Megacities, mega-opportunities: Accelerating urbanization means rising public-private collaboration

CFOs I meet in my travels as PwC’s US tax leader often acknowledge the world’s accelerating urbanization. By next year, the UN estimates that there will be 22 megacities—17 of these in developing economies—with populations of 10 million or more.   This extensive urbanization will strain existing infrastructure in older cities, necessitating massive mega-projects to support new trade flows and satisfy education, health and other needs.    

Here in the United States, significant investment into infrastructure is already occurring.  According to a recent PwC study,  Capital project and infrastructure spending:  Outlook to 2025, the United States is currently the world’s second largest capital project and infrastructure market (China is first).  By 2025, annual investment in US infrastructure is slated to top $1 trillion. The term ‘infrastructure’ is wide-ranging, including economic activities in traditional sectors such as transportation and utilities, as well as projects in sectors such as manufacturing and social infrastructure.  And this infrastructure, whether new or existing, must be flexible enough to embrace the rapid technology evolution that continues to be an emerging global megatrend.

Attracting investment for infrastructure

So how will local governments build this necessary infrastructure?  Historically, they may have raised taxes or issued bonds to pay for public projects.  But these may now be considered the ‘old ways’ because they may be too time-consuming and ineffective when cities are trying to get things done in the face of this accelerating urbanization.  Instead, local governments may need to actively target specific companies and investors rather than wait for those companies and investors to approach them to negotiate public projects.

 Tax incentives can spark development

The urbanization megatrend provides exciting possibilities for businesses to partner or collaborate with the public sector.  And to spur collaboration, governments are increasingly offering tax incentives that make investments in major urban centers more financially attractive to private investors.  A city may grant specific tax exemptions, abatements, or other inducements to lure developers near a particular attraction or location in order to build the type of infrastructure it needs.  For example in Los Angeles, the local government invited investors to build hotels to improve occupancy availability near convention centers to host large crowds.  A critical goal was to expand the local job base in the urban area. 

Governments have long used tax incentives for the occasional job creating projects, for example, or for making significant capital investments.  But now, they will need to be more strategic and focus on who to give the incentives to when the project serves the local market needs.  Governments will also need to closely assess the needs of their residents and how they can accommodate them.  Public-private collaboration where tax incentives are granted will likely occur much more frequently in the future for governments to manage the expected explosion of urbanization or risk falling behind in the race.

Balancing stakeholder goals

Although identifying and quantifying potential tax exemptions or incentives is complex, they are among many factors that must be managed to reap the benefits of public-private collaboration.  Both private industry and government must answer to varying stakeholders.  For example, governments will need to balance their desire to provide financial aid to lure development with the risk of being perceived as favoring private companies.  Businesses will also need to weigh the cost-benefit of pursuing projects by determining whether a specific tax abatement is sufficient to overcome the host of tax and other regulatory requirements required in that jurisdiction.

Win/win for both private and public sectors

Notwithstanding the challenges, when the ultimate goals of industry and government align, good things can happen.  Public-private ventures can be a win-win situation in which both parties enjoy benefits.   The completion of infrastructure in megacities can support growth and job creation, benefiting the public.   These ventures may also provide a state or locality with an additional option to finance expensive infrastructure projects, without the need to raise significant public funding (such as through tax increases).  Private business, on the other hand, can reap profit for their public and private shareholders while also serving the greater good.  Many types of investors will likely pursue these opportunities (such as private equity money, sovereign wealth funds, and other institutional investors) as they seek a sufficient return for the investors.

The bottom line is that tax incentives can start the wheels in motion, enticing investors to build and create the infrastructure that is needed to support accelerating urbanization.  And more and more governments may seek to use tax incentives as an inducement to spur private industry action, enabling a ‘win-win’ situation between the public and private sectors.