February 18, 2017Doug Hadden
“Delivering sustainable infrastructure at scale lies at the heart of (Qureshi, 2016)” sustainable development. Smart infrastructure helps cities to reduce optimize energy and water consumption while reducing waste and pollution. Economic growth without the traditional negative impact of growth is the promise of smart cities. Rapid urbanization means that cities have become the nexus for smart infrastructure development. But, governments are challenged to fund effective and sustainable smart infrastructure despite “IMF estimates [that] suggest that for every dollar of investment in infrastructure, output increases by nearly three (EY, 2015)”
What is the government infrastructure funding gap?
“A major expansion of investment in modern, clean, and efficient infrastructure will be essential to attaining the growth and sustainable development objectives that the world is setting for itself. Over the coming 15 years, the world will need to invest around $90 trillion in sustainable infrastructure assets, more than twice the current stock of global public capital. (Bhattacharya, Oppenheim, Stern, 2015)” The current annual global investment of “some $2.5 trillion a year on transportation, power, water, and telecommunications systems…[is] not enough (Woetzel et al, 2016).” The annual infrastructure underinvestment of $350 billion triples to over $1 Trillion when the United Nations Sustainable Development Goals are included. (Woetzel et al, 2016). Other estimates show that “upwards of $6 trillion annually in sustainable infrastructure in the next 15 years, more than double the current level (Qureshi, 2016)“
The infrastructure funding gap has extended because of the recent financial crisis and the impact on cities that “have been slower to emerge from the financial crisis and many are desperate for ways to bring in cash to offset depressed tax revenues… Unfortunately, such desperation combined with limited nancing information has led to some poor decisions on the part of public officials. (Center for Urban Innovation, 2014)”
City governments are also under pressure from the “growth of a global urban middle class, with correspondingly high expectations of public services and the quality of the urban infrastructure and environment. (UK Government, 2016)”
What solutions could close the infrastructure gap?
Lack of financing is the major constraint to closing the infrastructure gap at every tier of government. The general approaches to overcoming the financing gap (Center for Urban Innovation, 2014) are:
- Government-based financing tools
- Development exactions
- Public-private partnerships (PPPs)
- Private fund leveraging options
Other mechanisms include:
- Pay per use (Siemens, 2016)
- Innovative use of NGO funding (PwC, 2013)
- Crowdfunding (PwC, 2013)
- Incentives for investment in low carbon technologies (Bhattacharya, Oppenheim, Stern, 2015)
- Enabling innovation hubs (Tomer, Puentes, 2014)
- Regulatory environment changes to encourage private sector innovation (EY, 2015)
- Taxation changes to encourage private sector investment in renewable energy (Booth, 2015)
- Improved policy certainty (Bhattacharya, Oppenheim, Stern, 2015)
- Asset-finance arrangements (Siemens, 2016)
- Credit guarantees (EY, 2015)
- Improved Value for Money in public procurement (Consult Australia, 2014)
There is sufficient levels of potential investment. It is clear that the “the capital-intensive nature of infrastructure investment means private capital is a critical complement to public funds in scaling “smart investment.” (EY, 2015)” “Currently, $110 trillion of investible assets are held by the private sector globally. Of this, we estimate $70 trillion are managed by private-sector investors who are currently invested in, or have listed infrastructure as part of their longer-term strategy. (Bhattacharya, Oppenheim, Stern, 2015)”
Private sector investor segments include: (Bhattacharya, Oppenheim, Stern, 2015)
- Banks and investment companies: $69.3 trillion in assets;
- Insurance companies and private pensions: $26.5 trillion in assets;
- Sovereign wealth funds: $6.3 trillion in assets;
- Operators and developers: $3.4 trillion in assets;
- Infrastructure and private equity funds: $2.7 trillion in assets;
- Endowments and foundations: $1 trillion in assets.
Changes in the regulatory environment can spur innovation. Governments can create an “enabling environment for investment through broader regulatory and institutional reforms. (Qureshi, 2016)”
What are the issues with increased private sector involvement in government financing?
The use of innovative mechanisms or private sector investment is not without risk. For example, PPPs can bring public investments off budget, can lack transparency and can hide project risk assumed by governments. Procurement mechanisms and “poor contract designs can thwart these potential benefits, producing inefficient project outcomes and saddling governments with large scale costs and liabilities. (Qureshi, 2016)”
Increasing privatization of municipal operations runs the risk of viewing citizens as consumers. The resulting infrastructure priorities could extend inequality with city districts becoming “ enclaves of privilege, with private sector representatives already advocating the exclusion of the poor and marginalised through high prices and policing. (Datta, 2016)”
How does smart public finance enable financially sustainable infrastructure funding?
