While financial viability is central to the principles of long-term urban sustainability, should it become the defining factor of policy making, beyond its social equity remit? Keeping both elements into balance is essential towards improving the long-term viability of those sustainable efforts. To better understand those key terms, they must first be defined and understood. For the purposes of this essay, the point of view of public sector investments only is taken ignoring the financial viability aspects of the private sector involvement within the built environment, even if they increasingly take on traditional responsibilities of the public sphere, since profit is almost always the overriding and ultimate goal.
Defining financial viability and its relationship to sustainability
“Urban sustainability” is generally understood to mean ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs.’ (World Commission on Environment and Development, 1987, pp. 41). This definition remains vague as human “need” is an ill defined and evolving concept, in particular between emerging and developed nations. While food, shelter, employment and clothing are defined as primary needs, their quality or quantity is dependent on the environment and availability. “Need”, in urban sustainability terms also encompasses elements such as quality of life, access to economic opportunities, healthcare, recreation or nature. “Need” is often poorly distinguished with “want” which in the human case is infinite. There are furthermore considerable limitations (social, technological, economical, environmental etc..) on the current ability of any State (regardless of its form of Government) to create such sustainability while maintaining social equity. Adequate measures of sustainability are scarce and prone to the simplification of complex eco-systems.
While there are no agreed upon paradigm of the components of “urban sustainability” it includes the traditional criteria of politics, economics, culture and ecology but in the contemporary urban context can be refined to include concepts such as environmental and cultural preservation, energy efficiency, public transport, poverty alleviation, educational systems, employment opportunities etc.. The potential measures and methods of improving urban sustainability and resilience are near endless but at their core, remains a reliance on scarce financial capacity for their implementation and maintenance. This would indicate that adequate financial viability is indeed at the heart of urban sustainability.
Financial viability within a sovereign framework is generally understood to mean that levels of government debt should not exceed the expected ability of that Government to service that debt through fiscal or other revenues relative to Government expenditure. Financial sustainability is thus generally measured through a GDP-to-debt ratio that should not be exceeded. Within emerging markets such as Mongolia, the question of access to efficient capital markets and the predictability of future revenues as well as their ‘willingness to tax’ in order to meet debt obligation often puts into question their financial sustainability. Emerging markets, in an effort to improve financial viability would often exceed prudent GDP-to-debt ratios in order to catalyse the economy and maximise potential future fiscal returns on investment that could be generated and thus increase GDP levels. As national GDP grows, the State’s ability to generate additional revenues generally grows with it. Measures of financial viability are weakened by the uncertainty of future macro market conditions, real growth rates, real rates of interest, inflation and a myriad of other subjective variables, few of which are within State control.
Financial viability goes beyond simply making a financial return on a direct investment, it can also include impact on externalities. For instance London’s £300m investments in bike lanes may reduce the financial burden of the NHS on the State by over £1 billion (Burgess, 2013), potentially more if reduction in car emissions are taken into account. An improvement in public parks may have a positive impact in nearby home values, therefore increasing taxable amounts and thus outweighing investments made into the public parks. There are no easily identifiable linear causality paths that would remove the considerable subjectivity and uncertainty linked to measuring financial viability within the public sector.
No city, even one considered to be otherwise relatively sustainable, is entirely self-reliant as it will continue to depend on its surrounding areas and global networks for agriculture, labour and investments. As such any measurement of financial viability must encompass the intangible benefits and costs associated with it as well as delve into balances of trade, currency rates, tariffs, inflation etc..
A social responsibility to its citizens
While overall financial viability is important to the continued development of a city, its first responsibility is to its citizens who act as its stakeholders and in most democracies, its shareholders. A city belongs to its inhabitants and it is the responsibilities of its leaders to create a more equitable and sustainable urban environment. This philosophy of thought was exemplified in the “Right to the City” movement started by Lefebvre in 1968 and taken up since by Harvey (2008) in protest to the growing focus of municipalities on its most privilege (and financially liquid) classes to the detriment of its poorest citizens who were viewed as second class citizens often perceived as a drain on resources. Are cities such as Monaco, Tokyo, New York or London financially viable? Certainly, are they sustainable? Yes but only for those few who can afford the privilege of living there and maintain their own financial viability.
Fiscal participation is often cited as the cornerstone of civic duty and democracy through the reinforcement of transparency, governance and accountability. The city of Athens in 500 B.C. created a responsibility of shared governance by its citizens, electing their decision making body and thus sacrificing personal interest for the greater good. This principle was strengthened by the creation of a mandatory and progressive fiscal system for all as well as through the creation of measured coinage used to pay the wages of municipal workers, courts and defence institutions (Seaford, 2004). Athens created one of the earliest financially viable and sustainable municipal finance systems with a steady stream of fiscal revenues and wealth creation in order to benefit a population equal in status and rights.
