Page 62 - A U4SSC deliverable - Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects

Lastly, a project that proves useful to the community, whether it makes financial or economic sense
or not, will improve the community’s perception of the parties involved. All involved parties, from
the sponsoring institutions to the construction companies and financing providers, will take credit
for a successful real asset or service in its operational phase, sometimes regardless of whether or
not they were accountable for the performance of the project in economic or financial terms.

In order to identify and attract investors, it is important to understand which of these categories of
success is appropriate for them. It is also important to note that the longer the life of the real asset
created by the project, the better for the community. The extension of the life span of the whole
asset – in its operational life or afterwards – will create wealth and public value to the community.
Sustainability always makes sense for the environment, society and the economy. and will therefore
help to attract investors.

The decision to invest in an urban development project does not relate directly to the nature of
the investors themselves but rather to the level of risk that the investor finds acceptable. In this
respect, the greater the involvement of public institutions, the more stakeholders will be willing to
accept the risk . The involvement of public institutions in projects is therefore crucial in attracting
investors. Public institutions, IGOs and NGOs involved can control many of the risks related to
large projects. They can advise local governments, by justifying why it is important to reduce red
tape, or by advising that they provide guarantees and warranties to the investors and contractors,
ultimately paving the way for the work to be done.

Private investors in urban development have learned that SPV companies should be created to
isolate risks and liabilities related to the project itself from the rest of their activities. However, the
reputational exposure is still there. Therefore, even if predicted returns on investments are likely to
be achieved, the lack of institutional stakeholders leads private investors to be active only in well-
developed economies where there are fewer unknown risks to projects and where more insurance
is available. It is not necessarily a matter of the cost of the capital or the amount of the returns that
matter, but the amount of risk involved.

In order to make investments more attractive, public institutions, NGOs and IGOs should create
platforms to guarantee the correct performance of all stakeholders in the project. This should
take place in both the construction and operational phases, with legal and economic expertise
supporting both the investors and the developers, and a strong arbitration presence, to prevent
and potentially solve disputes. Smaller investors and companies will also be attracted to these
projects if “extraordinary” returns became more evident to them.

Public investors do not measure success primarily by short-term financial gains. Instead, they look
to make sure that the project provides free cash flows, accountable in an agreed way with the
financing parties. Private investors look for a positive impact on the balance sheet of the project,
and need the financial income to meet the rate of debt payments agreed with the financiers. Public
institutions are learning to make projects financially sustainable, and private investors are realizing
that non-financial returns, including reputation, do have a long-term impact on the financials of

44 U4SSC: Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects