Pictures of the Future    Fall 2006

Sustainable Megacities

Megacities are unique and complex," says urbanization expert Dr. Willfried Wienholt. "And effectively addressing the challenges they face is a Herculean task that requires, among other things, a great deal of creativity and financial power." For the past year or so, Wienholt, who works at Siemens Corporate Technology (CT), has been studying megacities and the general global trend toward urbanization.

The United Nations has defined a megacity as an urban development with more than ten million inhabitants. Wienholt is convinced that "future urban development strategies must give greater consideration to the principle of sustainability." After all, between now and 2030, 90 % of global population growth will occur in cities. It is estimated that an additional two billion inhabitants will move into urban centers in Asia, Africa, Latin America and the Middle East during this period. This will put a huge strain on infrastructure and the environment.

Consider water, for example. Cities already consume 60 % of all drinking water worldwide, either directly or indirectly as water for raising food products. With regard to energy, the state of São Paulo—the largest urban area in South America—accounts for 60 % of total energy consumption in Brazil. In view of this situation, the UN has formulated a series of goals related to sustainable development that are designed to improve the quality of life in cities. These goals include suitable housing and access to clean drinking water for all, power supplies and transport systems that are as efficient and environmentally friendly as possible, and land use and construction projects that proceed in accordance with the principle of sustainability.

Eco-City. Such goals can be—and are—being put into practice. Dongtan, which will be the world’s first "eco-city," is an example. Plans call for the city to be built in the next few years on a 630 ha parcel on an island in the Yangtze estuary near Shanghai. This city will be characterized by minimal water consumption and an extremely efficient energy supply—including alternative energy sources—for reducing carbon dioxide emissions. Parks, lakes and open areas will also greatly improve quality of life. Dongtan’s first construction phase is scheduled to be completed in time for the 2010 World Expo in Shanghai, making Dongtan a global model for urban development.

Megacities in most emerging markets can only dream about such conditions. "There are only limited possibilities for sustainability in many cities," says renowned urban planner Prof. Albert Speer (see interview). Rapidly growing cities such as Mumbai in India are suffocating in traffic. Mumbai is also struggling with drinking water and sewage systems built by the British back in colonial times. Moreover, the city has to absorb some 350 new families that move there every day (India).

Mumbai’s infrastructure is in danger of collapse, and it will be anything but easy for it and similar cities to achieve the UN’s sustainability goals. There are no simple solutions—not because technology is inadequate, but because of the complexity of the structures in place. A prerequisite for sustainable development in cities like Mumbai and São Paulo is good governance. This must encompass the entire administrative and economic system of a city, region, or even an entire country, with all the complex relationships this includes. This in turn requires the greatest possible efficiency and transparency, as well as socially oriented policies and, above all, clear lines of responsibility.

Achieving this can take a lot of time in democracies, where stakeholders must be given a voice and a range of institutions have to agree on specific measures. What’s more, the whole playing field can change completely after the next election. Despite conventional wisdom, things aren’t much different in China in this regard. "Those familiar with the country know that political decisions are not simply dictated from above," says Speer, who has completed numerous projects in China since the 1990s. "The individual regions and municipalities also have a lot to say on many matters." Efforts to protect the environment and promote sustainability run into difficulties in many cities because they are initially viewed as being too expensive.

"But investment in the environment and sustainability pays off in many different ways," says Wienholt. Such investment not only improves quality of life; its other effects also strengthen a city’s economy. For example, reducing traffic jams in an urban area leads to greater productivity. "Ultimately, a city with a high quality of life will attract more investment and be transformed into an engine of economic growth," says Wienholt.

This explains why economic growth in India has in many cases shifted from the megacities to smaller neighboring cities. Often the latter are more flexible and offer better conditions. One example is Pune, which has three million inhabitants and is situated less than two hours by car from Mumbai. Pune’s economic growth has for years exceeded that of its megacity neighbor, which has 18 million inhabitants.

Three Types of Megacities. Together with his team at CT and external partners, Wienholt has developed a study for examining sustainable urban development using Siemens’ Pictures of the Future methodology, which analyzes trends and determines the conditions necessary for technology development. The study divides megacities into three categories:

Each of these categories of megacity faces different types of challenges. The study found, for instance, that some cities, such as Tokyo, urgently need to take action to avoid problems in the future. For example, the population of the Japanese capital is aging rapidly, and this can have a number of consequences. Moreover, despite its high level of sophistication, Tokyo’s infrastructure requires continual further investment. For example, half of the facilities for water supply are in need of extensive modernization.

Despite the differences between megacities, there are also several trends common to all of them. One of these, according to the Institute for the Future in Palo Alto, California, is "light infrastructure," which refers to systems whose strength is derived from a network of numerous small parts.

