There Are New Ways to Invest in Thriving, Inclusive and Livable Cities

  • Non-motorized and electric transport are improving local air quality and citizen health.

  • Transit-oriented development is optimizing land use and public transit investment to counter traffic congestion and urban sprawl.

  • Clean, onsite energy and building efficiency are reversing inefficient and polluting energy consumption.

Promising Solutions Exist, But They Are Not Deploying Evenly and Fast Enough

Financing Sustainable Cities: Current Challenges and Innovative Approaches

Finance is a crucial ingredient for sustainable urban development. In an environment of constrained municipal budgets, finance took center stage when international leaders gathered to support the UN New Urban Agenda, the Sustainable Development Goals and the Paris Agreement. While cities have a growing range of sustainable investment choices appeal to urban residents, building new or replacing existing sustainable infrastructure is a capital-intensive process that requires substantial upfront investment.

Why Aren’t Investments in Sustainable Urban Solutions Happening Faster and at Greater Scale?

While investment capital and demand for sustainable solutions are in good supply, according to the New Climate Economy, structuring successful sustainable projects can be a complex, time-consuming process. The challenge is that supply and demand are often mismatched: cities’ sustainable infrastructure projects (the “demand side”) are not seen as viable investment opportunities by the investor community (the “supply side”) as they are too small, or too risky relative to expected returns.

This is particularly pronounced in emerging markets, where such investments are critical. The mismatch results in too few “bankable” projects, or investment-ready projects that are attractive enough for investors.

Financing Sustainable Cities: Current Challenges and Innovative Approaches

  1. Sustainable projects often involve novel, non-traditional infrastructure assets that fall outside the traditional infrastructure model and therefore have different, sometimes riskier, investment profiles;

  2. Key stakeholders are not familiar with alternative infrastructure and service solutions, and lack a common language and space for learning and dialogue on locally suited approaches; and

  3. Investment environments, especially policy and regulatory frameworks, are not yet adapted to sustainable approaches.

Business Models are Shifting Towards Sustainability

Successful sustainable urban solutions often involve shifts in existing business models. For example, by purchasing or leasing solar panels, energy users are changing their relationship with energy utilities and can be paid for the power they produce, or earn money from leasing their roof space to a solar company. In urban mobility, travelers can choose to pay a fee for sharing cars and bikes, rather than owning them. Even housing choices are changing as many urban residents are increasingly choosing to live close to public transit over auto-centric suburban living. Such “transit-oriented development” improves people’s access to a variety of services, amenities and job opportunities and helps keep the costs of public infrastructure down.

Finding new business models, like those mentioned previously, to accelerate and scale up investment in sustainable cities will hinge on answering four key questions: what to invest in, how to pay for it, how to mobilize investment capital and how to structure implementation. These questions matter for any organization delivering a product or service, whether public or private.

To best answer these questions, three key stakeholders need to develop sustainable solutions together. City decision makers, service providers and investors need to build a shared understanding of the challenges and opportunities of different business model choices to ensure cities meet their service objectives, infrastructure and technology providers satisfy their bottom line, and financiers make a return on their investment.

Overcoming the Investment Gap

Cities are uniquely positioned to deliver sustainable solutions that can positively impact the lives of over half the world’s population. Promising urban service innovations that already exist still need to scale up to their full potential for cities to truly realize the benefits of sustainable urban development. The successful implementation of ambitious investment programs requires shifts in traditional business models that bring public and private interests into alignment. New approaches to developing sound project pipelines are needed to smooth and accelerate the early stage investment process where important knowledge, capacity and interest gaps can exist.

Bridging the Gap Between Ideas and Implementation

Many sustainable urban projects stall at the idea phase due to a lack of funding, limited internal expertise to pursue new business models, or challenges in coordinating across different public and private sector agencies. The Financing Sustainable Cities Initiative is helping to address each of these challenges to bridge the gap between ideas and implementation.

What We Do

FSCI’s main components:

  • the development of a peer-to-peer learning community,

  • the provision of technical assistance, and

  • the delivery of an online engagement platform.

