Funding, financing and governing urban infrastructure Regional Studies Association Student and Early Career Conference, 28 Oct 2016 Andy Pike Henry Daysh Professor of Regional Development Studies andy.pike@ncl.ac.uk
Outline The arguments Urban entrepreneurialism redux Funding, financing and governing urban infrastructure The UK case: City Deals, London and uneven development Conclusions
The arguments Evolving context for funding, financing and governing urban infrastructure Harvey s (1989) urban entrepreneurialism redux: Financialisation accelerating, deepening and reinforcing urban entrepreneurialism into new and more speculative directions with socially and spatially uneven and uncertain outcomes Reworking rather than diminishing the role of the state in urban entrepreneurialism and managerialism Funding, financing and governance fixes for urban infrastructure in global city regions unstable and undermining for national political-economic rebalancing
Urban managerialism, crisis and transition rationally planned and co-ordinated (Harvey 1989: 7) provision of urban facilities and services Social need focus Collective provision and consumption led and orchestrated by the state at national and local levels following Keynesian fiscal strategies Economic crisis Deindustrialisation Internationalisation Erosion of the urban economic and fiscal base and rising indebtedness Source: Harvey, D. (1989) From managerialism to entrepreneurialism: the transformation in urban governance in late capitalism, Geografiska Annaler. Series B. Human Geography, 71, 1, 3-17
Urban entrepreneurialism redux urban governments had to be much more innovative and entrepreneurial, willing to explore all kinds of avenues through which to alleviate their distressed condition and thereby secure a better future for their populations (Harvey 1989: 4) Source: Harvey, D. (1989) From managerialism to entrepreneurialism: the transformation in urban governance in late capitalism, Geografiska Annaler. Series B. Human Geography, 71, 1, 3-17
27 years on Key changes I financialisation Current special episode of global financialisation, exponential growth, phenomenal acceleration and [enhanced] pressure asserted by finance (Harvey 2015: 100, 177-78) Use values of the fixed capital locked in place in urban infrastructure transformed into exchange values and rendered liquid, transactable and mobile by capitalization (Harvey 2012: 11) = Financialisation accelerating, deepening and reinforcing urban entrepreneurialism into new and more speculative directions with socially and spatially uneven and uncertain outcomes Source: Harvey, D. (2015) Seventeen Contradictions and the End of Capitalism, Oxford University Press: Oxford; Harvey, D. (2012) The urban roots of financial crises: reclaiming the city for anti-capitalist struggle, Socialist Register, 48, 1-35
27 years on Key changes II the role of the state precisely because all this activity [i.e. investments in the urban built environment] is a hugely important site for value and surplus value production [and] is so long-term, it calls for some combination of finance capital and state engagements as absolutely fundamental to its functioning (Harvey 2012: 12) = Reworking rather than diminishing the role of the state in urban entrepreneurialism and managerialism Source: Harvey, D. (2012) The urban roots of financial crises: reclaiming the city for anti-capitalist struggle, Socialist Register, 48, 1-35
Urban infrastructure integral to capitalism in order for capital to circulate freely in space and time, physical infrastructures and built environments must be created that are fixed in space (Harvey 2015 :75) Source: Harvey, D. (2015) Seventeen Contradictions and the End of Capitalism, Oxford University Press: Oxford
Source: Dubai 2016, Author s image
Defining infrastructure Source: Weber, B. and Alfen, H. W. (2010) Infrastructure as an Asset Class: Investment Strategy, Project Finance and PPP, Wiley: Chichester
anything that can be destroyed in an action movie (John Oliver) Source: John Oliver (2015) Infrastructure, http://www.huffingtonpost.com/2015/03/02/john-oliver-infrastructure-video_n_6783818.html
Evolving context since the 1980s Source: New metro station, Athens, Greece; DG REGIO, European Union
Growing infrastructural development and renewal demands and gaps Source: MGI (2016) Bridging Global Infrastructure Gaps, McKinsey Global Institute: Brussels: 4.
