How Special Purpose Vehicles Drive Smart City Projects in India

India’s Smart Cities Mission set out to transform 100 cities with better infrastructure, cleaner environments, and technology-driven services. But behind every smart traffic system, integrated command centre, and redeveloped urban precinct sits a far less visible engine: a company. Each smart city is run not by its municipality alone but by a dedicated entity called a Special Purpose Vehicle (SPV). Understanding how these SPVs are built and how they function explains a great deal about how ambitious urban projects actually move from policy documents to concrete reality.

What is a Special Purpose Vehicle in the smart city context 🔗

A Special Purpose Vehicle is a limited company created for one specific job: implementing smart city projects at the city level. When the Smart Cities Mission was launched in 2015 by the Ministry of Housing and Urban Affairs (MoHUA), the central government decided that the day-to-day execution of projects should not rest with traditional municipal bodies. Instead, the implementation of the Mission at the city level is carried out by an SPV created for the purpose.

This was a deliberate design choice. Indian cities are normally governed by local bodies empowered under the 74th Constitutional Amendment Act of 1992. The Mission introduced the SPV as a parallel implementing agency, registered as a company rather than functioning as the usual third tier of local government. The logic was speed and focus: a company structure offers operational flexibility and autonomy that conventional government departments often lack, allowing decisions and procurement to move faster.

Establishing an SPV: structure and shareholding 🔗

The most important feature of an SPV is who owns it. Each SPV is incorporated under the Companies Act, 2013, with the State or Union Territory government and the Urban Local Body (ULB) acting as joint promoters. The State/UT and the ULB hold a 50:50 equity shareholding in the SPV, and this balanced ownership is the cornerstone of how the company is governed.

Why the 50:50 pattern matters 🔗

The equal split is not a formality. It ensures that neither the state government nor the local body can dominate the other. The state brings policy direction, regulatory backing, and a broader strategic view, while the ULB contributes local knowledge and ground-level implementation capacity. Keeping shares equal forces both partners to work together rather than at cross purposes.

This shareholding pattern has to be maintained at all times. The Mission guidelines allow private players or financial institutions to take an equity stake, but only on strict conditions. The State/UT and ULB shares must remain equal to each other, and together they must retain majority shareholding and control. A ratio like 40:40:20 between State, ULB, and private sector is permitted, but uneven splits such as 35:45:20 are not, because the State and ULB stakes would no longer match. This rule keeps public control firmly in place even when private capital comes in.

How an SPV gets set up 🔗

The process begins once a city is selected under the Mission through the City Challenge competition. The state government and the ULB then collaborate to incorporate the SPV as a company. They jointly decide the paid-up capital, which is set in proportion to the size of the project and the financing required. For example, a city’s SPV might start with a modest initial paid-up capital contributed equally by the state and the municipal corporation, then expand it as projects grow.

Each SPV is headed by a full-time Chief Executive Officer (CEO) and has a board that includes nominees of the Central Government, the State Government, and the ULB. In practice, many SPVs have been led by district collectors with municipal commissioners serving as CEOs, drawing senior administrative experience into the company’s leadership.

Functions and operations of SPVs 🔗

The SPV is far more than a holding company for funds. It is given a wide and active mandate over the entire life cycle of smart city projects.

The full project life cycle 🔗

According to the Mission framework, the SPV will plan, appraise, approve, release funds, implement, manage, operate, monitor, and evaluate the smart city development projects. In other words, a single entity carries a project from the drawing board through construction and into long-term operation. This concentration of responsibility is meant to reduce the delays and coordination failures that often plague projects split across multiple departments.

Managing funds and grant utilisation 🔗

Money flows into the SPV through a carefully controlled channel. Funds provided by the Government of India come as a tied grant and are kept in a separate Grant Fund, to be used only for the purposes laid down in the Mission guidelines. The state government and the ULB provide a matching contribution. Releases are not automatic. Yearly instalments are released only after the SPV submits its quarterly City Score Card, shows satisfactory physical and financial progress through Utilisation Certificates, and meets the milestones in its Smart City Proposal. This performance-linked funding keeps SPVs accountable for results.

