Guest Column
are initiated actually reach fruition (about five per cent
only).
There is also the ongoing issue of transparency and
accountability of projects taken up using private sector
investment – with both civil society groups and certain
political quarters demanding that public services with a
natural monopoly being provided by private entities be
subject to audit the same way as any public agency or
authority.
However, the established view in policy (with some
basis in law) is that a private company, even if providing
public services should be subjected to public audit – and
that any such supposedly ‘undue’ advantage that the pri-
vate sector party may be getting may, in fact be a natural
product of market processes, and therefore beyond the
purview of scrutiny.
Established literature concerning PPP refer to what is
widely referred to as a ‘public sector comparator’, a
mechanism which effectively tries to determine what it
would cost a compe-
tent public authority
or agency to deliver
the same service un-
der the same condi-
tions – which in turn is
used to determine if
any ‘undue’ advantage
is being claimed by a
private party provid-
ing a public service in
the first place. How-
ever, there is no generally agreed method for determin-
ing this which is currently in use in India.
The problem of accountability exacerbates signifi-
cantly with PPP contracts based on land based transac-
tions – where a private party is expected to develop a
parcel of land belonging to the appropriate Government
and share some form of proceeds with the same. In most
developed nations, this kind of transaction uses high
quality, fair and independent valuation of the land and
other fixed assets as a key principle of the transaction. In
India, we are yet to develop a disciplinary regime where
States and local authorities are compelled to use stand-
ards in valuation of fixed assets – such as IVSC (Interna-
tional Valuation Standards Council) or the RICS Red
Book – leading to allegations of causing losses to the
State exchequer. There is some improved awareness in
this regard as market regulator SEBI is now insisting on
such standards being followed in REITs and InvITs (In-frastructure Investment Trusts), but this is yet to perme-
ate down to urban development and more importantly
smart cities.
As far as financial sustainability of smart cities is con-
cerned, the municipal finance system is constitutionally
designed to be dependent upon a superior Government.
Successive (Central) finance commissions have linked
the transfer of assigned revenue (city’s share of State rev-
enues from taxes and other levies collected by the State)
to the city’s capability of augmenting its own sources of
revenue. This works for large cities which have a large
source of revenue base, but not so much for smaller cities- which remain largely tied and dependent on State and
Central transfers.
Municipal borrowing has traditionally been a trouble-
some area as most municipal bodies cannot borrow
without the State Government’s permission. The mu-
nicipal bond market has all but dissipated since octroi –
which was a keystone of revenue inflows - has now been
abolished in most parts
of the country.
The new GST regime
does away with a num-
ber of State taxes. This
could technically ham-
per municipal bodies
more as there will now
be two levels of as-
signed revenue settle-
ment – one from Cen-
tre to States and the
other from State to municipalities. A delay in the settle-
ment cycle would mean liquidity crunches on municipal
bodies as States also await the compensatory settlement
from the Centre.
Smart Cities are expected to use two innovative ap-
proaches to overcome the above situations – one of them
being the SPV (Special Purpose Vehicle) route to de-
velop smart cities which has (i) considerably more au-
tonomy to raise capital from markets, and (ii) SEBI pro-
moted framework for municipal bonds and derivatives,
which will hopefully re-kindle the practice of municipal
bonds. This will help in ensuring financial sustainability
of smart cities.
While the smart cities mission is quite ambitious in
what it hopes to achieve for urban India, finding ways to
fund the mission will be quite challenging. <
The Author is Global MD, Emerging Business, RICSwe are yet to develop a
disciplinary regime where states
and local authorities are
compelled to use standards in
valuation of fixed assets