Urban Challenge Fund: Will India avoid repeating its city infra failures?

Less than a year after the Smart Cities Mission (SCM) completed 10 years — five years more than planned — the Union Cabinet approved another mega urban infrastructure scheme with even higher allocations.

Called the Urban Challenge Fund (UCF), the central assistance (CA) will constitute 25 per cent, or Rs 1 lakh crore of the Rs 4 lakh crore fund, the rest coming from state governments, urban local bodies and private partners, over the next five years.

This is billed as a “paradigm shift” in urban development approach – from grant-based financing to “market-linked, reform-driven and outcome-oriented infrastructure creation”. The scheme proposes that a minimum of 50 per cent of the project cost would be raised from the market.

Too little funds

That India needs to build and upgrade urban infrastructure is not in doubt. Such infrastructure is essential to make urban centres not only liveable but also growth drivers.

The Economic Survey of 2025-26, released a fortnight ago, quoted the World Bank to say Indian urban population will rise to 40 per cent or 600 million — up from 31 per cent in 2011 — and contribute 70 per cent to the GDP. In comparison, the survey said, top 10 cities in China, the US and Germany (2023) account only for 9 per cent population and 28 per cent of GDP.

The survey warned, “Any infrastructure breakdown” in urban areas in India would have “disproportionate effects on national growth”.

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A January 2024 World Bank report had said India needed $840 billion for its urban infrastructure development by 2036, or $55 billion, or 1.2 per cent of the GDP, per annum. That is Rs 70 lakh crore (at then exchange rate of Rs 83) until 2036 or Rs 4.6 lakh crore a year. Going by this, the UCF of Rs 4 lakh crore for next five years is grossly inadequate.

No lessons were learnt from the JNNURM. The same may happen with the Urban Challenge Fund.

But that is just onepart of the issue. The other part is why India’s urban infrastructure drive has not yielded optimal result — as is evident from the multiple reviews of the past two such mega projects, Smart Cities Mission (SCM) of 2015-25 and its precursor, the UPA-era Jawaharlal Nehru National Urban Renewal Mission (JNNURM) of 2005-12.

But before getting there, first let’s take a look at what the UCF is all about.

What's changed from Smart Cities?

A Union Cabinet statement announcing the approval of UCF listed the following elements:

• It will “leverage market finance, private participation and citizen-centric reforms”.

• It aims “to build resilient, productive, inclusive and climate-responsive cities, positioning those as key driver of the country’s next phase of economic growth”; it would implement the 2026 budget proposals relating to “Cities as Growth Hubs, Creative Redevelopment of Cities, and Water and Sanitation”.

• Minimum of 50 per cent of project financing to be mobilised from market sources, including municipal bonds, bank loans and Public–Private Partnerships (PPPs), the remaining by states, UTs, urban local bodies (ULBs) or other sources. ULBs would be positioned as “Bankable Asset Class”.

• A strong thrust on “reforms across Urban Governance, Market & Financial systems, Operational efficiency, and Urban Planning”.

States are expected to take the lead in transforming cities — yet the UCF still routes power and funding through the Centre.

• Private sector participation to be encouraged through “structured risk-sharing frameworks and benchmarking of service delivery standards”.

• A dedicated Rs 5,000 crore corpus to enhance the creditworthiness of 4,223 cities including Tier- II and Tier-III cities, particularly for first-time access to market finance.

• Projects will be selected through “a challenge-based framework”, including transformative impact, sustainability and reform orientation; funding will be linked to reforms, milestones and clearly defined outcomes.

• In principle, the fund will cover all cities.

On the face of it, the approach is sound, except its elements are no different from those of the SCM. The only difference between the two is that the latter was meant for 100 selected cities.

Repeating old failed patterns

The SCM’s aim was to “improve the quality of life in 100 cities by providing efficient services, robust infrastructure, and sustainable solutions”. The funding pattern was the same. Of the Rs 1.6 lakh crore spent on the SCM over 10 years, the Centre’s contribution was Rs 48,000 crore, the rest coming from state governments, urban local bodies and private sector (PPPs). The SCM projects were also implemented through “citizen participation”.

