Demographic Decline,Population Aging,and Modern Financial Approaches to Urban Policy

Demographic Trends and Differences in the Performance of EU Cities and Regions

Regional science, urban economics, and economic geography have all tended to discuss systems of cities from the perspective of central place theory, rank size and Zipf’s law types of rules or distributions (McCann 2013), or new economic geography frameworks (Fujita, Krugman, and Mori 1999). From this perspective, cities are understood as arising from the effects of competing territorial systems (Cheshire and Gordon 1995) over time and the spatial configuration of a system of cities is shaped by this evolutionary process. In the case of the EU, the dynamics of the European spatial system has been accelerated by the long-term processes of globalization and European integration and, more recently, by the impacts of the Great Recession (McCann 2015).

Three decades of pan-European international and interregional convergence have recently given way to increasing divergence (EU 2014) on both levels (Dijkstra, Garcilazo, and McCann 2015). Moreover, the European story of interregional convergence and divergence is not a simple story of big city versus small city or urban versus rural, but rather reflects a complex and varied picture (McCann 2015). Economic growth in the 1990s was dominated by larger cities and this process largely continued well into the 2000s in Eastern Europe, whereas in Western Europe economic growth in the New Millennium was dominated by smaller- and medium-sized cities (Dijkstra, Garcilazo, and McCann 2013). Since 2008, the EU interregional trends have been toward divergence, and differences in population growth and decline are one of the most important markers of these divergence processes (EU 2014).

Demographic change impacts on a variety of components of the urban economy. Some of the key areas are urban labor markets, infrastructure planning, and housing (Batz 2012), but general conclusions on the future potential growth patterns at the national macro level (EU 2015) are not sufficient to make generalizations about the impact of demographic change on the local level, as population changes in local labor markets occur much faster and are more pronounced than at the country level. Locally, in many cases, average population age and shrinking are more likely to be influenced by the migration rate in the short run than by natural population growth, whose impact tends to be over longer periods. At the same time, urban areas and, hence, local urban and regional labor markets differ considerably in terms of size, economic structure, and economic performance. In this respect, population decline is in most cases a symptom of the structural crisis of the local economy and, once in full swing, depopulation blocks the process of socioeconomic recovery. Across the European system of cities, these various demographic mechanisms interact in complex ways and these trends raise fundamental challenges to the management of cities and city regions.

In general, urban productivity growth is explained in textbooks (McCann 2015), as being correlated with population growth via the wage signals driving interregional or international migration (Dennett 2014; Faggian and McCann 2009a). However, the evidence suggests that in the European context, the links between growth and decline in urban economic performance on the one hand and population growth and decline on the other hand are complex. In terms of urban growth, the positive trends have been rather more heavily weighted to differential fertility rates rather than migration (EU 2014), although the higher fertility rates in certain cities tend to be the result of the prior in-migration of young people. Conversely, urban population decline is also strongly associated with the out-migration of workers, and in particular younger workers, who tend to be relatively more geographically mobile (ESPON 2010). Indeed, of all age cohorts, geographical mobility is most marked in the case of young university graduates (Faggian and McCann 2006, 2009b; Faggian, McCann, and Sheppard 2007; Fielding 2012), the group with the highest levels of human capital, and whose mobility also tends to be the most oriented toward cities (OECD 2011a). All areas face population aging (OECD 2015) but in this context, interregional in-migration tends to be most associated with slower rates of population aging and relatively buoyant local labor markets, whereas interregional out-migration tends to be associated with a combination of relatively rapid population aging, weakening local labor markets, and urban population decline. This latter combination is extremely toxic on many levels, with the social, housing, and health care needs of the aging population growing relatively faster than the ability of the local labor market to fund and provide for such needs. In contrast, in growing cities, the balance is shifting relatively in favor of the local labor markets. As such, population change is not simply a scale phenomenon but a qualitative phenomenon with increasing population generally reflecting an increasing economic buoyancy and resilience while population decline reflects an increasing economic fragility and vulnerability.

