Innovation In Financing Needed To Fund Smart Cities

Innovation in financing needs to be the utmost priority of the government for the achievement of the ambitious Smart Cities project in India. Hitting all the right notes, experts from various domains pitched for different finance models across the country, bringing in global best practices and incorporating more innovation in terms of financing these projects.

Focussing on the complexities of financing the smart cities project, Vivek Aggarwal, secretary to the Madhya Pradesh government, stated how his state has initiated projects worth Rs 86,000 crore and raised finances from various sides, including PPP deals, multilateral bilateral agencies like the World Bank, cross-subsidy model, KFW, and policy support initiatives which could be monetised.

"We have a great success story of PPP in highway sector and we are now extending that story in the urban sector", Aggarwal said, speaking at the BW Smart Cities Conclave in New Delhi on Wednesday.

Nicolas Fornage, regional director for South Asia of the French development Agency, strongly advocated exchange of expertise and experience and cited success stories in Kochi.

"State government can play a very important role in development and cooperation between various cities in an integrated manner, which addresses both intercity and intra city under one umbrella", he said.

Why does India need innovation in financing these projects? The logic is simple: out of 60 smart cities, less than 50 per cent of the financing is tied up from the state sources and the rest still need to be addressed. On top of that, most of these projects are non profitable and have long gestation period.

Garima Kothari, senior VP (Urban Infrastructure-Banking Group), Yes Bank, defines an important role of banks in this process. "Yes Bank has set up a separate desk for smart cities which works throughout the life cycle of the project, right from conceptualising to advisory, operations and sustainability and helping them leverage their finances," Kothari said.

Sharing stories of successful smart cities project under PPP, Aggarwal said how his state came up with an experiment model called Smart City Space, whose main component included Smart poles with embedded services like smart lights.

The investment estimate was projected to be Rs 600 crore. When clearly evaluated by the government, it was decided to enter into a PPP monetised model, with 3 sources of revenue- digital advertising, energy saving, and leasing out telecom connectivity.

"The balance when estimated was more than the capital expenditure made, so we decided to give tenders, which included bidding fee and viability gap funding as well," he said.

The panel concluded how it is more benefiting to enter into a PPP model than borrowings given the gestation period, with projects including user charge and normal tax mechanism which could be used to repay the amount over a longer term. Second, the projects including shorter gestation period with a possible return on capital, the money could be raised from the local market including municipal bonds. "It could be taxing to pay through the municipal bonds, through the revenue growth. Indore had to face similar problems for building roads", says Vivek.

"Municipal bonds still today contribute a small fraction. Investors' appetite is yet to come in this mode of financing", said Kothari.

Inserting the 'Liveability' quotient in the smart cities, Pawan Maini, managing director of Ramboll, said how the acceptability of the fees and the taxes levied on the user's changes.

"Users today are willing to pay more only if the level of services they are getting is acceptable," Maini said.