Fuelled by population growth and rural-to-urban migration, urbanisation in Sub-Saharan Africa is rapidly increasing, generating a massive need for investments in urban infrastructure. Africa urbanises at lower income levels and without the same degree of productivity increases seen in other regions. More than half of the residents in African cities live in informal housing, and three-quarters of this population is either unemployed or relies on informal jobs. The society faces a huge challenge in providing infrastructure and basic services for liveable and productive cities while accommodating their rapidly growing urban population.

The initial phase of this initiative has been dedicated to reviewing the issues crucial to addressing the above. Whilst the study identifies areas where more work is needed, evidently there is a connection between the trajectories of economic transformation, multi-level governance, and financing urban development. This policy brief focuses on three core issues: improving investment planning, raising local revenues, and enhancing access to external finance.

Urban planning is crucial to prepare for the orderly expansion of cities to guide investment, prepare subdivisions of land and install skeletal infrastructure before building. Retrofitting informally built areas is complex and much more expensive.

Responding to the surge in urban population seems to result in either the time-consuming process of building capabilities to harmonise goals and collaborate effectively, or a tendency to address the urgency to develop infrastructure without any consideration of the former. However, infrastructure development cannot be put on hold while perfect policies and institutions are put in place. These ends need not be mutually exclusive: investment in urban development does not have to be withheld until fully capable institutions are in place, nor do governments need to resort to “non-invasive” planning and building of urban infrastructure regardless of institutions and policies.

Land-based finance is one of the most promising – and underutilised – OSR streams that can be leveraged to strengthen urban management more broadly, even though it can be a complex undertaking. The obstacles to harnessing this source of revenue include out-of-date or non-existent land cadastres, complex and informal land tenure systems, lack of systematic property addressing systems, insufficient professional capacity in surveying and valuation and the costs of these activities. Technological innovation, such as using GIS to geo-locate properties and create up to date digitised land and property records, can be used to overcome these problems. Land-based finance can also be improved through simplified valuation methods.

Nonetheless, fully leveraging these tools will require local governments to build capacity, show willingness to experiment, and overcome resistance from powerful landowners. Some reforms, while technically promising, can easily fail if the broader incentive structure is not considered.

While it is important for building the financial capacity of subnational authorities, improving OSR may not provide sufficient finance for investment; indeed, in most countries, we expect the main sources of revenue for intermediate cities to remain as 'transfers' (conditional, unconditional and/or contractual) from the national to the local level through revenue sharing formulae. Financing sustainable urban development thus needs to focus on coherence among all components of an integral system of financing, which includes direct investments of state authorities at the city level and various forms of predictable intergovernmental transfers to local governments, efficient collection of OSR, and private and external investment.

Even where borrowing is legally permitted, many cities still lack the revenue streams, financial management capacity and creditworthiness to take on debt. Development partners can be crucial in facilitating creditworthiness reform, both in terms of technical and financial assistance.

Focusing only on projects that generate sufficient revenue to repay investments may lead to disregarding the need for public or social goods where direct monetary returns may be insufficient but the overall public benefit is significant. Such projects may need support from local or central government to become bankable so that their overall public benefits can be realised. Where development partners become involved in project design, they may wish to promote transformative projects that help alleviate poverty and support green agendas, while also promoting cost recovery within affordability constraints.

Development partners were crucial in facilitating creditworthiness reform, as demonstrated in the case studies, both in terms of technical and financial assistance. It can be difficult for cities to justify investing in internal creditworthiness reforms year after year, since its returns to the public are long term and thus generate little potential for short-term political gain.

Budget support in a decentralised context can be a catalyst to tighten economic and budgetary frameworks and to strengthen the investment and business environment, and reduce investment risks, thus enhancing sectoral policies, institutions, and regulatory frameworks. Therefore, it is essential to exploit synergies and complementarities with other tools such as blending to increase their effectiveness. Subnational application of Public Expenditure and Financial Accountability and Tax Administration Diagnostic Assessments can trigger useful reforms to improve financial management and tax administration, and thus increase creditworthiness.

Borrowing at subnational level without a sovereign guarantee is often seen as the next ‘big’ solution to overcome the infrastructure gap. Creating municipal investment banks or other pooled credit facilities can be a bridge to direct subnational borrowing, building on the framework for central-local fiscal relations. However, strong governance and risk allocation are needed to prevent subnational borrowing from creating contingent liabilities.