BIG Ideas for India's Budget 2018 ... Unlocking US $ 1.24 Trillion of value trapped within Indian cities
Executive Summary :
The Budget proposal below is addressed to Mr. Arun Jaitley, India's Finance Minister.
This proposal seeks to unlock US $ 1.24 **Trillion of value trapped in Indian cities and specifies how this massive capital resource, once released can be used for national development ... thereby helping to Triple the size of the Indian economy from US $ **2.44 Trillion today to US $** 7.32** Trillion by 2028.
The Graphic in the PICTURE (above) displays how this money can be raised through an Asset Backed Security mechanism, in US $ **50 **Billion clips ... to finance India's New Smart Cities and our Next Generation Clean Energy Networks.
Please refer to the Graphic (above). It describes the (1) Policy measures (2 ) Asset Backed Security mechanism and (3) The Monetisation mechanism that ensures that a majority of immovable Asset sales ( 80 % ) are owned by Indian entities within a rapidly expanding domestic market that will be created by this budget proposal.
The note below contains details of my talk on Smart City and Clean Energy Financing at the Asian Development Bank's ACEF forum in Manila in June 2016. This talk specifically described the THREE sources of finance to raise the US $ 1.24 **Trillion or Rs **78.8 Lakh Crores, for the Indian Govt, without having to take a single paise from either the State of Central Govt budgets.
The overall impact of implementing this budget proposal will be for India to become the Worlds Largest Construction market within 5 - 7 years. This will be accompanied by robust investment multiplier impact of 3 + , and the creation of millions of new jobs in the Construction and manufacturing industries which serve the construction sector.
At the end of the note, I have described the first such Multi- Billion Dollar Urban Equity Withdrawal project, The Larsen & Toubro promoted, 93 acre " Bandra ( E ) project which is likely to release Rs 70,000 Crores in free cash to the Government of Maharashtra ... for development work.
Henry Kissinger has said " If you are going to do something ultimately, you might as well do it immediately ".
This US$ 1.24 Trillion cash is lying trapped in our cities, we should take take Kissinger's advice and use this money right now... and all it needs is a Policy document.
I. BACKGROUND :
To understand the thinking behind the above budget proposal, there is a need to first appreciate the scale of the challenges facing the Finance Minister and the Govt of India in the run up to the 2019 election. On the one hand Mr. Jaitley has to produce a budget that expands investment within the economy and at the same time, provide for massive resources to mitigate Agrarian / Farmer distress as well as cater to the Middle Class that is looking for sops ... and New Jobs.
The challenges within the Indian economy are very serious, these are :
The Banking system has a huge BAD LOANS problem which in Excess of Rs 12 Lakh Crores or US 188 Billion.
There is also a Huge Slowdown in New Investment from the private sector, which is driven in part by the unwillingness of Indian Banks to lend and partly by investors who have been risk averse lately.
Jobless Growth & Severe Under Employment ... Very few new Jobs are being created , even as millions of young people are joining the working age group ( without work ) each year. In addition even in the case of those who can be called employed, we have a sever under-employment problem during most of the year.
This Third problem of Jobless growth & Under employment and is the most serious and could also lead to large scale Social Unrest in India.
So unless we can somehow FILL the BIG HOLE in our Financing, there is a serious possibility that we are headed for trouble. It is in this context that this Budget Proposal on " Urban Equity Withdrawal " is possibly just what the doctor ordered for the Indian Economy.
II. Unlocking Value ... Through a Creative " Smart City " Financing Plan
There has been a lot of discussion about Smart Cities in India. Very few however have been looking seriously at the financing angle of these large projects.
If you attend any conference on the subject, all that the " Brilliant " speakers will say is " Public Private Partnership ( PPP ) " . Beyond that ... its anyones guess.
This paper shows how, the raising of vast sums of money in possible by applying the concept of Urban Equity Withdrawal as enunciated in the World Bank concept note on the subject ( World bank PPIAF Policy paper No 7, By George E Peterson ' 2009 ).
