06 Nov 2012  Views on News

Stop Talking About the Weather and Do Something: Three Ways to Finance Sustainable Cities

How do we ensure that our cities are resilient in the face of inevitable future weather events like Hurricane Sandy? John Macomber offers three ways that the private sector can take action.

 

The wrath of Hurricane Sandy has illuminated a fundamental question: How do we ensure that our cities are resilient in the face of inevitable future disasters? A destroyed city is not a sustainable city. I'm making the case that it's time to stop complaining about climate change. It's time to stop waiting for the government. It's time to stop spending a lot of money on cleanup after the fact. Rather, it's time for the private sector to take action around adaptation and prevention. My work in sustainable urbanization indicates that we can connect engineering, environment, infrastructure, and private finance to invest in cities that are sustainable, competitive, and resilient.

It's not just global warming, stupid.

Regardless of whether climate change leads to an increase in volatile weather, the effect of climatic events will grow worse every year. Why? It's a matter of demographics. Around the world, people are moving to cities by the hundreds of millions. Where are these cities? On the coasts. Poor people move from rural areas to New Orleans, Atlantic City, Dhaka, Mumbai, Lagos, Port au Prince and Jakarta in search of better economic opportunity--and they are more and more in harm's way as their numbers increase. More often than not, they end up the low-lying sections, which happen to be both the least expensive areas of town and the most vulnerable to floods, tsunamis, hurricanes, and cholera.

So what should we do about that? I speak about sustainable cities all over the world, and the vast bulk of businesspeople I meet tell me that it's not their job, that the government should take care of it. But it's unrealistic to believe that governments around the world will suddenly start spending huge amounts of money on preventive infrastructure—even if it makes engineering sense to strengthen surge gates, elevate subway entrances, and raise levees.

The idea of large-scale public spending on adaptation assumes that citizens and their governments agree on a method of raising funds via taxation or tariffs. It also assumes that governments will necessarily invest those funds in plans that are based on evidence, scenario planning, and benefit cost analysis. Finally, it assumes that the public will agree to make investments that have ZERO revenue and ZERO guaranteed return on investment--the value of the avoided cost of future potential losses notwithstanding. That's a lot to assume. It's an unlikely scenario.

Some governments around the world do have the constitutional obligation to rebuild homes and relocate citizens following natural disasters. Many do not. Some have the public resources to invest in disaster prevention or protection prior to the event. Many do not. Rich countries like the United States can invest in infrastructure to mitigate disasters, but this is no guarantee that they always will. What steps will guide us collectively on this path?

There are three phases to any natural disaster involving urban populations: prevention, response, and recovery. Response and recovery get the most publicity, of course. But prevention is the best investment. Here are three approaches to private sector investment in the public works that start to mitigate the effects of many disasters.

Property Permissions and Prohibitions

Popular discussion often considers prohibiting people from building in the path of events like floods or earthquakes or landslides, or even relocating them out of harm's way. This is a global quandary. Why? In the US context, let's suppose governors Cuomo of New York, Christie of New Jersey, Jindal of Louisiana, and Stott of Florida all decided to mandate that a) nobody can own residential property in a designated hurricane flood zone, b) all commercial businesses in a flood zone must raise their ground floor to mean sea level plus 10 feet, and c) all in place emergency generators had to be moved above the 100 year flood line? On the one hand this would be about the most effective flood and disaster prevention action possible—almost a guarantee of public safety and well-being. On the other hand, such a mandate would be prohibited in the United States by the Fifth Amendment, which forbids governments from taking private property without just compensation. Thus, if private property owners agree to give up some short term value or rights in pursuit of longer term greater shared value, this will be a matter of contracts, negotiation, and finance—not of engineering, meteorology, or political fiat. This is a big problem that business can't solve alone…but it won't be solved without the involvement of business.

Financial Structuring to Create Assets

Governments may not have the financial capability to invest in preventive (or improved) infrastructure—but that need not be the end of it. The private finance and operation of public infrastructure is on the rise all around the world for revenue-generating works like roads, power plants, and airports. There is also a path to the private finance of preventive infrastructure. In Holland, private dikes protected multiple other private landowners (for a recurring fee) as far back as the 12th century. This business model may well rise again in levees, emergency power, or bridges.

Financial Structuring to Protect and Replace Assets

Finally, believe it or not, the key to infrastructure resilience may lie in the unglamorous corner of financial products, including insurance. How? For starters, before any home is approved for insurance coverage in the private market, it must pass some sort of fire, earthquake, and flood underwriting. The government may not be able to mandate extensive private property requirements, but the insurance industry can. The quest to attain insurability has led to increased resilience in structures in many areas around the world.

