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Capital markets for cities

Working papers

Written by Judith Tyson

Hero image description: Street view of Dali City, Yunnan, People's Republic of China with installed solar panels. Photo: Asian Development Bank (CC BY-NC-ND 2.0) Image credit:Street view of Dali City, Yunnan, People's Republic of China with installed solar panels. Asian Development Bank Image license:CC BY-NC-ND 2.0

Tackling climate change requires a radical restructuring of cities’ carbon footprint and rapid implementation of adaptation measures. However, there is a huge gap in finance needed to address these challenges.

For cities to strengthen their revenue mobilisation to access external financing they need to build the fundamentals of strong leadership, strategic planning, and credible public financial management.

Capital markets offer cities an additional and potentially transformative source of private finance. Access to capital markets would offer cities large scale finance, at a lower cost and over a longer term than bank lending or project finance.

However, cities face multiple barriers to access capital markets: cities may not have the legal mandate required and national capital markets may be underdeveloped; cities often lack credit ratings and, though cities have assets that could be used to raise finance, many struggle to develop a pipeline of ‘bankable’ projects.

Project preparation facilities that support cities to prepare ‘finance-ready’ projects do exist and there are financial intermediaries that offer technical expertise and publicly funded loans or blended finance to cities. However, to date, such interventions have only mobilised very limited private finance for a modest number of city projects. Much more needs to be done if cities’ financing needs are to be met.