Urban Reforms

India is a part of the global trend towards increasing urbanisation in which more than half of world's population is living in cities and towns. 27.8 per cent of India's population (285 million) live in urban areas as per 2001 census.

It is important to note that the contribution of urban sector to GDP is currently expected to be in the range of 50-60 percent. In this context, enhancing the productivity of urban areas is now central to the policy pronouncements of the Ministry of Urban Development. Cities hold tremendous potential as engines of economic and social development, creating jobs and generating wealth through economies of scale. They need to be sustained and augmented through the high urban productivity for country's economic growth. National economic growth and poverty reduction efforts will be increasingly determined by the productivity of these cities and towns. For Indian cities to become growth oriented and productive, it is essential to achieve a world class urban system. This in turn depends on attaining efficiency and equity in the delivery and financing of urban infrastructure.

Resource Gap

The India Infrastructure, Report, 1996, assessed the total annual investment needs of water supply, sanitation and roads sectors at Rs. 28,036 crores per year on an average during 1996-2006. Whereas funds to that extent are not available.

To overcome these constraints and challenges, the Ministry of Urban Development has initiated institutional, fiscal and financial reforms. First generation urban sector reform - known as the 74th Constitutional Amendment Act of 1992, recognises the principles of local self governments and empowers urban local bodies with financial resources through Central Finance Commission and State Finance Commissions. Subsequently, in order to strengthen these local bodies, second generation reform have also been started. In the last decade, enormous progress has been made in removing impediments to efficient investment.

Resource Mobilisation Effort

In August, 1996, the Central Government guidelines entitled 'Urban Development Plans Formulation and Implementation' were circulated to all State Governments for adoption. These guidelines, apart from other issues, suggest innovative approaches for fiscal resource mobilisation. In the backdrop of the New Economic Policy, it was suggested that the traditional system of funding based on Plan and budgetary allocations be reduced and ultimately withdrawn due to fiscal deficit. Subsidies need to be rationalised and urban development plans and projects need to be placed on a commercial format by designing commercially viable urban infrastructure services and area development projects. This can be achieved by restoring a proper match between functions and source of revenue by giving additional tax measures. Other innovative resource mobilisation measures include using land as resource, increase in the non-property taxes and using Public-Private Partnership in service delivery.

Second Generation Reforms

Regulatory Framework

The participation of the private sector in financing and the delivery of infrastructure at the municipal level, especially in the water and sanitation sector, requires a regulatory framework to protect consumers, apply environmental standards and support the delivery to the poor. As there are a variety of models of regulation from centralised to decentralised systems, guidelines will be developed at the National level to ensure consistency across the country. Appropriate training programme and capacity support to regulators will also be developed in partnership with the private sector and urban research institutions.

Model Legislation

The Central Government is in the process of preparing a model legislation for facilitating private sector participation in urban infrastructure. This is necessary as the present legislative scenario does not encourage private sector participation in this field. A model Municipal Act which will be recommended to the State Governments, would include modification and simplification of Municipal bylaws, provision for enhanced borrowing, allowing the entry of private sector and authorising concenssionaires to penalise users for non payment of tariffs.

Municipal Accounting System

The Task Force constituted by the O/o C&AG of India had recommended for introduction of accrual basis of accounting system for the urban local bodies (ULBs) and suggested model budgeting and accounting formats for that purpose. The Task Force Report was circulated to all States/UTs for adoption of accrual basis of accounting system as well as the budget and accounting formats. Further to provide a simplified tool kit to the ULBs for recording the accounting entries, Ministry of Urban Development in cooperation with the Office of C&AG of India has prepared a National Municipal Accounting Manual (NMAM) and circulated to all States/UTs in January, 2005. The Manual comprehensively details the accounting policies, procedures, guidelines designed to ensure correct, complete and timely recording of municipal transactions and produce accurate and relevant financial reports. The NMAM would help the States prepare their state-level accounting manuals in accordance with their own requirements for use by the ULBs. This initiative is expected not only to enhance the capacities of ULBs in municipal accounting leading to increased transparency and accountability of utilization of public funds for the development of urban sector but also will help in creating an environment in which urban local bodies can play their role more effectively and ensure better service - delivery.

