As UN-Habitat reiterated in the report it published at the World Urban Forum in Katowice (Poland) in 2022, “Cities are here to stay, and the future of humanity is undoubtedly urban”. As engines of economic growth and home to the bulk of the population, cities are at the very heart of sustainable development issues. The challenges are enormous: ensuring access to essential services for newly-arrived urbanites and strengthening urban planning by mainstreaming practices that are resilient to climate change and improving city governance.
These challenges vary, depending on a country’s wealth, the geographical location of its cities and the scale of both current and projected urban growth. More specifically in Africa, which will have nearly 900 million new urbanites by 2050, these challenges are exacerbated by the poor technical and financial capacities of cities, their vulnerability to climate change and inadequate urban planning.
While governments throughout the world see cities as key actors in implementing inclusive, resilient and sustainable public policies, they are not given the financial resources needed to achieve the objectives assigned to them. Cities are usually responsible for laying on essential urban services like public transport, access to drinking water, sanitation, collection and treatment of solid waste, affordable housing, economic infrastructure, sport, culture or managing health crises such as Covid-19. But they do not receive the financial transfers from central government or the local tax revenues needed to grapple with the challenges of climate change and build economically, socially and spatially inclusive infrastructure. At the same time, particularly in developing countries, cities have little or no access to long-term financing (in phase with the periods over which infrastructure is depreciated) from local public or private banks.
BREAKDOWN OF FUNDING SOURCES FOR CITIES
While this situation is especially acute in poor countries, it also affects the vast majority of cities in emerging economies. There are many reasons for this. First, increasing levels of national debt are undermining the financial autonomy of cities: the bulk of tax revenues are still collected at central government level and only a small proportion is redistributed to decentralised local authorities. Second, there is still insufficient knowledge of the local tax resources that could be used (type and quality of housing and land). Lastly, local public service management (markets, waste, water, transport, etc.) is coming under increasing strain due to higher demand (urban growth) and pressure to improve or renew infrastructure that is often in a very poor state.
Consequently, to achieve the eleventh Sustainable Development Goal (SDG 11), we need to either provide cities with access to public and private sources of finance or strengthen existing access. Historically, urban development has been underpinned by public funding, via central government subsidies for specific infrastructure projects or financial transfers (i.e. national tax revenue allocated on a pro rata basis, or taxes collected at local level by government departments and partially redistributed to decentralised authorities).
To ensure their economic attractiveness and improve public services, cities have also got private investors involved. Partnerships have been set up in commercial or market-based sectors such as transport, water and sanitation, solid waste and tourism infrastructure. This has led to public resources being used to finance essential services (health, schools, etc.) or projects whose economic ‘return’ is either deferred - in the case of urban developments that help regions adapt to climate change, for example by increasing the proportion of natural areas (urban cooling) - or not immediately measurable.
In the urban arena, the private investor business model is based around charging a fee to the user (who pays for a service) and, in certain cases, payment of a balancing subsidy by the local authority which imposes affordable rates for users that do not cover all irreducible investment and operating expenditure or specific operating constraints. The business model for the city as a whole is much broader - and therefore more difficult to calculate - and determined over a longer timeframe that factors in improvements in quality of life, economic attractiveness (which helps maintain or boost local tax revenue) and “future costs avoided” by adapting urban infrastructure to climate change (e.g. energy efficient buildings, protection of riverbanks, redevelopment of waterways, etc.). In several countries, this model is rounded out by extracting the positive externalities of investments, such as higher land values at the end of a real estate development project.
CONDITIONS AND PROGRAMS TO ENCOURAGE PRIVATE FINANCING
This division of roles between the public and private sectors requires cities and governments to create robust frameworks for managing decentralised budgets. The institutional framework must allow for a clear division of responsibilities between central and decentralised government as well as for regular legal and financial management control. This first condition provides the private sector with a basis for assessing the organisation of local project ownership and management quality. Secondly, the degree of financial autonomy, in other words, the share of financial resources over which the city has decision-making power (particularly the power to set local tax rates or public service charges) is an essential lever that enables it to trace out its future financial trajectory and to programme investments.
Financial autonomy creates trust in the city’s relationship with citizens and with private investors: the objectives of balanced budgets and investment planning are set in the medium or long term, external financing requirements (subsidies from central government or other institutions, loans or sustainable and green bond issues) are evaluated and scaled in phase with the city’s financial sustainability, and public-private partnerships created to build infrastructure form part of a strategic trajectory that can be clearly analysed by private investors.
Getting the private sector involved in financing local public infrastructure is also contingent on the quality of project preparation. The lack of “bankable” or viable projects is recognised as one of the major reasons why the private sector invests so little in infrastructure. To try to remedy this, public development banks across the world provide cities with “project preparation facilities” that enable them to assess municipal projects from a technical and financial perspective, prepare their financing arrangements (public, private, PPP, joint investment in a special purpose investment vehicle involving the city and private players) and get projects up and running on the back of technical assistance (financial management, accounting, project risk management). Data collection is essential at this stage, particularly in rapidly growing urban areas as this makes it possible to optimise the city’s infrastructure requirements and develop predictive models of sector-based trends.
Technical assistance is also provided at national or local level to devise robust sectoral contractual models (transport or water supply contracts, etc.) inspired by successful experiences in other cities: “city networks” (e.g., C40, Global Covenants of Mayors, FMDV, united city and local government initiatives) or decentralised “peer-to-peer” cooperation arrangements can be very effective here.
THE NEED FOR A PARADIGM SHIFT
The emergence of the “cities of tomorrow”, capable of housing almost two-thirds of the planet’s population and offering inhabitants a better quality of life, calls for a paradigm shift in the relationship between the public and private sectors. Given the need for a change in scale, recognition that cities are in the vanguard when it comes to tackling climate issues could go hand in hand with better access to dedicated, scaled-up financing instruments. Examples include investor guarantees from the State or international financial institutions to underwrite “climate bonds” issued by cities, showcasing “green” assets (preserved biodiversity) in municipal budgets to encourage private banks to finance the expansion of natural spaces within urban areas, or ramping up “impact” investment programmes to encourage the private sector to implement local public policies that promote social and economic inclusion and protection of the environment.
Beyond current forms of partnership, the future basis for cooperation between cities and the private sector could be co-construction as a means of developing a shared long-term regional development perspective. As part of this new relationship, extending guarantee mechanisms for major financial backers (e.g., payment for public services, debt repayment, exchange risk guarantees - project revenues are often denominated in local currency) could accelerate the movement of private investment to the countries of the South, and to cities in particular.
A utopian vision? Perhaps, but the stakes are exceptionally high because they concern the very future of humanity. Cities are precious ecosystems, the spatial expression of the organisation of people and their activities. In Europe during the Middle Ages, they were created around overlapping private interests and overseen by wealthy feudal lords. Transposing this to the present day, whereby international institutions support and secure access to private funding for cities could provide a source of inspiration.