SMART CITY PROJECTS IN INDIA:

ISSUES AND CHALLENGES

Corresponding Author: Dr Vinay Kandpal

Assistant Professor,
University of Petroleum & Energy Studies, Dehradun, India
Email: vinayaimca@gmail.com

Ms. Harmeet Kaur,

Assistant Professor,
Amity University, Ranchi
Email: harmeet26@gmail.com
Dr Vikas Tyagi
Assistant Professor,
Faculty of Management Studies,
DIT University, Dehradun
Email: vikastyagidit@gmail.com
Abstract

India has seen massive growth in its urban population in the recent decades. Government and
policy makers are facing challenges such as increase in urban population from rural areas and
huge gaps in infrastructure. Smart city would be a city with facilities like smart people, smart
technology, smart energy, smart transportation, smart IT and communication and above all smart
governance. This paper is an attempt to focus on the key issues and the challenges to develop
new cities or improve the infrastructure facilities in our existing cities which are over populated
and not properly managed. Further, this paper also focuses on the challenges in financing smart
city projects in India. Government of India has recently made the Smart Cities Mission under
which 100 smart cities would be made. Several initiatives are being led by the Government of
India to convert 100 Cities into Smart Cities. The possible choices for smart city financing could
be PPP, Debt financing, FDI and Viability gap funding. The government could use PPP Route
and could also encourage FDI for effective implementation of Smart Cities Project in India.
Keywords— Smart City, Infrastructure Financing, FDI, PPP
1

Electronic copy available at: https://ssrn.com/abstract=2926260

Introduction:
The rapid growth of Indian economy has placed a stress on physical infrastructure, Social
Infrastructure and Institutional Infrastructure because all these 3 major areas already suffer from
a deficit. Smart city could be a possible solution to all these problems. Smart city is mainly
concerned with “smart governance”, “smart energy”, “smart environment”, “smart people”,
“smart transportation”, “smart IT and communications”, “smart buildings” and “smart living” at
large. Smart is not just about technology-enabled, but also about power, water, transportation,
solid waste management and sanitation. A smart city's core infrastructure is information
technology, where a network of sensors, cameras, wireless devices, data centers forms the key
infrastructure providing all important services. Shri Narendra Modi Ji Flagship smart city
projects were inspired by Gujarat International Finance Tec-city (GIFT) in the state of Gujarat,
which is a smart city still under construction influenced by the Chinese city, Shanghai. The
Union Cabinet recently cleared the Smart Cities Mission under which 100 smart cities would be
built.
With the urban population set to rise in the upcoming years India faces the challenge of
mass urbanization. While the smart city is an area of opportunity for infrastructure companies
and developers, it's a long-term project that will need no less than 20 years. In India, given its
demographics and diversity, unique challenges and opportunities exist for developing "smarter"
cities which attract increased investment, employ innovative technology, create environmentally
sustainable solutions, grow operational efficiencies and amend the lives of urban citizens. Many
countries have shown interest already including Japan, which is keen on developing Varanasi as
a smart city, and Singapore, which has indicated Andhra Pradesh's new capital as its choice.
France, UK and the US are keen as well, it is learnt.

Electronic copy available at: https://ssrn.com/abstract=2926260

 Smart
Environment

Smart Smart Economy

Technology

Essentials of
Smart City
Smart Smart People
Governance

Smart Smart
Communication Transportation
and Technology

Figure 1 Essentials of Smart City

Essentials of Smart City: For the success of smart city projects in India following features are
essential:
a) Smart Environment: For creating a more livable and healthy environment, it is crucial that
planned smart cities are environmentally sustainable. This will not only improve the air quality,
but also reducing wastage of water, electricity, fuel, etc. To add further smart environment
mainly deals with
 Waste management and recycling technologies
 Sustainable resource management for energy-stressed cities
 Effective control of pollution and protection of environment.
b) Smart Governance: The current governance structures do not have adequate peoples'
participation. People do not get the feeling of ownership of the city. Therefore, there is a
requirement of involvement of citizens in decision-making processes. Involvement of the public
in decision making and transparency in governance is critical for Smart Cities. Typically, the
principle to be followed is “Governance by Incentives rather than Governance by

