Invest in Success: Leveraging the Return from Global Cities

1. Invest in Success: Leveraging the Return from Global Cities Greg Clark Toronto, May, 2008

2. Key questions • Is city development an investment or an expenditure for Governments? • Why are there so many investment gaps in cities? • Do these gaps need to be addressed? What are the costs of not closing them? • What can we do about it? • What can Toronto do about it?

3. Propositions • New global era requires a renewed focus on city investment. Demand side drivers with supply side constraints. • National success is not possible without city success. • Improved City investment requires dedicated tools and public / private endeavour: financial tools and development agencies are essential. • Investment is the critical task of city leadership. • Development Agencies are a key tool in fostering financial innovation. • Being ‘investment-ready’ is the key task for cities. • Cities have to provide investment prospectus. • Asset management and leverage within cities is key. • Work with public and private investors in partnership. • Investment and co-ordination are central to building prosperity.

4. But, substantial problems • Cities have limited fiscal tools. • Investment cycle is 25 years, not a single mandate. • Major cities subsidise other places through transfer payments. • Cities compete for investment in public finance systems and in markets • National govs compete to be fiscally tight. • Cities cannot easily develop finance track record. • Much of the national benefit of city growth is intangible or not measured. • Political representation does not reflect actual population and cities are under-represented. • Market knowledge on city investment opportunities is not perfect. • Municipal staff not widely skilled in development finance, project finance, or investment disciplines.

5. Cities and Regions need investment • Transition to knowledge led economy • Interaction of place with economy • What businesses and people need • Agglomeration, proximity, quality of place, co-ordination success • Economic integration • Continental, global,…. Competition and Collaboration • Environmental Imperatives. Completing the clean-up and greening the city economy. • Social inclusion. New forms of intermediation. • Policy Innovation and delivery. speed, authority, governance. • Space, flows, economic units. • Metropolitanisation, cities, and regions.

6. Management skills raise entrepreneurship and business performance Skills Enterprise Skills raise firms’ capacity to develop and use new technology Entry of new firms raises competition Innovation Competition Increasing competition creates incentives for business investment Investment Productivity, Place, and Investment 1. Indigenous growth 2. Primarily supply side 3. Market failures in…… New firms can create demand for skilled labour Investment in physical capital increases firms’ innovative capacity 4. And drivers of growth

7. Take a long term view. 6 Long Term Drivers: Economic Internationalisation. Human mobility and demographics. Environmental change and challenge. Technology development. Urbanisation of poverty and inequality. Continental governance. How localities and regions respond matters. Governance, investment, strategy, leadership, marketing & branding, catalyst, collaboration. Population and investment strategies, branding, climate impact, science and knowledge, inclusion, open-ness.

8. An Urban and Metropolitan World • Globalisation and the knowledge economy have repositioned metropolitan regions as drivers of national economies: • 2025: 75% of world population will live in cities/metropolitan areas 2025: 17 of world’s 25 largest cities will be in coastal regions in Asia 1925: 25% of world population lived in cities

9. Global economic integration has increased dramatically over recent years… “Globalisation is the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, free international capital flows, and more rapid and widespread diffusion of technology.” Source: International Monetary Fund Figure: Three waves of globalisation • History of Globalisation • Globalisation is not a new phenomenon, there have been numerous examples of markets undergoing structural change and periods of high levels of cross-border trade going back as far as Roman times. • However globalisation, as we consider it now, really took off in the late 19th Century as Britain led the way with a large increase in exports to the world and global migration increased significantly. • World War I sparked a period of retreat but after World War II there has been further waves of globalisation. • The current wave is distinctive because of the scale and pace of change; the international fragmentation of production and the maturity of international capital markets. Source: World Bank 1

