Narendra Modi’s 100 smart cities: Who will put money on table? What will happen to urban poor?

The 100-smart city is an idea that deserves attention. But convincing investors to put in money in these new cities will be a huge challenge.

Dinesh Unnikrishnan September 21, 2016 09:43:48 IST
Narendra Modi’s 100 smart cities: Who will put money on table? What will happen to urban poor?

On paper, Prime Minister Narendra Modi’s 100 smart cities plan has impressed everyone from the very beginning. The announcement on Tuesday of 27 new smart cities, takes the total number of smart cities so far to 60.

The latest round includes Modi’s constituency, Varanasi. The government’s plan to make 100 smart cities, out of which 60 announced so far with a total proposed investment of Rs 1.45 lakh crore is ambitious in every sense, for it carries the potential to kick off private investment cycle in India’s urban infrastructure and, if it succeeds,to set an example for other aspiring cities.

Narendra Modis 100 smart cities Who will put money on table What will happen to urban poor

A file photo of GIFT city in Gujarat. Reuters

What is a smart city

Let’s look at what is a smart city. The website of Ministry of Urban Development says, “the objective is to promote cities that provide core infrastructure and give a decent quality of life to its citizens, a clean and sustainable environment and application of ‘Smart’ Solutions. The focus is on sustainable and inclusive development and the idea is to look at compact areas, create a replicable model which will act like a light house to other aspiring cities.”

It is an ambitious plan indeed, even though political parties have been questioning Modi’s smart city scheme with respect to the choice of cities and the fate of existing cities. What one should note is that most experts agree that, at least on paper, Modi’s smart city project is a much better version of what has been experimented in the past to improve housing and infrastructure facilities in India.

The Congress-led UPA government’s years have seen schemes such as the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Rajiv Awas Yojana, which were later renamed as Atal Bihari Vajpayee and Sardar Patel respectively. Smart cities are the next level of taking this experiment ahead. There is no harm in the repackaging and renaming exercise as long as the job is done in a better way.

The problem, however, is on implementation and how the government will handle the socio-economic-jurisdiction issues that ‘smart’ cities will bring along in their wake. The past experience, beginning with the PURA (Providing Urban Amenities to Rural Areas) scheme in 1990s, should make one cautious while embarking on a fresh housing infrastructure revolution.

Execution woes

Consider these points:

For one, the biggest challenge for Modi’s smart city dream is securing capital from domestic private investors and foreigners. This isn’t easy since profit-hungry private investors will be worried about the returns from Day One, which should ultimately come from user fees.

As per the current plan, each new smart city will receive Rs 200 crore in the first year and the Rs 300 crore over the next three years. The state governments and local bodies which will have partnership in the special purpose vehicles (SPVs) at the city level will match the center’s contribution. But, the contribution from the state will account for only a fifth of the total fund requirement needed by the Five Year Plan.

According to Deloitte,  the 100 smart cities mission will require an investment of over $150 billion over the next few years with private sector contributing $120 billion. In other words, only one-fifth of the total investments in smart cities will come from the government. The rest of the money should come from the private sector. “Government funding cannot be sufficient,” said Devendra Pant, chief economist at India Ratings and Research. “And it is a big challenge to get private investments. When you talk about urban infra projects, recovery will not be immediate. You should find out alternate ways of revenue generation. Can private sector investor get returns to his investments? Nobody will come for charity.”

Though big cities still have a better chance to get funds, the smaller ones in the list of hundred, will have to struggle, Pant says.

If one goes by recent reports, the signals so far is that foreign investors, who are supposedly enthused about the prospects of investing in smart cities, haven’t really put money on the table. A 1 September Hindu Business Line article, which cited an RTI query, said no investment has come from foreign investors ever since Modi embarked on the 100-cities smart city journey some two years back. What does this mean? Foreigners aren’t as thrilled as us on India’s smart cities.

Secondly, how will the SPVs raise funds is a question. The government has clarified that the Centre's contribution to smart cities will be strictly in the form of grants and the ULB is exercising its own discretion in utilising these funds as its equity contribution to the SPV. The SPV can access funds from other sources including debt and loans besides user charges.

Raising money from bond issuances will not be easy for SPVs considering the experience of municipal bond issuances in the past, said Pant of India Ratings. “What will be the revenue model of that SPV? Till now, response to municipal bonds has been lukewarm. Not much money has been raised. It will be a test whether these SPVs will be able to leverage the grants given by central and state governments and raise money in the debt market."

Third, there is a likelihood of new smart city plans clashing with the existing limited infrastructure of cities. In cities, where there already is chaos on account of inadequate infrastructure such as congested roads and land scarcity, how will the designers of new smart cities prepare ground for world-class infrastructure is a question. So is the question, how will these cities accommodate the urban poor and migrant unskilled workers.

One of the ways for investors to recover money they invest in smart cities is through charging inhabitants for better services. This can make smart cities a costlier option for a large section of urban poor and can lead to social imbalance, too.

The bottom line is this: There aren’t two thoughts on the potential of the 100-smart city plan. It is an idea that deserves attention. But, convincing investors to put money in these new cities will be a huge challenge. Much of its success will lie in the execution. And even if that happens, the government will have to find out an answer to what the new world of smart cities will mean to the urban poor.

(Data support from Kishor Kadam)

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