I W___ _ ________________ ___ _ _ __________L__.__ , WeoteC b~~___ v _ _/n \ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . . .. .I.v.. i. . . .~. . . . Danida Federation of Canadian Monioipalitios Feddrati-n .anadi.nno des monicipalites r I O rbanI We welcome your comments, tbougbts, and suggestions about The Urban Age. Mdnfagemen[ Editor: nic. multilingual and multi-religious environ- Your recent cultural heritage issue [Vol. 4, ment. This issue of The Urban Age is funded by the No. 4] was verv timely, as recent high-tech India's unique qualities of assimilation have Danish Agency for International Development, the d Federation of Canadian Municipalities (Canadian developments begm to threaten a very human been exercised first with regard to the Moguls, International Development Agency), the Dutch cultural identity. Urban planners and thinkers and later the British who have been among the Ministry of Foreign Affairs, and the World Bank. may have a diffi Developmental funding has been provided by the m cult time piecig together new migrating forces attempting to govern- and UNDP-UNCHS(Habitat)-Wi(orld Bank Urban theories for the world of tomorrow. shape India into a united country. Previously Management Programme and the World Bank. In her article, "The Politics of Heritage," the land had been a number of small, frag- Editorial Board Patralekha Chatterjee rightly exposes the un- mented, quarreling multi-religous kingtoms jeb Brugmann, International Council on Local scrupulous Hindutva politicians in Inrdia for of zealots. Enicironosental Initiatives, Toronto, Canada James H. Carr, Fannie Mae Foundation, aggrandizing clumsy urban issues for their While the present cultural turf wars also Wasbington, DC, USA4 conceited political intentions. In a true histori- may pass on as a transitional phase, the multi- G. Shabbir Cheema UnitedNations Develop Unent cal sense, however, India was never invaded heritages of India may help it with yet another Prograsnme. New Yosh, USA Charles Correa, Bombay, India or colonized; rather, it was the tropica' climate transformation toward becoming an economic Zsanzsa Daniel, Researcb Institute, Ministry of and natural resources of this vast and varied power. Finance, Budapest, Lrungary Mamadou Diop, DakarlMetropolitan Community land that attracted most of the country's in- Zahyr Siddiqi Council. Dakar, Senegal migration. Architect/Urban Planner Nigel Harris, Development Planning Unit. University College, London, England This migration has helped India become a Jeddah, Saudi Arabia Bas M. van Noordenne, Dutch .Ministry of Foreign country with a trulv multicultural. multi-eth- Affairs The Hague, The Aetberlands Charles Landrv, Comedia, Stroud. England Aprodicio Laquian, UBC Centre for Human Settlements, Vancouver, Canada Akin Mabogunje, Ibadan, N`igeria Mohamad Machnouk, Eco Beirut, Beirut, Lebanon Giovanni PaduLla, It Mloncio, New York, USA Pablo Trivelli, Santiago, Chile Paime Tvanela, Ianternational,Counc ion This has been a tricky issue to put together. the taxpayer. The concept of equity for the Jaime Valenzi-iela, International Council onn Local, Environmental lnitiatives, Santiago, Chile The reason is this: city investment strategies taxpayer is not a novel one -for centuries, Emiel Wegelin, Institute of Housing and Urban Development Studies, Rotterdam, The require balancig the needs of many compet- stars have been fought over this Issue. What IS NVetherlands ing interests -the community, the city, the new is having the taxpayer - the community Executive Commnittee private sector and national government. -be included in the negotiations between Arif Hasan. Karachi, Pakistan In the past, cities have used guarantees. tax the private sector and the city over the kind, Hilda Herzer, Centro Estudios Sociales y breaks and exclusivity to attract private invest- type and size of urban infrastructure being Ainbientales, Buenos Aires. Argentina Peter Swan, UNCHSRegionalProgrammefor ment. In the future, performance-based man- built. Community Development in Asia, Bangkok. agement, intelligent and flexible regulatory Not only that. The new thinking referred to Thailand policies and the profit motive will direct the by Lyndsay Neilson in the guest editorial as Regional Production Tearns city's policies. strategic investment packaging calls for a Cairo-Randa Fouad., UttP Arab States Regional Our writers pose some interesting, iF contra- holistic approach to urban investments that In/orenation Advisor, Wagdi Riad, Head of Environment Department, Al-Abram Neewspaper dictory, questions: Can good returns on when planned carefully can bring about great Quito-Yves Cabannes and Peter Claesson, tIP principal also bring customer satisfaction? returns -for investors and users. There is a Latin America and Cast bgbean Office Without basic amenities how do cities attract correlation between "adequate infrastucture Editorial Staff investment? Are analytical tools useful in track- as a prerequisite for competitiveness antd for Editor-in-Chief Margaret Bergen Editor Leslie Carper ing industrial development patterns? economic growth." Design Consultant Ken Iseman As we discovered, financing urban infra- Cities it seems are putting the private inves- Desktop Publishing Mrhelle Zonk structure is only one piece of the puzzle. The tor on notice. Contribute to our long-term Distribution Patricia Moran question raised in the lead by Tim Irwirn is how growth -or else! The Urban Age is published four times a year and is to balance the needs of the city with those of --Margaret Bergen available to developing country subscribers free of charge. Developed country subscribers are charged US$20.00 annually. Editorial offices are located at Room F-6P-174. The Wodld Bank Group, 1818 H Street, NW, Washington, DC 20433, USA. Fax: 202 The Urban Age aims to create aforums for the global exchange of ideas, knowledge, and 522 3223: e-mail: mbergen@Mworldbank.org information about urban issues in developed and developing countries. The ideas expressed in © 1997 The International Bank for Reconstruction articles appearing in The Urban Age reflect the personal comments of each author and are not and Development. The World Bank, 1818 H Street. representative of any one agency or organization. Material in The Urban Age is copyrighted. NW, Washington, DC 20433, USA. Requestsfor permission to reproduce portions ofThe Urban Age should be sent to the Editor. The All rights reserx'ed. Urban Age encourages dissemination o4r its work and will normally give permission promptly, and, when reproduction is for noncommercial purposes, without asking a fee. @i 'Ihe teban Ageis pnoled by Automared Graphic Systtes Inc, -on ecy< led paper using soy based inks CONTENTS FEAT U R ES Timothy Irwin 4 Responsible Investing for Cities and Taxpayers Patralekha Chatterjee 10 India's ULBs Give Lenders More Than lOUs Margaret Bergen 12 National Governments: Help or Hindrance? Olga Kabanova 14 Rebuilding Moscow: Boom or Bust? Steven A. Waldhorn and Edmund A. Egan 16 The New Competitive Benchmarking Lucy Conger 18 Mexico City's Fiscal Autonomy: Building It in or Building It Up? Leslie Carper 20 Urban Appeal: What Investment Banks Bank On DEPARTM ENTS Lyndsay Neilson 8 Guest Editorial New Ways to Package Urban Investments Charles L. Choguill 22 Communities Speak Ten Steps to Sustainable Urban Infrastructure Giovanni Padula 24 American Urban Challenge Light Rails to Keep Salt Lake Afloat Yves Cabannes 26 Mayor's Column Interview with Mexico City's Governor-Elect Cuauhtemoc Cardenas Jenepher W. Moseley 27 Books Can Indian Cities Organize to Attract Funding? Robert McNulty 28 Newsline People's Voice Heard by U.S.-China Delegation 29 The Urban Calendar Don Aitkin 30 City Manager's Desk Training Tomorrow's City Managers Today Responsible Investing for Cities and Taxpayers TIMOTHY IRWIN In the last decade, a wave of infrastructure which puts you in an especially vulnerable but to remain. Although the investor can make privatization has swept the world. This position regarding possible future adverse the precautionary move of entering into a legal novel approach began with national and developments. Moreover, once you've made contract with the city to try to protect itself provincial governments in the United King- your investment, you're stuck. If things go from subsequent exploitation, even this step is dom and Chile, and quickly spread to other wrong, you can't get your funds back and not foolproof. A city government in a country parts of Europe, Latin America, Asia, and depart. Not all investments are like this. The without quick, competent, and impartial courts Africa. Now regional governments around the investor who purchases land to open a gro- will find ways to harm the outside investor if world are seeking out private investors to own cery store, for instance, and discovers that no it is determined to do so. and operate their infrastructure. And, more one wants his goods, can always sell the shop Such was the experience of a private Japa- recently, city governments have jumped on and recoup part of the initial investment. But nese-led company that agreed to build a new the bandwagon and are looking for new ways if you buy water pipes and lay them in the road to relieve congestion in Bangkok, in to privatize the urban infrastructure services ground only to discover that your customers return for the promise of charging a toll of 30 for which they are responsible. Private inves- won't pay what you hoped, it would be too Baht. When the road was nearly finished, the tors, however, are justifiably wary of commit- costly to dig up the pipes and sell them to government went back on its agreement and ting themselves, because they have lost money another investor who wants to supply a differ- opted to permit a maximum toll of only 20 in the infrastructure business in the past. The ent city. The investment is literally and figu- Baht. The company protested and refused to challenge for city governments now is how ratively sunk. open the road, whereupon the government best to attract the investors while ensuring that took the company to court -and the court the city benefits. The politics of infrastructure ordered the company to comply. When it refused, the government took over its opera- Why private investment in infrastructure is Another stumbling block is the highly politi- tions, and the company was nearly bank- hard to attract cized nature of infrastructure services. Impor- rupted. tant services like electricity, transportation, All business investments entail risks. Invest- piped water, and sewage collection are often Common private investment pitfalls ments in developing countries can be espe- provided by firms that have no competitors. cially risky, because of their turbulent econo- As a result, their provision is usually steeped Cities try to make themselves attractive to private investors; in doing so, however, they DEALS THAT INCLUDE TAX BREAKS, should guard against going too far. In their GUARANTEES OR EXCLUSIVITY TEND TO BENEFIT zeal to attract infrastructure dollars, they must INVESTOIRS WITHOUT GIVING THE CITY THE BEST takeintoaccountalltheramificationsofthe INIFRASTRUCTURE FOR ITS MONEY. activities investors plan to implement -not just for the immediate time period, but far ihto mies and volatile politics. It's hard to predict in political controversy and their prices tend to the future as well. For their part, investors whether you are investing in a country whose be government controlled. Unfortunately for don't always take into account the full impact economy will grow at 5 to 10 percent every private investors, governments don't see votes their investments will have on the city for both year for a decade like the Asian Tigers, or one in raising the prices of infrastructure services the short and long term. Investors may ask for whose income will shrink year after year, as even when the cost of supply goes up. This tax breaks, for example, in