XXXX - BGLP0007 Debt, Finance, & Prosperity – Term 1 Essay – 2039 words

Debt Finance and Urban Infrastructure

Introduction
The availability and accessibility of urban infrastructure is an essential constituent of citizen’s right and a foundation of
prosperity. Still, the extent of the right to change the city and people’s ability to achieve prosperity will significantly hinge
on how these essential public infrastructures are financed. This essay looks to consider the role of financialisation and
debt-based finance in the provision of urban infrastructure. The work will first outline how the current practices of debt-
based finance in the process of urban infrastructure development hinder citizenship and collective prosperity. These
inherent issues are such as infrastructure rationing, the unequal distribution of infrastructure investment, and the impact
of privatisation and securitisation of urban infrastructure to the social welfare. Following this, the work then looks to
assess the efficacy of potential and emerging alternatives to the problems alluded in the first section. As infrastructure
investment is highly complex, political, and contextualised; this work, therefore, looks to assess different alternative
finances depending on scenarios. The two suggested alternatives are tax-based reformation and emerging civic
crowdfunding, both to be evaluated of their benefits, viability, and limitations.

Issues of Debt Finance

When looking to consider the ways in which current practices of debt-based finance hinder prosperity in relation to
infrastructure investment, it is essential to acknowledge the rationale behind the use of debt-based finance. The plan
for urban regeneration after the Second World War with minimal treasury available meant that the government needed
to rely on debt-based investments which were primarily funded by private financial institution’s credits, debt instruments
(i.e. government bonds), and associated tax arrangement to finance large-scale urban expansions (Harvey, 2008). On
the bright side, the government is now able to obtain sufficient funding for infrastructure improvement they otherwise
would not have without the use of financialisation to leverage debts. On the contrary, the high reliance on a debt-financed
approach has meant that many governments and cities have become subject to a degree of rationing by the providers
of credit. In other words, the determining factor in the level of infrastructure investment in a given city or region will not
be determined purely by its economic needs, but by the criteria used by lenders to judge the creditworthiness of the
authority. This means a small local government with low credential would face difficulties in accessing debt finance
without the subject of high-interest rate, which in turns exacerbate domestic debts and threatening long-term
sustainability of public provisions (Grewal et al., 2015).

Likewise, infrastructure gap is a consequence of financial gap (Langley, 2018), thus “how something is financed” is less
important than “whether investments take place at all or what projects the money flow into” (Bieri, 2015, p. 2431). With
credit providers such as banks, institutional investors or global consortia play a decisive role in judging the relative merit
of each infrastructure project; it induces a risk of unequal distribution of infrastructure investment. In particular, the use
of finance, with associated interest costs and lending decisions, can mean that infrastructure investment is targeted
where it can provide the best risk-adjusted returns for the lenders, rather than where it can do the most good. If that so,
the right to change the city, where principally belong to the public (Harvey, 2008), are now falling into the control of 1%
anarchic Wall Street’s bankers and affluent elites (Bieri, 2015) whose motives are profiteering, not maximising social
XXXX - BGLP0007 Debt, Finance, & Prosperity – Term 1 Essay – 2039 words

benefits. This, in turn, results in the majority of investment being directed to regions where the economy is already
strong, potentially neglecting underdeveloped cities due to higher uncertainty and longer payback periods. This is
despite the fact that investment in infrastructure is vital to remove supply-side bottlenecks and enable regional
economies to grow (Dutta, 2015). Such an issue becomes even more pronounced in developing nations, where levels
of income inequality between capital cities and underdeveloped regions not only impede prosperity but also aggravates
poverty (Chotia and Rao, 2017). In this case, infrastructure development can be instrumental in fostering local economic
growth and lifting people from poverty, but the process of achieving this can be significantly stymied by the extent to
which essential investment is directly by creditors to regions where it is not as vital to prosperity and social outcomes.

Finally, the progressive privatisation of urban infrastructures since the 1980s (Langley, 2018), while providing greater
operational efficiency from profitmaking incentives, are subject of exclusionary of access and provision to some
marginalised social groups. Likewise, the intensified commodification and securitisation have raised the fundamental
issues around the extent to which the use of debt financing establishes infrastructure as a traded product. In other
words, investors may choose to pursue investments in infrastructure projects and the associated debt in an effort to
make speculative gains from projects, rather than supporting the underlying social and economic objectives (Knight
and Sharma, 2016). Furthermore, institutional investors show a high propensity to purchase infrastructure assets in cities
around the world, potentially redirecting these assets towards profitable business operations, rather than providing core
economic support to the local region (Torrance, 2009). Take Thames Water, UK’s largest privately-owned monopoly of
water distribution, for example. With only its name remains intact, the change of ownership has resulted in dramatic
displacements of its shareholders from the public to the consortium of institutional investors (Allen and Pryke, 2013). It
otherwise changes the label of a household from citizens who have the right to access to clean water, to financial
commodities that can be bundled and sold to global investors as financial products that are tradeable for speculative
gains (Allen and Pryke, 2013; Bayliss, 2013). Therefore, a high surge of utility bills does not necessarily translate into
infrastructure improvement nor better provision but rather to maximise dividends and shareholder’s values. Evidently,
while Thames Water paid £1.16 billion dividends to its investors during 2006-2015, they allegedly paid zero corporate
tax and neglected its environmental duty to circumvent water pollutions caused by failure to maintain and manage
essential equipment (Plimmer and Espinoza, 2017). Despite numerous cases that private financialisation of public
infrastructures fails to comply with social objectives (Bayliss, 2013) and deliver collective prosperity as anticipated, the
federal governments still promote the agenda in their policymaking nonetheless.

