urban infrastructure financing and delivery in india and china

105China & World Economy / 105 – 120, Vol. 14, No. 2, 2006

Urban Infrastructure Financing andDelivery in India and China

Darshini Mahadevia *

Abstract

This comparison is not restricted to Mumbai and Shanghai but also to Bangalore andHangzhou, Delhi and Beijing and so on. The Chinese and Indian economies are expected tobe the growth engines of the global economy. In this process cities are expected to play animportant role, through their transformation into “World Class” cities, a term now doingrounds in the policy circles in Mumbai, to be achieved through massive infrastructureinvestments made in them. In China, this has been possible because of the decentralizedadministrative and fiscal system in China. In contrast, in India, the system of urbaninfrastructure is currently evolving and making a transition from a centralized to adecentralized system. This paper: (i) compares the Chinese and Indian financial systems toexplain differences in the quantum of funds available in cities in both countries; (ii) looks aturban responsibility allocations in terms of institutions; and (iii) compares capital investmentsmade by one city each in the two countries, in Beijing (China) and in Mumbai (India).

Key words: urban, infrastructure financing, China, India

JEL codes: H54, R51, R38, H41

I. Introduction

When Indian Prime Minister Dr Manmohan Singh announced in 2005 that Mumbai will belike Shanghai for India, a trigger was fired. Little did he know that his statement would betaken out of context and interpreted differently than what he had meant. Since then, theterm “Shanghaing Mumbai” has caught on in the city development discussions in India.

* Darshini Mahadevia, Associate Professor, School of Planning, Center for Environmental Planning &Technology, India. Email:[email protected] paper is the outcome of research as an AsianScholarship Foundation Fellow in 2004, at Tsinghua University, Beijing.

mailto:Email:[email protected]

106 Darshini Mahadevia / 105 – 120, Vol. 14, No. 2, 2006

The Chief Minister of Maharashtra said that he would do his best to fulfil the dream ofmaking Mumbai into a World Class City like Shanghai. The reference is to a new paradigmof city development: high-end infrastructure led urban development.

This article compares the system of urban infrastructure financing and delivery in Chinaand India, from the perspective of India’s urban development experience and needs. Notmuch work on comparing Chinese and Indian urban experience is available at the moment,except two titles: one by Kundu (2000) on urbanization and migration and one byMukhopadhyay (2001) on comparing planning in Shanghai and Mumbai. The present articlefirst discusses the financial system in the two countries with inferences drawn for infrastructureinvestments, infrastructure delivery mechanisms in the cities of both countries, figures ofinfrastructure investments in both cities, first of Beijing and then of Mumbai and then drawspositive implications and sound warnings for Indian cities from experience of Chinese cities.

In fact, currently, China and India, the countries with the largest populations in the world(both having populations above 1 billion), attract automatic comparison. Together, they housetwo-fifths of the world population (UNDP, 2005). China’s population in 2004 is estimated to be1.3 billion, whereas that of India is 1.1 billion. However, the population growth rate of India isdouble that of China and, hence, India’s population will surpass that of China’s shortly.

Although China’s population is 1.2 times that of India at the moment, her economy is2.4 times that of India’s (World Bank, 2005). Total GDP of China (in 2003) was US$1417bn,whereas that of India was only US$600.6bn. Per Capita GDP of China is US$1100 (in 2003),whereas that of India is US$564 in the same year; China’s per capita GDP is nearly doublethat of India’s. But in purchasing power parity terms, China’s GDP is 1.75 times that ofIndia’s. India’s long-term economic growth rate in the 1990s was far lower (at 4 percent perannum) than the 8.5 percent per annum growth rate of China (World Bank, 2005).

In China, in 2003, 38.6 percent of the population is supposed to be living in urban areas,whereas in India the number is just 28.3 percent. As per the population census of 2000, 36.22

percent of China’s population, that is 458 million people,1 was classified as urban (NBS,2003), or had urban residence2. The urban population growth rate in the 1990s was 4.34percent per annum in China, whereas it was just 2.75 percent per annum in India. It is arguedthat China’s urbanization level and urban population growth rate figures are quite low ascompared to the economic growth rates observed by the country, because of the hukou(residency permit) system that controls the number of rural residents moving into urban

1 The figures referred to here are that of Chinese Mainland excluding the population of Hong Kong SAR,Macau SAR and Taiwan provinceprovice.2 There is a problem with the definition of urban residence in China and, hence, there are varyingestimates of urban population.