While the ultimate responsibility for municipal finance does rest with the citizenry, increasingly complex financial mechanisms, poor governance, a lack of transparency, centralisation and poor accountability lead to challenges for the people to exercise this responsibility. Alfred Parker (1968) explored those issues and stated that ‘these problems have severe implications for the civic role of the citizen of the future’. A gradual removal of the of the people in the decision making process of municipal finances has a negative impact on its participatory process and thus its long-term human driven sustainability.
A short critique of a cost-benefit approach
Traditional indicators of subjective economic performance and intangible quality of life are insufficient to truly understand the complex dependencies that exist in an urban setting between economic growth, human sustainability and the natural environment. As Alberti, M. (1996) explores in her essay ‘Measuring Urban Sustainability’, financial capital cannot be substituted to natural capital. In essence, not all natural resources are renewable, and often the costs of renewing them as well as the (as of yet) poorly understood negative externalities far exceed the short-term financial gains that could be generated. This thought process has led to the creation of the Cost Benefit Analysis (CBA) as a public policy decision making tool meant to partially mimic market principles and quantify those intangible elements into monetary terms. It consists of quantifying future costs and benefits and discounting them to a net present value. This is a useful exercise in measuring or grading various public investment proposals but has a number of shortfalls when out of context. An example is provided by Ackerman et al (2002) whereby a certain Mr W. Kip Viscusi was asked to quantify the value of human life for the purposes of a tobacco trial and concluded that according to his CBA, cigarettes should be subsidised by the State as premature deaths of smokers reduced the State’s cost burden on healthcare and pensions.
While CBA’s are a useful guide which can assist in measuring the merits of projects on a financial basis, their applications are limited and notoriously subjective or prone to absurd calculations since they attempt to estimate the uncertain costs of a public policy and weight it against intangible benefits such as a healthy environment while discounting those sums from an uncertain future. The Cost-Benefit analysis is also critiqued as it assumes a macro view which does not quantify personal conflicts of interest. Since many of the quantifiable monetary benefits may occur in other jurisdictions or ministries (for instance using the cycling – NHS example), the Municipality of London may be reluctant on spending its scarce financial resources in order to benefit the British Government without direct compensation. While this is a simplification, it exemplifies the conflicts of interest that may exist when policy decision makers use CBA’s to achieve gains at a micro-level that function in an essentially closed-loop system.
Is Ulaanbaatar financially viable or sustainable?
Ulaanbaatar (UB) is a city that was built and developed following Soviet planning principles where the State was responsible for the provision of all infrastructure, public services and housing, absent of financial incentives. All public utilities and infrastructure access would thus be provided to its citizens devoid of financial viability imperatives, the city was simply not expected to generate revenues. Today the city is struggling (and often reluctant) to adapt to a new economic model which relies on usage fees and taxation for the provision of infrastructure and public services. In particular if viewed from the context of a highly volatile political environment and widespread poverty (IMF, 2015). The Municipality of Ulaanbaatar (MUB) still derives approximately 93% of its revenues (Brane et al, 2015) from the Government of Mongolia (GoM), which itself derives the majority of its revenues from taxes and royalties generated through the extractive industries (Oxford Business Group, 2015). While the MUB is attempting to move towards a more sustainable and fiscally independent future, it requires massive investments to do so, something it cannot achieve with its current low levels of financial viability.
Between 2009 and 2013, Mongolia, a commodity rich country, benefited from the highest rates of GDP growth in the world, culminating at 17.6% GDP growth in 2013 (Oxford Business Group, 2015), this was driven by strong commodity prices and an open policy towards foreign direct investment (FDI). The GoM took on considerable debt which was in part passed on to the MUB for infrastructure investments and cash-hand outs to the population. It seemed then that those investments where financially viable since growth was expected to continue unabashed and investor confidence in the country remain high thus allowing the GoM to obtain increasing revenues and pay off their growing debt burden. This was not to be. The GoM adopted a number of nationalist measures that drove away FDI, commodity prices collapsed and GDP growth rates fell to 0.1% in 2016 as a result (ADB, 2016). The GDP-to-debt ratio skyrocketed to over 200% – clearly unsustainable levels when considering that GoM revenues fell by over 40% in the same period (World Bank 2016a). Mongolia and recently Ulaanbaatar have attempted to maintain past levels of expenditure by raising increasingly greater amounts of external debt through bonds and other forms of borrowings at staggeringly high costs (11.6% for the 1.5Bn Chinggis Bond in January 2016 – World Bank 2016b) which reflects the possible default risks as perceived by lenders.
