Creating the Bold Foundations for India’s Urban Future

by Shirish Sankhe - Feb 17, 2015 11:30 AM +05:30 IST
Creating the Bold Foundations for India’s Urban Future

Given India’s economic progress over the last 20 years, it’s fair to ask: why hasn’t that translated into a better quality of urban life?

It’s 10.30 AM as Naina Dixit walks into the offices of a bank at Nariman Point, the upscale heart of Mumbai’s business district. Soaking wet, she’s late again because she had to wade through water-logged roads to the train station thanks to a downpour; there was no chance of finding a taxi in her semi-flooded neighbourhood. She managed to catch the women-only service on the Western line. Then she slogged along the cracked and litter-strewn sidewalks to her office. Once at the office, she changed into fresh clothes, in order to look the part of the high-profile executive assistant she is.

The point of this vignette is to portray how difficult life can be for the 377 million Indians, even for the middle class. For the poor, of course, it is much worse. 22% of families in urban India live in slums, where basic amenities are in short supply. Only two-thirds of city residents have sewage or septic coverage, and 26 percent lack piped water. The heavy rain that inconveniences Dixit can devastate these areas, washing away homes and spreading disease.

Given India’s economic progress over the last 20 years, it’s fair to ask: why hasn’t that translated into a better quality of urban life? In fact, things may even have deteriorated over the last two decades.

Creating the Bold Foundations for India’s Urban Future

Perhaps politics explains a lot. The state of India’s cities is a function of political disengagement at the highest level. With most of the country living in rural areas, we have found cities easy to ignore. In effect, successive governments have used cities as a bank to pay for the rest of the state. Even today, urban areas will account for only about 178 of the 543 seats in the Lower House of Parliament. Historically, poor voter turnouts in urban areas have distanced cities even further from India’s political and developmental process.

While things are beginning to change, this doesn’t bode well for major urban reforms, particularly when the largest wave of urbanization is yet to come. Between 2011 and 2030, the McKinsey Global Institute estimates that the population of India’s cities will increase from 377 million to more than 610 million. By then, India will have about 70 cities with a million or more people, up from 53 today. Cities will account for 70 percent of GDP and 85 percent of tax receipts. There will be seven “mega-cities” with more than 10 million people, up from three today.

Over the past several years, as we have started to debate how to fix these cities, several committees have come up with their reports.

India spends just $17 per person per year on urban infrastructure. We estimate that the required funding is $134. Political authority is also in short supply. Mayors of Indian cities are typically leaders in name only; it is appointed bureaucrats (commissioners) who manage daily affairs. Appointed for two-to-three year terms, they mostly lack a stake in the long-term development of the city. Very few cities have integrated long-term master plans on transportation, housing, and basic infrastructure. Finally, there is an acute shortage of people with expertise in urban affairs.

And this hints at what we see as the largest problem of all. Because India has underinvested and undervalued its cities for so long, it has not developed the capabilities it needs to do better. Rather than dive into the specifics of, say, transportation or zoning, we focus here on five bold ideas that can establish the foundations for long-term improvements in our cities. We believe, unless these are implemented–and sooner the better– India will not be able to face the massive urban challenge it faces.

1. Transfer 20 percent of GST (good and services tax) directly to the cities

India’s cities account for almost 85 percent of its taxes, but almost all of it goes to state and national governments. A better idea is to allow cities a stake in their own growth by sharing a portion of the taxes that they generate. The Central Finance Commission has made a modest step in this direction, allocating $1 billion per year (around 1.5% of the estimated GST) to the urban bodies. That is not nearly enough.

In China, 25 percent of the VAT goes to the city where it is generated. Cities therefore benefit directly from local investment; no wonder the mayors roll out red carpets for investors. By contrast, investors often perceive Indian cities as unwelcoming. Shifting taxes this way could raise roughly $45 per person per year- going a long way to close the funding gap.

2. Monetize land to fund infrastructure

Antiquated planning norms have prohibited Indian cities from raising money that could be used to fund infrastructure. India has shied away from growing vertically and charging for it or from auctioning green-field urban land. India’s tendency to use a standard Floor Area Ratio (FAR) of 1– meaning developers are allowed to build the equivalent of one-story high on available land– means that cities have sprawled outward rather than upward.

Major cities around the world finance infrastructure by monetizing land, either by selling land directly or selling the rights to higher FARs, so that developers can build taller buildings on a site. For example, Singapore and Hong Kong each raised about US$ 33 billion between 1998 and 2007 through this route.

But there are some notable examples that bear witness to the efficacy of this idea. The Mumbai Metropolitan Region Development Authority (MMRDA), for example, has auctioned land in the Bandra-Kurla Complex (BKC) and used the proceeds to fund more than $4.5 billion of roads and mass transit systems. Over the next five years, MMRDA is expected to spend $20 billion, a substantially portion of this by monetizing land.

Recently, the Municipal Corporation of Greater Mumbai introduced a policy to charge developers a premium, based on type of development, for all projects that require a higher FAR. This is expected to raise close to $500 million a year, enough to fund $1.5 billion of infrastructure every year after leveraging. Until this policy, higher FARs were granted on a discretionary basis, serving as lucrative rent-seeking channel that in turn distorted the land market. Our calculations show that monetizing land could raise $58 per urban resident per year.

