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Financing Smart Cities


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Need for Smart Cities, Introduction to Smart Cities, India Smart City Initiative Details, Financing Mechanisms to support implementation & Global Examples

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Financing Smart Cities

  1. 1. J.P. Gadia, Resurgent India
  2. 2. • Need for Smart Cities • Introduction to Smart Cities • India Smart City Initiative Details • Financing Mechanisms to support implementation • Global Examples
  3. 3. • Cities are likely to inhabit 40% of India’s population by 2030, and contribute nearly 75% of the national GDP in the next 15 years • The global experience is that a country’s urbanization beyond 30% happens at a much faster pace till it reaches about 60-65%. • India is, thus at a point of transition and the current trajectory is likely to result in urban decay and gridlock • Thus, planning for urban cities become critical to magnify the development potential and arrest underlying stress • With this vision, the Government of India, led by Prime Minister Narendra Modi, has set up the task on development of 100 Smart Cities in the country 37.7 42 47 52 63 75 Urban share of India GDP % 220 290 377 600 1991 2001 2011 2030 Rapid Urbanisation +223 Urban Population Mn Urbanisation Rate 26 28 31 41
  4. 4. • No standard definition for this vision. • Various definitions have been put forth for Smart Cities, over time: Characterized and defined by a number of factors including sustainability, economic development and a high quality of life. – European Commission That monitors and integrates conditions of its critical infrastructures , better optimize its resources, plan its maintenance activities, and monitor security aspects while maximizing services - The U.S. Office of Scientific and Technical Information • From an implementation perspective, a Smart City should leverage the existing traditional and complement the modern to enable a better standard of living, sustainable development and better management of resources .
  5. 5. • In the absence of a standard definition, an integrated framework with 3 key enablers established under the guidance of Ministry of Urban Development • The framework facilitates implementation and is helpful to both existing and new cities – Existing cities can aspire to create new features towards smartness – New cities be aided in their planning & operations by creating dimensions and metrics around the enablers • The delivery of the enablers rests on the existing and created infrastructure under following pillars : – Physical , Institutional , Social, Economic Integrated Framework
  6. 6. MISSION OUTLAY • Smart Cities Mission on an outlay of INR 48,000 crore over 5 years SELECTION OF CITIES • Aspirant will be selected through a ‘City Challenge’ competition • It is intended to link financing with the ability of the cities to perform to achieve the mission objectives. • All states to have at least one Smart City OPERATIONAL AND FINANCIAL SUPPORT • Selected cities will receive Rs 100 crores over 5 years each year • Each state will form a SPV for financing smart cities • Smart City Council India formed to promote development • Focus on core infrastructure services like adequate and clean water, sanitation ,solid waste management, efficient urban mobility, affordable housing, power supply etc. • AMRUT, in parallel will be implemented in 500 locations with a population of one lakh and above Timeline
  7. 7. *Additional investments required in Affordable housing, 24x7 electricity, ICT services, education, cost-efficient health services, recreation & sports facilities, etc. have not been estimated / considered by the MoUD in the above fig. Source: Ministry of Urban Development, McKinsey, Resurgent Analysis Funding Requirement* Green Field  Significant funding requirement as development done from scratch  All aspects of development such as power, water, solid waste mgt. need to be addressed  Typically, funds raised through sale of land / commercial / residential space  Relatively lower funding requirement as large scale modifications avoided  Focus on leveraging technology solutions to deliver citizen services – water supply, solid waste mgt, etc.  Typically, user charges are levied to meet the operations & maintenance costs Funding Criteria Brown Field **INR 7 lac crore will be required over the next 20 yrs. ; Annual investment of INR 35k crore required 85 60 205 350 700 Water Sewerage & Sanitation City Roads Mass Transit Total Funding Requirement Fig in chart in INR (‘000 Crores)
  8. 8. Financial Support from Government  Center allocation  Viability Gap Funding  National Investment and Infrastructure fund  Sale of land and/or commercial and residential real estate  Increasing FAR (Floor area ratio or total floor area of a building) Land Monetization  Borrowings from multi-lateral and bi-lateral agencies  Municipal bonds  PMDO facility  Flexible PPP models  Infra. Debt funds Debt and PPP  Tap fees  Charges on sale / registration of property  Green tax on fuel purchase  Urban tax on purchase of new vehicles User Charges / Fees / Taxes Funding Strategy
