Countries around the world are rapidly urbanising. The global population living in cities has more than doubled over the last 40 years and is projected to reach 55% by 2050. Increasingly, traditional funding and financing mechanisms for sustainable urban development are proving inadequate to meet the growing demand. Innovative financing and funding mechanisms are both essential for cities to meet growing infrastructure needs. This chapter explains why policymakers should give more attention to the issue of financing sustainable urban development in Southeast Asia. It then introduces the ecosystem of actors and outlines the various approaches to financing. Finally, it presents the research objective and analytical approach of the study.
Financing Sustainable Cities in Southeast Asia
Diversifying Instruments and Leveraging Private investment
Abstract
Countries around the world are rapidly urbanising. The global population living in cities has more than doubled over the last 40 years and is projected to reach 55% by 2050 (OECD/European Commission, 2020[1]), demanding significant investment in infrastructure, both to accommodate population increases and to adapt to new challenges like climate change. The global investment needed to support urban growth is estimated at USD 94 trillion between 2016 and 2040. Additionally, the International Finance Corporation (IFC) has estimated that cities in emerging markets will need USD 29.4 trillion in cumulative climate investment between 2018 and 2030 to mitigate and adapt to climate change effectively (IFC, 2018[2]). High-quality infrastructure is a cornerstone of sustainable urban development, delivering a host of social, economic, and environmental benefits, including reduced traffic congestion, increased productivity, more affordable housing, and improved resilience to climate change (OECD, 2015[3]).
Southeast Asia has represented one of the most dynamic areas in the world in the last decades, showing high population and economic growth. Between 2018 and 2030, 90 million people are expected to urbanise in the ASEAN region, with medium-sized cities between 200 000 and 2 million people projected to drive 40% of the region’s growth. By 2025, two in three people in the ASEAN region will be living in cities. (ASEAN Smart Cities Network, 2018[4]). Meeting the demand for urban infrastructure investment and public service provision has been a major challenge in this region, causing multi-faceted problems, including power outages, chronic traffic congestion, and air and water pollution. These problems, in turn, have made cities in Southeast Asia particularly vulnerable to risks and the impacts of natural disasters.
While financing sustainable urban development has never been more important (Box 1.1; Box 1.2), conventional funding and financing mechanisms are proving insufficient to meet growing demand. Traditionally, infrastructure investments – including for sustainable urban development – have been funded with public money (OECD, 2015[5]). However, the capacity of governments to finance quality infrastructure investments, already strained before COVID-19, has become even more challenged by monetary policy tightening in key markets and fiscal policy issues worldwide. Public deficits and budgetary constraints imposed during the pandemic put infrastructure investments at risk. There is therefore a need for more innovative financing mechanisms and investment models that leverage private sector investment.
While there is already strong demand from the private sector for urban development, sustainability is not always prioritised, highlighting the need for more effective policy frameworks to guide investment. The good news is that sustainable finance has become a leading investment approach for investors seeking to pursue diverse investment options (Patalano, 2020[6]).
Adopted by the Regional Development Policy Committee in 2019, the principles consolidate the lessons from the past 20 years and more of work on cities to guide policy makers in building smart, sustainable and inclusive cities. The principles were welcomed by mayors and ministers during the 7th OECD Roundtable of Mayors and Minister held on 19 March 2019 in Athens, Greece. Mayors, ministers and partner institutions are committed to supporting the implementation of the principles through the Athens Pledge.
The Principles offer high-level guidance for developing smart, sustainable, and inclusive cities based on three pillars: (i) targeting an effective scale, (ii) adopting a coherent and integrated strategy, and (iii) engaging stakeholders. They emphasise the importance of stakeholder engagement, particularly for investments and developments that can support high-quality and inclusive urban infrastructure.
In particular, Principle 8 emphasises the need for adequate funding and financing to implement urban policy responsibilities at all government levels. This includes promoting a diversified, balanced, and sustainable mix of resources (such as grants, taxes, user charges, fees, and revenues from assets), allowing subnational governments sufficient flexibility to manage their revenues or "fiscal space", mobilising innovative financing tools, and leveraging private sector finance.
Source: (OECD, 2019[7]); (G20-OECD, 2022[8])
In 2023, the OECD together with the G20 published Financing Cities of Tomorrow for the G20 Infrastructure Working Group. This report emphasised the importance of making cities inclusive, resilient, and sustainable, in response to discussions at the G20 Finance Ministers and Central Bank Governors. In reference to the “G20 Principles on Financing Cities of Tomorrow”, this report suggested guidance to accelerate infrastructure investment by three ways.
Firstly, it outlines how new forms of urban planning can mobilise private finance for inclusive, resilient, and sustainable urban investment. Secondly, it examines how leveraging private investment can enhance cities' capacity to support necessary investments in a constrained fiscal environment. Finally, it considers the potential opportunities and challenges in mobilising sustainable finance—such as green, social, and sustainable bonds and loans, sustainability-linked bonds, and catastrophe bonds—for infrastructure investment by city governments. The report also includes 17 brief case studies from 12 countries, showcasing innovative practices for creating the Cities of Tomorrow.
Source: (G20/OECD, 2023[9]).