Smart public finance leads to “to better reporting and decision-making, which in turn leads to better use of public resources. Public bodies and their stakeholders need to understand the full, long term economic impact of their decisions with respect to their financial performance, financial position and cash flows. (PwC, 2013)”
Smart public finance integrates long-term budget planning, smart funding (PwC, 2013) with outcome analysis. It extends beyond traditional annual budget planning. In particular, city governments need the ability to financially model different funding mechanisms. “Part of the challenge for cities is in selecting the right tool at the right time. (Center for Urban Innovation, 2014)” This need for long-term cost-benefit modeling of capital-intensive smart infrastructure investments needs to extend to long-term operating costs, using the smart public finance technique of cost-drivers. Scenario planning and “what-if” analysis is required to identify the risk and return for different financing mechanisms.
These scenarios can also estimate outcomes to identify project priorities. This can help governments to build “ institutional structures for investment planning and building a pipeline of projects that take into account development impact and environmental sustainability from the outset. (Bhattacharya, Oppenheim, Stern, 2015)”
“Public Investment Planning is a critical subset of budget planning. It includes important capital projects and is fundamental to PFM. Public Investment Planning benefits from PFM concepts of program and performance budgeting. Of longer-term horizons of Medium-Term Expenditure Frameworks (MTEFs), because public investments take time to complete. Results can be improved through citizen engagement and Participatory Budgeting. Critically, public investments are improved through performance budgeting or results-based budgeting. In other words, budgets designed based on desired outcomes are better tracked and provide evidence of success. (Hadden, 2016)”
Smart public procurement is necessary because of the need to integrate smart infrastructure investments. Smart city planning scenarios need to integrate with procurement systems that extend beyond “purchasing components” (Polis, 2015). Outcomes also need to measured and managed. Transparency is a critical component of smart public finance because of the ability to coalesce business and citizen actions around critical goals like sustainability or inclusion. This tracking also enables smart cities to adjust investment and funding mechanisms in response to actual outcomes.
Why is Smart Governance needed?
The complexity of broad smart city investments requires transparency and participation. Smart governance is needed “ to improve the participation of the citizenry in decision-making processes, to make more efficiency the public and social services rendered to stakeholders, to achieve transparent governance and to implement political strategies and perspectives.” (Bolívar, 2015)”
Information and Communications Technologies (ICTs) are required in smart cities, particularly the use of Internet of Things (IoT) monitoring and data-gathering devices. The city ICT investment must extend to open government technologies built on public finance transparency. “Governments must use ICTs to improve political participation, implement public policies or providing public sector services. If government is to change, citizens will also have to change how they engage with government and what they expect from government local governments are called to be key actors to create an interactive-, participatory- and information-based urban environment with the ultimate aim at producing increasing wealth and public value, achieving higher quality of life for citizens. Therefore, in smart cities, governance should encapsulate collaboration, cooperation, partnership, citizen engagement and participation (Bolívar, 2015)” “Local governments are called to be key actors to create an interactive-, participatory- and information-based urban environment with the ultimate aim at producing increasing wealth and public value, achieving higher quality of life for citizens. Therefore, in smart cities, governance should encapsulate collaboration, cooperation, partnership, citizen engagement and participation (Castelnovo, Misuraca, Savoldelli, 2015)“
The use of smart transparency needs to extend to simplification and visualization. “Effective marketing means most citizens have heard of smart cities or something similar, but few understand what it means. Greater transparency in technology deployment not only educates citizens on the tangible costs and bene ts of smart city improvements, but also makes it easier to advance similar upgrades in years to come. (Tomer, Puentes, 2014)” “Soundness, clarity, and credibility of public policy are especially important for infrastructure investments, given their longevity, public good characteristics, associated externalities, and inevitable and intimate links to government policies. (Qureshi, 2016) “
Why is PFM reform necessary to achieve smart government objectives?
Many governments do not have the necessary smart public finance mechanisms in place to effectively plan and implement smart city projects.
PFM reform enables smart government processes through (Hadden, 2016)
- Multiple year planning to consider long-term outcomes
- Accrual accounting to calculate the real value: expenditures, economic value-add, climate finance and revenue improvement
- Program budgeting to classify Smart Government initiatives across Ministries, Departments, Agencies and tiers of government for effective tracking
- Results-based budgeting to compare objectives with results (Hadden, 2016)
Procurement reform is necessary to take advantage of new funding mechanisms such as PPPs and experimental and agile projects. “At a time when public finances are stretched, better procurement offers government the chance to build more for less, achieving better project outcomes with fewer delays. It also makes government agencies a more desirable client for industry to do business with, which in turn will lead to more firms competing to provide their services to government. (Consult Australia, 2014)”
Regulatory reform for “business entry and exit regulations, competition policies,…, foreign investment rules, …and property rights, tax policies, and anti-corruption laws. (Qureshi, 2016)” can improve the procurement environment.