  9. 9. Central Government Allocation • Cabinet allocated INR 48K crore for the smart city project ; Each smart city to be funded INR 100 crores per year for the five years • Initial investment of INR 5k crore for the selected cities to prepare City Development plan • Allocation of funds provided by center - 60% in infrastructure, 10% for e- governance initiatives and rest will be equity contribution for building townships along with Pvt. developers • Each state will form a Special Purpose Vehicle for smart city financing. Viability Gap Funding • VGF up to 90% reduction in project cost for cities in hilly areas and 40% reduction in project cost for cities on the plains National Investment and Infrastructure fund • Funding for smart cities to be supported by the INR 20K NIIF fund • NIIF funds will be secured from PSU dividends and Central govt.
  10. 10. Borrowings from multi-lateral and bi- lateral agencies • Borrowing can be secured from multilateral agencies such as ADB for financing smart city projects. • Recently, the Govt. has sought support from ADB for annual funding of at least $20 billion in smart city projects Municipal bonds • ~10% of the funding requirement can be raised through municipal Bonds; Civic bodies in US have raised USD 500 billion through them • Recently, SEBI approved guidelines for allowing municipal bodies to raise funds through issue of municipal bonds PMDO facility • This provision, which was initially set up in 2006 can be leveraged for funding smart city projects • Recently, the corpus under the facility has been enhanced from INR 5K Cr. to INR 50K Cr. Flexible PPP models • Funding from the private sector is necessary to meet the overall funding requirement • PPP models where in the private sector companies are leveraged for technical support, capital funding and oversight of operations Infra. Debt funds • IDFs can be directed to invest in municipal bonds by defining these as eligible investments • IDFs can also re-finance debt taken during the construction phase as well as additional funds for financing operations
  11. 11. Land Monetization • Typically, in brownfield projects, the funds can be through the sale of sale of land and/or commercial and residential real estate • Funds can also be raised by increasing the floor area ratio, that is, total floor area of a building in comparison to the size of the land upon which it is built User Charges • User fees allow cities to impose fees to cover the cost associated with funding supporting infrastructure • Under this system, the public jurisdiction shoulders the costs of service/infrastructure investment and dedicates the fee stream from private users to repayment Tap Fees • Tap fees can be levied to cover the cost of tying water meters for new connections to existing lines • Several States in US such as Michigan and Colorado charge fees for installing water meters, which are usually over and above normal water usage charges based on consumption Other taxes These can also leveraged to finance smart city initiatives. However, they need to explored further to understand their potential benefit /impact - • Green tax on fuel purchase • Urban tax on purchase of new vehicles • Betterment charges payable on sale / registration of property
  12. 12. California (USA) Financing Instrument Municipal Bonds Intended Benefit  In 2006, the state of California estimated, that it will grow by 30% over the next 20 years, putting a $500 bn strain on infrastructure, specially transport Financing Strategy  A two phased 20 year investment plan was proposed, the first phase involved issuance of Municipal bonds Use & Impact  To meet the funding requirement, state voters passed a $37.3 billion bond package, the largest ever offered on a single ballot  The transportation sector received $19.9 billion of the allocation. These funds went to congestion reduction, highway and local road improvements, transit, air quality, safety and security
  13. 13. Toronto (Canada) Financing Instrument User Fees Intended Benefit  User fees can be leveraged to secure financing to fund part of smart city initiatives  User fees allow cities to impose fees to cover the cost associated with funding services and enhancements to increase the quality of life and cover administrative and regulatory processes Use & Impact  In 2009, in order to address the $500 Mn deficit, municipalities in Toronto introduced levy of user fee on a set of city services, such as $50 for recreation programs, additional 50 cents for paying parking online, new property tax accounts @ 50, etc.  User fees collected by the municipalities were used to make enhancements to the city infrastructure
  14. 14. Colorado & South Carolina (USA) Financing Instrument Tap Fees Intended Benefit  The primary use of tap fees is to cover the cost of tying water meters for new connections to existing lines  It involves an upfront payment to cover costs associated with growth Use & Impact  In South Carolina, the Charleston Water System charges a $500 tap fee for a ¾” water line tap and and $200 for a sewer line tap of six inches or smaller  Colorado uses a combination in which all residential units pay a tap fee of $4,000 for a 3,000 square foot home and an additional $2 per square foot is tacked on after that.  These charges are used to fund capital improvements and recover the cost of integrating new development into existing infrastructure