Revisiting Urban Development

Urban infrastructure projects are typically messy, complex and difficult to implement but with the impetus on the revival of the Indian Economy its significance has been renewed

 

Need for Urban Development

Cities are an efficient way of organizing people’s lives: they enable economies of scale and network effects, reducing the need for transportation and making economic activity more environmentally friendly. The diversity of talent in close proximity can spark innovation and create employment, as exchanging ideas breeds new ideas. The diversity of cities also promotes social tolerance and provides opportunities for civic engagement. Today, the linkages between cities already form the backbone of global trade, and cities generate a majority of the world’s gross domestic product.

The Story So Far

Since the late 1960s and early 1970s urban development authorities, state housing boards, and urban local bodies typically had the monopoly for land assembly and development in Indian cities. They were no financial, planning or managerial wherewithal to actually develop urban land as rapidly as it should have been, thus giving rise to unconscionable land price increases. In 1950, a third of the world’s population lived in cities; today, the proportion has already reached more than a half. By 2050, city dwellers are expected to account for more than two-thirds of the world’s population. This rapid rise in urbanization will mainly take place in developing countries. India’s urban development is among the most important– the country’s urban population is forecasted to almost double from 2014 to 2050.

According to the Government of India’s High Powered Expert Committee (HPEC), approximately $640.2 billion is needed until 2031 for investment in urban infrastructure and services if India is to maintain and accelerate economic growth. The investment required for the eight major sectors of urban infrastructure (roads, transport, traffic support, street lighting, water supply, sewerage, storm water drains and solid waste management) is estimated at $506.3 billion. Approximately half of that amount is needed in Class IA and IB cities alone; Class IC cities require 30% and Class II–IV+ cities 20%. An additional $67.0 billion will be needed for renewal and redevelopments of certain urban areas, particularly slums, and $16.3 billion will be required for capacity building of urban local bodies (ULBs) to ensure the availability of sufficient skills to plan, develop and manage the required infrastructure projects. Given the fact that the public sector is in no position to bankroll investments of this magnitude, a significant funding gap clearly exists for the Government of India for the required investment in (urban) infrastructure. The HPEC estimates the funding deficit at 0.15–0.39% of GDP per annum for the period 2012–2031, which amounts to a funding gap of $80– 110 billion. In contrast, the Planning Commission’s Working Sub-Group on Infrastructure estimates the funding gap in infrastructure in general to be $238.4 billion for 2012–2017. Obviously the time periods, the assumptions and the scope of infrastructure are different in the two approaches. Yet, both estimates reveal that significant private investment is required to satisfy India’s infrastructure needs.

Living standards and business operations have been negatively impacted by India’s inability to provide universal access to and continuity of basic urban services. In 35 municipal corporations, the average under spending on capital investments necessary to meet minimum standards of services is 76%. According to the HPEC, the current deficit in urban infrastructure and service provision can be attributed to a combination of factors such as chronic neglect of urban planning and infrastructure development by state governments, the Government of India’s lack of leadership, fragmented and/or overlapping institutional responsibilities, and low recovery of operating and maintenance costs by utilities.

Major Policies Impacting Urban Development in India

74th Amendment to the Constitution

This 1992 amendment requires state governments to modify their municipal bylaws to empower ULBs to function as institutions of self-governance. However, most ULBs suffer from poor institutional frameworks and talent shortages. Moreover, the degree to which decision-making powers have been devolved in practice varies widely from state to state.

Jawaharlal Nehru National Urban Renewal Mission (JNNURM)

The JNNURM (2005–2014) was a programme designed as a partnership between the Government of India, state governments and ULBs to encourage reforms and fast track development in specific cities. It aimed to make urban infrastructure and service delivery mechanisms more efficient, increase community participation and improve the ULBs’ accountability to citizens. Although the programme succeeded in securing a commitment to reforms from state and city governments, it was not designed to bind these governments to their commitments.

Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 201315

This piece of legislation, commenced in 2014, establishes new rules for compensation, resettlement and rehabilitation to facilitate the smooth functioning of the property market. However, the compensation mechanism for public land acquisition has been criticized as being unfair and unclear, while increasing the incubation time and overall cost of projects by as much as 5% in some cases. Since enactment, the majority of states have been unable to complete land acquisition, and the act is currently under review.

Make in India

This programme, launched by the new administration in 2014, aims to facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best-in-class manufacturing infrastructure. It spans more than 30 sectors, from leather to space. As of December 2014, the only project promoted under the Make in India programme is the DMIC. Under the programme, the Government of India has also emphasized sustainability issues by introducing a “zero defect, zero effect” policy.

Clean India Mission

The Swachh Bharat Mission (SBM) (“Clean India Mission”) has been launched in October 2014 and will run for five years to mark the 150th anniversary of Gandhi’s birthday. “All statutory towns will be covered under the SBM. The objectives of the SBM are elimination of open defecation, eradication of manual scavenging, modern and scientific solid waste management, and generating awareness about sanitation and its linkage with public health.”

Challenges in Development of Urban Infrastructure

Urban Infrastructure includes a scale of activities which are unique yet diverse, so the challenges are imminent. This sector requires a consistent, persistent, precise and organised approach to sustain the momentum of growth and development it encompasses

Planning - Many urban governments lack a modern planning framework. The multiplicity of local bodies obstructs efficient planning and land use. Rigid master plans and restrictive zoning regulations limit the land available for building, constricting cities’ abilities to grow in accordance with changing needs.

Housing - Building regulations that limit urban density - such as floor space indexes – reduce the number of houses available, thereby pushing up property prices. Outdated rent control regulations reduce the number of houses available on rent – a critical option for the poor. Poor access to micro finance and mortgage finance limit the ability of low income groups to buy or improve their homes. Policy, planning, and regulation deficiencies lead to a proliferation of slums. Weak finances of urban local bodies and service providers leave them unable to expand the trunk infrastructure that housing developers need to develop new sites.

Service Delivery - Most services are delivered by city governments with unclear lines of accountability. There is a strong bias towards adding physical infrastructure rather than providing financially and environmentally sustainable services. Service providers are unable to recover operations and maintenance costs and depend on the government for finance. Independent regulatory authorities that set tariffs, decide on subsidies, and enforce service quality are generally absent.

Infrastructure - Most urban bodies do not generate the revenues needed to renew infrastructure, nor do they have the creditworthiness to access capital markets for funds. Urban transport planning needs to be more holistic – there is a focus on moving vehicles rather than meeting the needs of the large numbers of people who walk or ride bicycles in India’s towns and cities.

Environment - The deteriorating urban environment is taking a toll on people’s health and productivity and diminishing their quality of life.

 

What is Required?

Stable Policy Framework for Private Investment in Urban Infrastructure

India, like several countries around the world, faces an acute need to provide new or modernized infrastructure and public services. Once the policy environment is stable and the right conditions for investors have been created, the Government of India needs to look at the various tools available to enable investments in strategic infrastructure and urban development. One such tool is public-private partnership (PPP). This report provides a best-practices framework and checklists to facilitate the review of the Indian PPP model of urban development. PPPs can accelerate infrastructure development by tapping the private sector’s financial resources and skills in delivering infrastructure effectively and efficiently on a whole lifecycle-cost basis.

