The central government's Smart Cities Mission is an
ambitious project, which envisages various city-level projects, in
areas such as low-cost housing, renewable energy and public
transit. The sheer magnitude and size of the project brings to mind
implementation and finance.
The first phase of the mission has been rolled out, with the
central government disbursing the first tranche of `1.94 billion
(US$29 million) to many selected cities. However, the present
financial assistance from the central government, state governments
and urban local bodies (ULBs) will aggregate to only a fraction of
the total estimated cost.
To bridge this gap, the mission contemplates financing through
various sources, including multilateral agencies. Such financing
may be easier and cheaper than other funding options. The fact that
it works for long-term infrastructure projects is well demonstrated
by Delhi Metro, which successfully raised a major portion of its
funding through the Japan International Cooperation Agency (JICA).
Also, as the Smart Cities Mission is not aimed at developing tier 1
or metropolitan cities, but at financing tier 2 or tier 3 cities,
with the probability that these may eventually develop into
business cities, banks may see the projects as a risky or
not-so-attractive proposition. Considering these factors, financing
by multilateral agencies is likely to emerge as a major source of
The World Bank, the Asian Development Bank and Agence
Française de Développement have already made
financial commitments to the mission. However, executing a facility
commitment is only the first step and each project special purpose
vehicle (SPV) will still need to satisfy the conditions precedent
to drawdown. Strict terms may be imposed on the SPV, ULBs and the
state governments, for disbursal of the loan tranches.
Disbursement of loans may be subject to stringent screening
processes, diligence and scrutiny. Many projects may not pass the
test unless the SPV is able to identify clear project milestones,
time lines to achieve those milestones and risk allocation. The
risk of milestones not achieved, or of unforeseen eventualities,
also raises the necessity of procuring adequate insurance for each
phase of the project. Whether this has been ensured has not been
made public by the government.
Loans from multilateral agencies come with stipulations as to
permitted end-use, and end-use compliance certificates are also
required to be provided to the lender, periodically. Hence, use of
proceeds will need to be monitored closely. The borrower is also
required to strictly comply with anti-corruption norms and managing
these adequately will be a Herculean task, in the Indian
Smart cities projects are still untested waters, and require
long-term financing with greater risk for returns. While the exact
details of the financing terms secured from the multilateral
agencies mentioned above have not been made publically available,
it is likely that financial covenants/guarantees will be
In the instance of Delhi Metro, the guarantee for the funding
from JICA was provided by the central government. If guarantees are
required, the central government may be the only body competent to
provide such guarantees. However, to ensure transparency and
accountability, the central government should lay down strict
guidelines, which SPVs will be required to comply with, in lieu of
these guarantees. The entire process should be well structured and
not ad hoc.
All multilateral agencies, as part of their standard facility
documentation, require detailed environmental impact assessments
(EIAs) and also include covenants for compliance with environmental
protection norms and standards, throughout the project. While it
may be easier to produce a satisfactory EIA at the beginning of a
project, continued compliance will be required during
implementation. Non-compliance may jeopardize further drawdowns or
may even be an event of default under the facility, leading to the
facility being recalled. It is about time that projects focus on
environmental detail, in addition to technical and commercial
An understanding of the municipal legal framework, operation of
ULBs and state governments, and functioning of the SPV, will help
any international agency to appreciate the ground realities, and
structure the facility documents accordingly. However, the SPVs
also need to tailor their implementation programmes to address
Urban Development Minister Venkaiah Naidu aptly summarized
the issue when he said that money from the governments and ULBs
will act only as "seed money" for each smart city and
cities will have to "be creative in raising the required
finance". Thus, he highlighted the fact that smart cities will
need a smart approach to financing.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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