The govt will have to formulate policies and guidelines to ensure commercially viability of such projects for foreign capital to flow in, says Deloitte
The government would have to come out with commercially viable policy and guideline framework for its smart cities projects to attract domestic and overseas private funds for them, say experts.
The biggest challenge for the 100 smart cities, for which the central and state governments would be disbursing Rs 100 crore each along with funding from the urban local bodies (ULBs) and private partners, would be raising finances for the projects since most corporation bodies do not have the capability to raise finances on their own strength.
"The government will only act as a facilitator but it would have to come out with a viable business model for the project to woo investments from both Indian and overseas investors," said Neeraj Bansal, India head – real estate and construction sector – KPMG.
He said the government could draw a parallel between the way greenfield and existing airports have been successfully developed under the public-private-partnership (PPP) model and smart cities projects.
Bansal said if the government could come out with policies and guidelines that could ensure commercially viability then there was a glut of overseas capital waiting to be deployed in such projects.
The government is looking to execute 100 smart cities projects under PPP model, which will involve central and state governments, ULBs and private partners.
Arindam Guha, senior director of Deloitte, said the funding requirement for new cities could easily be recovered through sale of land.
He said other options that could be considered were land pooling and mechanisms like higher Floor Area Ratio (FAR) and Floor Space Index (FSI), which could attract private investments into these projects.
A report released by Deloitte estimates an investment of between Rs 75,000 crore and Rs1.5 lakh crore for a greenfield smart city with a population of 5-10 lakh. It said the project could take 8-10 years to complete.
The Deloitte research note raised concerns over financial losses of ULBs mounting if tariff rates were not fixed at levels that could ensure recovery of costs.
"Most ULBs are not financially self-sustainable and tariff levels fixed by the ULBs for providing services often do not mirror the cost of supplying the same. Even if additional investments are recovered in a phased manner, inadequate cost recovery will lead to continued financial losses," said the Deloitte report.
To counter this, Guha suggested tariff structure would have to be redesigned to enable cost recovery through some level of cross-subsidisation.
He said suitable financing options like build-operate-transfer (BOT) could also be considered to stagger the initial requirement to reduce the burden on the partners.
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