Municipal Investment Finance

Municipal Investment Finance

The Challenge

Demographic pressures, climate change and the promise for economic opportunity are driving increased urbanization in many parts of the world. Today, one half of the world’s population is living in cities. Urban growth is not limited to capital cities – it is having a profound impact on secondary cities too. The pressures of growing urbanization are acute as in the world’s least developed countries (LDC) where many of the world’s fastest growing cities are located. The proportion of people living in urban areas is expected to rise to 62% in Africa and 65% in Asia by 2050 (UN Habitat). In some countries, this means a doubling of the current urban population within a few decades. For LDCs that already struggle to meet the needs of the poor, this trend is likely to increase the pressure in terms of access to basic services because the mechanisms are not in place to finance the necessary investment.

Migration pressures put enormous strains on urban resources; there is increased demand for water, sanitation, education, transport, energy, housing and jobs. Unless cities can provide the necessary infrastructure and services to meet the urban populations’ needs, increased urbanization is likely to result in greater urban poverty, pollution and inequality, characterized by sprawling informal urban settlements.

Beyond the provision of basic services, disaster resilience is increasingly recognized as a key challenge in the post-2015 agenda. The Ebola outbreak in West Africa has not only put big cities such as Monrovia and Freetown on lockdown, it has also revealed the complete lack of preparedness and the weakness of key infrastructures (particularly health infrastructure) in smaller cities such as Kenema (Sierra Leone) and Gueckedou (Guinea). The earthquake in Nepal resulted in enormous damage in Kathmandu and beyond. Successive waves of refugees fleeing from wars and natural disasters are putting enormous pressure on cities worldwide. It highlights not only the lack of preparedness of many cities but also the crucial role of the decentralization agenda in putting cities firmly in charge of their own development.

The future economic development of LDCs now depends significantly on how well urbanization is managed. Cities harbor an enormous economic potential but unless this potential is maximized through adequate policies and the provision of the necessary support infrastructure, the development impact will be weak. City governments need to have access to the necessary tools and capacities to manage urbanization, but crucially, they also require a huge amount of investment capital to finance major infrastructure improvements. Mobilizing these resources remains a considerable challenge for most cities, which depend heavily on government transfers for their development.

Given the scale of investments needed to provide an ever-growing amount of urban dwellers with the necessary services and infrastructures, the focus is starting to shift towards a smart blend of financial mechanisms that match transfers from central government with greater own revenue and sustainable borrowing. The critical challenge is to foster an enabling environment for municipal financing, in which local governments have the necessary capacities and rights to engage with financial markets, whilst at the same time managing the risks inherent in this type of arrangement.

How We Are Helping?

The overall programme outcome is to increase the ability of local governments (LGs) and other sub- sovereign entities to address key urbanization challenges (such as climate change adaptation, food security, adequate housing and access to utilities) through access to sustainable sources of capital financing. This program, which covers all LDCs, responds to a number of core challenges and opportunities of the post-2015 agenda, in particular with regard to urban development. It will contribute to narrowing the existing financing gap, which means that many LDCs are currently unable to get access to the financial resources needed for their development needs. Moreover, it responds to the growing urbanization challenge, which sees urban growth without the corresponding infrastructure development needed to support the population influx, drive local economic development and provide critical social and economic infrastructure.

There is a growing consensus the LDC growth will hinge on adequate and equitable urban development, which is able to spread the benefits of growth to a wide number of poor people. In this regard, gender equity will play a key role in this programme as will the inclusion of young people, who are often the worst affected by the lack of basic infrastructure and urban opportunities. Specifically, the program will focus on: building the necessary capacities for local authorities to gain access to alternative sources of municipal financing, including municipal bonds; strengthening and developing municipal finance markets and intermediaries; and creating the enabling policy environment to improve the capital financing process.

UNCDF has a unique mandate within the UN system. It provides seed capital to test out innovative financial mechanisms that address specific development challenges. Over the last 30 years it has developed a specific expertise in local government finance, intergovernmental fiscal transfers and local investments. UNCDF is now building on that experience to help local governments tap into alternative sources of financing outside of the circuit of public finance. Amongst the range of tools developed are the Local Development Fund (LDF), the Local Finance Initiative (LFI) – aimed at mobilizing capital from domestic private resources – and the Local Climate Adaptive Living (LoCAL) Facility, which helps local governments access international climate finance for adaptation measures. UNCDF has also supported numerous LDC governments in setting up their own investments agencies for local governments, having thereby made a substantial impact on the decentralization process in many countries.

To learn more about the Municipal Investment Finance initiative, you can download the MIF brochure.

In Detail


Municipal Finance Investment

Goal The programme uses a four-step approach to addressing the issue of local governments’ access to sustainable sources of financing:

1. Advance the municipal financing agenda nationally and internationally

2. Support complementary efforts to make cities more resilient

3. Supplement and leverage local government grant funding with sub- sovereign credit

4. Mitigate risks that thwart private financing

Active In
Total project cost and UNCDF contribution$24.7 million