3. Design Integrated, planned spaces in and around cities

We lack integrated master-planning in our cities. Local governments prepare incomplete and disjointed master-plans. For example, most cities lack 20-year transportation master-plans that integrate peak traffic with land use. The completely predictable result is haphazard development. Gurgaon, a city of about 1 million people, is an example. It has high rises and shopping malls and golf courses and is supposed to be the emblem of a rising and modern India. But it also has water shortages, power cuts, no sewage system and not nearly enough public transport.

Residential apartments in Gurgaon
Residential apartments in Gurgaon

In an ideal world, every Indian city would create brilliantly comprehensive 20-year master plans, and in fact we believe that they should be required to do so. But to start the process of change, it makes sense to take action on a smaller scale. We propose that India’s big cities begin to develop three to five “larger spaces” in an integrated manner. And India’s smaller cities each create at least one such “space”. These spaces could be inside the cities or nearby. They could be 50 acres or 5,000 acres. The authority could be local or state.

But they will have some common elements. They will, for a start, have an economic strategy (financial center, a light-manufacturing park, an innovation or services cluster). They will have an integrated master-plan. They will build tall. They will have planned utilities based on the ultimate density and population. The government would provide power, water, sewage, and connectivity; in turn, the authority can monetize its land assets.

Such well-planned pockets of urban excellence could begin to transform India’s urban landscape. The Gujarat International Financial Tec-City (GIFT) is such a work in progress. It’s the kind of place that is common in China or Singapore– Singapore’s Punggol is a dense 2,360-acre “new town” that will house about 100,000 people when it is finished. The area will be economically mixed, and everyone will be at a walking distance to a rail station. Green spaces and commercial development are factored into the planning. India should seek to build many new Punggols.

4. Create dedicated agencies to improve service delivery to citizens and improve “ease of doing business”

The cumbersome decision-making processes of too many government departments are a serious drag on India’s ability to improve its citizens’ quality of life. Every effective city in the world has institutions with clear mandates, reliable budgets and clear lines of authority to deliver specific things. For example, Transport for London (TfL) is a corporatised agency with an independent board. The CEO, appointed by the mayor, runs operations. And while Londoners grumble about the Tube as often as they do about the weather, the system works.

The London Tube
The London Tube

Mumbai has one such agency and it has worked well. Brihanmumbai Electric Supply and Transport (BEST) is the city’s public transit operator and electricity provider. The General Manager oversees new routes, vendor selection, recruitment, and day-to-day management. The board is autonomous, allowing BEST to make decisions quickly. This model should be extended, city by city, to areas such as water, waste management and transport.

Cities are complicated organisms. It takes specific skills to deliver power, water, education, transit, housing, health services, fire-fighting, police protection, and economic development. India simply does not have enough people with these skills.

A mid-term review of a major urban program, for example, found that several state governments had spent less than 30 percent of the funds allocated because they did not have the expertise to develop plans, identify priorities, raise funds, and execute projects.

In addition to building the capacity and institutions, we need to dramatically improve the “Ease of Doing Business” in our cities to be within top 50 to ensure economic vitality and job creation. This can be done by decoupling all non-related procedures, centralizing and digitizing applications and introducing a risk-based approach for inspections.

5. Directly elect mayors and give them authority

Given the scale and complexity of India’s urbanization, the need for modern urban structures is urgent. But they barely exist. The poor state of governance in Indian cities is as obvious as the broken traffic lights and piles of uncollected garbage. Simple questions like “Who is responsible for running the city?” have no answers. Or rather, the answer is that no one is responsible.

In China, mayors are appointed, but the central government gives them considerable leeway in how to deliver economic growth and civic improvements. In fact, being an effective mayor is becoming a well-trodden path for advancement in the Communist Party. In the West, mayors are typically elected, and urban residents are quick to hold them accountable. India’s urban leaders lack both authority and accountability. Surely, it is time for the world’s biggest democracy to have elected leaders in the country’s most visible and important places. And these 50 to 100 mayorial positions could allow ambitious young politicians to build their managerial capabilities without waiting to fill a ministerial berth.

The resistance to this idea comes at the state level. Chief Ministers and lower-level authorities don’t want effective mayors because they fear a reduction in their own powers. It is a short-sighted and ungenerous point of view; and given the state of India’s cities, impossible to justify.

MAKING CHANGE HAPPEN

The political will to deal with India’s urban problems has been lacking for decades. But at least now India’s cities are being talked about; there are countless ideas under discussion. The key is to begin to think systematically. As citizens, we need to stop asking that the roads be fixed and instead demand that the institutions that build the roads be fixed. This will not, of course, be easy. Resistance to change is strong, particularly at the state level, where notables fear a loss of power and patronage. It is the national government, then, that needs to be the catalyst for change.

These five initiatives will not dry the roads that make Naina Dixit’s commute such a misery or bring sewer service to the slums. What they will do, however, is to create the capabilities– in the form of people, agencies and money– to allow India to tackle its urban problems in a wholesome way. And that would be the biggest challenge of all.

Shirish Sankhe is a director in McKinsey’s Mumbai office and supports clients in both our Infrastructure and Public Sector practices. He works closely with major energy and infrastructure companies in India and across the world
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