities facilitate this collaboration and enable the joint production of knowledge through free flow of ideas. Throughout history, cities have been engines of innovation and progress. Ancient Athens, a prosperous trading town attracted the best minds from war torn Asia Minor. This first generation of migrants and the influence of their ideas on friends and students led to a remarkable time in history that witnessed the birth of Western philosophy, drama and history. Great ideas flourished when artists and scholars lived in close proximity, exchanging ideas freely.

In a world where rapid growth is leading to dire environmental impacts, the book also suggests that high density living in cities is the path to a greener future.

There is no such thing as a successful city without human capital

If there is one common thread that links successful cities across the world even today, it is their ability (like Ancient Greece’s) to attract smart people and to enable them to work collaboratively. Successful cities around the world follow this process. When Singapore separated from Malaysia in 1965, it faced enormous challenges- the diminutive state was surrounded by two antagonistic neighbours: Malaysia and Indonesia, it had no natural resources and no natural sources of food or water. As Glaeser puts it, “In the 1960s, Singapore was a poor shantytown where indoor toilets were a rarity. (Yet) Today, Singapore is a glistening First World City with one of the highest per capita GDPs on earth.” What produced this remarkable transformation? Glaeser attributes this success to a host of factors including rule of law, low levels of corruption and excellent infrastructure. But most importantly, Singapore invested in education- in the 1960s the average adult in Singapore had less years of schooling than her counterparts in Lesotho or Paraguay. By 1995, school kids from Singapore were outperforming other countries in the Test of International Math and Science. The creation of high quality home-grown human capital pushed Singapore to the forefront of electronics, biomedical production and finance.

Similarly, Bangalore owes much of its economic success to investment in education. In the early 1900s, Sir Mokshagudam Visvesvaraya’s efforts led to the establishment of University of Mysore and Bangalore’s engineering college, which bears his name. High human capital and a pro-business government brought industries like Hindustan Aeronautics Limited and Bharat Heavy Electricals to Bangalore. It is the same virtuous cycle, in which firms are attracted by high human capital and workers are drawn by these firms, which had led to Bangalore’s domination in the IT sector.

Cities are green

Glaeser finds that in the US, households living in areas with more than ten thousand people per sq. mile use half the gas used by a household in an area with density of fewer than one thousand people per sq. mile. Increased density of neighbourhoods reduces the average distance to shopping markets, groceries and schools. Increased density also permits the growth of public transportation, which are much more energy efficient. For example, public transport in New York emits 0.9 pounds of carbon dioxide per trip, a tenth of the emissions produced from an average car trip. Interestingly, there are also intra-city differences in emissions. Suburban households consume 300 gallons more of gas and 27% more electricity than an urban household.

A household in America’s greenest city, San Diego emits 60% less carbon than its counterpart in Memphis, America’s brownest city. So why aren’t more people living in San Diego? The answer is that housing restrictions in Coastal California have led to an under-supply of houses, pushing prices up. Legislation protecting the environment requires any large construction in the state to undertake an environment impact review. In 2008, California generated more reviews that the rest of the US. These impact reviews add costs and delays to new construction, making them more expensive. Glaeser argues that these reviews take a narrow view of impact on the environment. Prohibiting construction in California shifts it to browner areas that are less energy efficient, magnifying the impact on the environment.

The book cautions against India and China following similar misguided environmental policies that create an anti-urban bias. As millions shift from hinterlands to cities, “their decisions about land use will have a huge impact on energy consumption and carbon emissions. If they live at high densities and use public transit, then the whole world will benefit. If they sprawl, then we will all suffer from higher energy costs and higher carbon emissions. One important reason the West must shrink its own carbon footprint is to reduce the hypocrisy of telling India and China to be greener while driving our SUVs to the mall.

Flat World, Tall City

Glaeser finds abundant examples of misguided anti-urban policies in rapidly urbanizing countries. Following tenets of British urban planning, in 1991 Mumbai capped Floor Area Ratio (FAR) for most of the city at 1.33. This meant that in one of the most densely populated cities on earth, buildings could have an average height of one and a third stories. A city as populous as Mumbai should build taller. “An abundance of close and connected vertical real estate would decrease the pressure on roads, ease the connections that are the lifeblood of a 21st century city, and reduce Mumbai’s extraordinarily high cost of space.” Thus, the book argues that building taller to ensure higher densities is the way forward for cities in India and China.