Through these activities and our research on business models for sustainable urban solutions, FSCI identifies the ingredients of sustainable urban projects around the world and shares the experiences of cities and investors on what to invest in, how to pay for it, how to mobilize investment capital and how to structure contracts and institutional frameworks.

Where We Work

FSCI is a global initiative, currently providing support to cities in: South Africa, Brazil, Colombia, Argentina, Chile, India, Mexico, New Zealand, United States, UK, France and Norway

We Work on Several Technical Areas in Land Use, Urban Energy and Mobility:

  • Bike-sharing systems

  • Bus rapid transit systems

  • Low- and zero-emission buses

  • Efficient new buildings

  • Municipal building retrofits

  • Transit-oriented development

Four key areas

  • Bike-Sharing Systems: A Last-mile Solution for Cities’ Transit Networks

    Cities increasingly recognize the impact bike-sharing systems can have on their broader mobility landscape. In recent years, bike-share has gone viral around the world, with 1 million shared urban bicycles in operation in 2015. The trend started in Europe, expanded to North America and has recently spread to cities in Asia and Latin America.

    Bike-sharing systems are a mode of active mobility used by cities to promote integrated transport systems. Bike-sharing systems allow people the ability to pick up bicycles in one location and return them in another.

    Challenges

    • Financial sustainability: Operational cost of bike-sharing systems typically exceed revenue from user charges, which makes it necessary to diversify sources of reliable funding.

    • Accessibility & safety: Achieving optimal usage of the system requires a safe cycling environment and a widely accessible system that encourages lower-income ridership.

    • Service delivery structure: As a relatively new form of urban mobility, there is still uncertainty as to the best balance of responsibilities between the public and private sector, including ownership and operation.

    Benefits

    • Last-mile connection: Bike-sharing systems can increase the reach of public transit to cover the beginning or end of individual trips.

    • Reduced emissions: Non-motorized mobility improves local air quality and reduces global greenhouse gas emissions.

    • Traffic relief: Increasing bicycling through bike sharing options for short trips helps relieve overburdened roads and motorized transit systems.

    • Public health: Activities like bicycling can reduce the risks of heart disease, obesity and diabetes, which have been linked to sedentary lifestyles.

    What Business Models Are Cities Using?

    • Over 500 city examples of bike-sharing systems identified

    • 30 city bike-share business models analyzed

    • Practitioner and expert interviews with EnCicla Medellin, Citi Bike NYC, B-Cycle, ECOBICI (Mexico City), Capital Bikeshare Washington D.C., among others.

    Supporting City Initiatives

    • Colombia | Financing Sustainable Cities Initiative, in collaboration with the Development Bank of Colombia (FINDETER) and the Ministry of Transport of Colombia, provides technical assistance and capacity building to the various Colombian cities in understanding and structuring the business models for their bike-sharing systems.

    • India | Thanks to the Smart Cities Initiative, several Indian cities are now planning city-wide bike-sharing systems. FSCI is supporting the city of Bhopal in structuring their bike-sharing system business model. The launch of this fully automated bike-sharing system of 500 cycles spread across 50 stations is expected in April 2017.

    Key Findings for Bike Share System Business Models

    • What to invest in? Scale & access are key factors of success: Planning bike-share systems at a scale that responds to the city size and is easily accessible is crucial to achieve the desired ridership. Balanced and equitable station placement, coupled with integration with the public transit system, is highly desirable.

    • How to pay for it? Blending funding from different sources: Revenue from user charges is typically complemented with other funding sources, such as selling sponsorship, advertising rights, local environmental taxes and parking fines. Many cities consider bike-sharing systems within the broader public transit system and earmark some public funding to cover operations.

    • How to mobilize investment capital? Limited need for public sector finance: Commercial loans and guarantees are used in some cases, but generally bike-sharing systems have relatively low upfront capital investments compared to other urban mobility options, so it is unlikely that cities will incur debt when choosing bike-sharing systems.

