Finance for Urban Climate Action Remains Low. How Can Cities Bridge the Gap?
https://www.flickr.com/photos/nanpalmero/26724407168/

It can be challenging to get sustainable infrastructure projects off the ground. But the right support and resources might be enough to bridge the gap. Photo by Nan Palmero/Flickr

Due to historic levels of urbanization, cities have become focal points for creating a more sustainable world. Cities currently account for 80% of global GDP, 70% of emissions, and two-thirds of total energy consumption. The urgent need for climate action is clear, as articulated in the Sustainable Development Goals, Paris Agreement and New Urban Agenda. However, investment levels have not increased to keep pace with demand.

The Climate Policy Initiative reported that $455 billion was generated for climate action in 2016. But it’s unclear how much has been channeled to cities, and investment levels pale in comparison to the need. Projections vary depending on a range of factors, but it’s estimated an additional $5.5 trillion per year will be needed until 2035 to meet the global demand for sustainable infrastructure in cities. Project preparation, which includes strengthening technical, financial and regulatory steps, could require an additional $300 billion per year.

There are significant barriers to local governments accessing private capital that have contributed to this growing financing gap. Many cities remain reliant on intergovernmental transfers from sales and income taxes that are generated nationally but then allocated according to formulas that are often predisposed against urban areas. Cities may also lack the legal authority to generate their own funds, such as through property taxes or taking on debt. If cities are able to issue debt, then there may also be limitations on how debt proceeds can be used or secured. Lenders and investors also have cited concerns regarding the ability of cities to generate new projects, properly design and scope them, adequately manage fiscal resources, and disclose relevant financial information.

So, what can cities do in the short-term to attract more investment for sustainable projects?

Success Begins at the Planning Stage

It is clear that “business-as-usual” practices will not achieve the goal of reducing climate change impacts from and in cities at the pace required. New approaches to planning as well as innovative revenue and financing models will be needed.

New ways of planning can help to create the framework for doing things differently. Cities can set local sustainability targets, for example, prepare climate action plans, incorporate sustainability and resiliency objectives into overall capital planning, promote investments that result in efficiency and cost savings, and better track the impacts of these investments.

From there, the next step is to prepare a list of sustainable investments that can be brought forward. This isn’t always easy. One of the largest and most persistent challenges to delivering sustainable infrastructure – and urban infrastructure in general – is generating a pipeline of projects. That is, selecting the right projects and then carrying out feasibility studies to ensure they are properly scoped, designed, and financially feasible.

Cities also need to do better at considering whether and how private financing can be attracted for a specific initiative. “Bankability” is tied to ensuring adequate political commitments, addressing stakeholder concerns, evaluating potential revenue and funding sources, and identifying risks.

All these activities are critical building blocks for unlocking financing for climate action.

Learn more about financing sustainable urban development with an entry-level Learning Guide on TheCityFix Learn.

Early-Stage Project Support

There are more than 150 project preparation facilities that have been launched by donors, multilateral banks and bilateral agencies around the world. But many have struggled due to a lack of mature and properly designed projects.

TheCityFix Labs, an initiative of WRI Ross Center and Citi Foundation, is facilitating the mobilization of financing by providing tailored technical assistance to projects and cities during early-stage development to help projects become more bankable. Having gone through a highly competitive selection process, the projects supported through TheCityFix Labs are more mature and have the greatest potential to bring about long-term environmental and social benefits. A key element of the technical assistance provided is the preparation of business plans that identify potential sources of funds, estimate financing gaps, and provide governments with a framework for deciding whether and how to attract private capital.

In Mexico, we’ve been working with a cohort of project teams to improve bankability for green infrastructure, renewable energy, and water resource management projects in seven cities. A similar technical assistance program is helping a cohort of ten firms to bring pilot projects on energy consumption, water usage and solid waste management to fruition in India. As of this writing, at least nine of the cohort firms in India are implementing, developing or negotiating a pilot project with a city government or a public agency. Additional support is helping to market these concepts to cities and facilitate matchmaking. One of the firms has attracted $20 million in equity capital, with other potential financing commitments being considered for at least three of the other firms.

Improving early stage project preparation is clearly a key piece of the financing puzzle and can jumpstart the sustainable urban infrastructure pipeline that is desperately needed in a range of sectors. Given the limited availability of public funding, better designed and prepared projects can help cities to mobilize public funding as well as potentially tap into the substantial amounts of private debt and equity capital that remain on the sidelines. Direct bank loans, public-private partnerships (PPP), leases and green bonds are some of the private financing mechanisms that cities can look to for support. For example, financing from green bonds has grown significantly in recent years, going from $2 billion in 2012 to $168 billion in 2018. Accessing them, however, will require cities to demonstrate creditworthiness or generate sufficient revenues. These sources, separately or in combination, can help cities bring forward more sustainable investments, which in turn, will help meet countries’ national climate and sustainable development goals.

Albert Amos is Global Senior Manager for Urban Finance at WRI Ross Center for Sustainable Cities.

Christopher Moon-Miklaucic is a Research Analyst with Urban Finance at WRI Ross Center for Sustainable Cities.