107Urban Infrastructure Financing and Delivery in India and China

districts, taking up temporary residency there and then moving into non-agricultural jobs.There are 660 cities in China, of which 4 (Beijing, Shanghai, Tianjin and Chongqing) are

national level cities; 275 are prefectural level cities and 381 are county level cities. Then there aretowns. In India, there are 5161 urban areas (2001 population census), of which, there are 384urban agglomerations (UA).3 As per 2001 population census, 145 UA had populations of lessthan 100 000. Also, there were 27 million plus cities, 396 cities with populations between 100 000and 1 million, and 4230 urban centers with populations below 50 000 in this year (based ondatabase from Census of India).

In China, urban infrastructure levels, especially with respect to basic infrastructure, arehigh. For example, per capita water consumption in all the urban areas together is 213 liters percapita per day (Table 1); 78 percent of urban population is covered by water supply and 67percent is covered by a gas network; gas is used not just for cooking but also for waterheating round the year and room heating in winter. More than half the population has accessto flush latrines; 68 percent of the night soil collected is disposed of and more than half thegarbage collected is disposed. For all the public utilities, the situation is far better in easternprovinces of China as compared to other provinces, indicating existence of regional inequalities.

Whereas urban infrastructure data for China pertain to higher order services, we have

Table 1. Basic Public Utilities Coverage, China, 2002

UMCF per capita (RMB)

Water consumption:

LPCD

Water coverage

(%)

Gas coverage (%)

% flushed latrines

Night soil disposal rate

Domestic garbage disposal

All China 896 213 77.85 67.17 51.70 67.60 54.24 East 1378 225 86.23 82.25 60.79 76.45 63.00 Central 446 206 75.84 58.57 34.46 54.48 50.16 West 434 185 60.59 43.98 66.45 54.02 37.59

Source: From China, Department of Finance and Ministry of Construction (2003).Notes: UMCF, Urban Construction and Maintenance Fund. LPCD, liters per capita per day.

Table 2. Basic Services Coverage, India, 1998

% households covered Basic service All urban Towns with population up to 50 000

% households with access to tap water 70 58 % households with access to bathroom facilities 66 56 % households with access to drainage 80 68 % households with access to covered drainage 31 14 % households with access to latrines 75 61 % households reporting garbage collection by local authorities 14 10

Source: Mahadevia and Sarkar (2003).

3 Urban agglomeration consists of the main urban center and all the contiguous development around it,which might include other urban centers as well as outgrowths with rural populations.


been able to present only basic infrastructure data for urban areas of India (Table 2). Thedata is from the National Sample Survey conducted in 1998. Approximately 70 percent ofhouseholds in urban areas reported to have access to tap water. Although 79 percent ofhouseholds reported access to drainage, only 31 percent stated that they had access tocovered drainage. Of households, 75 percent have access to latrines. With regards togarbage collection, the situation in Indian cities is very poor; just, 14 percent of thehouseholds report garbage collection by the city governments. In small towns the situationis worse. The difference in levels of infrastructure development in the two countries cannotbe explained by just a difference in per capita incomes. We have to look elsewhere and thatis towards differences in public finance systems and urban responsibility allocation systemsof the two countries.

II. Public Finance System

1. The Case of ChinaAfter beginning economic reforms, China started to devolve government authority fromcentral to local levels, the latter including provinces, prefectures, counties, towns, andtownships. Local governments supervised approximately three-quarters of the stateindustrial firms in terms of output and also held major responsibilities for fixed investments,initially in industry but increasingly in infrastructure. Local governments at township andvillage levels directly controlled township and village enterprises. As regulators of thelocal economy, local governments issued business licenses, coordinated local businessdevelopment, resolved business disputes, and engaged in tax policies. Local governmentsalso acquired the authority to determine the structure of local expenditure, and they wereresponsible for local public goods provision, such as schooling, health care, utilities, pricesubsidies and urban development. In particular, local governments played an importantrole in attracting foreign investment into their localities (Qian, 2000).

This devolution of responsibilities was accompanied, in 1980, by fiscal decentralization,in which the local governments were encouraged and rewarded for promoting economicdevelopment. Under the new fiscal system, local governments entered into negotiatedlong-term (usually 5-year) revenue sharing contracts with higher-level governments. Usually,the participating provinces and municipalities were allowed to keep a share of revenue thatthey collected before handing over the negotiated amount to the higher level government.Therefore, local governments were interested in either negotiating low shares or disclosinglower incomes to the higher level governments.

