Financing Climate Futures RETHINKING INFRASTRUCTURE Financing a Resilient Urban Future A Policy Brief on World Bank and Global Experience on Financing Climate-Resilient Urban Infrastructure Financing Climate Futures RETHINKING INFRASTRUCTURE Financing a Resilient Urban Future A Policy Brief on World Bank and Global Experience on Financing Climate-Resilient Urban Infrastructure Standard Disclaimer: This volume is a product of the staff of the Interna- tional Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not neces- sarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement: The material in this publication is copyrighted. Copy- ing and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/The World Bank encourages dissemina- tion of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, tele- phone 978-750-8400, fax 978-750-4470, http://www. copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. This paper was prepared as a part of Financing Climate Futures: Rethinking Infrastructure, a joint initiative of the OECD, UN Environment and the World Bank Group, to help countries deliver on the objective of making financial flows consistent with a pathway towards low emissions and climate- resilient development. It was authored by the World Bank Group and does not necessarily reflect the views of the OECD or UN Environment. CONTENTS 6 Abbreviations 7 Overview 8 About this policy brief 8 Terminology and scope of the brief 9 Acknowledgments 10 1. Financing climate-resilient urban infrastructure: Some basic concepts 16 2. The impacts of climate change on urban infrastructure and how to address them 16 Overview 18 Taking action: Changing the management practices and operations of infrastructure system to enhance climate resilience 21 Taking action: Changing urban infrastructure system design to enhance climate resilience 26 3. Trends and innovations in urban infrastructure financing 26 Overview 28 Policy control powers 28 Taxes 29 Land value capture 30 Insurance 30 User fees 31 Payments for ecosystem services 32 Ecological fiscal transfers 32 Official development assistance 34 Global climate funds 36 Public-private partnerships 38 Dedicated financing facilities and “green banks” 39 Bonds 41 4. Key takeaways 44 Appendix: Impacts of climate change on urban infrastructure: Water, transport, and energy systems 49 References Boxes 19 Box 2.1 New York MTA cat bond 22 Box 2.2 China’s US$300 billion “sponge cities” 24 Box 2.3 Building climate resilience into power system planning in Bangladesh 25 Box 2.4 Florida Power & Light Company hardens system against storm outages 27 Box 3.1 Policy and investment decision making under uncertainty 38 Box 3.2 Supporting green infrastructure in European cities: The Natural Capital Financing Facility 39 Box 3.3 New Jersey Energy Resilience Bank Figures 26 Figure 3.1 Percentage of local “Adaptation Economy” spending on urban infrastructure climate adaptation initiatives (by subsector) in 10 global megacities 27 Figure 3.2 Total climate adaptation spending by urban infrastructure sector in 10 global megacities, 2014–15 Tables 11 Table 1.1 Financial sources potentially available to support urban infrastructure projects 31 Table 3.1 Utility cost recovery rates based on sector, income level, and region 33 Table 3.2 Climate adaptation finance per year, multilateral development banks (MDBs) 35 Table 3.3 Allocation of global climate funds to water, energy, and transport projects 37 Table 3.4 Urban public-private partnership projects by region Photo 15 Photo 1.1 Financial Solutions for City Resilience Workshop, Bangkok, July 2018. Abbreviations ADB Asian Development Bank Japan International Cooperation JICA AFD Agence Française de Développement Agency CDIA Cities Development Initiative in Asia KWh kilowatt-hour CEPAC Certificate of Potential Additional LDCF Least Developed Countries Fund Construction LVC land value capture CIF Climate Investment Funds MDB multilateral development bank CRP City Resilience Program (World Bank) MW megawatt CSO combined sewer overflow NCFF Natural Capital Financing Facility GCF Green Climate Fund NGO nongovernmental organization GDPc gross domestic product (city) ODA official development assistance GEF Global Environment Facility OECD Organisation for Economic Co- DFI development finance institution operation and Development DFID Department for International O&M operations and management Development (U.K.) PES payment for ecosystem services DR demand response PPCR Pilot Program for Climate Resilience Electricité de France EDF PPI Private Participation in Infrastructure ecological fiscal transfer EFT PPP public-private partnership Energy Resilience Bank (N.J.) ERB RATP Régie Autonome des Transports Florida Power & Light Company FPL Parisiens Green Climate Fund GCF ROI return on investment Global Environment Facility GEF SCCF Special Climate Change Fund Deutsche Gesellschaft für GIZ SDG Sustainable Development Goal Internationale Zusammenarbeit TEPCO Tokyo Electric Power Company GmbH TNC The Nature Conservancy GW gigawatt TWh terawatt-hour Inter-American Development Bank IDB UNEP United Nations Environment International Energy Agency IEA Programme 6 | Financing a Resilient Urban Future OVERVIEW As urbanization trends become more prominent on these issues, as are national governments globally, a variety of questions arise about how worried about the threats to their primary cities will develop physically, demographically, economic engine. Local climate action plans economically, and technologically. Each dimen- are emerging that–as best they can given the sion has profound implications for the type and many uncertainties about what the future may scale of infrastructure needed to facilitate–or hold–reflect the latest climate science and cir- manage–these changes. cumstances such as local geography, level and type of economic activity, demographic trends, Climate change and the push to deliver on the policy-making capabilities, political will, and United Nations’ global Sustainable Development legacy investments in infrastructure systems. Goals (SDGs) raise the ante on all of these issues. The science and circumstances profoundly af- For example, climate change may accelerate the fect what climate resilience strategies or in- growth rates of some cities as subsistence farm- vestments are viable. ers and pastoralists in rural areas lose their liveli- hoods because of drought and are forced to move In many cities in the global South, the problem to areas where other livelihood opportunities is even more complex because cities already are more promising (Rigaud et al. 2018). In oth- facing an infrastructure deficit must also grap- er cities, climate impacts may ultimately shrink ple with the growing demand for infrastructure the amount of land available for habitation or services sufficient to accommodate their bur- affect the viability of economic activity on that geoning populations. This problem is particu- land (Hallegatte et al. 2013). Aging infrastructure larly acute in Sub-Saharan Africa and South systems may be especially prone to damage as Asia. Layering climate change on top of this temperature levels rise, extreme weather events situation only adds to the challenge as cities grow in severity, and higher sea levels and storm weigh strategies to ensure that the investments surges become more problematic, overwhelming made today do not quickly become tomorrow’s the design capacity of these systems. damaged or stranded assets. Failing to invest in urban resilience can also reverse hard-fought The cost of the direct physical impacts of climate development gains and send millions of urban change may be matched or exceeded by the indi- residents back into poverty (Santos and Leit- rect economic losses suffered if essential infra- mann 2015). structure systems and supply chains are forced offline for many weeks or months (Noy and Patel Where will the resources come from to pay for 2014). Both types of impacts could have dramatic any climate-related repairs or these new or re- effects on a city’s ability to bounce back follow- placement climate-resilient urban infrastruc- ing a climate-related disaster (Goldstein 2018). ture systems? The cost may be immense, with some estimates placing the current sustainable Acknowledging these possibilities, mayors and infrastructure financing gap at more than US$1 local policy makers are increasingly focusing trillion a year (Bhattacharya et al. 2016). Overview | 7 About this policy brief of these instruments to different contexts. How- ever, because the World Bank primarily engages This policy brief was developed as part of the Fi- with governments, this analysis does not delve nancing Climate Futures initiative, a joint effort into the roles different types of private financing of the Organisation for Economic Co-operation instruments may play in the financial package for and Development (OECD), United Nations En- a specific investment project (such as subordinat- vironment Programme (UNEP), and the World ed debt or equity investment). Bank, with the support of the German Federal Ministry for the Environment, Nature Con- This policy brief is organized as follows. Chapter servation, and Nuclear Safety. The initiative 1 describes how urban infrastructure costs are emerged in response to the invitation by the traditionally funded or financed in cities around G20 Hamburg Climate and Energy Action Plan the world, as well as the recent trends in this for Growth for “the OECD, UNEP, and the World area. Chapter 2 distills the growing literature Bank to compile ongoing public and private on how climate change may affect urban infra- activities within the G20 for making financial structure systems, what solutions local author- flows consistent with the Paris goals and, build- ities and infrastructure system operators may ing on this, to analyze potential opportunities need to consider to address these challenges, for strengthening these efforts and present this and how these solutions link back to capital or analysis in 2018.” operating cost implications. Chapter 3, the heart of the analysis, looks in greater detail at the rele- This brief complements the longer Financing vance of the specific policy, funding, and financ- Climate Futures: Rethinking Infrastructure report ing mechanisms currently available in each sec- prepared by OECD and another analysis pre- tor, highlighting specific city examples where pared by UN Environment, both of which will be possible. The brief concludes with some final released in late 2018. thoughts on the issues that local governments, infrastructure system operators, national gov- The analysis described here examines issues re- ernments, and development finance institutions lated to the funding and financing of three core may wish to consider going forward. urban infrastructure systems: water, transport, and energy. These systems are essential to sus- taining local public health, economic produc- Terminology and scope tivity, and quality of life. These systems are also of the brief critical during times of crisis, facilitating the movement of people out of harm’s way and sup- porting recovery once the emergency has ended. In this policy brief, the default choice is use of the term climate resilience wherever possible This brief draws on World Bank experience and when describing activities directed at reducing data sets and a desktop review of the academic and the future impact (or system vulnerabilities) of grey literature on these topics. It does not pres- climate change–related risks. In several instanc- ent new research on the topic, seeking instead to es, however, the terms adaptation or climate ad- bring existing information together in new and aptation appear. Use of these terms is deliberate, different ways. Specifically, it seeks to answer the so that the text accurately reflects the author’s question of what funding and financing instru- choice of terms in research or publications cited ments may be available to local governments and in this brief. The term climate adaptation is also infrastructure system operators in cities around commonly used by multilateral development the world, and how these instruments link back banks (MDBs) to report climate co-benefits, and to the climate challenges these governments and some of the global climate funds also prefer this operators may face. Because the answer is heavily term. For consistency’s sake, their lead is fol- dependent on local circumstances, this brief of- lowed to ensure that their conclusions or results fers some commentary on the potential relevance are not misrepresented. 8 | Financing a Resilient Urban Future As for the scope of this policy brief, it does not only the incremental costs associated with the seek to capture or discuss the totality of the design elements that make a project climate re- World Bank’s experience on all facets of ur- sponsive qualify as adaptation-related finance. ban resilience, including economic, social, and Because of the limited scope of this policy brief, technological resilience. This topic has received the approach employed by each researcher or growing research and programmatic attention institution is simply accepted as a given, and in recent years, and it has been explored at the cost or spending levels as they have defined length in other publications by the World Bank them are reported. and other institutions (see, for example, Rodin 2014 and Santos and Leitmann 2015). The World Finally, in this brief use of the term infrastruc- Bank has been particularly active in this area. Its ture is necessarily broad, encompassing forms 2015 flagship report Investing in Urban Resilience that are both “green” (natural/ecosystem-based) detailed a myriad of technical assistance, ana- and “grey.” lytic work, and financing mechanisms address- ing different aspects of this issue (Santos and Leitmann 2015). Acknowledgments This brief also does not seek to develop a new This policy brief was written by Stephen Ham- definition of what constitutes spending on cli- mer, with key support from David Allen and mate-resilient urban infrastructure. Each of the Rissa Camins. We also benefited greatly from data sets reported on here uses its own defini- helpful inputs from World Bank colleagues Raul tions and methods. For example, Georgeson et Alfaro-Pelico, Maria Cordeiro, Richard Damania, al. (2016) aggregated data on what they charac- Marc Forni, Charles Fox, Stephane Hallegatte, terized as the “make and mend” economy. They Josef Leitmann, Neha Mukhi, Julie Rozenberg, looked at 10 specific sectors of the economy and Arame Tall, and Roland White. then quantified spending on specific activities thought to have a relationship to adaptation and A special note of thanks is extended to col- resilience to climate change. The leading MDBs leagues at the German Federal Ministry for the employ a process-based approach, seeking to Environment, Nature Conservation, and Nu- distinguish between a regular development clear Safety (BMU), Deutsche Gesellschaft für project and one that provides climate adapta- Internationale Zusammenarbeit GmbH (GIZ), tion co-benefits. To qualify as the latter, a pro- and German Federal Ministry for Economic Co- ject must include design elements responsive to operation and Development (BMZ) for their ac- future (and locally appropriate) climate change tive interest and helpful suggestions during the impacts. Moreover, for accounting purposes drafting of the report. Overview | 9 1. FINANCING CLIMATE-RESILIENT URBAN INFRASTRUCTURE: SOME BASIC CONCEPTS Several aspects of urban infrastructure sys- repairs in a timely manner could result in far tems fundamentally shape the financing con- greater expenditures down the line, shifting versation. The first is the overarching enabling the burden from operating budget to capital environment, market structure, and system de- budget (McKinsey 2013). sign parameters established by government at the national1 or local level. The decisions made Third is the difference between a local authority’s at this level affect who operates these systems, overall spending levels and the capital and oper- whether a competitive marketplace is in place ating budgets linked to specific infrastructure for infrastructure services delivery, and how systems. The point here is that a city is a “system these services are priced. Important decisions of systems” (Gardner 2016) and–especially when are also made on the extent to which a nation- speaking about financing considerations–sys- al government makes intergovernmental cash tem-specific circumstances matter. For example, transfers available to support local infrastruc- a city may have a municipally managed depart- ture systems, thereby supplementing any sys- ment for roads and highways on which use is tem revenues, and how or whether government freely permitted. In the same city, however, the shoulders any of the risk borne by the system electricity supply may be owned and operated by operator for climate-related disasters. a private utility. Access is limited to those paying for the service, and few government resources The second aspect is the basic difference be- are available for either operating or capital ex- tween a local authority’s capital expense budget, penditures. The management team at each utili- covering expenditures for goods and services ty likely views the financing landscape for their whose benefits extend beyond one year, and respective operations in starkly different terms. its operating expense budget, covering the ex- penditures needed for day-to-day operations, Table 1.1 illuminates the elements that funding including maintenance (Venkateswaren 2014). and financing landscape might include. It pre- This temporal difference is important because sents 12 basic types of funding sources that local the impacts of climate change may increase the authorities or infrastructure system operators maintenance requirements for assets of the ur- may conceivably tap to pay for operations or ban infrastructure system. Failure to undertake system upgrades. Sources include those over 1. For simplicity’s sake, the term national government is treated as a proxy for all supralocal government bodies, including state or regional authorities. The goal here is to differentiate a government entity with primary political and administrative responsibility for a specific city (referred to here as a local government or local authority) from other tiers of government responsible for multiple cities. 10 | Financing a Resilient Urban Future which local government may have some lever- potentially of use but generally outside of local age such as intergovernmental cash transfers, government control include dedicated climate taxes, user fees/tariffs, fines/penalties, official funds, philanthropic resources, private debt or development assistance (ODA), government-is- equity investments, risk finance and insurance sued debt, and the creation of some type of payouts, and central government transfers de- public-private partnership. Funding sources termined by formulas. Table 1.1 Financial sources potentially available to support urban infrastructure projects Type of source Description Comments Intergovernmental • Cash transfers of tax revenues The importance of these transfers in local budgets is gener- cash transfers or other resources from central ally linked to the level of fiscal decentralization authorized by government to local authorities for a national government. general or specific use Depending on restrictions imposed by the provider, cash transfers can be used equally for operating or capital expendi- tures. The size of the cash transfer is generally based on some formula or methodology and can be vulnerable to political differences between providing and receiving institutions. The timing of the transfer is a key concern because delays in receipt can make it difficult for a city or system operator to meet payroll or other costs. Heavy reliance on these transfers can also lead to delays in emergency response or post disaster recovery because recipients have limited control over the timing or conditions governing release of the transfers. Taxes May include: Taxation powers at the local level are typically tightly con- • General tax revenues (such as prop- trolled and regulated by national government. erty, sales, and income tax) Targeted taxes that seek to internalize the cost of negative • Targeted environmental or loca- externalities are commonly used to support public goods, tion-specific taxes or surcharges including capital expenditures on environment-focused infra- linked to access to infrastructure structure. services or other amenities Revenues can be used for either operating or capital expendi- tures. Land value capture • A mechanism to allow a government Typically targeted at the location-specific beneficiaries of to capture some of the development a policy or zoning change or other capital investments. Can be value impact of policy and zoning structured as a tax (linked to existing property taxes) or as an changes or amenity and infrastruc- auctionable development right. Generally used to support new ture improvements in a designated capital investments. area User fees/tariffs • Directed at the users of a good or Fees/tariffs are usually tightly regulated, balancing equity and service (such as the per unit charges cost recovery goals. One benefit is that they can be adjust- for electricity or water usage; rider- ed relatively quickly and deliver immediate sources of new ship fees for public transport) revenue compared with other financing sources that may be available only once a year or on a one-off basis. Can be used for either operating or capital expenditures. Fines/penalties • Financial penalties for violation of Generally considered to be an unstable revenue source. redirected for other environmental quality standards or Presumes that a system exists to monitor and levy these fines. use other rules Alternatively, penalties may arise from legal proceedings assessing damages for rule violations. Financing climate-resilient urban infrastructure: Some basic concepts | 11 Type of source Description Comments Official development May include: From multilateral and bilateral sources. Generally linked to assistance (ODA) Grants or subsidies a framing agreement laying out goals for how resources are to be used. Often comes with an emphasis on environmental and Market rate investment project financ- social safeguards designed to protect people and ecosystems. ing (loans) or development policy Depending on a country’s development status, these funds Loans may or may not include discounted (concessional) rates to Concessional rate investment project ensure affordability. financing (loans) or development May take the form of loans to support capital investments or policy loans projects or loans to support policy, regulatory, or institution- Pay-for-results loans al changes. De-risking instruments (guarantees) May take the form of a direct loan or a credit guarantee aimed at improving the attractiveness of a project to private investors. Government-issued May include: Requires basic creditworthiness and an enabling environment debt General obligation bonds that allow a city or system operator to issue bonds. Because of the transaction costs of issuing a bond, they are usually used to Special-purpose bonds finance large capital projects. Green bonds (for dedicated environ- mental purpose) Other private finance May include: Classes of investors have different appetites for these types of Investment in public debt (general or investments based on return on investment (ROI), investment project-specific) liquidity, and investment tenure. Some investors also make sectoral investments for asset diversification purposes. Equity stake investment in specific projects Typically used for capital investment projects. Investment in infrastructure system operators operating under a pub- lic-private partnership (PPP) or other operating authority PPPs Build-operate contracts between Can take multiple forms, often with a focus on how contracts government and private contractor can be structured to require the private contractor to bring additional resources to maintain or upgrade the infrastruc- ture system. Can also be structured so risks to system integrity are shared by government and contractor, thereby providing the contractor with a greater incentive to ensure the system is properly maintained or protected against risks (including climate change) Dedicated climate May include: May involve entitlement window with guaranteed resource funds Loans/grants from Global Environ- flow to individual countries based on fixed parameters. Also ment Facility (GEF), Green Climate includes project-based applications under certain funding Fund (GCF), Climate Investment windows. Funds (CIF), or country- or re- Access to carbon-focused climate funds is linked to the mitiga- gion-specific funds tion outcome achieved, but if done properly projects can also Carbon markets or other mar- be structured to deliver climate adaptation co-benefits. ket-based climate instruments Can be used for either operating or capital investment costs. Philanthropic May include: Typically involves small grants. Resources are more commonly resources Grants or subsidies available for technical studies, project preparation, and capaci- ty building than for capital investments. Social impact investments Social impact investments are typically made in companies or projects with the intention of generating both a financial and a social or environmental return. Often structured to generate a below-market (concessional) financial return on investment. 