This paper however sets a new benchmark by going much beyond the world bank paper to raise an enormous US $ 1.24 Trillion in financing, without taking a single rupee from either Central, State or Municipal budgets.
III. The Three Sources of Finance
There are three possible sources which allow this Urban Equity value to be unlocked in India over the next 10 - 15 years :
1. From Central PSU owned land in Metros : US $ 40 - 188 Billion
2. Land Conversion from Agricultural to NA at city limits : US $ 300 Billion
3. Planned Re-Zoning of our Cities : US $ 900 Billion
Given the nature of the above assets, most of this money will be available to State and Municipal / local governments.
I worked with various alternative financing options for 6 months before I settled for just three sources after consulting Tax experts to get their views.
Since the sums of money involved are HUGE, I have also specified under what conditions and safeguards this money can to be released for development projects across 29 states and 7 union territories. The safeguards are necessary as without them, given past experience, there are likely to be large leakages.
Overall, the execution of this financial plan has the potential to Triple Indian GDP by 2028 through a construction boom in India. This construction boom, will in-turn, stimulate massive " Make in India " activity ... to supply building materials to the construction sector.
It is now time to do a deep dive into these three sources. Lets start with the simplest potential source of hard cash ... PSU land banks.
**1. Urban Equity Withdrawal from PSU Land Banks **
This source of financing is available in our Metro Cities such as Mumbai, New Delhi, Chennai and Kolkata. In addition, large sums can be raised in cities such as Bangalore, Pune and Hyderabad.
Central and State Government owned Public Sector Undertakings ( PSUs ) own very valuable land in cities like Mumbai, Delhi etc. The total value of Land Banks with the PSUs is easily of the order of Rs. 12 Lakh Crores or US $ 188 Billion.
The Largest land holdings outside of the railways are available with the Port Trust Of India which has over 50,000 Acres of Land, some of which is in large Urban Centers. The Railways also has approximately 10,000 Acres in cities and towns across India. The Mumbai Port Trust for instance owns almost 1800 Acres in South Mumbai. Its the most expensive real estate in the world valued at nearly US $ 45 Billion.
To release this value and to apply the concept, It would be necessary for Government to first raise FSI's on this land before selling it ... or leasing it ( Politically Safer option ).
Cherry picking & Shared Selling : It is proposed to cherry pick 3000 acres out of a total of 30,000 acres of PSU owned land for this purpose. Next, I would like to propose that the Govt. raise the FSI on this 3000 Acres of land from current levels of 1.5…to between 6 and 9 before putting it on the market.
Approx. 50 % of the money realised from the sale can be used to finance large public education and healthcare projects after paying the initial 50 % to the PSU. I believe that doing this will raise US $ 40 Billion or Rs. 2,54,432 crores at an exchange rate of Rs 63.608 / US $.
Even after the shared sale of this 3,000 acres for financing large national Education and Healthcare schemes, another 27,000 acres of prime land will still remain with Central & State PSU's.
Of the balance 27,000 acres, another 10,000 acres can be used for earning annual lease rentals. This will provide a fixed income for Central / State governments, thereby helping them pay for the operations costs of state education and healthcare schemes, a majority of which will be in rural areas in the concerned states.
I am assuming here that US $ 8 Billion or Rs. 50,886 Crores will become available each year, starting in 2017 and it is proposed that this money be withdrawn in 5 yearly instalments ( 2019 to 2024 ) and immediately be moved to a Secure Escrow Account to finance mass Education projects.
**1.1 Action Item for NITI Aayog / Ministry of Finance **
As the sums of money that will be realised under this Urban Equity Withdrawal plan are huge, NITI Aayog needs to issue a detailed note on procedure to be followed so that money is released from the Secure Escrow Account only after project milestones are achieved.
