Urban projects expand, but private investment continues to remain elusive

Despite the clear pace of growth of cities in India, the ability of the city managers to track private investment is slow

Four years since the Narendra Modi government invited the private sector to invest in India’s urbanisation, a considerable amount of money — Rs 1.64 trillion — has got invested in just the Smart Cities programme. The 15th Finance Commission has awarded Rs 1.21 trillion to cities. More will come in from the 16th Finance Commission.

 

None of it has, however, emanated from the private sector. Not that the cities are not trying. 

 

Of the little that has come in, the most prominent is that of the Adani Group to redevelop the Dharavi slums in Mumbai. The bid was for Rs 5,069 crore for putting in upward of Rs 25,000 crore to rework the 600-acre land parcel. 

At present, private sources finance only 5 per cent of the infrastructure investment in Indian cities — 3 per cent as PPPs and 2 per cent as commercial debt, a World Bank dataset shows. 

 

"Private investment is gradually gaining traction, particularly for solutions that have: (i) reduced upfront costs and assured revenue streams via innovative business models such as a lease or a fee-for-service model; (ii) financing mechanisms to mitigate risk such as guarantees, blended finance, subordinated debt, line of credit, etc. and (iii) proven demand aggregation with policies in place, such as extended producer responsibility (EPR)," said Asmita Tiwari who, with Natsuro Kikutake, co-authored the recent WB report 'Towards Resilient and Prosperous Cities in India'. 

 

The newly elected Delhi government has also begun a series of projects for Delhi. Here too, it is a special assistance scheme for Union Territories of the central government that will finance Delhi for Rs 600 crore. Other notable projects like Dholera in Gujarat, Dighi in Maharashtra, or Greater Noida in Uttar Pradesh have also taken off without any private investment.

 

Speaking at a global investor meet in 2020, Prime Minister Narendra Modi had promised: “If you are looking to invest in urbanisation, India has exciting opportunities for you.” Despite his exhortation, the flow has not materialised. 

The reluctance of the private sector to invest in cities directly, except through bonds floated by municipal corporations, stems from several factors, said Abhas Jha, World Bank manager for urban development and disaster risk management.

 

“The three challenges for developing urban projects are how to prepare a financing plan, take care of environmental issues, and involve the community in the projects,” he added.

 

These are genuine concerns. There are two types of government intervention in cities. One set includes pan-India interventions like the recent Digital India, Startup India, affordable housing, the Real Estate (Regulation) Act, and Metro Rail. The other set involves city-specific projects like augmenting bus fleets with smart ticketing, improving water supply, pavement and road improvements, and low-cost housing.

 

The latter is essentially boots on the ground and needs community participation. The nature of financing these projects is also different and needs calculation of how much money should be put in for a measurable gain. These, as experts reckon, need capacity building.

 

One of those is training of municipal cadres to involve them in long-range targets. “Given rapid urbanisation, time is limited to undertake the necessary planning and to scale up investment in resilient urban development, which is essential not only to make cities more efficient and liveable,” noted a recent World Bank report, Towards Resilient and Prosperous Cities in India. The Bank, in its checklist for drawing in private sector finance for urban climate change projects, reckons a) develop guidelines on inclusion of equity instruments in priority sector lending to support scale-up of growth-stage solutions, and b) build capacity of city officials to prepare capital investment plans for cities as long-term objectives.

 

As of now, to draw in private investment, cities are just monetising the current cash flow from projects to float bonds. The difficult task of drawing in private investors to run the projects is not even on the horizon.

 

A clear evidence of this passive work shows up when municipal departments make little effort to draw in inputs from the affected population about their choices.

 

It is peculiar that while central government ministries like coal or power regularly engage with the community before the development of any project, the same zeal is missing from the urban mission. Private sector companies, faced with the risk of volatile urban constituencies, prefer to work on tenders as contractors rather than on a public-private partnership basis.

 

The tardiness is visible even in developing infrastructure to handle threats where there is a need for a mix of government and private entities, as a Ficci–LTTS white paper notes. “Cybersecurity governance should enable interagency coordination and public-private partnerships (PPP). National and state cyber centres should act as fusion hubs — linking intelligence agencies, law enforcement, sectoral regulators, and infrastructure operators.”

 

The upshot is: despite the clear pace of growth of cities in India, with almost 40 per cent of the total population based in them, the ability of the city managers to track private investment is slow.

 

Jha said the government needs to create capacity in the same way as they do for other sectors. Some cities lack finances (these are the younger cities), while older cities like Mumbai suffer more from lack of technical assistance than lack of finance.

 

Bringing in the private sector into specific projects is difficult across the world. Countries like Indonesia, Malaysia, and Colombia have been supported by the multilateral institutions for massive urban rejuvenation projects where the private sector has been absent. So India is not alone.