U.S. Engagement With International Organizations
Good Morning and welcome to the World Urban Forum’s Business Assembly. It is an honor to serve as lead of the U.S. Delegation. Before I start, I want to thank: Mr./Madam Chair, as well as Dr. Clos and the UN-Habitat team for their work in organizing the conference, as well as the Italian government and the city of Naples for their generous support and hosting of the event. I would also like to thank all of our non-governmental partners for the essential support and valuable perspectives they bring to the conference.
As the Chief Economist, I work alongside incredibly talented diplomats, and my role is to encourage them to consider the world through a very important lens: economics. My job involves looking ahead, often around corners, to advise Secretary Clinton on emerging economic trends with significant economic implications. I am here today because when we talk about the growth of cities, the word “significant” is an understatement. We are in fact witnessing one of the most important, and unprecedented, economic transformations in human history. We know it is already changing our societies and economies in fundamental ways. We know governments will need serious and expensive investments in infrastructure, capacity building, and regulatory and institutional strengthening to manage these changes. What we don’t know, however, is how governments will pay for it.
Cities are already home to more than half of the world’s population. McKinsey estimates that cities generate 72 percent of global GDP. As cities grow and expand over the coming decades, hand in hand with rises in consumer income, we will feel the economic reverberations from Tokyo to Jakarta, from London to New Delhi, and from New York to São Paulo. The impacts will continue to shape societies, economies and governance issues for years to come.
The advantages of these large population flows are that, with lots of people living and working so closely together, they can be more efficient, innovative and productive. Cities with higher population densities benefit from economies of scale and experience greater economic growth. High density populations also allow for more efficient supply of infrastructure and services. And population flows create attractive commercial opportunities, which are good for economic growth. But these flows also create stresses on city systems and resources. In too many places, the infrastructure is light years behind the people. And that puts pressure on governments to provide a livable environment where people can live and work peacefully and productively. And that means both infrastructure and good governance.
Infrastructure is the lifeblood of cities. And governance is key to sustainable infrastructure. Emerging cities need increasingly smart infrastructure investments and policies to keep pace with their growing populations and other critical factors like climate change. And in the 21st century, that requires more than water access, reliable energy, and public transportation. It means connectivity: moving ideas as well as people, connecting businesses with labor markets, and connecting consumers with businesses. It means education and health, security of land and property, and emergency services and law enforcement. And of course, it also means housing. We speak of using “housing as a platform” to improve quality of life and that requires infrastructure - infrastructure investments are essential for cities to benefit from the economic potential these large population flows offer. Without smart investments, cities risk losing out on these growth benefits.
Perhaps even more important though are the social and political imperatives. As we all know, the revolutions of recent years unfolded in crowded city squares, from Benghazi to Tunis. And as global warming contributes to extreme weather events and resource scarcity, cities will need to be prepared for changing human migration patterns.
But there is no getting around a simple truth: Infrastructure is expensive. As complicated as infrastructure development is, one of the most difficult challenges is how to finance it. And the numbers are staggering. The world’s demand for infrastructure will require trillions of dollars over the next four decades. The McKinsey Global Institute estimates that cities will need to increase investments in new physical capital to more than $20 trillion per year by 2025. That is more than the economies of Japan and Germany combined. The American Society of Civil Engineers estimates that the United States alone requires $2.2 trillion invested over the next 5 years just to restore and maintain our existing infrastructure.
Cash strapped governments, including the United States, can’t shoulder this burden alone. One of our great challenges is to make sure they don’t have to. That’s why we need to increasingly look to create the enabling environment for public-private partnerships to fund and operate those infrastructure projects capable of generating a return to investors. And we need these partnerships to be flexible and above all, to work. And work on more than one level. PPPs can do more than just mobilize capital; they can improve delivery of services and enable more efficient use of resources. PPPs should leverage strengths. But they are also complicated. The Public part of the PPP needs to think ahead to what role they should play as investor, guarantor, capacity builder or provider of tools and systems to enable the PPP environment. Not only do successful PPPs need a transparent regulatory framework and guard against waste and corruption, they need to be adaptive to a continuum of uses, cultural norms, government regulations and local enterprise structure. Governments of all sizes can be better and smarter about their role.