Global Financial Crisis and the Great Recession Source: IMF (2016: 13) World Economic Outlook 2016, IMF: Washington DC
Infrastructure and economic growth, recovery and competitiveness Investment in network infrastructure can boost long-term economic growth in OECD countries. Moreover, infrastructure investment can have a positive effect on growth that goes beyond the effect of the capital stock because of economies of scale, the existence of network externalities [i.e. positive or negative effects on a user of a product or service of others using the same or compatible products or services] and competition enhancing effects (Égert et al. 2009: 3) Source: Égert, B., T. Koźluk and D. Sutherland (2009), Infrastructure and Growth: Empirical Evidence, OECD Economics Department Working Papers, No. 685, OECD Publishing..
State indebtedness, fiscal consolidation and austerity Source: IMF (2016: 17) World Economic Outlook 2016, IMF: Washington DC
The search for new public and/or private funding and financing models Source: CBI (2011: 33) An Offer They Shouldn t Refuse: Attracting Investment to UK Infrastructure, CBI: London.
Financialisation and infrastructure as an asset class Essential services for populations and businesses relating to physical flows (i.e. broadband, energy, transport) or to social goods (education, healthcare) Government as a direct client, highly proximate to the transaction (via economic regulation) and/or guarantor Long term and supporting high leverage Stable and predictable cash flows Attractive and less volatile returns Low sensitivity to swings in business cycles and markets Inflation hedge Low default rates Natural monopolies due to network characteristics, capital intensity or government policy Generally low technological risk Source: Adapted from Inderst, G. (2010) Infrastructure as an asset class, EIB Papers, 15, 1, 70-104
Funding and financing practices Temporality Type Examples Taxes and fees Special assessments; User fees and tolls; Other taxes Established, Tried and tested Grants Extensive range of grant programmes at multiple levels Newer, Innovative Debt finance Tax incentives Developer fees Platforms for institutional investors Value capture mechanisms Public private partnerships Asset leverage and leasing mechanisms Revolving infrastructure funds General obligation bonds; Revenue bonds; Conduit bonds New market/historic/housing tax credits; Tax credit bonds; Property tax relief; Enterprise Zones Impact fees; Infrastructure levies Pension infrastructure platforms; State infrastructure banks; Regional infrastructure companies; Real estate investment trusts Tax increment financing; Special assessment districts; Sales tax financing; Infrastructure financing districts; Community facilities districts; Accelerated development zones Private finance initiative; Build-(own)-operate-(transfer); Build-lease-transfer; Design-build-operate-transfer Asset leasing; Institutional lease model; Local assetbacked vehicles Infrastructure trusts; Earn Back funds
Dimension Traditional approaches Emergent approaches Rationale(s) Economic efficiency Social equity Market failure Unlocking economic potential Expanding revenue streams Releasing uplift in land values Market failure Focus Individual infrastructure items Infrastructure systems and interdependencies Timescale Short(er) up to 10 years Long(er) up to 25-30 years Geography Single local authority area Functional economic area Scale Small(er), targeted Large(er), encompassing Lead Public sector Public and/or private sectors Organisation Projects Programmes Funding Grant-based Investment-led Financing Process Governance Management and delivery Established instruments and practices Formula-driven allocation, (re)distributive Centralised Top-down National government and single local authority-based Single local authority-based, arms-length agencies and bodies Innovative, new and adapted instruments and practices Negotiated, competition-based (De)centralised Bottom-up and top-down National government and multiple local authority-based Multiple local authority-based, joint ventures and new vehicles Source: O Brien, P. and Pike, A. (2016) Deal or no deal? Governing urban infrastructure funding and financing in the UK City Deals, Draft Paper, CURDS: Newcastle University.
