While the Smart Cities Mission has given a boost to infrastructure development, it is also important to build sustainable infrastructure that protects natural resources and the environment. This will ensure reduced energy consumption, construction costs and maintenance expenses, thereby promoting effective use of financial resources. Environmentally-friendly infrastructure projects will attract more investors and financing, and drive economic and social growth. By NSN MURTY
The year 2020 began on an upbeat note but the COVID-19 bogey seems to have turned the applecart upside down. The IMF has estimated a slump in global economy and a slash in India's growth rate to 1.9 per cent for FY2021 as against the expected 9 per cent year-on-year for the next five years, according to the updated World Economic Outlook (WEO) report.
The Economic Survey 2019-20 noted the high correlation between economic growth and infrastructure. Therefore, spending on infrastructure, which is the backbone for the growth of all sectors, will play a crucial role in sustaining the growth momentum in the next five years.
The Task Force on National Infrastructure Pipeline has published a report highlighting that $1.4 trillion needs to be spent in infrastructure during 2019-25 to help India attain the $5 trillion economy goal. During this period, project capital expenditure in the infrastructure sector will be primarily focused on energy, roads, urban projects (AMRUT, smart cities, MRTS, affordable housing and Jal Jeevan Mission), railways rural infrastructure and irrigation. India needs to spend 7-8 per cent of its GDP, or around $200 billion, on infrastructure every year. However, thus far, the country's annual infrastructure expenditure has only been $100-110 billion, which marks a shortfall of approximately $90 billion per annum. This investment gap can be plugged with innovative approaches such as public-private partnership (PPP). In fact, the development of smart cities will create many opportunities for PPP, thus reducing the investment gaps in the infrastructure sector.
The focus should be on developing next-generation Indian cities with technology as a key enabler for solving infrastructure challenges. In essence, infrastructure needs to be easily accessible and affordable, and citizen-government engagement must be efficient and effective.
Strategy and development need to be well coordinated
It is estimated that by 2050, 68 per cent of the world's population will reside in urban areas. This trend of increasing population density in cities is also expected to play out in India, though on a lower scale. Research suggests that 40 per cent of the nation's population will live in cities by 2030. It is also estimated that 75 per cent of India's GDP will come from cities by the end of the next decade. However, Indian cities today do not have the adequate infrastructure to meet the demands of the rising population, which, in turn, affects the quality of life.
Anticipating these shifts, the Govt of India announced in 2015 the Smart Cities Mission, which aims at developing 100 smart cities. A budget of approximately $28.5 billion has been allocated for the mission (to be borne equally by the central and state governments), which has the dual agenda of economic growth and improving citizens' quality of life.
The government's continued focus on building smart and sustainable cities was reflected in the recent budget, with allocation for the Smart Cities Mission and Atal Mission for Rejuvenation and Urban Transformation (AMRUT) being increased by 10 per cent.
Smart city infrastructure encompasses housing, development of commercial areas, convention centres, slum redevelopment, etc. Currently, a major part of the budget is being used to develop the required infrastructure through retrofitting of urban areas. Development is also being undertaken through greenfield projects. For example, on September 7, 2019, the country's first greenfield industrial smart city, Aurangabad Industrial City (AURIC), at Shendra in Aurangabad was inaugurated by Prime Minister Narendra Modi. With a "walk-to-work" concept, the project will include the development of housing along with shopping centres and workplaces within close proximity. From a socio-economic point of view, the development will attract investment from multinationals and provide further impetus to the manufacturing sector and job market.
The manifold benefits of smart cities
Regardless of whether smart cities development is undertaken through retrofitting, redevelopment or greenfield area-based development, it is expected to have a significant impact on the economy and infrastructure development of the country. Some of the salient positive outcomes include:
Higher demand for commercial real estate
The office space market is expected to witness significant growth as smart cities initiatives bring in improved infrastructure and IT connectivity. This will further supplement the demand for hotels, serviced apartments, shopping malls, etc., in Tier 1 and Tier 2 cities, thus paving the way for large multinationals to set up their offices, shared services units and regional headquarters.
