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Mr. NSN Murty, Director and Leader, PWC

03 Jul 2016

‘Attractive PPP model not enough to ensure private participation in Smart Cities’ The NDA government has envisaged building 100 Smart Cities over next five years. It has approved outlay of Rs 48,000 crore for funding these projects. These projects are to be developed through PPP model and there are also plans to mobilise funds through municipal bonds. However, given the estimated fund requirement of over 150 billion dollar, mobilising adequate financing could still be a tremendous challenge for selected cities. Anyway, private sector participation cannot be taken for granted. NSN Murty, Director and Leader, Smart Cities, PwC, tells Infraline Plus what needs to be done to attract private participation and how adequate funding can be mobilised for these projects.

Can India mobilise adequate funds through public-private partnership and municipal bonds to finance smart city projects?

The funds available through Central and State Government Grants and Schemes are limited and hence there was a strong emphasis on improving the internal fiscal efficiency of the city (by improvements in property tax collection and levy of cess/fee for services offered) and creation of an enabling environment (public procurement reforms) for private sector participation. Both these provide positive sentiment to the private sector and help in quality participation. Cities like Pune, Bhubaneswar, Bhopal and Indore have designed projects that are financeable and attractive for private sector participation. Whereas cities like Ahmedabad and Chennai are also looking at raising capital through municipal bonds for investment in the city projects.

What are the other options that can be tapped to raise funds? Can stock markets be tapped for raising money to finance smart city projects?

Cities participating in the Smart Cities Mission have evaluated several financing options such as Convergence Funding from AMRUT, SBM, IPDS, FAME, Smart City Fund, State Schemes, Value Capture Financing, savings through energy efficiency and property tax collection improvements, levies and green cess and creation of financially viable public-private partnership (PPP) based projects. There is a focus on creating an enabling environment to attract the private sector investment in the city but it is not the only mode of financing. Under the smart cities mission, Cities are supposed to form Development Corporations and ,at a later date, to have the flexibility to dilute the government equity up to 49%. But as of now, most of the cities have envisaged a 100% government owned entities.

Only a handful of municipalities in India are credit-rated. Given that, how realistic is the municipal bond option for financing smart city projects?

Ministry of Urban Development has already made it mandatory for all the cities to go for credit-rating and they need to work on the fiscal situation to improve this rating. Some cities have a very strong credit rating. For example, Ahmedabad has AA from CARE Rating and the corporation has envisaged that a part of the Rs 439 crore required for projects will be raised through Municipal Bonds. Bhubaneswar has also identified municipal bond as source of finance post credit risk assessment. So cities have a strong intent to look at municipal bonds market and have realised the importance of good credit rating. The work has already started to address this requirement.

Do you think the existing PPP model is attractive enough for investors or more needs to be done?

An attractive PPP model is not enough for the private sector, there is also a need to address several open-ended challenges such as well-documented role, scope, rights and assets library that will be monetised and serviced, payment model based upon Escrow Account, assurance of fulfilment of City/State obligation towards the project in terms of asset or rights allocation and/ or linking of fund/ revenues and keeping the project clear of any political risks. A proper and time-bound implementation of these recommendations will make the projects and city attractive for private sector participation and investment.

Given that private investors’ experience of PPP model in India has not been very encouraging, how realistic is this option for funding smart city projects?

Smart Cities Mission focus is on providing a conducive environment for private sector participation in the government projects. With the strong commitment from Central Government and positive intent of the cities, private sector is looking forward to participation in these projects but with a caveat that they look forward to translation of these Smart City Proposal reforms commitment into action during implementation phase.

How is the scope for attracting Foreign Direct Investment into smart city projects?

Several countries and international firms have shown keen interest in India Smart Cities Mission. USA has adopted the cities Visakhapatnam, Ajmer and Allahabad, UK is focused upon Amravati, Indore and Pune. Similarly, France is going to support the transformation of Chandigarh, Nagpur and Pudducherry and Germany is going to provide support to Kochi, Bhubaneswar and Coimbatore. Specifically, the selected cities will gain from the experience of the European economies in the following domains: affordable housing, solid waste management, security, education, healthcare, traffic management and parking. This would also mean support to these cities in making processes simple yet robust to ensure hassle free investment by firms from respective countries. So in the coming days, we will see lot of international firms engaging directly with the cities to participate in their Smart City Projects.