12 | Financing a Resilient Urban Future Type of source Description Comments Insurance payouts May include: Can have a high cost ratio but may nonetheless be preferred (used to repair or Private risk or catastrophe insurance by governments and system operators facing strict borrowing replace damaged constraints who will not be able to borrow to finance repairs system assets) National or regional parametric risk if damages occur; if borrowing is too slow to allow for a rapid facilities response to system outages; or if insurance brings other advantages such as speed, predictability, transparency, and discipline in how resources are used. Parametric risk facilities vary in terms of whose resources are at risk in terms of payout (private investors or development aid/donor resources) and the nature of the triggering event or action. Speed of payout is a concern, as is clarity on what qualifies as a triggering event. Typically used to replace revenues (for operating capital) or for replacement or upgrade of capital stock. The amount of resources potentially available quently too few trained tax assessors, revenue from each of these funding sources varies pro- collectors, and effective enforcement mecha- foundly across countries. For example, a com- nisms. Even if the national government allows parison of eight large cities in OECD countries a local government to impose specific types of found that intergovernmental cash transfers taxes or fees, it may have difficulty delivering on ranged from a low of 6 percent in one city’s the full revenue potential of these funding in- budget to 69 percent in another’s. However, six struments (Venugopal and Yilmaz 2010). of the eight cities in the study receive less than a third of their annual budget from these trans- In many countries, official development assis- fers, with the majority of the difference made up tance is another critical part of the financing from own-source revenues, including various picture, particularly for large capital investment types of property taxes, sales taxes, and other projects. Sources of funds may be global or re- fees (Slack 2017). gional multilateral development institutions such as the World Bank, Asian Development By contrast, cities in developing countries are Bank (ADB), or Inter-American Development generally far more dependent on intergovern- Bank (IDB) or bilateral development finance in- mental transfers. One study looking at local gov- stitutions such as the Japan International Coop- ernment resources in Tanzania found that own- eration Agency (JICA), Deutsche Gesellschaft für source revenues make up just 7 percent of total Internationale Zusammenarbeit GmbH (GIZ), revenues in Tanzanian cities, with cash trans- Agence Française de Développement (AFD), and fers covering the remaining 93 percent (Masaki the United Kingdom’s Department for Interna- 2018). Bahl’s 2017 study looking at the finances of tional Development (DFID). The parameters gov- 10 large Asian and Pacific Rim cities (including erning funding are formally negotiated and cod- Bangkok, Beijing, Jakarta, Kolkata, and Saigon) ified in a multiyear agreement. These resources similarly found that intergovernmental trans- typically cover a wide range of development fers are a “major” revenue source for most of goals, with the level of attention paid to climate these cities and that their ability to establish dif- change mitigation and climate adaptation vary- ferent types of local taxes is greatly proscribed ing across countries. by central government. Depending on the ODA source and how fund- A principal reason intergovernmental transfers ing is structured, monies may flow separately dominate the fiscal picture of many developing to a specific city or project or pass through as countries cities is the general lack of capacity part of a larger intergovernmental transfer al- within local government, where there are fre- location. Before development support can be Financing climate-resilient urban infrastructure: Some basic concepts | 13 allocated to an urban infrastructure project, the by the World Bank estimates that only 20 per- project must generally receive the endorsement cent of the 500 largest cities in developing coun- of the national finance ministry as it is often the tries are considered creditworthy (Kuzio and official interlocutor of ODA relationships. Some Lypiridis 2018). The Bank provides a preliminary development finance institutions (DFIs) do have self-assessment tool3 that allows users to develop direct urban access financing windows, includ- a customized action plan of specific institutional ing AFD. How much this influenced the fact that reforms, capacity building, and other measures 51 percent of AFD’s climate-focused lending in that improve their creditworthiness and their 2014 had an urban focus (CCFLA 2015) is unclear. ability to plan, finance, and deliver infrastruc- ture services. The difficult and sometimes slow To enhance the level of own-source resourc- work then lies ahead as cities begin to make the es, ODA, and private capital available for ur- needed changes revealed by the assessment pro- ban-scale projects, cities are increasingly fo- cess. To date, more than 600 officials from more cusing on capacity building, city (or system) than 300 cities in 60 countries have participated creditworthiness, and project preparation sup- in World Bank–led workshops on this topic. The port initiatives. The goal is to address the ina- Bank is currently in the process of revamping bility of a city or infrastructure system operator these activities, so they better align with fol- to attract certain types of financing or to learn low-up technical assistance work. more about how to bundle available own-source and ODA resources in ways that strategically Another important global trend is the creation mobilize other resources. The notion of lever- of project preparation facilities aimed at turning age emerged from the Addis Ababa development ideas about infrastructure upgrades or system finance conference in 2015, when the leading expansion into investable projects. Facility staff MDBs agreed to enhance the use of concessional work with the project proponent to improve the resources to crowd in other sources of finance project description or design, carry out detailed (Joint Ministerial Committee 2015). The World feasibility studies, determine the structure of the Bank’s vision of how to deliver on this pledge deal and identify potential investors, and under- is known as Maximizing Finance for Develop- take other project development tasks that most ment.2 The Bank is also preparing to release investors consider preconditions (USAID 2017). a new policy note exploring how to prioritize the Project preparation facilities supportive of ur- use of concessional public finance to maximize ban climate projects have been established by the climate impact and crowd in additional pri- C40 Cities (2018); the Inter-American Develop- vate financing sources on climate-related pro- ment Bank (2018); and the Global Urbis program jects (World Bank, forthcoming). of the European Union, European Investment Bank, European Bank for Reconstruction and The World Bank (2015a) and C40 Cities (2016) Development, and Global Covenant of Mayors have each launched city creditworthiness ini- (Global Covenant of Mayors 2017). tiatives that seek to remedy low-capacity lev- els within city government by educating local The Cities Development Initiative in Asia (CDIA) government leaders about the fundamentals of is one of the oldest project preparation facilities. creditworthiness and municipal finance. These It has engaged 143 medium-size cities in 18 Asian fundamentals include revenue management and countries over the last 11 years. Supported by enhancement; expenditure control and asset Austria, France, Germany, Sweden, and Swit- maintenance; capital investment planning; debt zerland, and managed by the Asian Develop- management; and financing options. Research ment Bank, CDIA has helped 71 cities with pro- 2. For more information, see http://www.worldbank.org/en/about/partners/maximizing-finance-for- development. 3. See http://www.citycred.org. 14 | Financing a Resilient Urban Future ject preparation studies that ultimately yielded Photo 1.1 Financial Solutions for City Resilience Workshop, US$7.7 billion in project support. CDIA conducts Bangkok, July 2018. infrastructure investment prioritization as- sessments and project preparation studies, and it provides capacity development support. The initiative seeks to ensure that each urban infra- structure investment has positive impacts in at least two out of three priority areas: poverty re- duction, environmental governance, and climate change mitigation or climate change resilience. To date, 13 percent of CDIA’s project preparato- ry studies have focused on climate change resil- ience, often in connection with flood and drain- age infrastructure. CDIA has been co-managed by ADB and GIZ, but as of 2019 it will continue as an ADB-managed multidonor trust fund.4 The World Bank’s new urban infrastructure pro- ject preparation facility is integrated into its City Resilience Program (CRP), a multifaceted initia- tive that seeks to help local officials shift away from the traditional sector-specific approach- es toward projects and programs that improve a city’s resilience in a more holistic manner.5 CRP engages in three distinct phases of work: (1) a comprehensive needs assessment looking at the institutional, technical, and financial bar- riers to infrastructure system investments in Photo credit: Stephen Hammer. a city; (2) a rapid capital assessment that gives an initial indication of a city’s (or system opera- The CRP initiative was launched in 2017 and is tor’s) readiness to access specific types of capital currently working with 45 local government finance instruments used by the private sec- teams in 20 countries. Engagement is launched tor and development finance institutions; and by holding week-long intensive workshops in- (3) once the specific policy interventions and volving government teams, sector experts, and investment plans are defined, expert advisory project financing advisers. (photo 1.1) With suf- support (including legal and financial services, ficient funding, the World Bank expects to bring transaction structuring, and capital markets ex- on 40–50 new cities each year, with a major perts) to tackle private capital mobilization, PPP emphasis on knowledge sharing across cities. arrangements, and loan structuring and syn- The Bank also expects to use these workshops dication. If necessary, assistance is also made and technical assistance efforts to leverage re- available on hedging, de-risking, and credit en- sources from other initiatives at the World Bank hancement financing instruments. linked to infrastructure adaptation.6 4. http://cdia.asia/. 5. For more information, see http://www.worldbank.org/en/topic/disasterriskmanagement/brief/city- resilience-program. 6. See Santos and Leitmann (2015) for a full listing of these instruments. Financing climate-resilient urban infrastructure: Some basic concepts | 15 2 THE IMPACTS OF CLIMATE CHANGE ON URBAN INFRASTRUCTURE AND HOW TO ADDRESS THEM Overview The discussion of impacts that follows is indica- tive and does not seek to fully replicate the many The previous chapter focused on the mechanisms excellent studies that explore these impacts at that local authorities and infrastructure system great depth–see, for example, Ebinger and Van- operators could access to support spending on cli- dyke (2015); Ebinger and Vergara (2011); and mate resilience. This chapter provides a glimpse Rosenzweig et al. (2011, 2018). The appendix to into the impacts of climate change and the possi- this brief provides more detail about the impacts ble solutions driving local funding needs. described here. For the purposes of this policy brief, the major Impacts of temperature increase impacts of climate change affecting urban in- and drought on operations and operating frastructure are divided into three basic types: and capital budgets (1) temperature increase and drought, (2) oth- er extreme weather events, and (3) sea level rise With each passing year, rising temperatures are and storm surge. Each of these impacts has the becoming more commonplace in cities around the potential to damage urban water, transport, and world, straining infrastructure systems as cities energy infrastructure, affecting the physical in- struggle to cope with the heat (Rosenzweig, 2018). tegrity of system assets and the level or quality In urban water systems, higher temperature and of service that could be provided by these assets. drought can affect the level of water supply avail- In some instances, the impacts of climate change able and degrade water quality. Temperature rise could alter the level or timing of demand placed can also increase rates of evaporation, thereby in- on infrastructure systems. For example, rising creasing the demand for water for landscape irri- heat levels could increase the overall level and de- gation and human consumption and exacerbating mand for energy, or floodwaters could overwhelm the competition for water resources. the storage or throughput capacity of water sys- tem assets. In the transport sector, higher temperatures can buckle road surfaces and railway tracks and Climate change could have positive impacts as change the freezing and thawing conditions af- well, such as operating cost savings and lower re- fecting roadways and subsurface rails during win- pair costs for utilities. For example, milder winters ter months, affecting their durability and quality. could reduce the level of asset damage associated Passengers may be forced to endure higher tem- with snow or freezing temperatures. Whether the peratures both above and below ground while overall operation cost impacts are positive or neg- waiting for transport services to arrive, potential- ative depends on the circumstances in each city. ly affecting their willingness to use these systems. 16 | Financing a Resilient Urban Future In the energy sector, impacts may take sever- with storms can badly damage physical infra- al forms. Energy demand is likely to be affected structure assets. Downed trees, tree limbs, and in many cities as rising temperatures interact wires can block roadways, undermine the struc- with growing wealth and rising population lev- tural stability of facilities, and damage equip- els, driving up the demand for air-conditioning ment. For water systems, intense rainfall events and refrigeration technology. According to the will increase sediment loads in waterways and International Energy Agency (IEA), the energy reservoirs, leading to increased siltation of wa- demand for cooling is expected to triple globally ter storage facilities and reducing overall stor- by 2050 over the current levels (IEA 2018). China age capacity. Higher rainfall volumes can also has already experienced tremendous increases overwhelm cities with combined sewer overflow in its cooling-related load, jumping from 6.6 ter- systems, resulting in the release of raw sewage awatt-hours (TWh) in 1990 to more than 450 TWh into local waterways. Fuel stocks staged near in 2016, a 68-fold increase. The amount of genera- power plants may be destroyed by floodwaters tion capacity required to satisfy the growing peak or rendered unusable. demand is potentially massive. Extreme weather events typically result in High levels of energy demand can tax transmis- higher operating costs for cleanup, repair, and sion and distribution systems beyond their orig- replacement of assets. In addition, utilities inal design limits, leading to equipment failure. knocked offline may experience a loss in oper- Drought can also reduce the volume of water ating revenue, and insurance costs may rise be- available to cool thermal power plants and less- cause of a payout. For energy systems, capital en energy output from hydro facilities, leading investments in flood barriers or berms may be to brownouts or blackouts. Higher temperatures required, or assets may have to be moved out of can lengthen the growing season for vegetation, flood zones altogether. Meanwhile, water stor- thereby increasing the amount of material that age capacity may have to be expanded to handle could fall and damage power distribution lines future floodwaters and rainfall. during wind and rainstorms. Impacts of sea level rise and storm surge on In each of these cases, utilities may incur capital operations and operating and capital budgets costs for additional supply and storage capacity for water and energy resources. System operators Sea level rise and storm surge also pose threats to may also face operating revenue losses as system physical infrastructure. Floodwaters and storm generation output and usage levels are affected. surge can undermine the structural stability of Depending on the locale, the overall operational roads, rail networks, and bridges. They also can and maintenance costs may increase for munici- damage vehicles, transmission poles, and under- palities as they seek to repair damaged roads, rail ground substations, among other assets. Saltwa- lines, and power distribution networks. In some ter encroachment can contaminate surface and instances, cooling water intake or effluent pipes groundwater supply sources. will have to be relocated, and power transmission and distribution systems may need to be upgrad- Beyond the repair and replacement costs of dam- ed to meet more rigorous performance standards. aged infrastructure as sea levels rise, cities may no longer be able to rely on gravity to discharge Impacts of extreme weather events combined sewer overflow and wastewater efflu- and storms on operations and operating ent, increasing pumping costs. Energy assets in and capital budgets coastal areas may have to be replaced with saltwa- ter-resistant alternatives or relocated to higher Because of climate change, storms and other elevations to avoid sea level rise and storm surge. extreme weather events may become more fre- Transmission and distribution assets may also quent and severe. For all system types, the flood- have to be hardened or placed underground to ing, high winds, and lightning strikes associated prevent damage during extreme weather events. Financing climate-resilient urban infrastructure: Some basic concepts | 17 Potential positive impacts of climate mate risks and defray future replacement and change on operations and operating recovery costs for water, transport, and ener- and capital budgets gy systems. The impacts of climate change will generally be System management practices adverse, but there may be some cost reductions in certain cities. For example, warmer temper- Changes in system management practices are atures may reduce the incidence of burst water essential to mainstream climate change action distribution pipes in winter, or lower snow and into the planning and maintenance activities of ice levels may result in less damage to road sur- an infrastructure system operator. For exam- faces, rail tracks, or above-ground power dis- ple, some local authorities and infrastructure tribution lines. Whether overall operating cost utilities are educating their general staff about impacts are positive or negative depends on the climate change issues and integrating respon- circumstances in each city. sibility for specific climate resilience tasks into individual staff or teamwork program agree- Climate change impacts outside urban areas ments. Such steps expand the capacity of indi- viduals within the operation, create the man- Climate change–related system impacts may date for staff to systematically take this issue occur directly within a city, or they may occur into account, and then establish oversight mech- remotely where power is generated or water is anisms that maintain an organizational focus stored before it is consumed in the city. For pow- on these issues over time. In Rio de Janeiro, for er generation or transmission assets that feed example, the city’s latest climate adaptation plan into but are located outside of the purview of specifically highlights the need to define institu- a local energy system owner or operator, the