The annual global infrastructure investment deficit is $1 trillion and growing. Now more than ever, as the global population shifts from rural to urban, national governments need to invest in cities.
According to a report by the Global Commission on the Economy & Climate, if this gap isn’t closed, as many as 2 billion city dwellers will live in informal settlements by 2030. But better urban growth could be a $17 trillion opportunity by 2050 if national policymakers can transform their urban financial systems and overcome investment, regulatory and institutional barriers to ensure compact, coordinated and connected cities.
The report, “Financing the Urban Transition,” examines all the major financing mechanisms for building sustainable urban infrastructure. Here’s a look at three of them:
- Debt financing is hampered because of a lack of creditworthiness – only 4% of the 500 largest citiesin developing countries are classified as creditworthy in international financial markets.
- Land value capture is used by both developed and developing countries to increase infrastructure: for example, the metro in Hyderabad, India was developed by a private contractor who financed most of the $2.7 billion construction costs and expects to recover them over the next 35 years from fare revenues and property development.
- Public-private partnerships, which are common in many countries including Australia, Canada, the UK, and the US, have the power to transform urban infrastructure – but most countries which use PPPs do so for less than 10% of their public infrastructure investments.
The report says these finance mechanisms could have significant potential for sustainable urban infrastructure. And if the world moves to a compacted, connected and coordinated urban infrastructure model, we could see higher savings and lower costs. But governments need to make that investment first so they can lock in economic and climate benefits for decades to come – instead of bearing the costs.
“Cities that are compact, connected and coordinated could generate a stream of savings equivalent to around $17 trillion by 2050,” said lead report author Dr. Graham Floater, who serves as EGC Director of LSE Enterprise. “But to get that urbanization dividend, national governments need to invest in sustainable urban infrastructure. To unlock the finance required, national policy makers must overcome institutional capacity constraints and inertia, and address the perceived risks for private investors, sovereign wealth funds and others. If they can achieve it, the long term pay-offs for national economies will be high.”