Union Budget 2025–26 introduced the Urban Challenge Fund (UCF) as a bold new instrument to re-energise city development. Budget documents emphasise a ₹1 lakh crore corpus to support three themes – “Cities as Growth Hubs”, “Creative Redevelopment of Cities”, and “Water and Sanitation” – with the Centre funding up to 25% of each approved project. The UCF is deliberately structured not as another grant‐in‐aid, but as a catalytic financing platform: projects must be “bankable” (with their own revenue or viability) and backed by substantial market funds (at least 50% from bonds, loans or PPPs). This 25–50 financing model was flagged by the Finance Minister in her Budget speech and reiterated by officials: for example, HUDCO’s (Housing and Urban Development Corporation) investor presentation notes a ₹10,000 crore allocation for FY26 under UCF and spells out the rule “finance up to 25% of bankable project costs, with at least 50% funded through bonds, bank loans, or PPPs”. In a nutshell, UCF is meant to leverage market capital, not replace it, and to incentivise systemic, revenue-backed innovations in urban infrastructure.
Since the announcement, UCF has been moving from concept to reality. According to Business Standard, the government approved draft guidelines in September 2025 and earmarked an initial ₹10,000 crore for FY26, with a ₹300 crore pilot (“prototype”) scheme to test the model. This pilot focuses on smaller cities (1,00,000 population) to “demonstrate the potential of developing bankable projects” under UCF themes. MoHUA officials have described this as an AMRUT-linked curtain-raiser: for example, Union housing and urban affairs ministry additional secretary D Thara, confirmed at a WRI (World Resources Institute) panel, that the ₹300 crore pilot will even carry a 70% credit guarantee backing to reduce risk.
These steps suggest the authorities intend to fine-tune UCF “in-flight”. HUDCO is positioning itself as a key partner: in its AGM report HUDCO describes launching a new “Urban Invest Window” to help city governments prepare bankable projects, and notes that UCF is explicitly viewed as an opportunity to drive financial and institutional reforms in city administration. In short, MoHUA, HUDCO and other institutions (including NaBFID) are aligning to support UCF rollout. As one observer noted, “Cities have some experience of PPPs and revenue-generation, and UCF can build on that – but states need capacity to package projects to qualify for the fund”.
Complementary, Not Duplicative
Crucially, UCF is framed as a complement to existing urban schemes, not a replacement. Unlike traditional grant programs (e.g. AMRUT, Smart Cities Mission, etc.), UCF is explicitly outcome-driven and market-leveraged. Its champions stress that it will catalyse novel projects that might not fit within siloed schemes. For example, schemes like VGF (Viability Gap Funding) and CITIIS have had limited success. (CITIIS 1.0, launched in 2018, saw limited success as only 12 pilot projects were funded nationwide)
Similarly, the Urban Infrastructure Development Fund (UIDF) for tier-2/3 cities has so far seen 730 projects sanctioned but only 3 completed as of Feb 2025 – underscoring its poor absorption. By contrast, UCF is designed for bankability and accountability, requiring realistic business models. Its 25% co-financing rule ensures ULBs and private sponsors have skin in the game. In theory, that should avoid the slow utilizations seen under pure grants.
Moreover, UCF aims to reach where prior programs struggled. The Smart Cities Mission has been largely central‐funded and “area-based” (redeveloping core urban districts), achieving high completion rates but relatively few bold PPP innovations (94% of its 8,067 projects are already complete, per official data). Similarly, UIDF’s tier-2/3 focus has tepid progress. UCF is pitched to plug these gaps: it offers a flexible platform (via HUDCO/NBFCs) to finance last-mile projects in midsized cities – from transit-oriented development hubs to small-scale EV charging networks, from water reuse plants to smart lighting corridors. As HUDCO put it, UCF is “another promising opportunity… announced to drive financial and institutional reforms in Urban Local Bodies”.
Design Features and Enhancements
Beyond its headline 25–50 model, UCF can incorporate innovative finance tools. Already, lessons from elsewhere and from the pilot suggest adding blended instruments and risk buffers. For example, the MoHUA pilot’s 70% credit guarantee is one such tool. More broadly, UCF projects could use subordinated loans or conditional grants (where central support is converted to a loan if revenues underperform), performance-linked disbursements (funds released upon meeting milestones), and first-loss equity or partial guarantees to attract private co-investors. However, long-term self-sufficiency and financial viability have to be prioritised.
