Invest in Success: Leveraging the Return from Global Cities

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Invest in Success Leveraging the Return from
Global Cities

• Greg Clark
• Toronto, May, 2008

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Key questions

• Is city development an investment or an
  expenditure for Governments?
• Why are there so many investment gaps in
  cities?
• Do these gaps need to be addressed? What are
  the costs of not closing them?
• What can we do about it?
• What can Toronto do about it?

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Propositions

• New global era requires a renewed focus on city
  investment. Demand side drivers with supply side
  constraints.
• National success is not possible without city
  success.
• Improved City investment requires dedicated tools
  and public / private endeavour financial tools
  and development agencies are essential.
• Investment is the critical task of city
  leadership.
• Development Agencies are a key tool in fostering
  financial innovation.
• Being investment-ready is the key task for
  cities.
• Cities have to provide investment prospectus.
• Asset management and leverage within cities is
  key.
• Work with public and private investors in
  partnership.
• Investment and co-ordination are central to
  building prosperity.

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But, substantial problems

• Cities have limited fiscal tools.
• Investment cycle is 25 years, not a single
  mandate.
• Major cities subsidise other places through
  transfer payments.
• Cities compete for investment in public finance
  systems and in markets
• National govs compete to be fiscally tight.
• Cities cannot easily develop finance track
  record.
• Much of the national benefit of city growth is
  intangible or not measured.
• Political representation does not reflect actual
  population and cities are under-represented.
• Market knowledge on city investment opportunities
  is not perfect.
• Municipal staff not widely skilled in development
  finance, project finance, or investment
  disciplines.

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Cities and Regions need investment

• Transition to knowledge led economy
• Interaction of place with economy
• What businesses and people need
• Agglomeration, proximity, quality of place,
  co-ordination success
• Economic integration
• Continental, global,. Competition and
  Collaboration
• Environmental Imperatives. Completing the
  clean-up and greening the city economy.
• Social inclusion. New forms of intermediation.
• Policy Innovation and delivery.
• speed, authority, governance.
• Space, flows, economic units.
• Metropolitanisation, cities, and regions.

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Productivity, Place, and Investment
1. Indigenous growth 2. Primarily supply side 3.
Market failures in
New firms can create demand for skilled labour
Investment in physical capital increases firms
innovative capacity
4. And drivers of growth
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Take a long term view.

• 6 Long Term Drivers
• Economic Internationalisation.
• Human mobility and demographics.
• Environmental change and challenge.
• Technology development.
• Urbanisation of poverty and inequality.
• Continental governance.
• How localities and regions respond matters.
• Governance, investment, strategy, leadership,
  marketing branding, catalyst, collaboration.
• Population and investment strategies, branding,
  climate impact, science and knowledge, inclusion,
  open-ness.

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An Urban and Metropolitan World

• Globalisation and the knowledge economy have
  repositioned metropolitan regions as drivers of
  national economies

• 2025 75 of world population will
  live in cities/metropolitan areas
• 2025 17 of worlds 25 largest cities will be in
  coastal regions in Asia

• 1925 25 of world population lived in cities

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Global economic integration has increased
dramatically over recent years
Globalisation is the growing economic
interdependence of countries worldwide through
increasing volume and variety of cross-border
transactions in goods and services, free
international capital flows, and more rapid and
widespread diffusion of technology.
Source International Monetary Fund
Figure Three waves of globalisation

• History of Globalisation
• Globalisation is not a new phenomenon, there have
  been numerous examples of markets undergoing
  structural change and periods of high levels of
  cross-border trade going back as far as Roman
  times.
• However globalisation, as we consider it now,
  really took off in the late 19th Century as
  Britain led the way with a large increase in
  exports to the world and global migration
  increased significantly.
• World War I sparked a period of retreat but after
  World War II there has been further waves of
  globalisation.
• The current wave is distinctive because of the
  scale and pace of change the international
  fragmentation of production and the maturity of
  international capital markets.

Source World Bank
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There are economic, political and social drivers
of this recent wave of globalisation

• Free Trade/Geo-Political Shift
• Since World War II and especially since the fall
  of the Soviet Bloc, there has been a strong
  commitment by many nations to free trade.
• This is achieved in principle through reducing
  tariffs and other barriers to trade.
• There have been numerous multi-lateral trade
  agreements between countries and overseen by the
  World Trade Organisation.
• The establishment of the EU has allowed and
  encouraged the free movement of goods, services
  and capital between its member states.

