May 2015 Financing Smart Cities J.P. Gadia, Resurgent India
May 2015
Financing Smart Cities
J.P. Gadia, Resurgent India
Agenda
• Need for Smart Cities
• Introduction to Smart Cities
• India Smart City Initiative Details
• Financing Mechanisms to support implementation
• Global Examples
Need for Smart Cities : The Indian Context
• 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
1970-71 1980-81 1993-94 1999-2000
2009-10 2030-31
37.7 42 47 5263
75
Urban share of India GDP %
1991 2001 2011 2030
220290
377
600
Rapid Urbanisation
+223Urban Population Mn
Urbanisation Rate
26 28 31 41
Introduction to Smart City
• 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, economicdevelopment 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 .
An integrated framework to enable ‘Smart City’
• 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
India Smart City Mission Details
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
It is estimated that INR 7 lac crore will be required to build smart cities for the next 20 years
*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
8560
205
350
700
Fig in chart in INR (‘000 Crores)
Strategy for funding smart cities
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
Financial Support from Government
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.
Debt and PPP
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
Land Monetization & User Charges
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
Global Examples of Financing Solutions (1/3)
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
Global Examples of Financing Solutions (2/3)
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
Global Examples of Financing Solutions (3/3)
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