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Funding for smart cities: Key to coffer lies outside India

The Union government is set to approach the World Bank and the Asian Development Bank (ADB) for a loan of £500 million and £1 billion each for 2015-20.

Written by Shalini Nair | Published: September 5, 2015 4:17:14 am
five-year Smart Cities plan, Smart Cities plan, World Bank, Asian Development Bank, ADB, Economic Affairs, Ministry of Urban Development, BRICS The reason for the mission garnering such wide-spread interest is owing to the fact that it opens up India’s until now largely-closed urban infrastructure and services sector to private investments. C R Sasikumar

The Rs 1 lakh crore that will be granted for the ambitious five-year Smart Cities plan by the Centre, state governments and municipal bodies of the 100 selected cities, will account for merely a fifth of the money needed for the mission. As per Central government estimates, a whopping Rs 4 lakh crore of funds will be infused chiefly through private investments and loans from multilateral institutions among other sources.

Bilateral and Multilateral agencies

The Union government is set to approach the World Bank and the Asian Development Bank (ADB) for a loan of £500 million and £1 billion each for 2015-20. The finance ministry’s Department of Economic Affairs is presently scrutinising a proposal sent by the Ministry of Urban Development on procuring loans from these two institutions.
Ministry officials said that similar proposals will also be sent for procuring funding from the BRICS New Development Bank, China-led Asian Investment Infrastructure Bank, Japan International Cooperation Agency (JICA), Agence Française de Développement (AFD) and Germany’s GIZ and KfW Development Bank. “We are yet to decide on the amount to be sought,” said the official.

Ashok Srivastava, senior project officer (Urban ) for the Asian Development Bank told The Indian Express that if the finance ministry approves the proposal, it will be the bank’s highest funding to India’s urban sector. “The states will have to bear the foreign exchange risk but our interest rates will not be more than one percent,” said Srivastava. On the issue of facing resistance from urban local bodies (ULBs) owning to the conditionality imposed by multilateral agencies, World Bank’s lead urban specialist Barjor Mehta said, “These are misguided perceptions. Most of our safeguards are citizen-centric.” He said that AMRUT and Swachh Bharat, with its focus on water, green open spaces, transport and sanitation, forms the base of the government’s comprehensive urban agenda and Smart Cities is the innovation. “The World Bank is very keen to partner the Centre, state governments and cities that are able to meet these challenges,” said Mehta adding that the tenor of the loan could be up to 20 years.

The World Bank, ADB, AFD, KfW, JICA, in addition to a host of other agencies, will also provide technical assistance to the cities in preparation of their Smart City plans as well as on procurement of consultants. These include UK government’s Department for International Development, UN Habitat, United Nations Industrial Development Organization and US Trade and Development Agency.

Increased space for private sector in urban infra and service provision

The reason for the mission garnering such wide-spread interest is owing to the fact that it opens up India’s until now largely-closed urban infrastructure and services sector to private investments.

“The Centre and state government-ULB funding for every city will be Rs 1,000 crore over a five-year period. ULBs’ capacity for self-funding has been reduced greatly with major revenue sources such as octroi abolished. Every city is expected to raise another Rs 4,000 crore through a range of available options including public-private partnerships,” said an official. Several services, which were historically handled by urban local bodies or planning agencies, will now be handed over to private players which might be involved in everything from the construction to the operations stage.

Every city is expected to set up a special purpose vehicle (SPV) to implement its Smart City plan, an SPV in which the state and the municipal body will have a major stake-holding in 50-50 proportion. The private player or financial institutions will also get equity stake in the SPV, which can extend to a maximum of 50 percent. According to Central government officials, public private partnerships are required so as to “generate capital for the mission and bring about efficiency”. In return, the private sector will be allowed to get their returns on investments by charging citizens user fees.

“The Centre can in no way ensure inclusiveness for the urban poor, migrants and the marginalised if it hands over its responsibilities in terms of infrastructure and basic service provision to the private sector on such a mass scale. What kind of safeguards can the government possibly have in place when it is only providing 20 per cent of the funding for Smart Cities and just 10 per cent of the funding for its ‘Housing for All’ mission,” said Amitabh Kundu, former economics professor from the Jawaharlal Nehru University.

The idea of cities, in a developing nation such as India, serving as a space for investment of private capital is perhaps the reason why the mission has evinced interests from a host of countries such as the US, UK, Germany, France, Spain, the Netherlands, Sweden, Israel and Australia to Asia’s two biggest economies of China and Japan. The mission also opens up the possibility of private players being able to push their technologies on a mass scale in a lucrative Indian market. “These be anything from LED lights, to sewage treatment or waste to energy technology and CCTV cameras,” said PSN Rao, urban planner who also heads the Delhi Urban Arts Commission.

Beyond physical infrastructure such as basic services, transport and real estate, Smart Cities will also help funnel private investments into urban India’s social infrastructure such as provision of healthcare and education.

Other sources of funding

In addition to all the above sources, cities can explore options such as municipal bonds or the National Investment and Infrastructure Fund. Ministry officials say that ULBs can also dig into the increased funds that will be devolved to them — Rs 87,144 crore for 2015-20 — as per the 14th Finance Commission’s recommendations. Officials concede that land prices will escalate in each of the 100 smart cities, a process which has already begun. Hence it has suggested that municipal bodies could gather additional funds for the mission from various land based financing instruments such as vacant land tax, land conversion charges and floor space index premium. Cities have also been told to consider the 14th Finance Commissions recommendation of incrementally increasing taxes such property tax and professional tax or increasing the scope of entertainment tax.

At a regional workshop of the 40 Smart City nominees from north India and Gujarat on Thursday, Urban Development Minister M Venkaiah Naidu said that money coming from the governments and ULB will act only as the seed money for each Smart City Plan and that cities will have to “be creative in raising the required finance”.

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