ICRIER’s Program on Capacity Building and Knowledge Dissemination on

Urbanisation in India

Summary of the Conference on

Financing Metropolitan Governments in Developing Countries

on

April 23, 2014

Venue: Jacaranda Hall

India Habitat Centre

New Delhi

In Partnership with Capacity Building for Urban Development, Ministry of Urban

Development

ICRIER and the Lincoln Institute of Land Policy held a conference on the 23rd of April, 2014

around the book “Financing Metropolitan Governments in Developing Countries” and its

relevance for India. The conference brought together editors and some authors of the volume,

central and state government officials, municipal commissioners, and urban experts.

The book, co-edited by Roy Bahl, Johannes Linn and Deborah Wetzel, was published by the

Lincoln Institute of Land Policy, Cambridge, Massachusetts in 2013. It is a collection of essays

offering analytical insights into the issues of metropolitan finance and governance. It also

includes empirical case studies from metropolitan regions in India, China, and Brazil. The editors

are renowned experts in the field of public finance. The book is written as a follow-up to the

seminal book on public finance, “Urban Public Finance in Developing Countries” by Bahl and

Linn, published 20 years ago. While that book focused on governance and public finances of

urban local bodies, this book focuses on metropolitan finance and governance.

Developing countries are going to be home to most of the population growth and this growth is

set to take place in the urban areas of these countries. This urbanization is going to be

‘metropolitan’ in nature. The concentration of economic activity in the metropolitan regions will

present a tremendous opportunity for most of the developing countries to harness the full

potential of these regions. However, existing metropolitan regions in developing countries face

massive infrastructure deficits and service gaps, which pose a challenge in exploiting their

metropolitan opportunity to the fullest.

This is clearly seen in the case of India. At present, India is approximately 33-34 per cent urban.

By 2031, India will have 600 million persons residing in cities. A majority of this population will

stay in larger urban spaces. However, India’s metropolitan regions face tremendous deficiencies,

and this has largely to do with metropolitan governance.

On the occasion of the Conference, the book, “Cities and Public Policy: An Urban Agenda for

India” by P.K. Mohanty, (Sage Publications India), was launched by Dr. Isher Judge Ahluwalia,

Dr. Roy Bahl, and Dr. Johannes Linn.

Session I: An Overview

Principal Presenters:

Johannes Linn

Non-resident Senior Fellow, Global Economy and Development, Brookings Institution

Johannes Linn began with the observation that metropolitan areas are the key game changers

around the globe. World population as of 2014 is 7 billion and it is set to increase to 9 billion by

2050 with virtually all the population absorbed in urban areas. The number of megacities (with

populations > 10 million) is projected to increase from 19 in 2007 to 27 in 2025, and about 10

per cent of the world’s urban population will reside in these cities. Of the projected 27

megacities, 21 will be in less developed countries and some of them will be in India. By 2025, 48

cities will have populations ranging from 5 to 10 million, and three-fourths of these will be in

developing countries, accounting for a large proportion of the GDP of these countries. Since

cities are growth drivers and large cities and city regions could be key drivers of economic

growth (owing to modernization, innovation and linkages to the global economy), financing and

governance of metropolitan regions assumes tremendous importance.

Roy Bahl,

Professor Andrew Young School of Policy Studies, Georgia State University

Roy Bahl highlighted the following main messages from the book:

1. A metropolitan strategy is typically missing in planning for urbanization, since

governance lies with administrative jurisdictions which are different. Planning for

metropolitan areas is not based on economic considerations.

2. There is no doubt that there are financial constraints. Also, financial resources are not

flowing down to the local level. However, a theme that runs across a lot of chapters in the

book is that unless institutional challenges are addressed, these regions cannot flourish.

There have been significant improvements in management practices, but not much has

been done to remove institutional constraints.

3. There are huge variations in governance and finance practices of metropolitan regions. In

China and South Africa, there are large metropolitan governments but in Mexico City and

Sao Paulo, there are many fragmented governments. In India, for example, in Mumbai,

there are many para-statals involved in urban and metropolitan governance.

Implications for India

Discussant 1

Anil Baijal

Chairman, National Institute of Urban Affairs (NIUA)

India is not an exception to the problems of metropolitan regions in other developing countries.

