Harvard lecturer, John D Macomber, discusses the potential for SIBs in mega cities…
Mega-Cities May Need Social Impact Bonds
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The future of cities depends on… innovative financing, says John D Macomber, senior lecturer in the finance unit at Harvard Business School. Contrary to what many believe, there is no infrastructure funding gap when it comes to urban initiatives, as the world is not short on capital. What we have, rather, is a bankable projects gap where the projects themselves are simply not attractive to investors, he argues.
The main challenge is that while investors are great at understanding a single asset with standalone cash flows, such as a toll road, tackling the issue of mega-city sprawl requires multi-sector coordination so that roads, rail, land-use, zoning, power, water, and sanitation work together.
In traditional financing models, investors can’t see their way to a financial return based on some abstract added value of the integrated whole, says Macomber. “The benefits are diffuse, including economic growth, city competitiveness, more jobs for more people, and more efficient use of scarce resources such as energy (which leads to less pollution).”
So, what’s the answer? Cue a new financial product, the social impact bond – also known as the pay-for-success contract. It creates a risk-bearing financial arrangement between public, private, and non-profit organisations.
Such instruments could be structured so that, say, real estate developers and infrastructure promoters are paid bonuses based on various measures of progress achieved beyond the minimum expectation – multi-sector outcomes could include the likes of reduced commuting times, or reductions in the rate of urban pollution per unit of GDP.