Public-Private Participation Guidelines

Central Government will develop guidelines for involvement of the private sector in infrastructure, which will ensure competitive biding process in a transparent manner. These guidelines will not only protect the consumers but also ensure integrity of the process. This would support municipalities in designing the PPP process on the lines of the BOT Centre in Philippines or the PPP in the Ministry of Finance in South Africa.

Fiscal Incentives

Foreign Direct Investment(FDI)

Hitherto Foreign Investment Promotion Board (FIPB) allowed direct investment in providing urban services on a case to case basis. This scenario has changed with the decision of the Central Government removing restrictions on FDI in urban infrastructure facilities which are now open both under FIPB and the automatic route as per sector specific guidelines. Guidelines have since even issued for FDI in development of integrated township including housing and building material.

External Assistance

Since independence, externally assisted urban sector projects have accounted for US$ 2300 million. A review of these projects indicated a need to adopt a programme approach rather than a project approach for availing external assistance. It also indicated the need to encourage a multiple donor scenario and tapping low cost funds for urban infrastructure.

Tax Free Municipal Bonds

Municipal Bonds were successfully issued by several Municipal Corporations like, Bangalore, Ahmedabad, Ludhiana, Nagpur, Nasik, Madurai for raising resources for urban infrastructure. The Central Government had announced tax exemption in case of bonds issued by Municipal / Local Governments. Guidelines were issued by this Ministry on 8.2.2001 for regulating issue of tax free municipal bonds. Under the guidelines, such bonds will be issued for raising resources for capital investment in creation of new infrastructure as well as augmentation of existing systems. Tax free bonds worth Rs. 100 crore by Ahmedabad Municipal Corporation have been permitted for improving infrastructure. Hyderabad Municipal Corporation has also been permitted to issue tax free municipal bond for Rs. 82.50 crore.

Pooled Financing for Municipal Infrastructure

Traditionally, municipal corporations and urban local bodies have relied on subsidised funds for providing urban services which constraints the constraints the introduction of user charges and efficient project operation and maintenance. In view of the huge resource gap, direct access to capital market would now be an accepted viable option. However, access to capital market requires financial discipline and enhanced credit rating. It has been the experience that only bigger municipal corporations are in a position to take the advantage of the resources available in capital market. Medium and smaller municipalities are unable to do so due to weak financial position and lack of capacity to prepare viable project proposals. A State level pooled financing mechanism is being proposed for smaller and medium municipalities. The objective of a State level pooled finance mechanism is to provide a cost effective and efficient approach for smaller and medium sized ULBs to access the domestic capital markets for Urban infrastructure and to introduce new institutional arrangements for mobilising Urban Infrastructure Finance.

City Restructuring

Government of India is also encouraging citywide reforms and restructuring so as to ensure that cities are managed efficiently and become creditworthy (to attract private finance ) which will enable them to prepare long term plans for infrastructure investments and implement poverty alleviation programs.

Citywide reforms and restructuring will, however, result in significant transaction costs during the period of transition. Leaving cities to finance these costs by themselves will delay and make it difficult to implement these reforms. It is to partly offset this disadvantage that the Ministry of Urban Development is proposing to set up a performance based City Challenge Fund for catalyzing city level economic reform programmes. The resources from the Fund would be given as grants but should ideally be matched by equal allocations either from the cities themselves or from the respective State governments. Access to the fund would be on a competitive basis.

Establishment of an Urban Academy

The proposed Urban Academy is visualized as a centre of excellence in Urban Matters such as urban water supply, sanitation, urban transport, urban governance, municipal finance, etc. It will be a n ideal town-planning habitat, wherein experts from India and abroad can experiment with new layouts, building materials, landscaping, heritage preservation etc., and it will have Synergic links with all other institutions specializing in urban matters. This will coordinate all Training and Capacity Building Initiatives and efforts of Change Management Forums.

Conclusion

In conclusion, it is evident that the New Economic Policy launched in India in 1991-92, did see several important initiatives in the urban sector designed to encourage private sector participation in urban infrastructure projects. These initiatives, would need to be taken to their logical conclusion. A series of new Reform Measures are being put together for implementation during 10th Plan Period. Through these, we hope to reverse the declining standards of urban infrastructure in the country.