By 2030, cities will house approximately 60% of the world’s population and already more than one in three urban dwellers lack access to at least one core service like reliable energy, clean water or affordable housing. Green, sustainable infrastructure, including renewable energy and nature-based solutions, can often provide urban services more affordably and with greater social, environmental and public-health benefits than traditional “gray infrastructure.” But green projects tend to have high up-front costs, long return horizons and, perhaps most critically, often use innovative, relatively untested technologies or business models. This added form of risk in a world where investors evaluate risks and returns based on historical performance data and track records is a major barrier to accelerating green investments, contributing to an estimated $2-4 trillion annual sustainability investment gap.
There have been numerous efforts to fill the gap with private capital, including innovative financial instruments, frameworks for disclosure and third-party assessment of climate risk, and programs to improve the bankability of proposed green projects. No intervention type has yet proven to be a silver bullet, but WRI’s recent experience working with green innovators in cities highlights strategies for improving the bankability of novel sustainability projects.
In 2018 and 2020, WRI Ross Center ran TheCityFix Labs, three “innovation accelerators” focused on improving the bankability of sustainability solutions from the public and private sectors. In 2018, with assistance from the Citi Foundation, WRI India operated a year-long Lab to accelerate small and medium enterprises in the urban water, energy, and waste sectors, and WRI México operated a similar Lab for government-proposed green infrastructure and energy projects. In 2020, WRI Brasil operated a condensed, three-day “pocket” Lab targeting government-backed green space projects. The Labs shared a mission and overall theory of change: accelerating green innovation by providing project developers with technical and business expertise. And while green innovation risk emerged as a central theme for all three, each Lab found its own strategy for mitigating it.
Mexico: Making the Business Case
Participants in TheCityFix Labs México came with strong technical expertise, but most lacked experience on how to build a compelling business case based on financial risks and returns. WRI worked closely with the project developers to build viable business plans and revenue models, and to provide early stage matchmaking with investors.
Most of the projects still face hurdles associated with the project preparation process, but many are on track to success. For example, the Escuelas por el Clima project has built a profitable business model for climate-themed schools across the state of Guanajuato, including using solar panels for power. This project is leveraging decades of work the solar industry has done to build policy and finance mechanisms that are now trusted both by regulators and by investors.
In contrast, other Lab participants, who developed green infrastructure projects, have had to advance revenue models based on newer policy and finance mechanisms – for example, land value capture instruments and green water tariffs. And because these models are not as well understood by governments and investors, the Lab helped develop and socialize detailed financial models and alternative funding strategies.
Brazil: Making the Political Case
The Brazil pocket lab was meant to test an approach to project acceleration in anticipation of running full-scale Labs, but it also improved participant projects. Like in the México Lab, participants brought well designed green infrastructure projects, but less developed plans for generating revenue. While strengthening business models, the Brazil Lab also delved into social and environmental impact and how to attract government funding.
For example, a proposed green space project in Palmas would provide numerous ecosystem services that improve community resilience and improve the lives of residents. The Lab worked with the project developers to quantify the benefits and make a strong political argument to key government offices. They also helped broaden the project’s scale by integrating several isolated natural infrastructure projects into one large project, now named Susuapara Conecta. Aggregation will make the project more attractive to large foundations and development banks, while strengthening the political case by expanding potential positive impacts and engaging a larger constituency.
India: Proving Feasibility
TheCityFix Labs India focused on private sector enterprises and connecting them to public sector needs and processes. The Lab ultimately leveraged more than $28 million in new private financing, partly by helping participants strengthen their business plans, but also by facilitating piloting arrangements with local governments. Pilots can be risky for clients, and startups often find it difficult to allay clients’ concerns. WRI India was able to help bridge the gap between the enterprises’ proposals and the clients’ comfort levels.
Ultimately the Lab facilitated pilots with local governments for treating wastewater, mapping a sewerage network, developing a waste collection and separation center, and testing energy efficiency solutions. The pilots, many of which are ongoing, aim to test new solutions to increase their attractiveness to investors and local government clients alike.
One startup, Fluid Robotics, entered into an agreement with the Greater Hyderabad Municipal Corporation to test their robots and machine learning models by conducting a remote sensing survey and monitoring a wastewater pipeline for three days. After successfully monitoring 1.3 million liters of raw sewage daily, Fluid Robotics has scaled its innovative solution to Bangalore and are in discussions with the Bangalore International Airport Authority to examine a 3-kilometer stretch of a buried wastewater pipeline using their technology.
Combining Business With Impact
Combining the potential impacts of a project with a clear business case is key to successfully attracting private sector investors, foundations or development banks.
Private sector investors are expanding their ESG strategies and commitments, but always keep sight of monetary returns. Foundations and development banks are looking to maximize impact, and that means funding projects that will have long-term financial viability. And local governments can help to accelerate the implementation and scaling of high-impact projects, but only if the business model can attract a range of investors, mitigating financial risk by blending finance sources.
A Role for Local Government: Facilitating Pilots
Nothing allays investors’ fears like a successful pilot. While successfully shepherding nine enterprises to pilot stage, WRI India identified three key things local governments can do to remove hurdles.
First is matchmaking. Local governments are well positioned to identify neighborhoods or municipal offices that might be willing and suitable test subjects. Governments also have the ability to make introductions, build trust and help to secure the required commitments from all parties.
Second, is legal facilitation. Permits, licenses and procurement procedures can bog down a pilot – especially those that push technological boundaries. Local governments can foster a pro-innovation environment by creating streamlined processes for vetted projects, like the projects that were selected to participate in the TheCityFix Labs program.
Finally, local governments can make pilots more successful by sharing anonymized data on public service use or other relevant city processes and consumer behaviors.
WRI Ross Center’s work on green innovation continues. WRI Brasil plans to take its pocket lab concept to full scale, and TheCityFix Labs team has developed an interactive business skills training resource to support project ideation for future Labs. Enterprises like the participants in the first round of Labs are small players in the global sustainable infrastructure industry–but if local governments and initiatives like TheCityFix Labs can help mitigate financial risks and fear of “the new,” then these small players can have outsized impact by setting new paths forward.
Ted Wong is Research and Project Analyst for Urban Efficiency & Climate at WRI Ross Center for Sustainable Cities.
Beth Olberding is Research Analyst II on the UrbanShift program at WRI Ross Center for Sustainable Cities.
Gabriela Morales is Manager of Water Management and Urban Resilience at WRI México.