• Falling Transport Costs
• An important factor that has driven globalisation
  over the last 50 years is the significant falls
  in the costs of transportation.
• Containerisation and haulage have dramatically
  increased the capacity and speed with which goods
  can be transported around the globe and
  domestically.
• This has reduced the need for goods to be
  manufactured near to the consumer.
• Recently there has also been significant falls in
  the cost of air travel allowing people to move
  easily around the world.

• Advances in Technology
• There have been significant advances in
  information and communication technology over the
  last 20-30 years.
• This has facilitated information exchange and has
  lowered transactions costs.
• Combined with lower transportation costs, this
  has enabled firms to outsource different elements
  of their business to various locations and hence
  the growth of multinationals.
• There is also a direct effect with new technology
  industries offering opportunities and a greater
  need for skills.

• Mobility of People
• Both internal and international migration have
  been drivers of globalisation.
• The willingness and ability of people to move has
  provided an increasingly flexible labour market
  to meet the needs of growing sectors.
• Internal both inter- and intra-regional migration
  has increased steadily over the last few decades.
• International migration has also been on the
  increase, with indications suggesting that this
  trend will accelerate in the coming years,
  supporting continued globalisation.

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Internationally this has led to urbanisation,
increased trade and capital flows and the
geographic fragmentation of production
Urbanisation - Nearly half the world now live in
urban areas.
Trade Flows - World trade has increased
dramatically over the last 50 years.
Source UN DESA (2005)
Capital Markets Dramatic increases in the last
few decades.
Geographic fragmentation of production
Companies are splitting their production process
around the world to where it can be done most
efficiently.
The globally integrated enterprise, fashions its
strategy, management and operations to integrate
production worldwide. That has been made possible
by shared technologies and shared business
standards, built on top of a global information
technology and communications infrastructure. New
technology and business models are allowing
companies to treat their functions and operations
as component pieces, companies can pull those
pieces apart and put them back together in new
combinations. S Palmisano, head of IBM,
12/6/06 in the FT
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The current wave is expected to continue with the
emergence of new economies driving the global
economy

• Emerging economies
• Globalisation Is expected to continue at an ever
  increasing pace driven by emerging economies,
  such as China and India.
• They are growing at a rapid rate and are forecast
  to account for nearly 40 of the growth in the
  world economy over the next 15 years.
• Emerging economies have access to a huge labour
  force over 80 of the worlds population live in
  emerging economies.
• This supply of labour, combined with an
  increasing openness to trade and improved
  communications has allowed these emerging markets
  to forge strong manufacturing based, export
  economies.
• This shift in power away from developed countries
  will have a profound effect over the coming years
  across the global economy and specifically for
  Britain.
• In general, the emergence of these economies has
  and will be good for the developed world with
  consumer goods becoming cheaper and productivity
  being boosted by increased competition.
• However, there are likely to be losers as a
  result of increased competition with rising
  inequality as the rising ascendancy of emerging
  economies alter the relative returns to labour
  and capital.
• The impact on the UK over the coming years is
  likely to follow a similar pattern to what has
  been going on over the previous 30 years, with
  the comparative advantage shifting towards
  innovative and knowledge-intensive service
  sectors.

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Framework for city growth
Global economy and Macro-economic framework
Markets
Feedback effects
Economic growth performance
Use of resources
Productivity
Population
Innovation creativity
Industrial structure
Business ownership mgt
Human capital
Connectivity .
Environ mgt
Drivers
Business environment investment
Educational and research base
Land and physical infrastructure
Social/ cultural infrastructure quality of life
Ecological base .

Governance structure .

Pre-conditions
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As many city economies are under-bounded some
regional governance may boost growth

Relationship between size of government and
economic growth

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City/ Region
Cities, Regions, and Mobility
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Focus the Challenges of bigger city-regions.

• Bigger cities now key to national economic
  success.
• But bigger cities not focus of national economic
  policies.
• Cities/regions/metropoles not recognised well in
  higher order or sectoral policies.
• But globalisation happens through institutions
  and firms based in bigger cities, and using
  metropolitan logistics and infrastructure.
• Bigger cities provide a high return on public
  and private investment if they can solve problems
  effectively.
• Organising the economic city and its story is
  the first key task.
• Demonstrate the ability to make an economic
  difference.
• Global cities working with globally companies, a
  large firms agenda as well as small firms.
• Make the case for the city economicallyLondon,
  New York, Auckland, Madrid.
• Invest in success......

