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One Size Does Not Fit All

one Size Does Not Fit All Darshini Mahadevia Different countries have used different tools to articulate the relationships across the levels of governments. In India, China and Brazil, states the introduction to Part I

BOOK REVIEWjune 14, 2008 EPW Economic & Political Weekly32One Size Does Not Fit AllDarshini MahadeviaV ery little is known about the world of cities, how they develop, how they get land, how they are gov-erned, how their infrastructure is financed, and so on. This book is a collection of essays on infrastructure financing in the cities in five different countries, Brazil, China, India, Poland and South Africa. It might appear that China and Poland, the former socialist economies (and China retains strong state control even now), might have similar systems or Brazil and India, two capitalist economies with very high levels of inequity, might have similar systems. But, these essays bring to the fore how these seemingly similar economies are dissimilar with respect to financing urban infrastructure. These essays also bring to fore another important fact: no matter how much the cities may want to inde-pendently link up with the global econo-mies, or some might say secede from the national economic system, their financial systems are amazingly intricately linked with the national systems. The essays in the book are dealing with the financing of cities at two levels, at the national level where the overall national financial systems, in particular public finance systems are discussed and then city/state (provincial) level systems are discussed in each of the five countries.The book is based on a conference, the “Practitioners” conference on mobilising urban infrastructure finance in a respon-sible fiscal framework: lessons from Brazil, China, India, Poland and South Africa. The conference was held to examine two potentially conflicting policy goals: (i) maintaining fiscal discipline, and (ii) even then mobilising adequate finance for infrastructure needed for economic growth and improving the quality of life in the cities of the developing economies. The book therefore is purely from the per-spective of finance and not intertwined directly with the issues of development, although it states that “urban infrastructure finance is an essential element in growth and development” (p 27), explicitly stating the commonly held view that adequate finance leads to infrastructure develop-ment, which would automatically trans-late into growth and then development. The issues of equity in infrastructure development too are not the concern of the essays in the book. In spite of the limitedfocusofthe book, the essays are interesting reading.The first part of the book deals with macro issues of sources of funds for urban infrastructure, powers of raising financial resources and expenditure function allo-cations across different tiers of govern-ments, in particular the extent and frame-works for market and institutional bor-rowingsandimposed restrictions on the sametoensure fiscal responsibility at the local level in the five countries. The arti-cles in this part are by:(i) Su Ming and Zhao Quanhou, ‘China:FiscalFramework and Urban Infrastructure Finance’; (ii)Subhash Chandra Garg, ‘Overviewof Urban Infrastructure FinanceinIndia’; (iii) Luiz de Mello, ‘Fiscal Responsibility Legislation and Fiscal Adjustment: The Case of Brazilian Local Governments’; (iv)Krzysztof Ners, ‘Infrastructure Deve-lopment in Poland: Issues at Stake’; and (v)Philip van Ryneveld, ‘Fiscal Decentral-isation and Financing of Urban Infra-structure in South Africa’.The issues of city infrastructure financ-ing assume importance in this period when decentralisation is taking place in many countries but for a multitude of reasons, the key ones being increased local level involvement in resource man-agement, economic growth and political assertion. Increased decentralisation has brought in concerns about fiscal dis-cipline at local levels, particularly of infrastructure development strategy on debt financing.Different countries have used different tools to articulate the relationships across the levels of governments. In India, China and Brazil, states the introduction to Part I ‘National frameworks to balance fiscal dis-cipline and local investment needs’, ad-ministrative controls feature strongly, whereas in Poland and South Africa, vari-ety of institutions including that of the fi-nancial sector, the courts and constitu-tional prohibitions, have been used for es-tablishing financial discipline across the different levels of government. Even where the countries use administrative tools for the purpose, the institutional systems are quite different. The Indian system relies exclusively on the state governments for defining relationship with the cities whereas Brazil, Poland and South Africa treat cities independently of the provinces. In China, the system is mixed; some cities (national level ones) are treated on par with the provinces whereas other cities are delegated powers by the provinces but in a coordinated way across the nation. The book also brings to the fore the fact that decentralisation in some countries – China, Poland and South Africa – has been part of larger political change. The articles in this book therefore suggest that both the fiscal discipline and contents of decentralisation are very con-text specific and are dependent on each country’s development needs.The editors state that each national gov-ernment has to take the risk of allowing the local governments to take their own fiscal decisions, including fiscal misman-agement (they use the term misbehaviour) and opportunities to make them invest in local level infrastructure. All local govern-ments have to face the controls of the higher order governments and be always discontented in this matter. Substantive financial relationships with higher levels of government are necessary for both risk control and management and fiscal trans-fers from the national government.They further add that mobilising pri-vate capital markets and banks for infra-structure financing has helped, particu-larly when some balance is maintained. Risk is an essential part of a growth strategy; avoiding it might have very high opportunity costs, they argue. But, the risk can be managed if the framework is Financing Cities – Fiscal Responsibility and Urban Infrastructure in Brazil, China, India, Poland and South Africaedited by George E Peterson and Patricia Clarke Annez;for the World Bank, Sage Publications, Los Angeles, London, New Delhi and Singapore, 2007; pp 352; $ 42.