One example of such an infrastructure involves future energy supplies. Here, Siemens experts from CT predict that distributed power-generation systems will account for a larger share of installed output in the years to come. Wind power generation facilities are booming worldwide, and Siemens and other manufacturers are developing small high-temperature fuel cells that can supply electricity and heat to building complexes.

Numerous small, distributed systems reduce the risk of failure, can be controlled via the Internet, and can even network themselves in the manner of modern communication systems based on ad-hoc networks (Emergency Communications). Meanwhile, in the industrial area, an example of a light infrastructure is Siprocess. This miniature chemical plant that Siemens is launching on the market is an example of a flexible, efficient and environmentally friendly production technology (see Chemicals and Pharmaceuticals).

We can also expect the political importance of major cities to grow, because they will in many cases account for a large share of a country’s gross domestic product (GDP) and generate a correspondingly large amount of tax revenue. Tokyo, for example, already accounts for 40 % of Japan’s GDP, and Buenos Aires generates 45 % of Argentina’s.

Still, budgetary pressures on cities will remain intense, which is why we can also expect to see new financial models. For instance, more and more private investors are already providing funding for infrastructure projects. This development is still in its infancy in many countries because until recently there wasn’t a legislative framework for private investment in public projects. However, Siemens is increasingly becoming a partner when it comes to financial solutions.

Siemens Financial Services (SFS) is the international leader in the customized structuring of project financing solutions. "No other industrial company and no major bank has such a large and experienced team in this field," says Johannes Schmidt, managing director of SFS. With its approximately 1,700 employees, 130 of whom are specifically involved in this area, SFS is a center of expertise in financing and risk issues not only for Siemens, but also for external customers and investors. "Our primary focus is risk management," says Schmidt. "That’s because every investor wants to achieve returns in line with the risks they take."

The Project & Export Finance team at SFS is currently developing financing solutions for some 600 Siemens projects. That amounts to a project volume of more than 55 billion €. For every new project, SFS experts analyze the market, the legal and political situation, as well as technical details. They then draw up a financing plan that includes loans from international institutions such as the World Bank, credit from major private banks, and funding from the capital markets.

In some cases, SFS will itself participate by providing its own capital, as was the case with India’s first private airport, which is located in Bangalore. SFS has a 40-percent interest in BIAL, the airport’s operating company. "We’ve been involved since planning for the project began in 1999," says Dr. Wolfgang Bischoff, managing director of Siemens Project Ventures (SPV), which is responsible for SFS’ equity business. "Construction didn’t begin until July 2005." That’s because planning was delayed by debates on the proper location for the airport, implementation of required legislation, and two changes of government.

Persistency paid off, however, as various Siemens groups are supplying technical equipment for the airport, including systems for handling luggage, transport, communications, computers, fire protection, air conditioning, security, runway lighting, control centers and power supplies (see  India and  Airports). "When completed in April 2008, Bangalore will be India’s most modern airport," says Bischoff. India is actually a land of airport opportunities, with some 40 airports scheduled to be privatized and modernized over the next few years.

Balancing Risks. SFS not only faces the challenge of coming up with balanced financing; it must also find a way to equalize the risks of all those involved in a project. One of its current projects is the Chinese-German Friendship Hospital, a 500-bed clinic (expandable to 1,000) to be built in the Shanghai International Medical Zone by 2010.

The project’s partners are SPV, the private German hospital operating company Asklepios, and Tongji University in Shanghai. "We’re now optimizing the business plan and structuring the financing," says SPV project developer Andreas Fortströer. "It’s very important for partners to focus on the areas where they have the most expertise."

With this in mind, Asklepios will contribute its clinics’ knowledge of commercial hospital operations, including optimization of all business and work processes, while the Chinese partner will ensure that the special requirements of the local market are appropriately considered. For example, there are virtually no general practitioners in China; people simply go to a hospital when they feel ill. This, of course, has led to large outpatient departments.

All information will be collected by SPV, where Fortströer and his team will then develop a feasible plan and coordinate the overall concept. "We need information on how many patients we can expect, which ailments patients complain about most, and how we should use the medical equipment we get from Siemens," Fortströer explains. The planning process will be followed by a detailed risk-profitability analysis of the hospital, the results of which will form the basis for the participatory structure.

When the project is concluded, Siemens will have helped give Shanghai yet another state-of-the-art hospital that will improve the quality of life for the nearly 13 million people that live in the city. Prof. Wan Gang, president of Tongji University, calls it a win-win situation for all the parties involved.

For megacity expert Willfried Wienholt, the Shanghai project is an example of how technological expertise, intelligent financing and strategic planning can make a major city a more pleasant place to live in. Schmidt, for his part, believes private investment can accomplish a lot, given the right political and social conditions. "Raising capital isn’t the problem," he says. "There’s plenty of money out there around the world."
                                                                                                 Norbert Aschenbrenner