Increasing private sector investment into sustainable city infrastructure
Making cities investible
Cities are the engine of the global economy, accounting for approximately 80% of global GDP1 . The current urban population of around 3.9 billion is expected to grow to around 6.34 billion by 2050 - 70% of the total global population. This growth is rising fastest in a handful of emerging markets and developing economies, namely India, China and Nigeria, who will contribute between them more than 35% of overall growth in urban populations between 2018 and 20502 .
1 - The New Climate Economy, Seizing the Global Opportunity, 2015
2 - UN Department of Economic and Social Affairs - 2018 Revision of World Urbanization Prospect
Key takeaways:
- To attract investment city governments need to ensure they have appropriately functioning fiscal, credit, regulatory, legal and institutional environments. These environments should be underpinned by a strong vision and leadership from the city accompanied by a long term strategic infrastructure plan including a pipeline of investable projects which will provide an acceptable return level capable of attracting private sector investors.
- Private investment in public infrastructure is increasing as the risk return tradeoffs are better understood by the private sector. One of the key requirements to attract private capital in to city infrastructure is a clear articulation of the risk allocation between the city and the private investor, codified through legally enforceable contracts. There exists a wide body of knowledge of risks crystallising and resulting in losses as the risks were not properly identified, allocated and mitigated. New approaches to managing the next generation of project investors and lenders is required.
- There exists a range of tools available to catalyse private finance. The applicability depends on the context of the specific projects / plans city governments are looking to implement. There are three primary ways that cities can look to raise money for urban infrastructure: asset sales and land development; public-private partnerships; and asset monetisation / securitisation. Where investment is hampered by perceived and real risks and inefficiencies, for example in developing markets, there is growing recognition of the need to mitigate these risks through more innovative means to unlock private resources e.g. green bonds, land value capture and blended finance.
Final word
There are no easy answers when examining the ways of boosting private finance in cities in developing countries, but it is clear it has a valuable role to play in meeting global low-carbon, climate-resilient infrastructure ambitions. Banks and institutional investors can provide the upfront capital investment to finance the infrastructure, but cities and governments need to provide the predictable revenue streams in order to support this financing.
