How can cash-poor African, Asian cities raise finance for key infrastructure?

by Sophie Davies | @sophiedaviesed | Thomson Reuters Foundation
Friday, 17 November 2017 14:07 GMT

An emergency official watches an excavator dig through the rubble of a collapsed building in the Victoria Island district of Lagos November 5, 2013. REUTERS/Akintunde Akinleye

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Cities in Asia and Africa must develop new forms of financing for infrastructure in the face of a huge financing gap

Cities will have to develop new forms of financing for transport, infrastructure and other urban resilience projects, in the face of a huge financing gap, according to the head of the Igarapé Institute.

"We're going to have to come up with new forms and means of financing these projects because it's a huge financing gap right now, especially in Africa and Asia," said Robert Muggah, co-founder of the Brazil-based Igarapé Institute, which focuses on security and development issues in Latin America.

"There are enormous opportunities in these sectors and I think companies would be lining up if there were just a little less risk associated with them," he told the Thomson Reuters Foundation on the sidelines of the 2017 Smart City Expo World Congress in Barcelona this week.

The global demand for infrastructure investment is estimated to total $3.7 trillion a year. However only about $2.7 trillion is invested annually, leaving a $1 trillion financing gap, according to the World Economic Forum.

It is a big challenge to get these projects off the ground because ultimately cities in many developing countries are cash poor, and cannot finance important initiatives themselves, he added.

Poor taxation systems mean some developing cities do not have enough revenue to move ahead with these projects, which are critical in cities seeing rapid population growth, he said.

This is because some of the population do not pay taxes as they work in informal labour markets and live on the periphery of cities in slums, he added.

"Cities are going to have to find a way to make sure that land is actually tenured, that people are actually paying taxes otherwise they won't be able to raise the kind of capital they need to make the hard decisions they have to," he noted.

Neither can these cities raise capital for the projects themselves easily because they do not have a credit rating, he said. Most small and medium sized cities in Africa and Asia – with a population of under 1 million people – do not have credit ratings, he added.

Investors can "still be reluctant to get involved in some of these cities of the fast growing Global South", he noted.

African cities like Lagos and Johannesburg are struggling to attract international investors, who may prefer to invest in less risky projects in developed cities in North America or Europe, he said.

One way to make these projects more attractive to investors would be to empower international financial institutions like the World Bank so they can invest in these kinds of projects in a more structured way, or launch new financial instruments with commercial banks, he added.

Cities could also look to financing solutions like green bonds to raise funds for infrastructure, however only Cape Town and Johannesburg have been successful in issuing green bonds to date, he noted.

Cities could also help themselves by developing their start-up mentality, meaning they could pool investments for specific projects, he said.

"A lot of large companies especially infrastructure and technology companies do see opportunities in these sectors", but they worry that business contracts may not be honoured in developing cities, he said.

However, it is now easier for cities with less cash to develop urban projects, he said.

That is because they can develop lighter, less expensive infrastructure projects instead of traditionally heavy, capital-intensive ones, he noted.

"They can move away from really heavy infrastructure like roads and move towards more mixed use infrastructure that may involve bikes, light rail and rapid bus transit," he said.

"Cities that are fast growing have an opportunity to not make the mistake of investing in really capital-heavy infrastructure and come up with the lighter, tighter, smarter infrastructure of today," he added.

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