Monte Carlo Simulation in financial risk analysis for urban development using value capture

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Many studies document the financing gap for the infrastructure investments needed for efficient, equitable, environmentally sustainable and fiscally responsible development projects. Capture of the value generated by government interventions (infrastructure investment and land use regulations) can help close this financing gap. To be approved and executed, such projects must have viable financial strategies (i.e., they must be bankable). Officials of national and multilateral development banks and private financial institutions often lament the lack of such bankable projects. Although the engineering for the civil works may be viable, the financial engineering may not be. The prefeasibility phase of the financial analysis involves deciding whether the more costly feasibility analysis is warranted. The time and budget constraints for the prefeasibility studies are often tight, the data imperfect, and the government officials may lack financial training. This study showed how we dealt with these constraints for the revitalization of Rio de Janeiro’s center city, and how MCS might have assisted us in this.

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