City Infrastructure Financing and

Smart Cities Model

Bambang Susantono, Ph.D

Vice President for Knowledge Management
Asian Development Bank
 Urbanization in Asia and the Pacific
Asia-Pacific is the fastest urbanizing region in the world…

Source: 2015. UN ESCAP and UN Habitat. The State of Asian and Pacific Cities 2015 .
 Global Migration
Global migration patterns…

Source: 2015. Internal Organization for Migration. World Migration Report. Geneva.
 Climate Impacts and Financing

Source: http://www.adb.org/news/infographics
 ADB at COP21

5
 Sustainable Development Goals
Goal 11: Make cities and human settlements inclusive, safe,
resilient and sustainable
11.3 6.1 11.6 11.5

Planning & Water Sewerage & Solid Waste Urban

Policy Supply Sanitation Management Drainage

Green & Public Urban Affordable Slum Heritage

Spaces Transport Housing Upgrading Conservation
11.1 11.4
11.7 11.2

In addition, links to Goal 1: End poverty in all its form everywhere and Goal 13: Take urgent action to combat climate change and its impacts
 Global Risks and Development Issues

Risks in Developing Asia

Source: 2016. World Economic Forum. The Global Risks Report 2016. Geneva .
European Cities Australian
Cities

American
Cities

Middle
Eastern Cities

World Cities: Liveability-Sustainability

Nexus of Built Environments
Source: Newton (2012), Liveable and Sustainable?
Socio-Technical Challenges for 21st Century Cities,
Journal of Urban Technology, 19(1), 81-102
 The Smart City Model

Source: http://www.enterrasolutions.com/2013/04/a-thought-probe-series-on-tomorrows-population-big-data-and-personalized-predictive-analytics-part-
1.html
 Challenges for Smart City infrastructure…..

International Electrotechnical Commission 2014. White Report on on Orchestrating infrastructure for sustainable Smart
Cities taken from LETERRIER, N. Au cœur des smart cities, VP Innovation, Schneider Electric, 2013.
http://grenobleenergie.files.wordpress.com/2012/09/131003-schneider-electric-leterrier-gemnanoinside-ir t.pdf
 Infrastructure needs
The situation in Developing Asia:
• 600 million individuals lack access to electricity
• 1.7 billion people lack access to basic sanitation
• 360 million lack access to safe drinking water
• 40 million new city dwellers a year will drive
infrastructure needs
The challenge:
• Infrastructure investment needs have been estimated to be around $8-
10 trillion from 2010-2020 (in 2008 US dollars)
• Countries on average investing only 2-3% of GDP annually, against 6%
required to meet the demand
• Infrastructure investments will need to be environmentally and socially
sustainable
 Infrastructure needs by sector
~$10.0 trillion
(5-6% of GDP)

A huge step-up in Social Infrastructure

infrastructure
investment is x2.5 Water & Sanitation
required for Asia in real terms

to sustain Transport
economic growth
~$4.0 trillion

Seamless Asia
Telecommunications
(4% of GDP)
~$2.6 trillion
(5% of GDP)
Energy
(Electricity)

1990-2000 2000-2010 2010-2020

Source: ADB, Infrastructure for a Seamless Asia, 2009; ADB’s estimates (Asia ex-Japan, all data in 2008 US$)
 A big role for the public sector …
but increasing need for private sector as well
Annual Infrastructure Expected Private Sector Contribution by
Investments, 2010-20 Type of Instruments (estimates) Source of Funds

~$1 trillion ~$400 billion

Unlisted Equity (Infra
10 Funds)
Institutional
Equity Listed Equity Investors:
110 (Developers)
Private 400 key catalysts as
they take the
Corporate/ Project “riskiest piece”
60 Bonds