    • How to structure implementation? Public-private role differentiation: Like other public mobility services, city administrations are developing legislation (bicycle plans, traffic regulations, etc.) and providing infrastructure, like bike lanes. Private entities are often in charge of operations and revenue collection, where contracts vary between bundled contracts and those that separate the provision of equipment, bicycles and software provision, to allow for future changes in technology or usage patterns

  • Efficient New Buildings: Avoiding Resource-Intensive Lock-in

    Buildings consume one-third of the world’s energy and use large amounts of other resources, including materials and water. Cities worldwide are taking action to make new buildings more resource efficient. Increases in new building stock is expected predominantly in emerging and developing cities, where most of urban growth is expected. These cities need to find creative ways to drive real estate development toward delivering efficient new buildings.

    Efficient new buildings can combine a range of different high-performance measures that increase resource efficiency, including efficient exterior envelopes and building materials and onsite equipment, such as renewable energy, water, waste and other efficient building systems

    Challenges

    • Financing challenge: New efficient buildings often require higher upfront investment in design and technologies than conventional new buildings. This can mean longer payback periods, which may not fit well with standard financial products for real estate investments

    • Lack of data and monitoring: There is limited data on the performance of new efficient buildings to enable a precise calculation of lifecycle return on investment, including occupants’ impacts.

    • Disconnected value chain: Tenants, who benefit from savings accrued from efficient new buildings, may be unable to communicate their preferences for lower operational and maintenance costs to developers ahead of construction.

    Benefits

    • Resource efficiency and cost savings: New efficient buildings are associated with significantly reduced energy use (and therefore also greenhouse gas emissions) and operational cost savings.

    • Local jobs: Increased demand for efficient buildings can stimulate employment in the local construction industry.

    • Occupant and resident wellbeing: Comfort and productivity for building occupants is improved, including through reduced indoor and outdoor air pollution.

    • Property values: Both rental and sale price can be positively impacted over time.

    What Business Models Are Cities Using?

    • Over 66 cities with building efficiency regulations identified

    • 19 business models analyzed in 12 countries

    • Expert and practitioner interviews on efficient new building implementation

    Supporting City Initiatives

    Financing Sustainable Cities Initiative supported CESPEDES, affiliated with the World Business Council for Sustainable Development (WBCSD), through a workshop on “Net Zero Energy Buildings” (NZEB), a type of high-efficiency building that meets 100 percent of its energy needs through on-site renewables on an annual basis. The workshop brought together different private actors from the building sector supply chain and representatives from national and local governments. In the year following the workshop, the Mexican business consortium, Consorcio NZEB, began developing a building with which they aim to achieve Latin America’s Net Zero Energy Building Certification.

    Key Findings for Efficient New Buildings

    • What to invest in? Context-sensitive standardization: Greater standardization projects are needed in the efficient new building market, but local climate and building uses are important considerations when selecting new efficient building approaches. Passive design, utilizing natural ventilation and heating, is a basic principle of new efficientbuilding standards, such as passive house and the net zero energy building certification. Keycomponents include a range of exterior andinternal measures and technologies to meet buildings’ energy and other resource needs.

    • How to pay for it? Experimentation with incentives: A range of incentives are used worldwide to shift construction practices toward greater efficiency. One-off grants, tax credits, utility rebates and subsidized development fees are used as monetary incentives to decrease upfront costs to developers. Non-monetary incentives, such as density bonuses, upzoning and expedited permitting also exist. The broad range of approaches reflects the continued search for effective methods for stimulating the market of efficient new buildings.

    • How to mobilize investment capital? Tailored finance for efficient investments: While there is a large range of financial products used to finance buildings, these are not typically used to encourage efficient buildings. Existing products have been adapted to encourage greater building efficiency, including low-interest construction loans and green bonds for efficient building projects. Sometimes these require the buildings in question to become certified through a programsuch as Leadership in Energy and Environmental Design (LEED).

    • How to structure implementation? Strong public sector signals: Ambitious building codes and city-scale certification programs, coupled with the capacity to implement and monitor regulation, are key measures driving investments in efficient new buildings. These are often combined with visible commitment from senior leadership, including through the setting of tangible targets and exemplary practice on new public buildings or retrofitting the existing stock. Other important public sector actions include awareness and capacity building of the local construction industry through initiatives such as design competitions, benchmarking and transparency and technical assistance programs.