Financing sustainable urban development involves multiple stakeholders. National governments set strategic frameworks, fund infrastructure, and attract investment, while city governments manage essential services, optimise urban assets, and engage investors. Multilateral institutions provide financing, technical support, and credit enhancements, particularly in emerging markets. The private sector plays a crucial role through direct investments and public private partnerships. Effective policies, governance, and planning are essential for mobilising resources and ensuring sustainable urban growth.
Effective co-ordination across government levels, jurisdictions, and sectors is crucial for efficient urban infrastructure investment. Vertical co-ordination aligns planning, optimises shared investments, and minimises contradictions through mechanisms like city deals and regional strategies. Horizontal co-ordination ensures infrastructure spans multiple jurisdictions efficiently, with inter-municipal cooperation enhancing economies of scale. Cross-sector co-ordination fosters holistic, place-based development by synchronising public and private investments. Engaging private and civil society stakeholders further strengthens strategic planning and implementation.
Innovative financing and funding mechanisms are both essential for cities to meet growing infrastructure needs. Financing spreads upfront costs over time, while funding ensures operational expenses and debt repayment. Insufficient funding limits subnational governments’ access to finance, affecting their creditworthiness. Reliable funding sources are essential for sustaining investment and securing financial stability (G20-OECD, 2022[8]). Subnational governments, including municipal and regional authorities, are responsible for approximately 60% of general budget resources in G20 countries and 40% globally, financing essential services like transport, water, and housing (G20-OECD, 2022[8]). However, general are often insufficient to fund these essential services, especially amid economic challenges. Subnational governments can attract investment through a balanced mix of revenues: grants, taxes, and user charges (OECD, 2019[10]). Borrowing, when fiscally managed, can enhance financial capacity (IMF, 2020[11]), while private investment can bridge funding gaps and support large-scale projects.
This report aims to provide a comprehensive understanding of sustainable urban development financing within ASEAN-5 countries (Indonesia, Malaysia, the Philippines, Thailand, and Viet Nam). The analysis focus on those countries for the reason they are middle-income countries with the fast-growing economy in the Southeast Asia. It seeks to answer four key questions:
What are the main financing trends in sustainable urban development projects in ASEAN-5?
What is the relation between project categories (sectors) and funding and financing instruments?
Which sector(s) are most successfully mobilising private capital?
How can diversifying financing instruments for sustainable urban development leverage private capital?
The report was motivated by a critical gap in existing urban green finance data. While aggregate urban green finance data, such as green bond issuance by country and sector, are available, there is limited “place-based” data on where these investments are implemented, making it difficult to identify where funding gaps are particularly acute or not. The report fills this information gap on the financing of sustainable urban development projects in Southeast Asia by analysing 129 projects in the ASEAN-5 countries. The projects can be grouped under four categories: (i) integrated urban development, (ii) urban transport, (iii) water, wastewater and waste management, and (iv) buildings. Each project is examined individually, with particular attention to the financial instruments used. The report then identifies challenges and proposes solutions as to how financing can be diversified and scaled up across the broader Southeast Asia region.
The analysis draws on two OECD Principles on Urban Policy: “leveraging the potential of cities of all sizes for advancing environmental quality and the transition to a low-carbon economy” and “promoting inclusive cities that provide opportunities for all by improving access for all urban residents and users” (OECD, 2019[12]). Sustainable urban development is linked to urban green growth, which fosters economic development while reducing negative environmental externalities and the impact on natural resources and environmental services (OECD, 2013[13]).
The study is based on desk-based research, including institutional and legal framework reviews. Primary sources include project databases from international organisations and initiatives (Table A A.1), while secondary sources include several individual resources from national and local institutions and project websites (Annex B). The findings highlight financing mechanisms and barriers to private investment in sustainable urban development. The definitions of the key terms are provided in Annex A.
Number of projects by category, expressed as a percentage of the total (n=129).
Note: Results based on a sample of 129 sustainable urban development projects collected by the OECD. The number of projects included per category is not indicative of a trend, as the sample is not representative. Out of the 48 integrated urban development projects, 23 were neighbourhood improvement projects (48%), 13 were disaster risk reduction projects (27%), 7 were smart cities (15%), 3 were TOD projects (6%), and 1 was green areas (2%).
Source: Author’s elaboration based on the project list Annex C.
Number of projects by category in each country (n=129).
Note: Results based on a sample of 129 sustainable urban development projects collected by the OECD. The number of projects included per country is not indicative of a trend, as the sample is not representative
Source: Author’s elaboration based on the project list Annex C.
Average project size (USD) by category (n=1290.
Note: Results are based on a sample of 129 sustainable urban development projects collected by the OECD, from which only 125 projects have disclosed financial information.
Source: Author’s elaboration based on the project list Annex C.
In addition to analysis of the 129 selected sustainable urban development projects, the findings presented in this report are supported by information gathered through interviews and desk research about key legal instruments, guidelines and initiatives, and selected cases.
The key legal instruments, guidelines and initiatives were grouped into three themes:
Creating basic conditions to maximise private investment in sustainable urban development,
Diversifying funding sources and financing instruments, and
Guiding private investment to drive urban sustainability.
Table A A.2 in Annex A outlines major legal instruments, guidelines and initiatives studied in this report.
References
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