In most countries, metropolitan areas, despite being economic engines, do not get enough

resources. There is need for an organization that has power, resources and capacity to absorb

finances and deliver goods and services. How should such an organization be structured? How

should metropolitan regions mobilize finances? In India, a Metropolitan Planning Committee

prepares a plan at the regional level. However, it not only faces resource constraints but is also

highly dependent on the state government for its powers. There are also issues regarding

competency as can be seen from the following break-up of human resources at the metropolitan

level:

Group A – 1% of the total employees

Group B – 2% of the total employees

Group C – 23%of the total employees (clerical)

Group D – 74% of the total employees (below clerical? How would you describe this group?)

The above break-up shows that there are very few persons at the top level of

management/administration, and there is the further question of adequate capacity and skills.

The 13th Finance Commission allocated 1.93 per cent of the central divisible pool to the third

tier. Better performing states should get more finances, which would lead to more sustainable

assets. The JnNURM was supposed to support and incentivize reforms in land markets, bring

about financial credibility of municipal bodies and improve their access to capital markets, but

this has not happened. There is a crucial need to make use of financial incentives to facilitate

reforms at the local government level. The successor national urban renewal mission should be

restructured to meet this need.

Discussant 2

V. Ravichandar

Chairman, Feedback Consulting

1. The state has a stranglehold on the local tier. There is no system in which mayors are

elected directly. In Bangalore, at the regional level, the Metropolitan Planning

Committee (MPC) was set up after a Court intervention. However, the state government

did not allocate any finances to the MPC. It shows that empowering the third tier is not

an easy task. More active involvement of the younger generation of ministers is a

prospective solution to this issue, the reason being that if this generation of ministers

sees cities as launch pads of their political careers, cities will get the much needed

political attention.

2. There is need to revise the governance structure at the state level. The state should adopt

a system by which it is divided into different regions. The role of the state would be to

provide high connectivity network across these regions. For example, Karnataka could

have 5 regions; each region should have anchor cities and have 6 to 8 nodes of

competitiveness around the anchor city.

3. In 2001, the property tax collection by the Bruhat Bangalore Mahanagara Palike

(BBMP) was very low. Recent years have seen tremendous growth in property tax

collection, mainly due to major reform in the design of the property tax regime with new

assessment and valuation methods and introduction of a Self-Assessment Scheme with

better enforcement through random checks. This new regime provided transparency and

resulted in greater willingness to pay the tax that is due, thereby resulting in greater

buoyancy in tax collections.

4. To foster accountability, a fund based accounting system was introduced, which made it

possible to track expenditures at every level. The new system worked well for a year,

after which the Corporation made a case to combine contracts in electricity, waste, and

roads. This made it difficult to maintain the same level of accountability.

5. Innovative financing in the form of borrowing, land based financing, and public private

partnerships could be employed to address financial issues at the local level.

6. It is important to address the needs of the existing cities before thinking of introducing

new cities in India.

7. Capacity gap is a major problem at the local level.

General Discussion:

Initiating the discussion, Isher Judge Ahluwalia pointed out that Indian urban dialogue is heavily

focused on the need for decentralization, which leads to transparency and accountability, which

in turn results in better service delivery. But there is an apparent conflict between the focus on

decentralization and the need for metropolitan planning, finance and connectivity to reap

agglomeration benefits. In fact, there is need to move away from the concept of the rural-urban

divide to emphasize rural-urban synergy within the context of regional development.

By focusing only on decentralization at the cost of planning for metropolitan development, we

are missing a critical piece of action. Since urban share of India’s GDP is expected to increase

from 66% to 75% in 2031, there is need to plan for metropolitan and regional development so as

to foster agglomeration to accommodate the rapidly rising share of industry and services in the

economy.

The main issues that came up during the discussion are listed below:

1. Political will is important while thinking about any issue associated with urban local

bodies. Even resource generation for these local bodies is linked to political will. Since

the flow of funds from higher levels of government is much larger to rural than that to

urban areas, this reduces the incentive for gram panchayats (village local governments) to

be recognized as “urban local governments”.

2. While thinking about bringing more towns under the umbrella of “urban”, it is also

important to take into consideration the issue of administering the finances for these

areas.

3. Devolution of finances to urban local bodies should not be discretionary.

4. It is essential to re-visit the municipal personnel system and organizational structure of

these municipal bodies. Capacity building of the staff and institutional incentives are an

important step towards empowering these urban local bodies. Training is necessary, but

training must be directed at those who will continue to serve the municipal sector. Hence

the importance of municipal cadre.

