MC Explains: What is Smart Cities Mission, and why has it been extended by a year?

MC Explains - All about the Smart Cities Mission and its one-year extension

”The extension makes perfect sense, considering the hurdles that Covid-19 placed in the path of all infrastructure development, and the disruptions that remained even after the worst was over. These issues were serious – supply chains and manpower availability were severely impacted, and Smart Cities Mission is a complex undertaking that requires seamless deployment of resources. Any continuity breaks in such resources have a cumulative impact that pushes up delivery timelines,” said Anuj Puri, Chairman, ANAROCK Group.

The Mission may have seemed to fall off the radar amid the multiple disruptions caused by the pandemic and thereafter the war in Europe, but the government evidently means business on, he said. The extension is a reaffirmation of its commitment to secure its objectives, adding, “The fact that housing demand has picked up tremendously and continues to thrive is an additional impetus to this focus.” The demand is heavily weighted towards high-quality housing that ensures improved ease of living, and this is exactly what smart cities will deliver, Puri said.

“More than the halfway mark across most cities, an extension was imminent and will help in completing the unfinished projects,” said Vimal Nadar, Head of Research at Colliers.

What is the Smart Cities Mission? 

The Smart Cities Mission was launched by Prime Minister Narendra Modi on June 25, 2015. A total of 100 cities were selected in rounds from 2016 to 2018 and were supposed to complete their projects within five years of their selection. The SCM was extended in 2021 until June 30, 2023, on account of the delay in the completion of the projects due to the pandemic.

The objective of the scheme is to promote cities that provide core infrastructure, clean and sustainable environment and give a decent quality of life to their citizens through the application of 'smart solutions'.

According to the SCM guidelines, the central government will provide financial support to the extent of Rs 48,000 crore over five years, on an average Rs 100 crore per city per year. An equal amount on a matching basis will be contributed by the state government or urban local body.

In its area-based development, cities undertake the redevelopment of existing business districts, develop new commercial hubs and public spaces, and upgrade infrastructure like water supply and sewage lines.

Even though the cities were selected, the development work or project implementation started at least 18 months after the selection process as cities had to first form Special Purpose Vehicles (SPVs) and the appointment of CEOs took time. The development work in most cities is currently in the advanced stages.

Was the extension inevitable?

Some urban experts, however, say that the extension was inevitable given the slow pace of progress.

“It was kind of inevitable, given the slow rate of progress in several cities. Cities have also frequently changed the projects for which the grant(s) were given, and even now, cities are considering new projects – some of which are because something that was originally planned did not work out. Rest because utilisation did not happen. And, while some cities have come close to bringing transformative changes, many have addressed this as "just another scheme to create regular projects,” said Digbiyoy Bhowmik, a freelance development consultant.

What does the Standing Committee on Housing and Urban Affairs say about the Mission in its report?

In its report on the Ministry’s demand for grants (2023-2024) presented to the Lok Sabha a few months ago, the Standing Committee on Housing and Urban Affairs noted the “contrasting difference” in the performance of cities.

“On the one hand, 32 smart cities have completed more than the number of projects planned for implementation under the SCM, in some cases even four times more than the actual target. On the other hand, the remaining 68 smart cities are yet to meet the project completion targets wherein the performance of some cities is quite dismal. Therefore, the total number of completed projects gives a misleading picture because it also takes into account the excess projects accomplished by 32 performing smart cities,” the report had said.

What is the completion status of the smart cities project? 

Around 5,700 projects (72 percent by number) worth Rs 1.07 lakh crore (60 percent by value) have been completed by April 30, according to the government data. Around 50 cities have completed close to 75 percent of their projects and are on track to complete the remaining works by June 2023. More than 66 percent of projects in small cities and over 80 percent of projects in the large metros have been completed, media reports quoted a ministry of housing and urban affairs official as saying.

How is the Smart Cities Mission being financed?

