SPV FOR SMART CITY COCHIN: CONCERNS

Cochin is fifth in the first list of 20 Smart Cities and there is justifiable joy and euphoria around. The professional circles are abuzz with excitement. A slice of the action is what everyone wants!

Implementation is to happen through an Special Purpose Vehicle (SPV). So, what is this SPV's form and mandate? Who are the players and what are their powers?

Modifying, Managing or Manipulating public realm is always a political process; an expression of political power that runs the place. In a democracy, it ought to reflect the true nature of the entire mass of the people.

In real life though, there is no singular mass called people. It is a celebration of their plurality! This is often, when viewed through the select eyes of a few, rather chaotic, unorganised and unkempt. The contest for the public realm thus, forever remains open.

The SPV is the new kid on the block. It would declutter the bureaucratic gridlock and wave its financial magic wand and create the city beautiful that “everyone” wants. Really? Okay, here's how: To quote from the SmartCity Guidelines of the MOUD:

The implementation of the Mission at the City level will be done by a Special Purpose Vehicle (SPV) created for the purpose. The SPV will plan, appraise, approve, release funds, implement, manage, operate, monitor and evaluate the Smart City development projects. Each Smart City will have a SPV which will be headed by a full time CEO and have nominees of Central Government, State Government and ULB on its Board. The States/ULBs shall ensure that, (a) a dedicated and substantial revenue stream is made available to the SPV so as to make it selfsustainable and could evolve its own credit worthiness for raising additional resources from the market and (b) Government contribution for Smart City is used only to create infrastructure that has public benefit outcomes. The execution of projects may be done through joint ventures, subsidiaries, public-private partnership (PPP), turnkey contracts, etc. suitably dovetailed with revenue streams.

The SPV will be a limited company incorporated under the Companies Act, 2013 at the city-level, in which the State/UT and the ULB will be the promoters having 50:50 equity shareholding. The private sector or financial institutions could be considered for taking equity stake in the SPV, provided the shareholding pattern of 50:50 of the State/UT and the ULB is maintained and the State/UT and the ULB together have majority shareholding and control of the SPV.

Funds provided by the Government of India in the Smart Cities Mission to the SPV will be in the form of tied grant and kept in a separate Grant Fund. These funds will be utilized only for the purposes for which the grants have been given and subject to the conditions laid down by the MoUD.

The State Government and the ULB will determine the paid up capital requirements of the SPV commensurate with the size of the project, commercial financing required and the financing modalities. To enable the building up of the equity base of the SPV and to enable ULBs to contribute their share of the equity capital, GoI grants will be permitted to be utilized as ULBs share of equity capital in the SPV, subject to the conditions given in Annexure 5. Initially, to ensure a minimum capital base for the SPV, the paid up capital of the SPV should be such that the ULB’s share is at least equal to Rs.100 crore with an option to increase it to the full amount of the first instalment of Funds provided by GoI (Rs.194 crore). With a matching equity contribution by State/ULB, the initial paid up capital of the SPV will thus be Rs. 200 crore (Rs. 100 crore of GoI contribution and Rs. 100 crore of State/UT share). Since the initial GoI contribution is Rs.194 crore, along with the matching contribution of the State Government, the initial paid up capital can go up to Rs.384 crore at the option of the SPV. The paid up capital may be enhanced in the subsequent years as per project requirements, with the provision mentioned above ensuring that ULB is enabled to match its shareholding in the SPV with that of the State/UT.

After selection of the cities in Stage II of the Challenge, the process of implementation will start with the setting up of the SPV. As already stated, it is proposed to give complete flexibility to the SPV to implement and manage the Smart City project and the State/ULB will undertake measures as detailed in Annexure 5 for this purpose. The SPV may appoint Project Management Consultants (PMC) for designing, developing, managing and implementing area-based projects. SPVs may take assistance from any of the empanelled consulting firms in the list prepared by MoUD and the handholding agencies. For procurement of goods and services, transparent and fair procedures as prescribed under the State/ULB financial rules may be followed. Model frameworks as developed by MoUD may also be used for Smart City projects.

