Issue #4 80654 handshake IFC’s quarterly journal on public-private partnerships mass rapid transit: A tool for urban expansion In this issue financing: Beyond sovereign guarantees low-income housing: Lessons from Latin America q&a: Economist Edward Glaeser, former U.K. Secretary of State for International Development Clare Short, Barcelona Global CEO Mateu Hernández Cities ppp s In partnership with Australia • Austria • Brazil • Canada • Catalonia (Spain) • Flanders (Belgium) • France • Ireland • Italy • Japan • Kuwait • Netherlands • Norway • Sweden • Switzerland • United Kingdom • United States • Public-Private Infrastructure Advisory Facility (PPIAF) • Global Partnership for Output-Based Aid (GPOBA) • Private Infrastructure Development Group (PIDG) • African Development Bank • Asian Development Bank • Brazilian Development Bank (BNDES) • Caribbean Development Bank • Central American Bank for Economic Integration • European Investment Bank • European Bank for Reconstruction and Development • Inter-American Development Bank • Infrastructure Consortium for Africa • Islamic Development Bank Issue #4 – January 2012 IFC Advisory Services in Public-Private Partnerships 2121 Pennsylvania Avenue, NW • Washington, D.C. 20433, USA • +1 (202) 458 5326/7 • ifc.org/ppp Editorial Tanya Scobie Oliveira • Alison Buckholtz Art & Design Jeanine Delay • Victoria Adams-Kotsch Disclaimer This journal was commissioned by IFC, a member of the World Bank Group, through its Advisory Services in Public-Private Partnerships department, which helps governments improve access to basic public services through public-private partnerships in infrastructure, health and education. The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of, IFC or its Board of Directors or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use. Cover photo © Eva Serrabassa/istockphoto Letter from IFC There is a near-perfect correlation between urbanization and prosperity across nations, as pioneering urban economist Edward Glaeser points out in his myth-busting Triumph of the City. He reminds us that “the real city is made of flesh, not concrete,” and that cities succeed or fail due to human capital, rather than physical capital. However, the right physi- cal capital—thoughtfully tailored infrastructure—increases the efficiency of cities, allowing for more and better innovation. Public-private partnerships (PPPs), at their best, facilitate this growth on a scale and timeline that would be impossible without private capital. This issue of Handshake takes readers on a tour of urban PPPs that put citizens first. Expert authors introduce readers to solutions that have revolutionized citydwellers’ experience, like PPPs for housing, transportation, and water delivery. We focus especially on the need for a new vision of the city, featur- ing provocative discussions with Glaeser and with Clare Short, former U.K. Secretary of State for International Development. Glaeser reacquaints readers with the virtuous cycle created by dense urban spaces, where employers are attracted by the large pool of potential employees and workers are drawn by the abundance of potential employers. Short builds on the social benefits of this urban concentration. By pointing out that “real democracy” is based on the practice of engaging people in local development, she returns us to the certainty that cities are at the heart of civilization. Laurence Carter, Director Tanya Scobie Oliveira, Editor IFC Advisory Services in Public-Private Partnerships Photo © Jeremy Edwards/istockphoto Features Financing 20 Beyond sovereign guarantees | 62 Public transport Mass Rapid Transit | 40 7 public transport PPPs | 44 Urban bikeshare programs | 48 Wellington cable car | 50 Principles for sustainable transport | 52 Urban water Myth vs fact | 54 “Everything became possible” | 56 Bucharest water and sanitation | 58 Manila water | 58 Water concessions in Colombia | 60 Housing & slums 50 Development at the base of the pyramid | 16 PPPs for low-income housing | 20 In this issue 2 | handshake 25 Columns PERSPECTIVE Insights & opinions Getting cities right | 06 Cities & climate COMPASS Surveying the PPP landscape A call to action | 25 St. Petersburg: Lessons Low-carbon China? | 27 in PPP implementation | 10 GHG emissions & urban lifestyle | 28 LEGALEASE Law & legislation, decoded Legal challenges and regulations in urban PPPs | 18 FAST FACTS A glimpse ahead 12 Top 600 cities | 35 LAST WORD Closing thoughts Q&A Cities as development partners | 65 Managing urbanization | 12 Clare Short Triumph of the PPP | 30 Edward Glaeser PPPs in urban revitalization | 36 Mateu Hernández Speeding toward the future | 46 K. Rajaraman IFC | 3 Contributors 65 William (Billy) Cobbett is Manager of Cities Alli- ance, a global partnership based at the World Bank in Washington, D.C. 46 20 Abha Joshi-Ghani heads the Urban Development and Local Government Practice 20 in the World Bank’s Sustainable Develop- ment Network, guiding the World Bank’s work Taimur Samad on urban policy and is a Senior Urban Specialist, Latin America Region, at the World Bank, working on PPPs in land and housing strategy, and knowledge and learning. 06 development, urban redevelopment, and infrastructure finance in Colombia and Brazil. Luis Andrés Axel E. N. Baeumler is a Senior Economist in the World Bank’s South Asia is a Senior Infrastructure Economist at the World Sustainable Development Department. Bank’s Sustainable Development Department, Trans- port, Energy, and Urban Sustainable Development. 4 | handshake Judy L. Baker Dan Hoornweg is a Lead Economist at the World Bank Institute is a Lead Urban Specialist in the World Bank’s working on urban development issues. Finance, Economics and Urban Department. Vipul Bhagat Ede Ijjasz-Vasquez is a Chief Investment Officer and Manager in IFC’s is a Sector Director in the World Bank’s Sustainable Advisory Services in Public-Private Partnerships. Development Department. Isabel Chatterton John Leber is a Senior Infrastructure Specialist in the joint World is an Investment Officer in IFC’s Advisory Services in Bank-IFC Subnational Finance Unit working in Public-Private Partnerships. Latin American countries. Cledan Mandri-Perrott Jeanine Delay is a Senior Finance and Infrastructure Specialist in the coordinates the communications and knowledge ini- Financial Solutions Group of the Finance Econom- tiatives for IFC’s Advisory Services in Public-Private ics and Urban Department part of the Sustainable Partnerships and is art director of Handshake. Development Vice Presidency. Jeff Delmon Philippe Marin is a Senior Infrastructure Specialist in the Financial is a Senior Water and Sanitation Specialist for the Solutions Unit of the Finance, Economics and Urban World Bank’s Water Division, Sustainable Develop- Department and the Global Expert Team on PPPs at ment Department, Middle East and North Africa the World Bank. region. Victoria Delmon Shomik Mehndiratta is a Senior Counsel in the World Bank Legal Vice is a Lead Urban Transport Specialist in the World Presidency. Bank’s Sustainable Development Department. David Ehrhardt Edouard Perard is CEO of Castalia LLC, a company that advises on is the Regional Coordinator for South Asia in the PPPs and private finance of infrastructure, based in Public-Private Infrastructure Advisory Facility Washington, D.C. (PPIAF) of the World Bank. Joshua Gallo Cathy Russell is an Infrastructure Specialist and Program Leader for was formerly a Communications Officer for the the World Bank-administered Sub-National Technical Global Partnership on Output-Based Aid (GPOBA), Assistance (SNTA) Program. based in Washington, D.C. Isabella Gawith David Sislen is an analyst at Castalia LLC, a company that advises is a Sector Leader in the World Bank´s Sustainable on PPPs and private finance of infrastructure, based Development Department, Southern Africa. in Wellington, New Zealand. IFC | 5 Perspective Getting Cities Right By Abha Joshi-Ghani &Vipul Bhagat 6 | handshake Cities are the hearts of nations, and their pulse can be felt upon touchdown. Does it take too long to make your way out of the terminal? Can you easily find a trolley for your luggage? Are taxis waiting to take you to convenient hotels? Do bad roads turn a ten-mile ride into a two- hour nightmare? How readable is the signage along the way? Do the streets look clean, or are garbage cans overflowing? Those and many other successful elements of urban infrastructure and services create a world-class city. World-class cities do not result from public efforts alone. Cities are limited in resources and must engage the private sector to meet infra- structure and service provision needs. Urban public-private partnerships (PPPs) are one answer. They help deliver city services and infra- structure by introducing private sector innova- tion, efficiency, and financing. We see long-term, positive effects of PPPs across the globe, from a toll ring road in Tamil Nadu to the reinvention of Barcelona for the 1992 Olympics. The role of PPPs in urban settings is particularly relevant now, as the world experiences a massive upsurge in the population of cities. By 2030, many cities will have doubled in population. The impact will be strongest in many African and Asian cities with rudimentary infrastructure –metropolitan areas that are already bursting at the seams. PPPs will allow these constrained cities to meet the needs of their burgeoning populations, supplying the resources that make a city livable and attractive, in the midst of this unprecedented demographic shift. Photo © Josh Liba IFC | 7 Measuring success Transform Transportation The success of these PPPs will be measured by Handshake’s feature on innovative transporta- how they contribute to urban growth: making tion PPPs includes links to Bogota’s successful, opportunities for businesses to innovate, assur- cost-effective TransMilenio, which operates like a rail-based system, and São Paulo’s Yel- low Line, which boosts the reach of that city’s urban rail network to 420 km. Thinking ahead guarantees the Mass Rapid Transit (MRT) projects sustainability of rapidly urbaniz- like these are tools for urban expansion, as experts explain in an article about ing areas around the globe. balancing MRTs’ complexity and risks with the benefits. ing services reach the right people, and keeping Treat waste and deliver water citizens mobile, employed, and safe. After all, as pioneering urban economist Edward Glaeser In wastewater treatment, the private sector (Triumph of the City) says in Handshake’s feature builds and operates the treatment facility, and interview, cities are ultimately about human absorbs the up-front capital investment while capital, not physical capital. This basic under- the public sector provides residential con- standing underpins the diversity of urban PPPs nections and bears the risk of collecting user profiled here, including those that: charges. Water delivery projects in Morocco, Colombia, and Bucharest present several differ- ent options for city governments to fulfill the Create communities basic obligation to deliver water 24/7. Manila Handshake showcases urban PPPs that make a Water deserves singling out in our pages because difference at the local level, such as community the city was infamous throughout Asia for its water supply schemes and popular bikeshare outdated, inefficient water system. The privatiza- programs. These projects show that it’s not tion of Manila’s Metropolitan Waterworks and always necessary to attract big players to improve Sewerage System, on which IFC was lead advi- citizens’ quality of life. Small-scale projects in sor, fundamentally changed the sector. transportation can include modest bus terminals (a steady revenue stream is assured because you Regenerate brownfields capture value around the land, attracting shops and other renters), a sole cable car, or a parking PPPs can also be the key to brownfield develop- garage (the direct revenue stream makes this one ment, when old industries have disappeared and of the most straightforward urban PPPs around). the land left behind, often in prime areas, is too polluted to build on. A forward-looking govern- 8 | handshake ment will clean up that land and bid it out for how China’s rapid urbanization could ultimately redevelopment. The same is true for waterfronts create 45 million jobs in urban areas. In Barce- – prime spots for squatters in cities with little or lona, innovation and foresight also pay off for no provision for low-income housing. Mixed-use generations that follow, explains Mateu Hernán- PPPs provide a way to compensate the squatters dez, CEO of Barcelona Global, in Handshake’s fairly, clean up the land, and put amenities and first video interview. real estate in a central location. Thinking ahead guarantees the sustainability of rapidly urbanizing areas around the globe, and Supply low-income housing and our treatment of cities and climate change rein- develop slums forces why cities must be compact and energy- Many cities see the benefits of mixed-use and efficient, green and sustainable. Sustainable low-income housing, offering incentives to devel- cities are also inclusive, former U.K. Secretary of opers. Handshake gives readers insight into Latin State for International Development Clare Short American countries that have instituted sweeping reminds us in Handshake’s second feature inter- structural reforms in the urban housing sector view. These cities integrate all of their citizens during the last two decades. These countries, into the socioeconomic fabric, engaging them in including Brazil, Chile, Colombia, and Mexico, developing the practical systems that comprise have built sound regulatory environments “real democracy.” conducive to the growth of primary mortgage Ultimately, as with most things in life, the key markets. In the