Who’s going to pay for the Smart Cities in India?

— Shashwat DC

The whole euphoria for the smart city was kicked up when Arun Jaitley, Union Minister of Commerce was presenting the interim budget in 2014. Announcing the allocation of Rs. 7060 crore for developing 100 smart cities, he stated, “As the fruits of development reach an increasingly large number of people, the pace of migration from the rural areas to the cities is increasing. A neo middle class is emerging, which has the aspiration of better living standards. Unless new cities are developed to accommodate the burgeoning number of people, the existing cities would soon become unliveable. The prime minister has a vision of developing one hundred Smart Cities, as satellite towns of larger cities and by modernising the existing mid-sized cities. To provide the necessary focus to this critical activity, I have provided a sum of Rs 7,060 crore in the current fiscal.” Indeed, the new PM has been pretty exuberant and excited about the whole smart city business, after all, he was the brain behind the ultra-modern Shanghai-type GIFT city in Gujarat. No wonder smart city is the flavour of the season, with constant discussion, deliberation and investment announcement.

The new government is betting big on urbanisation and its increasing numbers. Currently, around 31% (around 377 million) of India’s population lives in the cities, that number is set to grow exponentially to 600 million by 2030. And by 2050, more than 50% of India’s population would be urbanised. According to estimates, India will house 1.6 billion people by 2050, and be the most populous country on the planet. Thus, we will need to find cities that can accommodate some 433 million Indians that will get added in the next three decades. That’s almost twice the number of people currently living in cities in India.

To build these many cities, we will require big money. According  to the A Handbook titled “Smart Cities in India. Reality in the Making” released by All India Association of Industries (AIAI) and Indo-French Chamber of Commerce, the cost for creating 100 smart cities will be very huge. As per the assessment of the High Power Expert Committee (HPEC) has assessed a Per Capita Investment Cost (PCIC) of Rs. 43,386 for a 20 year period. By using an average figure of 1 million people in each of the 100 smart cities, the total estimate of investment requirements for the services covered by HPEC (water supply, sewerage, sanitation and transportation) comes to Rs. 7 Lakh crores over 20 years. That translates to an annual requirement of Rs. 35,000 crores investments in infra alone.

In fact, according to announcement made by Shankar Agarwal, Secretary, Ministry of Urban Development at the event by AIAI, the union government is going to fund up to Rs. 1,000 crore worth infrastructure investment in each of the cities selected under smart city project over the next ten years. In the same note, he also made it clear that the smart city thing will be joint effort between public sector and private sector, as around 80-85% of the project costs would be borne by private sector, with the rest coming in from government bodies.

The funding of these cities is very much a mystery as yet. With the government looking to rope in the private sector and the private unsure, this can lead to numerous delays. One of the primary concerns of the investors is how to they make money. Considering the gestation period for such mammoth projects is pretty long, 10-15 years, why would a private player want to park his money in investments that will take so long to payback. Going by the past experiences we had with BOT (Build Operate Transfer), the PPP (Public-Private Partnership) has never really taken off. What typically works in India is tax-breaks, interest-free loans, and incentives. Thus to be able to bring in the private players and make them invest their money in the smart cities, would require innovative allurements from the government.

Also, private players should necessarily now look at new models of making profits. Typically, in any such infrastructure project (take the instance of bridges or even metros) the chosen private company will create the infrastructure, account the cost of creation and operation, add a mark-up and then charge the users in terms of toll tax or travel tickets. This infra-centric approach must also change. Take the case of Lavasa City, the first actual smart city before the term became fashionable. HCC not only constructed the whole infrastructure, but went a step ahead and decided to set up a firm to run the city. Just like we pay usage charge for a modern airport, the citizens of Lavasa will have to pay a usage charge to Lavasa Corporation that will run the various systems in the city, right from water supply to waste management. This way, HCC is not looking to make a quick buck, sell the homes at inflated rates and move out in the jiffy. Because they have a steady revenue model, they are in for the long run. This could also be one of the many reasons why homes in Lavasa are still in the affordable range.

In the end, while the announcements made by President Obama in terms of US investments in smart cities of India, or even the news that the Qatar prince is investing Rs. 1 Lakh Crore in the sector, might excite us all, the ground reality is we still have to evolve a prudent financial model to fund these cities, to bring in the private players. The honest fact remains that government cannot run and fund this program by themselves. Else, there is a possibility that this might go on to be one of India’s biggest failure. The battle is not only about the money at the stake, but of the very future of this nation. Hence, there can never be too much scrutiny in the government plans.


Leave a Reply

%d bloggers like this: