An overwhelming body of evidence suggests that cities need greater access to financing for smarter urban infrastructure and new technology. A lack of financing can be the most significant hurdle of all.
As a first principle, national, regional and city-levelfunding needs to be redirected away from business-as-usual urban infrastructure development, such as road-building. This would significantly reduce the investment gap and release funds for mass transit infrastructure, and is particularly important for countries with more limited budgets. China, for example, invested nearly US$200 billion in highway construction nationwide in 2012, with over US$1 trillion to accelerate the construction of urban public facilities during its 12th Five-Year Plan from 2011 to 2015. 131 India’s main urban development fund – the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) – is skewed towards the construction of bridges and flyovers to support conventional motorisation. 132 Redirecting investment can be particularly effective for urban transport infrastructure. 133 Bogota’s BRT system was partially financed by redirecting funds away from urban highway programmes.
Other steps for increasing city financing include greater budgetary control, enhanced creditworthiness, the use of land value capture, municipal bonds, reform of multilateral funding, and support for project preparation. 134 These are discussed in turn below.
A narrow revenue base induces many cities to convert publicly owned agricultural land to urban land for revenue generation. Providing cities with greater fiscal autonomy – backed up by appropriate fiduciary safeguards – would help them to leverage the significant co-financing often required for large-scale urban infrastructure investment, such as mass transit systems, rather than simply converting land to pay for basic public services.
Enhancing creditworthiness is one way to boost city finances. An inability to source financing for large-scale urban infrastructure projects is closely related to poor credit ratings. According to the World Bank, only 4% of the 500 largest cities in developing countries are deemed creditworthy in international financial markets, rising to 20% in local markets. Investing US$1 in raising the creditworthiness of cities can leverage more than US$100 in private-sector financing for smart infrastructure. 135 The World Bank’s City Creditworthiness Initiative is demonstrating how cities can improve their credit ratings through an array of measures, such as increasing locally generated sources of revenue, better debt management, and developing multi-year capital investment plans.
Such higher creditworthiness can unlock financing for low-carbon, climate-resilient infrastructure. Lima provides a good example of a city working with a range of international institutions, including the Public Private Infrastructure Advisory Facility (PPIAF), to gain a credit rating. This helped to unlock funding for its BRT project. In another example, Kampala in the space of one year managed to boost its locally generated revenue by 86%. With borrowing limits pegged to own revenue, this has almost doubled what the city can borrow for large-scale urban infrastructure.
Greater use of land value capture can also help finance large-scale urban infrastructure, while also driving more compact urban forms. Land value capture involves financing the construction of new transit infrastructure with the profits generated by the increase in land value stimulated by the presence of that infrastructure. For example, in Hong Kong, the government’s “Rail plus Property” model captures the uplift in property values along new transit routes, ensuring efficient urban form while delivering US$940 million in profits in 2009 for the 76% government-owned MTR Corporation. 136 Saõ Paulo has raised over US$1.2 billion in six years using related instruments, and Curitiba is funding the conversion of a highway into a BRT corridor, complemented by higher-density, mixed-use spaces and green areas – an investment of US$600 million. 137 Variations of land value capture include development impact fees, tax incremental financing, public land leasing and development right sales, land readjustment programmes, connection fees, joint developments, and cost/benefit-sharing. 138 Cities such as Houston have created special Tax Increment Reinvestment Zones to help finance the cost of urban infrastructure. 139
Cities can use municipal bonds to finance a group of infrastructure projects, whose collective assets underwrite the bond. Such bonds allow cities to attract large institutional investors which typically prefer not to invest in small, individual projects.For example, Johannesburg recently issued a US$136 million green bond to finance a diverse range of investments, from hybrid buses to biogas energy and rooftop solar water heaters. The bond was 1.5 times oversubscribed and will earn investors a return of 185 basis points above sovereign bonds.
The global climate-related bond market is currently estimated at US$503 billion.140 Municipal bonds are a small share of this, less than US$2 billion, indicating significant potential for scaling up. Models such as the Qualified Energy Conservation Bond (QECB) used in the United States to allow local governments to borrow money to fund energy conservation projects could also be translated into other sectors to fund projects which generate economic returns and carbon savings. With public infrastructure investment falling in many countries, attracting private capital into smarter infrastructure is even more urgent. Institutional investors in the OECD alone have more than US$70 trillion in assets under management but face significant investment barriers related to the complexity of investments and transactions costs associated with smaller infrastructure projects. 141 To overcome these barriers, cities can set up exchanges or dedicated vehicles to match infrastructure projects with financial backers. For example, the mayor of Chicago set up the Chicago Infrastructure Trust in April 2012 to invest in transformative infrastructure projects. Smaller cities could set up pooled financing mechanisms between cities to aggregate the packaging, standardising, marketing and selling of urban infrastructure investments for the private sector. 142
Existing multilateral development bank (MDB) funding in middle- and low-income countries could go further to support the development of more compact, connected and coordinated cities. The eight largest MDBs have committed to investing US$175 billion over the next decade for more sustainable transport.143 However, according to the MDBs’ self-reported breakdown, only about 25% of current MDB financing for transport supports sustainable transport. Less than a fifth of projects reported in 2012 focused on urban transport projects, except for road and urban highway construction. 144 This suggests that, for the foreseeable future, MDB financing will continue to provide incentives for business-as-usual urban growth rather than compact urban growth and connected infrastructure.Institutions such as the World Bank have established a set of tools to assess the carbon impacts of investment decisions. However, MDBs provide support to cities on a sector-by-sector basis rather than via holistic packages aligned to a strategic approach to managing urban growth. MDB funding could be reformed to ensure a more strategic, coordinated approach. Greater consideration should also be given to improving cities’ access to MDB financing, in partnership with national governments.
Finally, cities need support to prepare infrastructure projects and financing deals, especially rapidly expanding mid-sized cities in emerging and developing countries. Many cities have good ideas and plans for smarter urban infrastructure, but often lack the necessary expertise to prepare and package these into bankable projects that can attract private-sector capital. While dedicated financing vehicles designed for this purpose can help (see municipal bonds above), international support is also valuable. For example, the Cities Development Initiative for Asia (CDIA) 145 provides assistance to mid-sized Asian cities to bridge the gap between their development plans and implementation. More than US$5 billion in large-scale urban infrastructure investments are under development due to CDIA’s catalytic input, delivered at a cost of around 0.25% of the investments under preparation.146