African cities are vital areas that require well-funded infrastructure and services to be livable, sustainable, and productive. However, financing urban development is a complex issue. A recent working paper by the African Cities Research Consortium (ACRC) explores municipal finance across ten cities and seven urban development domains, highlighting general trends and lessons. The focus cities are Accra, Dar es Salaam, Freetown, Harare, Kampala, Lagos, Lilongwe, Maiduguri, Mogadishu, and Nairobi.
Expenditures: What is the money spent on?
The research shows that in the majority of ACRC cities, most functional responsibilities for urban services and infrastructure are either the responsibility of the central government or they constitute shared functions, where city governments tend to focus on implementation, with financing provided by the central government.
National governments typically manage spending areas that involve redistribution, significant externalities, and national policy objectives, such as housing, education, and health. City governments generally oversee local impact functions like waste collection, street lighting, and local market management.
- Education, Health, and Food: National governments either directly provide key social sector services like education and health, or allocate funding for the local delivery of social services, with centralized guidance and controls.
- Transport: Large transport infrastructure is primarily managed at the national level due to its wide-ranging economic benefits and the necessity for cross-jurisdictional connectivity. However, cities may control urban roads and, in some instances, finance their own public transport systems.
- Security and Waste Collection: Cities are generally responsible for local public goods like street lighting and waste management. However, creating sustainable financing models for waste management poses a challenge, and the sector is often underfunded.
- Water and Sanitation: These sectors can be managed by either the national or city governments or shared between them. This sector faces growing financial challenges and frequently depends on external funding. Despite this, public provision still fails to reach all urban residents, leaving many underserved.
- Housing and Informal Settlements: Housing is usually managed by the central government, while city governments deal with land-use regulation and property taxes. Upgrading informal settlements mainly falls under the city’s responsibility, particularly regarding providing infrastructure and services like water and electricity, which can raise land values in those areas.
Revenues: Where Does the Money Come From?
Cities have three primary sources of revenue: intergovernmental fiscal transfers, own-source revenues, and external development partner funds.
Intergovernmental Fiscal Transfers: Intergovernmental fiscal transfers are crucial grants from higher-level governments to cities, assisting them in meeting expenditure needs since central governments collect revenue more efficiently. These transfers can be unconditional, allowing cities to set their own priorities, or can come with conditions on spending or performance targets.
Own-Source Revenues: Revenues that the city directly collects and spends consist of both tax sources, such as property taxes, and non-tax sources, such as user fees, charges, and fines. Land-based financing represents a significant potential revenue source for African cities, but complex land tenure dynamics and political factors impede its effective use.
Development finance plays a vital role in funding urban infrastructure and services, coming in various forms, from grants, which do not require repayment, to soft loans, a borrowing form that necessitates repayment, although at concessional rates and terms. While some funding goes directly to cities, most are routed through national governments and then transferred to cities via the intergovernmental transfer system. In some cases, development finance bypasses city budgets entirely, with projects executed directly by donors while still aligning with municipal priorities.
Borrowing: A Potential Source of Financing
Some African cities are exploring borrowing as a means of financing long-term infrastructure, yet this is not yet a widespread practice. Legislative and political constraints, lack of creditworthiness, and macroeconomic conditions are some reasons that hinder long-term borrowing by African cities. Accessing climate finance remains challenging for many cities due to these constraints and the fact that most climate finance is provided in the form of loans.
Key Findings: An Inspirational Path to Sustainable Urban Growth
Empowering Local Governments for Urban Service Delivery. Across African cities, the role of central governments in urban service provision remains significant, but cities are beginning to take ownership of their futures. While the expenditure assignments for city governments are often limited, cities like Nairobi demonstrate how expanded responsibility can lead to stronger, more autonomous urban management. By progressively taking on more services, cities can become catalysts for local development, delivering essential services like street lighting, waste management, and beyond. The path toward decentralized governance is a journey, one that is shaped by the unique challenges and opportunities in each city. The collaboration between central and local governments in areas like health, education, and water proves that shared responsibility can foster innovation and improve service delivery.
Revitalizing Revenue Streams for Sustainable Growth. Intergovernmental fiscal transfers have long been a lifeline for many African cities, providing the funds necessary for urban infrastructure and services. However, intergovernmental fiscal transfers cannot do it alone. As cities like Freetown and Kampala are showing, the future of urban finance lies in boosting local revenue generation. Through strategic reforms, such as leveraging digital tools to collect property taxes, cities can reduce their reliance on transfers and unlock new financial potential. The journey towards greater fiscal independence may be challenging, but the reward is a future where cities thrive on their own terms, where every dollar raised is reinvested into the very community that generated it. Political and administrative hurdles are stepping stones toward the transformation of African cities into financially self-sufficient hubs of progress.
Unlocking the Power of Municipal Borrowing for Capital Investments. Municipal borrowing holds the key to financing transformative infrastructure projects, yet few cities in Africa have broken through the barriers that limit their access to long-term debt financing. The constraints—whether legislative, political, or capacity-related—are not insurmountable. As cities push for the legislative reforms and political will needed to unlock this potential, the support of central governments is crucial in providing a nurturing environment that fosters sustainable borrowing practices. The same challenges exist for accessing climate finance, yet they present an opportunity for cities to lead the charge in climate-resilient investments. With the right guidance, cities can evolve into credible borrowers, unlocking long-term financing that builds a prosperous and sustainable future.
Key Takeaways
- To enhance urban livability, productivity, and sustainability, African governments need to increase funding and financing for cities and ensure these resources are effectively utilized at the local level.
- Reforming municipal finance systems is essential for improving the provision of essential services and strengthening the relationship between city governments and their citizens.
- African governments must increase funding for cities and ensure resources reach the local level to enhance urban livability, productivity, and sustainability.
- Reforming municipal finance systems can strengthen the social contract, improve tax compliance, and boost revenue for infrastructure and services.
- Most city governments have limited exclusive service responsibilities, with many functions shared between central and city governments.
- Functional assignments vary significantly between cities and countries due to differing levels of decentralization.
- Intergovernmental fiscal transfers are the primary revenue source for most African cities, but conditionalities can restrict local allocation.
- Despite the increasing need for capital investments, African cities encounter substantial legislative, political, and capacity constraints that severely limit their ability to secure long-term debt financing from capital markets.
- Similar constraints affect cities’ ability to access climate finance, which is mainly offered as loans.
- Rather than leaving cities to navigate complex financial landscapes on their own, central governments should champion their development as credible borrowers through strategic policy creation, capacity enhancement, careful risk management, and careful risk control.
Read the full open-access report:
Gundula Löffler and Astrid Haas, “Municipal finance: Crosscutting report”, March 2025. African Cities Research Consortium (ACRC).
