Filling the urban infrastructure gap starts with regulations...

How can cities fund the vast infrastructure development needed to meet demands for basic services in the future? Transport, water, sanitation, housing – inclusive, reliable, affordable – prerequisites for any competitive city. Continued urbanization, climate change and disruptive technologies bring additional challenges and opportunities to the mix? Mayors make decision in a complex web of externalities. It’s not just about money; it’s also about innovation.

Financing estimates for urban infrastructure in emerging markets vary - ADB estimates that in Asia alone $100 billion a year is needed to address urban infrastructure needs. One thing most people agree on is public budgets and know-how alone won’t get cities where they want to be. IFC’s 2018 Climate Investment Opportunities in Cities report estimates Cities in emerging markets have the potential to attract more than $29.4 trillion in climate-related investments in sectors such as green buildings, public transportation, electric vehicles, waste, water, and renewable energy by 2030.  Private capital will have to fill the gap.

But how will that happen? We keep hearing about the need for cities to improve creditworthiness and structure more bankable projects; this is true. Cities will need to leverage commercial borrowing, bonds, PPPs and land value capture mechanisms to supplement their own scarce resources; but it starts with regulations. Municipal authorities are arguably best placed to make decisions on urban infrastructure needs given their closeness to the people and dynamics of the city. Yet, relatively few cities have full control over their budgets or have the legal ability to borrow commercially. Significant decentralization reforms took place in the late 1980s and early 1990s in most of Asia, Africa and Latin America. Today, the notion of “local self-government” is the norm in more than 130 countries; but there is a significant difference between administrative decentralization and fiscal decentralization. An analysis done by IFC’s Economics unit notes that out of 160 countries worldwide, only 16 percent of central governments grant taxation autonomy to municipalities and 56 percent ban municipalities from any form of borrowing.  How can private capital be leveraged to its full potential if the majority of cities don’t control their budgets and can’t borrow commercially?

Not all cities are ready for full fiscal decentralization of course. Some small economies and weaker administrations will always require central government support to fund the bulk of their infrastructure needs. But as central government budgets get progressively stretched with challenges like Ebola, civil war and refugees, central governments will need to create regulatory space for strong municipalities to access private capital and innovation. Only in such an enabling regulatory environment can we really begin to tackle the challenge of unlocking private capital. Only then can the development world, together with governments, begin to help build cities’ creditworthiness, transparency and the bankable projects that private investors are looking for.