The inexorable march of the city

In recent years, some critics have argued that improvements in information technology will obliterate advantages of urban living. However, as the book says, “a few decades of high technology can’t trump millions of years of evolution. Connecting in cyberspace will never be the same as sharing a meal or a smile or a kiss…whether in London’s ornate orchards or Rio’s fractious favelas or the dusty workspaces of Dharavi, our culture, our prosperity and our freedom are all ultimately gifts of people living, working, and thinking together – the ultimate triumph of the city.

30
May

Making Room for a Planet of Cities

By Vishnu Prasad, IFMR Finance Foundation

In a report titled “Making Room for a Planet of Cities”, Shlomo Angel et al examine how the prevailing planning paradigm of containment, which is predicated on the containment of sprawl in cities, is unsuitable for rapidly urbanizing countries like India. The report is based on a study of the historical evolution of urban land cover in 120 cities, including 30 cities for which maps and data are available from 1800.

The key findings of the report are:

  1. Persistent Decline in Urban Density: Analysing a global sample of 120 cities, the report finds that average built-up area density reduced from a mean of 144 p/ha (people per hectare) in 1990 to 112 p/ha in 2000. Examining a representative sample of 30 cities (for which data is available from 1800), it becomes clear that declining urban density is a feature observed throughout the 20th century. Urban densities peaked circa 1894. Densities have declined from their peak of 430 p/ha to an average of 100 p/ha in 2000.
  2. Reduced fragmentation of City footprints: Fragmentation or discontinuous development of the city (often referred to as sprawl) has been measured using two complementary metrics- openness index is a neighbourhood level scale that measures the average share of open space within a walking distance circle (1 km2 in area) about every built-up space in the city and city footprint ratio, a city level metric, defined as the ratio of city footprint (the total built-up and open area in a city and its suburbs) to the city’s built-up area. The mean value of the openness index in the global sample reduced from 0.47 in 1990 to 0.42 in 2000. The mean city footprint ratio also reduced marginally from 2.01 in 1990 to 1.93 in 2000.This means that on average, cities today contain as much urbanized open space as their built-up area.
  3. Growth in urban land cover outpaces growth in urban population: In the global sample of 120 cities, urban population growth averaged 1.60% p.a between 1990 and 2000. During the same time period, urban land cover grew at 3.66% p.a. At this rate, the world’s urban population will double in 43 years while urban land cover will double in just 19 years. Accra’s explosive growth (below) provides us a glimpse of the scale of urbanization challenges facing the world.

Why has the containment paradigm failed?

The containment paradigm believes that it is in the public interest to contain unrestrained urban expansion, typically decried as sprawl, and to make cities more compact. It argues that

  1.  the current density of urban land is too low and needs to be increased;
  2. there is an excessive amount of vacant land within the built-up areas of cities that needs to be filled in; and
  3. land on the urban periphery needs to be left largely undisturbed.

The classic example of this planning paradigm is Seoul, where the establishment of a green belt in 1971 which prevented the conversion of land to urban use in a 1482 km2 area surrounding the city (Figure 2). As the map shows, urban growth has burgeoned in the permitted area and led to the development of satellite towns and edge cities outside the greenbelt area. This has led to increased commuting distances and higher carbon emissions. Within the city, restricted supply of land has led to sky-rocketing house prices. Seoul’s rent-to-income ratio was 0.35; second highest in the world and twice the global average of 0.16.

Figure 2

In Sao Paulo, restriction of urban growth seeking to protect the entire countryside surrounding the city has led to virtually no available open space within the city (Figure 3). Sao Paulo has an openness index of 0.18, the lowest among the global sample of 120 cities.

Figure 3

Making Room Paradigm

The making room planning paradigm rests on four tenets:

  1. Realistic projection of urban land needs: New York City (NYC) and Barcelona are prime examples of cities that have realistically projected land needs. In 1811, NYC (with a population of 100,000) prepared an expansion plan projecting a 10-fold increase in population. Similarly, Ildefons Cerdá envisioned a 10-fold increase in Barcelona’s population. Assuming a 1% annual density decline, the report forecasts that 22 countries will multiply their urban land cover 10-fold between 2000 and 2050. Cities need to realistically project their urban land needs to prepare for such expansions in the future.
  2. Generous metropolitan limits: Metropolitan limits have to be large enough to accommodate 20 to 30 years of urban expansion based on realistic projections of population growth, density decline, and changes in fragmentation levels. The study argues that Beijing, with an administrative area 11 times its built-up area, is a best practice example of this tenet.
  3. Selective protection of open spaces: Instead of protecting too much land from urban development at no cost to the public (like Seoul and Sao Paulo) and ending up with no open space at all, this strategy aims to protect some land at a minimal cost to the public so it remains open in perpetuity. The report cites the example of Singapore that has a number of parks and open spaces distributed throughout the city area.
  4. Arterial grid of roads at 1km apart: Cities must prepare for urban growth by to securing the rights-of-way for an entire arterial road and infrastructure grid in the area within the new administrative boundaries. Toronto serves as an example of a city that has been able to build and maintain an effective public transport system that extends along an arterial road grid far into the suburbs. It now has the third-largest transit system in North America.
16
Apr

The outbreak that enabled urbanisation: London in “The Ghost Map”

By Anand Sahasranaman, IFMR Finance Foundation

This post marks the beginning of our new blog series “Cities in Books“. In this series we will put across posts that reflect on how cities are portrayed in books and relate them from an urbanisation perspective.

“It is August 1854, and London is a city of scavengers.”

Thus begins ‘The Ghost Map’, Steven Johnson’s brilliant book on the London cholera outbreak of 1854. The book, on the one hand, is a medical thriller that follows its two protagonists – the physician John Snow and clergymen Henry Whitehead –  as they use reason and evidence to overturn the prevailing orthodoxy on the understanding of communicable diseases and in the process, found the science of modern epidemiology in what is still considered a seminal event in the field of public health.

Simultaneously, the book is also remarkable for its view of the epidemic as a consequence of urbanisation and the response to it as one of the defining milestones that made long-term urbanisation and high density growth sustainable prospects. In making this argument, Johnson starts off by providing us a visceral portrait of London circa 1854, to lay out the background on which the story unfolds. Sample this edited fragment about the scavenger economy of London:

“Just the names [of the scavengers] alone read like some zoological catalogue: bone-pickers, rag-gatherers, pure-finders, dredgermen, mud-larks, sewer-hunters, dustmen, night-soil men, bunters, toshers, shoremen. They were the London underclasses, at least a hundred thousand strong. So immense were their numbers that had the scavengers broken off and formed their own city, it would have been the fifth-largest in all of England…

Early risers […] would see the toshers wading through the muck of low tide, […] their oversized pockets filled with stray bits of copper recovered from the water’s edge. […] Beside them fluttered the mud-larks, often children, dressed in tatters and content to scavenge all the waste that the toshers rejects as below their standard: lumps of coal, old wood, scraps of rope.

Above the river, in the streets of the city, the pure-finders eked out a living by collecting dog-shit […] while bone-pickers foraged for carcasses of any stripe. Below ground, in a growing network of tunnels beneath London’s streets, the sewer-hunters slogged through the flowing waste of the metropolis. Every few months, an unusually dense pocked of methane gas would be ignited by one of their kerosene lamps and the hapless soul would be incinerated twenty feet below ground, in a river of raw sewage.

London’s underground market for scavenging had its own order of rank and privilege, and near the top were the night-soil men […] City landlords hired the men to remove the “night soil” from the overflowing cesspools of their buildings.”

With a population of 2.4 million people as per the 1851 census, and grossly inadequate infrastructure, London was “drowning in its own filth”. Great numbers of people living closer to each other in unsanitary conditions – the ingredients for the spread of cholera bacterium were optimal.

A growing city with infrastructure unable to keep pace with population, generating tremendous quantities of waste and sewage, and scavenger economies built around the waste – these are themes that resonate across many developing country metropolises even today. London’s transformation to a global city with good quality infrastructure therefore can be seen as a beacon of hope for these cities as they confront their infrastructure and public service challenges, but with the added complexity in most cases of much higher populations than London in 1854– in some cities like Mumbai and Delhi, an order of magnitude greater. However, the technologies and solutions available at present to tackle civic problems at scale also provide these cities tremendous opportunity to drive change much faster than London in 1854 was able to.