As such, under current demographic and fertility trends and the retirement of the baby boom generation, population growth in European cities will increasingly be the result of positive net in-migration and increased fertility rates while population decline will increasingly be the result of net out-migration and declining fertility. The fact that higher skills groups and younger age cohorts are the most mobile groups means that in general population decline will also be associated with a relative skills decline in comparison to growing regions. Job creation is therefore expected to be unevenly distributed across cities, driven by differences in total factor productivity, innovation performance, and labor market flexibility. The resulting growing interregional inequalities across Europe plus the increasingly different demographic patterns across EU regions therefore mean that we are likely to face more frequent and more intense financial demand and supply imbalances both within and between EU cities and regions. On the one hand, there will be increasing numbers of rapidly declining and fiscally stressed cities, oversupplied with undermaintained infrastructure coexisting with prosperous and growing cities attracting limited supplies of scarce investment capital and highly qualified mobile human capital. Yet, our knowledge in urban economics and regional science of the links between these issues is remarkably limited. Apart from a very few pieces of research (Dow 1982, 1987; Dow and Rodriguez-Fuentes 1997; Hess and Van Wincoop 2000; Ramos 2007; Crocco, Santos, and Amaral 2010), the monetary aspects of regional development have been almost entirely ignored by the field, leaving us heavily underprepared to consider these types of issues. Our lack of analytical knowledge is especially problematic in a context where EU central government budgets are severely constrained and also made less flexible by the need to meet their long-term pension obligations. In such situations, the results are likely to be increasing interregional and interurban financial imbalances in wealth, welfare, and the quality of urban life, because demographic differences meter out different financial liabilities and cities facing population decline face especially stark long-run financial difficulties. Overall, the spatial reorganization engendered by changing global convergence and divergence trends will have led to spatially diversified wealth effects, since the new urban spatial equilibrium is likely to destroy a substantial amount of wealth held by residents and investors in shrinking cities, while capital gains will concentrate in growing urban systems such as export hubs, particularly in countries where local demand expansion is tied down by macroeconomic constraints and limited capacity for fiscal transfers. In the majority of the EU countries, especially those of the so-called EU periphery, a major share of household wealth is held in urban assets, and typically in the form of owner-occupied housing, as these have traditionally protected the value of the investment against inflation and economic downturns, ² and have also provided the most prevalent source of collateral including for the financing of entrepreneurial start-up activities (Henley 2005; Reuschke and Maclennan 2014; Black, de Meza, and Jeffreys 1996). Spatially differentiated shocks to the EU urban system (Dijkstra, Garcilazo, and McCann 2013, 2015) will therefore induce complex and varied local financial imbalances.

The differential movements of different skills groups mean that increasingly the management of population decline as well as changes in residents’ wealth and welfare will be determined by a city’s ability to maintain its competitiveness. This itself will partly be determined by the cities’ ability to retain and attract highly qualified human capital and innovative firms, but other factors and issues also play a role. Indeed, as well as engendering demographic differences in productivity-enhancing drivers and in the local asset base, there are also four other major issues which complicate the challenges faced by cities experiencing population decline in particular.

First, the impacts of demographic decline on housing is a key dimension, and several trends will affect the specific balance of supply and demand in individual cities. The generalized decrease in average household size means that despite population decline in many EU countries, the demand for dwellings is still likely to remain largely unchanged in the coming decades at an aggregate level. However, the dynamics of individual housing markets will differ between cities, with some cities characterized by the widespread aging in place of many senior citizens as the propensity to migrate declines with age; within these senior age groups, any such movements which do occur tend to be strongly influenced by prior family connections. The impacts on housing prices are also likely to be spatially diversified. There are currently conflicting opinions about the possibility of a dramatic reduction in house prices due to the withdrawal of baby boomers from the housing market, with some authors considering it unlikely and others highly probable (Takáts 2010; Graham and Sabater 2015; The Housing and Ageing Alliance 2013). The experiences from currently shrinking cities, however, tend to reveal a primarily negative impact of the increase in vacancies on real estate prices as well as adverse impacts on the image and attractiveness of the cities affected. These adverse population decline effects are especially compounded in the more fragile EU economies which were most severely hit by the 2008 crisis, whereby population aging will also take place in a context of decreasing public expenditures and the consolidation of public accounts, along with often weak private-sector job creation due to lower postboom demand in banking, insurance, finance, legal services, real estate, and construction.

Second, the underutilization of urban infrastructure is another key risk associated with population decline. Two main characteristics of urban technical infrastructure in the context of urban shrinking are their very high-fixed costs, typically up to 80 percent of total costs, and an obligation to provide a minimum level of services to all consumers and users, which in the case of considerable population decline and lower system use will increase the per capita costs of operating and maintaining roads, power systems, sewers, or drinking water networks. Fewer residents will have to pay more for these oversized or underused infrastructure facilities, while additional costs can arise from the need to adapt to different consumption patterns, or to demolish and downsize inefficient facilities. However, urban redevelopment in such a context is complicated by the fact that city population decline tends to involve the generation of somewhat spatially random patterns of vacancies and dereliction. Although urban blight and dereliction tend to be focused on certain weaker neighborhoods, within these neighborhoods vacancies and dereliction patterns tend to be random, due to different localized patterns of household aging, real estate liabilities, and different tenancy structures. Typically, urban development can only proceed via land assembly activities, and in such situations these also involve complex legal provisions, including compulsory purchase and compensation agreements.

Third, these differing interregional demographic trend issues also have potentially serious implications for public financial settlements in terms of the balance between central and local funding sources and the share of finances transferred from central to local government, including the use of resources linked to pension payments. However, these fiscal federalism issues are beyond the scope of this particular article.

Fourth, some aspects of the recent debate on secular stagnation and the increasingly difficult objective to generate durable high-quality employment are also particularly salient for the discussion on cities and local economies hit by population aging and population decline. This is particularly the case for countries where the macroeconomic scenario is one of slow growth, high unemployment, and increasingly unequal income and wealth distribution. In commenting these dynamics, Summers (2013) mentions the joint effect of “Baumol’s Law” and the “Moynihan Corollary,” ³ in which over time many service- and culture-related activities are increasingly only able to survive within the public sector. In principle, the two sectors can survive and possibly thrive in the same urban economy, living side by side in cases where employment in the high-productivity, high-income tradable sector is sufficiently strong to generate jobs in the low-productivity nontradable service sectors. However, the point is that the same concentration–agglomeration factors that determine successful urban development in certain cases can also lead to sustained decline in others, some of which are critical for ensuring the long-term quality of life of local citizens.

Clearly, there are a range of macroeconomic policies that can help to mitigate some of the effects of population decline and population aging, including stimulating technical innovations for increasing the productivity of services to the fostering of medical innovations, education, and lifestyle changes among older age groups. However, the specificity and diversity of these challenges at the local level and limitations in the scope of fiscal transfers mean that any top-down policies which are conceived and administered centrally must also be accompanied by local policies relying on a more effective place-based bottom-up approach, as discussed below.

The Role and Potential for Place-based Urban Policies in the Context of Adverse Demographics

Modern regional and urban policies (McCann 2015; OECD 2009, 2011b, 2014) aim to mobilize private sector and civil society stakeholders in public–private investment partnerships. More specifically, in many cases, modern EU regional and urban policies (McCann 2015) are aimed at fostering sustainable urban development in cities hit by the wider aging and adverse population trends in Europe. Therefore, in the context of urban and regional demographic decline and population aging, the relationships between aging, decline, and urban structure should be examined taking into account the point of view of long-term investors, in order to identify a more effective role for place-based policies in facilitating local transition and transformation. This long-term investor perspective or “vision” of urban systems can be articulated in two complementary views, which should be seen as ways of thinking about the urban and territorial dynamics in order to inform investment strategies.

The first is the vision of the city as a macroeconomy, which is very often incorporated into the conventional urban economics approach. Cities are represented through production functions, and their growth performance metrics relate to population, income, gross domestic product, productivity (and total factor productivity in particular), tradable versus nontradable services, and so on (Henderson 1985). It is interesting to see how recent work has revisited this classic approach, including the local multiplier concept (Moretti 2012), coming up with important results on the ability of high-skill migrants to induce very substantial nontradable job growth in a local economy, although low wages in the nontradable sectors remain a difficult issue.

