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Financing of Smart Cities

The Smart City Mission will be operated as a Centrally Sponsored Scheme (CSS) and the Central Government proposes to give financial support to the Mission to the extent of Rs. 48,000 crores over five years i.e. on an average Rs. 100 crore per city per year. An equal amount, on a matching basis, will have to be contributed by the State/ULB; therefore, nearly Rupees one lakh crore of Government/ULB funds will be available for Smart Cities development.

The project cost of each Smart City proposal will vary depending upon the level of ambition, model and capacity to execute and repay. It is anticipated that substantial funds will be required to implement the Smart City proposal and towards this end, Government grants of both the Centre and State will be leveraged to attract funding from internal and external sources. The success of this endeavour will depend upon the robustness of SPV’s revenue model and comfort provided to lenders and investors. A number of State Governments have successfully set up financial intermediaries (such as Tamil Nadu, Gujarat, Orissa, Punjab, Maharashtra, Karnataka, Madhya Pradesh and Bihar) which can be tapped for support and other States may consider some similar set up in their respective States. Some form of guarantee by the State or such a financial intermediary could also be considered as an instrument of comfort referred to above. It is expected that a number of schemes in the Smart City will be taken up on PPP basis and the SPVs have to accomplish this. 

The GOI funds and the matching contribution by the States/ULB will meet only a part of the project cost. Balance funds are expected to be mobilized from:

  • States/ ULBs own resources from collection of user fees, beneficiary charges and impact fees, land monetization, debt, loans, etc. 
  • Additional resources transferred due to acceptance of the recommendations of the Fourteenth Finance Commission (FFC). 
  • Innovative finance mechanisms such as municipal bonds with credit rating of ULBs, Pooled Finance Mechanism, Tax Increment Financing (TIF). 
  • Other Central Government schemes like Swachh Bharat Mission, AMRUT, National Heritage City Development and Augmentation Yojana (HRIDAY). 
  • Leverage borrowings from financial institutions, including bilateral and multilateral institutions, both domestic and external sources. 
  • States/UTs may also access the National Investment and Infrastructure Fund (NIIF), which was announced by the Finance Minister in his 2015 Budget Speech, and is likely to be set up this year. 
  • Private sector through PPPs.

The distribution of funds under the Scheme will be as follows: 

  • 93% project funds. 
  • 5% Administrative and Office Expenses (A&OE) funds for state/ULB (towards preparation of SCPs and for PMCs, Pilot studies connected to area-based developments and deployment and generation of Smart Solutions, capacity building as approved in the Challenge and online services). 
  • 2% A&OE funds for MoUD (Mission Directorate and connected activities/structures, Research, Pilot studies, Capacity Building, and concurrent evaluation).

Financing of Smart Cities PDF File  [246.91 KB]

Challenges/The Need for Smart Cities

The Mission is operated as a Centrally Sponsored Scheme and the Central Government has proposed to give financial support to the Mission to the extent of Rs. 48,000 crore over five years,  i.e., on an average of Rs. 100 crore per city per year. An equal amount on a matching basis is to be contributed by the State/ULB. Hence, nearly rupees One Lakh Crore will be available through Government/ULB funds for development of ‘Smart Cities’. In addition to the Central Government funds and the matching contribution by States/ULBs, other remaining project costs are to be mobilized through State/ULB’s own resources such as user fees, impact fees, beneficiary charges and also through innovative financing mechanisms such as municipal bonds, pooled finance mechanism, private sector participation etc., and other Central Government schemes. Borrowings from financial institutions including bilateral and multilateral institutions and both domestic and external sources can be utilized.

After the Stage 1 of the challenge, each potential Smart City will be given an advance of Rs. two crore for preparation of SCP which will come from the city’s share of the A&OE funds and will be adjusted in the share of the city. 

In the first year, the Government proposes to give Rs.200 crore to each selected Smart City to create a higher initial corpus. After deducting the Rs. two crore advance and A&OE share of the MoUD, each selected Smart City will be given Rs. 194 crore out of Rs. 200 crore in the first year followed by Rs. 98 crore out of Rs. 100 crore every year for the next three years.

The yearly instalment of funds will be released to SPVs after they meet the following conditions:

  • Timely submission of the City Score Card every quarter to the MoUD, 
  • Satisfactory physical and financial progress as shown in the Utilization Certificate and the annual City Score Card, 
  • Achievement of milestones given in the roadmap contained in SCP, and iv. fully functioning SPV as set out in the Guidelines and the Articles of Association. A Board Resolution should certify that all these conditions have been met, including a certificate that all the conditions relating to establishment, structure, functions and operations of the SPV as given in the guideline document.. 

The 100 cities under the Mission have proposed to execute 5,151 projects worth Rs. 2,05,018 crores in 5 years from their respective dates of selection. Financial innovation is built in the design of their capital investment plans. The distribution of funding envisaged from different sources is as follows: Central and State government: Rs 93,552 crore (45%), Convergence funding from other missions, programs of the Central/State Governments and/or ULBs: Rs 42,028 crore (21%), Funds from PPP Rs. 41,022 crore (21%), Loans/Debt Rs. 9,843 crore (4%), Own sources Rs. 2,644 crore (1%), Other sources: Rs. 15,930 crore (8%).

Details of funds released by Government of India to States/UTs for Smart Cities till 31 March 2018 under Smart Cities Mission PDF File  [683.9 KB]