According to a Centre for Policy Research Budget brief, financing for SCM can come from multiple sources. Of the total project costs, 22.5 percent are to come from the central government. States and Urban Local Bodies (ULBs) are to provide another 22.5 percent of the funding. In addition, more than a fifth (21 percent) of funding is to come from convergence with other missions such as AMRUT, Swachh Bharat Mission (SBM), National Heritage City Development and Augmentation Yojana (HRIDAY), Digital India, Skill Development, Housing for All, etc.

Further, 21 per cent is to come through Public Private Partnerships (PPPs), 4 per cent from loans and debts, 1 per cent from own source revenue of ULBs, and 8 per cent from other sources. An important innovation under the scheme is the creation of an SPV responsible for implementation at the city level. SPVs are responsible for planning, appraisal, approval, and release of funds as well as to manage, operate, monitor and evaluate the development projects undertaken by the city, it said.

These SPVs are limited companies registered under the Companies Act, 2013 and are owned by the state or UT and the ULB in an equity shareholding of 50:50.

Not all central government funds, however, have been released by states to SPVs. Cumulatively, till December 23, 2022, about Rs 32,666 crore (92 per cent) of the Centre’s funds were released to SPVs. There are, however, state variations. States such as Jharkhand, Kerala, and Telangana have transferred all the funds. On the contrary, central government funds transferred to SPVs as a share of total Centre’s funds were lower for the North Eastern Region states such as Meghalaya (84 percent), Assam (83 percent), Manipur (80 percent), Nagaland (77 percent) and Tripura (73 percent), the CPR India Budget Brief had said.

How does the SPV structure in Smart Cities Mission work?

Experts say that the SPV structure of the Mission seems to have become a challenge along the way.

Bhowmik explained that initially, it was envisaged that the SPV would have custody of funds that it proposed to leverage from other schemes in addition to the SCM but for obvious reasons, this was not realised. Also, despite several rejoinders from the government, not a single SPV got complete financial autonomy, which is well enshrined in company law, he added.

It would be interesting to see what happens to the Smart City SPVs once the funds are expended. Generally, companies are created to last in perpetuity; but that would imply that there is a steady stream of revenues to support the company (the SPVs are created under the Companies Act, 2013, though by strict definition, they are not government companies). Now that has not happened, and unless the shareholders – the state government and the municipal body do not find more funds and businesses for it, there may be no option but to wind up the company, he said.

There is also the problem where assets created by the SPV are being 'transferred' to another agency or department. “From a company perspective, this is as good as writing off what is otherwise a productive asset. In essence, this is a classic case of asset-liability mismatch. Somehow, I do not think any state got the hang of what a 'company' is supposed to do and just treated this as another expendable asset that was created for compliance and can be happily done away with once its purpose is served,” he added.

Pratap Padode, founder and executive director of FIRST Construction Council and Smart Cities Council India, said the SCM failed to muster more PPP projects. A total of 232 PPPs worth only Rs 15,006 crore have been taken up across 53 smart cities. Secondly, the execution of projects rather than outcome has been the objective of the Mission. Thirdly, there has been no plan for the future of the 100 SPVs created, and the future of their CEOs lies in limbo, added Padode.

How does the SCM compare with Jawaharlal Nehru Urban Renewal Mission (JNNURM)?

Jawaharlal Nehru Urban Renewal Mission (JNNURM) was launched on December 3, 2005, for a seven-year period (up to March 2011). The previous central government then extended the tenure of the mission for another two years — from April 2012 to March 2014. It envisaged a total investment of over $20 billion over seven years.

As per the report of the Comptroller and Auditor General, most of the projects initiated under JNNURM were not completed. Among urban infrastructure projects, only 231 out of the 1,298 sanctioned projects were completed. Similarly, with respect to housing projects, only 22 of the 1,517 projects were completed. Against a total allocation of Rs 66,084 crore, the central government released less than 50 percent, Padode explained.

In the case of SCM, even though the investment value of Rs 1.3 lakh crore has been achieved the amount released by the government is Rs 71,000 crore, which is marginally higher than the allocation of Rs 66,084 crore in JNNURM but the project completion ratio has improved over JNNURM scheme greatly as in SCM around 5,700 projects worth Rs 1,07,000 crore have been completed by April 30, 2023, said Padode.