same section, we address the PPP to success for cities is in doing all of this well, potential of slum development, noting that the as Cities Alliance Manager William Cobbett poor’s purchasing power can represent a signifi- tells Handshake readers. “Getting cities right… cant market for the private sector if organized will become the most important developmental and leveraged effectively. challenge of this and the next generation,” he concludes, explaining what’s at stake in rapid If you build it, they urbanization. “Cities are the places where we will fail, or succeed, in dealing with most of will come our global challenges.” Cities must plan ahead and build infrastructure before it’s needed, being proactive rather than reactive. The investments may not break even quickly, but they attract people and firms that are vital for vibrant world-class cities. Chinese cities, for example, invested billions in infrastructure in anticipation of growth, and many of their cities are already up to capacity. A forthcoming World Bank publication excerpted in this issue explains IFC | 9 Compass Saint Petersburg: Lessons in PPP implementation By Jeff Delmon The enchanting city of Saint Petersburg, Rus- markets could recover. The toll road bid process sia, boasts the canals of Venice, the cathedrals was cancelled and the project broken up (more of Paris, the architecture of Stockholm, and the on this later). The light rail project was also non-stop festival atmosphere of white nights restructured to fit with evolving ridership in the in July and August. As Russia’s second city, city. The airport, the last project to be launched, with around 4 million people and a bustling was the first to reach financial close, so here we economy, it is also becoming a global business simply note that hard currency revenues and an leader, and many have watched with great inter- existing asset and revenue stream are convenient est during the past several years as the federal advantages when financial markets are lean. government started efforts to implement PPPs. Lesson 1b: Roll with the punches. Saint Petersburg has now closed five projects, and several more are in process. It has not been Lesson 2: Maintain the vision while easy; the city has learned hard-won lessons along remaining practical. the way, including: Without distracting from these strategic projects, the city looked forward, to a large portfolio of Lesson 1: Start with the basics. PPP projects, and began creating a PPP frame- The city started with projects—very big, very work. It passed a municipal law on PPPs and bold projects, like a €6 billion toll road and a €1 created a central unit to capture lessons learned. billion tunnel, followed by a €1 billion light rail As teams gained experience in transaction line and a €1.2 billion airport expansion. The procurement and closure, they were moved on toll road and tunnel came to bid in late 2008— to the next project. While this is an effective way leading to Lesson 1a: Timing is everything. But to use the skills developed among the deal teams, rather than get discouraged, the city restruc- it made it difficult to empower the central PPP tured the tunnel, flipping it around so that the unit, which did not have its own transaction- concessionaire finalized the design first, thereby tested validation. delaying the search for financing until the 10 | handshake The city allocated a PPP project to the central PPP unit to implement directly. This distracted the central PPP unit from its other functions of developing standard practices and other commodification. But it was an essential capacity building exercise and gave the PPP unit needed gravitas. Lesson 3: Seek financing where it is most attractive; avoid the myopia of normalcy. As part of the federal government’s effort to encourage PPPs, the Investment Fund was created, providing grants for strategic PPP projects to make them more financially viable. (This mechanism is similar to India’s viability gap fund and the U.K.’s PFI credits). The city is one of the few entities to access the Investment Fund (for the toll road and the tunnel), due to its proactive approach. When the airport came up for financing, the city looked to allies in IFC and the European Bank for Reconstruction and Development, as well as Russian banks like Vnesheconombank (VEB) and VTB. When the toll road hit the wall of the financial crisis, the city got creative, using the Investment Fund, issuing city infrastructure bonds backed by federal guarantees to fund part of the road, and looking to Russian banks to finance the PPP portion. Some suggest that the city should have sought international financing, but the continu- ing soft international financial markets, the bitter pill of foreign exchange risk, and the success of Saint Petersburg’s neighbors in India with local financing look to have proven them right. IFC | 11 Managing urbanization Photo © Cities Alliance 12 | handshake Q& A Former U.K. Secretary of State for International Development reflects on PPPs’ role in rapid urbanization Interview by Alison Buckholtz Clare Short, the former U.K. Secretary of State for International Development and head of the Department for International Development, was a Member of Parliament for 27 years. Her activism now focuses on the urbanization of the poor and the need to prevent the spread of slums. She spoke to Handshake about how to apply the lessons of the past to the rapid urbanization taking place in developing countries. IFC | 13 What sort of trajectory can today’s own businesses, and they’re an enormous source rapidly urbanizing cities expect, of economic development if you give them a chance. It’s also critical to remember that deliver- based on the lessons of history? ing education, healthcare, water, and sanitation, and getting access to new technology like renew- The lessons of history fall on Africa and South able energy, is cheaper to do in urban areas. Asia, which are urbanizing faster than anywhere Demand is concentrated, rather than spread out else. This is an enormous opportunity, and an as in rural areas. There is real opportunity for inevitable historical transition that no one can economic uplift in urban populations. stop. It can either be well managed or poorly managed, and what we’ve seen from the past is that with poor management you get spreading How does urbanization lead to squalor and slums, disgruntlement, and angry better economic opportunities? populations, accompanied by political instability. Then, from the agitation and anger of the poor Everybody’s worried about food prices and agri- in urban areas comes transformation and reform. cultural productivity, and thinks the answer is No piece of history is the same everywhere, but putting investment in rural areas. But again, let’s usually it’s not a pretty journey, and there is lots look at the lessons of other continents. When of conflict and unhappiness. you get concentrated populations in the city, you get a market for agricultural production and an outlet for some of the population that can’t find a place to be productive in rural settings. The lessons of history fall But governments don’t often see on Africa and South Asia, it this way. Why? which are urbanizing faster Governments fear urbanization and they fear than anywhere else. slum dwellers. They think they’re messy, and that they will keep coming if their lives are improved by sanitation and better houses. In trying to prevent them from coming to the So what are the most important city, governments are in danger of missing the opportunity urbanization brings when slum lessons for rapid urbanization? dwellers are invited into the city as full and equal citizens. Governments are behind: the old model It’s critical to include your urbanizing popula- of all-powerful governments is changing. You’ve tion in the building of the cities. They’re vibrant got to engage local government and people. people: they build their own houses, have their 14 | handshake Is there a role for the private sector? The old model of all- You cannot create the cities of the future without people saving and borrowing, and the private powerful governments sector wants to be there and needs to be there. is changing. You’ve got That’s the opportunity. Because you can’t get the resources that cities need without it. Public- to engage the local private partnerships are very much part of the government and people. equation. But the development model also has to change. Why do you say the development Have any organizations evolved model is part of the problem? to serve the needs of the new urban poor? People’s image of the poor of the world is a rural population. If you take a snapshot of all the good If you look at SlumDwellers International, it and caring people working in development, 90 is helping the slum dwellers to come together, percent of the pictures would be in rural areas. save, and form relationships with local govern- There’s a fixed idea in peoples’ mind. And if ments to talk about what they need and want. everyone could just catch up, the beauty of the They save a lot of money in the hope that some possibility is that as people concentrate in urban will be allocated for housing and they can bor- areas, all sorts of connections can be made that row against their savings. They’re doing what’s lead to greater efficiency. You can really take needed, and now they just need partnerships to advantage of the spirit and benefits of city living. be able to achieve development. Everyone claims But it takes a while for the story line to change, to support democracy, and the practice of engag- and for peoples’ image of poor people to change. ing people in the development of their country is real democracy. Governments fear urbanization and they fear slum dwellers. IFC | 15 Development at the base of the pyramid How PPPs can meet the growing needs of slums By Judy L. Baker By 2030, the number of slum dwellers in the resent a significant market for the formal private developing world will double to 2 billion people. sector as well. This signifies an enormous opportunity. The unmet needs in these rapidly growing slums are staggering, including basic services like hous- Is Business Prepared? ing, along with clean drinking water, sanitation, Yet private sector investments in slum areas do roads, drainage, electricity, solid waste collection, not come easily. Businesses are often ill-prepared and health and education services. to service low-income markets, or wary of the market. Informality of land property rights is This major development challenge presents an enormous barrier, particularly in areas where a significant market opportunity for private the risk of eviction is high. Many of the needs in entrepreneurs. The poor, who comprise the base low-income urban neighborhoods are also public of the economic pyramid, have substantial pur- goods that create minimal private demand. chasing power based on numbers alone. There is Streets, drainage, and sanitation are often consid- also increasing recognition of the considerable ered the responsibility of the state. resources generated through remittances that are often channeled into housing and education. PPPs have tremendous potential for reaching the urban poor. Such partnerships can take many Much of the poor’s purchasing power fuels the forms. The experience in urban slums to date informal economy. If organized and leveraged has mainly been through components of larger effectively, the poor’s purchasing power can rep- projects that may include an entire utility (water, 16 | handshake Photo © Cities Alliance Housing & Slums sewerage, electricity, transport) within a certain Government’s Role city or region. Municipal governments may hire a private company to extend the water and sani- The private sector can be encouraged and tation network to new parts of the city, including assisted by partnerships with government agen- slum communities (a service contract), or they cies and NGOs. Government can fulfill the dual may include in a concession the commitment role of liberalizing the markets that affect the to extend service to certain slum communities. urban poor—for example, by adjusting building This latter option obliges the private company to and land use regulations for affordable housing, recover the costs of service provision and initial and by ensuring a regulatory framework that investment from its customers, including slum permits the delivery of services by small-scale dwellers. providers. Pilot projects to extend service to poor com- Government can also support the private sector’s munities as part of water concessions have had interest in the urban poor with assistance that success in some cities, although moving beyond helps to subsidize and/or mitigate the com- the pilot phase has been difficult. In Port Vila, mercial risk of entering the low-income sector. Vanuatu, a concession contract successfully Where the government is the holder of property extended free potable water service to poor areas rights, it has discretion over stabilizing and legal- through cross subsidies from wealthier areas. In izing land tenure to slum dwellers. In most cases Manila, the concessionaires Mayniland Water the existence of urban slums is directly correlated Services and Manila Water Company use a vari- to the government’s inability to provide infra- ety of internal programs and partnerships with structure, basic services, and planning capacity nongovernmental organizations (NGOs), com- to urban residents. But governments can still munity organizations, and small entrepreneurs obstruct the private sector’s involvement in to increase water distribution to slums. service provision and development by claiming exclusive rights to service provision, or by using free public housing or services to gain political Output-Based Aid