5. There is need for strong interaction between practitioners (officials from municipal

corporations, for example) and academic researchers on a regular basis in order to bridge

the gap between policy recommendations made by researchers and the actual needs and

problems faced by metropolitan regions.

6. India is 33 per cent urban, and the pace of urbanisation is gathering momentum. In such a

context, there is need to work with elected representatives, whose potentials remain

untapped or underused. Representation of people from urban areas in state assemblies

and the national parliament is disproportionate to the contribution of these areas to the

GDP of the state and/or the country, and this situation has to be changed to one where the

voices of urban representatives are heard more strongly.

The general discussion was followed by the launch of Dr. P.K. Mohanty’s book, “Cities And

Public Policy: An Urban Agenda For India”.

THE BOOK “CITIES AND PUBLIC POLICY: AN URBAN AGENDA FOR INDIA” BY DR.

P.K. MOHANTY, CHIEF SECRETARY, GOVERNMENT OF ANDHRA PRADESH, was

launched by Dr. Isher Judge Ahluwalia, Dr. Roy Bahl and Dr. Johannes Linn

Speaking on the occasion, Linn, Bahl and Ahluwalia congratulated the author and emphasized

the importance of the subject which has been neglected by researchers in India. Mohanty’s

academic qualifications as well as long spells of holding important positions of policy with

relevance for the sector at the state as well as the Centre, place him in a unique position to write

on this subject with authority. The book is meant for economists, planners, policy makers, and

students. It is interdisciplinary in nature and draws upon literature from different streams such as

urban economics, new institutional economics, transportation, planning, and sociology, among

others. Recognising that cities are home to two powerful externalities – agglomeration and

knowledge, the author explains how cities create agglomeration rents for both mobile and

immobile factors which are untapped for revenue generation in India. As rents occur at both

regional and local level, there is need for a regional policy in India within the national policy

framework. The book also provides a theory on why India is under-urbanized. There exists a

conflict between the urban planner – who wants to constrain the city size – and the national

planner – who wants to expand it.

Session II: Metropolitan Public Finances

Principal Speaker: Abhay Pethe, Vibhooti Shukla Chair Unit in Urban Economics and

Regional Development, University of Mumbai

The process of urbanization is well and truly underway in developing countries, and this calls for

a change in the mindset. Urban space is emerging wherein small and medium towns and cities

are coming up in close proximity to the large primate city.

Metropolitan regions are emerging as economic drivers in developing countries including India.

These must be recognized as spaces of high economic densities and hence crucial for growth and

development. They also play a disproportionately large role in contributing to the economy of

the provinces and the nation and to the exchequer of the higher governments in a buoyant

manner. They have to be nurtured for their crucial role in growth and development.

These metropolitan regions bring to the fore special problems in governance. There is neither a

well defined domain within the national architecture of public finance nor are there rules for

fiscal assignment.

In some sense, even more important than resources is the issue of politics and institutions, where

the context is provided by the current state of politics at higher levels of government.

Metropolitan government is an emergent entity; in many cases it is non-existent in the context of

participatory democracy. Rectifying this situation is the first charge on any discussion about

metropolitan public finance.

Metropolitan regions must be provided with some structured authority to provide public goods

and address concerns that are area-wide. It has to be recognized that decentralization as per

Roy’s home rule, is at odds with the concept of a metropolitan government which in an ‘optimal’

sense is bigger and farther away from the people.

There exist various arrangements for metropolitan governance worldwide. Some of these are (a)

many urban local bodies with an implicit or explicit coordination mechanism, (b) monocentric

government with an empowered mayor and/or a mayor in council and/or a chief executive, and

(c) sector-specific bodies to exploit scale economies. These arrangements are a product of the

different fiscal-federal frameworks in these countries.

In practice, reliable, consistent and hence comparable data are non-existent, and there are

multiplicity of designs from hierarchical (with several hierarchies - 5 in Egypt) to spheres (such

as in the South African case) to a single authority (as in Cape Town), that do not lend themselves

to preference ordering. Clearly, one size does not fit all.

There is also no observed correspondence between federalism and decentralization, a fact that is

true even when seen across the single or multiparty democracies or systems.

As far as the fiscal powers and distribution thereof are concerned, sub-national expenditures are

around 60 per cent of the total, but the revenue assignments (own or dedicated) are nowhere

close, leading to unfunded mandates.

