This presentation was held during the 5th GIB

Summit, May 27-28 2015. The presentation and

more information on the Global Infrastructure Basel Foundation are

available on www.gib-foundation.org

The next GIB Summit will take place in Basel,

May 24-25, 2016.  

The information and views set out in this presenation are those of the author(s) and do not necessarily reflect the opinion of the Global Infrastructure Basel Foundation. Neither the Global Infrastructure Basel Foundation nor any person acting on its behalf may be held responsible for the use of the information contained therein.  

© Z/Yen Group 2015

Z/Yen Group Limited 90 Basinghall Street London EC2V 5AY United Kingdom tel: +44 (20) 7562-9562

“When would we know our financial system is working?”

5th GIB Summit

Financing the Transition: Sustainable Infrastructure in Cities

Thursday, 28 May 2015 Basel, Switzerland

© Z/Yen Group 2015

Financing the Transition: Sustainable Infrastructure in Cities

♦  A Long Finance & WWF report

♦  Published in March 2015 ♦  Following six months of

research ♦  Full report available

online - http://www.longfinance.net/lf-research.html?id=915

© Z/Yen Group 2015

♦  Rising urban population Ø Expected 75% of world population of projected 9.6

billion people to live in cities by 2050

♦  Increasing infrastructure needs Ø Upgrading existing vs. building new infrastructure

♦  Global infrastructure investment need is huge Ø e.g. between USD 57 trillion (S&P) and 82 trillion by

2030 (OECD) ♦  Significant environmental impact

Ø Cities account for about 75% of global CO2 emissions

♦  How to finance and deliver the required urban infrastructure sustainably?

Challenges facing cities

© Z/Yen Group 2015

♦  Provide an overview of financing instruments commonly used to finance infrastructure

♦  Assess their potential to support sustainable infrastructure development

♦  Focus on energy efficiency and renewable energy projects

♦  Methodology Ø Desk research Ø 20 semi-structured interviews Ø >180 responses to an online questionnaire Ø A webinar to discuss preliminary findings

Research objectives & approach

© Z/Yen Group 2015

Interviews Financing the Transition: Sustainable Infrastructure in Cities

© Z/Yen Group Limited and WWF, 2015

11

Fig. 3 Interviews

Sector Interviewees Public cities Cape Town, Western Cape (South Africa)

Chicago (USA) Gothenburg (Sweden) Pune (India) Sao Paulo (Brazil) Vancouver (Canada)

Finance multilateral

Asian Development Bank (ADB) European Bank for Reconstruction and Development (EBRD) European Investment Bank (EIB)

Finance private, investors, advisors

Allianz SE, Allianz CP Inderst Advisory

GreenCape

Private other infrastructure, technology

Siemens

CSOs, networks & initiatives

C40 Cities Development Initiative Asia (CDIA) Global Infrastructure Basel (GIB) ICLEI

A questionnaire was issued online to gain insight perception of sources of finance and financial instruments (see Appendix 3). 184 people from 27 countries kindly contributed to the online questionnaire, though a significant European bias should be taken into account when considering the data, given that nearly 80% of the respondents are based in Europe.

Fig. 4 Respondents by location Regions Respondents Africa 2 Asia 11 Australia 3 Europe 145 Latin America 4 North America 19 Total 184

Fig. 5 Respondents by sector Industry sector Respondents Finance 57 Professional Services 50 Private Sector Other 18 Public Sector 11 IFIs & MDBs 2 CSOs 15 Academia 21 Other 10 Total 184

A webinar, Finance Toolkit for Sustainable Cities: Challenges & Opportunities for Innovation , was held in two sessions on 29 January 2015 in order to present, discuss and gather feedback on preliminary findings. About 60 people from 16 countries joined the webinar.

2.3. Research challenges, key definitions & limitations There are some inherent challenges when conducting this type of research. Definitions can be problematic. How do we define cities? What is sustainable urban infrastructure? Terminology can be confusing too.

