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THEME PAPER
McKinsey (2010), cities importance of a financing mechanisms for infrastructure
accounted for 80% of the nation's mechanism by discussing the development in the future.
tax revenue in 2008. fiscal stress that the Urban Local STATE OF FINANCES
The state and central Bodies (ULBs) are facing. It An important imperative for
governments need to explore explains VIF in detail and developing infrastructure is the
financing mechanisms using the discusses the method of its availability of finance. Most of
potential of the cities and taking implementation. The VIF the urban renewal and
lessons from the different mechanism can be used with the infrastructure development
financing techniques being already existing value capture projects are not completed or
practiced around the world. The tools and can also be delayed because of the non-
Public-Private-Partnership (PPP) incorporated in the models of availability of the funds
model has not been updated, PPP and Build, Operate and required. JNNURM could not
municipal bonds have collapsed, Transfer (BOT). The paper achieve the intended outcome
borrowing capacity remains explains how an increment is because of shortage of funds as
unexplored and the value generated and captured to the states and ULBs could not
capture methods are left generate a stream of payment. provide their contribution in the
unexploited. There is a need to The increment is escrowed to project cost. The same problem
move forward with the idea of pay off the debt that is initially is being experienced in the
long-term borrowing incurred to finance the project. It Smart Cities Mission as well.
internationally by devising a also highlights the importance of Different studies have indicated
mechanism for repayment. The reviving municipal bonds, that the Indian cities face
study of Value Increment infrastructure bonds and the tremendous fiscal stress due to
Financing (VIF) is placed in this need to explore different long- which the infrastructure systems
context as it is one of the finest term borrowing options. The are deteriorating. McKinsey
methods of generating a stream case studies of two successful (2010) has predicted that India
of payments to service the loan value capture models in India needs to spend Rs. 9.74 million
for infrastructure development. are also discussed in the paper. crore on cities by 2030, with Rs.
VIF is a financing mechanism VIF is a mechanism that has 5.31 million crore as capital
that trades the anticipated future been successful in other expenditure. India's annual per
revenues to fund the current countries when collaborated capita spending on cities is $50,
infrastructure improvement. It is with long-term borrowing. If which includes the capital and
a sustainable fiscal instrument such a mechanism can be used operational expenditure, which
used by different authorities of in the future in projects like the is insignificant when compared
various countries to generate Bandra Kurla Complex or the with countries like China ($363),
funds to meet the requirements Sardar Patel Ring Road, they can South Africa ($508) and United
for public investment, prove to generate be er results Kingdom ($1772). The High-
improvements and economic in the future, placing the Powered Expert Commi ee for
development. It is a mechanism authorities in a more estimating the investment
that takes off the load from the comfortable position. The paper requirements for Urban
central authorities and spreads it ends by giving policy Infrastructure estimates that
among the beneficiaries over recommendations and India needs to spend Rs. 3.92
generations. highlighting the importance of million crore for urban
mixing different financing
This paper highlights the infrastructure investments. If
22 HUDCO-HSMI Publication
