By Deepti George, IFMR Finance Foundation
Following the sessions by Dr. Isher Ahluwalia and Mr. Vikram Kapur, (covered in this post) the workshop participants discussed critical topics such as decentralisation and governance, political economy and institutional fragmentation, revenue generation and infrastructure financing, water and sanitation, capacity building, and land and city growth. The discussions, group exercises and presentations coalesced around a few themes, highlighting their importance for the urban agenda.
These themes provide rich scope for further analysis and research, and highlight the need for deeper exploration of specific issues critical to understanding and managing the urbanisation process.
For instance, the discussion on financing strategies for cities to raise the huge quantum of investment required to build and maintain infrastructure and services, brought the following issues into sharp relief:
1. The importance of own revenue generation and the ability to leverage funds:
Cities in India have traditionally been used to financing themselves purely through grant funds provided by higher levels of government. This has led to a culture of dependency and lack of accountability to citizens. It was pointed out that in order to raise the magnitude of investments required for urban infrastructure over the next 20 years, cities would have no choice but to leverage their grant funds by reaching out to the debt markets. Currently, on account of poor capacities and insufficient own-revenue generation, most Indian cities are unable to access debt markets.
This brings into sharp relief the critical importance of cities being able to generate own-revenues (from sources such as property tax and user charges), because without sufficient internal revenue generation, external debt will not be serviceable. Strategies for cities to improve their internal revenue generation will be key to developing sustainable financing models for urban infrastructure.
The TNUDF model (a PPP focused on raising debt for small and medium cities) was also seen as a scalable mechanism for other states to enable their cities to raise debt funds from the market.
2. Market-worthiness of ULBs as a tool to enable flow of funds from capital markets:
ULBs will be constrained in raising funds from the markets also because the rating models used to rate ULB debt do not take into account the operating models of cities in performing their duties. Because rating agencies focus their analysis purely on the financial aspect of ULBs and the associated credit risk that this implies, they tend to miss out on the many other aspects critical to the way a ULB functions. This results in low credit ratings (below investment grade) overall for ULBs, and further it does not distinguish between cities that are financially similar but vastly different in terms of their management and operating capacities. These capacities have tremendous impact on the performance of local governments.
In this context, the role of a set of “market-worthiness” standards that provide deeper insights into the operating, technical and management capacities of ULBs was seen as being an important complement to the credit rating process. Taken together, the credit rating and “market-worthiness” rating could provide a more comprehensive sense of the risks associated with the ULB. Discussants saw this type of market-making activity as being especially important in the context of small and medium cities.
Similarly, there were deep discussions on a number of themes such as the importance of standards for public service delivery, the need for capacity building, the nature of decentralisation and the mechanisms for improved governance.
This note describes these themes in greater detail.