This chapter presents the results of the analysis of 129 sustainable urban development projects (both public and private) and a desk-based review of institutional and legal frameworks and suggests future policy directions. The key findings and future policy directions are grouped into three themes: (i) improving public finance and other financial frameworks to enable private investment in sustainable urban development, (ii) removing barriers and providing incentives to broaden the range of funding sources and financing instruments for sustainable urban development, (iii) strengthening urban planning and legal systems to leverage private investment for sustainable urban development. These insights aim to inform policymakers and stakeholders on effective strategies for fostering sustainable urban development.
Financing Sustainable Cities in Southeast Asia
Abstract
3.1.1. Fiscal capacity of city governments
Rapid urbanisation and environmental challenge such as climate change in Southeast Asia are creating strong and increasing demands for investment in sustainable urban development. ASEAN-5 countries are facing a persistent gap in public finance to meet such demands. At the national level, public expenditures are growing faster than public revenues, and countries are highly dependent on public debt (OECD/ADB, 2019[1]). On the revenue side, in 2020, average national total tax revenue was 18.7% of GDP across ASEAN-5, significantly below the OECD average (33.5%). Viet Nam reported the highest level of total tax revenue as a share of GDP (22.7%) followed by the Philippines (17.8%), Thailand (16.5%), Malaysia (11.4%) and Indonesia (10.1%) (Figure 3.1). Such limited public revenue will constrain the national government’s ability to support local infrastructure investments. While this implies opportunities to improve budget resources by increasing taxes, it also underscores the limited public sector budget to meet the growing need for quality infrastructure investment, highlighting the necessity to leverage private investment.
% GDP
Source: Author’s elaboration based on data from the Global Revenue Statistics Database (OECD, 2022[2]). Global Revenue Statistics Database.
This financial challenge is further compounded by varying levels of economic development and infrastructure needs across the region, necessitating innovative approaches to bridge the expenditure-revenue gap. Governments are increasingly exploring avenues such as public-private partnerships (PPPs), sustainable finance instruments like green bonds, and fiscal reforms aimed at enhancing revenue generation and efficiency in public spending. For example, Indonesia has enhanced PPP infrastructure projects through improved regulations and subsidies, and has shown strong commitment to GSS bonds aiming to create a robust market ecosystem (Box 3.6), while reforming its VAT system through the 2021 Tax Harmonization Law. Despite these efforts, achieving fiscal sustainability continues to be a significant challenge for ASEAN-5 countries.
City governments are pivotal in leading public sector efforts due to their proximity to and understanding of local needs. Their capacity to respond effectively is largely shaped by national fiscal decentralisation frameworks. Decentralisation processes enable city governments to better respond to local needs through place-based policy and infrastructure investment, also increasing spending responsibilities (OECD, 2019[3]). For example, in Thailand, the COVID-19 pandemic led to fiscal decentralisation by the national government, aimed at strengthening the ability of local governments to more rapidly respond to the pandemic with local, tailored initiatives.
In 2020, across OECD countries, subnational governments have been found to be responsible for 39.5% of total public investment, on average (OECD-UCLG, 2022[4]). This figure varies across ASEAN-5 countries, as some exceed the OECD average, including Viet Nam (71.4%) and Indonesia (44.3%) (Figure 3.2). On the other hand, local governments’ spending responsibility remains limited in Malaysia (7.2%), the Philippines (11.1%), and Thailand (30.5%) – all below the OECD average – indicating a stronger reliance on national governments in these countries.
% of total public investment
Source: Author’s elaboration based on (OECD/UCLG, 2022[5]) World Observatory on Subnational Government Finance and Investment.
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. To help overcome the challenges posed by constrained public budgets, ASEAN-5 countries need to increase the fiscal capacity of city governments for sustainable urban development projects. For instance, given the fiscal risks associated with excessive subnational government borrowing, it is essential to expand city governments' access to finance in a fiscally responsible manner. This requires implementing appropriate fiscal rules, ensuring adequate institutional capacity, and supporting transparent borrowing practices (G20-OECD, 2022[6]).
The 2022 G20-OECD Policy Toolkit offers an overview of potential funding sources and financing instruments that subnational governments can leverage (Figure 3.3).
Source: (OECD, 2022[7]). G20-OECD Policy Toolkit to Mobilise Funding and Financing for Inclusive and Quality Infrastructure Investment in Regions and Cities. OECD Publishing, Paris.
3.1.2. Currency risks in sustainable urban development financing
An over-reliance on non-local currencies for funding and financing exposes sustainable urban development projects to foreign exchange risks
The majority of the sampled projects (96 projects, 74%) are funded and financed in hard (non-local) currencies, either in US Dollars, Euros, Australian Dollars, or Japanese Yen. Funding and financing currencies differ across groups (Figure 3.4). For example, 86% of water, wastewater, and waste management projects (32 projects) are funded and financed in hard currencies. This number includes all the projects that are supported by international donors and those financed by joint ventures. Half of the building projects (4 projects, 50%) are financed in local currencies. The only building project financed by hard currency was the Bangkok Sathorn Project, funded in Japanese Yen by a Japanese consortium.
Note: Results are based on a sample of 129 sustainable urban development projects collected (cf. Annex C).
The practice of financing in non-local currencies accommodates the needs of financial institutions, who prefer investment in more stable currencies. However, it entails a risk of currency mismatch as urban projects receive business income in local currencies, while the debt obligations associated with the projects are in non-local currencies. There is a need to alleviate the foreign exchange risk, which arises from the volatile foreign exchange rates over the long term (World Bank, 2019[8]).
Funding and financing currencies also varied across countries (Figure 3.5). All the sampled projects in Viet Nam are funded and financed in hard currencies. Sampled projects in Indonesia are also heavily funded and financed in hard currencies (26 projects, 90%). More than half of the projects from the sample in Thailand (15 projects, 68%) are funded and financed in the local currency. These findings from the selected sample could potentially represent the complexity and variability in funding and financing mechanisms across ASEAN-5 countries, highlighting the importance of understanding and managing currency risks.
Note: Results are based on a sample of 129 sustainable urban development projects collected (cf. Annex C).
Measures to minimise foreign exchange risks
Fostering the development of local capital markets and encouraging domestic financial institutions to provide long-term financing solutions can reduce reliance on external currency hedges like TCX and governmental guarantees, which can help to mitigate currency risks in emerging markets. In countries with sound capital markets, future cash flows could also be hedged with currency derivatives (OECD, 2015[9]). A currency swap, for instance, allows two transaction parties to exchange principal and/or interest payments of a loan in one currency for an equivalent loan in another currency. In doing so, lenders or borrowers can hedge their loans/investments at least partially. In some emerging markets where these derivatives are not available, Currency Exchange Fund (TCX), a special purpose fund, provides currency hedge functions (IISD, 2015[10]). TCX provides over-the-counter (OTC) derivatives to hedge the currency and interest rate mismatches that emerge when international investors provide financing in emerging economies (OECD, 2016[11]). By offering the FX hedge products to emerging countries where the derivative markets do not exist, the fund enables borrowers in such economies to access long-term financing. Borrowers are protected from growing debt burdens or financial losses.
However, there are some shortcomings related to TCX. The services are only available to investors, the majority of which are international financing institutions and their clients, limiting the opportunity for small-scale investors. Moreover, one single large transaction can easily exceed the country limit, reducing the hedging opportunities of remaining transactions. Another downside is its core principle to offer ‘additionality’; TCX can only offer hedging products should there be no commercial alternative available (IISD, 2015[10]). FX risk arising from currency mismatches can also be mitigated through public guarantees. The ‘Guarantee of Access to and Remittance of Foreign Exchange’ enables unlimited exchange of local currency into foreign currency and the dispatch of such foreign currency out of the country. This guarantee is especially important in high demand in countries where the foreign exchange reserves are inconsistent and foreign exchange earnings are low. With this guarantee, the guaranteed holders will receive prioritised foreign exchange reserves from the government.
In Viet Nam, the local currency, Dong, is not a convertible currency, which means that the guarantee of foreign currency on availability, convertibility and remittance is key to project bankability. In the early 2000s, infrastructure projects in Viet Nam were fully reliant on the governmental guarantees of convertibility and repatriation. However, the practice was modified over time. In line with the Vietnamese government’s interest in reducing obligations derived from governmental guarantees and protecting its foreign currency reserves, the government introduced new regulations to lower the foreign currency convertibility rate and enforce stricter criteria for receiving government guarantees. Amidst this emerging distress on investors, the Vietnamese domestic financial market has continued to grow, with a few domestic banks showing interest in providing long-term finance for infrastructure projects. The market development of Viet Nam implies that the development of local banking and capital markets is the ultimate solution to address potential currency mismatches associated with long-term urban development projects (World Bank, 2019[8]). Governmental guarantees, a conventional approach to mitigate the future FX risk associated with long-term urban projects, are accompanied by surging concern over enlarging contingent government liabilities and decreasing foreign currency reserves. In the long run, nurturing the domestic capital market and investors to provide LCY financing is the ultimate solution to avoid future currency mismatches.
3.1.3. Underdeveloped domestic capital markets
Limited roles of domestic financial institutions
The review of the sampled urban development projects found that international donor loans from multilateral development banks and bilateral development agencies are an important source of financing for sustainable urban development projects. Of the 129 projects, 69 (53%) were supported by international donor loans. However, the degree of dependence on such financial sources varies across groups. Only 13 (35%) out of 34 water, wastewater, and waste management projects were financed at least partially by international donor loans, compared to 24 (50%) out of 48 integrated urban development projects, and 4 (50%) of the 8 building projects (Figure 3.6).
In Viet Nam, 24 (46%) out of 52 of the sampled projects are at least partially financed by international donors. This could be due to the high ratio of large-scale urban development projects across several municipalities and water, wastewater, and waste management projects. In Indonesia, 20 (69%) out of 29 projects are at least partially financed by international donors, and in Thailand 10 (45%) out of 22 projects. Private-led urban development projects, including emerging smart city projects and green buildings, are also common in the Thailand projects sampled.
While the ASEAN-5 countries have a bank-centred financial system, the dominant players and systems vary across the countries. Viet Nam and Indonesia are characterized by a public-reliant banking system, where state-owned banks play a significant role. The Philippines provides a contrasting landscape, where commercial banks are vital to the financial market.
Number of projects receiving international donor loans
Note: Results based on a sample of 129 sustainable urban development projects collected by the OECD
Source: Author’s elaboration based on the project list Annex C.
