Maria Chow
MEng Materials Science student, University of Oxford
Email: [email protected]
Introduction
It is no wonder cities are known as the driving forces behind economic growth and development as they provide a wealth of opportunities for improving employment, personal development, and in many cases a better quality of life. Yet this culmination of people, resources and finance has been well proven to have serious impacts on our environment. With this in mind, governments, businesses, and individuals are often united by the shared goal of improving everyday urban living and livelihoods. Sustainable urbanism is urgently needed in a world suffering from rapid climate change . With the motivation there, the key focus turns to the methods and financial models that may enable and sustain such changes in our built environment. This blog assesses current evidence to answer: What financial models across the Global South and North have been deployed to finance sustainable urban development? Critically analysing current research and practice, I assess what are their similarities; their benefits, and their limitations?
Reviewing cases studies and evidence from multiple, trusted data sources can help to identify, and highlight the financial models that are effective. Assessing evidence at the global context, may help policy makers and governmental authorities to select new scenarios that may be most suitable to their local context. This is the justification for taking a global view on financing local sustainable urban development. To evaluate the effectiveness of different financial models, criteria must be established. The OECD’s definition of sustainable urban development proposes cities – people, buildings, and systems – should aim to be resilient, economically sound, environmentally sustainable, and socially responsible. An effective financial model for sustainable urban development will foster economic competitiveness and innovation, manage congestion, enhance social inclusion, and be environmentally sustainable. The following sections will assess existing financial models in various regional areas, and then possible solutions and outcomes will be presented.
Financial models worldwide
In the following assessment of financial models used to fund sustainable urban projects, the key stakeholders considered were generally municipal authorities, regional governments, Non-Government Organisations, the private sector (such as private banks, businesses, and individual investors.) and overseas development assistance (ODA).Whilst there were a range of financial methods employed to tackle specific issues, combinations of these may also be effective. These were smart subsidy allocations, investment pooling, risk diversification, risk asset management, Public-Private Partnership (PPP), ODA finance, and conventional public finance.
The following section highlights four examples of urban projects: infrastructure in Zurich (Europe); transportation in Manila (Asia); local services in Kibera (Africa), and revitalisation of the built environment in Philadelphia (North America). The broad geographical spread of these case studies has been chosen to illustrate the range of financial policies adopted across diverse contexts.
Case Study 1: Infrastructure
Geographical Context: The Sihlcity Mega Project in Zurich (Europe)
Financial Models: investment pooling, risk diversification, risk asset management
Sihlcity is a multifunctional urban complex in Zurich, Switzerland, developed on a former industrial brownfield site. The project was financed and owned by financial actors, marking a shift towards financialization in urban development, with planning beginning from the 1980s and construction initating in the early 2000s. The total cost of the Sihlcity Megaproject was CHF 600 million. Collaborative planning between local private development companies (Karl Steiner) and municipal authorities (City of Zurich) meant that the City of Zurich was able to implement their sustainable development strategy with enormous private sector backing.
Using a local development company meant that costs were minimised Political and administrative authorities implemented certain requirements, such as the developer must use the services of a renowned architect and that their project had to contribute to the city’s functionality and sustainable development. This forced the developer to focus on sustainable transport options , maintaining its economic viability and financial profitability, and taking active responsibility to push to speed up the transport planning. They also played a significant role in influencing people to use collective transport. In conclusion, reduced traffic congestion was achieved. The City of Zurich also acted as a mediator between the all actors, reinforcing the benefits of having a multi-stakeholder approach to finance.
Although the outcomes meant a reduction in traffic congestion, and a boost to Zurich’s economy, there were legal disputes between the City of Zurich and Karl Steiner before the project began. The City of Zurich argued that the local development company should not build an office district in the proposed location, but after a legal dispute they were able to obtain a permit. The efficiency and motivation for the private company was, in a sense, boosted by existing specific opportunities. For example, the land to be developed was situated next to a highway, and was less than 3km from the city centre, and part of an economically successfully metropolitan area of over one million residents. The land belonged to a single owner, facilitating many aspects of development.
Case Study 2: Transport
Geographical Context: Urban railway projects in Manila (Asia)
Financial Models: PPP, ODA, financial and government perspectives, bilateral and multilateral development banks
Three urban railway projects (LRT1, LRT2 and MRT3) in Manila, the Philippines were funded by private, ODA, and governmental enabling factors. PPPs are often studied in developed contexts, yet little in developing countries, which provides an important focus for this case study. In 2012, the Phillipine government intervened in phase 2 of the MRT3 railway project by changing the maintenance company to a private one, leading to a deterioration of the project, Following this phase, the government then employed an ODA loan from Japan to re-orientate the project’s development. Comparing this case study to the one above, there was less financial sustainability without government subsidies due to the high capital costs of infrastructure. Sihlcity constructed transportation infrastructure, yet was highly dependent on private funding. The dependability and consistency of finance sources is key to project outcome.