Having established that London in 1854 was rife with conditions for the spread of cholera, Johnson then describes the untiring work of Snow and Whitehead in fighting against the prevailing orthodoxy of the ‘miasma’ theory, which held that diseases such as cholera were caused by bad air and smells. Based on their scientific approach of collecting data on where deaths had occurred, mapping this data and comparing this with areas which were considered to be ridden by ‘miasma’, they were able to conclusively prove that the ‘miasma’ theory could not explain the deaths caused by the epidemic. They were also able to prove that it was the water from the pump located at Broad Street that caused the spread of the disease. The maps developed by Snow were critical in clinching the case for the water-borne theory.

“When Snow set out to do the second version of the map was to create a Voronoi diagram using the thirteen pumps as points. He would diagram a cell that showed the exact subsection of addresses on the map that were closer to the Broad Street pump than they were to any other pump. But these distances were to be calculated on foot-traffic terms, not the abstract distances of Euclidean geometry. […]

And so the second version of the map […] included a slightly odd, wandering line that circumscribed the centre of the outbreak, roughly in the shape of a square with five or six areas jutting out, like small peninsulas, into the surrounding neighbourhood. This was the area encompassing all those residents for whom the quickest trip for water was to the Broad Street pump. Superimposed over the black bars that marked each death, the amorphous shape took on sudden clarity: each peninsula extended out to embrace another distinct cluster of deaths. Beyond the circumference of the cell, the black bars quickly disappeared.”

Dr.Snow’s Map

Modern epidemiology was born out of this map. What is striking is the fact that the physical mapping of the spread of an outbreak enabled the detection of its source. Today, we see wide application of maps in understanding many different types of urban issues, and this owes in substantial measure to John Snow’s maps of the cholera outbreak.

Additionally, Johnson also argues that the very nature of ‘urban’ London was crucial to Snow and Whitehead making their breakthrough.

“And it was precisely [Snow and Whitehead’s] metropolitan connection that made this solution possible: two strangers of different backgrounds, joined by circumstance and proximity, sharing valuable information and expertise in the public space of the great city. The Broad Street case was certainly a triumph of epidemiology, and scientific reasoning, and information design. But it was also a triumph of urbanism”

The lasting consequence of the cholera outbreak Johnson posits is the fact that public health authorities oriented themselves towards the new science. What this meant was that there was a new focus on creating infrastructure that enabled the supply of clean water and the removal of sewage to create sanitary, hygienic cities. In the long view, Johnson argues, it is this change that has enabled (and will continue to enable) the trends of increasing urbanisation and denser cities while ensuring health and safety for citizens.

“Establishing sanitary water supplies and waste removal systems became the central infrastructure projects of every industrialised city on the planet. […] The changes ushered in by the sewer system were manifold: fish retuned to the Thames; the stench abated; drinking water became markedly more appetizing. But one change stood out above all the others. In all the years since Henry Whitehead helped track down the Old Ford reservoir contamination in 1866, London has not experienced a single outbreak of cholera. The battle between metropolis and microbe was over, and the metropolis had won.”

 

7
Apr

US Municipal Securities Market – Part II: Evolution and Current Status

By Krushna Ranaware, Intern, IFMR Finance Foundation

This post follows our earlier post on US Municipal Securities Market.

The evolution of US Municipal Securities Market can be divided into three distinct phases1

i. 1800s-1950
ii. 1950-1975 and
iii. 1985-present.

i. 1800s-1950

The idea of using public financing for infrastructure works emerged in the early 1800s. The financing of Port of New Orleans in the 1800s was the first instance of an authority using public financing. Until then (and for a few decades after) the dominant form of financing transport, canals and railroad was corporate debt. Following this, the issuance of Erie Canal bonds issued between 1812 and 1825 were guaranteed by New York State. The Port Authority of New York and New Jersey were among the first conduit bonds issued by state for a specific public purpose which overlay multiple municipal boundaries and whose debt was paid not from taxes but from operating revenues.

As the United States moved into the new century, city governments were granted “home rule” by state legislatures. This broadened their ability to borrow and spend. This period also witnessed an expanded Federal agenda of public work programmes. Post-World War I, the rate of increase in outlays for public works by states tended to exceed the proportional expansion of tax revenues. Moreover, outlays constituted an increasing proportion of total governmental cost payments during this period. Thus, the states experienced a growing need for borrowing to finance public works. By 1925, municipal revenue bonds became an established method.

