by Hemal Shah
As the US-India partnership on Smart Cities gets underway with Vizag, USIBC’s Hemal Shah lays out the prospects of the city becoming a blueprint for a long lasting structure to finance India’s infrastructure needs.
In 2014, Prime Minister Narendra Modi and President Obama met for the first time in Washington and drafted a clutch of bilateral goals for an elevated US-India relationship. One of these goals was to develop together three of India’s 100 selected cities – Visakhapatnam (Vizag), Ajmer, and Allahabad – into “Smart Cities.”
To mark the next big step in this cooperation, the US Trade and Development Agency just concluded a grant with the state government of Andhra Pradesh to draft a planning framework and development strategy for Vizag. By December 2016, a private consortium of three US companies – AECOM, IBM, and KPMG – will have a masterplan ready for Vizag’s graduation to a smart city.
But beyond this immediate cheer, the US-India cooperation in Vizag actually has bigger potential to transform bilateral ties. In other words, how can both sides use the process of creating a masterplan to transcend symbolism and leave a legacy of economic and strategic significance? The answer is simple – address India’s most pressing needs on access to long-term infrastructure finance in public-private partnerships (PPPs).
The lack of adequate financing options for long-term infrastructure projects acts as a major deterrent for potential private investors in India. Banks are overextended and saddled with non-performing loans. This doesn’t pose a major issue to countries like Japan, China and the UK, which use their sovereign investments to fund India’s smart city planning. Nonetheless, developing stronger and independent financing options will make India’s infrastructure needs achievable and sustainable.
Vizag is arguably the perfect city to exemplify such strategic and economic bilateral cooperation. With integrated access to road, rail, port, and airport facilities, Vizag’s presence along the new Chennai-Vizag Industrial Corridor is likely to attract investments worth $15 billion. Vizag’s importance as a tourist destination is rising, with foreign arrivals jumping up by 229 per cent last year. India’s Malabar naval exercise with the US and Japan also took place off the coast of Vizag last year, tying in neatly with India’s “Act East policy” and United States’ pivot to Asia.
As the US consortium in Vizag starts to plan development projects with the Andhra Pradesh Municipal Administration, including urban and local bodies (ULBs), three key points should be highlighted. First, encourage ULBs to represent their finances accurately, audit their accounts and disclose them, and automate all such processes to generate higher value for their assets. This will help build their credit worthiness and facilitate the development of a municipal bond market to address the lack of financing options. Furthermore, Vizag can always tap into its small-scale experiment with municipal bonds conducted back in 2010.
Second, advocate the use of the hybrid annuity model to structure PPPs wherein 40 per cent of the project cost is borne by the private company and the rest of the 60 per cent is paid by the government through annuities collected from user fees over a fixed period of time. Such a model will have a three-pronged effect: projects will be planned based on user choice/needs; user mentality will shift to pay more for better quality utilities; user fee collection will boost revenues to pay off the project cost.
Finally, planners should aim to work with ULBs beyond the December 2016 master-planning deadline to ensure continuity and serve as a source of background knowledge on projects planned by them. This will ensure a bottom-up approach for implementers and eliminate potential principal-agent problems.
Vizag can serve both as a symbol and legacy of economic and strategic significance for the US-India relationship that can be further emulated in Allahabad, Ajmer, and beyond.
Hemal Shah is Manager for Logistics, Hospitality, and Real Estate at the US India Business Council (USIBC) in Washington D.C. She tweets at hemalshah_7.