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The Sustainable
Cities Initiative:
Putting the
City at the Centre of Public-Private Infrastructure Investment
Background
Canada
has the potential to be a world leader in the provision of
environmentally-sound infrastructure in developing countries.
Few commercial, environmental and political opportunities
are as significant. Strengthening and developing Canada's
competency in urban-based public-private infrastructure (PPI)
will lead to a global competitive advantage while contributing
to a more sustainable planet.
The
environmental case for a sustainable cities initiative is
straightforward: the bulk of the population lives in cities;
they are where a given dollar spent has maximum positive environmental
impact; and in cities the connection between environmental
improvement and quality of life is immediate (and thus an
emerging political priority). If cities are important now,
they will be almost the only priority in coming years.
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Demographic
experts estimate that in 2025, there will be about 2.5 billion more
city dwellers than there are today. The vast majority will be in
the cities of the developing world. To put this in perspective,
cities of the developing world will need to cope with the rough
equivalent of two more "Chinas" worth of population within
one generation. Decisions made today about urban transport, energy,
water and waste infrastructure, buildings, and even products and
services will have an ongoing environmental impact. If Canada hopes
to make a positive contribution to global sustainable development,
perhaps nothing is so important as "getting cities right."
The
commercial case is also clear. Viable cities are essential to wealth
creation. The World Bank estimates that as much as USD $200 billion
per annum over the next decade needs to be spent on urban infrastructure
in Asia alone. When other areas of the developing world are considered,
this figure rises to approximately USD $4.5 trillion over the next
ten years. Such investments are an enormous opportunity for Canadian
builders, operators and suppliers. Major financed projects are currently
under way in many cities that could use Canadian strengths.
Canada
is not getting its share of this market. If Canadians continue with
"business-as-usual," we are almost certain to fall further
behind. One indicator of underperformance is Canada's record in
winning World Bank contracts. Historically Canada has done well
in winning consulting contracts from the World Bank (over twice
the average disbursement on a per capita basis). However, we obtain
less than the average disbursement for equipment, and only one-quarter
of the average disbursement for civil works projects (World Bank,
1997 figures).
Furthermore,
urban infrastructure will increasingly be delivered by the private
sector -- primarily through public-private partnerships involving
municipal governments. In 1990, annual global infrastructure spending
was approximately USD $100 billion, with financing almost evenly
divided between the private and public sources (including international
financial institutions, development and export credit agencies).
By 1996, global infrastructure spending increased to approximately
USD $850 billion, and the private sector's share rose to 85 percent
(Export Development Corporation, 1997 figures).
If
Canadians are to participate meaningfully in this expanding global
market, we will have to become more aggressive, effective and strategic
in securing public-private infrastructure (PPI) projects and other
public-private partnerships. Canada also needs to distinguish itself
from its competitors: particularly France, Germany, the Netherlands,
and the United States.
American,
Dutch, and German companies have access to internal and external
financing sources that, together with Japanese firms, set them apart.
The giant Compagnie G�n�rale des Eaux (Vivendi) is aggressively
promoting its cross-sectoral urban expertise. Countries such as
Switzerland and Holland are already marketing their companies as
providers of integrated sustainable cities solutions, and are providing
the governmental and institutional support that make them well positioned
to deliver on these promises. In both cases, the rationale would
appear to be the enormous scope for both environmental and economic
benefits and the associated goodwill such activities generate.
Clearly,
Industry Canada's September 14-15 conference on PPI is very timely.
The question of what Canada and its firms can do to undertake such
projects could not be more relevant.
Directions
for Change: the NRTEE Proposal
From
the National Round Table on the Environment and the Economy's (NRTEE)
perspective, and from that of the dozens of private sector experts
contributing to the Sustainable Cities Initiative, the best way
forward is:
1)
to focus on "urban-scale" projects such as transit systems,
water supply and wastewater treatment facilities and district heating
systems; and
2)
to increase Canadian firms' familiarity, knowledge and competency
with PPI projects to contribute to a more comprehensive strategy
aimed at responding to the ballooning demand for "sustainable
urban solutions" in select cities around the globe.
The
Sustainable Cities Initiative has four key messages:
1)
Differentiate the "product." Canada's
international stature as a Good Samaritan will stand us in good
stead. It will be reinforced by targeting urban, environmentally-sound,
and demand-driven projects -- by wedding private enterprise to public
purpose.
