Investor Ready Cities: From London to Rio de Janeiro

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! RSVP Here.

Yesterday, we went over a few success stories told in timely and valuable report from Siemens, PwC and  Berwin Leighton Paisner. Entitled Investor Ready Cities: How cities can and deliver infrastructure value, the report examines in some detail how cities that have “the appropriate foundations of institutional stability can leverage financial mechanisms to their advantage to help deliver the infrastructure that is so critical to their future.”

Here are three more inspiring snapshots that tell the story of cities moving towards a more sustainable future.

Medellin

The second-largest city in Colombia, with a population of nearly 2.2 million in 2005, saw a threefold increase in population over a 20-year period. This came at a time when governance and power was concentrated at the national level and control of financing was distributed to nationally important projects. As a result, informal settlements appeared on the city fringes and up onto the precarious hillsides that surround the city, leaving residents disconnected from the commercial heart of the city and the employment opportunities they had sought to access.

“Poor infrastructure and lack of opportunity led to Medellin experiencing some of the highest levels of crime endured by any city across the globe,” according to the report.

In 1991, a new constitution increased the influence and powers of municipal governments. For Medellin, this meant the power, authority and responsibility to tackle these issues through strategic intervention that was to literally change the city landscape.

Starting in 2000 and over the next 10 years, a succession of mayors created and implemented an integrated urban development plan. The vision encompassed a comprehensive strategy that sought to tackle issues facing the most deprived neighborhoods of Medellin and to identify solutions to the growing problem of poor connectivity, education and governance, and the use of public space. PUIs (Integral Urban Projects) were identified, introducing major infrastructure projects; these projects also provided an anchor for local development and a catalyst for the enhancement of public and green space. The plans sought to recover the most marginalized areas of the city, in an effort to invigorate local communities and re-engage the dispossessed.

The first major infrastructure project to take place under the PUI was the gondola system ‘Metro Cable, Linea K.' The cable car, opened in 2004, stretches 2 kilometers (1.2 miles) into the neighborhood of Santo Domingo -- creating a link directly from the city center to one of the city’s poorest areas. Travel times of up to 2 hours were reduced to 7 minutes on the cable car.

“As a transport solution success, it is worthy of recognition in its own right, but when delivered in conjunction with the urban development plan, the story is one of social mobility and revived community integration that is far greater than the transport story alone,” the report says. Cable car stations were made places of social integration through IT training and an adjacent library.

By connecting communities, the report continues, there has been a significant decrease in the levels of crime, with violent crime reduced by nearly 80 percent. “Commercial activity is said to have increased by 400 percent, and new businesses have developed along the route of the cable car, creating employment for less skilled workers.”

Medellin has demonstrated the “benefits of applying the ‘correct’ solution for its city, which as a consequence has made Medellin one of the most vibrant and commercially active cities in Latin America.”

London

Transport for London (TfL), a statutory body that was set up in 2000, is responsible for the planning, delivery and day-to-day operation of London’s public transport system. Its main mission is to provide or secure the provision of public transport passenger services to, from or within Greater London. TfL’s largest current infrastructure project is Crossrail, which involves construction of 21 kilometers (13 miles) of new twin-bore tunnels under central London, construction of nine stations and procurement of new rolling stock. Services are expected to start in 2018.

Each train will carry 1,500 passengers, with peak services of 24 trains per hour in each direction. The projected cost is pegged at £15 billion ($25.2 billion), and it is currently the largest construction project in Europe. Funding at that level requires a variety of channels: More 60 percent of Crossrail’s funding will come from Londoners and London businesses, through fares. Also, “value capture schemes” have been set up: compulsory developer contributions as part of a Mayoral Community Infrastructure Levy; and a more generally levied Crossrail Business Rate Supplement. There will also be a grant from the central government. Financing has included a loan of £1 billion ($1.7 billion) from the European Investment Bank to TfL, one of the largest loans the bank has ever made.