How does Smart Public Finance improve Smart City Public Investments?
Smart public finance enables the:
- Selection of the most effective funding mechanisms to overcome the infrastructure gap through better budget planning
- Alignment of investments with desired goals by aligning outcomes with budgets
- Participation of citizen and business participation through financial transparency
- Improvement of decision-making through continuous measurement
- Reduction of costs and risk through improved public procurement and contract management
Bhattacharya, A; Oppenheim, J. Stern, N. Driving Sustainable Development Through Better Infrastructure: Key Elements of a Transformation Program. Brookings Institution, 2015. https://www.g24.org/wp-content/uploads/2016/02/Driving-Sustainable-Development-Through-Better-Infrastructure-Key-Elements-of-a-Transformation-Program-Bhattacharya-Oppenheim-Stern-July-2015.pdf
Bolívar, M. Smart Cities: Big Cities, Complex Governance? Public Administration and Information Technology, 2015. http://www.springer.com/cda/content/document/cda_downloaddocument/9783319031668-p1.pdf?SGWID=0-0-45-1515253-p176336243
Booth, Rupert. A smart business case for smart cities. Institute of Asset Management, May 2015. https://theiam.org/system/files/privatedownloads/2/5996-assets_may_2015_watermarked_8.pdf
Castelnovo, W; Misuraca, G; Savoldelli, A. Smart Cities Governance, The Need for a Holistic Approach to Assessing Urban Participatory Policy Making. Social Science Computer Review, November 26, 2015. http://journals.sagepub.com/author/Savoldelli%2C+Alberto
Datta, A. Will India’s experiment with smart cities tackle poverty—or make it worse? Quartz, January 28, 2016. https://qz.com/604835/will-indias-experiment-with-smart-cities-tackle-poverty-or-make-it-worse/
Hadden, D. Why PFM Reform is Integral to Smart Government. FreeBalance, September 8, 2016. http://freebalance.com/public-financial-management/pfm-reform-smart-government/
Hadden, D. Public Financial Management & Smart Government Lifecycles. FreeBalance, September 6, 2016. http://freebalance.com/public-financial-management/public-financial-management-smart-government-lifecycles/
Qureshi, Z. Meeting the challenge of sustainable infrastructure: The role of public policy. Brookings Institution, June 29, 2016. https://www.brookings.edu/wp-content/uploads/2016/07/Sustainable-Infrastructure-Policy-Paperwebfinal.pdf
Tomer, A; Puentes, R. Getting Smarter about Smart Cities. Brookings Institution, April 23, 2014. https://www.brookings.edu/wp-content/uploads/2016/06/BMPP_SmartCities.pdf
Woetzel, J; Garemo, N; Mischke, j; Hjerpe, N; Palter, R. Bridging global infrastructure gaps. McKinsey Global Institute, June 2016. http://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/bridging-global
—The Future of Government. PwC, June 2013. https://www.pwc.com/gx/en/psrc/publications/assets/pwc_future_of_government_pdf.pdf
—Routes to Prosperity. EY, June 2015. http://www.ey.com/Publication/vwLUAssets/EY-routes-to-prosperity-via-smart-transport/$FILE/EY-routes-to-prosperity-via-smart-transport.pdf
—Smart Cities Financing Guide. Center for Urban Innovation at Arizona State University, 2014. https://urbaninnovation.asu.edu/sites/default/files/smartcitiescouncil_-_financing_guide-3_31_14.pdf
—Smart Cities Plan, Consult Australia, July 2016. https://www.consultaustralia.com.au/docs/default-source/cities-urban-development/smart-cities-plan—submission—final—20160711.pdf?sfvrsn=2
—Smart Cities Pitchbook. UK Government, March 2016. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/526238/Smart_Cities_Pitchbook.pdf
— SmartStart, Modeling private sector finance adoption for SmartStart cities. Siemens, 2016. https://finance.siemens.com/financialservices/us/industries/industrial_finance/documents/sfs2016-smartstart-whitepaper.pdf
— Sustainable Urban Mobility and the Smart City. Polis, November 2015. http://www.polisnetwork.eu/uploads/Modules/PublicDocuments/polis_smartcities_policy_paper_november_2015.pdf
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