The Federal Government had a major impact on local governments accessing public financing for public works projects through its regulatory standard setting powers. For example, the Flood Control Act of 1917 and 1928 was passed to control of floods on three rivers. Local interests protected because of flood control were to contribute not less than one-half of the cost of construction. The Hill Burton Act of 1946 was designed to provide federal grants and guaranteed loans to improve the nation’s hospital system. The federal money was only provided in cases where the state and local municipality were willing and able to match the federal grant or loan, so that the federal portion only accounted for one third of the total construction or renovation cost. The Housing Act of 1946 required municipalities with populations over 50,000 to finance one-third of the cost of redevelopment activities to match the two-thirds federal share.

ii. 1950-1975

The post- World War II period saw an increase in individuals’ taxable incomes as well as an increase in average effective tax rate for insurance companies. It also saw the emergence of a range of environment protection legislations. In addition, pent-up housing demand, the changing character of transportation and a shift in structures for manufacturing facilities, all combined to produce a huge demand for additional public and private facilities. In response to that demand, the level of state and local government debt rapidly increased. So while the total outstanding debt in 1960 was only $66 billion, by 1981 the amount was over $361 billion.

This period also saw an increase in the total outstanding amount of short term borrowing. In the early 70s, the annual dollar amount of short term debts issued equalled or exceeded the amount long-term debt issued. Also, revenue bonds began to constitute over half of new issues in the late 1970s. During this period, there were four purposes for which short term borrowing was put to use:

  • Over one-third was for public housing or urban renewal purposes
  • Synchronizing flow of current disbursements with current tax receipts
  • Reducing financing costs associated with capital projects, in order to avoid borrowing the amount required to finance an entire capital project before all of the funds are needed
  • Financing expected and unexpected operating deficits.

Some of the important federal legislations in this period that influenced the kind of debt issued in this period are:

  • The Veterans’ Adjustment Act of 1952 included benefits like low-cost mortgages, loans to start a business or farm, cash payments of tuition and living expenses to attend college, high school or vocational education, as well as one year of unemployment compensation for World War II veterans. They could receive state and federal benefits, the federal benefits beginning once state benefits were exhausted.
  • The Air Pollution Control Act of 1955 left states principally in charge of prevention and control of air pollution at the source. Under the Clean Water Act of 1972, the Congress created a major public works financing program for municipal sewage treatment. In the initial program the federal portion of each grant was up to 75 per cent of a facility’s capital cost, with the remainder financed by the state. In subsequent amendments Congress reduced the federal proportion of the grants and in the 1987 Water Quality Act, it transitioned to a revolving loan program. The environmental legislations permitted companies to borrow through state and local agencies for pollution control purposes, allowing them to enjoy lower interest rates because of the tax exempt status of interest on state and local debt.
  • The Elementary and Secondary Education Act of 1965 is one of the most far reaching federal legislation affecting education ever passed by the Congress. Under this act, federal funds would not serve as replacements for local funds but rather they would serve as ancillary resources.
  • The Housing and Urban Development Act or New Communities Assistance Program of 1970 was established to guarantee bonds, debentures, and other financing of private and public community developers and to provide other development assistance through interest loans and grants, public service grants, and planning assistance.

iii. 1985-present

As of 2010-2011, the municipal securities market had close to 44,000 state and local issuers, and with a total face amount of $ 3.7 trillion. Figure 1 below shows that while the amount issued per year has not fluctuated much, the number of issues has seen great fluctuation since 1986. Each dip in the number of securities issued roughly corresponds with periods of recession in the American economy2.

Figure 1 Summary of debt issued (1986-2010)

As Figure 2 shows, retail investors or individual investors have been the largest owners of municipal debt for more than the last decade and half. These investors usually buy and hold securities till the end of the maturity period. As of 2010-2011, approximately 50 per cent of the outstanding total outstanding debt was held directly by individuals and up to 25 per cent was held on behalf of individuals by mutual, money market, closed end and exchange traded funds.

Figure 2 Ownership of debt (1996-2010)

As shown in Figure 3, most of the total outstanding debt, despite many fluctuations, is issued for general purpose. General purpose debt is issued for long range capital needs issuing agencies as well as to support construction of public work facilities and their upkeep improvements especially when there is a shortfall of federal funds. General purpose is followed by education as the purpose with the second largest issue.