favor. Output-based aid is also a growing trend in Involving the private sector in public utilities structuring subsidies to the private sector to and works does bring challenges. But as cities ensure that performance targets are met— continue to consider PPPs to improve public particularly those related to service provision services, service expansion to slums can be for the poor. Examples include extending integrated into PPP contracts. The private sector water connections to slums through a one- has much to gain from PPPs, given the rapidly time network extension, and connection fee expanding market opportunities. This is a subsidies in Manaus (Brazil), Ethiopia, Jakarta significant incentive to work toward sustainable and Surabaya (Indonesia), Mozambique, and solutions for reaching the urban poor. Manila (Philippines). IFC | 17 Legalease Legal challenges and regulations in urban PPPs By Victoria Delmon In many ways, urban environments are ideal for they may not be able to benefit from police developing PPPs: there is a high concentration protection. of potential customers, and projects are often Land acquisition for infrastructure can also be high-profile and prioritized by government. problematic, given the competition in cities for There are also a number of sectors in addition to land use. It is important to identify a right-of- the traditional infrastructure sectors where PPPs way or plot of land that can be acquired for a have been developed in urban areas: hospitals, PPP project early in the project development solid waste facilities and court buildings, as well process, as this will reflect on the fundamental as projects tailored to urban areas, such as mass feasibility of the project. rapid transit and light rail systems in the trans- port sector. But urban PPPs in developing countries present significant legal challenges, especially where they Urban PPPs in developing involve slums or informal settlements. There countries present significant are specific concerns about land rights relating to slums: for instance, if a road is to be built legal challenges, especially through a slum, it must be decided whether the where they involve slums residents have rights to resettlement. Govern- ments debate how to provide services like water or informal settlements. or electricity to slums because they recognize that provision of a service might be deemed to be a step towards recognition or “formalization” of The World Bank Legal team has developed the the settlement. One solution includes providing PPPI Resource Center to provide guidance and a water stand pipe at the entry point to the slum. materials on the legal, contractual, and But private operators may have safety concerns regulatory issues around PPPs. It includes when entering into informal settlements where checklists and risk matrices as well as sample 18 | handshake laws and regulations, terms of reference for consultants, and sample agreements and contracts. Many reference materials on the website relate to urban PPPs and can serve as useful resources. In the transport sector, for example, there are mate- rials for light rail projects and mass rapid transit projects, such as the TransMilenio bus-based rapid transit project in Colombia. Links to and summaries of urban water projects such as the Manila water concession may also be helpful. A section of the PPPI Resource Center is devoted to theft or non-technical losses of water and electricity and the legal tools that countries have developed to manage this issue. One notable developing trend is that solutions for solid waste collection and disposal increas- ingly involve PPPs. The World Bank has been involved in a number of initiatives in this sector, including developing model agreements to be used by local authorities for waste collection and disposal services in several countries in North Africa. There are also significant social and legal issues in developing PPPs in this sector, including the question of how to manage or regularize infor- mal waste-picking and to ensure that the private sector is able to regularize sorting of waste. To address the needs of practitioners working in solid waste, the PPPI Resource Center has added this sector to its resources. IFC | 19 Photo © DirkZ PPPs for low-income housing 6 lessons from Latin America By Taimur Samad During the last two decades, many Latin 30 percent of the mortgage portfolio to American countries have instituted sweeping the secondary market. structural reforms in the housing sector. These • Mortgage insurance products that enable reforms have enabled sound regulatory environ- lenders to hedge risks for mortgage lending ments conducive to the growth of formal land to lower income segments. and housing markets. One key component • Targeted tax incentives for low-income has been the expansion of primary mortgage mortgage lenders and investors in second- markets. ary markets as well as targeted interest rate subsidies for low-income households. Increasingly, housing policy in much of Latin America complements market forces through • A package of enabling reforms including instruments that create incentives for lenders and those that have improved land management builders to venture down-market, meeting the and property rights. demand from low and middle income house- The net impact of these structural reforms holds. Such instruments include: and “demand-side” incentives has been a brisk • Large demand subsidy or voucher programs increase in mortgage lending and home pro- that enable lower income residents to close duction for middle and low-income segments. the financing gap for formal housing. However, policymakers have found that these reforms and incentives have not made a signifi- • State lenders originating mortgages in cant dent in housing deficits. In Colombia, for Mexico and Brazil for the low and middle example, officials estimate a 2.5 million housing income segments. deficit in cities, with annual production barely • Mortgage securitization, which in countries able to keep up with the demand generated from like Colombia now exceeds approximately 20 | handshake Housing & Slums Photo © Agência de Notícias do Acre new household formation. In Mexico, this figure bearing the commercial risk for project develop- is approaching 9 million units. ment, marketing, and sales. In the face of continued and significant hous- In Mexico, the government has launched an ing deficits, countries like Brazil, Mexico and ambitious land and housing development pro- Colombia are considering more aggressive gram on municipal land, Desarrollos Urbanos supply-side strategies organized around PPP Integrales Sustentables (DUIS). The program principles. These PPPs aim to create incentives aims to support large-scale land and housing for private developers to develop and take to developments through integrated planning and market low-income housing projects by provid- a mix of public and private investments on a ing access to subsidies within the structure of project-by-project basis. The government also “concession-style” or “output-based” contracts. guarantees access to mortgage lending from state The largest of these regional programs is the mortgage companies. Developers bear partial Minha Casa Minha Vida (MCMV) in Brazil. project risk. MCMV was launched in 2009 and has com- The Macroproyectos Urbanos program in mitted a staggering 160 billion Brazilian reais Colombia (under development with the support ($81 billion in 2009) in subsidies and associated of the World Bank) will dedicate up to $500 incentives through 2014 to meet a target of 3 million in supply-side subsidies through 2014 million low and middle income homes. The pro- under a mixed-use land and housing develop- gram involves three product lines targeting three ment PPP approach in partnership income segments with a PPP-style approach with developers. for middle income segments. For these middle While these PPP programs for land and housing income segments, developers receive subsidies development are nascent, lessons are emerging on the sale of units to eligible households while to guide policymakers through the opportunities and risks of such interventions. IFC | 21 Scale is good, but beware (negative) externalities. 1 Large land and housing PPP programs that consolidate and direct subsidies can attract developers and catalyze private financing in roproyectos Urbanos program suffered from poor quality technical and environmental design because municipal governments were responsible for project development. Relying on private developers is not without risk. Developers frequently have a land pipeline that low-income housing. they are looking to take to market. This pipeline may not always be the most appropriate, due to However, reaching this scale is not without risks. indirect investment requirements in infrastruc- In Brazil, the magnitude of the MCMV program ture and social services. This reinforces the need has generated concern that it—alongside overall for the public sector to build strong and inde- buoyant growth and a large public investment pendent project evaluation capacity. 3 program—is contributing to rapidly escalating land prices as developers rush to buy land in larger cities where absolute deficit levels are con- Mixed-use land and housing siderable. Additionally, analysts are concerned development has multiple that effective demand—clients with access to benefits. mortgage lending—may dry up as banking institutions reach mortgage lending limits. When thinking big, policymakers are advised Mixed-use land and housing PPPs require to keep a full system view of how the potential developers to deliver a minimum built area of PPP program will impact different aspects of low-income housing alongside market rate hous- the housing markets. ing, commercial and industrial use installations, 2 and others based on the developer’s discretion. Colombia’s Macroproyectos Urbanos program, Allow developers to drive for example, employs a mixed-use approach to project development, with maximize cross subsidies from higher rent uses, oversight. and to mitigate social risks associated with purely low-income housing projects. Private developers are best placed to identify Mixed-use projects can also serve to expand and structure a project pipeline. The role of the tax base for cash-strapped municipalities. the public sector is to create a clear regulatory While municipalities rarely want to dedicate framework and to invest in technical and real precious land to low-income housing, they estate capacity to be able to effectively analyze might be convinced by the costs and benefits proposals and negotiate with developers. In of a well articulated mixed-use approach. Colombia, initial investments under the Mac- 22 | handshake Develop a framework 4 Where construction finance markets are deep, for post-construction asset subsidies can be disbursed on an output basis against the sale of homes to eligible buyers. This and social management. is possible in countries like Brazil and Mexico, where private construction finance markets have PPPs in low-income housing have not tradition- emerged and state banks and provident funds ally dealt well with post-construction asset and actively lower borrowing costs for developers or social management—these functions tend to directly extend credit to home builders. be left to municipal governments with limited In less developed markets, policymakers may ability and capacity. In Brazil, for example, the consider a more nuanced approach to disag- evaluation of the first phase of the MCMV pro- gregating PPP contracts with developers into gram found that low-income housing projects output-based stages. In such instances the public were susceptible to poor operations and mainte- sector will take on more project risk and will nance practices and potential asset deterioration. need to carefully understand and mitigate these To address post-construction asset management, risks. In either context, the public sector should policymakers should consider a concession-style build capacity in PPP contract design and arrangement where a portion of subsidy payouts management. 6 are made over a five-year post-construction period, conditional on the structuring of a condominium management arrangement. Create incentives for smart Similarly, regional experience demonstrates and sustainable urban that better post-construction social management growth. practices reduce social risks in low-income hous- ing projects. In Medellin, Colombia, low-income The need for significant new home construction housing programs are accompanied by the provi- is inevitable in Latin America, given the scale of sion of integrated social services that have proven housing deficits. A significant increase in housing to enhance livability and security. production can reinforce existing urban sprawl. 5 Policymakers should be careful to design the next generation of low-income land and housing Promote a cautious, output- PPP programs around smart growth principles. based design for supply side Incentives may be built into PPP programs that subsidies. encourage improved public transport connectiv- ity and the use of low-cost, green homebuilding Subsidies for low-income housing PPPs technologies. should be designed to minimize excessive public sector risk. IFC | 23 Cities& Climate Change As the world hurtles toward its urban future, the opportunities and challenges of urbanization become ever more apparent. Cities are the most complex, economically powerful, culturally diverse, and socially important creation of humanity, but also a key factor in climate change. 24 | handshake Photo © Nikada/istockphoto Climate A call to action By Dan Hoornweg Cities drive our economies and cultures; they bring together ideas, passions, finance, and a rainbow of colorful agendas. They are home to most of the world’s infrastructure, governments, and cultural institutions, as well as For- tune 500 companies. But storm clouds are gathering. Eighty percent of GHG emissions come from cities, and citydwellers will bear the brunt of adapting to climate change. The rapid urbanization of the coming 25 years promises that cities in devel- oping countries will need to accommodate 2 billion additional residents who will require water, sanitation, transportation, electricity, healthcare, and education. Addressing future GHG emissions and increasing resilience must be an integral part of any city’s climate change plan. Urban residents, governments, and businesses need to develop sustainable cities—not only because cities contribute to climate change, but also because able to it. Low-carbon cities reduce GHG emis- they are particularly vulner­ sions as they usher in an era of cost savings, cleaner air, and better living standards. The experiences of cities like Barcelona, Portland, and Vancouver supply important lessons, as illustrated by the video interview with Barcelona Glob- al’s CEO in this issue. After all, cities, like people, can learn from each other as they focus worldwide on climate change mitigation and adaptation. IFC | 25 80 7.0 People % of world population living in cities total urban population in billions 6.4 70 living in 5.7 6.0 60 5.0 cities 5.0 50 4.2 3.5 4.0 40 2.9 3.0 30 2.3 urban population 1.7 2.0 percent urban 20 1.3 1.0 Source: 10 0.7 1.0 UN Department of Economic & Social Affairs, 0 0 Population Division 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Year 1. Tokyo, Japan 26. Lima, Peru 2. Mexico City, Mexico 27. Bogota, Colombia 3. Mumbai, India 28. London, U.K. 4. New York, U.S.A. 29. Tehran, Iran cities & urban areas 5. São Paulo, Brazil 30. Hong Kong, China 6. Delhi, India 31. Chennai, India 7. Calcutta, India 32. Bangalore, India 8. Jakarta, Indonesia 33. Bangkok, Thailand 9. Buenos Aires, Argentina 34. Dortmund, Germany 10. Dhaka, Bangladesh 35. Lahore, Pakistan 11. Shanghai, China 36. Hyderabad, India 12. Los Angeles, U.S.A. 37. Wuhan, China largest 13. Karachi, Pakistan 38. Baghdad, Iraq 14. Lagos, Nigeria 39. Kinshasa, Congo 15. Rio de Janeiro, Brazil 40. Riyadh, Saudi Arabia by population 16. Osaka, Japan 41. Santiago, Chile 17. Cairo, Egypt 42. Miami, U.S.A. 18. Beijing, China 43. Belo Horizonte, Brazil 19. Moscow, Russia 44. Philadelphia, U.S.A. Combined, the 50 largest 20. Manila, Philippines 45. St. Petersburg, Russia cities and urban areas are 21. Istanbul, Turkey 46. Ahmadabad, India home to 500 million people, 22. Paris, France 47. Madrid, Spain have a total GDP of $9,564 23. Seoul, South Korea 48. Toronto, Canada billion, and emit 2.6 billion 24. Tianjin, China 49. Ho Chi Minh City, Vietnam tonnes of CO2e per year. 25. Chicago, U.S.A. 50. Chongging, China The 2006 population figures are based on censuses carried out between 2000 and 2005 and adjusted to take account of average annual population 26 | handshake changes (www.citymayors.com). By 2050, global urban population will Low-carbon China? China’s cities continue to absorb about 13 million double; rural residents each year. Accompanied by sustained high economic growth, this rapid urbanization puts built-up area will tremendous pressure on all forms of public services such as energy, water, transport, and waste. This triple. pressure will continue during the 12th Five-Year Plan period (2011–15) with explicit targets for a four percentage point increase in urbanization, to 51.5 percent, and the creation of 45 million jobs in urban areas. That cities are responsible for about 70 percent of global energy-related greenhouse gas emissions adds an additional challenge for China, given that it already is the single largest generator Top countries of carbon emissions. & 50 largest cities China’s leaders have made ambitious commitments in terms of population, GHG emissions, and GDP to reduce the carbon and energy intensity of the economy and transition to a low-carbon growth Population (millions) path. Consider President Hu Jintao’s commit- 1. China 1,192 ment to a 40–45 percent reduction in the carbon intensity of GDP by 2020, relative to 2005. The 2. India 916 12th Five-Year Plan includes, for the first time, an 3. 50 largest cities 500 explicit target to reduce carbon emissions by 17 percent by the end of 2015. GHG emissions (M tCO2e) This is possible because Chinese cities have a high 1. USA 7,107 level of autonomy. Indeed, they have been the pri- 2. China 4,058 mary agents of economic transformation in the last three decades. Today, in response to the emerging 3. 50 largest cities 2,606 focus on environmentally sustainable growth, many cities are already developing eco- and low-carbon GDP (billion US$ PPP) city initiatives. Such initiatives are expected to 1. USA 14,202 intensify as the implementation of the 12th Five- Year Plan unfolds. 2. 50 largest cities 9,564 3. China 7,903 Adapted from Sustainable Low-Carbon City Source: World Bank 2010. Table is for indicative purposes only. The Development in China by Axel Baeumler, Ede years of data sources vary across countries and are determined by the Ijjasz-Vasquez and Shomik Mehndiratta (World last available UNFCCC-reported country data. Bank, February 2012) IFC | 27 The lifestyle choices of urban residents can significantly impact emissions. According to economist Edward Glaeser, the average household in 48 major metro areas generates up to 35 percent less GHG emissions when located in the city instead of the corresponding suburbs. Here Handshake presents three examples that show how infrastructure, policy, and access to services are closely interrelated. GHG emissions & urban lifestyle Maria, a program assistant for a private com- pany, lives in Bogota City. She shares a house with her husband and two children and loves to cook. She has many electri- cal appliances in her kitchen, including a refrigerator, microwave, stove, and blender. She also has a TV, DVD player, computer, and miscellaneous other items to make life easier. She does not have heating or AC, as it’s not needed. Maria commutes from home using the Transmi- lenio bus rapid transit system. She usually spends her vacations at home. Ph ot o© 3.5 tCO2e per year Ni kad a/ist o ckphoto 28 | handshake tCO2e (tonnes of CO2 equivalent) is a measure for describing how much global warming a given type and amount of GHG may cause, using the functionally equivalent amount or concentration of CO2 as reference. ers ity 11.5 tCO2e per year Univ dia n c or Co © to o Ph Nathan is a student living with his parents in the suburbs of Toronto. He owns a medium-sized car which he uses to go to school (25 kms each way daily). He also travels by plane at least twice a year. He cannot imagine not having a mobile phone, iPod, and laptop. He also has other entertainment systems at home that he keeps plugged in all the time. Due to the weather, his house needs to be both heated and cooled. Yusuph, a Tanzanian tailor, lives in Dar es Salaam. He never has his electrical appli- ances plugged in unless he is using them, as he is afraid that they might overload dur- ing one of the common power cuts. He has a TV, sewing machine, radio, refrig- erator, water boiler, and table fan. He lives with his wife, his three children, and two cousins in a typical Swahili house. Despite the warm weather year round, he has no air conditioning. Every day, he takes the “daladala” (minivan) to work (10 kms). Ph ot o© 1.8 tCO2e per year Da vid Den nisPho tos IFC | 29 Edward Glaeser, author of Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier, is the Fred and Eleanor Glimp Professor of Economics in the Faculty of Arts and Sciences at Harvard University, where he has taught urban and social economics, and micro- economic theory since 1992. A World Bank Fellow and a Senior Fellow at the Manhattan Institute, his work focuses on the determinants of city growth and the role of cities as centers of idea transmis- sion. He spoke to Handshake about the role of PPPs in urban settings. Interview by Alison Buckholtz 30 | handshake Photo © Louise Kennedy Converse Q& A A leading urban economist on risks and rewards of the PPP In Triumph of the City you have written that “there’s a lot to like about urban poverty”—that it should be judged not against urban wealth, but against rural poverty, which is worse. The basic point here is that cities don’t make people poor. They attract poor people with economic opportunity, with a better social safety net, the ability to get around without a car for every adult. People are moving for a reason. It’s a terrible thing that there are so many poor people in the world, but it’s not a terrible thing that they have come to cities to try and make their lives better. Statistically, there is a near-perfect correlation between urbanization and prosperity among nations. As a country’s urban population rises by 10 percent, the country’s per capita output increases by 30 percent. And per capita incomes are almost four times higher in those countries where a majority of people live in cities than in those countries where a majority of people live in rural areas. IFC | 31 Along the same lines, you confess like the very successful Chilean highway system, one of the great PPP success stories of the world. your frustration that smart people The highways are paid for by user fees, getting enact so many foolish urban poli- the right infrastructure to people who need and cies. Which of these urban policies value it the most. That’s a great achievement. It would you counsel against first? prevents the construction of infrastructure in places that don’t need it. The most basic mistake [on policymakers’ part] The problem is that there is infrastructure is looking at the enormous challenges that our needed that you can’t always require user fees for, cities face, and then concluding the right policy as with providing clean water or sewage services. is to keep people on the farm. Because if we are This is an issue of basic human decency...and it is to see a path out of poverty to prosperity, that where things become the most difficult, because path will run through cities. It’s really crucial to it’s not clear that the revenue stream will come react to the enormous difficulties of cities by try- from the government. That makes things harder, ing to solve these difficulties, rather than to keep but it doesn’t mean they don’t need to be done. people from moving to urban areas. They do. They just require alternate models of financing. But there is always the challenge If there were well managed PPPs of funding new infrastructure. where the contract and regulations Which approaches have proven were clear and the government themselves? did not have any direct subsidies, There’s a lot of wisdom in Adam Smith’s old would that stop the capturing of view, which is that the best way to fund infra- subsidies by the middle class? structure is to pay for it with user fees. And when PPPs work best, they actually play to this, It’s not easy, but you want to do as much as you can to mimic It’s a terrible thing that there are so many poor the idea of a user fee people in the world, but it’s not a terrible thing from vouchers. I do want to stress that that they have come to cities to try and make nothing is going to their lives better. work perfectly, and any situation on the ground is going to be 32 | handshake Part 1 Part 2 London School of Economics University of Chicago “Triumph of the City” presentation Future of the City Symposium March 14, 2011 February 1, 2011 “There’s no such thing as a poor urbanized country. There’s no such thing as a rich rural country.” Edward Glaeser gamed heavily by all the factors involved. That’s last thing it needed was new houses and a mono- fundamentally unavoidable. We have to know rail. That message is relatively irrelevant for most that and still try to design as robust an institu- of the developing world, which desperately does tion as possible. need new houses and new infrastructure because they might have a lot of human capital but they Are there significant differences don’t have the physical capital that’s needed to manage it. in lessons learned about infrastructure PPPs in the Infrastructure is key for cities, but developed and developing world? everyone everywhere now has to do more with less—it’s referred to In the developed world, we see the mistake of putting infrastructure ahead of people. For as “smart infrastructure.” Can we example, the great mistake of urban renewal look at developing country cities and public transport subsidies in the 1970s and and apply the idea to PPPs doing the 1980s in the United States was when these policies were used to rebuild declining cities in more with less? the U.S. This missed the fundamental point— cities are really about human capital, more than Obviously, we should always be trying to do physical capital. If you look at a city like Detroit, things in as efficient a manner as possible. We which has an abundance of physical capital, the should always be open to new technologies. But IFC | 33 the view that infrastructure used to be expensive and can now be cheap—that feels wildly implausible to me. There are no silver bullets. Can citydwellers consider themselves environmentalists? Absolutely. Cities are friends of the environment. [In developed countries,] nature lovers who live surrounded by trees and grass consume more energy than their urban counterparts; traditional cities have fewer carbon emissions because they don’t require vast amounts of driving. New York State’s per capita energy consump- tion is next to last in the country, which largely reflects public transit use in New York City. Car-based living imposes environ- mental costs on the entire planet. To me, good environmentalism means putting buildings in places where they will do the least ecological harm. We should be more tolerant of tearing down the short buildings in cities in order to build tall ones, and more intolerant of the activists who oppose emissions-reducing urban growth. What advice would you give to analysts and PPP practitioners working on urban infrastructure projects? There is a lot to be gained in the marriage of public and private, but there are also enormous risks. There are cases where either the government has mistreated the private partner, or companies have figured out a way to mistreat the government. PPPs always require firm oversight. They are enormously valuable as a way to solve a financing problem, and the people who are fighting to solve this problem are doing one of the most important jobs in the world. 34 | handshake Fast Facts Top 600 Cities* 2010... ...2025 Population 1.5 billion 2.0 billion that’s 22% of the global that’s25 % of the global population population $30 trillion (2007) $64 trillion (2025) GDP that’s more than half of global GDP that’s nearly 60 percent of global GDP 485 million 735 million # Households average GDP average GDP per capita of per capita of $20,000 $32,000 ...of which * McKinsey’s City 600 lists the top 600 cities by con- tribution to global GDP growth from 2007 to 2025. 235 million households in developing Source: McKinsey Global Institute, Urban World: world cities will have income Mapping the Economic Power of Cities, March 2011. above per annum $20,000 IFC | 35 PPPs in REVITALIZATION Mateu Hernández is CEO of Barcelona Global, a non- governmental forum that brings together experts, companies, and entrepre- neurs involved in economic development in Barcelona. Before that, he was director of economic development for the city of Barcelona, served as executive vice president of Barcelona Activa, an agency promot- ing entrepreneurship under the Barcelona City Council, and was acting manager of the 22@ district. 36 | handshake Video production by Jeanine Delay Q& A In the past two decades, Barcelona has emerged as one of the world’s leading centers of innovation in urban development and economic regeneration. After the reinstatement of democracy in 1978, the city was confronted with huge public infrastruc- ture needs, particularly in transportation, com- munications, and in deteriorated industrial and inner-city areas. At the time, however, the city lacked the financial means to tackle its challenges. By hosting the 1992 Olympic Games and sub- sequently the 2004 Forum of Cultures, the city was able to invest in infrastructure, reverse seri- ous inner-city problems, and enhance its global brand. The success was due largely to strong public leadership coupled with innovative private collaboration. To this day, the Barcelona City Council remains committed to using new technologies for intel- ligent city management and for deploying infra- structure, such as Wi-Fi on public roads, iBicing Photo © Jaume Meneses (bikeshare access via iPhone), and mGovernment (mobile technologies for the provision of pub- lic services). All this is helping the city become an international benchmark for creative urban solutions, exemplified by the innovation district of 22@. The experience of Barcelona IFC | 37 22@ Overview In 2000, the Barcelona City Council approved a new urban planning ordi- nance aimed at transforming the old Photo © BarcelonaDigital industrial area of Poblenou into a magnet for innovation. The 22@Barcelona zone encourages the replacement of previous industrial activ- ity with offices or other business services and equipment related to new technol- ogy and knowledge. 22@Barcelona is the most important urban transforma- tion project the city has embarked on in recent history and one of the most ambi- tious in Europe. 22@ Urban planning Photo © BarcelonaDigital Ultimately, the goal of the 22@ project is a compact city where the most inno- vative companies co-exist with research, training and technology transfer centers, along with housing (4,000 new subsi- dized residences), facilities (145,000 m2 of land), and green areas (114,000 m2). 38 | handshake 22@ Ten years Photo © Jaume Meneses IFC | 39 Barcelona Mass Rapid Transit A tool for urban e x pansion By John Leber & Cledan Mandri-Perrott As the world experiences rapid urbanization, there is growing interest in using Mass Rapid Transit (MRT) to solve urban transportation prob- lems. Yet developing MRTs is a complex and capital intensive process. Governments and public authorities are using a variety of public-private partnership (PPP) models to leverage resources and expertise. MRT is a bus or rail-based public transport encourage higher density development and mode operating on fully or partially exclusive better use of scarce, expensive urban space. rights-of-way—also known as the “alignment.” They can also promote greater equity and This alignment can be at-grade (i.e., surface- mobility for a larger segment of the population. based), elevated, or underground. Some of the most common forms of MRT are metros, streetcars, tramways (sometimes referred to as Critical success factors light-rail transport, or LRT), and bus rapid MRT solutions are typically customized to a transit (BRT). particular city or transportation corridor. Coor- dination is necessary among various levels of central and urban governments that have over- Benefits of MRT lapping responsibilities and policies. Managing MRT solutions are increasingly preferred by pol- such complexity and the associated risks can be a icymakers because they provide high carrying- daunting challenge for even the most experienced capacity coupled with energy efficiency. MRTs and sophisticated public authorities. Critical support strategies for reduced air pollution and success factors for MRT schemes include: 40 | handshake Public transport • Completing robust engineering feasibility the system and its operations can be studies to ensure viable technical design so- dimensioned accordingly. lutions (particularly for elevated and under- • Ensuring that the operation of the system ground MRT). is responsive to customer needs such as • Having a good understanding of the mini- comfort, speed, and punctuality, and that mum passenger volumes (ridership) so that the system is safe and reliable. MRT Speed Peak Capacity Technical Traits Type (pax/hr)** Streetcar/Tram Low Low (5k or less) • Frequent street crossing (less than 30 kph) • Primarily at-grade • Single-car configurations Light Rail Train Low-medium Low-medium • Mostly at-grade (avg. 30 kph) (10k-20k) • Single and double car configurations • 2-3 lanes from existing road Bus Rapid Transit Medium Medium • Mostly at-grade (avg. 25-30 kph) (5k-10k) • Articulated buses • 2-4 lanes from existing road “Light” Metro High Medium-high • Either elevated or (avg. 45-65 kph) (15k-30k) underground • Requires grade crossing Heavy Metro High High • Either elevated or (avg. 45-65 kph) (60k or more) underground • Complex civil works *passengers/hour at peak IFC | 41 • Understanding the fare structure and how service can be made up with other forms of that structure may affect demand. revenue, such as advertising and real estate • Designing operations and maintenance to development. Typically, revenues from advertis- maximize the system life, and adequately ing in stations and trains are not significant. budgeting for regular operations and main- Figures represent around 4 percent of farebox tenance expenditures. revenue; station concessions such as small kiosks, newsstands, and vending machines may gener- • Considering continued investment in the ate an additional 7 percent. Similarly, real estate system design and contractual mechanisms development or capturing increased land values that allow for this investment. directly linked to MRT presents challenges. • Considering integration of the MRT scheme with other transportation modes (pedes- trian links, parking, rail, and airport links) to ensure a comprehensive urban transport strategy. True Cost of Service Together, these factors can ensure that the MRT Amortiza- solution, and the PPP mechanism in place to tion of deliver it, are tailored to the particular needs cost of civil works of a city or transport corridor. The economics of MRT Government MRT projects involve large capital expenditures subsidy for the design and construction of the system, along with significant operation and mainte- Amortiza- nance costs (O&M). Revenues generated by the tion of system (known as farebox revenues) are generally capital cost of set by public authorities with political, social, equipment transport, or urban planning objectives in mind. & machinery As a result, farebox revenues rarely cover operat- ing expenses, and rarely cover the full cost of the project. As the graphic to the right shows, O&M cost Non-Farebox for a project to succeed, more often than not of equip- ment & Socially the funding gap must be met by some form of machinery acceptable/ government subsidy. and civil competitive works fare A common misconception is that the gap between the farebox revenue and the cost of 42 | handshake Trends in MRT PPPs This structure also does not allow lenders to watch over the operator, which acts a form of PPP models for MRT projects can range from internal oversight. Care needs to be taken to full system concessions, where the private sector ensure that the contractual terms avoid the takes design, construction, and operation risk, potential for “asset sweating,” where the operator to outsourcing of operation and maintenance, defers maintenance on assets to reduce costs. where the role of the private sector is limited to operations risk. Appropriate risk allocation Contracts can be designed to overcome some is a defining quality for a successful PPP—risk of these issues by incentivizing the operator to should be transferred to the party that is best behave as if it owned the system. One method of suited to manage it. accomplishing this is through a financial struc- ture that encourages ridership, thereby creating Some of the advantages for cities developing the incentive for the operator to ensure the MRT projects through PPP structures include system’s performance is attractive to customers. placing the risk of development and construc- tion with the private sector to achieve improved Another method is through a carefully-defined system design, faster completion, and lower cost, regime of key performance indicators (KPIs) and leveraging the diversity of expertise and that covers a variety of O&M areas, such as experience of a worldwide operator. Together, punctuality of train services, and ensures the best these can help achieve more innovative and cost- use of the system’s assets. Payment deductions effective approaches to service delivery. and bonuses would be based on the operator’s performance, incentivizing the desired behavior. More recently, the trend for MRT PPPs is a In many instances, both of these methods (rider- move away from full concession and investment ship incentive and KPIs) are used in tandem. risk, toward public financing of capital invest- ment with private operation and management. As MRT becomes a tool for urban expansion, it These contracts, which would appear to be easier is important to take stock of its record. Under- to structure and manage, pose their own inher- standing the importance of effectively allocating ent challenges. Although under an O&M con- risk between the public and private parties, tract structure, ownership of the assets remains and developing structures that are flexible and with the government metro authority and some responsive to the public’s needs, will power or all of the operation and maintenance risk MRTs forward in a rapidly urbanizing world. of the metro system is transferred to an O&M operator, the typical commercial incentives are not present. This is because the operator has not had a financial stake in the development of the project and its payments are normally not directly linked to the revenue received from the system’s customers. IFC | 43 7 public transport PPPs Hong Kong’s MTR Bangkok’s Skytrain The MTR Corporation Limited serves 4 Bangkok’s extraordinary levels of traffic million passengers daily throughout Hong congestion suggested that demand was Kong and mainland China. It is one of robust enough to support a large, complex the preeminent mass transit systems in the rail system. But debt and equity investors world and one of the few to generate an in Skytrain eventually suffered considerable operating profit through its development losses when actual ridership figures fell well of real estate and other associated commer- below preliminary estimates. Why? Poor cial opportunities. Hong Kong’s approach integration with other modes of transport illustrates how MRTs can achieve financial and difficult access to the system for users. success by combining the development of Once these problems were addressed, rider- commercial opportunities with high quality ship improved. transport services. Stockholm’s Metro Seoul’s Metro Line 9 The Stockholm Metro ran successfully The Seoul Metro Line 9 Corporation for years under a purely public sector developed, operates, and maintains the model. In 1990, Stockholm Transport Seoul Subway Line 9 Section 1, a 25.5 km awarded five- to ten-year operations subway line with 25 stations. The company and maintenance contracts for its three benefits from minimum revenue support metro rail lines, its light rail system, the from the government for the first 15 years suburban railway service, and commuter of the 30-year concession. The other eight rail services. This approach has allowed lines are publicly owned and operated. The Stockholm Metro to improve service Seoul Metropolitan Government conces- and reduce costs through competitive sioned Line 9 to a private operator to tendering, and to tap into private sec- increase productivity and set a benchmark tor expertise to chart the course for the for the public operators of the other lines. system’s next 50 years. 