PMO is keeping a hawk's eye on finance schemes for Modi's Smart Cities project

As the Prime Minister's flagship Smart City projects face a funds crunch, the Office of the Prime Minister wants the government to help cities draw up plans that will make Indian cities and local bodies richer. Directly monitoring the Urban Development Ministry's Value Capture Financing (VCF) guidelines, that will provide cities with innovative options to generate more funds, the PMO wants the ministry to provide cities with best global practices for generating more revenues. While UD ministry is working on the guidelines, an RTI reply reveals that the PMO is holding monthly meetings to ensure that the guidelines are rolled out effectively and without delay.

Prime Minister Narendra Modi had announced developing a hundred smart cities. In the first phase 20 cities were identified, for which a fund of Rs1,00,000 crore has been allotted by the Centre. A cost of Rs2,40, 320 crore has been estimated for these 20 cites. The cities will have to source the rest of the funds through external means.

However with most cities and municipal bodies reeling under a funds crunch, PMO wants UD Ministry to draft VCF guidelines that will help cities generate additional funds.

VCF will allow cities to increase their earnings through infrastructure development. As a practice commonly followed, state governments and local administrations give land to investors at the circle rate fixed by the government. The appreciation in the price of the land after investment and development is passed on to the developer, while the states are left with just the minimal value.

"With the new guideline, the increase in value can be captured by the government through various VCF tools," suggests the guidelines' concept note.

Value of land appreciates due to regulatory changes and investment in public goods infrastructure. There is increment in land valuation due to large public investment. The ministry of Urban Development proposes to handhold the development of such a state specific VCF framework.

Currently the state governments collect urban tax, area-based development charges and charges for regularisation of unauthorised colonies. Every state and municipal body has its own sources. Under the VCF government will bring together the best practices followed within the country and in different parts of the world.

The VCF proposes Tax Increment Financing (TIF) followed in the United States. The TIF allows the government to set up an incremental revenue from future increase in property taxes. The government is also looking at the option of implementing the land pooling schemes followed by Gujarat and Haryana where land owners agree to exchange their barren lands for infrastructure serviced smaller plots. Increased Floor Area Ratio to generate additional funds is also being discussed.

"We are looking at all the best practices followed across the world as well as in the various states across the country. The guidelines will give states and local bodies a detail of all such practices. The cities will be allowed to tailor these schemes to suit their needs," said a ministry official.

Currently these cities are targeting funding from mission grants, convergence with other missions, their existing revenue sources, public private partnership, market borrowing and Corporate Social Responsibility funds of business establishments.

The office of the Prime Minister is closely monitoring the project and is meeting the UD ministry every month to keep track on the pace of the project. "We have had three different correspondences with the PMO since April. The draft policy will be out next month," said a ministry official.