By Dezan Shira & Associates
Editor: Tracie Frost
India’s urban population is projected to increase from 370 million in 2015 to 590 million in 2030, an unprecedented expansion that will change the economic, social, and political landscape of India. The urbanization of India brings with it a host of environmental and humanitarian issues, from pollution to lack of civic amenities like drinking water, sewage, and electricity. However, urbanization may also mean big opportunity for business. Prime Minister Narendra Modi is betting on such opportunities with his Smart Cities initiative.
“Smart Cities” was one of Modi’s main promises in the run-up to his election in 2014. After election, Modi unveiled an ambitious plan defining the key elements of 100 smart cities he hopes to establish across India, and Finance Minister Arun Jaitley allocated US$1.2 billion for Smart Cities in the 2014-2015 budget. However, by some estimates, US$1 trillion is needed to finance these cities. Further, cities participating in the Smart Cities scheme must come up with up to 80 percent of the funds themselves.
Private sector participation is needed in order for public sector entities to leverage access to private sector financing. This need to raise funds will open market opportunities to domestic and foreign investors interested in public-private partnerships in many sectors, including IT infrastructure, energy management, environmental sustainability, GIS mapping, engineering, and sanitation.
The Smart Cities initiative envisions public-private partnerships (PPPs) and municipal bonds filling large portions of the funding gap. Several services, typically provided by governmental bodies, will be licensed to private companies, which could be involved in everything from the construction stage to operations. Each participating city must establish a special purpose vehicle (SPV) to implement its Smart City plan. The SPV will be a limited company incorporated at the city-level, in which the state and the urban local body will be the promoters. The state and the urban local body will each have a 50 percent share of the SPV. Private companies may also have up to a 50 percent equity stake in the SPV, as long as the state and local body maintain equal shares. Ideally, SPVs will be able to raise funds, have flexibility, gain state guarantees, and function predictably and consistently. Private companies will recoup their investment through charging user fees.
To facilitate public-private partnerships, India is relaxing access to its urban infrastructure and services sector for private investment. The largest sectors that are being targeted for PPPs are in areas with significant unmet infrastructure needs, such as water supply, waste management, and transportation. Thus far, PPP commitments have already been made by IL&FS Energy Development Company, CISCO, Hitachi, Siemens, NEC Corporation, and others, but many more opportunities exist. Opening the public services sector to private investment also unlocks the opportunity for companies to market their products to a lucrative Indian market. Beyond basic infrastructure needs – roads, transport, housing – Smart Cities will also channel private investments into urban India’s social infrastructure in areas such as healthcare, safety, and education.
Several countries, including the United States, Singapore, Spain, France, Germany, and Japan, have committed funds toward the Smart Cities project. Many of these countries are also encouraging their citizens and businesses to take the lead in developing Smart Cities. The United States led an eight day mission in India during February in which 18 American companies met with Indian policymakers, businesses, and urban planners to explore opportunities for American businesses in the Smart Cities initiative. During that mission, U.S. Deputy Secretary of Commerce, Bruce Andrews, said that he believes the Smart Cities project will “serve as an engine for high-tech investment,” which will in turn grow the Indian economy.
As promising as the Smart Cities concept is, it remains to be seen how the initiative will actually play out. For one, Indian public-private partnerships have a mediocre track record, at best. Private companies have faced tremendous difficulty in recovering their costs due to entrenched cultural and political sensitivity. Moreover, the central government has moved to impose local content requirements for procuring products and services on Smart Cities. Andrews flagged this development as one of the biggest challenges for India’s Smart Cities plan, saying that local content requirements will act as an impediment to free trade and technology development.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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