Innovations to Finance a Sustainable Urban Future

As cities grow, the effect of urban sprawl on pollution, poverty, and shared prosperity is an increasing concern, underscoring the need for long-term planning to ensure urban areas are low-carbon and livable, inclusive, competitive, and resilient in the face of climate change, disasters, and other shocks.

How to finance these vast needs in a rapidly urbanizing world will be discussed this week at the World Urban Forum in Medellin, Colombia. If managed well, urbanization has tremendous potential to accelerate poverty reduction and advance many development goals.

Financing that growth is a challenge. Over $1 trillion a year is necessary to bridge the infrastructure gap between what is needed and what is being built in developing countries, and that figure is higher for low-carbon infrastructure. Official development assistance (ODA) stands at about $135 billion today, and financing options through municipal governments’ revenues, debt, or national government transfers are not enough to fill the gap.

“We need to join forces to support cities and their leaders to take a sustainable development path,” said Zoubida Allaoua, acting vice president for sustainable development, who will be speaking at the conference. “That’s why we have developed a framework to inform policy makers on key decisions affecting their land use planning for infrastructure investment to connect cities and people to jobs, markets and homes. We’re also developing new approaches and innovative financial schemes to ensure private and public capital flows to cities in developing countries.”

What needs to be done?

The Bank is working with cities and partners to broaden and deepen sources of financing for sustainable infrastructure.

Credit Ratings

One approach is to support cities’ work to improve their credit ratings so they can access financing. Many municipal governments in the developing world cannot access capital markets – among the 500 largest cities in developing countries, only a few are considered creditworthy, about 4 percent in international financial markets and 20 percent in local markets.

This is a long-term process, and it begins with the basics. As part of its city creditworthiness program, the World Bank is working at three levels: with cities, to help them improve financial management, debt management, and capital investment planning; with national governments, to help develop policy frameworks, laws and regulations for municipal governance and infrastructure finance to promote the development of financing and climate related projects; and with the private sector to build capacity of finance professionals and other technical experts.

The City Creditworthiness Academy for African Cities, held in Nairobi last year, was a first step. Eighteen cities from 10 countries conducted a self-assessment of their municipal finances as the basis for a multi-year action plan, which will guide technical assistance on revenue and debt management, improved expenditure control and asset maintenance, capital investment planning, as well as planning, structuring, and execution of financing transactions. The next creditworthiness workshop, part of the Low-Carbon, Livable Cities Initiative, will take place in Seoul, April 21-25.

Pooling Financing

Innovative financing mechanisms are also being developed. Green bonds are one growing source of financing for individual projects. Another involves pooling financing.

Although each city is unique, there are also certain common needs that can be better met if resources are put together. To encourage cities to convert street lights to more efficient LEDs, the World Bank is developing a financing mechanism that pools together investment needs of cities that want to finance retrofits, to help them access the market at better terms. This way, the retrofits can be paid for with little or no impact on a city’s cash flow.

The magnitude of the challenge makes it clear that no single entity will be able to finance the world’s urban agenda. It will take the commitment of the global development community as a whole, as well as the involvement of the private sector.