City Infrastructure Financing and Smart Cities Model Bambang Susantono, Ph.D

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1 City Infrastructure Financing and Smart Cities Model Bambang Susantono, Ph.D Vice President for Knowledge Management Asian Development Bank

2 Urbanization in Asia and the Pacific Asia-Pacific is the fastest urbanizing region in the world Source: UN ESCAP and UN Habitat. The State of Asian and Pacific Cities 2015.

3 Global Migration Global migration patterns Source: Internal Organization for Migration. World Migration Report. Geneva.

4 Climate Impacts and Financing Source:

5 5 ADB at COP21

6 Sustainable Development Goals Goal 11: Make cities and human settlements inclusive, safe, resilient and sustainable Planning & Policy Water Supply Sewerage & Sanitation Solid Waste Management Urban Drainage Green & Public Spaces 11.7 Urban Transport 11.2 Affordable Housing Slum Upgrading 11.1 Heritage Conservation 11.4 In addition, links to Goal 1: End poverty in all its form everywhere and Goal 13: Take urgent action to combat climate change and its impacts

7 Global Risks and Development Issues Risks in Developing Asia Source: World Economic Forum. The Global Risks Report Geneva.

8 European Cities Australian Cities American Cities Middle Eastern Cities World Cities: Liveability-Sustainability Nexus of Built Environments Source: Newton (2012), Liveable and Sustainable? Socio-Technical Challenges for 21st Century Cities, Journal of Urban Technology, 19(1),

9 The Smart City Model Source: 1.html

10 Challenges for Smart City infrastructure.. International Electrotechnical Commission White Report on on Orchestrating infrastructure for sustainable Smart Cities taken from LETERRIER, N. Au cœur des smart cities, VP Innovation, Schneider Electric, t.pdf

11 Infrastructure needs The situation in Developing Asia: 600 million individuals lack access to electricity 1.7 billion people lack access to basic sanitation 360 million lack access to safe drinking water 40 million new city dwellers a year will drive infrastructure needs The challenge: Infrastructure investment needs have been estimated to be around $8-10 trillion from (in 2008 US dollars) Countries on average investing only 2-3% of GDP annually, against 6% required to meet the demand Infrastructure investments will need to be environmentally and socially sustainable

12 Seamless Asia Infrastructure needs by sector ~$10.0 trillion (5-6% of GDP) A huge step-up in infrastructure investment is required for Asia to sustain economic growth ~$2.6 trillion (5% of GDP) x2.5 in real terms ~$4.0 trillion (4% of GDP) Social Infrastructure Water & Sanitation Transport Telecommunications Energy (Electricity) Source: ADB, Infrastructure for a Seamless Asia, 2009; ADB s estimates (Asia ex-japan, all data in 2008 US$)

13 A big role for the public sector but increasing need for private sector as well Annual Infrastructure Investments, Expected Private Sector Contribution by Type of Instruments (estimates) Source of Funds Private ~$1 trillion 400 Equity ~$400 billion Unlisted Equity (Infra Funds) Listed Equity (Developers) Corporate/ Project Bonds Institutional Investors: key catalysts as they take the riskiest piece Gov. 600 Debt 220 Commercial Bank Loans Retail Investors/ Deposits Source: ADB s estimates

14 Insufficient infrastructure spending in Country many ASEAN countries Infrastructure Estimated Needs vs Spending ASEAN Needs as % of Economies Infra Spend Infra Needs Estimated GDP as % of GDP ( ) (Annual, ( ) USD Billion 2020) Infra Spend as % of GDP (2012) Indonesia Malaysia Philippines Thailand Viet Nam (for 2009) Cambodia; Lao PDR; Myanmar N.A. ~4.0 Source: Bhattacharyay, Kawai, Nag (2012); ADB staff estimates.

15 Infrastructure Landscape in Indonesia National Medium-Term Development Plan Vision Public infra investments to rise from 4.2% in 2015 to 6.2% of GDP in 2019, with major focus on transport and electricity Total outlay of $425 billion envisaged National Medium Term Development Plan, Infrastructure Investments by Sector $40 bn $20 bn $70 bn $180 bn $40 bn 15 $75 bn Transport Electricity Oil&Gas Water (rural&urban) Housing ICT

16 Public Sector Role. Will remain important as certain types of infrastructure must be financed by government Government in Asia still has scope to expand and strengthen the revenue base. Government needs to reform to tackle weaknesses in institutional, regulatory, and financial systems. Need to attract more private sector investment in infrastructure.