di- tional focal points, assign responsibilities across rect costs will be immediately borne by that en- different departments, train professionals with- tity. Customers in the city may nonetheless feel in local government, and create incentives and the pinch as prices rise to cover the cost of any fundraising mechanisms to allow the placement system repairs or changes needed to harden the of scientific and technical professionals within system against climate change impacts. Depend- specific departments (Rio de Janeiro 2016). ing on locale and historic investments or agree- ments, urban water customers may be affected Analytically, many cities and utilities are un- by climate change impacts at the point of supply dertaking climate risk and system needs assess- that are quite different from those impacts expe- ments as a first step, seeing this as a road map rienced in the city itself. for directing efforts going forward (Asian Devel- opment Bank 2013; World Bank 2015b). The re- sults inform changes in system monitoring and Taking action: maintenance protocols, as well as conversations Changing the management about future system design changes. Many wa- ter industry groups and consultants have devel- practices and operations oped guidance on how to carry out these assess- of infrastructure system to ments, including how to manage uncertainty enhance climate resilience about the localized nature and severity of the impacts (GWOPA, UN Habitat 2016; Hulsmann et Local authorities and infrastructure system op- al. 2015; USEPA 2018). One point that inevitably erators can mitigate the higher capital and op- arises in these risk assessment conversations is erating expenditures arising from the impacts the central role of facility siting in minimizing of climate change by implementing manage- or exacerbating climate risks. For obvious rea- ment practices and operational changes that sons, water facilities are often located adjacent reduce hazards to physical infrastructure. Da- to local waterways, leaving them vulnerable to ta-informed forward planning can lessen cli- flooding. As system upgrades are considered, 18 | Financing a Resilient Urban Future however, a climate proofing strategy may in- bond in 2013 to cover losses specifically arising volve relocation of these facilities to other par- from storm surge (see box 2.1) A second catastro- cels of land where the flood risk is lower. phe bond was issued in 2017 valued at US$125 million. The bond pays out if there is a storm Many public works departments and system op- surge event that exceeds certain threshold levels erators are launching initiatives to improve their at one of two tidal gauge locations in New York oversight of climate resilience efforts. PG&E, the Harbor (Artemis 2013). largest private investor–owned utility in Califor- nia, has recruited its own in-house science team to regularly review relevant climate science Box 2.1 New York MTA cat bond studies and integrate that information into the In 2012 the storm surge from Hurricane Sandy inflicted damage company’s risk assessment process (PG&E 2016). totaling nearly US$5 billion on New York’s Metropolitan Trans- In Hong Kong, local officials have set up a work- portation Authority (MTA), the largest transportation network ing group to monitor the implementation status in North America (Mortimer 2013). In preparation for more of recommendations arising from a climate as- frequent and severer weather events, in 2013 the MTA sought sessment of its transport system (UITP 2016). the first-ever storm surge–focused catastrophe bond worth US$200 million. The bond, named MetroCat Re Ltd., was issued To the extent necessary, climate considerations by First Mutual Transportation Assurance Company (FMTAC) also should be integrated into procurement the MTA’s traditional insurance provider. practices, especially for equipment that has The bond is triggered on the basis of storm surge heights at two a long lifespan. In London, Transport for Lon- tidal gauges in New York Harbor managed by the National Oce- don (2015) invested in a Comprehensive Flood anic and Atmospheric Administration and the U.S. Geological Risk Review that covers all assets and all causes Survey (Kenealy 2013). In a pre-sale report, the rating agency of flooding, emphasizing impacts related to loss Standard & Poor’s demonstrated through modeling how the of service. As part of this assessment, Transport two tidal gauges selected by the MTA were those most close- ly correlated with the MTA’s exposure at different subway and for London is prioritizing key assets and assign- transit tunnels. The MetroCat was structured with no sliding ing a “tolerability of safety risk” factor to these scale of loss, so that FMTAC would receive 100 percent of the facilities. The World Bank has begun to embrace outstanding principal if a loss payment were triggered. Stand- improved asset management practices as a sys- ard & Poor’s rated the MetroCat bond at BB– and priced it with tematic part of its work with transport clients, an interest rate of 4.5 percent (Burne and Mann 2013). arguing that mainstreaming climate change into In May 2017, the MTA and FMTAC issued a second cat bond, siting, operations, maintenance, and system structured by Swiss Re Capital Markets and Goldman Sachs, planning activities will ultimately deliver a pay- for US$125 million. In addition to storm surge, the bond will back over the long term that is many times the be triggered by parametric factors associated with earthquake size of this upfront investment. One study look- risks over a three-year term. The bond was eventually priced ing at this issue in the Pacific Islands concluded with an interest rate of 3.7 percent. that “every dollar of routine maintenance that is deferred will end up costing US$5 in repairs, or ultimately US$25 in rehabilitation or replace- One area in which system operators may wish to ment as the asset declines overtime” (Pacific expand efforts is data collection linked to local Infrastructure Advisory Centre 2013). weather and climate conditions. Because of the tremendous uncertainty over how conditions One after-the-fact strategy potentially of use will change in the coming decades, utilities can to utilities or system operators is the adoption better inform future planning efforts by compil- of catastrophe bonds (also called cat bonds) to ing locally accurate data on system needs under serve as an insurance instrument to cover loss- different weather conditions. Flood hazard maps es from climate-related disasters. The New York are being scrutinized to determine which sys- Metropolitan Transportation Authority was the tem assets are most at risk and how flood zones first transit agency to pursue such an instru- may change because of sea level rise or more ex- ment, procuring a US$200 million catastrophe treme rainfall events. Some national transport The impacts of climate change on urban infrastructure and how to address them | 19 ministries have begun to revise their construc- In the immediate run-up to a climate-related tion protocols to better take changing conditions storm event, system operators could install flood into account. For example, Canada, Denmark, barriers near energy stations or water facility New Zealand, the Republic of Korea, and the entrances, cover ventilation grates, and move United Kingdom have begun changing drainage rolling stock to elevations where they are less at standards and structures and modifying road risk. As an option of last resort, operators could construction protocols to handle higher volumes remove particularly critical and hard to replace of water (Filosa 2015). To support this planning equipment just before a storm arrives. In New work and to ensure timely access to information York in the 24-hour period before Hurricane in the run-up to and during extreme weather Sandy hit the city, the subway system had crews events, many system operators are purchasing remove critical (and hard to replace) control and bespoke information or working with weather signal systems that were particularly vulnera- forecasting firms or agencies to tailor the type of ble, reducing the eventual downtime in the sys- information that is publicly available. tem from three weeks to one (Kolitz 2017). System operational changes A change in operating practice specific to the en- ergy sector is the use of demand response (DR) System operators can take several steps before, programs that pay customers to cut demand during, and after climate-related events to en- when requested by the system operator. Pay- sure that operations are less likely to be affect- ment levels can vary, based on the amount of de- ed or recover quickly if the impacts of climate mand reduction and how far in advance the cus- change do slow or stop system services. One step tomer notifies the system operator it is willing is pricing system services to promote conserva- to take this action. Demand response programs tion and efficient water and energy use, which have proven highly effective in many developed in turn affects the amount of resources a utility countries but are less prominent in developing must supply or treat. As the impacts of climate countries because they lack the enabling en- change become more prominent, the role of vironment. DR programs typically require the pricing may become even more important as a presence of third-party firms or entities that means of cutting demand and reducing the need will install the equipment needed to enable the for costly new supply sources. A key challenge, customer response, monitor the change in ener- however, is how to structure the tariff so it does gy use, and manage payments from the system not price low-income users out of the market, operator. One exception is India, where the pilot making it impossible for them to afford access to demand response programs established over the even basic system services. last several years have successfully reduced the demand for electricity by nearly 50 megawatts Other operational activities that can be carried (MW) during critical demand periods (Sarkar out before climate change–related events are et al. 2016). managing vegetation (to prevent limbs from falling on roadways and power lines), clearing During and after extreme weather events, trash from drainage systems, and reducing com- equipment substitution may be required. In the mercial water losses. These activities may have transport sector, buses could offer routing flexi- to be pursued more aggressively in the future. bility when subsurface or surface rail networks Rigorous adherence to an equipment mainte- are flooded or otherwise shut down. Public com- nance schedule can also ensure the longevity of munication after extreme weather events is also mission-critical equipment. Operational chang- critical to ensure that the public and local busi- es that increase systemwide climate resilience nesses have the information they need about start with improved maintenance practices be- road closures, transit options, water quality, and cause of the revenue and operating cost implica- energy supply. Stockpiling key equipment can tions and the link to supply adequacy issues that allow repairs to made quickly following such may arise in the future. an event. For example, Paris’s Régie Autonome 20 | Financing a Resilient Urban Future des Transports Parisiens (RATP) and many oth- service reach and structure of the “formal” wa- er transport system operators now stockpile ter supply and wastewater treatment system.7 sand (for sandbagging operations), pumps, or other mission-critical equipment that may be Land use planning is an important starting damaged in a climate event, allowing workers point for efforts to influence water system to repair any problems without excessive delay needs in a city. Allowing development to expand (RATP 2018). Timely system repairs of damaged into flood-prone areas means a city virtually rail or road surfaces, bridges, water facilities, guarantees it will be obliged to grapple with sea and power generation assets are important be- level rise or stormwater management problems cause of both the short- term revenue impacts long into the future. By contrast, land use strat- on the system operator and the longer-term egies that create “green” infrastructure, includ- economic impacts on the region, affecting the ing parks and other open spaces that double as tax base on which local system operations may short-term stormwater retention ponds, can partially depend. reduce the size requirements and cost of “grey” (manmade) infrastructure that local authorities or system operators are obliged to build and Taking action: maintain. China has been particularly active in Changing urban infrastructure promoting the use of green infrastructure in 30 of its cities (see box 2.2). system design to enhance climate resilience Using their control over construction practices and permits, local authorities can influence sys- Management or operational changes will help temwide needs through a parcel-specific focus. mainstream climate change into existing oper- For example, many cities promote the use of ations. However, because many cities will likely green roofs or on-site storage cisterns to man- grow in the coming decades or need to replace age stormwater runoff from individual parcels certain system assets, new design principles or of land. In heavy downpours, these systems features that clearly account for climate change serve as a buffer and lessen (or eliminate) a par- impacts will be required. Some of these will ap- cel’s demands on the formal stormwater man- ply to the physical design of the system, whereas agement system. Rules that limit the extent of others will emphasize geographic considera- allowable impermeable surfaces on a given par- tions to minimize exposure risks. Because of im- cel have a similar impact. Barcelona has gone so portant sectoral differences, this section breaks far as to estimate the total potential green roof the discussion out by infrastructure type. space capacity in the city (65 hectares), although as of 2013 only 3.5 hectares of green roofs could Water systems be found in Barcelona. In the Barcelona Green Infrastructure and Biodiversity Plan 2020, the Urban water systems have three major compo- city committed to increasing this number in nents: water supply, wastewater treatment, and each of the city’s 10 districts (Ajuntament de stormwater management. These systems reflect Barcelona 2013). From a system operator’s per- local demand, geography, proximity to supply spective, a key virtue of such rules is that they sources and the quality of those sources, any effectively transfer some stormwater manage- historic agreements granting the city access ment costs directly to individual property own- rights to supply sources, zoning rules affecting ers relieving the cost burden on the commu- lot size, and system design decisions about the nal system. 7. In some cities, service levels differ geographically, with decisions frequently driven by the expense of extend- ing service networks to less densely populated areas. In such areas, property owners may be expected to rely on their own groundwater supply or manage wastewater on-site via septic tank systems. This discussion primarily focuses on the formal infrastructure-intensive systems available in cities. The impacts of climate change on urban infrastructure and how to address them | 21 Box 2.2 China’s US$300 billion “sponge cities” China is investing nearly US$300 billion (1.9 trillion yuan) through 2020 to create 30 “sponge city” projects in Beijing, Shanghai, Shenzhen, Wuhan, and other areas. Sponge city projects are an approach to flood manage- ment that utilizes blue-green infrastructure such as permeable pavement, rain gardens as catchment basins, and wetlands to buffer against floodwater (Ohshita and Johnson 2017). Many cities in arid areas of northern China have struggled to provide adequate sewerage systems as road networks and urban developments have rapidly expanded (Garfield 2017). In recent years, major storms in the region have damaged infrastructure and caused flooding and loss of life. By 2030, China aims to install sponge city projects in 80 percent of urban areas across the country and reuse at least 70 percent of rainwater (Roxburgh 2017). In Shenzhen, a city of 20 million, the local government is partnering with The Nature Conservancy(TNC) and Glocal, a local nongovernmental organization, to create a sponge city demonstration project at an apartment building (Standaert 2018). The project will outfit the building with a potted plant system that absorbs water and gutter systems to capture excess rainwater in large tanks. The city is seeking to scale up the project to cover 50 percent or more of its buildings to reduce localized flooding, cut urban heating costs, and decrease canyon-ef- fect air pollution. As of November 2017, China provided cities with US$12 billion for sponge projects. The central government pro- vides funds for 15–20 percent of the costs (Biswas and Hartley 2017). The remainder of the costs is shouldered by local governments and private developers. TNC is looking into how financing structures in other cities outside China can be used in China. Environmental impact bonds are a possibility (Standaert 2018). However, in the Chi- nese context this debt-financing instrument may not be necessary because government-led initiatives can often be expanded and implemented quickly. For now, state-owned enterprises are likely to remain the main source of funding for sponge city projects. Several strategies are available to increase the cause of extreme weather events, the structural robustness of local water systems. Manmade or integrity of the storage facility is not at risk. natural berms or barrier walls can help protect water storage and wastewater treatment facili- Some cities may need to explore new water ties from flooding events and sea level rise. Some supply options in the coming decades. Identi- cities may need to increase the capacity of their fying new sources of water is a challenge in an stormwater diversion systems because, with the era in which freshwater sources are subject to spread of impermeable surfaces and the grow- long-standing water rights agreements. New ing intensity of storm events, systems once suf- storage facilities (sometime doubling as hydro- ficient are now undersized due to the increased power plants) are discussed, but they are gen- runoff levels. A different issue arises in cities that erally not something undertaken by local water have combined sewer overflow (CSO) systems system operators because of the cost, land use that process storm runoff through the waste- required, and the siting and permitting chal- water treatment system. The design of these lenges in areas outside of their geographic con- systems allows large volumes of storm water to trol. Many system operators believe desalina- overwhelm a system, pushing untreated sew- tion plants are a promising new supply source. age into local waterways. In the future, system Growth rates for new installations are estimat- operators may wish to separate these stormwa- ed at 7–9 percent a year in the Middle East and ter and wastewater systems lest contamination North Africa region alone (Voutchkov 2016). concerns become a recurring problem, possibly These systems have high associated energy costs, in violation of local water quality standards. At however, because of the energy intensity of the water supply storage facilities, system capacity desalination process. To the extent that these fa- may need to be revisited to allow cities to better cilities are powered by fossil fuel sources, cities withstand extended drought conditions or to en- may find themselves exacerbating the climate sure that when water volumes are too great be- problem these facilities are helping to solve. 