India’s municipalities can learn from the funding pattern of smart cities

The Smart Cities Mission (SCM) is slowly creating a new rhythm in municipal finances. The 90 cities under the mission have proposed a substantial budget of Rs 1,91,205 crore, sourced through traditional and relatively unorthodox financial mechanisms.

This raises two questions: What do the finances of the mission bring to the table and at what cost?

The Centre for Policy Research has analysed the finances of the top 90 cities and found that a little over 80% (over Rs 1,55,500 crore) of the funding is directed towards ‘area-based developments,’ which focus on improving small portions (a little over 4%) of total area of the cities. The remainder of the funds are directed towards ‘pan-city’ projects that impact a larger geographic scale.

The funds for these projects are raised from a variety of public and private sources. The primary mechanism of funding projects comes from the smart cities budget. The mission offers cities INR 1,000 crore per city over five years, and this accounts for over 50% of the budget of the top 90 cities. The SCM funding was initially imagined as seed money that could help cities venture into the debt market, however this funding seems to be used more as a regular grant. Over 20% of funding for the 90 cities is sourced through a process of ‘convergence’ wherein the cities incorporate the budgets of other government schemes such as the Swachh Bharat Abhiyan and the affordable housing schemes etc into the smart city proposal budgets.

The private sector provides an equal percentage of funding through public-private partnerships and corporate social responsibility. Finally, loans provide around 7% of the proposed budget for the top 90 cities. A very small portion of funds were officially sourced from the newer forms of fund raising - municipal bonds and the debt market, land monetisation and user charges. As the Mission progresses however, cities are taking a renewed interest in these forms of raising capital. For instance, while only Warangal officially mentioned municipal bonds in the proposals, over 20 cities are today seeking this form of finance.

The advantage of debt financing is that a large quantum of capital can be procured in short time. These processes might result in citizens repaying the infrastructure costs over a period of time, unlike most government grants, which need not be repaid. The same holds true for user charges, which could increase the rates of basic services (water, electricity, roads, transportation) and could ostensibly further disadvantage vulnerable communities that might not be able to afford the new charges.

While the Mission does not utilise these methods extensively, they could reframe the discourse of urban infrastructure financing in the future.

The SCM is supposed to act as a ‘lighthouse’ and inspire similar development across the existing smart cities and in new cities and in a situation with feeble access to municipal finances and greater motivation to undertake urban development projects could lead to a situation where the State weans municipalities from government funding and promotes the use of debt market and fee-based mechanisms of raising finances to improve Indian cities.

While the grant-based finance system was potentially more inclusive, the reality is that it might not be sufficient for the demands of a burgeoning urban population. Indian municipal finances are in a poor state, and while there are several solutions including an efficient and uniform implementation of the 74th amendment (which pushes for a devolution of several powers including taxation) to the municipal government, it is also possible to consider the SCM approach to urban development financing.

Persis Taraporevala is research associate with the Centre for Policy Research, New Delhi

The views expressed are personal