Blog: Financing the SDGs in cities: Innovative new approaches

This article was originally published by OECD, Development Matters

“Cities are major drivers of the global economy. Today, cities occupy only 2% of total land but account for 70% of GDP.”(Habitat III, 2016)

Many of the investments needed to achieve the Sustainable Development Goals (SDGs) will take place at the sub-national level and be led by local authorities, especially in urban areas. Massive public and private investments will be needed to improve access to sustainable urban services and infrastructure, to improve cities’ resilience to climate change and shocks, and to prepare them to host 2.5 billion new residents over the next three decades, particularly in developing countries.  If city authorities can meet these challenges head-on, the sustainable development dividends could be immense. This reality underscores the need to recognise and strengthen the capacities of local authorities as major actors in promoting sustainable development.

The United Nations held its 3rd Conference on Housing and Sustainable Urban Development (or Habitat III) last month in Quito, Ecuador. The event ended with agreement on a New Urban Agenda that sets fresh standards for sustainable urban development, rethinking the way we build, manage and live in cities around the world.

Habitat III was the first to occur when the world population is majority urban. It is estimated that 54.5% of people now live in urban areas with this number set to climb in the future. As the New Urban Agenda notes, the increasing concentration of people in cities poses challenges to sustainable development, including inequalities, social and economic exclusion, and environmental degradation. Yet urbanisation also offers opportunities for economic growth, social and cultural development, and environmental protection. Both the challenges and opportunities can be addressed through better planning, design, finance, governance and management.

A major theme at Habitat III was finance; how can cities leverage, manage and deploy resources to support sustainable and inclusive urban development and to bounce back from major shocks? The conference tackled this challenge from a variety of perspectives – financing and maintaining  of public spaces, promoting cities’ taxation policies and powers, mobilising financing for infrastructure investments through municipal bonds, and forging new partnerships such as the C40 Cities Finance Facility that supports developing countries in  mobilising finance for city-level climate change action.

Access to finance is one of the most significant barriers that city leaders face in delivering on their development plans. In developing countries, local taxes account for 2.3% of GDP, compared to 6.4% in industrialised countries, and just 4% of 500 cities in low-income countries have access to international markets. Additionally, there is a shortage of not only financial resources but also expertise in securing investment for infrastructure projects. Despite these difficulties, many cities are devising innovative ways to diversify sources of finance as well as strengthen urban residents’ access to appropriate finance so as to empower them as agents of change. How?

For example, several middle-income economies are seeking to develop dynamic municipal green bond markets to raise investment for environmentally sustainable development projects. Green bonds are debt instruments that link the proceeds to projects that produce a positive environmental impact. Sometimes, investors will accept a lower return when there is a commitment to use funds raised in a socially or environmentally responsible manner. The city of Johannesburg in South Africa recently successfully used this financing modality to fund renewable energy initiatives, and other cities are close behind. Mumbai in India is planning its first green bond issuance on international capital markets before December 2016. The cities of Lagos in Nigeria and Dakar in Senegal also hope to launch municipal green bonds for the first time in 2017.

The potential of municipal development funds and sub-national pooled financing mechanisms is also being explored by several developing countries, such as Colombia and South Africa. Sub-national pooled financing mechanisms (SPFMs) provide joint access to private capital markets (bank finance and bonds) as well as public sector finance (e.g. from development banks) at advantageous terms for borrowers (in this case local and regional governments) that share similar missions and credit characteristics but lack the financial expertise and credit history to access credit markets on their own. It is an approach that has been used successfully by cities in several OECD countries to fund investments in such areas as water and sanitation, energy, transport, and telecommunications.

Other innovative financing tools include cash transfer and microfinance schemes for urban residents in precarious housing settlements. El Salvador, for example, applied this approach to enable the residents of the capital of San Salvador to improve and upgrade their living conditions. Meanwhile, the potential of crowdfunding for urban improvement is only being explored now.

Development partners such as UNDP, the OECD, the French Development Agency (AFD), the Inter-American Development Bank, the World Bank and many others also are working with cities to strengthen public financial management at local levels, provide financing directly to local authorities (sometimes in local currencies so as to reduce currency risk), extend credit guarantees and/or deliver technical assistance in project preparation. For example, UNDP assists sub-national authorities prepare low emission and climate resilient development plans that include tools to catalyse more development finance. In partnership with AFD, UNDP recently explored how sub-national authorities in low-income countries could make use of new financing modalities, such as green bonds and borrowing in local currencies.

This shows the value of a multi-stakeholder approach. Bringing together major actors including city leaders, development banks, private sector investors, international agencies, NGOs and local community organisations can foster new forms of co-operation and networking amongst urban stakeholders and help identify catalytic interventions that have the potential to deliver positive outcomes across several SDGs. This approach also ensures local ownership and helps identify capacity and knowledge gaps on financing sustainable urban development.

Cities have enormous potential to reduce poverty, provide new economic opportunities for billions of people and deliver low-carbon sustainable development. Looking ahead, national governments need to work with their cities to develop funding mechanisms and fiscal frameworks that increase fiscal autonomy and provide for a more inclusive distribution of resources in urban centres. City leaders need to strengthen their capacities to structure and deliver urban development projects, and identify and evaluate the merits of innovative funding mechanisms, including public-private partnerships. Meanwhile, international investors — development agencies and banks — need to find new ways to invest directly in cities in ways that minimise risk (e.g. around debt sustainability), maximise development outcomes and build local capacities. Technical assistance can be a valuable component of development partners’ engagement with cities, and international organisations can play an important role in sharing lessons learned and success stories across cities.

When it comes to devising innovative financing tools for unlocking the economic potential of urban areas, we are just beginning.

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