Alternative Finances
This section of the work will look to assess the efficacy of potential and emerging alternatives to the problems of debt-
based finance. The first alternative is assessed upon the assumption of strong subnational government’s involvement in
providing municipal infrastructure. One of the leading proposed solutions is the adoption of special property taxes which
are used to build up cash reserves to fund future investment in infrastructure. In theory, taxation is very effective and
efficient at gathering the funds necessary to support infrastructure investment, allowing the government a full autonomy
without the subject of rationing from creditors. Property tax is particularly suitable since it is progressive taxation which
ensures those best able to pay shoulder the burden and is controlled by local governments (Aluko, 2005). Unlike central
government or private corporation, municipal authorities work closely with people at the grassroots, thus capable of
XXXX - BGLP0007 Debt, Finance, & Prosperity – Term 1 Essay – 2039 words

involving long-neglected citizens in decision-making on improving public infrastructure and fostering civic engagement
(Aluko, 2005). Successful examples of such options can be seen in the case of Pennsylvania in the United States. In
this case, fifteen cities developed a form of “split-rate” property tax, whereby taxes on build infrastructure was lowered
to encourage investment, while the tax on land values was raised to discourage speculation (Hartzok, 1997). The net
result of this was to raise significant funds for investment in infrastructure, as well as encouraging private sector
investment without the associated build-up of debt on the local governments’ balance sheet. Unfortunately, the ability
of cities and regions to raise significant funds from property taxes largely depends on the existing level of economic
development. In particular, taxation revenue consists of internally generated funds, which in turn requires a sufficient
level of local economic activity and collection efficiency to support the necessary levels of expenditure on urban
infrastructure. According to Mabe and Kuusaana (2016), this limits the effectiveness of a property tax-based method of
financing infrastructure in many developed countries, as most tax revenue is spent on providing other basic services,
and various challenges to property tax must be resolved before the revenue will be sufficient to fund infrastructure
investment on a similar scale to traditional debt-based models.

The second alternative takes weakening public investment due to budgetary austerity cut into consideration, thus
understanding the need of private finances to support municipal infrastructure investment. In this case, citizen-led
crowdfunding can be a viable alternative to traditional debt-based finances. In principle, crowdfunding is collaborative
fundraising from a large and diverse pool of donors via an online platform (Davies, 2014). It infuses the use of
‘technology-based revolution’ and ‘entrepreneurial drive’ to invent a platform of participatory democratised finance
(Bieri, 2015). That said, crowdfunding is varied in types: from donation to investment; and can be implemented in various
situations from funding entrepreneurial idea to investing in public infrastructure. In this work, I will mainly focus on civic
crowdfunding projects which are unique from mainstream crowdfunding where it must support ‘collective activities with
the output that benefit the social welfare’ (Davies, 2014). Civic crowdfunding is better than traditional debt-based finance
in a way that the “democratic management over its urban deployment constitutes the right to the city” (Harvey, 2008, p.
37), thus empowering people’s ability to find prosperity in their own hands. The other benefit is its transparency of
campaign progress and its high visibility of participant’s action thus reinforcing a sense of community, fostering social
capital and solidarity through integration of efforts to accomplish a greater good (Benkler and Nissenbaum, 2006).
Although the government’s participation is not mandatory, it is nevertheless optimal when the crowd, for-profit and non-
profit organisations, and municipal government aligning their interests and closely collaborating. To illustrate,
‘Crowdfund London’ is a civic crowdfunding initiative instigated by the collaboration of the Mayor of London with
Borough’s key stakeholders to fundraise community-led social projects. So far, 191 projects are pitched with the total
value of £7.95 millions (Mayor of London, n.d.). However, this value is merely an accounting calculation, it is yet to
account behind-the-scene collaboration and civic engagement whose value is beyond measurable. Also, unlike AKA
United Nations – private crowdfunding for global investors who targeted a hefty return (Bieri, 2015); these civic projects
are primarily a donation or reward crowdfunding whereby participants do not seek financial returns, but instead desire
to build social capital and belonging (Davies, 2014). That said, civic crowdfunding is currently limited to small-scale
projects such as local parks or minor renovations of local high-street. It still has a long way to replace the prominent
debt-based finance who is capable of orchestrating billion-dollar worth infrastructure project. Nevertheless, the small
step of civic crowdfunding serves as the acclamation of de-financialisation and de-commoditisation of public
infrastructure provision. Civic crowdfunding paves the way for democratised participatory finance, reverting to the
XXXX - BGLP0007 Debt, Finance, & Prosperity – Term 1 Essay – 2039 words

traditional locally-shared ownership where everyone has the right to access, and more importantly, enables the
collective power to reshape urbanisation process that suits their vision of prosperity.

Conclusion
This assignment has demonstrated that, although the debt-financed model is very effective at orchestrating mega-
infrastructure project, it nevertheless poses a threat to collective citizen’s right and social prosperity. First, debt-based
finance is prone to creditors’ rationing which potentially risks unequal distribution of investment, resulting in neglecting
underdeveloped regions despite the apparent need for infrastructure only due to lack of financial appeal. Furthermore,
the pervasive privatisation and financialisation of public infrastructure risk of not only promoting exclusionary practice
but also detrimentally converting a provision for social benefit to a profit-making operation that unduly extracts wealth
from the poor to the rich. Therefore, it is essential that the alternative finance can at least return the investment decision
and managerial power to its public agent, the municipal authorities, through property tax reformation. Or better, the
emerging alternative can empower residents the ability to shape the future of the city with their own hands through civic
crowdfunding. Though financially limited independently, if both alternatives can functionally combine, it can show the
possibility of future infrastructure investment that is significantly less reliant on debt-based profit-making finances that
ultimately deprive citizen’s right and hinder their ability to achieve prosperity.

References
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