return for the many in Africa did in the 1970s and 1980s. And political aspect of infrastructure funding, com- construction and services they provide. Or it's hard to know whether a given country's bined with the sunk nature of investments, they may ask for guarantees from the govern- courts will be fair arbiters of disputes that may creates trouble for the investor. City politicians ment that they will receive a certain level of arise between the private investor and the seeking funds may promise uncommitted pri- revenue even if demand turns out to be lower urban government. vate investors the leeway to charge prices that than expected. Or they may seek exclusivity in When you invest in water supply networks, will cover all their costs (including those of the providing the service. sewage treatment plants, roads, underground investments themselves). But once the invest- By acceding to these demands, the city railways, and other infrastructure, you are ment is made, the city will be tempted to government encourages investment. Given constructing expensive assets whose costs can renege on such promises because it can later the choice, investors would prefer not to pay be recouped only over 10 to 20 years or more, lower prices, leaving investors with little choice taxes, take risks, or face any competitors. But 4 THE URBAN AGE while cities must be sensitive to the interests of private investors, they should be wary of assenting to these particular requests. Private investment is not better than public per se. Just as with any good or service, it benefits the taxpayer and consumer only when it gives the city a better value for its money. And deals that include tax breaks, guarantees, or exclusivity tend to benefit investors without giving the city the best infrastructure for its money. The problem with these deals is that they help investors only at the expense of the city's residents. Tax breaks for infrastructure investors al- ways mean higher taxes or poorer services for someone else. If infrastructure investors pay less tax, city residents must either pay more or receive lower quality city-funded services. Or they are forced to pay more for goods and services from other businesses whose taxes are higher than they would otherwise be and who must pass this increase on to the con- sumer. Guarantees have no imimediate cost to the taxpayer, which make them a more tempting concession to make to private investors. How- ever, should problems arise later (if demand turns out to be lower than originally forecast or if the exchange rate plummets), the city's residents are again forced to foot the bill. Guarantees are not always wrong. When the city guarantees something it can control, such as continuing to permit a toll to be charged on the investor's road, the guarantees help both parties because they encourage the city to keep its promises and shield the investor from anxiety over circumstances it can't influence (such as the toll on a road). But when guaran- tees relate to outcomes the city government cannot control, they weaken the private investor's incentives to performn well. When investors have guaranteed revenue, for ex- ample, they will be more willing to build roads the -government wants built even if they be- lieve the roads will be little used. If the investors are protected from shifts in the local exchange rate, they'll have more incentive to borrow in the foreign currency, ignoring the higher cost of repayment if there is a drop i the exchange rate. Exclusivity can also hurt city residents, since ' a company can get away with poorer perfor - mance than if it were in danger of losing customers to competitors. Poorer perform-ance results in higher prices or lower quality. Or THE URBAN AGE I R E S P O N S I B L E I N V E S T I N G expect to earn more than they spend, raising Low prices lead to over-consumption and CONTINUED FROM PAGE 5 prices at the outset of the agreement to the unnecessary investment point where they cover the costs of supply is exclusivity could lead to less investment in the one of the single most important steps the city Another problem when prices are too low is expansion of the infrastructure network, since can take to get private investment. that those customers who do have access to a firm with a monopoly does not have to worry the service tend to over use it. Households about other firms signing up new customers Low prices often help the rich, with water connections tend to use too much before it does. not the poor water. Likewise, residents with cars drive too much. This in turn puts pressure on the city Good policy attracts good investment Raising prices is tricky, but its benefits to build more water treatment plants and extend beyond attracting private investment. additional roads to meet demand that results Fortunately, there are ways of obtaining Although the policy of keeping prices below from over consumption. But the city does not investments that don't just shift costs to con- costs is intended to help the poor, the results avoid service costs by keeping user fees low. sumers or taxpayers. These options create are often disadvantageous. When prices are One way or another, the city's residents still opportunities that didn't exist before. How- lower than costs, this can put the agency have to pay for the water they use, the trains ever, not all of them are within the city's providing the infrastructure in financial diffi- they catch, and the roads they drive. Ulti- domain or under its control. For example, culty. Consequently, it skimps on mainte- mately, they will pay for it, either in tax hikes investors want low inflation but this is up to nance and puts off investing in new ventures, to subsidize the low-priced infrastructure, or national government to provide, not cities. leaving poorer customers without access to in lack of goods and services, such as fewer A KEY RATIONALE FOR ENCOURAGING police and parks. Permitting cost-covering prices can solve PRIVATE INVESTMENT IN INFRASTRUCTURE IS TO theseproblemsatthesametimethatitattracts HARNESS PRIVATE OWNERS' INTEREST IN MONITORING privateinvestors. Whenwatercompaniescan FIRMSi TO ENSURE THAT THEY OPERATE AS charge for the full cost of their service, for E F F I C I E N T L Y AS POSSIBLE. example, they will willingly extend their net- work to those customers who are uncon- Yet cities themselves can make a big differ- services. Many residents of developing cities, nected but willing to pay. The city's total ence by: for example, would pay the full cost of piped cnsut will rise less total consumption of water will rise less quickly - ensuring that infrastructure prices cover water; because they can't get it, they end up than might have been expected, however, the full costs of services; payingmoreforwatersoldbyvendors. They're since existing customers- deterred by higher * introducing policies convincing investors unable to get the service because the agency prices - will cut back their consumption. that they will not be exploited in the future; supplying water is too cash-poor to fund Raising current prices is one challenge. and investments and, since it can't charge for the Another is to convince private investors that - allowing investors to make profits by full cost of the water, would only end up prices will continue to cover costs in the lowering costs, increasing quality, and finding damaging its financial base by connecting future. Many cities lack credibility with inves- new customers. new customers. Infrastructure services are tors and can't win it simply by making pro- often subsidized by cities (because prices nouncements or promises. City managers Allow prices to cover costs don't cover costs), but those subsidies tend to must therefore imaginatively approach the Historically, city and other governments help the rich rather than the poor. question of how to create a reputation for have often kept the price of infrastructure UbnAi,m3 eW~ services below the costs of supplying them. Water utilities in the developing world, for pcsnN. e EtIl M'1 pyi ywer example, recover an average of only 30 per- edi o p' - cent of the costs of supplying water. Urban rail e r systems, too, often fail to earn even the day-to- Q4 .. day costs of operation, let alone construction r: t costs. Often the sector that recovers the small- bo~[~: ~ ~ m~a est proportion of its costs is urban roads, 6 I THE URBAN AGE ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~/I3 which are often completely free to the user- partly because of the logistical difficulties of 4 p~~~sa n collecting tolls, but also because of political go~~e s ~ . 49 i n nrsrcue i~ reluctance to charge for them. Singapore has B~UByIOtO~ ~ra itil~~rjr using individual roads in the city by levying a .. Peo~cptL toll on all cars entering the city. Since private rlon(92 e6.fAa #c 'bpaLhss< companies are willing to invest only if they rsore gfiafynI ttu4t' 6 1 THE URBAN ALGE integrity and attract investment. city government, and so may more readily win of investor-provided services, but the city A large part of the solution is for the city to the trust of investors. When investors are shouldn't dictate how the investor should run enter into a contract with the investor that sets unlikely to trust any regulatory agency in the the business to achieve quality standards. For out the rules that will govern the service for the country, the city may have to rely on periodic example, the regulatory contract between a life of the investment. But because the invest- renegotiation of the contract between the city city and a gas distribution company might ment can recoup its cost only over a period of and the investor, assisted when necessary by reasonably specify the allowable range of gas 10 or 20 years, it won't usually be possible or a completely independent third party such as pressure at the point of delivery to consumers even desirable to determine in advance all the an international arbiter. In all cases, the initial and the safety standards to meet. But the details of every regulation that might conceiv- regulatory contract should include provisions contract shouldn't generally specify where the ably apply throughout the life of the invest- for how subsequent changes will be made. company gets its gas, how many people it ment. For example, who can say how much employs, what materials it makes pipes from, water should cost in a given city in 20 years' Allow investors to profit if they run the or where exactly the pipes should be laid - time? Who can determine what quality stan- business better although exceptions may arise. Governments dards the water should be measured against in that have traditionally made these choices for 20 years? The regulatory contract must be Getting the most out of private investment cities may have difficulty refraining from exer- flexible enough to permit the rules to change requires city governments to allow investors to cising control in these areas, but they must do with circumstances, but not so elastic that it profit when they run their operation well. so in order to get the best deal for the city. allows the city to make changes at whim. The Conversely, it requires that investors also contract needs to permit future alterations accept the risk of losing money. while protecting the investor and the city from A key rationale for encouraging private The city must give investors a genuine stake changes that take advantage of either party. investment in infrastructure is to harness pri- i o a g t To invite investment, the city must relinquish vate owners' interest in monitoring firms to in operating the busimess and not ust min the some degree of control over the future of ensure that they operate efficiently. Those make more money if they run the business regulation. private owners can normally be expected to well-and less if they run it badly It must be monitor the firm more closely to check that it Changing the regulatory contract in the isn't