Special Purpose Vehicles to Steer the Mission on Smart Cities

The Mission on Smart Cities requires the actual programme for each such City to be driven by the Special Purpose Vehicles (SPVs) that would be created in the months to come. There are anxieties as well as hopes about this model of urban development, which is quite unique in many ways, at least for India

Hopes arise because there has been a general dissatisfaction with the governance framework of the cities, more or less in all the States, albeit with some exceptions, such as in Gujarat, Tamil Nadu and sporadic cases in several other States. The main reason for the anxiety is the delay that has already occurred and, besides, the very novelty of the concept of SPVs as a de facto replacement of the traditional institutions of local governance.

The Mission on Smart Cities (MSC) was announced as the “Beacon Light” Programme for urban development in May 2014. The announcement was followed by a whole gamut of consultations with various stakeholders within and outside the government and finally the Mission Guidelines were notified in September 2015. The guidelines provided for selection of 100 cities to be taken up for focused development under the MSC, of which in the first round, 20 would be taken up under a competitive process, while the remaining 80 would be taken up in further lots. The first lot of 20 cities was notified in end-January 2016 and the second lot is expected to be announced by mid-April 2016. The area declared as Smart City is generally expected to be around 250 to 500 acres, that is, about 10 per cent (or even less) of the area of the municipality.

The activities taken up so far under the MSC for the 100 short listed cities were driven largely by expert consultants, who assisted the municipalities concerned to garner citizens’ expectations and converted the same into Smart City Plans. Once a city is approved as eligible to secure the MSC funds from the Central Government, the municipality of the City would have to recede in the background, yielding the entire space for governance in relation to the Smart City Plan (SCP) to the SPV. The MSC Guidelines have made many innovative arrangements in relation to the SPVs, of which the more significant ones are discussed below.

Constitution of the SPV

The State Government along with the municipalities is expected to create an SPV separately for each city. The SPV shall be a company registered under the Companies Act 2013, with equity capital contributed equally by the State Government and the Municipality. The promoters, that is, the State Government and the Municipality, shall determine the paid up capital requirements of the SPV from time to time, as per need. The initial equity share of the Municipality is proposed to be Rs. 100 crore, which will flow from GOI grants. State Government will have to provide concomitant amount from its own resources. Equity from the private sector or financial institutions in the SPV could also be permitted, provided the shareholding pattern of 50:50 of the State and the Municipality is maintained and the State and the Municipality together have majority shareholding and control of the SPV.

The Board of Directors (BOD) of each SPV shall consist of nominees of three categories, namely, the Government of India, State Government, and the City Municipality. In addition, the SPV shall have Independent Directors picked from the panel maintained by the Ministry of Corporate Affairs (MOCA) of the Government of India. The State Government shall appoint one of its officers such as the District Collector as the Chairperson of the SPV. The Chief Executive Officer (CEO)of the SPV shall be a full-time officer and appointed after approval of GOI. He can be removed only after approval of the GOI.

It is apparent that the SPV would be a very comprehensive entity, placing together the major stakeholders in the development of the city, ranging from the Central Government to the State and the Local Government. There could be some concern about the feasibility of the Central Government placing its nominees in 100 city SPVs spread over the nook and corner of the country. If these nominees are going to be the serving officers of the Central Government, then they will have to be sourced from numerous ministries as no single ministry can have that number, particularly if the nominees are to be of the level of average seniority, say, Deputy Secretary.

However, if the Central Government were to identify its nominees from outside the Government, say, from universities or retired bureaucrats or corporate entities, then they would become akin to the Independent Directors, leading to two types of Independent Directors (IDs), one from the panel maintained by the MOCA and the other from outside that panel. In such a situation, the selection of Directors from outside the MOCA panel could be viewed with suspicion, at least in some cases.