44 | handshake Photo © marksdk Public transport Dakar’s Toll Road Bogota’s TransMilenio The $315 million Dakar Toll Road is pav- The cost-effective TransMilenio BRT (bus ing the way toward improved transport and rapid transit) operates like a rail-based trade in Senegal. The road is being built as system by providing exclusive bus lanes. a concession, the first experience of its kind The operator is responsible for integrating on the continent, outside of South Africa. all public transport services for the city. By When completed, the Dakar-Diamniadio 2016, TransMilenio will serve 5 million toll road will connect Senegal’s capital city passengers per day along 388 km of main and the rest of the country, easing the way lines on 22 corridors—at a cost of $5 mil- for tens of thousands of local commuters lion per kilometer. TransMilenio demon- and greatly improving access to markets for strates how MRTs can be successful when businesses. IFC was lead transaction advisor fully integrated into a city’s public transport on the project. services, without the higher costs associated with a rail based system. São Paulo’s Yellow Line (Line 4) By 2012, a critical section of São Paolo’s Yellow Line, built by the ViaQuatro consortium, will be 12.8 km long. The concessionaire has spent $450 million on equipment and rolling stock, and estimates that its total investment will reach $2 billion during the 30-year operat- ing contract. During the opening celebrations, officials predicted that São Paulo’s urban rail network would reach 420 km by 2014. The Yellow Line was implemented as a PPP to share development and operational risks with the private sector and to reduce the state government’s capital expenditure, allowing investment in other priority projects. Keep an eye on… IFC | 45 Speeding toward the future: ...India Chennai’s new metro India, with six of the Traffic congestion in Chennai, the capital city of the Indian fifty largest cities in State of Tamil Nadu, disrupts the lives of over 7 million the world, is a rapidly people who live and work in the area. To ensure sustainabil- developing market for ity in this rapidly urbanizing city, the Tamil Nadu govern- MRT projects. Because ment, along with the government of India, is constructing projects of this size a 45 km metro rail system. When completed in 2015, the ($3 billion+) require a blended approach, Chennai Metro is expected to significantly reduce travel time MRT PPPs have been and vehicular pollution. The cost of the Chennai Metro is developed or are about $4 billion, funded jointly by the government of India under development and the state of Tamil Nadu with a 60 percent loan from for the Delhi Airport the Japan International Cooperation Agency. IFC is transac- Line, Mumbai Metro, tion advisor to the Chennai Metro for the design and tender- Hyderabad Metro, and ing of an operations and maintenance (O&M) contract. Chennai Metro (a PPP K. Rajaraman, Managing Director of Chennai Metro Rail for O&M services). Limited (CMRL), spoke to Handshake about CMRL’s approach to contracting for such a large-scale MRT project. What was the impetus for the Chennai Metro? Shorter travel times and comfortable transportation throughout the city will directly impact economic produc- tivity and improve living standards. The metro will serve the two busiest corridors in Chennai and is expected to carry 700,000 passengers every day, beginning in 2015. Bus transport is dominant; the system carries up to 3 million passengers per day. The suburban rail and elevated rail systems carry about 1 million passengers per day. Despite this, the share of public transport in Chennai K. Rajaraman is only 29 percent. People cannot rely on the timetable 46 | handshake Photo © lux & pixel Q&A or determine when they’ll arrive at home or at tunneling. We feel this is the optimal solution: work because the traffic situation on the roads is specialized contracts which are not too small, not becoming worse, with 25 percent more vehicles too large. These contracts were sized suitably so on the roads every year. The only effective solu- that they were not too big for reputed contrac- tion in Chennai is an underground and elevated tors available in the market. This approach has rail network that will cover the busiest corridors enabled us to get the right price with the right and ensure on-time transportation. The state number of contractors so that CMRL could government’s goal is to raise the share of public handle all this activity. Optimization of the transport in Chennai City to about 45 percent number of contracts has also enabled us to keep by 2025. This calls for investments of around the project on time. $20 billion in this sector. The state government has also recently announced it will set up a What were the other benefits of this monorail system in certain corridors. approach? Why did CMRL split the project into CMRL is a public body and we need to justify the prices of these contracts. Full transparency numerous contracts? is essential and this ensured that we were able Our experience showed us that there were three to establish confidence among bidders, enabling options. One option could have been bundling them to quote competitively. the project into a few consolidated packages with few contractors that could carry out the whole What advice would you give to other project. The other option was to break it down government officials? into a moderate number of packages. Third, we could break it down into 150-200 micropack- Ensure you have a strong team with the right ages, with individual contracts addressing even contract management skills and that there is the materials. But we did not feel that any strong competition among bidders for all of the company would have been able to provide every- contracts. You don’t have to compromise on thing we needed, and the risks and costs would quality, but you do have to ensure the prices are be obviously higher anyway. The other extreme, right. having to split the project into several hundred micropackages, meant that CMRL would have What are your hopes for Chennai Rail? had to do a lot of work with tendering and con- By showcasing the private sector’s role, particu- tracts. Interfacing with contractors would have larly in O&M, the project could be a model presented enormous time demands—too many for developing similar infrastructure projects contracts and too many contractors. in India. CMRL would also be able to use this So we went with the moderate approach and experience to expand its network in a more broke it up into 22 contracts. Most are system efficient manner with the lessons learned from contracts such as trains, signaling, track, and this project. IFC | 47 pUBLIC TRANSPORT CaBi A bicycle sharing system or bikeshare is a Launched in September 2010, service in which bicycles are made available Capital Bikeshare (also known as for shared use to individuals who do not CaBi) is the nation’s largest bikeshar- own them. ing system. It is owned by the (D.C.) For users, bikeshares remove some of the District Department of Transporta- primary disadvantages to owning a bike, tion (DDOT) together with Arling- including theft, lack of parking or ton, Virginia, and operated in a storage, and maintenance. public-private partnership with Alta Bicycle Share, Inc. The system is the successor to DDOT’s first bikesharing system, called Smartbike D.C., which launched in August 2008 and was the first program of its kind in the U.S. Setup and operating costs are covered by the city, and revenue is recouped on a monthly basis from member- ship and usage fees. Costs for Capital Washin Sources: Wikipedia, The Huffington Post, SmartPlanet.com are, Bikeshare totaled $5 million for 100 stations, with additional first-year sh gt e on operating costs of $2.3 million. ik Alta Bicycle Share purchases the B ,D tal equipment, builds the bikes and Founded: 9/2010 stations, does the installation and .C. Capi Users: 18,000+ , back-end membership support, and U SA handles all the maintenance and Bikes: 1,225 | Stations: 115+ operations. Type: PPP In April 2011, the District said it Partners: Arlington, Vir- expects to earn revenue to cover 50 ginia, (D.C.) District Depart- percent of annual operating costs. ment of Transportation, Alta Bikeshare It also starting the process to sell advertising with the goal of raising $500,000. Photo © Mr. T in DC 48 | handshake Usually implemented by Vélib governments to reduce On July 15, 2007, Paris launched traffic congestion, air and Vélib, the bike-based system of sound pollution, and revital- individual public transportation. ize public spaces, bikeshares Although many systems have been have also been cited as a way to set up since the 1960s, Vélib—a PPP connect users to public transit between Paris and SOMUPI, a com- networks. pany led by JC Decaux—is one of the largest and most successful. SOMUPI Sources: Wikipedia, Le Figaro (France), Le Parisien.fr, Sustainable Transport Magazine (ITDP) is responsible for the full cost of set- up, operation, and management of the system, which is integrated into Paris’ public transport network. In return, the company receives exclusive rights to operate billboards in 1,628 There were an estimated 200 bikeshares locations. worldwide in 2010—see the Bikesharing The city of Paris collects all revenue Map. from subscriptions and rental fees. If contractual standards are met, ib , Paris, Franc SOMUPI is also entitled to a 12 l e percent share of the revenue as well Vé as an amount equal to 12 percent of its advertisement sales. Founded: 7/2007 Vélib’s bikes are designed to be sturdy and detract theft, but 16,000 bikes Subscribers: 200,000+ had to be replaced during the first Bikes: 24,000 | Stations: three years. This has cost the city €1.6 1,800 million per year. The city agreed to Type: PPP cover costs of €400 for each bike that Partners: City of Paris, needs replacement due to high theft SOMUPI (a joint venture of and vandalism rates. JCDecaux and Publicis) Since 2001, bicycle use in Paris has risen by 48 percent. Photo © Boris Doesborg IFC | 49 Public Transport WELLINGTON: The little cable car that could By David Ehrhardt & Isabella Gawith 50 | handshake Public transport Wellington, New Zealand, recently judged the coolest small capital in the world by Lonely Planet, is also home to one of the coolest small PPPs in the world. Lonely Planet gave Wellington top honors for paying lawyers, surveyors, engineers and other its cultural scene, its local film industry, and the external experts in debentures, to be paid back abundance of independent coffee roasters. But only if and when shareholders were paid. its editors missed the real symbol of Wellington: The cable car was completed in 1902, at an the shiny red cable car that carries around 3,000 estimated cost of £17,479 (equivalent to $1.6 passengers each day from the Central Business million today). By 1926, annual ridership was District to the university and suburbs on the 2 million, and the investors earned a handsome steep hills above the city. profit. However, by the 1940s, competition from The cable car was built with private finance council-run buses was causing problems for the in the 1890s by the Upland Estate Company company. A dispute over unfair competition (UEC), developers of what is now the swanky reached the Supreme Court in 1946, resulting in suburb of Kelburn. The property developers purchase of the cable car by the Wellington City realized that their project’s success depended Council. on providing quick access between the new The Council operated the cable car for 44 years suburb and the city. The solution: a cable until 1991, when national legislation required car modeled on successful projects in San council-owned passenger transport services to Francisco and another booming New Zealand be corporatized or privatized. This led to the for- city, Dunedin. mation of the council-owned Wellington Cable UEC formed the Kelburn and Karori Tramway Car Limited (WCCL). WCCL initially tendered Company (KKTC) in 1889. UEC intended to out contracts for maintenance and operation to fund two-thirds of the required £30,000, and private firms. Serco had the operating contract raise the remainder through a public share offer- from 1997 to 2007, and since 2007 WCCL has ing. But of the 10,000 shares offered, only 1,680 managed it. Operations and maintenance take sold, requiring UEC’s existing shareholders to place in-house. buy the rest. No public finances were available Wellington’s cable car PPP (as well as a less either, so after lengthy negotiations, the Welling- picturesque, but still very useful PPP that treats ton City Council allowed the purchase of land Wellington’s wastewater) is a good example of and retained the right of purchase, but offered New Zealand’s strong tradition of public-private no financing. Without public monies, KKTC cooperation in infrastructure. This bodes well for turned to a risk sharing mechanism popular the new national PPP policy and its implement- among speculative companies of the time: ing agency, the National Infrastructure Unit. Photo © Br3nda IFC | 51 Principles for Sustainable Transport Walk Cycle Great cities start with great pedestrian environments. Bicycles and other means of people-powered Walking is the most universal form of transport and transport, like pedicabs, allow for the convenience when streets are designed to prioritize pedestrians, of door-to-door travel, but use less space and fewer health, economic activity and safety all improve. resources. They are the healthier and more sustainable Walkable streets are the fundamental building alternative to cars and taxis for short trips. To blocks of a sustainable city. encourage their use, riders first need to feel safe, and in general, the more bicycles on the streets, the safer they become. This also requires slowing down traffic and providing high-quality dedicated space, like bike lanes. Mix Densify Sustainable transit will not be viable unless it connects By 2030, cities are projected to absorb 2 billion more people to attractive places that encourage them people. High density is crucial to low-carbon cities. to stay. Making a street “great” includes having Density needs to be related to the capacity of all a diversity of places and activities along it. Lively modes of transportation. If roads are designed to be downtowns stack retail on the ground floor, with bike and pedestrian-friendly and transit priority lanes residential and office space above. Shops and offices on major arterials, activities like shopping, working are supported by the people who work there by day and day care can be co-located to make walking, and by the people who live there at night, helping to cycling and mass transit more convenient than create a vibrant street life. driving. This will shorten trip distances, save travel time, and preserve millions of square kilometers of arable land. These dense communities use resources more efficiently, reducing the carbon footprints of its residents. 