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Cities Today Need to Up Their Game, Starting with Innovatively Financing Their Infrastructure

Julie Kim
Thursday, May 19, 2016

The world is becoming increasingly urbanized as another million people move from rural areas into cities around the globe every week, putting increasing strain on overstretched city infrastructure.

From New York to Jakarta, we are trapped in our cars in interminable traffic jams. From Tokyo to Paris, we are packed like sardines in underground metro systems, afraid to breathe. From Hong Kong to San Francisco, we are resigned to living in “pods” (euphemism for a box) as the only affordable solution for housing. And, more recently, we have been worried about drinking lead contaminated water from aging water mains (some dating well before the Civil War) in Flint, Newark, and who-knows-what other older cities in the U.S.

Today’s cities have no choice but to discover new and innovative models for urban infrastructure financing. Instead of relying on national governments and development grants, subsidies, and transfers that are unsustainable in the long run, they need to become smarter and more financially savvy. Because cities are where the rubber (quite literally) meets the road, they have the opportunity to be at the forefront—engaging their citizens and investors alike, devising creative and innovative solutions on their own, designing projects that are bankable, and marketing them globally.

More than half of us already live in cities. In the next 10 years, the top 600 cities will generate 60 percent of global GDP (about $30 trillion) and 440 of them—the so-called Emerging 440—will be mostly mid-size cities (pop. 1-5 million) from the developing world. Although the lure of better access to jobs, education, healthcare, and other amenities exists, the reality of urban living can be challenging. City governments’ are overwhelmed with the task of providing adequate infrastructure services—roads, public transit, clean water, waste management, electricity, telecommunications, public schools, affordable housing—to the meet the rising tide of urban migrants.

Every dollar we invest in infrastructure increases economic output by at least two dollars. Nonetheless, we face a global infrastructure funding crisis. Out of the annual USD $4.5 trillion we need globally (three-quarters being for urban areas), only $1.5 trillion appears on balance sheets, leaving an annual spending gap of $3 trillion, equivalent to 3 percent of global GDP. Increasingly, cities are “left holding the bag”.

As a part of the Financing Urban Infrastructure Initiative launched in 2015, the New Cities Foundation just published a Handbook on Urban Infrastructure Finance, a tool to help cities’ tackle their impending infrastructure challenges. The Handbook was written with the Emerging 440 in mind. These middleweight emerging cities will drive growth. However, the majority has limited financial savvy and will face major challenges when it comes to creditworthiness, capacity building, and bankable infrastructure projects. Megacities receive the bulk of investment and small cities benefit from grants and aid from the international financial community.

By design, the Handbook is a “how-to” guide on understanding and applying different financing mechanisms to cities’ sector-specific infrastructure needs. It explains basic underlying concepts so that cities can better navigate the complex world of infrastructure financing, ensuring that the myriad financing vehicles available today are understood within their proper context. The Handbook focuses on the instruments that help cities become more self-sustainable in the long run rather than traditional subsidy-like funding.

Crucially, the Handbook introduces the Emerging 440 to innovative new ideas and global best practices in funding infrastructure, including:

-       CEPAC (Certificados de Potencial Adicional de Construção or Certificates for Additional Construction Potential) bonds from Brazil are a new funding vehicle for urban areas needing redevelopment, enabling cities to trade future development rights as options in the capital market.

-       Crowdfunding and mini-bonds from the U.S. and U.K. are a user-investor approach that provides funding for much needed small, civic-oriented projects, such as bike lanes and urban parks.

-       Long proven effective in Scandinavia, a Local Government Funding Agency (LGFA) is a multi-city pooled approach that enables cooperation between cities to build their financial credibility and borrowing capacity together in the global marketplace.

-       Although still a new concept, social impact bonds or a pay-for-success approach relies on performance standards rather than financial returns. It offers a potential venue to unleash the large pool of philanthropic funds and corporate cash reserves for socially responsible infrastructure needs.

In the end, financing has to be repaid one way or another. Nothing is free. In order for funding to be sustainable, the buck ultimately stops with taxpayers and users—that is, you and me. Finding ways to provide the needed infrastructure is not just about financing. It is about our collaborative effort to create a collective vision for a better alternative to the status quo—that is, building new and advanced infrastructure systems that are robust, agile, and environmentally and financially sustainable for our future generations.