Figure 3 Purpose of debt as percentage of total outstanding debt (1986-2010)


1-This analysis is incomplete due to unavailability of data for some individual years between 1959-1962, 1962-1967 and 1974-1984
2-The sudden leap in the total outstanding amount from 2004 to 2005 is a result of revision in the Federal Reserve’s figures on municipal securities and loans due to a change in data sources. New data indicate that municipal securities and loans outstanding in 2004:Q1 is $740 billion greater than previously estimated in the flow of funds accounts. The estimate of household holdings of municipal securities and loans is revised up by about $840 billion, on average, from 2004 forward.

28
Mar

US Municipal Securities Market – Part I: Introduction

By Krushna Ranaware, Intern, IFMR Finance Foundation

This post is part of our blog series on Municipal Finance.

In the United States, critical infrastructure financing has been facilitated to a great extent through the issuance municipal bonds or ‘munis’. States and local governments and their agencies issue municipal securities primarily to finance public infrastructure as well as to provide for cash flows and other needs of the government and sometimes to finance private projects. America’s local governments spend about one-eighth of the GDP, one-fourth of total government spending, and employ over 14 million people. Some of the distinct features of local governments are:

i) property taxes form majority of local taxes;
ii) inter-governmental taxes form one-third of local revenue;
iii) relatively balanced budgets.

As of December 31, 2011, there were over 1 million municipal bonds outstanding, in the total aggregate principal amount of more than $ 3.7 trillion with 44,000 state and local issuers (compared to 50,000 corporate bonds with outstanding principal amount at $11.5 trillion).

Types of Municipal Securities

Securities issued by state or local entities can be classified as:

  1. General Obligation (GO) bonds: Bonds that are supported by the taxing power and/or full faith of and credit of the issuing authority. Holders of GO bonds can be repaid using revenue from all legal sources of the issuing authority and hence their issuance needs voter approval.
  2. Revenue bonds: Revenue bonds are supported by specific revenues only, like revenue earned from taxes levied on a particular project for which financing was undertaken using revenue bonds.
  3. Other types of securities: Conduit revenue bonds are issued by a state or local authority or their agencies on behalf of a third party that in turn bear the responsibility of repayment of the bond. College savings plans or ‘529 Plans’ which are sponsored by states or their agencies, provide tax advantages in order to assist saving for future college costs. Municipal issuers also use derivative products to execute interest rate swaps while investors use this instrument to hedge risks or increase returns.

Features of Municipal Bonds

Tax exemption

Federal tax exemption is one of the primary reasons for preference of municipal securities over other forms of securities. Interest payable on such securities is not subject to federal income tax if certain requirements imposed by the Internal Revenue Service regulations are met. In 2008, taxable municipal securities accounted for 11% of the aggregate principal amount of municipal securities issued; that number rose to 18% in 2009 and 32% in 2010(U.S. Securities and Exchange Commission, 2012).

Credit enhancement

The issuance of municipal securities is affected by the availability of credit enhancement, a form of bond insurance, which often takes the form of a letter of credit issued by a bank, a governmental guarantee, or an insurance policy issued by a bond insurance company. Municipal bond insurance was first introduced in 1971 and letter of credit supported municipal bonds became very popular after the introduction of variable rate municipal bonds in the early 1980s. Credit enhancements were common during 2000-2007, with more than half of the municipal securities principal issued supported by at least one type of credit enhancement during that period. As seen in figure 1, this trend was reversed in 2008 due to the effect of the financial crisis on banks and municipal bond insurers.

Types of Markets

Primary Markets

There are two types of purchases in the primary market one where securities are offered to anyone with the wherewithal to purchase them and the other where, through private placement, securities are bought by investment banks. The following chart shows the process of initial issuance bonds in the primary market.

The first step involves state or local governments getting authorization to issue debt through voter referendum or existing statutes. In the next step, the issuer determines the details like dollar amounts, maturities and coupon rates for the bonds. The third step involves bidding for the issue publicized using advertisements, setting in motion the underwriting and rating processes. The rating agencies contract with the issuer to rate the debt issue and publish the ratings. The rating agency collects the information it requires for the analysis and then publishes the rating a week before the sale of the debt issue. Instead of requiring formal competitive bidding, many short term municipal issues and some long term issues are privately placed with local commercial banks or other institutions through negotiated sales. Offerings of municipal securities are issued through an underwriting process where brokers and dealers or a ‘syndicate’ of under-writers purchases securities directly from issuers and reoffer them to investors for a fee known as the underwriter’s discount gross underwriting spread. Nearly all long term state and local debt issues are sold initially to underwriters. The syndicate submits a bid stating net interest cost to the municipality and if it is successful, the syndicate then owns the securities. The underwriters then try to sell the securities to institutional and individual investors at prices that cover their underwriting spreads and provide them with an adequate profit for their risk.