The UK case: City Deals, London and uneven development
Spatial disparities in the UK in context, 1995-2012 Source: Cambridge Econometrics
Rebalancing Our ambition is to foster prosperity in all parts of the country, harnessing the great potential across the range of industries in the UK. Opportunity must not be confined to particular postcodes, and hardworking and talented individuals must not be denied the chance to succeed. Instead, we must rebalance our economy, ensuring that growth is spread and prosperity shared Source: Nick Clegg, Deputy Prime Minister, quoted in BIS (2010a: 3) Local Growth: Realising Every Place s Potential, Cm7961, Department for Business, Innovation and Skills: London.
UK urban infrastructure governance and investment This government is committed to rebalancing growth across the regions and nations of the UK and is committed to the creation of a Northern Powerhouse (HMT (2015) Budget 2015, London, HM Treasury: 14).
UK infrastructure investment Source: House of Commons (2013) Infrastructure Policy, House of Commons Library: London: 9, based on Office for Budget Responsibility data
Infrastructure investment for economic growth, recovery and competitiveness
Lack of funding not financing is the problem what is restricting annual capital expenditure on infrastructure is not financing but funding. Funding (paying for the infrastructure over time) and financing (meeting the up front costs of construction) are fundamentally different. If it is not clear to financiers that users and/or taxpayers will pay relatively stable, secure and predictable amounts of cash each year for an infrastructure project, it is impossible to attract financing, regardless of how much money institutions have available to finance sound projects (Maxwell- Jackson 2013: 5) Source: Maxwell-Jackson, Q. (2013) Build the Infrastructure: Bin the Wish List, CentreForum: London
City Deals The Coalition Government is committed to building a more diverse, even and sustainable economy. As major engines of growth, our cities have a crucial role to play. But to unlock their full potential we need a major shift in the powers available to local leaders and businesses to drive economic growth. We want powerful, innovative cities that are able to shape their economic destinies, boost entire regions and get the national economy growing. The aim of these deals is to empower cities to forge their own path, to play to their own strengths and to find creative solutions to local problems (Nick Clegg, Deputy Prime Minister, Foreword, HMG 2011)
Waves 1, 2 and 3 Wave 1 Wave 2 Wave 3 Greater Birmingham The Black Country Glasgow and Clyde Valley Bristol Region Bournemouth Aberdeen Greater Manchester Brighton and Hove Cardiff Leeds City Region Greater Cambridge Inverness Liverpool City Region Coventry and Warwickshire Nottingham City Region Hull and Humber Newcastle Region Greater Ipswich Sheffield City Region Leicester and Leicestershire Milton Keynes Greater Norwich Oxford and Central Oxfordshire Thames Valley Berkshire Plymouth Preston and Lancashire Southampton and Portsmouth Southend Stoke and Staffordshire Sunderland and the North East Swindon and Wiltshire Tees Valley Source: Deputy Prime Minister s Office and Cabinet Office
City Deal geographies Source: O Brien, P. and Pike, A. (2016) Deal or no deal? Governing urban infrastructure funding and financing in the UK City Deals, Draft Paper, CURDS, Newcastle University
Population in City Deal areas 32,128,398, 51% 30,622,502, 49% City Deal areas Rest of GB Source: O Brien, P. and Pike, A. (2016) Deal or no deal? Governing urban infrastructure funding and financing in the UK City Deals, Draft Paper, CURDS: Newcastle University.
Gross Value Added (GVA) of City Deal areas 675,648, 45% 816,815, 55% City Deal areas Rest of GB Source: O Brien, P. and Pike, A. (2016) Deal or no deal? Governing urban infrastructure funding and financing in the UK City Deals, Draft Paper, CURDS: Newcastle University.
