Corporate speed dating: Finding financiers for India's smart cities

Corporate speed dating: Finding financiers for India's smart cities

Mumbai India financing smart cities
ShutterstockPeter Burana
Rapid growth in India's urban population centers, like Mumbai, is forcing the challenges of sustainable development.

Shaky fundamentals

Substantial concerns remain, however, about the effectiveness of VGF in catalyzing private sector participation in sustainable development. Feedback from industrial VGF partners in the solar industry, for example, suggests that competitive underbidding for federally sourced financing reduces financing below levels sufficient for project commercial viability.

Research on corporate governance in India also illustrates a grim outlook for the global investor community. In cyclical sectors essential to urban development — such as industrials, property, materials and discretionary consumption — both data obfuscation and an overleveraged corporate sector have reduced investor confidence in firm management, undermining economic development in the long term.

These concerns mean that domestic lending rates in India, particularly for renewable energy projects, are significantly higher than those provided by foreign and multilateral development banks.

For example, standard SBI domestic business debt interest rates, around 11 percent, are dramatically higher than those of the Asian Development Bank or the International Finance Corporation, which provide funding rates as low as 4 percent.

Infrastructure inhibitors

Concerns about SCI financial performance and corporate governance are emblematic of India’s deeply embedded and inefficient regulatory framework.

Restrictive land use policies — such as Floor Space Indexes (PDF) that are well below optimal capacity — limit the efficient densification of population centers and have induced unregulated urban sprawl and restricted investment.

Population densities in metropolitan areas surrounding India’s largest cities are already extremely high (PDF) and growing (on average 2,450 persons per square kilometer within 50 kilometers of city centers).

Coupled with historic underinvestment in transit infrastructure, these policies promote traffic congestion between the largely residential periphery and the commercial core.

These policies have observable impacts on household and business welfare. For example, households in Bangalore, India’s third largest city, lose 2–4 percent of annual income (PDF) due to higher transit and commuting costs.

Indian businesses, too, face increased market-connection costs, with freight costs between metropolitan centers and their peripheries twice India’s national average — and five times that of comparable transit in the United States.

Policy reform and investor outreach

Because the SCI lacks a domestic regulatory and investment climate that is conducive to sustainable economic growth, the initiative faces an uphill battle for relevance.

Outcomes can be improved by refocusing attention on the reform of India’s regulatory framework and deepening engagement with international financing bodies.

Reform of Indian land use policy, in particular FSIs, to promote higher-density inhabitation of urban centers not only will reduce transit congestion and transit costs for workers and businesses, but also allow for more energy-efficient delivery of municipal services. Improvements in service delivery also must be coupled with full-cost-recovery tariff structures to promote system development and expansion.

Improving the confidence of domestic and multilateral investors in Indian sustainability projects will prove more challenging, however. The Modi administration could start by strengthening regulation of India’s state-run banking system, feeding through to the corporate sector by promoting investment discipline and transparency.

These domestic policy reforms, if regulated effectively, would go a long way toward achieving Modi’s vision of developing new or refurbished urban centers as “magnets of foreign investment, jobs, and symbols of efficiency.”

Upcoming events, such as the 6th World Renewable Energy Technology Congress in August, present a unique opportunity for Indian businesses to partner with multilateral investment networks, leveraging private investment expertise with informed domestic governance for sustainable and inclusive urban development strategies.

Lacking formalized mitigation commitments, this integrative strategy seems a best-alternative approach — securing India’s domestic environmental heritage and economic livelihoods while contributing meaningfully to the global sustainability regime.

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