Innovative Financing For Smart Cities in India ... Raising Rs 78 Lakh Crores ... over the next 10 years

Synopsis :

There has been a lot of discussion about Smart Cities in India. Very few however have been looking seriously at the financing angle of these large projects. Everyone says " Public Private Partnership ( PPP ) " and beyond that ... its vague at best.

This paper shows how, the raising of vast sums of money is possible by applying the concept of Urban Equity Withdrawal as enunciated in the World Bank concept note on the subject ( World bank PPIAF Policy paper No 7, By George E Peterson ' 2009 ).

This note however sets a new benchmark by going much beyond the world bank paper to raise an enormous US $ 1.24 Trillion in financing, without taking a single rupee from either Central, State or Municipal budgets.

In my view, there are three possible sources which allow this Urban Equity value to be unlocked in India over the next 10 years :

From Central PSU owned land in Metros :       US $ 40 Billion

Land Conversion from Agricultural to NA :    US $ 300 Billion
at city limits

Planned Re-Zoning of our Cities    :                US $ 900 Billion

Given the nature of the above assets, most of this money will be available to State and Municipal / local governments.

I worked with various alternative financing options for 6 months before I settled for just three sources after consulting experts to get their views.

Since the sums of money involved are HUGE, I have also specified under what conditions and safeguards this money can to be released for development projects across 29 states and 7 union territories. The safeguards are necessary as without them, given past experience, there are likely to be large leakages.

Overall, the execution of this financial plan has the potential to double Indian GDP by 2025 through a construction boom in India. This construction boom, will in-turn, stimulate massive " Make in India " activity ... to supply building materials to the construction sector.

The article below appeared in two popular magazines recently and was also sent to the Ministry of Finance / NITI Aayog as a citizens input to the Union Budget.

The rest of this note examines the three sources of finance in detail

1. Potential Urban Equity Withdrawal from PSU Land Banks

This source of financing is available in our Metro Cities such as Mumbai, New Delhi, Chennai and Kolkata. In addition, large sums can be raised in cities such as Bangalore, Pune and Hyderabad.

Central and State Government owned Public Sector Undertakings ( PSUs ) own very valuable land in cities like Mumbai, Delhi etc. The total value of Land Banks with the PSUs is easily of the order of Rs. 12 Lakh Crores or US $ 200 Billion.

The Largest land holdings outside of the railways are available with the Port Trust Of India which has over 50,000 Acres of Land, some of which is in large Urban Centers. The Railways also has approximately 10,000 Acres in cities and towns across India.

To apply the concept, It would be necessary for Government to raise FSI’s on this land before selling it.

Even after the shared sale of this 3,000 acres for financing large national Education and Healthcare schemes, another 27,000 acres of prime land will still remain with Central & State PSU's.

Of the balance 27,000 acres, another 10,000 acres can be used for earning annual lease rentals. This will provide a fixed income for Central / State governments, thereby helping them pay for the operations costs of state education and healthcare schemes, a majority of which will be in rural areas in the concerned states.

I amassuming that US $ 8 Billion or Rs. 50,886 Crores will become available each year, starting in 2017 and it is proposed that this money be withdrawn in 5 yearly installments ( 2017 to 2022 ) and immediately be moved to a Secure Escrow Account to finance mass Education projects.

1.1 Action Item for NITI Aayog / Ministry of Finance

As the sums of money that will be realised under this Urban Equity Withdrawal plan are huge, NITI Aayog needs to issue a detailed note on procedure to be followed so that money is released from the Secure Escrow Account only after project milestones are achieved.

The money should preferably be released under a high court monitored process to prevent Scams / Leakage as has happened in a north Indian state where large sums were reportedly withdrawn after they were raised under a “ Securitization Transaction “.

After this withdrawal, there was no money left for the next State Govt. when it wanted to execute projects as certain revenue streams were pledged under the securitization facility by the previous government to the banks and could not be used to fund new projects.

There is a need to avoid these kinds of incidents and Government needs to specify a proper process.I have already written to NITI Aayog and the Finance Minister, Mr. Arun Jaitley, in this regard.

2. New Enhanced Fee for Conversion of Agricultural Land to Non Agricultural ( NA ) Land at periphery of cities

Land Conversion is a very large potential source of revenue for state & municipal governments which is currently being ignored.

Land is a State subject and State Governments usually charge between 5 % and 9 % of the existing basic value of the agricultural land as a conversion fee or conversion tax ( as in the case of Andhra Pradesh ).

