Financing smart cities

Smart cities need smart financing. The investments planned under the Government of India program on smart cities would presumably be concentrated on small areas within a city on focused interventions to improve the quality of life. The resultant impact on property prices can be substantial. Given the public nature of these investments, it is only appropriate that a share of the incremental value (by way of higher property prices) be captured by the Government, if only to finance the expansion of the smart city to other parts of the city. In other words, the public investment made under the Smart City program would be the seed capital to catalyze smart city interventions across the city.

One way to do this is to define each smart city area as a tax-increment financing (TIF) district. The tax-increment can be escrowed and used to initiate the project in another part of the city and so on. The practical implementation challenge would be in discovering property prices and overcoming the political economy of an additional tax. The former can be somewhat mitigated, especially in larger cities, by accessing property transaction databases of banks and real-estate developers. If nothing at all, the guidance value increase can be taken as the measure of value increment. 

The political economy can potentially be addressed through the same City Challenge competition being proposed for the selection of the Smart City itself. How about a Challenge competition among localities or wards or Residents Welfare Associations to select the preferred location for the smart city investments on the condition that it would have to be a TIF district? This would take the sting out of the political argument that taxes were being forcibly imposed on the locality. Further, this would also ensure program ownership and make it a real people's competition.