BOOK REVIEWEconomic & Political Weekly EPW june 14, 200833well structured. Lastly, the editors admit that “this book offers heterodox approaches that worked in one country while having failed in others. None of them were arrived at with a “one-off” reform, but emerged incrementally” (p 38). This is interesting given that the World Bank is generally presumed to be pushing for similar solutions in all countries. The case in point is pushing for formation of public utilities in each country instead of urban local governments getting directly engaged in provision of basic services. Finally, the editors end on a pragmatic note: “finding the ‘right’ framework for balancing com-peting objectives may be less important than knowing whenthe current system needs to change and how to shift it in the right direction” (p 38).BrazilLuiz de Mello’s article on Brazil shows that this case is well known for repeated debt rescheduling provided by the federal gov-ernment to sub-national governments, an outcome of poor fiscal discipline at the local government level. The national gov-ernment came to be affected because of the sub-national governments’ borrowing in foreign currency, because the former had to constantly protect its position in the international capital markets. Overall, the macroeconomic condition of high in-flation and steps taken to address it resulted in debt becoming the most attractive source of finance at the sub-national level. Finally, a fiscal responsibility law (FRL) was introduced in 2000 mandating fiscal balance. TheFRL was supplemented with prohibitions on local government borrow-ings and limitations on the exposure of the banking system to sub-national govern-ments. All channels by which sub-national governments can incur debt have been blocked. The tight regulations have con-strained all local governments, although only three municipalities have been re-sponsible for over borrowing and incur-ring 70 per cent of the total municipal debt. Further, the constitution requires the municipalities to earmark 25 per cent of revenue to finance spendingoneduca-tion and 15 per cent onhealthcareand has put a ceiling on personnel spending. There are also assignment ofexpenditure functions across and within the different levels of governments, all these resulting in rigidities in current spending. I person-ally think that some earmarking is neces-sary to ensure budgetary resource flows to sectors such as the social sectors which are not financially remunerative but have strong long-term societal benefits and conversely prevent all the public expendi-ture allocations on remunerative infra-structure investments.ChinaMing and Quanhou show that the system in China is bottom up, with highly decen-tralised system of public finance, which was reformed in 1994 with the assignment of specific taxes to the national govern-ment to be used for equity transfers. These reforms only concentrated on revenue side of the public budgets and did not make any expenditure assignments, as in other countries presented in this book. In fact, in China, there is no legislation that codifies the expenditure responsibilities of different tiers of government. What is however commonly known that the local government officials are rewarded for inducing and then keeping high growth rates resulting in heavy expenditures on economic infrastructures. At the same time, the local governments have very high flexibility in deciding their priorities while the national governments have flexibility in offloading responsibilities to the lower tiers of government without compensatory transfers of revenue or fiscal autonomy. According to Bahl (1999: 140), in the first half of 1990s, cities, counties and townships were responsible for about 75 per cent of all the expenditure of the provinces and 55 per cent of all expenditure in China, a situation that would not have changed now. This push-es the local governments to continue to use land as a resource for infrastructure investments on one hand and continue with the practice of off-budgetary ex-penditure, something peculiar to China emerging from fiscal-contracting system practised from 1980-93.They also show that there is a formula based grant called tax rebating that the central government uses to transfer to the provinces, which is essentially a reward for large tax collections at the provincial level and it is so scaled that the richer provinces have more tax rebates. The other system of fiscal transfer is a standardised one, based on a formula. Fiscal disparities have increased across provinces in China because of the system of fiscal transfers, no expenditure responsibility allocation across the levels of government, higher order of decentralisation than in other countries and highly unequal economic development across the regions of the country. The sub-national governments have responded by introducing a large number of special fees, usage of lands, and imposing user charges. Also, there is no formula of revenue sharing between the provincial and municipal governments. As a result, besides the sources of revenue mentioned above, the