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Urban Infrastructure: Who Pays?

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An initiative launched in 2011 by U.S. President Barack Obama and Brazil’s President Dilma Rousseff stands at the vanguard of policy innovation to spur inclusive and equitable economic development through sustainable and resilient urban investment. Showcased at the Rio+20 Conference in June, the U.S.-Brazil Joint Initiative on Urban Sustainability (JIUS) aims to catalyze infrastructure investment in “smart cities,” beginning with Philadelphia and Rio de Janeiro. Building on Philadelphia’s aspiration to become a leading “green city,” and recognizing the reality that Rio de Janeiro must undertake extensive infrastructure investment before the 2014 World Cup and 2016 Summer Olympics, the JIUS (pronounced “juice”) strives to create a new paradigm for integrated urban investment that is socially and environmentally sound.

The JIUS partnership, composed of the U.S. Environmental Protection Agency, the Brazilian Ministry of Environment, the Brazilian Development Bank, the Rockefeller Foundation, the SAIS Energy, Resources and Environment Program and others, seeks to elevate the profile and facilitate the implementation of sustainable, resilient infrastructure projects. Because these projects are often smaller and more diffuse than traditional infrastructure projects, they have typically struggled to garner the political and financial backing necessary to drive execution.

Daunting Challenges

In the face of rapidly expanding urban populations and changing climatic conditions, strategic investment in urban infrastructure is pivotal if cities are to be smart and resilient. Today, slightly more than half the world’s population lives in cities. By mid-century, the figure is expected to rise to two-thirds. Within little more than a decade, the number of megacities with populations exceeding 10 million is projected to increase from around 20 to nearly 40. This unprecedented pace of urbanization represents a unique opportunity. Will the world grow its cities in a manner that exacerbates environmental degradation and economic inequity? Or will it harness ingenuity and innovation for ecosystems enhancement and inclusive economic growth? Constructing future cities to serve as centers of efficiency, innovation, social dynamism and economic opportunity while simultaneously adapting to issues of climate change and constrained resources stands as a challenge of truly global proportions. Meeting this challenge will require multifaceted innovation in policy, technology and finance as well as massive investment in infrastructure.

The investment decisions that shape our cities’ physical landscape, moreover, will influence critical questions of economic development, public health, quality of life and vulnerability to climate change. The goal, in turn, must be to approach infrastructure investment not as an exercise in function alone but as the socially, economically and environmentally impactful endeavor that it is.

Toward that end, the global community—from municipal governments to multinational corporations, from local utilities to institutional investors—must embrace a new paradigm for sustainable urban infrastructure. What is required is an approach that fosters investment in green economy projects that are more resilient and less resource-insensitive, projects that strive not merely to provide necessary services but to do so in a manner that enhances both the urban and natural environments. Fortunately, such a process is under way and gradually gaining champions.

Going Green, Building Resilience

The JIUS endeavors to develop green stormwater infrastructure projects—for example, urban parks, green roofs and permeable ground cover—that can help build cost-effective_ and resilient urban water systems that often go unfunded in favor of much larger and costlier “gray” infrastructure projects (such as large underground pipes and storage tanks). Philadelphia’s “Green City, Clean Waters” program, promoted under the JIUS, is intended to upgrade the city’s stormwater management system with just such a portfolio of green investments. By identifying particular projects and developing policy tools and financing incentives to support them, Philadelphia aims to strengthen its water system through investments that include planting trees, harvesting rainwater from rooftops and replacing impermeable pavement with porous material that permits rainfall to seep back into the soil. In this manner, Philadelphia’s “Green City, Clean Waters” program, and the JIUS more broadly, are leaders in a critical paradigm shift toward innovative infrastructure investments.

Moreover, the JIUS aims to guide investment along a path that accounts not only for the environmental implications of urban-investment decisions but also for their social and economic ramifications. The Gramacho Gardens open-air landfill on the outskirts of Rio de Janeiro stands as an example. Historically, the landfill has received some 3 million metric tons of waste per year, releasing large volumes of methane, a highly potent greenhouse gas, as the waste decomposes. A project to capture the methane and ultimately convert it into energy to be sold to Petrobras, Brazil’s leading energy corporation, would reduce greenhouse gas emissions and create jobs and a potentially steady revenue stream.