 

Creation of Institutions to Stimulate Capacity Building and Attract Talent To Grow Businesses

An analysis of India’s economic competitiveness reveals two facts: manufacturing accounts for less than 15% of India’s GDP, which is low; and India needs to grow its number of white-collar jobs to retain and attract talent. India also needs “lighthouse” projects with the potential for interdisciplinary collaboration in the area of urban development

To meet the challenges of rapid urbanization, the Government of India had launched the Jawaharlal Nehru Urban Renewal Mission (JNNURM) in 2005 with an overarching objective to strengthen and empower urban local bodies/municipalities and to catalyze investment, both public and private, for urban infrastructure and amenities. The mission aim was to provide grants of between 35% and 90% of the cost of urban renewal projects for 65 mission cities, provided these cities agree to a set of mandatory reforms, which include cleaning up the municipal accounting system and land reforms. The 463 projects—ranging from roads to sewerage, solid waste management and sanitation—cost an estimated ` 49, 000 crore. Central government allocation for the project was approximated at ` 23, 500 crore, with the rest being put in by the state governments and municipal and city bodies.

Experts have pointed out that JNNURM could achieve only 20-30 percent success. A large part of this exercise is driven by consultants and that does not culminate into expected results. The country’s institutions should be driving these schemes, it is equally important to introduce competent municipal cadres to ensure the task is correctly done. This implies setting up more institutions which can produce efficient municipal cadres. Last but not the least, the political will has to sustain, all the urban programmes are politically motivated and hence have a short term perspective which adds to the inefficiency. If there is a change in political governance at the centre, measures need to be in place to ensure, these initiatives continue seamlessly.

 

Urban Transportation

Urban mobility is multi-dimensional in terms of policy and operational implications. Therefore, coherence in policy interventions and linkages among processes are essential. The complexities of urban transport cannot be resolved without a concise and cogent policy. Urban areas whether mega-cities, cities or towns, have grown and are growing. The inconsistent quality of public transport drives people to personalized transport, most of which are fuel-inefficient, congesting and unsafe. The government on its part has devised a robust plan to facilitate urban transportation through capital intensive projects like the metro railway and the results have been positive. But affordability continues to remains a constraint.

Likewise in road transport, transportation has been enhanced through the availability of hybrid and low level buses. These vehicles are high on comfort and low on pollution but are limited primarily to select areas. Attempts need to be made to phase out the old vehicles are introduce these new models on all possible routes. The proposed ring routes which facilitate inter connectivity between distant parts of the cities and towns have to be introduced to ensure that the pressure on the mainstream railway eases off. The local corridors of the railway have to witness vertical expansion to allow additional local trains to ply on. The initiatives have been taken and once they fructify it will make way for decongestion of the regular routes especially during peak hours.

Why Do Master Plans Fail?

A standard governmental response to Rapid City growth is to prepare comprehensive metropolitan plans. Such plans attempt to shape the growth of a city for perhaps five to twenty years, as has been done in various cities in India through the development of “Master Plans”. These plans typically delineate land use in a detailed manner and attempt to freeze city structure for the planned period. It is also typical to do physical planning for all the anticipated infrastructure needs. Often, however, the costs of such infrastructure are not calculated realistically and corruption adds to the cost, the plan becomes non-operational and implementation falls short of what was intended. This has typically been the case in Indian cities. Large portions of the growing cities have thus been deprived of essential needs.

Financing Urban Infrastructure Projects

Urban infrastructure projects are typically messy, complex and difficult to implement. Thus project management skills in Indian cities need to be enhanced. For such projects to be seen as commercially viable there is a need to find all kinds of credit enhancement mechanisms that can then effectively connect lenders and investors with urban infrastructure entities.

Availability of “Free” Equity for Project Agencies: Depending on the level of positive externalities, a project agency that is not otherwise commercially viable can become viable if, in principle, the government provides some share of equity that is not to be compensated. The remaining equity can then receive appropriate market returns, as can the debt, while the project as a whole may have lower than market financial returns, through high economic rates of returns. A similar role could be played by the provision of “free” or subsidized debt.

Guarantee Mechanisms: Different kinds of risks can be mitigated by different kinds of guarantee mechanisms. Such guarantee mechanisms can be commercially priced, or otherwise, depending on the source of the risk.

