Key Urban Infrastructure Challenges

18

1.1 Global Urbanization Context

Urbanization is a well-known phenomenon that has become an integral part of our modern culture. The role of cities and their prominence in the global economy is now at the center of contemporary dialogues, both nationally and internationally. Credible institutions like McKinsey are predicting that 65 percent of the future growth in global productivity will come from the top 600 cities, generating 30 trillion of new wealth for the world by 2025. 2 The top 25 of these cities are mega cities with over 10 million in population. A majority, over 400, are mid-size cities with a population between 200,000 to 10 million spread out across 57 countries. Of the top 600, 440 of the cities—the so-called Emerging 440—are also from the developing world, with over 60 percent from China. Their growth would be organic in nature, largely propelled by the inevitable rural to urban migration inherent in the development process. It is estimated they would be responsible for 47 percent of future growth, generating 23 trillion in new global wealth by 2025. With rapid and highly concentrated growth, these 600 cities will undoubtedly face many diicult challenges in the foreseeable future. For the top 25 mega cities, the risk of hyper-urbanization and resulting urban blight is always around the corner. They need to be sensitive to when the marginal cost of growth outweighs the marginal beneit. For the rest, opportunities abound, but they come with diferent challenges for diferent cities. In developing countries, with organic growth and latent consumerism on their side, cities need to become much smarter to get better access to the global marketplace. In advanced economies, as organic growth slows inevitably and the demographics become more challenging, cities need to compete harder to maintain their economic and political legitimacy—often without much success as we saw in Detroit and other cities that had to resort to bankruptcy in recent years. For all, however, foremost on their agenda should be the need to balance rapid growth that is economically driven with sustainable and inclusive development plans that are ecologically sound and that ensure social equity for all citizens, including the urban poor.