The money should preferably be released under a high court monitored process to prevent Scams / Leakage as has happened in a north Indian state where large sums were reportedly withdrawn after they were raised under a " Securitization Transaction ".
After this withdrawal, there was no money left for the next State Govt. when it wanted to execute projects as certain revenue streams were pledged under the securitization facility by the previous government to the banks and could not be used to fund new projects.
There is a need to avoid these kinds of incidents and Government needs to specify a proper process.
2. New Enhanced Fee for Conversion of Agricultural Land to Non Agricultural ( NA ) Land at periphery of cities
Land Conversion is a very large potential source of revenue for state & municipal governments which is currently being ignored.
Land is a State subject and State Governments usually charge between 5 % and 9 % of the existing basic value of the agricultural land as a conversion fee or conversion tax ( as in the case of Andhra Pradesh ).
This results in a huge loss of potential revenue to the State & Municipal Governments as the conversion fee of 9 % is applied to the value of agricultural land.
Actually, maximum appreciation in the value of land happens only after its conversion to " Non Agricultural " status … resulting is massive revenue loss to Government.
It has been estimated (by others) that the potential income for State / Municipal governments from a 10 % conversion fee ( levied on land after conversion to NA ) could be of the order of US $ 2 – 3 Trillion over the next 20 years.
I have however taken a more conservative view and in my estimate, potential State / Municipal Govt. earnings from levying the Land conversion fee on Non Agricultural land ( i.e. after its conversion ) at US $ 300 Billion across 29 states and 7 union territories over the next 10 years ( i.e US $ 600 Billion over the next 20 years ).
This value needs to be determined when this land is sold for the first time under its Non - Agricultural status and taxed on the basis of the proceeds received by the seller. Once the sale takes place, the original conversion fee charged on the value of the Agricultural land can be reimbursed.
I would recommend that this money be used for the financing of large Education / Healthcare & Smart City facilities. This could lead to India entering the league of developed nations within the next 10-15 years.
We are assuming that US $ 30 Billion / year or Rs. 1,90,824 Crores can potentially become available each year between 2019 and 2028 if the necessary legislative / legal and administrative mechanism is put in place at the State Govt. and Municipal levels.
The sums so raised from the process need to be immediately moved to a Secure Escrow Account to finance mass Education , Public Healthcare & Urban Development / Smart City and Clean Energy projects.
We need to execute the " Urban Equity Withdrawal " concept by intelligently drafting new legislation to capture revenue for the Govt while giving a substantial incentive to the private owners of land.
NITI Aayog / Ministry of Finance would need to issue proper guidelines as specified in 1.1 above, that might be followed to use this money.
**3. New Enhanced Fee for Re-Zoning Urban Land for Development of Smart Financial Centers **
India is set to see massive changes in the Urban Landscape over the next 20 years, as 400 Million people across the country, migrate from rural to urban areas.
Re-Zoning of our cities and the creation of Smart Financial Centers present state governments and municipal corporations in 600 districts with a huge, Once in a Century Opportunity to re-invent the urban landscape and at the same time raise an almost unlimited amount of capital to finance the re-construction of towns and cities across India.
In my presentation to the Asian Development Bank in June 2016, I had proposed that the best way to do this would be to start up a detailed Urban Planning Exercise ... To be carried out in over 600 district headquarters and in each surburb of our Metro Cities. In this exercise certain areas in each suburb ( within metros ) and in each district, could be designated as New Commercial / Smart Financial centers by re-zoning them and increasing their FSI from 1.5 – 4.0 currently to between 8 – 12.
3.1 Proposed Local Govt. Scheme
Citizens / Owners of these properties could receive 70 % of the increased valuation proceeds and the State / Municipal Governments could collect 30 % in cash once the properties are sold to new buyers or re-developed by the original owner and sold to buyers.