The other complementary vision of the city looks at the urban system as a set of interlinked assets. Indeed, Mills (1972) conceived of a city as a financial portfolio in space and this vision provides us with a corporate strategy approach to thinking about urban areas, and in many ways can be aligned with the needs of city managers. This approach is more explicit in the professional and business literature (Porter and Kramer 2011), but even there the linkages between the city-as-portfolio concept and urban investment strategies are not fully articulated. In particular, this approach brings to center stage the governance issues involved in designing and implementing appropriate responses to urban demographic challenges. These interlinked asset classes are the material and immaterial assets that constitute a city, including natural assets relating to the city’s geographical location and features, its public and private built structures, its human capital, and its enterprise assets. Although the notion of interlinked assets is intuitively obvious, specific analysis in the academic literature is limited, as well as practical, replicable applications in cities affected by demographic change and population decline. The design of a tailored strategy to inform investment decisions in these cities should be underpinned by city diagnostics examining, for instance, “how the existing skill mix correlates with city demography and how aging may affect the city skill endowment in the medium to long term, and whether migrants will be able to re-place the gap in younger population cohorts to preserve or improve the skill mix and maintain competitiveness and the required cash-generation capacity” (Leanza and Carbonaro 2016b, 188). In an agglomeration framework, the only synthetic, but partial manifestation of the performance of these interlinked assets are the local real estate cash flow and capitalization effects (Gordon and McCann 2000) and cities which are highly diversified in sectoral terms offer financial diversification possibilities for reducing risk. However, in a city facing both aging and population decline, the adverse impacts on each asset class can be transmitted into other asset classes largely irrespective of the local levels of sectoral diversification. A city increasingly populated by older people without successors is also increasingly characterized by citizens occupying residential assets they cannot afford to maintain and at the same time they may also become unable to pay the taxes necessary to support oversized infrastructure (Batz 2012; Bonvalet et al. 2007). As already mentioned, any interregional and interurban productivity differences may be further exacerbated by financial factors. A weaker total factor productivity will also bring about rising borrowing costs, as without guarantees or other types of support from higher governmental levels a local risk premium will be charged on new initiatives by financial institutions and other investors to compensate for higher location-related risks, including higher expected bankruptcy and recovery costs. In practice, in weak cities, the gap between investment profitability and the risk-adjusted cost of funds for local investment may further increase adjustment costs, making adjustment by market mechanisms alone impossible. At the same time, higher governmental levels may have limited resources to transfer to the local level, particularly in Europe in the aftermath of the 2008 crisis, preventing recourse to many of the fiscal-stabilizer interregional transfer mechanisms commonly used in the past to mitigate these unbalances. Adverse local demographics characterized by population decline and population aging will thus generate tensions with central governments regarding fiscal transfers and will therefore complicate the adjustment for cities confronted with a weaker local tax base and revenue generation capacity. Local labor markets can expand in cash-generating tradable segments with a resilient productivity, but not all cities will be able to rely on such resilience. The implication is that without strong central government support only better urban asset management strategies, including cost-effective decommitment of assets, can assist cities under stress to reduce the risk that these dynamics will lead to uncontrolled and damaging impacts on their economic performance and the welfare of their residents. In terms of strategic financial investing in support of urban policy, it will be therefore critical for the urban policy manager interested in strategic investing to have an understanding of where the value creation opportunities lie within the city, and how civic economy institutions and the nonprofit sector can help when public resources are unable to assist in the traditional way. This is just as true in declining cities as it is in growing cities, but it is also rather more difficult, challenging, and urgent in the case of declining cities with a weak demographic structure (Leanza and Carbonaro 2016b).