1.2 Key Urban Infrastructure Challenges

Urbanization cannot happen in a vacuum Cities need to provide basic infrastructure services—clean water, power and Chapter 1 Introduction 2 For more detailed discussions on Top 600 cities, see Dobbs et. al. 2012, MGI 2011, MGI 2012, and MGIMIP 2013. 19 Infrastructure encompasses many sectors. The following is a list of infrastructure sectors generally included in infrastructure inancing discussions. Broadly, infrastructure assets that are largely in the public sector domain are those in transportation, waterenvironmental, and social infrastructure sectors; the other sectors in the following list are primarily in the private sector domain. In the inancial community, “infrastructure sector” is sometimes narrowly deined to include only transportation and social infrastructure sectors, which, together with the energypower and oilgas sectors, make up the three largest sectors included in the infrastructure asset category. Other smaller sectors that are treated separately, but are included in the infrastructure asset category are telecommunications, watersewage, chemicalpetrochemical, mining, and the industrial sector. The term “social” infrastructure that is of public service is used in contrast to “economic” infrastructure that has revenue generating potential. Economic infrastructure generally includes transportation and utilities energy, renewable energy, water, waste management, etc.. Transportation Sector: • Surface: Roads, Bridges, Tunnels, Railroads, Parking • Public Transit: Urban Rail, Bus Rapid Transit • Air: Airports, Navigation Aid Systems • Sea: Seaports, Canals WaterEnvironmental Sector: • Water Supply and Treatment drinking • Wastewater Treatment sewerage • Solid Waste Treatment Social infrastructure Sector: • Schools and Educational Facilities • Healthcare Facilities Box 1: Representative Infrastructure Sectors electricity, telecommunications, roads, public transit, sewage system, schools, hospitals, to name a few—to support the growth and basic livelihood of their citizens and businesses see Box 1. Unlike the digital world that deines our ethos today, however, infrastructure embodies hard, ixed assets that are least of all agile or robust—and the services do not come cheap. 20 • Prisons and Justice Facilities • Civic and Cultural BuildingsFacilities • DefenseNational Security PowerEnergy Sector: • Generation: Hydro Plants, Geothermal Plants, Nuclear Power Plants, Gas OilCoal-Fired Plants, Solar Power Plants, Wind Farms, Biomass • DistributionTransmission “Grid”: Towers, Substations, Transformers Lines, Fiberoptic Network Telecommunications Sector: • Cable, Fiber Optic Network, TransmissionReceiving Towers, Base Stations, Satellites OilGas Sector: • ExtractionReinery: Oil Reinery, LNGLPG Plants • Storage: GasOil Storage • Distribution: GasOil Pipelines Other Sectors: • ChemicalPetrochemical: BiodieselPetroleumChemicalPetrochemical Plants • Mining: Precious Metal ExtractionSmeltingProcessing, Mining Operations Facilities • Industrial: PulpPaper Mills, Metal Processing Plants, Steel Mills, Cement Plants Diferent infrastructure sectors have diferent sets of issues on how to provide and pay for their services. For the transport sector, the challenge for cities is providing reasonable alternatives to cars, which, for systems like urban rail transit, require high upfront costs that are hard to recover from fare box revenues alone. For the water wastewater sector, the upfront costs are lower, but collecting user charges can be mired in political controversy because the services are often viewed as entitlements that should be subsidized. For the social infrastructure sector, such as education, health, justice, and civic facilities with a strong public service component, cities need to rely heavily on public funds because there is no clear user charge potential. The energy sector, on the other hand, is largely privatized with mature inancing markets because the user- pay culture is well established. A private 21 operator-government regulator is the model used successfully in many countries for this sector. With rapid urbanization, we are currently facing a global infrastructure inancing crisis. On the demand side, various sources indicate that we need between 57 to 67 trillion in infrastructure spending worldwide—almost 5 percent of gross world product every year from now until 2030. 3 This amount relects a 60 percent increase over and above historical spending levels. In addition, almost half the total spending needs represent a funding shortage and 75 percent of the total needs is for cities and urban areas. Not all of this spending need is in new construction. In many developed economies with mature but aging infrastructure systems, a signiicant amount is in operations and maintenance costs needed to barely maintain current levels of service. 4 An added challenge for cities is the shifting of funding responsibility away from national government to local and regional governments, due in part to the declining iscal health of many national governments in the lingering post-2008 crisis environment. On the supply side, the irony is there is plenty of money, especially in the private sector. There is currently an oversupply of private capital. There is also an unprecedented appetite for infrastructure assets from the private investment community—in part because the asset class has performed consistently well in recent years often with above-par returns. Institutional investors, such as pension funds that are particularly suited for infrastructure assets with their “long-termism,” have been increasing their allocations steadily in infrastructure investment in recent years. Especially in the developing world, international inancial institutions and development banks are also becoming much more active in inancing infrastructure projects—and, increasingly, their activities are at sub-sovereign, local levels. The issue at hand hence is not a lack of money, but rather insuicient infrastructure projects in the pipeline to keep up with the money supply. The real problem, however, is that the money is not free. According to a recent joint study by the Organization for Economic Co-operation and Development OECD and G20 countries, 5 the levers that can reduce the global infrastructure inancing gap not only include robust inancing strategies but, more importantly, suicient and sustained revenue funding sources that can ultimately pay for the inancing. There is an important distinction between inancing and funding. Falling short of direct grants or subsidies, infrastructure inancing, 3 See MGIMIP 2013 for more detailed discussion on global infrastructure spending estimates and gap. 4 See ASCE 2013 and NSTPRSC 2007 for more detailed discussion on the operations and maintenance needs for the U.S. 5 See WEF 2014 for more detailed description the ongoing eforts by OECD-G20 and the infrastructure and investment task force oice of the B20 Australia 2014. For additional discussion on infrastructure inancing challenges in general, see World Bank 2014. 22 in essence, is raising the high upfront costs to build the infrastructure when and where needed by leveraging future revenues that can repay the upfront costs. For a project to be inanceable now, it needs clear revenue streams in the future. Financing is the raising of this upfront capital to expedite the process. Funding is the revenue streams in the future to repay the inancing. The lack of projects in the pipeline is due in reality to many projects that are not inanceable because of the lack of clear revenue sources. What is in short supply thus is not inancing, but the revenue funding sources. In the end, these revenues come from either taxes or user charges, both of which are generally considered to be in the public and civic domain. In addition to smart inancing and suicient revenue sources, the OECD-G20 study also identiied the need for smart institutions as the third important lever in reducing the global infrastructure inancing gap. Infrastructure development is a long-term endeavor and getting the inancing and revenue streams in place is only part of the equation. Cities need policies, regulations, enabling institutions, processes, resources, and other basic institutional building blocks that ensure that the inancing terms are honored so that investors can keep coming back over the long term. Cities must have institutional know-how to secure the best inancing deal possible. They must also have management know-how to operate their infrastructure eiciently over the entire project lifecycle to ensure their services are sustainable over the long term.

1.3 Handbook Objective and Organization