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Over half of the world’s population today lives in urban areas. By 2050, this figure is expected to increase to two-thirds. Asia and Africa, still largely rural, are urbanizing faster than other regions and will contribute a significant share of the additional 2.5 billion people that will live in urban areas by 2050. More than 80 per cent of global GDP is generated in cities, meaning cities are vital to the sustainable development agenda.

At the United Nations Conference on Sustainable Development (Rio +20), governments recognized the contribution that cities and human settlements can make towards sustainable development. This was reinforced by the Open Working Group’s inclusion of Goal 11 to make cities and human settlements inclusive, safe, resilient and sustainable in the proposal for Sustainable Development Goals.

Urban finance as an investment in the global future

Urbanization is a powerful force that can drive development. Its transformative energy provides the catalyst for structural change, pushing the transition from reliance upon rurally-based primary sector activities to diversification into high-productivity, high-value industries and services, and laying the foundation for rapid innovation.

If well-managed at the national, regional, and local levels, urbanization can create urban-rural linkages that enhance economies and livelihoods for both urban and rural populations. Well-managed urbanization and the resulting urban-rural economic and physical linkages can also support the social inclusion of vulnerable groups and the protection of the environment. Financing sustainable urbanization is therefore a good investment that pays dividends in prosperity and quality of life.

The increases in productivity and economic growth that accompany urbanization have the potential to unlock financial resources for municipalities to support further growth. The success of land value sharing practices worldwide is a case in point. As cities improve their financial management practices and are able to reinvest the value created by development, the result can be a virtuous cycle of investment and economic growth.

Strengthening municipal finance at the International Conference on Financing for Development

Although urbanization and development are inextricably linked, the advantages of urbanization are not guaranteed. Good urbanization is a conscious process. Unplanned, unmanaged, and unfunded development has frequently led to slum conditions and other urban problems such as congestion, pollution, social isolation, high levels of unemployment, particularly of young people, and crime. The quality of the urbanization process impacts the ability of urban economies to grow, the quality of life within cities, and the environmental externalities generated by the growth process.

The planned extension of infrastructure and deliberate infill-facilitating strategies can ensure that the supply of serviced plots keeps pace with development, preventing unplanned and unmanaged urban growth and keeping formal development affordable.

Municipal finance is a critical for the implementation of planned growth strategies; even the best planning efforts will fail if they are not accompanied by an implementable and sustainable financing strategy. To pay for the type of infrastructure and public services that unleash economic growth and support quality of life, cities need access to adequate funding and the ability to finance capital projects.

Looking ahead

There are a number of areas where the international community can support improvements in local finance that are needed for sustainable development.

• Supportive governance and institutions, from the central level down, are critical. Central governments must clarify responsibilities for, and institutions to deliver infrastructure and services among different levels of government. This must be done in an efficient, transparent and accountable manner. Local responsibilities must be matched with funding and capacity. National Urbanization Policies are one entry point for strategic actions at the national level.
• The structure and administration of local revenues must be improved. Local governments must have access to diverse revenue streams that grow as development takes place, including access to municipal and international bonds. Land-based financing is an emerging best practice in this arena.
• Local governments must strengthen basic financial management. A renewed focus on transparent planning and bookkeeping and effective tax administration is needed. In addition, greater efficiency in local expenditures, up-to-date tax registries, and successful valuation, collection, and enforcement of tax codes are essential.
• Creditworthiness and access to credit markets present major opportunities to finance sustainable urban growth once local governments have mastered basic financial management and created long term investment plans. The process of achieving creditworthiness can also be used as a basic financial management strategy.
• Local governments must improve their capacity to guide the private sector in the implementation of a sustainable development agenda, sharing costs as well as benefits of urbanization. The immense gap in local financial needs for urban development in coming decades cannot be met by public finance alone. Public-private partnerships and, more often, well-managed regulations can direct the immense potential of the private sector toward economically, environmentally and socially sustainable development.

There is much to gain in the pursuit of improved local finance. Well-resourced cities feed the engine of development and can spur sustainable growth in the long term.