Maximizing Finance For Sustainable Urban Mobility

Maximizing finance for sustainable urban mobility
DANIEL PULIDO
FEBRUARY 07, 2018
The World Bank Group (WBG) is currently implementing a new approach to

development finance that will help better support our poverty reduction and shared
prosperity goals. This crucial effort, dubbed Maximizing Finance for Development
(MFD), seeks to leverage the private sector and optimize the use of scarce public
resources to finance development projects in a way that is fiscally, environmentally, and
socially sustainable.
There are several reasons why cities and transport planners should pay close attention
to the MFD approach. First, while the need for sustainable urban mobility is greater than
ever before, the available financing is nowhere near sufficient—and the financing gap
only grows wider when you consider the need for climate change adaptation and
mitigation. At the same time, worldwide investment commitments in transport projects
with private participation have fallen in the last three years and currently stand near a
10-year low. When private investment does go to transport, it tends to be largely
concentrated in higher income countries and specific subsectors like ports, airports, and
roads. Finally, there is a lot of private money earning low yields and waiting to be
invested in good projects. The aspiration is to try to get some of that money invested in
sustainable urban mobility.
What are the constraints to greater private investment in sustainable

urban mobility?
Only a small share of private investment in transport goes to public urban transport.
Why is this?
1. Most urban transport systems do not cover their operation and maintenance expenses,
let alone capital expenses.
2. Unlike airports and ports, urban transport projects generate revenues in local currency,
creating an immediate barrier to cross-border financing.
3. Upgrading to more environmentally friendly vehicles or building a mass transit system—

metro, light rail, Bus Rapid Transit, etc.—requires investing large amounts of money at
once.
4. Private urban transport operators have limited control over ridership, especially in cities
that are seeing rapid motorization and the emergence of new alternatives like shared
mobility.
5. The contracts between authorities and operators for urban transport concessions are
complex and vary widely within the same country, or even within the same city.
6. In many developing cities, bus services are provided by multiple small and
unsophisticated operators that are not considered creditworthy or cannot generate
sufficient repeat business to become a valued client for commercial banks.
What can governments do to remove these constraints?

1. Focus on who pays (funding), not only who lends (financing). The question should
not be how much money cities need to borrow and from whom, but rather how much
money they can afford to spend given society’s willingness to pay for sustainable
mobility via taxes or user charges. When we are approached with a financing gap and
a request for a loan, we should turn around and say: how much more funding can you
raise out of the sector? Have you considered urban transport systems’ ancillary
revenues? Are you maximizing land value capture opportunities? Can you reduce
implicit subsidies to cars so that you can reallocate some of that money to fund more
sustainable transport? A sustainable urban mobility system generates enormous
benefits that can be monetized to create new income streams and raise financing.
2. Public-Private Partnerships (PPPs) are not the only way to raise private
finance. By using the new revenue streams mentioned above and improving their
financial management, local authorities—including urban transport state-owned
enterprises and national or subnational governments—could become more attractive to
private investors and issue commercial municipal debt.
3. Broaden the investor base. Don’t just turn to banks, which have a limited capacity to
provide long-term finance, but consider institutional investors as well, such as pension
funds and insurance companies. Climate investors can also provide new sources of
funding: in December 2016, Mexico City became the first subnational government to
issue a green bond in Latin America that was used to finance sustainable transport
projects, including improvements to the city’s metro system.
4. Focus on developing more efficient financing frameworks. The urban bus sector is
one in which you need to completely change the procurement and financing framework
to remove the constraints. An example of such change is splitting the delivery of urban
bus services in two different PPPs: one for the provision and maintenance of the bus
fleet (most capital-intensive part) and the other one for operations. Larger bus
acquisitions can facilitate and reduce the cost of financing, while contracts focused on
operations improve cost-recovery and increase the operators’ focus on improving
operational performance.
5. Develop comprehensive investment programs rather than individual

projects. Scale matters: it is not the same to go to the market with one project than with
a program, which creates a critical mass and draws on greater interest from the private
sector.
What can the World Bank Group do to help?
The WBG is helping client countries overcome these hurdles via advisory, lending, and
risk management products. Constrains may arise on different fronts and call for a
multisector response involving multiple WBG practices as well as a variety of World
Bank, IFC, and MIGA products. When the challenge is to design projects that can
attract private sector interest, World Bank teams provide advisory services to help client
governments design better urban rail PPPs. When a client municipality struggles to
access private finance due to low credit ratings and shallow financial markets, a credit
guarantee may be the right option. Another constraint could be the foreign exchange
risk, for which the WBG can provide hedging solutions.
I look forward to continuing working on engagements that bring together the best of the
WBG to address these complex issues and help us reach sustainable mobility goals.

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Maximizing finance for sustainable urban mobility

The World Bank Group (WBG) is currently implementing a new approach to

What are the constraints to greater private investment in sustainable

3. Upgrading to more environmentally friendly vehicles or building a mass transit system—

What can governments do to remove these constraints?

5. Develop comprehensive investment programs rather than individual

What can the World Bank Group do to help?

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