In June, the landfill was closed. Daily trash is now transported to the most-advanced treatment plant in Latin America to curb production of greenhouse gases and pollution of nearby marshes. Further, about 75 million cubic meters of methane gas will be collected over the next 15 years from the remaining waste. Petrobras plans to purchase the landfill’s methane for use in its refineries. A portion of the revenue stream from methane sales will help rehabilitate the impoverished favelas that have sprung up around the landfill—generating social and environmental benefits.

JIUS aims to develop pilot portfolios of citywide projects that emphasize cost savings, carbon reduction, reduced air and water pollution, and greatly improved resilience of communities and their infrastructure to shocks and surprises, whether induced by climate change or other factors.

The innovative approach to urban infrastructure pursued under the JIUS represents a leap in the right direction. Yet reorienting infrastructure investment toward objectives of sustainability and resilience will not be sufficient without innovation in capital mobilization. According to Deutsche Bank, some $40 trillion will be required for urban infrastructure investments around the world by 2030. Where will these funds come from?

Finding New Investors

Given the scope of investment required for sustainable infrastructure projects and the beleaguered state of public budgets across much of the world, engaging new partners will be critical. At present, such investment remains constrained less by a shortage of capital per se and more by an institutional gap that prevents available capital from reaching green infrastructure projects. Developing partnerships that embrace financial players traditionally operating outside the realm of sustainable investment represents a critical step on the path to smart, resilient cities. Attracting such players, however, will require innovative financing and project preparation mechanisms to meet their financial requirements while simultaneously driving a sustainable global agenda. Succeeding on these fronts will be key to unleashing the surge of capital required to drive investment in green economy projects at the scale and speed required.

One potential source of capital is sovereign wealth funds (SWFs), state-owned investment funds frequently established with revenue from natural resources. Countries ranging from the United Arab Emirates and Saudi Arabia to Norway and Australia host SWFs, which often invest globally for the purpose of saving wealth or stabilizing income streams tied to volatile natural resource prices. Combined, SWFs represent more than $5 trillion in assets. Because the primary function of many funds is to conserve wealth for future generations, they generally adopt a conservative investment approach and seek rates of return no less than 10 to 15 percent on equity. In addition, these funds typically invest in projects with total capital requirements of at least $500 million—not always the case for the type of smaller, sustainable infrastructure projects discussed above. At the same time, their emphasis on building wealth for the future makes SWFs particularly well suited to infrastructure investment, as they can operate under the long time horizons characteristic of the sector. Harnessing their trillions to drive the growth of smart, resilient cities—through large- as well as small-scale projects—will require innovation in the current system of preparing and financing sustainable projects, including the full integration of dynamic geographic information systems and information communications technologies.

The Energy, Resources and Environment Program at SAIS is working in partnership with the Rockefeller Foundation to explore ways to facilitate and accelerate capital flows from sovereign wealth funds into resilient and sustainable infrastructure investment. Research and meetings over the course of the past year have highlighted the importance of both developing a joint-investment platform and aggregating smaller projects. Such developments would help diversify risk and achieve the requisite financial scale for SWFs to channel their resources into the type of smaller sustainable infrastructure projects that have traditionally hovered below their radar.

On this front, the JIUS work on developing investable portfolios of urban infrastructure projects could provide a new model. Bundling projects into portfolios, as the JIUS seeks to do, could serve to bridge the barrier between green-economy_ projects—which may be individually smaller in size and capital requirements than traditional infrastructure projects—and the larger capital sources, like SWFs, required to drive them to fruition.

At the same time, a new and formidable alliance of sovereign wealth funds, multilateral development banks and foundations will prove critical to reducing risk and enabling the convergence of “blended” sources of capital—from grant funding for project/portfolio preparation to private equity for project finance. Currently, important conversations regarding the formation of such an alliance are taking place with some of these institutions, including the World Bank, other multilateral banks, the Rockefeller Foundation and Mubadala, Abu Dhabi’s sovereign wealth fund.

The leaders of these institutions now stand poised to transform the landscape of sustainable and resilient infrastructure investment, if they can formalize an investment partnership and deploy their vast resources to ensure its success. Doing so would represent a truly historic transformation, unleashing the flow of massive amounts of capital in pursuit of sustainable, resilient, equitable and inclusive economic growth on a global scale.


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