52 | handshake The successful city of the 21st century will be replete with choices, includ- ing non-motorized, post-fossil fuel travel options. Citizens of the world do not want to sit in bumper-to-bumper traffic. They do not want to walk in mud, nor feel threatened on a simple bike ride. They want to be in cities that provide for creative interaction, affordable living and healthy movement. These principles will help achieve that end. Connect Transit Cities that are pleasant to walk and bicycle through Some trips are too long to make walking or cycling a typically have large numbers of narrow, short streets viable option in our growing cities. Comfortable, safe, and many intersections. This makes the traffic slow high-speed public transit can move millions of people down while walking becomes more direct, varied, quickly and comfortably using a fraction of the fuel interesting and attractive. Streets that are short and and space required by automobiles. Bus-based mass relatively narrow are also well-scaled to the perception transit systems like bus rapid transit (BRT) have often of people on foot. Buildings, shops, trees and other proven to be a cost effective, high quality solution, streetscape elements are closer to the pedestrians and combining the efficiencies of metro systems with cyclists as they travel, increasing the vitality of local exclusive bus lanes and clean new buses. retail. Compact Shift Community location has a long-term impact on Even in 2030, some trips will still be made by car. But sustainability. New developments placed far from more cars will mean more congestion, pollution and existing cities are inconvenient and rarely thrive. City time on the road unless traffic is managed better. planners can avoid this by locating compact new sub- This includes what many cities are doing now: using centers within or adjacent to existing cities. In addition parking and congestion charging to encourage people to protecting arable land, this strategy significantly to leave their cars at home, eco-zones where only clean decreases the cost of providing transit, utilities, and vehicles can enter, and removing highways in favor of other services to these new locations, while reducing community revitalization. most residents’ daily commute. This is excerpted from Our Cities Ourselves: Principles for Transport in Urban Life, a collaboration between the Institute for Transportation and Development Policy (ITDP), Gehl Architects and Nelson Nygaard, and a companion to the ITDP “Our Cities Ourselves” program. IFC | 53 Urban Water Myth vs Fact Private sector participation in urban water and sewerage By Edouard Perard There is a perception among some scholars that middle-income countries: 22 in East Asia and the number of urban water and sewerage utili- the Pacific, eight in Europe and Central Asia, 21 ties operated by the private sector in low- and in Latin America and the Caribbean, three in the middle-income countries is declining, and that Middle East and North Africa, six in South Asia the urban water sector may be experiencing a and four in Sub-Saharan Africa. “remunicipalization” phase. True or not, this In fact, in 2010 the total number of urban water belief merits close examination. and sewerage utilities operated by the private With the boom of desalination markets and sector reached a record high of 257 utilities in increasing need for water treatment, it is true 35 countries. A closer look reveals that the total that most new private activity in the water number of urban water and sewerage utili- sector concerns treatment activities rather than ties operated by the private sector in low- and urban utilities. For example, 78 percent of middle-income countries has actually never new water projects with private participation decreased over the last 20 years. The number of signed during the last five years were for water new and renewed projects implemented across treatment. the years outweighs by far the number of proj- However, new urban water and sewerage utility ects concluded or cancelled. projects with private participation reach financial This trend is also verified at the regional level. closure every year in all regions. Over the last Here, the number of urban water and sewerage five years, 64 urban water and sewerage utility utilities operated by the private sector has never projects reached financial closure in 19 low- and significantly decreased over the last 20 years. 54 | handshake The Latin America and Caribbean (61), followed by divestiture (20), and region has the highest number of urban greenfield project (11). water and sewerage utilities currently A closer look at the data makes it clear operated by the private sector (149 that the hypothesis of an ongoing utilities in operation), followed by East “remunicipalization” phase is more a Asia and the Pacific (56), Europe and misperception than a reality. If the cur- Central Asia (30), Sub-Saharan Africa rent trend follows the evolution of the (10), South Asia (eight) and the Middle last 20 years, the number of urban East and North Africa (four). water and sewerage utilities operated by When it comes to the type of contrac- the private sector in low- and middle- tual arrangements, most urban water income countries should exceed 300 and sewerage utilities currently operated within the next five years. by the private sector are established All calculations are based on data from the under a concession agreement (165). PPI Database (World Bank and PPIAF): Next is a management and lease contract http://ppi.worldbank.org Number of urban water and sewerage utilities operated by the private sector in low- and middle-income countries 300 250 200 150 100 50 0 1991 1995 2000 2005 2010 East Asia and Pacific Europe and Central Asia Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa IFC | 55 Urban water “Everything became possible” Morocco’s informal settlements gain access to water and sanitation By Cathy Russell In Morocco, many people who move to cities in ship on Output-Based Aid (GPOBA), a World search of a better life end up living in informal Bank-administered program, for a pilot project settlements without access to basic services such to expand services using an innovative output- as clean water and sanitation. This has a negative based aid (OBA) approach. The pilot is being effect on their health and well-being, especially implemented by two private operators, LYDEC for women and children who must spend several in Casablanca and Amendis in Tangiers, and a hours a day fetching water from public fountains public utility, RADEM, in Meknès. or wells. “Under the OBA approach, the operators receive In 2005, Morocco made it a priority to extend the subsidy payment only after an independent service to these poor peri-urban neighborhoods agent has verified that they have delivered and encouraged operators and local governments working connections to the targeted house- to reduce connection fees for water and sanita- holds,” explains Adriana de Aguinaga, acting tion services. The government and the operators program manager of GPOBA. “This increases of water utilities in three cities subsequently transparency and ensures that the funding requested a grant from the Global Partner- benefits the people who need it most.” 56 | handshake Photo © GPOBA video: Improving Lives in Morocco The OBA approach is refo- cusing service provision on households. This has increased accountability, strengthened partnerships between local authorities and operators, and made monitoring of service delivery a priority. “The OBA subsidy fills the gap between the “Before, without water, it was difficult to plan affordable level that these households can pay or do things. I felt doors were closed but they and the real cost of extending services to these are now finally open. Everything became pos- households,” says Xavier Chauvot de sible,” said Hassana Jaatouti, a project benef- Beauchêne, World Bank task team leader ciary in Meknès. for the project. The World Bank is now working with the So far, more than 50,000 residents of informal government of Morocco to plan a scale-up settlements have benefited from water and sani- program to bring water and sanitation services tation connections provided via the OBA pilot. to other disadvantaged communities in urban The impact on their lives has been dramatic. areas, using the OBA method. IFC | 57 Urban Water For decades, the municipality of Bucharest, The municipality hired IFC to facilitate effi- Romania struggled with the city’s water and ciency gains so that consumer service levels sanitation needs. Because of leaks and waste could improve with minimum tariff increases, to in the distribution network, water losses were transfer most of the investment responsibilities nearly 50 percent. That, along with an inad- to the private sector and make it as self-sufficient equate metering system, resulted in low revenues as possible, and to avoid the dangers of a private for the municipality, with water consumption monopoly. In 2000, Bucharest created APA levels four times the European Union average. To Nova, a joint venture concessionare company, meet European Union standards, Bucharest was to establish and manage all water and sanita- required to make large investments in sewerage tion services in metropolitan Bucharest under and water storage, and to increase account- a 25-year concession contract. This marked ability and incentives to improve efficiency. But Romania’s first public-private partnership in low tariffs meant that investment funds were the water and sanitation sector, and it was one insufficient. of the first sector transactions in Europe. In the Manila Water Photo © Danilo Pinzon/World Bank Among major Asian cities, metropolitan Manila was infamous for its outdated, inefficient water system. The government agency responsible for delivering water and sewerage services was heavily indebted, and by 1995, three-quarters of the homes in the eastern half of Manila lacked 24-hour water services. Only 8 percent had sewerage connection. Overall, almost two-thirds of the water produced was lost to leaks, poor metering, and illegal connections. That changed with the privatization of the Metropolitan Waterworks and Sewerage System (MWSS), which followed government legisla- 58 | handshake Bucharest Water and Sanitation decade since this pioneering transaction paved the way for others, Bucharest has seen dramatic improvements to its water and sanitation needs, including: • A new water treatment plant which reduced dependence on two older plants. • Reduced water losses by 44 percent (during the 2002-2006 period). • A new metering system and reduced leakages, leading to a 50 percent drop in total water demand. tion in 1995 that fundamentally changed the • In the east zone, households with 24-hour sector. IFC ultimately helped the government access to water increased from 26 percent design, manage, and implement a competitive in 1997 to 99 percent in 2006, and system and transparent bidding process for two parallel losses were cut in half. Sewerage connections 25-year concessions that were awarded based on also doubled over the same period. the lowest average water tariff bids. A $7 billion • Manila Water Company’s “Water for the investment to expand and improve metropolitan Poor” program now allows residents in the Manila’s water and sewerage system focused on poorest neighborhoods to pay $1.50 per better service, lower rates, and fewer leaks and month for clean water, a fraction of what illegal connections. Successes included: they paid before. • An initial drop in rates of 74 percent in Manila’s east zone and 43 percent in the west. IFC | 59 Water concessions in Colombia By Luis A. Andrés, David Sislen & Philippe Marin An increasing number of the urban poor in for water and the time taken to respond Colombia have access to water and sanita- to consumer complaints was dramatically tion because of an innovative approach by reduced. the government, which shares responsibility New approaches have now emerged. for key services with local authorities and Municipalities are extending services to the the private sector. urban poor by promoting local entrepre- These reforms were led by the cities of neurs in the water sector, creating a pool Cartagena and Barranquilla. Both cities of small, local service providers who can contracted operations out to “mixed” com- respond more quickly to demand. panies jointly owned by the municipality, The key to Colombia’s success in improv- a private operator, and local private share- ing access to water and sanitation services holders, with the city authorities retaining has been devising homegrown solutions ownership of the infrastructure. and adapting models developed in other Results were impressive. Access to water countries to its own conditions and needs. and sanitation services improved substan- tially in both cities between 1994 and 2002. More than 80 percent of the new connections were in poor neighborhoods. Excerpted from Charting a New Course: Structural Services became more efficient and reliable. Reforms in Colombia’s Water Supply and Sanitation Metering reduced losses from unaccounted- Sector, World Bank (2010). 