Financing Sustainable Cities in Southeast Asia

Executive Summary

Southeast Asia is urbanising at a rapid pace. Between 2018 and 2030, 90 million people are expected to move to cities in the ASEAN region. This surge in urban population is placing significant pressure on urban infrastructure and public services, driving a host of complex challenges, ranging from power shortages and chronic traffic congestion to air and water pollution. These challenges, in turn, have made Southeast Asian cities particularly vulnerable to the impacts of natural disasters and climate-related risks. Urban areas in the region face major environmental threats, including high greenhouse gas emissions, severe flood risks, rising sea levels and storm surges, rising average temperatures, and more intense and prolonged heat waves. These issues underscore the critical need to invest in climate adaptation and resilience infrastructure. However, traditional funding and financing mechanisms are struggling to meet escalating demand. While public sector finance plays a fundamental role in addressing these needs, sustainable urban development can only be achieved through coordinated investment from both public and private sectors.

This report reviews how sustainable urban development is funded and financed in Southeast Asia, focusing on the rapidly urbanising ASEAN-5 countries of Indonesia, Malaysia, the Philippines, Thailand, and Viet Nam, providing following key findings on ways forward for sustainable urban development.

Improving public finance and other financial frameworks to enable private investment in sustainable urban development

• Rapid urbanisation and climate change in Southeast Asia are creating strong and increasing demands for investment in sustainable urban development. City governments are pivotal in leading public sector efforts due to their proximity to and understanding of local needs. However, their capacity to respond effectively is largely shaped by national fiscal decentralisation frameworks. For example, local governments’ spending responsibility as a share of total government spending remains limited in Malaysia (7.2%), the Philippines (11.1%), and Thailand (30.5%) – all below the OECD average (39.5%) – indicating a stronger reliance on national governments. A common challenge across the region is the underutilisation of local own revenue generation. In many cases, local governments have limited authority to set fees and charges, adjust local tax rates, or access borrowing options, constraining their ability to finance needed infrastructure.

• A large majority (76%) of the projects analysed in this report were funded and financed in foreign (non-local) currencies, in USD, EUR, AUD, or JPY. In countries where non-local currency funding is common, it is critical to minimise foreign exchange (FX) risk. Developing domestic financial markets is essential to mobilise long-term capital from domestic savings, reducing exposure to FX volatility in future urban investments.

• Within the selected sample of projects, domestic financial institutions currently play a limited role in financing sustainable urban development. Most project funding comes from foreign investors and joint ventures. To strengthen domestic involvement, ASEAN-5 countries could expand domestic capital markets by reinforcing investor base.

• Urban development projects in Southeast Asia also face risks not directly related to the finance itself but which nevertheless serve to deter investors, including institutional instability, legal complexities, and rigid timelines. To minimise these risks, governments could simplify permitting processes, introduce “one-stop” services for development and building permits, enforce standard approval times, strengthen inspections and enforcement, and build trust in developers through licenses and performance guarantees.

Removing barriers and providing incentives to broaden the range of funding sources and financing instruments for sustainable urban development

• ASEAN-5 countries are not fully leveraging the full spectrum of available financial instruments for sustainable urban development. While 73 of the 129 sampled projects used public loans, 14 projects used private equity, 6 projects used bonds, and none employed an infrastructure fund or real estate investment trusts (REITs) as private financing instruments. Efforts to drive sustainable urban development through improving access to, and the range of, financing instruments are limited. Green financing is concentrated in a few sectors such as buildings (52.8%) and energy (26.6%).

• Bond markets, especially green bonds, remain underdeveloped. Scaling up the use of Green, Social, and Sustainability (GSS) bonds, supported by incentives such as tax exemption benefits for bond issuers and stronger regulatory frameworks such as clearer taxonomies and guidelines for GSS bonds, could help unlock more private investment into sustainable urban development projects.

• Private Equity and Infrastructure Funds are gaining traction in Southeast Asia, but urban development still relies heavily on international public finance such as Official Development Assistance (ODA). REITs are underused due to regulatory and tax barriers; for example, REITs often face double taxation risks. To boost investment in climate-resilient projects, governments could improve tax systems, enhance public-private partnerships (PPPs), and reduce barriers for REITs to support green buildings and sustainable development.

• There is a mismatch between public and private investment in urban areas (in terms of both location and level of investment), which can lead to gaps in infrastructure and services that undermine the effectiveness and financial viability of potential private urban development projects. To foster more impactful private investment benefitting well-being and resilience, aligned with public investment and alleviating public fiscal burden, governments could offer incentives such as reduced property taxes or free access to public land for co-ordinated sustainable urban development projects. Establishing land value capture mechanisms such as Community Infrastructure Levies (a form of development charge) and strengthening PPPs could also help direct and align long-term investments.

Strengthening urban planning and legal systems to leverage private investment for sustainable urban development

• ASEAN-5 countries have increased their use of national and subnational strategic planning documents to promote investments. In the past decade, four ASEAN-5 countries have introduced National Urban Policies (NUPs). The development and implementation of NUPs can send a strong signal to the market, attracting investments by offering a clear framework for sustainable urban development. Moreover, NUPs can help improve multi-level co‑ordination around their goals by promoting a diversified and balanced mix of resources to finance urban development across government levels.

• Urban development in ASEAN-5 countries is not sufficiently climate-proof, partly due to a lack of co-ordination between ministries, as well as across national and subnational governments, delaying the implementation of broader climate goals and strategies in urban planning frameworks. Governments should embed climate objectives into land use and spatial planning policies at all levels, enforce stronger climate-related regulations, and provide incentives for climate-resilient, environmentally friendly practices. In addition, better co-ordination across jurisdictions through measures such as inter-municipal co-operation arrangements will enhance the efficiency of infrastructure planning and investment by leveraging economies of scale and policy synergies, as many infrastructure projects span multiple jurisdictions.