Who will finance the mega cities of the future?

Why the focus on financing cities?

The United Nations’ Sustainable Development Goals report, 2022 states that by 2050, seven out of 10 people are expected to live in urban areas. India’s story is no different: by 2047, half of the country’s population will be living in urban areas. Therefore, cities need better planning, in which infrastructure is focused on spatial, social and economic inclusion. Spatial and social inclusion would mean providing affordable necessities such as housing and water. Economic inclusion would include jobs. A World Bank report states that Indian cities will require capital investment of $840 billion by 2036 in infrastructure and municipal services.

What are the funding avenues for cities?

Indian cities occupy only 3% of the country’s land, but contribute more than 60% to its gross domestic product (GDP). With increasing urbanisation, revenue from tax and non-tax sources and grants from central and state governments are proving insufficient. Public private partnerships, issuance of municipal bonds and green bonds by urban local bodies (ULBs), capture of land value in terms of additional floor space index, etc., could be alternative financing sources. Also, the local bodies may consider levying user charges for sanitation, water etc. If it is successful, it will help in improving their credibility.

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What steps has the central government taken?

Urban Infrastructure Development Fund has been proposed in the Union Budget 10,000 crore per year to public agencies to create infrastructure in Tier-2 and Tier-3 cities. Other measures include providing safe and dignified sanitation, state-led investment in urban development and encouraging cities to raise their creditworthiness for municipal bonds.

What’s up with municipal bonds?

The municipal bond market has been an untapped source of funding that urban local bodies are trying to tap into. NSE has 28 municipal bonds issued by 10 cities – Pune, Hyderabad, Indore, Amravati, Bhopal, Visakhapatnam, Ahmedabad, Surat, Ghaziabad and Lucknow. As per reports, the government has identified over 30 cities with good ratings in the municipal bond market. This year Indore Municipal Corporation became the first city to issue green bonds on NSE.

What else can be done?

Commercial debt financing, including loans and bonds, is one option. Any bond purchase is made with three factors in mind: return on investment, whether the bond has sovereign backing, and whether there are any tax incentives. A sovereign backing gives investors confidence and the government can provide guarantees. Making them tax-free can’t hurt – eg tax benefits for interest income or capital gains.

Jagdish Shettigar is a faculty member at BIMTECH and Shiven Mishra is an architect.