Harvard Case - City of Calgary: Financing Infrastructure
"City of Calgary: Financing Infrastructure" Harvard business case study is written by Pernille Goodbrand, Darrin Ambrose, Jyoti Gondek. It deals with the challenges in the field of Strategy. The case study is 11 page(s) long and it was first published on : Mar 23, 2018
Start with: The City of Calgary should adopt a multi-pronged approach to financing infrastructure, prioritizing long-term financial sustainability and leveraging innovative funding models.
At Fern Fort University, we recommend a comprehensive strategy that combines traditional funding sources with innovative financing mechanisms, including public-private partnerships (PPPs), green bonds, and infrastructure bonds. This approach will ensure the City can meet its infrastructure needs while minimizing the impact on taxpayers and fostering a sustainable economic future.
2. Background
The City of Calgary faces the challenge of financing a substantial infrastructure backlog, estimated at $10 billion. This backlog includes critical projects like road repairs, transit expansion, and water infrastructure upgrades. The case study highlights the City's current reliance on property taxes and debt financing, which creates constraints on future spending and limits the ability to invest in long-term growth.
The main protagonist of the case study is the City of Calgary, grappling with the need to balance current budgetary pressures with the need for long-term infrastructure investment. The case also touches upon the role of the citizens, stakeholders, and the City's financial advisors in navigating this complex issue.
3. Analysis of the Case Study
Applying a Strategic Framework:
We can analyze the City of Calgary's situation using a Porter's Five Forces framework to understand the competitive landscape and identify opportunities for innovation.
- Threat of New Entrants: Limited, as infrastructure development requires significant capital and expertise.
- Bargaining Power of Buyers: High, as citizens have voting power and influence on infrastructure priorities.
- Bargaining Power of Suppliers: Moderate, with a mix of local and international suppliers for infrastructure projects.
- Threat of Substitutes: Limited, as essential infrastructure services are difficult to replace.
- Rivalry Among Existing Competitors: Moderate, as municipalities compete for resources and investment.
Key Challenges:
- Limited Funding Sources: Reliance on property taxes and debt financing restricts the City's ability to invest in large-scale infrastructure projects.
- Growing Infrastructure Needs: The aging infrastructure and increasing population demand significant investment in roads, transit, and utilities.
- Public Perception: Public support for increased taxes or debt financing may be limited.
Opportunities:
- Innovation in Funding Models: Exploring alternative financing mechanisms like PPPs and green bonds can attract private investment and reduce reliance on traditional sources.
- Strategic Partnerships: Collaborating with private sector companies and other levels of government can leverage expertise and resources.
- Data-Driven Decision Making: Utilizing data analytics to prioritize infrastructure projects and optimize resource allocation.
4. Recommendations
1. Diversify Funding Sources:
- Public-Private Partnerships (PPPs): Leverage private sector expertise and capital by partnering with companies for design, construction, and operation of infrastructure projects. This can reduce upfront costs for the City and introduce innovative solutions.
- Green Bonds: Issue bonds specifically for environmentally friendly infrastructure projects, attracting investors seeking sustainable investments and potentially lower interest rates.
- Infrastructure Bonds: Issue bonds dedicated to funding specific infrastructure projects, allowing the City to tap into a wider pool of investors.
- User Fees: Implement user fees for specific infrastructure services, such as toll roads or parking, to generate revenue directly from beneficiaries.
2. Enhance Financial Planning and Management:
- Develop a Long-Term Infrastructure Plan: Establish a comprehensive plan outlining infrastructure needs, funding strategies, and project prioritization.
- Implement a Balanced Scorecard: Monitor performance against key metrics, including financial sustainability, infrastructure condition, and public satisfaction.
- Strengthen Corporate Governance: Ensure transparent and accountable financial management practices.
3. Foster Public Engagement and Collaboration:
- Communicate Infrastructure Needs: Clearly articulate the importance of infrastructure investment and the benefits to the community.
- Involve Stakeholders: Engage citizens, businesses, and other stakeholders in the planning and decision-making process.
- Promote Transparency and Accountability: Provide regular updates on infrastructure projects, funding sources, and project progress.
5. Basis of Recommendations
1. Core Competencies and Consistency with Mission: The recommendations align with the City's mission to provide essential services and foster a sustainable and prosperous community. Diversifying funding sources and leveraging innovative financing models support the City's long-term financial sustainability and infrastructure development goals.