The analysis of the projects sampled shows that foreign private investors also play an important role in finance instruments such as public-private partnerships, special purpose vehicles, and joint ventures. Out of 31 projects that use private-only or mixed investment models, 12 (39%) projects are financed by foreign investors through foreign direct investment or joint venture. The types of foreign investors include construction engineering companies such as Singapore’s Surbana Jurong, China’s Gezhouba Group, China Communications Construction Company, Ltd, Japan’s Nishimatsu Construction, Australia’s Lendlease, the Netherlands’ Tahal Group, Japanese multi-sectoral conglomerates (Marubeni, Mitsubishi Corp, Mitsui & Co., and Sumitomo Corp), and France’s utility company, SUEZ Environment. They arrange joint ventures with other international players or local enterprises to finance urban projects in ASEAN-5 countries.
The potential for national development banks to promote sustainable urban development in the region has not yet been maximised; only three projects were identified with the engagement of a national development banks. In the project Makassar-Parepare Railway Line in Indonesia, the Indonesian National Development Bank, PT Sarana Multi Infrastrukture, was a lender. The provided financing was used for the construction of the railway and its infrastructure, which will ultimately reach 144 kilometres and 16 stations. In the Philippines, an urban water and sanitation project was co-ordinated by the national development bank with a government guarantee (Box 3.1).
The project aimed to assist selected 40 Local Government Unit (LGUs) to provide sustainable water and sanitation services and to strengthen their institutional and technical capacity for planning, budgeting and financial management of local services. It contributed to improving water supply systems in LGUs, water utilities where the partnering private operators were selected, and to the physical infrastructure in household toilets, as well as on-site sanitation facilities including soakaway pits or the disposal of wastewater flows.
A USD 7.48 million loan from the World Bank’s International Bank for Reconstruction and Development (IBRD) was channelled through the Development Bank of the Philippines. Following the selection of sub-projects (construction, rehabilitation and expansion of the water supply system, on-site sanitation facilities and micro-drainage infrastructure) and participating entities (an LGU, a private operator or a financial institution), the aforementioned IBRD loan was sub-loaned to the participating entities. The loan from IBRD extended to DBP was guaranteed by the Government of the Philippines. In addition, DBP also contributed US$ 0.97 million to the project by itself.
The project showcased the critical role of the national development bank, which (i) channelled the international development fund and (ii) redistributed financing to the participating subnational governments.
Source: (World Bank, 2022[12]). LGU Urban Water and Sanitation Project APL2.
Establishing solid investor base support in the development of domestic capital markets
Reinforcing investor base is a crucial pillar to develop domestic capital markets, especially in ASEAN-5 countries, given the limited number of regional investors and low market liquidity. Pension funds and foreign investors are two primary institutional investors:
Expanding pension funds would be a strategic move to strengthen domestic financial institutions in sustainable urban development. Compared to the other four countries, Malaysia has a sizeable pension fund. The Employee Pension Fund was launched in 1951, and the Retirement Fund (KWAP) in 2007. At the end of 2016, aggregated assets under management amounted to up to 70% of national GDP. In light of the renewal of social security systems, the pension fund is expected to grow in countries such as Indonesia and Thailand (Kitano, 2018[13]). The development of pension funds in ASEAN-5 countries will provide larger and longer-term investments in the capital market, benefitting infrastructure sectors that need long-term finance.
Foreign investors could play a vital role in the diversification of ASEAN-5’s investor base. Their risk and return preferences tend be different from those of domestic investors, and they also buy and sell more frequently, which contributes to improving the market liquidity. The reduced country risk, enhanced sustainability awareness, and gradual deregulation of the risk hedge instruments across the five countries allow more foreign investors to participate in the ASEAN-5 market. However, foreign exchange regulation restricts offshore transactions. Foreign investors could withdraw their money abroad in case of market disruption, which implies a potential capital reversal in the macro-region. The development of the domestic market is a foundation to expand foreign investors in the region (Kitano, 2018[13]).
In addition, since new emerging international climate finance is geared towards financial support to national governments, it is critical to rethink and establish new forms for vertical collaboration between tiers of government. It has to be noted that access to green financing does not necessarily raise challenges that are radically different from former attempts to leverage private investors for infrastructure investments. The general need to ‘fix the fiscal fundamentals’ in the relationship between tiers of government is related to the need to build a robust funding base to engage with private sector investments (White and Wahba, 2019[14]; OECD, 2021[15]). For example, enabling municipalities to raise their own revenues or to engage in debt financing or Public Private Partnerships (PPPs) requires significant and often controversial reform of national regulations, such as those determining the degree of fiscal autonomy of local governments. Indeed, there are borrowing limits for municipalities in Malaysia and Thailand (ADB, 2024[16]). In this context, the OECD has formulated a set of recommendations around four key areas that policymakers could focus on to create an enabling environment for subnational governments to leverage innovative funding and financing for infrastructure investment. These four areas are: (i) reinforcing subnational government fiscal autonomy and financial capacity, (ii) building subnational government investment capacity, (iii) enhancing co-ordination and cooperation among and across levels of government, and (iv) establishing enabling regulatory and legal frameworks (OECD, 2021[15]).
3.1.4. Non-financial risks in urban development
Interviews with experts in Southeast Asian countries highlighted that urban development projects in Southeast Asia often face non-financial project risks that hinder their feasibility and attractiveness to investors. Frequent institutional changes result in uncertainty regarding regulations, inconsistent policy implementation, and shifting government priorities that leave investors unsure about long-term project viability. Complex legal frameworks surrounding land ownership and usage create challenges such as ambiguous land rights, conflicting ownership claims, and lengthy legal procedures that can stall project timelines and lead to potential disputes. Further, the rigidity in scheduling land development projects, characterised by inflexible timelines and bureaucratic hurdles, often leads to delays in securing necessary approvals and limits adaptability to changing market conditions. These cumulative factors contribute to a broader perception among investors that urban development projects in the region are risker than other investment opportunities. Such project risks commonly observed in Southeast Asia prevent investors from participating in urban development projects, as they are relatively riskier than other investment options.
By minimising risks such as frequent institutional changes, complexity in the legal system regarding land, and rigidity in scheduling land development projects, the financing of sustainable development projects could be supported. Good project design and governance is a pre-requisite for successful project delivery. For instance, in Viet Nam, there are three types of development approvals: (i) investment approval, (ii) issuance of land use right certificate, and (iii) development approval and building or construction certificates. Most projects require all three types of approval. After attaining investment approval and favourable appraisal of the environmental impact, the proponent must submit a request for land allocation to the local Department of Natural Resources and Environment. A construction permit based on a detailed design of the project is also required (OECD, 2018[17]).
Options to reduce project risks could include:
Simplifying the permit/approval system,
Introducing “one-stop” service for development and building permits,
Establishing and enforcing standard processing times for different types of permits/approvals, enabling private developers to anticipate the timelines for application results,
Enhancing inspections and enforcement to ensure that permitted/approved developments are completed as planned (OECD, 2018[17]), and
Maintaining and strengthening the capacity of developers/contractors through construction licences, technical and financial audits, and performance guarantees.
3.2.1. The use of financial instruments for urban sustainability: an overview
The sampled sustainable urban development projects often combine funding and financing. Of the 129 projects, 63 (49%) utilised a combination of funding and financing (often pairing loans with general budget resources), 31(24%) relied solely on financing, and 8 (6%) used only funding. Information on the specific financial instruments used was unavailable for 27 projects (Figure 3.7).
Public loans – predominantly sourced from bilateral and multilateral donors – emerged as the predominant financing instrument in 73 of the 129 projects. These loans are commonly paired with public general budget resources by the national or subnational governments (used in 63 projects). Public Capital Expenditure are the second most utilised funding instrument employed in 66 projects. Figure 3.8 offers a detailed breakdown of these funding and financing instruments. None of the projects on the list employed an infrastructure fund or real estate investment trusts (REITs) as private financing instruments, which suggests potential to diversify financing options for sustainable urban development projects. However, it is possible that this finding is reflective of the sample inclusion criteria. Of the 129 projects sampled, 75% used public sources only, 14% used private sources only, and 10% used mixed (i.e., both public and private) sources (Figure 3.9).
Number of projects 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
Source: Author’s elaboration based on the project list Annex C.
Note: Results based on a sample of 129 sustainable urban development projects collected by the OECD, some projects have two or more funding or and financing instrument sources
Source: Author’s elaboration based on the project list Annex C.
Number of projects by sources of investment expressed as a percentage of the total (n=129)
Source: Author’s elaboration based on the project list in Annex C.
While ASEAN-5 countries generally have relatively underdeveloped domestic capital markets, their economies have traditionally relied on robust banking systems. ASEAN-5 countries have bank-centred financial systems due to a weak institutional capacity to comply with global accounting standards and carry out administrative tasks, as well as underdeveloped infrastructure and rules and regulations. For example, in Viet Nam, the State Bank of Viet Nam oversees approximately 45 domestic banks, including five dominant state-owned banks: (i) Agriculture Bank, (ii) Joint Stock Commercial Bank for Investment and Development of Viet Nam (BIDV Bank), (iii) Joint Stock Commercial Bank for Industry, (iv) Trade of Viet Nam (Vietin Bank), and (v) Joint Stock Commercial Bank for Foreign Trade of Viet Nam (Vietcom Bank) (Asian Development Bank, 2014[18]). The banking sector contributes around 16-18% of the national annual GDP (Tu D. Q. et al., 2022[19]). Urban projects are, therefore, unable to fully capitalise on bonds. These findings highlight the important need for enhancing financial infrastructure and regulatory frameworks to promote more diverse and resilient financing mechanisms for sustainable urban development in ASEAN-5 countries.
In recent years, green financing has gained a slightly more prominent role in policy frameworks. However, investment decisions are principally based on project profitability, rather than the projects' potential environmental and social impact. Private investors tend to invest in more profitable projects, such as building and energy sectors, where the future financial return is stable. Taking the case of green bonds, the majority of ‘use of proceeds’ from ASEAN-5 green bond issuers is allocated to the buildings (52.8%) and energy (26.6%) sectors, totalling almost 80% (Figure 3.10). Arthaland, the Philippines-based local property developer, issued a PHP 3 billion (equivalent to USD 142.7 million) debut green bond to fund its building portfolio (CBI, 2020[20]), including Cebu Exchange and Lucima. Many urban development projects remain underfunded due to their lower profitability, a fact which highlights the need for policies or incentives to attract private capital to these essential but less lucrative sectors.
Many urban and infrastructure projects are not lucrative for commercial investors, who prioritise financial returns and favour short- and medium-term investments. To mitigate this, it is essential to improve public-private partnerships and risk-sharing mechanisms that help private investors engage in long-term urban infrastructure projects. Despite growing demands by investors to align their portfolios with societal values, sustainable investment has yet to become a primary investment channel. For example, even in the US, ESG investment accounts for only 20% of all professionally managed assets (at over USD 11 trillion), and is concentrated in non-urban sectors with higher relative project profitability (OECD, 2020[21]).
