MUST-HAVE CONDITIONS FOR URBAN TRANFORMATION

MUST-HAVE CONDITIONS FOR URBAN TRANFORMATION

“We needed a predictable stream of cash flows that we could isolate”, said the banker who participated in a recent municipal infrastructure finance project, “because the government’s financial management systems are broken.” His team took the safest revenue stream for the city - its property taxes - established an ESCROW account, added some cash collateral to get the AA-credit rating that he needed, and closed the transaction.

His could be the classic story of the fast-rising banking star: blue-chip MBA, head of debt capital markets within five years of joining the bank.

Along the way, he had read the reports on urban infrastructure requirements in India: Rs 28,000 crores each year for the next 10 years, 600 million Indians living in urban areas by 2030.

He took the risky decision of suggesting that the bank begin a new group in Infrastructure Finance. Soon, he was making the rounds of the cities, meeting with commissioners who would make impressive powerpoint presentations on their infrastructure needs: hundreds of crores in road networks, water and sanitation systems, and garbage treatment plants.

He would leave these meetings convinced that a deal would materialize soon. However, there was an uneasy question at the back of his mind, “With so much pent-up demand for good urban infrastructure, with so much economic activity, with the banks flush with funds, how come so little has happened?” There had been barely five municipal bonds over the past decade, adding up to a few hundred crores.

The more he dug, the more he learned. He learned that the commissioners really had little clue of the true financial position of their cities; that the cities didn’t have robust accounting systems, that the figures had often not been audited for several years. He learned with some discomfort about the democratic process: that the Mayor and councilors wanted to determine the priorities for the city, but there were tensions between them and the commissioner. He himself was far more comfortable dealing with the administration than the political system.

He learned about the NGOs who wanted equitable treatment for all citizens, including the poor. There were also citizen groups who said that they had not been consulted in any of the decisions, that corruption would eat away at the loans, leaving behind poor quality assets.

Faced with this unexpected complexity, his vision for running a large infrastructure financing group started to fade. He began to tire, wanting to close at least one deal, so that he could declare victory and move on.

And this is how the municipal bond issue came to be. A forgettable transaction, in which nobody really won. Not the banker, not the municipality, certainly not the citizens.

This is the reality of urban development in our country.

A complex, intertwined, messy machine that seems to be moving at an exasperatingly slow pace, while the situation races out of control. And like the blind men around the elephant, each of the stakeholders in this arrangement offer a different script for the change that is required, defined by their perspective of the problem.

As in most complex systems, the challenge is in articulating a credible change plan that contains a minimum set of commonly accepted conditions among all the parties. This is key, the minimum set of conditions. The danger is in settling for too small a congruence of acceptable conditions, which will not carry in them either the critical mass or latent energy to trigger larger sustainable change.

Hence, what is required can be called the “Minimum Urban Sector Transformation Conditions”, or the “M.U.S.T. Conditions”. These are not a buffet-bar of options, where a selection of one or more can be made; rather, they are an all-or-nothing set, a MUST-HAVE list. What follows is a suggestion of what these “M.U.S.T. Conditions” could be:

1. A comprehensive revamping of the financial management systems of our urban local governments, based on modern, accrual-based accounting system that deliver timely, accurate decision-support information.

2. The passage of strong disclosure laws to ensure the regular presentation of quarterly audited performance information into the public domain.

3. The strengthening of laws to institutionalize citizen participation in urban areas. Policy-makers have historically offered the complexity and size of urban areas as reasons why this cannot be done. Unfortunately, there can never be sufficient arguments to justify making second-class citizens out of urban residents.

4. The establishment of monitorable formulae to ensure that development works being taken up fulfill universal access and social justice obligations, so that the poor do not lose out in public infrastructure provisioning.

5. The dismantling of all restrictive provisions that continue the involvement of state government machinery in local government functioning, including special-purpose vehicles and para-statal organizations.

One could think of these MUST Conditions as forming the microstructure of governance. If we can provide our cities and towns with all of the above must-have conditions, we can start creating the virtuous cycle of change. Better internal systems will provide information that will help improve compliance in property taxes, trade licences and a range of user fees; participatory decision-making processes can create more ownership over public assets and greater monitoring of public works; independence for the municipality can shorten decision-making cycles and match authority with accountability; conditions for equitable development as well as general organizational efficiency can be monitored with rigorous disclosure provisions.

With the above MUST Conditions, private-sector participation in infrastructure provisioning can also become much easier, either in financing or in project delivery. The transformation could begin in the state capitals, and percolate to the smaller cities and towns over time, as the scaffolding of delivery gets more robust, and there is institutional comfort with these new arrangements.

With these must-have conditions, maybe our banker friend need not look to move out of Infrastructure financing.

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The author is founder of Janaagraha. He can be reached at ramesh@janaagraha.org