Urban Infrastructure Investment
Mechanisms, Possibilities, and Special Financing Vehicles
Infrastructure Development Finance Company Ltd.
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Structure Background Current financing mechanisms Strengths and weaknesses of current
mechanisms New possibilities:
– Pooled Finance initiatives, Viability Gap Funding, Urban Funds
Bringing private capital into Urban Infra
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Galloping Urbanization Urban Population was 26% in 1991 likely to
increase to 36% in 2011– Rate of urban population growth likely to be
almost thrice that of total population growth
Urbanization picks up after reaching 25% according to international experience
Economic reforms and globalization will make cities primary wealth creators
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India’s economic growth has been led by urban areas
India has become increasingly urban– 1981: 23 per cent, 1991: 26%, 2001: 29 per cent
Economic growth led by urban areas : industrial and service sectors accounted for – 1981 : 62 % of GDP– 2001: > 75% of GDP
More urbanized states recorded high growth rates– Tamil Nadu, Maharashtra, Karnataka, Gujarat, Delhi-Haryana
At the local level, larger cities in faster growing states have grown rapidly– Chennai, Hyderabad, Mumbai, Bangalore
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Demand Supply Gap
Annual investment needs in Urban Infrastructure are about Rs. 400 billion*
as against an availability of Rs. 50 billion, (excluding new mass transit and
township development projects)
*give or take a few hundred billion!
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Urban Infrastructure… Needing large investments in…
– Urban Transport– WatSan
– Desalination– Reuse of “pre-loved” water
– Solid Waste collection, transportation & disposal– Almost all States looking at SEZ development
(main developer as well as component developers) with private sector participation
– Investments are being actively sought even for the ‘traditional’ industrial area developments which now include Biotech parks, hardware parks, and so on
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74th Constitutional Amendment
Introduces fundamental changes in system of urban governance– provides for regular and fair conduct of
elections through State Election Commissions– provides a framework for assignment of
appropriate civic functions (as per 12th Schedule of Constitution)
– States required to constitute State Finance Commissions to improve municipal finances
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Government Funding Virtually the entire investment,
construction, operating, and maintenance is by government– Direct budgetary devolution (tax-payer
money)– Debt raised against government
guarantees, (and “letters of comfort”)– Financing primarily by HUDCO and LIC
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Local Authority Funding After the 74th Amendment, there is
increasingly, funding generated by the ULB– Escrowing revenues such as property tax,
entry tax/ octroi– Selling/ securitizing land
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Multilateral/ Bilateral Funding
World Bank, ADB, DFID…– Based on reform agenda– Fairly detailed appraisals done– Sectoral or project-wise– Generally addresses needs of urban poor
However, for commercial loans, based on Government of India Guarantees as security…
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Private Sector Interest? Urban Infrastructure, has not yet found
investor interest in the absence of clear directions on various aspects - Risk, social/ political, Regulatory, cost recovery mechanisms, etc.
Various attempts are being made to convert Urban Service (water, waste-water, Solid waste, etc) into ‘Bankable projects’– This is likely to open a new area for
investments– And a new breed of ‘Operating’ companies to
provide these services
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Strengths… Fairly simple financing mechanism, from
budget or Government secured lending Quick – if political will is there Suits a “basket of projects” approach, since
there is no need for detailed diligence. Lenders are also OK, since the money is
lent against the surrogate credit assessment of the State
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Weakness… Practically no diligence on the project
financials– Viability, user-charge recovery, and such minor
issues are non-critical, high gestation period for loan sanction
Financial requirements are increasing way beyond direct budgetary/ guarantee capacity
State budget deficits and statutory guarantee limits constraining State Gov. funding capacity
No impetus to reform
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Beginnings well made… May not be complete “success stories”, but:
– Tamil Nadu Tirupur, Alandur, TNUDF Pooled Finance
– Municipal Bond issues Ahmedabad, Hyderabad, Nashik
– Sukhthankar Committee, Maharashtra– Urban infrastructure funds – IFCG, Feedback U-
Fund and MUIF– BATF in Bangalore– Water O&M PSPs (attempts!) in Pune, Goa,
Bangalore, Hyderabad
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Pooled Finance TNUDF sponsored issue, successful in
Tamil Nadu– USAID (DCA) guarantee for 50% of principal
Karnataka (KUIDFC) pursuing similar issue Government of India’s proposed PFDF, also
a pointer in this direction– Yet to take off
Issues of listing Trust-financed Bonds (SEBI), would have to be addressed to ensure a market for these instruments
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Pooled Finance… (2)Proportion of Pooled ULB
Finances
Government Budgetary Support
Debt Service Ratio of 1.3
to 1.5
PFDF/Government
Bond Service Fund
State Intercept
USAID GuaranteeRated Bond Instrument
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Viability Gap Funding Proposed by Government of India
– To “Prop-up” marginally viable projects– Established and clear guidelines for
allocation Problem may be in the lack of developed and
structured projects, that are eligible to claim this assistance
Also will take time to disseminate info/ capability to the ULB level
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Capital Market Access Bond issues of Ahmedabad,
Hyderabad, BMP, Nashik etc., have not led to large-scale replication– Issues of market appetite, end-use– Limited number of ULBs which can
access financing on a standalone basis– Pooled Finance seems a more
appropriate structure for small ULBs
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Access to domestic institutions
For the Local Body Reluctance of Local bodies to accept FI conditions
typically stipulated to mitigate project risks– ULBs have option of (a) FIs assistance (cash flow
basis; with conditions) Vs (b) MLA funding/ Govt. Institutions ( GoI/ State guaranteed; soft push, if any)
– ULB prefers the latter to the former (obvious!)
