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Financing Smart Cities
The document discusses India's Smart City Initiative aimed at developing 100 smart cities to accommodate the projected urban population growth and boost economic contributions. It outlines the implementation framework, financial strategies, and funding mechanisms required to support this initiative, including government allocations and private partnerships. The focus is on improving urban infrastructure, sustainability, and quality of life through innovative financing and operational models.
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Financing Smart Cities
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- 2. • Need forSmart Cities • Introduction to Smart Cities • India Smart City Initiative Details • Financing Mechanisms to support implementation • Global Examples
- 3. • Cities arelikely 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. • No standarddefinition 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. • In theabsence 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. MISSION OUTLAY • SmartCities 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. *Additional investments requiredin 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. Financial Support fromGovernment 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. Central Government Allocation • Cabinetallocated 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. Borrowings from multi-lateral andbi- 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. Land Monetization • Typically, inbrownfield 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. 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. 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. Colorado & SouthCarolina (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
Editor's Notes
- #5 Globally various cities have developed to achieve various stages of “smartness” , sometimes absolute new smart cities have been planned -- Tianjin Eco City in China, Songdo in S. Korea
- #6 Institutional infrastructure: Activities that relate to governance, planning and management of cities. Physical infrastructure: The urban mobility system, the housing stock, the energy system, the water supply system, sewerage system, sanitation facilities, solid-waste management system, drainage system, etc, which are all integrated through the use of technology Social infrastructure: Components that work towards developing the human and social capital, such as education, health care and entertainment. These also include performance and creative arts, sports, open spaces, children’s parks and gardens. The concept city should promote inclusiveness and have structures that proactively bring disadvantageous sections into the mainstream of development Economic infrastructure: The city has to first identify its core competence, comparative advantages and analyse its potential for generating economic activities. Determining these gaps in required economic infrastructure will comprise building incubation centres, skill development centres, industrial parks & export-processing zones, trade centres, service centres, financial centres and services & logistics hubs.his return from a nearly two-month-long sabbatical.
- #8 The High Power Expert Committee on Investment has estimated a funding requirement of INR 7 lac crore over a period of 20 years. This translates into an annual requirement of INR 35,000 crore. This estimate covers water supply, sewerage, sanitation and transportation related infrastructure. This figure does not consider the investments that will be required in affordable housing, 24x7 electricity, integrated ICT services, education, cost-efficient health services, recreation and sports facilities, cultural facilities, public parks, botanical gardens etc. The quantum of investment will depend on whether the development is green- field or on the back of an existing city / brown field. Investment in Greenfield smart cities can be significantly higher as new cities require development of ‘smart’ urban infrastructure from the scratch. Green field projects need to address all aspects like use of non- conventional sources for power and water, green building certifications for all constructions, recycling of waste water for non- potable uses, environment- friendly mass rapid transport, zoning including mandatory open areas, etc. On the other hand, in a brown- field development, the focus is limited to leveraging technology solutions to deliver various citizen services like water supply, solid waste management, health & education services, building plan approval, etc. in a seamless and efficient manner. Large scale modifications of existing infrastructure is usually not undertaken to avoid major disruptions. In most green- field projects, bulk of the financial resources are mobilized through sale of land or built- up commercial or residential space, with user charges helping meet recurring operations & maintenance costs. In the case of existing cities, user charges constitute the primary means of servicing the investments made since the scope for new residential/commercial space development is usually limited.
- #9 Detailed in subsequent slides
- #10 Central Government Allocation- The Cabinet has allocated INR 48,000 crore for the smart city project over five years, with INR 100 crore to be given to each city per year for the next five years. Typically, each state will form a Special Purpose Vehicle to be set up for smart cities which will ensure their financing. The government will also provide incentives in the form of a CAPEX subsidy for projects via Viability Gap Funding mechanism – up to 90% reduction in project cost for cities in hilly areas and 40% reduction in project cost for cities on the plains. Of the funds allocated to each Smart Cities by the Central Government, approximately 60% will be earmarked for investment in infrastructure and 10% for e-governance initiatives. The remaining funds will be in the form of equity contribution of the government in two integrated township projects (in partnership with a private developer), that is, in one Greenfield project and one redevelopment project. The Central and state government will also provide an initial investment of INR 5,000 crore for the selected cities to prepare the City Development Plan and project reports to ensure successful implementation of the scheme. Funding support from National Investment and Infrastructure fund - A large share of funding in the smart cities project is expected to flow from the INR 20,000 crore National Investment and Infrastructure Fund (NIIF), which was announced in the 2015-16 Budget. Approximately, INR 15000 crore will be secured from the PSUs as dividends and INR 5000 crore from the center.
