Private sector funding for smart cities hindered by regulatory constraints, say experts

The private sector will have to mobilise "enormous" amounts of capital to help with the global smart cities transition, but nations must first address regulatory and institutional barriers to incentivise the movement.

That is the view of the World Bank’s institutional development specialist Roland White, who joined financial experts from Citi, S&P Global Ratings, the Rocky Mountain Institute and GIZ to encourage cities to adopt new regulatory measures that accelerates the amount of capital made available for urban green projects.

White noted that while there was a lack of “bankable projects” that investors were willing to finance, he and the panel felt that the establishment of government-assisted institutions would enable businesses to collaborate on and finance smart city projects.

Speaking at the C40 Financing Sustainable Cities Forum in London on Tuesday (4 April), White said: “It is obvious to everyone that a future without enhanced private sector investment within cities is just not going to work. The volumes of need are enormous, and investment needs to transition from billions to trillions in the urban sector alone. Clearly the private sector is going to have to play a role there.

“However, [the private sector] is only going to be able to play that role if regulatory and institutional restraints are addressed. A lot of the work that we do, alongside lending to sovereigns for investments into cities, is working with national and city governments to address constraints.”

As the world’s biggest provider of public finance to developing countries, the World Bank has pledged to spend 28% of its investments directly on climate change projects, and that all of its future spending would take account of global warming.

However, unattractive regulatory environments across many of these areas are limiting the amount of capital that organisations and businesses can pledge to new urban projects, and White called on nations to develop institutions that could act as a bridge between central and local governments and the private sector.

White alluded to the World Bank’s work with the city of Kampala in Uganda as an example of how the right regulatory frameworks can unlock capital for developments in developing countries. Kampala is one of the few areas in the African continent outside of South Africa that has boosted access to revenue streams. This has been achieved through the World Bank’s involvement with the Kampala Institutional and Infrastructure Development Project, which targeted institutional efficiency improvements of the Kampala City Council (KCC).

The five-year, $183m project started in May 2015 and has acted as a crucial pillar to secure funding for urban mobility upgrades in the city. It is these type of institutions, White claimed, that can align financial streams to the needs of the city.

Another global example listed by the panel was that of Mexico City. Banks have been funding infrastructure developments such as airports and roads because they know they’ll receive returns on these projects.

German development agency GIZ’s urban transport specialist Gustavo Jimenez noted that Mexico would soon have the “most profitable toll road in the world”, a prime example of banks looking at the profitability of projects.

For Jimenez, it was the role of institutions and businesses to create green projects that can “shift priorities” amongst the banks, and make them focus on sustainability.

“When we think about sustainable cities we have much smaller projects that have a bigger impact, but these might not be as profitable or sexy for bankers to invest against,” Jimenez said.

“We need to shift priorities within the capital markets and shift priorities within cities and national governments to re-incentivise bringing in that capital, which does exist but is not going to the right projects. Businesses and cities need to work to make these projects sexy and we need to be quick, cities don’t have a plan B.”

Green Bonds

Financial intelligence provider S&P Global’s managing director Michael Wilkins claimed that green bonds were one instrument that should be developed further in order to move revenue streams towards sustainability projects.

Barclays figures place the global market worth of green bonds at $92.9bn, almost double the size of the market from the year prior. In fact, the Bank of England governor, Mark Carney, claimed that more than £76trn currently belonging to global investment firms could be funnelled into green bonds.

The World Bank issued its first ever set of green bonds that directly link financial returns to companies performing to the standards and aims on the United Nation’s Sustainable Development Goals (SDGs) and Wilkins claimed that the growth in this market was slowly forcing investment firms to reassess project benchmarks.

“Through green bonds, significant amount of capital has been raised recently,” Wilkins said. “In Europe, a number of corporations involved in retail and commercial real estate have issued green bonds successfully to finance their buildings.”

“This is an area to explore. Investors are looking not just to the credit quality of bond issues but to the green quality of bond issues. It’s another benchmark that needs to be measured.”

London’s leading fund

One city that has successfully developed an institutional environment to direct finance at green projects with the aid of private investment is London. The London Green Fund was established in 2009 to develop a pipeline for bankable sustainability projects.

The Greater London Authority (GLA) was presented with a £50m holding fund from the European Investment Bank (EIB), matched by London authorities, and the Green Fund was used to establish projects in the city.

The highly-commended fund provided equity for “higher risk” projects that cover waste, energy and green buildings and attracted private sector funding and interest across the entirety of London. As of December 2015, the Fund had committed all the funds allocated and invested in 18 projects valued over £500 million.

GLA’s principle policy programme officer Simon Wyke was speaking later on at the C40 Forum and claimed that these types of funds and institutions needs to bring in private sector partners and finances in order to be successful.

“The fund was required to bring in private sector funding,” Wyke said. “One of the really important things about the fund is to raise awareness of the project and increase the investment opportunity to mobilise private sector finance and recognise that the public sector won’t be able to finance the requirements.

“It was the ability to use our public funding to invest in projects which helped to share the risks with the private sector, support businesses to look and analyse the challenges, and bring the expertise, the knowledge and the skills of the private sector that the public sector doesn’t have.”

Matt Mace

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