Lessons from Detroit for Indian cities

By: Kala Seetharam Sridhar


In July, the US’s famed Motor City, Detroit, filed for Chapter 9 bankruptcy protection after piling up $18.5 billion debt. It became the largest US municipality ever to go broke. According to US federal law, the purpose of filing Chapter 9 bankruptcy is to protect a municipality from its creditors while it develops and negotiates a plan for repaying or adjusting its debts.

Only about 700,000 people live in Detroit today, less than half the population in 1950. Its unemployment rate is over 18% and per capita income is a measly $15,000 per annum. This heralds the decline of manufacturing in the city that was once Motown.

While there have been fewer than 500 such Chapter 9 bankruptcy petitions filed in the US by municipalities in over 60 years, I wish, given the level of public services they offer, Indian cities declare themselves to be operationally dysfunctional, so that the entire world knows that Indian citizens are miserable.

One might ask what the level of services has got to do with a city’s financial situation. Very much. Detroit has the highest rate of violent crime among the nation’s big cities. Average police response time is almost an hour compared with 11 minuters for all US cities.

Nearly 80,000 buildings in Motown are abandoned or seriously blighted, and 40% of streetlights do not work. Consider this: there were 41,082 potholes in Bangalore as of July 2013 (of which the BBMP claims to have filled 22,617).

The average oneway commute time in Bangalore increased from 25 minutes in 1991 to nearly 41 minutes in 2001. Clearly, citizens are getting no value for the taxes they pay to the city. Roadsides are filled with garbage, government schools are not worth sending children to and government hospitals are not a patient’s first choice.

India is also unique in that no public sector company is allowed to file for bankruptcy. Further, as economists Vijay Joshi and IMD Little point out, India is one of the few countries to have a Sick Industrial Companies Act. A sick unit is a company (in existence for not less than five years) that is found at the end of a financial year to have accumulated losses equal to or exceeding its net worth.

To rehabilitate such companies, there used to be a Board for Industrial and Financial Reconstruction, which is now called the Appellate Authority for Industrial and Financial Reconstruction. This agency was expected to “rehabilitate” “sick” units that were not allowed to “die”.

Tap Capital Markets

We carry a baggage of sick companies and sick city governments that cannot declare bankruptcy and allow take over by a private company.

Readers may recall that Jamshedpur is essentially a private — Tata — town. It was the 7th cleanest city in 2010, according to a survey by GoI. Jamshedpur Utilities and Services Company, which was carved out of Tata Steel from its Town Services Division in 2004, is India’s only comprehensive urban infrastructure service provider.

Until they become financially viable, cities cannot deliver acceptable levels of public services to citizens. In the research we did for the Thirteenth Finance Commission, in which we explored the magnitude of new financing options using a sample of four Indian cities, we made an attempt to assess the potential of land as a municipal financing tool. We found that there could be a significant increase in a municipality’s revenues should revenues from land leasing and sales by the urban development authorities accrue to municipal corporations.

Further, we know from the examples of Ahmedabad and Bangalore that cities can access the bond market with or without state government guarantee.

Our cities should tap capital markets and other sources of revenue or become Detroit, declare operational dysfunction, or better, file bankruptcy and accept that they cannot finance services without drastic changes in the way they function.

The writer is with Public Affairs Centre. Views are personal