Toolbox
Financial Instruments
Toolbox Themes
- Urban Nature
- Sustainable Urban Mobility
- Urban Finance
Objectives
Make a proposal of financial instruments for the strategic project portfolio and initiatives identified in the plan.
Results
Proposed financial instruments for the Strategic Project Portfolio and initiatives identified in Phase 2
Description
This activity seeks to provide alternatives that substitute or complement the resources coming from the municipal budget, understanding that transfers from the central government and the ordinary local budget are not sufficient. The New Urban Agenda promotes the collection of local governments' own revenues in order to contribute to fiscal decentralisation and the expansion of revenue sources (UN-Habitat, 2020; UN-Habitat, 2021). It should be emphasised that the expansion of revenue sources requires greater coordination and cooperation between levels of government and sectors.
Using as a basis the strategic project portfolio (Development of Strategic Project Sheets (Activity 41), and/or initiatives identified in Block E (Formulation of Strategies and Initiatives (Activity 22) or Block F (Land Strategies (Activity 26) and the results of the Financial Resources Review (Activity 3), the team should identify and propose the mechanisms for financing urban development in order to achieve the mobilisation and capture of land value; allowing self-financing under the principle of those who benefit the most contributing the most to pay for it. The financial instruments should integrate the procedure to be followed in accordance with municipal and central legislation so that the planning instrument developed acquires legal certainty or validity.
The team will use the T50 Financial Instruments Guide which will give the technical team a better understanding of the different sources of funding, considering the following strands:
- Own income
- The urban financing mechanisms that are considered in central and local laws, seeking to ground them in the strategy and reality of the municipality.
- External sources of funding that do not depend on the budget or municipal revenues, and which are via borrowing, central government and non-governmental organisation funding, private participation, etc.
With the categorisation of financial instruments, the team will be able to learn about entities that can provide technical assistance and/or funds for such instruments in order to make a proposal of financial instruments for each prioritised project of the strategic project portfolio, according to the objectives of the municipality and what is allowed in its national and municipal legislation. The team will finally be able to select those that best suit its context, as well as propose and develop additional financial instruments to be considered.
Steps
- Review the fact sheets of the Development of Strategic Project Sheets (Activity 41).
- Review the initiatives that were established in the Formulation of Strategies and Initiatives (Activity 22) (if Block E was developed) or Land Strategies (Activity 26) (if Block F was developed).
- Considering the strategic project portfolio and the initiatives, identify the financial instruments that may be useful, using the table in the T50 Financial Instruments Guide.
Resources
- Finance for City Leaders Handbook (2017)
- Rethinking City Revenue and Finance (2022)
- Land and Property Taxes (2011)
- Value Capture and Land Policies (2012)
- Innovative Land and Property Taxation (2011)
- Rapid Financial Assessment for Planned City Expansion (PCE)
- UIIF Urban Infrastructure Insurance Facility
- Leveraging Land: Land-based Finance for Local Governments - A Reader (2016)
- Financing Sustainable Urban Development (2021)
- PPP Reference Guide 3.0
- Public-Private Partnership Handbook (2008)
- Methodological Guide for the Operationalisation of Urban Projects (2018)
- Climate Finance Reports and Tools
- Financial Instruments Toolkit (for urban climate projects)
- Global Compendium of Land Value Capture Policies (2022)
Sustainable Urban Mobility
To enable sustainable urban mobility, access to diversified financing is necessary; from municipal revenues to green bonds and international grants. In most urban areas, safe system-based investments such as street redesigns often lack upfront financial justification, but generate large social returns. Funding instruments should target lifecycle costs for transit and pedestrian networks, ensure affordability for low-income users, and prioritise safety retrofits. A review of the mobility project sheets, (activity 41) can help align and match each project with a funding type, e.g PPPs. It is also beneficial to explore other sources like climate finance, health sector budgets and road safety funds for co-financing urban mobility projects.
Urban Nature
To successfully finance NbS, cities need to explore diverse funding sources and mechanisms beyond their traditional municipal budgets. The first step is to align NbS projects with the broader urban development strategy and identify their financial needs based on the strategic project portfolio. Once the financial requirements are clear, cities can explore various funding options, including public and private sources. Local governments can consider land value capture, where those who benefit from the enhanced ecosystem services (such as increased property values or improved air quality) contribute to the financing of NbS projects.
In addition to internal revenue sources, such as taxes and fees, cities should actively seek external funding from national governments, international donors, and private sector investments. Green bonds, impact investments, and public-private partnerships can be particularly useful for scaling NbS projects, especially in urban areas with limited resources. Effective coordination between different levels of government and sectors is essential to mobilize these financial resources and ensure that NbS initiatives are financially sustainable in the long term.
Additional Resources:
State of Finance for Nature
Financing Nature based Solutions
The little book of investing in Nature