municipal govern-ments have resorted to borrowings in a big way from the banks. Non-performing loans threaten the domestic banking sector and need to be streamlined. Sub-national governments are a very large part of the banking sector’s aggregate debt problem. While that is the case, the sub-national governments, the provincial and the municipal, have to bear the costs of social security and other social sector expenditures [Mahadevia 2007a]. This also results inhigh inter-city inequalities [Mahadevia 2008].IndiaIndia’s case is very different from that of the other countries in the book, as evident from the article by Subhash Chandra Garg. Garg’s article, as the title suggests, is an overview, given that the institutional framework for urban infrastructure deve-lopment is so diverse across the states in India that it cannot be generalised and there are no finance figures available at the centralised level to undertake any sys-tematic analysis of revenues and expendi-ture at the localgovernment levels. Thus, the second article on India in the book is on one intermediary, which is not yet providing a significant share of investment finance forurban infrastructure,although it is supposed to be.First of all, the municipal functions are part of state government responsibilityin India, and some states have devolved the functions to the municipal governments while others have not yet done so and continue to perform some municipal func-tions through state government departments
BOOK REVIEWjune 14, 2008 EPW Economic & Political Weekly34or specially created parastatals. The situa-tion varies from state to state and any generalisation is difficult. There are too many institutions; all having few func-tions, resulting in a poor state of urban in-frastructure, huge finance requirements to meet the infrastructure goals and no institution made responsible and account-able for the purpose. The problem is compounded by the municipal governments having no other source of revenue but the property tax, and with 25 per cent of the urban population below the poverty line, there are large sections for whom even basic services are unaffordable if given at cost. Municipal governments not having any sound revenue base have resorted to issuing bonds in the capital market and also borrowing from financial institu-tions and more often than not they are retiring higher interest debt by the lower interest debt, as illustrated by the case of Ahmedabad City [Mahadevia and Brar 2008 and Yadav 2005]. The central government has introduced a Fiscal Responsibilityand Budget Management (FRBM) Act 2003 to streamline state government finances; in other words, reduce deficits at the state government level. Critics have arguedthat this would stifle capital investments incer-tain necessary sectors such as health,edu-cation as also agriculture, given a serious agrarian crisis in the country.Further, while the national level finance commissions decide national to state level financial resources, given that the former have a much larger taxation base than the latter, the requirement of state level finance commissions to devolve finances to the local governments (urban and ru-ral) has not yet been implemented leaving higher levels of ad hocism on the one hand and lack of resources at the local level, to which many expenditure responsibilities have been devolved under the 73rd and 74th constitutional amendments, on the other. Urban infrastructure investments there-fore lag significantly. Garg’s article also clearly brings out that there is too muchof fragmentation of urban institutions in India for infrastructure delivery. Thus, this article leaves the readers with more confusion than answers to the question of urban infrastructure financing in India.PolandMunicipal governments in Poland have been able to balance borrowings with mobilis-ing resources at the municipal level. The directed credit programmes, say for environ-ment, have also been successful. This was necessary because as a member of the European Union, Poland had to invest in environmental infrastructure. This is part of the challenge that Poland has; meeting OECD benchmarks on the GDP and the social indicators while improving basic (including) urban infrastructure and housing.Privatisa-tion has led to about a 40-50 per cent drop in public expenditure in infrastructureevenin Poland like in Latin America. The context is entirely different than in China, which also is transiting from the socialist economy. The pattern of urbanisation in Poland is different; large companies locating in small cities and using local labour force.The Polish constitution has set out the guiding rules on fiscal policy and public debt management. The Public Finance Act has introduced restrictions on borrowing by the local authorities. Hence, the public debt is more at the central government M S Swaminathan Research FoundationMSSRF requires a Project Coordinator for its programme on Mahila Kisan Sashaktikaran, in Vidarbha.Job Description: To form, develop, and strengthen a federation of women farmers (with special reference to widows of