22 | Financing a Resilient Urban Future Transport systems events, and so they must seek equipment or sys- tem design features less prone to damage during Transport systems in cities usually comprise these events or less costly to repair or replace various types of roads, sidewalks, bike lanes, (World Bank 2017). highways, bridges, and tunnels; mass transport systems either above or below ground; marine Energy systems and rail systems; intermodal freight facilities; and airports. Not only essential to daily life and Energy system operators have long taken weather the economic vitality of a city, the transport sec- into account when designing and operating their tor also plays a key role in facilitating an emer- systems. Hot days drive up the demand for energy gency response to natural disasters. However, for air-conditioning, and attention turns to deter- transport systems and road networks are high- mining where the power will be sourced from and ly vulnerable to the impacts of climate change whether the load borne by different segments of and generate high asset and well-being losses the local grid will exceed its design capacity. when damaged. This short-term focus does not necessarily mesh System operators and the relevant local plan- with a system’s long-term needs, however, par- ning bodies must therefore work closely to in- ticularly if demand changes and climate risks tegrate long-term climate information into local result in a significant departure from current planning processes. Steps in this approach can patterns. The World Bank’s energy and cli- include mapping hazards, identifying highly mate teams recently collaborated with power vulnerable assets, and understanding the poten- transmission system operators in Bangladesh tial risk of asset failure. For example, in Can Tho, (Box 2.3) and the eastern Caribbean to develop Vietnam, the World Bank team working with the new ways to weave long-term climate change local people’s committee on a comprehensive re- projections into their regular demand forecast- silience strategy discussed how the placement ing and system upgrade planning (World Bank of a new bridge could drive development into 2017a). The push for electric vehicles as an in- either the low-lying parts of the city or those dustrialization or climate change mitigation at a higher elevation (World Bank 2014). Bridge strategy may also have to be factored into local placement had obvious implications for the con- power system planning processes. Electric ve- struction cost of the bridge, but longer-term hicles change overall load levels and the timing implications were the potential repair costs for of the load, and they require the installation of any road networks that might ultimately be con- charging stations across the local distribution structed in low-lying areas of the city. grid, including locations originally designed for much lower load levels.8 When climate risks do exist, it may be neces- sary to invest in system upgrades that protect Demand forecasting work is also essential in the system from these risks. Investments will identifying the need for new or expanded power vary by system type: building expansion joints generation capacity in a city. To the extent that into rail networks, redesigning subway entranc- some generation sources may be less reliable in es to be more flood-resistant, elevating road the future–for example, because elevated water surfaces or train tracks in areas likely to flood temperatures in rivers used by power plants for more frequently in the future, and elevating sys- cooling purposes force these facilities offline, tem-critical equipment. System operators may or because drought cuts the output potential of also acknowledge that it is not possible to fully hydro facilities–there may be a need to expand protect against some climate change–related the level of transmission capacity feeding power 8. The World Bank is currently in the process of developing guidance for government and power system opera- tors on issues associated with the shift toward electric mobility. The report will be released in December 2018. The impacts of climate change on urban infrastructure and how to address them | 23 Box 2.3 Building climate resilience into power system planning in Bangladesh Bangladesh is one of the world’s most vulnerable countries to climate change. Home to over 161 million people, it faces frequent rolling blackouts due to inadequate power generation. In April 2017, Bangladesh had 13,179 MW of electrical generating capacity, or less than 400 kilowatt-hours (kWh) per capita, of which three-fourths comes from domestic gas extracted from onshore gas fields. As a result, Bangladesh has one of the lowest generating capacities in the world. In 2014 Bangladesh announced an ambitious program to develop the nation’s power system by increasing capacity by an additional 10 GW by 2019 and achieving 100 percent electrification by 2021 at a cost of approximately US$35 billion. The centerpiece of the program is a power system master plan dating from 2010 that weighs options to increase capacity to about 57 gigawatts (GW) by 2041. Recognizing the need for low-cost electricity, the 2010 version of the master plan adopted a least-cost planning methodology that was carried over to the 2015 iteration of the plan. The least-cost planning analyses in 2010 and 2015 were led by the consulting division of Tokyo Electric Power Company (TEPCO) and funded by the Japan International Cooperation Agency. This analysis suggested a shift in the generation mix from natural gas to coal in recognition of the declining amount of natural gas available domestically and the low price of coal. Bangladesh’s power system master plans of 2005, 2010, and 2015 reflect three separate analyses undertaken over an 11-year span. While comprehensive, the plans for domestic generationfailedto fully account for important cli- mate change–related risks, including flooding (which damages or forces power stations offline) and extreme heat waves (which drive up demand for cooling). Working with the government, the World Bank’s energy and climate teams recently reran the analysis, taking these climate change impacts into account. The new analysis found that standard least-cost planning methods under- estimate capital costs by US$3 billion over 25 years if Bangladesh omits the costs of protecting against floods. Moreover, the analysis identified the need to prioritize locations for new power plant development based on their flood risk profiles. For countries like Bangladesh in which most power plant sites are at high risk for flooding, a climate-aware plan that considers flood risk and alternative generation technologies (including renewables) can save US$0.2–3.3 billion during the planning period. The implications of this analysis are global and represent a first attempt to explicitly integrate climate risks in the models that underpin power system planning. Source: Based on World Bank (2017a). into a city or expand existing (or construct new) pursue to achieve redundancy in the system, al- generation facilities in or near the city less vul- lowing it to better withstand (or rebound from) nerable to these climate risks. climate-related damage. In New Orleans, which was hard-hit by Hurricane Katrina in 2005, the During flooding, storm surge, extreme weath- local utility partnered with the U.S. Department er, or heat events, system “hardening” strate- of Energy to explore the role that microgrids can gies that move critical equipment out of harm’s play in maintaining critical infrastructure dur- way may prove helpful (see box 2.4). Steps could ing storm-induced outages. Facilities were iden- include elevating electric transformers or sub- tified in areas less prone to inundation that could stations above flood levels, adding air-cooling serve as potential system hosts. This information capacity at power stations to supplement or re- is feeding into planning efforts for a “resilience place water-cooled systems, or burying trans- district” in the city (Meub 2018). Towns in the mission and distribution wires to limit their Philippines are similarly piloting solar-powered vulnerability to wind damage. System operators microgrids as a hedge against brownouts and may also wish to explore what steps they can storm-induced outages (Philippine Star 2018). 24 | Financing a Resilient Urban Future Box 2.4 Florida Power & Light Company hardens system against storm outages Florida Power & Light Company (FPL) has invested nearly US$3 billion since 2006 in hardening and stormproofing its electric network (Nehamas and Dalhlberg 2018). To handle stronger winds of up to 150 miles per hour, FPL has replaced wooden poles that no longer meet certain wind loading and strength criteria with steel and concrete poles. The utility has also increased the size of distribution lines to protect the system from lightning and short- ened the span between poles to better withstand severe weather. Strengthened power lines have been shown to perform 40 percent better than nonhardened power lines, and they have allowed FPL to improve service reliability by 25 percent over the last five years (Pounds 2017). By the end of 2016, FPL had hardened over 600 main power lines in key areas that service more than 700 critical facilities, including police and fire stations, hospitals, and other emergency service centers. In addition to the physical strengthening of its system, FPL has installed over 4.8 million smart home meters and 36,000 smart grid devices in its poles and wires (Fischbach 2016). This smart grid technology allows FPL to monitor and assess the health of the power system, as well as restore power quickly when outages occur. In the aftermath of Hurricane Matthew in September 2016, the Florida Public Service Committee allowed FPL to collect a US$3.36 monthly surcharge per customer over 12 months to pay for storm cleanup and upgrades (Turner 2017). After Hurricane Irma swept through South Florida in late 2017, FPL then sought to levy a US$4 monthly surcharge through 2018 and a US$5.50 monthly surcharge into 2020. However, following reform of the federal tax system in December 2017, the utility decided to use the federal tax savings to offset Hurricane Irma restoration costs and avoid a general base rate increase until 2022 (Neal 2018). In March 2018, in the aftermath of Hurricane Irma, FPL announced a pilot program to put utility lines underground. FPL will seek approval from the state regulator to pilot several locations within its 35-county service territory. Dur- ing Hurricane Irma, only 19 percent of underground main lines lost power, compared with 69 percent of hardened overhead power lines and 82 percent of nonhardened overhead power lines (Pounds 2018). FPL plans to pay 25 percent of the cost of placing power lines underground, with cities and developers covering the remaining amount. It aims to have 60 percent of its distribution system hardened or placed underground by the end of 2018 and the entire system underground by 2024 (Keefer 2018). The impacts of climate change on urban infrastructure and how to address them | 25 3 TRENDS AND INNOVATIONS IN URBAN INFRASTRUCTURE FINANCING Overview Georgeson et al. (2016) are a notable exception. They use proprietary data sets and methods to Limited information is available on the current estimate public and private spending on cli- sector-specific, climate-resilient infrastruc- mate adaptation upgrades in 10 global meg- ture spending in cities. Climate change impact acities (Addis Ababa, Beijing, Jakarta, Lagos, studies that estimate the spending required London, Mexico City, Mumbai, New York, Par- over a certain period to upgrade a specific in- is, and São Paulo) for the period 2014–15. The frastructure system are accessible, as well as authors reach two key conclusions. First, cli- anecdotal information detailing how much was mate adaptation spending, or what the authors spent to repair and upgrade a specific system call the “‘adaptation economy,” is currently just after a major catastrophe. However, the aca- a tiny fraction of a city’s gross domestic prod- demic and grey literature are noticeably silent uct (GDPc), ranging from 0.14 to 0.33 percent. on the current overall level of climate resilience In percentage terms, the figures are gener- spending in cities around the world. ally quite consistent by city type (developed, emerging, developing), with few exceptions. Figure 3.1 Percentage of local “Adaptation Economy” This remains the case when the focus is nar- spending on urban infrastructure climate adaptation rowed to urban water, transport, and energy initiatives (by subsector) in 10 global megacities systems. There is little variation between coun- 20 tries across the water transport, and energy sectors (see figure 3.1). % of local Adaptation Economy spending 15 The picture changes, however, if the focus is on aggregate spending levels because there are material differences in the total level of climate 10 adaptation spending between different city types, ranging from £15 million in Addis Aba- ba to £1.624 billion in New York over the 2014– 5 15 period. The authors conclude that spending appears linked to protection of the stocks of capital more prevalent in developed cities, 0 such as comprehensive energy and trans- port systems supporting “high-consumption, rk on ris ng ty o i a s ba ba go rt ul Ci Yo ba Pa nd iji ka um Pa La Be high-comfort lifestyles.” Figure 3.2 isolates o ew sA Lo Ja ic o M ex Sã N di M Ad total climate adaptation spending by urban in- Water Transport Energy frastructure sector across each of the 10 cities Source: Based on Georgeson et al. (2016). covered by the Georgeson et al. study. 26 | Financing a Resilient Urban Future In another comparative analysis, Lee and Kim Figure 3.2 Total climate adaptation spending by urban (2018) look at planned and actual spending on infrastructure sector in 10 global megacities, 2014–15 climate adaptation projects in six metropolitan 250 cities in Korea. The study does not contextual- ize climate adaptation spending as a part of the 200 overall spending of a city, but it does illuminate key adaptation priorities across these cities, 150 £, million such as a heavy emphasis on sewer system up- 100 grades to handle increased stormwater volumes, investments in the development of new water 50 resources, and investments to preserve wa- ter quality. 0 rk on ris ng ty o i a s ba ba go rt ul Ci Yo ba Pa nd iji ka um Pa La Be o Neither of these studies provides insights into ew sA Lo Ja ic o M ex Sã N di M Ad the origin of the resources used to support Water Transport Energy these investments, including intergovernmental transfers. As noted earlier, sources of funds vary Source: Extrapolated from Georgeson et al. (2016). widely by city, depending on the larger political and national authorizing environment, credit- about the applicability of these instruments to worthiness considerations, and the local govern- a city or infrastructure system context. Munici- ment’s institutional and administrative capacity. pal government officials or infrastructure system operators must assess that situation based on lo- The balance of this chapter explores the current cal circumstances. Moreover, each instrument global experience with the use of different fund- may have more or less relevance, depending on ing and financing instruments over which local the type of cost burden being targeted (for exam- governments or infrastructure system operators ple, changes in operating and maintenance costs may have some control. It makes no presumption resulting from climate change impacts versus Box 3.1 Policy and investment decision making under uncertainty Cities and infrastructure system operators are increasingly employing sophisticated methods to assess climate risks that may affect operations or the physical integrity of their system and basing operations and maintenance and investment decisions on the results. Climate change introduces deep uncertainty to this process: uncertainty about how much carbon dioxide emissions will grow over the time; how the climate system will respond to different aggregate emission levels; and how those system responses will manifest themselves at the local level, interacting with other natural and social systems. The World Bank is working on sector-specific guidance to support improved decision making under uncertainty. This guidance seeks to identify robust decisions (that is, those that satisfy multiple objectives in different plausible futures and over multiple time frames), evaluate the trade-offs among options, and identify actions that reduce the vulnerability of future investments. Central to many of these approaches are discussions between climate experts and key system stakeholders on current and future priorities and monitoring systems that assess risk throughout the life of a project so solutions can be adjusted over time to respond to this new information. Guidance also typically includes a blend of preventive actions and reactive solutions. To date, World Bank teams have developed guidance for the water supply sector, flood risk management projects, hydropower facilities, and road network projects. This work is relevant to the funding and financing discussion in this chapter because it influences the amount of resources needed by a city or system operator over time. However, so far little work has been done on linking the uncertainty discussion with the type of funding and financing instruments employed by a local authority or infra- structure system operator. Source: Based on Hallegatte (2012, 2017). Trends and innovations in urban infrastructure financing | 27 the cost of financing major system upgrades or or parking areas using permeable surfaces (City replacements that make the system more cli- of San Jose 2011). In Can Tho, Vietnam, the World mate-resilient). Bank’s City Resilience Program is helping the local people’s committee plan a major land rede- The majority of the instruments discussed here velopment project, building in requirements that can be used for anticipatory investments–that bidders incorporate an enhanced stormwater and is, design and construction spending aimed at floodwater management system into their design avoiding or minimizing damage caused by cli- (World Bank 2018a). mate change. Less attention is focused on recov- ery or reconstruction instruments that help ad- Local authorities interested in pursuing these dress after-the-fact climate-related damage costs. strategies must recognize that their effective- ness is ultimately linked to the quality of any enforcement efforts. Cities with limited enforce- Policy control powers ment capacity or a legacy of corruption related to regulatory enforcement may see few impacts or Because many local governments have power behavioral changes in the absence of a robust en- over land use and zoning, they are able to influ- forcement regime. ence what occurs on a given parcel of land. Land use rules are important because they can pre- clude or minimize development in areas vulnera- Taxes ble to climate hazards, thereby keeping expensive infrastructure investments out of harm’s way. Many local authorities support the development Building codes specifying what building practic- and maintenance of urban infrastructure sys- es are allowed or required are another closely re- tems with general tax revenues directly under lated set of powers sometimes delegated to local their control. These revenues may derive from lo- authorities. cal property taxes, sales or income taxes, permit fees, and other revenue sources. In general, local Both sets of powers are relevant to climate-resil- authorities or infrastructure system operators ient infrastructure because they also allow local must be authorized by the national government authorities to place the investment onus directly to levy these taxes. on the property owner. This is particularly true for new parcel development or major redevelop- This also holds true for targeted taxes, which ment projects because it can be difficult to force can be another important source of funding. The longtime property owners to undertake the retro- key difference between targeted taxes and gen- fitting needed to meet new codes or requirements eral taxes is that targeted taxes are specifically developed with enhanced climate resilience in aimed at the users or beneficiaries of a specific mind. For example, as noted in chapter 2 some infrastructure system. In the United States, for local authorities are taking steps to reduce storm- example, more than 1,300 government jurisdic- water management operating costs by imposing tions or water authorities impose some type of land use policies requiring or incentivizing the stormwater fee to help pay for local stormwater use of more permeable surfaces on a given a par- control measures. These fees can be based on cel of land. These measures help shift a portion a fixed rate per parcel or on the extent of imper- of the cost burden away from system operators meable surfaces (such as roofs, driveways, or oth- and onto individual property owners. The city of er paved areas) covering a parcel (Milne 2015). For San Jose, California, has such requirements that example, in the Seattle region of the United States vary according to parcel size. Property owners there is a US$0.129 property tax levy per US$1,000 developing vacant land or redeveloping an ex- of assessed property value. The tax raises US$55 isting plot of land must attempt to minimize the million a year, with the proceeds used to support amount of impervious surfaces, manage roof and levee improvements, flood barrier construction, driveway runoff on-site, and construct driveways and other efforts aimed at protecting roads, pow- 28 | Financing a Resilient Urban Future er systems, and water and wastewater infrastruc- the city. The revenue will be used for street repair, ture.9 The underlying reason for these taxes is sidewalk construction, creation of safer corridors clear–one study estimates an acre of pavement for bicycles, intersection safety, and high crash generates 10–20 times the runoff from an acre of corridor safety improvements (City of Portland grass (Frazer 2005). The tax thus serves as both 2016). Chicago (2018) imposes a tax of US$0.05 a usage charge and an incentive for the property per gallon on fuel sold in the city. The revenue is owner to take steps to reduce runoff levels. ring-fenced to pay back transport-related bonds issued by the city (City of Chicago Debt Manage- In Mexico City, the incentive goes in the other ment and Investor Relations 2018). When craft- direction: the local government  offers a 10 per- ing fuel taxes, it is especially important to pay cent property tax reduction for new and exist- attention to how the tax is constructed. Because ing buildings that install green roofs (C40 Cities many fuel taxes are imposed on a per-gallon-sold 2015). The subsidy policy has been quite effective. basis, the amount of funds raised may respond The city is currently  Latin America’s leader in to changes in driving habits or an increase in the green roofs, accounting for nearly 22,000 square fuel efficiency of vehicles driven in that jurisdic- meters of green space on local rooftops (Maxwell tion. Both changes could reduce the revenue flow. 2015). In North Rhine–Westphalia, Germany, the As a result, some countries have moved to impose combination of a surface water drainage charge vehicle-miles-traveled taxes on certain types of and subsidies resulted in a significant increase in vehicles such as heavy trucks (Kim 2016). green roof and water reuse system installations, and more than 6 million square meters of land In the energy sector, Boulder, Colorado, is one was disconnected from the local stormwater sys- of the first cities in the United States to impose tem between 1996 and 2004 (Bennett 2011). a local tax on electricity use. The revenue collect- ed supports energy efficiency initiatives, public Some jurisdictions are beginning to consider ded- education, and energy audits. Differential rates icated taxes specifically linked to climate resil- are charged based on the type of user (residential ience as a way of increasing the level of funding users, US$0.0049 per kilowatt-hour; commercial available for climate projects. In the nine-county users, US$0.0009 per kilowatt-hour; industri- San Francisco Bay area in California, 70 percent al users, US$0.0003 per kilowatt-hour). The tax of voters supported a 2016 ballot measure self-im- costs the average residential user US$21 a year, posing an annual US$12 tax per property in each commercial user US$94 a year, and industrial county over the next 20 years. The measure will user US$9,600 a year, generating roughly US$1.8 raise US$25 million a year (and US$500 million million a year for climate-related initiatives (City over the life of the measure). Among other uses, of Boulder 2018). To date, this spending does not funds will be available to support habitat resto- appear to include climate resilience initiatives ration and green infrastructure along the bay for the energy system, but that is not precluded aimed at providing flood and storm surge protec- should Boulder decide to pursue this approach. tion (San Francisco Bay Restore 2016). In the transport sector, fuel taxes have long been Land value capture used by national governments to pay for high- way development and maintenance. Some local Land value capture (LVC) is a public financ- authorities are now seeking to impose their own ing method whereby governments trigger an localized version of this tax, targeting different increase in land or property value because of fuels sold within the city limits. In the United a regulatory decision (such as a change in devel- States, voters in Portland, Oregon, authorized in opment rights) or an investment in infrastruc- 2016 a tax of US$0.10 per gallon of all fuel sold in ture or an amenity. The government seeks to 9. See http://kingcountyfloodcontrol.org/. Trends and