Financing the future of cities

Governments will need to think creatively to find the funds for futuristic infrastructure projects

Written By:
March 16, 2016
Financing the future of cities
Visionary: an artist’s impression of the proposed Jakarta Great Sea Wall project. Photo: Waterfronts NL

Planning what Southeast Asian cities will look like in the future is one thing, but actually financing progress will be a much greater challenge for governments. Recent estimates by the Asian Development Bank (ADB) suggest that $60 billion will be needed each year during the next decade to fund the necessary infrastructure developments across the region.

According to Joris van Etten, senior urban development specialist at the ADB, Southeast Asian cities have traditionally employed two methods for financing urban development: local taxes on land and property, and grants and financial transfers from central governments. However, he added, in order to generate the resources required to meet the infrastructure demands of the future, the region’s cities “will have no choice but to get their own house in order. [They must] maximise local tax collection, as well as innovate, so as to generate additional financing beyond traditional government transfers.”

Take the planned ‘Great Sea Wall’ of Jakarta as an example. In October 2014, Indonesia’s president-elect, Joko Widodo, signed off on this monumental project, which will see a Garuda-shaped wall constructed around Jakarta’s bay in order to protect the capital, of which 80% is predicted to be below sea-level by 2030 due to flooding and environmental destruction.

The project is expected to cost more than $40 billion and take 20 years to complete, and the Indonesian government has already said it will struggle to finance the project without outside assistance.

Because of this, innovative ways to fund the project have been proposed. As well as the wall, a waterfront city will be built. Composed of 17 artificial islands, complete with luxury houses, office space, toll roads and a railway, it is expected to accommodate more than two million people. The majority of the Great Sea Wall will, in theory, be funded through real estate sales and infrastructure development on the islands.

“The skylines of many Southeast Asian cities are not defined by public sector investment but rather by investments from the private real estate sector,” van Etten said. “The cities which normally come out on top in the lists of most liveable cities in the world are those which have been successful in securing development partnerships between the public and private sectors.”

An example of this cooperation is a Public-Private Partnership (PPP). Deden Rukmana, associate professor and coordinator of the urban studies and planning programme at Savannah State University in the US, believes that PPPs will be “the future of urban development in Southeast Asia”. 

A PPP is a long-term contractual agreement between a government, local or national, and a private company, typically for a public service. Through this agreement, the private entity often bears significant risk and management responsibility, and remuneration depends on performance and outcomes.

This kind of agreement is not new to the region – PPPs have existed in Southeast Asia for decades, albeit with differing degrees of success – but there now appears to be a push to make them a more common form of procurement.

In February, the East Timorese government selected the French industrial group Bollore to build and operate a deep-water port in its capital Dili, which will be governed by a 30-year PPP. And the Thai government has declared 2016 a ‘special investment promotion year’, with plans to roll out investment privileges for foreign investors, including the fast-tracking of PPPs.

However, if the number of PPPs is to increase in the future, then local government will have to adapt to meet the complexities of these arrangements.

“Unlike traditional procurement, [PPPs] require government departments to select projects against criteria, which include value drivers such as transaction size, level of complexity, risk transfer and scope for design and construction innovation,” read a 2014 report by the ADB. “Government departments will need to develop technical capacity to undertake project selection and prioritisation, procurement options analysis, bid selection criteria, valuing life-cycle operating costs, preparation of business cases, identification, measurement and pricing of risk and project benchmarking.”

Furthermore, as most commentators contend, if Southeast Asian cities are to develop sufficiently in the future and meet their infrastructure development needs, then the roles of both national and local governments will become increasingly complex and important.

“Local governments need to identify the needs of urban infrastructure and cooperate with private entities for financing urban infrastructure projects,” said Rukmana. But while he believes that most growth will come from private investment, local governments must focus on projects that “private entities will not be interested in due to low profitability”. That is, developments that typically benefit the poorest in society, such as low-cost housing.

“Public and private sectors should identify and agree on the visions of their urban development that will benefit all stakeholders,” Rukmana said. This might require substantially higher investment by local governments but, as a recent study by the IMF found, city authorities should not be averse to increasing their spending, since every dollar spent on infrastructure development generates $3 in output for the economy.

Nevertheless, the fact is that metropolitan areas across the region will need billions of dollars in the coming decades to modernise, grow and mitigate the problems inherent to urbanisation, such as overpopulation and access to essential resources.

According to Mark Tewdwr-Jones, professor of town planning and member of the Global Urban Research Unit at Newcastle University in the UK, there is a danger that Southeast Asian cities might begin to compete with each other for those funds, especially if overseas investment becomes scarcer.

In the past 20 years, he explained, many European governments have actively encouraged cities to compete with one another for inward investment. However, with larger economies and higher levels of public spending, European cities might be in a better position to do this than those in Southeast Asia.

Rukmana said it will be the role of central governments to stop any devolvement into unhealthy competition between cities: “Central governments should be involved in the negotiations between local governments and the foreign investors [and] help local government find the best mutual agreement with foreign investors.”

Van Etten believes that competition is almost inevitable, but he has some advice for cities on how to come out on top. The private sector typically decides where to invest based on “anticipated gains and related risks”, and the best way for cities to outcompete rivals is by convincing investors that their infrastructure projects are “well thought through and make sense from a technical, financial, economic, environmental and social point of view”.

Again, this will require more from Southeast Asian governments across the board. Maintaining stability while building strong democracies will be crucial to safeguarding investor confidence. “Ensuring social and environmental justice will be the most important role of city administration for the future of the city when the role of foreign investors and the private entities are increasing,” said Rukmana.

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