  • Low- and Zero-Emission Buses: Transitioning Fleets for Cleaner Air and Healthier Cities

    Low- and zero-emission buses can create economic, environmental and health benefits. In general, zero-emission buses have lower operating costs than traditional buses, given savings from reduced fuel consumption and maintenance. They can also help cut emissions that contribute to poor local air quality and global climate change. Furthermore, less noise pollution and vibration make for a more enjoyable journey for passengers and drivers and improve livability for residents along transit routes.

    Electric buses are an alternative to regular diesel buses, in which the engine is fully electric and draws its energy from batteries, rather than from fossil fuel.

    Challenges

    • Upfront costs: Electric buses can be over 50 percent more expensive than established diesel options. This includes direct capital cost of buses and indirect costs, such as import duties. New efficient buildings are associated with significantly reduced energy use (and therefore also greenhouse gas emissions) and operational cost savings.

    • Technology risk: A switch to electric buses requires operators to change their accustomed way of working, which creates uncertainty about how the new buses and ancillary technologies will perform in the long run.

    • Skewed procurement frameworks: In many places, bus fleets are procured on the basis of lowest upfront cost rather than lifecycle cost, putting electric buses at a disadvantage against diesel vehicles.

    Benefits

    • Local and global emissions: These vehicles substantially improve local air quality and can reduce global greenhouse gas emissions.

    • Service quality: Low- and zeroemission buses can make for a more pleasant journey because they reduce vibrations from motors and are less noisy than diesel buses.

    • Operation & maintenance cost: Expenses associated with fuel and maintenance are lower due to increased operational efficiency.

    What Business Models Are Cities Using?

    • Over 280 city examples of low- and zero-emission buses identified

    • 26 business models analyzed in 20 cities

    • Expert and practitioner interviews on implementation cases around the world

    Supporting City Initiatives

    • Cities from across the globe | FSCI’s first Finance Academy, focused on finance for low- and zeroemission buses, convened senior finance and transport decision makers to support them in identifying new business models to help achieve their clean bus targets. Over 10 C40 cities attended, with some city targets ranging from 100 to 300 additional battery electric buses on the road in the next four years.

    • Chile | Santiago is renewing the bus fleet contracts for Transantiago, the city’s public transport system, offering an opportunity to include low- and zero-emission buses in the contracts. FSCI provided technical support through a multi-stakeholder workshop, helping stakeholders explore business models for Transantiago’s transition. Assistance was provided in partnership with WRI, the Inter-American Development Bank (IDB) and the Global Environment Facility (GEF).

    Key Findings for Low- and Zero-Emission Bus Business Models

    • What to invest in? Technological innovations: Electric bus technologies are evolving fast. Innovations in battery sizes, charging speeds and approaches to swapping batteries on-the-go are making it easier to integrate them into existing bus routes.

    • How to pay for it? Targeted public funding: Public administrations are tackling both direct and indirect investment costs. A variety of grants are helping cover direct costs, including for both capital and operational expenditure on buses and R&D. Tax incentives, such as value-added, import and corporate profit tax breaks, are used to reduce the cost burden on operators and manufacturers. In some cases, manufacturers are providing price reductions and in-kind maintenance and training support to operators.

    • How to mobilize investment capital? Making credit available & reducing the cost of finance: Operators can reduce the cost of finance resulting from clean bus investments by accessing credit guarantees or concessional debt, where these are made available, for example, by public sector financial institutions. A relatively new source of finance are manufacturers, some of which have opened new lines of credit to enable potential buyers to purchase their buses.

    • How to structure implementation? Procurement reforms draw in new actors: Cities are adapting how buses and bus services are procured, allowing third parties to assume an important de-risking role. Combining quotas for cleaner fleets with more flexible procurement enables bus manufacturers to offer operators the option to lease both buses and batteries (rather than purchasing them), which can reduce technology risk. Energy utilities, who see the electrification of the sector as a new business opportunity, can provide favorable pricing and charging infrastructure.

  • Transit-Oriented Development (TOD): Optimizing Land Use for Compact and Connected Cities

    The world is experiencing unprecedented urbanization. Cities around the globe are exploring the potential of TOD to manage urban expansion and density. Historically, TOD has been used most in North American and East Asian cities. While relatively new to other geographies, many elements of TOD—such as mixed land use, affordable housing and public transit—are already present in the master plans of major Brazilian and South African cities, and in India, the Ministry of Urban Development approved the Transit Oriented Development Policy for Delhi in 2015.

