Friday, August 16, 2013

Sustainable Cities: Business Opportunities from Resource Efficiency in Urbanization

The exodus of people from rural environments to the cities continues around the world. There are now 7 billion people on earth and it is anticipated that by 2050 there will be at least 9 billion people, most of whom will be living in cities. As of 2011 there were 3.6 billion people living in cities by 2050 that number is expected to almost double to 6 billion people living in urban contexts. Cities must find ways to deal with this massive population influx.

The question that we all face is how to make urban existence sufficiently sustainable so that burgeoning populations do not outstrip the carrying capacity of the local environments in and around these cities. How are we to provide food, water, electricity, roads, vehicles etc. Nowhere is this problem more serious and more pressing than in the developing world.

Along with these serious challenges come extraordinary opportunities for the business community. Governments may play a role, but they have limited resources and limited capacity to finance the costs of urbanization. The private sector will have to play a salient role if we are to meet these challenges.

In a Harvard Business Review article, titled "Building Sustainable Cities," John D. Macomber presents his research draw from his experience consulting with municipal governments, urban planners, corporations, and entrepreneurs in the United States, Europe, Latin America, and Asia.

He has seen many different business strategies for addressing the challenges posed by rapid urbanization and scarce resources. His experience has shown him that businesses are discovering how to create and claim value by improving resource efficiency to reduce waste, and stretch resources.

He offers a framework that rests on three pillars: new business models that generate profits by optimizing the use of resources; financial engineering that encourages investments in efficiency, and careful selection of markets.

investments in resource efficiency is not only about enhancing a given city it is also about generating value for companies over the long term.

Macomber explains that “financial engineering” applies to the use of algorithms to create trading strategies. But in this article he uses the term to refer to "a general set of financing and capital structure strategies for companies and projects."

This includes everything from taxes, bonds, interest rate swaps; contributions of land in exchange for bonds, debt instruments, or stock; vendor financing for future considerations; and equity in the promoter, the operator, and the engineering firm.

"This approach is designed to attract more capital to the project by offering different levels of risk and return, different cash-flow priorities, and opportunities for both short-term and long-term investors. When governments are “stuck” and can’t deliver core infrastructure, these techniques are particularly useful." Macomber says.

"Otherwise it can be hard to match the cost of the initial resource-efficiency investment with the extensive and very widely distributed benefits that are realized in the long run."

According to Macomber, water, electricity, and transit projects deserve the greatest focus.

To assess the efficiency opportunity lies look at resource-efficiency initiatives in terms of both technology and finance. Then look at the products and services that new cities will require, and that provide the return investors and entrepreneurs need, optimize both.

Using these dimensions a company can assess its offerings on what he terms an “efficiency matrix.” (Technological sophistication increases from left to right, while financial sophistication increases from bottom to top.).

In this matrix a company’s resource-efficiency products and services can be plotted according to how sophisticated they are financially and technologically.

As sophistication increases, offerings approach the efficiency frontier at the perimeter of the matrix.

For more information on the Efficiency Matrix click here to see a narrated infographic.

© 2013, Richard Matthews. All rights reserved.

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