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.[1] 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.
Sustainable Cities: Finance, Design, and Innovation 
Yiran, thanks for the thought-provoking post. Government must make investments in critical infrastructure and provide essential services. That said, your post makes the important point that governments should think more creatively about how to drive desired outcomes and that once governments get beyond thinking about themselves solely from the perspective of a writer of checks, that more efficient or better outcomes might be possible.
One recent example of this type of thinking that stands out for me is a program in Massachusetts called Solarize Mass (http://www.solarizemass.com/index.cfm/page/About-Solarize/pid/12858). Through this program, the state has been able to increase adoption of residential solar and drive down the average cost of those installations to the homeowner without increasing the level of subsidies it provided for each installation. Essentially, the team that runs the state residential solar rebate program realized that, while they had made a great deal of progress, they were not getting the uptake that they might have expected given the generous level of subsidies relative to the high price of electricity in Massachusetts and so they went out to look for alternative ways to get the outcome they sought.
What they discovered is that the cost of customer acquisition in the residential solar industry has been persistently and stubbornly high, but that there were models being deployed in a couple other states in the country that dramatically increased demand for residential solar while at the same time bringing down the cost of installations through the use of coordinated education, marketing and outreach, combined with a group purchasing model that provides increased savings as more people in a community go solar. The great thing about this program is that the state was able to drive results not by increasing the subsidy it provided, but rather by creating the right conditions for the market to grow. In the context of fiscally constrained governments, more innovations of this type are necessary.
By Sachin Desai
Thank you for this interesting post, and nice quote by Cuomo! To add to the discussion, I want to discuss how the government can invest effectively if soft power is unavailable.
I agree that generally a government should prefer use of its non-fiscal powers to direct the markets to accomplish public priorities. However, unfortunately we are living in a world where such soft power, aka “regulation,” is becoming harder to implement. There are whole states in the South where mentioning “regulation” is worse than making racist slurs. Ironically, under Obama’s tenure in his first year, he was able to greatly increase the budget of the DOE and create multiple new programs funding energy research. Yet he failed to promote EPA regulations that would have done arguably more to incentivize sustainable investment (and save lives). Think of the Health Care bill – it was arguably the regulation (mandated purchase of health care) that upset people more than the concept of the no-insurance “tax.” Additionally, regulations are not best for all situations – they are hard to change, their true costs/benefits are hard to measure sometimes, and worst of all, we have to pay lawyers to “interpret” them!
So when the government has to invest, how should it best do so? We’ve learned that the stimulus was likely inefficiently spent. On the flip side, certain programs, such as DARPA, have helped engender the internet and GPS, and are generally considered NPV-positive. Although this is worth further space than a blog comment, as a teaser I want to introduce 2 factors to consider when investing as a government:
• Is the government investing where there is a market failure? There is no need for the government to invest in cool tech startups or retail, but maybe instead in sustainability, where we know the markets aren’t pricing such long-term costs.
• Are the investors insulated from politics? Easier said than done, but the federal government’s DARPA has been a success in this area by being hidden within DOD. ARPA-E, the DOE’s attempt to copy DARPA, is attempting to be similarly insulated but in different ways. Almost every halfway-important person in the agency has to leave in 3 years, so they have no time to be influenced by politics. Also, they were given the freedom to hire off the GSAS scale (the government’s mandated pay scale), so they could bring in decent talent.
See http://www.nytimes.com/gwire/2011/02/14/14greenwire-obamas-doe-budget-request-promotes-clean-tech-32236.html?pagewanted=all.
This may be controversial, but probably not at HBS. Here is one commentary about how the stimulus was wasteful. http://www.ihatethemedia.com/alan-greenspan-obamas-stimulus-a-giant-waste-of-money.
http://www.newscientist.com/article/dn13907-fifty-years-of-darpa-hits-misses-and-ones-to-watch.html?full=true.