Canada
has proven sectoral strengths and a fine record of government support.
With fine-tuning of program design and incentives, and with the
commitment of all three orders of government, sustainable urban
development can become a unique Canadian marketing proposition.
Should
Canada's commitment to reduce greenhouse gas emissions unfold as
many expect, Canadian firms able to do this abroad will have an
important market -- and access to additional financing. Because
reducing urban air pollution has direct climate change benefits,
and because health and urban air quality are key issues in developing
cities, emissions reductions can be pursued as an environment-economy
win-win with significant political benefits.
The
Canadian government wants new ways to showcase the capabilities
of Canadian project developers and vendors in foreign countries.
The NRTEE has highlighted how key firms in the telecommunications,
transportation, energy, building and environmental sectors can be
marketed as providers of sustainable cities solutions. The Canadian
government should implement the minor institutional changes that
will allow Canadian firms to maximize this opportunity. In this
way, expanding urban infrastructure opportunities become the framework
for increased Canadian efforts to expand our PPI capabilities.
2)
Give municipal leaders and urban residents what they want.
Increasingly, this is cross-sectoral suites of products and services
that address underlying needs, rather than unsynchronized, ad hoc
marketing of isolated products and services. For example, the need
to improve the quantity and quality of drinking water can be met
by a team of actors which, together, can provide a solution. This
team could include land-use planning and municipal regulation experts
in addition to those with complementary products and services.
This
type of unified approach places a premium on identifying municipal
and local industrial needs, and forming partnerships capable of
responding to them.
- Needs
Identification: Few Canadian companies have the financial and
human resources to conduct in-depth market assessments in a number
of cities, let alone to gain the confidence of city officials
who know or indeed formulate the precise urban development priorities.
Yet we do have officials, not-for-profit groups, twinning arrangements,
and business ventures operating in cities around the world that
have gained local confidence and are helping to shape the demand.
The key is to turn these isolated actors into networks, and their
knowledge into opportunities.
- Partnerships:
Partnerships are important for a number of reasons. Projects need
to be a certain size to attract debt and equity capital. The transaction
costs for smaller urban projects are not significantly less than
those associated with mega-projects. This tends to skew the market
toward the latter, regardless of whether these projects are appropriate
in terms of risk, or to the actual requirements of the community.
If smaller projects are put together as a package, this impediment
may well be overcome.
Furthermore, formal partnerships with associated arrangements
for performance bonding and risk insurance can link competencies,
thereby decreasing risk and increasing lender confidence. Partnerships
can put Canadian firms in the position of being able to solve
a city's problem, rather than merely selling a product -- a factor
that can set Canadians apart from competitors.
To
facilitate such partnerships, the NRTEE and the Department of Foreign
Affairs and International Trade (DFAIT) commissioned a study of
the various Canadian organizations and businesses active in cities
around the world, outlining their core activities and local partners.
This is the first attempt at a comprehensive record of who is doing
what on a city-by-city basis. This compendium can serve as an indispensable
tool for both needs identification and partnership formation.
3)
Come to the table with readily-accessible financing.
There are two points to be made, both related to risk.
- The
major challenge is not availability of financing, but rather the
challenge of ensuring Canadian firms are adept at assuming, allocating
and managing risk. Without addressing these risk issues, attempts
to expand Canadian PPI capability may falter.
- Assuming
that companies have or gain these competencies, it is important
to have a governmental backdrop in Canada that works to reduce
the risk factors. There are things we can do to make the financing
process more transparent, streamlined and predictable -- particularly
during the crucial development phase.
4)
Target specific urban markets with the greatest potential
for success. Starting with the cities where Canada already
has a significant presence, the NRTEE put these through a number
of screens. These screens include:
- financial
and administrative capacity to undertake PPI projects;
- interest
of the international financial institutions (IFIs);
- stable
government; and
- a
match between needs and Canadian capabilities.
This
enabled the NRTEE to identify Canadian niche opportunities in a
"short list" of cities.
These
city profiles offer Canadian firms a form of primary due diligence.
Whether or not individual companies agree that the identified cities
are the places to start, the profiles serve as a model of the type
of reports needed to set the stage for more in-depth due diligence
by both public and private players.
Act
Now
The
NRTEE is urging the federal government to collaborate with industry
and other interested groups and to act now to put Canada in a leadership
position for sustainable urban development. Clear business support
for a Sustainable Cities Initiative will be a powerful catalyst
of government action.
