Well-functioning infrastructure remains critical to long-term economic growth. There is a global consensus on this. However, lack of proper infrastructure, especially those necessary for health and wellbeing has even more acute consequences. This is obvious while reading Water wars in Mumbai by Graham et al. The words used, especially “stealing water” and “war” evokes shock in one’s mind.
But such discourse could become more recurrent in the near future as the population of cities increase through continued urbanization and internal population growth. It is worth noting that this isn’t a uniquely Indian problem. African cities are already facing extreme pressure on current nascent infrastructure as the urban population (estimated at about 50% in most countries) continues its increase. This necessitates a strategy for dealing with the above problem before these wars become literal and commonplace.
Infrastructure provision necessitates huge upfront investment (high fixed cost), continuous management (relatively high variable cost), and the risk of very little return on investment vis-à-vis other investment options. Thus the private sector has naturally shied away from solely funding infrastructure, especially in developing countries. It is therefore not surprising that infrastructure finance is one of the biggest (if not the biggest problem) cities face in providing high quality infrastructure to residents. However, as urban population (and the consequent demand) continues to increase, certain funding strategies might be adopted with a view towards improving returns for those who take the risk of investing as well as ensuring adequate infrastructure provision for the teeming city population.
Funding strategies could be divided into three, depending on the current state of development in different parts of the city. For undeveloped land being considered for sale to developers, the government might mandate these developers to provide some (or all) infrastructure, depending on the strength of the company’s balance sheet. The incentives could include low import duties on relevant machineries (and materials) and tax reduction (or breaks) for a number of years. In addition, the relevant companies could be allowed to charge tolls or user fees for a number of years as additional incentive.
Furthermore, in parts of the city where infrastructure is already being provided but inadequate (or of low quality), the government could supplement its contribution by seeking private investors for public-private partnerships. This would involve both construction of new infrastructure and renovation of existing ones. A number of investor options exist including development finance institutions and infrastructure-focused private equity firms. Since these are private investors primarily focused on returns, the city must be strict in revenue generation notwithstanding the probable unpopularity of fee increases.
Finally, and more importantly, infrastructure has to be provided for people living on the fringes of the city. Infrastructure provision in this part of the city is more complicated since main city dwellers see slum dwellers as illegal settlers who have to be relocated or starved towards relocation. Hence infrastructure provision in this case might mean more than just providing water and electricity. The core problem of informality must be dealt with since investors will be hesitant about investing in places where usage monitoring might be hard. This problem could be mitigated by providing credit for land purchase in addition to providing infrastructure.
By removing the problem of informality, revenue generation could be better assured since addresses will be very clear. Notwithstanding the relatively lower income level of people in this part of the city (compared with residents of the main city), research has shown that these informal settlers pay more than twice the amount paid by formal settlers. This means that, given the chance to pay just as much as formal settlers, residents in current informal settlements would have no problem paying their bills; an important factor for investors considering investments in this part of the city.
While the above strategies should ideally work for different parts of the city, there are possible negative factors which cannot be denied. Foremost, most governments are elected for 4 years and have to seek re-election periodically. Hence long-term planning might not fit with their short-term orientation. This is especially important in dealing with the issue of informality; a politically-sensitive issue for residents in the main parts of the city.
Even more important is the need to ensure consistent revenue generation which might include periodic price increase for major resources like water; a potentially destructive move for politicians. Nonetheless, we believe that with increasing urban population, city governments would be unable to fully provide infrastructure by depending on government revenues only. Hence there is the need to enjoin the support of the private sector. But this would also involve making provisions to ensure that they get their return on investments.
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