Retail Investors/
Deposits
Debt
Gov. 600 220 Commercial Bank
Loans

Source: ADB’s estimates

Insufficient infrastructure spending in
many ASEAN countries
InfrastructureEstimated
Country Needs vs Spending—ASEAN
Needs as % ofEconomies
Infra Spend Infra Spend
Infra Needs Estimated GDP as % of GDP as % of GDP
(2010-2020) (Annual, 2010- (1980-2009) (2012)
USD Billion 2020)
Indonesia 450.0 6.2 7.0 3.0
Malaysia 188.1 6.7 6.0 3.5
Philippines 127.0 6.1 2.0 2.2
Thailand 173.0 4.9 4.0 2.0
Viet Nam 110.0 8.1 12.8 9.2
(for 2009)
Cambodia; 46.5 9.5 N.A. ~4.0
Lao PDR;
Myanmar

Source: Bhattacharyay, Kawai, Nag (2012); ADB staff estimates.

 Infrastructure Landscape in Indonesia
• 2015-2019 National Medium-Term Development Plan
– “100-0-100” Vision
– Public infra investments to rise from 4.2% in 2015 to 6.2% of GDP
in 2019, with major focus on transport and electricity
– Total outlay of $425 billion envisaged

2015-2019 National Medium Term Development Plan,

Infrastructure Investments by Sector
$20 bn
$40 bn

$70 bn $180 bn

$40 bn

$75 bn
Transport Electricity Oil&Gas Water (rural&urban) Housing ICT
15
 Public Sector Role….

• Will remain important as certain types of

infrastructure must be financed by government
• Government in Asia still has scope to expand and
strengthen the revenue base.
• Government needs to reform to tackle weaknesses in
institutional, regulatory, and financial systems.
• Need to attract more private sector investment in
infrastructure.
 Infrastructure Financing
Revenue-Expenditure Flow in
TrendIndonesian Cities(in IDR)
in Local Government Finances
7,000,000

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

-
2010 2011 2012 2013 2014

Revenue Expenditure

• Other financing options are needed to

bridge the financing gap
Source: http://www.adb.org/news/infographics
 Infrastructure Financing Options
Alternative financing sources for urban infrastructure projects

Multilateral,
Private
Capital Bilateral &
Institutional
Markets Export Credit
Investors
Agencies

Domestic Asset Private-sector

Financial Leverage Participation &
Institutions (land) Joint Ventures

Source: KPMG Analysis, Linking Cities to Finance: Overcoming Bottlenecks to Financing Strategic Urban Infrastructure Investments, 27-28
September 2010 , Shanghai, China
Traditional Sources of Funds…
 Alternative Sources of Funding
• Capital markets: Few Asian cities have issued bonds, while Asian countries
have a high saving indicating a huge potential for capital market financing.
Need to develop local-currency/municipal bond to also promote
transparency and accountability.
• Private institutional investors: Pension funds, insurance, foundations and
endowments can provide investments for infrastructure and governments
need to provide conducive regulatory structures.
• Multilateral, bilateral and export credit agencies: Institutions such as ADB
can provide low-cost, long-tenor financing and share global best practices
and experience.
• Asset leverage (land): use land rights to urban infrastructure delivery to
improve project viability by selling or leasing public land, and use the
proceeds to fund urban infrastructure projects. Land-based financing also
provides opportunities for PPPs.
 How to tap the resources for financing
Infrastructure Development
• Asian economies have large savings of about $5
trillion annually, in addition to global savings of
$53 trillion
• To tap the resources it requires:
– Deeper capital markets
– Local currency bond markets
– More sophisticated financial systems
– Robust frameworks for PPPs
– Regional Cooperation and Integration
 Asia’s financial systems
still lag advanced economies…
Financial structure around the Pension and mutual fund assets
world (% of GDP), 2011 (% of GDP), 2013
400 Australia
Bonds
350 United States
Stock market
300 United Kingdom
143 Banking system
250 Brazil
200 Mexico
150 84 46
Korea, Rep. of
100 39 71 Pension fund
India
50 110 46
60 PRC Mutual fund
42
0
Pakistan
OECD Latin Dev. Asia
America 0 100 200 300
Source: ADB estimates based on data from Beck et al. (2000, 2009) Sources: OECD (2015), Pension funds' assets (indicator). doi:
and Cihak et al. (2012). 10.1787/d66f4f9f-en (accessed on 13 February 2015); Worldwide
22 Mutual Fund Assets, available:
http://www.ici.org/research/stats/worldwide
 Infrastructure bonds still nascent
Country Infra Project Bonds % of Total
($ billion) Corporate Bond
Market
China, P.R. 288.5 42.2
Indonesia 1.3 7.3
Korea 154.0 15.2
Malaysia 29.6 22.8
Philippines 2.6 19.8
Singapore 23.0 25.0
Thailand 1.5 2.5
Viet Nam 0.7 18.0
Note: PRC and Korea data refer to outstanding bonds issued by infrastructure-related entities, as % of
top 30 corporate issuers.
Source: ADB, January 2015 Draft Report on Local Currency Bonds and Infrastructure Finance in ASEAN + 3

