1. Mobilising funding and financing for inclusive and quality infrastructure investment in regions and cities

Courtenay Wheeler
Yingyin Wu
Isabelle Chatry
Dorothée Allain-Dupré

To support the theme of the G20 in 2022 to “recover together, recover stronger”, the Indonesian G20 Presidency drew attention to the importance of inclusive infrastructure investment in regions and cities.1 On 17-18 February 2021, in their second meeting under the Indonesian G20 Presidency, Finance Ministers and Central Bank Governors agreed to “develop policies to mobilise inclusive infrastructure investment to enhance social inclusion and address subnational disparities in regions and cities” (G20, 2022[1]). To support this objective, the Organisation for Economic Cooperation and Development (OECD), in cooperation with the Asian Development bank (ADB), were requested to support the G20’s Infrastructure Working Group (IWG) in developing a policy toolkit to mobilise financing mechanisms to enhance infrastructure investment in regions and cities (Policy Toolkit) (G20, 2022[1]).

A draft of the Policy Toolkit was presented to IWG members in June 2022 and benefited from comments from G20 member countries. To inform the development of the Policy Toolkit, the OECD prepared an accompanying report on inclusive infrastructure investment for the IWG titled Addressing territorial disparities in future infrastructure needs in the wake of the COVID-19 crisis (OECD, 2022[2]). This Policy Toolkit reinforces work under the Italian G20 Presidency in 2021, which included the G20 High-Level Conference on Local Infrastructure Investment (Italian Ministry of Finance, 2021[3]) and a report on innovative funding and financing in regions and cities (OECD, 2021[4]).

This Policy Toolkit aims to highlight ‘policy opportunities’ that can help to mobilise funding and financing for inclusive and quality infrastructure investment by subnational (state, regional, local) governments across developing, emerging and developed countries. A focus is placed on subnational governments, as these governments often have an important role to provide basic public infrastructure essential for inclusion, resilience and sustainability in regions and cities. They can also have a key role to support economic development (UNCDF, 2022[5]). A focus is also placed on quality infrastructure investment to align the Policy Toolkit with the G20 Quality Infrastructure Investment Principles (Japan Ministry of Finance, 2019[6]), as improving both the quantity and quality of infrastructure investment also supports inclusivity, resilience and sustainability.

This Policy Toolkit covers four ‘pillars’ relevant to mobilising funding and financing for inclusive and quality infrastructure investment by subnational governments: the enabling environment, funding instruments, financing instruments and investment approaches. All these pillars are interlinked. Access to finance for infrastructure investments, for example, is improved by creating an enabling environment that supports sustainable subnational government borrowing and by mobilising funding (i.e., revenue sources such as user charges).

This Policy Toolkit is voluntary and non-binding. Rather than recommending specific policy tools, it provides a ‘toolkit’ of policy opportunities that may serve as a starting point for national or subnational governments seeking to support infrastructure investment in regions and cities. Whether, when, where and how to use tools should be considered on a case-by-case basis, in line with the local context.

Many regions and cities have a significant need for infrastructure investment to sustain growth and improve well-being. In 2017, the OECD estimated that approximately USD 95 trillion in public and private investments would be needed in energy, transport, water and telecommunications at a global level to sustain growth between 2016 and 2030 (OECD, 2017[7]). Similarly, the Global Infrastructure Hub and Oxford Economics estimated that USD 94 trillion of investment will be needed between 2016 and 2040 across 50 countries (Oxford Economics, 2017[8]). In developing Asia alone, there is a need to invest USD 26 trillion in infrastructure to maintain the region’s growth momentum and respond to climate change between 2016 and 2030 (ADB, 2017[9]). Much of this investment is needed at a regional and local level.

Infrastructure investment needs vary substantially across different regions and cities, both within and across countries. Among other areas, different investment needs can arise due to existing subnational infrastructure disparities and the asymmetric impacts of megatrends and shocks, such as urbanisation, climate change, digitalisation, demographic change and the COVID-19 crisis (OECD, 2022[10]). The COVID-19 crisis, for example, revealed many pre-existing territorial inequalities in access to health, social and digital infrastructure that highlight the need for more inclusive and resilient infrastructure (OECD, 2021[11]).

In the coming years, many urban areas will require substantial investment in both existing and new infrastructure. The global population living in cities with at least 50 000 inhabitants is projected to reach 5 billion (55% of the global population) by 2050, up from 3.5 billion in 2015 (OECD/European Commission, 2020[12]). In Developing Asia alone, an additional 1 billion people are anticipated to live in cities in the next 30 years (UN DESA, 2018[13]). Sustainable, resilient and inclusive infrastructure will be required to support continued urbanisation that fulfils cities’ potential as engines of growth and job creation (ADB, 2021[14]). In addition to investing in new infrastructure, existing infrastructure in urban areas needs to be better maintained and transformed to become more sustainable and resilient in the face of new megatrends and shocks (Italian G20 Presidency, 2021[15]; OECD, 2021[16]).