farmers who have committed suicide) and enable the organization to access all the required support services and agricultural training inputs, build linkages and enable it to become an autonomous entity in due course. Also coordinate the ongoing education support programme for children of the widows. The job requires extensive travel across Wardha and Yeotmal districts.Qualifications: Essential – postgraduate degree in any social science, and at least seven to ten years’ experience of grass roots organizational work among farmers, and/or among women; good reporting and communication skills; knowledge of Marathi language.Desirable: Evidence of one or more of the following: exposure to women’s studies or gender studies; some understanding of agriculture, NRM and rural development and related subjects; experience in networking with other agencies; strong interest in women’s issues. Ability to ride a two-wheeler will be an advantage.HQ: Wardha. Salary: Rs. 12000-750-18000 per month plus allowances. For additional details, visit our website www.mssrf.org. Send your application to Manager (Pers. & Admn), M. S. Swaminathan Research Foundation, III Cross Street, Institutional Area, Taramani, Chennai 600 113. Last Date: June 30, 2008.
BOOK REVIEWEconomic & Political Weekly EPW june 14, 200835level than at the local government level. At the same time, although in absolute terms as well as a share of total expenditure, investment expenditure is higher at the local level than at the central government level, the latter’s investment expenditure plays a significant role in the country. Thus, the issue of decentralisation is very much a question of debate in Poland. In terms of responsibilities, the local government looks after urban in-frastructure whereas the central govern-ment looks after national road networks, railways, telecommunications and power.In Poland, local governments have demonstrated a strong borrowing capacity and there have not been defaults, states the article by Krzysztof Ners. The local governments’ ratio of debt servicing to annual income is strictly controlled at 15 per cent. The local governments have commercialised the public utilities to form municipal companies, although full priva-tisation is not there. This is the institution-al structure that the World Bank is trying to advocate in many of the developing economies of Asia. South AfricaIn South Africa, the constitution has pro-hibited central government guarantee of local government debts. Immediately post-apartheid, the commercial banks were re-luctant to lend to the municipal governments and they supported a private intermediary dedicated to municipal borrowers. This situation has reversed in recent yearsand the commercial banks have begun lending to the municipalities. In contrast toBrazil, local governments have significant borrow-ings. Grants from the national governments are for the provision of services to the poor municipalities and neighbourhoods. Also, since 1994, post-apartheid, muchofthe emphasis has been on the extension of services to the poor areas. And there has been a relative success in it.A decentralisation framework was cre-ated, which led to creation of provincial governments. The national and provincial governments were given the responsibility of primary and secondary education and health, with more than 80 per cent of their budgets allocated to these services besides distributing welfare grants. Local govern-ments were given traditional municipal service responsibility. Like in India, the local governments have limited tax powers while most tax powers rest with the national government. The local government has power to raise property taxes and local business tax. While there is significant tax transfer to the provincial government bythe national government, the former makes very little tax transfers to the local governments. Hence, the local governments have to rely greatly on the user charges andnon-tax revenues for their resources, both together was about 14.3 per cent in2003-04 (see article by Philip van Ryneveld). This has also resulted in the lo-cal governments depending substantially on their own revenues and also borrow-ings to fund part of their capital spending. The constitution prohibits government guarantee of loans in general, but, there are exceptions and one of them is if every government publishes a report on the guarantees it has granted. There is also a Municipal Finance Management Act, passed in 2003, to ensure accountability and transparency in financial decisions at the municipal level.Mobilising ResourcesThe second part of the book covers resources, which has articles on specific casestudies from each country. For China, there are two cases presented in the book: ‘UrbanInfrastructure Investment Financ-ing in Shanghai’ by Gao Guo Fu and ‘Land Leasing and Land Sale as an Infrastrucutre Financing Option’ by George E Peterson, mainly focused on case of China. India’s case ispresented by L Krishnan in ‘Tamil Nadu UrbanDevelopment Fund: Public-Private Partnershipin an Infrastructure Finance Intermediary’. Brazil’s case is provided in