Modern place-based approaches to development policy (Barca, McCann, and Rodriguez-Pose 2012; McCann and Rodriguez-Pose 2011; OECD 2014) as advocated by the reforms to the EU regional and urban policies (McCann 2015), emphasize the critical role that multistakeholder engagement set within the appropriate institutional context can play in fostering local development. In particular, finding ways to develop innovations linking related technologies, related activities, and related societal themes is critical for building resource concentration and these are all central elements of the smart specialization agenda of the EU (McCann and Ortega-Argilés 2013a, b). Such innovations also call for an experimentalist governance approach (Sabel and Zeitlin 2010) and this is essential in cities facing population decline and population aging which by definition cannot simply resort to traditional development strategies based on earlier periods of population growth. Instead, alternative development approaches must be sought, which are only consistent with the long-term demographic challenges facing these cities. Priority areas relating to the environmental upgrading of derelict land, the redesign of housing and transportation systems for an aging population, the remodeling of the geography of public facility location patterns, the rethinking of access and mobility arrangements to civic centers, new uses for public spaces, and redesign of civic areas to enhance safety, are all obvious challenges for cities facing population decline and population aging. In addition, providing new places and spaces for business activities and entrepreneurial start-ups is critical for bolstering the local economy. Designing policies which integrate technologies and activities aimed at addressing these different challenges provides declining cities with new opportunities for experimentation and innovation. Each of these challenges will involve innovation, and the application of new building, energy, transportation and design technologies, and development funding can provide the much-needed financial basis on which such innovations can occur. These are the themes underpinning what is increasingly referred to as multisector “smart shrinking” strategies for urban areas. Such smart strategies should capture synergies in multisector investment designed to achieve the employment generation impact necessary to sustain the endogenous capacity to support aging and demographic decline through the application of innovative technologies which do not need economies of scale and urban size for effective impact (e.g., lower costs, higher total factor productivity; Leanza and Carbonaro 2016a; Brynjolfsson and McAfee 2014).

A Portfolio Approach to Urban Investments

Within the fields of public economics and fiscal studies, there is a vast literature on optimal resource allocations in the context of multilevel government and finance (Ferrara 2010; Oates 2011; Ahmad and Brosio 2015). However, as with urban and real estate economics, this literature is almost entirely silent on how to address urban and local financial problems in the context of population aging in conjunction with population decline. This is because the underlying models are all based on assumptions of growth in population or productivity or prices or land areas. The lack of any analytical guidance means therefore that the risks of capital misallocation associated with the twin challenges of unbalanced urban growth and an underfunded public sector are exacerbated by aging and adverse demographic change. Against this backdrop, both the city development manager and the long-term investor in sustainable development need to confront diverse risks and opportunities associated with the management of specific asset classes, different costs to maintain them, as well as different opportunities to generate financial and nonfinancial returns. While a city is not a corporation, as already explained, a corporate strategy approach to managing city assets in an integrated way, including the use of metrics relating to diverse assets, is essential in order to identify a “sustainable” rate of return on investments.

Nowadays, the literature on local asset-based financial investment vehicles is extensive (Medda, Partridge, and Carbonaro 2015; Grace and Ludiman 2008), and two central features of these vehicles make them particularly relevant to address problems in cities facing aging populations and demographic changes. First, these investment vehicles for urban policy interventions are meant to be financially self-sustainable over time, whereby financial sustainability is based on a diagnostic of the interlinked local assets and their capacity to generate cash flow. Such flows, in principle, ought to be generated either entirely independently of funding from higher governmental levels or, alternatively, they should be able to significantly leverage and multiply the impacts of funding flows exogenous to the local economy. Second, the use of metrics based on the nonfinancial impacts on the long-term sustainability of the local economy constitutes an additional key dimension to assess the performance of investment choices. The need to combine these two features has motivated the development of an urban portfolio approach which aims to pool urban projects with a view to optimizing investment selection, taking into account their financial and nonfinancial performance (Medda, Partridge, and Carbonaro 2015).

The development of a new portfolio approach for urban investments gives stakeholders and decision makers a practical tool for structuring and combining different typologies of projects into one overall urban investment package tailored to the opportunities and challenges faced by cities, as they adapt to aging and demographic changes (Medda et al. 2014). Two components are central to the new urban investment portfolio approach. First, financial and nonfinancial impacts of urban investments are elements of value creation. We argue here that every urban investment project should be evaluated through a combination of financial performance and assessment of nonfinancial impacts related to environment, energy, health, culture, and quality of life, to mention a few. From this perspective, private capital investors will consider possible urban investments through a wider lens of impacts which will determine a reduction in the financial returns in relation to single investments, but will nevertheless satisfactorily forgo risk and give rise to stable and secure investment options. The urban investment portfolio thus allows us to integrate the nonfinancial valuations with conventional financial valuations in order to arrive at a combined impact indicator for any investment combination.

