Koan Partner Vivan Sharan on “Smart Cities: A Reality Check”, Businessworld, June 27

 

The familiar adage that ‘India lives in its villages’ will stop holding true within a few decades. And this transition, represented by urbanisation on an unprecedented scale outside of China, is already changing domestic politics. Urban areas were given scant attention in the ‘gareebi hatao’ era, marked by an emphasis on social schemes catering to the rural poor. Today, they are veritable microcosms of India’s various challenges and opportunities. Urban areas arealso the drivers of production and consumption in the Indian economy; accounting for 60 per cent of GDP. 

 

 

The UPA Government too had an ambitious urban development programme called the Jawaharlal Nehru Urban Renewal Mission (JNNURM), not too different from the new initiatives on offer. The Comptroller and Auditor General (CAG) audited JNNURM in November 2012, to find that the implementation statistics left a lot to be desired. Among other glaring implementation failures, it found that only 253 of a total of 2815 projects were completed by March 31, 2011. The CAG attributed this failure to poor management, including deficiencies in the guidelines, delay in release of funds and so on. Have the right lessons have been learnt from this?

 

Unlike the JNNURM, the Smart Cities initiative will give more control to the states and place the onus of self-assessment on them. And consequently it is hoped that the States will compete with each other on performance to receive enhanced support from the Centre. TheCentral Government for its part will have to rise above political compulsions of giving preference to NDA ruled states. It would also have to adhere to transparent and objective methodologies for sanctioning monies on time (and not in the last quarter of each fiscal in a rush to match targets), utilisation of interest, monitoring of funds etc. 

 

Another critical question is one of governance capacity. The CAG report found that the monitoring and assessment of JNNURM was poor, at all levels. Therefore devolution of monitoring and assessment duties to the states is not necessarily likely to be a panacea. And herein lays the importance of a robust conceptual framework. Any framework that presumes the existence of implementation, monitoring and assessment capacities of local governments, even to assess their own weaknesses, is likely to fail. Instead what is required is a framework that can harness low hanging fruits such as regular scrutiny by civil society, meaningful participation of the private sector and provision of technical support for instituting best practices within Urban Local Bodies (ULBs). 

 

Importantly, the financial data of ULBs must be comparable. A number of ULBs continue to follow single bookkeeping system of financial accounting, a primitive practice to put it mildly. The National Municipal Accounts Manual (NMAM) issued in 2004, endorsed by the CAG, prescribes a common accounting framework for ULBs. This serves as a good starting point. Among other things, it suggests the replacement of single entry cash basis of accounting by double entry accrual based system of accounting. It also encourages compliance with the ‘Generally Accepted Accounting Principles’;accounting Standards issued by the Institute of Chartered Accountants of India. There is also a clear opportunity here to learn from experiences in other countries. 

 

The corporatisation of ULBs can yield significant benefits in terms of reporting of financial data. Corporate bodies owned by ULBs have to adhere to the provisions of the Companies Act, 2013. Their books of accounts are open to inspection by relevant nodal authorities and they have to file copies of key financial documents such as balance sheets, profit and loss accounts with the Registrar of Companies. In addition the corporatisation of ULBs may help local governments address the fundamental challenge of inadequacy of finances to deliver on the Smart Cities and AMRUT mandates of creation of ‘smart’ infrastructure and efficient delivery of basic services. 

 

Under existing external commercial borrowing guidelines, ULBs are not eligible to directly raise debt funding from external lending agencies. On the other hand, a public company may borrow up to its share capital and free reserves. A publicly owned company can also raise capital in the form of share capital or by issuing debt. Under the Companies Actand the regulations prescribed by the Central Bank, companies can raise debt in the form of debentures and bonds as long as they follow the recently establishedguidelines by Securities and Exchange Board of India (SEBI). 

 

To meet their financing needs,only a fraction of which can be met by them Central Budget, corporatised ULBs can try to leverage a variety of financial instruments. Bonds issued by ULBs with good financial track records could become alternative investment avenues for conservative investors. In fact, various categories of bonds including General Obligation Bonds, Revenue Bonds and Green Bonds can also be looked upon by ULBs. They must look to capitalize on the fact that there is excess liquidity in the global financial system.

 

The bad news is that the Indian municipal bond market accounts foronly around 0.012 per cent of GDP at current prices compared to the United States where the aggregate principal amount outstanding by the fourth quarter of 2014 was about 21.7 percent of the country’s GDP.Financial inclusion and stable inflation will be prerequisites to the growth of the fixed income market in India. Indeed many of the challenges associated with urban development require a deeper introspection on the structural deficits of the Indian economy. 

 

Nevertheless given existing constraints, innovative financing models will have to form the backbone of urban development and eventual creation of  smart cities. Some possible alternatives could include user fees models, value capture models, tax increment financing and civic crowd funding. Each of these will require serious study and demand that the government adopt a multi-stakeholder approach for soliciting expert inputs. Indeed, the experiences of the Municipal Corporation of Delhi, which struggles to pay its workers, show that there is no guarantee that corporatisation of ULBs will make them financially viable. However, through appropriate process innovation and guiding policies, the central and state governments must ensure that this is the exception rather than the rule.