Smart City Mission: The challenges ahead

By Soumya Kanti De Mallik and Siddhanth Pandey, HSA Advocates
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The Smart Cities Mission of the Ministry of Urban Development is a flagship project of the government of India, an urban development initiative of massive proportion, set to attract billions of dollars of investment, and billed as one of the largest urban development projects in the world. Since its launch in June 2015, 60 cities have been selected, through a nationwide contest, to receive funds from the government and assistance from several agencies including the World Bank and the Asian Development Bank. However, implementation of the mission is replete with hurdles.

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Soumya Kanti De Mallik
Associate partner
HSA Advocates

When the ministry launched the mission, government agencies (including municipalities) and private parties were given absolutely no clarity on the operation, management and financing of the special purpose vehicle (SPV), award of contracts, and bankability of a project. The mission guidelines simply provided for incorporation of a limited liability company (SPV) promoted jointly by the state government and urban local bodies to undertake the smart city projects. Besides this, no contractual framework governing the project development, operation and management, corporate governance aspects and state support was prescribed.

The lack of contractual framework will create ambiguity on obligations of parties and functioning of the SPVs, deter investments, and impede implementation of the projects.

To attract private capital and funding from multilateral agencies, it is crucial that a robust contractual framework covering the project development aspects, shareholder obligations, financing, state support, etc., be conceptualized and shared with the SPV.

The framework agreement will typically be a master developer cum shareholders’ agreement designed to cater to the smart city development proposals, and contain enabling provisions to accommodate all contemplated investments in the smart cities. The SPV will act as the master developer and undertake the projects contemplated under the proposal.

A clear demarcation of shareholder obligations, specific project milestones, implementation processes and functioning of the SPVs under the framework agreement will address all of the above-mentioned issues and act as a catalyst for the much required private capital and multilateral agencies funding, and also support proper coordination and timely completion of projects.

For the infrastructure projects contemplated, there will be significant risk in the initial development and construction stages, and monitoring and management of such risks will be of utmost importance. The role of consulting firms in monitoring the risks and assisting in risk mitigation thus assumes great significance in this context.

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Siddhanth Pandey
Associate
HSA Advocates

Such firms can be appointed by the SPV to monitor/supervise construction of high quality infrastructure, assist in drafting of contracts/tender documents, assist in evaluation of bids, conduct due diligence on projects and assets, ensure timely completion of activities, and act as performance enablers in respect of the projects. The firms would build in a system of checks and balances for responsibilities of the stakeholders and would increase the value and viability of projects in smart cities.

In addition to adding value, the consulting firms would also provide comfort to government agencies, investors and financial institutions for future investments, disbursement of grants and financial assistance.

To ensure success of the mission, SPVs should have full freedom and power over the finances, operations and day-to-day affairs of the projects, without any interference or approval requirement from any authority. Political interference or influence in the functioning of the SPVs should be avoided.

Some factors that would ensure independence of the SPV include: appointment of board members and key managerial persons through a transparent process, at competitive compensation to attract best available talent; giving the SPV control over source of funding; and delegation of requisite powers from the authorities to the SPV board. These and other provisions ensuring independence of the SPV should be included in the relevant agreements.

Also, assistance from state government agencies should be a prerequisite and provided to the SPV, as and when required, and covered under a state support agreement.

If the above challenges are addressed by SPVs and concerned authorities, the higher will be the likelihood of timely and successful implementation of the smart city projects, which will immensely contribute to the success of the mission and its objective, i.e. to provide citizens with a better living and a clean and sustainable environment.

Soumya Kanti De Mallik is an associate partner and Siddhanth Pandey is an associate at HSA Advocates. HSA is a full-service firm with offices in New Delhi, Mumbai, Bengaluru and Kolkata.

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