Below post is cross-posted from our Financing Small Cities Blog.
By Aditi Balachander and Anand Sahasranaman, IFMR Finance Foundation
At a fundamental level, it can be argued that internal revenue sources are the most critical funding levers available to a municipality because without effective, predictable generation of internal revenues, it will be impossible to attract new, external sources of funding. External sources, whether in the form of bank loans, bonds or other capital market instruments, will be available to municipalities only on the basis of the internal revenues they generate now and are expected to generate in the future. Additionally, the internal revenue generation of a municipality is but a reflection of the quality of its governance, and the transparency and accountability of its administration. Any assessment of the internal financing capability of a municipality is, therefore, a judgment on its governance standards. A better governed municipality implies better information availability, better assessment capability and better collection efficiencies that are then reflected in the quantum of revenues generated through internal funding levers. Therefore, any attempt to substantially improve the infrastructure provision scenario in India will need to begin by giving a significant thrust to improving the assessment, enforcement and collection of internal revenue levers.
While the generation of internal revenue is critical for a city, the use of land as a source of financing urban infrastructure can be a very useful supplementary mechanism. Traditionally, urban infrastructure has been financed by savings of local government, grants from higher levels of government and capital borrowings. However, at a time when government budgets are hard pressed and large-scale borrowings are hard to come by, land-based financing presents an important option for local infrastructure finance. By leveraging the sensitivity of land values to urban economic growth and the principle that benefits of infrastructure are capitalized into land values, land-based financing instruments have come to play a key role in complementing other sources of capital finance.
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