investing in projects with no prospect of prepared to let the investor enjoy high returns chaningthereguatoyucntrateith succivessind t projectsurethe fimo keprospcts o when things go well - and resist popular future success and to pressure the firm to keep costs pressure to take back all of what will be down by not overpaying for supplies or labor. viewed later as unjust monopoly profits if the City governments can set up agencies with To harness this potential, however, the rules firm does well. Conversely, the contract must the autonomy to modify the regulatory con- governing the business must (1) enable the permit the investors to lose money, and even tract when necessary. When Argentina's fed- investors to perform better, and (2) give them go bankrupt, if they misjudge the business or eral government privatized the distribution of the financial motivation to do so. perform poorly. That is, the contract should water in Buenos Aires, for example, it created allocate business risks to the investor. If a city a special agency to review the regulated price Letting managers manage privatizes its water system, for example, it of water every five years. Alternatively, a city should write a contract that gives the investor can use an already existing provincial or The city must allow investors to change the more money if the demand for water rises. national agency in which the investor has way a business operates if need be; otherwise, This gives investors an incentive to connect faith. Although such agencies are subject to no improvements can be expected. It may new customers, ensure the water pressure is political pressure, they are not beholden to sometimes be necessary to regulate the quality adequate throughout the day, and maintain water quality. tic industry and deterred overseas investors. The structedbythe private sectorusingBOTareJalan These recommended steps are not always capital for'same ofthe b'iggest infrastructure projects Kucing-Kepong lnterchange, NorhSuth Express inthe last .five-.years has came though Build,: way,Malaysia-Singapore Second'Crossing, easy to implement. It is politically difficult for Ope'rate and Transfer (BT) and doKnor country Seremban-Port Dickson Highway, Shah:Alam cities to raise infrastructure prices and then :-'-,gr.ants with funds:from multilateral agencies. The ExresswayNoah-South EXpressayCentral LPnk give up a measure of freedom to alter them in new General Santos City airport wasifinancedi by and Kuala Lumpur-KarakHighway. . The U.S. Agency for International Develo6pment. A, In the rush to drum upfiriancingforinfrastuc- thefuture. Italsorequiresconsiderable legal lighftrbiIway along Metro. Maniul6s- Epania ide los ture projects,cies are trying a wide var of and economic expertise to determine the Santos,Avenue is underKconstruction b'y aconsor- techniques. A number of Asin infrastructure details of an optimal regulatory framework for tiu.m of firms including local ones. Ani Indonesian funds havebeein set upinthelast yearto provide Wf(m isbuiding anelevatedtollway--the Skyway- equity financing for such-.projects. T- vest- leadirig to the financial district.. ment ars of the -Singapo6egvernment have be easier to offer tax breaks, guarantees, and -_TheMaaysianapproach toinfrastctureplan- invested US$250 m ,illion intosuch a fund. exclusivity, recognizing that city residents won't . ning isth centralize and,dcentrhized. The Municipal bonds also hold great pro.mise far realize the extent of the imposed costs. In the .county'sseventhfive-yearplan, released lastyear, A sia. Inthe pastthreeyears,Thailand, Malaysia dta=. at-ally increased public ,,s,pend ninfra- and Indonesia. have joined.'ndia' in-se:tting up ' long run, however, the city will be better off strucure,es'p,ecially in the transport s,-ector. At the their own domestic bond rating agencies, the sooner it tackles these tough issues. 0 .same time, ,Malaysia has made impressive strides _-Patn-alekh Chatterjee oward `attracting private investr;ent to sectors -such as roaddevelopment - a,catahyst forurban Timothy Irvin is in the Private Sector Develop- economic growth. Am ong the many, roads con- ment Department of the World Bank. THE URBAN AGE j 7 New Ways to Package Urban Investments LYNDSAY NEILSON P rivate and public investors are forming achieved without positive coordination and privately funding a large part of what 'will new partnerships to invest in urban good public-private partnerships. become the public realm. Nearby Cyberjaya is P infrastructure and, in so doing, are being developed along similar lines. heralding a promising new approach for city Packaging investments for both private Lippo-Karawachi is a privately funded hew governments around the world. The two sec- and pubic gain city nearJakarta in Indonesia, one of a number tors hope that by holding hands they will be of similar developments that are accommodat- able to introduce a broader and more holistic Investors and city managers can work to- ing the city's expansion and meeting the needs approach to city investing. The private and gether to develop an investment plan for both of a growing middle class. The developers are public investors on the forefront of this inno- public and private expenditure in key areas of providing the necessary infrastructure and vative new thinking are developing compre- the city based on infrastructure investments. public facilities from profits gained by land hensive investment "packages" for the long- termhealthofcitiesandtheircontinuedsus- COMPREHENSIVE CITY INVESTMENT PACKAGES WILL tainabledevelopment. ULTIMATELY STIMULATE BROAD ER ECONOMIC: RETURNS Instead of promoting a scattershot approach to investing - a toll road here, a subway there, The objective should be to maximize eco- value hikes and property sales. They have a water system elsewhere - this new ap- nomic returns to the city, not just commercial taken responsibility for operating municipal proach built may ultimately stimulate addi- returns to investors, and improve city develop- services, financed from these fees, and are tional economic returns. ment in both private and public realms. regulating building alterations within the city. The trend toward increasing private invest- If there is a strong need for private invest- Private and public investors are also work- ment in infrastructure construction and serv- ment in a rail system, both city managers and ing together to revitalize smaller and more ices that have traditionally been provided by investors should consider where and when localized districts by coordinating funding the public sector has had - and will continue the benefits will flow, to whom, and what efforts in infrastructure, housing, environmen- to have -an impact in two significant ways: consequential investments might be encour- tal improvements, and public facilities within It frees up public resources to invest in the aged or stimulated by the primary investment. a local master plan and development agree- public realm, and it leverages private invest- Can new housing development be stimulated ments. ment so that it can be funneled into the public along the rail route? Are there opportunities Australia has 26 districts, developed under a realm. nearby for new business activities and, hence, national Better Cities program whose aim is to Traditionally, the vast majority of invest- jobs for new residents? Does the construction improve new urban growth and redevelop- ment in cities has come from private sources. of the railway create attractive new public ment management. The national government Urban assets such as land, buildings, and even spaces and places? Will investment in a provided $800 million to state governments infrastructure have long been privately owned package of related developments improve the over five years to support innovative urban by households, businesses, community orga- viability of the investment in the rail system? investments. This, in turn, stimulated $2 billion nizations, religious groups, and even political One approach that a growing number of in complementary state and local government parties. Those with sufficient wealth to invest developing countries are embarking on is the investment and -after the first four years - usually benefitted from city growth as asset private financing and development of com- $5 billion in private investing. The 1995 report values appreciated and new investment op- plete new towns -with land value capture a of the program's evaluation team concluded portunities emerged. People without adequate major source of return on the initial invest- that, "The program has removed significant income and assets were locked out of this ment. Public facilities are being provided in infrastructure barriers inhibiting urban devel- arena of wealth creation. However, managing Putrajaya as part of the privately funded and opment and redevelopment. Strategic areas public and private investment in an integrated managed development of this planned city have been developed which otherwise would way can often achieve a beneficial transfer of which will be Malaysia's new administrative have been bypassed, redundant institutional the value added by urban growth between capital. Profits from property value increases land was redeveloped for housing, and signifi- categories of assets. This can lead to improved as well as land, housing, office, and commer- cant opportunities for private investment in public as well as private assets and hence cial development will finance major public formerly neglected areas were opened." benefit those who don't hold assets as well as assets, including the city's open spaces, a lake For the private sector, the appeal of this those who do. It can also leverage the total and surrounding parks, public housing and approach is that it offers them a measure of value of investment beyond what might be numerous other public facilities - in effect, certainty about policy, reducing their risk. 8 I THE URBAN AGE When investment is diversified, it allows in- Cities as investment systems From project to package vestors to gain returns from more than one source. This reduces market risk. Additionally, A city is created by both public and private A city considering private sector investment the management process involved in packag- investment, but is by nature more than the sum in infrastructure makes a public policy error if ing usually means that decisionmaking on of those investments. it views that investment as an isolated short- individual projects within the package can be Each city has a unique geography, and term investment separate from its urban con- implemented faster and with more certainty, markets place different values on different text. Investments provide a service and gener- reducing delays. locations within the city. Whether on a coast, ate direct commercial returns if successful, but open plain, inland river, or valley surrounded they also have the potential to stimulate The public realm by mountains, geography will affect a locale's additional investment, both public and pri- economic activity. Further, the city's physical vate. The city also must manage the timing, Governments invest in cities in order to: and social structure will prompt households scale, and location of infrastructure invest- * create a living environment appealing to and businesses to value some locations over ments and coordinate public and private private investors by financing infrastructure to others. Urban growth changes the structure of activities within a strategic, far-reaching frame- offer needed services; land values, often creating unearned wealth work for the city. * meet the needs of citizens unable to for asset holders, irrespective of their indi- Geographically based development and generate adequate income, afford housing, or vidual decisions and actions. Public policies, investment plans that are focused on strategi- pay for health, education, and other basic population