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Needed: Smart Financing

Some cities like Pune and Bhubaneswar are able to raise funds, while others like Guwahati and Solapur are struggling to attract investment

Photo Credit : Vikramjit Kakati


Big Challenges: The poor credit rating of cities is a constraint in raising funds for them

When the Smart Cities Mission was launched, the biggest challenge for policy makers was finding funds for these hundred cities, in the light of the huge investment required to upgrade their basic infrastructure. Critics had raised doubts over the financial viability of the project, which they considered ambitious and premature, considering the poor infrastructure of Indian cities and the past track record of other infrastructure projects, like JNNURM.

However, within a year of the project being launched, the euphoria over the Smart Cities Mission has begun to die down. The Central government, States and the cities are increasingly feeling the pressure to find funds for the most ambitious project of the Narendra Modi government. Many cities have already expressed difficulty about raising funds and are demanding more Central grants, causing sleepless nights to the mandarins of the ministry of urban development and the PMO. The PMO is directly monitoring the progress of the project through monthly meetings to help cities raise funds.

“This project is tougher than what we had thought. We are now discussing how to collect this amount. People thought that as Guwahati is included in the list of Smart City projects, so lots of money will come. But this is not the case,” Guwahati Development Minister, Himanta Biswa Sarma, said. Guwahati had submitted a Rs 2,400 crore proposal for the Smart City project. The city has had a tough time arranging funds, which has stalled the project. Smaller cities face similar challenges.

The government had proposed Rs 48,000 crore of financial support for 100 smart cities over the next five years. An equal amount, on a matching basis, was to be contributed by the States and urban local bodies (ULBs) for the development of smart cities. Arindam Guha, senior director, Deloitte in India said, “The basic infrastructure project costs would be at least ten times the sanctioned amount. The gap would have to be met by the States, urban bodies and private companies.”

According to the government’s own estimate, to maintain and build city infrastructure, the cities will have to spend as much as Rs 7 lakh crore over the next 20 years, which roughly amounts to spending Rs 35,000 crore each year. This is a huge fund corpus and it is not possible for the Centre or the States individually to fund the massive infrastructure investment required for these cities.

“The amount of allocation I have made is not sufficient, even a matching grant from the State is not sufficient. That’s why I have come up with the PPP model. PPP is the way forward for urbanisation in India. People have to be willing to pay for the services they want,” Urban development minister, Venkaiah Naidu had admitted during a recent interview.

In the light of the gap in funding, the government has incorporated various financial tools to facilitate financing the cities, such as public-private partnership, foreign direct investment, aid from international finance companies and external borrowing. The government has also recommended that States mobilize funds and ULB’s use their own resources from collection of user fees, beneficiary charges and impact fees, land monetization and other self-financing options like Municipal Bonds and pooled finance mechanism, to raise additional funds.

There was also a specific provision for a National Investment and Infrastructure Fund (NIIF) by the finance ministry, with an initial corpus of Rs 20,000 crore.

The Challenges
“Several challenges remain with respect to the development of smart cities, including those related to project funding, project management, government decision making and policy and regulatory framework,” P. N. Sudarshan, a senior director at Deloitte said.

One of the major challenges of the ‘mission’ is the uneven financial health of the cities. While cities like Pune and Bhubaneswar are doing well in terms of raising money, others like Guwahati, Solapur and Jaipur are struggling to attract investment. Even private players are avoiding cities with more infrastructure challenges and are opting for cities in which infrastructure bottlenecks are minimal.

The urban development ministry had spoken of self-financing cities, using the bottom up approach. However, with most cities and municipal bodies reeling under a funds crunch, generating additional funds has emerged as a challenge. The poor credit rating of cites is also a constraint in raising money from external agencies.

The ministry had proposed various user charges and taxes to mobilise funds, but the urban local bodies have been shying away from imposing the additional levy, anticipating protests. Market regulators have been warming up to the idea of Municipal Bonds, but investors have shown no interest in the bonds in their current form, dreading poor returns and unusually high risks. Companies are unlikely to come forward with funds unless they assess the business they are investing in to be rewarding.

“India must elevate the financial standing of its urban areas, making them more attractive destinations for future investment,” said a recent report by the US-based think tank, Brookings Institute. Till the government comes up with a smart way of financing the project, implementation of the Smart Cities Mission will remain a challenge.

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