There is very little autonomy in expenditures (leading to agency transfer problem) and even on

the revenue side there are bands for setting rates of taxes or user fees (albeit not always fully

exploited). India represents a case where there are complex sharing (formula-based)

arrangements for intergovernmental transfers (Paul Smoke). The states do not as a rule devolve,

but the 13th Finance Commissions has initiated a process where this is becoming possible.

As far as borrowings go, there are legal and constitutional conditions (mostly the need for

approvals from higher level governments). There has been a process and innovation to establish

creditworthiness (ratings) and learning from developed countries where there are established

practices. Overall there are complicated arrangements for oversight and monitoring including

lack of staffing autonomy and hence accountability. The challenge is to seamlessly integrate the

metro regions within the fiscal architecture of the country.

The Mumbai Metropolitan Region which has an urban area of 1242 square km, provides 33 per

cent of Maharashtra’s gross state domestic product and 4 per cent of India’s gross domestic

product. It provides tax revenues to the tune of 70 per cent to the state government of

Maharashtra and 10 per cent to the government of India. Logically, higher levels of government

should invest in this region for their own good. In order to ascertain what kinds of public

investments are being made in the region, , one needs to study the investments made by (a) urban

local bodies, (b) fund flows from JnNURM, (c) funding from international donor agencies, (d)

public investments by institutions other than urban local bodies, such as state para-statals like the

MMRDA and MHADA , and (e) Public Private Partnerships in the region. Investments in the

region are around one third of its requirements as per the report on the Business Plan for Mumbai

Metropolitan Region (see MMRDA and LEA 2008).

The metropolitan region also faces tremendous governance deficiencies. There are destructive

conflicts and power imbalances among the public organizations which function in the region,

resulting in inadequate provision of infrastructure and serious governance issues.

Urban local bodies in India are typically weak and hence unable to provide adequate and good

quality public goods and services. The totality of finances of ULBs and the para-statals are far

from the sums required to take care of the special problems and challenges that arise in

metropolitan regions. Finally, governance is the key!

The analysis leads to several questions going forward:

1. What kind of government do we want to manage the metropolitan regions?

2. What constitutional and statutory modifications will be required for this?

3. What will be the level of autonomy given to such a government?

4. How do we create a fiscal space for metropolitan public finance in the national architecture?

Session III: Empowering Decentralization

Opening Comments by the Chair:

Dr. Rajat Kathuria

Director and Chief Executive, ICRIER

In introducing the subject of Empowering Decentralization, Dr Kathuria emphasized that cities

can perform their functions effectively only if they are given substantial autonomy in managing

their efforts. This is based on the theory that government that is closer to the people works better.

By itself, empowering decentralization cannot be seen as a panacea to the problems facing cities

and metropolitan areas in India. The two main objectives of decentralization have to relate to the

quality of service delivery and accountability.

In India at the local level functional independence has not been accompanied by adequate

financial autonomy. This raises the question of the quality and sustainability of public service

delivery at the local level. At the same time there are capacity constraints at the local level.

While designing metropolitan governance structures there is a need to pay adequate attention to

the problems related to capacity, independence, and effective funding arrangements for these

structures.

Principal Presenter:

Roy Bahl,

Professor, Andrew Young School of Policy Studies, Georgia State University

The decentralization theorem which is a basic rule for assigning the function of providing public

goods and services to the lowest level of government is consistent with the principle of economic

efficiency. The theorem leads to people getting what they want thereby increasing overall public

welfare. The assignment that finally results involves a balancing of expenditures across the

different tiers of governments. The assignments should be based on whether there are economies

of scale or externalities in service provision. The question is whether there is decentralization at

the metropolitan level. Scholars who advocate decentralization to the lower levels also propose

greater centralization at the metropolitan level. The considerations of preferences, externalities,

and economies of scale that draw decentralization to the urban local level should lead to

centralization at the metropolitan level.

Finance should follow functions, which should in turn follow the governance structure. The

home rule or getting government closer to the people criteria is the first form of metropolitan

government. This implies that the metropolitan government has a number of municipal

governments leading to jurisdictional fragmentation. This is seen in the case of Sao Paulo which

has 39 municipalities, Mexico City which has 54 municipal governments and Kolkata which has

38 municipal governments. The advantage of such an arrangement is that you have much more

local control but the disadvantage is that you lose out on economic efficiencies and economies of

scale at the metropolitan level. As factors of production are mobile within the region, it is very

difficult to levy a regional tax.

