The problem with smart cities
Urban administrations and the private sector must join hands for the Special Purpose Vehicle model to work
By 15 December, 85 cities out of the total 98 included under the Smart Cities Mission had submitted their respective Smart City Plans to the ministry of urban development. Hopefully, the remaining cities will follow suit shortly. The stage is ready for this ambitious mission that aims to make Indian cities sustainable and competitive.
The journey so far has a few lessons and concerns that need attention. Apart from criticism on the quality of proposals and public participation, there were indications of a few cities hesitant to submit their proposals. One of the main reasons for the apathy of urban local bodies of some cities pertains to the Special Purpose Vehicle (SPV), which is to be mandatorily constituted for the implementation of their respective Smart City Plans. SPVs with private investments have been increasingly encouraged as an efficient mechanism for infrastructure projects. This would be ideally seen as an attractive option for urban local bodies struggling to meet investment requirement. Then why have these local bodies been so disapproving of the smart city SPVs? According to media reports, the local bodies of Greater Mumbai, Navi Mumbai, Pune, Kochi and Nashik have indicated that the essence of ‘local self-governance’ will be defeated with specific focus on private sector driven SPVs.
An SPV is a legal entity created for a specific purpose, which can theoretically be shut down after the specified purpose has been achieved. The major advantage of an SPV is that it allows investors to limit their risks and maximize profits, and bypass cumbersome legal and regulatory issues. In India, SPVs have come to dominate the infrastructure landscape. A prominent example of this would be road construction, operations and maintenance. In certain other cases, like metro rail projects, the private-public partnership efficiencies are yet to be realized.
One of the reasons for setting up SPVs in smart cities is to ensure objective and efficient decision making, independent of municipal councils, which are subject to local politics. The Smart Cities Mission (SCM) guidelines mandate an equal share of equity contribution by the state government and urban local body, thereby making them the majority shareholders. Nevertheless, urban local bodies are disturbed by the idea of an SPV bypassing the elected municipal council as proposed in the SCM guidelines (4.1.1 and 4.1.2). It threatens to chip away at the notion of decentralized and democratic decision making. A demonstration of this contestation was noted when the Greater Mumbai Municipal Corporation mandated that there would be no private sector participation, and the mayor would have veto power over the SPV’s decisions. Although the central government may not honour this resolution, it signals that empowering an SPV will not be easy.
Currently, according to the SCM guidelines, cities are required to create an SPV once they have been selected. However, in the absence of clarity on specific projects and assured revenue streams, it would be very difficult for private companies to participate. This, combined with a lack of management control, may reduce the attractiveness of SPVs for private investors.
The SCM guidelines also stipulate that government funding can only be used for projects that have public benefit outcomes. What are the criteria to decide the degree of public benefit of projects? Such distinction could lead to a tiered hierarchy of projects based on a user’s ability and willingness to pay in the context of cities with a significant percentage of urban poor.
Finally, there is the issue of convergence at city level. There are cities that are covered under more than one such flagship programme. For example, Varanasi is included under both SCM and the Heritage City Development and Augmentation Yojana (HRIDAY). The manner in which a smart city SPV interacts with the implementing agency for HRIDAY, and how two projects under the two separate programmes complement each other, is yet to be seen.
Clearly, there are issues regarding SPVs which need to be clarified. An important first step would be to build safeguards to protect the democratic nature of governance structures. There is merit in understanding the mindset behind some of the caveats voiced by unhappy urban local bodies. A robust governance structure, which allows for sharing of power and financial resources between urban local bodies and the private sector stakeholders, would go a long way towards assuaging fears.
The second important aspect would be for the government to clarify the financial nature of SPVs and how the private sector can contribute effectively. The nature of the asset and price sensitivity of citizens towards that asset could be used as a factor in deciding issues of charging user-fee.
Critical issues of capacity and skill building for local bodies need to be addressed in parallel. Matters related to intellectual property rights, open standards and technology transfer should be enshrined at the highest level of government since it is difficult for individual urban local bodies to negotiate with private parties. The current SCM guidelines do not cover these aspects.
Only when these issues are addressed can SPVs be truly successful.
Source: http://epaper.livemint.com/epaper/viewer.aspx