© Z/Yen Group 2015

♦  Defining sustainable infrastructure - infrastructure assets or projects that Ø reduce the environmental impact of urban infrastructure

(e.g. energy efficiency or renewable energy projects); Ø  improve the ability of such infrastructure to cope with the

consequences of climate change; Ø help to protect biodiversity and ecosystem services; Ø enable the integration of nature-based assets into urban

development.

♦  Challenges Ø Conventional vs. sustainable infrastructure Ø Unique vs. common issues facing cities Ø New vs. common financing approaches & instruments

Sustainable infrastructure

© Z/Yen Group 2015

♦  Governments - local, provincial, national ♦  Financial services e.g. commercial banks,

specialist funds ♦  International financial institutions, regional and

national development banks, export credit agencies

♦  Institutional investors - pension funds, insurance companies, sovereign wealth funds

♦  Capital markets - e.g. traded debt and equities ♦  Other - corporate finance, angel investors,

community

Sources of finance

© Z/Yen Group 2015

Finding #1

Some financing instruments have higher potential to enable investment in

sustainable infrastructure

© Z/Yen Group 2015

Financing the Transition: Sustainable Infrastructure in Cities

© Z/Yen Group Limited and WWF, 2015

3

Sustainable urban infrastructure projects can be perceived as entailing relatively higher costs and risks compared to conventional infrastructure projects. Evidence however increasingly demonstrates how investment in sustainable infrastructure can boost infrastructure productivity and result in accumulated savings over time. Sustainable infrastructure projects should be structured, marketed and financed according to how anticipated savings and other quantifiable benefits can be monetised. For projects where technological risks or project uncertainty are more pronounced, public financial instruments or leverage tools can be used to improve their risk-return profile. Further, third party platforms and resources providing independent and expert guidance on sustainable infrastructure options and proven technologies can inform cities and investors’ decision-making particularly in areas where they lack in-house capacity and expertise.

A range of financial instruments across public finance, debt and equity finance are commonly used to finance infrastructure. More often than not different financial instruments come into play to fund a single project. The financing approach, including the choice of instruments, is likely to depend on a range of factors including:

• the type of infrastructure; • the stage, type and timeframe of the project; • the contractual arrangement; • the stakeholders involved and their risk/reward requirements; and, • the regulatory environment.

Finding 1 – Some financial instruments have a higher potential to support investment in sustainable infrastructure (see Figure 1 below). Whether this potential can be achieved depends on:

• instrument design and scope; • the integration of sustainability into investment or lending criteria; • conducive and stable public policies.

Fig. 1 – Financial instruments with significant potential to support investment in sustainable infrastructure

Type Instruments Public Public private partnerships (PPPs)

Tax incentives Land value capture mechanisms Building rights and permits Grants and subsidies

Debt Loans (incl. concessional loans or loans blended with grants) Special purpose bonds (e.g. green city bonds) Targeted guarantees and credit enhancement Debt refinancing mechanisms (e.g. asset-backed securities, forfeiting)

Equity Listed infrastructure equity Infrastructure funds Thematic/targeted private equity structures and funds Equity-funded direct investments (SPVs and JVs)

Financing instruments with potential for sustainable infrastructure

© Z/Yen Group 2015

Finding #2

The lack of investable projects seems to be the main issue preventing sustainable infrastructure investment at scale rather

than the lack of finance

© Z/Yen Group 2015

Overcoming barriers to investability

Barriers

♦  Lack of robust funding streams

♦  Lack of expertise and market capacity

♦  Lack of scale ♦  Balanced risk-returns

Possible solutions

♦  Quantifying & monetizing sustainability impact

♦  Demonstration & capacity building

♦  Project aggregation ♦  Project prioritisation &

preparation ♦  Sound governance

© Z/Yen Group 2015

Finding #3

Cities can develop an attractive investment proposition in sustainable infrastructure

based on a ‘product & marketing approach’

© Z/Yen Group 2015

Financing the Transition: Sustainable Infrastructure in Cities

© Z/Yen Group Limited and WWF, 2015

8

financing structure of sustainable infrastructure projects; public sector tools and incentives to leverage alternative sources of finance while meeting sustainability objectives and targets; and sound governance and best practice in order to boost investor and stakeholder confidence.