3
Enforcement”. This would imply that people do the right things because there are incentives to
do so and not due to the fear of penal action.
c) Smart IT & Communications: CISCO defines “smart cities as those who adopt scalable
solutions that take advantage of information and communications technology (ICT) it increase
efficiencies, reduce costs and enhance the quality of life”.
The extensive use of ICT is a must and only this can ensure information exchange and
quick communication. The ability to shop on-line or book tickets on-line or converse online is
very powerful ways of reducing the need for travel, thereby reducing congestion, pollutants and
energy use. In a smart city, there is a requirement of smart metering communication and smart
solutions for safety and security.
d) Smart Transportation: It would be appropriate for the urban transport policy to also fall
within the framework on a national “urbanization policy”. There is a need to frame a policy for
As India’s population continues to grow, more citizens will move to cities. India is
anticipated to come out as the world’s 3rd largest construction market by 2020, by adding 11.5
million families every year. Smart Buildings will save up to 30 per cent of water usage, 40
percent of energy usage and reduction of building maintenance costs by 10 to 30 per cent. About
67 per cent of the rural population continues to defecate in the open, and India accounts for about
50 per cent of the world’s open defecation The Government of India and the World Bank have
signed a USD 500 million credit for the Rural Water Supply and Sanitation (RWSS) project in
the Indian states of Assam, Bihar, Jharkhand and Uttar Pradesh.
Literature Review:
U. S. -India Business Council, (2014) conversed the opportunities and challenges
affecting the growth of smart cities in India. Looking at the huge demography and diversity in
India, it provides increased investment opportunities, adoption of innovative engineering,
improved operational efficiencies and lives of urban citizens. The government of India has
initiated to launch 100 smart cities which require an overall capital investment of $1.2 billion.
Cautious planning, leveraging and sound financial environment is required to insure a continuous
supply of finances during the gestation period and to uphold a sound risk return profile. The
report seeks to study the various financial tools reconnoitered by asset class and financing
approaches. Smart Cities entails smart funding that needs the blend of risk and return, constancy,

4
and right venture. The paper suggests making an effort to mitigate the risk to increase the
competitiveness of financing opportunities in the smart cities. The instruments available to
accomplish this goal are thoughtful planning, enhancements of credit, tax incentives, improved
coverage and management organizations and innovative financial structures.
Karuna Gopal, President, Foundation of Futuristic studies (2014) enunciates that global
financing is one of the greatest challenges for development of smart cities. Financial support of
smart cities can be reached by both public and private sector funding. Defying the rudiments, she
suggests that the earlier development of cities was only viewed as the public sector work carried
on by the government, but now the development of smart cities is accepted as an investment
principally in the emerging market. For some projects the government may have to provide the
seed capital through direct public financing or state-owned bank and then after the completion of
the initial development phase capital can be attracted from private developers and third parties.
Ryser et al, (2014) reconnoiters the belief of “smart city” by contrasting and comparing a
narrow with an eclectic understanding of “smart cities” and by placing the concept of “smart
city” into the context of certain city typologies engendered over the last few decades. It considers
the research, debates, government policies and declarations of the industry to analyze the
contributions of smart cities to the existing urban policies and planning strategies.
Egenhofer et al, (2013) emphasizes on the objective of the smart cities to accelerate
investments and inventions. The financial system is vital for the existence of the market and new
models and markets can be created with the help of new financial mechanisms. Creation of the
financial system requires attracting potential investors by introducing innovative financial
product depending upon the risk, return requirements of the investors, monetization of indirect
economic benefits and encouraging citizens to participate in the funding process. The paper
suggests the creation of new financial models such as Smart City (municipal) project bonds and
the participation of local city authorities in planning the funding process. The paper further
identifies the obstructions and potential solutions for funding the smart cities. The suggested
measures for attracting the required capital for investment are inviting the funds from special
institutions like pension funds, reducing the real and perceived risk of investment, reduction of
transaction cost and development of off balance sheet investment mechanism.