In addition to shared taxes, local governments could collect “extra-budgetary funds”,


which were not subject to sharing, and “off-budget funds”, which were not even incorporatedinto the budgetary process and, therefore, not recorded (Qian, 2000). Extra-budgetary incomeis a revenue source that does not fall under the tax sharing formula with the higher level ofgovernment. It is a mechanism used by local governments to divert resources from sharingpools to their sole use. The extra-budgetary revenues are: water use surcharges, domesticloans, foreign capital, enterprise self-raised funds, proceeds from the lease of land, andother funds. Municipal governments also collect funds through private channels. Therefore,instead of collecting budgetary revenue, the local governments had incentives to collectextra-budgetary revenues, which became an important source of municipal infrastructuredevelopment.

The off-budget funds are the revenues that the local governments do not report to thehigher order government. These are the earnings of the state-owned enterprises (SOE),which are retained by the local governments. The local governments also impose taxes andcharges on the local enterprises, some legal and some not (Bahl, 1999), which are retainedby the department and used for specific purposes. “The local governments may colludewith SOEs to determine use of these funds, or they may view the retained earnings as abase for their own extra-budgetary taxation” (Bahl, 1999, p. 85). Because local governmentofficials (at provincial and city level) are powerful, they are able to either get back thisrevenue by imposing special charges or to influence the SOE to make expenditures forpublic purposes, such as for provision of social services, local infrastructure developmentand local economic development.

Each province has different methods of collecting extra-budgetary funds. In ruralareas, education and health services’ charges are levied on households. Qian (2000) arguesthat fiscal decentralization and functional devolution led to increased inequalities, reducedthe Central Government’s re-allocative role and undermined the Central Government’sfiscal policy. But, at the same time, it also led to increased experiments at the local level,such as collection of off-budgetary and extra-budgetary revenues and also incentives forlocal governments to collect revenues.

To deal with tax evasion by local governments, tax reforms were introduced in 1994, whichallotted specific taxes collected at the provincial level to the Central Government. For example,the enterprise income tax was fully assigned to the local government and the VAT (value addedtax), was put under Central Government administration, of which 25 percent was to be givenback to local governments. This has provided the Central Government with more resources tobe used for distributive purposes, such as western development strategy (Bahl, 1999).

A systematic source of urban infrastructure is the earmarked tax called the UrbanMaintenance and Construction Tax (UMCT), which was launched nationwide in 1985 (Wu,1999). The full proceeds of this tax are retained by the municipal governments for local


infrastructure development. This was the only tax that could be approximated as a local taxbefore the nationwide fiscal reforms of 1994. This tax has become a stable source of fundingfor local governments. However, over time, importance of this source for infrastructure fundinghas reduced (Table 3). Another tax, called the public utility surcharge, is also a source of fundsfor local governments. The tax rates are set by the Central Government. The UMCT is collectedas a surcharge on the consolidated industrial and commercial tax levied on the output ofindustrial and commercial enterprises and incomes of enterprises in transport, hotels, cateringand other services. It is enterprise tax for government services. It fluctuates with output levelsof enterprises. It is not applied to public institutions (Wu, 1999).

Inevitably, local governments do not find UMCT adequate for use in development workswithin their jurisdictions. Therefore, despite taxation reforms in 1994, cities continue usinginnovated methods to raise extra-budgetary funds. Since 2001, non-tax methods of financing(other than off-budgetary and extra-budgetary forms) urban infrastructure have increased.Foreign investment including direct investment is one source of financing urban infrastructure,but is largely confined to cities in south and east China; that is, coastal China (Table 3). Theshare of domestic loans in the total Urban Maintenance and Construction Fund (UMCF) hasincreased from just 8.6 percent in 1991 to 27.7 percent in 2002. Also, the contribution of self-raised funds, that is the urban utility company’s own efforts to collect funds, has increased; itsshare going up from nil in 1991 to 19.0 percent in 2002. Over time, UMCT as a source of urbaninfrastructure has decreased, its share declining from 26.1 percent in 1991 to 10.0 percent in 2002.The allocation from the Central Government has also decreased. Central allocation remains highonly in the western provinces (11.4 percent of the provinces’ total UMCF revenues). A very lowproportion of foreign investment funds contribute to urban infrastructure. Currently, the largestsource of funds for infrastructure is domestic loans (28 percent), coming mainly from the bankingsector, through government guarantee.