innovations in urban infrastructure financing | 29 capitalize on this increase in value by selling the vironmental bonds discussed below, the proceeds properties benefiting from the investment or by from cat bond sales are not made immediately identifying a proxy for this land value increase available to support preemptive climate resilience (such as the assessed value of the land) and then investments. Rather, the proceeds are held in an collecting additional taxes, betterment charges, investment account for the entire bond term. If or other assessments to pay for or help offset there is no triggering event, investors get their any of the original investment costs (Suzuki et money back at maturity, just like a regular bond. al. 2015). LVC is well known in transit circles be- If a qualifying triggering event occurs, however, cause increases in land value are associated with investors lose their principal and the money is the creation of a new transport hub or corridor. released to the sponsor of the bond. Cat bonds hold appeal to the sponsor (such as a transit sys- The use of LVC to support climate resilience in- tem or energy utility) because they are treated as vestments is a newer notion, predicated on the insurance products, not municipal bonds, which idea that an infrastructure investment that makes means the sponsor only pays the premiums, not a neighborhood less prone to flooding or a cli- the entire bond principal. This is advantageous to mate-related power outage might enhance its the sponsor because it means debt limits or im- value compared with other areas of the city. For pacts on its credit rating need not be a concern example, there is already some evidence that ar- (ReFocus Partners 2017). eas less prone to flooding in Florida’s Miami-Dade County enjoy a “nuisance” premium over other ar- In recent years, the New York Metropolitan Trans- eas around the city in terms of pricing (Keenan, portation Authority issued cat bonds for US$200 Hill, and Gumber 2018). To date, however, there million and for US$125 million. The U.S. national has been no attempt to pursue an LVC strategy that rail system, Amtrak, also issued a cat bond val- explicitly seeks to capitalize on this differential. ued at US$275 million (Insurance Journal 2015). To date, the urban energy sector has made limited There may also be other ways to structure LVC ap- use of these instruments. In 2003 and 2011, Elec- proaches so they support investments in climate tricité de France (EDF) pioneered the use of two resilience. In São Paulo, for example, the local au- parametric insurance cat bonds to protect against thority identified a section of the city it wished to windstorm damage to its national transmission see redeveloped, and then it issued bonds (known network. The goal was to obtain a source of risk as Certificates of Potential Additional Construc- capital that would pay out quickly after a trigger- tion, or CEPACs) for auction to developers to allow ing event and to secure risk transfer for an area them to build at height or density levels not al- of ECF’s operation that was previously uninsured. lowed under current zoning rules. Under the ar- These bonds were not repeated after the 2011 rangement, over the last 10 years São Paulo has re- bonds matured (Artemis 2017), and it appears that ceived roughly US$2.2 billion for use in supporting similar cat bonds have not been issued by EDF or essential infrastructure and housing in those same any other large electric utility since then. neighborhoods (Blanco et al. 2017). There are no restrictions in how these funds are to be utilized, meaning some or all of the funds raised could be User fees devoted to climate resilience investments. Depending on the type of infrastructure system in question, user fees or tariffs are often assessed Insurance as a means of supporting partial or full recovery of a system’s operations and maintenance (O&M) This use of catastrophe bonds (cat bonds) for costs. The amount of cost recovery achieved is sector-specific climate resilience activities is generally a political or regulatory issue because a relatively new phenomenon that complements the need for resources to cover O&M costs, or any the traditional insurance coverage employed by necessary capital upgrades, must be balanced infrastructure utilities. Unlike the green and en- against the risk of pricing customers out of the 30 | Financing a Resilient Urban Future Table 3.1 Utility cost recovery rates based on sector, income level, and region Percentage of water utilities whose average Percentage of electricity utilities whose tariffs appear to be… average tariffs appear to be… Too low to Enough to Enough for Too low to Enough to Enough for cover basic cover most O&M and cover basic cover most O&M and O&M O&M partial capital O&M O&M partial capital Global 39 30 30 15 44 41 High income 8 42 50 0 17 83 By income level Upper-middle income 39 22 39 0 71 29 Lower-middle income 37 41 22 27 50 23 Lower income 89 9 3 31 44 25 OECD 6 43 51 0 17 83 Latin America and Caribbean 13 39 48 0 47 53 Middle East and North Africa 58 25 17 - – – - – - By region East Asia and Pacific 53 32 16 29 65 6 Europe and Central Asia 100 0 0 31 38 31 South Asia 100 0 0 33 67 0 Sub-Saharan Africa – - – - - – 29 71 0 Source: Komives et al. 2005. Note: OECD = Organisation for Economic Co-operation and Development; O&M = operations and maintenance. market. Especially in many parts of the develop- Utilities whose rates are set by a regulatory agen- ing world, user fees are subsidized to ensure that cy may also face difficulty if the staff of these low-income households can maintain access to agencies are not certain how to assess valid cli- these services. mate-related expenditures. In California, the state Public Utilities Commission recently estab- To the extent that system operators can impose lished a rulemaking process related to spending new road or bridge tolls or increase the cost of on climate change adaptation (California Public existing tolls or electricity or water charges, they Utilities Commission 2018). It will ultimately help can help address some of the rising cost burden determine what climate-related expenditures are they are likely to face from climate change. System considered deserving of cost recovery. operators cannot get too far ahead of their cus- tomers’ ability to pay, however, which potentially limits the use of these fees as a cost recovery tool. Payments for ecosystem This problem is already emerging in many parts services of the world where user fees for essential services are so low that they do not even cover basic O&M costs. According to a 2005 World Bank assessment Payments for ecosystem services (PES) are a fi- of cost recovery levels in the water and electricity nancial instrument in which the users of ecosys- sectors around the world, the problem is particu- tem services (for example, parks or open spaces larly acute in South Asia and Sub-Saharan Africa that provide recreational or temporary flood con- (Komives et al. 2005)–see table 3.1. trol benefits or the cooling or air quality benefits Trends and innovations in urban infrastructure financing | 31 of urban forest cover) compensate the providers Ecological fiscal transfers of these services. Users of ecosystem services can include individuals, communities, businesses, or A closely related instrument is an ecological fis- governments acting on behalf of their citizens. cal transfer (EFT), a form of cash transfer from A PES scheme essentially rewards land and oth- a national government to a local or regional er natural resource managers for access to “green government aimed at promoting biodiversity infrastructure” that otherwise would not be avail- conservation and ecosystem services that can able at these levels in the absence of such pay- support adaptation goals. Through EFTs, local ments. As a result, PES indirectly puts a price on and state actors can be compensated by the na- ecosystem services that had previously not been tional government for creating or maintaining compensated, such as climate adaptation benefits. certain types of ecosystem services. Recipients are required to meet conditions to use the funds PES schemes must be carefully designed to not and to show accountability in the process. These undermine existing stewardship efforts. Many conditions include clear objectives, an allocation land or resource managers may already be subject method for the funds, measurable targets, and to regulation and do properly undertake meas- an auditing and evaluation system. A successful ures to protect and enhance ecosystem services. fiscal transfer instrument must include (1) rev- enue adequacy–to ensure sufficient resources PES schemes can be most efficiently applied in for the transfers; (2) equity–so that transfers situations in which vary according to local fiscal needs and capaci- ty; (3) transparency and stability–to allow local • Specific land or resource management actions governments to prepare a budget that forecasts have the potential to increase the supply of total revenue from the transfers; and (4) capaci- a particular service. ty building–to help local organizations and firms • There is a clear demand for the service in take over once the program has been completed. question, and the provision of the service is financially valuable to potential buyers. EFTs have been used in Brazil, China, India, • It is clear whose actions have the capacity to South Africa, and the United States. In Brazil, increase or enhance the supply. ecological fiscal transfers have been used by the central government since the 1990s. Some Bra- PES schemes come in a variety of forms that can zilian states rely on the ICMS (Imposto sobre include both public and private actors. Although Circulação de Mercadorias e Serviços) Ecológi- some PES programs include contracts between co, a value added tax on goods and services. consumers and suppliers and ecosystem ser- Municipalities with conservation or protected vices, many programs continue to be funded by areas receive 5 percent of the revenue from the governments and involve intermediaries such as ICMS, and those with larger protected areas re- NGOs. A majority of schemes have focused on ceive a greater share of the revenue. The mecha- carbon sequestration and storage, biodiversity nism provides local Brazilian governments with conservation, and water quality protection. An financial incentives to prioritize conservation important feature of PES schemes is that they efforts (Cassola 2010; Rowcroft and Black 2017). can be developed and operated at various levels of scale: international, national, catchment, and local (neighborhood). New York City has one Official development of the most well-known urban programs, tar- assistance geting investments and payments in rural are- as 100 miles north of the city that are adjacent to the city’s massive water supply system. The Official development assistance (ODA) is a tra- payments ensure proper management of wood- ditional source of funding for water, transport, lands, prevent erosion, and minimize pollutant and energy systems in most developing coun- runoff into the city’s reservoirs (Hu 2018). tries. In 2014 the OECD’s Development Assistance 32 | Financing a Resilient Urban Future Committee published summary data detailing tion sector each year, split between grants and bilateral support for urban climate change ad- loans. The urban fraction of this amount is un- aptation. Collectively, these commitments made clear, although OECD did note that US$9.2 billion up 8 percent of total bilateral adaptation-related in development aid was committed to “large” aid for the period 2010–12, averaging US$720 mil- water supply and sanitation systems in 2015 lion a year. Seventy-two percent of this support (OECD 2018a). During the same time, ODA aver- was in the form of loans–a far higher percentage aging US$9 billion a year was allotted to trans- than most adaptation-related aid. The emphasis port projects. Again, the urban fraction of this on loans likely reflected the fact that 84 percent total is unclear, as is the proportion of funding of urban adaptation–related support targets allotted to climate adaptation. cities in middle-income countries, which tend to be less eligible for grants. Thirty-seven per- Energy systems are traditionally one of the larg- cent of the funds supported transport and stor- est areas of ODA support in developing coun- age climate adaptation initiatives, and another tries. Between 2013 and 2015, donors committed 18 percent funded water supply and sanitation an average of US$27.2 billion to enhancing sys- climate adaptation initiatives. Ten cities–eight tem access, system reliability, the development of which are in Asian countries–account for 77 of clean power sources, and improved manage- percent of the bilateral commitments, reflecting ment practices (OECD 2018b). Data that break the strong geographic focus of the five donors this down into projects targeting urban systems (European Union, Germany, France, Japan, and or climate adaptation are not available. Korea) responsible for 97 percent of urban cli- mate adaptation–related aid during this period Data provided by the multilateral development (OECD DAC 2014). banks (MDBs) provides additional insights into how ODA is supporting climate adaptation In the latest OECD ODA tracking report (2013–15), projects in the water, transport, and energy an average of US$13.69 billion in development sectors. Table 3.2 breaks down investments by assistance was directed at the water and sanita- the reporting categories most closely linked to Table 3.2 Climate adaptation finance per year, multilateral development banks (MDBs) a b c d=a+b+c e f=d÷e g h=e÷g Spending on climate adaptation, targeted Water + categories transport Water + + energy transport + coastal Energy, Coastal and Total MDB + energy Total MDB flooding transport, riverine climate + coastal climate infra- and other infrastructure, adapta- flooding in- finance, structure Water and built envi- including built tion fi- frastructure all climate adaptation wastewa- ronment flood protec- nance, all as % of total mitigation as % of ter sys- infrastruc- tion infrastruc- Subtotal categories MDB climate + adapta- total MDB tems (US$, ture (US$, ture (US$, (US$, (US$, adaptation tion (US$, climate Year millions) millions) millions) millions) millions) finance millions) finance 2014 541 1,147 847 2,535 5,069 50% 28,345 9% 2015 1,362 1,230 589 3,181 5,024 63% 25,096 13% 2016 1,129 1,093 973 3,195 6,224 51% 27,441 12% 2017 2,600 1,938 88 4,626 7,352 63% 35,219 13% Source: IDB et al. 2014, 2015, 2016, 2017. Trends and innovations in urban infrastructure financing | 33 the three infrastructure categories of interest climate risks to essential urban infrastructure here. One thing clearly stands out. Although en- and building codes that promote increased cli- ergy, transport, and water and flood protection mate resilience. investments dominate the MDBs’ annual spend- ing on climate adaptation (over 50 percent in each of the years reported here) as a percentage Global climate funds of the overall climate finance spending by the various MDBs, climate adaptation spending on All three urban infrastructure sectors have ben- urban infrastructure has been relatively small. efited from global climate funds set up by inter- This percentage may reflect the high spending national bodies over the last 20 years. Howev- levels on mitigation projects, the spending lev- er, compared with the potential market needs els on other nonurban infrastructure projects, noted earlier, the allocation of resources to ur- or the methodology used by MDBs to track cli- ban infrastructure projects is relatively small mate adaptation spending, which limits credit and the geographic reach is limited. Based on for adaptation finance to the incremental cost a World Bank team assessment of information of making a project better address climate risks available on each fund’s portfolio, it appears that (IDB et al. 2017). The World Bank (2018c) recent- across the four global climate funds discussed ly announced it had increased its investments in here, an estimated US$1.94 billion has been al- adaptation in fiscal 2018, with 49 percent of its located to climate adaptation support for water, climate finance supporting adaptation efforts, transport, and energy infrastructure projects, compared with an average of 42 percent during leveraging an additional US$4.1 billion in public fiscal 2015–17. Other MDBs have also committed and private co-financing. By far the lion’s share to exploring ways to increase their level of sup- of these resources–roughly 61 percent–have port for adaptation projects (AfDB, 2017). focused on climate adaptation upgrades in the water sector, with the balance split among the Because of the way MDB data are currently col- other sectors (see table 3.3). lected, no systematic information is available to break down this information into urban versus The Pilot Program for Climate Resilience (PPCR), nonurban figures. One report published by the one of the Climate Investment Funds (CIF), has City Climate Finance Leadership Alliance (CCF- invested US$103 million in seven countries in LA 2015) did include self-reported figures for projects on climate resilience in the water sec- several MDBs–including the World Bank Group tor. Because of the design of these projects, it and other bilateral aid institutions for a single is difficult to determine what proportion of calendar year, but the methods used by the dif- these funds is strictly urban in nature. Another ferent institutions were not consistent, nor did US$89 million from the PPCR supports trans- the report divide the figures into climate adap- port-related climate resilience projects in seven tation investments and mitigation investments. countries, but again the urban fraction of this total is not clear. The energy sector has received A separate point is the type of ODA mecha- much PPCR support to date, although an alloca- nism employed. Development policy financing tion of US$11 million to one project in Tajikistan involves resources that support policy reform includes energy sector resilience to climate or institution- and capacity-building projects. change. Across the three sectors, the US$203 Funds are made available to clients upon com- million in PPCR funds has leveraged US$661 pletion of a set of policy or institutional actions million in co-financing from government and or changes agreed upon in advance between private sources.10 the funder and the recipient. For urban infra- structure projects, qualifying actions might in- It is still early day to see definitive trends in clude land use changes that help minimize the Green Climate Fund (GCF) support for urban 10. All figures based on communication with Jose Andreu, Climate Investment Funds team, July 2018. 34 | Financing a Resilient Urban Future Table 3.3 Allocation of global climate funds to water, energy, and transport projects Sector Water Transport Energy Total Additional funds Allocation Allocation Allocation Allocation, leveraged No. of (US$, No. of (US$, No. of (US$, No. of (US$, (US$, Fund projects millions) projects millions) projects millions) projects millions) millions) Pilot Program for Climate Resilience 7a $103.3 7a $88.8 1 $11.0 12 $203.0 $661.5 (CIF-PPCR) Green Climate Fund 19b $1010.8 6b $273.3 6 $362.4 29 $1,646.5 $2,828.1 (GCF) Least Developed Countries Fund [LDCF] and Special 9c $41.4 2c $4.3 1c $1.4 9 $47.1 $611.9 Climate Change Fund [SCCF] Adaptation Fund 6d $27.7 3d $13.5 6 $41.2 Total $1,183.2 $379.9 $374.8 $1,937.8 $4,101.5 Source: World Bank. Note: CIF = Climate Investment Funds. a. Three projects include both water and transport elements. b. One project includes both water and transport elements. Four projects include both energy, water, and transport elements. c. Two projects include both transport and water elements, while one project includes energy and transport elements. d. Three projects include both water and transport elements. One water project also includes housing and EWS (economically weaker section) elements, which have been excluded from the dollar total. infrastructure climate adaptation projects. lion) and a multisector project in Bangladesh Of the three sectors, water has been the biggest that supports mainstreaming of climate and recipient of GCF climate adaptation funds to disaster risk in the water and transport sectors date–six urban and rural projects are receiving (a US$40 million grant that leverages US$40 approximately US$1011 million. GCF resources million in additional project co-financing).12 on these projects are blended with an addition- The GCF has also supported energy system cli- al US$950 million from government and pri- mate adaptation in Tajikistan (US$50 million vate sources.11 in loans and grants to support increased hydro sector adaptation, leveraging an additional Two GCF transport projects have been ap- US$83 million in government and private sec- proved thus far, one on the island of Nauru in tor resources). A second GCF project support- Micronesia (a grant of US$27 million that lev- ing the development of new hydro resources erages additional co-financing of US$38 mil- in the Solomon Islands has also been approved 11. Based on communication with GCF team, World Bank, July 2018. Covers projects approved by the GCF Board through B21, October 2018. 