Case Study 3: Local Services
Geographical Context: Kounkuey Design Initiative Project in Kibera (Africa)
Financial Models: Community based management, NGO funding
The Kounkuey Design Initiative (KDI) is a nonprofit design and community development organization founded in 2006 by a group of Harvard Graduate School of Design students. KDI partners with under-resourced communities to transform neglected spaces into Productive Public Spaces that aims to address residents’ physical, social, and economic needs through participatory design processes.Opportunities for the community-led management of urban green infrastructure were stimulated. The voice of the people was strong, and their desired projects of planting riverbanks and creating new drainage banks were able to be carried out with the aid of NGO funding. This is a clear alternative to top-down planning, like the case studies above, which may fail to address the needs of local communities.
Additionally, with the vast range of skills of different stakeholders, this means various projects can be carried out such as waste management, mitigation of floods, protection of ecology, providing public spaces, reduction of river pollution, provision of water and sanitation services, generation of incomes, and offering social initiatives. This collaboration with the informal settlement of Nairobi can bring about a nuanced understanding of the complexity of the local context.
When public financial services have limited financial abilities, NGOs may step in as a form of alternative financial assistance. However, there are a few key considerations to keep in mind. As NGOs are often international, and external agents, a lack of awareness of cultural and local context, as well as a drive for name and commercialisation, may be problematic. Local activist voices have criticised NGO-led initiatives, saying:
“The world wants to help, and the organisations come here, sending their proposals under the name of ending poverty. However, we are being commercialized rather than being ‘helped’. Kibera is just a place for people to fill their bank accounts, and a lot of organisations do not know the importance of involving people in their work. How do you end poverty without involving the poor who you are trying to help?”
It is difficult to determine the extent to which NGOs can be involved. On one hand, their involvement can fill funding gaps and provide necessary skills that may be lacking. On the other hand, when NGOs, like the private sector, have other intentions or processes, their effect can not only be restrictive, but even damaging.
Case Study 4: Revitalisation
Geographical Context: The Reinvestment Fund in Philadelphia (North America)
Financial Models: Community Development Finance, smart subsidy allocation, external investors
This final case study touches on the side of economic growth that may not seem obvious at first, that wider progress in society can lead to urban decline in some industrial cities. Whilst initially contradictory, the growth of information technology and economic globalisation have led to many firms decentralising away from cities with economies based on declining manufacturing sectors. ESG, however, is increasingly a cornerstone of general business development, with sustainable urban regeneration or revitalisation which can highly attractive to investors. In former distressed industrial cities like Philadelphia, there is a high demand for post-industrial functions such as land recovery, upgraded amenities, and ecological improvements for infrastructure systems.
Further factors that may influence investment potential are visual markers. Urban degradation, beyond the negative impact on human livelihoods and essential infrastructure, can serve as a negative market signal and inhibit investment. This has been reflected in term of the ‘broken window’ thesis, which in terms of investment suggests a positive engagement with effectively ordered and carefully managed urban landscapes.
Improving the efficiency of financial models
Digital finance has been proposed as an effective way of enhancing existing financial services with digital technology, sometimes referred to as Fintech. As a democratic and inclusive financing approach, digital finance can be a positive pathway in rural and low-income areas by enhancing access to financial services,and potentially contributing to poverty reduction. Many recurring barriers stem from information asymmetry. Whether it is this lack of contextual information that means NGOs might be disruptive in their efforts to build infrastructure, or the attractiveness of markets being hampered due to lack of information, a low-cost, robust informational structure through digital finance is highly attractive.
Digital finance can act as an enabling source for financial institutions to channel resources to green industries, and has improved financing channels for MSMEs (Micro, small and medium enterprises) with differentiated services, enhancing resource allocation into desirable markets. Risk monitoring systems can be established to detect greenwashing, and provide more rigorous assessment of environmental impact and sustainability policies.
Having intense and unregulated competition can cause instability, so the effectiveness of digital finance models are dependent on effective governance at state and municipal scales.n Inappropriate and excessive regulations can also dampen the development and effectiveness of such models. The issue of data security is key, and when this is insufficient or inefficient, consumers may be wary and distrust these channels. The education levels of a workforce is another key aspect of how effective digital finance can be, and the extent to which the use of utilising digital technologies can expand.
Should all stakeholders invest in sustainable urban development?
It is often evident that financial institutions have a tendency to extend credit to environmentally friendly firms. Additionally, with the growing market for ‘green’ tech and development, investing in sustainable urbanism is increasingly seen in a positive light by state, corporate, and private capital. Remembering the holistic developmental goal of sustainable urban development requires a global perspective. The climate crisis has no borders. It transcends regional and national boundaries, impacting all people regardless of location. This necessitates global cooperation for a fair and just transition to more sustainable cities and livelihoods. This is absolutely necessary in an increasingly interdependent world: whether developing new sustainable infrastructure or revitalising old industrial cities, communication is the highest consideration. Municipal authorities need to continue communicating with other municipal authorities, and national governments with other national governments.