Private sector funding, not the budget- is the key to smart cities

India has drawn up grand plans and preparations are underway to launch 100 Smart Cities.  There is a wide range of expectations from the Union Budget for Smart Cities funding. But, the key element of funding, is yet to be addressed. With the Government funding just about 20 percent ($30 bln.) of the overall funds required for Smart cities, it is imperative to get the private sector engaged early on to fund the remaining 80 percent ($120 bln.). However, this is easier said than done. The article below is based on the situation in India, but a lot of the statements are relevant for cities worldwide.

So, what will it take to get the Private Sector engaged and secure the Smart Cities Program?

1.  Building Investor Confidence

Infrastructure projects not only have long gestation periods but also the cost recovery period and subsequent operations could span 10 to 20 years or longer. In the case of Smart Cities, investment and technology have not only to come predominantly from the Indian Private Sector, but also a substantial part has to come from international companies as well.

Consider an international investor’s apprehension in the backdrop of the recent agitation in the state of Haryana.

This agitation has sent shock waves in the business world. The estimated losses on account of the so called “Rage Over Reservation’ are to the tune of Rs. 34000 crores (USD 4.9 billion). Please see the link to a news item below.

Estimated Loss From The Recent Agitation In Haryana 

Destruction of public property during the recent agitation in Haryana

If the Government is powerless to stop such agitations, how do you expect private sector to invest huge funds in smart cities and risk their investment? Keep in mind- the first thing to take a hit in any agitation in India, is infrastructure.

The Government needs to find ways to restore investor confidence in India. So having a government that not only talks, but also walks its talk, would be critical to private sector funding of smart cities.

2.  Setting Up Governance And Institutional Mechanism

A lion’s share of investment in Smart Cities (an estimated $120 bln.) has to be brought in by the private sector. For this to happen they have to first have confidence in not only the Government’s Smart City plan but also its capability to deliver on the plan.

The private sector needs to have a clear view of the institutional model that the government plans to create, to set up and manage the smart cities. This would include the mechanism for providing project related clearances, a command and control center to bring together diverse government stakeholders for unified decision making and timely deployment of government funding.

In addition, the mode of investment should allow for private sector control over its investment and a say in the management of its investment. This could come about via mechanisms such as Special Purpose Vehicles.

3. Bring In Total Transparency In Decision-Making

Between now and the setting up of Smart Cities, several decisions that have a bearing on private investment, would be taken by the government. Having total transparency in these decisions would be the key to building up investor confidence.

Traditionally Indian bureaucracy has had a hands-off approach with the private sector whereby government functionaries have kept private sector players at an arms length. If you expect the private sector to bring in 80 percent of the investment, then you have to allow them to be a part of your decision making process as well.

International investors need a level playing field. If the selection of key players for smart city project is done on the basis of the traditional ‘Least Cost Basis it will not allow for quality to be considered and smart city contracts could go to players who have no understanding of what a Smart City is.

4.  Municipalities Will Need To Explore Innovative Means Of Financing

The Stockholm municipality above has adopted innovative funding mechanisms

A lot of work in Smart Cities will happen at the Municipality or the Urban Local Body level. Considering this, municipalities will need to explore raising funds themselves rather than depending on private sector investment or Central Government funding alone.

One way of doing this will be to explore mechanisms such as Municipal Bonds. These are debt vehicles issued by state and local governments to finance their operations and fund municipal projects.

5.  So, What Has Happened In This Space, In India?

The City of Ahmedabad

While some municipal authorities in the country have issued such bonds, the total funds raised through Municipal Bonds were about Rs 1,350 crore ($0.2 billion) as of last year. The Bangalore Municipal Corporation was the first municipal corporation to issue a Municipal Bond of Rs 125 crore ($18.1 mil) with a state guarantee in 1997.

However, access to capital market commenced in January 1998, when the Ahmedabad Municipal Corporation issued the first municipal bonds in the country (without state government guarantee) for financing infrastructure projects in the city. It raised Rs 100 crore ($14.5 mil) through its public issue.

Among others, Hyderabad, Nashik, Visakhapatnam, Chennai and Nagpur municipal authorities have issued such bonds.

But, is this enough?  The answer is ‘No’.

6.  Early Engagement With The Private Sector

Indian Government has traditionally worked with the private sector on city projects leveraging conventional procurement methods. This approach could prove to be inadequate for Smart City projects, as generally interaction with the vendors creating the Smart City architectures must begin earlier in a project lifecycle.

7.  Explore Cloud Based City Services

New business models are changing traditional funding mechanisms by procuring Smart City ‘Solutions as a Service’ (SaaS). Private sector companies are creating cloud offerings to enable Smart City solutions for areas such as traffic management, lighting, and healthcare. These offerings are attractive for policymakers as they reduce or even eliminate dependency and risk associated with pure capital expenditure deals.

8.  Adopt Outcome Based Procurement

Traditionally, government procurement has been input based and contracting, price based. It’s only very recently that procurements for contracts to build, update and manage physical infrastructures such as roads and pavements have been based on outcomes such as minimizing congestion or increasing the overall quality of performance throughout the lifetime of the asset within the contract value, rather than on procuring inputs.

Smart cities will need significant output based procurement contracts to ensure that what is planned, is actually delivered.

9.  The Road Ahead

Whilst the Government is working with its internal stakeholders to expedite the Smart City Program and get down to implementation, the fact remains- private sector engagement and private sector funding, will be the key to success.  It is imperative that the Government partner early with the private sector to make this program a success.

*) Featured image: Jean-Pierre Dalbéra (cc)

About the Author: Srinivasan is an independent consultant working in the area of strategy and technology interventions in the public sector domain. He has worked in companies like IBM and TCS and has over 30 years of experience spanning 24 countries.



Leave a Reply

Your email address will not be published. Required fields are marked *