Table 3. Revenue of Urban Maintenance andConstruction Fund, China

Total UMCT Fees of utilities

Central financial allocation

Local financial allocation

Water fee

Domestic loan

Foreign investment

Self-raised funds by

enterprises & institutions

Other revenues

All China 1991 100.0 26.1 10.1 3.8 10.4 1.3 8.6 4.0 0.0 35.6 2000 100.0 11.9 2.7 5.8 10.5 0.5 20.9 4.3 16.8 26.7 2001 100.0 10.7 1.9 3.5 12.8 0.4 29.4 2.2 16.2 22.7 2002 100.0 10.0 1.6 2.4 12.4 0.4 27.7 1.9 19.0 24.5

By regions in 2002 East 100.0 8.5 1.4 1.0 12.7 0.4 29.1 2.0 19.9 25.1 Central 100.0 15.2 2.3 3.7 12.2 0.3 21.1 1.9 20.0 23.3 West 100.0 13.5 1.7 11.4 11.1 0.2 27.7 1.8 10.7 22.0

Source: From China, Department of Finance and Ministry of Construction (2003).Note: UMCT, Urban Maintenance and Construction Tax.


2. The Case of IndiaThe system of public finance is well streamlined in India, unlike in China. India is a case offederalism with constitutional demarcation of functions and taxation powers between thecentral and state (equivalent to province in China) governments. The tax and expenditurepowers of the central and state governments are specified in the Seventh Schedule of theIndian Constitution (Rao, 2000). The functions assigned are either the sole responsibilityof the Central Government or of the state governments or are concurrent responsibilities ofboth. Urban development, including urban housing, and land and infrastructure developmentare the sole responsibility of the state governments, which they may pass on wholly orpartly to the Urban Local Governments (ULG) through a Municipal legislation. The stategovernment sets up parastatals (public sector corporations) to perform certain functions inurban areas, such as water supply and sewerage boards and public transport corporations.State governments make capital investments and let the parastatals recover some costs.

The tax bases are assigned exclusively either to the center or the states. The states allowULG to collect certain taxes, such as property tax. According to Rao (2000), most broad-basedand progressive taxes have been assigned to the center. Among the various taxes assignedto the states, tax on sale and purchase of goods gives substantial income to the stategovernments. From the fiscal year 2005–2006, VAT has replaced sales tax and excise tax inmost states of India. Although the major share of taxes collected goes to the Central Government,the state governments have a major share of expenditure responsibilities. Recognizing this,the Constitution provides for sharing of revenues from personal income tax and central exciseduty (tax on production now replaced by VAT). In addition, the states are given grants-in-aidas additional assistance along with some tax devolution. The tax devolution and grants-in-aidare decided by the Finance Commission, appointed every 5 years by the President of India.Currently, it is the 12th Finance Commission period.

There is a situation of vertical fiscal imbalance in the Indian public finance systemwherein there is asymmetry between revenue sources and expenditure responsibilities. Forexample, in the 1991–1992 budget, the center received 62.4 percent of all taxes collected andthe states received 37.6 percent of taxes. However, the center had to make only 46.4 percentof all expenditures, whereas the states had to meet 53.6 percent of all expenditures (Rao,2000). At the time of setting up of the 12th Finance Commission in 2002, 52–53 percent ofexpenditures were made by the state governments when they collected just 37 percent oftotal revenue4. The states end up borrowing to meet their obligations. Vertical fiscalimbalance is one of the important reasons that most states in India have mounting deficits

4 As per A Memorandum to the Twelfth Finance Commission of India by the Gujarat State.


and debt. Therefore, the states are not in a position to increase their allocations fordevelopment projects in the cities. Lack of resources at the command of state governmentshas also resulted in conflicts of interests between urban and rural areas.

The Finance Commission also decides the allocation of grants-in-aid and tax devolutionamong the states using certain considerations such as population size, poverty incidence. TheCentral Government steps in during disasters and calamities and allocates some special grants-in-aid. The Central Government also stands guarantee for individual states for external loans.Lastly, the Central Government devolves funds to states through Centrally Sponsored Schemes.

