The Business of Urban Transformation
On Wednesday, October 29, CHF International and the Comparative Urban Studies Project co-hosted a conference on "The Business of Urban Transformation." David W. Fulton, Advisor in the Office of the U.S. Executive Director at the World Bank, offered observations on the role of the private sector in urban development. J.P. Solomon, CEO of Maya Organic Private Ltd., discussed the challenges and successes of "LabourNet," an enterprise that aims to create sustainable work conditions for the informal sector in India. David Painter, Vice President of TCG International, provided an overview of efforts to engage both slum dwellers and the private sector in slum-upgrading projects. Judith A. Hermanson, Senior Vice President of CHF International, provided introductory remarks and moderated the discussion. Hermanson presented a video, Where Hope Lives: A Closer Look at the Changing Face of India's Urban Slums, highlighting CHF's work to engage the private sector and harness the energy of low-income urban communities.
David Fulton proposed two questions to frame his presentation. First, how can cities effectively leverage private sector capital? Second, how can cities attract the foreign investment that is critical for development? The answer to both questions is deceptively simple: "Capital goes where it is welcome, safe, and profitable."
Fulton noted that the World Bank has attempted to meet urban infrastructure needs by increasing lending across all sectors, by working with donors to leverage infrastructure projects, and by increasing public-private partnerships. The Public-Private Infrastructure Advisory Facility, for example, is a multi-donor facility that has worked with the World Bank to fund small technical assistance grants in support of public-private partnerships. Ultimately, projects of this nature should help to make the environment for capital environment more "safe,"said Fulton.
While no true consensus has emerged among urban development experts regarding strategies to involve the private sector in slum upgrading, Fulton detailed lessons learned from a successful large-scale slum-upgrading project that took place in Singapore following a massive fire in 1961. A Housing Development Board (HDB), created by the government, guided the replacement of slums with apartments and office buildings for the next two decades. Today, over 80 percent of Singapore's population lives in HDB housing units. How was Singapore able to accomplish this feat? The answer, concluded Fulton, lies in a combination of political will, adequate funding, community engagement, and a private sector that was consistently generating more jobs.
J.P. Solomon and Gayathri Vasudevan of LabourNet described the efforts of their organization to address labor market inefficiencies in India. Over 70 percent of India's GDP is generated in urban areas, with 450 million workers—92 percent of the total workforce—operating in the informal sector. The key problem that LabourNet seeks to solve is the lack of coordination and information in labor markets. Employers are seeking reliable, high-quality laborers, while workers (who often face caste and language barriers) search for steady, long-term employment. LabourNet fills this gap by linking job-seekers with jobs. In the process, it provides workers, or "micro-entrepreneurs," with skills training, financial services, and access to health coverage, all of which help to improve employability and increase earning potential. LabourNet also creates a verifiable identity for informal sector workers and facilitates remuneration by allowing employers to make non-cash payments. The overall effect is one of value creation for both micro-entrepreneurs and small businesses.
David Painter emphasized the need to engage both top-down and bottom-up processes if slum-upgrading is to be successful. From a top-down perspective, local governments, NGOs, and the private sector can provide financing for critical infrastructure. On the bottom-up side, microfinance can play a key role in empowering slum dwellers to improve both the physical conditions of their housing and the economic conditions of their neighborhoods. The central question, according to Painter, is whether slum-upgrading efforts can be "scaled up." If this is to happen, policymakers must engage mainstream financial institutions, including private commercial banks, pension funds, and insurance companies. They must also reduce the perceived risks to private sector lenders and investors by avoiding premature and inappropriate regulations (such as interest rate caps), and by establishing strategic business partnerships. Painter cited the example of CEMEX, a Mexican cement company that has provided financing for residents in poor urban neighborhoods so they can purchase the materials they need to build their homes.
Painter's plan for slum-upgrading hinges on the use of municipal bond financing to mobilize private sector investment. But if debt financing is to succeed, the borrowing municipalities must be financially sound, and they must have institutions to ensure a safe legal and regulatory environment for investors. These conditions can be met through a combination of: 1) local initiative; 2) central government support; 3) international development agencies willing to engage in risk-sharing; 4) the presence of long-term capital markets; and 5) credit ratings agencies that help local investors understand the risks they face. With these elements in place, scaling up can be achieved through the coordinated efforts of governments, the private sector, and slum-dwellers themselves.
By Michael Richardson