Financing the Development of Small and Medium Cities
Urbanisation in India is currently marked by two fundamental trends: lopsided migration to the larger cities and unbalanced regional economic development. In this context, this paper makes a case for the concerted development of small and medium cities as the key focus in the strategy to ensure sustainable urbanisation in India. As cities plan for the long term, among the most critical components they need are the availability of land and the provision of infrastructure and services for a growing population. This paper suggests the need for land banks and land readjustment mechanisms, and assesses the efficacy of current mechanisms for infrastructure provision in small and medium cities. There is also a rationale and need for the creation of new cities, either on the peripheries of large cities or around industrial clusters, with private participation and financing.
The urban population of India is concentrated in large cities. More than 60% of the urban population lived in Class I cities as of 2001. Chattopadhyay (2008) points out that the rate of population growth in these Class I cities has also been consistently increasing over the past five decades, from 45% in 1961-71 to 62% in 1991-2001. This has been accompanied by a decrease in population growth in smaller urban centres. This trend of migration towards the larger cities is due, in large part, to the economic prominence of these cities. These cities are the engines of economic growth, but are plagued by severe challenges to their civic infrastructure and service delivery capabilities. For this reason, they are deemed to be at the forefront of the urban challenge today.
India is rapidly urbanising and the rate of urbanisation is expected to climb steeply over the next few decades. McKinsey Global Institute (2010) predicts an urban popula- tion of 590 million by 2030, as compared to 340 million in 2008. For India to be more inclusive, it is imperative that both economic growth and urban population be more equitably distributed. Therefore, any meaningful long-term vision for India would be incomplete without planning for the cities of tomorrow.
Where Are the Cities of Tomorrow?
Why Small and Medium Cities?
An Assessment of the Current Scenario
A Comprehensive Approach to Development
Financing Land and Infrastructure
- Land Banks and How to Finance Them
- Innovative Financing of Land and Infrastructure through Land Pooling
- The Centrality of Grant Funding for New Infrastructure Creation
- Debt Financing for New Infrastructure Creation
Development of New Cities
- Nodes at Over-Congested City Peripheries
Development and Financing of Industrial Cities
Urbanisation in India is currently marked by two fundamental trends – lopsided migration to the larger cities and unbalanced regional economic development. Both these trends need to be reversed.
This paper makes a case for the concerted development of small and medium cities as key to the strategy for ensuring sustainable urbanisation in India. The development of these cities can disperse rural migration and ensure more balanced regional development. However, smaller cities are hobbled by problems of poor economic prospects and low levels of infrastructure provision; government programmes aimed at these cities have failed to achieve any meaningful change in this scenario. There needs to be a new approach to the planning of these cities.
Theory suggests that smaller cities are fundamentally linked with their rural hinterlands and these rural-urban linkages encompass human, financial and market connections. Any planning exercise for these cities should incorporate their surrounding rural areas and therefore, a regional planning framework that includes economic development and infrastructure planning for an entire district may be the way forward. Constitutionally-mandated DPCs may be the best vehicle to undertake this planning exercise. Although the performance of DPCs on the ground so far leaves much to be desired, improved performance can be incentivised by linking conditional grants from the centre to state governments on the composition and operationalisation of DPCs in the state.
The next important question relates to the financing of infrastructure and service delivery for these small and medium cities. As cities plan for the long term, one of the most critical components they need to plan for is the availability of land. Small cities should look to create the land banks that they will need for future development by acquiring these lands upfront. These land banks can be financed with the help of a derivative product provided by the central government that guarantees a minimum increase in land values (say 1%). Small cities can use this guarantee to borrow from banks that would otherwise be unwilling to lend to them and thus finance their land banks.
However, land acquisition can be a complex, time-consuming process and wherever feasible, mechanisms such as Land Re- adjustment and Pooling (LRP) can be used to make lands avail- able for development without needing them to be acquired. LRP is a self-financing mechanism that allows for landowners to work as partners with local government and enables comprehensive planning of land and infrastructure provision. LRP should be legislated in the town planning acts of all Indian states.
The financing of new infrastructure provision in small and medium cities will be dependent on grant funding for the short term. The UIDSSMT programme should be given high priority and cities should be encouraged to prepare project proposals for funding. The UIDSSMT financing mechanism can be modified with a new feature, making available a portion of UIDSSMT funds to be used as guarantee funds for pooled bond issues. This can ensure that UIDSSMT funds are leveraged to a greater extent than they are currently and reach a larger number of cities.
There also needs to be a concerted push to revive the moribund pooled financing scheme that allows multiple small cities to pool together their infrastructure projects and access the capital markets with bond issues to raise financing. Despite a few successful pooled bond issues, there has been a distinct lack of activity in this market. This can be attributed to a guideline that requires that tax-free pooled bonds be issued at 8% or less. This stringent requirement makes new bond issues economically unviable. It must be revised so that the interest rate cap is a spread over a benchmark rate, such as the govern- ment securities rate.
The development of small and medium cities is essential to sustainable urbanisation, and it can be augmented by the development of new cities. New city development can take the form of development of nodes near large existing cities in order to ease the population pressure on the latter. These nodes are designed to decongest the larger cities. One way to finance the development of such nodal cities is through the issue of long-term local government bonds backed by partial central government guarantees.
New cities can also be developed around large industries and industrial clusters. Since these industries are private ven- tures, there is tremendous scope for involving the private sec- tor in planning the development of these cities and getting them to substantially participate in financing the creation of infrastructure, even as equity partners. Such cities can also experiment with other innovative service delivery and financ- ing mechanisms that could have tremendous relevance for the country at large.
Urbanisation in India is gathering momentum and in order to be able to plan for a sustainable urban future, immediate attention needs to be paid to the small and medium cities of the country. It is only through the focused development of these cities as the cities of tomorrow can India develop a meaningful long-term urbanisation strategy.
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