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Investment in urban development in India

According to Satyanaranya (2003) only 50 percent of the population in urban areas had water taps within the premises. Approximately 65 percent of households had some sort of water facility, be it a tap or well or hand pump within the premises. The remaining 35 percent of the population depended on outside sources. On the sanitation front, 61 percent of households have access to either pit latrines or water closets. There is a clear need for investment in urban development in India, given its population growth and increasing urbanization. The required funding for urban infrastructure has been estimated (NCAER, 1996). Increasingly efforts are made to tap private funds, but a number of conditions need to be satisfied before cities can access the capital market. The efforts to help local governments in India to obtain infrastructure range from creating municipal infrastructure development funds to establishing state level financial institutions (SLFIs). In this article some efforts made by Indian municipalities to finance urban infrastructure will be reviewed.

State governments are responsible for the urban sector and local governments are considered to be responsible for water, sanitation and sewerage. The 74th constitutional amendment in India promotes decentralization and suggests strengthening and establishing State Level Financial Institutions (SLFIs) to help states to finance their investments. A number of State level Infrastructure Development Corporations have been created in India since 1992.iii  Their mandate is to provide financial assistance (loans and advances) to urban local bodies (ULB) for financing infrastructure and services.iv The SLFIs were often used to channel Central Government grant money to municipalities. Later also HUDCO (the Housing and Urban Development Corporation) loans were channeled through them.  Private or semi-public institutions have indicated that they are willing to finance urban infrastructure.v

Intermediation: the FIRE versus the Bond bank approach

Municipal bond markets are a growing market in developing countries and a convenient way to finance urban infrastructure. USAID (1996) intended to help Indian cities to prepare projects in such a way that bonds can be issued in the American capital market, using a partial USAID guarantee. In principle water supply, sewerage, roads, land development, education and health facilities could be financed under the Financial Institutions Reform and Expansion Project (FIRE, 1996). The formula is that each city would issue bonds itself.

Bonds are finding favor with Indian borrowers and investors since 1994. In that year the primary market issuance by Indian companies exceeded the volume of offerings on the Indian share market (Financial Times, 28-4-1995). However, if the SLFIs issue the bonds it would not require the individual municipalities issuing, but a state level organization would do it for them. This is just like a Bond bank in the US or like the Bank of the Dutch Municipalities (BNG) in the Netherlands. Bond banks issue bonds and pass on the money in the forms of loans for bankable infrastructure projects to the municipalities. The US Bond Bank is described in Petersen (1999) and the Dutch BNG model in table 2.

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