23 October 2019

Infratrack

The Smart Leap

 

The latest Equirus Research report takes a closer look at the doability of the 100 Smart Cities development programme, and its ability to negotiate funding and execution challenges. Is the project a Game Changer or a Big Hoax? 

 

In late August, the Indian Government announced a list of 100 cities which would become smart cities over next five years. Since taking charge last year, the Smart City Mission is one of the key projects of Modi government and it has been highlighted as an initiative which could lead to a significant improvement in the quality of life for citizens of cities which would be identified as smart cities.

 

Though there is no standard definition but as per government the objective behind the ‘Smart City’ initiative 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. For government the focus is on sustainable and inclusive development and the idea is to look at compact areas and create a replicable model. So, as per the government document on smart cities, the core elements in smart city would include: adequate water and electricity supply, sanitation including solid waste management, efficient urban mobility and public transport, affordable housing, robust IT connectivity and digitalisation etc.

 

So, if we go by the government documents, essentially there is not much to differentiate between what extra elements a smart city would have vs. what any other livable city would or should not have. More importantly, there are no objective criterion involved such percentage coverage for a certain facility etc.

 

The government also believes that the purpose of the ‘Smart Cities Mission’ is to drive economic growth and improve quality of life of people by enabling local area development and harnessing technology that leads to smart outcomes. Area based development will transform existing areas (retrofit and redevelop); including slums, into better planned ones, thereby improving liveability of the whole city. New Greenfield areas will be developed around cities in order to accommodate the expanding population in urban areas.

Admittedly the idea may not be original but it comes with a good intent and if the objectives are met even partially, it would be a big leap forward for these smart cities and for the people living in them.

 

However, the devil lies in the execution and we think there are four basic issues;

 

Too many cities designated as Smart: We would like to draw a parallel here with the SEZ initiative and its implementation eight-ten years back. Then, the government simply allowed just too many SEZs (of which most were unviable) to come up and as a result, the end result was way short of expectations. Similarly, we think that it would have been better if the focus would have been on a far smaller number and developing them as model for others going forward.

 

Meagre Fund allocation: As per the information available from government sources, the Smart City Mission will be operated as a Centrally Sponsored Scheme and the Central Government proposes to give financial support to the Mission to the extent of `480 billion over five years i.e. on an average `1 billion per city per year. An equal amount, on a matching basis, will have to be contributed by the State/ULB. If we look at the list of cities which have designated as 'Smart', many (or rather most) of them would already have annual municipal budgets running into multiple times of this figure.

 

Buy-in from State governments would be important: There have already been state governments which have shown scepticism. As per news reports, the Chief Minister of Uttar Pradesh Akhilesh Yadav said that Smart Cities’ plan is like wearing tie over kurta pyjama and Centre’s project is not bridging urban-rural divide in terms of infrastructure. If there is not enough support from state governments in terms of funding and administrative help, we think it would be difficult to this scheme to reach its logical conclusion.

 

Financial leverage and role of SPVs: It is also envisaged that government grants will be leveraged to attract funding from internal and external sources. Unless there is a viable business model or guarantee from the Central Government (considering the state of finances most state governments are in), it would not be easy. Also, the track record of Public-Private Partnership (PPP) projects is at best mixed and when there would be multiple parties involved (central and state governments, local body, private entity), the task would be even more challenging.

 

Hence, it would be difficult to assess at this stage on how much positive impact this initiative can make. But, the potential set of beneficiaries could include:

  • PPP opportunities – L&T, GMR, GVK, Reliance Infra, Adani Group
  • Urban Infra – BHEL, Crompton, IRB, Sadbhav Infra, Ashoka Buildcon
  • Information Technology – Capgemini, Wipro, HCL Tech, Infosys, Accenture, Tech Mahindra
  • Smart Grid – ABB, Siemens, PowerGrid, Telvent, Echelon, Schneider
  • Security Solutions – Zicom, Bosch India,
  • Digitisation and Internet – CISCO, IBM, HCL Infosystems, Bharti Airtel, Idea, Vodafone, Reliance Industries.

 

 

IMPACT OF INITIATIVE

 

Among other things, the effects of the success of smart city initiative could also include

 

Increased migration from villages to cities: If the government is successful in achieving its objectives with close to 100 cities, it would lead to more villages to cities migration. That could reduce the availability of farm labour and it would be very similar to the effect NREGA had. So, it would lead to higher inflation as well. It will be good for farm equipment companies and consumer staples.

 

More requirement for skilled labour: The smart cities will require more skilled/semi-skilled employees to run them and the development of smart cities would increase the demand for them. It may increase the relative prosperity gap between skilled and unskilled labour. This will be good for education and training institutions.

 

 

GOVERNMENT’S MISSION:

 

The Smart Cities Mission of the government is a bold, new initiative. It is meant to set examples that can be replicated both with and outside the smart city. The core infrastructure elements in the city would include- sufficient water supply, sufficient electricity supply, sanitation, including solid waste management, efficient urban mobility and public transport, affordable housing, robust IT connectivity and digitisation, e-Governance and citizen participation, sustainable environment etc. The Smart Cities mission is to drive economic growth and improve quality of life by enabling local area development and harnessing technology that leads to smart solutions. Applications of smart solutions will enable cities to use technology, information and data to improve infrastructure and services.