New funding per capita ( ) in City Deals 900 800 800 700 600 556 500 400 300 385 346 200 100 0 145 60 53 51 34 26 23 3 3 Source: O Brien, P. and Pike, A. (2016) Deal or no deal? Governing urban infrastructure funding and financing in the UK City Deals, Draft Paper, CURDS, Newcastle University
Infrastructure funding and financing in the City Deals Instrument City Deal Detail Earn-Back Greater Manchester Payments by results infrastructure investment designed to raise GVA growth, from which GM earns back a return of national tax Defined long-term grant funding Tax Increment Financing (New Development Deals) Economic and Strategic Infrastructure Investment Fund Rail and Bus Devolution Local Transport Major Funding Greater Cambridge, Glasgow Clyde Valley and Leeds City Region Newcastle, Sheffield City Region and Nottingham All Wave 1, Black Country, Greater Norwich and Preston, South Ribble and Lancashire Greater Manchester, Bristol and West of England, Leeds City Region and Sheffield City Region Greater Birmingham and Solihull, Bristol and West of England, Leeds City Region, Sheffield City Region, Preston, South Ribble and Lancashire Up to 25 years grant funding paid in 5- year tranches and subject to assessment. LAs may borrow to fund up-front spending Critical infrastructure investment against projected future business rates Pooled funding, business rates, loans, borrowing and/or developer contributions to be self-sustaining Commissioning, managing and regulating local and regional franchises/networks 10-year nationally devolved transport funding matched locally for strategic transport investments One-off Transport Project Funding Oxford and Oxfordshire Joint national and local investment in individual road schemes Source: Authors research; Marlow, D. (2012) City Deals Implications for Enhanced Devolution and Local Economic Growth, Policy Briefing, LGiU: London.
Governance models in the City Deals Elected Mayor Governance Liverpool City; Bristol City Example Combined Authority West Yorkshire (Leeds City Region) Elected metro mayor and Combined Authority Greater Manchester; Sheffield City Region; Liverpool City Region; North East (Newcastle, Sunderland); Tees Valley; Greater Birmingham and Solihull Private sector-led Nottingham Source: Authors research; Marlow, D. (2012) City Deals Implications for Enhanced Devolution and Local Economic Growth, Policy Briefing, LGiU: London.
Change in Local Authority spending power and Government funding, 2010/11-2015/16 Source: National Audit Office (2014) Financial Sustainability of Local Authorities, NAO: London
Tax revenues attributable to local and regional government as % of total tax revenues by country, 1975-2012 Source: Martin, R., Pike, A., Tyler, P. and Gardiner, B. (2016) Spatially rebalancing the UK economy: the need for a new policy model, Regional Studies,
Source: Daniel Chapman
London s economic turnaround Source: Martin, R., Gardiner, B. and Tyler, P. (2014) The Evolving Economic Performance of UK Cities: City Growth Patterns 1981-2011, Working Paper, BIS Government Office for Science, Foresight Future of Cities: London.
London s economic geography Source: ONS (2014) Commuting Patterns into London, 2011, ONS: London.
Population change, England, 2014-24 2014 2024 No. % England 54,316,600 58396,300 4079700 7.5 London 8,538,700 9,708,000 1,169,300 13.7 East 6,018,400 6,554,300 535,900 8.9 South East 8,873,800 9,596,200 722,400 8.1 South West 5,423,300 5,816,500 393,200 7.3 East Midlands 4,637,400 4,950,200 312,800 6.7 West Midlands 5,713,300 6,052,400 339,100 5.9 Yorkshire and the Humber 5,360,000 5,608,900 248,900 4.6 North West 7,133,000 7,409,100 276,100 3.9 North East 2,618,700 2,700,600 81,900 3.1 Source: Office for National Statistics Population Projections 2016
London regional rail passenger journeys, 1995/96-2013/14 1000000 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 1995-96 1997-98 1999-00 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14 Source: Office of Rail and Road (2016)
Filling the London infrastructure gap Infrastructure Type Projected Cap. Ex. (2016-2050) ( bn) % Total Housing 547 42 Transport 466 35 Energy 148 11 Schools 68 5 Water 49 4 Green 22 2 Waste 14 1 Digital 8 1 Total 1,324 100 Source: Arup (2014) The Cost of London s Long-term Infrastructure, Final Report for Greater London Assembly, Arup: London.
