Ed note: This article is part of a short series on financing smart city infrastructure, sponsored by Siemens. Please join us for a live Google Hangout with Siemens, PwC and Berwin Leighton Paisner on June 12 at 10 a.m. PT/1 p.m. ET, where we’ll talk about this issue live!
“Tomorrow’s climate needs will require [cities] to build infrastructure that can withstand new conditions and support greater numbers of people,” said former World Bank President Robert Zoellick.
Indeed, cities across the globe need to construct new transit systems, roads and utilities – or modernize their aging infrastructure – to adapt to the changing climate, reduce carbon emissions and support growing populations. But an important question remains: How will cities pay for such projects?
A new report, “Investor Ready Cities,” compiled by engineering company Siemens, professional services network PwC and law firm Berwin Leighton Paisner, aims to help cities think about new ways to fund their infrastructure projects – by taking a fresh look at traditional funding models like taxes and user fees and by attracting private investors.
For example, the report points to the United Kingdom’s Milton Keynes Tariff as an innovative take on the long-established model of local governments charging levies on new commercial development in their jurisdiction. In the U.K., cities cannot borrow money against projected revenue from new development fees used to fund community infrastructure projects. Local U.K. authorities circumvented this restriction by establishing the Milton Keynes Tariff, essentially a “roof tax” on new developments, and, with approval from the country’s finance ministry, collaborated with the national housing and communities agency English Partnerships (EP).
Through the partnership, EP “pre-funds” infrastructure projects – the expansion of transit, highway, education and health systems to rapidly growing urban areas – prior to receiving the tariff’s returns. However, the report reminds cities exploring such development levies that setting tariffs too high could stifle future development; cities must engage developers in their process to establish such a fee.
“Investor Ready Cities” also calls out tax incremental financing (TIF) as a way to fund urban infrastructure projects. TIF creates additional tax revenues for governments by expanding the base of taxpayers – instead of increasing the current tax rate or establishing additional taxes – or by setting up a tax collected only within the area directly affected by the investment the TIF will finance, called the TIF “catchment area.” New York City created a TIF structure to fund the extension of the city’s subway system to Hudson Yards, a former industrial site and the least developed part of Manhattan, forecasting that the connection with existing transit and the rest of the city would bolster commercial and residential development in the area. Investors in the half-square-mile TIF area required the city to earmark a portion of its property taxes for investors – in case the TIF did not create as much revenue as projected to pay back financers. The city also agreed to cover interest on the TIF bonds for the same reason.
In order to create revenue to pay back investors in a TIF model, the report notes, cities must take on a project that creates value – for example, one that leads to an increase in development, such as in the case of Hudson Yards. These types of infrastructure projects are “complex, extensive and time-consuming,” so government officials should make sure their public agencies operate as “streamlined, decision-making structures” before they proceed with such a financing approach, the report says.
Cities are increasingly turning to user charges like bridge tolls as a way to fund infrastructure projects, the report also points out. This revenue stream often seems fairer to community members, as it offers a direct match between the population using the service and the population who pays for it. User charging cannot only raise funds for infrastructure improvements, but also change citizen behavior and achieve greater policy goals, as in the case of Tel Aviv’s dynamic tolling system.
In 2011, the city set up a new “Fast Lane” on its heavily congested Highway 1, the road to the Tel Aviv airport, as well as video cameras and sensors along the highway to measure traffic volume. Drivers who want to avoid traffic can pay to enter the Fast Lane, but the toll changes based on congestion: As traffic volume and demand for the Fast Lane increase, so does the price – publicized to drivers on signs along the highway. The lane encourages carpooling by waiving the toll for vehicles with three or more passengers and supports public transit: Part of the toll revenue funds a commuter bus that is free to all passengers. Because the Fast Lane prevents stop-and-go traffic, even at rush hour, it allows drivers to maintain optimal speeds and prevents carbon emissions.
However, “Investor Ready Cities” reminds cities to clearly connect a user charge with a specific, new or additional service; users do not like to pay a fee if they feel that service was funded by existing taxes or charges.
In addition to such innovative funding and financing options, governments should also remember to look for ways to streamline their current operations, the report goes to say, to free up resources they could invest in new projects.
Cities clearly have many options to consider when attempting to raise revenue for infrastructure projects. As climate change’s impacts unfold and populations increase – putting a strain on cities and their aging infrastructure – cities that have the creativity to make the most of these funding models will be the ones that thrive.
“A city’s ability to deliver the necessary urban infrastructure for sustainable and effective growth is intrinsically linked to its ability to attract and retain capital, both in terms of human resources and talent as well as financial capital,” the report says. “At a time of intense competition between cities, the ability to attract such mobile capital will define success.”
Passionate about both writing and sustainability, Alexis Petru is freelance journalist based in the San Francisco Bay Area whose work has appeared on Earth911, Huffington Post and Patch.com. Prior to working as a writer, she coordinated environmental programs for Bay Area cities and counties. Connect with Alexis on Twitter at @alexispetru