2. External Customers and Internal Clients: The recommendations address the needs of both external customers, such as citizens and businesses, and internal clients, such as City departments and staff. By ensuring adequate infrastructure investment, the City can improve quality of life, attract businesses, and support economic growth.
3. Competitors: The recommendations consider the competitive landscape by leveraging best practices from other municipalities and exploring innovative financing models. This approach allows the City to remain competitive in attracting investment and talent.
4. Attractiveness - Quantitative Measures: The recommendations are expected to generate positive returns on investment through improved infrastructure, economic growth, and reduced long-term costs. While quantifying the exact financial benefits is challenging, the potential for increased tax revenue, reduced maintenance costs, and enhanced economic activity suggests a positive impact.
5. Assumptions: The recommendations rely on the following assumptions:
- The City is committed to long-term financial sustainability and infrastructure development.
- There is sufficient political will and public support for innovative financing models.
- The private sector is willing to partner with the City on infrastructure projects.
- The City has the capacity to manage and implement complex financing arrangements.
6. Conclusion
By adopting a multi-pronged approach to infrastructure financing, the City of Calgary can meet its current and future infrastructure needs while ensuring long-term financial sustainability. The recommendations presented in this case study solution provide a roadmap for the City to navigate the challenges and capitalize on the opportunities presented by the evolving infrastructure landscape.
7. Discussion
Alternative Options:
- Increased Property Taxes: This option is politically unpopular and could negatively impact residents.
- Borrowing from Private Banks: This option carries higher interest rates and could lead to increased debt burden.
Risks and Key Assumptions:
- Political Risk: Changes in political leadership or public opinion could hinder the implementation of innovative financing models.
- Market Risk: Fluctuations in interest rates or economic conditions could impact the feasibility of PPPs and bond issuance.
- Implementation Risk: The City needs to ensure it has the necessary expertise and resources to manage complex financing arrangements.
Options Grid:
| Option | Pros | Cons | Risk |
|---|---|---|---|
| PPPs | Access to private capital, expertise, and innovation | Potential for higher costs, risk sharing, and regulatory complexity | Political risk, market risk, implementation risk |
| Green Bonds | Attract sustainable investors, potentially lower interest rates | Limited market size, potential for higher issuance costs | Market risk, implementation risk |
| Infrastructure Bonds | Diversify funding sources, potentially lower interest rates | Higher issuance costs, potential for increased debt burden | Market risk, implementation risk |
| User Fees | Generate revenue directly from beneficiaries, reduce reliance on taxes | Potential for public resistance, limited revenue generation | Political risk, implementation risk |
8. Next Steps
Timeline:
- Year 1: Develop a comprehensive infrastructure plan, conduct feasibility studies for PPPs and green bonds, and engage stakeholders in the planning process.
- Year 2: Implement pilot PPP projects, issue green bonds for specific infrastructure projects, and refine financial management practices.
- Year 3: Expand PPPs and green bonds to other infrastructure projects, monitor performance against key metrics, and adjust strategies based on results.
Key Milestones:
- Develop a comprehensive infrastructure plan: Establish a clear roadmap for infrastructure development, including project prioritization, funding strategies, and timelines.
- Pilot PPP projects: Implement small-scale PPP projects to gain experience and refine the process.
- Issue green bonds: Issue green bonds for environmentally friendly infrastructure projects, demonstrating the City's commitment to sustainability.
- Monitor performance: Track key metrics, including financial sustainability, infrastructure condition, and public satisfaction, to assess the effectiveness of the implemented strategies.
Conclusion:
The City of Calgary has a unique opportunity to leverage innovative financing models and create a sustainable future for its infrastructure. By embracing a multi-pronged approach, the City can ensure long-term financial stability, meet its infrastructure needs, and foster a vibrant and prosperous community.
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Case Description
In 2007, the former Calgary mayor was preparing to make the case for a Community Revitalization Levy to secure financing to develop Calgary's East Village, a downtown brownfield site. The East Village had a difficult history, and economic, social, and environmental issues abounded there. All previous attempts at redevelopment had failed. After doing meticulous research, the mayor presented to Calgary City Council his idea of the Community Revitalization Levy, the first of its kind in Canada, and it was approved. Next began the momentous task of carrying out the redevelopment, and the City of Calgary could not be directly involved. The mayor had to decide how the city could ensure the success of the redevelopment of the East Village.
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