Municipal infrastructure needs more investment: harnessing private capital (responsibly!) will help

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 Illustration design for property investment | Photo credit: Bleakstar, Shutterstock
Illustration design for property investment | Photo credit: Bleakstar, Shutterstock

With more than half of the world’s population now living in cities, and cities now responsible for 75 percent of global CO2 emissions, finding practical ways for subnational governments to accelerate delivery of infrastructure, in a sustainable fashion, has taken on new urgency.

Despite the clear need for this investment, the reality is that cities’ ability to procure the volume and quality of infrastructure required remains limited by restrictions on subnational borrowing/long-term contracting, poor municipal-level finances, and a shortage of project development capacity.  Put simply: we need to change the status quo, drastically and quickly.

While the use of PPPs continues to grow as a way to attract private sector investment, their contribution still tends towards larger, sovereign-backed (that is, national) projects rather than opportunities at the subnational level. Moreover, a lack of programmatic, standardized approaches results in uneconomical transaction costs for both government and bidders. Add the lack of clear sovereign backing (combined with poor subnational balance sheets) and the result is a significant reduction in the creditworthiness of city-led projects.

As if these challenges weren’t enough, legal restrictions may even outright prevent the signing of long-term contracts and—from an affordability angle—less control over taxation makes clear revenue streams harder to identify.

While these hurdles seem insurmountable, the good news is that there’s been a fair amount of attention to the municipal piece of the infrastructure puzzle. This blog space even treated the subject (with humor, we might add) last week. What’s even better news is that—beyond lip service—new resources and models are coming into play. For example, the Global Infrastructure Facility (GIF) is working with international financial institutions across the globe to support scalable project preparation, identify new subnational revenue streams, and enhance the creditworthiness of cities. Below are a few concrete examples of how we’re doing this.

Designing for scale—In Brazil, the GIF is supporting IFC and the World Bank in the structuring of up to 10 standardized municipal street lighting PPPs. These pilot transactions will act as the first step toward a programmatic approach suitable for up to another 200 cities that would reach half the country’s population of 200 million. Acting at scale, and with a standardized approach, we expect transaction costs to fall, stimulating more private sector competition that in turn will drive down the costs of the investments. Implemented in full, the program has the potential to contribute 20 percent of Brazil’s total energy consumption reduction goal set under its Nationally Determined Contribution (NDC). Given the size of the country, this is a significant climate achievement and one potentially replicable in other countries.

Finding additional revenues— The GIF is working with the World Bank to help various municipalities, including Dhaka (Bangladesh) and Cali (Colombia), incorporate the concept of land value capture into public transport project design, providing new revenue streams to help offset government outlays. This approach helps ensure cities establish adequate taxation structures to recover a portion of expected economic benefits flowing from the project. It also encourages an aligned, city-wide approach to maximizing the positive social, economic, environmental, and, importantly, fiscal impacts of the investments—leading to smarter outcomes all around.

Leveraging national-level capacity and creditworthiness—Cognizant of the gap between a national and subnational project in terms of creditworthiness and project preparation capacity, GIF is also working with governments to develop halfway house models that provide national support while recognizing the city-level nature of the investment. In Botswana, for example, GIF is funding IFC’s support to the National Water Corporation. This work will include due diligence analysis and managing the international bidding process to select the private partners for wastewater reuse in the capital Gaborone. Here, we expect this to yield a robust project structure with bankable payment mechanisms. Going further, we also expect this will be a benchmark for future PPP projects in other cities in the country and the region.

This work is ambitious—and imminently achievable. We know that, working together, cities can fulfill their potential as the core of economic and social development—providing livable, inclusive, and sustainable environments.  At the GIF, we are committed to work in collaboration with our partner financial institutions to support projects across the energy, transport, water and sanitation sectors, facilitating municipal access to affordable, sustainable private financing.

We’ll be exploring this more with our partners at our upcoming annual GIF advisory council meeting in mid-October. In the meantime, learn more about our work here or leave us a note in the comments section below. 

 

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What it takes for subnational PPPs in Brazil

Promoting bankable PPPs in Brazilian municipalities

Authors

Rob Pilkington

Infrastructure Specialist, Global Infrastructure Facility

Marianna Buchalla Pacca

Infrastructure Consultant, Global Infrastructure Facility

Join the Conversation

Emmanuel P. Sano
October 09, 2019

I agree that there is a need for more PPP funding in the subregional projects vis-a-vis national Projects. Cities and Provinces and Provincial Utilities needs further assistance and funding through PPPartnerships. Am working with electric and water utilities and I see a derth for more funding for expansion projects in the Philippines in particular.