Financing Cities of Tomorrow

By 2050, the global population living in cities is projected to reach 5 billion, growing from 3.5 billion in 2015. Massive investment in infrastructure will be needed to accommodate this growth, and to adapt infrastructure to climate change and benefit from the digital transition. A new report by OECD–Financing Cities of Tomorrow–explores ways to meet this challenge.

Cities have strong potential to better meet current and future urban infrastructure challenges and enhance investment. City Governments are at the frontline of delivering local urban services and thus well positioned to identify investment needs for quality urban infrastructure investment over the long term. They can use their power over urban planning and development strategies, local land use decisions and development control to plan the effective use of cities’ assets and thus minimize investment costs. City Governments can engage early with key stakeholders, such as potential investors for future infrastructure projects during the renewal of urban plans to stimulate future infrastructure investments.

Better urban planning improves the likelihood of raising private capital for inclusive, resilient and sustainable urban investments. Effective urban planning, namely, the systematic design and organization of land use and amenities in a city, can play an instrumental role in optimizing urban infrastructure financing, by way of maximizing investment benefits and creating significant opportunities to attract private investment. To build a conducive environment for further use of urban planning, the followings actions are proposed:

  • Shape a new generation of strategic plans that are fit for purpose to address 21st century
    challenges, such as master plans and national urban policies that accelerate a net zero transition
    in cities.
  • Create a regulatory environment for supporting private investment in cities through transparent and predictable processes, including for zoning regulations, permit procedures and environmental impact assessments.
  • Strengthen stakeholder collaboration and engagement between different stakeholders including
    government agencies, the private sector, academia and civil society through consultations on new
    urban plans and other knowledge exchange platforms.

Financing of urban infrastructure cannot be achieved without cities leveraging private investment. City Governments have a key role in the planning and provision of urban infrastructure, with subnational governments responsible for almost 60% of total public investments in G20 countries. However, the capacity of cities to invest through own source revenues and capital transfers in a tight fiscal environment, is limited, creating significant funding gaps for meeting current and future infrastructure needs. Private sector investment can play an important role in meeting those needs but significant efforts will be needed to raise the current contribution of the private sector. To further support the leveraging of private investment across a broader range of cities worldwide, the following approaches are proposed:

  • Strengthen cities’ competences, such as providing legal and institutional grounds for new funding
    and financing mechanisms as well as partnerships, to be able to deploy innovative instruments to
    leverage and support private investment.
  • Finance emerging and changing infrastructure needs with new instruments such as biodiversity
    offsetting, land value capture, land pooling and land banks.
  • Develop built-in mechanisms to address possible negative impacts of land value increases on
    vulnerable and marginalized groups when designing instruments.

Improving City Governments’ access to sustainable finance for quality infrastructure investments can help create more inclusive, resilient and sustainable cities. Recent growth in the availability of sustainable finance provides an important opportunity for City Governments to borrow to better meet their investment needs. The issuance of green, social and sustainable (GSS) bonds by subnational governments globally grew from USD 17.5 billion in 2017 to USD 54.8 billion in 2022. Subnational
governments represent approximately 5.5% of total green bond issuances, 9% of social bond issuances,
8.7% of sustainability bond issuances and 1% of sustainability-linked bond issuances. To better unlock the potential of sustainable finance (and finance more generally) for City Governments the following actions are proposed:

  • Create an enabling environment for City Governments to access affordable and sustainable
    finance through effective fiscal and regulatory frameworks, building institutional capacity,
    increasing cooperation and coordination, and developing city friendly financial markets, while
    encouraging fiscal responsibility.
  • Ensure that cities have access to sufficient and predictable sources of funding to meet capital,
    operational and maintenance costs for infrastructure, and to repay financing.
  • Enhance the use of sustainable financing instruments for infrastructure investment by City
    Governments through targeted measures to support each instrument’s adoption

Read the full report: OECD (2023), Financing Cities of Tomorrow: G20/OECD Report for the G20 Infrastructure Working Group under the Indian Presidency, OECD Publishing, Paris,