For the Domestic Institution Guaranteed lending (state/ central) is no more risk-
free, from regulatory considerations
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Earmarked Urban Funds The CCF, URIF, PFDF, IFCG and MUIF
were envisaged by GoI/ State Govt., 3 years ago– Did not take off very well
Too small a corpus, too long a wish-list of reform interventions sought
Proposal to consolidate the existing Central Govt. funds (Mega City, IDSMT, etc.), to make them better oriented to the proposed end-use
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Large-scale Interventions Possibility in the short/ medium term subject to
– De-linking of City projects from State Government finances through direct assistance by Central Government
– Closer MoUD – State Govt. – City Government’s interaction in project preparation, financing and implementation issues
However, specific projects/ basket of projects are amenable for PPP forms– Aggressive application of viability gap finance,
annuity financing and dedicated city funds to enable early financial closure (such as road development funds)
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Reasons to be optimistic Realization of need for improvement of
Urban Services, and concurrently, the finance needed for doing so
Various precedents are being tried and tested, and experience is maturing– But yet a long way to go
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Conducive Macro-economic Policies
0
100
200
300
400
East Asia andPacif ic
Europe andCentral Asia
Latin Americaand the
Caribbean
Middle Eastand North
Africa
South Asia Sub-SaharanAfrica
Investment in Infrastructure Projects with Private Participation by Region, 1991-2001, $ Billion.
Source : World Bank WP 5, 2003
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Fiscal policy – Tax policy
–Widening of tax bases–User charges
– Policy of fiscal transfers – decentralization of powers and finances
Fiscal Policies
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Making Local Governments Credit Worthy– Make property taxes more buoyant– Make subventions from higher levels less discretionary – Decentralize more services – Freeing Property markets (ULCRA, DDA and even in
China’s SEZs) Making Urban Infrastructure Projects
Commercially viable– There is a need for many borrowers, investors and
intermediaries– Urban infrastructure projects will require credit
enhancement
Capacity Building For ULBs
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Capacity building of ULB’s Institutional, administrative and managerial Financial Capacity & Independence Reasonable and equitable USER CHARGE collection Property tax reform
Key State-level financial intermediaries help TNUDF, KUIDFC
Financial Regulatory Issues: ULB lending is on par with commercial lending, for
accounting, prudential norms, and provisioning Efficient Service Provision – PSP as appropriate
Core Issues In Financing Urban Infrastructure
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Who are the lenders?– Banks and other Domestic FIs, Multilateral and
Bilateral Institutions, Mutual Funds, Insurance Funds, Provident Funds, Individuals
What does Government do?– Policy/ Regulatory Frameworks– Equity for Project Agencies– Guarantee Mechanisms– Funds/ Programs for capacity building– Fuel Bond Markets : Govt. borrowings– Fiscal incentives
Developing Capital Markets for Urban Infrastructure
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Conclusions Cities have coped reasonably well in the past
– But under stress now: Challenges faced by huge investment and O&M requirements
– No reason why the problem cannot be addressed in the future
Clear policy and regulatory frameworks needed Local capacities must be strengthened
Decentralization to be actually implemented Mobilize and leverage all resources possible
including private investment/ PPPs