Pause to Play - Smart Cities, SPVs and some regulatory challenges

The Ministry of Urban Development (MoUD) has short-listed 98 cities for Stage I of the Smart Cities Mission (Mission) in accordance with the Smart City Mission Statement and Guidelines (Guidelines). In this article, we analyse whether the strategy prescribed by the Guidelines for implementation of the Mission is practicable within the existing legal framework for development of city infrastructure and city governance and aim to suggest some alternate options for implementation of the Mission. Implementation of Smart City Proposals The Guidelines envisage that smart cities will be developed primarily through three models – two Brownfield development models (accommodating and replacing existing built-up infrastructure, respectively) and one Greenfield development model. In addition, every Smart City Proposal should contain a Pan-city element under which smart solutions would be applied to the existing city-wide infrastructure. Smart City Proposals are expected to be implemented through a special purpose vehicle (SPV) incorporated under the Companies Act, 2013. The Guidelines require the SPV to plan, appraise, approve, award, release funds, implement, manage, operate, monitor and evaluate the smart city development projects. Each SPV will be promoted by the relevant state government/Union Territory and urban local body (ULB) with equal shareholding between the two at all times. The Guidelines also allow private investment in the SPV, provided the state government/UT and the ULB together continue to hold majority shareholding and control of the SPV (and maintaining their inter-se equality of shareholding). As a 50:50 joint-venture between the relevant state government and the ULB, the SPV will not be a Government Company under the Companies Act, 2013 since at least fifty one percent of the paid-up share capital of the SPV will not be held by the state government – the SPV will be treated as a non-government company. Consequently, the funds that will devolve to the SPVs will have to be segregated from the consolidated funds of the state, yet the SPVs will not be subjected to the oversight of the CAG as the SPV is not a Government Company, as noted above. . Delegation of powers to the SPV and its key functions The Guidelines encourage the state government and ULB to empower the SPVs by delegating various rights and obligations of the ULB in relation to the smart city project to the SPV. The key powers and functions of the SPV have been specified in the Guidelines, and accordingly, such recommended delegation needs to be examined against the existing constitutional and legal framework. The delegation contemplated in the Guidelines is wide and raises various issues, including the constitutionality of the SPV appropriating all functions of the ULB, which is an elected constitutional body. There is also lack of clarity on how the ULB, various parastatals and the SPV are to delineate and harmonise their individual roles and functions. Can the state governments/ ULBs delegate powers of a ULB to an SPV? The 73rd and 74th Amendment to the Constitution of India (Constitutional Amendments) dealt with the creation of local governing bodies in rural areas (i.e. panchayats) and urban areas (i.e. ULBs) and gave them constitutional status. Articles 243P-243ZG focus on ULBs and govern their functioning. The specific governance functions that may be devolved to the ULBs by the state governments are set out in the Twelfth Schedule of the Constitution. However, the Constitutional Amendment does not automatically delegate such functions to the ULBs – it merely creates a framework for their existence, and Article 243W of the Constitution specifies that "the Legislature of a State may, by law, endow" municipalities with such powers and authority as may be necessary to enable them to function as institutions of self-governance and fulfil the functions listed in the Twelfth Schedule. The curtailment of powers and functions of ULBs through delegation of their powers and functions to the SPV as proposed in the Guidelines can be done by the state governments and is not per se ultra vires the Constitution. In fact such delegation has already been done by various state governments in favour of various parastatals (such as development authorities, housing boards etc.). In light of the constitutional provisions described above, a ULB’s power is a function of the provisions of enabling legislations passed by the relevant state and, consequently, the existing ULBs in India may have powers that vary from state to state. Further, unless sub-delegation by an ULB is authorised by the relevant state legislation, acts of sub-delegation by the ULB to the SPV could be considered bad in law. Also, the extent to which an ULB can delegate powers and functions to the SPV will depend on the specific municipal corporation laws of the relevant state – it is possible that in certain states the delegation of the municipal corporation’s powers to the SPV would lie beyond the scope of the corporation’s statutory powers. Therefore, each state government needs to carefully analyse the relevant legislation dealing with the ULB to map the powers and functions which the ULB can delegate to the SPV. Such legislations will also have to be examined to understand the permitted process for delegation of powers from the ULBs to the SPV and also the principles that are to guide the exercise of delegated power by the SPV in order to avoid such delegation being challenged as excessive and arbitrary. Finally, any unfettered delegation resulting in the delegator (ULB) abdicating its role entirely may be held to be illegal. Continuing control and oversight by the ULB may be necessary for such delegation to be legally sustainable. Alternative options that can be considered by state governments Performance of the key functions and responsibilities of the SPV (as set out in the Guidelines) may not necessarily require the wide delegation by state governments/ULBs in favour of the SPV as recommended by the Guidelines. Instead of delegating powers of ULB to the SPV, the state governments and ULBs could enter into a master developer agreement with the SPV, which empowers the SPV to undertake the functions and responsibilities envisioned in the Guidelines. The Guidelines authorise the SPV to incorporate joint ventures and enter into public private partnership arrangements for implementation of the Smart City Proposal. The SPV is also authorised to enter into contracts, partnerships and service delivery arrangements. Therefore, under a master developer agreement, the SPV (as the master developer) may fulfil the functions of appraising, approving and sanctioning projects comprising the Smart City Proposal by entering into agreements with private parties in engineering procurement construction/turnkey/public private partnerships modes. In this context, it should be noted that the selection of the SPV as the master developer and execution of a master development agreement may have to comply with the procedures prescribed under the procurement rules of relevant state/ULB, and these rules in some instances may have to be amended to allow for selection of the SPV on a single source basis.