Second, the insurance industry can provide a form of public-private partnership for the wise use of emergency funds. Government agencies in many municipalities—and even federal governments including Mexico and Morocco-—purchase property-casualty insurance products for their constituencies. This turns out to be a way to consistently fund disaster reserves—essentially pre-paying the deductible—in a way that is harder for politicians to interfere with than simply setting aside a chunk of cash.

Finally, large funds can invest around the world in "catastrophe bonds"—essentially putting up capital that gets returned with interest if there is no catastrophe, and which is forfeited toward mitigation and recovery efforts if there is a catastrophe.

In the meantime it's important to remember that resilience equals sustainability. When we move beyond commentaries on the weather and artists' sketches of would-be-publicly-funded storm gates, we can collectively focus on how to privately fund public infrastructure and how to deploy an important tool of structured finance—insurance products—to push for the physical components of a less vulnerable, more sustainable city…even as hundreds of millions of people move into more and more exposed geographies.

About the author

John Macomber teaches the course "Sustainable Cities: Urbanization, Infrastructure, and Finance" at Harvard Business School

Related reading

Paul M. Barrett, "It's Global Warming, Stupid." Business Week, 2012
Emily Badger, "5 Ideas that Could Have Prevented Flooding in New York," The Atlantic Cities, 2012
Mark Tercek, "4 Ways to Rebuild After Superstorm Sandy," The Christian Science Monitor, 2012
Wendy B. Jacobs, Leah R. Cohen, and Jennifer McGrory, "Legal Options for Municipal Climate Adaptation in South Boston," Harvard Law School, 2011
John Macomber, "The Role of Finance and Private Investment in Developing Sustainable Cities," Journal of Applied Corporate Finance, 2011

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Comments

    • Hugh Quick
    • home, none

    Yes, do something to protect cities rather sit about whinging at the weather but don't get so arrogant that you think you can provide foolproof protection from the power of natural phenomena - you won't

     
     
     
    • Anonymous

    Perhaps it is time to implement, and regulate, an integrated watershed planning approach to land use and decision-making.

     
     
     
    • Bill Wallace
    • President, Wallace Futures Group, LLC

    John - You ought to make contact with Anthony Kane, Spiro Pollalis and Andreas Georgoulias at the Harvard University Graduate School of Design (GSD). For the past year, the Institute for Sustainable Infrastructure (ISI) and the Zofnass Program for Sustainable Infrastructure at the GSD have been working on Envision, a rating system for sustainable infrastructure.

    The premise of the rating system is that, contrary to Shakespeare, the past is not prologue. Infrastructure can no longer be designed based on historical assumptions, but instead must take into account new and rapidly changing operating conditions: extended droughts and heat waves, more frequent and intense storms, spiking energy prices, water shortages, etc.

    Anthony and I have developed the rating system which was put on line in January of this year. See www.sustainableinfrastructure.org. So far, we have about 200 accredited assessors and verifiers and are starting to accept projects. I understand that New York City is sending 18 of their public works people through the accreditation course.

    A week ago, the organizations met at the GSD to explore ways to monetize the Envision credits as a way of demonstrating value. We have a long way to go, but we're optimistic.

    Bill Wallace Steamboat Springs, CO HBS AMP 104

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    Global warming is a reality and cannot be ignored. But attributing all unpredicted calamities to it is indeed stupid. We must have strong action plans to counter eventualities like Sandy even though these cannot be fully foolproof. And, all agencies must combine to provide relief after the event so that normalcy is restored at the earliest. Expecting only government to do so is a tall order/expectation and private participation is necessary. The present regime acted fast soon after Sandy struck and exemplary role was played by the Obama administration even ignoring the seriousness required in view of presidential election. This, however,did help Obama. Rapid urbanisation is order of the day.This applies to coastal as well as other areas. No doubt coastal areas have risks due to storms, other areas could also get problems,e.g., due to earthquakes. Hence, there is need to develop all sorts of risk management plans.

     
     
     
    • Henk Saaltink
    • Retired P.Eng

    We should do our best to make our cities safer and more resistant to Natural disasters such as earthquakes and large floods. We have successfully done this throughout history. The only thing that has changed is that the natural disasters are becoming more extreme, and that our vulnerability is also increasing as a result of the growing development. There is more "stuff" to be damaged !!!!

     
     
     
    • Kuhan Tharmananthar
    • Environmental Consultant

    Sir, whilst adaptation is indeed a key concern for the developed and developing world, we need to address this urban migration. Technology along with a reassessment of a nation's socio-economic goals need to help rebalance the spread of population. The increasing strain on food, water and energy is intensified by urban conflation. Current scientific perception is that there is enough food and water on the planet to support 9bn - the problem is distribution.