By Caroline Fouvet
Rapid urbanisation, especially in developing countries, is leading to a range of difficult challenges which are further complicated by the effects of climate change. This has put the role of municipal finance in the spotlight as subnational and local entities might be best placed to deal with urban issues and allocate resources.
According to recent research, over 100 cities will have populations larger than 5.5 million people within the next 35 years, most of them in developing countries. Questions then arise on how to ensure those new urban centres will become sustainable living spaces and avoid pitfalls such as substandard housing conditions, uncontrolled pollution, air contamination, restrained access food and water, and poverty and unemployment. As climate change compounds such issues and places the developing world in a vulnerable position, it is necessary for cities to mobilise the resources that will help them face this situation.
One of the potential options is scaling up municipal finance, which was promoted during the United Nations-HABITAT’s 9th World Urban Forum in Malaysia last month and highlighted the need to raise subnational investments to meet the Sustainable Development Goals (SDGs) by 2030.
Municipal finance is described as “the revenue and expenditure decisions of municipal governments” and materialised through financial tools such as equity finance, pooled finance arrangements, municipal bonds, public-private partnerships (PPPs) and crowdfunding. Catalysing the use of those instruments is an option to secure long-term investments in critical infrastructures and overall sustainable urban development, as cities may face various constraints to raise local revenue sources and take on debt.
Green bonds, which fund green infrastructures, can for instance provide cities with lower capital expenditure levels for sustainable projects, and help them overcome restricted financial capacities. In 2016, Mexico City issued the first municipal green bond in Latin America to finance transit improvements and energy-efficient street lighting, which actually became oversubscribed as the bonds sold could not meet the investors’ demand. Although both mitigation and adaptation measures can be financed through green bonds, the largest share of proceeds has so far been allocated to urban transport and water systems, with adaptation projects only amounting to 5% of the overall use.
Municipal finance, however, has to address several challenges arising from those innovative instruments. The design of PPPs must for instance undergo scrutiny to avoid being poorly designed, hence leading to costly service coverage, poor service quality or fiscal liabilities. A balanced budget is also a necessary requirement for subnational entities to avert financial difficulties when implementing urban projects and to demonstrate that no bail out from central authorities will be required. In addition, good governance is a sine qua none condition to ensure that resources are transparently and properly managed.
To achieve the UN’s 2030 agenda, and in particular SDG 11 “Make cities inclusive, safe, resilient and sustainable”, municipalities are at the forefront of action. Allocating municipal resources to low-carbon, climate resilient projects and diversifying financial instruments can contribute to the efforts of facing the urbanisation challenge.