12. Based on communication with GCF team, World Bank, July 2018. Covers projects approved by the GCF Board through B21, October 2018. Trends and innovations in urban infrastructure financing | 35 (US$86 million in GCF loans and grants, lever- ators will rarely enjoy direct access to these aging US$148 million in additional resources). funds as requests must be approved by and channeled through the sovereign focal point The Least Developed Countries Fund (LDCF) to each fund. Other funds may be structured and the Special Climate Change Fund (SCCF), to allow direct subnational access. Municipal two funds managed by the Global Environment governments and infrastructure system oper- Facility (GEF), have issued grants to urban in- ators should learn how these resources work in frastructure projects. A World Bank team as- their country. sessment of LDCF and SCCF project-level data produced estimates that nine projects specifi- cally target urban infrastructure systems, em- Public-private partnerships phasizing flood protection measures, including some based on ecosystem-based approaches; A public-private partnership (PPP) is a contrac- upgrades to water supply systems; and other tual relationship between a government entity measures. Across the three infrastructure sec- and a private party to provide a public asset or tors, nine grants worth US$41.4 million support service. PPPs typically involve very costly pro- water system upgrades in seven countries and jects, and they call for private sector engagement two regions, and two grants valued at US$4.3 in a project or service over an extended period. million promote enhanced climate adaptation Governments generally pursue PPPs to contain in transport systems. A single project in Ma- cost; to limit the risks associated with delays lawi includes elements promoting enhanced in the delivery of a project; to establish budg- energy system adaptation valued at approxi- etary certainty over an extended time frame; mately US$1.4 million. Collectively, these LDCF and to extend their capacity for infrastructure and SCCF grants are estimated to leverage an development, maintenance, or service delivery additional US$573 million in project co-financ- (World Bank 2018b). PPPs can also be effective ing from public and private sources. at mobilizing recent technologies and using up- dated knowledge to improve operation of the The Adaptation Fund has allocated US$28 mil- system and provide discipline in the construc- lion in support of six urban water projects– tion phase of a project to prevent cost overruns. generally focused on flooding protection–in Governments may also turn to PPPs to facilitate seven countries in Latin America, East Asia, greater access to finance beyond that available to and Africa. Three of these projects also include government itself. transport climate adaptation elements, which are estimated to total US$14 million across four The World Bank’s PPP database14 contains in- countries.13 No co-financing has been reported formation on thousands of projects worldwide, on these projects. including more than 1,400 projects dating back to 1984 which are clearly labeled as being spon- These data are clearly an incomplete portrait sored by local governments. (see table 3.4). Sev- of the total climate funds available to support enty-eight percent of these projects are in East urban infrastructure projects because other Asia (of which three-fourths are in China), and national and philanthropic funds are availa- 14 percent are in Latin America and the Carib- ble. Moreover, because of the ways in which bean. Water and sewerage projects (including the funds highlighted here operate, municipal water treatment and water supply and delivery) governments or infrastructure system oper- and energy projects (primarily focused on elec- 13. Based on communication with Adaptation Fund, November 2018. 14. The World Bank’s Private Participation in Infrastructure (PPI) database contains information on more than 8,000 infrastructure projects dating back to 1984. The database contains 50 data fields per project record, in- cluding country, infrastructure services provided, and type of private participation, based on publicly available information. It is one of the most comprehensive data sets of its kind globally. See http://ppi.worldbank.org. 36 | Financing a Resilient Urban Future Table 3.4 Urban public-private partnership projects by region East Asia Europe and Latin America Middle East and South Sub-Saharan Primary sector and Pacific Central Asia and Caribbean North Africa Asia Africa Total Energy 491 12 1 2 15 5 526 Transport 79 5 46 3 7 140 Water and sewerage 528 42 149 9 9 737 Total 1,098 59 196 5 31 14 1,403 Source: World Bank analysis of World Bank’s Private Participation in Infrastructure (PPI) database as of August 22, 2018. tricity generation and natural gas distribution) define such situations in terms of type, frequen- dominate the project list. In the transport sector, cy, or intensity, which leaves a lot of room for road projects make up half the total, and port fa- interpretation and legal challenges. The burden cilities are responsible for most of the balance. of developing such definitions, and assigning The database contains information on just 11 local responsibility for managing any risk, thus falls rail projects, covering both light rail and freight on the contracting parties (World Bank Group/ PPIAF 2016). In the United Kingdom, however, The database does not include detailed infor- by law weather and climate events are never mation about each project, so it is not clear how included in force majeure clauses, leaving the many of these projects have some elements in ei- management of climate up to the private inves- ther their design or service delivery requirements tor. In Japan, some PPPs define the nature haz- specifically emphasizing climate risk reduction. ard component of force majeure, but this is more the exception than the rule. Other research indicates it is unlikely that many PPPs specifically address climate risks in In Canada, climate change was taken into ac- the way they should (World Bank Group/PPIAF count in a PPP supporting the construction and 2016). As a contractual relationship, this is some- operation of a bridge connecting New Brun- what surprising because PPPs typically provide swick and Prince Edward Island. Designed, built, tremendous clarity on responsibilities and risk financed, and operated by a private consortium, allocation (financial, market, political, legal, the design guidance called for a structure one and operational) related to the project (Inde- meter higher than what was considered cur- pendent Evaluation Group 2015). The impacts of rently necessary to account for any future rise climate change can threaten the revenue model in sea level (Agrawala and Fankhauser 2008). on which a project is based or hurt a provider’s ability to meet the service delivery or quality re- The World Bank has developed guidance on strat- quirements built into the contract. Thus it would egies that parties entering into a PPP contract make sense that more PPPs formally account for may wish to consider to ensure climate change climate change as a factor affecting the design is taken into account (World Bank Group/PPIAF and implementation of a project. 2016). Parties should Guidance provided by many national govern- • Retain the ability to modify a project through ments to help government entities interested its term so they can take into account new in establishing a PPP typically contain no direct scientific or technical information that could references to climate change. Many do require help improve the system’s ability to adapt to that PPP contracts account for unforeseen risks changing climate conditions. under a force majeure clause, which includes • Impose technical standards or a “fitness for pur- “Acts of God” such as extreme weather events. pose” warranty that require the private party to The guidance typically does not explain how to ensure that the infrastructure can meet its in- Trends and innovations in urban infrastructure financing | 37 tended function over an extended time frame, phe risk insurance or risk-deferred draw- thereby giving the private partner the incentive down options, or other sovereign insurance to take long-term climate risks into account. schemes) to protect revenue streams if key • Conduct a revenue analysis that takes cli- system assets are damaged or forced offline. mate change into account, and then employ • Differentiate climate risks from “Acts of God,” the relevant financing instruments (such as thereby clarifying the circumstances under index-based weather derivatives, catastro- which a contractor’s failure to perform would be accommodated. Box 3.2 Supporting green infrastructure in European Dedicated financing facilities cities: The Natural Capital Financing Facility and “green banks” Funded by the European Investment Bank and the European Union’s LIFE Programme, the Natural Capital Financing Facil- ity (NCFF) is a €100–120 million revolving fund that supports Housed at a development finance institution projects promoting biodiversity and nature-based climate ad- or established as a freestanding entity, financ- aptation. Support takes the form of project loans and equity in- ing facilities that support the preparation and vestments of between €2 and €15 million during the pilot phase financing of climate-related investments have running through 2021, as well as project preparation, imple- been around for many years. Facilities that nar- mentation, and monitoring grants of up to €1 million. The NCFF finances up to 75 percent of total project costs for direct debt rowly focus on urban projects or urban infra- financing subject to the €15 million cap. Equity investments are structure climate resilience are, however, a rel- capped at 33 percent of the total project value (European Invest- atively new idea. A virtue of narrowly focused ment Bank 2018). facilities is that staff can quickly build expertise in specific markets, regulatory structures, fi- The NCFF provides support for businesses engaged in sustain- able forestry, agriculture, aquaculture, ecotourism, and biodi- nancing instruments, and technology. versity offsets that go beyond regulatory requirements. In urban areas, the NCFF provides funding for so-called green and blue In the climate resilience sphere, the European infrastructure, including the creation of green corridors, green Investment Bank and the European Commission roofs, green walls, ecosystem-based rainwater collection and have collaborated on creating a dedicated financ- reuse schemes, flood protection, and erosion control. Projects ing facility that will promote the use of “‘green must be located in EU-28 countries. Government agencies and infrastructure” to help address both increases in private businesses are eligible to apply for support. ambient temperatures and flooding problems in Athens, Greece, is the first urban recipient of support from the cities. Grants, loans, and equity investments in NCFF. It obtained €5 million to better integrate green and blue in- climate resilience projects and businesses are frastructure elements into the redesign of streets, squares, and available during the pilot phase of the program open public spaces. The projects will be designed to align with (European Investment Bank 2018)–see box 3.2. In the climate impacts identified in the Athens Resilience Strategy, the United States, the New Jersey Energy Resil- including reducing the urban heat island, lowering the potential ience Bank was created in 2013 to address prob- for flash flooding, and increasing the connectivity of green spac- lems that arose with critical energy infrastruc- es (and thus the habitat for fauna). The exact of mix of projects ture during Hurricane Sandy. Capitalized with a will be determined via a co-creation process with citizens and other relevant stakeholders. US$200 million grant from the U.S. government, the Energy Resilience Bank provides low-inter- The funds are earmarked as part of a larger €55 million project in est loans and grants to hospital and water treat- Athens aimed at upgrading the city’s infrastructure and improv- ment facilities to support upgrades that should ing energy efficiency in public buildings. Athens pursued funds protect them against power outages in future from the NCFF as part of the larger financing deal in part be- storms (Johnson 2014, 2016)–see box 3.3. cause the project comes with a technical assistance grant sup- porting the planning, scoping, feasibility, design, and permitting process for both the main infrastructure and the integrated na- In other parts of the world, green banks are ture-based systems. being established to serve roughly the same purpose as dedicated financing facilities. To 38 | Financing a Resilient Urban Future date, the primary focus of these facilities has been to support energy efficiency and low Box 3.3 New Jersey Energy Resilience Bank carbon development through the provision of In 2013 the U.S. state of New Jersey established the New Jersey concessional loans, risk guarantees, and equi- Energy Resilience Bank (ERB) to minimize the impacts of major ty investments in projects. According to OECD power outages in the state and strengthen resilience by offering (2017), green banks have been established on financing support for distributed energy systems at critical facili- a national scale (Australia, Japan, Malaysia, ties (such as hospitals, long-term care facilities, and wastewater Switzerland, United Kingdom), state level (Cal- treatment plants) affected by major disasters (New Jersey Board ifornia, Connecticut, Hawaii, New Jersey, New of Public Utilities 2014). The ERB, the first bank of its kind in the York, Rhode Island–all in the United States), United States, was created in response to power disruptions in county level (Montgomery County, Maryland, much of the state during Hurricane Sandy. In the aftermath of the hurricane, the storm surge left more than 90 wastewater treat- United States), and city level (Masdar, United ment plants offline and forced the evacuation of two hospitals af- Arab Emirates). Washington, D.C., also recently ter the electricity failed. approved the creation of a green bank to serve the city. It is currently awaiting congressional The ERB was established with a US$200 million grant from the approval (DC.gov 2018). U.S. government as part of its postdisaster aid program. The bank seeks to leverage public and private capital to fund energy pro- jects that provide clean, reliable sources of energy (Tweed 2014). One important question facing these entities The ERB provides critical facilities with low-interest loans and is where to find the funds needed to capitalize grants that allow them to remain online using distributed energy their programs. As noted earlier, the New Jersey technologies when traditional sources are offline (Johnson 2016). Energy Resilience Bank was capitalized with Applicable technologies may include combined heat and power disaster relief funds from the U.S. government plants, fuel cells, and solar panels with off-grid inverters and bat- after Hurricane Sandy. In other countries, green tery storage. banks have been capitalized through govern- ERB funding targets the nine counties most damaged by Hur- ment appropriations, carbon tax or emissions ricane Sandy (Johnson 2014). As of July 2018, the ERB had ap- trading scheme revenues, utility bill surcharges, proved 11 projects and disbursed over US$65 million to a range and bond issuances and loans (OECD 2017). of entities, including seven hospitals. The hospitals have also re- ceived additional loans from PSE&G, the largest electric utility in the state, to supplement ERB’s financing. Two other facilities re- Bonds ceiving ERB funds are the Bergen County Utility Authority (US$27 million) and the South Monmouth Regional Sewerage Authority Municipalities and infrastructure system oper- (US$2.5 million). Both facilities lost power for a prolonged period ators allowed by sovereign authorities to issue in the aftermath of Hurricane Sandy (Choose NJ 2016). debt can tap private investors for support for The ERB has not yet been replenished for another round of financ- capital projects. In many countries in more ad- ing, although additional federal money may be forthcoming to al- vanced economies, debt in the form of bonds is low it to continue operations.a a traditional source of financing for infrastruc- a. Bruce Ciellela, Managing Director, N.J. Energy Resilience Bank, personal ture systems, often with user fees or other sys- communication, July 12, 2018. tem revenues ring-fenced to pay back the bond. Bond markets have seen many different types green infrastructure to absorb and slow surg- of innovations in recent years. For example, in es of storm water around the city during heavy addition to their regular bond issuances, Wash- rains, thereby reducing the frequency and vol- ington, D.C.’s water and sewer agency recently ume of combined sewer overflows that con- issued the country’s first environmental im- taminate local rivers. Under the provisions of pact bond, which pays investors a higher rate the bond, if the level of runoff is reduced by at of return if key environmental objectives are least 41 percent compared to the baseline level, achieved (or charges them a premium if they the agency will pay investors a bonus of US$3.3 are not achieved.) The bond’s US$25 million in million. But if at the end of a designated period proceeds will be used for the installation of runoff levels are reduced by less than 18.6 per- Trends and innovations in urban infrastructure financing | 39 cent compared to the baseline level, investors carbon and energy-efficient buildings (29 per- will make a “risk share payoff ” to DC Water of cent), and clean transportation (15 percent). US$3.3 million (Goldman Sachs 2016). Sixteen percent of funds supported “sustaina- ble water management” and “adaptation” (Cli- Although it has yet to be issued, one bond issu- mate Bonds Initiative 2018a). Limited data are ance likely to garner attention in the next year is available on how many of these funds support- the US$400 million “Miami Forever” general ob- ed urban projects in either developed or devel- ligation bond, approved by voters in 2017. Nearly oping countries. half (US$192 million) of the bond proceeds are to be dedicated to flood prevention and sea level Because of the tremendous increase in the num- rise mitigation projects around the city. Projects ber of cities developing climate resilience strat- will be chosen via a process involving extensive egies as part of their climate action plan, Stand- public input (Miami Forever 2017). ard & Poors expects to see growing interest in municipal green or climate-aligned bonds that Green bonds are another way in which cities support local climate resilience projects (S&P and infrastructure system operators can com- Global Ratings 2018). However, it is important to bine climate and capital-raising goals. Focused acknowledge the risks that overindebted local specifically on supporting investments in green authorities pose for the national governments of physical assets (such as solar panels, public both developed and developing countries. If local transport system upgrades, or water system governments are unable to make payments on improvements), green bonds appeal to inves- debts, state or national governments are gener- tors seeking to align their investing with cer- ally obliged to cover the shortfall. Governments tain types of environmental or social outcomes, must therefore proceed with caution and estab- including climate adaptation. Green bonds are lish systems to ensure that cities granted the abil- more complicated than general obligation or ity to assume debt do not overextend themselves. revenue bonds issued by a city because use of the funds is limited to agreed-upon asset types One way of easing an extensive debt burden is or classes. Green bonds also require some type through a “debt-for-climate swap” (or “debt-for- of review process to ensure that funds are spent nature” swap) in which a bilateral or multilateral appropriately or deliver certain outcomes. agreement reduces a developing a country’s debt stock in exchange for a commitment from the The global interest in green bonds has grown debtor to invest in national climate adaptation or dramatically over the last decade, with total is- mitigation programs. This voluntary transaction suance hitting US$161 billion in 2017 (Climate cancels some level of debt of the recipient coun- Bonds Initiative 2018b). Issuers include compa- try or city, allowing the savings from the reduced nies, national governments, development insti- debt to be invested in conservation projects or tutions, and cities (which have raised US$17 bil- climate-related expenditures. Donors might in- lion to date). City-focused green bond have been clude the governments of developed countries, issued almost entirely in developed countries, private foundations, international conserva- however, because creditworthiness challenges tion organizations, and commercial banks. For and sovereign prohibitions on municipal bond example, in early 2018 The Nature Conservan- issuance continue to limit these opportunities cy purchased $15.2 million in outstanding debt in most developing country cities. As of October from the Seychelles and mobilized an additional 2018, Johannesburg and Cape Town, South Afri- $5 million in grants from several foundations, ca, were the only two cities in a developing coun- the UN Development Programme, and the Glob- try to issue green bonds directly (Oliver 2016). al Environment Facility. The Seychelles then cut its debt service by US$2 million a year, and these Following historic trends, the clear majority of resources have now been diverted directly into green bond revenues raised in 2017 supported the newly established Seychelles Conservation renewable energy projects (33 percent), low and Climate Adaptation Trust (UNDP 2017). 