The second component in the portfolio approach is the interdependency of the projects, which represents a fundamental prerequisite in the evaluation of urban investments. For instance, new advances in technologies such as the internet of things should convince us to adopt the interdependency paradigm, the connection of economics and environmental, cultural, and social aspects to technological advances within the interdependency between infrastructures. In recent years, social and urban infrastructure sectors, by being increasingly interconnected and interdependent with one another, have produced great revenue potential, for example, in health and social care for the elderly through cohousing initiatives or crowdsourcing platforms such as bottom-up financial credit systems. The values of infrastructure interdependency, as evinced in the urban supply chain, can be a source of additionality compared to the single infrastructure benefit baselines because interdependent infrastructures can be linked to opportunity of the investments across sectors, for example, value creation and value capture of investment costs.

The cross-sector portfolio leverages on the integration of projects and the engagement of stakeholders thus reducing the financial risk exposure and stakeholder engagement are the fundamental drivers of the new urban financial agenda. The concept of value creation (Swaback 2007; Porter and Kramer 2011) is an essential element of a modern financial approach to urban policy and includes the use of innovative financial mechanisms such as crowdsourcing for local community-led development initiatives, ⁴ peer-to-peer lending and impact investing tools, to mention just a few, as well as innovative approaches to urban redesign and redevelopment. While the systematic description and analysis of ongoing experience on the ground are not the focus of this article, current innovative experiments already provide ample materials to develop a better-focused analytical framework and combine it with empirical evidence to identify how best to achieve financially sustainable and socially inclusive impacts via bottom-up strategies. These financial innovations are particularly evident at the microurban level, in which bottom-up actions allow the average citizen to participate and contribute financially to new urban initiatives. This may prove to be particularly relevant in tackling the problems of demographic changes and aging populations, as microinitiatives to fund cost-effective measures to support increasingly frail populations are likely to be an essential ingredient of high-impact investment portfolios for these cities. In parallel to new bottom-up funding opportunities and initiatives, according to Hebb and Sharma (2014), urban finance is moving rapidly toward the financialization of cities, with pension funds, insurance companies, and sovereign wealth funds becoming major private investors in this arena. Some scholars (Bongman 2011; O’Brien and Keith 2009; Clark and Wojcik 2007) argue that this increased financialization is likely to turn the attention of urban asset managers to financial performance so as to extract maximum financial value, and such action would take place largely at the expense of social benefits. However, the urban portfolio approach (Medda et al. 2014; Panayiotou and Medda 2014) does not select projects merely on the basis of their financial returns when constructing an urban investment portfolio. Economic, environmental, and social impacts are equally considered in the investment selection, so that the optimal portfolio is defined on the basis of joint maximization of public and private objectives. Urban portfolio investment is grounded on differentiated yet integrated strategies rather than on piecemeal projects. A portfolio of diverse urban projects should not, however, be seen as a trade-off between “bad” and “good” projects. Instead, the urban portfolio approach allows both risky and less risky investments to coexist, in effect giving the private-sector good financial returns while also addressing the city’s wider social needs. In particular, by combining different types of projects and fostering synergies between investments, a diversified portfolio with strong financial returns on some projects would compensate or cross-subsidize the weaker financial returns of other projects, which nevertheless are designed to achieve high nonfinancial impacts. Moreover, if new projects are added to the portfolio over time, the user can also verify whether or not they improve the overall performance of the portfolio. The data on which these portfolios are assessed are derived from a combination of traditional project appraisal methods for assessing the likely financial returns plus the use of alternative nonmarket valuation techniques for assessing nonfinancial returns, the nature of which depends on the particular project. Indeed, there is now a vast literature for assessing nonmarket valuations or valuing nonmarketable goods in areas relating to environment, energy, health, culture, well-being, and quality of life (Carson 2012; Ruth 2015), and these valuations can be integrated with orthodox financial valuations in order to arrive at combined financial and nonfinancial returns of any combination of investments. Investment appraisal techniques incorporating the values flowing from the local provision of nonmarket goods and services can be used to rank alternative urban project options. The level of sophistication offered by these techniques means that the valuation of alternative types of nonmarket goods can be undertaken in a manner which also allows us to calculate the optimal levels of subsidies or revolving loan finance required from public or philanthropic sources which most efficiently and effectively complements the funding from private sources of capital. The local long-term demographics need to be factored into the pricing of such models, and this is particularly important where budgets are decentralized or devolved and where finance is being raised in part by local bond sales. These principles are applicable either in a unitary or a multilevel financial setting, with the calculation of the optimal local subsidies or revolving loan finance also depending on the overall budgetary relationships between central and local government. In all likelihood, the optimal level of subsidy or revolving loan finance will be positively related to the rates of population decline and aging, positively related to the costs of converting and rehabilitating real estate and infrastructure facilities, and inversely related to local land prices. The assessing of the required levels of fiscal support and the values of nonmarket goods and services is all crucial information which both private investors and public policy makers require when assessing the possible alternative urban policy options, alongside their relative returns and benefit–cost rankings.

