By Yiran Gao
“It is not a government’s obligation to provide services, but to see that they are provided.”
—former New York Governor Mario Cuomo
Different strategies of how private sectors can invest in sustainable cities under various situations have been laid out in Professor Macomber’s framework. In this framework, government appears as an “entity making direct investment”. However, is this the best role that government should play in the framework of creating sustainable cities? If not, how should a smart government behave to best facilitate creating sustainable cities?
The answer to the first question, I believe, should be “no”. Governments’ long time struggle in finding funds to finance infrastructure is a well known situation. After four straight years of $1 trillion-plus deficits, $901 billion is the estimated deficit of U.S. federal government by the year 2013. Scaled down to state level, according to Mr. Dana Levenson, chief financial officer of MassDOT, the total cost of all projects in their wishlist exceeds $200 billion. However, within their budget capacity, they can only invest in $13 billion on the “must-do” projects. As worth-doing as a lot of projects are, it’s just unrealistic for the government to fund every single project. Given limited capital resources, governments tend to put their money on the most urgent and indispensable projects.
If government is not the best entity to play as an investor in the framework, what’s its best role? The famous saying from former New York Governor Mario Cuomo listed at the beginning of this article might shed some light on the question. The market has an “invisible hand” (Adam Smith, 1759) that regulates itself in order to maximize the financial benefit. However, sometimes – for instance, in providing public goods – the market fails to provide services or goods efficiently, named “market failure”. And this is when government – the “visible hand” – should make its intervention.
The intervention might not necessarily be financial giving – that’s what non-government entities should do – but could be enforcement (e.g. legislation), or “soft” interventions. The latter is where government could maximize the function of its visible hands as well as make full use of market’s invisible hand. Soft interventions, in this article, include regulatory incentives, such as FAR bonus in affordable housing building, and innovative programs, such as long-term leasing of infrastructure. In the King Abdullah Economic City case, for example, soft intervention could play a big role. Given the extreme scarcity of funding, I would propose the government and EEC sign a long-term lease with a third party private developer/operator. In the long-term lease contracts, the third party has the right of using the land, and could develop, hold and make profits from the industrial valley land or seaport for, say, 75 years, under the condition that they pay the total 75-year leasing rent upfront. At the same time, EEC could get a huge amount of funding from the rent in order to fund other parts of the sustainable city, such as schools, health facilities, etc. In this case, the third party will get profits, EEC will get cash flow to address the financial problem, and the government will not totally lose control of the development. There is a drawback that the government will not capture the financial benefits of developing the land for the following 75 years, but in comparison with the long term benefit – creating jobs, driving economic growth, etc. – this loss is minimal. And the most import of all, by using innovative soft intervention, the government could really deliver the services and goods, and make the sustainable city happen.
To conclude, a smart government, unlike a consortium or a developer, should not be hands-on providing services; instead, it should focus on creating innovative programs to make soft interventions to the market, in order to ensure services are provided, and are provided efficiently.