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How will we finance the city infrastructure of the future?

What are the biggest financial priorities for cities in our rapidly urbanising world? Who are the key players to invest in urban infrastructure? What are the most effective, innovative financing mechanisms that cities can adopt?

These are urgent questions that global cities are asking as they face a huge infrastructure funding gap. To find solutions to this major 21st century challenge, the New Cities Foundation has launched the Financing Urban Infrastructure Initiative. Its mission is to produce actionable research and pragmatic recommendations for key urban decision-makers, including mayors, institutional investors and real estate developers, on how we can use innovative financing models that can address this gap.

The Initiative will be led by Dr. Julie Kim who joins us from the Stanford Global Projects Center as a New Cities Foundation Senior Fellow. We caught up with Dr. Kim, to find out more about her planned research.

NCF: How has infrastructure financing changed over the past few decades?

In the past 50 years, we went from infrastructure financing being largely in public hands to increased private sector participation – starting in the mid-80s for emerging economies and mid-90s for advanced economies.

More recently, it came back into the public hands with “remunicipalisation”, especially for the water sector.

Today, there is an unprecedented investor appetite for infrastructure globally and there are more financing options available for cities. As the market becomes more complex with increased demand, a more sophisticated approach is required.

NCF: What are the most pressing priorities in financing cities in the 21st century?

JK: Firstly, cities must strive to be more independent financially. They need to seek local financing capacity while capitalising on all resources available from multilaterals, bilaterals, central and provincial governments.

Secondly, they need to become smarter. The money is there, but packaging bankable projects is difficult. It takes sophistication and financial knowledge to reach well-balanced financing structures, which requires better education, networking and capacity building. This is one of the areas where the New Cities Foundation can play an important role.

Thirdly, cities need to be balanced in their development approach, especially big cities facing rapid growth and globalisation. They must balance the desire to grow economically with the need to address critical environmental and social equity concerns, whilst being sensitive to local needs and promoting inclusivity.

For small to medium-sized cities, it’s important to tap into all external resources – including grants, subsidies, credit guarantees and more.

NCF: It is well documented that cities in the Middle East and Asia face the toughest challenges when it comes to meeting investment resources with demand. How will you go about researching solutions specific to these zones?

JK: These cities need credible institutions and rule of law to attract financing: political instability presents a big challenge. In the short to mid-term, these cities must work closely with multilaterals and other development-oriented institutions to tap into their resources on technical assistance, capacity building and political risk insurance programs. Then, with multilateral backing, they must engage institutional investors for the long haul, in order for economic growth to catch up with the repayment needs.

In particular, they should explore opportunities with sovereign development funds and other impact investors who are interested in socially responsible investments with long-term positive impacts.

NCF: Do you have some standout examples of effective urban financing models that you’ve worked on or witnessed, that you can share with us?

JK: One example related to the local financial independence I mentioned earlier is the Enhanced Infrastructure Financing District (EIFD) model in California.

EIFD allows local and regional agencies new taxing powers – benefits assessment and Tax Increment Financing, for example – as well as multi-agency collaboration across multiple sectors, including transportation, water, waste management, and more. Urban infrastructure projects should not be developed in isolation, but in conjunction with land development that helps to trigger economic growth.

I was also involved in Pusan Centum City in South Korea where a 300-acre former air force base was converted into a major “economic incubator”. This was initially entitled “DMZ” – digital media zone – mixing technology, media and entertainment with education and residential land uses. This was a successful development that succeeded in drawing $2bn in outside investment.

NCF: This June, you’ll be coming to our New Cities Summit in Jakarta: a city that encapsulates many of the issues faced by rapidly urbanising zones in Asia. What interests you most about this city and its neighbouring areas?

JK: I’ll be fascinated to observe how this booming megacity plans to address economic, environmental and social equity challenges within a context of rapid urbanisation and growth. On a personal level I’m fascinated by Jakarta’s incredibly rich culture: its multi-layered, multiethnic population, peaceful and functioning effectively in all aspects.

I think Jakarta can emerge into one of the most unique metropolises in the world, on a par with global cities such as Paris, London, New York, Tokyo, Shanghai – growing to symbolise South East Asia beyond what’s being offered by Singapore.

Dr Julie Kim is a senior fellow at the New Cities Foundation (NCF), an international non-profit organisation. This Q&A was originally posted on the foundation’s blog.

The Financing Urban Infrastructure Initiative is supported by Cisco and Citi.
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