Rural areas will also need substantial investment to build resilience, increase sustainability and improve well-being. While digitalisation provides significant opportunities to support economic development, many rural areas face a “double divide” arising from reduced access to both physical and digital infrastructure (OECD, 2022[2]). In G20 countries, for example, internet download speeds over fixed networks in rural areas are 31% lower than the national average, while cities are 21% higher (OECD, 2021[17]). The “double divide” can hamper access to online alternatives to physical infrastructure that are even more useful in rural areas, such as emerging public services in education (e.g., online distance learning activities) and healthcare (e.g., telemedicine) (OECD, 2022[2]). Closing the double divide might also help to make rural areas more attractive and reduce pressures on urban areas from rapid population growth.

Responding to the different and interdependent needs of regions and cities requires all levels of government to support long-term and place-based infrastructure planning and investment. Effective multi-level governance is essential to support quality infrastructure investment that is undertaken at the right scale and is in line with local priorities.

The responsibility for public infrastructure investment is shared across levels of government. Central or federal governments often have key infrastructure responsibilities, including for nationally significant and critical infrastructure such as highways, long-distance railways, electricity networks and universities. They may also be responsible for guiding, supporting, facilitating, coordinating, funding and/or financing infrastructure investments by subnational governments. Subnational governments are often responsible for essential basic infrastructure such as local and regional transportation networks, education and health care facilities, environment, and social housing. Subnational governments also often have important responsibilities for guiding infrastructure investment, including through land use policy, building permits, and environment regulations.

In many countries, subnational governments are particularly important public infrastructure investors and have many climate-related expenditure responsibilities. They are responsible for almost 60% of public investment in G20 countries, representing 1.9% of GDP (OECD/UCLG, 2019[18]; OECD, 2021[4]). In OECD countries, they are responsible for 63% of climate and environment significant public expenditure and 69% of climate and environment significant public investment (OECD, 2022[19]). This means that they are well-placed to harness sustainable financing as they will need to deliver many green projects to help address climate change (e.g., building upgrades, sustainable public transport, renewable energy, etc.).

Given the important role of subnational governments, mobilising funding and financing at a subnational level can help to provide more inclusive, resilient and sustainable infrastructure in regions and cities. This Policy Toolkit covers four ‘Pillars’ that are critical to mobilise funding and financing for subnational governments: the enabling environment, funding instruments, financing instruments and investment approaches. For each Pillar, this Policy Toolkit highlights ‘Policy Opportunities’ with specific ‘Example Policy Tools’. These are informed by case studies included in the full-length policy toolkit prepared by the OECD with input from ADB.

Each of the Pillars are critical to help mobilise funding and financing for quality infrastructure investment in regions and cities. The enabling environment determines the instruments and approaches that can be mobilised by subnational governments, as well as how and when they are used (OECD, 2014[20]). Financing is essential to help cover the high up-front costs of infrastructure investment and spread the payment for those costs across future beneficiaries. Funding is also essential to help pay up-front investment costs and to pay for infrastructure operations, maintenance and repay financing. Different investment approaches are needed to harness funding and financing for specific projects.

Creating an enabling environment for infrastructure investment by subnational governments is a critical element of mobilising funding and financing in regions and cities. The enabling environment is created by various frameworks, regulations, processes, systems, organisations, networks and other structures that enable and shape how subnational governments invest in infrastructure. A supportive enabling environment can increase the ability of subnational governments to use different funding sources and financing instruments, and investment approaches. While there is no ‘right’ enabling environment that applies across all countries, as the enabling environment will depend on national and local contexts, there are a number of common cross-cutting policy opportunities as described below.

Policy Opportunity 1: Develop fiscal and regulatory frameworks that support subnational governments to harness funding and financing for quality infrastructure investment in their areas of responsibility, while also managing subsequent risks and considerations (e.g., indebtedness, investment quality etc.).

  • Example policy tools: Inter-governmental fiscal frameworks; budget balance rules; debt rules; internal and external audits; fiscal risk assessment; monitoring and early warning systems; independent fiscal institutions.

Policy Opportunity 2: Increase access to financial markets for subnational governments, including by exploring opportunities for expanding the use of specialised public or private financial intermediaries or trust funds, and developing local capital markets for subnational government debt, which can help to improve the affordability and accessibility of finance for these governments.

  • Example policy tools: Credit assessments; subnational pooled financing mechanisms; trust funds; national infrastructure banks.

Policy Opportunity 3: Build institutional capacity within subnational governments, in order to improve the ability to mobilise funding and financing instruments and ensure that mobilised resources are used effectively.

  • Example policy tools: Capacity building programmes; technical assistance facilities; project preparation and monitoring platforms; PPP units.

Policy Opportunity 4: Support effective co-ordination, cooperation and engagement across and among levels of government, and with local communities, which can support the pooling of resources and help to ensure that infrastructure is delivered at the right scale and in the right place and is in line with local priorities.

  • Example policy tools: City and regional deals/contracts; regional and local development strategies; inter-governmental investment co-ordination platforms; inter-municipal cooperation arrangements; stakeholder engagement.