Secondary markets

The secondary market refers to all transactions in an issue that occur after the original underwriting and sale processes are completed. A good secondary market is important for a debt issue as investors are more likely to be willing to purchase state and local securities if they believe they can easily liquidate their holdings when they want to. Liquidity is an important factor for long term than short term municipal debt since most short term debt is purchased and held to maturity. Data on the size of the secondary market for state and local debt are scarce since the market is conducted over the counter, i.e. the securities are not listed or traded in a formal exchange. This means that participants dealing in the secondary market are not required to report their transactions. Thus little is known about the size of the market or the characteristics of the participants in the market. However, as seen in Figure 3, in 2011, the five biggest dealers in the market conducted 54 per cent of the total transactions in the secondary market.

References:
U.S. Securities and Exchange Commission -“Report on the Municipal Securities Market” (2012)

22
Mar

Funds devolution from state governments to ULBs: The case of Karnataka

By Anand Sahasranaman, IFMR Finance Foundation

The revenue share between state governments and ULBs is determined by the State Finance Commissions (SFCs) which are set up by state governments every 5 years. In essence, the mandate of the SFC is to determine:

  1. the principles of distribution to rural and urban local governments the net proceeds of the taxes, duties, tolls and fees levied by the state
  2. taxes, tolls and fees which may be assigned to rural and urban local governments
  3. grants-in-aid to rural and urban local governments from the consolidated funds of the state

In Karnataka, the third SFC was instituted to provide recommendations for the period 2008-09 to 2012-13. The report assessed the current state of ULBs in the state and developed the formula for determining the devolution of funds over this five year period.

SFC analysis of ULBs in Karnataka (2002-03 to 2006-07) reveals the following:

  1. 7.35% of all ULBs2 run a deficit, but the trend is most pronounced for City Corporations (CCs), where 33% run deficits.
  2. Across ULB types, per capita income of ULBs is greater than per capita expenditure by a factor of 2.59 (in 2006-07)
  3. Grants from state government (specific and general) contribute to 61% of overall ULB revenue, but there is a clear trend of increasing dependence on grants as we move to the smaller ULBs; grants contribute 59% of CC and City Municipal Council (CMC) revenues, while amounting to 63% and 71% in case of Town Municipal Council (TMC) and Town Panchayat (TP) revenues respectively. However, grants per capita show a declining trend as we move to smaller ULBs, except for the case of TPs, which have significantly higher values than CMCs and TMCs.
  4. Of own-revenue sources, property tax forms the most significant lever, at 15.7% of total revenue; again significance drops as we move to smaller ULBs – CC (20.4%), CMC (16%), TMC (12%) and TP (9.2%). Property tax per capita also shows a declining trend as we move to smaller ULBs.
  5. Salaries and allowances form the largest chunk of expenditure (31.9%) and expenditure per capita across ULBs
  6. There is a positive association between per capita expenditure and per capita revenue. Additionally, population (-,+) and literacy (+,+) are significantly (at the 99% confidence level) correlated with variations in per capita revenue and per capita expenditure respectively.

In terms of the trends in devolution of funds from the state government over the period of the pervious SFC, the report notes the following:

  1. Overall revenue of the state increased at an increasing rate from 2002-03 to 2007-08
  2. In the same period, devolutions to rural and urban local governments also grew, but at a much lower rate than the state government revenues

Based on this analysis, the SFC recommended the following:

  1. 33% of the Net Own Revenues (NOR) of the state to be shared with rural and urban local governments
  2. The criteria for determining the share of funds to rural and urban local governments was to be as follows:
  3. Based on these criteria, the split between rural and urban local governments of the total devolved amount worked out to 70:30. This meant that 23% of the NOR was to be devolved to rural local governments and 10% of NOR to urban local governments.
  4. The 10% NOR devolved to ULB’s was to be split into 3 components as follows:

The complete SFC report is available here.



1-All data, tables and charts taken from the Report of the Third State Finance Commission, Government of Karnataka
2-There are four types of ULBs in Karnataka: City Corporations (CC), City Municipal Councils (CMC), Town Municipal Council (TMC) and Town Panchayats (TP)