17 Infrastructure Financing 7,000,000 Revenue-Expenditure Flow in Indonesian Cities Trend in Local Government Finances (in IDR) 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000, Revenue Expenditure Other financing options are needed to bridge the financing gap Source:

18 Infrastructure Financing Options Alternative financing sources for urban infrastructure projects Capital Markets Private Institutional Investors Multilateral, Bilateral & Export Credit Agencies Domestic Financial Institutions Asset Leverage (land) Private-sector Participation & Joint Ventures Source: KPMG Analysis, Linking Cities to Finance: Overcoming Bottlenecks to Financing Strategic Urban Infrastructure Investments, September 2010, Shanghai, China

19 Traditional Sources of Funds

20 Alternative Sources of Funding Capital markets: Few Asian cities have issued bonds, while Asian countries have a high saving indicating a huge potential for capital market financing. Need to develop local-currency/municipal bond to also promote transparency and accountability. Private institutional investors: Pension funds, insurance, foundations and endowments can provide investments for infrastructure and governments need to provide conducive regulatory structures. Multilateral, bilateral and export credit agencies: Institutions such as ADB can provide low-cost, long-tenor financing and share global best practices and experience. Asset leverage (land): use land rights to urban infrastructure delivery to improve project viability by selling or leasing public land, and use the proceeds to fund urban infrastructure projects. Land-based financing also provides opportunities for PPPs.

21 How to tap the resources for financing Infrastructure Development Asian economies have large savings of about $5 trillion annually, in addition to global savings of $53 trillion To tap the resources it requires: Deeper capital markets Local currency bond markets More sophisticated financial systems Robust frameworks for PPPs Regional Cooperation and Integration

22 Asia s financial systems still lag advanced economies Financial structure around the world (% of GDP), OECD Bonds Stock market Banking system Latin America Dev. Asia Source: ADB estimates based on data from Beck et al. (2000, 2009) and Cihak et al. (2012). Pension and mutual fund assets (% of GDP), 2013 Australia United States United Kingdom Brazil Mexico Korea, Rep. of India PRC Pakistan Pension fund Mutual fund Sources: OECD (2015), Pension funds' assets (indicator). doi: /d66f4f9f-en (accessed on 13 February 2015); Worldwide Mutual Fund Assets, available:

23 Infrastructure bonds still nascent Country Infra Project Bonds % of Total ($ billion) Corporate Bond Market China, P.R Indonesia Korea Malaysia Philippines Singapore Thailand Viet Nam Note: PRC and Korea data refer to outstanding bonds issued by infrastructure-related entities, as % of top 30 corporate issuers. Source: ADB, January 2015 Draft Report on Local Currency Bonds and Infrastructure Finance in ASEAN

24 Increasing Private Sector Participation

25 PPPs should be considered Financing: PPPs help relieve the financial strain on city governments by mobilizing resources from the local, regional or international private sector that can facilitate increased and better social services, including developing more projects. Efficiency and Cost Savings: Private investors have strong incentives to (i) complete projects quickly to start earning, (ii) reduce costs, (iii) introduce competition, and (iv) transfers of technology and know how. Quality: Improve service quality and enhance accountability. Change in Focus: allow city governments to focus on outputs instead of inputs to improve the overall service quality.

26 Key challenges of PPPs Cost Recovery: The private sector focuses on returns in setting user charges, while governments tend to subsidize them, creating cost recovery concern. Foreign Exchange Risk: revenues in domestic currency, while project financing may use foreign currency, creating foreign exchange risk. Political Risk: Political instability and regulatory framework changes put a risk on contracts. Weak Governance: Weak governance and corruption reduce international interests and PPPs. Contingent Liabilities: Many city governments fail to consider contingent liabilities when entering PPPs.

27 Financing & Enabling Urban Infrastructure Investments Take charge of local finance by: Maximizing conventional finances (e.g., user charges) Exploit tradable development rights and marketable permits Introduce green charges Increase local capabilities to enable local governments to tap financial markets. Improve the legal, regulatory, and institutional frameworks to enable private sector participation. Improve facilitative arrangements (credit enhancement mechanisms, credit rating systems) to enhance borrowing and repayment capacities of local governments. Improve technical and managerial capacity of cities to become financially credible and accountable.

28 Way forward... Secure public and private financing Translate vision (e.g. 100%-0%-100% for electricity access, slums and irrigated agriculture) to reality Adopt programmatic approaches to address impediments, and mobilize large scale public and private funding Promote a robust framework for PPPs Ensure macroeconomic and fiscal sustainability Develop sound risk-sharing arrangements Develop and deepen local currency bond markets Modern legal framework for capital markets, with funded pension systems and strong fund management industry Incentives for project bonds

29 Concluding remarks Urban growth is key for higher, sustainable, and more inclusive growth As infrastructure development is a complex process, a more collaborative approach should be adopted. Governments should open up infrastructure investment opportunities to the private sector, which can also improve its investment portfolios. PPPs can be a win-win solution but not a panacea. Other creative financing schemes, including bundling up with property and area-wide development, should be explored.

30 ADB s Future Cities Program COEs S W L O W Promoting Smart Infrastructure Development Mainstreaming Integrated Solid Waste Management Financing Low Carbon Climate Resilient Urban Infrastructure Water Operators Partnership Future Women, Future Cities City Twinning with focus on ICT Waste Management Options Low Carbon Interventions for Cities Utility Twinning with focus on Water & Sanitation Female leaders & urban management Tbilisi Colombo Mandalay Ho Chi Minh City Bandung Ulaanbaatar Suva

31 Thank You