Understanding The Challenge: How Is The Smart City Project Going To Be Funded

If you have been following the news, you probably know that the Indian government has recently announced the names of 98 cities that would be part of the Smart City project. Over the course of this project, the government would develop these cities into smart cities with the use of information technology and next-generation urban planning methods.

The Smart City project is one of the most ambitious infrastructure projects any modern Indian government has ever undertaken. An approximate budget of over INR 98000 crore is required to fund the project over the next five years.

Considering the fact that all the major construction companies in India well-equipped to pull off this project seem to have incurred debt, how is this project going to be a reality?

Here are a few ways through which the government is looking to fund this ambitious project.

Government Funds The Project?

As mentioned earlier, private mega-project building companies have their own constraints as they are rarely able to raise the capital necessary to handle a project of this magnitude. The government, having understood the limitations of private companies, has pledged to mobilise funds of up to INR 48,000 crore over the five-year period through centrally-sponsored schemes. This means that the government can facilitate the revolutionary Smart City project by offering INR 100 crore per city every year.

The remaining funding of the smart city project can be borne by respective state governments and local civic bodies to meet the INR 1 lakh crore requirement. To serve this end, the government has come up with an SPV (Special Purpose Vehicle) plan wherein the state, urban local bodies, and private players can contribute as equity partners.

What About The Banks?

Banks are an option but a highly unlikely one because the infrastructure sector has racked up too much debt over the last few years. The debt stands at INR 10, 07,400 crore as of March 2015 when compared to only INR 9500 in March 2001 with Compound Annual Growth Rate (CAGR) of 39.5%. Also, the fact that there simply have been too many non-performing (properties which don’t generate the desired revenues) and stressed assets (properties which have too much interest hanging on them) makes borrowing money from banks a huge gamble.

Can’t External Lending Institutes Like World Bank And ADB Help?

Several international lenders like World Bank and Asian Development Bank (ADB) have been lending money for several infrastructure projects in India. For instance, the World Bank, including the International Financing Corporation (IFC), have been funding projects with up to $25 billion. From the ADB, India has borrowed a sum of about $27 billion to fund various development projects. Other sources like the newly formed BRICS bank and the Asian Infrastructure Investment Bank (AIIB) are also expected to help with the financing. But the requirement is so huge even these modes of funding might fall short. This means the government needs a truly “smart plan” to fund the smart cities.

Urban Local Bodies Have a Significant Role

Given the enormity of the project, the Urban Local Bodies (ULB) need to wake up from their usual slumber and be more proactive. Compared to their counterparts in the USA where ULBs fund up to 10% of the infrastructure projects, the Indian bodies pale in number as they make up for only 1% of the overall funding of the project. So, when the time comes, the ULB can make use of municipal bonds to finance the project.

These are the few way that can facilitate the completion of the smart city project. The government needs to come up with smart avenues to fund the project. In case, you are interested in learning more about the developments in the smart city project, visit commonfloor.com for a wide range of information on the topic.

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