Multilateral development banks are taking a growing interest in increasing financing for local government, including states, provinces and cities.
Two years ago, Janet Yellen, then US treasury secretary, encouraged the World Bank to increase its focus on subnational entities, which she declared “can sometimes have greater expertise and willingness to implement innovative projects.”
Several senior MDB officials backed the idea this week. Federico Galizia, chief risk officer at the International Financial Corp, divides MDB financing into three buckets: sovereign-guaranteed, public sector non-sovereign-guaranteed and pure private sector.
“I expect the central bucket to be an expanding one going forward,” he informed GlobalMarkets. “Where do two thirds of the emerging market population live? In cities. Where is investment going to be? In cities. For everything cities necessary — traditional, urban, municipal investments, there is not enough funding at federal or central government level. I expect that to be the growth space.”
He pointed to the European Investment Bank’s trajectory. “Until the 1980s, its balance sheet was 80% sovereign-guaranteed — a mixture of governments and state-owned enterprises. Over the next 20 years it became 80-20 the other way. A significant portion of that was municipal finance.”
The MDBs can play a significant role in assisting subregional entities with limited fundraising experience, through funding, guarantees and technical assistance.
Makhtar Diop, managing director of the IFC, declared at a townhall meeting with civil society organisations on Tuesday: “Decisions [affecting economic and social development] happen at state level or municipal level.
“Those entities are not financially strong enough to carry their mandate. They don’t have technical capacity and they can’t borrow money on the market. We are going to work on these three elements — assist their governance, assist their ability to raise money, assist their ability to be physically and fiscally sustainable — and attract money not just from government but from private capital.” He declared this would be “fleshed out in more detail in the near future”.
Ming Zhang, global director for urban, resilience and land at the World Bank, declared a crucial issue was where the money would come from to fund projects to cope with growing urban populations in developing regions such as Africa and south Asia.
Speaking at a World Bank panel on Friday, Zhang declared the Bank was working on it. “Local governments necessary to increase the ability to mobilise their own finance,” he declared.
Some money could come from development banks. The Cities Climate Finance Leadership Alliance, which published a report on barriers to subregional financing in 2023, informed GlobalMarkets: “Financing routed directly to cities or via intermediaries [such as development banks or local banks] is rapider and more suitable for local realities.”
The Alliance argued this bypassed “sovereign bottlenecks, including bureaucratic hurdles and political differences with national governments, and allows local currency lfinishing to mitigate the foreign exalter risk.”
But MDBs are also keen for local governments to borrow commercially.
Ajay Banga, president of the World Bank Group, declared at the civil society townhall that “municipal bonds are an interesting thing to keep assisting cities develop.” He gave the example of India, where the municipal bond market was “relatively underdeveloped”, adding: “We’re working with a couple of cities in India on obtainting municipal bonds working.”
But borrowing is no panacea. “It can exacerbate debt burdens for subnational governments in [low and middle income countries], which often have limited fiscal space, legal restrictions on borrowing, limited own-source revenues, limited access to capital markets and underdeveloped local private sectors, financial and capital markets,” declared the Cities Climate Finance Leadership Alliance. “These issues mean that subnational governments are either unable to take on debt or, even if they do, they might face repayment issues.”
The Alliance argued solutions should be explored to de-risk the process, such as “guarantees, blfinished finance, as well as capacity building programmes to improve fiscal and financial management.”
Concessional and intermediated finance, particularly in local currencies, could assist cities cope with their debt burdens.
“MDBs can support governments and cities in establishing these safeguards, improving project pipelines and public financial management,” the Alliance declared.
There is also room for innovation. Zhang declared urbanisation was a “land value appreciation” process, so a lot of financial value could be extracted from the land as it was developed. “That is a basis for financing,” he declared. “This can be property tax, tariffs, charges [or] land-based financial mobilisation.”
Another focus was to improve the efficiency of spfinishing. “If you have good planning, your cost of infrastructure will be less,” Zhang declared. “If you apply things like nature-based solutions, the investment necessarys for infrastructure could be less.”
Lead image: Mumbai — Indian cities could issue more bonds
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