Fig. 2 ancing

Firstly, cities should seek finance through external sources for projects that have reasonable prospects of meeting inve -return requirements. Public resources should be targeted primarily at priority projects which lack clear and predictable revenue streams. Second, cities should identify the range of public instruments, tools and incentives that both match their local contexts and which can effectively support sustainable infrastructure financing and development. Third, cities should aim to strengthen investor confidence by improving the transparency, accountability and sustainability of public finances as well as the efficiency of planning and procurement processes.

As shown in this report, some cities are already

incentives, tools and financial instruments. Cities like Vancouver (Canada) and Pune (India) are tying low-carbon requirements to planning application processes and tax incentives, not only in relation to new infrastructure development but also to support the sustainable upgrading of existing infrastructure. Local and national governments in countries such as South Africa, Canada and India are actively pursuing economies of scale where applicable by establishing special purpose vehicles or companies to maintain, upgrade and develop infrastructure either across municipalities or within specific sectors (e.g. green technologies, renewable energy). Sao Paulo (Brazil) and London (UK) are leveraging land value capture mechanisms to raise finance on capital markets. Cities like Chicago (USA) are working to avoid additional debt on their balance sheets by structuring public private partnerships through separate entities involving private sector actors. Cities such as Gothenburg (Sweden) and Johannesburg (South Africa) are working to improve transparency and accountability on how the funds raised on capital markets through special purpose bonds (e.g. green city bonds) are being used.

Finding 4 Collaboration across city departments, government entities at all levels and among stakeholders is key to unlock investment in sustainable infrastructure.

Project preparation

& pipeline

development

Mapping public tools &

incentives

Sound public governance

& best practice

Opportunities for learning &

multi-stakeholder collaboration

!"#$%"&$'()*+*,-$'-.#")+&.-')$'/&-*,&+0,+&"))

A ‘product & marketing’ approach

© Z/Yen Group 2015

♦  Tying low-carbon requirements to planning application processes and tax incentives Ø E.g. Vancouver (Canada), Pune (India)

♦  Leveraging economies of scale Ø E.g. GreenCape (South Africa), Solar Energy

Corporation (India) ♦  Capturing increases in land value

Ø E.g. CEPACs, Sao Paulo (Brazil) or Crossrail, Greater London Authority (UK)

♦  Green bonds – improving transparency and disclosure Ø E.g. Gothenburg (Sweden)

Early signs of city innovation

© Z/Yen Group 2015

Wealth of initiatives & resources

Research & data Best practice, innovation & policy

Finance & sustainable infrastructure

Africa Infrastructure Knowledge Programme (AIKP)

Global Commission on the Economy & Climate – New Climate Economy

LSE Cities

New Cities Foundation

World Bank’s Urbanization Knowledge Partnership

WRI Ross Centre for Sustainable Cities

C40 Cities Climate Leadership Group

Cities Alliance

Compact of Mayors

ICLEI

Metropolis

United Cities and Local Governments (UCLG)

WBCSD’s Urban Infrastructure Initiative

WWF’s Earth Hour City Challenge

Cities Development Initiative for Asia (CDIA)

Energy Efficiency Finance Institutions Group (EEFIG)

Global Fund for Cities Development (FMDV)

Global Infrastructure Basel (GIB)

ICLEI’s Solutions Gateway

SDI’s Urban Poor Fund International

World Bank’s Low-Carbon Liveable Cities Initiatives

© Z/Yen Group 2015

1.  Guidance on what sustainability means for infrastructure (incl. how to measure impact)

2.  Framework to guide cities in the process of identifying and mapping relevant public sector tools, incentives and financing instruments

3.  Global database of sustainable infrastructure projects and financing structures

4.  Recognition for innovation and best practice

Recommendations

© Z/Yen Group 2015

♦  About the research project - http://www.longfinance.net/lf-research.html?id=915

♦  Report available online - http://www.longfinance.net/images/reports/pdf/Financing_the_transition_March2015.pdf

♦  Comments on the report welcome! Contact: chiara_vongunten@zyen.com

THANK YOU!

More information