10. There are economic, political and social drivers of this recent wave of globalisation… • Falling Transport Costs • An important factor that has driven globalisation over the last 50 years is the significant falls in the costs of transportation. • Containerisation and haulage have dramatically increased the capacity and speed with which goods can be transported around the globe and domestically. • This has reduced the need for goods to be manufactured near to the consumer. • Recently there has also been significant falls in the cost of air travel allowing people to move easily around the world. • Free Trade/Geo-Political Shift • Since World War II and especially since the fall of the Soviet Bloc, there has been a strong commitment by many nations to free trade. • This is achieved in principle through reducing tariffs and other barriers to trade. • There have been numerous multi-lateral trade agreements between countries and overseen by the World Trade Organisation. • The establishment of the EU has allowed and encouraged the free movement of goods, services and capital between its member states. • Advances in Technology • There have been significant advances in information and communication technology over the last 20-30 years. • This has facilitated information exchange and has lowered transactions costs. • Combined with lower transportation costs, this has enabled firms to outsource different elements of their business to various locations and hence the growth of multinationals. • There is also a direct effect with new technology industries offering opportunities and a greater need for skills. • Mobility of People • Both internal and international migration have been drivers of globalisation. • The willingness and ability of people to move has provided an increasingly flexible labour market to meet the needs of growing sectors. • Internal both inter- and intra-regional migration has increased steadily over the last few decades. • International migration has also been on the increase, with indications suggesting that this trend will accelerate in the coming years, supporting continued globalisation. 2

11. Internationally this has led to urbanisation, increased trade and capital flows and thegeographic fragmentation of production… Urbanisation - Nearly half the world now live in urban areas. Trade Flows - World trade has increased dramatically over the last 50 years. Source: UN DESA (2005) Capital Markets – Dramatic increases in the last few decades. Geographic fragmentation of production – Companies are splitting their production process around the world to where it can be done most efficiently. “The globally integrated enterprise, fashions its strategy, management and operations to integrate production worldwide. That has been made possible by shared technologies and shared business standards, built on top of a global information technology and communications infrastructure. New technology and business models are allowing companies to treat their functions and operations as component pieces, companies can pull those pieces apart and put them back together in new combinations.” – S Palmisano, head of IBM, 12/6/06 in the FT 3

12. The current wave is expected to continue with the emergence of new economies driving the global economy… • Emerging economies • Globalisation Is expected to continue at an ever increasing pace driven byemerging economies, such as China and India. • They are growing at a rapid rate and are forecast to account for nearly 40% of the growth in the world economy over the next 15 years. • Emerging economies have access to a huge labour force; over 80% of the world’s population live in emerging economies. • This supply of labour, combined with an increasing openness to trade and improved communications has allowed these emerging markets to forge strong manufacturing based, export economies. • This shift in power away from developed countries will have a profound effect over the coming years across the global economy and specifically for Britain. • In general, the emergence of these economies has and will be good for the developed world with consumer goods becoming cheaper and productivity being boosted by increased competition. • However, there are likely to be losers as a result of increased competition with rising inequality as the rising ascendancy of emerging economies alter the relative returns to labour and capital. • The impact on the UK over the coming years is likely to follow a similar pattern to what has been going on over the previous 30 years, with the comparative advantage shifting towards innovative and knowledge-intensive service sectors. 4

15. Framework for city growth Global economy and Macro-economic framework Markets Feedback effects Economic growth performance Productivity Use of resources Population Innovation & creativity Industrial structure Business ownership & mgt Human capital Environ mgt Connectivity . Drivers Business environment & investment Educational and research base Land and physical infrastructure Social/ cultural infrastructure & quality of life Ecological base . Governance structure . Pre-conditions

16. … As many city economies are ‘under-bounded’ some regional governance may boost growth… Relationship between size of government and economic growth …

17. International Students Recreation and Tourism Work Shopping and Commerce Investment Migration Events & Culture & Sport Inward Investment & Trade City/ Region Cities, Regions, and Mobility

19. Focus: the Challenges of bigger city-regions. • Bigger cities now key to national economic success. • But bigger cities not focus of national economic policies. • Cities/regions/metropoles not recognised well in higher order or sectoral policies. • But globalisation happens through institutions and firms based in bigger cities, and using metropolitan logistics and infrastructure. • Bigger cities provide a high return on public and private investment if they can solve problems effectively. • Organising the economic city and it’s story is the first key task. • Demonstrate the ability to make an economic difference. • Global cities working with globally companies, a large firms agenda as well as small firms. • Make the case for the city economically……London, New York, Auckland, Madrid. • Invest in success......