The
NRTEE is developing detailed recommendations for the federal government.
These recommendations track the arguments made above.
1.
Differentiate the Canadian approach.
Canada
has managed massive post-war urbanization remarkably smoothly, and
can boast of several significant achievements. Our development firms
and implementing agencies have a first-rate reputation. The Sustainable
Cities Initiative should build on these strengths. Among other selling
points, the Canadian Sustainable Cities Initiative should emphasize
that Canadian players are prepared to make a long-term commitment;
that they are seeking to apply leading-edge solutions; and that
they would work cooperatively to find the best fit. They are not
simply "pushing technologies."
- Industry
Canada and DFAIT should develop and maintain an up-to-date marketing
package of Canadian strength in sustainable urban infrastructure,
building and environmental management. They should promote our
integrated and development-oriented expertise as a distinct feature
of Canada. There should be an explicit frame put around our expertise
in telecommunications, urban transit, information technology,
water and wastewater systems, community energy systems, buildings
and facilities.
- Canadian
development agencies should make sustainable urban development
a key policy and programming priority.
2.
Make financing readily available.
a)
Increasing experience with PPI/ risk assumption and management
- The
most important action that Canadian governments at every level
can take is to use the PPI model themselves. Critically,
these projects must involve a sharing of risk between the partners.
Without this experience with PPI and risk, efforts to expand Canadian
PPI activity abroad will be thwarted. Indeed, Canada is now at
the point where Canadian firms are becoming uncompetitive for
PPI projects even in Canada. Most of the Canadian success stories
abroad involve those who first road-tested PPI projects in Canada.
b)
Removing impediments to the flow of capital to international urban
infrastructure projects
- The
Export Development Corporation (EDC) should use its powers and
mandate to establish "regional infrastructure investment
funds." These funds should be set up with Canadian lending
institutions and the relevant international financial institutions
and should be targeted for infrastructure and building projects
in selected urban regions around the world.
- The
EDC should consider providing investment guarantees to Canadian
investors in PPI projects that meet agreed-upon sustainable development
criteria. Investment guarantees would put Canadian firms
on a more equal footing with American firms receiving support
from the Overseas Private Investment Corporation (OPIC).
- The
Department of Finance should consider relaxing restrictions on
the ability of labour-sponsored venture capital funds and pension
funds to invest in foreign ventures -- provided those funds
flow into approved urban environmental ventures and PPI projects.
c)
Making the process for receipt of development funds more transparent,
streamlined and predictable
The
Canadian International Development Agency (CIDA) should develop
"city strategies" within its country programs, focussing
first on those urban areas most likely to be successful as part
of a "sustainable cities initiative."
Within
these city strategies, CIDA funding rules should:
- encourage
initial due diligence to identify sound local partners;
- foster
teaming rather than competition among Canadian implementing agencies;
and
- encourage
implementing agencies to pursue development projects, commercial
projects or a combination of the two that meet the requirements
of the municipality and that have been developed collaboratively.
3.
Support team building.
a)
CIDA and other funding criteria should be modified to encourage
combined proposals by Canadian teams in urban regions and to encourage
partnerships.
b)
In those cities/regions where primary due diligence has been conducted
(such as via the city profiles described above), expenses associated
with finding local partners should be eligible for front-end funding,
recoverable upon success.
c)
In selected cities where substantial Canadian teams are working,
CIDA or another funding agency should provide "team secretariat"
funding over the life-cycle of a comprehensive project. This
would permit a corporate memory to be developed and sustained. As
well, ongoing contacts with municipal officials, industrial leaders
and community residents would be maintained. Canadian companies
benefitting from these services could also contribute to their costs
based upon success in PPI or similar ventures.
The
NRTEE Sustainable Cities Initiative is about:
- recognizing
cities as a distinct developmental and market opportunity; and
- simultaneously
and synergistically reaping economic, environmental and political
benefits.
We
are convinced that focussing on the second point will make the urban
market greater and development work more effective. The NRTEE's
work outlines what needs to be done to realize synergies among Canadian
strengths in design, technological innovation, financing and implementation.
Cities
are also an important locus of public-private partnerships and PPI
projects. The Sustainable Cities Initiative gives a framework and
a compelling justification for concerted action to expand our PPI
capabilities.
Canada
has a window of opportunity to position itself as a front-runner,
rather than an also-ran, in providing real urban solutions. We just
need to get started -- now.
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