- #11 Borrowings from multi-lateral and bi-lateral agencies – The Government has sought support from agencies such as Asian Development Bank (ADB) for the development of smart cities. Recently, the Finance minister pitched for annual funding of at least $20 billion from ADB by 2020 for developing smart cities in India. Municipal bonds – The Government is looking to leverage the municipal bond market to raise funds for building smart cities. At least 10% of the funding requirement can be raised through this source, if it is leveraged effectively. Recently, the Securities and Exchange Board of India approved guidelines for allowing municipal bodies to raise funds through issue of bonds which can be traded on stock exchanges. The new set of guidelines would permit the municipal authorities, which have financially sound track record to raise the funds from public and institutional investors. These bonds would be known as the ' Muni bonds' and would also help retail Investors Park their money with government bodies with attractive returns. In the US, such bonds help civic bodies raise 500 billion dollar. Pooled Municipal Debt Obligation (PMDO) facility - The budgetary provision for the pooled municipal debt obligation facility, which was set up in 2006 with the participation of several banks to promote and finance infrastructure projects in urban areas on shared risk basis, has been enhanced from Rs.5,000 crore to Rs.50,000 crore. The facility has also been extended by five years till 31 March 2019. PPP models - Since the overall investment required to build smart cities (INR 7 lakh crore) is quite large for the Union and the state governments to bear on their own, it becomes inevitable to involve private sector either through the Public- Private- Partnership model or as a complete private investment. Public-private partnership are agreements between a public agency (federal, state or local) and a private-sector entity that uses the specific skills and assets of each sector for the delivery of a service for the general public. Smart city projects can be built under PPP model where in the private sector companies can be leveraged for technical support, capital funding and oversight of operations. Infrastructure debt funds – IDFs can be directed to invest in highly rated municipal bonds by defining these as eligible investments. As IDFs are required to invest in post construction assets they could be used as a means to re-finance debt taken during the construction phase as well as additional funds for financing operations.
- #12 Land monetization - Cities / states can plan for funding smart city initiatives by monetizing the available land – For new cities, a large part of the initial investments may be recovered through sale of land and/or commercial and residential real estate. Additionally, the returns on investment can be generated through land monetization by increasing FAR - floor area ratio or total floor area of a building in comparison to the size of the land upon which it is built. Land in cities is at a premium and the existing FARs does not permit development of high rises, which results in high cost of housing. A revision in these norms can be an additional source of funds. User Charges - Most Urban local bodies are not financially self-sustainable and tariff levels fixed by the ULBs for providing services often do not mirror the cost of supplying the same. Even if additional investments are recovered in a phased manner, inadequate cost recovery will lead to continued financial losses. Hence, it becomes imperative for the ULBs to impose user charges / fees for the services rendered so as to meet the funding requirement. User fees can be used 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. Typically, the public jurisdiction shoulders the costs of service/infrastructure investment and dedicates the fee stream from private users to repayment. Tap Fees - Tap fees are another option local jurisdictions use to force upfront payments to cover costs associated with growth. These utility connection fees are used to fund capital improvements and recover the cost of integrating new development into existing infrastructure. The primary use of tap fees is to cover the cost of tying water meters for new connections to existing lines. Some jurisdictions also use tap fees to cover the cost of sewer line inspections. For example, local governments in various US states like Michigan and South Carolina charge "tap fees" to cover the cost of installing water meters and sensors for monitoring water supply and quality. These fees, which are usually over and above normal water usage charges based on consumption, are usually charged on a flat- rate basis based on either the diameter of the pipeline or the built- up area of the house. Other options to raise funds for financing smart cities could be - Green tax on fuel purchase, urban tax on purchase of new vehicles and betterment charges payable on sale / registration of property