The second form of metropolitan government is based on a technical model which has to face the

challenge of functional fragmentation. In the belief that local bodies cannot provide regional

goods, state governments create technical bodies at the regional level. Mumbai has many

parastatals at the regional level providing regional infrastructure. There are advantages as scale

economies can be captured and externalities internalized. There is also better coordination.

However there are disadvantages in the form of less local control and inter-jurisdictional

conflicts. Here it is possible to levy regional taxes and user charges.

The third form of metropolitan government leads to coordinated delivery. It emphasizes spatial

efficiencies. The advantage of this model is that it has built in coordination and has more

political power. However, it leads to less local control, increased inter jurisdictional conflicts and

creates inflexible metropolitan boundaries. Since factors are immobile, one can levy regional

taxes.

Local governments can be empowered in a number of ways:

1. Get expenditure assignment rightsuch that non local level functions are not decentralized.

2. Pull back from vertical programs.

3. Do not impose regulations while decentralizing powers.

4. For metropolitan level finances, regional taxation must be authorized.

5. Local government wage bill should be decentralized.

6. A realistic borrowing framework must be put in place.

7. As metropolitan boundaries are dynamic, it should be possible to redraw the boundaries.

8. The system of grants should be asymmetric with an incentive component.

9. There should be a metropolitan strategy.

Implications for India

Discussant 1: Mr. Vasanta Rao

GM Finance, Bangalore Metro Rail Corporation, Bangalore

Decentralization theorem leads to greater powers at the local level. Has this led to de facto

increase in power? For decentralization to be meaningful, it is pertinent that urban local bodies

tap all possible sources to increase revenues.

Urban local bodies have several untapped sources of “own” revenue. Their taxing powers are

also underutilized. This is because both the tax administration and the city councils follow

populist agenda. In India the property tax system on annual rental value is flawed. Many local

governments have addressed this issue by moving to area based assessment. This method may

not be one of the best practices but it is pragmatic and has also led to increased compliance.

However, for buoyancy of property tax revenue under the area based assessment system,

continuous revaluation of properties is crucial.

In some cities in India property tax revaluation has been done once in ten or twenty years though

the law mandates periodic revaluations. The municipal corporation of Bangalore follows an area

based assessment of property tax. The statute demands that the revaluation shall be done once

every three years. The statute empowers the local council to enhance the revaluation up to 30 per

cent depending on the index the council would like to choose at the time of the revaluation.

Further, the statute states that if the council fails to pass the revaluation then there will be an

automatic revaluation by 15 per cent over the previous year. This was deliberately mandated by

the state legislation so that the tax administration does not follow any populist agenda. Despite

these statutory provisions the city council passed a unanimous decision not to exercise their

powers of revaluation. They also pressurized the state government to not revise the mandatory 15

per cent enhancement. This situation was repeated in election years of 2000 and 2014-15. The

resultant losses have been very large for the city of Bangalore.

Property tax assessment in many urban areas in India suffers from low coverage. GIS can help in

addressing this problem. Besides the problem of physical identification and coverage,

exemptions are another problem. In Punjab, for example, two thirds of the properties are exempt

from paying property taxes.

The estimated loss to the Bangalore Municipal Corporation is around Rs 500 crores due to

underutilizing their powers of taxing.

The Karnataka state cabinet has approved a policy for land monetization. It has allowed

increased FSI around the metro rail corridor and a levy of a one- time development cess. The

funds received from this instrument are to be pooled in a metropolitan infrastructure fund which

is shared between the infrastructure provider agency and other civic providers. Though the

cabinet passed this policy two years ago, these tools are yet to be used.

Discussant 2: Mr. Satya Poddar

Senior Tax Partner, Ernst & Young

Can one have decentralization of functions and governance without decentralization of financial

handles? If there is no decentralization of financial handles, then the functions that are

decentralized have to be funded by grants. If there is no decentralization of taxation powers, then

there is no accountability. The home rule principle requires the service users to pay for the

services, which leads to an efficient allocation of resources. How does one achieve

decentralization of finances?

One can achieve decentralization of finances if urban local bodies capitalize on the property tax

collections, make use of user fees, and impose broad based taxes. Property tax has an immobile

base which is well defined and meets the benefit principle of public finance. User charges can be

in the form of a tax or a price. Dubai has no taxes but has around three thousand different user

charges. Singapore predominantly has broad based taxes – income tax, GST (Goods and Services

Tax), personal income tax, payroll tax and national pension plan contribution.

