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City bonds offer new route towards infrastructure funding

City bonds offer new route towards infrastructure...

City bonds could provide an important new funding option for urban infrastructure development.


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City bonds could provide an important new funding option for urban infrastructure development. But in an era of austerity and shrinking subsidy, nothing comes for free. Civic leaders have to make tough choices about how to best use existing assets to create investment vehicles that offer sufficiently attractive returns.

An International Monetary Fund study   found that every 1% of GDP spent on infrastructure investment boosts productivity output by 1.5%. This rise in GDP offsets the rise in debt, meaning that infrastructure investment pays for itself if done correctly.

The question facing civic leaders typically is around how to fund this investment. There have been three main mechanisms available over the last few years:

  • Environmentally-targeted funding: governments in developed economies have provided large-scale funding for renewable energy generation, waste disposal and other environmental projects over the last 10 years. However, the subsidies are beginning to dry up and this is not always an option for smaller-scale projects.
  • Green bonds: The market in green bonds is growing steadily with healthy demand from environmentally-aware institutional investors. Since 2008, the World Bank have issued over $8.5 billion in green bonds to cities around the world to help fund transport and major infrastructure projects.
  • Social investment: In the UK, Big Society Capital exists to encourage investment in small businesses that have a social purpose behind them. Bristol was awarded Social Enterprise City status in 2013, to promote social enterprise start-ups. These projects are typically small scale and high risk for investors, and so unlikely to provide a long-term funding solution for cities.

I would suggest that there is another option that cities and their leaders can explore. Civic leaders need to recognize that they do have significant assets at their disposal. They must make the most of those to attract investment beyond subsidies and philanthropy.

A city with a portfolio of housing, sport facilities, transport facilities, road network and energy generation businesses could package these assets, together with associated cash flows, to create a city bond. Imagine a Bristol, Essen or Christchurch Bond – each of them related to the assets and cash flows in those areas and providing investors with a return.

Bond investors are interested in the security of future cash flows. Grouping a number of assets together within a defined geographical area should create a ‘hub’ of possible investments of sufficient size to interest investors, while diversifying the risk of investing in single assets.

Creating city bonds will mean a council sacrificing a percentage of future revenues or even having to increase local taxes to pay bond holders. At the same time, funds released by bonds could finance a community farming initiative, revolutionize the transport network, fund local schools or build new housing. Trading off their costs and benefits will pose some difficult choices for councillors.

Clearly, there are many barriers to making this work – council commitment and the complexity of process among them. But funding should not be a barrier to infrastructure creation. There are an increasing number of investors looking to park their money in long-term infrastructure investments. Now it is up to city leaders to create a market to attract that money.

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