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Leadership challenges in cities and regions.

• Transition to a new economy and its
  requirements.
• Openness to international populations.
• Rapid and dynamic growth of metropolitan regions.
  Mega trends driving metropolitan growth.
• Service needs of dynamic populations.
• Greater transparency to customers and
  stakeholder.
• Investment not enough. Financial resources are
  finite and national public finance is slow to
  follow growth. Lack of investment tools.
• Formal power and competence less than needed.
  City and regional governments do not control
  everything boundaries, competences, division of
  labour with higher/lower tiers, markets,
  regulation/freedom
• National and sub-national governments guard their
  own space. Co-ordination challenges.

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City Leaders
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There are new ingredients appearing in city
strategies that appear to be distinctive

• Internationalisation strategy.
• Talent and population strategies. (eg Open-ness).
• Economic collaboration.
• Sustainable development and climate adaptation
  (environment and energy).
• Investment strategies.
• Business partnerships.
• Regionalism and national success.
• Additional investment requirements.

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Positioning the role of Economic Development
within City-Regions.

• Economic develop not like public services.
  Engaging in markets, increasingly global
• It is not an expenditure cities/regions make. It
  is an investment that yields returns if done
  well. Income side of balance sheet.
• Not just a department within a city/region, but a
  rationale for what the city/region does. The
  prosperity agenda.
• Wide range of city gov activities and other
  public services contribute to economic
  development culture, tourism, planning, housing,
  education, transportation city needs a
  co-ordinating approach. Choices about how to
  organise. Offices, Agencies, Partnerships.
• Not a choice amongst competing priorities, but a
  means to achieve wider goals in social,
  environmental, cultural realms. It is the
  business of everyone.
• Economic development has broad outcomes
  taxes/resources, land values and assets, jobs and
  choices for citizens, investment, visitors,
  prestige, dynamism and buzz, partnership with
  business on city goals, a clear future for the
  city and its people..

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Features of effective city/region organising

• One Plan and strong story line. An investment
  prospectus.
• Economic agenda across whole Regional/City Gov,
  not within one department.
• Organised business leadership that is demanding
  and consistent and speaks to all orders of
  Government.
• Customer orientation employers, investors,
  visitors, entrepreneurs, traders, innovators,
  developers, infrastructure
• Focussed number of top priorities, sectors, and
  spaces.
• Expanding capacity to implement. Range of
  financing tools.
• Range of delivery vehicles that can attract
  external investment.
• Problem Solving and Project Management
  orientation.
• Strong economic agenda and partnerships with
• Local public sector, Local and regional Private
  Sector. Regional public partners, Provincial and
  Federal Governments, Global partners.
• A collaborative leadership that leads, empowers,
  focuses on big picture and leverages resources to
  deliver.

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Success and failure in City Economic Development

• Success.
• Rising tax base with lower taxes.
• Employment and incomes for citizens and choice of
  jobs.
• Resources for social and environmental
  programmes.
• Multiple distinctive and attractive locations.
• Managed growth and investment.
• Increased global connectivity.
• Strong collaborations.

• Failure
• Dwindling tax base with high taxes.
• Reduced resources for other programmes.
• Environmental degradation.
• High unemployment and high emigration.
• Disinvestment.
• Failed projects and initiatives. Bickering.
• Reduced global connectivity.
• Unmanaged decline.

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Do some cities succeed without strategies?

• Yes they do, but are there other ingredients
  present
• Barcelona
• New York
• London
• Dublin
• Long term factors of city success versus medium
  term factors of city success. (ref London and New
  York versus city indexes).

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Why do city and regional strategies fail?

• Strategy done for wrong reason /strategy has no
  focus or specificity
• Lack of leadership and cross city working.
• No communication, compacting, and conviction.
• No assessment of local assets and
  distinctiveness.
• No assessment of demand side opportunities.
• No responsibility amongst competent bodies.
• Lack of tools to implement at scale.
• Lack of investment, capacity/resources.
• Failure to solve problems as they arise.
• No intention to implement.
• No support from higher tier Govs, or neighbours.

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But is city strategy the key variable? What
about?

• Implementation.
• City Leadership.
• Business behaviour and leadership.
• Investment.
• Infrastructure.
• City identity and image
• Asset Management.
• Delivery capability.
•            

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What is long term city success?