23
Increasing Private Sector Participation…
 PPPs should be considered
• Financing: PPPs help relieve the financial strain on city governments by
mobilizing resources from the local, regional or international private
sector that can facilitate increased and better social services, including
developing more projects.
• Efficiency and Cost Savings: Private investors have strong incentives to (i)
complete projects quickly to start earning, (ii) reduce costs, (iii) introduce
competition, and (iv) transfers of technology and know how.
• Quality: Improve service quality and enhance accountability.
• Change in Focus: allow city governments to focus on outputs instead of
inputs to improve the overall service quality.
 Key challenges of PPPs…
• Cost Recovery: The private sector focuses on returns in setting user
charges, while governments tend to subsidize them, creating cost recovery
concern.
• Foreign Exchange Risk: revenues in domestic currency, while project
financing may use foreign currency, creating foreign exchange risk.
• Political Risk: Political instability and regulatory framework changes put a
risk on contracts.
• Weak Governance: Weak governance and corruption reduce international
interests and PPPs.
• Contingent Liabilities: Many city governments fail to consider contingent
liabilities when entering PPPs.
 Financing & Enabling
Urban Infrastructure Investments
• Take charge of local finance by:
– Maximizing conventional finances (e.g., user charges)
– Exploit tradable development rights and marketable permits
– Introduce green charges
• Increase local capabilities to enable local governments to tap financial
markets.
• Improve the legal, regulatory, and institutional frameworks to enable
private sector participation.
• Improve facilitative arrangements (credit enhancement mechanisms,
credit rating systems) to enhance borrowing and repayment capacities of
local governments.
• Improve technical and managerial capacity of cities to become financially
credible and accountable.
 Way forward....
• Secure public and private financing
– Translate vision (e.g. “100%-0%-100%” for electricity access,
slums and irrigated agriculture) to reality
– Adopt programmatic approaches to address impediments,
and mobilize large scale public and private funding
• Promote a robust framework for PPPs
– Ensure macroeconomic and fiscal sustainability
– Develop sound risk-sharing arrangements
• Develop and deepen local currency bond markets
– Modern legal framework for capital markets, with funded pension systems
and strong fund management industry
– Incentives for project bonds
 Concluding remarks
• Urban growth is key for higher, sustainable, and
more inclusive growth
• As infrastructure development is a complex process,
a more collaborative approach should be adopted.
• Governments should open up infrastructure
investment opportunities to the private sector, which
can also improve its investment portfolios.
• PPPs can be a win-win solution but not a panacea.
• Other creative financing schemes, including bundling
up with property and area-wide development,
should be explored.
 ADB’s Future Cities Program COEs

S W L O W
Promoting Mainstreaming Financing Low Water Future
Smart Integrated Solid Carbon Climate Operators Women,
Infrastructure Waste Resilient Urban Partnership Future Cities
Development Management Infrastructure

City Twinning Waste Low Carbon Utility Twinning Female leaders

with focus on Management Interventions with focus on & urban
ICT Options for Cities Water & management
Sanitation

• Tbilisi
• Colombo
• Mandalay
• Ho Chi Minh City
• Bandung
• Ulaanbaatar
• Suva
 Thank You

www.adb.org