FINANCING URBAN DEVELOPMENT: A CHANGING LANDSCAPE
I prepared this for an MBA course focused on "Rethinking Business." The paper explores the changing landscape of financing for urban development projects. Report introduction copied below.
Rapid urbanization and population growth are placing a considerable strain on our cities. For the first time in history, more than half of the world lives in cities. These trends are projected to accelerate, adding 2.5 billion people to cities by 2050, bringing the proportion of global population in urban areas to 66%. Furthermore, nearly 90% of this growth is expected to take place in Asia and Africa (World Bank: Urbanization Prospects). While urbanization can promote economic growth—cities currently generate more than 80% of global GDP—it can also create significant challenges in the need to meet demand for basic services, infrastructure, affordable housing and more (World Bank 2014). Cities will need to make substantial investments in the coming decades in order to meet these demands.
According to a 2011 report from The Climate Group, Accenture, Arup and Horizon, “Cities alone will have to spend a staggering $350 trillion or 7 times current global GDP in the next 30 years on urban infrastructure.” The World Bank estimates that at least $1 trillion per annum is required to fill the urban infrastructure gap just in low- and middle-income countries (World Bank: 2013). When taking into account all countries globally, this number rises to a need for $4 trillion (5% of global GDP) in annual infrastructure investments until 2030 (WEF 2015). The World Economic Forum estimates that the public sector can raise less than half of that amount—leaving an approximately $2 trillion per annum funding gap. Private sector investment in urban infrastructure and development is thus essential. Further, this represents an opportunity for private sector actors to deploy innovative financing models that promote urban development while generating returns.
With the growing focus on meeting this urban challenge and new trends such as “Smart Cities,” private companies have become increasingly interested in funding urban development. Given the massive size of investments often required and the longer time horizon for returns, innovative financing models have been developed to fund urban projects and to bring together private, public and social funding partners.