Source: Author’s elaboration based on (Climate Bonds, 2021[22])
3.2.2. Unlocking the full potential of bonds for sustainable urban development
Scaling up the use of GSS bonds through incentives and stronger regulatory frameworks
Despite their increasing presence as financing instruments, GSS and sustainability-linked bonds have yet to become common instruments for financing sustainable urban development projects in ASEAN-5 countries.
Malaysia established a Green Sustainable and Responsible Investment (SRI) Sukuk Grant Scheme in 2018. This scheme is one of the first global examples of incentive structures to support green bond issuance, providing tax exemption benefits for green Sukuk issuers. Green Sukuk is an Islamic bond whose proceeds are dedicated to environmental purposes. It has attracted increasing interest in Indonesia and Malaysia (CBI, 2019[23]). Indeed, the Indonesian government is a large green Sukuk issuer, but their green Sukuks are not included in the selected list of projects for this paper as their use of proceeds covers a range of projects and are not dedicated to specific urban development projects. The Malaysian government aims to encourage more companies to finance green, social, and sustainability projects through GSS bond issuances.
Sustainable finance initiatives date back even further in Indonesia. Following the Sustainable Finance Roadmap Phase I (2015–2019), the Financial Service Authority of Indonesia (OJK) launched Phase II for the period from 2021 to 2025. This second phase incorporates plans for the development of a complete market ecosystem for sustainable finance and the co-ordination of appropriate taxonomies with other institutions. Combined with a few other initiatives on sustainable finance, the Indonesian government is paving the way to advance sustainability through finance (Climate Bonds Initiative, 2021[24]).
Deploying sustainable finance, including GSS bonds, is not a simple task, as issuers have several hurdles to consider. For the projects to be categorised as either ‘green’, ‘social’ or ‘sustainable’, an issuer must build its own green/social/sustainability bond framework, grounded in the existing International Capital Market Association (ICMA) GSS bond principles and ASEAN Standards. Even after its successful bond issuance, a GSS bond issuer has to continuously provide reporting to the market participants on the actual use of proceeds. These challenges are being tackled through several initiatives, including the ASEAN Taxonomy for Sustainable Finance and the ASEAN SDG Bond Toolkit (Box 3.2).
The ASEAN Taxonomy for Sustainable Finance
The Association of Southeast Asia Nations (ASEAN) released its ‘Taxonomy for Sustainable Finance’ draft (Version 1) in November 2021. Version 1 stipulates a list of focus sectors: agriculture, forestry, and fishing; electricity, gas, steam, and air conditioning supply; manufacturing; transportation and storage; water supply, sewerage and waste management; and construction and real estate. All these sectors have significant implications on GHG emissions and gross added value. The draft also incorporates sector-specific guidance for member countries and their entities. It positions itself as a benchmark to guide capital and funding for more sustainable societal transformation. It includes urban development projects for zero-emission transport as activities that could potentially be automatically classified as green, which would simplify the selection process
ASEAN SDG Bond Toolkit
SDG bonds are GSS bonds linked to specific Sustainable Development Goals (SDGs). The ‘ASEAN SDG Bond Toolkit: A Practical Guide to Issuing SDG bonds in ASEAN’ was prepared to address the rising concern that none of the ASEAN-5 SDG 2030 targets will be met. It guides issuers by delineating the key principles and processes.
ASEAN-5 governments have developed policy frameworks to accelerate sustainable investments following this trend. Indonesia, for example, introduced the “Application of Sustainable Finance (No. 51/POJK. 03/2017)” in 2017, obliging financial services agencies, issuers, and public companies to provide the funding needed to achieve sustainable development goals and ensure adequate financing for the efforts to address climate change. The regulation also requires targeted entities to prepare sustainable finance action plans and ensure adequate environmental and social management policies and processes are in place (OJK, 2017[27]). This indicates a significant shift towards institutionalising sustainability in financial systems, which is crucial for achieving long-term sustainable development goals.
Globally, the size of the sustainable finance market has grown significantly in the past decade and was estimated to exceed USD 35.3 trillion in the five major global markets at the beginning of 2020, with a 55% increase in the period 2016-2020 (Global Sustainable Investment Alliance, 2021[28]). Almost USD 1 trillion of assets were held in sustainable funds at the end of 2019. ESG assets are estimated to reach USD 53 trillion by 2025, and the debt market is forecasted to reach USD 11 trillion simultaneously (Clifford Chance, 2022[29]). Europe has been the leading market in the arena of green finance, having made a commitment to becoming the first climate-neutral continent by 2050, underlining the role of finance in achieving this goal (Clifford Chance, 2022[29]). Following Europe's prolific green bond market, Asia-Pacific became the second-largest green bond market in 2021, with the largest YoY growth of 16% (Figure 3.11).
Source: Author’s elaboration based on CBI Interactive Data Platform (Bonds Climate Initiative, 2021[30]).
The maturity of bond markets varies across ASEAN-5 countries. While bond markets in Thailand and Malaysia are relatively well-developed, the markets in Viet Nam, the Philippines and Indonesia are still in the early development stage, with governments as the primary bond issuers. Corporate bonds, issued by commercial players, used to finance infrastructure, are repaid from the user charges collected by the operating company. Public bonds issued by national or subnational governments are also used to finance infrastructure.
In Malaysia, the outstanding bond amounts exceed nominal GDP by 25%. Corporate players are actively issuing bonds, predominately in the construction, infrastructure, communication, and energy sectors. The country possesses the largest Sukuk market, representing 45% of the global Sukuk issuances as of 2020. This signifies Malaysia’s robust and diversified bond market, which can effectively channel private capital into critical infrastructure projects and sustainable development initiatives.
Corporate bonds are gradually acknowledged in some countries, such as Viet Nam. With the 2005 amended corporate law and the 2020 new PPP regulation, a corporate bond has become an official financial instrument for infrastructure projects (ASEAN/UNDP, 2021[31]); (MLIT, 2022[32]). This indicates a growing acceptance and use of corporate bonds in financing instruction, which could contribute to diversifying funding sources for sustainable urban development.
To fully capitalise on the potential of sustainable finance, ASEAN-5 countries should seek to expand the use of GSS bonds beyond their current focus on buildings and transport. Governments can create incentives, such as tax exemptions or subsidies, to encourage more widespread issuance of GSS bonds. Malaysia’s Green Sukuk Grant Scheme serves as a successful example of how targeted incentives can foster growth in green bond markets—similar models could be adopted by other ASEAN-5 nations to accelerate sustainable urban development across various sectors.
Strengthening regulatory frameworks to support the development of bond markets provides an important opportunity, especially in countries where capital markets remain underdeveloped, such as Viet Nam, the Philippines, and Indonesia. These nations could focus on creating the legal and institutional infrastructure necessary for robust public and corporate bonds issuances. Clearer taxonomies for green finance, better reporting standards, and more transparent oversight mechanisms will help attract investors to sustainable projects.
Creating intermediaries dedicated to subnational sustainable infrastructure financing could provide a valuable mechanism to address the limited range of financial instruments in ASEAN-5 countries. These intermediaries could bridge the gap between governments and private investors, thereby facilitating the financing of smaller, often overlooked, urban projects that are vital to the long-term sustainable development but are typically seen as less profitable. By acting as a link between supply (private capital) and demand (public projects) intermediaries could help shape incentives on both sides and unlock new sources of funding for sustainable urban growth.
For example, the People’s Survival Fund in the Philippines is providing grants to integrate local disaster risk reduction and planning for climate adaptation, including the development of infrastructure. Priority is given to the areas that have a strong presence of multiple, climate-related hazards and high poverty incidence, and that present key biodiversity challenges. Proponents of the fund are not only asked to provide suitable proposals but also an updated annual investment plan, as well as a local development plan considering climate risks. Despite the fund’s difficulties in attracting enough proposals, by 2020 the fund had approved around USD 5.5 million worth of projects, benefiting six municipalities in the Philippines (Department of Finance, 2020[33]).
Fostering the development of capital markets to provide long-term financing is essential. Governments across ASEAN-5 countries can focus on building the institutional capacity and regulatory environments necessary to support more resilient capital markets. By offering alternatives to bank-centred financial systems, these countries could unlock new streams of financing for urban development projects. This could allow them to scale up infrastructure investments without relying exclusively on short-term loans.
Promoting local currency bond markets
Following the 1997 Asian Currency Crisis, in which foreign investments were withdrawn from Asian countries, the Asian Bond Market Initiative (ABMI) was launched in 2002 under the collaborative leadership of ASEAN, the People’s Republic of China, Japan, and Korea (ASEAN +3). This initiative aimed to develop local currency (LCY) bond markets, enabling ASEAN economies to mobilise domestic savings to finance their long-term investment needs and reduce their vulnerability to the sudden reversal of capital flows. The initial phase of the initiative (2002–2007) focused on creating a supply of LCY–denominated bonds by improving access to the bond market for a wider range of potential issuers, developing bond market infrastructure (such as settlement systems, rules and regulations related to its transactions), and strengthening the capacity of domestic credit rating agencies (Table 3.1).
In response to several policy dialogues and discussions among the stakeholders, the initiative later refocused its agenda around four main areas: (i) promoting the issuance of LCY-denominated bonds, (ii) facilitating demand for LCY-denominated bonds, (iii) strengthening the regulatory framework, and (iv) improving bond market infrastructure. Using long-term LCY bonds to finance urban projects, instead of short-term bank loans in foreign currencies, can be advantageous, because it makes projects less vulnerable to foreign exchange and financing risks, especially in cases where infrastructure projects generate revenues in local currencies (ADB, 2017[34]). Integrating LCY-denominated bonds into the financing of urban projects supports efforts to diversify financing instruments and mitigate currency risks, potentially enhancing financial stability and sustainability across ASEAN-5 countries.
Source: (ADB, 2017[34]). The Asian Bond Markets Initiative: policymaker achievement and challenges.
Manage default risks while expanding subnational borrowing
Cities are major investors in infrastructure. It is estimated that subnational governments – state, regional, and local – are responsible for almost 60% of general budget resources in G20 countries. In ASEAN-5 countries, around 75% of infrastructure investments is financed by a public source, with the remaining 25% financed by the private sector, mainly in the form of commercial loans (direct lending) (Climate Bonds Initiative, 2019[35]). In ASEAN-5 countries, it is estimated that the government share in infrastructure accounts for 90% in the Philippines, 80% in Thailand, 65% in Indonesia, and 50% in Malaysia (Goldman Sachs, 2013[36]).
ASEAN-5 countries could also increase city governments’ capacity to access the capital market through GSS bonds. GSS bonds provide opportunities for subnational governments to access private capital for urban projects, alleviating budgetary constraints. In some OECD countries, such as France, Japan, Sweden, and the United States, subnational governments have become significant GSS bond issuers (Climate Bonds, 2021[37]) (Box 3.3). Unlike these countries, ASEAN-5 countries have yet to capitalise on subnational GSS bond issuances.