Octroi is abolished in India in all states but one – Maharashtra. It is a very important source of

revenue for Municipal Corporations in Maharashtra. When GST was to be implemented it would

lead to the abolishing of the entertainment tax and octroi. However, municipal bodies from

Maharashtra opposed this. The argument from the municipal corporations was that GST

collections would accrue to the state and the centre but its implementation would lead to a loss to

the municipal corporations in Maharashtra.

There are great welfare losses from entertainment tax. Every time a new theatre is built they are

given exemption from this tax. Since these taxes continue to be levied on old theatres, it creates

competitive distortions. This makes entertainment tax a tax only on old investment.

Despite the fact that both these taxes at the national level have miniscule revenue collections, the

two could not be abolished. The question is whether within the context of GST, can one devise a

mechanism to compensate urban local bodies for revenue losses due to the abolishment of tax

handles such as octroi and entertainment taxes.

A part of GST collections has to be reserved for urban local bodies. Devolution of these

reserved collections can be based on sales made at the urban local body level. However, this

requires tracking of sales at that level. It is important to bring in land and property within the

GST framework. This will provide enough revenues to the urban local bodies. At present it is

unclear whether it is within the framework. The final outcome will be a political one.

General Discussion

1. Tiebout’s model has two dimensions to it; either voters vote out the government or they

vote with their feet and move to a new jurisdiction. In the case of China, voters do not

have a political vote and thus the former option is not available. In India, voters are

mobile and also have a political vote. Thus the model holds better for India.

2. On GST and local bodies, the question is whether the devolution from the consolidated

kitty of the GST would be any different from giving grants which are typically based on

consumption patterns.

3. Countries have had different experiences when it comes to an asymmetry in grants with

respect to big cities. It could either mean that they are favored more as the returns are

greater or are asked to provide matching grants where they are required to buy in. One

can design metropolitan governments in a way that they could be self financing and do

not require any grants. Large metropolitan cities can be self financing, e.g., Hong Kong,

Singapore.

4. The home rule condition requires accountability at the local level. The necessary

condition for this is to have empowered mayors. It also requires a separate cadre at the

local level whose wage bill is the responsibility of the local government and not of the

higher level governments.

5. It isnecessary to have a rule that says that local governments do not raise revenues by

incorrect measures. In India local governments are using Floor Space Index tool to make

revenues rather than using it as a planning tool. Local governments in India are also

acquiring revenue by regularizing unauthorized development. This leads to several

unintended consequences.

6. The higher level governments state that there is less capacity and greater corruption at the

local level. However if citizens demand better governance at the local level, then with the

correct system in place capacity at the local level can be built to deliver this.

Session IV: Financing of Public Infrastructure

Principal Presenter:

Dr. Johannes Linn

Nonresident Senior Fellow, Brookings Institute

What should ‘ideal metropolitan financing’ look like in 2050? Some ideas can be discerned from

the chapters in the book:

1) Bahl (2013) states that there should be a decentralized, metro wide government with

autonomy, accountability and capacity.

2) Bird and Slack (2013) observe that a metropolitan government should be self-financed

with combinations of property taxes, non property taxes and user charges.

3) Ingram et al (2013) mention that large infrastructure projects should be financed by

borrowing and public private partnerships.

4) Anwar Shah (2013) suggests that the government should rely on transfers to a limited

extent.

5) Kharas and Linn (2013) maintain that it is very important that external finances should

focus effectively and systematically on metropolitan city finances.

The current state of metropolitan regions is quite different from the ideal one. There exist huge

gaps between investment needs and available resources. Cities are more dependent on transfers

than their own revenue sources. There exists a menu of solutions that one can look at to

ameliorate the infrastructural deficiencies in metropolitan regions. This primarily involves a

combination of own sources (user charges, property tax, land value capture and other taxes) and

external resources (grants/transfers, borrowing, public private partnership and external aid).

User charges are best for utilities, transport, and waste collection. In practice they are not

effectively used and are sometimes discounted by experts. Ideally, user charges should be levied

to finance infrastructure , e.g., public private partnerships. Property tax should provide the

maximum resources to urban local bodies according to theory. However, in practice it is not used

to its full potential. Land value capture can be another important source of finance. There are

interesting examples of this across different countries. However, they are administratively very

difficult to use and sometimes end up as lost opportunities (for instance, Delhi Metro did not

plan or charge betterment levies around metro stations). Income tax is a shared tax, and rarely

gets shared with the lower level governments. VAT is a very difficult tax to levy effectively, and

Octroi is still used in some countries even though it is known to be a bad tax.

