IFWEN Updates: How do we finance integrated infrastructure systems?
March 10, 2021

IFWEN: Understanding Innovative Initiatives for Governing Food, Water and Energy Nexus in Cities. IFWEN is a Belmont Forum funded international team of researchers and stakeholders working to advance knowledge about urban governance related to FWEN, and Green and Blue Infrastructure (GBI) as its base. START is supporting ICLEI Africa’s involvement in the Belmont Collaborative Research Action.

No matter what aspect of sustainable development we are interested in implementing, be it sustainable food systems, water sensitive settlements, equitable and inclusive mobility, food-water-energy-nature nexus, or circular economy design thinking, the central considerations must be finance and governance: how do we resource our approach, and what relationships are need to ensure its success? Our last blog spoke about how we develop supportive environments for different City departments to collaborate and co-fund cross-sector initiatives. In this blog we reflect on several financing innovations which can support implementation of integrated infrastructure solutions. The reflection is based on discussion in a session entitled All Together Now: Mobilising Public Finance for Integrated Infrastructure Solutions, convened at the Local Climate Solutions for Africa Congress 2020, which included:

  • Luc Gnacadja (moderator), President, GPS-Dev (Governance & Policies for Sustainable Development)
  • Jose A. Puppim de Oliviera, Professor, Fundação Getulio Vargas (FGV), and Principle Investigator for the IFWEN project
  • Fatou Gibba, Diretor of Local Governance, Ministry of Local Government, The Gambia
  • Xanthea Limberg, Mayoral Committee Member: Water & Waste, City of Cape Town
  • Maryke van Staden, Director of Business | Director of carbonne Climate Centre, ICLEI
  • Ben Mokheseng, Head: Transacting Municipalities & Waterboards, Development Bank of Southern Africa

Barriers to financing integrated infrastructures

Cities don’t necessarily have leverage on the supply of Food, Water and Energy because it comes from external sources or suppliers and it does not fall within their jurisdiction. While local governments have the mandate for distribution of water and energy, the mandate does not necessarily extend towards sustainable management of these resources, and many local governments are dependent on the resource sales for income. When it comes to food, local governments have different mandates, but most are still attempting to articulate their role in supporting sustainable urban food systems. These differing mandates pose challenges when trying to draw finance to integrated solutions.

There is misalignment between municipal budget cycles (1 year) and the time it takes to effectively fund infrastructure development. What this means is that large government grants allocated to municipalities may fall away if not spent within the allocated financial year. This results in stalled infrastructure projects. Therefore, city officials need to be empowered to implement faster, or to have a mechanism to extend funding across financial years.

Investors and donors often look to fund large capital projects which means that smaller, localised projects don’t qualify for funding. However, this can be solved by bundling projects to attract investment and rolling them out in phases. Smaller projects could also seek funding from grants or through bilateral support. Acknowledging the role of small businesses in delivering novel and integrated approaches, governments at all levels, in partnership with investors, should support the creation of small grant programmes to enable growth of these businesses.

How do we overcome these barriers?

It is important to develop and build on cities’ capabilities to enable the co-creation of solutions. A few ways in which Cities can support integrated approaches are as follows:

  • Understanding the local investment needs and developing initiatives that make both economic and financial sense.
  • Supporting systems thinking capabilities across departments, which can identify the links between departmental objectives and see the opportunities for funding projects with multi-sector benefits
  • Developing and sharing viable investment cases that identify scalable solutions, to draw funding from banks and investors.
  • Building and showing a good track record of sustainability solutions and maintain a good credit record.
  • Ensuring a strong administrative (executive/council) interface to avoid political interference which often derails infrastructure projects.
  • Promoting participatory approaches in the planning and implementation of projects to ensure outreach and inclusion of communities, and therefore stronger ownership of the process. This also reinforces the strong track record for implementation.

One of the best ways to build these capabilities in cities is to support city-to-city learning and exchange. Provide platforms in which cities can learn from each other within countries and across the continent. We can widen the opportunities to achieve local sustainability and global sustainability outcomes by encouraging deeper learning processes in and between cities. It also expands the scope for access to funding and partnership opportunities. External and network organisations play a vital role in providing these platforms while also providing the technical and financial support to cities.

Cities need to play a strong leadership role in driving integrated solutions at the local level by breaking through the silos and developing strategies and plans with budget implications in mind. Budgets need to be developed based on the latest strategies, and not simply rolled over based on previous spend. Proactive budgeting towards catalytic projects and initiatives can also attract further investment, let alone driving forward strategic City outcomes.

What specific initiatives are proposed for financing integrated infrastructures?

Performance based climate resilience grants: This financial mechanism allows funding to be decentralised to the local level, for local governments to be considered in national government budgets and for national revenue to be shared and transferred to the local level. 

Establishing a water catchment fund: This enables the optimal management and operations of water catchment areas and key water sources to a city [1: Lessons from City of Cape Town]. A number of stakeholders (including farmers, NGOs, businesses, and surrounding municipalities), contribute to this operational fund to ensure that water sources are properly managed. For example, the fund finances the clearing of alien vegetation which ensures the increased flow of rainwater to catchments areas. The collective contribution to the fund enables shared accountability and shared risks which ensures that the efficient functioning of the shared resource benefits all users in the system. 

Delinking the flow of revenue to resource consumption by establishing a uniform water tariff structure. Tariffs for resource services typically make up a large portion of municipal income. By delinking these income sources from the amount of consumption, it means that income is not impacted by reduced consumption, and the city can promote sustainable lifestyles, while not risking its budget.

Capacity building and technical support through the Transformative Action Programme (TAP – Gap fund) provides technical assistance to develop local climate adaptation projects that are bankable and scalable. These aim to catalyse the flow of capital, attract investment and leverage climate finance opportunities. Projects need to be transformative and have clear targets such as reduced GHG emissions. TAP aims to connect local governments, technical experts and financial institutions.

Fiscal Front Loading: This approach allows under-resourced municipalities to spread the implementation of infrastructure projects over a number of budget cycles by providing large funding upfront, which the municipality pays off with each new budget. This allows implementation of large infrastructure systems without the time constraint of one budget cycle. This requires that municipalities receive implementation capacity and support to prevent underspending.

Please see insights from the full session here: https://youtu.be/iHDooTJoJak

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