Green and sustainable bond issuance framework, Île-de-France, France
The Île-de-France Region is an early adopter of sustainable finance and globally, was the first to issue a sustainable bond in a public format (in 2012). More recently, the region has developed a framework for green and sustainable bonds that is compliant with the International Capital Market Association Green Bond Principles, Social Bond Principles and Sustainability Bond Guidelines. This framework defines what proceeds from green and sustainable bonds may be used for, the process for project evaluation and selection, the management of proceeds and the reporting and review requirements. In 2021, Île-de-France issued its first tranche under the updated framework for GSS bonds in April 2021 and achieved a negative yield, highlighting its attractiveness.
The first social bond in Spain by the Autonomous Community of Madrid
The Community of Madrid, for the first time in Spain, turned to capital markets to raise funds to promote initiatives in support of the region’s health system, given the impact of COVID-19. It devoted the EUR 52 million raised through a social bond to support the regional health system, under the umbrella of its recently renewed Sustainable Financing Framework, which envisages earmarking funds from the General Budget to finance social and environmental projects.
Environmental impact bond in Washington DC, United States
In 2016, Washington DC’s water and sewer agency issued an environmental impact bond, which pays investors a higher rate of return if key environmental objectives are achieved (or charges them a premium if they are not achieved). The bond’s USD 25 million proceeds are for the installation of ‘green infrastructure’ to absorb surges of storm water during heavy rains, ultimately reducing the frequency and volume of sewer overflows that contaminate local rivers. The bond return is linked to the level of runoff reduction. If the reduction exceeds 41%, compared to a baseline level, the agency will pay investors a bonus of USD 3.3 million. If at the end of a designated period the level of runoff reduction is less than 18.6%, investors will make a ‘risk share payoff’ to DC Water totalling USD 3.3 million.
Source: (OECD, 2021[15]). Unlocking infrastructure investment: Innovative funding and financing in regions and cities. OECD Publishing, Paris.
Finally, risk can be transferred in the form of guarantees and credit enhancement. Investment ‘de-risking’ requires that the risks to private investors generated by suboptimal regulatory regimes and below-investment-grade municipalities are transferred to other entities, typically national governments, MDBs, or donor agencies. This may be done through various forms of guarantees or credit enhancement.
Credit enhancement aims to improve access to finance, reduce financing costs, and enhance financing terms and conditions for subnational governments. It transfers the risk from financial investors to the providers of credit enhancement, which are, in most cases, multilateral financial institutions, higher-level governments, or other public finance institutions. Credit enhancement providers will assume funding risks in case of default by subnational governments or projects. Guarantee is one common mechanism of credit enhancement, provided to cover specific risks, including revenue assumptions, availability payments, and responsibility for assuming debt obligations upon contract termination (OECD, 2021[38]). For example, the European Investment Bank (EIB), provides guarantees to support loan or bond issuance by subnational governments and project authorities, or offers low-interest finance for projects in Europe (EIB, 2020[39]); (Government of UK, 2022[40]); (Mayor of London, n.d.[41]).
Aligning finance infrastructure investments with sustainable urban development objectives
To foster greater private sector involvement in sustainable urban development, it is recommended that ASEAN-5 nations direct investors and financial institutions towards sustainable investment. In early 2022, the European Banking Authority (EBA) – an independent EU Authority that ensures effective and consistent prudential regulation and supervision across the European banking sector – published the final draft to implement technical standards on Pillar 3 disclosures on ESG risks. The newly drafted standards delineate comparable disclosures and key performance indicators (KPIs), including a green asset ratio (GAR) and a banking book taxonomy alignment ratio (BTAR) to illustrate how financial institutions have sustainability considerations embedded in their risk management, business models, and strategy to achieve the Paris Agreement goals. The new framework was built on the existing initiatives, including the Task Force on Climate-related Financial Disclosures (TCFD) and the Financial Stability Board (FSB), but went beyond by setting out disclosure timelines, granular templates, tables, and instructions to ensure consistency and comparability for better disclosures (European Banking Authority, 2022[42]). With the introduction of these new standards, EBA aims to reveal how climate change risks are mitigated by financial investments. Following the example of the EBA, ASEAN-5 countries could consider launching a macro-regional initiative to define KPIs and deliver specific guidelines for financial institutions to follow. Disclosing the sustainability performance across financial institutions in the region with the same set of KPIs would pressure banking sectors in the macro-region to advance their contribution to sustainability.
To effectively enhance green financing instruments in ASEAN-5 countries, clear guidance on GSS bond issuances, sustainability-linked bonds, and the use of proceeds is crucial. Bonds entail a unique difficulty compared to bank loans. At the time of bond issuance, the bulk of the funding will flow in without any flexibility for multiple disbursements in accordance with the evolving funding needs of the projects. The bulk of incoming cash flow at the initial investment implies the deterioration of working capital. Furthermore, bond investment in ASEAN-5 projects is often considered as unstable, as the projects conducted in the macro-region tend to oversee profit deterioration and delayed construction periods, exacerbating the risk of delayed cash flow. Bonds could be more appropriate to help refinance the projects that generate stable revenues (MLIT, 2022[43]).
Clear guidance on the process of GSS and sustainability-linked bond issuances and the applications of the use of proceeds, as well as the appropriate deployment of bonds in stable revenue-generating projects, could enhance green financing instruments.
3.2.3. Leveraging private equity for urban development
Within ASEAN-5 countries, private equity has been increasingly leveraged to finance infrastructure and development. As a result, the prevalence of financial instruments such as corporate bonds, infrastructure funds, and Real Estate Investment Trusts (REITs) has increased. These instruments could provide opportunities to accelerate investment in sustainable urban development in Southeast Asia. However, the use of such alternative financial instruments, as opposed to conventional bank lending, remains relatively low in the region’s bank-centred financial markets.
Private Equity (PE) including Infrastructure Funds and REITs are increasing in Southeast Asia to varying degrees
PE investors have demonstrated increasing interest in Southeast Asia in recent years, leading to a record high deal value in the region at the end of the year 2021. The region also marked the largest growth in deal volume in all Asia except Japan (Akhtar, Usman; Kidd, Tom; Varma, Suvir, 2022[44]). Viet Nam and Indonesia saw soaring investor interest, which accounts for 50% of total deal value, up from 11% in 2017 (Varma and Boulton, 2019[45]). PE channels foreign and regional funds for investment into ASEAN-5-based companies (ASEAN and UNCTAD, 2022[46]).
Sustainability has increasingly become a mainstream investment focus. In Southeast Asia, 56% of companies met the sustainability criteria of Bain & Company in the first half of 2019, compared to 30% in 2017. The company’s survey also revealed that 96% of Southeast Asian investors had accelerated their commitment to incorporate ESG criteria into their decisions (Varma and Boulton, 2019[45]). These numbers highlight a significant shift towards sustainable investment practices, indicating a growing recognition of environmental, social, and governance factors in driving long-term value and resilience.
In most ASEAN-5 countries, urban development projects are generally led by public sectors and financed through Official Development Assistance (ODA) and Public-Private Partnership (PPP). Private companies and private equity funds make direct investments in PPP projects, along with urban developers. In the Philippines, large conglomerate companies strongly influence urban development by investing directly in infrastructure projects (MLIT, 2022[43]). This demonstrates the critical role that local private sector entities play in mobilising resources and driving progress in infrastructure development.
The Asian Development Bank estimates infrastructure investment is the backbone of Southeast Asia’s economic growth, but the region faces a huge investment shortfall of more than USD 100 billion. To bridge this gap, private capital could play a much larger role in financing infrastructure projects (Asian Development Bank, 2022[47]). The region requires trillions of dollars in new infrastructure over the next two decades to keep pace with current urbanisation trends. It is estimated that the ASEAN-5 region will require about USD 7 trillion in new urban infrastructure and housing investment through 2035 (Lin, 2015[48]). The OECD estimates that globally around USD 95 trillion of investments will be needed between 2016 and 2030 in energy, transport, water, and telecommunications infrastructure to sustain growth, or around USD 6.3 trillion per year, even if governments take no further action on climate change (OECD, 2017[49]).
Climate-resilient infrastructure will play a key role in driving sustainable urban development. In Southeast Asia, countries need to invest 5.7% of GDP in infrastructure to face climate change impacts through 2030 (Asian Development Bank, n.d.[50]). However, securing finance for such investment remains a key challenge. Globally, out of USD 30.8 million in investments in climate adaptation between 2017-2018, only 3-5% had an urban component (Richmond, Upadhyaya and Pastor, 2021[51]).
Furthermore, while international climate finance is progressing, the goal set under the Paris Agreement has not yet been achieved. Developed countries pledged to mobilise USD 100 billion per year by 2025 to support climate action in developing countries, yet mobilised only USD 83.3 billion in 2020, marking only a 4% increase from 2019, and still USD 16.7 billion short (OECD, 2022[52]). In addition, it is estimated that approximately USD 6.9 trillion annually is required to achieve climate and development objectives from 2016 to 2030 (OECD/The World Bank/UN Environment, 2018[53]). Aligning public and private investments in low-emission and resilient infrastructure is an effective strategy to enhance resilience, prevent further emissions lock-in, and achieve both climate and the Sustainable Development Goals.
Urban development is often realised through real estate investment, including by intermediaries such as REITs (Kim Min, 2020[54]). REITS have become particularly important in the housing market. A REIT is an emerging financial instrument in countries such as Viet Nam, the Philippines, and Indonesia, while Malaysia and Thailand have relatively developed REIT markets. Malaysia, for example, has 18 listed REITs, 4 of which are complied with Islamic finance principles (Figure 3.12). This highlights the growing significance of REITs as a versatile funding mechanism, which could be pivotal in diversifying the financial landscape and enhancing sustainable urban development across the region.
Note: The numbers are as of November 2021 for Australia, Thailand and Malaysia, December 2021 for Japan and the United Kingdom, January 2022 for Singapore, Philippines and Indonesia, and February 2022 for the United States, South Korea, China, and Viet Nam.
Source: Author’s elaboration based on MLIT (2022[43])
The real estate industry is one of the largest GHG-emitting sectors, representing 30% of the global GHG reported by UNEP (UNEP, 2021[55]). Considering the magnitude of the impact of real estate on the environment, there is a growing trend to promote investment in properties that exhibit high green and environmental considerations.
Despite the potential of utilising private capital in real estate development, the analysis found that none of the 129 sustainable urban development projects sampled deployed REITs as a funding mechanism in ASEAN-5 countries. Even in Thailand and Malaysia, where REITs are more prevalent, their full potential does not seem to be leveraged for green or sustainable projects, including buildings.