External resources are of four kinds: grants/transfers, borrowing, public private partnership and

external aid. Transfers in practice are ad hoc, based on complex formulae, and are sometimes

driven by political motives. Borrowings are underutilized at the metro level as there is little

creditworthiness and lack of project preparation. A strong regulatory oversight, a municipal

rating system, and strengthening of local revenue and management capacity are required for

borrowings to become a dependable external resource. Public private partnerships were once

considered a panacea for urban infrastructure issues. However in practice they have not been

successful. There is scope for experimenting with them at the community level. One of the major

issues with external aid has been lack of reliable and good data. Donors have good intentions but

in practice there is lack of 1) resources and capacity at the metropolitan level, 2) attention to

metropolitan level issues, 3) focus on sustainability and scaling up of success stories, and 4)

systematic data collection at city level.

Implications for India

Discussant 1: Mr. Barjor Mehta

Lead Urban Specialist, World Bank

There are several municipal bodies in the Mumbai region. The region also has a development

authority – Mumbai Metropolitan Regional Development Authority (MMRDA), but it does not

have a metropolitan government. In India there are no metropolitan governments. In the absence

of a government, there are arrangements. The development authorities are essentially planning

authorities. Sao Paulo also has 39 municipal bodies and a metropolitan government.

Another interesting case is that of the coastal city of Daar es Salem. It has a population of

roughly 5 million people. In the 1960s it used to have three independent local governments -

Ilala, Kinondoni, and Temeke. They wouldn’t talk to each other and they collapsed one by one in

the 1980s and early 1990s. As these municipalities could not be dissolved, Daar es Salem

Municipal Council was created at the metropolitan level. The elected members from the three

municipalities would select councilors to form the Council and these councilors would then

select the Mayor of Daar es Salem. However, even after electing a mayor, the municipalities did

not want to have anything to do with the metropolitan government. The World Bank wanted to

set up a metropolitan development program for Daar es Salem but could not manage it. Now, the

World Bank has three standalone investment programs for the respective municipalities. Only

the funds are routed through a unit which sits in the Daar es Salem Municipal council. There

exists a similar issue in the city of Kampala, Uganda which enlarged its jurisdiction and created a

metropolitan government.

China’s metropolitan arrangement is a result of adaptive experimentation, and local

improvisation. However, in India these two words do not exist. There is more of a “jugaad” here.

India needs more of adaptive experimentation. In India we do not link investments in

infrastructure to growth activities. We have transport plans in India which are mobility plans, but

are not integrated with the land use plan and economic activities in the city. Therefore,

investments are not linked with growth. If one wants to experiment in a metropolitan area in

India, this could be a good avenue.

The Rajiv Awas Yojana has gone wrong in many ways. The problems seen in the yojana are

because of not following these basic rules. As the chapter on slums states ‘finance public goods

by public finance and do not finance private goods using public finance’.

There is now going to be a change in World Bank’s intervention in India. It will be with

individual states rather than with the central level government. The Bank will continue to have

policy dialogue at the national level, but to have impact on urban local bodies, intervening at

state level seems to be good idea.

Discussant 2: Dr. Rajiv Lall

Executive Chairman, IDFC

When we compare India with China, it is both frustrating and exhilarating. It is exhilarating

because China has been able to do so much. It is frustrating because in India there are many

constraints in terms of the current political economy. Unless we understand the politics of the

context we are operating in, we will not achieve the desired outcomes or progress. There is a

need to recognize and harness the political economy of the situation. If we do this, we will come

up with more creative solutions that stand a better chance for achieving success.

At the local level there is no governance, revenue base, and capacity. States do not want to

empower cities and that is why they do not have a revenue base. This is related with the political

economy of the situation. There exists no metropolitan government in India and our urban local

bodies do not have the capacity to deal with regional level problems. Even though there is a need

for it, a position of an empowered mayor at the metropolitan level is politically impossible as it

would be stronger than that of the chief minister of the state.

The contours of our parliamentary constituencies are predicated on the 2001 census population.

Due to the fact that constituencies are being decided on population estimates based on older

census data, there is an underrepresentation of urban voice in the Lok Sabha. This process of

demarcating the constituencies is also a highly politicized process.

