Sustainable financing of cities: 4 success factors from India’s Smart City Mission experience
Cities in developing countries require sustainable financing solutions with limitations around property tax revenues and dependence on other government tiers.
The India Smart City Mission (SCM) experience is becoming a game-changer in mobilizing external financial resources.
Here, we present four critical success factors for cities raising resources from non-government sources through alternate financial mechanisms.
Most cities in developing countries still struggle with limited financial resources, which remains one of their major challenges.
In India, most cities rely on revenue from property taxes, but as they continue to be inadequate due to political sensitivities over increasing rates, the dependency shifts to grant financing from federal and/or provincial governments.
1. Identification of suitable sectors and projects: Specific sectors (like water, urban transport, solid waste, etc.) for resource mobilization were selected based on potential investor expectations. Subsequently, projects within these sectors were selected based on a robust assessment of the underlying risks and returns. These sectors and projects differed from city to city, given the competitive advantages of the particular local body.
2. Extensive preparatory activities: The design of SCM enabled the cities to fund preparatory activities through government grants. In the case of PPP projects, for example, activities like appointing specialist advisors for feasibility studies, detailed project report preparation, and structuring of the transaction and bid process management for selecting the private partner received due attention. Project risks were distributed between the government and private sector through objective and transparent contracts, with the government bearing early-stage risks around the land, right of way, etc., and innovative structures like escrow accounts for capturing high-quality revenues being proposed as required. For municipal bonds, activities like identifying the underlying asset or project, updating financial statements for the urban local body, structuring and credit rating of the instrument, appointing merchant bankers and other specialists, etc. were undertaken as part of SCM.