The level of REIT market development varies significantly across ASEAN-5 countries. A high level of taxation imposed for an exchange of a real estate property for a REIT, double taxation on dividends, and a potential loss of ownership regulated by free float weight are major obstacles preventing the development of REIT markets (MLIT, 2022[32]).
Strengthen private equity for sustainable urban development
The increasing presence of Private Equity (PE) and infrastructure funds in Southeast Asia presents a significant opportunity to drive sustainable urban development. However, for these financial tools to make a meaningful impact, governments and private sector stakeholders need to create enabling environments and foster sustainable investment practices.
Governments could incentivise PE and infrastructure funds to direct capital toward climate-resilient urban development projects. This could be achieved by offering tax breaks, subsidies, and other financial incentives for investments that prioritise environmental, social, and governance (ESG) criteria. Expanding the focus beyond traditional infrastructure could help bridge the gap in sustainable urban infrastructure, including housing, transportation, and renewable energy systems.
Establishing dedicated infrastructure funds with a sustainability focus could an effective strategy for closing the significant infrastructure investment gap in Southeast Asia. Governments could set up or expand such funds that prioritise projects aligned with national development goals and international climate commitments, including those outlined in the Paris Agreement. Collaborating with multilateral organisations like the Asian Development Bank (ADB) could help design innovative financing mechanisms that encourage long-term private investment in infrastructure.
Enhancing collaboration between public and private sectors is another vital step. Public-Private Partnerships (PPP) remain a strategic mechanism for financing large-scale infrastructure projects in Southeast Asia. Governments could thus focus on improving the institutional frameworks for PPPs by creating clearer guidelines, fostering investor confidence, and offering risk-sharing mechanisms that make such partnerships more attractive to PE investors.
Moreover, further promoting the use of Real Estate Investment Trusts (REITs) in sustainable urban development is an important step to take advantage of private capital while propelling sustainability. Governments could promote further use of REITs in Southeast Asia by reducing taxation and regulatory barriers. By unlocking the potential of REITs for financing green buildings and environmentally sustainable real estate developments, ASEAN-5 countries could draw inspiration from successful models like Singapore’s UOB APAC Green REIT ETF and Germany’s green dividend initiative:
The world’s first Asia-Pacific (APAC) Green REITs Exchange Traded Funds (ETF), UOB APAC Green REIT ETF (hereafter the ‘fund’) became listed on Singapore Exchange (SGX) in November 2021. Investments are made in the higher-yielding REITs that exhibit better environmental performance. In doing so, the fund aims to contribute to sustainability outcomes and the greening of the real estate sector (UOB Asset Management, 2022[56]). This is a forefront example of REITs for the sustainable real estate industry in the ASEAN-5 macro-region.
Alstria AG, a Germany-based REIT, launched the ‘Green Dividend’ concept in 2020, offering investors two options: receiving full dividends or keeping a partial dividend in the portfolio to be re-invested in sustainable projects. This ‘Green Dividend’ initiative has allowed the company to implement sustainable measures in properties currently in its portfolio and to acquire more sustainable properties, contributing to a transition to a net-zero society (Alstria, 2021[57]).
Tax benefit schemes from Japan and Türkiye can also be instrumental to advance REITs for sustainable urban development projects (Box 3.4).
In Japan, policies at both national and local levels have created an attractive rental housing market. In the midst of urban shrinkage, the Tokyo municipal government promotes residential intensification in the capital region. The government promotes the condominium as a new residential model in central wards of Tokyo. The development of the REIT market in Japan has been supported by generous tax treatment and planning liberalisation from the central government. Most importantly, dividends distributed to investors are deducted from taxable income if the distributed portion exceeds 90% of the profits. This arrangement enables REIT investments to be exempted from income tax, avoiding double taxation.
In Türkiye, the tax advantage is another incentive for REITs. Portfolio administration gains of REITs in Türkiye are exempt from corporate tax. At the investor level, the sale of shares is subject to a 0% of withholding tax for domestic and foreign investors. This may provide an incentive both at the supply side and the demand side.
Source: (Erol and Ozuturk, 2011[58]). An Alternative Model of Infrastructure Financing Based on Capital Markets: Infrastructure REITS (InfraREITs) in Türkiye.
The development of Thailand’s REIT market suggests a potential lesson for such emerging REIT markets. The REIT market in Thailand dates back to the Property Fund for Public Offering (PFPO), which was introduced in 2002. PFPO was first listed in 2003 to invite investment into the real estate industry, but due to its low global recognition and liquidity, it did not become a popular financial instrument. To overcome these challenges, Thailand introduced a new regulation on REITs, encouraging conversion from PFPO to REIT, which has higher market liquidity. Following the success of Singapore, Thailand provided preferential treatments related to value-added tax, income tax, transfer cost and registration fees to promote this newly introduced financial instrument. With these tax merits, Thailand’s REIT market has grown to 25 listed REITs, in addition to 51 PFPOs as of October 2021.
The development of Malaysia’s REIT market was steered by introducing guidelines. Following the success of REIT markets in Japan and Singapore, the Securities Commission Malaysia introduced guidelines on REITs to improve market liquidity and monitoring. Furthermore, the country implemented “Guidelines for Islamic REITs”, paving the way for REITs to be aligned with Islamic finance principles (MLIT, 2022[43]).
The Philippines revised its act on REITs in 2020, favouring investors and corporations to promote more investment in REITs and to establish REITs. The enforcement of the new act lowered the minimum public ownership to 33% from the previous 40% (which needs to be increased to 67% within the initial 3 years upon listing), and gave property trusts access to tax incentives, including the exemption to a 12% value-added tax for the transfer of properties to REITs (Ramintas, 2020[59]). However, the new act simultaneously raised a constraint, requiring all REITs to reinvest any proceeds from the sale of shares or other securities issued in exchange for income-generating real estate, in the Philippines. For this aim, REITs must now submit a reinvestment plan (Securities and Exchange Commission Philippines, 2020[60]). This requirement reflects the SEC’s goal to promote the development of the local capital market and nurture Filipino participation in the local real estate industry (Bar and Moises, 2020[61]). While this requirement encourages local developers to found and manage REITs in the Filipino market, it stands as an obstacle to multinational REITs, who tend to make (re)investments in more than real estate markets. Following this new regulation, 5 REITs including Ayala Land, Inc, a subsidiary of Ayala Land, are publicly listed as of January 2022. The cases of Thailand, Malaysia and the Philippines highlight the potential role of tax incentives and alleviated regulation on public ownership to develop local REIT markets.
Emerging REIT markets in Viet Nam and Indonesia may follow the path of these countries, by implementing regulatory amendments to mitigate the complexity of the market and taxation policies.
3.2.4. Promoting land value capture tools to raise additional funding for sustainable urban development
Land value capture (LVC) tools could help raise additional funding and support sustainable urban development in cities. The main objective of LVC is to generate new capital for investment in public infrastructure – whether through fees, taxes, or additional building rights (OECD, 2019[62]). This could be done through policies that allow subnational governments to recover increases in land values through the alteration of land use regulation and infrastructure deployment. The recovered land values could enable sustainable urban development by generating additional funding for welfare-enhancing infrastructure that would otherwise not be constructed due to budget constraints. Several LVC instruments are systematically used in Singapore, such as land readjustment and charges for development rights. Especially noteworthy are Singapore’s practices in land readjustments and expropriations for the purposes of urban expansion, urban development, or renewal. Compensation is paid based on the property values practiced at the market, property owners rarely appeal against the decision of readjustment or the compensation (OECD, 2022[63]).
The recent evolution of tax law in Thailand illustrates potential obstacles to promoting the use of LVC in ASEAN-5 countries. Thailand enforced the New Land and Building Tax Act in January 2020. This Act replaces the regressive and outdated property tax law under the Household and Land Tax Act, B.E. 2475 (1932), the Local Land Development Tax Act, B.E. 2508 (1965), the Notification of the National Executive Council No. 156 of 1972 and the Royal Decree Designating the Medium Price of Land for Land Development Tax Assessment of 1986 (ASEAN, 2020[64]). Residential properties, which were previously exempted from taxation, are now taxable assets under this act (Charoenkitraj and Amonpiticharoen, 2019[65]). However, due to long-abandoned regulations related to land and building taxation, many Thai taxpayers found the new property tax charges abrupt and unfamiliar. It might therefore take some time for the general public to accept LVC, which is based on a similar concept of charging land or properties for tax collection and greater public benefits. Consensus building among a wide range of stakeholders, public and private actors, and communities, is important for the success of LVC (Mabrurotunnisa and Aditya Iskandar, 2021[66]).
Digitalisation could offer a solution to enhance public trust in the government and improve transparency and accountability, which is essential to consensus building. The introduction of electronic platforms could help eliminate the risk of corruption, collusion, and nepotism during the valuation process, by removing face-to-face interaction with government officials. E-platforms would also allow stakeholders to monitor the implementation process and ensure transparency. Further, their introduction would help mitigate the risks related to frequent personnel changes in governmental bodies LVC (Mabrurotunnisa and Aditya Iskandar, 2021[66]).
Establishing clear and fair rules for LVC through legal definitions, legislation, and effective law enforcement is important to tackle the challenges related to the lack of transparency and accountability. LVC is better accepted by landowners when charges are derived from the amount of land value uplift a public improvement generates, as opposed to being charged based on public costs. Taking into consideration the socioeconomic status of landowners by differentiating LVC charges based on income levels could help improve public acceptance while fulfilling equity goals.
The successful implementation of LVC also requires developing stronger local government capacity. In most countries, local governments have the responsibility of determining which landowners are affected by LVC, setting fee tariffs, negotiating with landowners and developers, and managing land assets, among others. However, in many cases, local governments lack the capacity to carry out these tasks. National governments need to provide local governments with adequate administrative support, policy guidelines, and accurate cadastre and land transaction data for LVC implementation. At the local government level, training city officials on the benefits of LVC and how to use market forces to capture increases in land value could help derive public benefits and achieve more equitable outcomes (Mahendra et al., 2020[67]).
In addition, spatial planning frameworks could clearly define the roles of different levels of government in preparing plans and land-use regulations that serve as the baseline for LVC administration. As a potential source of inspiration, this report provides examples of how OECD countries implement different types of LVC instruments (Table 3.2).
Adequate and fair land valuation before and after the use of general budget resources or a change in land use is another challenge (The Global Land Tool Network, 2021[68]). It is a pre-requisite to put in place an appropriate cadastral system, which keeps up-to-date information on values and owners of the land. Roles and responsibilities of the LVC implementing agency need to be clearly defined. It is also indispensable to ensure adequate training and capacity building for the agency officers to carry out an accurate analysis of the costs, benefits, and risks of LVC.
