Filling The Gap: Sustainability, Infrastructure, And The Private Sector
With the passage of the UN Sustainability Goals in 2015, environmental impact is of increasing importance for the governments that build our infrastructure. They not only want their countries and cities to be “smart”—that is, with well-developed and coordinated infrastructure—they want to do it without contributing to the world’s environmental problems.
Companies concerned with sustainability issues are already leading the way in employing new technologies to reduce their carbon footprint.
But infrastructure is a daunting issue—even without the pressures of sustainability. Under current tax regimes, governments will only be able to fund half of what’s needed[1] to meet upcoming infrastructure demands—not to mention fulfill UN Sustainability goals. If governments want to create smarter, more efficient, more connected, and better-run cities and countries, innovative solutions and thinking will be needed to fill the gap—and these can come from the private sector.
The growing pressure to become smart
There is no doubt that today’s need for smarter cities is driven in part by skyrocketing infrastructure demands. Increasing urbanization is creating unprecedented pressure on the transit systems, power grids, and water processing of today’s cities. According to the United Nations, by 2030, 60 percent of the world’s population will live in cities.
This growth is often manifesting itself in urban sprawl—inefficient, low-density development with car-based transport that has the potential to wreak havoc on global emissions. And in developing nations, the inability to keep up with infrastructure demands are making new city dwellers—who are often living in informal and unplanned settlements—particularly susceptible to natural disasters and rising sea levels.
Closing the infrastructure gap to meet increased urban needs is highly unlikely if governments keep trying to finance projects with public funds. In many economies, government deficits, increased public debt-to-GDP ratios, and the perception of inefficient spending have forced public officials to actually reduce funding of infrastructure.[2] If smart cities are to encompass improved—and sustainable—infrastructure, smart financing is going to be needed as well.
The sustainable appeal of PSP
Enter the private sector. Infrastructure funded by private sector participation (PSP) is not a new concept. There are a number of models—some tested, some new—for bringing in the private sector. Some of these include:
- Financing model payments: This is a model in which the public sector provides payments received that match agreed cost (including finance) amounts, allowing full coverage of expenditure and agreed returns. Similar models are used in availability-based public-private partnership structures
- User fees/charges: In this model, users pay directly for services, such as through road tolls. While this may seem straight-forward, it can be riskier due to the uncertainty of quantifying payments in advance.
- Indirect income generation: This model generates revenue from ancillary services, such as selling advertising in a public space. Other examples include air right sales/lease or density bonusing.
- Value capture: this involves monetizing some of the value that an infrastructure project generates directly or indirectly. Building new infrastructure will likely increase the property values in surrounding areas, giving the city government an opportunity to capture some of the that value. For example, a government that builds a new transit hub could create a special taxing district around it.
Incorporating a sustainable angle within these scenarios going forward will certainly offer the private sector new opportunities. Sustainable direct value capture can come from governments sharing the costs of a highway with the private sector, who would participate if it is able to have exclusive rights to a dedicated lane for commuter buses or trains. Bike share programs are a win-win initiative for everyone when it comes to sustainability and Smart City planning: cities get less congested streets while the bike share companies locate in optimal locations. Data from these rentals can also help city planners frame future transit strategies.
Sustainable PSP solutions can work for everyone. Cities get better transit, the private investor has a low-risk revenue stream for years to come, and carbon emissions are lowered.
Lessons from the private sector
It’s not only funding that can be gained from the private sector when it comes to sustainable infrastructure. Companies concerned with sustainability issues are already leading the way in employing new technologies to reduce their carbon footprint. Take the Edge office building in Amsterdam, where Deloitte is the main tenant and developer of an app that helps feed data to the building’s 28,000 sensors. The Edge has been called the “smartest building in the world” by Bloomberg: lights are turned on and off and temperatures adjusted depending on who’s in the building and where. Workspaces are assigned depending on need so that less space sits idle. Fuel usage is cut by locating parking immediately as a car arrives.
The British rating agency BREEAM gave the Edge the best sustainability score ever recorded. But sustainability for sustainability’s sake is not the goal here. By decreasing space needs and increasing energy efficiencies, the Edge is expected to have an attractive return on investment.
Governments can learn from private sector experiments with sustainable technologies and approaches like the Edge. They can also arm regulators with a strong case to shift codes to favor such sustainable efforts as smart buildings. A building code that serves sustainability goals and the bottom line is hard to argue with.
Time’s getting short
The UN Sustainability Goals seek implementation by 2030. That’s just around the corner, especially given the long time horizons of infrastructure projects. The pressure is even greater when you consider the projections for urban living: by 2050, city dwellers will outnumber their rural counterparts by a ratio of two to one.[3]
Governments need to start planning now if they want to build not only smart cities but sustainable cities. And while there is strong interest from the private sector, governments must take the lead in order to capitalize on private sector thinking and support—no matter what form it takes.
[1] The Sustainable Infrastructure Imperative, Global Commission on the Economy and Climate
[2] Fostering investment in infrastructure, OECD
[3] The World’s Cities in 2016, United Nations