URBAN INFRASTRUCTURE FUNDING: MAY A THOUSAND LILIES BLOOM

URBAN INFRASTRUCTURE FUNDING: MAY A THOUSAND LILIES BLOOM 

Estimates for urban infrastructure in India put the tag at Rs 30,000 crores a year for the next decade. The total outlay by states and centre is barely Rs 1,000 crores a year. In the words of the Planning Commission, “the present level of funding is not even tackling the fringes of the problem”. The recently announced National Urban Renewal Mission (NURM) is the country’s largest urban initiative, but even this promises Rs 50,000 crores over seven years – Rs 7,000 crores a year.  

Our cities are facing a funding crisis. They will have to find Rs 20,000 crores a year on their own, with limited sources of their own revenues. Hence, debt financing is inevitable. And this is where the trouble starts: from the perspective of potential lenders, cities are not the most credible of borrowers. Lenders want far more comfort on projects: their importance to the city, the timeliness and quality of implementation, and – most importantly for the lenders –comfort on the projected cash flows. There is little credible comfort that most cities can provide on these issues. As a result, the municipal bond market in India has barely begun, with just a few hundred crores of funding.

Viewed from the other side, these early trends are being seen with deep suspicion by citizens: projects they don’t want, funded by money that they will have ultimately have to pay back. These concerns are not only legitimate, they have real financial consequences. For example, Bangalore has desperately needed a mass transit system for a long while now. However, the Metro project has many opponents because of the manner in which the public consultation process was conducted, and the confusion surrounding the project. In this unplanned rush to get the project kicked off, delays become inevitable; the project cost has already doubled to Rs 7,500 crores, and we haven’t even broken ground yet.  

The reality is that - in many cases - the interests of the lenders are not necessarily different from those of citizens: every one wins by working on high priority consensus projects. It takes a little longer to get consensus, but a lot less time and money to implement the projects. Unfortunately, none of the players – citizens, lenders, or city governments – see the situation in this light, so the idea of finding common ground finds few takers.

 What might work, therefore, is if there was a financing instrument that brought these interests together in some simple yet elegant manner. Let me offer an idea for precisely such an instrument that I call “LILIES” – “Local Investment for Local Infrastructure Enablement Schemes”. Quite simply, LILIES are urban infrastructure projects which have a minimum threshold – say 25% - of the borrowed funds coming from local residents. A local resident can be quite easily defined – any individual who can show that they are a bona fide resident of the city – ration card, voter ID, utility bill etc.

LILIES provide tax-free returns and have a small interest incentive for the local resident compared to other lenders- say 0.25%. All LILIES will give priority to local investment. Institutional investors in LILIES only need to top-up the funds to the amount needed. So, for example, suppose that in a Rs 100 crore LILIES project, local resident participation is Rs 35 crores. Additional funds of Rs 65 crores comes from institutional lenders. Local residents in LILIES will get – say – 8.25% tax-free interest, while institutional investors will only get 8% tax-free. If there is no local interest for at least Rs 25 crores, this is not a LILIES project. 

There are four reasons why LILIES might make sense. First, they tap into the growing savings pool of urban India. A majority of the Rs 20 lakh crores in bank deposits, growing at 15% a year, and the mutual fund industry - Rs 2 lakh crores growing at 30% a year - is coming from urban India. LILIES can be an extremely attractive investment alternative for large numbers of urban Indians looking for reasonable and predictable returns. With the savings pie growing by Rs 150,000 crores, a reasonable portion of the annual Rs 20,000 crore urban infrastructure gap could be financed through LILIES. 

Second, LILIES provide a very important information loop for lenders: local resident participation provides data into the legitimacy and credibility of the project, information that cannot be discovered otherwise through market mechanisms – that elusive common ground is more easily discernible. As LILIES gain credibility, projects that do not secure the local resident contribution can be questioned about their real benefits.

Third, the benefit of LILIES could go beyond just funding, and result in better project implementation as well. Local residents are more likely to be more active stakeholders in the progress of a project than a removed institutional lender.

Fourth, no public infrastructure takes place in a vacuum, it emerges out of political processes; urban is no exception. Vigorous political processes in urban government are very new, and are currently getting deepened to include citizen participation in decision-making. Urban infrastructure financing experiences across the world have also shown the importance of local stakeholder participation. LILIES could support the trend towards transparency and participation, by providing a complementary role to the citizen stakeholder: possibly as lenders to the project, if they are so inclined.

 If LILIES work, they can break down the current sense of unease and suspicion about the market into smaller conversations about specific projects, where local residents are active stakeholders. While Indians have got comfortable borrowing for their personal lives, India is still not comfortable with borrowing for its public infrastructure. For this alone, LILIES would be an important addition to the available set of financial instruments for urban infrastructure investment. 

If cities across the country begin to use this to finance their infrastructure needs, who knows, maybe a thousand LILIES could bloom!

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The writer is Founder, Janaagraha. He can be reached at ramesh@janaagraha.org