21. Leadership challenges in cities and regions. • Transition to a new economy and it’s requirements. • Openness to international populations. • Rapid and dynamic growth of metropolitan regions. Mega trends driving metropolitan growth. • Service needs of dynamic populations. • Greater transparency to customers and stakeholder. • Investment not enough. Financial resources are finite and national public finance is slow to follow growth. Lack of investment tools. • Formal power and competence less than needed. City and regional governments do not control everything: boundaries, competences, division of labour with higher/lower tiers, markets, regulation/freedom • National and sub-national governments guard their own space. Co-ordination challenges.

22. City Leaders

23. There are new ingredients appearing in city strategies that appear to be distinctive • Internationalisation strategy. • Talent and population strategies. (eg Open-ness). • Economic collaboration. • Sustainable development and climate adaptation (environment and energy). • Investment strategies. • Business partnerships. • Regionalism and national success. Additional investment requirements.

24. Positioning the role of Economic Development within City-Regions. • Economic develop not like public services. Engaging in markets, increasingly global… • It is not an expenditure cities/regions make. It is an investment that yields returns if done well. Income side of balance sheet. • Not just a department within a city/region, but a rationale for what the city/region does. The prosperity agenda. • Wide range of city gov activities and other public services contribute to economic development: culture, tourism, planning, housing, education, transportation: city needs a co-ordinating approach. Choices about how to organise. Offices, Agencies, Partnerships. • Not a choice amongst competing priorities, but a means to achieve wider goals in social, environmental, cultural realms. It is the business of everyone. • Economic development has broad outcomes: taxes/resources, land values and assets, jobs and choices for citizens, investment, visitors, prestige, dynamism and buzz, partnership with business on city goals, a clear future for the city and its people…..

25. Features of effective city/region organising • One Plan; and strong story line. An investment prospectus. • Economic agenda across whole Regional/City Gov, not within one department. • Organised business leadership that is demanding and consistent and speaks to all orders of Government. • Customer orientation: employers, investors, visitors, entrepreneurs, traders, innovators, developers, infrastructure… • Focussed number of top priorities, sectors, and spaces. • Expanding capacity to implement. Range of financing tools. • Range of delivery vehicles that can attract external investment. • Problem Solving and Project Management orientation. • Strong economic agenda and partnerships with: Local public sector, Local and regional Private Sector. Regional public partners, Provincial and Federal Governments, Global partners. • A collaborative leadership that leads, empowers, focuses on big picture and leverages resources to deliver.

26. Success. Rising tax base with lower taxes. Employment and incomes for citizens and choice of jobs. Resources for social and environmental programmes. Multiple distinctive and attractive locations. Managed growth and investment. Increased global connectivity. Strong collaborations. Failure Dwindling tax base with high taxes. Reduced resources for other programmes. Environmental degradation. High unemployment and high emigration. Disinvestment. Failed projects and initiatives. Bickering. Reduced global connectivity. Unmanaged decline. Success and failure in City Economic Development

27. Do some cities succeed without ‘strategies’? • Yes they do, but are there other ingredients present: • Barcelona • New York • London • Dublin • Long term factors of city success versus medium term factors of city success. (ref London and New York versus city indexes).

28. Why do city and regional strategies fail? • Strategy done for wrong reason /strategy has no focus or specificity • Lack of leadership and cross city working. • No communication, compacting, and conviction. • No assessment of local assets and distinctiveness. • No assessment of demand side opportunities. • No responsibility amongst competent bodies. • Lack of tools to implement at scale. • Lack of investment, capacity/resources. • Failure to solve problems as they arise. • No intention to implement. • No support from higher tier Govs, or neighbours.

29. But is city strategy the key variable? What about? • Implementation. • City Leadership. • Business behaviour and leadership. • Investment. • Infrastructure. • City identity and image • Asset Management. • Delivery capability.

