The announcement of the list of 20 cities nominated in the first phase of the Smart Cities Mission has generated a lot of excitements among the people belonging to selected cities, while leaving many others disappointed.
First off, the short-listed cities are not already “smart”. But they will be labelled smart once they are able to fulfil the criteria mandated under the scheme. In other words, the cities will be a sort of laboratories where the pilot projects will be carried out in a small scale to see how far it be implemented across the cities in the long run.
However, a critical analysis of the project raises many questions that are rather hard to answer. In other words, it will be difficult to say, at this point, whether the Smart Cities Mission can see through the challenges inherent to projects of such gigantic proportions.
But first, let’s get to know a little about the smart city concept.
Where did the idea come from?
The concept of smart cities originated at the time when the entire world was facing one of the worst economic crises. In 2008, IBM began work on a ‘smarter cities’ concept as part of its Smarter Planet initiative. By the beginning of 2009, the concept had captivated the imagination of various nations across the globe.
Countries like South Korea, UAE and China began to invest heavily into their research and formation. Today, a number of excellent precedents exist that India can emulate, such as those in Vienna, Aarhus, Amsterdam, Cairo, Lyon, Málaga, Malta, the Songdo International Business District near Seoul, Verona etc.
According to Union Urban Development Ministry, in the approach of the Smart Cities Mission, 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.
Smart Cities Mission: How Does it Work?
From a layman perspective, the implementation of smart solutions can be a long-drawn process. In other words, it can take a decade or so before the cities can actually offer smart solutions to their citizens.
Those who are not familiar with the urban development dynamics or parlance, may find it rather difficult to comprehend the process of implementation of schemes under the Smart Cities Mission.
Let’s see what the entire process consists of.
SPVs = Special Power Vehicles: The formation of SPVs will be the first step to implementing smart city experiments. A special purpose vehicle (SPV), as the name suggests, is formed for a special purpose. Therefore, its powers are limited to what might be required to attain that purpose and its life is destined to end when the purpose is attained.
In simple terms, it’s like a temporary company formed to achieve a specific mission past which it is dissolved.
So, basically the formation of SPVs will be necessary to run the Smart Cities experiments in each city selected in the first phase of the mission.
Who will Head the SPVs?
According to the smart cities guidelines, the SPV will have equal equity participation from the state and urban local body. It will be headed by a chief executive officer (CEO), who will have absolute executive powers to run the scheme.
Moreover, the Centre’s guidelines propose the CEO be appointed by the Centre; also, a CEO’s dismissal is only possible with the central government’s prior approval. Some experts say this condition might be modified.
The SPV will also have central government representatives on its board, along with those from the state and urban local bodies.
The Centre has recommended the CEO be delegated powers under the municipal and relevant state laws. It also suggests urban development boards, local self-governments and other state departments delegate relevant approval and decision-making powers to the SPV. This could lead to a turf war.
So what are the potential problems?
While the Centre recommends these powers be handed to the SPV, experts indicate it is unlikely that such powers will be transferred in entirety. State authorities, where favourable, might amend regulations for the pilot projects, while retaining the powers.
Private sector participation in SPVs
The Centre encourages the SPVs to form further joint venture companies, create subsidiary companies and sign public-private partnership (PPP) agreements is required. Private participation in an SPV is allowed, as long as the state and the urban local body maintain majority and equal stake in the company.
However, the Union government guidelines in public domain are silent on whether the subsidiaries created by the SPV must necessarily be controlled by the state government and the urban local body.
Experts believe the SPV could spawn many holding companies, each with private participation to deliver a component of smart city development, as it would be difficult to have all stakeholders for all components taking part in a single SPV.
While the Centre has proposed to leave it to SPVs and state authorities to decide what model best fits their bill, experts believe it requires innovation and that matters of power delegation should be settled well before the private sector is brought on board.
What It Takes for Selected Cities to be Labelled ‘Smart’
The Union government has specified what a city needs to achieve to be labelled ‘smart’.
It has set SPVs at least two targets in this regard.
- First, redevelop at least 50 acres or retrofit 500 acres or build a green-field project over 250 acres. For any of these, the SPV will have to provide an entire bouquet of smart services, such as electronic delivery of services, intelligent handling of municipal solid and waste water, smart parking and energy-efficient buildings. Achieving this would take 3-10 years, depending on which of the three options a city chose, former urban development secretary Shankar Aggarwal had said in a presentation in Washington in January this year.
- The second criterion requires any of the smart services from the entire bouquet being implemented across such a city, such as an intelligent traffic management system or smart metering.
The strategy document of the smart city programme reads:
Since the smart city is taking a compact-area approach, it is necessary that all residents feel there is something in it for them. Therefore, the additional requirement of some (at least one) citywide smart solution has been put in the scheme to make it inclusive.
Jagan Shah, director of the National Institute of Urban Affairs, which is working with the ministry on the programme, says,
These are demonstration projects through which urban local bodies’ capacity to execute will be shown. This could later be replicated and scaled up to the city level.
Hence, a city will have to provide only one pan-city service that could be labelled ‘smart’. While a city could do more if it chooses to, the funds from the Centre are capped.
The Challenges for Prospective Private Partners
Private investors will essentially seek adequate returns on investment and identified streams of revenue. Mckinsey and Company, a consultant empanelled for developing city-specific plans, says in its presentation that there are four sources of funding available for financing smart cities:
- Land monetisation
- Increased property tax and user charges
- Debt and PPP
- Government support
According to their estimates, 46% of the overall capital required will have to be generated from selling land and real estate in the areas under development.
While debt and PPP provide 20% of the capital expenditure, government grants account for the remaining 34%.
As per experts, monetisation of land will play a key role. Instruments such as tax increment financing are also important. The need to monetise land arises because essentially, a smart city will provide several public services that might not generate adequate profits but are likely to have high costs involved.
However, some experts say projects based on land monetisation could face challenges, given the slump in the property market. They believe user charges and other sources of revenue to be generated by the urban body will have to be considered as keenly. Mckinsey’s report notes these could be utilised in meeting operating costs.
Fund Generation is a Colossal Challenge
For the programme, the Centre has committed Rs 48,000 crore through five years and states are expected to match this, ensuring a total corpus of Rs 96,000 crore for these pilots in 100 cities.
However, A US-India Business Council report on smart cities in India says to redevelop cities as ‘smart’, investment of at least $10 billion is required. For 100 cities, it works out to $1 trillion. The participation of private investors is essential and is encouraged at all stages by the government’s guidelines.
Developing smart pilot colonies, too, will require more money than currently being offered by the government.
How long will it take for the selected cities to offer smart solutions/services to their citizens?
It depends on whether the pilot projects are successfully implemented in the selected cities.
According to some experts, the smart city program will be able to set up only 100 pilot projects in the first five years. In other words, unlike many believe, no smart cities will be created within the first five years. At best, we will see some smart colonies across the country.
Will smart cities project be successful?
It depends on the following three factors:
Power delegation: Whether the state governments and urban local bodies are able to delegate their powers for smooth functioning of special purpose vehicles.
Private Sector Accommodation: How private participants are accommodated in the SPV mechanism. This will require a great deal of balance in power delegation among the Centre, states and urban local bodies.
Revenue Generation: This is extremely crucial to the Smart Cities project. The SPVs and private participants must generate revenues from the real estates developed in the smart colonies. Considering the massive expenditures involved in the making of smart colonies, the Centre’s contribution is not enough. Therefore, the SPVs must generate alternative source of revenues to make this scheme successful.
Courtesy: Business Standard and Hindu
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