The urban community can save Financing for Development

The Addis Ababa conference may not have lived up to its potential, but city leaders can still drive the agenda forward.

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The Addis Ababa Conference on Financing for Development, held 13-16 July, was a political success yet a practical disappointment. Though an outcome agreement was reached, the 193 U. N. member states were unable to put together a bold agreement for how to finance the new Sustainable Development Goals and related agenda.

The narrative of the agreement — the Addis Ababa Action Agenda — is broadly correct. Development finance will increasingly be driven by domestic resources, private investment and targeted overseas development assistance (ODA), all topics that are mentioned in the agreement.

In addition, curbing illicit financial flows and improving tax systems, also both addressed in the action agenda, remain critical to achieving the SDGs. Likewise, capital markets will need to be redesigned so that a far more substantial level of financing can be channelled to sustainable infrastructure and clean energy. There is much work to be done, and the document highlights many of the important sectors.

However, the member states of the United Nations, particularly from the developed world, did not bring credible commitments to make Addis the breakthrough that was needed. There were no major announcements for new funding commitments or transformative initiatives. Negotiators from the developed world strongly and successfully resisted any new initiatives on tax cooperation until the very last day of the conference. How the world will mobilize the additional USD 2-2.5 trillion per year in investments for sustainable development remains an outstanding question.

Nonetheless, there is still an opportunity to make the Addis outcome more actionable. This will happen in the near future, in the weeks leading up to the adoption of the SDGs in September and the COP 21 climate conference in Paris at the end of the year.

To do so, the urban community must take the leading role.

A significant part of the future of development finance is associated with urbanization and the challenges and opportunities that arise from a growing urban population. Organizing the urban community is not an easy task, but the practical, action-oriented nature of city governments means that, going forward, they can help drive the agenda.

Actionable agenda

Here are four actionable steps that the urban community should consider to help the international political process save face and be useful.

First, urban policymakers should make a concerted effort to develop municipal bond markets in cities around the world. Municipal bond markets have proven to be a very successful way of providing long-term financing for urban infrastructure while providing stables returns for investors.

The United States provides an example of a well-functioning municipal bond market, with over USD 3.5 trillion of debt outstanding. Developing countries should agree to carry out feasibility studies, and then develop pathways, of the creation of well-functioning, local-currency municipal bond markets to finance infrastructure. These plans should be initiated at the SDG conference in September 2015 and released by the Habitat III conference on cities in 2016.

Second, cities must develop SDG infrastructure plans in coordination with the financial community. The SDGs call for a major scaling up in social-sector investments such as health and education that will be primarily financed by the public sector, as well as in infrastructure and energy investments that will be financed by the public and private sectors. City-level plans for the SDGs, created in coordination with stakeholders from the public and private financial sector, would help pave the way for a practical boost in investments to achieve the SDGs.

Third, in coordination with national governments, cities should commit to the creation of well-capitalized, well-functioning development banking institutions that can help cities channel the financing needed to achieve the SDGs.

Development banking is making a major comeback globally. The Asian Infrastructure Investment Bank (AIIB) and the New Development Bank, both headquartered in China, are good examples of this on a global level. At the same time, sub-national development banks, such as the NY Green Bank and Connecticut Green Bank in the United States, show that the model works even in developed countries. Cities need to make an assessment of whether the right financial institutions are in place to finance the SDGs at the city level.

Fourth, institutional investors need to make commitments to support the achievement of the SDGs on a city level. Specifically, institutional investors need to commit to increasing their allocation to infrastructure and green energy projects. Globally, public pension funds and sovereign wealth funds have less than a 2 percent allocation to these sectors.

If the lack of bankable projects is indeed a stumbling block, then these institutions need to help finance and support a greater pipeline of projects. Institutional investors are now fully part of the development finance ecosystem, and they should be asked to contribute in a practical way toward urban development.

The Addis Ababa Action Agenda can indeed still become actionable, but it will require cities to take the lead. Passing the baton from international negotiators to city mayors and urban planners is a good idea. Whether this happens in time is a question that remains to be answered.

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Aniket Shah

Aniket Shah is programme leader of the Financing for Sustainable Development Initiative at the Sustainable Development Solutions Network (SDSN) in New York. For 2014-15, he has been seconded to SDSN from Investec Asset Management, an international investment management firm based in South Africa and the United Kingdom. In this role, Aniket worked with the world’s largest institutional investors, from both the public and private sectors, to develop long-term portfolio investment strategies with a focus on emerging markets and Africa. Previously, Aniket worked at the Earth Institute at Columbia University, where he served as special assistant to the director, Professor Jeffrey Sachs, and worked on international development projects in Africa, Asia and North America.