Subnational finance: connecting local development to capital

Local and regional governments, cities, utilities and other subnational institutions are on the frontlines of development. They deliver essential infrastructure and services, drive local economic development, and are increasingly responsible for responding to climate change, urbanization and growing infrastructure needs.

Yet the financing systems available to them rarely match these responsibilities, particularly in least developed countries and other frontier markets. Regulatory and institutional constraints often limit direct borrowing, while local investment remains heavily dependent on grants, fiscal transfers and limited own-source revenues. At the same time, weak project preparation, fragmented pipelines and unsuitable financial structures mean that potentially viable investments are often not designed from the outset to attract other sources of finance.

UNCDF addresses both sides of this challenge. It helps subnational institutions structure investments that can become financeable and sustainable, while using catalytic capital and financial intermediation to create pathways to domestic and international finance.

“By bringing actors together around investable pipelines, appropriate financial structures and catalytic capital, UNCDF helps turn local development priorities into financing opportunities capable of achieving scale” - Mohammad Abbadi, Global Lead on Subnational Finance

Matching local investments with the right capital

The challenge in subnational finance is not simply a shortage of capital. It is often a mismatch between the financing available and what local investment requires - longer tenors, affordable and preferably local-currency financing, appropriate risk allocation, and financing structures capable of accommodating smaller or less-established borrowers.

At the same time, many local investments are conceived primarily around available grants, fiscal transfers or annual budget allocations rather than structured from the outset to access a broader range of financing.

UNCDF works on both sides of this equation.

On the investment side, UNCDF works with subnational entities and their national partners to strengthen project preparation and financial structuring, identify sustainable revenue and repayment mechanisms, improve financial management and creditworthiness and, where appropriate, ring-fence revenues or other predictable cash flows to support viable financing structures.

On the capital side, UNCDF helps structure combinations of grants, fiscal transfers and own-source revenues with catalytic and commercial finance, using risk-sharing and credit-enhancement instruments where needed to improve financing terms and bring risks within levels that different investors and lenders can accept.

The objective is to use scarce public and concessional resources strategically—not only to fund investments directly, but, where conditions permit, to leverage them to mobilize additional domestic and international capital on terms that local investments can sustain.

Learn how UNCDF supports energy-efficient municipal infrastructure financing in Morocco

Creating pathways to capital where direct borrowing is constrained

Not every municipality, local government or utility can, or should, borrow directly. Legal restrictions, limited scale, weak credit histories and high transaction costs can make direct access to financial markets impractical.

UNCDF therefore works across the wider financial ecosystem to create alternative pathways to capital.

National development banks, municipal development funds, public banks and other domestic financial intermediaries can provide critical bridges between national financing systems and subnational investment. They can aggregate smaller projects, intermediate larger pools of capital and provide financing where individual subnational entities cannot access markets directly.

UNCDF works with these institutions to develop dedicated subnational financing windows, pooled financing structures, local-currency solutions, on-lending arrangements and risk-sharing mechanisms that connect local investment needs with domestic and international capital.

Where legal frameworks, creditworthiness and market conditions permit, UNCDF can also support direct or pooled access to capital markets through municipal and thematic bonds and other structured financing solutions.

Case study: Unlocking domestic finance through East Africa’s first sub-national green bond

Using catalytic capital to move investments toward financial close

UNCDF combines investment advisory and transaction structuring with catalytic financial instruments to address the barriers that prevent potentially viable local investments from accessing finance.

Depending on the market and transaction, these instruments can include:

• Performance-based and investment grants
• Concessional loans
• Guarantees, first-loss capital and other forms of credit enhancement
• Risk-sharing and co-financing facilities
• Pooled financing structures
• Local-currency and other tailored financing solutions

These instruments can be layered with public resources and development or commercial finance so that risks are allocated to the institutions best positioned to manage them.

UNCDF uses concessional resources strategically and proportionately to address identified barriers, improve project viability and mobilize additional capital—helping public and grant resources crowd in rather than unnecessarily substitute for other forms of finance.

Connecting subnational investment with larger pools of capital

Development finance institutions, multilateral development banks, domestic institutional investors and other capital providers can offer the scale and long-term financing required for subnational infrastructure. Yet their ability to reach smaller cities, utilities and local institutions can be constrained by transaction size, limited credit histories, unfamiliar risk profiles and the costs of originating and structuring individual transactions.

UNCDF can help bridge this gap.

By preparing and structuring transactions, strengthening local institutions, deploying catalytic capital and establishing effective intermediation structures, UNCDF helps create investment opportunities that larger financial institutions can assess, finance and ultimately replicate.

This may involve co-financing alongside UNCDF, guarantees and risk-sharing structures, financing through national development banks and other intermediaries, pooled investment vehicles, or participation in municipal and thematic bond structures.

Over time, successful transactions can build performance records, improve market information and demonstrate financing models that can be replicated across cities and countries, creating stronger and more sustainable channels between subnational investment and domestic and international capital.

Building functioning subnational finance ecosystems

UNCDF's objective goes beyond financing individual projects. It works across the enabling environment needed for subnational finance to function sustainably.

This includes supporting policy and regulatory frameworks for responsible subnational finance; strengthening fiscal management, revenue systems, data and creditworthiness; developing investment-ready pipelines; strengthening national development banks and other financial intermediaries; and demonstrating financing structures that can subsequently be replicated and scaled.

Through this approach, UNCDF helps transform suitable local development priorities into structured, financeable and sustainable investment opportunities, while recognizing that grants and fiscal transfers will remain essential for many public services and investments.

The result is a stronger connection between local development needs and capital, making more strategic use of scarce public resources while opening additional pathways to domestic and international finance for resilient infrastructure, essential services, climate action and local economic development.

Our projects related to subnational finance