Public-private partnerships and project delivery 🔗

SPVs are not expected to build everything themselves. The Mission explicitly encourages them to bring in private expertise and capital. Projects may be executed through joint ventures, subsidiaries, public-private partnerships (PPP), turnkey contracts, and similar arrangements. This flexibility lets an SPV choose the delivery model that best fits each project, whether that is a road redevelopment, a water supply upgrade, or an Integrated Command and Control Centre.

The results speak to the model’s capacity. As of March 2025, over 93 percent of the more than 8,000 projects under the Mission had been completed, with the government disbursing nearly the entire budget outlay of around ₹48,000 crore. The same period showed SPVs delivering complex, multi-sector projects on tight timelines while building a skilled urban management workforce inside government.

Ensuring sustainability: revenue and creditworthiness 🔗

Grants from the centre and the state are finite. The far harder question is how a smart city sustains its infrastructure once Mission funding ends. This is where the financial design of the SPV becomes critical.

The need for a dedicated revenue stream 🔗

The Mission guidelines anticipated this challenge from the start. States and ULBs are required to ensure that a dedicated and substantial revenue stream is made available to the SPV so that it can become self-sustaining and develop its own creditworthiness to raise additional resources from the market. The guidelines also insist that government contributions be used only to create infrastructure with clear public-benefit outcomes, keeping the SPV’s commercial ambitions aligned with public purpose.

A dedicated revenue stream can take many forms, including user charges, service fees, and value captured from improved urban services. The reason these matter is simple: predictable income lets an SPV plan for the long term and signals to lenders that it can repay borrowings.

Building creditworthiness to raise resources 🔗

Creditworthiness is the SPV’s gateway to financing projects that exceed available government funds. To borrow from banks or tap the markets, an SPV must demonstrate a reliable income and a sound track record. Here the SPV structure offers a genuine advantage over traditional municipalities. Because SPVs operate independently and can control specific revenue streams, those streams can serve as collateral for private investment, something that the deficit-ridden balance sheets of many ULBs struggle to offer.

This matters because the funding gap is large. Beyond central and state grants, the remaining requirements are to be met through user charges, public-private partnerships, finance commission allocations, land-based fiscal tools, municipal bonds, and loans from bilateral and multilateral organisations. Yet most of these sources are limited in scale. Revenue from user charges in even the best-performing municipalities often covers only a fraction of total expenditure because of leakages and unmetered use, which is precisely why building independent SPV creditworthiness is so important.

Tapping the municipal bond market 🔗

One promising route is the municipal bond market. Bigger and more progressive local bodies in states like Gujarat, Maharashtra, Karnataka, and Tamil Nadu have experimented with bonds, supported by regulations from the Securities and Exchange Board of India that enable municipalities to raise capital through bond issues. Adoption has been uneven so far, largely because proving creditworthiness remains difficult for bodies that run on grants and deficits. An SPV with a ring-fenced revenue stream is far better positioned to issue revenue bonds and attract investors than the underlying municipality would be on its own.

The road beyond the Mission deadline 🔗

The Smart Cities Mission reached its formal completion date of 31 March 2025, but the SPVs are not simply being wound down. Recognising the institutional capacity these companies have built, MoHUA has advised States and UTs to integrate SPVs and Integrated Command and Control Centres into their long-term governance frameworks. To keep them financially viable, the Ministry has suggested that states allow SPVs to charge a professional fee, or “Centage,” for planning, designing, and implementing central and state government schemes.

This repurposing reflects a broader recognition that future cities will keep needing the kind of focused, technically equipped project management that SPVs provide. The transition from grant-dependent implementing agencies to self-sustaining urban management entities is the next test of the model. Their long-term success will depend on whether they can secure those dedicated revenue streams and establish the creditworthiness that the Mission guidelines envisioned from day one.

What do you think? Should city-level companies like SPVs continue to run urban projects after the Mission ends, or should those responsibilities return fully to elected municipal bodies? And how can an SPV balance the need to earn revenue with its duty to keep essential public services accessible to all residents?

References

1. https://smartcities.gov.in/implementation
2. http://www.pondicherrysmartcity.in/structure-spv.php
3. https://www.thehindu.com/news/national/all-100-cities-selected-under-smart-cities-mission/article61697551.ece
4. https://smartcities.gov.in/financing
5. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2135474
6. https://thewire.in/economy/financing-smart-cities-a-case-for-municipal-bonds-market
7. https://www.teriin.org/opinion/financing-indias-smart-cities-mission-special-purpose-vehicle