increases, patterns of migration, cally planned urban development outcomes, necessities; and public and private investment decisions all rather than being limited to sectoral invest- * manage the public realm, or spaces be- create effects across cities from which asset ment outcomes, can become a vital vehicle for tween the private investments. holders and investors frequentiy benefit. managing urban improvement, especially Imagine that the city's public policy man- where growth and renewal are rapid. Clear The efficiency with which public expendi- dates cleaning up and revitalizing its water- plans and bases for agreements between ture is managed is often questioned, and front parks to improve the environment. This public and private participants can be a sig- alternative, market-based service delivery ar- benefits private property holders in the vicinity nificant means of attracting new investment in rangements are often substituted for govern- because those properties become more attrac- regions where investors acting individually or ment-funded services. Although theoretically tive places in which to live and conduct in the absence of clear public policy may be a market-based approach is limitless, practical business. The community at large also benefits reluctant to invest. Investments that might be limits as to how far market mechanisms can from a more attractive public realm, and new noncommercial on a stand-alone basis can extend or be applied do exist. investors view the appeal of this revitalized often be justified as part of a package where In most cities, publicly owned urban land location with interest. New investment and, they add to the overall value of the bundle. A CITY CONSIDERING PRIVATE SECTOR INVESTMENT IN INFRASTRUCTURE MAKES A PUBLIC POLICY ERROR IF IT VIEWS THAT SECTORAL INVESTMIENT AS AN ISOLATED SHORT-TERM INVESTMENT SEPARATE FROM ITS URBAN CONTEXT. forms a significant share of the total developed consequently, economic activity results. City managers should scrutinize each public or area - more than half in cities where roads Suppose, for example, a private corporation private investment to leverage direct and indi- comprise a large portion of urban space. The is encouraged to invest in a light rail system. rect benefits from it. key buildings that house institutions and re- Access for people and business improves. A framework of mutually beneficial invest- flect cultural development are generally, though Property holders along the routes benefit from ment agreements can be a significant tool in not necessarily, publicly owned. The air we increased property values. New business op- the hands of city managers. Investors must breathe; the rivers, lakes, and groundwater portunities may emerge around stations and change their perspective to see an urban basins that provide our water; the ocean we shops on the system where travelers congre- infrastructure investment as more than just fish in; and the biota that makes up the rest of gate. Homeowners may be attracted to live another short-term project. Instead they must ' ~~~~~~~~nearby for the sake of convenience. New our environment are likewise publicly owned residences may be built as demand creates take a far-reaching view of the changes it can and managed. The quality of management of new investment oppounities In the process stimulate and the additional investment re- the public realm is fundamental to the success land and property values change, and wealth sponses it can generate. U of cities. Clean air, clean water, attractive has been generated beyond the initial rail public places and open spaces such as parks system investment. The investor may find the and recreational places all play a strong role investment more attractive if some of these Lyndsay Neilson is an Australian geographer, in the social, environmental, and economic subsequent value gains can be captured as part urban planner, and director of the University allure of cities for private investors. of a broader package. of Canberra Centrefor Developing Cities. THE URBAN AGE l 9 India ULBs Give Lenders More Than IOUs PATRALEKHA CHATTERJEE N ew Delhi. Walk through a shop- national product. Between 1991 and 2001, the really being suggested is that a clearer relation- ping complex in downtown Delhi alreadly over populated country will increase ship between citizens and the elected govern- on a summer afternoon and the by 163 million people; 89 million of these will ment is possible," notes Dr. Rakesh Mohan, enervating sound of a dozen kerosene genera- live and work in urban areas. But with poor director general of the National Council for tors assaults your ears. Or pass through a nice neighborhood and inhale the noxious fumes InetetRqieet o UbnIfatutr R ilions) of small diesel engines. What's going on? You're in the middle of a brownout. Water Sa tation R Ttl Perf annum Unwilling to suffer silently in the dark from the erratic service of the state-owned Delhi A I tment 1996-97 86 6 8. 236 516 Electric Supply Undertaking, residents have d' Ivtn 0 7 7 77.38 232.14 46.4.3 purchased their own sources of power. But Oeaon&mieane489.62 972 being "powerless" is only part of the frustra- T (96001) 22.98 tion of daily life in the Indian city. Most TTL(010)277 residents start their morning by switching on the water pump. The municipal corporation supplies water for an hour each morning and roads, recurring brownouts, inconsistent tele- Applied Economic Research. Forming public- half an hour each evening, but if there's no phone connections, and unhealthy sanitation, private sector partnerships to fund infrastruc- electricity, there's no water. And when the many of her cities will cease to be the growth ture projects is the key theme of the report, overhead water tank is empty, Delhites must centers they are in the rest of the world. which was authored by Mohan's team of buy from private vendors. experts. If this is India's capital, imagine life in other Size of infrastructure investment required Traditionally, urban infrastructure financing cities. has come from central and state governments According to a recent Indian census esti- Clearly, large sums of capital are required to as well as multilateral agencies such as the mate, 20 percent of urban households never reverse this situation. By the year 2001, urban World Bank and Asian Development Bank, in have access to safe drinking water, only 23.5 local bodies (ULBs) in India will require more the form of loans and grants. But ULBs haven't percent have toilet facilities, and the drainage than US$9 billion to eliminate deficiencies in been in a position to make full use of these system covers only 66 percent of the urban existing levels of service and provide the funds because they lack even basic amounts to population. population with a modicum of core services, meet ongoing operation and maintenance requirements of providing utilities -even when startup capital is provided by these INFRASrTRUCTURE IN INDIA NOT ONLY MAKES outside institutions. Since most urban infra- FOR ARDUOUS LIVING BUT IS THE SINGLE BIGGEST structureservices areviewedaspublicser- STUMBLI NG BLOCK TO GREATER PRODUCTIVITY vices,India'scitieshaveneverentertainedthe FOR ALL INDIAN CITIES. notion of cost recovery. When user charges These are the figures on paper. In reality, according to 1983 Planning Commission esti-arleidthpicpruntstolwtovn g p p . Y, g 983 g o es ~~~~~~~~~~meet the variable cost of providingthe service. things are much worse. Access to safe drinking mates. This figure is expected to increase to This is peariculrly evident in water and sani- water does not necessarily mean water piped more than US$12 billion if municipal manag- thtion services The total lack of cost recovery into homes. Only half of urban dwellers have ers decide to "raise services according to high- l i i ft iff i recovery, and annual revision of tariffs indexed to infla- household connections. About 30 percent range norms proposed by the Commission, tion deters the private sector from entering must walk half a kilometer daily for water. according to The India Infrastructure Report, thi 'ivti I The appalling state of urban infrastructure a study on commercializing infrastructure in India not only makes for arduous living but projects in India. Municipalities unbundling services is the single biggest stumbling block to greater "All this money won't come from heaven. It productivity for all Indian cities. The country's is too complicated for the central or even state But change is in the air. India is unshackling cities make up one-quarter of the population governments to plan for so many cities when its command economy and eliminating hand- and account for more than half of the gross each has a different requirement. What is outs to the public. Because neither central nor 10 I THE URBAN ACaE state govemments have enough funds to meet water supply, sewage, sanitation, and other trative reforms to shore up revenues. Octroi the requirements of urban infrastructure fi- infrastructure projects. The AMC bond has collections have increased from US$115.88 nance, some municipalities are starting to received an A+ rating by Credit Rating Infor- million in 1990-91 to US$261 million in 1995- unbundle operation and maintenance ser- mation Services of India Ltd. (CRISIL). 96. Last year, BMC, which has the largest vices. Government savings from privatizing "Cities have to look inwards for resources. Indian municipal revenue budget and popula- solid waste collection in New Bombay have You cannot keep running to the state or tion, was assigned an AA- rating on a US$7.14 topped 40 percent. In Rajkot, the fourth federal government for funds all the time," million bond issue, indicating high safety of largest city in the western state of Gujarat, road sweepingandgarbagecollectinghavebeen CITIES HAVE TO LOOK INWARD FOR RESOURCES. handedovertoprivatecontractorsin2of19 YOU CANNOT KEEP RUNNING TO THE STATE OR FEDERAL wards, with a 15 percent savings for the Rajkot GOVERNMENT FOR FUNDS ALL THE TIME. Municipal Corporation. Private sector partici- pation in these services has proved cost effec- asserts Ahmedabed municipal commissioner timely interest and capital payment. BMC is tive and efficient, and it obviates the need to Keshav Varma, who put AMC in the black in not planning to go in for a bond issue right less than three years. His main strategy has now, but "a credit rating improves its standing New players and products been to professionalize urban government vis-a-vis lending institutions," states RohitJha, and instill public confidence by making a senior analyst at CRISIL. Lending institutions increasingly want to visible difference in the city's appearance by play a catalytic role. The World Bank recently cleaning up roads and clearing out garbage. Alternative infrastructure financing approved a US$200 million line of credit to But appearance alone is not always a "market- Infrastructure Leasing and Financial Services friendly" signal, so he followed that up with Bond issues are not the only financial route. (IL&FS), a domestic intermediary for funding administration reforms. Tax assessment and Tirupur, for instance, is experimenting with infrastructure projects. The loan seeks to collection methods were revamped. Octroi the build-operate-transfer (BOT) mechanism, create appealing business climates for private and property taxes constitute the main source whereby a private party or consortium will infrastructure investment. It appears to be of revenues for AMC. "Octroi collections went finance, operate, and maintain a facility for a working, because IL&FS is now considering a way up by nearly 80 percent in just three years specific period, after which it is transferred to handful of projects, involving telecommunica- (1994-97). The AMC budget in 1994 was a government or public agency. Project costs tions, power, port, airport, surface transport, US$106 million. In 1997, it is US$224 million," decrease