30. What is long term city success? 25 Global Indexes of Cities. London and New York in 21st C. 2000 – 2100? 1900 – 2000? Collaboration not competition. Compare the cities: 14 measures. Thematic investigation. Engage other cities: Tokyo, Paris, Hong Kong? Frankfurt, Dublin, Madrid? Seoul, Mumbai, Sao Paolo? Which Cities winning? What factors of success? An Index of Indexes? Long Term Factors?

31. Medium term measures of success? • Connectivity and space to grow. • Quality of Life and Place (eg Urban Design). • Skills of labour force. • Innovation and Creativity • Entrepreneurship. • Industrial structure. • Cost base of cities. • Transparency of business environment. • Identity and Brand Building.

32. Longer term? • Openness to International Populations. • Power of the City Identity and Brand. • Location and Access to growing markets. • Role of city in International Trade. • Power of influence of language and regulatory/legal systems. • Depth of artistic, architectural and cultural endowment. • Continuity of city leadership. • Success in adjusting to shocks and luck in being on the right side of conflicts. • Sustainability in terms of climate and environmental sensitivity. • Investment in the city from all sources (including higher tiers of government).

33. Financing city development: 10 principles. • Smart finance for smart cities: getting the fiscal relationships with higher tiers of Government right • Promote active private sector leadership in city investment • Metropolitan finance for metropolitan amenities • Sharing the benefits of growth locally • Flexibility in public funding to enable private co-investment • A new approach to public assets • Financial innovation in public and private sectors • Long term market building by the private sector • Focus on the quality of the propositions not on the supply of finance • Build capable specialist financial intermediaries

34. Making markets work better for local development • The age of subsidies is past. • Healthy local investment markets: • Supply of capital • Demand and deal flow • Information and co-ordination • Brokerage and intermediation • Market failure is not a simple supply issue • Economic development task is to build the market. • Demand side is key and facilitation is essential.

35. Investing in City and Regional Economic Development. • Private sector co-investment is an important quest. • Role of regions and cities is to ‘investable’ and ‘investment-ready’. • Reduce risks and costs, improve returns, help to build steady flow of propositions. Conditions of a growing market. • Economic Development Strategy as ‘Investment Prospectus’. • Good for Cities and Regions. • Good for Private Sector. • Key roles for national and multi-national organisations. • Build partnership with investment sector.

36. Public/Private Finance. • Why? What is the incentive structure? • Public Goals. • More Capital, rebuild regional/local investment markets, commercial discipline,attracts wider interest, more sustainable, investment rather than expenditure. • Private Goals. • New business lines and markets, diversification of business, ethical or CSR priorities, predictable returns, new relationships and influence, strengthen local economies and improve performance of related investments.

37. Not just capital financing Human capital Enterprise, Creativity, Innovation Social and environmental infrastructures New technology and science Brand, image, and identity

38. What can cities do ? Public finance Private finance Foster investment dialogue with private sector. Support existing investors better. Reduce risk, cost, and uncertainty. Seek advice and partnership early. Build ‘investment-ready’ propositions. Better information on city finances and investment opportunities. Investment prospectus. Promote the city for investment. Develop infrastructure as an asset class. Build templates and pilots to make complex finance easier. • Accept reality – sound fiscal strategy. • Prioritise larger and catalytic investments. • Pursue sustainable growth of tax base. • Make the case for cities through tangible investment projects. • Efficiency and effectiveness of city government. • More public-public joint ventures. • Capable development agencies and corporations. Shared agencies and intermediaries. • Asset management. • Recruit financial talent. • Business and investment friendly services and approaches.

39. What can Toronto do? A 3 pronged strategy: • Improved financial management and fiscal autonomy. • More public-public partnerships. • Better leverage of private finance. • Demonstrate fiscal competence and optimum use of existing resources and tools. • Work with existing investors to improve their returns and create incentive for reinvestment. • Identify key large projects for early due diligence and investment-readiness. • Innovate and be confident with new financial tools.