The government share of the additional revenue will be used to finance large Education , Healthcare and Clean Energy ( Solar + Wind ) energy schemes and to improve the city's infrastructure. This fee based measure has the potential to raise approximately US $ 900 Billion ( Rs. 57.24 Lakh crores ) for State and Local governments across 600 Indian cities ( conservative estimate ) over the next 10 years. This means that on an average Rs. 5,72,472 lakh crores could potentially become available each year starting in 2019.
IV Big Opportunity for Indian / Foreign Urban Planners
Specific areas will be selected for Re-Zoning and Increasing FSI after a 100 year, detailed perspective plan is prepared for each city / district headquarter. The objective of the exercise will be to turn our cities into smart cities through excellent planning and by reducing Transportation load.
As India has a severe shortage of town planners currently ( We currently have just 2000 odd town planners ) , it will be necessary to bring in sophisticated town planning skills from around the world. This will ensure that Indian cities leapfrog development cycles and deploy the latest in town planning practices.
Due to flawed policy, town planning was ignored in India for the last 60-70 years. Town planning skill sets in India therefore declined and our current set of town planners need proper training which is best provided by foreign experts.
The net cost of using International talent in planning our cities will be just 2 % – 3 % of Project cost. It is therefore far more economical to use the best town planning talent from abroad. If on the other hand we succumb to political pressures and use improperly trained local planners, we risk losing a large part of the balance 97 % of the investment due to poor planning skills. This could be a disaster leading to a loss of Lakhs of Crores worth of GDP.
Once our local planners acquire necessary skills, they will be able to take on international competition and do very well. Today they just do not have the necessary skills.
I am therefore of the view that all roadblocks that hamper the bringing in of world class town planning skills from foreign countries, need to be removed by the Govt. of India.
V. Re-Zoning Of Cities alone ... could Double Indian GDP
The net GDP gain from this third source ( one time re-zoning exercise )alone has the potential to Double Indian GDP by 2025, besides raising large sums of capital for government to create state of the art infrastructure in Urban India. Re-deploying some of this money to rural India ( Building Lakhs of Check Dams, 30,000 Rural Schools & 6000 Rural Hospitals ), will also Stop Rural Migration to Cities and prevent the creation of Slums in our cities. The beneficial impact of this strategic deployment of Urban Equity to rural areas will be huge.
Re-Zoning of Indian cities will also create millions of new jobs.
By bringing in various clean technologies and promoting low carbon construction practices within the Re-Zoning related construction projects, Indian cities can become models of sustainable growth, providing massive employment opportunities while serving as the principle base for a " Make in India " Plan. Startup of large construction projects in India is therefore crucial for the achievement of the Prime Minister's " Make in India " plan
VI. Creating 60 Million new Jobs in Urban Areas by 2025
To fast track our smart cities programme, it is critical that all State Legislatures pass the 74th Amendment to the constitution before implementing this scheme.
Passing of this amendment will lead to the shutting down of illegal State Govt. Parastatials such as MMRDA ( in Mumbai ) and DDA ( in New Delhi ) which are working against the constitution of India . MMRDA and DDA therefore should be shut down / converted to State PSU's and be made to compete with private companies to provide services to citizens.
MMRDA / DDA's current " Development Authority " status is simultaneous with their " Project Promoter " status. This creates very serious conflict of interest issues and results in serious delays in project implementation as can be seen from the fact that it takes 5 years to start up even minor projects in Mumbai.
After shutting these organizations down / converting them to state PSU's, their " Development Authority " role should be returned to the Municipal Corporations which should have a directly elected and accountable mayor.
It needs to be understood that MMRDA and DDA have imposed an extremely high political cost on the nation. They have for instance prevented India from producing the kind of political leadership that cities such as Paris (François Mitterrand), London ( Boris Johnson ) and New York ( Michael Bloomberg ) have produced.
Shutting down MMRDA and DDA and a mere passing of the 74th Amendment to the constitution might result in the creation of nearly 60 million jobs across India as Urban development projects are speeded up tremendously. The truth is that MMRDA / DDA and the bureaucrats within them are preventing 60 million jobs from being created in India. This is an extreme price to pay for the nation.