with BOT contracts because any water supply, effluent treatment, and integrat- Varma points out. financial outlay must be justified through ing regional development. If AMC today enjoys an enviable financial operation and profit, preventing To be eligible for IL&FS loans, ULBs must status and impressive credit rating, it is largely overspecification and procurement delays. demonstrate that they are watching the bot- due to measures preventing tax evasion by Tirupuris the hub of India's cotton knitwear tom line and come up with innovative financ- disconnecting water supply and drainage lines industry. The town exports US$1 billion of ing methods. One such method is tapping the and issuing warrants to raid premises where fabric annually, roughly 90 percent of India's capital market. "This route requires develop- taxes were delinquent. "Ahmedabad has dem- cloth exports. More than 300,000 people ment of commercially viable projects which onstrated that you don't have to change the working in Tirupur's industry grapple with will raise resources through municipal bonds. system completely. You can begin by opti- poor infrastructure daily. Water shortage is at Increases in tax revenues, including property mally using the existing system," says Sujatha the core of theirproblems, and they pay dearly and service taxes, can help to access the Srikumar, CRISIL's head of infrastructure sec- to buy it from private vendors, says R.M. capital markets by improving the cost recov- tor rating. Subramanyam, a representative of the Tirupur ery of urban services as well as the credit rating "If we get the first bond right, the market Exporters Association. of urban local bodies," according to Chetan opens up for other municipalities," says K. IL&FS raised US$25 million by issuing float- Vaidya, senior urban management advisor of Ramchand, IL&FS assistant vice president. ing rate notes in the United States guaranteed the debt market/infrastructure arm of the "We'll list the bond on the national stock by USAID notes that will mature in 30 years to United States Agency for International exchange so it can be traded. Every day, we fund the Tirupur Area Development Program, Development's India's Financial Institutions will put outa buyer's and a seller's quote of the a US$156 million integrated program covering Reform and Expansion Project, FIRE(D). AMC bond." water supply, sewage, and effluent collection. To take advantage of new investment op- Ahmedabad has already triggered imitators. Industrial water users will have to pay a portunities, municipalities must forge into A host of municipal corporations want to be competitive price, and the project will use uncharted territory. The city of Ahmedabad- benchmarked in relation to others. Credit cash flow to recover the investment and up- a hive of commercial activity - is the first in ranking has been the catalyst. City managers grade services. The city will be responsible for India to issue a municipal bond. The are waking up to the fact that being creditwor- billing and collecting. Equity participation Ahmedabad Municipal Corporation (AMC) thy means taking concrete steps to shore up comes from the state-run Tirupur Exporters US$28.5 million bond issue (floated in August) revenues, cut losses, and solidify savings. Association, local agencies and IL&FS. The represents the first time a municipal corpora- Like Ahmedabad, Bombay Municipal Cor- New Tirupur Area Development Ltd. will tion has tapped capital markets to upgrade its poration (BMC) has also stepped up adminis- CONTINUED ON PAGE 12 THE URBAN AGE I 11. INDIA'S ULBS CONTINUED FROM PAGE 11 National Governments: select four international consortia to under- take the project on a BOT basis. Alvin B. Garcia, Mayor, Cebu City, the Philippines Regulatory framework - problems and UA: You have made one of the mostsuccessfulpartnerships in attracting theprivatesectorto invest requirements inyourcity. Seagate, with 15,000employees, the world'slargest manufacturer-ofcomputerdisks has relocated to your city. What incentives did you offer to attract them to Cebu City? The Tirupur experiment holds promise for other industrial hubs seeking to explore fi- AG: The tax incentives offered to foreign companies like Seagate to invest in the Philippinesare nancing alternatives to bonds. But amid eu- nationally defined. That is, they are determined by national law and apply equally throughout phoria about the new ways to finance urban the country. The incentive for Seagate to relocate in Cebu had more to do with other factors infrastructure, analysts caution against forget- including the availability, quality, andi cost of our workforce. Cebu has a track record of being ting the necessity of guarantees and regulatory able to sustain the requirements of other similar frameworks. For private-public partnerships industries (semiconductors, audio, video, and to succeed, the central government must play computer equipment, etc.) because of the infra- the role of facilitator and put in place incen- structure - an international airport, seaport - tives and a legal framework while transferring and quality of life Cebu has to offer. The power to city governments. The next step is to attraction of high-tech industries such as Seagate expediently hand over financial power to is perfectly compatible with the growth objec- them. Establishing a credit-based system is tives of Cebu. The principal benefit is to the useless if urban governments have no way to people in the employment opportunities they become creditworthy. receive. "Development of a municipal bond system in India needs to be set within a proper UA Prvatesectorinvestmentisnotnecessarily regulatory System,"> says Dr. Meera Mehta, incompatible with the financial goals of cities- senior urban finance advisor to FIRE(D). She However, do you see the immediate short-term advocates nullifying the step of obtaining state financial needs oftheprivate sector conflicting government permission, advocating instead 0.-:2 i- i with the needfor more comprehensive develop- "mandatory credit ratings." She wants to see a cap on the total allowable amount based on m t c logtr growth? levels of service performance. Mehta recom- AG: Balance is the key. While it is conceivable that the short-term financial needs of the private mends making "audited five-year capital in- sector may conflict with the development planning required for the city's long-term growth, a vestment plans mandatory, as the Tamil Nadu balance must be struck. This realization makes it easier for both sides to get on with their agendas. Urban Development Fund has done." Finally, there is the question: who deter- UA: Doyouplan to integrateprivate investors aspartners in city building in thefuture? mines what a city needs? The answer depends oines whow a much sholds bhe invested inwi AG- Yes. We are already integrating private investors in building the city of the future. In fact, on how much should be invested in which infrastructure facility. "Currently, city devel- even as we speak, Cebu City has embarked on a waterfront deveLopment project which opment is driven by planners and the political constitutes urban renewal. This massive undertaking is possible only because the city has process rather than the economic needs of the integrated private sector investments into this project. metropolis," says Nasser Munjee, executive director, Housing Development and Finance UA: What concretesteps did your city take tofostera livable urban environment to entice investor Corporation in Bombay. Munjee is associated relocation to Cebu City? with Bombay First, a citizen advocacy initia- AG: First of all, the city never stops planning, and this planning process invoLves participation tive for urban regeneration. Future calcula- of not only local residents but also foreign investors already present in Cebu. The city also takes pr g y's Y the initiative to fund infrastructure that meets the needs of a growing metropolis. go awry, Munjee points out, because "the development plan of the city has no connec- tion with what Bombay may need in 20 years in terms of port facilities, railway links, and airports." If cities are to be engines of growth, Bask Data about Cebu City Size: 36,000 has. Populafion: 700,000 (1996 est.) those who live and work in them must play an Located on the island of Cebu in the Central Philippines, metropolitan Cebu has the country'sfastestgrowingeconomy and accounts forclose to 10 percent integral part in planning their future. * of total exports. Approximately 80 pertent of inter-island shipping in the county is owned and based in (Cbu. Patralekha Chatterjee is a New Delhi-based Mayor Alvin Garcia is affiliated with Bando Osmena, a local polifical party that has no nafional fies. Mayor Garcia was first elected in 1995 after serving journalist who specializes in development is- seven years as Vice-Mayor. The major areas of focus of his administrafion are (1) economic development, (2) tourism, and (3) urban renewal. sues. 12 I THE URBAN AGE Help or Hindrance? S the -tpetleedfo finanCehas se sel Dr. Rita Joshi, Mayor, Allahabad, India 3 o es UA Wat incentives haveyou offered theprivate sector to attract them to invest in your city? m RJ: Through a federal govemment scheme, Allahabad has been targeted to produce electricity a from garbage as an altemative source of energy to lighten the urban load from garbage a re We pollution. The municipal corporation of Allahabad invited investment bids, and a leading e acsaid, construction company, collaborating with a British partner, won the bid. The city will provide pointin _ot seven acres of land and will transport garbage free of charge. The project will last six months, t b si,te inthe European and power generation by landfill system will take one and half years, at which time the state n d t in six years, and boat an-expanding economny.. "'The GDP [gross electricity board will buy the power. The city Do s pd irse n s d stomeUc.odutctto Rto- de-Janir6io is equivalent-to will save 25 percent of its present Rs6 million 4percenfthei6Pof all ofa A ica," chimed - ;t annual cost of picking up the garbage and in Rio's ma Lui Paulo Conde. will be cleaner. i b an privatizations of publtili _tiqs- and servicare now seen as -the S6luion to th6usrngeand forfinancing. (rn 1996,-US$725~ . '5 \, t UA: Private sector investment is not neces- mliinub g a o al - ta sarly incompatible with thefinancialgoals p fro Latin Ameic- of cities. However, doyou see the immediate, inisce inclssuef U mllionhichX short-term financial needs of the prvate whe competition to convince sector conflicting with the need for more i t bbonds is on, andthe BarcE . elona and Rlopitches wil surely:be heard time comprehensive development planning for -nagains ties ueueupforendorsement the city's long-term growth? oe ttels. The6 vision of Cities-as, a prdc that must be - ;ga L RJ: Unfortunately, we do not have any fiscal st foeign drt t was d une in autonomy and cannot invite private invest- an limpasshio commentary by0Riccro Petrella, ment. This falls under the domain of the a4 prGfessor- at BlimsCtoi nvriyo state government. Louvain and president of the Lisbon Group. TEco- nomic forces, can buy-a cit and buy that portion of UA: What concrete steps did your city take to foster a livable urban environment to invite givesi," he said,citing the sale of in r rWatercompanies. We are selling our cities to the investor relocation to Allababad? p "-e0 f6rc- e-s'-.