60 Smart Cities In The Bag: What Next?

The government on Tuesday announced a list of 27 cities, across 12 states, which will be included in its smart cities mission. Following the latest announcement, 60 cities are now included in what is one of the most ambitious urban development plans undertaken by the government. In the first round, announced in January, the government had included 20 cities, followed by another 13 cities in May.

The selection of cities to be included in the mission kicks off a long and complicated plan to revitalise the country’s urban infrastructure.

• As a first step, cities selected have to set up a special purpose vehicle (SPV)
  
• The state and city administrations will hold 50 percent each in the SPV
  
• The state government will appoint a senior bureaucrat to head the SPV
  
• Each smart city will get Rs 1,000 crore, half of which will come from the central government

“The process of structuring takes about 6-9 months. We would expect that by the second half of fiscal 2017, these SPVs will be in a position to start giving out contracts. These contracts could stretch across sectors like technology, construction, waste management, water supply among others,” Sameer Bhatia, President - Infrastructure Advisory, CRISIL said.

Most of the 20 cities that were selected in the first round have completed the process of setting up SPVs, NSN Murthy, executive director and leader for Smart Cities at PwC India added.

Some have also appointed programme management consultants. A few of them have merged existing projects with the smart cities program and are already in the project implementation phase, Murthy said.

Where Will The Funding Come From?

The balance will need to be generated by the SPVs themselves.

One way to do this is by monetising land holdings and states could look to transfer some of their land into these SPV to help generate funds. About 30 percent of the funding needs could come through this route, said Bhatia of CRISIL.

These SPVs may also look to raise funds via the debt markets but this is easier said than done. For a rating agency to be able to rate an SPV like this, it would need a clear picture of the finances of the state and the local municipal body. While the former is easy to do, the latter is not. Only after these SPVs are rated, will they be able to raise debt.

While some of these entities are acquainted with the credit rating process, not many have tapped the debt market. Only close to 20 municipal corporations have so far borrowed from the debt markets.

“The government is pushing these SPVs to get rated as a first step. The idea is that eventually these SPVs will go to the markets but that may take some time since initial funding is in place,” said Bhatia.

Murthy of PwC said that SPVs set up for smart cities are also looking to draw in private investors by using the PPP (public private partnership) model and rely only minimally on government grants.

“Since cities are taking the lead in these projects, the process of clearances will be easier. At the same time, concession agreements are being drawn up in a manner that would work for the industry so there should be interest in PPP projects,” said Murthy.

Can Smart Cities Lead To A Pick-Up In Investment?

Both Bhatia and Murthy feel that smart city projects, if implemented well, have the potential to kickstart private investment in urban infrastructure. As a start, projects planned under this mission could boost business for EPC (Engineering Procurement and Construction) firms, said Bhatia.

Foreign firms are also seeing this as a large business opportunity. Since a number of foreign governments are supporting the smart cities development programme, private firms from these countries may have greater comfort in participating, said Murthy.