Emergence of smart cities
presents new opportunities

By Hemant Sahai and
Pranav Kumar Singh,
HSA Advocates

The Indian government’s announcement of an ambitious programme for creation of over 100 brownfield and greenfield “smart cities” presents unprecedented investment opportunities. In the first of our regular columns on this emerging business opportunity, we headline some key developments as well as critical issues that will engage the technical, financial and legal brains as this sector gathers momentum.

Earlier this year, India and the US agreed to partner to develop three smart cities. Memorandums of understanding were signed by representatives of the US States Trade and Development Agency and the state governments of Uttar Pradesh, Rajasthan and Andhra Pradesh in the presence of India’s urban development minister, for developing smart cities in Allahabad, Ajmer, and Visakhapatnam. Japan, Singapore and other countries too have expressed interest in participating in the smart cities development programme.

What exactly is a smart city? While various definitions have been propounded, each stressing the significance of technology, the draft concept note issued India’s Ministry of Urban Development recognizes four essential attributes of a smart city: (a) institutional infrastructure (including governance); (b) physical infrastructure (water and power supply, sanitation, waste management, transportation, affordable housing, connectivity, etc.); (c) economic infrastructure (to create economic growth and employment opportunities); and (d) social infrastructure (education, health, culture, entertainment).

Our definition is simpler: “creation of an ecosystem that empowers citizens to access diverse economic opportunities and social services in an efficient and inexpensive manner”. This empowerment can be achieved through technology, infrastructure and high quality governance.

While this definition may appear unidimensional, it captures the main attributes of a smart city, i.e. an entity that offers its citizens diverse economic opportunities to achieve a high standard of living, in a predictable and enabling environment. Therefore, availability of high quality infrastructure and technology including IT to access services, plus availability of diverse economic opportunities, all contribute to the making of a smart city.

Finally, the city needs a soul, which comes only from the diversity of its peoples and cultures. This requires high quality and predictable governance, including law and order, management of essential services and creation of enabling policy frameworks, to encourage citizens to seek economic growth, to migrate to and make these cities their homes, in preference to the traditional metropolises.

Viewed from this perspective, the definition is not unidimensional at all. Creation of a smart city will require deployment of significant financial and human resources. Governments will need to leverage the best technical, financial and legal brains, to create developmental models that attract capital and technology. Upgrading of existing and creation of new infrastructure is just one facet and cannot obfuscate the need for creation of economic, financial, legal, regulatory and governance models different from what India has experienced so far.

It is clear that the staggering investments required can be leveraged only through a combination of public and private capital. Therefore, in addition to public funding of trunk infrastructure and IT systems, it is now universally accepted that private capital can be attracted only through appropriate public-private partnership models that provide the right mix of economic incentives and appropriate risk sharing.

Governance of these cities will be one of the most complex challenges since India’s constitutional and legal framework envisages local urban bodies as the primary managers of cities. Existing bodies do not have the institutional capacity to either raise financing or manage the transition to smart cities. There is need for innovative legislation that will allow a legal framework for developing efficient, independent and autonomous governance institutions.

The Delhi-Mumbai Industrial Corridor (DMIC) project, which envisages creation of six greenfield cities, is experimenting with new governance structures for its cities and has created enabling legal frameworks for them. However, DMIC’s advantage lies in developing greenfield cities and the model may not work for brownfield smart cities. Article 243Q of India’s constitution provides the umbrella framework for creation of such governance structures and innovative and original legal thought will be required.

Financing these projects too will require significant innovation and political will. Diverse models, including monetization of land, are being considered for raising finances, however, these models run the risk of distorting these projects into speculative real estate play. There is need to bridge capital markets and infrastructure financing, specifically deepening of the corporate and municipal bond markets. This requires changes to the legal and regulatory framework.

While the challenges may appear daunting, political will coupled with entrepreneurial acumen should help mitigate some of these risks.

Hemant Sahai is the managing partner and Pranav Kumar Singh is a partner at the New Delhi office of HSA Advocates. HSA is a full-service firm with offices in New Delhi, Mumbai and Kolkata, and with a correspondent relationship in Bangalore.

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