Municipalities in low- and middle-income countries (L&MICs) face financing needs that far exceed available resources. Urban infrastructure investment in L&MICs requires 2 to 4 percent of their combined GDP annually, yet current investment flows cover only a small fraction of this demand, creating a financing gap of 1 to 3 percent of GDP. This gap cannot be bridged by public and international development sources alone. Currently, most infrastructure investment is funded through public fiscal sources. To meet the growing demand, there must be a much greater reliance on private and repayable financing.
The World Bank’s 2025 report, Unlocking Subnational Finance: Overcoming Barriers to Finance for Municipalities in Low- and Middle-Income Countries, offers a compelling diagnosis of the barriers and a roadmap toward solutions. It reveals that repayable finance—through loans, bonds, and public-private partnerships (PPPs)—remains vastly underutilized. Most municipalities across L&MICs have little or no access to such finance. Where borrowing is permitted, it tends to be confined to a few large, creditworthy cities. Even in these cases, the majority of financing comes not from private capital but from public development banks or direct government loans.
The Lay of the Land: Recent Trends in Financing for Municipalities in L&MICs
Municipalities in low- and middle-income countries (L&MICs) currently mobilize only minimal levels of repayable finance to meet their infrastructure investment needs. Municipal debt in these countries rarely exceeds 2 percent of GDP, and in many cases, there is no meaningful municipal borrowing at all. In countries where borrowing is permitted, it is typically limited to a small number of larger, wealthier, and more capable cities. These cities often rely on government financial institutions (GFIs), such as development banks, rather than on private capital markets.
The vast majority of municipalities remain excluded from accessing debt finance, unable to meet the requirements for creditworthiness or prepare bankable projects. Similarly, municipal engagement in public-private partnerships (PPPs) has been limited, stagnant, and highly concentrated. From 2015 to 2023, municipal PPPs represented just 2 percent of the total PPP investment value across all L&MICs, excluding China.
These global trends are echoed in the five focus countries examined in the report: Brazil, Colombia, India, South Africa, and Türkiye. In India, municipal borrowing stock remains below 0.1 percent of GDP. In Türkiye and South Africa, it stands at around 1 percent, while Brazil and Colombia show slightly higher levels at approximately 1.6 percent of GDP. With the exception of Brazil, fewer than twenty municipal PPP projects were reported across these five countries during the period 2015 to 2023, representing a combined investment of less than USD 900 million.
As is the case globally, municipal borrowing in these countries is dominated by government financial institutions and, in some instances, by the central government itself. However, it is worth noting that some GFIs—such as the Development Bank of Southern Africa (DBSA)—raise funds from domestic capital markets and subsequently on-lend to municipalities. While this model provides an important financing channel, it does not address the structural limitations preventing broader access to finance for the majority of municipalities.
The Triple Constraint: Demand, Regulation, and Supply
The report identifies three key barriers that prevent municipalities from mobilizing repayable finance:
- Demand-Side Challenges. Many cities lack the financial viability needed to access capital. Poor revenue bases and operational deficits limit repayment capacity. Many cannot recover even half of the operating costs for essential services like water supply. Absorptive capacity is weak—cities struggle to spend what they already have, let alone manage additional financing. Only 35 of the 100 largest cities in developing countries have ever issued municipal bonds.
- Regulatory and Institutional Barriers. National regulatory frameworks are often overly restrictive or vague. In Brazil, tight post-crisis rules cap municipal borrowing. India lacks standardized processes for approval and risk pricing. While South Africa has a more advanced regulatory system, it still imposes centralized tariff controls that deter PPPs in sectors like water. These frameworks, though well-intentioned, must strike a balance—managing fiscal risks without stifling sustainable finance.
- Supply-Side Limitations. Private capital is generally hesitant to lend to municipalities due to underdeveloped local capital markets, exchange rate risks, and the dominant role of GFIs. Public lenders often benefit from privileged access and guarantees, which can crowd out private investment rather than complement it. Development banks play a crucial role, but without structured incentives and market-friendly practices, their dominance can discourage broader market participation.
Addressing the Challenge: What Determines a City’s Investment Readiness?
A city’s ability to attract repayable finance depends on two key dimensions: the broader national environment and the city’s own financial and institutional capacity. Cities in low- and middle-income countries often face constraints on both fronts—nationally, due to restrictive fiscal frameworks or unclear regulations, and locally, due to weak financial management and limited project preparation capabilities.
