The challenge of financing climate-resilient cities

20th May 2016 Jonathan Andrews

Ban Ki-moon, UN Secretary General, said that there was “no time to waste” when he launched the State of City Climate Finance report during the COP21 in Paris last December. Jonathan Andrews examines the report’s implications and how the group behind it, the new Cities Climate Finance Leadership Alliance (CCFLA), aims to mobilise climate finance for cities

The UN has revealed in its State of the City Climate Finance report that over the next 15 years, approximately US$93 trillion of infrastructure designed to be low-emission and climate-resilient will need to be built globally and that more than 70 percent of this infrastructure will be built in urban areas, at a cost of $US4.5 trillion to US$5.4 trillion per year.

“Today’s financing landscape does not provide cities with adequate access to affordable financing suited to low-emission, climate resilient infrastructure,” states the report. “The challenge is not simply to increase the amount of money in the pipeline, but also to create an enabling environment that encourages existing and new financing to flow from a broad spectrum of sources.”

The report highlights the obstacles that many cities face in accessing capital which include uncertainty over regulatory and tax policies, lack of expertise in project development, lack of control over infrastructure planning, high transaction costs and lack of proven funding models at the city and regional level.

To assist cities in accessing the funding they need for resilient infrastructure, the UN launched the Cities Climate Finance Leadership Alliance (CCFLA) during the Secretary- General’s Climate Summit in September 2014. The coalition is made up of more than 40 organisations including public and private finance institutions, governments, UN and technical support agencies, city and subnational networks and associations, research and other non-governmental organisations and philanthropic foundations.

“Cities are often hindered from raising funds and many lack creditworthiness,” says Yunus Arikan, Head of Global Policy and Advocacy, ICLEI, one of the city networks involved in the alliance. “That is why CCFLA aims to increase capacity within cities. CCFLA members will help cities to develop the kinds of skills and knowledge that lead to more bankable projects, attracting investment from financial institutions. By increasing capacity, the CCFLA will help cities to build their creditworthiness.”

Although the alliance will not lend directly to cities nor have a ‘pot of funds’ it will rather “stimulate the flow of investment towards climate-related infrastructure projects in cities”.

Quite how the alliance will achieve this is still unclear. The alliance’s strategy lists a lot of ‘urging’, ‘engaging’ and ‘supporting’ with very little concrete actions to date. One exception is the creation of a network of labs. These labs will be designed to focus on using development bank and concessionary capital to identify, pilot and evaluate new instruments, models and mechanisms for financing low-emission, climate resilient urban infrastructure.

World Bank figures reveal that of the 500 largest cities in emerging economies, only 4 percent are deemed creditworthy in international markets. James Alexander, Head of Finance and Economic Development at C40 Cities, another member of the alliance, believes that the CCFLA will help cities overcome this crucial aspect.

“This is exactly why the CCFLA exists,” he says. “The challenges faced by actors in accessing finance or achieving a credit rating are significant and need many actors to work together to help overcome them. Some solutions will take time, others require new thinking. Cities can be supported when they have low credit ratings by credit enhancement products. When they can’t raise finance, they can consider public-private partnerships. A major challenge is the lack of capacity within cities to take forward these sorts of transactions and C40 and the CCFLA are working to address this.”

Yunus Arikan, Head of Global Policy and Advocacy, ICLEI
Yunus Arikan, Head of Global Policy and Advocacy, ICLEI

Increasing cities’ capacity to manage infrastructure development is one hindrance that is repeated by multilateral development banks, private sector banks and the cities themselves.

“Part of the challenge with cities in our region is that on average, initial project preparation is weak, and important urban infrastructure projects seldom do not have a clear debt repayment source and are therefore not financeable,” says Ellis J. Juan, General Coordinator of the Emerging and Sustainable Cities Initiative (ESCI) at the Inter-American Development Bank (IDB) that works alongside the bank’s Climate Change division within the alliance. “ESCI works directly with municipalities to assist them in the project preparation stage.”

Peer learning and also better training of city staff will be a key driver of the alliance, according to another member, the Japan International Cooperation Agency (JICA).

“The most critical issue is that cities don’t have enough experience and expertise in financial management and technical planning necessary for developing strong ‘bankable’ investment proposals,” explains Tomoharu Otake, Head, Office for Global Issues and Development Partnership, Operations Strategy Department, JICA.

One issue where the alliance has found traction is helping to reform how multilateral development banks are able to lend to city governments. Announced by Shinzo ̄ Abe, the Prime Minister of Japan, in November 2015, JICA introduced new measures for sub-sovereign loans.

“This is to correspond to the increasing demand of developing countries to enable local governments and other sub-sovereign actors to secure direct financing especially for their infrastructure development,” says Otake.

Other multilateral and bilateral development banks have already adapted their lending to sub- sovereign entities, including Agence Française de Développement, the IDB, the Asian Development Bank and the European Bank of Reconstruction and Development.

“Through the sovereign window we lend directly to local development institutions–such as Findeter in Colombia–with a sovereign guarantee of repayment,” explains Juan, from the IDB. “These local institutions on-lend our credit line to local municipalities or provinces.”

The bank also, through the non-sovereign window, lends directly to private companies (PPP projects), and to municipal utilities and state- owned enterprises. “We do not have a sovereign guarantee in this case, so we assume full credit risk of the final borrower,” adds Juan.

Ellis J. Juan, General Co-ordinator of the Emerging and Sustainable Cities Initiative, Inter-American Development Bank
Ellis J. Juan, General Co-ordinator of the Emerging and Sustainable Cities Initiative, Inter-American Development Bank

A lot of the alliance’s actions will also come from what members have already implemented, including ICLEI’s Transformative Actions Programme which each year selects up to 100 local climate action projects and helps connect them with funders.

“That is the kind of coordinating role we pursue at ICLEI and it will be greatly aided and accelerated by the global alliance of the CCFLA,” says Arikan.

Similarly the alliance will provide a platform for C40 and the IDB to share learning and gain knowledge
as it develops its own Finance Facility that aims to overcome the obstacle of pushing green funds to provide finance directly to cities. Members of the alliance are now working on a plan to help put the report’s suggestions into actions.

“Time is critical and we must engage in efficient and proven solutions,” explains Amal-Lee
Amin, Chief Climate Change and Sustainability Division, IDB. “The CCFLA could be the catalyst that will allow us to leap frog the obstacles to a more resilient urban scenario.”

 

 

 

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