5
 Achaerandio et al, (2012) emphasizes on the need of vision, adequate financial planning,
stake holder’s participation and influential and strong leadership for the development of smart
cities. Traditional methods of raising the funds which are based on the risk - return tradeoff are
not much helpful and adequate for financing the requirements of smart cities. The critical areas
identified for the successful development of smart cities are 1) establishment of public –private
partnership 2) development of viable funding strategy 3) improving the efficiency of internal
processes 4) enhancement of innovation in the city and 5) inclusion of stakeholders. The paper
suggests the financing mechanisms for smart cities which consist of structural funds for
development up to 43.2%, 36.4% of the total requirement through public private partnership and
the rest 27.2% through city budgets and private investments. Generating the correct ecosystem of
partnerships and alliance is a crucial success aspect, and after being proposed in the plan phase,
this requires to be concretized and properly established during the design phase.
Objective of Study:
This paper is an attempt to discuss and state the issues involved in the flagship
programme of Shri Narendra Modi ji and the challenges involved in successful implementation
of strategies as far as smart technology, smart environment, smart transportation, smart buildings
and smart people.
Issues concerned with developing Smart City Projects:
Under the flagship “Safe City” project, the Union Ministry proposes USD 333 million to
make seven big cities (Delhi, Mumbai, Kolkata, Chennai, Ahmedabad, Bangalore and
Hyderabad) to center on technological progress rather than manpower. Ministry of Urban
Development plans to invest more than USD 20 billion in the metro rail projects in coming
years. The proposed 534 km, Mumbai- Ahmedabad high speed rail project will have an
investment of around USD 10.5 billion. The Government of India has approved a USD 4.13
billion plan to spur electric and hybrid vehicle production by laying out an ambitious target of 6
million vehicles by 2020. Electric vehicle charging stations in all urban areas and along all state
and national highways by 2027. India has invested $1.2 billion so far and hopes to attract more
funding from private investors and from abroad. Developing a new or green field Smart City
with target population of 5 to 10 lakhs is likely to require financial investment ranging between
INR 75,000 and 150,000 crores and may require 8 – 10 years for implementation

6
Financing Smart City Projects in India:
India is planning for 100 new smart cities and will also develop modern satellite towns
around existing cities under the smart city program. Investments of around USD 1.2 trillion will
be needed over the succeeding 20 years across areas like shipping, energy and public security to
build smart cities in India. Robust capital markets, innovative business models, a sound tax
environment, public-private partnerships, and world class investment-grade projects. These are
the building blocks for the financial infrastructure on which a smart city thrives. The risk-return
profile of a Smart City investment in India is unique: For both Government and investors, strong
and continued master planning is the key to the dynamic management of both potential risks and
opportunities. It is expected that a large part of the financing for Smart Cities will have to come
from the Private sector with the States/Cities and the Central Government is only supplementing
that effort.
To attract financing, policymakers should increase risk mitigation efforts to make their
Smart City competitive not just with other Indian urban centers but with comparable global
investment opportunities. Tools available toward this goal include planning, credit
enhancements, tax incentives, concession agreements, and upgraded reporting and data
management systems. Above all else, policymakers should turn to assure a consistent,
predictable, transparent business climate for both domestic and global investors with regular,
meaningful industry dialogue. USD 1.2 billion allocated for smart cities and FDI norms relaxed
USD 83 million allocated for Digital India Initiative. PPP Model to be used to upgrade
infrastructure in 500 urban areas. Smart City projects to create 10-15% rise in employment.
Government of India and World Bank signed USD 236 million agreement for reducing disaster
risks in coastal villages of Tamil Nadu and Pondicherry. The Power Grid Corporation of India
Ltd has planned to invest USD 26 billion in the next five years (2012-17).
Debt Markets
The need for infrastructure development in India is unquestionably vast. However, the
sector faces a number of fundamental challenges, including the need for new; long-term
investors participate in funding projects. To date, debt financing in India has been largely led by
banks, which—with significant infrastructure assets already on the books—are fast approaching
their debt limits. As a consequence, the marketplace looks to pension funds and life insurance

