The Public Wealth of Cities
How to Turn Around Cities Fortunes by Unlocking Public Assets
If you either live or work in New York City you get used to things being crowded — sidewalks, shops, streets, buses, trains, buses — pretty much everywhere you go there are people with you. Presumably it is the same in most other large metropolitan areas as cities are increasingly becoming places where people want to live. Although overall city population growth averages less than 1% in the U.S., what has been different recently is that the infrastructure in the city itself has aged, leading to an increased perception that the city is more crowded – subways feel more crowded as old signal equipment failures lead to train delays, overdue maintenance on roads and bridges leads to road congestion and increased traffic jams and commuter trains are running ‘standing room only’ into urban train stations that are at capacity.
In our 2016 Citi GPS report Infrastructure for Growth, we found the total global need for infrastructure spending was $58.6 trillion over the next 15 years. At the same time that report noted the world had an enormous infrastructure investment deficit with infrastructure spend as a percentage of GDP falling to around 3.3% – below what we viewed as a necessary level of 4.1% of GDP by 2020.
Dag Detter and Stefan Fölster had previously argued in a Citi GPS report The Public Wealth of Nations that one of the ways nations could find money for infrastructure projects is by putting their public assets to work by managing them better and accounting for them on their national balance sheets. In their new book The Public Wealth of Cities, they update their argument to focus on cities, noting that most cities in the U.S. are facing an impending investment disaster, with a crisis in physical investment as well as a lack of funds to invest in the development of social and human assets.
But there are standout cities that are doing much better than others and in fact can pull their countries along towards better growth and social development. These “turbo cities” have made canny investments that make their daily operation cheaper, more effective, and sometimes even yields a direct return. This gives economic muscle for further investments. The secret to turbo cities is that they make the value of their long-term investments more transparent and visible and make evidence-based decisions at arms’ length from day-to-day politics.
Detter and Fölster advocate three steps for cities to move towards turbo cities: know your assets, allow more professional management of city assets, and shift expenditures from consumption to investment. They find that the best way for a city to manage commercial assets is to put them in a commercial holding company, an Urban Wealth Fund, which allows it to act professionally as if it were a publically-owned private equity fund.
In addition to walking through the argument presented by Messrs. Detter and Fölster, we present commentary from Citi’s Special Economic Advisor Willem Buiter on why this solution makes economic sense, as well as commentary on its effect on the municipal bond market and from a Public Sector perspective, how it will help address the infrastructure investment gap.