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The Ministry of Urban Development has issued a guidance note to enable smart cities to borrow from multilateral development banks such as Asian Development Bank and World Bank for project execution.
“The idea is that the Centre should hand-hold the cities and help them execute projects with loan assistance from multilateral development banks,” a senior official from the Ministry told BusinessLine .
These cities will be tasked with identifying financially viable smart city projects for which they would like to borrow.
“They will undertake a techno-economic viability (TEV) study for the identified project,” the official added. The TEV study is a risk-mitigation exercise and is considered by financial institutions prior to their lending decision. It provides an appraisal of technological parameters and its impact on the commercial viability of the project and forms part of the Detailed Project Report (DPR).
The study is also important as the Ministry has in the past stressed that States should structure user charges so that operation and maintenance costs are met. Moreover, user charges should be partially indexed to inflation and improved quality of services, states were told.
“The Ministry, multilateral development banks, and national financial institutions such as India Infrastructure Finance Company Ltd (IIFCL) and State Bank of India (SBI) will together undertake an initial screening of projects and finalise a list of those to be taken up for loan assistance,” the official said.
World Bank and ADB would provide a line of credit to IIFCL and SBI. The grant would be shared with their subsidiaries — IIFCL Projects Ltd and SBI Capital Markets Ltd — to develop financial appraisal and syndication capabilities.
“The special purpose vehicles (SPV) created by the smart city will approach these national financial institutions with their project proposals,” the official added.
After financial closure of the project, the SPV will be required to open a trust/ escrow account with the national financial institution. Moreover, the SPV will also ensure that inflows and outflows for the project, including debt and equity, flow from the escrow account.
“In order to ensure that the mission is executed in an efficient manner, the SPVs will also provide quarterly construction monitoring reports to lenders,” the official added.
In September this year the Ministry had informed the states that the government is pursuing a loan of $1 billion from the Asian Development Bank and another $500 million from the World Bank to provide funds to SPVs. This was in addition to an outlay of ₹48,000 crore approved by the Union Cabinet for the mission.
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