OPINION | How can Modi's Government fund Indian Smart Cities by K. Yatish Rajawat
IndraStra Global

OPINION | How can Modi's Government fund Indian Smart Cities by K. Yatish Rajawat

By K. Yatish Rajawat
Prime minister Narendra Modi's poll promise to set up 100 smart cities across the country is still on the drawing board, though the ministry of urban development is expected to give the final touches and announce a plan this month.
Informed sources suggest there are some issues the ministry is still struggling with, one of them being a bureaucracy that has still not got its arms around the grandiose scheme.
Two more interesting details have trickled out about the plan: for one, most of the smart cities will be brownfield development. In other words, they are not going to be new ones but rejuvenation of existing cities. And secondly, there are plans to rejuvenate infrastructure in 500 cities.
The name for the mission is another one that is still being worked out. It is likely to be one from the pantheon of thinkers that the RSS and core think tank of the BJP want to propagate, sources say.
Names aside, the crucial question is the funding urban rejuvenation with the ministry of finance not allocating funds for the project. As it is going to be a multi-year mission, the allocation has to be done annually.
While the corporate lobby is looking for a public-private partnership (PPP) model that could help it get a play, the government should tread this path carefully. PPP should not be the only option.
One way out could be for the ministry to create an institutional mechanism for funding urban infrastructure. A development financial institution -- something like an urban infrastructure investment corporation -- capable of raising funds from international markets, including sovereign funds, pension funds and even wealthy family offices, needs to be created with initial funding from the Indian government and the New Development Bank set up by the BRIC nations.
Cities are not yet capable of raising funds via bonds on their own as there is nobody to guarantee counter-party risk. An urban infrastructure investment corporation assumes significance in this context as it can help cities to raise long-term funding from investors like pension funds and sovereign wealth funds.
The corporation should be an independent institution with a professional CEO capable of selling the opportunity of funding India’s urban infrastructure opportunity. It can even assume the counter-party risk of the PPP.
Problem with depending on the PPP model to fund investment in urban infrastructure is manifold. First, the PPP modal faces opposition not only from political parties but even from people. Once companies are shareholders in the project what they are more concerned about is not the quality of services but their own profits. Secondly, city-based projects given out in the PPP mode face natural opposition as charges on citizens go up.
The reason for this is that the Indian polity is yet to understand the principle of advocating higher charges for better services without attracting the ire of voters. Political parties like the Aam Aadmi Party and others are only waiting to leverage on such issues though the strategy is not always in the long-term interest of development.
The AAP has promised free water and free power in Delhi and has posited itself against corporates providing these services. This strategy endears the AAP to the common man, and this is likely to become the norm. Therefore, shareholding and ownership of urban projects where citizens will be directly affected will face a lot of political opposition in the coming times.
Moreover, it is a myth that public services are better developed by the private sector. Several research and experience in other countries have shown that private sector companies may execute a project quickly if they get financial incentives but they may not be the best entities for delivering services. Government public services organisations may not have the spit and polish of the private sector but they invest and are more dedicated.
Oxfam International in a paper last year had pointed out that while the private sector is important it cannot be the primary driver of development of infrastructure. While Oxfam can be anti-corporate in its stance there is more than a grain of truth in it. The failure and cancellation of some of the toll roads in the country can be a case in point.
It is to be noted that some of these roads built under the PPP model, particularly those in cities, have not fared well. That is why they are being cancelled by state governments.
Another issue with the model is the conflict interest in the role of the government, which is the policy maker, regulator, operator and even arbitrator all rolled into one. What makes matters worse is the private sector riding rough shod over users, by raising toll charges at will, not making any incremental investments after the initial ones and ignoring a large section of the population who are unable to pay the toll.
When it comes to urban services other than toll roads, there is another problem. People, who are not willing to pay toll, can avoid a road by taking an alternative route. But urban services like water or electricity are not so. These are natural monopolies. And monopolies are not healthy whether they are in the public or private space.
True, the private sector can build infrastructure better than the public sector; but for public services that cover various income segments, they are not always capable. In the case of urban infrastructure services like water or sewerage disposal, different income segments are to be covered. All should also be offered the same quality of service.
The learning from toll PPPs is that the private sector cannot handle local conflicts like nearby villagers demanding free access. This kind of problem then builds up on itself and gets political support.
On the whole, PPP is not a solution for all urban services. The model should be used only sparsely and wisely.
This article first appeared in FirstPost on April 21, 2015