5 big ideas from the Habitat III meeting on financing urban development

Key talks took place in Mexico City on 9-11 March, aimed at figuring out how to pay for the New Urban Agenda.

MEXICO CITY — Last week, some of the world’s leading thinkers on the complex issue of financing urban development met in the Mexican capital. They came together at the invitation of the United Nations, which is preparing its 20-year urbanization strategy, the New Urban Agenda, which is slated to be ratified in October at the Habitat III conference in Quito, Ecuador.

Organizers have called the issue of how to pay for the expected worldwide growth in cities “the millennium challenge”. While last week’s gathering may not have solved 1,000 years’ worth of urban issues in three days, it did offer a snapshot of innovative ideas from across the globe.

[See: New solutions to close the gap on municipal finance]

1.     Public-private partnerships — whatever they are, exactly — aren’t all they’re cracked up to be

The letter ‘p’ is popular with city leaders, who have increasingly dived headlong to finance new projects through public-private partnerships, also known as PPPs. The term is a loose one, with no fixed definition of how much should be public and how much private. But in general, PPPs consist of a private company, or more often a consortium of companies, paying for new infrastructure — a stadium, say, or a train line — out of its own pocket in exchange for an equity stake — think leasing fees or operating revenue.

But giving away the money tree isn’t always a wise move for the public sector. PPPs are “just another form of debt, but much more expensive than the kind of debt you can make through capital markets,” cautioned George McCarthy, president of the U. S.-based Lincoln Institute of Land Policy. He noted that global interest rates remain at historically low levels, which means that debt is “almost free”.

[See: Habitat III can galvanize city-business collaboration on sustainable urban infrastructure]

What’s more, a municipality that doesn’t have its financial house sufficiently in order to enter the debt market probably isn’t ready to sit down at the negotiating table with a global infrastructure provider. A recent Ford Foundation study found that of 110 “green” infrastructure projects worldwide structured through PPPs, 80 percent failed.

2.     Floating a municipal bond is a great exercise in capacity-building

Nonetheless, city leaders are increasingly looking to debt markets to finance major projects. While the process of getting to that point offers a steep learning curve, it can carry ancillary benefits for a city, as well — particularly in terms of capacity-building.

Michael Metzler, who directs the U. S. Agency for International Development’s Development Credit Authority, says he’s seen this happen before. His favorite example is Dakar, Senegal, whose efforts to finance a new market through a municipal bond Citiscope chronicled last year. “Dakar didn’t want a programme in municipal strengthening,” he said. “They wanted to issue a bond, period.”

Metzler’s office is always looking for cities up to that challenge. It worked closely with the City of Dakar to walk officials through the complicated process while also providing a loan guarantee. The Senegalese president, a rival of Dakar’s mayor, ultimately played hardball politics, blocking the city from moving forward on floating the bond. Dakar sued and the case is currently under adjudication.

Still, Metzler remains bullish on the experience for Dakar. “It’s a great example, because it built up institutional capacity.” Further, he’s confident the bond will eventually get to market.

3.     Revenue streams can be earmarked and managed by citizens

Until 2011, street parking in Mexico City was, officially, free. Unofficially, local entrepreneurs known as franeleros charged arbitrary prices in exchange for not damaging a car. While this form of informal valet did provide employment, it also stripped the city government of revenue from an asset that it maintains.

Enter EcoParq, a system of parking meters — a common sight in cities of the developed world — now in in 13 neighbourhoods across Mexico City. Since launching five years ago, EcoParq has collected USD 34 million in revenue for the city.

Successfully installing parking meters may not sound revolutionary, but what Mexico City does with the revenue is unique. As Felipe de Jesús Gutiérrez, the city’s secretary of urban development and housing, explained, residents of EcoParq zones — those most directly affected, although resident permits are offered free of charge — feel entitled to having a say in how that money is spent.

Since street parking is part of the public realm, the city decided that 30 percent of the proceeds from the meters will go into projects managed by the Public Space Authority, which designs parks and open space in the city. One neighbourhood installed 164 crosswalks; in another, streetlights. It’s like participatory budgeting but with a very specific revenue stream and very narrow potential outcome.

4.     Cities in the developing world should rely on national and regional sources of financing

“Buy local” is a popular mantra in places that want to support the surrounding economy. Shop at an independent store owned by someone who lives in the community rather than at a national chain, this logic goes, because the money will circulate locally rather than get siphoned off to a corporate headquarters somewhere far away. That same idea should apply at a much larger scale when it comes to financing infrastructure, says Anaclaudia Rossbach of Cities Alliance’s Brazil office.

“Instead of contracting four international banks to resolve the financing question, we should use local players more,” she said. “Local financing agencies know the reality on the ground better and have the capacity to better assess the situation.”

[See: The SDGs will not be achieved without local financing]

In her opinion, that would mean less reliance on institutions such as the World Bank and the Inter-American Development Bank and more on investments from groups such as Colombia’s Findeter and Brazil’s National Economic and Social Development Bank (BNDES) and Caixa Econômica Federal.

And with a strong regional institution like CAF, the Development Bank of Latin America, serving 19 countries, Rossbach thinks the region is in the best position to pursue this approach. But she notes that over time, Africa and Asia — which have regional development banks of their own — could follow.

5.     The good, bad and ugly of ‘value capture’

Real-estate developers salivate over the prospect of new transit lines. What was once a worthless parcel of land can become a gold mine overnight when city officials announce that a subway, light rail or bus rapid transit (BRT) system will be coming, connecting a neighborhood to jobs and economic opportunity.

So shouldn’t the city get a share of such a windfall, since it shelled out for the heavy-duty cost of digging the dirt and laying track in the first place? So goes the argument in favor of what’s known as value capture, a “virtuous cycle” theory under which the public sector can pay for expensive infrastructure by assuring itself a share of the proceeds that new investment generates.

[See: A towering challenge: Habitat III must promote municipal fiscal health]

But value capture can get messy, especially in the Global South, where urban informality, limited or non-existent cadastre (land-ownership registry) systems, and dysfunctional land markets that make accurate property-value assessments impossible can combine to create major headaches.

This has led to fierce critics of value capture. Mariana Fix, an economics professor at the University of Campinas, says it accelerates gentrification in cities across Brazil. It can also be used as a pretext for clearing informal settlements through forced evictions, an accusation she leveled at São Paulo’s Água Espraiada project.

Still, Gustavo Partezani Rodrigues, of the São Paulo’s Office of Urbanism, comes to the policy’s defense. He argues that the city council has made significant improvements to ensure more equitable outcomes in future applications.

Either way, such back-and-forth may prove to be value capture’s savior — underscoring this as a flexible policy with room for improvement.

Note: This report has been updated to clarify the finding on green PPPs that have failed.

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