State Finance Commissions devolve the state finances to the ULG, either on an ad hocbasis or using some formula. The State Finance Commission firstly decides on a proportionof state revenues to be distributed between rural local governments (the Panchayats) andULG. Once decided, then the State Finance Commission allocates the distribution of financesamong the ULG. Furthermore, there are also scheme transfers of different governmentdepartments. Therefore, it is next to impossible to know the exact amounts of funds goinginto different urban infrastructure development in the country as a whole.

Property tax, and in some states continuing Octroi tax (which is a tax on goods cominginto the city) are the two major sources of revenue for the ULG. There are other revenuesources, but, collections from these are quite miniscule (Mahadevia, 2005; Mahadevia andMukherjee, 2002; Mathur et al., 2002, among others). Besides, large cities are also able todrawn in loans from different public sector and private sector financial institutions. Othershave to solely depend on state government grants and soft loans, all of which coming fromtax collected by themselves.

III. Urban Infrastructure Delivery

1. The Case of ChinaThe system of infrastructure provision is highly decentralized. The responsibility of raisingfunds for infrastructure provision is the responsibility of the local government, assisted by theprovincial governments. Except for the national level cities, and the cities qualifying for centralassistance, all cities depend on their own and their respective provincial government’s financesfor capital as well as maintenance expenditures of infrastructure and public utilities. The systemof infrastructure and public utility provision and their financing is depicted in Figure 1.

The municipal government of the city, for example, Beijing Municipal Government, isresponsible for infrastructure and public utilities provision and maintenance in urban areas.It takes the overall responsibility of planning of all infrastructure and utilities and makingcapital investments in them. The counties and districts in the rest of the city take care of


these responsibilities through their own funding.The city government takes the responsibility of providing city level infrastructure, and

the rest of the infrastructure is decentralized to the respective level of administrative hierarchy.In large cities, urban districts and sub-districts, which are below the city government level,take up responsibilities for local level (secondary and tertiary) infrastructure. For city levelinfrastructure, a separate company is set up, which gets grants from the city government.These companies also borrow, but with the guarantee coming from the city government.Tertiary level infrastructures are also taken care of by local planning and administrativeauthorities, such as special development zones (as Zhongguancun Sci-tech Park in HaidianDistrict of Beijing) or by the Danweis (work units) around which the socialist city life wasorganized and which continue to be an important form of urban living even now.

Some functions, such as solid waste collection, and social welfare activities, are passedon to administrative structures below the district level, performed by the district governmentsthrough Street Offices and the Neighborhood (Residents’) committees. Danweis also takean active role in functions that need to be performed below district level. For example, adanwei would purchase water from the water company and provide it to the residents at noor low cost. Some danweis, in cities such as Beijing that uses groundwater, also sourcetheir own water. They lay the internal sewerage and drainage networks and maintain them,organize collection of solid waste and lay gas pipelines and operate them. For all theseservices, the danwei might or might not charge all or some residents.

2. The Case of IndiaCity governments that are the ULG, the Municipal Corporations/Municipalities/NagarsPalikas5, solely6 or along with the parastatals, are in charge of provision and maintenance ofurban infrastructure and basic amenities. In some places, the local authority can be aspecial board such as a cantonment board for military areas or a special developmentauthority or an industrial development estate or a park. Some of the parastatals are: theBangalore Water Supply and Sewerage Board, the Chennai Water Supply and SewerageBoard and the Bangalore Metropolitan Public Transport Corporation.

If it is the ULG that is solely responsible for all the functions, then, the ULG constructs,operates and maintains the entire networks, from trunk to tertiary level networks. When theinfrastructure is in large housing colonies or private townships, the management of thehousing colony or the township constructs, operates and maintains the main and tertiary

5 Small town municipal body.6 The functions that an ULG perform are largely determined by the municipal legislation of the stategovernment


level infrastructure in them. In housing colonies, however, once the project is constructed,it is handed over to the ULG, which then operates and maintains the infrastructure such asroads, water supply lines, sewerage and drainage networks.

In recent years, in some states, Special Purpose Vehicles (SPV) have been created,which function as a parastatal (a public agency that functions independently like a companyin China), for specific projects such as construction of major roads, flyovers, riverfrontdevelopments. The SPV source funds from government, financial institutions as well as theprivate sector and have cost recovery models in their projects. However, in some instances,for example roads in the city, the SPV is solely funded through state government funds: anexample is Maharashtra State Road Transport Corporation, which has constructed flyovers

Figure 1. Urban Infrastructure and AmenitiesResponsibility Allocation, China

Major highways in city

Local roads

Subway

Buses/trams

Main trunks

Local network

Main trunks

Local network

To landfill sites

Local collection

Road

Public transport

Water Supplya

Sewerage

Wastewater treatment

Gas supply

Solid waste

Solid waste recycling

City government

District government

City government Companyb/Districtgovernment

District government/ Danwei/Housingassociation

City government company


City government/District government

District government/ Danwei /Neighbourhood committee




City government company/Danwei

City government company/Danwei/Housing association

Source: Based on discussions with the researchers in Beijing, namely, Dr. Meng Yanchun of School ofPublic Policy and Management, Tsinghua University and Dr. Huang Shunjiang of Institute of UrbanDevelopment and Environment of Chinese Academy of Social Science, Dr. Liang Wei of UrbanPlanning and Design Institute of Tsinghua University.

Notes:aNon-drinking water. bIn Beijing, the sewerage system is also the responsibility of the water supplycompany.


in Mumbai City. The state government might borrow funds from the World Bank or anyother financial institution, as is being done under the Mumbai Urban Infrastructure Project,which is funded by the World Bank, and in Hyderabad where flyover construction isfunded and managed by the state government through World Bank loan funds.

There are problems of responsible authority in the peri-urban areas of large cities,which are witnessing rapid population growth rates. Here, in most instances, an urbandevelopment authority is created, which raises capital through sale of land and impositionof development charges, which then makes capital investments in all types of infrastructure,such as roads, flyovers, water lines, sewerage and drainage lines, and all other publicprojects. However, the maintenance of these is undertaken local governments, which mightbe urban or rural. The rural governments and small ULG do not have the financial ability to

Figure 2. Urban Infrastructure and AmenitiesResponsibility Allocation, India

Major highways in city

Local roads

Metro rail

Buses/trams

Main trunks

Local networkc

Main trunks

Local networkc

To landfill sites

Local collection

City Road

Public transport

Water Supplyb

Sewerage

Wastewater treatment

Solid waste

Solid waste recycling

Ci ty government a/s ta t e governmentparastatal/development authority

District government/developerd

City government/state governmentparastatal/development authority

H o u si ng coo per a t iv e/a sso cia t io n/developerd

City government/private company

City government/state government

Ci ty government/ wa rd committee/Neighbourhood committee

City government/private company

Railways/metro rail company

City government/transport corporation/companyCity government /sta te governmentparastatal/development authorityH o u s ing co op era t i ve/ a s soc ia t io n/developerd

Notes: aCity government also refers to any other local authority in charge of development. bDrinkingand non-drinking water for most population except elites in some cities who buy water from theprivate drinking water suppliers. cLocal network is the onsite network in a residential colony. In mostslum colonies there is no onsite networks. dDeveloper can be private sector or public sector, the latterbeing housing boards etc..


maintain this infrastructure, which then go into serious disrepair.Solid waste management is solely a responsibility of local governments. Urban

governments are somewhat able manage solid waste; however, rural governments of villagesin urban peripheries do not have the capacity to do so. Hence, many pockets in peri-urbanareas do not have any system of solid waste management. They also become dump-yardsof main cities’ garbage.

After the 74th Constitutional Amendment, which suggests setting up wardcommittees,7 below city level, some of the ULG functions were decentralized to the wards.Solid waste management has already been passed on to ward committees. It is envisagedthat the operation and the maintenance of some local infrastructure will be passed on tothe ward committees, which would collect their own funds through user charges forproviding these services.

IV. Infrastructure Financing in Beijing and Mumbai

Our data is sourced from the Urban Construction and Maintenance Fund (UMCF). Wehave not looked at the budgetary funds of the Chinese cities as these are largely foroperation and maintenance activities provided by the city government and for socialservices. The budgetary amounts do not include expenditures by individual companies fortheir respective functions.

