How to finance urban development megaprojects?

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As Latin American and Caribbean (LAC) cities grow, so do their needs for adequate and sustainable infrastructure. Whether building a new mega-project, or regenerating a run-down urban area, as in the cases of Bilbao and Washington DC, the region’s cities need financing to meet the costs of such works.

Consequently, the mayors of the cities of LAC face a big budgetary uncertainty: how can municipalities meet the current challenges with limited financial resources that have been further depleted by the pandemic? What financing options are available to fund large infrastructure projects?

The IDB Mayors’ Forum in Denver on April 26, 2023 discussed some of the most creative solutions cities around the world are currently implementing to diversify their revenue sources, combining local and national equity with private investment.

In today’s article, which is part of a series on subnational financing, we explain three of the most successful international strategies for financing urban mega-projects. At IDB’s Housing and Urban Development Division we truly hope that these experiences can serve as inspiration for LAC cities, to whom we would be happy to offer our advice and support.

Megaprojects: benefits beyond infrastructure

Urban megaprojects are large-scale development initiatives aimed to achieve a comprehensive transformation of spaces in cities through changes in land uses and in the built environment. These are complex programs of urban intervention involving multiple stakeholders and employing substantial levels of capital. Examples include London (Canary Warf and King’s Cross), New York (Hudson Yards), Barcelona (District 22), Singapore (Jurong Lake District) and Medellin (Ciudad Rio).

When successful, urban megaprojects can improve employment opportunities and local finances, enhance social infrastructure, improve property values, reduce the crime rate, and improve health conditions. Current research indicates that the number and size of these projects have increased over the past decades and with that increase comes new opportunities to innovate and redesign our built environment.

Unfortunately, the associated costs to bring about these changes can easily run into the billions of dollars, which can seem impossible, when you consider that most municipal governments in Latin America and the Caribbean are fiscally constrained, largely dependent on transfers from central governments to cover their spending responsibilities.

Three strategies for financing urban development megaprojects

Although there are many ways to finance urban renewal megaprojects, we share some of the ones that have worked most successfully internationally. To do so, we will travel to Japan, London and Hong Kong:

1. LAND READJUSTMENT

This is one of Japan’s main urban planning tools that assists in the development of large-scale urban mega projects in the country. The main mechanism for executing land readjustment involves changing the design, location, dimensions, and area of several land parcels through a process of transferring property rights from one area to another in pursuit of the intended urban design scenario. In other words, old lots are transformed into new ones, in partially or totally different locations and forms. The “innovation” of this tool is, ultimately, the participation of landowners in the urban project through the equal division of the project’s costs and benefits, thus avoiding the need for expropriation and its associated costs and bureaucratic obstacles.

*Left: exterior of Akihabara Intermodal Station | Right: exterior of Shinagawa Station*

The tool was used successfully in the cases of the Akihabara intermodal Station (US$346 million estimated) and Shinagawa Station (US$4.4 billion estimated) and supported the development of roads, squares, public spaces, local streets by contributing land to the public land bank.

2. PUBLIC-PRIVATE PARTNERSHIPS WITH FLEXIBLE STRUCTURES:

In London, Section 106 Agreements regulate Public-Private Partnerships, which can require, for example, that owners and developers make a financial commitment (either fixed or recurring) or offer in-kind support in the local interest (such as affordable housing or community facilities) in exchange for development permits.

In the case of King’s Cross, Section 106 agreements established flexible land uses across floors, providing the conditions for consortium members to respond to market changes and other conditions as the project evolved. The process allowed the project to adapt to new conditions while addressing spatial needs, such as key routes, public spaces, historic preservation, maximum and minimum height requirements, and development zones. A recent study on the social and economic benefits of the redevelopment of King’s Cross found that it adds more than 600 million pounds per year in added value to the economy with more than 3 billion invested in construction since 2008, while outpacing other areas in terms of employment growth and increases in commercial and residential values.

*Aerial images of King’s Cross. Left: regeneration by construction of new buildings next to existing ones. Right: railroad station*

3. JOINT VENTURES:

One of the best cases of successful joint ventures in urban megaprojects is Hong Kong’s Mass Transit Rail (MTR) Corporation which for decades has used the Rail plus Property (R+P) model. The MTR Corporation was established in 1975 as a government-owned enterprise to build, operate, and maintain a mass transit railway system for Hong Kong’s public transport needs. In simple terms, the business model of the R+P functions by the government providing MTR with land “development rights” at different stations. To convert these development rights to land, MTR pays the government a land premium based on the land’s market value without the railway. MTR then builds the new rail line and partners with private developers to build properties, thus receiving a share of the profits that developers make from these properties.

*Right: Mass Transit Rail Corporation headquarters | Left: World-Wide House, a building constructed under the joint venture system by MTRC.*

For example, between 2000 and 2015, profits from property development and related business of MTR Corporation, including Hong Kong station commercial business and Hong Kong property rental and management business, accounted for more than 50 percent of MTRC’s total profit. More recently, in 2019, for every pound collected from tickets, there was £0.6 collected from either property rental and management or commercial businesses in stations.

As we already mentioned, this is just a sample of the various funding possibilities available to municipalities wishing to embark on building major urban renewal projects. Next week we will be back to share an analysis of how municipal funding works in the region. In the meantime, do not hesitate to share in the comments section if you know of any type of mega-project in your country or city. We’ll be happy to read them!

Cover Image: Ciudad de Río, Medellín