Ulaanbaatar, as is the case in most other cities, is governed by elected officials who have a personal incentive to be re-elected in order to benefit from power, status, the ability to enact change and as is often the case in Mongolia, access to corruption (Transparency International, 2015). This conflict of interest is inherent in all cities and impacts their “willingness-to-tax”. Cities such as Ulaanbaatar may therefore be “financially viable” in theory but would rather be facing bail-out negotiations as a more palatable solution than servicing high levels of debt. Therefore putting in jeopardy many of the social good and poverty reduction projects launched in the past few years. The current preferred solution by the MUB is to develop new forms of financially viable projects by co-operating with donor institutions.
UB has been the beneficiary of considerable donor funded sovereign loans (over 3.5bn USD over the past 10 years for a 11.5bn USD GDP (Oxford Business Group, 2015). Those sovereign loans are typically given at near zero % interest rates over the very long term (over 35 years) in order to alleviate poverty and assist in the human development of the city through infrastructure investments and other urban programs. With shortages of funds from the GoM, an increasingly demanding populace as well as an active political scene, such donor funded projects have become a key element in the development strategy of the city. Yet, a majority of donor loans are not repaid or are renegotiated (Hansen, 2000), donor funding is unpredictable in its regularity and amount (Gunning and Mash, 1998). It is thus questionable whether such financing should form the basis of viable financing for sustainability in UB (even if for the short-term), despite this being its ultimate aim, in particular since most donor funding is countercyclical in nature, being generally disbursed in times of negative shocks to the economy.
UB is hampered in its sustainability development efforts by its inability to raise sufficiently affordable sources of financing. This stems from its lack of credibility in international markets due to its currently poor ability of generating sufficient revenues, this despite the considerable social benefits of many of its projects. While those projects may be beneficial in sustainability terms, they are not financially viable and thus cannot proceed. UB must now build strong financial foundations in order to prosper later.
In order for Ulaanbaatar to improve its financial viability without negatively impacting its social responsibilities or its natural resources, it is important that it improves its capacity for predictable revenue generation. This can be achieved through better utilisation and efficiencies of its current property portfolio as well as through more aggressive fiscal policies. Such fiscal policies do not need to lead to lower purchasing powers per capita or aggravating poverty. A fairer system of taxation, in particular focused around property ownership and capital growth as well as a progressive tax rate on personal wealth would dramatically increase the stream of revenues to the MUB without undue stress being placed on the lower to middle income groups of the city (de Gruben, 2016). It would also improve accountability, transparency, a reduction in corruption and improve long-term market stability.
The MUB must also act towards creating the conditions necessary for renewed economic growth. Such conditions include abandoning punitive measures against the informal economy in favour of incentive based mechanisms as well as developing infrastructure and public utility access to those segments of the population that today have none. In having the public sector focused on providing financially viable projects that improve sustainability, it may also ‘crowd out’ more efficient private sector investments that would have freed up public capital and resources. Public Private Partnerships are a good way of mixing efficient profit making incentives of the private sector with the social good incentives of the public sector.
While considering the financial viability of its projects, the MUB should also carefully analyse the probabilities of being overly optimistic as it may impact perceptions of financial viability (and thus higher costs of borrowing) or pessimistic as it would create an opportunity cost of missing out on higher levels of revenues, something which is critical in Ulaanbaatar’s case. A balance of the two while maintaining monetary stability and independence from the political system would improve urban sustainability considerably. Many of the Government initiatives launched today do not meet basic financial viability principles and are thus destined to remain short-term politically driven programs. Public investment projects are increasingly analysed solely through a flawed system of CBA’s as a definite measure of public utility without due consideration to the long-term negative impacts on the human environment.
While Urban Sustainability as a concept is still relatively undefined and fluid, it is clear that establishing the right tools and measures for financing such sustainability is key, even if such financial viability is itself highly probabilistic. The overall long-term viability of such investments is essential in their aggregate, if only to achieve an adequate redistribution of resources and establish improved social equity. While there will be certain projects such as public transport, infrastructure development, affordable housing or healthcare provisions that may not achieve by themselves their aims of financial viability, they should be financially subsidised through fiscal and investment revenues, municipal reserves or through the positive externalities that they may cause. This social equity measure is now a key element of urban sustainability.
Municipal decision making is not subject to the same financial viability standards as the private sector since they can afford longer term positions and rarely go bankrupt, despite some extraordinarily poor examples of financial management displayed by some municipalities. Despite this, Municipal finances are now so intertwined with the private sector that they are forced to abide by market principles and their standards if they wish to maintain their capacity for long-term capital raising.
The case of Ulaanbaatar demonstrates that financial viability is essential, not just to reduce the impact of the political cycle and to improve transparency, accountability and the decision making process but also to begin to introduce concepts of sustainability to the city. Without financial viability, the MUB will not have the resources to provide a sustainable environment for its citizens to grow and prosper over the long-term and will fail in its objectives of providing sustainable economic growth and opportunities.
Financial viability in order to achieve urban sustainability is arguably more important within emerging economies that must satisfy a fast pace of growth than in more developed nations where certain levels of sustainability, revenue generation and investments have already been achieved.
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