This results in a huge loss of potential revenue to the State & Municipal Governments as the conversion fee of 9 % is applied to the value of agricultural land.

Actually, maximum appreciation in the value of land happens only after its conversion to “ Non Agricultural “ status … resulting is massive revenue loss to Government.

It has been estimated (by others) that the potential income for State / Municipal governments from a 10 % conversion fee ( levied on land after conversion to NA ) could be of the order of US $ 2 – 3 Trillion over the next 20 years.

I have however taken a more conservative view and estimates potential State / Municipal Govt. earnings from levying the Land conversion fee on Non Agricultural land ( i.e. after its conversion ) at US $ 300 Billion across 29 states and 7 union territories over the next 10 years ( i.e US $ 600 Billion over the next 20 years ).

This value needs to be determined when this land is sold for the first time under its Non - Agricultural status and taxed on the basis of the proceeds received by the seller. Once the sale takes place, the original conversion fee charged on the value of the Agricultural land can be reimbursed.

In my view this money should be used for the financing of large Education / Healthcare & Smart City facilities. This could lead to India entering the league of developed nations within the next 10-15 years.

 

I am assuming here that US $ 30 Billion / year or Rs. 1,90,824 Crores can potentially become available each year between 2017 and 2026 if the necessary legislative / legal and administrative mechanism is put in place at the State Govt. and Municipal levels.

The sums so raised from the process need to be immediately moved to a Secure Escrow Account to finance mass Education , Public Healthcare & Urban Development / Smart City projects.

We need to execute the “ Urban Equity Withdrawal “ concept by intelligently drafting new legislation to capture revenue for the Govt while giving a substantial incentive to the private owners of land.

NITI Aayog / Ministry of Finance would need to issue proper guidelines as specified in 1.1 above, that might be followed to use this money.

3. New Enhanced Fee for Re-Zoning Urban Land for Development of Smart Financial Centers

India is set to see massive changes in the Urban Landscape over the next 20 years, as 400 Million people across the country, migrate from rural to urban areas.

Re-Zoning of our cities and the creation of Smart Financial Centers present state governments and municipal corporations in 600 districts with a huge, Once in a Century Opportunity to re-invent the urban landscape and at the same time raise an almost unlimited amount of capital to finance the re-construction of towns and cities across India.

I would like to propose that a detailed Urban Planning Exercise be carried out in over 600 district headquarters and in each suburb of our Metro Cities. In this exercise certain areas in each suburb ( within metros ) and in each district, could be designated as New Commercial / Smart Financial centers by re-zoning them and increasing their FSI from 1.5 – 4.0 currently to between 8 – 12.

Proposed Local Govt. Scheme

Citizens / Owners of these properties could receive 70 % of the increased valuation proceeds and the State / Municipal Governments could collect 30 % in cash once the properties are sold to new buyers or re-developed by the original owner and sold to buyers.

The government share of the additional revenue will be used to finance large Education & Healthcare schemes and improve the city’s infrastructure. This fee based measure has the potential to raise approximately US $ 900 Billion ( Rs. 57.24 Lakh crores ) for State and Local governments across 600 Indian cities ( conservative estimate ) over the next 10 years. This means that on an average Rs. 5,72,472 lakh crores could potentially become available each year starting in 2018.

Huge Opportunity for Indian / Foreign Urban Planners

Specific areas will be selected for Re-Zoning and Increasing FSI after a 100 year, detailed perspective plan is prepared for each city / district headquarter. The objective of the exercise will be to turn our cities into smart cities through excellent planning and by reducing Transportation load.

As India has a severe shortage of town planners currently, it will be necessary to bring in sophisticated town planning skills from around the world. This will ensure that Indian cities leapfrog development cycles and deploy the latest in town planning practices.

Due to flawed policy, town planning was ignored in India for the last 60-70 years. Town planning skill sets in India therefore declined and our current set of town planners need proper training which is best provided by foreign experts.

The net cost of using International talent in planning our cities will be just 2 % – 3 % of Project cost. It is therefore far more economical to use the best town planning talent from abroad. If on the other hand we use improperly trained local planners, we risk losing a large part of the balance 97 % of the investment due to poor planning skills. This will be a disaster leading to a loss of Lakhs of Crores worth of GDP. Once our local planners acquire necessary skills, they will be able to take on international competition and do very well. Today they just do not have the necessary skills.