 

Coverage and Duration of Smart Cities Project: The mission will cover 100 cities and its duration will be 5 years (FY2015-16 to FY2019-20). The total number of smart cities has been distributed among states and UT's on basis of equitable criteria. The formula gives equal weightage to urban population of the state/UT and the number of statutory towns in thestate/UT. Based on this formula, each state /UT will have a certain number of smart cities with each state/UT having at least one.

 

Basic criteria for selection of a city/municipal area

  • Implementation of e-governance and online grievance redressed mechanism
  • Publication of e-newsletter
  • Putting all government expenditure online for public
  • Swachh Bharat: at least 5 per cent increase in coverage of latrines since 2011 Census
  • Track record of paying salaries to employees
  • Track record of urban reforms and citizen participation being introduced

 

The number of smart cities will be capped at a certain indicated number. The distribution of smart cities will be reviewed after two years of the implementation of the mission.

 

Essential Features of Smart City Proposal: The proposals are expected to include a large number of infrastructure services and smart solutions. The elements provided would assure electricity supply with at least 10 per cent of the smart energy requirements coming from solar, adequate water supply including waste water recycling and storm water reuse, sanitation including solid waste management, rain water harvesting, smart metering, pedestrian friendly pathways, encouragement to non-motorised transport, non-vehicle streets/zones, smart parking, energy efficient street lighting, innovative use of open spaces etc. In case of redevelopment and Greenfield models of smart cities, in addition to the essential features mentioned above, at least 80 per cent buildings should be energy sufficient and green buildings. Additionally, of the total housing provided in Greenfield development, there can be expected to have at least 15 per cent in affordable housing category.

 

Development Strategies for Smart Cities: The strategic components of area based in the Smart Cities mission are city improvement (retrofitting), city renewal (redevelopment) and city extension (greenfield development) plus a pan city initiative in which smart solutions are applied covering large parts of city. Retrofitting: This will introduce planning in an existing built up area to achieve smart city objectives to make existing area more efficient. An area more than 500 acres will be identified by the city in consultation with citizens. Since existing structures are largely to remain intact, it is slated that more intensive infrastructure service levels and a large number of smart applications will be packed into retrofitted smart city. This strategy is expected to be completed in a short time.

 

Redevelopment: This will replace the existing built up environment and enable co-creation of a new layout with enhanced infrastructure using mixed land use and increased density. Redevelopment envisages an area of more than 50 acres identified by urban local bodies in consultation with citizens. Two examples of redevelopment model are the Saifee Burhani Upliftment project in Mumbai and the redevelopment of East Kidwai Nagar in New Delhi being undertaken by National Building Construction Corporation.

 

Greenfield: This development will introduce most of the smart solutions in a previously vacant area of more than 250 acres using innovative planning, plan financing and loan implementation tools with provision for affordable housing. Greenfield developments are required around cities in order to address the needs of the expanding population. One well known example is GIFT city. Greenfield developments could be located within the limits of urban local bodies or within the limits of local urban development authority.

 

Pan City: Development envisages application of selected smart city solutions to the existing city wide infrastructure. Application of smart solutions will involve the use of technology, information and data to make infrastructure and services better. For instance, applying smart solutions in transport sector. Another example can be waste water recycling and smart metering for better water management in the city. As smart city is expected to take a compact approach, it is necessary that all the city residents feel there is something in it for them also. For North Eastern and Himalayan states, the area proposed to be developed will be one-half of what is prescribed for any of the alternate models – retrofitting, redevelopment or greenfield development.

 

FINANCING OPPORTUNITIES

 

The Smart City mission will be operated as a centrally sponsored scheme and it proposes to give financial support to the mission to the tune of `48,000 crore over 5 years i.e. an average of `100 crore per city per year. An equal amount on matching basis will be contributed by the state. A total of close to `1 lakh crore will be made available for smart cities development. Government grants from the center and state will be leveraged to attract funding from internal and external sources. The project expenses are slated to vary depending upon the level of ambition, model, capacity to execute and repay. The success of this endeavor will depend upon the robustness of SPV’s revenue model and comfort provided to lenders and investors. A number of state governments have successfully set up financial intermediaries in Tamil Nadu, Gujarat, Orissa, Punjab, Maharashtra, Karnataka, Madhya Pradesh and Bihar that can be tapped and other states may also consider a similar model in their respective states. It is expected that number of schemes in the smart city will be taken up on PPP basis.

 

The GOI funds and the matching contribution by the states are anticipated to meet only a part of the project cost. Balance funds are expected to be realised through innovative financing schemes- pooled financing scheme, tax increment financing, Tax increment financing, additional resources transferred due to acceptance of recommendations from fourteenth finance commission, other central government schemes like Swachh Bharat Mission, AMRUT, National Heritage City Development and Augmentation Yojana, Private sector through PPPs, States may also access the national investment and infrastructure fund announced by the Finance Minister in his 2015 Budget Speech which is to be setup this year and the rest from state's own resources through collection of user fees, beneficiary charges, impact fees, land monetisation, debt, loans and etc.

 

The distribution of funds under the scheme would be – 93 per cent project related funds, 5 per cent administrative and office expenses funds for state (towards preparation of pilot studies connected to area based developments and deployment and generation of smart solutions, capacity building as approved in the challenge and online services), 2 per cent administrative and office expenses for MoUD (Mission directorate and connected activities and structures, research, pilot studies, capacity building and concurrent revolution).




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