Note: (1) lists only those countries whose property taxes have characteristics that make them effective value capture instruments. Due to the high degree of fiscal decentralisation in federal countries, the availability of any of these instruments may vary significantly from state to state.
Source: (OECD, 2019[12]). "Financing climate objectives in cities and regions to deliver sustainable and inclusive growth", OECD Environment Policy Papers, No. 17, OECD Publishing, Paris, https://doi.org/10.1787/ee3ce00b-en.
National subsidies and joint financing models between national and local governments could also bridge financing gaps and increase local general budget resources associated with sustainable urban development. In principle, Transferrable Development Rights (TDR) unbundle the development potential of a given property or land, and make the development rights a separate commodity, which an owner can choose to sell (OECD, 2021[15]). In this way, TDR allows land or property owners in low-density development zones (“sending areas”) to sell their development rights to other property owners or real estate developers for use at a different location (“receiving areas”). With the “transferred” development rights, purchasing owners can develop their “receiving” parcel at a higher density than it would otherwise be legally possible (World Bank, 2015[69]); it could come in the form of additional buildings, additional height, additional density, or some other form established by jurisdiction. The landowners in the sending areas can realise a financial return by selling development rights (Land Use Solutions for Colorado, n.d.[70]). Local governments can also buy development rights to control prices and design details or restricting growth. The TDR programme allows local governments to control land use while simultaneously compensating landowners for restrictions on the development potential of their properties.
Communities can use TDR programmes to preserve open space, farmland, historic buildings, or housing. With the compensation linked to the sale of development rights, TDR makes such preservation more equitable and politically palatable by compensating landowners who lose the right to develop their property. TDR is more commonly used for conservation purposes, including farmland communities, open spaces, or other natural or cultural resources by redirecting development that would otherwise occur on that land (Pennsylvania Land Trust Association, 2019[71]).
Another benefit of TDR is that it takes advantage of private capital. Compensation for landowners in ‘sending sites’ are determined by the real estate market. Instead of relying on scarce public budgets, the compensation comes from the private real estate market with capital from other landowners and real estate developers. From a community’s perspective, the preservation of the neighbourhood is achievable without reliance on taxes.
There are several key elements to the success of TDRs. Designation of the “sending” and “receiving” areas is the first step. Development constraints (such as limited infrastructure, poor soils, steep slopes, and other physical constraints) incentivise landowners in sending areas to participate in TDR. Conversely, receiving areas with more opportunities, jobs, education opportunities, shopping, public services, and other urban amenities, are more suitable for TDRs, with potential for more growth (Pruetz and Pruetz, 2007[72]).
Establishing the valuation and costs of development rights is pivotal. The additional profits must exceed the cost of the development rights to make TDR work. Meanwhile, the financial return of the development rights needs to compensate landowners in sending sites. The valuation and cost analysis needs to be consulted with valuation experts to determine the appropriate rates for the transactions to take place (Land Use Solutions for Colorado, n.d.[70]).
3.2.5. Strengthening public development financing
To support urban development financing, ASEAN-5 governments can consider establishing dedicated funding mechanisms that blend public and private capital sources, facilitating access to diverse financial products and advisory services for local infrastructure projects. There are various types of financial intermediaries specifically designed to support subnational governments for development.
The closest to a fully-public option would be a subnational development bank or fund that is fully owned and managed by the government. Such entities can mobilise grants and subsidy programmes for infrastructure investment by subnational governments, and support the effectiveness of these programmes to deliver quality infrastructure – in line with national, regional, and local priorities. National infrastructure banks and funds can also play a key role in improving access to finance for subnational governments’ urban development projects. They can provide a wide range of financial products, including debt, equity, credit enhancement support, as well as advisory services (OECD, 2021[15]).
Moving further towards the private sector side, a subnational development bank or fund could be co-owned and operated by the national (or a regional) government and private investors. Such entities would likely blend funds from public sources (e.g., contributions from national and subnational government general budgets as well as money secured from international development and financial institutions) and private sources (e.g., private investors, individual deposits, etc.). In Indonesia, for example, PT Sarana Multi Infrastruktur (PT SMI) is a state-owned enterprise that specialises in infrastructure financing (SMi, 2022[73]). PT SMI allocates equity and debts from the central government, loans from multi-lateral institutions and private financial institutions, and bond issuances, to provide financial support, advisory services, and project development to subnational governments and specific infrastructure projects (OECD, 2021[38]). Indonesia’s Regulation on the Application of Sustainable Finance (No. 51/POJK.03/2017) includes a classification into 12 sustainable business activities to encourage financial institutions to improve their sustainable portfolio (PwC, 2021[74]). The government of Indonesia intends to foster sustainable development by enforcing this regulation that builds and strengthens the foundation for green financing (Smoke, 2019[75]).
Municipal development funds can function as a catalyst both for investors and local governments, balancing demand and supply. In the Philippines, the Municipal Development Fund (MDF) was created in 1984 as a way to offer Local Government Units (LGUs) access to capital finance for social and economic development projects. It is a revolving fund consisting of grants and loans from international donors and financial institutions. Since 1998, MDF has been managed by the Municipal Development Fund Office (MDFO) in the Department of Finance. The objective is to harmonise disbursements for LGU funding, but also to allow the central government to monitor the use of international financing. MDF acts as an alternative infrastructure financing for LGUs that cannot access private capital. In addition to project evaluations, MDFO provides technical assistance for LGUs to carry out projects in a financially sustainable way. As a result, MDFO improves the financial capacity and creditworthiness of LGUs, equipping them to directly access the private capital market. The Local Government Unit Guarantee Corporation (LGUGC) is another mechanism used for subnational lending. It was incorporated in 1998 as a private financial guarantee institution that provides financial guarantees for LGUs and other public/private entities, in case of borrower defaults. On the basis of the provided guarantee, partner financial institutions provide loans or underwrite bond issuances. MDF and LGUGC are successful examples where the intermediary institutions enable LGUs and other entities to access financing for urban projects.
3.2.6. Considering operation and maintenance in financing sustainable urban development projects
It is not always clear how the quality of urban spaces (including buildings) is maintained after a project has been financed and completed. It is therefore necessary to integrate regulations related to proper maintenance into the conditions of green financing.
“Operation and maintenance” has become a commonly used term in urban projects. It refers to the long-term maintenance that guarantees the safety and efficiency of urban infrastructure and building projects. Amidst ageing infrastructure and buildings in Asian countries, including the targeted five countries, there is a growing recognition of the significance of “operation and maintenance”. However, despite the rising interest in this topic, funding for such a long-term operation remains challenging for property owners and developers.
A new perspective on “operation and maintenance” is to view it as a potential avenue for generating additional returns for the neighbourhood, rather than as a financial burden, as well as a pathway to engage with stakeholders, thereby ensuring the long-term sustainability of urban projects. Japan and the United States provides examples of alternative solutions to ensure the long-term sustainability of urban projects (Box 3.5).
Japan: The Otemachi, Marunouchi and Yurakucho district (the OMY district) in Tokyo, Japan, endeavours to generate new values, attraction, and excitement in their neighbourhood, in collaboration with public and private sectors. To guarantee the sustainable urban growth of central Tokyo city, the OMY district aims to enhance the neighbourhood values by collaboration among commercial actors, community organisations, and members of the public, making use of the urban space. This initiative is a signature example of ‘area management’, which means voluntary neighbourhood management among residents, developers, and landowners to preserve the natural environment and boost the neighbourhood economy. ‘Area management‘ has become popular in urban development. However, securing financial sources has become a shared challenge to expand and promote its activities, given the potential free-rider problem; some businesses can benefit from area management activities without making a contribution. The renewed guideline of area management in Japan allows municipalities to collect contributions from local enterprises, subject to more than two-thirds of their consent, which will then be donated to area management organisations, who will manage and oversee the activities in their neighbourhood. This donation system aims to alleviate the potential free-riders by making local stakeholders accountable while securing sufficient funds for activities. The activities include community clean-up, neighbourhood watch, local events, and emergency and disaster training to boost local economies, enhance security, and provide spaces for social interaction.
The United States: The quality of urban neighbourhoods is enhanced via schemes such as Business Improvement Districts (BID). A BID is a type of PPP in which property and business owners make a collective contribution to maintaining, developing and/or promoting their commercial districts. The model is based on the shared maintenance programs implemented in shopping centres, where tenants of the shopping centres make a commitment to jointly maintain common spaces. The objective of this BID structure is to secure additional funding sources for the purpose of common goods, including public safety and cleanliness. BIDs are founded and deployed in cities in Canada, South Africa, the UK, and the US. Having land and business owners directly in charge of their districts, the BID system encourages long-term maintenance and upgrades, even years after the completion of building projects.
Source: Author’s elaboration based on (World Bank, n.d.[76]). Business Improvement Districts; (Council for Area Development and Management of Otemachi, n.d.[77]). For city planning that will prosper for the next 100 years; (MLIT, 2010[78]). Recommendation of Area Management (エリアマネジメントのすすめ）In Japanese); (Cabinet Secretariat of Japan, 2020[79]). Guidelines for Local Regeneration Area Management Contribution Framework.
3.2.7. Enhancing public-private investment co-ordination
There is insufficient co-ordination between private investment and government budget resources in sustainable urban development projects
While private investment in sustainable projects is often constrained by profitability concerns in certain sectors, it is also constrained by the lack of co-ordination between the public and private sectors. For example, in Thailand, private companies that lead public transport projects can only make investments directly linked to transport services. They cannot, for instance, simultaneously make decisions regarding- or invest in - public areas, parks, car parking, or housing developments in the urban spaces surrounding stations. Allowing a broader scope of decision making and investment by these companies could enhance the profitable of the overall transport project by, for instance, increasing ridership and user charges, especially for parking spaces. Conversely, a similar challenge arises when real estate developers invest in (bankable) housing development without providing sufficient (non-bankable) urban infrastructure to guarantee the quality of public services (e.g., parks, schools, hospitals).
The 129 cases analysed for this report highlight the importance of local PPP policies and guidelines for unlocking private participation in urban projects across ASEAN-5 countries. In the Philippines, Executive Order No. 8 (2010) revitalised PPP initiatives by establishing a PPP Centre to drive the national development strategy forward. The PPP Centre co-ordinates and monitors all PPP projects in the country, facilitates implementation agencies, and manages the Project Development and Monitoring Facility (PDMF). It offers project advisory services and facilitation and enhances agency capabilities through various capacity-building training programs. The Centre provides technical assistance to a number of institutions, including national government agencies, government-owned and controlled corporations, government financial institutions, state universities and colleges and local government units (LGUs), to help them implement essential infrastructure and development projects. The Centre also advocates for policy reforms to improve the legal and regulatory frameworks that govern PPP projects (Republic of the Philippines, 2022[80]). The Centre, for instance, works with the Securities and Exchange Commission (SEC) on policy and process enhancements to facilitate the entry and participation of international institutional investors and pension funds in financing PPP Projects. The PPP Centre in the Philippines serves as an enabling hub that oversees the pipeline of PPP projects and provides capacity-building for stakeholder institutions.