7
companies who are well capitalized and seeking long-term returns. U.S. life insurance and
pension funds are enthusiastic about extending their presence in India.
Municipal bond markets have also remained underdeveloped in India and have a long
way to go. The Municipal Corporation of Ahmedabad has been a trailblazer, but comparable
structures are rare. In the past two years, Government of India has proposed several structures
intended to mobilize debt financing, including a regulatory framework from the Reserve Bank of
India (RBI) for a non-bank finance company (NBFC) which issues bonds, and one regulated by
the Securities and Exchange Board of India (SEBI) for a trust structure which issues listed shares
in a style similar to a mutual fund. Both the NBFC and Mutual Fund IDF route are designated to
free banks from the aforementioned asset-liability mismatch and allow for increasing lending.
Public Private Partnerships
Smart City initiatives often engage in various types of Public Private Partnerships (PPPs)
as infrastructure, particularly benefits from a formal alignment of government and industry
capacities, technology, assets, and capital. The key to a successful PPP is the ability for both
parties to prosper within the agreement, which is frequently seen with partnerships that have
strong governance, realistic objectives, dedicated income streams, and manageable degree of risk
equitably shared between the parties.
There are two parts of the development of a smart city: infrastructure (communication,
electricity, roads, sanitation, water assets among others) and real estate. In India, the foreign
ownership and investment regulations for infrastructure and real estate are different. The
Government should consider classifying most Smart City development as “infrastructure” to start
with, such that for a smart city development, the same ownership, financing and taxation
regulations apply to both the parts of the development. The nature of the concession agreement
between the government and the developer is another key area to PPP success. India has
sufficient experience in entering into such agreements for airports and roads. The concession
agreement between the government and developers must deliver a well-defined scope of the
project and proper tolling agreements if the smart city is to be developed on a “Build-Operate-
Transfer” (BOT) basis along with private sector actors. To reduce the coordination burden
between many stakeholders, a Smart City’s concession agreements should consider both

8
infrastructure and real estate development on a composite (part of the same development) basis
rather than separately.
Viability Gap Funding (VGF): Government of India has launched a Viability Gap Funding
(VGF) Scheme to raise the fiscal viability of competitively bid infrastructure projects which are
warranted by economic returns, but do not exceed the standard threshold of financial returns.
Under the scheme, the government provides grant assistance up to 20% of the capital cost of the
project, with an additional grant of up to 20% of the project costs can also be provided by the
sponsoring authority. The contractual documents, delineating the risks, liability and performance
standards have been devised and 10 year tax holiday is available to private companies investing
in Indian infrastructure. The government of India has also set up independent regulatory
authorities to balance the interest of all stakeholders.
Challenges for Smart City Projects in India:
The High Power Expert Committee on Investment Estimates in Urban Infrastructure has
assessed a Per Capita Investment Cost (PCIC) of $685 for a 20 yr period. The total estimate of
investment requirements for the smart city comes to $113 billion over 20 years (with an annual
escalation of 10 percent from 2009-10 to 2014-15)
Land acquisition, foreign direct investment and other questions still remain unresolved.
The prospect of heavy sums of private sector finance, either domestic or foreign will be a
challenge. These concerns mean many projects may not be commercially viable at the starting
time. The failure of a PPP is often due to due to lack of realistic objectives, financial
management, project governance, and equality in risk management.
The establishments that help cities manage electricity, water, waste, traffic flows,
municipal operations, and city services are becoming increasingly complex and can be
expensive. Although the return on investment may be attractive, complexities often make it
challenging for cities to kick-start their Smart City projects.
To develop smart cities in India, there is a need to address challenges relating to political
alliance, financing and stakeholder management. Greater alignment between and within
government agencies will be required. A conducive policy and investment environment for
private investors is imperative. It will also have to be ensured that all stakeholders have been