“The success of TfL is a good example of the benefits of enabling holistic city wide control and decision making over the most important modes of transportation,” the report concludes, because efficiency, evolution and innovation are thus enabled. “The model of a transport body with cross-modal powers, the ability to raise finance directly in capital markets and answerable to city rather than national politicians is one that has broad relevance to major cities.”

Thameslink is the key north-south rail corridor running through central London and the South East of England; it carries more than 50 million passengers per year. Along London’s key commuter lines, increasing demand and aging infrastructure have contributed to overcrowding and delays. “Because of this, improving the quality of London’s key rail services, such as Thameslink, has been highlighted by a succession of U.K. governments as a top transport priority,” the report notes.

In 2005 the DfT took control of control of Thameslink as sponsor in order to manage the delivery of needed upgrades. Two years later, DfT laid out its plans for the Thameslink Program as part of its wider rail infrastructure and funding policy initiative. This included £6.5 billion ($10.9 billion) worth of commitments to upgrade the Thameslink infrastructure and procure new rolling stock through the Thameslink Rolling Stock Project (“TRSP”).

Following a competitive bid process, the TRSP contract was awarded to the Siemens-led Cross London Trains Ltd. consortium last year. To finance the project, a Private Finance Initiative/Public-Private Partnership (PFI/PPP) arrangement for lease of the rolling stock and the two depots was put in place.

These leases, together with the maintenance of the trains over a period of 20 years, have an aggregate contract value of £2.6 billion ($4.4 billion) in present value terms discounted to 2013 prices. Siemens Financial Services and its Cross London Trains consortium partners (3i Infrastructure and Innisfree), the DfT, and a syndicate of 19 banks worked to close the deal.

Financing major developments of rail infrastructure “presents many complex challenges, requiring significant planning, a well thought-out solution and skilled execution teams,” the report says. The conclusion: “Managing multi-stakeholder partnerships is critical for major infrastructure projects in order to develop realistic project-delivery milestones and build robust contingency plans. Furthermore, coordinating these partnerships so that interests are closely aligned and communicated is vital to keeping major infrastructure projects on-track throughout financial negotiations.”

Rio de Janeiro

Rio’s port area was traditionally a dynamic area that connected the city to international trade routes. That all changed starting in the 1970s, and the port entered the 21st century with vast stretches of underutilized and degraded areas, poor infrastructure and sanitation, and derelict historic buildings.

Enter the $3.5 billion Porto Maravilha (Port of Wonder) project. It is “central to the regeneration of Rio’s physical and social infrastructure,” the report says. By regenerating the port, Rio is using the only centrally located area available for substantial development while also refocusing commercial growth back into the city center and supporting greater transport integration.

When completed in 2016 the port will have 1,235 acres of modern infrastructure and mixed-used real estate. This will be accomplished through the use of CEPACs, or Certificates of Potential Additional Construction, that are issued by municipalities. They are used to finance building projects and infrastructure development within a particular area through sale of real estate development rights. Within Porto Maravilha, Caixa Economica Federal (CEF) — the Brazilian Federal Savings Bank — took up all CEPACs issued from Rio City Hall. CEF did this through a specifically created fund – the Porto Maravilha Real Estate Investment Fund (FII), which is able to sell CEPACs directly to developers or otherwise bring engage them for joint venture purposes “both to help make a market and to capitalize on market buoyancy.”

The report concludes that Porto Maravilha “is an excellent example of an holistic approach to city-led regeneration and infrastructure delivery,” because it combines urban project legislation; land use zoning; real estate tax breaks; creation of an urban development company, real estate investment fund and PPPs; strategic use of public land and tradable financial instruments.”

As a result the City of Rio is able to use new and existing assets to leverage private investment; to stimulate regeneration through strategic infrastructure investment; to direct of development activity; and to share in value uplift through strategic land disposal, joint ventures and CEPAC trades.

Image credit: Flickr/sico_activa

Join Triple Pundit 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 how to finance cities of the future.