In my view therefore all roadblocks that hamper the bringing in of world class town planning skills from foreign countries, need to be removed by the Govt. of India.

Re-Zoning Of Cities could Double Indian GDP

The net GDP gain from this one time re-zoning exercise alone has the potential to Double Indian GDP by 2025, besides raising large sums of capital for government to create state of the art infrastructure in Urban India. Re-deploying some of this money to rural India ( Building Lakhs of Check Dams, 30,000 Rural Schools & 6000 Rural Hospitals ), will also Stop Rural Migration to Cities and prevent the creation of Slums in our cities. The beneficial impact of this strategic deployment of Urban Equity to rural areas will be huge.

Re-Zoning of Indian cities will also create millions of new jobs.

By bringing in various clean technologies and promoting low carbon construction practices within the Re-Zoning related construction projects, Indian cities can become models of sustainable growth, providing massive employment opportunities while serving as the principle base for a “ Make in India “ Plan. Startup of large construction projects in India is therefore crucial for the achievement of the Prime Minister’s “ Make in India “ plan

Creating 60 Million new Jobs in Urban Areas by 2025

To fast track our smart cities programme, it is critical that all State Legislatures pass the 74th Amendment to the constitution before implementing this scheme.

Passing of this amendment will lead to the shutting down of illegal State Govt. Parastatials such as MMRDA ( in Mumbai ) and DDA ( in New Delhi ) which are working against the constitution of India . MMRDA and DDA therefore should be shut down / converted to State PSU’s and be made to compete with private companies to provide services to citizens.

MMRDA / DDA’s current “ Development Authority “ status is simultaneous with their “ Project Promoter “ status. This creates very serious conflict of interest issues and results in serious delays in project implementation as can be seen from the fact that it takes 5 years to start up even minor projects in Mumbai.

After shutting these organizations down / converting them to state PSU’s, their “ Development Authority “ role should be returned to the Municipal Corporations which should have a directly elected and accountable mayor.

It needs to be understood that MMRDA and DDA have imposed an extremely high political cost on the nation. They have for instance prevented India from producing the kind of political leadership that cities such as Paris (Fran?ois Mitterrand), London ( Boris Johnson ) and New York ( Michael Bloomberg ) have produced.

Shutting down MMRDA and DDA and a mere passing of the 74th Amendment to the constitution might result in the creation of nearly 60 million jobs across India as Urban development projects are speeded up tremendously. The truth is that MMRDA / DDA and the bureaucrats within them are preventing 60 million jobs from being created in India. This is an extreme price to pay for the nation.

Proof of Concept : L & T’s Bandra ( East ) Deal

On the 31st of October ‘ 2015, the Times of India published a report on a deal that Larsen & Toubro ( L & T ) has presented recently to the chief Minister of Maharashtra Mr. Devendra Fadnavis.

Under the deal L & T is to develop 93 acres of land in Bandra ( East ) which earlier was a housing colony belonging to the Govt. of Maharashtra.

The highlights of the deal are summarized as follows :

1 Total amount L & T will invest :            Rs 30,000 Crores

2 Expected Sales realization :              Rs 1,25,000 Crores

3 Project Management Consultant Fees  : Rs 5000 Crores

4. Govt of Maharashtra Payout (UEW) :  Rs 70,000 Crores

The important thing about this deal is the Urban Equity Withdrawal ( UEW ) Component. Under the teams of the deal, Govt. of Maharashtra will receive Rs 70,000 Crores in Cash after the promoter has accounted for his profit.

This essentially is an application of the first concept ( 1 ) discussed above. L & T of course has come up with this landmark deal independently which shows that the idea works and can generate massive amounts of capital for the Government. Concepts ( 2 ) and ( 3 ) above can yield even larger amounts for the Government.

This paper has shown how Rs 8,14,182 Crores ( Rupees Eight Lakh, Fourteen Thousand, One Hundred and Eighty Two Crores ) can be made available each year for Smart Cities in India Across 29 States and 7 Union Territories. Also all of this money can be raised totally independent of either the Central or State Government Budgets & without diverting any cash from existing Schemes.

 

– Concluded –

 

About the Author :

Ashish Puntambekar is head of Strategic Planning ( Innovation Group ) at a Fortune 500 Company. He is a specialist in Design Thinking and large infrastructure project design. He recently published a paper on the above Subject at the Asian Development Bank in Manila.