    Transit-Oriented Development (TOD) aims to achieve walkable, mixed-use, compact urban areas serviced by high-quality mass transit systems that offer a variety of services, amenities and job opportunities to the residents of that community.

    Challenges

    • Complexity & sequencing: TOD requires alignments between several types of infrastructure investments at the intersection of land markets and transportation systems that often take place over different timeframes.

    • Coordination & trust: Planning and executing TOD investments requires private sector actors and public agencies to work together in new ways, including creating supportive policies and risk-sharing arrangements.

    • Funding & finance: Cities and project developers face a shortage of tailored investment vehicles and dedicated funding sources for TOD projects, which are often capital intensive and require substantial up-front investments.

    Benefits

    • Service and job accessibility: TOD is associated with increases in local employment opportunities and access to amenities.

    • Efficient use of infrastructure: Capital and operational expenditure on infrastructure decrease with managed density.

    • Traffic relief: TOD can increase public transit, which helps relieve overburdened roads and motorized transit systems.

    • Household income: Spending on transportation can decrease due to proximity to destinations; the effect is strongest when housing is kept affordable.

    • Local business income: Mixing residential and commercial uses is associated with increased foot traffic for local businesses.

    What Business Models Are Cities Using?

    • Over 50 city examples of TOD investments worldwide identified

    • 30 TOD business models analyzed

    • Expert and practitioner interviews, interactive group exercises and moderated discussions

    Supporting City Initiatives

    • Brazil | FSCI provides technical assistance and capacity building for the Metropolitan Chamber of Rio de Janeiro in identifying TOD projects and framing business models around metropolitan train stations.

    • Colombia | FSCI, in collaboration with the Development Bank of Colombia (FINDETER), provides technical assistance, capacity building and dialogue facilitation to Cali for a large-scale urban transformation project that follows TOD principles (Corredor Verde).

    • Traffic relief: TOD can increase public transit, which helps relieve overburdened roads and motorized transit systems.

    • India | FSCI conducts capacity building for Bangalore Metro Authority and other public officials to brainstorm possible business models for implementing TOD projects in Bangalore.

    • South Africa | FSCI, partnering with C40’s TOD Network, convened public officials from South Africa’s four largest cities to drive greater investment in TOD projects. This was the first time these cities collaborated on TOD business models.

    Key Findings for Transit-Oriented Development

    • What to invest in? Combining diverse asset groups: Without exception, TOD investments involve structuring multiple tangible and intangible assets, often across geographical scales, including station areas, districts and transit corridors. There can be an increase in risks, costs, time and complexity where there is fragmented land ownership that needs to be consolidated. Improved methods for valuing and monetizing public goods, such as city identity, accessibility and affordability, could be key to unlocking the business case for TOD. Effective land-owner and public citizen engagement in TOD planning and implementation is also essential.

    • How to pay for it? Blending incentives & revenues: The public sector has used betterment charges or tax-based levies, and in some cases selling development rights above legal maxima. This is called “land value capture” when these are calculated to reflect expected increases in land values resulting from public action. The leasing or sale of new real estate has been used where transit agencies have property holdings (“rail plus property”). Grants and tax incentives have been used to stimulate private sector investments in slow real estate markets.

    • How to mobilize investment capital? Structuring and tailoring: TOD tends to involve equity, debt and de-risking due to its capital-intensive and time-extensive nature. Loan products tailored to TOD investments have played a critical role, including dedicated TOD investment funds with the public sector and not-for-profit investors assuming top-loss positions. U.S. cities have issued tax increment financing (TIF) bonds, municipal bonds backed by future property taxes.

    • How to structure implementation? Risk-sharing arrangements: Public sectordriven changes in land-use regulation (for example, through land readjustment or upzoning) and specially designated areas for land value capture are framework conditions for TOD. Many TOD projects are implemented through public-private partnerships, with the public sector investing in transit and supporting infrastructure, while the private sector develops real estate.

The initiative