-,, e. [bu the clients are not citizeis." RJ: We now have a four-star hotel in Allahabad - the first in the city. When the hotel chain Th 5future forthewrld' largest ities; those wanted to construct the building, it said that it needed a good approach road -the existing is fraought mitngrs trellaid, inhabitantsh one was full of encroachments and filled with potholes. They told us this at the end of the thetagmentat:ionfcitiesinttooaves andhave- ots. budgetary year. Although we did not have the money, we somehow found the resources and Betfween 40 and 66 perent of the world's ctY the corporation built a new road. dwelers have'no access to potable vwater And, except fo ey-, l fte Xf ciiswt ouain ov.ter 1 mlio aeion eegn onriesF. These UA: What have been some of the majorproblems in partnering with the private sector? c-e la basic urbansei csfo poor who RJ: Good roads, water, and fewer labor problems could help make Allahabad a productive may-make up jramorty of each metropolitan industrial city. The power supply (something not under my control) is likewise very erratic; center. "The problem is -no hoWtobe competitive, but how to build4 uphe commnnon wat Of the 8 the city is too congested to permit further building, so all future investment construction must b on the g 2 - = ~~~~~~~~~~~~~~~~~~biihon pieiiktlZhll:bef on t.he gfobein S.eas," be located beyond city limits. The city is further hampered by corrupt business practices. But P noted. by far, my biggest constraint is the lack of functional and financial powers the federal =-r=l ba ajaor l sen- bureaucracy permits. SUS d i atei a global -comon cannot be privatFozed..His plea for a global water Basic Date about Allahbahd Size: 64 square kilometers Populabion: Approximotely 1.2 million. contc h t would cretie o'eoperativei links be- Allahabad is located in Northern India, in the stote of Uttar Pradesh, 800 kilometers southeast of Delhi. tweenhe-rmegaciies, ofthe-world sparked contro- versy Santingo Ivlayor Jam aintexPressed Dr. Rita Joshi is not affiliated with any political party, she wns elected in November 1995 through direct elections to a five-year term, se n er; There are no major industries within Allahabad city limits aithough the city counts several small businesses, including flour and oil mills, cold storage, and ion: Wt= Petretia proposesat oneerewas ie-e n hn ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~W~ bo Pe6iia ptnoj- i Ua 6s6s rrever w4tHi.pe- fin box manufacturing. mented tnineFnrsitWord." He then thrw down the Dr. Joshi has three administrative priorifies: gpunttett Santiago. ie-said, needs $1.5 billion to- 1) Drinking water. Almost 30 percent of slum dwellers do not hove adequate access to potable water. The city hos 2200 hand pumps, of which one- c p tup toprevent cholera. How i third do not function. are weoinancethis - 2) Upgrading the 50-year-old exisfing sewer system burdened and muloncfioning by the rise in populacion. .- c:ge 3) Garbage collection. Only 27 garbage collecting machines are available for a city that generates 350 meic tons of garbage onnually. THE URBAN AGE I 13 Rebuilding Moscow: Boom or Bust? OLGA KABANOVA MO OSCOW. If anything epitomizes the ture of many legislative acts, and too-short mayor's very free hand in the building boom. face of the new Russia, it is Moscow's land leasing arrangements). Their criticism is mainly reserved for Mayor l current building boom. Ultramod- Foreign investors may also sense subtle Yuri Luzhkov's two main ventures and pet ern banks operating under the new, still- xenophobia among city administrators as well. projects: restoring the Cathedral of Christ the unfamiliar free enterprise system can be found Luzhkov has repeatedly stated that he will not Savior, destroyed in the 1930s; and construct- behind the historic facades of old mansions. allow the city to become another Manhattan. ing a huge underground shopping/recreation This surprising, sometimes uncomfortable, jux- He vows that construction must adhere to complex just beyond the Kremlin walls on taposition of new and old perfectly illustrates authentic Moscow stylistic standards and urges Manezh Square, slated for completion by early the essence of Moscow today as this city tries banning contemporary architecture in the cen- September to celebrate Moscow's 850th anni- desperately to transform itself. ter city. Architects, builders, and investors versary. Moscow's embrace of modernization has must revise their plans in accordance with the The cathedral restoration project lacks city- resulted in unprecedented growth as well as new multi-stage approval system of appointed wide support. Many residents see it as an act unforeseen problems. As city officials feel architectural councils of the Moscow Commit- of repentance for the sins of the Soviet regime, their way toward democracy, they have often tee for Architecture and Construction as well which destroyed hundreds of city churches. stumbled over their own bureaucratic feet. as City Hall. Another unfamiliar phenomenon But the mayor was undeterred by such criti- Although they were initially enormously suc- city managers are dealing with under the new cism and by arguments against restoration cessful in attracting outside investment, un- free enterprise system is competitive bidding. made by architects and historians who pointed predictable changes in governmental policy Previously, contracts were awarded to design out that architect Konstantin Ton's work had seemed recently to have put a damper on the institutes with close ties to City Hall, eliminat- been unfavorably viewed even when the inflow of foreign capital. A second major ing opportunities for many Russian and for- cathedral was originally erected in the last bureaucratic snafu has turned out to be the eign architects. century. They further argued that, given wide- carte blanche to oversee the city's spiraling Despite its explosive growth, Moscow's spread poor housing conditions and rampant growth accorded the newly re-elected mayor, building boom has been, from a geographic transportation problems, it was unethicat to Yuri Luzhkov. A third concern of Muscovites standpoint, highly localized and narrowly pre- spend vast sums for a show of contrition. is the rapid rate at which old historic buildings scribed. More than 80 percent of all construc- Nevertheless, the cathedral is rising at an have been razed and the dearth of architec- tion and reconstruction by municipal authori- unprecedented rate, and although municipal tural foresight with which new ones are being ties, private investors, and the nouveau riche authorities claim it is not costing the city a put up. is concentrated in only 10 percent of the city, kopeck, residents are skeptical that funding specifically its historic district. (The outlying for such a gigantic project can come from Is Moscow selling out to foreigners? areas, where the majority of Muscovites live, private donations alone. Yet despite their continue to remain unchanged from 10 years misgivings, most Muscovites believe the ca- For the most part, it is Russian money that ago.) The transformation from yesterday's thedral will enhance the city's beauty. is being funneled into Moscow construction. historic neighborhoods to tomorrow's mega- The shopping complex in the heart of the Despite the fact that investment in Moscow city has given rise to serious concerns, not the city, however, has not received the same real estate promises significant returns (30 to least of which is the dilemma of how to grudging positive response. Years of construc- 40 percent annually for development projects), preserve the ancient European capital and tion has turned the huge square, empty for 50 foreign investors are no longer storming the restore worthwhile architectural monuments years until 1990, into a four-level underground market, contradicting the oft-heard Commu- in the midst of dramatic change. Muscovites shopping and recreation complex decorated nist Party assertion that "Moscow is selling now seem pleased that the initial rampant with lights, arches, balustrades, and bronze itself to foreigners." Outside investors attribute destruction of these districts has slowed some- sculptures depicting characters from Russian their recent caution to the city's political and what. folktales. There is unanimous agreement among economic instability; rapidly changing tax residents that the mall ruins the view of the policies; lack of insurance to cover real estate Popular mayor's unpopular moves Kremlin. investment risks; the complexity of dealing Many regard it as an aesthetic and financial with Moscow's bureaucracy; and an underde- Despite winning an overwhelming 90 per- debacle. Construction was carried out, not veloped legislative base (including lack of cent of the vote - or perhaps because of it- after planning and design were completed, land ownership rights, the contradictory na- Muscovites have felt free to criticize their new but simultaneously - and sometimes even 14 I THE URBAN AGE prior-to it. The original design was overly ambitious from both artistic and economic standpoints. Riddled with miscalculations and 4> repeatedly revised by a succession of planning ' and design organizations, in the end, almost nothing remained of the original plan. Con- struction costs (still unpublished) heavily bur- - -. dened the city budget, and city financiers don't expect to recoup costs in the near future. Moreover, despite Russia's new openness, the project was off-limits to outside review. In . a these times of political confusion in Russia, K. few administrative checks and balances on the ' - 4 . * mayor exist. It is not incumbent on him to convene a public forum to critique a proposed ; 4 -? -- X; project, nor is he called upon to account for _V the construction projects he okays. Given the a re city's snowballing growth, he is free to - or A I'K'L forced to - make decisions unilaterally. . . Such carte blanche may seem astounding, g . ',.''- but the practice, left over from communism, is business as usual in Moscow. Muscovites grew4 accustomed to the fact that new buildings and i monuments would suddenly appear in their midst although they weren't consulted about their facades, locations, or costs. While urban , dwellers have enjoyed more of a say in how their city is shaping up, their voices have too oftenionly been heard as criticisms - after the fact. Things are changing, however, and a b highly visible scandal surrounding anun popular sculptural monument to Peter I demv onstrated that taxpayers are less than thrilled with all the mayor's projects. Although they may not agree with every- thing that earns his stamp of approval, Muscop b it it vites appear to respect Luzhkov's efforts and f attribute the city's awakening from its long slumber primarily to his personal energy. He ~Zt single handedly oversaw the reconstruction of ol Moscow's surrounding highway, which was inE su&h deplorable condition it was dubbed "deadman's highway." meter and the demand for expensive housing the historic center of the city was rapidly of two or three years ago has dropped. But the disintegrating into disrepair and seemed Boom plateaus majority of residents feel that Moscow is at the doomed to fall to the wrecker's ball. Moscow inception of what will prove to be a drastic was considered a hopelessly declining city Laws of socialist policy and economics no facelift for the city, beyond the reach of repair. Now Muscovites longer govern the rebuilding of Moscow, but Despite being fraught with administrative, see that their city is being transformed almost projects are still not yet implemented as they financial, and planning problems, the remark- overnight from a gloomy totalitarian capital to are in developed countries. Administrative able changes taking place in Moscow today a vibrant international city, right before their policies are changing too rapidly to permit continue to dazzle residents of the ancient amazed eyes.U serious predictions of how things will be done Russian capital. For decades preceding the in the future. Some experts believe Moscow's frenzied construction that has consumed the building boom, which is not backed up by city in the past five years, Muscovites resigned reliable financing, is peaking and will soon themselves to the fact that their city was only Olga Kaba nova is an art critic and architec- level off. Rental office space fell in the past expanding outward as new neighborhoods ture columnist for