9
included in the decision-making process. Clear lines of accountability will have to be
established.
Building new cities and upgrading existing ones are fraught with challenges pertaining to
integrated master planning, political alignment, financing and stakeholder management. An
enabling policy framework and better alignment of government agencies between and within all
levels will be required.
Successful implementation of smart city solutions needs effective horizontal and vertical
coordination between various institutions involving institutions providing various municipal
amenities as well as effective coordination between central government (MoUD), state
government as well as local government agencies on various issues related to financing, sharing
of best practices and sharing of service delivery processes.
It is easier to build new ones rather than transform old ones into smart cities. But
upgrading cities are also as imperative and it takes anything from two to three decades to do so.
In such cases the work has to be undertaken area wise. It is always work in progress as you can
always keep upgrading.
Other challenges for India include merging technology with law enforcement. There is no
point in installing high tech traffic signals if its implementation cannot be enforced. India will
also have to find ways of encouraging private investment for infrastructure required for a smart
city.
Conclusion:
India’s smart city program hopes to revolutionize city life and improve the quality of life
for India’s urban population. Smart City would require smart economy, bright people, smart
organization, smart communication, smart engineering, smart transit, fresh environment and
bright living. Nevertheless, with mass migration leading to basic problems, like water shortages
and overcrowding, the rate at which these cities will be developed will be the key. Several
initiatives are being led by the Government of India to convert 100 Cities into Smart Cities.
Government to Actively Use PPP Route and Encourage FDI for Effective Implementation of
Smart Cities Project in India. The government is concentrating on encouraging Public Private
Partnership (PPP) for successful implementation of the smart city project in India. Financial and
IT services sectors are on the priority list of the government to garner investments from leading

10
companies such as Cisco, EMC, GE, IBM, Bajaj, etc. in coming years. Few of the major
companies that are currently involved in project planning of these cities include Halcrow,
Synoate, Knight Frank and AECOM India. The real challenge before the Government is to build
inclusive smart cities for all its residents, regardless of whether they are rich or poor. Creating a
smart city isn’t just about creating the physical infrastructure — roads, clean water, power, and
transport. It is desired that public private partnerships (PPP) will deliver, but the mechanism
appears to require a lot of plucking in order for it to work, a fact recognized in the recent Budget.
The big challenge will be to create self-sustaining cities, which create jobs, use resources wisely
and also train people. The idea should be to make cities work for the masses. India has to now
take an important decision in the context of creating smart cities. It has to determine if it desires
to opt for making new cities or upgrade existing ones.
References:
Anthopoulos, L. G., & Vakali, A. (2011), “Urban Planning and Smart Cities: Interrelations and
Reciprocities” Springer-Verlag Berlin Heidelberg, 1-12.
Concept note on smart cities dated 3rd Dec. 2014, from Ministry of Urban development
Government of India, page no. 3-4 Revised on 14.10.2014(Work under progress)

Gopal, K. (2014, May). Smart India will be ushered in sooner than we believe is possible.
Construction Opportunities, pp. 30-31.

Khan, Y. Z. (2015, January-March). Smart City “A Dream to be true”. International Journal of

Linguistics and Computational Applications (IJLCA), 2(1), 1-5.
Laartz, J., & Lulf, S. (2011, March). Partnering to build smart cities - McKinsey & Company.
Retrieved March 14, 2015, from McKinsey & Company:
www.mckinsey.com/.../GDNT_Partnering_to_build_smart_cities_FINAL..
Mookerji, N., & Taneja, M. (2014, September 18). Flexible PPP pact to woo industry for smart
city. Retrieved April 20, 2015, from Business Standard: http://www.business-
standard.com/article/economy-policy/flexible-ppp-pact-to-woo-industry-for-smart-city-
114091701235_1.html
Pandey, M. (2014, September 13). Narendra Modi's imprint on smart city project. Retrieved
March 10, 2015, from India Today: http://indiatoday.intoday.in/story/narendra-modi-imprint-on-
smart-city-project/1/382571.html
Ryser, J. (2014). Planning Smart Cities ... Sustainable, Healthy, Liveable, Creative Cities ... Or
Just Planning Cities? Proceedings REAL CORP 2014 Tagungsband, 21-23 May 2014,Vienna,
Austria. (pp. 447-456). REAL CORP.

11
The Smart City Perspective. PWC India, July 2014

12