Emerging Themes: Financial Resource Management

As the 20 lighthouse cities begin to embark on their smart city adoptions, they have to consciously plan their financial resources. The current resource restrained times require the cities to adopt multiple approaches in their financial planning; improve the efficiency of user fee and property tax collection, explore newer ways of raising revenues such as local municipal bonds and global finance mechanisms such as clean development mechanism (CDM) and reform institutional barriers to attract private sector to finance urban infrastructure. Deployment of ICT enabled sensors on existing and new infrastructure will help to monitor water and energy usage and price the resources to match the demand. Yet, additional resources will have to be raised to cover the operations and maintenance (O&M) costs of these technological interventions. A preliminary analysis of the 20 SCPs shows varying preferences of the cities to tap possible avenues for urban infrastructure financing.

• The cities have identified 6 main types of funding- grants under the smart cities mission, convergence with other missions, public private partnerships (PPPs), borrowing from lending banks, increase in own source revenue and others such as corporate social responsibility.

• Overall, the 20 lighthouse cities will raise Rs. 64,000 crores, thereby leveraging an additional Rs. 44,000 crores against the 20,000 crores investment by the central and state governments.

• Indore, Bhopal and Jabalpur have the most financially ambitious proposals. For every rupee that is funded through the mission, these cities aim to leverage Rs. 5.29, Rs. 4.56 and Rs. 3.64 respectively through a combination of public private partnership, augmentation of own source revenues, long term borrowing and others (corporate social responsibility, state finance grants etc).

• Aside from the central and state grants, own sources accounting for 33% of the planned investments are the biggest source of revenues. These are followed by public private partnerships and convergence funds, both estimated around 13%.

• Land  monetisation is the most widely used tool, understandably by cities seeking to leverage funds using the improved level of infrastructure in the identified areas. Borrowing long term debts to finance capital infrastructure is definitely the least preferred option, possibly due to lack of good credit ratings of the municipalities.

• Per capita expenditure inversely influence financial efficiency. From an efficiency point of view, the cities of Ahmedabad (Rs. 3401), Chennai (Rs. 2940) and Surat (Rs. 5812) exhibit the most cost effective smart city proposals. These cities have the lowest per capita proposed expenditures for their smart city plans.

• Cities need to assess capital financial needs of their smart city plans against the annual municipal revenues they generate. The higher the ratio of resources needed to the municipal income, the greater is the need to improve the income the cities can generate while the opposite case is strictly not true.  Bhubaneswar, Belagavi and Jabalpur need resources multiple times their annual municipal incomes and consequently need to look at increasing their revenues over the duration of the SCP.  This revenue capacity needs to be continually augmented to sustain the smart city effort and to scale it from a specific area to the entire city.

• Alongside the revenue capacity, equally important is the expenditure capacity. This indicator represents the city’s capacity to execute the smart city proposal based on the recent municipal expenditure. It is calculated by dividing the proposed annual SCP expenditure by latest available actual municipal expenditure. A resultant number less than 1 indicates that the Smart City Proposal is well within the city’s existing capacity. A number greater than 1 indicates that the city has not executed a project of this scale previously and needs to focus on capacity building to ensure its successful implementation. Amongst the 20 lighthouse cities, Pune, Surat, Ahmedabad. New Delhi Municipal Council and Chennai exhibit sufficient financial experience in implementing projects proposed in their SCPs.

• A mobilisation diversity index, similar to the Herfindahl-Hirschman index was calculated to test the diversity of the funding sources (other than the national mission grant) as identified in the Smart City Proposals. The value of HHI is between 0 and 1. A number close to 0 indicates that the funding sources are less diverse, i.e. most funding is from a single source. A number closer to 1 indicates greater diversity of the funding sources, i.e. the funds are coming from a variety of sources. Diversity in funding indicates resilience of the financial plan. Interestingly despite not having any credit rating and therefore low borrowing capacities, the cities of Solapur, Belagavi and Kakinada have the most diversified portfolio for resource mobilisation.

Definitions of Financial Indicators

Budget (INR Crore) – the overall capital expenditure proposed in the SCPs by each city

Budget Efficiency – the overall capital expenditure divided by the population of the city

Funding Leverage – the amount of money to be mobilised by the city divided by the funding identified under national and state schemes

Mobilization Diversity – similar to Herfindahl-Hirschman index, calculated to measure the dependence of the proposal on one or more funding sources

Revenue Capacity – the amount of money to be mobilised divided by the latest municipal revenue of the city

Expenditure Capacity – the amount of money proposed to be spent under the SCP divided by the latest municipal expenditure of the city

JnNURM Property Tax Reform – the status of implementation of JnNURM tax reform

Credit Rating – the credit worthiness of the city

Note: $1 = Rs. 66.48