chapter titled ‘Mobilising Financing for Urban Sanitation Infrastructure in Brazil’ by Aser Cortines and Sandra Bondarovsky. There is a case study of a private sector inter-mediary in South Africa by Johan Kruger and George E Peterson in ‘INCA: A South African Private-Sector Intermediary’. Patricia Clarke Annez has a chapter on ‘Urban Infrastruc-tureFinance from Private Operators:What Have We Learned from Recent Experience?’, which is an overview on the topic.This part takes a “practitioner’s per-spective in examining several of the financing strategies and institutional mechanisms put together for this purpose, particularly innovations that have attempted to break new ground in mobilising resources for local infrastructure investment” (p 205). Countries such as China and Brazil have evolved local infrastructure finance strate-gies; China mixing the sources of finance whereas Brazil passing public-private part-nership (PPP) law, given that the water supply and sanitation sector faced financial crunch. Brazil has worked out a model where a private consortium funds the public sewerage system and then the costs are recovered through revenue streams gener-ated by user charges. It is however not known whether all households have been covered by such a financial arrangement.Countries such as India and South Africa have evolved a system of municipal develop-ment funds. This system is a way of lending to individual municipalities without the lenders requiring to monitor each sub-loan. The Tamil Nadu Urban Development Fund (TNUDF) is a state level entity. But the viability of such funds depends on the domestic interest rates; when they are high, such funds are in demand but when low the municipalities directly approach the funders.The much used strategy in China, and now even being used in India in a small way, is use of land as a resource for infra-structure financing. Peterson states that this also involves risks. Asset sales are like borrowing; in both, upfront value is received in anticipation of future revenue streams. Thus, this also requires restraints and regulations, the latter in particular for the abuse of the system and corruption where local officials may want to lease out more lands than required. Also, dependence on land as a revenue source may lead to un-certainty if the real estate market tempo-rarily collapses. What neither the article nor the book discuss is that the dependence on land drives up the values in property markets, pushing out the low income groups from the market and also making less public land available for housing the poor; both seen in case of Indian cities by Mahadevia (2007b).In China, infrastructure investments are by the investment companies, that is the asset management companies, at the city level. It is common for infrastructure investment to account for 40 per cent of the aggregate local spending and sometimes even more. The case of Shanghai shows
BOOK REVIEWjune 14, 2008 EPW Economic & Political Weekly36that the asset management companies have tapped all sources of finance for infra-structure development. In the earlier phase, these companies depended heavily on cashing on the land assets, inherited from the past and borrowing against the future revenue stream. The recent thrust, in cities such as Shanghai, where per capita incomes are high, is to make current bene-ficiaries pay more for the costs of infra-structure investments – through user charges, polluter pay charges and other de-vices. This is also a shift from depending largely on enterprises taxes for increasing the revenues of the local governments.In South Africa, the local financing strategies in the country are dependent on the overwhelming policy thrust on providing free basic services for all the ur-ban households and particularly to the ones that have suffered apartheid. Even then, a private intermediary, Infrastruc-ture Finance Corporation (INCA) was set up. INCA has set up its internal capital structure, with debt bonds having the largest share and equity the smallest and also has a business plan. The company has been financially successful. The municipal governments have been judiciously using the debt route to financing.Lastly, the article by Annez shows that the private participation in infrastructure (PPI)inurban services sector is parti-cularly of high risk. Topping the list of risks are contractagreementsregarding tariffs and investment in system expan-sion. “No less than 76 per cent of all inter-nationalPPI contracts in water and sanita-tion sector had to be renegotiated, on average within 1.6 years of contract signing. Contracts with price caps on user fees were especially vulnerable to renegotia-tion. Political sensitivities to rate hikes are part of the explanation for the failure to negotiate and implement stable tariff agreements”. In the context of India, Kundu(2001) has shown that the early PPI contracts were more in favour of the private sector than the public sector. Annez also states: “The notion that private businesses could straightforwardly apply customary business practices to collect water and sani-tationcharges also proved to be optimis-tic. Finally, the private companies involved inPPIs borrowed heavily on international markets for investment financing, exposing the projects to foreign exchange risk” (p 218). Annez predicts that “PPI is likely to play a useful but limited role in future ur-ban infrastructure investment” (p 219). This, in fact, goes on to show that at low income levels, PPI for basic services is still out of question, whichever the country is and whatever her political system is. And if the governments want the private sector to be involved, they need to explic-itly know what they want from the private sector. Concluding RemarksThe book has been solely written, as it ap-pears, to motivate countries and cities to think about mobilising resources for capi-tal investments from private and banking sector to boost infrastructure develop-ment. This can happen if the countries do not get bogged down in ideological de-bates and if one step is taken at a time. It also says that in moving towards seeking private sector financing, there may be financial risks, which may be managed through appropriate institutional struc-tures and regulatory mechanisms. But not doing so has higher risks; there are very high opportunity costs of that. In other words, the argument is based on the para-digm of strengthening the markets through a strong state with strong and effective regulatory role. The book admits that its focus is limited and hence the issues men-tioned below and left out of discussion in the book is not the fault of the editors.This book portrays the dilemma as one of infrastructure investments for local economic growth vs fiscal balance at the local level. The real challenge is to introduce a third dimension into it – expenditure on items that have long-term and large positive externalities. This aspect too must be introduced in analysing urban infrastruc-ture financing systems.All the five articles allude to the fact that the local governments of the large cities have more financial resources as well as higher ability to borrow and service debt. In Poland, the smaller municipalities, that is the urban counties, are more indebted and many more have become indebted during 2002-04. In China, the smaller municipalities have a very small economic and financial resource base. In Brazil, the large three municipal governments account for 70 per cent of the municipal debt. In India, some studies do point to the fact that large/metropolitan city governments have larger per capita financial resources than the rest, unless the state govern-ments carry out redistribution in favour of smaller ones as in the case of Andhra Pradesh [Mahadevia and Mukherjee 2003]. The South African case is similar to that of some states in India; the uppertier of local governments has been creditworthy for borrowing whereas the rest are more comfortable depending on transfers and internal advances. Hence, going the debt financing route for urban infrastructure development supports and may enhance inequalities in the urban system.Lastly, further research is required on the outcomes of sustainable financing strategies and increasing municipal financesthrough the debt route; outcomes withregardtoim-provement in urban infrastructure in any significant way at the overall level and im-proving the access of the urban poor to these in particular. This book therefore has to be followed by systematic research on equality and equity concerns related to urban infrastructure financing, which at least would and should be the concerns of the national governments.Email: d_mahadevia@yahoo.comReferencesBahl, Roy (1999):Fiscal Policy in China: Taxation and Intergovernmental Fiscal Relations, The 1990 Institute, San Francisco.Kundu, A (2001): ‘Institutional Innovations for Urban Infrastructural Development: The Indian Scenario’, Development in Practice, Vol 11 (2 and 3), pp 174-89.Mahadevia, D (2007a): ‘Urban Infrastructure Financ-ing and Delivery in China’,Economic & Political Weekly, 42 (11), pp 964-72. – (2007b): ‘Urban Land Market and Access of Poor, India’, a paper presented at the Workshop on Urban Poverty, held by Jawaharlal Nehru Univer-sity, at Nainital, July 13-14. – (2008): ‘Globalisation and Infrastructure Devel-opment in Cities of China: Comparing Beijing and Dongguan’ in Darshini Mahadevia (ed),Inside the Transforming Urban Asia: Policies, Processes and Public Actions, Concept, New Delhi, pp 192-230, 2008 (in print).Mahadevia, D and H S Brar (2008, in print): ‘Changes and Continuities in Development Priorities’ in Darshini Mahadevia (ed),Inside the Transforming Urban Asia: Policies, Processes and Public Actions, Concept, New Delhi, pp 132-67.Mahadevia, D and A Mukherjee (2003): ‘Municipal Finances and Development in Small and Medium Towns: Comparing of Gujarat, Punjab and Andhra Pradesh’, Working Paper No 18, Institute of Human Development, New Delhi.Yadav, C (2005): ‘Impact of Bonds on Finances of Ahmedabad Municipal Corporation’, Unpublished Master’s Dissertation, School of Planning, CEPT University, Ahmedabad.

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