Quality infrastructure boosts job market
Infrastructure development requires manpower and labour. Smart cities growth will open up multiple job opportunities in commercial and residential spaces. Developers are set to play an important role in smart city implementation.
The mission will allocate land and funds for the development of affordable housing in convergence with the "Housing for All by 2022" scheme, which aims to build 20 million homes across all urban areas. Thus, the scheme is targeted at the lower income group, which represents a good opportunity for small real estate developers. Ghaziabad, Surat and Vellore are good examples of housing and inclusiveness.
Partnerships in tech-enabled infrastructure
Collaboration between the private and public sector will be instrumental in raising the required capital for infrastructure projects in smart cities and further delivery of citizen services. As real estate companies collaborate with the services sector, opportunities for joint ventures (JVs) or consortiums to support government projects will increase, with the two sides complementing each other's product portfolio and creating holistic smart city solutions, especially in the ICT and infra space.
Technology companies can collaborate with real estate developers to plan end-to-end execution, including infrastructure planning, use of technology and design and architecture and ICT-based interventions such as smart building energy management systems, metering infrastructure, etc. In addition, data-driven real estate strategy is expected to gain momentum. For example, decisions on locations for setting up new retail stores can be made by analysing footfall data in an area gathered using sensors.
Mixed land use model and compact design
The mixed land usage model involves utilisation of land in the same place for offices, housing, shopping, centres, etc. For successful implementation of smart city projects, a comprehensive urbanisation strategy plays a crucial role. Planning of new layouts for an identified area requires expertise and in-depth knowledge of mixed land usage. Driven by redevelopment, this model is gaining interest among real estate players and smart cities projects. Several other factors such as diversified risk, financial viability of mixed land use projects and benefits, such as ease of commuting, make it more attractive. This allows the government to generate revenue from tax and reduce the cost burden associated with infrastructure and public service delivery.
Projects such as the Saifee Burhani Upliftment or Bhendi Bazaar Project in Mumbai, East Kidwai Nagar in New Delhi and the Naya Raipur Development Authority are good examples of mixed land use or compactness.
While the development of smart cities promises to bring in a host of benefits, for these benefits to be realised, the following areas require attention:
Smart city infrastructure requires huge introductory capital for implementation and operations & maintenance. Large-scale funding poses a major challenge for authorities, considering the long incubation period. A majority of the funding for infrastructure initiatives is from debt financing. Hence, there is a need to explore other models such as municipal bonds, infrastructure debt funds and PPP. Recently, SEBI relaxed the norms for muni bonds issuance for entities working in the area of urban development, including municipalities, to raise funds through debt securities. The amended regulation will also allow SPVs of smart cities to raise funds through munis.
Simpler policies and processes
Regulatory bottlenecks that discourage private sector participation in the smart cities arena need to be eliminated. According to a joint report by the World Economic Forum and PwC, land acquisition, dispute resolution, permit processes, information availability and procurement processes are some of the areas in which additional reforms are needed. There is also a need for empowerment of urban local bodies and single-window clearance systems.
Creating sustainable infrastructure
While the Smart Cities Mission has given a boost to infrastructure development, it is also important to build sustainable infrastructure that protects natural resources and the environment. This will ensure reduced energy consumption, construction costs and maintenance expenses, thereby promoting effective use of financial resources. Environmentally-friendly infrastructure projects will attract more investors and financing, and drive economic and social growth. For construction companies, there will be opportunities for development of smart and energy-efficient buildings that ensure economical use of power and water, and better air quality. The challenge lies in creating awareness around appropriate models and strategies for implementing sustainable and resilient infrastructure.
The government has recently intervened in order to fast-track smart city implementation projects or tenders. The next step is to adopt relevant measures to tackle the above challenges. The best practices of the 100 Smart Cities can be further cascaded to 4,000 cities in the country, thus helping the economy to grow at a faster pace.
NSN Murty is Partner & Leader, Smart Cities, PwC India