Commersant-Daily and year from US$1,000 to US$650 per square spilled over into outlying areas. By contrast, Russian Telegraph THE URBAN AGE I 15 The New Competitive Benchmarking STEVEN A. WALDHORN AND EDMUND A. EGAN A s private ways of financing public pliers bringing money into the region. Robust telecommunications infrastructure must soon infrastructure are increasingly sought growth most often results from a region's come to be the major enabling technology if _J I by developing cities, more attention highly competitive industry clusters, whose developing cities are to join the international will have to be paid to the strengths of the dynamism generates growth for the whole Intemet-based commerce and industry in the country's underlying economies. When tax gamut of industrial, commercial, residential, next century. dollars or government-guaranteed bonds are and public sectors. Overall, moving to more market-based-in- the financing source, there is less of an urgent need to consider broader economic factors in infrastructure decisions. But when munici- palities seek private financing, both minimiz- ing uncertainty and understanding their long- term ability to pay become of paramount importance. For this, domestic and foreign ei "build itfadtwi c bomedic ie an for publi investors, city planners, banks, and interna- tional lending agencies all must secure - and itrd dopre be able to measure Kthe economic 'funda- G a R which will, in turn, maketheirclfustrseve mentals" of a city or locale. hmueare tn evtsPoesn In recent years, urban and regional econo- mies in nearly all large countries have fol- lowed divergent paths from larger national and global patterns. Southen China has fol- loweditsowndevelopmentalcoursesincee the early 1980s, tied more closely to foreign in- infrastructure clusteent vestment than to the growth of the national market. Indian states such as Kanataka have Several decades of development experi- frastructure financing mechanisms will in- developed technologically advanced indus- ence with failed "build it and they will come" volve both opportunities and risks for public tries far more rapidly than the rest of the projects has demonstrated that an unfocused policy. Privately financed infrastructure tends nation. In Latin America, megacities such as approach to infrastructure development does to be more profitable - and therefore more Sao Paulo and Mexico City have faced espe- not work. on the other hand, the experience likely to be implemented - in developed THE KEY TO OPENING PRIVATE SECTOR partseof-thesworld. Those regions that already INFRASTRLICTURE FINANCING CHANNELS IS FINDING have successful clusters in place will more B ETTER ANALYTICAL TOOLS TO TRACK DEVELOPMIENT readily attract new infrastructure investment, constituting its PARTICULAR REGIONS. competiwhich will, in turn, make their clusters even more competitive and lead to a more vital cially acute growth challenges. The key to of over a decade of cluster-based economic infrastructure cycle. opening private sector infm-structure financing development policymaking suggests that spe- To tap into the vital cycles that appropri 'ate channels is finding better analytical tools to cifically targeted infrastructure investment can infrastructure helps to create, tomorrow's in- track development patterns in particular re- jump-start the competitiveness of a particular vestors will increasingly seek out existing gions. group of industry clusters. Vital infrastructure clusters. Conversely, to prevent a "vicious may be both "hard" - e.g., physical projects cycle" that could make infrastr-ucture invest- Clusters and infrastructure such as highways or telecommunications - or ment less feasible in regions with less competi- "'soft" - including investmnents in technologi- tive clusters, public planners will need to Over the long term, the profit potential of an cal capacity, human capital, or quality of life, guard against the tendency and focus on infrastructure project is closely tied to the Roads and railways have helped develop helping smaller cluster groups grow. competitiveness of the surrounding region resource-based industries in countries such as constituting its market. The competitiveness Indonesia and Venezuela. Multimodal trans- Benchmarking clusters of the regional economy, in turn, is driven by portation facilities have made distribution and the fate of its leading industry clusters - the logistics clusters a reality in Asian entrepots As the demand grows for more robust key export-oriented firms and associated sup- such as Singapore and Hong Kong. And measures of the fundamentals of the urban 16 I THE URBAN AlGE economy, benchmarking the competitiveness of clusters, and the cost and quality of key D o C turef -r infrastructure, will become critical to attracting infrastructure financing. Benchmarks can help = _________= ______=________ identify cities with healthy long-run prospects; they can then be turned to a city's advantage by identifying possible weaknesses that strate- nIy tadotpocerors gic new infrastructure projects could remedy. * t u f 1 s In the United States, the cluster and infrastruc- _ P ture- dimensions shown in the table at right * e o _ t have been used in a series of studies to ef - f pinpoint and compare regional economies. * L n- i=u-. Ini today's economy, industry clusters in regions around the world are in a state of Cfute cive n-s: evolution. The value chain associated with Growthin ploymn6t, outut averag ages relative to regional tas each cluster - the series of production steps * 4-Absoute s-ie in -ejmpoyet, odut,- W prodUctivity from research and development through manu- facturing to distribution- is constantly chang- Related inftastn =turei technology ing in response to new technology and mar- b* oncentrationin scentific and techni c-al labor kets. At the same time, the increasingly global : esac and develp expenditures character of production systems means that , Patents regions are also continually changing the pieces of the value chain in which they infrast bcture a capital specialize. .i = i:000 - specialize. * ~~~~~~~Educational attaiinment For example, Singapore's strong perfor- = S o loa job tr industries mance between 1965 and 1990 was primarily * due to the city government funneling funds into value-added infrastructure for its industry R elte - m tcttke: si- I natc t :e clusters, including sea and air transport facili- * Aro v fo p n a ties, education, technology, and a modern - Commute time system of industry regulation. As a result of - TVruk delay this early, ongoing investment into Singapore's *- Pubic=transit use areas of need - such as light manufacturing and distribution clusters - it has now become el ted infrastr-cte busnes climate a more sophisticated economy with public, * Labor -aws private, and international infrastructure in- * Wage R= aes vestment supporting such new clusters as * TaxBrden information technology. As neighboring Ma- laysia has in recent years sought to move its Souore. Wadhomand Ega-.- eccnomy in similar directions, it has started shifting investment into similar infrastructure, including projects to improve the quality of life * telecommunications and other informa- private infrastructure investment which only in Kuala Lumpur as well as building a new tion technology capacities advanced regional economies are capable of Multimedia Super-Corridor. In general, when a region's clusters move supporting. Investment in each of these types Infrastructure planners in the future will up the value chain, it often shifts emphasis of infrastructure can span the public and need to consider the ongoing feedback be- from a reliance on "hard" to "soft" infrastruc- private sectors, but all share a common depen- tween a region's competitive clusters and the ture. This is because high-end jobs in a given dence on regional competitive clusters. G existing and potential provisions of hard and cluster tend to be the most knowledge-inten- soft infrastructure, including: sive, and require specialized skills and lead- • technology programs; ing-edge technology. Such skilled workers StevenA. Waldhornisaseniorvicepresidentat * technology parks; are in great demand and want to live in ICF Kaiser International Inc. and has super- * human capital improvement; locations with cultural amenities, clean envi- vised clusterstudiesfromMalaysiatoMorocco. * physical infrastructure, including interna- ronments, and social stability. This evolution EdmundA. Egan is a senior associate with ICF tional sea and air ports; and can open up opportunities for many types of Kaiser's Economic Strategy Group. THE URBAN AGE I 17 Fiscal Autonomy: Building it in or Building it up? LUCY CONGER M E EXICO CITY. If newly elected construction and social infrastructure pro- support priority public works projects. One of Governor Cuauhtemoc Cardenas grams. This last includes, "expanding the his first foreign trips soon after his July 6 is to make good on his campaign subway, processing clean water, and building election was to New York City where he and promise of greater fiscal autonomy for Mexico drainage pipes to release the torrential rains," his team met with bankers and investor-s to City, he must first dig the city out from under says Pascoe. promote the idea of private investment in the a mountain of rubble - both economic and Perhaps most significantly, Cardenas also capital. "We had a positive response," Pascoe asphalt. One of his first acts when he takes pledged to find avenues for financing infra- reports. office on November 1 will be to conduct a careful review of the infrastructure mega- projects instituted by his predecessors. One of these will undoubtedly be the project that cost the country the most in terms of money and image - the Mexican toll road debacle. Al- though not direcdy the fault of the former _ Mexico City governor, some of the financial t fallout from the problem has fallen into the city's and Cardenas' - lap. A civil engineer, Cardenas was elected on a Democratic Revolution Party (PRD) platform of increasing the city's financial indepen- dence. As one of the largest and most popu- lated urban areas in the world, Mexico City, currently contributes more to the federal gov-tl S ement than the city gets back through revs enue sharing. Cardenas plans to change this economic equation to peurit the city to funnel h ciliitfu.rg nm 'd tizo oes more of the funds it generates into sustaining p itself instead. His plan is for the city to collect bel taxes and retain them rather than passing the gathered taxes onto the federal governmnent, - which has traditionally taken its bite, before E~:- returning reduced revenues to the city. Ac- cording to Ricardo Pascoe, PRD International Affairs Secretary and a member of the transi- structure other than raising taxes. Although he As with other developing cities around the tion team, "The discuission about fiscal feder- has already taken steps in that direction, he world, the municipal government faces severe alism will be a major issue in Congress inl the faces an uphill battle. The nearly ruinous limitations on its capacity to channel funds next few months." public failure of the toll roads project, which into public urban infrastructure. Already US$3 The governor-elect's camnpaign promnises was privately financed by Mexican and foreign billion deeply in debt, the city will assume the included: (1) restoring the historic colonial investors, has made the private sector ex- additional burden of education and public area to build a long-planned hotel-cum-busi- tremely wary about investing in Mexico and health administration as part of the new fed- ness center; (2) erecting tourist facilities in the her capital city in the future. eral government's decentralization process in south-city; (3) funneling funds into textile and Nevertheless, Cardenas has taken his first 1998. Along with the added responsibility, apparel assembly plants; (4) strengthening the