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