• 25 Global Indexes of Cities.

• London and New York in 21st C.

• Which Cities winning?
• What factors of success?
• An Index of Indexes?
• Long Term Factors?

• 2000 2100?
• 1900 2000?
• Collaboration not competition.
• Compare the cities 14 measures.
• Thematic investigation.
• Engage other cities
• Tokyo, Paris, Hong Kong?
• Frankfurt, Dublin, Madrid?
• Seoul, Mumbai, Sao Paolo?

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Medium term measures of success?

• Connectivity and space to grow.
• Quality of Life and Place (eg Urban Design).
• Skills of labour force.
• Innovation and Creativity
• Entrepreneurship.
• Industrial structure.
• Cost base of cities.
• Transparency of business environment.
• Identity and Brand Building.

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Longer term?

• Openness to International Populations.
• Power of the City Identity and Brand.
• Location and Access to growing markets.
• Role of city in International Trade.
• Power of influence of language and
  regulatory/legal systems.
• Depth of artistic, architectural and cultural
  endowment.
• Continuity of city leadership.
• Success in adjusting to shocks and luck in being
  on the right side of conflicts.
• Sustainability in terms of climate and
  environmental sensitivity.
• Investment in the city from all sources
  (including higher tiers of government).

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Financing city development 10 principles.

• Smart finance for smart cities getting the
  fiscal relationships with higher tiers of
  Government right
• Promote active private sector leadership in city
  investment
• Metropolitan finance for metropolitan amenities
• Sharing the benefits of growth locally
• Flexibility in public funding to enable private
  co-investment
• A new approach to public assets
• Financial innovation in public and private
  sectors
• Long term market building by the private sector
• Focus on the quality of the propositions not on
  the supply of finance
• Build capable specialist financial intermediaries

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Making markets work better for local development

• The age of subsidies is past.
• Healthy local investment markets
• Supply of capital
• Demand and deal flow
• Information and co-ordination
• Brokerage and intermediation
• Market failure is not a simple supply issue
• Economic development task is to build the market.
• Demand side is key and facilitation is essential.

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Investing in City and Regional Economic
Development.

• Private sector co-investment is an important
  quest.
• Role of regions and cities is to investable and
  investment-ready.
• Reduce risks and costs, improve returns, help to
  build steady flow of propositions. Conditions of
  a growing market.
• Economic Development Strategy as Investment
  Prospectus.
• Good for Cities and Regions.
• Good for Private Sector.
• Key roles for national and multi-national
  organisations.
• Build partnership with investment sector.

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Public/Private Finance.

• Why? What is the incentive structure?
• Public Goals.
• More Capital, rebuild regional/local investment
  markets, commercial discipline,attracts wider
  interest, more sustainable, investment rather
  than expenditure.
• Private Goals.
• New business lines and markets, diversification
  of business, ethical or CSR priorities,
  predictable returns, new relationships and
  influence, strengthen local economies and improve
  performance of related investments.

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Not just capital financing

• Human capital
• Enterprise, Creativity, Innovation
• Social and environmental infrastructures
• New technology and science
• Brand, image, and identity

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What can cities do ?

• Public finance

• Private finance

• Accept reality sound fiscal strategy.
• Prioritise larger and catalytic investments.
• Pursue sustainable growth of tax base.
• Make the case for cities through tangible
  investment projects.
• Efficiency and effectiveness of city government.
• More public-public joint ventures.
• Capable development agencies and corporations.
  Shared agencies and intermediaries.
• Asset management.
• Recruit financial talent.
• Business and investment friendly services and
  approaches.

• Foster investment dialogue with private sector.
• Support existing investors better.
• Reduce risk, cost, and uncertainty.
• Seek advice and partnership early.
• Build investment-ready propositions.
• Better information on city finances and
  investment opportunities.
• Investment prospectus.
• Promote the city for investment.
• Develop infrastructure as an asset class.
• Build templates and pilots to make complex
  finance easier.

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What can Toronto do?

• A 3 pronged strategy
• Improved financial management and fiscal
  autonomy.
• More public-public partnerships.
• Better leverage of private finance.
• Demonstrate fiscal competence and optimum use of
  existing resources and tools.
• Work with existing investors to improve their
  returns and create incentive for reinvestment.
• Identify key large projects for early due
  diligence and investment-readiness.
• Innovate and be confident with new financial
  tools.