It is noteworthy that the fostering of multisector synergies and effective multisector project implementation must also have good governance and institutional coordination; these can help deliver impacts and reduce investment risks and are not necessarily scale related. Successful investment solutions in cities affected by demographic change and aging populations are likely to consist of fine-tuned multisector investment in diverse assets, probably to a higher degree than in growing cities, where increasing demand can be relied on to justify investment in, say, traditional transport infrastructure. Private-sector participation is facilitated if the investment portfolio offers a wide array of urban assets from the various sectors and objectives, including for instance, energy efficiency, age-related mobility services, smart transportation innovations, social enterprise development, and smart delivery of care services, in addition to conventional urban development and regeneration. As these diverse activities are built into integrated investment strategies designed and evaluated through tools like the portfolio platform and supported by good governance, the more attractive they will become to investors. Such investments, particularly if they seek to foster sustainable development, are likely to attract long-term investors including pension funds, commercial banks, and regional development institutions; this is especially true where such institutions are under pressure to comply with their corporate social responsibilities (Kanter 2011). Indeed, finding ways to help overcome many of the well-being and quality-of-life challenges in cities facing demographic changes and aging populations (OECD 2014) are exactly the types of societal issues that institutions such as pension funds aim to address. As such, there can be a significant alignment between the long-term goals of the “aging city” and those same goals of financial institutions.

Yet in order to make successful urban portfolio investment decisions to attract investors and achieve impacts, it is also necessary to strike a balance between the interdependency of the projects needed to capture impact-enhancing synergies and to reach a minimum investment critical mass. Importantly, sufficient diversification should be present to contain overall investment risks, even in weaker aging urban economies. Given that the ultimate portfolio goal is to achieve benefits and share risks and costs, strategic governance cooperation between the public and private sector is crucial to the development of a well-designed framework for investment that will yield an acceptable return to all participants. This is especially important because cash flow priorities tend to differ between sectors. Local government and public institutions mostly seek to defray current expenditure costs and private-sector partners primarily aim to remunerate their capital contributions; civic society partners will put their efforts into maximizing the societal benefits of their investments. The alignment of incentives across different stakeholders is therefore just as critical as the synergy between investments and although there are commonalities across sectors and stakeholders, some underlying differences in objectives still remain.