The UMCF in Beijing had received funds worth RMB27 589.33m (US$3338.50m) in2002.8 The city is able to collect nearly 9 percent of its UMCF revenue from UMCT, whichis little less than the all urban average (Table 4). The city also gets a central financialallocation of 3.05 percent towards the UMCF, which is higher than the national average ofcentral assistance to cities. Beijing borrowed a lot in 2002 from different sources. Domesticloans as a proportion of total revenue was 40 percent. This source’s contribution to theUMCF for all urban areas was 27.7 percent. Therefore, Beijing is able to leverage higheramounts of domestic loans than all urban areas of China. Foreign investment’s contributionto UMCF was only 1.2 percent. Self-raised funds by enterprises and institutions contributed15.79 percent to the UMCF in Beijing. In all urban areas, 19 percent of the UMCF came fromthis source. Beijing possibly does not need to self-raise funds as Beijing has the ability toleverage loans. Other revenues, which are contributions through, for example, donations

7 A ward is a geographic unit below the city level. Wards assumed only electoral function, with each wardbecoming the electoral constituency of an elected representative (councillor) of the ULG.8 The exchange rate of US$ 1 = RMB 8.2. (Reminbi also called Chinese Yuan) is used in the article.


and beneficiary contributions, were 9.6 percent in the city. Other revenues’ contribution toUMCF in all urban areas was far higher than its contribution to the UMCF in Beijing(Mahadevia 2005).

Expenditures incurred from the UMCF reveal the priorities of the city in makingurban expenditures. Beijing is spending 78 percent of UMCF funds on new fixed assetinvestments and 12 percent on maintenance of the existing assets (Mahadevia, 2005).Beijing was just spending 1.23 percent of UMCF on payment of domestic andinternational loans in 2002. This seems to be quite low. It is likely that the city isaccounting debt services somewhere else, which is not part of the UMCF. Investmentin fixed assets is the main purpose for which the resources of UMCF are used in Beijingand all cities. Therefore, the UMCF accounts for the bulk of capital investments inurban infrastructure.

Roads and bridges take up the largest proportion of resources (44 percent) of this fundin Beijing. The next largest share is taken up by public traffic (16 percent); that is, creationof infrastructure for public transport. This means that 60 percent of the resources of theUMCF in 2002 were used for transportation infrastructure, including infrastructure forpublic transport. Water supply attracted just 2.19 percent of UMCF in the city. Otherexpenditure received 6.6 percent of the total UMCF resources. Other expenditure includethe development of public plazas and other city beautification projects. The expendituresmade on Olympics facilities in Beijing are not reflected in these figures (Table 4).

In Mumbai, most urban infrastructure investments are made by the Brihad MumbaiMunicipal Corporation (Greater Mumbai Municipal Corporation). In Indian cities, there isno fund such as the UMCF for capital costs of infrastructure projects. The total budget size

Table 4. Composition of Expenditure from Urban Maintenanceand Construction Fund, 2002 (Million RMB)

Beijing Total expenditure (RMB million) 27 331.05 Total expenditure (US$ million) 3307.24 By industry (activity): total 100.00 1 Water supply 2.19 2 Gas supply 5.76 3 Central heating 0.55 4 Public traffic 16.36 5 Road and bridge 44.48 6 Sewerage 6.85 7 Flood control 3.34 8 Landscaping 4.56 9 Environmental sanitation 9.34 10 Other expenditures 6.57

Source:Data from China, Department of Finance and Ministry of Construction (2003).


in the 2004–2005 financial year for the proposed budget was Rs70 437m,9 of which 77percent was proposed for revenue (recurring) expenditures (Table 5). That means just 23percent of the proposed budget for the year, Rs16 126m10 was meant for capital expendituresor for infrastructure investments, which are long term expenditures.

On the capital account in Mumbai, like in Beijing, traffic gets the highest proportion,approximately 26 percent of the capital budget in the 2004–2005 budget. In Mumbai,allocation to traffic increased from 16 percent in 2002–2003 to 26 percent of the total capitalbudget in 2004–2005. Water supply received 23 percent of the capital budget funds in2004–2005. The third most important recipient of funds is sewerage, and then storm waterdrains. Water supply, sewerage and drainage get a low proportion of UMCF allocationbecause of 100 percent water supply coverage and very high sewerage coverage in Beijing.

It is possible for us to compare the capital expenditures made by the two cities for theyear 2002. It can be seen that Beijing’s capital expenditure on infrastructure is far higherthan that in Mumbai: the former had spent 13.8 times the latter on capital expenditures oncity infrastructure. These expenditures are for the functions that the two cities governmentsactually perform. In per capita terms, the UMCF of Beijing has 12 times the per capita capitalbudget of Mumbai. Mumbai needs to make substantial capital investments to transformitself while taking care of the city’s 55 percent population living in slums.