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A Parliamentary Standing Committee report of February 2024 found its outcomes unsatisfactory and listed the causes: lack of planning and capacity of cities, absence of greenfield projects, frequent changes and shelving of projects, non-representation to local bodies and experts, lack of accountability and transparency, lack of maintenance of infrastructure and digital assets created etc.

About private participation, it said, “expected funds could not be generated through PPPs” and their finance constituted “6% of their total cost under PPP”.

States taking the lead

More than a year later, former CEO of NITI Aayog Amitabh Kant (2016-2022) wrote, Indian cities were “grappling with over-crowding, pollution, and poor health” and suggested that “transforming our cities will require an overhaul of planning, strengthened governance and sustainable financing.” He proposed that “states must take the lead”.

Private finance made up just 6% of Smart Cities Mission costs. The Urban Challenge Fund expects the market to fund half of it.

It was during his stewardship the SCM was rolled out; the Aayog had defined the SCM, gave it a “reference framework” and also suggestions for its success.

In January 2026, a Comptroller and Auditor General (CAG) report on the ICT solutions implemented in seven cities of Karnataka under the SCM said they provided no benefit.

It said: “On evaluation of ICT enabled smart solutions implemented by the Smart Cities, Audit observed that utility of these technological interventions was negligible due to incomplete assessment of requirements, lack of coordination with other agencies and selection of technology without considering the requirement of end-users.”

These ICT solutions were: intelligent transport system, intelligent traffic management system, intelligent solid waste management, smart classroom, one city one portal, smart water, smart health and smart parking.

Decade of missed lessons

The Economic Survey of 2025-26 lists key “institutional issues” plaguing urban infrastructure development in general: “fragmented metropolitan governance and limited fiscal autonomy for cities – to plan, finance and deliver at scale”.

Also read | Urban Challenge Fund: Smart Cities Mission gets new coat of paint

An investigative report of October 2025 on the SCM concluded: “Despite 10 years of funding and attention, much of the work has been limited to surface-level fixes on ageing infrastructure. The mission has only delivered temporary solutions that lack a forward-thinking approach in strategies.”

All these flaws are eerily similar to the ones that were pointed out in the case of precursor, the JNNURM, covering 65 select cities with a budget of Rs 1 lakh crore.

Two review reports had found the JNNURM outcomes to be very poor in 2012, one by the CAG and the other a Planning Commission’s steering committee. They listed the reasons to be “poor planning”, “lack of ownership” (lack of public participation), “acute capacity deficit”, “one-size-fits-all” approach to reforms, failure to make “crucial” reforms relating to user charges, property tax, land market etc. These were not addressed while rolling out the SCM.

In short, no lessons appear to have been learnt from the JNNURM. The same may happen with the UCF.

Will UCF be any different?

A cause of worry is lack of qualitative assessment of the SCM by the Centre or the nodal agency, Ministry of Housing and Urban Affairs.

The Centre’s assessment at the end of 10 years (“10 Years of Smart Cities Mission”), released on June 24, 2025, makes a quantitative assessment: 7,555 projects (94% of the total 8,067 projects) were completed at a cost of Rs 1.5 lakh crore and 512 more projects worth Rs 13,043 crore were in the advanced stages of completion (taking the total to 8,067 projects at Rs 1.64 lakh crore).

Also read | NDA's Smart Cities Mission and UPA's JNNURM: Same flaws, similar outcome

The issues flagged by the Parliamentary Standing Committee or by the former NITI Aayog CEO find no mention. There was no annual or mid-term review of the SCM, which could have identified the shortcoming in time, enabling corrective measures. A quantitative assessment at the end of the project serves no purpose.

The other big concern is the framing of the UCF and its various elements, which largely repeat those of the SCM without specific corrective measures to ensure the past mistakes are not repeated.