Limited fiscal autonomy Municipal operating expenditures per capita ( ) Municipal taxes (local and shared taxes per capita) ( ) London (GLA + Boroughs 2011) 3,199 476 Berlin 4,910 2,570 New York 4,561 3,078 Paris 2,699 1,896 Tokyo 3,301 2,312 Source: Slack, E. (2013: 5) International Comparison of Global City Financing, Report for the London Finance Commission, Institute on Municipal Finance and Governance, Munk School of Global Affairs, University of Toronto
Tax and Spending in UK Cities 2013/14 ( billion) 160 140 134.6 120 100 98.2 80 60 40 20 0 30.6 30 22.7 23.4 19.8 18.6 15.1 19.7 12.5 14.2 9.5 8.8 London Manchester Liverpool Newcastle Sheffield Glasgow Birmingham Taxes generated Public spending Source: Centre for Cities (2015) Mapping Britain s Public Finances, London, Centre for Cities.
Funding and financing London s transport infrastructure: Northern Line extension Source: GLA (2013)
Speculating on density and tax receipts The Northern Line extension is a good infrastructure project but the justification and levels of density to pay for it are questionable. It is based on a TIF (business rate) scheme, and is a project that needs high levels of density to pay for itself (Official, London Government, Authors Interview, 2015).
State-backed financialisation Some commentators cite that a wall of money from Sovereign Wealth Funds, Infrastructure Funds, Pension funds and other similar investors is available to invest in infrastructure The size of the project, the construction risk, the demand risk and the likely reliance on nonpatronage revenues to pay the bulk of the project means that, without direct government guarantees, such investors are unlikely to invest in Crossrail 2 (PwC 2014: 7) Source: PwC (2014) Crossrail 2: Funding and Financing Study, PwC: London
Funding, financing and governance fixes for urban infrastructure in global city-regions in national political economies Governments and economic elites, however, may well decide that the national interest requires subordination of many local interests to that of the key city or cities that will be the leader in global competition As the production of wealth becomes more urban states have shifted resources to invest massively in their capital cities and in urban infrastructures, from information technology to research, financial platforms to transport (Crouch and Le Galès 2012: 406) Source: Crouch, C. and Le Galès, P. (2014) Cities as national champions?, Journal of European Public Policy, 19, 3, 405-419.
Capital value of infrastructure projects in London (c. 36bn/c.8m population = 4,500 per capita) Source: Calculated from HM Treasury (2014) National Infrastructure Plan 2014, HM Treasury: London and ONS (2014) population estimates.
Capital value of regional infrastructure projects and programmes in rest of England (c. 53bn/c.46m population = 1,152 per capita) Source: Calculated from HM Treasury (2014) National Infrastructure Plan 2014, HM Treasury: London and ONS (2014) population estimates.
Conclusions Evolving context for funding, financing and governing urban infrastructure Harvey s (1989) urban entrepreneurialism redux: Financialisation accelerating, deepening and reinforcing urban entrepreneurialism new and more speculative directions with socially and spatially uneven and uncertain outcomes Re-worked roles for the state in urban entrepreneurialism and managerialism speculation and co-ordination/integration with multiple actors and scales in UK governance Funding, financing and governance fixes for urban infrastructure in global city regions unstable and undermining for national politicaleconomic rebalancing London central to national growth and recovery but austerity, fiscal localisation and intensified spatial disparities
Acknowledgements This research has been undertaken in collaboration with Peter O Brien (CURDS, Newcastle University) and John Tomaney (Bartlett School, UCL) as part of the Infrastructure BUsiness models, valuation and Innovation for Local Delivery (ibuild) research centre funded by Engineering and Physical Sciences Research Council and Economic and Social Research Council (https://research.ncl.ac.uk/ibuild/)