Governments around the world are exploring how they can raise money for large projects in new and innovative ways. Infrastructure banks are one good example of how governments can provide a platform to leverage private capital, plug holes in project capital structures and share risk in infrastructure projects that are able to generate a return. President Obama has proposed creating a National Infrastructure Bank in the United States – an idea that has supporters across the political spectrum, from business to labor unions. Other initiatives are already underway and producing success stories. USAID’s Development Credit Authority, for example. In India, we used this innovative risk-sharing credit guarantee program to help an NGO win a loan from India’s second largest bank to finance housing for those in need. The result was that 2,500 housing units were built – creating affordable housing for 12,000 people.
We also need more programs like the U.S.-Brazil Joint Initiative on Urban Sustainability, an innovative public-private partnership that promotes investment in sustainable urban infrastructure.
Where will private funds come from? There are actually many sources of capital to consider outside of Federal or local budgets: pension funds, private equity funds, sovereign wealth funds, multi-lateral development banks, commercial banks… although it is still unclear to what extent commercial banks post-crisis will drive infrastructure financing in the future. The United States itself is fortunate to have a robust community development finance sector that has grown exponentially over the last 30 years. Our community development banks, credit unions and loan funds take on risk and innovate with financial tools to create businesses, housing, community facilities, and build capacity in traditionally underserved areas.
The real question for policymakers is which source — and model — of financing makes the most sense for their cities? How will governments and private sources of investment share risk and reward? How do you attract that investment? Part of the answer is governance.
Which is why I’m so pleased that the WUF paired the two themes of this segment – financing and governance. We need to start with good governance to enable global pools of private funds to flow and private companies to invest in urban infrastructure and services demanded by cities in the coming decades. Free, fair open and transparent processes, land tenure security, civil society involvement, an established legal framework and clear rules of the game, paired with oversight that ensures that both governments and private investors are responsible and accountable actors – this is what large international infrastructure investors consider when making investment decisions– particularly in developing countries. Investors need certainty and predictability. They want to know their rights will be respected. Governance provides that guarantee.
In our Millennium Challenge Corporation’s Compact with Lesotho, for example, the passing of a new land act led to growth in Maseru’s mortgage market and construction industry.
We have among us some of the most brilliant minds here today that are engaged on finding answers to these questions. This conference is an opportunity to examine and discuss the full range of financing options, from well established models and methods, to newer, emerging ideas and approaches.
There is much to learn from each other. For example, given that we now have many countries who are experienced in structuring public private partnerships, how can we better share best practices and learn from each other? How do we partner with multi-lateral development institutions like the World Bank and IFC, which have blazed trails in PPPs, in sharing risk and in creating governance frameworks capable of attracting private investment? How can we best model new development banks, new infrastructure banks, to channel global pools of capital into infrastructure? How do we best bridge the gap between government and the private sector on risk – and who is best placed to bear which risks where?
These are just a few of the questions I would encourage all of us to consider and discuss during our time together. Because the one thing we know for sure is that the status quo is not an option anymore. Historical change, especially at the speed and scale we are seeing now, requires thoughtful analysis and purposeful preparation. The growth of cities is rapidly underway, and shows no signs of decelerating – and the price tag for paying for this growth will only go up. Waiting will simply cost more. Urban growth is one of the most important forces reshaping the world today. We need serious, smart investments in infrastructure. And we need the resources and sustainable financing options to pay for it.
As Chief Economist at the State Department, I know that how cities manage this unprecedented growth will determine what our economies, societies and even global politics will look like in the years to come. It will shape the rise of emerging economic powers, the prospects of those hoping to join them, and the staying power of developed economies as well. And everywhere – from the streets of Manhattan to the shantytowns of Kibera - infrastructure finance and governance that enable it are critical pieces of the puzzle. There are lessons to learn from one another and a great deal of work to do. I want to thank everyone here for participating today, and helping prepare our cities for this historic transformation, one investment project at a time.