Appraisal Agencies: The existence of information asymmetries give rise to the reluctance of investors and lenders to invest in urban projects. The government can help in funding professional institutions specialized in such appraisal techniques, which can then build professional credibility and provide project appraisals that are respected, and therefore address information asymmetries effectively.

Programs for staff professionalization: National governments and international institutions can invest in directed programs to upgrade professional staff in local governments and project entities that can then lead to more efficient governments as well as project executors and maintenance agencies, thereby promoting creditworthiness.

Given the limited financial and managerial capacity of government managed utilities in India to deliver the anticipated needs of urban infrastructure in the coming years, it will be prudent to allow private initiatives to flourish whenever possible. Public sector infrastructure firms may well be flush with funds, but between them they will not be able to pump in ` 2-3 lakh crore into the economy and the government cannot seriously be considering a tax-and-spend policy to finance such large investments. This has given rise to the PPP Model which has proved to be an efficient exercise. According to a report prepared by CII on the role of the PPP in Urban Infrastructure it points out that the advantages of this model include

Augmenting Funds The requirement of funding for Infrastructure is immense – in India for example the requirement for Infrastructure over the next 5years has been estimated at USD 500 billion. Governments more often than not are unable to meet this level of funding and look to augment this by private sector investments Superior Project Delivery Superior project delivery is seen to be more potent an objective of government than augmentation of funds. Financial closure, Project commencement and Project completion schedules are typically built into the agreements with penal clauses for non adherence. Measurable parameters for project quality and maintenance are documented in the Agreements and deviations are typically penalised. Improved Efficiencies & Competitive Environment There are two critical components; first PPP improves efficiencies, as alluded through rigorous and disciplined contractual mechanisms. The second critical aspect is the morecompetitive environment that helps to improve efficiencies and reduces costs. 

Existing Indian Urban Development Projects

Industrial corridors The Government of India plans five industrial corridors that will provide an impetus to planned urbanization and manufacturing (see Figure 3). The DMIC is the only corridor currently under development. A total of 24 smart cities (see “100 Smart Cities programme,” below) are proposed under the DMIC, with the first three planned for completion by 2019: Dholera in Gujarat, Shendra-Bidkin in Maharashtra, and Global City in Haryana.18 The DMIC aims “to create a strong economic base with a globally competitive environment and state-of-the-art infrastructure to activate local commerce, enhance foreign investments and attain sustainable development”.The other four corridors are in the early stages of project development. A master plan has been developed for three cities in the Chennai-Bangalore Industrial Corridor (Punderi, Krishnapatnam and Tumkur). States have been asked to identify cities in the Amritsar-Delhi-Kolkata Industrial Corridor (ADKIC). The project influence areas for DMIC and ADKIC are 150-200 km on either side of their freight corridors. The influence areas for the other corridors are not yet specified.

City Projects Several new cities have been developed in India in recent years. Prominent examples include Dholera SIR (Gujarat), Gujarat International Finance Tec-City (Gujarat), Lavasa (Maharashtra), Palava (Maharashtra), Gurgaon (Haryana), SmartCity Kochi (Kerala), Haldia (West Bengal), Navi Mumbai Airport Influence Notified Area (Maharashtra) and Wave City (National Capital Region). Dholera SIR and Gujarat International Finance Tec-City (GIFT) are interesting examples of mainly publicly driven urban development projects, while Lavasa and Palava are examples of two privately driven urban development projects.        

New Indian Urban Development Projects

100 Smart Cities Programme The 100 Smart Cities programme aims to revolutionize India’s urban landscape. The Government of India is currently developing the framework to operate the programme and is holding consultations with key stakeholders, including state governments and ULBs, to enable the identification of potential cities. The documents “Draft Concept Note on Smart Cities” and “Record of Discussion Held with Business and Non-Profit on the Smart City Scheme” were published by the Ministry of Urban Development (MoUD) in September 2014. The draft concept note on smart cities has been updated in December 2014. However, the Government of India has not yet adopted a final definition of a “smart city”. The draft concept note indicates that the focus will be on improving mobility and energy efficiency and on providing access to basic urban services such as electricity, information and communication technology (ICT), water supply, sanitation and solid waste management 24 hours a day, seven days a week.