In essence, UCF’s own financing model should be blended and flexible. Disbursement can be phased: a small upfront grant component (say 5–10%) to cover planning costs, followed by tranches tied to construction and usage metrics. In all cases, the central 25% should remain contingent on robust evaluation of outcomes. The original guidance (25% funding if 50% leveraged) provides a strong scaffold, but real impact will depend on tailoring that model to each project’s context.
Learning from the Past
UCF’s designers would do well to absorb the history of urban funds. An earlier attempt – the City Challenge Fund (CCF) proposed in Budget 2002–03 – never really took off. Only tiny allocations were made (₹24.68 crore initially) and “no city had accessed CCF, perhaps because the size was too small and the stipulation of designing and implementing associated city-level reforms was too demanding”. Today’s UCF is orders of magnitude larger, but the CCF experience is a cautionary tale about administrative complexity and capacity gaps. Other schemes offer lessons too: the Smart Cities Mission eventually managed huge spending, but largely on conventional projects, with limited private co-finance. UIDF’s slow start illustrates that even well-funded programs need streamlined processes. In all these cases, rigid rules or excessive bureaucracy was a drag. UCF must avoid that trap by being responsive: in fact, MoHUA officials have signalled that UCF guidelines “can be modified even after launch based on learnings”.
Recommendations
Based on these insights, here are some recommendations to make UCF align with international best practice and be truly transformative:
- Service‐linked outcomes
Tie UCF funding to quantifiable service improvements (e.g. additional litres of water treated, kilometres of lit streets, public-space visitors, etc.), not just inputs. This ensures projects deliver public value. - Transparent scorecard
Use a published, weighted evaluation matrix at each stage. Criteria might include (for example) technical viability (25%), financial leverage (25%), social inclusivity or sustainability (20%), implementor capacity (15%), and innovation level (15%). Such clarity would improve applicant understanding and competition and deter arbitrary scoring. - Multi-stage application
Adopt a tiered process: a short initial concept note (Stage I) followed by invited full proposals (Stage II). Early filtering saves effort and allows technical assistance (via HUDCO/NBFCs) to help promising ideas before full submission. This is standard practice in successful challenge funds globally. - Robust Monitoring, Evaluation and Learning (MEL)
Mandate strong, independent M&E frameworks. Every UCF project should have clear baseline metrics and midline/endline evaluations. Document successes and failures, and create a learning database. This would help refine UCF operations annually. The ADB-supported projects under UCF should feed lessons back into policy in real time.
Spotlight: Transformative Project Types
To illustrate UCF’s potential, consider innovative projects that fit the bill:
- Transit-Oriented Development (TOD) hubs
Mixed-use redevelopment around suburban rail or metro nodes, combining housing, shops, and last-mile mobility (e-buses, shared autos) to reduce car-dependence. Revenues come from integrated land leases and commercial rents. - Circular economy parks
Urban industrial parks for recycling, composting, and green tech, with cross-subsidised services (e.g. “urban mines” for e-waste and battery recycling). User fees for processing create a revenue stream. - EV mobility hubs
Combining fast-charging stations, battery swapping, and parking for two/three-wheelers (including a fleet of electric autos), situated at the city outskirts. The hub model can yield toll/fee revenue.
All of these are system-level, innovative projects with identifiable revenue streams or public benefits. They go beyond “built as usual” schemes and embody the “challenge” spirit of UCF. Crucially, they would not have been fully possible under narrower grants – whether because they cut across jurisdictions, require upfront investment, or need private co-investors. UCF can unlock them by co-funding risk capital.
Conclusion
The Urban Challenge Fund is a promising addition to India’s urban finance toolkit. Its scale (₹1 lakh crore) and orientation toward bankable innovation mark a new direction. Early indications – pilot projects, institutional buy-in, a challenge-based format, a blended finance model, a willingness to course-correct and learn from mistakes built into the policy – suggest it can avoid past pitfalls. But success isn’t guaranteed.
The fund must remain truly challenge-driven: prioritising projects where even a relatively small subsidy can unlock much larger investment. Complementary financing instruments and robust governance will make it catalytic. If designed well, UCF can help India’s smaller cities become growth engines, from inclusive redevelopment in Tier-2 hubs to smart infrastructure in Tier-3 towns. With transparent processes and a learning mindset, UCF could prove the transformative financing mechanism it was envisioned to be – finally turning the promise of Budget 2025 into on-the-ground urban renewal.