Part of: Financing Sustainable Urban Development: An Introduction

Why isn’t enough investment available for sustainable urban systems?

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Most public funding for city services comes from taxes, fees, and transfers, which is not enough to meet demand. While some cities can obtain debt financing through bonds or loans, there are often legal restrictions and concerns about their ability to repay debt.  Some reasons for underinvestment in sustainable urban infrastructure are:

Socioeconomic factors:

  • Social and long-term economic benefits of sustainable services and infrastructure are usually greater than immediate financial returns, which makes it difficult to attract private finance.
  • Social returns may take decades to accrue and are difficult to monetize.
  • The risks of climate impacts are undervalued and dispersed.

Public funding factors:

  • Many cities rely heavily on central government transfers and lack the fiscal space to develop sustainable infrastructure.
  • Many cities lack the creditworthiness and legal authority to take on debt through bonds.
  • Many urban services compete for a city’s financial priorities.

Private finance factors:

  • Sustainable investments often involve large up-front capital costs, though savings may accrue during operations.
  • The private sector wants a faster payback period and requires higher returns given the risks related to new sustainable infrastructure.
  • Many countries have underdeveloped capital markets and banking sectors.

Different forms of public funding, blended finance, and private finance need to be explored to meet existing and future demand. 

Source: Authors 2019