tentative steps toward building solid partner- however, comes the budget and staff for supervisory capacity and efficiency of the state ships with potential investors for his vision of administering them, which may give Cardenas in development efforts; (5) ensuring that bid- urban independence. In the months before a bit of leeway in channeling funds to his pet ding auctions are run without favoritism; and assumning his post as governor, he and his social programs. (6) stimulating employment, especially for transition team instituted a financing search to In addition to the low level of investor trust IS I THE URBAN AGE engendered by his predecessors, Cardenas 1992 project's grandiose aim was to link Mexi- agencies went into debt on the strength of has his work cut out for him by his own can and North American markets in a grid of groundless projections that the toll roads would country's governmental constraints as well. rnodern superhighways that would criss-cross be heavily trafficked and hugely profitable. Another stumbling block for Cardenas on the the republic and connect Mexico's capital to The government's second fatal mistake was route to greater financial independence will the far outlying areas. In five short years, in designing a guaranteed traffic flow, called be the policy mandating that Mexico City must Mexico raised a whopping US$15 billion to the "Aforo,' which allowed Mexico to launch obtain authorization from the federal govern- build 3,600 miles of road, outpacing and the highway projects in international capital ment before municipal authorities can launch outdoing every other highway program in the markets. This guarantee received a warm bond issues and take out loans. The new world in the last 50 years. welcome on Wall Street where bankers treated governor will thus be unable to move a Today, the outer loop remains unfinished it as a sovereign risk. In August 1994, Standard financial muscle without first getting a thumbs- and incomplete, missing its last vital link, The & Poors made the landmark decision to give up from a cabinet minister. interstate highways are phantoms, nearly empty the Mexico-Cuernavaca road a high invest- Curdenas' method of obtaining private in- stretches of asphalt abandoned by tourists and ment grade of 'Ar." "This is the first time in the frastructure financing may not yet be com- truckers alike who are unable or unwilling to world that a highway outside the United States pletely ironed out, but he is at least well aware pay tolls that are among the highest in the received an investment grade," notes the fi- of the approach not to take. He has stated world. When the ring roads and highways nance minister. publicly that he has drawn a vital lesson from went bust, they nearly took Mexico's top bank Problems were compounded by a poorly structured US$207 million bond that was based not on the peso which would actually pay the tolls. but on dollar denominations. When the value of the peso dropped bv half in 1994. the plunge in revenues priced the roads out of local drivers' ability to afford them. Truckers and commuters had no choice but to boycott the already overpriced tolls in favor of free routes. The bidding process compounded a situa- tion already mired in problems. The govern- ment-provided specifications were hastily and poorly developed. Cost estimates andl details to guide the construction of each road were absent. During the construction phase. "every single risk materialized," said a financial ana- lvst close to the project. Road specifications changed, cost overruns piled up, and pro- ~.. ~ .~ . 2 jected estimates doubled. in fact, cost over- runs are a classic sign of corruption in Mexican - . r. -' - ~~~~~~~~~ . ' ' - ~~~~ government-backed construction projects. Such ' ..~~~ a stigma may be another reason Cardenas is ~~~~~1 ~~~~~~~~~~~, ~~~~~~appealing to private investors outside the '- government for infrastructure assistance in the city's future. the toll road fiasco that disgraced former and three giant construction firms down with The toll road legacy has cost Mexico not President Carlos Salinas de Gortari, under them. Said one source, It was a political tionly mony butesomen meau Poftseputa- whose aegis the spectacular failure was born program without an economic underpinning."' ciers no' think twice and look closely at and died. In August, Cardenas told construc- One of the key errors was that the investment o ortunities that cross their desk tion industry entrepreneurs that the private government's optimistic predictions of the fo sector must be more rigorous in its analysis robust traffic flows that would throng the from the country According to a former First and that the government will provide hard highway were unsupported by hard data. b P Y, data and solid, substantiated figures of cost "There were no reliable traffic studies, no like the toll roads and everyone shuns it." and revenue projections prior to any bidding detailed project plan," said another source. in the future. Traffic studies were conducted in three to five As most city taxpayers are now aware, the months as compared to U.S. records of road Lucy Conger reports on Latin American eco- toll road disaster, for which they are still use over an 18-month period. Nevertheless, nomic and financial topics for Institutional paying, was fraught with enormous, avoidable the federal government, construction firms, Investor magazine an5d Emerging Markets problems at every step along the way. The Wall Street investment banks, and credit rating newspaper. 19 Urban Appeal: What Investment Banks Bank On LESLIE CARPER oseph Taylor is first vice president and to define the probability of transfer risk. The general obligation pledge by local govern- head of Sovereign Research at Merrill sovereign rating also acts as a ceiling for the ments is rare because of the absence of a legal Lynch. A 20-year veteran in observing project rating. However, in rare circumstances, structure to permit them. From an investor's sovereign and local governments, he is also a the rating agency may assign a higher rating. standpoint, this type of municipal financing fixed-income analyst in financial markets. The simplest way to minimize construction may carry too high a risk unless local govern- risk is to finance that phase with a bank ments have a history of effective budgeting, UA: What can city governments that are seek- syndicate and refinance with the proceeds of strong financial accounting and control, and ing infrastructurefinancing do to inspirepri- a bond issue once the project is generating autonomy over tax rates. vate sector investor confidence? And, con- revenues. Economic viability risk refers to the versely, wbat risky conditions are off-putting to degree of assurance of a completed project's UA. Can investment banks negotiate a fine investors? revenue stream. For example, is it insulated line between short-term per-project investing from competitive price pressure or can it react that has in thepast inadvertently exploited city JT: Investors in the capital markets are in- nimbly? Is there technological or regulatory governments and citizens and the new holistic creasingly accepting the risks of financing risk? Covenants in toll road financing usually approach that has the potential to also inad- infrastructure. Traditionally, such financing require that the issuer make timely filings for vertently exploit the city by "buying" it with was almost exclusively done by bank loan rate increases to repay debt service. Off-take Western bonds? syndicates and private placements. As re- risk means that the entity taking the product cently as three years ago, one could state with or service is both capable and likely to con- JT: The investor's interest is in being repaid some confidence that, outside of North America, tinue paying debt service. Lastly, the curreny principal and not in "buying" control of the almost no project finance was undertaken in risk is a measure of whether the project government or directing it to finance projects. the capital markets. Since then, bond financ- manager will be in a position to pay even if General obligation bonds have the advantage ing has become more commonplace in devel- there is a devaluation. of local government flexibility since the secu- oping countries and falls into several major rity of general taxing power releases govern- categories: (1) energy projects primarily for UA: The two latest theories in urban infra- ment from the constraint of specific purpose electric power facilities, (2) oil and gas pipe- structure investing take distinct new up that generates adequate revenues. On the lines, and (3) transportation projects such as proaches a more holistic one that promte contrary, project finance must be linked to toll roads and railroads. oacberm holistic one tmut as certain projects that have a sufficient revenue long-term investing in the community as a sremtrpadb. By the end of 1996, Standard & Poors had wsole, and onethatseekstofosterpublic- assigned 76 ratings to US$21.4 billion in out- pwivatepartnersips Doyou see these twopnew A very successful Western model is the standing "project finance" debts, double the tpeories as afuture trend? "bond bank," which offers greater latitude in amount from mid-1995. As large as they are, selecting which projects are financed. Many these numbers still fall far short of the stagger- JT: A more holistic approach is very attractive worthwhile investments, such as education ingly huge US$500 billion estimate required to since capital costs are more evenly shared and urban transportation, lack revenue sources. meet infrastructure needs over the next 10 among an entire community. In some ways, Under the bond bank method, a central gov- years in developing countries. developing countries may have learned the emient agency issues debt with a sovereign What has changed? Investors and issuers are lesson of privatization too well: that every guarantee. The proceeds of this debt fund a more savvy in calculating the risks and projects project must pay for itself. This approach bond bank that originate loans for capital arc structured to minimize risk sufficiently to could, in fact, hamper the development of projects to local governments. Because a achieve an investment grade rating of "Baa3/ infrastructure that cannot produce an immedi- sovereign's ratings are higher, its market and BBB-." While each project has different char- ate payback. One example is the state-built borrowing costs are usually lower. Its loans to acteristics, there is a discrete list of principal toll-free U.S. highways that operate from na- local government are lower than the local risk factors that must be properly understood tional and state taxes. General municipal ob- government could get based on its credit before any project will have easy market ligation bonds, common in the United States, strength. A variation on the bond bank is a access: (1) sovereign or political risk, (2) are rare in Latin America and Eastern Europe, cooperative association in which local govern- construction risk, (3) economic viability risk, and virtually nonexistent in Asia without sov- ment contribute equity are shareholders and (4) off-take risk, (5) flow of funds risk, and (6) ereign support. The advantage of this type of guarantors of its debt. The agency also has a currency risk. financing is that local governments have dis- higher rating than any of the individual local The rating of the country where the project cretionary power over the spending and can governments to issue debt at lower rates. O is located is an indication of the degree of direct it to essential services that may not pay sovereign risk. Essentially, the rating attempts for themselves. However, debt secured by a 20 I THE URBAN AGE I ^ | _ _ r i v F F r X | l | " s b #' # Bi 11 WB * = s f,a,! X Ar,, * Ai1 R :3 Wi S / r ]||; _ W-t .! K wt *S - i ean ,. Wv __ ; : - WE *---+SS4w wS  _@ '1L @ > < _OR-__ _r>Fat