In Indonesia, the government has implemented a series of initiatives: improved regulations for PPP infrastructure projects, subsidises for PPP projects and credit enhancement for PPPs and State-Owned Enterprises (SOEs) by sovereign guarantees, gap viability funding, and availability payments (Climate Bonds, 2018[81]).
The selection process across proposed PPP projects needs to be aligned with the country’s national development strategy. National and subnational governments can collect project data and assess emerging trends and needs of sustainable urban development projects. National hubs, such as the PPP Centre in the Philippines, can serve as a platform for expertise that can provide appropriate technical assistance and guide project stakeholders to an adequate funding source. To calculate and recalculate contingent risks and implement and monitor the projects, implementation agencies and LGUs need to advance their technical capacity through capacity-building and advisory support. As long-term PPP projects often involve renegotiation, making clear and transparent rules and processes for success, with institutionalised frameworks, is important.
Indonesia is actively exploring avenues to channel private investment into sustainability-focused projects. One approach is the mandatory inclusion of sustainability considerations, which encourages private investment beyond profitability. This is supported by sustainable investment criteria, national regulations, and regional initiatives, such as those from the European Banking Authority. Entities like the People’s Survival Fund also provide grants to high-impact disaster risk reduction projects.
The government has enhanced Public-Private Partnership (PPP) infrastructure projects through improved regulations, subsidies, and credit enhancements, such as sovereign guarantees and gap viability funding. The alignment of PPP project selection with national development strategies is key. National hubs, similar to the PPP Centre in the Philippines, can offer technical support and guide stakeholders to suitable funding sources. Capacity-building initiatives are essential for implementation agencies and local governments to manage risks and monitor projects effectively. Clear frameworks and transparent processes are vital for successful renegotiations in long-term PPPs.
Indonesia has shown strong commitment to GSS bonds, with the Sustainable Finance Roadmap Phase II (2021-2025) aiming to create a robust market ecosystem. Challenges in deploying GSS bonds include the need for frameworks aligned with international standards and maintaining rigorous reporting. Indonesia’s “Application of Sustainable Finance (No. 51/POJK. 03/2017)” requires financial institutions and public companies to develop action plans for sustainable finance and ensure the integration of environmental and social management policies.
Improve co-ordination between private investment and government budget resources in sustainable urban projects
In order to enhance co-ordination between private investment and government budget resources in sustainable urban projects, several options can be considered. The first option is to require the private sector to make additional investments (e.g., investment surrounding stations), while offering them incentives to do so. In some cases, a public authority provides its private counterpart with public assets, including the right to use public land for free or at a reduced cost. Commonly used practices include the concession of public facilities for refurbishment and/or operation for a defined period and reduced or suspended property tax on investment revenues (OECD, 2015[9]).
The second option is to create a mechanism where the public and private sectors can make co-ordinated investments to ensure the long-term sustainability of urban development, thereby taking the wider urban spaces into consideration. For example, in the United Kingdom, the Community Infrastructure Levy (CIL) enables local governments to levy private developers, with the revenue raised used to deliver co-ordinated infrastructure to support development – such as public transport and parks (OECD/Lincoln Institute of Land Policy, PKU-Lincoln Institute Center, 2022[82]).
An additional strategy to improve the co-ordination between private investment and general budget resources in sustainable urban development is through the increased use of Public-Private Partnership (PPP) frameworks. To enhance the effectiveness of PPP initiatives, it is imperative to actively engage stakeholders through consultation and ensure a balanced understanding of public and private sector approaches in service delivery. Furthermore, defining project scope and monitoring project quality requires the involvement of end-users, to align the service specifications with user expectations. Involving end-users in designing and monitoring increases the chance of the projects being viewed as legitimate, fair, and understandable, contributing to the accountability of the country’s PPP initiatives (OECD, 2012[83]). Moreover, robust competition for the projects is fundamental to successful PPP delivery. Guaranteeing market competitiveness is vital, particularly in the ASEAN–5 contexts, where foreign participation is restricted. Having a number of competitive bids, instead of a handful of the same large conglomerates competing all the time, would help ensure value for money (OECD, 2016[84]). A clear and transparent regulatory framework is a foundation for market competitiveness, mitigating risks of regulatory capture, corruption, and unethical behaviour to ensure a low barrier to entry (OECD, 2012[83]).
3.3.1. Urban development at the national and subnational level of ASEAN-5 countries is not sufficiently climate proof
The analysis of institutional frameworks found that over the last decade, ASEAN-5 countries have made progress in establishing and implementing NUPs (Table 3.3), which can help shape, guide, and promote investments in sustainable urban development. More specifically, ASEAN-5 countries could use the NUP process to collect data, assess needs for sustainable urban infrastructure, prioritise different infrastructure projects and define the role of different actors.
Source: Author’s elaboration
In addition, NUPs are increasingly used to define how to finance urban development to achieve the goals set in the NUPs, which also helps mobilise different financing institutions including the private sector. Global monitoring of national urban policy found that diverse sources of funding and financing are being mobilised for NUP implementation, including national-subnational co-financing arrangements, public-private partnerships, private financing, and initiatives led by communities or co-operatives (OECD/UN-HABITAT/UNOPS, 2021[85]) (Table 3.3).
NUPs are also deployed to secure adequate funding for effective implementation of responsibilities for urban policy at all levels of government by:
Promoting a diversified, balanced, and sustainable mix of resources to finance urban development, infrastructure, and services across levels of government.
Utilising funding instruments such as taxes or fees to generate necessary revenues and foster behavioural change to build sustainable and inclusive cities.
Providing subnational governments with sufficient leeway to adjust and manage their revenues to respond to urban development needs.
Mobilising innovative funding and financing tools such as borrowing, land value capture mechanisms, and financing vehicles such as infrastructure funds; and
Leveraging private sector financing where appropriate to maximise related opportunities and address risk (OECD, 2019[86]).
ASEAN-5 countries are facing severe impacts from the changing climate, including rising temperatures, exacerbated heat waves, and increasing risk of environmental and disaster risks. However, the analysis illustrated that urban development is not always guaranteed to be climate-proof, not only due to a lack of funding and financing but also, to a large extent, by a lack of regulations and planning frameworks.
The review of institutional and legal frameworks found that ASEAN-5 countries, except Viet Nam, have made good progress in renewing national spatial plans and frameworks towards sustainable urban development. For instance, Malaysia’s third National Physical Plan has focused on improving the country’s strategic planning capacity and instruments to ensure sustainable physical development and effective and efficient town and country planning. Malaysia also established a special climate change trust fund, where infrastructure and technologies to address climate change were identified as one of the key areas of need. Similar initiatives to use national planning as a policy lever can be found in Thailand’s 12th National and Economic and Social Development Plan, which stipulates the revision of regulations in support of green urban infrastructure and encourages city planning and ordinances to scale up existing orientations towards “green cities” (Office of the National Economic and Social Development Board, 2017[87]). In a similar vein, the Ministry of Public Work in Indonesia fast-tracked strategic infrastructure investments in various cities as part of the National Spatial Plan (Tobing, 2017[88]).
Despite such planning frameworks, their implementation often lags behind due to fragmented institutional co-ordination (UNESCAP and UNHABITAT, 2019[89]). For instance, in Thailand, each province has its own land use regulations. Due to the lack of co-ordination between the central and municipal governments, as well as among municipal governments, the use of land and land ownership are complex.
3.3.2. Utilising national and subnational planning frameworks to increase climate action in ASEAN-5 countries
National urban initiatives can pave the ground for future sustainable urban development financing by shaping for urban planning, fostering partnership building, and channelling investment into sustainable urban development finance. In particular, the development and implementation of NUPs promoting sustainable urban development can send a strong signal to the market and consequently accelerate funding and financing for sustainable urban development.
For example, in Ireland, the recently launched Project Ireland 2040 (via its National Planning Framework 2018 – 2027) provides a brownfield/infill development target. The plan stipulates the country’s target for a minimum of 40% of all new housing to be built within the existing settlements, rather than built on the greenfield sites. The reuse of brownfields for further residential housing is based on the ‘circular economy’ concept, to utilise land use management by recycling the existing building stock (Government of Ireland, 2018[90]); (Dept of Rural and Community Development and Dept of Housing Local Government and Heritage, 2022[91]). By having a ‘circular economy’ as an overarching national principle, Ireland ensures that the country minimises natural resource use and reduces waste generation, thereby achieving sustainable growth (Irish Environmental Protection Agency, 2021[92]).
In the wider European context, strategic documents such as the New Leipzig Charter – The transformative power of cities for the common good and the Territorial Agenda 2030 – a future for all set forth visions for sustainable urban development and encourages national governments to use NUPs and multi-level governance frameworks to implement these visions. For instance, intermediary cities are emphasised in these documents, highlighting “the important role of medium-sized cities as part of polycentric urban systems” (European Commission, 2020[93]) and the “underexploited potential of small and medium-sized settlements to face the issue of the spatial polarisation of activities within Europe” (Council of the European Union, 2022[94]). These documents call for polycentric development models that accommodate all locales. Such strategic orientations guide national policymakers in adapting their NUPs to local contexts and foster mutual learning across countries.
In Malaysia, The National Low Carbon Cities Masterplan (NLCCM) was published in 2021 (KASA, 2021[95]). Built on the legacy of the Low Carbon Cities Framework (LCCF) introduced by the National Government, NLCCM provides guidance for subnational governments and businesses on how to drive the transition to low-carbon cities. The Masterplan adopts three key areas for its approach: measuring, managing, and mitigating GHG emissions to reduce environmental impacts, with 33 local governments in its scope.
In addition to establishing a clear national urban strategy, co-ordination and collaboration between national and subnational governments are necessary to securing financing for urban projects. Countries such as Viet Nam, Indonesia, and the Philippines do not have systematic mechanisms and criteria for prioritising urban projects, which leads to a lack of co-ordination of financial plans for subnational urban projects.
3.3.3. Utilising land use regulations to facilitate climate resilience
Land use regulations can be a powerful tool to facilitate climate resilience. The enforcement of local land use planning and zoning regulations has significant impacts on mitigation efforts –such as controlling urban sprawl, integrating renewable energy on rooftops or at urban peripheries, and improving transport planning and service delivery in cities, between rural and urban areas, and in low-density regions – as well as on how climate-related extreme weather events affect local communities and economies. Climate-friendly and risk-sensitive land use (e.g., denser urban areas, mixed-use development, home-job proximity, land use restrictions in hazard-prone areas) can further enhance the resilience of urban infrastructure (OECD, 2023[96]). Therefore, regulating land use is an important prerequisite to attract investment in sustainable urban development.
