The Organisation for Economic Co-operation and Development (OECD) estimates that about $71 trillion, or about 3.5% of the global GDP, will have to be invested through 2030 to improve the basic infrastructure worldwide. While governments and public sector entities remain the main drivers of infrastructure growth, there is a recognition of the need for private sector participation to pull off this feat. The challenge for India is no less, with urbanisation expected to reach 40%. Under Jawaharlal Nehru National Urban Renewal Mission (JNNURM), a provision of R50,000 crore has been agreed to as central assistance to states over seven years (2005-12). While central financing schemes will help the identified cities, the country will need several new cities, and mechanisms for financing their infrastructure development and maintenance.
One way out is to broad-base municipal taxes and user-charges. The size of municipal revenues is small in India compared to many countries. The total municipal revenue in India accounts for about 0.75% of the country?s GDP against 9% for the US, 8% for Germany, 4.5% for Poland, 5% for Brazil and 6% for South Africa. In developed countries, taxes account for about 50% of total revenues, of which property taxes seldom account for more than 20% of local current revenues. In many developing countries, including in India, the dependence of municipal authorities on property taxes is inordinately heavy, reflecting their narrow revenue base.
There is a visible trend in the OECD countries towards more effective utilisation of user- charges and benefit taxes. But user charges in India remain a grossly under-exploited source. Currently municipal taxes in India is largely limited to property tax. Other municipal revenue sources are a share in profession tax, entertainment tax, surcharge on stamp duty, and motor vehicles tax; vacant land tax and advertisement tax, most of which are not exploited. to their full extent. Appropriate levy of user charges or proxy-taxes would need to also be ring-fenced, say, into corporatised entities providing the economic or social service. Such corporatised agencies would enable raising capital from diverse sources. This will enable investment grade credit-ratings for certain agencies, opening up more sources of municipal borrowings.
Leveraging value creation in land prices is also another revenue source. In developing new cities, up-front government investments will have to become the pivot around which the private investments will slowly coalesce. Trunk infrastructures such as connectivity, mass rapid transit systems and other public transport may need to be developed by the government. Such initial infrastructure will create value in land prices and allow the government to reap a share of it. Cases in point are taxes such as purchasable/auctionable development rights, land gains tax, special assessment tax— which is a charge to any specific property in proportion to the increase in its property value due to infrastructure provision, which divides the cost of public works in proportion to the benefits conferred on properties. Singapore?s Land Transport Authority is a good example of leveraging real estate value, and of aligning urban transport pricing policy with financing needs. The MMRDA and similar agencies are also useful examples back home, though they directly carry the real estate market risk. It is important that such revenues are ring-fenced to ensure they go towards servicing the capital raised for infrastructure creation.
While municipal taxes and user-charges are politically sensitive issues in existing cities, in developing new cities there is a potential to start on a clean slate. A financially viable model is essential to harness private sector capital and enhance the sector’s capability in planning and running cities. The greenfield Tianjin Eco-city in China is being developed on 30-sq km of non-arable, salt-pan land for $22 billion and will be home to about 350,000 people. Expected to be completed in 10-15 years, it is being developed by the Sino-Singapore Tianjin Eco-City Investment and Development, a 50-50 joint venture company between a Singapore consortium led by the Keppel Group and a Chinese consortium led by Tianjin TEDA Investment Holdings, a state-owned enterprise based in Tianjin.
The proposed $22-billion Masdar City in Abu Dhabi, the world’s first zero-carbon, zero-waste, car-free city, is intended to rely mainly on outside funding and use less than one-third of the Abu Dhabi government’s $15-billion dedicated fund for the initiative. Masdar?s Business Model includes availability of capital to grow business (The Masdar Clean Tech Fund has spent $250 million on clean-tech ventures from its first fund), access to a community of venture capital firms specialising in funding and incubating cleantech, and access to extended supply-chains through a cluster of cleantech companies in Masdar.
Innovative public-private-partnership (PPP) models at the city planning and management level as well as at the service-specific SPV level (electricity, water, waste, traffic management, etc) need to be developed to attract financing.
(Concluded)
The writer is executive director-government reform and infrastructure development, PwC India. Views are personal.