India’s urban population is expected to reach 600 million by 2031. Providing infrastructure to accommodate this growth will be a huge task. The Ministry of Urban Development (MoUD) is encouraging Transit-Oriented Development (TOD) as one of its strategies for sustainable urban growth. There has been increased interest in India for scaling-up TOD projects in order to solve issues in existing and newly emerging urban areas. Therefore, it is important to understand that implementation requires cross-disciplinary integration and partnering at various tiers of government.

However, owing to the significant capital investments required, and long gestation periods without definite returns, few have signed on for TOD projects. There is a need to develop suitable financing mechanisms and concrete policy frameworks and regulations to encourage success.

Financing is Crucial to TOD

Successful global practices have shown that TOD cannot adhere to a one size fits all policy, especially when it comes to the financing model involved. Each component of the project needs to be looked at separately and the appropriate financing model applied. In addition, the role of all stakeholders in the financing process and the possible changes to the financing model need to be charted out.

There is significant capital available, allocated by the local, state and central governments, in addition to available funds from public transit agencies, businesses, financial institutions, community based organizations, philanthropies and developers. However, this money needs to be accessed and channeled effectively.

Existing Mechanisms to Finance Infrastructure

At present, there are several financial mechanisms that have been used for large-scale infrastructure projects in India. Depending on the type of project and the stakeholders involved, replicating these models could help future TOD projects get off the ground.

Public-Public Partnership: When two or more public agencies come together for a project, resources and responsibilities are pooled within a partnership agreement. For example, when the Ministry of Urban Development approved the Delhi TOD policy in July 2015, a pilot TOD project was initiated by the Delhi Development Authority (DDA) and the state-owned NBCC (India) Limited to take the project forward.

Credit Assistance: This method is traditionally used for large-scale infrastructure projects in India and involves budgetary support, grants and loans from multilateral or bilateral development agencies. One such example is the Delhi Metro, which is an equity joint venture between the state government and the central government, along with significant soft-loan assistance from Japan International Cooperation Agency (JICA).

Land Value Capture: This method recovers all or some of the increase in land and property value as a result of public infrastructure provision. The Delhi Metro Rail Corporation (DMRC) has successfully employed this financing method through property development. Phase-III of the Delhi Metro is looking to generate funds of close to INR 2500 crore (US $367 million) through the same method. The new Value Capture Framework Policy could help the government recover value generated via public infrastructure investments.

Public- Private Partnership (PPP): This approach involves private finance and advanced technical expertise made attractive with guarantees from the government. For instance, the Hyderabad Metro Rail Ltd (HMR) has been set up as a Special Project Vehicle (SPV) between the state government and the concessionaire, L&T.

Municipal Bonds: Tax-free bonds are issued by Urban Local Bodies (ULBs) in order to finance city improvement projects. The Ahmedabad Municipal Corporation was the first ULB to issue redeemable tax-free bonds in 2005. While the municipal bond market in India has thus far played only a limited role as a funding source, it has a high-track record in terms of repayment across all ULBs that have issued them.

Dedicated Funds Model: The Government of Karnataka has established a Dedicated Funds Model, where money is mobilized by imposing a Transfer of Development Rights (TDR) tax based on the market guidance value of all properties within a distance of 500 meters (1640 feet) from the Phase-II of the Bangalore metro line. The funds would be credited to the Metro Infrastructure Fund and shared proportionately between the ULB and infrastructure providers.

Moving Forward

While TOD has had widespread global success, as with any infrastructure project, TOD will not be successful in India until the question of finance is answered. Infrastructure financing mechanisms should be contextual and financially sustainable. These could include tax increment financing (TIF), betterment tax, user charges, selling of air rights, green bonds, project bonds and others.

An encouraging sign is that the government has become flexible in terms of allowing commercial bank lending, using tools such as take-out financing, infrastructure financing institutions, infrastructure debt funds, external commercial borrowing and foreign direct investments (FDIs). The applicability of existing finance mechanisms and the possibility of innovative methods for financing will be crucial for the implementation and scaling-up of TOD.

This was originally published by WRI India