An option for ASEAN-5 countries could be to strengthen institutional co-ordination in the implementation of national spatial plans. Stronger alignment between national and local spatial planning is needed to ensure effective national spatial planning frameworks. While the creation of clear vertical implementation and co-ordination bodies—such as Special Committees, as done in Korea (OECD, 2019[97])—could facilitate stronger alignment national and local planning systems could be beneficial as well. The German ‘Counter Flow Principle’ is one illustrative example, in which lower levels of government must adapt their plans to align with higher levels, while at the same time providing input and shaping those higher-level plans (OECD, 2017[98]). This approach could be particularly well-suited to federal systems or those that seek stronger decentralisation as this principle could help ensure a mutually agreed upon, aligned, and swift implementation of national planning decisions. The experience of the National Housing and Land-use Regulatory Board in the Philippines in mainstreaming comprehensive land use and development plans illustrates the effective combination of decentralisation and a framework for vertically integrated climate action in cities (UNESCAP, 2020[99]).
Another important policy lever is to strengthen low-carbon building certifications and guidelines to generate conditions for green investments. It is estimated that the construction sector and its use of current building materials account for nearly 40% of global energy-related carbon emissions (UNEP, 2021[55]). The built environment therefore has great potential to drive the net-zero transition in cities (OECD, 2022[100]). A range of reforms in building regulation have been recently carried out across ASEAN-5 countries, which could provide inspiration for policymakers.
An important policy option is to increase the engagement with the private sector on new green building regulations. A desk review of green building codes in ASEAN-5 countries underscores that the private sector is usually not consulted in the development of new regulations, which often creates an implementation gap after their adoption, with the exception of the Philippines Green Building Code (GB Code) that was develop by the Department of Public Works and Highways (DPWH), with the assistance of the World Bank-IFC, and the technical support of the Philippine Green Building Initiative (PGBI). The latter is composed of accredited professional organizations in the building industry. Dedicated engagement mechanisms are needed to address this gap in consultation. In addition, it is recommended that governments establish centralised hubs to address all matters related to energy efficiency in buildings. Such dedicated institutions could serve as incubators for new policies, accelerate the information sharing on new schemes, and to verify funding opportunities that overall could reduce the time for approval processes, as well as increase uptake by private developers (ASEAN Centre for Energy (ACE), 2018[101]).
Green areas in cities are key assets that provide urban residents with amenities, promote biodiversity, and help adapt to climate change (e.g., by helping cool down cities). For example, in dense cities, the presence of green areas is vital for enhancing health, facilitating social and leisure activities, as well as encouraging a sense of belonging among citizens. Amid the COVID-19 pandemic, urban residents “re-discovered” the importance of proximity and walkability to open spaces such as parks (OECD, 2020[102]). Access to safe, inclusive, and accessible green and public spaces is a target under Goal 11 of the Sustainable Development Goals. However, implementation measures to achieve such a target, such as nature-based solutions (NbS), remain largely underdeveloped. This is an important area for policy intervention for ASEAN-5 cities.
3.3.4. Establish capital investment planning to link a municipality’s strategic spatial plan to investment
To ensure effective urban development, municipalities could integrate their strategic vision, land use plans, and annual budgets through comprehensive capital investment planning. This process involves the city reviewing a multiyear capital improvement plan that identifies anticipated public infrastructure and investment projects, as well as the required financing. It assesses the city’s policies and financial capacity to manage the investments needed for the development of its spatial and built environment.
A fiscal capacity assessment of the city is an important part of the capital investment plan, which involves estimating future revenues, future operating expenditures, and the amount of funds available. The annual review of capital investment plans considers the fiscal impacts of capital investments. For instance, should the upgrade of the transit hub increase the value of the surrounding neighbourhood, municipal property tax revenue would also increase. Comprehensive, multiyear capital plans allow municipal governments to i) ensure effective management of public capital assets; ii) consider funding requirements, the likely timing of major required investment, future costs, and major upgrades; and iii) bundle anticipated projects together to pursue external funding sources to supplement any potential shortfalls. By combining the capital budget and the city’s spatial planning, municipal governments are able to anticipate future general budget resources and plan ahead to apply for transfers or external funding sources with lower transaction costs (World Bank, 2015[69]).
3.3.5. Aligning national urban initiatives to climate financing initiatives
The lack of sustainable urban development projects reaching an advanced level of project maturity to become attractive for green financing is well acknowledged. Apart from raising funding for the project preparation to cover pre-feasibility and feasibility studies, building up the necessary planning capacity at the subnational level requires comprehensive Technical Assistance Programmes (TAP). Despite the proliferation of multilateral platforms providing funding for these purposes to cities by Multilateral Development Banks, such as the Asian Development Bank, the Asian Infrastructure Investment Bank, and the World Bank, the demand for support is greater than the availability of funding, especially for small and medium-sized cities (CCFLA, 2021[103]). Against this background, national urban initiatives as illustrated above, may benefit from being more closely aligned with existing national and international instruments for green urban financing. Benefits may be greatest if this alignment focuses on enhancing local capacity for green project preparation. This includes prioritising capital investment projects, initiating urban sector studies to guide future pre- and feasibility studies, and establishing an updated urban planning framework based on essential evidence.
3.3.6. Promoting nature-positive cities
Nature-positive cities represent an innovative and holistic approach to urban planning that emphasises the integration of natural elements into the build environment (World Economic Forum and Oliver Wyman, 2024[104]). This strategy not only enhances biodiversity and ecosystem services but also contributes to the overall sustainability and resilience of cities. By incorporating green infrastructure and nature-based solutions, cities could address a multitude of urban challenges, including climate change adaptation, air and water quality improvement, and the enhancement of citizens’ well-being (World Economic Forum and Oliver Wyman, 2024[105]).
Furthermore, nature-positive urban development could lead to significant cost savings in the long run, making it an economically viable strategy for sustainable urban growth. For instance, green infrastructure including parks, green roofs, and urban forests helps mitigate the urban heat island effect, reducing energy consumption for cooling and lowering greenhouse gas emissions. These natural elements also enhance the ability of cities to adapt to climate change by manging stormwater runoff, reducing flood risks, and improving their overall climate resilience. By integrating nature-based solutions into urban planning, cities could achieve the dual benefits of mitigating climate change impacts and adapting to its inevitable consequences.
Traditional grey infrastructure, such as concrete stormwater systems, can be expensive to build and maintain. Nature-based solutions, like wetlands and bioswales, offer cost-effective alternatives that provide similar or superior performance in managing water and improving urban resilience. Investing in green infrastructure reduces the need for expensive retrofitting of existing infrastructure, leading to significant long-term savings for city governments.
Adopting a nature-positive approach in urban planning is a forward-looking strategy that aligns with the sustainable development goals. By leveraging the benefits of green infrastructure and nature-based solutions, cities not only improve their environmental performance but also achieve significant economic and social gains.
3.3.7. Fostering transit-oriented development projects
Transit-oriented development (TOD) is a key area of urban development that could enhance the bankability of public transport projects. Transport is not necessarily an attractive option for investors, due to uncertain ridership. TOD clusters jobs, housing, services, and amenities around public transport hubs. The improved proximity from offices and residential houses to the transport hubs reduces the reliance on private vehicles, leading to better public transport connectivity and increased fare revenues (C40, 2021[106]). TOD operating companies could also supplement their revenues with more stable revenues from rental payments associated with the surrounding offices and housing. Having TOD at the core of an urban planning strategy could help attract private financing.
3.3.8. Promoting inclusiveness in large-scale infrastructure investment in cities (e.g., use of inclusionary zoning)
Implementing regulatory benchmarks for affordable housing and encouraging REITs focused on social inclusion may allow municipalities to foster social inclusiveness in urban spaces. With the regulatory implementation of the minimum benchmark of affordable housing and REITs focused on social inclusion, infrastructure development projects could drive social inclusiveness in urban spaces.
In addition to the ‘greenness’ of the projects, urban development could also drive social inclusion through the use of inclusionary zoning. In the UK, for instance, the national benchmark for affordable private rent is 20% for all Built-to-Rent homes. In all newly-built large housing complexes, a minimum of 20% of units need to be affordable (Government of the UK, 2018[61]). In this context, Civitas Social Housing (CSH) and Triple Point (SOHO) are two examples of how the potential role of REITs in promoting social inclusiveness. Civitas Social Housing (CSH) was launched in 2016 as the first REIT that specialises in social housing investment with a focus on specialised support housing for vulnerable people with care needs. In addition, CSH makes investments in properties for vulnerable people who are at risk of homelessness (CSH, 2022[107]). With a mission to raise private capital to invest in social homes across England and Wales, CSH aims to tackle the chronic shortage of social housing in the UK (CSH, 2022[107]). REITs that invest in properties prioritising social considerations, such as those targeting excluded or marginalised populations, could advocate for social inclusion alongside environmental sustainability, to further drive urban sustainability efforts.
3.3.9. Strengthening sustainability criteria in financing to ensure project quality in the long term
The G20 Principles for Quality Infrastructure Investment (G20 Principles) of 2019 highlight the importance of infrastructure quality and sustainability. They identify infrastructure as "a solid basis for strong, sustainable, balanced and inclusive growth and sustainable development” and advocate for scaling up sustainable infrastructure investments (Ministry of Foreign Affairs of Japan, 2019[108]).
The 2022 G20 Sustainable Finance Report issued by the Indonesia G20 Presidency is an example of a policy that stipulates sustainability criteria in financing in ASEAN-5 countries. The report addresses three workstreams, including one on developing a transition finance framework. This workstream has emerged from the rising concern that the limited focus on pure “green” or “sustainable” activities has hindered capital flow towards a wider range of activities that support a transition to a low/no-carbon economy. The singular focus on the narrow interpretation of “green” and “sustainable” projects may have restricted capital flow towards certain business activities, including transition efforts by greenhouse gas (GHG)-intensive sectors and firms. To ensure the effectiveness of the framework, the report proposes recommendations in five key areas for the transition finance framework: (i) identifying transitional activities and investments, (ii) reporting information on transition activities and investments, (iii) developing transition-related financial instruments, (iv) designing policy measures, and (v) assessing and mitigating the adverse social and economic impacts of transition activities and investments. Clear definitions of transition activities and robust institutional guidance will reduce the risk of “green and SDG washing”, while effectively channelling capital towards activities that promote climate action (G20, 2022[109]).
The OECD further encourages countries to advance sustainable infrastructure through the dissemination of best practices and practical guidance. This approach extends to sustainable urban development, leveraging resources such as the OECD Compendium of Policy Good Practices for Quality Infrastructure Investment and the OECD Implementation Handbook for Quality Infrastructure Investment.
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