Moreover, if the State Governments too choose to place their nominees from a similar lot, for which they would get inspiration from the Central Government, then the SPV would become a non-official body like the Municipality but dominated with persons who do not represent the people through any electoral mandate. The possibility of the State Government loading the SPV with its political nominees could be high in states where the party in power in the State Government is different from that in the City Government.

Powers and functions of the SPV

The MSC requires the Smart City Plan to be an integrated area plan and just for specific projects of say, water supply or procurement of city buses. Therefore, effectively, the SPV will have to function for integrated development, management and governance of the City, at least to the extent of its geographical jurisdiction, which could either be the geographical area covered under the SCP or could be even beyond the SCP area, as decided by the State Government.

The MSC Guidelines empower the SPV to plan, appraise, approve, release funds, implement, manage, operate, monitor and evaluate the Smart City development projects. In its jurisdictional area, the State Government and the Municipality shall delegate to the SPV their powers as required by the SPV for its smooth functioning. This would include the powers to collect taxes and user charges.

Effectively, thus, the SPV replaces the Municipality and gets even more powerful than the latter because even State Government is required to delegate its powers, which perhaps even municipalities never got. The Mission Guidelines cite operational independence and autonomy in decision-making and programme implementation as the primary reason for the creation of the SPVs.

The pros and cons of the SPVs

All the features of the composition, powers and functions mooted for the SPVs are unique in the history of urban and rural development of India and can certainly be called a very bold step. States had experimented with SPVs for urban development in a limited and project mode so far. For instance, a riverbank redevelopment project in Gujarat was implemented through an SPV. Many States created SPVs for urban water supply systems, for project implementation as well as maintenance. City bus services were assigned to SPVs in many States.

The model of SPVs for the MSC is significantly different from the project based SPVs that have been created for urban development so far. This is so because the SPV for MSC would be handling the entire affairs of urban development, from planning, execution, selection of executing agencies, collection of taxes and user charges and so on, for which it will take away all the statutory powers of the municipality and, to a good extent, of the State Government too.

While the SPVs in Gujarat generally worked well, in many cases, the urban SPVs, devoid of any organic interwoven structure with the municipality remained construction agencies with only suboptimal results. At the same time, the SPVs made the city governments feebler, by steps. Another deficiency of the SPV model has been lack of accountability of the SPV to the city residents in a democratically structured way, as is expected from the statecraft of India’s democratic framework.

With the introduction of SPVs at the city level as a replacement of municipalities for planned urban development, we can now imagine an SPV for the State too, which would replace State Government in a corporatised mode, to bring about planned development of the State as a whole. Of course, it would be a wild dream and should be so, because we love democracy and want it to flourish at State and National level. But should we not strengthen democratic arrangements at the city levels too, to bring about planned urban development?

It is, however, also true that over the years, cities have not been able to see effective governance and planned development, for which the municipalities have been the first target for putting the blame. Often the root cause for this situation is placed on the imperfect implementation of the seventy-third and seventy-fourth amendments. However, we have also seen many examples of excellent work carried out by many municipalities, in several states. World-over, municipalities are the strongest tier of government for city affairs and one would find equally good reasons for making the municipalities strong in India too.

The way forward

It is apparent that municipalities in many states are at the moment inadequately staffed to handle the task of making their respective cities smart in an accelerated mode. The SPVs would definitely bring in modern managerial arrangements to usher in planned urban development speedily. However, if the term “development” is considered in its holistic connotation, it should include development of the local governance systems too.

The Smart Cities Mission, as also AMRUT, have already recognized the importance of governance reforms at city levels. The intention is, therefore, very positive.

However, in designing the details of the MSC, the same concept could be placed on sounder pedestal.

One way of achieving that objective could be to place the SPV under the administrative control of the Municipality by giving it majority holdings in the equity shares. At the same time, the arrangements for ensuring that the SPVs achieve their project and programmer development objectives may continue to be guided by the governments at higher levels, with progressively higher autonomy accorded to the local governments. That should be an excellent framework for making our cities smart not only in letter but in spirit as well.