Sustainable Cities: New Avenues for Financing

The world is being swept over by a strong wave of urbanization. From an urban population of one billion in 1960, it took 25 years to add the second billion and only 18 to add the third. And it is estimated that it will take just 15 years for the global urban population to cross four billion. In fact, about 70 percent of the world’s population is expected to reside in cities by 2050.

As population in cities around the world surges, it puts greater strain on infrastructure already struggling to keep pace with the requirements of its residents, emphasizing the needs for higher investments in infrastructure development. The Organization for Economic Co-operation and Development (OECD) estimates that about $71 trillion, or about 3.5 percent of the global GDP, will have to be invested through 2030 in order to improve the basic infrastructure worldwide, including road, rail, telecoms, electricity and water infrastructure.

And this won’t be all. Cities will also have to bear the cost of minimizing their impacts on the environment to ensure that urbanization does not take place at the expense of the planet. Considering that cities account for as much as 80 percent of global greenhouse gas (GHG) emissions, the World Bank estimates that urban areas will have to account for up to 80 percent of the expected $80-100 billion per year in climate change adaptation costs. Considering their higher efficiency in providing basic services than suburban or rural areas, cities that enforce energy-efficiency measures and adopt renewable energy sources – in other words, sustainable cities – will be able to make a significant positive impact in containing climate change.

The question is: who will bear these costs? While governments and public sector entities remain the main drivers behind infrastructure growth, there is a clear recognition of the needs for private sector participation to pull off this feat. This could explain the surge in public private partnership (PPP) deals worldwide; about 224 PPP deals worth $75.3 billion were closed in 2010, according to Dealogic Projectware, in comparison with 179 deals worth $56 billion in 2009.

Private investments have also received a boost from the fact that infrastructure, traditionally not considered a mature investment class, is steadily and increasingly finding favor among investors. In a recent survey by Deloitte, fund managers across Europe pointed to the emergence of infrastructure as a separate and distinct asset class within the alternative investment space. The survey also found evidence backing this claim: over the last 12 months, private sector investments in infrastructure assets in Europe totaled over €20 billion.

Private sector financing, which bore the brunt of the global financial crisis in 2008 and 2009, is also poised to take a bigger slice of the urban growth story. In what was a rebound, the combined global value of project financing transactions in 2010 jumped to $243 billion, according to data by the Infrastructure Journal. While still lower than the $312 billion seen at the height of the market in 2007, it marks a 38 per cent rise over 2009.

Emerging economies, with their astounding urban growth and strong economic performance, are attracting strong investor interests in this area. India is a prime example. The country’s urban population is expected to balloon to 590 million, or nearly twice the current population of the United States by 2030. Helped by government plans to encourage private investments, the country accounted for more than a fifth of the global project finance volumes, or about $81.4 billion, last year, as per the Dealogic Global Project Finance Review for 2010. This was the highest project finance volume for any country.

In mature markets too, there is growing realization that any plans for sustainable infrastructure development will have to include private sector players. Take,the City of New York’s plans to improve its infrastructure as an example. Recognizing the challenges posed by its growing population and its ailing infrastructure, the city adopted PlaNYC 2030, a comprehensive plan for infrastructure development and driving down its GHG emissions. As part of this plan, New York is working towards providing improved infrastructure, including transportation, waterways, housing and solid waste disposal mechanisms, and reducing its emissions by more than 30 percent by 2030. The plan envisages a strong role for the private sector in achieving its objectives, offering regulatory support in return to potential and existing investors.

That the move towards creating sustainable cities will create a greater need for private sector financing is clear. However, investors will have to be nimble in order to tap this opportunity. Different markets and evolving infrastructure needs will require that they do business in a more innovative way than before. For instance, investors may have to change the structure of projects and/or develop new funding models and financing options such as technology investments, especially clean technology financing.

The transformation of teeming, bursting-at-the-seams urban centers into efficient, sustainable cities will not take place without an adequate focus on promoting technology and innovation. From reducing traffic congestion to implementing alternative fuel technologies for mass usage and from promoting the adoption of electric vehicles to devising efficient waste disposal systems, technology will play a pivotal role in realizing sustainable cities around the world. Technology investments will prove invaluable, helping cities do more with less and addressing the climate change conundrum. Investing in technology will not merely offer another avenue for investors to participate in the urbanization opportunity but will also enable them to route efficiency gains made from technology towards financing infrastructure projects.

Roland W. Chalons-Browne is President and CEO of  Siemens Financial Services GmbH; Munich. Based in Munich, he is responsible for leading Siemens Financial Services business worldwide. Roland has been CEO of Siemens Financial Services Inc. in the U.S. since October 2005. Based in Iselin, New Jersey, he was responsible for leading commercial finance and leasing business across North America. Prior to joining Siemens, Roland served as Managing Director of WestLB in the Americas from 1989 through 2004, including securitizations of future cash flows, project and structured finance deals, and transactions in natural resources. The Financial Services (SFS) division of Siemens is a global provider of financial solutions in the business-to-business area. With over 2,000 employees and an international network of financial companies coordinated by Siemens Financial Services GmbH, Munich, SFS supports Siemens as well as non-affiliated companies, focusing on the three sectors of energy, industry and healthcare. SFS finances infrastructure, equipment and working capital and act as a competent manager of financial risks within Siemens. For more information see: www.siemens.com/finance.