As such, a major challenge for promoting a portfolio approach to urban policy investments is to reconcile and align the different incentives. However, in order for such a cross-sector and integrated approach to urban investing to be successful, we must mention decision makers and how they choose to finance urban projects. Specifically, program administrators and other professionals who shape our cities are often educated and trained according to theories and experience largely derived through their academic and professional specializations, so their problem-solving approach is often shaped by a single disciplinary lens. These professionals are certainly aware of the impacts of other disciplines and are likely to allow for such influences as they impact on the funding of urban projects. Nevertheless, the tendency for decision makers to retreat into their own disciplinary silos and be largely predisposed to a particular mind-set is not always helpful in the implementation of solutions to the complex and locally specific challenges posed by aging cities. Indeed, the ability and willingness to work across disciplinary and professional boundaries is itself a key dimension of local institutional capacity and governance capabilities. Yet, these capabilities can also be stretched by other factors common in the development arena. In particular, urban projects are often susceptible to time delays and consequently high levels of political or government risk, particularly relating to issues such as land purchases, land-use planning, and the provision of building permits. In order to ensure the attractiveness of urban investments to private investors, it is essential to maximize the benefits of effective management across urban assets including human capital, natural capital, and fixed infrastructure capital and to incorporate these features into the portfolio approach. Therefore, as we have already seen, in the portfolio approach to urban policy investments both political and governmental risks are captured by factoring the quality of governance and stakeholder cooperation as part of the portfolio structuring exercise. This broader approach which explicitly incorporates nonfinancial returns and governance-related features into the portfolio framework offers cities much greater leeway to design development projects and programs better tailored to their own needs and possibilities.

Conclusions

This article has examined the links between population aging and demographic decline, local economic development prospects, and the financial implications for urban policy. The approaches to urban policy in regions facing population decline borrow very little from either the urban and real estate economics literature or the regional science literature, because the models underpinning each of these fields are based on the assumption of growth. In contrast, population aging and demographic decline will tend to increase the demand for health services, social security, and the care for the disabled and the elderly, while reducing the viability of the local labor market and local government to provide these services. The result is that some regions and cities will increasingly face acute challenges in financing such services while for prosperous and relatively youthful cities these financial constraints will be much less significant. Population aging and decline becomes really biting when the ratio of locally resident employed workers to locally resident nonworkers and dependents starts to decline, because the capacity of local government to finance such services out of local taxes falls. Moreover, such a situation can occur long before absolute population decline becomes locally evident. In these situations, local government becomes increasingly dependent on central government fiscal transfers unless other sources of funding can be generated. Furthermore, the greater are the demographic differences in the experiences of cities and regions, the greater will be the resulting financial asymmetries and the greater the need for interregional fiscal transfers precisely because elderly exhibit extremely low interregional mobility. Yet the impacts of the 2008 global financial crisis mean that in many European countries, there is now a lower capacity or willingness to transfer central government resources to the local economies. These changing circumstances provide local government with clear incentives to look for local strategies that rely on a more proactive and effective management of local assets (in particular physical infrastructure and buildings) in order to help find financially sustainable solutions to these challenges and where necessary move the “break-even point” for the city economy to fit a smaller and more elderly population. In this context, investment strategies should take into account the increasing role played by digital innovation and the changing nature of agglomeration and scale economies, and the fact that potentially disruptive impacts may go hand in hand with opportunities for efficiency gains. As a result, there is already a greater demand for bottom-up place-based policies across EU regions and cities. A more proactive management of local assets should be planned in the context of investment strategies tailored to tackle the impacts of aging and depopulation, combining effectively several strategic strands in ways specific to the local circumstances, normally including a mix of value capture, innovative technologies, cash generation/cost reduction, and smart shrinkage measures.

The portfolio investment approach outlined here is one example of newly emerging approaches to urban development based on a combination of experience and analysis. This type of approach shows that it is possible to develop a practical decision support system to assist stakeholders in assessing the performance of individual projects on both financial and nonfinancial dimensions, and also demonstrates how to combine projects into an integrated portfolio approach aligned with a robust investment strategy. The application of these techniques to project design, development, and appraisal can engender significant institutional learning and governance capacity building. In addition, the experience of the JESSICA program offers the possibility that these types of innovative financial tools aimed at enhancing city investments can also spur further financial innovations and help to facilitate local institutional connections and a renewed sense of civic ownership among citizens. The conceptual framework for urban strategic investment described in this article is a good basis to further develop, refine, and replicate decision support tools to assist cities in the EU and elsewhere to meet the challenges of aging and depopulation in the hostile financial environment following the Great Recession.