Table 5. Composition of Budget, Mumbai (%) Items

RE 2002–2003 RE 2003–2004 BE 2004–2005 RE 2002–2003 RE 2003–2004 BE 2004–2005 In Rs In RMB Total revenue budget (million) 44 668.4 49 880.0 54 300.7 8428.0 9411.3 10 245.4 Total capital budget (million) 10 493.0 11 080.8 16 126.1 1979.8 2090.7 3042.7 Total budget (million) 55 161.3 60 960.7 70 426.8 10 407.8 11 502.0 13 288.1 Per capita capital budget (Rs) 865 897 1281 163.2 169.2 241.7 As % of capital budget As % of total budget Administration 1.09 1.05 1.90 0.21 0.19 0.44 Municipal buildings 2.62 2.34 4.83 0.50 0.43 1.11 Solid waste management 0.56 1.30 2.65 0.11 0.24 0.61 Slum improvement 3.53 7.68 2.07 0.67 1.40 0.47 Water supply 18.52 21.25 23.46 3.52 3.86 5.37 Sewerage 35.19 19.59 15.48 6.69 3.56 3.55 Storm water drainage 12.65 10.87 6.29 2.41 1.98 1.44 Traffic 15.65 22.84 25.64 2.98 4.15 5.87 Gardens 0.76 1.19 1.21 0.14 0.22 0.28 Village amenities 0.98 1.62 0.45 0.19 0.30 0.10 Plant and machinery 3.35 3.78 8.48 0.64 0.69 1.94 Operational budget 0.06 0.14 0.36 0.01 0.03 0.08 Others 5.04 6.35 7.18 0.96 1.15 1.64 Total capital 100.00 100.00 100.00 19.03 18.20 22.90 Total budget — — — 100.00 100.00 100.00 Source: Brihad Mumbai Municipal Corporation (2003, 2004).Notes: RE, revised estimates; BE, budgeted estimates.

9 US$1561.80m at the October 31, 2005 conversion rate of US$ 1 = Indian Rs. 45.1.10 US$357.56m) 80m at the October 31, 2005 conversion rate of US$ 1 = Indian Rs. 45.1.


V. Conclusions

Interesting conclusions emerge from the comparison of Chinese and Indian urbaninfrastructure financing systems. First of all, urban infrastructure financing in each countryhas to be observed in the context of their entire fiscal and institutional system. This becomesall the more important when it is observed that although the size of China’s economy is littlemore than double that of India, investments in cities of comparable size in the former are farlarger than that in the latter. For example, in 2002, Beijing made 13.8 times the capitalinvestment in infrastructure than Mumbai

In both countries, the municipal government is a very important entity in urbaninfrastructure provision and maintenance. Private sector funds are not yet so important inurban infrastructure systems in the two countries. The difference between the two is that inChina infrastructure is constructed and operated and maintained by separate companiesset up by the city government, whereas in India, it is the city government itself, through itsown departments, that carries out both these functions. Therefore, it is easier to movetowards a cost recovery system in China than in India. The most important differencebetween the two countries is that there is a very high order of fiscal decentralization inChina, associated with administrative decentralization, whereas in India, there is stillsomewhat centralization of the entire fiscal system, which then percolates down with urbaninfrastructure provision becoming, to a great extent, state governments’ responsibility.The lowest level of government, that is, the ULG, does not have much taxation power.

In Chinese cities, most cities have been able to meet the requirements of basic servicesand are moving to create a higher order of infrastructure. However, there are increasinginequities across cities’ urban districts and between cities in terms of high order infrastructures.

In contrast, the Indian system does not have in-built inequity. However, the cities arealso not able to fulfill the requirements of basic services for their populations. Largeproportions of the cities (poor neighborhoods) and large sections of the population (urbanpoor) in the cities of India do not have access to even basic services, such as water supplyand sanitation, partly because of the lack of availability and access. Mumbai still needs togo a long way to meet basic infrastructure needs. Only once these needs are met, shouldthe city move to creating high-speed roads and highways like in Beijing. However, underthe pressure of globalization, Indian cities such as Mumbai have started imitating thepresent development priorities of Chinese cities, and are, therefore, diverting financialresources away from basic services. This will not make Indian cities competitive withChinese cities because basic deprivation would continue to plague Indian cities such asMumbai.


References

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(Edirted by Xinyu Fan)

urban infrastructure financing and delivery in india and china

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