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Problem With Smart Cities

Geography Urbanisation
  • Published on: 10-Jan-16
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Problem With Smart Cities
  • 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.
  • The stage is ready for this ambitious mission that aims to make Indian cities sustainable and competitive.
  • 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 problem which is faced by urban local bodies is mandatory use of Special Purpose Vehicle(SPV).
  • Even though,  SPVs with private investments have been increasingly encouraged as an efficient mechanism for infrastructure projects and seen as an attractive option for urban local bodies struggling to meet investment requirement.
What are SPV’s:

  • SPV is also called by the name of special purpose entity (SPE) or special purpose corporation (SPC).
  • The name SPV is given to an entity which is formed for a single, well-defined and narrow purpose. An SPV can be formed for any lawful purpose.
  • No SPV can be formed for an unlawful purpose, or for undertaking activities which are contrary to the provisions of law or public policy.
  • An SPV is, primarily, a business association of persons or entities eligible to participate in the association.
  • SPVs are mostly formed to raise funds from the market. Technically, an SPV is a company. It has to follow the rules of formation of a company laid down in the Companies Act.
  • The biggest advantage of SPV is that it helps in separating the risk and freeing up the capital. As a result, the SPV and the sponsoring company are protected against risks like insolvency, which may arise during the course of operation.
  • The SPV also allows securitization of assets without disturbing the managerial relationship. Under the arrangement, any predictable income stream generated by secure assets can be securitized.
Why there is issue on the use of SPV's:

  • 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.
  • But urban local bodies are disturbed by the idea of an SPV bypassing the elected municipal council as proposed in the SCM guidelines. SPVs are threatening the notion of decentralized and democratic decision making.
  • 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.
  • Government funding is restricted only on the projects that have public benefits outcome. The criteria to decide the degree of public benefit of projects is still not framed.
  • 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.
Other problems faced by this project:

  • Retrofitting existing legacy city infrastructure to make it smart.
  • Financing smart cities: The total estimate of investment requirements for the smart city comes to Rs 7 lakh crore over 20 years (with an annual escalation of 10 per cent from 2009-20 to 2014-15). One needs to see how these projects will be financed as the majority of project need would move through complete private investment or through PPPs (public-private partnership). 
  • Availability of master plan or city development plan.
  • Financial sustainability of ULBs(Urban Local bodies): Most ULBs are not financially self-sustainable and tariff levels fixed by the ULBs for providing services often do not mirror the cost of supplying the same.
  • Technical constraints of ULBs: Most ULBs have limited technical capacity to ensure timely and cost-effective implementation and subsequent operations and maintenance owing to limited recruitment over a number of years along with inability of the ULBs to attract best of talent at market competitive compensation rates.
  • Three-tier governance: There should be effective coordination between central government (MoUD), state government and local government agencies on various issues related to financing and sharing of best practices and service delivery processes.
  • Providing clearances in a timely manner.
  • Capacity building programme: Building capacity for 100 smart cities is not an easy task and most ambitious projects are delayed owing to lack of quality manpower, both at the centre and state levels. In terms of funds, only around 5 per cent of the central allocation may be allocated for capacity building programs that focus on training, contextual research, knowledge exchange and a rich database.
  • Reliability of utility services: For any smart city in the world, the focus is on reliability of utility services, whether it is electricity, water, telephone or broadband services. Smart cities should have universal access to electricity 24×7; this is not possible with the existing supply and distribution system. Cities need to shift towards renewable sources and focus on green buildings and green transport to reduce the need for electricity.

By: Vishal
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