The link between the urban and the rural has begun to blur. However, there are several census

towns that are urban in character but do not have a municipal body. The fund flows associated

with rural are far greater than with urban. This leads to resource misallocation. One can try to

solve this problem by providing finances for infrastructure development in lieu of a rural

settlement which is urban in character converting to urban. The fund flow for this investment

could be of similar magnitude or slightly more than what was forgone on conversion. One

should also look at land value capture to augment finances. There is a need to charge a

conversion fee for converting land from rural to urban. There are several state agencies like the

development authorities and industrial development corporations, e.g., in Gujarat and

Maharashtra, which own large parcels of land. They have been partially successful in monetizing

that land bank to build and create infrastructure in varying degrees. There is a need to develop

the capacity of these bodies so that they can appropriately monetize the land they have.

Discussant 3: Mr. Sanjay Sridhar

Strategy Head (Urban Development and Accessibility), EMBARQ India

Following are the key takeaways:

1. Land development in China has been very successful. Governments have been highly

dependent on the revenues from this land development. This, however, is only a one-time

source of revenue. China is rethinking this model now and undoing some of the mistakes

they have made.

2. In India, there is need for a consistent and stable budget from the higher government to

the lower level bodies. If these budgets vary from year to year, it is difficult for the local

governments to plan their finances.

3. The case of Sao Paulo is very interesting. They have revisited their legal framework on

metropolitan governance. It is not a static document. It is constantly revised and certain

hybrids are created. There are great strengths derived from democratic processes.

4.

Private players in public private partnerships in infrastructure prefer certain sectors over

others. This is because private players do not have sufficient incentives in all sectors.

5. One needs to increase the efficiency of existing infrastructure rather than create new

infrastructure in metropolitan areas. This is the operational and maintenance cost versus

capital cost argument.

6. There is also a need to look at slum upgrading at the regional scale. The financial model

for the upgradation of slums is not feasible because even after upgradation, a social

hierarchy attached to the land continues operating.

7. Bangalore created its metropolitan planning committee to honor the court. However, it is

not functioning that well.

8. There is an ongoing metro project in Bangalore. EMBARQ is working with the

implementing agencies to create station area plans. The physical ability to get to a station

is directly impacted by the urban form around the metro station. Due to rise in land

values around the metro, all residential land use will convert to commercial or retail. The

land value capture around the metro will be highly dependent on the infrastructure

carrying capacity of the area as this would have a bearing on the FSI policy. For example,

in Bangalore, one can only effectively capture the gains in land values by bringing about

a change in FSI from 2 to 4.

9. In Bangalore, the civil society is very strong. They extract accountability from the

government. This is missing in some other cities in India.

10. The Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC) is

looking at issuing green city bonds. The vision is to create a financial architecture that

will support green growth. The green bonds would reduce carbon emissions and mitigate

climate change while improving service delivery and urban design.

General Discussion:

In most developing countries, property taxes are not utilized to the fullest. Prof Bahl raised a

related question whether a country could unify the administration – identification and evaluation

– of all land based taxes.

Johannes Linn pointed out that Columbia actually has this. Their National Cadastral Agency is

responsible for all of Columbia except Bogota. Bogota had hand written ledgers thirty years back

but the national agency had its data better managed. In principle this is a very good idea.

However, it might be very difficult to implement at the local level.

Isher Judge Ahluwalia observed that practically it might be difficult to get a national system

working as there are different degrees of commitment at the state level. There would be an

unwillingness from better functioning states to collaborate with states that are slow. . Also, why

would cities like Bangalore join a national level system when they know that would do much

better individually? The national e-governance project by the National Information Centre has

been made use of by only a few states that have understood the importance of backend

integration. Also, the desired outcomes can be achieved by more city level competition. A

national level unified system can be successful by synchronizing some crucial common elements

across states.

The challenges of harmonizing data exist also within a single city. There was an idea for

Bangalore a decade ago called BASIC – Bangalore Spatial Information Centre. However, city

level agencies such as Bangalore Municipal Corporation and the Water Board still have different

base maps.

With reference to Rajiv Lall’s point that census towns are not willing to be notified as urban due

to larger flows associated with being categorized as rural, there was a discussion on

categorization of rural and urban in India. Rajiv Lall suggested that to get around the political

economy problem of urban areas continuing to be administered as rural, JNNURM funds could

have been used much better if they were given to such rural areas for improving infrastructure

such as roads. Some participants responded by saying that provision of amenities was one thing,

but more important would be governing urban as well as rural areas better.