Unlocking financial opportunities: Evaluating urban infrastructure’s economic impacts

Walking through your neighborhood, you might occasionally stumble upon bustling construction sites. The noise, the detours – a bit of a hassle, right? But, have you realized that these urban infrastructure projects–such as a new park including walking paths and playgrounds, or perhaps a new transit station–could mean an increase in property values as the neighborhood becomes a more desirable place to work and live , more pedestrian activity and jobs in the area, improved health, and a stronger economy for the city?

A recent World Bank initiative, financed by the Sustainable Urban and Regional Development (SURGE) Umbrella Program*, aims to shed light on the broader impacts that urban infrastructure projects can bring, how such impacts can be estimated, and why it is crucial to do so. The initiative’s three reports provide valuable tools for estimating the socioeconomic impacts of urban infrastructure before their implementation (Guidance Paper), highlight the potential of urban infrastructure projects for attracting private investment through case studies, and offer guidance on the application of the hedonic pricing method, a tool to quantify urban infrastructure projects’ indirect benefits (Guidance Note).

How urban infrastructure reshapes a city

Urban infrastructure projects have the potential to generate a diverse range of social, environmental, and economic impacts.  These effects can be classified into four categories:

1. Direct impacts: Related to the actual construction and function of the infrastructure. This encompasses GDP growth, job creation, increased income, and better health.
2. Indirect impacts: These are the ripple effects from the main investment throughout the supply chain.
3. Induced impacts: These are the knock-on effects of increased household spending of those employed in direct and indirect jobs, like effects on induced spending, property values, broader job creation, and poverty alleviation.
4. Catalytic impacts: Long-term benefits in various sectors, like how street lighting in a heritage area might spur more private investments.

A detailed explanation of these impact categories can be found in the Guidance Paper, which outlines the potential impacts for thirteen categories of urban infrastructure, including water and sanitation, tourism and heritage, flood protection, and housing upgrading.

Grasping these wide-ranging impacts helps in realizing the maximum economic and social returns on investment. This aids policymakers in making data-driven decisions and drawing in private investment. For instance, an economic assessment during the design of the Klyde Warren Park in Dallas, Texas (see Case Studies report, p. 11) estimated a broad economic impact of $875 million, instrumental in securing $10 million for investing in this park; since it opened in 2012, it has been estimated that the Park has contributed more than $2 billion in broader economic impact to the city.

The Hedonic Pricing method: measuring indirect benefits

While evaluating the impacts of urban infrastructure is highly important, quantifying the associated benefits poses a particular challenge.  To assess the potential indirect impacts, several approaches can be employed, including input-output modeling, cost-benefit analysis, qualitative assessment, and hedonic pricing modeling. The choice of approach may depend on the nature of the benefits being evaluated, data availability, and the analytical expertise necessary to conduct the analysis.

The hedonic pricing method is a data-centric methodology, and it’s particularly adept at evaluating how diverse urban infrastructure projects affect property values. By breaking down property values into various factors – like amenities and location – it offers a monetary value associated with each. This guides policymakers to understand the potential returns from different urban initiatives.

A detailed guide on how to apply the hedonic pricing method is available, outlining the data needed, challenges, and practical examples.

Case Studies: Transformative Effects in Action

Two World Bank case studies, from Lebanon and India, highlight the significance of gauging indirect benefits. The findings underscore that considering and evaluating indirect economic benefits when designing and implementing infrastructure projects is important – as these projects can measurably catalyze broader socio-economic development and enhance quality of life. 

Case Study 1: Byblos, Lebanon

Byblos, one of the world’s oldest cities of the world, recognized as a UNESCO World Heritage Site, encompasses the ruins of numerous successive civilizations. The city was grappling with challenges during the early 2000s, as cultural assets faced physical and environmental degradation, tourism activity remained low, and the residents were adversely affected by the absence of green areas and open public spaces.

In response to these challenges, the Government of Lebanon received support from the World Bank to implement a $119 million “Cultural Heritage and Urban Development project”. This initiative aimed to leverage cultural heritage to catalyze economic recovery and post-conflict revitalization and promote social cohesion in five Lebanese cities.

Using an input-output modeling approach and qualitative assessment, the World Bank team conducted a posterior evaluation of the direct and indirect impacts of the project. The results revealed significant positive effects in each of the Lebanese cities, particularly in Byblos. Notably, between 2002 – 2016, Byblos experienced a substantial increase of 67% in residential unit prices, tourism spending rose by approximately $3 million, and tourism employment increased from about 660 to 1,575 employees. The mobilization of private investment was also a noteworthy achievement in Byblos, with each $1 invested resulting in $7 mobilized from the private sector, primarily through funding the renovation of public squares, sidewalks, and historic facades.

Case Study 2: Karnataka, India

The Indian state of Karnataka was experiencing rapid urbanization by 2005, particularly in its primary city, Bangalore. To address the challenges of this urban expansion, the World Bank and the local government initiated the “Karnataka Municipal Reform Project.” With a budget of $277 million, the project's focus was diverse: from upgrading sewage systems to road rehabilitation and strengthening municipal structures.

Post-project evaluations revealed notable outcomes, including a significant increase in property values ranging from 50% to 75% in slum areas due to new underground drainage connections. The environment benefited too, with reduced pollution in around 70 lakes. Furthermore, public health standards rose, marked by improved sanitation facilities.

^{Identified direct and indirect impacts for the Lebanon Cultural Heritage and Urban Development project, including real estate impacts (top), and the Karnataka Municipal Reform project, including real estate impacts (bottom) (Source)}