Given the speed at which India is becoming more urbanized, it is essential to use municipal bonds to satisfy the growing need for capital investment in urban areas. Talk about it. (Answer in 250 words)
In urban infrastructure, stakeholders from different economic sectors are involved including real estate, knowledge economy sectors etc. There is a multiplicity and sometimes, divergence of interests. Hence, there emerges a need for collaboration of public and private sectors to address the common mRead more
In urban infrastructure, stakeholders from different economic sectors are involved including real estate, knowledge economy sectors etc. There is a multiplicity and sometimes, divergence of interests. Hence, there emerges a need for collaboration of public and private sectors to address the common misalignment between them in the following ways:
- Investment requirements: Significant initial public subsidies might help kick-start the development. But long-term budget commitments – spanning over potentially different political mandates – may ultimately become a threat to the full delivery of the project and raise risks. Thereby, there is requirement of mobilisation of additional private capital.
- Convergence of different interests: Usually the public sector has some clear interests in developing, urbanising, regenerating, or optimising profits from either derelict or underperforming sites and brownfield areas. At the same time, for the private sector it means unlocking of new jobs and new investment opportunities in real estate and the possibility of associated investments in the local economy.
- Reduced risks: Risk allocation between partners needs to be at the heart of any collaboration between the public and private sector. While the government needs to take care of policy continuity, security of private investment, predictable timeframe of regulatory processes etc., the private sector undertakes socially comfortable cost recovery pricing of services and bears operational and constructional risk.
- Sharing of responsibility: While the government can bear the administrative and transactional cost of managing a collaborative project and wading through the complex bureaucratic procedures, the private sector can bring in efficiency gains from improved project delivery, operation and management, and access to advanced technology.
- Increase in rewards: Properly executed planning and development of a project also allows better screening of options, and helps in deciding appropriate project structure and choice of technology considering cost over the whole life cycle of the project. This expertise of the private sector provides relief to the public sector from the burden of the costs of design and construction.
- Complementary objectives: Stakeholders from business sectors require the levelling of knowledge gap regarding dynamics, pace and plurality of assets while the public sector seeks opportunities to create economic growth, boost innovation, tap into new technologies and invest in the future of the region.
Smart city solutions have emerged as a way forward to enable the convergence of stakeholders’ interests and to facilitate cooperation between investors for a more efficient and transparent use of resources and capital. The public sector may contribute by delivering the initial infrastructure rather than subsidising the development in later stages. Binding land use regulations should be set by the public sector from the early planning stages to ensure a wider shared value is delivered to the local community. Special public agencies or a department of local government could oversee relations with the developer over time. Some cities have successfully implemented public-private collaboration in wastewater management e.g. Alundur, Bangalore, Salt Lake (Kolkata) etc. as well as in urban road projects such as Mumbai Trans Harbour Sea Link Project, IT corridor project in Chennai, Hyderabad Outer ring road, Delhi- Gurgaon Expressway etc.
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According to the World Urbanization Prospects, 2018, more than 50% of India's population will be urban by 2050. By some estimates, India needs to build a Chicago every year and is expected to see an influx of population the size of the entire USA into its cities over the next decade. A new World BanRead more
According to the World Urbanization Prospects, 2018, more than 50% of India’s population will be urban by 2050. By some estimates, India needs to build a Chicago every year and is expected to see an influx of population the size of the entire USA into its cities over the next decade. A new World Bank report (2022) estimates that India will need to invest $840 billion over the next 15 years- or an average of $55 billion per annum-into urban infrastructure if it is to effectively meet the needs of its fast-growing urban population. Further, the National Infrastructure Pipeline (NIP) envisages Rs. 19 trillion of investments in urban India over a five-year period till FY25. However, the current urban financing system is plagued with several challenges. For instance, the devolution of funds to the Urban Local Bodies (ULBs) from the state is not predictable and timely. Further, these devolved funds are largely tied in nature, to either specific sectors or schemes. The ULBs contribute only about 1% of India’s GDP as their revenue share often does not rise with the economic growth of an area due to factors like undervaluation of land and limits on taxation power. In this context, successful listing of municipal bonds by more than 10 cities in India is a silver lining. Most recently, Vadodara has raised Rs 100 crore and has also been selected by the US Embassy and Treasury for a case study on successful listing and a benchmark for other civic bodies.
Significance of municipal bonds:
Despite its significance, urban financing through municipal bonds cannot be considered as a one stop solution for urban infrastructure financing due to the following reasons:
Thus, municipal bonds can help to pay for vital capital projects-roads, energy, water, sanitation, and other essentials-but there is a requirement of strict implementation of SEBI regulations on municipal bonds, having a specialized agency to protect bond-holders in cases of default (like in Denmark), and adoption of best accounting practices.
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