Some cities benefit from enabling conditions at both levels and have successfully accessed capital markets through municipal bonds. However, these are the exception. More commonly, strong national systems are undermined by weak local capacity, resulting in financing concentrated in just a few better-equipped municipalities. In rarer cases, cities with sound local fundamentals—like Kampala—are held back by national-level restrictions or poor sovereign credit ratings.
Proposals for Policy Actions
To effectively mobilize finance for municipalities, a comprehensive approach is needed that addresses challenges on the demand side, the supply side, and within the regulatory environment. Both national and municipal governments, as well as development partners, have essential roles to play in driving this process.
Demand-Side Actions
The demand side focuses on strengthening municipalities’ financial capacity, which is crucial for sustainable urban development. Key actions include:
- Strengthening the Funding Base of Municipalities. Municipalities can only secure financing if they have a solid funding base. National governments can help by:
- Expanding and rationalizing intergovernmental fiscal transfer systems to create conditions that encourage financial leveraging by municipalities.
- Increasing municipalities’ access to own-source revenue (OSR) by expanding the assignments of local taxes and fees.
- Supporting capacity-building programs to help municipalities improve their OSR efforts, such as training local officials and enhancing revenue collection systems.
- Enhancing Local Financial Management and Data: Municipalities need strong financial management systems to attract investment. Local governments can improve financial reporting, systems, and management capabilities, demonstrating their financial stability and attracting private investors. At the national level, governments can play a pivotal role by modernizing municipal financial management standards, systems, and auditing processes, while also supporting training and capacity development.
- Building Absorptive Capacity: For municipalities to effectively plan and execute urban development projects, they need improved absorptive capacity. National governments can support this by providing technical assistance, training, and resources to help municipalities design and implement sustainable urban investments and engage in complex financial transactions.
Regulatory Actions
On the regulatory front, it’s essential to create frameworks that allow municipalities to responsibly tap into repayable financing and private investments.
- Improving Municipal Borrowing and PPP Frameworks: National governments must improve frameworks for municipal borrowing and public-private partnerships (PPPs). This would ensure that municipalities can access repayable financing in a sustainable way, while also safeguarding against risks. Clear and transparent regulations would help municipalities and private investors navigate financial risks, ensuring that these risks are properly priced and that there is a fair playing field for all parties involved.
Supply-Side Actions
The supply side refers to the financial instruments available to municipalities for financing urban infrastructure projects. Interventions in this area need to be carefully crafted to avoid market distortions and crowding out private investment.
- Reducing Investment Risks for the Private Sector: One way to encourage private investment in municipalities is by reducing perceived risks. This can be done through mechanisms like project pooling, credit enhancement tools (such as partial risk guarantees), and viability gap funding. These tools can make investments more attractive to private investors, who may otherwise be reluctant to participate due to perceived risks.
- Support for Concessional Lending: A common supply-side intervention is providing concessional lending to municipalities through government-financed institutions (GFIs). However, to minimize fiscal risks, national governments should carefully design subsidies for GFIs to ensure a level playing field with private investors. Additionally, GFIs can be used to grow new market segments and prove the viability of certain projects, which can attract more private sector involvement.
International Financial Institutions (IFIs), bilateral donors, and global partnerships must scale up both technical assistance and financial support. They can provide direct help to national governments and municipalities, support demonstration projects to prove the viability of municipal finance, and foster knowledge sharing and matchmaking between cities and potential investors.
Conclusion
Bridging the infrastructure financing gap in developing cities requires a holistic strategy that strengthens municipal financial capacity, reforms regulatory frameworks, and enhances access to diverse funding sources. By enabling municipalities to become creditworthy, creating clear and supportive regulations, and attracting private investment through risk-reducing tools, all stakeholders—national governments, local authorities, and development partners—can unlock the transformative potential of subnational finance for sustainable urban growth.
The World Bank’s report, Unlocking Subnational Finance: Overcoming Barriers to Finance for Municipalities in Low- and Middle-Income Countries, provides a comprehensive roadmap to bridge the infrastructure financing gap in developing cities. It highlights practical solutions for mobilizing repayable finance, strengthening local financial management, reforming regulatory frameworks, and engaging private capital in municipal development.
The report was prepared under the auspices of the World Bank Group’s Subnational Finance
Task Force, by a team led by Roland White (Global Lead for Municipal Finance and Governance)
and comprising Sohaib Athar (Senior Urban Specialist), Sally Murray (Economist), Federica Iorio,
and John Iwan Probyn (independent experts).
Read the full open-access report:
https://openknowledge.worldbank.org/server/api/core/bitstreams/646266d5-ed42-4d59-a4c7-c9958e2fb0d9/content