40 | Financing a Resilient Urban Future 4 KEY TAKEAWAYS This policy brief highlights some of the new • Circumstances in developing countries are pro- operating conditions that cities and infrastruc- foundly different from those in developed coun- ture system operators may be forced to grapple tries. Fiscal instrument mechanisms that are with in the coming decades because of climate commonplace or have proved successful in change. The nature and timing of these chang- developed cities may not be easily replicated ing conditions, their severity, and their impact in cities with drastically different economic, on local system operating and capital expense financial, and political contexts. These dif- budgets will vary by locale. If one layers in oth- ferentiating circumstances fundamentally er factors–uncertainty about other market and affect what cities in developing countries can system pressures such as population growth; accomplish. Funding for adaptation meas- changes in technology, consumer tastes, and ures, in particular, can be addressed only to economic circumstances; and the need to over- the extent that fundamental aspects of city come legacy underinvestment in these sys- financing are fixed. Action in some areas may tems–then local authorities and system oper- be more fruitful than in others. For example, ators may face unprecedented challenges and in a developing country lacking an adequate massive costs as they try to keep their cities municipal credit market a donor-funded eco- thriving economic engines and desirable plac- nomic fiscal transfer to improve climate resil- es to live. ience would be more feasible than developing a green or municipal catastrophe bond. Exploring strategies for covering these costs has been the primary emphasis of this policy brief. • The national government plays an important role The options available in one city may look quite because it creates the essential operating condi- different in another, reflecting varying mar- tions for its cities, including whether local au- ket, regulatory, and policy circumstances. Even thorities and infrastructure system operators within the same city, the funding and financing can issue bonds, impose taxes, and enter into picture may be significantly different across PPPs. A national government also has a say in infrastructure systems. The value of each type how official development assistance is used of strategy in terms of scale and timing of re- and whether urban infrastructure projects sources is critical, and whether funds can cover are given priority in the use of these funds. increased operating expenses or capital invest- There are many valid reasons why a nation- ments only is an important factor for decision al government may want to keep a tight rein makers to weigh. on these decisions, rather than devolving decisionmaking powers to a local authority. Several key takeaways deserve further consid- One reason may be political considerations eration by local and national government offi- or concerns about whether it will ultimately cials and the larger climate and development be forced to cover debt incurred by these lo- finance community: cal authorities. A key question going forward Key takeaways | 41 is whether or when sovereigns should revisit although how much this trend will continue these restrictions of authority. This notion of over the coming decades is an open question. improved vertical policy alignment between Within the World Bank Group, the recent national and local government was at the capital increase by the International Devel- center of a call to action by the Global Cove- opment Association (IDA) and International nant of Mayors (2017) and others at the De- Bank for Reconstruction and Development cember 2017 One Planet Summit in Paris. And (IBRD) expands the overall lending volume this issue will likely remain a prominent one available to clients over time. Even if the pro- for local authorities seeking to actively engage portion of projects delivering climate co-ben- in climate resilience matters. efits remains relatively stable, that still means the availability of more money for urban in- • Local authorities and infrastructure system oper- frastructure climate adaptation projects. Pri- ators need to look hard at the capacity or policy oritization of urban infrastructure is a matter levers currently under their control and use them that must be raised jointly by both national strategically to tackle current and future climate government and development partners as challenges. Most important is a local authori- part of their framing agreement discussions. ty’s ability to use its policy authority to shape development in ways that essential urban • The creation of taxes dedicated to climate resil- infrastructure remains out of harm’s way. ience is still a new phenomenon, although there Meanwhile, when complemented by a strong is a long track record of user fees that have a cli- enforcement regime, land use controls can be mate link, meaning there are many implemen- exercised to force property owners to shoul- tation models from which to learn. Assuming der more of the burden of the impacts of cli- local authorities are authorized to establish mate change such as minimizing runoff into such taxes, who get taxed, on what basis, and communal stormwater management systems. how the funds will be used are questions that Land use control powers may also imply the policy makers must identify from the outset. ability to pursue land value capture strategies. Using the example of a per gallon fuel tax, lo- In São Paulo, additional development rights cal authorities pondering the stability of the are serving as a source of significant new rev- revenue stream must think carefully about enue. LVC strategies that seek to capitalize on how the tax is designed and whether changes climate resilience upgrades have yet to prove in technology or behavior could ultimately in- their viability, although this is an area that de- fluence the level of tax receipts. serves attention going forward. • The use of different types of bonds to support long- • Another capability that local governments and term capital upgrades is a well-worn strategy in infrastructure system operators control is the use many cities around the world, but basic credit- of comprehensive asset management strategies. worthiness considerations limit their use in much Covering infrastructure system siting and de- of the developing world. The growing interest sign considerations, maintenance and mon- in green bonds is noteworthy, although to itoring practices, and contingency planning, date few of the funds raised have specifically asset management affects all the new resourc- been used for climate resilience investments. es local authorities and infrastructure system Whether this subsector is an area of potential operators will ultimately need for capital in- growth is something that should be explored vestment or operations and maintenance pur- more fully because buyers may be looking for poses in the coming decades. quantifiable outcomes more easily achieved by investments in mitigation. • ODA will likely remain a resource of outsized importance in developing countries. The grow- • Sector-focused catastrophe bonds (cat bonds) may ing level of ODA that simultaneously delivers be an important new product line complementing climate co-benefits is an important trend, the traditional insurance schemes. In New York 42 | Financing a Resilient Urban Future and France, transit and energy system opera- much money these sources bring into govern- tors have used cat bonds as part of their disas- ment coffers. ter insurance strategy. Similar opportunities may exist in many cities targeting infrastruc- Perhaps the most significant innovation with ture systems. The scarcity of these issuances the potential to transform climate resilience deserves further exploration so that it be- for urban infrastructure is the growing role comes clearer whether it is simply an aware- that technical assistance initiatives and project ness problem, whether there are problems in preparation facilities are playing in helping gov- terms of the bond buyer appetite, or whether ernments improve their access to public and pri- it is a matter of who has the authority to issue vate financing. The Cities Development Initia- these bonds. tive in Asia and the World Bank’s City Resilience Program are the largest technical assistance pro- • Dedicated green banks and climate resilience fi- grams of their type, working in dozens of cities nance facilities will become broadly relevant only simultaneously to help government teams take if the question of how they are capitalized is re- raw ideas and refine them into project propos- solved. Growing global interest in these target- als capable of attracting support from the World ed financing mechanisms is a promising sign, Bank, other development finance institutions, but they are primarily a phenomenon in more global climate funds, and the private sector. The advanced economies. Solving the funding CRP draws heavily on private sector expertise to problem is a prerequisite to their growth. help cities structure deals in ways that use own- source resources and development aid to maxi- • Dedicated global climate funds are helpful, but mize the amount of private investment in these they have a limited reach in view of the scale and projects. Another important feature of CRP and diversity of global demand. The current fund- similar initiatives is the direct feedback given ing patterns may also reflect the priorities local government officials and infrastructure of those establishing the funds versus those system operators about any deficiencies in both formally submitting the requests (typical- individual proposals and the larger policy, regu- ly at the sovereign/ministerial level). Urban latory, and operating environment in a city, all infrastructure projects must compete with of which can entice or make investors hesitant priority investments in other climate-affect- to invest funds there. Remedying these prob- ed sectors, including agriculture, rural wa- lems can take some time, but the combination of ter supply projects, and health. These funds blunt talk by private sector experts and support- can nonetheless prove helpful in the capacity ive capacity building initiatives managed by the building and institutional strengthening sup- World Bank and others holds promise as a way of port they provide governments. This benefit is helping cities scale up their investments on cli- often overlooked if the focus is strictly on how mate and other essential development priorities. Key takeaways | 43 Appendix Impacts of climate change on urban infrastructure: Water, transport, and energy systems Impacts of climate change on urban water supply, treatment, and stormwater management systems Temperature increase and drought System component Infrastructure or system impact Potential budget impacts Higher temperatures can affect amount and nature of precip- Capital cost for additional supply sources itation (that is, rain versus snow), thereby affecting level and or storage capacity. timing of water supply availability. Higher temperatures can lead to degradation of water quality Higher operating costs for additional from concentration of contaminants as evaporation occurs water supply pretreatment. or through enhanced growth of algae, microbes, or invasive Capital cost for dredging of storage Water supply species. Can also result in loss of foliage in areas adjacent facility(s). to reservoirs or other supply feeders, resulting in increased turbidity of water or siltation lessening capacity of the stor- age facility. Higher temperatures can result in higher rates of evaporation Capital cost for relocation of intake pipes in surface water storage facilities. feeding water system. Higher temperatures can result in higher rates of evapo- Higher operating costs such as energy transpiration, increasing demand for landscape irrigation or cost associated with higher rates of water human consumption. May require additional storage capacity pumping and distribution. or physical reduction of water loss (through leakage) to deal Capital cost for network rehabilitation or with heightened demand or involve higher pumping costs construction of new or expanded storage to extract supply from deeper groundwater levels. Coastal or desalination facilities. Water demand cities may choose to pursue use of desalination plants as a supply option. Higher temperatures can raise competition for water re- Potential revenue loss from lower operat- sources, particularly from power plants dependent on rivers ing levels at water-cooled power stations. for cooling water supply. Capital cost for shift to air-cooled systems at power plants. 44 | Financing a Resilient Urban Future Extreme weather events and storms System component Infrastructure or system impact Potential budget impacts More extreme weather events can overwhelm capacity of Capital cost for expanded storage capacity storage facilities, creating safety hazards in both the imme- or enhancements of the structural integrity diate vicinity and downstream. of storage facilities. More frequent and intense rainfall events will increase sedi- Higher operating costs for additional water ment, nutrient, and pathogen/pollutant loads in waterways supply pretreatment. Water supply and reservoirs because of flooding. Intense rainfall events can lead to increased siltation of Higher operating costs for additional water storage facilities. dredging at storage facilities; capital cost of expanded storage system capacity. Intense rainfall events can overwhelm systems in cities Capital cost for CSO system redesign or de- Wastewater with combined sewer overflow (CSO–systems that combine velopment of stormwater and wastewater treatment wastewater and storm water runoff), leading to release of retention systems that reduce likelihood of raw sewage into local waterways. raw sewage release into local waterways. Sea level rise System component Infrastructure or system impact Budget impacts Higher potential for saltwater encroachment in surface and Capital cost for barriers or berms or devel- Water supply groundwater supply sources. opment of alternative supply sources. Higher likelihood of flooding of sewers and wastewater Higher operating cost for pumping of Wastewater treatment plants in coastal cities, with reduced ability to wastewater treatment facility effluent; treatment rely on gravity to discharge CSO and wastewater treatment capital cost for barriers or berms or relo- facility effluent. cation of treatment facilities. Impacts of climate change on urban transport systems Temperature increase System type Infrastructure impact Budget impacts Damage and rutting of road surface as it Higher operating and repair costs. softens from high heat. Change in freeze and thaw conditions Affects operating and repair costs. Roads, bridges, during winter months, affecting pothole tunnels incidence or other road surface damage. Change in incidence and severity of snow Change in road maintenance costs (more or less salt needed, and ice during winter months. number of snowplows and plow operators required, etc.), depending on incidence and severity of storms. Potential buckling of rail as it heats up Higher operating and repair costs. during extreme heat event. Rail bridges and tunnels Subsurface rail systems may experience Higher capital and operating costs for space cooling. elevated heat levels, with potential dis- comfort and health impacts on riders. Incidence of ice-blocked waterways may Budget impact unclear, as previously impassable waterways Marine diminish in severity and frequency. may now become more regularly usable in winter months, with knock-on operating cost and revenue impacts. Appendix | 45 Increased incidence of extreme weather events and storms System type Infrastructure impact Budget impacts Downed trees, limbs, and wires block roadways. Higher operating and cleanup costs. Water and waves can undermine structural sta- Higher operating and repair costs; possible capital bility of roadways or bridges, eroding subsurface replacement of certain road segments. or portion of roadway itself. Flooded tunnels may experience structural damage. Roads, bridges, Damage to vehicles, fleets, and equipment from Higher capital replacement costs. tunnels flooding or debris. Damage to linked systems (such as street lighting Higher repair costs; possible capital replacement along roadways, lighting in tunnels). costs. Damage to overhead lines for surface transport Higher operating and repair costs; possible capital from downed limbs, trees, and strong winds. replacement of certain line segments. Downed trees, limbs, and wires block roadways. Higher operating and cleanup costs. Water and waves can undermine structural stabil- Higher operating and repair costs; possible capital ity of tracks or rail bridges, eroding subsurface or replacement of certain road segments. portion of track surface itself. Rail bridges and tunnels Damage to vehicles, fleet, and equipment. Higher capital replacement costs Water and waves can damage or destroy sub- Higher operating and repair costs; possible capital surface transit stations, track and tunnels, and replacement of certain tunnel segments or stations. electrical and control systems. Damage or destruction of facilities, fueling facili- Higher operating and repair costs; possible capital ties, and power systems by floodwaters. replacement of certain tunnel segments or stations. Damage to inventory staged at or near port Potential loss of operating revenue and elevated Marine facility. insurance costs. Difficulty berthing ships because of higher eleva- Higher operating costs. tion of ship (compared with normal water level). Sea level rise and storm surge System type Infrastructure impact Budget impacts Water and waves can undermine structural stability of road- Higher operating and repair costs; possible way or bridges, eroding subsurface or portion of roadway capital replacement of certain road seg- itself. ments. Roads, bridges, tunnels Damage to linked systems (such as street or tunnel Higher repair costs; possible capital lighting). replacement costs. Damage to vehicles, fleet, and equipment. Higher capital replacement costs Surface railzwater and waves can undermine structural sta- Higher operating and repair costs; possible bility of roadway or bridges, eroding subsurface or portion capital replacement of certain road seg- of roadway itself. ments. Rail bridges Damage to vehicles, fleet, and equipment. Higher capital replacement costs. and tunnels Water and waves can damage or destroy subsurface transit Higher operating and repair costs; possible stations, track and tunnels, and electrical and control capital replacement of certain tunnel seg- systems. ments or stations. 46 | Financing a Resilient Urban Future System type Infrastructure impact Budget impacts Damage or destruction of facilities, fueling facilities, and Higher operating and repair costs; possible power systems by floodwaters. capital replacement of certain tunnel seg- ments or stations. Damage to inventory staged at or near port facility. Potential loss of operating revenue and elevated insurance costs. Marine Difficulty berthing ships because of higher elevation of ship Higher operating costs. (compared with normal water level). Potential reduced need for dredging because of higher Lower operating costs. water level. Impacts of climate change on urban energy systems Temperature increase/drought System element Infrastructure impact Budget impacts High heat or drought can warm or reduce the available Revenue loss; potential penalties for volume of cooling waters used to exhaust waste heat violating regulator-imposed temperature from thermal power plants or district heating and cooling standards in waterways where power plants plants, forcing shutdown or reduced output from exhaust their waste heat; potential capital the facility. cost for installation of air-cooling system (as alternative to water-cooled system design). Power or district heating and cool- Climate change–induced changes in cloud cover or wind Change in operating revenues. ing assets patterns may affect system generation output of solar photovoltaic or wind power facilities. Drought can lead to lessening or loss of hydro facili- Loss of operating revenues; capital cost of ty output. constructing larger retention facilities to ensure adequate water supply to feed hydro plant during dry season. Carrying capacity of transmission and distribution lines Higher repair and maintenance costs; higher decrease as ambient temperatures increase, leading to capital cost to upgrade these lines or install potential failure of the line as it reaches its design limits. redundant capacity to share the power load burden. Transmission and High heat can cause system failure of transformers or Higher repair and maintenance costs; capital distribution assets other equipment at power generation facility. investment in equipment that can operate under higher temperature conditions. Rising temperatures may lengthen growing season, Higher operating cost (tree-trimming leading to tree growth encroaching on power distribution operations). lines, putting them at risk of damage or failure. During periods of high heat, power demand (generally Higher repair and maintenance costs; higher linked to high rates of air-conditioning use) on individual capital cost to upgrade these assets to distribution lines, transformers, and substations may accommodate higher load levels or install exceed the available capacity, leading to power system redundant capacity to share the power distri- Energy demand failure. bution burden. Rising temperature drives elevated demand for air-condi- Higher capital cost for construction of addi- tioning and refrigeration use, increasing need for expand- tional generation capacity. ed peak supply availability and overall system capacity. Appendix | 47 Extreme weather events and storms System element Infrastructure impact Budget impacts Damage to assets from flooding, high Higher repair and maintenance costs; may require capital invest- winds, hail, or lightning strikes. ment in flood barriers and berms or relocation of these assets out Power or district of flood zone. heating and cool- ing assets Damage or loss of fuel stocks (for Higher operating costs for replacement of fuel stocks; may example, coal stockpiles flooded, no require capital investment in flood barriers or berms or relocation longer usable for power generation). of these assets out of flood zone. Damage to overhead lines from Higher operating/repair costs; may involve capital investment in downed limbs, trees, and strong more robust T&D towers and poles or undergrounding of certain Transmission and winds. line segments. distribution (T&D) assets Underground wiring, substations, and Higher repair and maintenance costs; may require replacement other system assets may be affected or relocation of select system assets to locations above elevation by floodwaters. of flood zone. Sea level rise and storm surge System element Infrastructure impact Budget impacts Damage to assets from flooding. Higher repair and maintenance costs; may require capital invest- ment in flood barriers or berms or relocation of these assets out of Power or district flood zone. heating and cool- ing assets Damage or loss of fuel stocks (for Higher operating costs for replacement of fuel stocks; may require example, coal stockpiles flooded, no capital investment in flood barriers or berms or relocation of these longer usable for power generation). assets out of flood zone. Damage to T&D towers and poles Higher operating and repair costs; may involve capital invest- from storm surge. ment in more robust T&D towers and poles or undergrounding of certain line segments. Transmission and distribution assets Underground substations or other Higher repair and maintenance costs; may require replacement system assets may be affected by with saltwater-resistant assets or relocation of select system floodwaters. assets to locations above elevation of potential sea level rise or storm surge. 48 | Financing a Resilient Urban Future References ADB (Asian Development Bank). 2013. Increasing ––––––––. 2016. Good Practice Guide: Creditworthiness. Climate Change Resilience of Urban Water http://www.citiesclimatefinance.org/2016/03/c40- Infrastructure: Based on a Case Study from Wuhan good-practice-guide-creditworthiness/. City, People’s Republic of China. Mandaluyong, ––––––––. 2018. C40 Cities Finance Facility. https://www. Philippines: ADB. c40cff.org/. AfDB (African Development Bank). 2018. One Planet California Public Utilities Commission. 2018. “Order Summit - Joint IDFC-MDB Statement - Together Major Instituting Rulemaking to Consider Strategies Development Finance Institutions Align Financial and Guidance for Climate Change Adaptation.” Flows with the Paris Agreement. Abidjan, Cote Rulemaking 18-04-19. Issued May 7. d’Ivoire: AfDB. Cassola, Rodrigo. 2010. TEEB Case: Financing Agrawala, Shardul, and Samuel Fankhauser, eds. Conservation Through Ecological Fiscal Transfers 2008. Economic Aspects of Adaptation to Climate in Brazil. http://img.teebweb.org/wp-content/ Change: Costs, Benefits, and Policy Instruments. uploads/2013/01/Financing-conservation- Paris: Organisation for Economic Co-operation through-ecologicalfiscal-transfers-in-Brazil.pdf. and Development. CCFLA (Cities Climate Finance Leadership Alliance). Ajuntament de Barcelona. 