Approach PPP model in smart city projects with caution

Approach PPP model in smart city projects with caution

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Smart City Mission of the government is an ambitious program aimed at bringing Indian cities at par with best in the world and in the process, solving many of the problems that are plaguing our cities today. Like any other government programmes the objective of SCM is also noble one and was started a few years ago with lot of hue and cry.  Since the size of the mission is big one involving multiple authorities at various levels, investment required to achieve the desired results are also huge. According to one estimate  the implementation of programme would require investments worth 150 billion US dollars over the next few years. For the government mobilising the sum of this magnitude without affecting its fiscal deficit targets, especially in view of multiple welfare measures announced in recent times, would be an uphill task. Further, since the programme requires the involvement of state governments whose fiscal health is much weaker than that of the central government, task of mobilising the funds becomes even more difficult. 

Therefore, we need to look for other sources of funding to take the programme to its successful completion. According to one estimation, of the $ 150 billion estimated investments, at least $ 120 billion is required to be brought in by private sector and foreign investments.  The central government has already asked states to generate half the funding for ‘smart cities’ from Public Private Partnerships (PPP). The selected cities are, therefore, need to be smarter and innovative to attract private investment into their cities through a variety of PPP models. 

However, the government needs to be very careful while going in for PPP model as a funding option. The government should not forget the fact that even for the private sector it would not be an easy task to raise the funds of that size considering the poor shape of balance sheet of many of our private sector enterprises. Also, raising money from the capital market would be easier said than done due to increased volatility in recent times, a trend which is likely to continue for some more time. Unfortunately, even the banking sector is saddled with non-performing assets (NPAs) and is busy in cleaning its loan portfolio. Borrowing from external sources may not be easier either as our reluctance to implement reforms of public utilities and pricing of their services. Also, many of our private sector enterprises have poor credit rating which will increase the borrowing cost for them. Even if the private sector is able to raise funds from Indian banking system for smart cities project, it would not be a private participation in its truest sense as most of the banks are government owned. Also, the government should ask for private participation not jus for meeting fund requirements but also to attract  latest technology and efficient operation and maintenance of the facility once it is implemented. 

Also, government should be careful while involving private sector in SCM projects as the general perception about the private sector involvement in projects related to public utilities like water supply, solid waste management and transportation is mostly negative. It is usually believed that private participation always results in cost of the service going up without commensurate improvement in the quality of service. Resentment will be more among the low-income and marginalized groups as they will be the worst affected. Therefore, the government should take them into confidence and convince them that their interest will be protected at any cost. 

Remember, JNNURM (which is the earlier version of SCM) could attract PPP only in 50 projects out of the 2,900 projects which was covering only 0.2 per cent of the total project cost. The government should learn from its past mistakes and should not repeat the same mistakes which it committed while implementing the earlier version of the present programme.

The government is also marketing SCM and the opportunities it presents to foreign investors too. The exercise of the government seems to be successful to an extent if the number of foreign investment proposals in SCM projects are any indication. While large amounts of money have been pledged for the development of ‘smart cities’ in India, the status of disbursement of funds or the conditionalities attached to these remittances are not known. An excessive dependence on foreign investment may not be the most appropriate way to approach critical aspects of national development, especially when political factors can disrupt these processes easily.

Private and foreign investment bring with them new technologies and systems, but measures must be taken to ensure that these are aligned with India’s specific needs and local circumstances. The government  must incorporate built-in safeguards to ensure private and foreign investment cannot and do not abrogate or dilute its responsibility in protecting human rights and fulfilling its welfare function assigned by the Constitution of India.