60 | handshake Photo © YaYapas Urban Water The case of Cartagena About 30 percent of Colombians—many of them poor—live in small cities and towns with insufficient water supply and sanitation coverage. To remedy this, in June 1995 the District of Cartagena entered into a man- agement contract with ACUACAR for the operation, maintenance, and rehabilitation of the water supply and sanitation systems for a period of 26 years, granting management autonomy to the operating partner. To fulfill its contractual obligations, ACUACAR is required to generate and maintain a mini- mum corporate capital of 4 billion Colom- bian pesos (approximately $1.9 million in 2009). In turn, ACUACAR executed a management contract with AGBAR. Its commitment as operating partner included the transfer of technology, recruitment of specialized staff, and training of workers, in addition to improving the indicators for efficiency in operations and investment for the reha- bilitation and replacement of networks and systems. The operator’s remuneration for its work is a percentage of ACUACAR’s income from tariff revenue, in addition to earnings on its ACUACAR shares. IFC | 61 Beyond sovereign guarantees The case for sub-national finance By Joshua Gallo & Isabel Chatterton In many countries, central governments have However, central governments are increasingly devolved the responsibility of infrastructure unwilling or unable (due to limitations of fiscal service provision to the sub-national level, which space) to guarantee sub-national borrowings. is essential for economic growth. Along with This new paradigm is testing the sub-nationals’ this devolution of provision responsibility comes ability to raise financing to fulfill newfound the requirement to raise revenues, enhance responsibilities in infrastructure service efficiencies, improve commercial viability, and provision. reduce a dependence on external financial sup- Perhaps this is a blessing in disguise. Historically, port—including central government guarantees. easy access to sovereign guarantees has cre- Photo © epSos.de 62 | handshake Financing ated perverse incentives for not pursuing more cities are beginning to view the market as a sustainable financing solutions. This dependence potential source of much-needed infrastructure has also tainted the way that sub-nationals are financing. To understand and weigh the vari- perceived by the markets, by making them seem ous options that exist for tapping this source like reactive agents of development. This in turn of finance, city officials may need specialized has limited their access to finance and therefore advice. The World Bank, in partnership with their ability to develop. This approach must many donors, responded to this need with the evolve, because whether the focus is climate creation of the Sub-National Technical Assis- change, massive migratory movements, or basic tance (SNTA) Program. infrastructure needs, the struggle to advance the Of course, financing without guarantees can- global fight against poverty and unsustainable not guarantee access to finance. But it promises development may be won or lost primarily at the the beginning of more pragmatic and forward- local level in developing countries. looking planning at the local level; more proac- Change isn’t easy, but rapid urbanization places tive approaches to revenue raising; and a sharper growing demands on governments in the devel- focus on sound financial management practices. oping world to deliver essential infrastructure This enhances the ability of local government services to an ever-increasing number of people officials to meet infrastructure needs. All local in cities. City budgets alone are usually unable governments, regardless of their size or capacity, to meet these demands, and sub-nationals’ weak can step forward to take on this challenge. creditworthiness is a major constraint when it comes to raising other sources of finance. Many Targets How Does SNTA Work? Expected Results • Improved credit ratings Sub-national • Rapid assessments: Capacity building entity to improve • Strengthened financial • Shadow credit ratings: Financial sustainability plans creditworthiness management • Financial mgmt assessments: Monitoring mechanisms • Increased revenue flows • Market-sounding: Debt-capacity analyses • Access to bank credit Sub-national entity ready to tap national • Public credit ratings: Financial advisory • Improved credit terms markets • Project identification: Financial mgmt policies • Bond issues • Legal reviews: Consensus builds • Govt transfer intercepts Central government to • Municipal finance analyses: Laws/regulations • Strengthened monitoring improve framework for sub-national financing • Value-capture identification: Best-practice dissemination • Improved frameworks IFC | 63 The Peruvian experience Until recently, Peruvian banks were discouraged public companies and other entities it con- from considering the sub-sovereign market. This trols; the credit rating from an international was due to a lengthy and complex sub-national credit rating agency; and the development of borrowing approval process, the limited technical a five-year macroeconomic corporate report and financial capacity of sub-nationals outside of for Lima with projections up to 2015. Lima, the difficulty predicting and intercepting • The Regional Government of Arequipa intergovernmental transfers, and the uncertainty signed a $10 million loan with a local about whether mayors and regional presidents commercial bank to finance its regional would honor the debt obligations contracted by road rehabilitation program. This marks their predecessors. the first time that a regional government This changed in 2008, when SNTA funded tech- in Peru has borrowed without a sovereign nical assistance to facilitate Peruvian sub-national guarantee. As with Lima, the loan was governments’ access to financing from commer- backed by an IFC guarantee. cial banks and capital markets. The goal was to Other Peruvian local governments and public complement existing government transfers and utilities supported by SNTA are also improving revenues, diversify funding sources, lengthen the their creditworthiness. At least one additional maturity of available commercial bank financ- commercial financing is expected to close in ing, create and strengthen credit histories, and 2012. introduce financial discipline. Success included the following results: Lima, driven by its need to achieve higher levels of leverage and by its desire to benchmark • The Metropolitan Municipality of Lima its debt management capacity in light of the signed a $70 million commercial bank subnational debt’s rapid growth, is reviewing loan with a local commercial bank in April its debt management and planning functions. 2010—the largest market-based borrowing Corporate-level financing options may be fea- ever concluded by a sub-national govern- sible for Lima along the more traditional project- ment entity in Peru. The loan was backed by level financing. SNTA support has delivered a a $32 million IFC partial credit guarantee. rapid market assessment to provide a glimpse of Technical assistance was instrumental for the market appetite for long term corporate borrow- overall engagement with Lima officials and ing by domestic institutional investors, as well as transaction support. In particular, SNTA to help inform the views of underwriters, rating supported the consolidation of the accounts agencies, and fiduciary banks. of the Municipality of Lima and the 19 64 | handshake Last word Cities as Development Partners By William Cobbett Policymakers at the city, national, and inter- national levels have a rapidly diminishing window of opportunity to allow their responses to catch up with the facts of rapid urbaniza- tion. The populations of most developing world cities will double in the next two decades, and failure to respond will carry huge financial, social, and political consequences. Some results are already evident in the spatial inefficiency of thousands of cities, the huge additional costs of retrofitting infrastructure, marginalized com- munities condemned to live in unrecognized and unserviced slums, anger at huge price increases on staple foods, a generation of youth with limited prospects for education or employ- ment, and the continued marginalization of young girls and women. Photo © Cities Alliance IFC | 65 Getting cities right—assuring that they are efficient, safe, environmentally, and economi- cally sustainable—is the most important developmental challenge of this and the coming generations. Cities are the places where we will fail, or succeed, in dealing with our global challenges. Even though cities are sometimes presented as concentrations of poverty, deg- radation, and vice, they are more appropriately understood as centers of culture, social and political progress, and sites of economic development. To achieve this vision, Cities Alliance’s decade of experience and success suggests the most promising ways forward: 1 Urgently improve the policy method of compartmentalizing poverty response. or growth undermines the relationship between urban growth and rural poverty A deficit of creative ideas fails to deal reduction, in which cities provide with existing realities and denies a markets, remittances, and goods to the future that is both certain and predict- rural spaces beyond. Neither poverty able. Urbanization is a reality, and it will reduction nor economic growth occurs continue. All attempts to prevent, divert, in discrete locales. or slow the process have failed miserably, certainly in the long term. The single most important change needed is a mindset and policy framework based on facts, which 4 Focus on systems of cities. anticipates and plans for urban growth. Using the national economy as a framework, cities should be regarded 2 Pay far more attention to small and medium cities. as interrelated systems that require con- nections, while allowing for regional differentiation and city- Only a very small percentage of the level specialization. world’s population will live and work 5 in mega-cities. The policy challenge Increase cities’ autonomy and is increasingly in small and medium accountability. size cities, most likely already ignored, under-resourced and struggling to cope. Cities are too often regarded as either 3 an inferior level of government, or little Reject the urban/rural dichotomy. more than the administrative arm of a higher tier. For real progress, city mayors and officials should be made accountable Long one of the stalest topics in to their voters and taxpayers, with local development, this false and outdated innovation and solutions encouraged. This 66 | handshake process is more likely to provide solutions- 8 Unlock urban land markets.. than distant bureaucrats or committees in Long a source of power, patronage, regional or national government. speculation, and corruption, opaque and dysfunctional urban land markets 6 Adopt a whole city, long-term perspective. have universal pride of place as the most consistent obstacle to sound city development and good governance. Too much of city development is weak- 9 ened by a project-based approach to Focus on women as development development, such as trying to solve the challenge of slums only in the slums. Too partners. many cities are weakened by a short-term outlook more concerned with the next Just as cities are the hidden agents of elections (or donor’s budget requirements) development and change, so the role than with the long-term future of the of women in development is neglected, entire city, viewed from the perspective despite their proven role as the most of the whole and future population. successful vectors of development. We Realistically, city development should need active steps toward improving girls’ adopt a 20- to 30-year time horizon, with and womens’ access to education, family administrative boundaries that facilitate planning, land and property rights, long-term planning. credit, and political representation. Historically, these changes have 7 Recognize the permanence, and citizenship, of the urban poor. overwhelmingly occurred not on the farm or the village, but in the city. Possibly the most obvious consequence of inappropriate policies is the sys- tematic exclusion of the urban poor. 10 Engage the private sector as partner. This results in their diversion to poorly We have no knowledge of any city that located and dangerous land, where they has escaped poverty and sustained eco- are forced to obtain services through nomic growth without attracting signifi- parallel and expensive markets, and cant private investment. Development denied access to economic opportunity. assistance should be geared to providing The energy and resilience of the urban a platform for such investment, and poor is often the least understood recognize the many guises of the private and most under-utilized driver of city sector, including the entrepreneurs in development. the slums. IFC | 67 Subscribe: ifc.org/ppp Connect with us: facebook.com/ifcinfrastructure scribd.com/ifcppp handshake@ifc.org ifc.org/ppp January 2012