India is urbanising fast. A much-quoted report from the McKinsey Global Institute covering urbanisation in India predicts that 590 million people or 40% of the population will live in cities by 2030, up from 340 million today. By that time, our country would have 68 cities with populations over one million, up from 42 today. But sadly, after decades of underinvestment, many of our cities lack a proper public transport system, adequate sewage and garbage treatment, sanitation and clean water. The report proposed that India raise its yearly capital spending per head in cities to $134 from a current level of $17, which is only 14% of China?s $249 a year. Many figures are bandied about by our planners regarding deficits in our urban infrastructure spending. A commonly agreed amount is Rs 2,20,000 crore!
Obviously, the government cannot finance the assets needed to make life in metros comfortable for all. The solution is public private partnerships (PPP), leveraging public finance with private capital to build city infrastructure. Internationally, this is an important route countries take to improve their cities. The PPP concept was introduced in the country only after 1990. Between 1950 and 1990, the sources of debt for municipal infrastructure were usually limited to the state governments or institutions like the LIC or HUDCO on the basis of state-till guarantees. In Tamil Nadu until 2003, 75% (Rs 700 crore) of the municipal debt was raised on this basis. This method has several drawbacks. To start with, there is lack of clarity on the size, terms of the loan and the repayments at the municipal level. The asset created by, say, a state water board, has no real involvement with the concerned municipality and the board takes on no responsibility other than construction.
This kind of financing is the least efficient way of creating civil assets. This ad hoc method has led to several water and sanitation schemes being written off. For instance, HUDCO backed several water supply and sanitation schemes in Salem in Tamil Nadu. This led to a substantial amount of pipes and equipment being procured. The water situation showed no improvement and the municipal authorities were barely involved. Similar disasters have happened in Trichy and Tirunelveli too. Most of these loans amounting to Rs 500 crore were written off subsequently. This method of financing continues to be dominant even now, especially in environment-related investments.
In PPP financing, there is an ongoing debate about whether the method should be equity- or debt- based. According to the World Bank and other private consultancy reports (Fitch, Morgan Stanley), the equity route has not been very successful anywhere. Equity will work only if urban infrastructure investments can generate genuine third-party sales as in case of telecom and power. It has been tried out in funding inner city toll roads, community investments like wedding halls. Prospects of raising equity for city roads and waste water treatment are limited. These require long term debt and the returns are low. Nor can one take advantage of listing the shares as the equity base is low. The revenue comes from multiple sources like fees, taxes and so on and therefore becomes quite risky for the investor.
In the US, around 94% of water systems are publicly owned and financed by private debt. Atlanta in Georgia signed an $800 million water concession with a party in 1999. The whole thing came apart in three years. In 1999, the state government of Victoria in Australia decided on a PPP equity route for expanding the urban transport services in Melbourne 18. The state-owned corporation, running an extensive network of trams and trains, made substantial losses each year. The services were divided into five franchises and contracts were awarded through competitive bids. The operators made losses, much restructuring and negotiations took place and it was not a happy experience for anybody.
On the other hand, international experience in both developed and developing countries shows that the debt route has worked much better for city-based projects. Some Tamil Nadu examples tell the story. Madurai is a growing city. It needed to decongest itself by building a bypass to separate long and short distance passenger and freight traffic. The city borrowed Rs 18 crore at 15% and built an 18 km bypass in 24 months. It serviced the debt through tolls. Madurai reduced its interest costs by securitising its loans by means of an AA-rated bond at 12.5%.
Similarly, Karur town wanted to finance an inner city bridge and managed to let out a concession on a competitive basis for a 15-year period to construction company ECCI. The bridge was completed on time, the town was successfully servicing debt and equity till the then state government without jurisdiction cancelled the concession. The next government ended up compensating ECCI.
Tiruppur, the garment city, has desperate need for water and sanitation. Its water-ways have been ruined by textile pollution. A water and sanitation project proposed in 2002 at a cost of Rs 1,300 crore as an equity PPP has been a non-starter. Its shareholders are the governments of India and Tamil Nadu, IL&FS, M&M and Tiruppur exporters. There is still no functioning sewage system, the losses are huge and there has been repeated debt restructuring. On the other hand Alandur, a small city, which has completed a sewer system at a cost of Rs 30 crore within a record 24 months, raised market finance and user charges of Rs 9 crore before awarding the contract. This financial innovation has been copied in neighbouring towns.
Every state has its success stories. But they are few and far between, and inadequate for our country of 1.1 billion people. Many towns like Ahmedabad, Bangalore and Nagpur have successfully gone to the bond market to raise funds to improve their cities. There have been no delays or defaults. Most urban planners feel that the constitution reform of 1992 that set out the division of responsibilities between the state and local bodies was a step in the right direction. So is the setting up of Jawaharlal Nehru Urban Reforms Mission. What has not happened is empowering the local bodies. Responsibility without power never works.
sushila.ravindranath@expressindia.com