The Government of India has proposed to create 100 smart cities under the Smart Cities Mission launched in June 2015. The total investment required as per the Smart City proposals of 60 cities is estimated at Rs 1.34 lakh crore or approximately $20 billion. The mission grants by the Central and State governments will not be adequate to meet the requirements of the Smart City mission. The cities will need to access funds from other sources e.g. private investments in form of PPP, municipal bonds or some loans from bilateral and multilateral agencies for successful implementation of the mission.
Given the present state of finances of the Urban Local Bodies (ULBs) (except few larger ULBs) cities may face some problems in attracting private investments or raising funds through borrowings. The Mission has shown good progress, but needs support from the government to facilitate access to the external funding. The Union Budget is around the corner and some of the financing issues of Smart Cities can be addressed by Finance Minister, Arun Jaitley, through following options:
Budget allocation for smart cities mission
The 100 smart cities of India have ambitious plans to develop projects pipeline. Central and State budget allocations need to be in sync with the fund allocations approved by the Cabinet for the Mission. The newly incorporated SPVs would need to leverage Central and State government funds including equity to access funds from the external sources. Thus, the Union Government shall ensure allocation of funds as per the Cabinet approval. Any negative deviations from the Cabinet approved fund allocation will lead to avoidable delay in implementation.
Access to finance from open market
Traditionally, the financial health of Urban Local Bodies (ULB) (except few in metropolitan cities) in India is not very robust. Besides municipal bond market in India has not grown. In such a scenario, it becomes difficult for ULBs with lower credit rating or even investment grade rating to access finance from market at a reasonable rate. To promote municipal bonds market by giving some level of comfort to investors, Ministry of Finance can take some credit enhancement measures. One of the measures suggested is to allow India Infrastructure Finance Company Limited (IIFCL) to provide partial credit guarantee (PCG) to smart cities. This will provide comfort to investors, besides helping ULBs to raise finance from municipal bonds at a reasonable and competitive coupon rate.
Convergence is one of the critical components in implementation of Smart City Mission. Through convergence, cities can access funds from other government programs and missions. Last year, we observed that support under schemes like integrated power development scheme (IPDS) of Ministry of Power was not available to smart cities because of budgetary constraints. In order to ensure good convergence, it is suggested that a separate line of budget be created within key Ministries/ departments to provide funding support for their projects being undertaken under Smart Cities.
National smart city financing facility
Smart Cities Mission has attracted attention of various investors. However, the mechanism for fund flow from investors is still cumbersome. It is suggested that a national financing facility for smart cities at the national level be introduced. This facility shall raise funds from commercial borrowings and multilateral/bilateral agencies and financial institutions like ILFS, IDFC etc and provide funds to SPVs directly. These funds can be backed up by guarantee from Union government. Further, the financing facility shall appraise projects and disburse funds directly to SPVs in a time-bound manner.
Smart cities development fund
The Smart Cities Mission has created project vehicles which will be responsible for planning and implementation of smart city projects even beyond the mission period. The SPVs are entrusted with responsibility of replicating smart urban development demonstrated in model area based development to entire city. In this context, the SPVs will need robust financial structure to fund future smart city projects. Thus, at national level, a cess or a special purpose fund needs to be earmarked to make available financial resources beyond mission period. In nutshell, we propose that an enabling environment be created to foster smart cities. It includes not just provision of government funding, but to create avenues to capture financing from various institutions working in development sector. This will involve appropriate allocation of funds as well as creating opportunities for others to make investment into the sector.