Most of the infrastructure is expected to be developed and funded either entirely as private investment or via PPPs. PPPs have been frequently used in India, but have not always been applied successfully or to their full potential. The MoUD has indicated that a new PPP model for developing smart cities will be forthcoming. The contribution from the Government of India and state governments will largely be through viability gap funding. Decisions on the final concept, allocated budget and final city selections are expected in February–April 2015, around the announcement of the national budget.

Redevelopment and Urban Renewal of 500 Cities The Government of India intends to redevelop and renew 500 cities, although details of the programme have not yet been made public. There are indications that the programme would include developing a comprehensive policy on urbanization and strengthening ULBs to oversee renewal efforts – the HPEC in its 2011 report calls it a New Improved Jawaharlal Nehru National Urban Renewal Mission. Cities with 100,000 inhabitants or less – Class II–IV+ cities, according to the suggested HPEC classification – would be included in the programme (and not covered under the 100 Smart Cities programme).

Regeneration of Heritage Cities Recently, the Government of India emphasized the relevance of preserving the cultural and religious heritage of the nation, which was partly addressed by the JNNURM. The MoUD launched therefore the “Heritage City Development and Augmentation Yojana (HRIDAY)” on 21 January 2015. At the time of publication of this report no further details have been available. The draft concept note on the 100 Smart Cities Programme mentions religious cities also as potential target cities.

Country-Specific Tie-Ups The new administration has entered into various country specific agreements since taking office in May 2014. A memorandum of understanding has been signed between India and Japan to turn Varanasi into a smart city with help from the city of Kyoto. The United States has expressed interest in developing three smart cities (Allahabad, Ajmer and Vishakhapatnam). 25 India and China have also signed three Gujarat-specific pacts.

The Road Ahead

India has developed a well balanced urban morphology due to historic and economic reasons. This morphology has also remained quite stable in spite of some major policy shifts. Given this stable structure of urbanization, in the present policy of liberalization and openness, in an effort to realign urban policy framework to meet the huge economic challenges of the future, there is a very strong case to reverse the planning processes and push for a more city-centric bottom-up economic and spatial planning process which would automatically address local opportunities and potentials. The multiple roles of cities need to be recognized and planned for. The city land use plan, which is a unilaterally drawn up by a statutory directive is not the right methodology to address the changing contexts. The requirement is for dynamic short term aims, as part of a more consistent longer term strategic vision. Most city managers traditionally have very little knowledge about the economy of the city they administer. This impedes the city from reacting positively and proactively to address issues of restructuring to meet national or global competitive conditions.

Cities should plan with the regional context in mind especially the nearby towns and rural areas that are dependent on it although some cities will be much more connected with their markets abroad. This would help develop a regional plan for urbanization and economic development which would then be integrated at the state level. Revamping the state level machinery for urban development is even more crucial than at the central level. At present responsibilities of urban development are fragmented into different departments. Also the pattern of this fragmentation is different from state to state. The state level apparatus needs to be consolidated as elaborated for the central level below.

At the national level, the ministry of urban development needs to be strengthened and reoriented if it has to play an effective role in overseeing urban planning and development. Since most the work in urban development planning is envisaged at the state level, the role of the central ministry is mainly as a nodal organization for coordinating action, providing technical advice and working out detailed urban investment implications. This technical support arm should be capable of leading urban policy making and would need to be at the cutting edge of urban research. The organization would need to develop systems for improving information on cities and monitoring of investment programs of these cities by standardization of data requirements, technologies of localizing data etc. This would go a long way in systematizing urban development processes and make it a readily available tool to enhance economic planning for the country.



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