And now the details, as mentioned in the said Annexure 5:

1. Structure of the SPV The City level SPV will be established as a Limited Company under the Companies Act, 2013 and will be promoted by the State/UT and the ULB jointly, both having 50:50 equity shareholding. This shareholding pattern has to be maintained at all times. The private sector or financial institutions could be considered for taking equity stake in the SPV, provided the State/UT and the ULB share are equal to each other, and the State/UT and ULB together have majority shareholding and control of the SPV (e.g. State/UT:ULB:Private sector shareholding can be in the ratio 40:40:20 or 30:30:40. Ratios such as 35:45:20 or 40:30:30 are not permitted since State/UT and ULB shares are not equal. Ratios such as 20:20:60 are also not permitted since the State/UT and the ULB together do not have majority shareholding). In addition to equity, the State/UT can provide its contribution to the Smart Cities Mission as grant to fulfil the State Government responsibility for ensuring availability of funds for the mission and for ensuring the financial sustainability of the SPV.
2. Raising and utilization of funds by the Company (SPV) The funds given by the Central Government to the SPV will be in the shape of tied grants and kept in a separate Grant Fund. These funds will be utilized only for the purposes given in the Mission Statement and Guidelines and subject to the conditions laid down by the Central Government. The ULBs may, through the State Government, request MoUD to permit utilization of GoI grants as ULB’s equity contribution to the SPV, subject to the following conditions: i. The State Government has made adequate contribution to the SPV out of their own funds. ii. The approval will be limited to the GoI grants that have already been released. Since future instalments of Smart City funds are subject to performance and are not guaranteed, the ULB will not be permitted to earmark future instalments to meet its equity contribution. iii. The utilization of GoI grants as equity contributions will not alter the relative shareholding of the State Government and the ULB, which will remain equal as per Mission guidelines. iv. It is clarified that the Government of India contribution to Smart Cities is strictly in the form of grant and the ULB is exercising its own discretion in utilizing these funds as its equity contribution to the SPV. The SPV will also access funds from other sources such as debt, user charges, taxes, surcharges, etc.
3. Board of Directors The Board of Directors will have representatives of Central Government, State Government, ULB and Independent Directors, in addition to the CEO and Functional Directors. Additional Directors (such as representative of parastatal) may be taken on the Board, as considered necessary. The Company and shareholders will voluntarily comply with the provision of the Companies Act 2013 with respect to induction of independent directors. Below, are given the broad terms of appointment and role of the SPV Board:-
   3.1 The Chairperson of the SPV will be the Divisional Commissioner/Collector/Municipal Commissioner/ Chief Executive of the Urban Development Authority as decided by the State Government.
   3.2 The representative of the Central Government will be a Director on the Board of the SPV and will be appointed by the MoUD.
   3.3 The CEO of the SPV will be appointed with the approval of the MoUD. The CEO will be appointed for a fixed term of three years and will be removed only with the prior approval of MoUD. The functions of the CEO include: a. Overseeing and managing the general conduct of the day-to-day operations of the SPV subject to the supervision and control of the Board. b. Entering into contracts or arrangements for and on behalf of the Company in all matters within the ordinary course of the Company’s business. c. To formulate and submit to the Board of Directors for approval a Human Resource Policy that will lay down procedures for creation of staff positions, qualifications of staff, recruitment procedures, compensation and termination procedures. d. Recruitment and removal of the senior management of the Company and the creation of new positions in accordance with the Company’s approved budget and the recruitment or increase of employees in accordance with the Human Resource Policy laid down by the Board. e. Supervising the work of all employees and managers of the Company and the determination of their duties, responsibilities and authority;
   3.4 The Independent Directors will be selected from the data bank(s) maintained by the Ministry of Corporate Affairs and preference will be given to those who have served as independent directors in the Board of Companies fulfilling Clause 49 of the listing agreement of Securities and Exchange Board of India (SEBI).

In other words, the city shall be controlled directly by the Cenral govt.through a CEO who runs the City like a Company that is answerable to its shareholders. Of course, the State and ULB together are the majority shareholders on record. Has the citizen been appraised of such a primary shift in the modus operandi of Civic Governance?