Smart Cities, their Financing and Challenges

Last month, Indian Prime Minister Narendra Modi announced about the plan to set up 100 smart cities in different parts of country to bring about sea-through changes in urban civic life and behavior with the goals of long term sustainability similar to Stockholm, Barcelona, Amsterdam, Glasgow and Singapore etc. This news has created a lot of buzz and excitement across the world and spectrum. But at the same time this announcement has resulted into a number of questions being put forward from the concept and impact of smart cities on civic life, sustainability and costs.

In a smart city infrastructure is integrated with technology and it effectively enhance quality, performance and efficiency of the urban civic services by actively and effectively engaging citizens using information and communication technologies at lower costs and resource consumption making it more environment friendly and sustainable in long term. Different government services, transportation, traffic management, energy, health care, water and waste management etc may become more efficient because of real time flow of information and responses to the challenges.

Cities and public services providers would be required to upgrade their infrastructure as per the new and innovative technologies and these upgrades would need huge money. So a lot of investment in these would be need of hour. A recent estimate by KPMG suggests that these 100 smarts cities would require an investment of around INR 60 trillion by 2022 and the Government does not have enough resources to finance such a mega project. Indeed government has to explore different models like Public Private Partnerships (PPPs), private investments and government based financing options such infrastructure and municipal bonds etc to covert these proposed smart cities into reality. Also different modes of financing will diversify the risks.

Private sector has to play important and vital roles for mobilizing capital and technologies as well as resources for infrastructure development, logistic planning, technical support and research and development with incremental capital support from government wherever necessary.  Considering huge business opportunities a number of private sector firms have eagerly announced about their motive to invest in these proposed smart cities.  But at the same time it is important that municipal bodies must have enough finances to make necessary civic services available to everyone to make these smart cities pro-people else this scheme would turn out to be just a business where the people at the bottom of pyramid don’t have place.

The inability of the municipal bodies of even the largest cities of India like Mumbai, Delhi, Chennai and Kolkata to arrange funds for different projects basically lies in the huge budget deficit as well as non-transparent reporting standards. So the first challenge is to bridge the gap between the revenues and expenditure by rationally pricing civic services through gradual positive pricing discrimination. It would be difficult for municipal bodies to implement with but it has to be done. The next challenge is to make the financial reporting transparent. Although government has already taken some steps towards it but that is not yielding. But if it is done, these municipal bodies can raise funds through municipal bonds because the present municipal bond market in India is just around INR 14 billion only; not even one percent of GDP at current prices as there is huge opportunities in municipal bonds segment. But at the same time government would have to make municipal bond segment lucrative enough for investors. Also there is huge scope and opportunities for the government to bring in investment from EPFO (Employees Provident Fund organization), and ESIS (Employees State Insurance System), National Pension System (NPS) as well as insurance sector by reforming the investment policies of these organizations.

At a time when there is huge uncertainty where the world economy is moving towards, it would be very difficult decision for the international investors to invest in long term risky project like smart city in a country where bureaucracy is said to be unsupportive and many unfriendly laws (mainly land and labor) and corruption use to put barrier in the process. This is perhaps the biggest challenge for the government to cope with as systematic reforms like such are not done in few days. Rather such systematic reforms often take years and sometimes decades. Also there may be worries on part of revenues for institutional investors as there is no clear-cut model or policy for revenues from public goods and services. So the government as well private firms investing in smart cities need to be very creative to put in a model that can generate enough revenues without depriving people at bottom of pyramid and also make profit. Packaging is important but it is the content that gives result.