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)


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

By Vishnu Prasad, IFMR Finance Foundation

Continuing our series on Municipal Finance in India, we review two recent developments- Report on Indian Urban Infrastructure and Services (2011) and JNNURM. This blog post summarizes the report’s finding on three key themes- Urbanization in India: Characteristics and Challenges, Urban Service Delivery and Investments for Urban Infrastructure.

Urbanization in India: Characteristics

The Report identifies three trends that characterize urbanization in India (up to 2001):

  • i. Structural transformation and decelerating urban population growth: India’s rapid economic growth has entailed a structural transformation in the economy such that the share of agriculture in GDP has declined from 34% in 1983-84 to 15% in 2009-10. During the same period, the share of services has burgeoned from 40% to 57% while the share of industry has remained constant. Structural transformation is typically associated with rapid urbanization as labour moves from low-productivity agriculture to high-productivity industry and services, which are typically located in urban areas. However, the Indian experience shows that there was only a moderate dip in the share of agriculture in total employment (agriculture still employs 52% of the workforce (2004-05)). Since employment was being generated in high-skilled sectors like IT, banking and telecom, it did not draw labour from rural areas. This led to a decelerating growth in India’s urban population- from 3.2% in the 1980s to 2.8% in the 1990s. However, a turnaround of this trend is expected for the year 2001-11. UN estimates suggest that urban population will be larger than their rural counterparts by 2045.
  • ii. Low levels of Migration: Although urban-rural productivity differentials have increased since 1993-94, this has not led to a commensurate increase in migration as Lewis and Harris-Todaro models have predicted. For reasons cited in the previous section, rural-urban migration accounted for only 21% of the total increase in urban population in 1991-2001. However, with urban India poised to generate 70% of all new jobs in India over 2010-30, the trend of low rural-urban migration is set to be reversed.
  • iii. Prevalence of Urban poverty: Even though urban poverty ratio has declined by half from 1973-74 to 2003-04, urban service deprivation and shelter poverty continue to be pressing problems for urban India. An environment of poor access to basic services, public health and other human development inputs perpetuates poverty in urban India. Heavily distorted land markets, an inadequate regulatory regime safeguarding property rights and absence of a strategy for inclusion of urban poor exacerbate the problem of shelter poverty. This is visibly manifested in the mushrooming of slums in urban areas. As of 2001, almost a quarter of India’s urban population lived in slums.

Urbanization in India: Challenges

The Report outlines the following challenges for urbanization in India:

  • i. Agglomeration vs. Congestion: Cities tend to exhibit agglomeration economies due to close proximity of firms to skilled labour, informational spillovers between individuals and firms, access to institutions and localization externalities. On the other hand, in the absence of robust urban infrastructure, congestion diseconomies in the form of traffic congestion, pollution and environmental degradation, deterioration in civil services etc. set in. India needs to tackle the challenge of maximizing agglomeration economies while minimizing the impact of congestion diseconomies.
  • ii. Creating synergy with rural development: In 2009-10, cities and towns are estimated to have contributed 62% to total GDP. As this growth continues, India needs to ensure that there are synergetic linkages with the rural economy, particularly agriculture. With boundaries of urban settlements being increasingly blurred and technology bridging the rural-urban divide, policies must aid rural poor in accessing the fruits of urban growth.
  • iii. Small cities and towns: India’s urban growth has been largely concentrated in ‘big cities’ (50 cities with population over 1 million account for 42.3% of urban population). The period of growth of big cities has also witnessed the slowing down of India’s towns. The slower growth of towns has “implications for how the urbanization challenge needs to be managed. The 3984 Class II and smaller towns with population of less than 100,000 in India also have very different levels of managerial and governance systems compared to larger Class I and metropolitan cities. Hence, interventions for preparing our cities will need to distinguish between the challenges and capacities of larger cities versus the smaller towns in the country.1

Urban Service Delivery

The Report reviews the current state of urban service delivery in India and attributes the negligent state of service delivery to four factors that are discussed below. The Report also recommends new service delivery norms and standards for urban areas in India.

State of Urban Service Delivery

Table 1 below provides a glimpse of the Report’s compilation on the dismal state of urban service delivery.

Factors for poor urban service delivery2

  • i. Inadequate investments in urban infrastructure: ULBs in India are heavily dependent on fiscal transfers from the higher tiers of government, which tend to be inadequate considering the needs of Indian cities. Mohanty et al. (2007) shows that for 35 municipal corporations, there was, on average, under-spending of 76 per cent on capital investments necessary to meet minimum standards of services.
  • ii. Poor maintenance of assets: The low spending on O&M of existing assets has further contributed to the problem of service delivery. Salaries and wages account for 54 per cent of the total municipal expenditure, on average.
  • iii. Fragmented institutional set up: The multiplicity of agencies with overlapping jurisdictions and fragmented roles and responsibilities has been a major factor in the poor delivery of urban services.
  • iv. Capacity constraints: Municipal administration has typically suffered from overstaffing of untrained, unskilled manpower on the one hand and shortage of qualified technical staff and managerial supervisors on the other.

Service Delivery Standards and Norms

A summary of service delivery standards and norms recommended by the Report are provided in Table 2 below:

Investment for Urban Infrastructure

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). This includes:

i. Rs 34.1 lakh crore for asset creation, out of which the investment for the eight major sectors is Rs 31 lakh crore;
ii. Rs 4.1 lakh crore for renewal and redevelopment including slums; and
iii. Rs 1 lakh crore for capacity building.

The relative shares of the eight major sectors are provided in Figure 1 below. Investments on urban roads form the bulk of the investments (55.8%) followed by urban transport and water supply (14.5% and 10.4%).

The capital expenditure estimates by city size class are given in Table 3 below.

1 – Page 16, Chapter 1. Report on Indian Urban Infrastructure and Services (2011)
2 – For a detailed discussion, see our previous posts in the Municipal Finance in India series