FINANCING SMART CITIES

BY

O.P. AGARWAL

3 PHASES OF FINANCING

2

Preparation

Construction

Operations & Maintenance

•  Conceptualization •  DPR Prep •  Project structuring •  Appraisal

•  Promoters funds - Equity

•  Loans - Debt •  Government grants

•  Owners funds •  TA grants

•  Civil works •  Construction management •  Testing & commissioning •  Training

•  Service planning •  Operation of services •  Maintenance

•  Fares/fees •  Subsidies •  Other income

COMMON QUESTION

We need Rs 10,000 crores (or more) but are getting only Rs 1,000 crores from the Central and State Governments. Where will the rest come from?

HOW ARE PROJECTS FINANCED

TRADITIONAL COMMERCIALIZATION PRIVATE SECTOR

Public Funds

Public Funds

Loans

Public Funds

Loans

Private Funds

Does not have to earn revenues

Needs revenues to repay loans

Needs revenues to repay loans and

provide a return on private funds

Rs 1000 crores is only the pool of public funds

Private Funds

Loans

PPP

Needs revenues to repay loans and

provide a return on private funds

• But, can we use the private sector everywhere?

• NO • So, how do we decide where to

use them?

PUBLIC VS PRIVATE SECTOR

High Public Value

Low Public Value

Profitable

Not profitable

PPP Private Sector

Public sector

EXAMPLES

Public Funding •  Metro Rail

systems •  Roads and

flyovers •  Drainage

systems •  Water supply •  Hospitals •  Safety services •  Educational

institutes •  Low Income

housing

Private Funding •  High/medium

income housing

•  Hospitals •  Small parking

facilities •  Bus services •  Economic

infrastructure •  Entertainment

facilities •  Telecom

systems

PPP Funding •  Some metro/

LRT systems •  Parking

projects •  Public transit

terminals •  Solid waste

management •  Airports

OTHER QUESTIONS TO ASK (1)

Can we not meet the demand by reducing losses or improving efficiency

• 30% of power is lost in T&D losses – much higher than international norms

• Very high losses in water supply due to leakage and poor infrastructure

Can demand be reduced in some way • Disincentives for high consumption levels – high fee

structure for higher levels of consumption • Can renewable sources be tapped – rain water

harvesting, solar energy, etc.

OTHER QUESTIONS TO ASK (2) Do we really need such a high cost facility?

•  Is a metro system really needed – will a lower cost system not be enough?

• Can local renewable energy grids meet some of the electricity demand

• Can improved parking management create new road space

Can community contribution help with some of the investments

• Can naming rights be used to finance some of the facilities – parks, local roads, etc.

POLL QUESTIONS •  You have decided to redevelop a low rise area of 100 acres

that has a lot of residential accommodation and shopping centers. You want to replace it with high rise buildings that provide more space and are smarter. Would you use: 1.  Public funds 2.  Adopt a PPP structure 3.  Give it to the private sector

•  You have decided that your city needs to develop its educational potential and so have decided to build a large new university that offers high quality education in multiple disciplines. Would you use: 1.  Public funds 2.  Adopt a PPP structure 3.  Give it to the private sector

ADDITIONAL RESOURCES TO BRIDGE THE GAP

To meet capital expenses

To meet O&M expenses

ADDITIONAL RESOURCES TO BRIDGE THE GAP – CAPITAL EXPENSES

12

Loans

Other Govt. programs

Sale of assets

•  Commercial loans •  Multilateral Bank loans •  Bilateral loans •  Supplier’s credit

•  Sale of land •  Sale of buildings

•  Make in India •  Digital India •  Housing for all •  HRIDAY

ADDITIONAL RESOURCES TO BRIDGE THE GAP – O&M EXPENSES

13

New Taxes

Commercial exploitation of land/buildings

Fees/fares

•  Fuel tax •  Land value capture •  Other dedicated taxes •  Supplement on property tax

•  Enhanced fees/fares

•  Rent commercial space over station buildings

•  Rent other property / assets

Others •  Advertising revenues •  Fee for naming rights

TAX ON FUEL •  In the US, a tax of 18 cents is levied on

every gallon of gasoline sold in the country

•  This has been used to build an annual program of $40 Billion for transport investment

14

BETTERMENT LEVY This is a tax that the govt. collects on a plot of land that its actions have in some way made ‘better’ Investments in public transport help “better” the property close to public transport systems A share of enhanced value can be used towards financing public transport Used extensively in Colombia

15

SALE OF ASSETS •  The New Moti Bagh colony in Delhi was largely financed

by selling a portion of the land to the Leela Hotel. This colony is considered a smart area in several ways and houses most of the senior officers of the Government of India

•  Many 5 star hotels have been built in heritage buildings sold by the Government and the proceeds of the sale have been used towards various public purposes

POLL QUESTION You need to build several housing units in your city that would include a mix of low income, middle income and high income units. While you have identified the land, your current financial resources do not allow you to pay for this. What would you do? 1.  Use loans and build it as a public project so that

loans can be repaid by selling the units 2.  Sell a portion of the land for building high income

housing and use the proceeds to pay for the medium income and low income housing

3.  Invite the private sector to build the entire set of units by offering the land and allowing the private sector to sell the units to applicants

SUGGESTED NEXT STEPS

•  Develop a vision for the city •  Decide what is needed to realize the vision •  Identify projects needed and estimate costs

THEN ASK THE FOLLOWING QUESTIONS FOR EACH PROJECT: •  Is this viable in the private sector? •  Is this viable as a PPP? •  Is this viable as a commercial project in the public

sector? •  Are lower cost options available and can they be

used? •  Can demand be reduced to obviate this project? •  Can efficiency gains obviate this project? •  What other government programs can be used to

pay for this project?

Project

Does the project have

revenue streams

Private investor

Does it have enough revenues to give a decent

return for the private sector PPP or a

public sector with

commercial loans

Traditional public sector

project

Yes

Yes

No

No

THUS: