Linking of user charges to inflation for Smart Cities proposed

The Urban Development Ministry has proposed linking of user charges in urban areas to inflation for financing the Smart Cities Mission.
A proposal has been mooted for automatic partial indexing of user charges in urban areas to inflation and quality of services to increase cost recovery to at least cover operation and maintenance charges, sources in the UD Ministry said.
For example, if a special water project is taken up for supplying 24-hour supply in the proposed Smart City then, as per the proposal, some charges would be levied to cover the operation and maintenance costs.
Since there will be a huge resource requirement for Smart Cities Mission and Atal Mission for Rejuvenation and Urban Transformation (AMRUT), the Ministry mooted the idea at a recent regional workshop on Smart Cities here.

The Ministry is developing a Model Concession Agreement in urban water supply based on tariff indexation to inflation to mitigate risks, sources added.
The model document also covers risk allocation between public and private sectors, performance standards and coverage targets besides providing for flexibility to urban local bodies.

Addressing the Mayors, Municipal Chairpersons and Municipal Commissioners at the regional workshop, Urban Development Minister M Venkaiah Naidu said, "As far resources are required, where there is a will, there is a way. If you can assure quality urban services, people will be more than happy to cooperate."
During the presentation on sources of financing the smart city mission, the UD Ministry has pointed out that user charges were way below cost recovery in urban areas.

In case of water, it is below 20 per cent; below 60 per cent in case of power and less than 80 per cent for gas.
Citing some examples, the workshop was told that average cost recovery in 2007-08 in case of large cities was 41.40 per cent in case of Bhopal, 40 per cent for Hyderabad, 28.10 per cent for Jaipur and just 18.20 per cent in case of Lucknow.
In case of other cities, average cost recovery was 55.20 per cent in Palakkad, 32.30 per cent in Malegaon and 34.30 per cent for Amaravati, indicating the huge gap between the cost of providing urban services and cost recovery.

Low parking rates in cities was also observed.
The Ministry noted that for urban local governments, parking fee is an important source of revenue, besides having the dual impact of influencing commuting choices in favour of public transport.
Elaborating on the principles of levying user charges, the UD Ministry stressed they should be so structured as to meet at least operation and maintenance costs and needed to be partially indexed to inflation for improved quality of services.
It was suggested that where services can be measured and beneficiaries identified, user charges must be applied. Water and sewerage charges should be levied separately rather than built into property tax, as is done by some states.

The 14th Finance Commission has recommended enhancing the resource base of urban local bodies through imposition of Betterment Tax, Impact fees, Advertisement tax, tax on newer forms of entertainment, raising ceiling on Profession tax from Rs 2,500 to Rs 12,000 per year.
The UD Ministry has informed the states that the government is pursuing a loan of USD 1 billion from Asian Development Bank and another USD 500 million from the World Bank to provide funds to the Special Purpose Vehicles to be created for each smart city.
Modalities in this regard are being worked out and loan should be available in 2016 for use by the first batch of smart city candidates to be chosen in the second stage of City Challenge competition among the 100 cities included in the Smart City mission.