VII. Proof of Concept : L & T's Bandra ( East ) Deal
On the 31st of October ' 2015, the Times of India published a report on a deal that Larsen & Toubro ( L & T ) has presented to the chief Minister of Maharashtra Mr. Devendra Fadnavis.
Under the deal L & T is to develop 93 acres of land in Bandra ( East ) which earlier was a housing colony belonging to the Govt. of Maharashtra.
The highlights of the proposed deal are summarized as follows :
Total amount L & T will invest : Rs 30,000 Crores
Expected Sales realization : Rs 1,25,000 Crores
Project Management Consultant Fees : Rs 5000 Crores
Govt of Maharashtra Payout ( UEW ) : Rs 70,000 Crores
The important thing about this deal is the Urban Equity Withdrawal ( UEW ) Component. Under the teams of the deal, Govt. of Maharashtra will receive Rs 70,000 Crores in Cash after the promoter has accounted for his profit.
This essentially is an application of the first concept ( 1 ) discussed above. L & T of course has come up with this landmark deal independently which shows that the idea works and can generate massive amounts of capital for the Government. Concepts ( 2 ) and ( 3 ) above can yield even larger amounts for the Government.
**VIII. Monetization through Asset Backed Securities and Lagged Asset Sales **
To effectively monetise the massive value trapped in land banks in Cities across India, the following steps are necessary :
**1. **NITI Aayog needs to prepare a Policy paper on Urban Equity Withdrawal, Ministry of Finance needs to notify the UEW Policy and at the same time create a basket of Govt. held PSU shares with a value of US $ 100 Billion, which can provide comfort to international finance institutions and persuade them to reduce lending rates in response to near Sovereign status bond issues
2. A Large Projects Office needs to be set up directly under the Indian Prime Ministers Office ( PMO ) on the lines of the Infrastructure and Projects Authority ( IPA ) which reports directly to the British Prime Minister. The IPA in the UK has the mandate and the bandwidth to execute 200 large projects with a total Capex of GBP 500 Billion. We need to set up a similar project structure under the PMO and under the Chief Minister in each State. Just like it is in the UK, these project offices will also be staffed by Project / Construction experts and Project finance experts which will coordinate the execution of hundreds of projects with various Govt. departments.
**3. **Specific Smart City projects need to be identified by the Ministry of Urban Development for fast track development. The US $ 45 Billion Mumbai Port Re-Development project is one such project where around 1800 Acres is available for Re-development.
**4. **A consortium of Indian Banks need to be identified to lead this massive resource raising effort. I expect Indian Banks that join this scheme to earn a total of US $ 1.8 - US $ 2.0 Billion each year in fee based income. This will be a bonanza for Indian Banks who join the consortium and it is likely to help them become amongst the largest banks in the world.
This paper has shown how Rs 8,14,182 Crores ( Rupees Eight Lakh, Fourteen Thousand, One Hundred and Eighty Two Crores ) can be made available each year for Smart Cities in India Across 29 States and 7 Union Territories. Also all of this money can be raised totally independent of either the Central or State Government Budgets & without diverting any cash from existing Schemes.
Depending on Export led growth in a very uncertain Global environment is not a sound strategy. It is infinitely better to stimulate domestic demand through policies such as Urban Equity Withdrawal, that through a Construction Based Stimulus , can create massive demand for manufactured goods within the country itself ... and in the process create tens of Millions of New Jobs by 2021 - 22.
I hope that the Hon'ble Finance Minister Mr. Arun Jaitley and senior officials in the Ministry of Finance will consider the ideas contained in this note as they finalize the Budget proposals for the Union Budget 2018.
- Concluded –
About the Author :
Ashish Puntambekar is lead designer and Trustee at the Nataraja Foundation in Mumbai. He is a specialist in large infrastructure project design and project finance.