2013. Barcelona Green 2015. State of City Climate Finance 2015. New York: Infrastructure and Biodiversity Plan 2020. http:// CCFLA. ajuntament.barcelona.cat/ecologiaurbana/ Choose NJ. 2016. “EDA Advances Two Projects for sites/default/files/Barcelona%20green%20 Energy Resilience Bank Funding.” July 14. infrastructure%20and%20biodiversity%20 plan%202020.pdf. City of Boulder. 2018. “Climate Action Tax.” https:// Artemis. 2013. “First Storm Surge Catastrophe Bond, bouldercolorado.gov/climate/climate-action-plan- MetroCat Re Ltd. 2013-1, Launches.” July 15. http:// cap-tax. www.artemis.bm/blog/2013/07/15/first-storm- City of Chicago. 2018. “Department of Finance, surge-catastrophe-bond-metrocat-re-ltd-2013-1- Revenue, Tax List, Vehicle Fuel Tax (7577).” https:// launches/. www.cityofchicago.org/city/en/depts/fin/supp_ ––––––––. 2017. “Multi-billion Dollar Electric Grid Risks info/revenue/tax_list/vehicle_fuel_tax.html. Need Risk Transfer: Swiss Re.” July 25. http:// City of Chicago Debt Management and Investor www.artemis.bm/blog/2017/07/25/multi-billion- Relations. 2018. “Chicago Motor Fuel Tax Bonds.” dollar-electric-grid-risks-need-risk-transfer- https://www.cityofchicagoinvestors.com/ swiss-re/. motorfuelbonds/financial-documents/i1399. Bahl, Roy. 2017. Metropolitan City Finances in Asia and City of Portland. 2016. “Charter, Code and Policies, the Pacific Region: Issues, Problems, and Reform City of Portland, Chapter 17.105 Motor Vehicle Options. Bangkok: United Nations Economic and Fuel Tax.” https://www.portlandoregon.gov/ Social Commission for Asia and the Pacific. citycode/71044. Bennett, Oliver. 2011. Surface Water Drainage Tax (Rain City of San Jose. 2011. “Council Policy: Post- Tax). London: U.K. Parliament. Construction Urban Runoff Management, Bhattacharya, A., J. P. Meltzer, J. Oppenheim, Policy #6-29.” https://www.sanjoseca.gov/ Z. Qureshi, and N. Stern. 2016. Delivering on DocumentCenter/View/3891. Sustainable Infrastructure for Better Development Climate Bonds Initiative. 2018a. “Green Bonds and Better Climate. Washington, DC: Brookings Highlights 2017.” https://www.climatebonds.net/ Institution, New Climate Economy, and files/reports/cbi-green-bonds-highlights- Grantham Institute for Climate Change and the 2017.pdf. Environment. ––––––––. 2018b. “Green Bonds Market Summary, Q1 Biswas, Asit K., and Kris Hartley. 2017. ”Tackling 2018.” April. https://www.climatebonds.net/files/ the Challenges of Sponge Cities.” China Daily, reports/q1_2018_highlights_final.pdf. September 26. DC.gov. 2018. “DC Green Bank.” Department of Blanco, Andres G., Nancy Moreno, David Vetter, and Energy and Environment, District of Columbia, Marcia Vetter. 2017. The Potential of Land Value Washington, DC. https://doee.dc.gov/greenbank. Capture for Financing Urban Projects: Methodological Ebinger, Jane, and Nancy Vandyke. 2015. Moving Considerations and Case Studies. Washington, DC: toward Climate-Resilient Transport. Washington, Inter-American Development Bank. DC: World Bank. Burne, Katy, and Ted Mann. 2013. “MTA Sells Storm Ebinger, Jane, and Walter Vergara. 2011. Climate Bond.” Wall Street Journal, July 31. Impacts on Energy Systems: Key Issues for Energy C40 Cities. 2015. Green Building City Market Briefs: Sector Adaptation. Washington, DC: World Mexico City. https://www.c40.org/researches/ Bank. European Investment Bank. 2018. Natural c40-usgbc-and-wgbc-green-building-city-market- Capital Financing Facility. http://www.eib.org/en/ brief-compendium. products/blending/ncff/index.htm. References | 49 Filosa, G. 2015. International Practices on Climate IDB (Inter-American Development Bank); EBRD Adaptation in Transportation: Findings from a (European Bank for Reconstruction and Virtual Review. Washington, DC: U.S. Department Development); World Bank; AfDB (African of Transportation. Development Bank); IDB Invest; ADB (Asian Fischbach, Amy. 2016. “FPL Hardens System against Development Bank); EIB (European Investment Storm Outages,” T&D World Magazine, June 20. Bank); and IsDB (Islamic Development Bank). 2017. Joint Report on Multilateral Development Banks’ Frazer, Lance. 2005. “Paving Paradise: The Peril Climate Finance. Washington, DC: IDB. of Impervious Surfaces.” Environmental Health Perspectives 113 (7). IDB (Inter-American Development Bank); World Bank; EBRD (European Bank for Reconstruction and Gardner, Gary. 2016. “The City: A System of Systems.” Development); EIB (European Investment Bank); In Worldwatch Institute, State of the World: Can a IIC (Inter-American Investment Corporation); City Be Sustainable? Washington, DC: Worldwatch AfDB (African Development Bank); and ADB Institute. (Asian Development Bank). 2016. Joint Report on Garfield, Leanna. 2017. “China Is Building 30 ‘Sponge Multilateral Development Banks’ Climate Finance. Cities’ that Aim to Soak Up Floodwater and Washington, DC: IDB. Prevent Disaster.” Business Insider, November 10. IDB (Inter-American Development Bank); World Bank; Georgeson, Lucien, Mark Maslin, Martyn Poessinouw, EIB (European Investment Bank); EBRD (European and Steve Howard. 2016. “Adaptation Responses to Bank for Reconstruction and Development); ADB Climate Change Differ between Global Megacities.” (Asian Development Bank); and AfDB (African Nature Climate Change (6). Development Bank). 2015. Joint Report on Multilateral Development Banks’ Climate Finance. Washington, Global Covenant of Mayors. 2017. “The Global DC: IDB. Covenant of Mayors Announces 3 New Initiatives and Partnerships to Support Local Climate Action IDB (Inter-American Development Bank); World at One Planet Summit.” Press release. https:// Bank; IFC (International Finance Corporation); www.globalcovenantofmayors.org/wp-content/ EIB (European Investment Bank); EBRD (European uploads/2017/12/GCoM-Release-12.12.2017-FINAL. Bank for Reconstruction and Development); pdf. ADB (Asian Development Bank); and AfDB (African Development Bank). 2014. Joint Report on Goldman Sachs. 2016. “Fact Sheet: DC Water Multilateral Development Banks’ Climate Finance. Environmental Impact Bond.” http://www. Washington, DC: IDB. goldmansachs.com/media-relations/press- releases/current/dc-water-environmental- Independent Evaluation Group. 2015. World Bank Group impact-bond-fact-sheet.pdf. Support to Public-Private Partnerships: Lessons from Experience in Client Countries FY02-12. Washington, Goldstein, Matthew. 2018. “Puerto Rico’s Positive DC: World Bank. Business Slogans Can’t Keep the Lights On.” New York Times, March 5. Insurance Journal. 2015. “Amtrak Sponsors $275m Cat Bond for Northeast Storm Surge, Wind, Quake.” GWOPA (Global Water Operators Partnership https://www.insurancejournal.com/news/ Alliance), UN Habitat. 2016. A Tool for Coastal east/2015/10/14/385087.htm. and Small Island State Water Utilities to Assess and Inter-American Development Bank. 2018. “Project Manage Climate Change Risk. Nairobi: UN Habitat. Preparation Facilities.” https://www.iadb.org/en/ Hallegatte, Stephane, Colin Green, R. J. Nicholls, and J. node/712. Corfee-Morlot. 2013. “Future Flood Losses in Major International Energy Agency. 2018. The Future of Coastal Cities.” Nature Climate Change 3: 802–6. Cooling: Opportunities for Energy Efficient Air Hallegatte, Stephane, Ankur Shah, Robert Lempert, Conditioning. Paris: OECD/IEA. Casey Brown, and Stuart Gill. 2012. “Investment Johnson, Tom. 2014. “State Targets $65m for Country’s Decision Making under Deep Uncertainty: First Energy Resiliency Bank.” NJ Spotlight, Application to Climate Change.” Policy Research September 3. Working Paper 6193, World Bank, Washington, DC. ––––––––. 2016. “NJ Energy Resilience Bank Getting Ready Hallegatte, Stephane, Adrian Vogt-Schilb, Mook for Second Round of Withdrawals,” NJ Spotlight, Bangalore, and Julie Rozenberg. 2017. Unbreakable: September 29. Building the Resilience of the Poor in the Face of Natural Disasters. Washington, DC: World Bank. Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Hu, Winnie. 2018. “Billion-Dollar Investment to Resources to Developing Countries. 2015. From Protect the ‘Champagne of Drinking Water.” New Billions to Trillions: Transforming Development York Times, A19. Finance: Post-2015 Financing for Development: Hulsmann, A., G. Grutzmacher, G. van den Berg, W. Multilateral Development Finance. Prepared jointly Rauch, A. L. Jensen, V. Popovych, M. Rosario, et by African Development Bank, Asian Development al., eds. 2015. Climate Change, Water Supply and Bank, European Bank for Reconstruction and Sanitation: Risk Assessment, Management, Mitigation Development, European Investment Bank, Inter- and Reduction. London: International Water American Development Bank, International Association. Monetary Fund, and the World Bank Group, April 2. 50 | Financing a Resilient Urban Future Keefer, D. W. 2018. “This Utility Is Heading New Jersey Board of Public Utilities. 2014. New Underground to Protect against Storm Damage.” Jersey Energy Resilience Bank Grant and Loan Energy Central, Aurora, CO. https://www. Financing Program Guide. October 14. https://www. energycentral.com/c/cc/utility-heading- adaptationclearinghouse.org/resources/new- underground-protect-against-storm-damage. jersey-energy-resilience-bank-grant-and-loan- Keenan, Jesse M., Thomas Hill, and Anurag Gumber. financing-program-guide.html. 2018. “Climate Gentrification: From Theory to Noy, Ilan, and Pooja Patel. 2014. “Floods and Spillovers: Empiricism in Miami-Dade County, Florida.” Households after the 2011 Great Flood in Thailand.” Environmental Research Letter 13: 054001. Working Paper Series 3609, School of Economics Kenealy, Bill. 2013. “New York’s MTA Buys $200 and Finance, Victoria University of Wellington. Million Cat Bond to Avoid Storm Surge Losses.” OECD (Organisation for Economic Co-operation and Business Insurance, October 11. Development). 2017. “Green Investment Banks: Kim, Julie. 2016. Handbook of Urban Infrastructure Innovative Public Financial Institutions Scaling Finance. Montreal: New Cities Foundation. Up Private, Low-Carbon Investment Policy Reform.” OECD Environment Policy Paper No. 06, Kolitz, Daniel. 2017. “The NYC Subway Is Still Getting Paris, January. Ready for the Next Hurricane Sandy.” Gizmodo, August 1. ––––––––. 2018a. “Detailed Aid Statistics: Official Bilateral Commitments by Sector.” OECD International Komives, Kristin, Vivien Foster, Jonathan Halpern, Development Statistics (database). https://doi. and Quentin Wodon. 2005. Water, Electricity org/10.1787/data-00073-en. and the Poor. Who Benefits from Utility Subsidies? Washington, DC: World Bank. ––––––––. 2018b. “Energy-Related Aid Data at a Glance.” http://www.oecd.org/dac/stats/energy- Kuzio, Michael, and Charis Lypiridis. 2018. New relatedaiddataataglance.htm. Perspectives on Results-Based Blended Finance for Cities: Innovative Finance Solutions for Climate Smart OECD DAC (Organisation for Economic Co-operation Infrastructure. Washington, DC: Global Partnership and Development Development Assistance on Output-Based Aid/World Bank Group. Committee). 2014. “OECD DAC Statistics: Aid to Urban Climate Change Adaptation.” https:// Lee, Jae-Seung, and Jeong Won Kim. 2018. “Assessing www.oecd.org/dac/environment-development/ Strategies for Urban Climate Change Adaptation: Urban%20Adaptation%20Flyer.pdf. The Case of Six Metropolitan Cities in South Korea.” Sustainability (10) 2065. Ohshita, Stephanie, and Kate Johnson. 2017. “Resilient Urban Energy: Making City Systems Masaki, Takaaki. 2018. “The Impact of Energy Efficient, Low Carbon and Resilient in Intergovernmental Transfers on Local Revenue a Changing Climate.” European Council for an Generation in Sub-Saharan Africa: Evidence from Energy Efficient Economy. https://www.eceee.org/ Tanzania.” World Development (106): 173–86. library/conference_proceedings/eceee_Summer_ Maxwell, Amanda. 2015. “Latin America Green News.” Studies/2017/3-local-action/resilient-urban- NRDC, May 11. https://www.nrdc.org/experts/ energy-making-city-systems-energy-efficient- amanda-maxwell/latin-america-green-news- low-carbon-and-resilient-in-a-changing-climate/. green-roofs-mexico-green-grid-uruguay-green- Oliver, Padraig. 2016. “Green Bonds for Cities: A tax. Strategic Guide for City-Level Policymakers in McKinsey. 2013. Infrastructure Productivity: How to Save Developing Countries.” Climate-KIC/South Pole $1 Trillion a Year. New York: McKinsey. Group/ICLEI/Climate Bonds Initiative. https:// climatepolicyinitiative.org/publication/green- Meub, Kristen. 2018. How Microgrids Could Boost bonds-guide-city-policymakers-developing- Resilience in New Orleans. Albuquerque, NM: countries/. Sandia National Laboratory, May 24. http:// www.sandia.gov/news/publications/labnews/ Pacific Infrastructure Advisory Centre. 2013. articles/2018/25-05/microgrids.html. Infrastructure Maintenance in the Pacific: Challenging the Build-Neglect-Rebuild Paradigm. Miami Forever. 2017. “Miami Forever Bond.” https:// Sydney, Australia: Pacific Region Infrastructure www.miamiforever.org/. Facility. Milne, Janet. 2015. “Storms Ahead: Climate Change PG&E (Pacific Gas and Electric Company). 2016. Adaptation: Calls for Resilient Funding.” Vermont Climate Change Vulnerability Assessment. Law Review 39 (819). http://www.pgecurrents.com/wp-content/ Mortimer, Sarah. 2013. “New York’s MTA to Sell $125 uploads/2016/02/PGE_climate_resilience.pdf. Million ‘Catastrophe’ Bond.” Reuters, July 15. Philippine Star. 2018. “No More Blackouts in Mindoro Neal, David. 2018. “That Hurricane Irma Cleanup Town.” March 18. https://www.philstar.com/ Surcharge Coming to Your FPL Bill? It’s Been nation/2018/03/18/1797800/no-more-blackouts- Turned Off.” Miami Herald, January 17. mindoro-town. Nehamas, Nicholas, and Nancy Dahlberg. 2018. “FPL Pounds, Marcia. 2017. “FPL spent $2.78B on Grid Spent $3 Billion Preparing for a Storm. So Why Did Upgrades, But Customers Doubt They Got Their Irma Knock Out the Lights?” Miami Herald, May 2. Money’s Worth.” Sun Sentinel, December 3. References | 51 ––––––––. 2018. “FPL Seeks Pilot Program to Test Standaert, Michael. 2018. “Sponge Cities: China’s $300 Underground Powerlines,” Sun Sentinel, March 1. Billion Investment Plan for Green Stormwater RATP (Régie Autonome des Transports Parisiens). Infrastructure.” Impact Alpha, May 7. 2018. “When the Seine Floods: How We Protect S&P Global Ratings. 2018. 2018 U.S. Municipal Green Bond the RATP Network.” https://www.ratp.fr/en/ and Resiliency Outlook. New York: Standard & Poors. decouvrir/coulisses/au-quotidien-traduire/when- Suzuki, Hiroaki, Murakami Jin, Hong Yu-Hung, and seine-floods-how-we-protect-ratp-network. Beth Tamayose. 2015. Financing Transit-Oriented ReFocus Partners. 2017. A Guide for Public-Sector Development with Land Values: Adapting Land Value Resilience Bond Sponsorship. http://www. Capture in Developing Countries. Washington, DC: refocuspartners.com/wp-content/uploads/pdf/ World Bank. RE.bound-Program-Report-September-2017.pdf. Transport for London. 2015. Providing Transport Rigaud, Kanta Kumari, Alex de Sherbinin, Bryan Services Resilient to Extreme Weather and Climate Jones, Jonas Bergmann, Viviane Clement, Kayly Change 2015: Update Report Following Last Report to Ober, Jacob Schewe, et al. 2018. Groundswell: Government in 2011. London: Transport for London. Preparing for Internal Climate Migration. Turner, Jim. 2017. “FPL customers to Pay for Costs of Washington, DC: World Bank. Responding to Hurricane Matthew.” Miami Herald, February 8. Rio de Janeiro. 2016. Climate Change Adaptation Strategy for the City of Rio de Janeiro. Rio de Janeiro: Tweed, Katherine. 2014. “New Jersey Launches Rio de Janeiro Prefeitura, Center for Integrated $200M Energy Resilience Bank for Microgrids and Studies on Climate Change and the Environment Distributed Generation.” Green Tech Media, July 24. –Centro Clima/COPPE/UFRJ. UITP (International Association of Public Transport). Rodin, Judith 2014. The Resilience Dividend: Being Strong 2016. Urban Rail, Climate Change, and Resilience: A in a World Where Things Go Wrong. New York: Public Joint Report by the Metro Committee, the Light Rail Affairs. Committee and the Regional and Suburban Railways Committee. Brussels: UITP. Rosenzweig, Cynthia, William Solecki, Stephen UNDP (United Nations Development Programme). Hammer, and Shagun Mehrotra, eds. 2011. Climate 2017. Debt for Nature Swaps. http://www.undp.org/ Change and Cities: First Assessment Report of content/sdfinance/en/home/solutions/debt-for- the Urban Climate Change Research Network. nature-swaps.html. Cambridge, U.K.: Cambridge University Press. USAID (U.S. Agency for International Development). Rosenzweig, Cynthia, William Solecki, Patricia 2017. Project Preparation Facilities Toolbox. Power Romero-Lankao, Shagun Mehrotra, Shobhakar Africa Program, USAID, Washington, DC. Dhakal, and Somayya Ali Ibrahim, eds. https://2012-2017.usaid.gov/sites/default/files/ 2018. Climate Change and Cities: Second Assessment documents/1860/PPF%20Toolbox%20REVISED.pdf. Report of the Urban Climate Change Research Network. Cambridge, U.K.: Cambridge University USEPA (U.S. Environmental Protection Agency). 2018. Press. Tools to Assess Risks to Water Utilities from Extreme Weather. https://www.epa.gov/crwu/tools-assess- Rowcroft, Petrina, and Jennifer Black. 2017. Toolkit of risks-water-utilities-extreme-weather. Measures for Managing Environmental Externalities Venkateswaran, Rama Krishnan. 2014. “Municipal in Urban Areas. Washington, DC: World Bank. Financial Management.” In Municipal Finances: Roxburgh, Helen. 2017. “China’s ‘Sponge Cities’ Are A Handbook for Local Governments, edited by Turning Streets Green to Combat Flooding.” The Catherine Farvacque-Vitkovic and Mihaly Guardian, December 27. Kopanyi, chap. 3. Washington, DC: World Bank. San Francisco Bay Restore. 2016. “Ballot Measure Venugopal, V., and S. Yilmaz. 2010. “Decentralization Summary: San Francisco Bay Clean Water, in Tanzania: An Assessment of Local Discretion Pollution Prevention, and Habitat Restoration and Accountability.” Public Administration and Program.” http://sfbayrestore.org/docs/ Development 30: 215–31. BallotMeasure Language.pdf. Voutchkov, Nikolay. 2016. “Desalination–Past, Present Santos, Valerie-Joy, and Josef Leitmann. 2015. Investing and Future.” International Water Association, in Urban Resilience: Protecting and Promoting London. http://www.iwa-network.org/ Development in a Changing World. Washington, DC: desalination-past-present-future/. World Bank/GFDRR. World Bank. 2014. Cần Thơ, Vietnam–Enhancing Urban Sarkar, A., N. Mukhi, P. S. Padmanaban, A. Kumar, K. Resilience. CityStrength Initiative. Washington, DC: Kumar, M. Bansal, and S. Ganta. 2016. Utility Scale World Bank. DSM Opportunities and Business Models in India. ––––––––. 2015a. “Creditworthiness Academy Provides Washington, DC: World Bank. Financial Management Training to Uganda’s Slack, Enid. 2017. How Much Local Fiscal Autonomy Do Urban Government Representatives.” http://www. Cities Have? A Comparison of Eight Cities around the worldbank.org/en/news/feature/2015/05/13/ World. Toronto: Institute on Municipal Finance creditworthiness-academy-provides-financial- and Governance, Munk School of Global Affairs, management-training-to-ugandas-urban- University of Toronto. government-representatives. 52 | Financing a Resilient Urban Future ––––––––. 2015b. Lesotho Water Security and Climate ––––––––. 2018c. “World Bank Group Exceeds Its Climate Change Assessment. Washington, DC: World Bank. Finance Target with Record Year.” Press release, ––––––––. 2017a. Building Climate Resilience into July 19. https://www.worldbank.org/en/news/ Power System Planning: The Case of Bangladesh. press-release/2018/07/19/world-bank-group- Washington, DC: World Bank. exceeds-its-climate-finance-target-with- record-year. ––––––––. 2017b. Climate and Disaster Resilient Transport in Small Island Developing States: A Call for Action. ––––––––. Forthcoming. Disciplined Use of Concessionality Global Facility for Disaster Reduction and Recovery. to Maximize Its Contribution to Climate Change ––––––––. 2018a. City Resilience Program: City-Level Capital Action. A Guiding Framework. World Bank Investment Planning and Transaction Identification: Climate Change Group. Washington, DC: World Cần Thơ, Vietnam Inception Report. Washington, DC: Bank. World Bank, June 20. World Bank Group/PPIAF (Public-Private ––––––––. 2018b. “What Are Public Private Partnerships?” Infrastructure Advisory Facility). 2016. Emerging Public Private Partnership Legal Resource Center. Trends in Mainstreaming Climate Resilience in Large https://ppp.worldbank.org/public-private- Scale, Multi-Sector Infrastructure PPPs. Washington, partnership/. DC: World Bank. References | 53 Financing Climate Futures RETHINKING INFRASTRUCTURE Governments recognise that scaling up and shifting financial flows to low-emission and resilient infrastructure investments is critical to deliver on climate and sustainable development goals. Efforts to align financial flows with climate objectives remain incremental and fail to deliver the radical transformation needed. The OECD, UN Environment and the World Bank Group, with the support of the German Ministry of Environment, Nature Conservation and Nuclear Safety, have joined forces under a new initiative – Financing Climate Futures: Rethinking Infrastructure – that provides a roadmap to help countries make the transformations in their infrastructure, investment and finance systems that are needed to make financial flows consistent with a pathway towards a low-emission, resilient future. For more information on Financing Climate Futures: Rethinking Infrastructure visit: oe.cd/climate-futures FINANCING A RESILIENT URBAN FUTURE: A Policy Brief on World Bank and Global Experience on Financing Climate-Resilient Urban Infrastructure In the coming decades, climate change will force cities to grapple with new operating conditions to construct and maintain key urban infrastructure. Strategies for covering the costs of climate-resilient upgrades will vary by locale, reflecting differing market, regulatory, and policy circumstances. This policy brief draws on World Bank experience and datasets and a desktop review of academic and grey literature on financing three core urban infrastructure systems – water, transport, and energy. It seeks to answer the question of what funding and financing instruments may be available to local governments and infrastructure system operators in different cities around the world, and how these link back to the climate challenges they may face. This brief was developed as part of the Financing Climate Futures initiative, a joint effort of OECD, UN Environment, and the World Bank Group, with the support of the German Federal Ministry for the Environment, Nature Cover image: Conservation, and Nuclear Safety (BMU). © Cire Notrevo / Shutterstock.com