Mobilising funding is essential to pay for infrastructure investment, operations and maintenance. For many subnational governments, mobilising funding is a key barrier for supporting additional infrastructure investment. Funding for subnational infrastructure investment mainly come from grants and subsidies provided by upper-level governments, own-source revenue (e.g., some taxes, user charges, property income, etc.) or user charges paid to a private operator of public infrastructure (e.g., when a concession agreement is in place). Common policy opportunities can exist across each funding source as described below.

Policy Opportunity 5: Mobilise grant and subsidy programmes for infrastructure investment by subnational governments and support the effectiveness of these programmes to deliver quality infrastructure in line with national, regional and local priorities.

  • Example policy tools: Competitive grant programmes; matching grants; conditions on grants; regional development funds; philanthropy; viability gap funding.

Policy Opportunity 6: Explore scope for subnational governments to mobilise targeted taxes to support quality infrastructure investment, particularly where there is a visible link between the levy and the investment to highlight the benefit of the tax.

  • Example policy tools: Tax increment financing; property taxes; carbon taxes; tourism taxes; mobility and transport taxes.

Policy Opportunity 7: Explore opportunities for harnessing user charges and fees to support infrastructure investment projects, while also considering the impact on accessibility across different socio-economic groups.

  • Example policy tools: Utility charges; congestion charges; parking fees.

Policy Opportunity 8: Improve the management of infrastructure assets by subnational governments, which may help to increase funding availability and ensure existing infrastructure is harnessed effectively.

  • Example policy tools: Property or land leasing; asset recycling.

Policy Opportunity 9: Strategically harness and capture the value of land, which can increase the funding available for quality infrastructure investment by subnational governments.

  • Example policy tools: Developer obligations, infrastructure levies; charges for development rights; land readjustment; strategic land management; transferable development rights.

Mobilising finance is essential to help subnational governments spread the high up-front costs of infrastructure investments over time. Without harnessing finance, subnational governments might not be able to pay for investment or they could place significant pressure on their annual budget. The use of finance can also spread the burden for the payment for infrastructure across its future beneficiaries (e.g., users, taxpayers). Opportunities for subnational governments to mobilise finance mainly relate to debt (loans, bonds) rather than equity; however, equity that supports subnational government investment is mobilised as part of public private partnerships (PPPs), in some partially owned state-owned enterprises (SOEs) or in private sector infrastructure operators. These opportunities are described below.

Policy Opportunity 10: Explore options for the use of concessional loans for subnational governments to target specific infrastructure investment gaps (e.g., supporting local governments to infrastructure for housing developments) and consider supporting the use of green loans to highlight the sustainability of investments.

  • Example policy tools: Concessional loans; green loans.

Policy Opportunity 11: Consider the scope for expanding the use of bonds by subnational governments to improve access to affordable finance (either directly or through financial intermediaries), and facilitate the use of green, climate, sustainable and social bonds to increase investment transparency.

  • Example policy tools: General-obligation bonds (municipal bonds); revenue and project bonds; thematic bonds (e.g., green bonds; social bonds; climate bonds; sustainability bonds, etc.).

Policy Opportunity 12: Explore opportunities for harnessing equity in support of subnational government infrastructure.

  • Example policy tools: Impact investing; equity in PPPs; blended finance.

Policy Opportunity 13: Explore the scope for targeted and effective use of guarantees to help mobilise private finance for quality infrastructure investment projects undertaken by subnational governments.

  • Example policy tools: Financial guarantees; performance guarantees.

The investment approach refers to how funding and financing are leveraged to deliver an infrastructure investment project. The choice of investment approach for an infrastructure investment can be separate to the choice of funding and financing instruments. For example, infrastructure that is procured by the public sector (‘traditional’ public procurement) may be financed through a loan or funded through grants, taxes or user charges. Similarly, an investment approaches include traditional public procurement to support private-sector participation in public infrastructure, delivery through subnational state-owned enterprises or delivery through subnational public-private partnerships (PPP). Policy opportunities are described below.

Policy Opportunity 14: Support private-sector participation in public infrastructure investment, operations and maintenance through ‘traditional’ and more innovative forms of public procurement

  • Example policy tools: Green public procurement; socially responsible public procurement.

Policy Opportunity 15: Where a subnational state-owned enterprise is used to support infrastructure investment (e.g. local public companies), ensure effective and proper use for delivering inclusive and quality infrastructure investment.

  • Example policy tools: Development authorities; transport authorities; local utility companies; infrastructure delivery authorities.

Policy Opportunity 16: Support the effective and proper use of public-private partnerships by subnational governments where they are determined to be appropriate for a specific investment project

  • Example policy tools: User-pays PPP; Government-pays PPP.

References

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Note

← 1. This chapter is a summary of the G20-OECD Policy toolkit on mobilising funding and financing for inclusive and quality infrastructure investment in regions and cities. It was produced for the Indonesian G20 Presidency as part of the Program of Work and Budget of the OECD’s Regional Development Policy Committee. The Policy Toolkit leverages the Recommendation of the OECD Council on Public Investment across Levels of Government, the OECD-UCLG World Observatory on Subnational Government Finance and Investment, and other recent work from the OECD on subnational infrastructure investment, in particular the report Unlocking Infrastructure Investment.

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