Financing Cities after Quito: What Progress, What Challenges ?

By Xavier Crépin, architect and urban planner, academic lead for the “Cities and Urban Environment” Urban School and co-director of the ISUR-VED Master’s programme at Sciences Po Rennes; founding member of AdP – Villes en Développement.

Financing cities, particularly African cities, has been one of the key issues addressed by the AdP – Villes en Développement association since its establishment. However, results remain far below what is needed, even though progress has been observed, particularly since the Quito conference.

Financing local and regional governments remains, with few exceptions, the crux of the problem. As recommended by UCLG Africa, climate finance should now benefit local and regional governments directly and thus serve as a lever for strengthening local finances, rather than financing projects on a case-by-case basis.

However, it is the production of the city itself by its residents that constitutes the main driver of urban development, and it is their technical and financial capacity that needs to be supported.

The first question that arises is: “Can urbanisation worldwide be financed during a period of rapid population settlement and accelerated urban transition and, if so, how?”

Jean-Marie Cour devoted a major part of his work to this question. Based on assessments of gross local product (GLP) in African cities, he estimates the public financing requirement at between 2 and 3% to cover investment in and maintenance of the facilities and infrastructure needed for them to function. Yet, on average, local resource mobilisation is around 0.5%, leaving a gap that must be filled.

Michel Arnaud puts forward several proposals to cover this shortfall, notably capturing part of the increase in value generated when agricultural land is converted into land designated for urban development to accommodate urban expansion, this change in legal status multiplying the value of the land.

Thus, to finance what Jean-Marie Cour calls “population settlement investments”, the production of the city itself can generate the necessary resources. These mechanisms have helped finance the development of African cities but also serve as a model in many cities worldwide, where public authorities control or regulate the capture of land rent. In the latter case, this financing has also supported the large-scale production of affordable housing for lower-income groups, as occurred in China.

This therefore works for rapidly growing cities. For existing cities or those with low growth, or even declining populations, other resources must be mobilised for maintenance and renewal, particularly through taxation. Accordingly, in the 1990s, a tax collection system based on identifying land ownership in areas without a cadastre was developed for the most disadvantaged cities: the urban land register.

However, while financing mechanisms identified in the last century do exist, Thierry Paulais shows that African urbanisation, the fastest in the world on the continent with the fewest financial resources, requires a change of scale.

Beyond the local taxation discussed above, he considers that the issue is not solely a shortage of resources, but calls into question the very system for financing local investment.

He explores several avenues: transfers from central government, particularly their regularity and predictability; improved financial management by local governments as a guarantee of their credibility; borrowing and therefore local governments’ access to capital markets; the establishment of funds dedicated to financing investment in cities; and, not least, resources generated through land development.

In doing so, he seeks to create favourable conditions for capital transfers from international financial institutions and foreign private investors.

Following the 2007–2009 subprime crisis, this financialisation of investment in emerging cities became widespread and produced developments aimed at segments of the population with purchasing power or at foreign buyers, leaving aside the population settlement investments identified earlier.

The conclusion is therefore simple: major cities worldwide attract substantial capital, but this is directed more towards financial returns than towards meeting urban populations’ essential needs.

This contradiction, which increasingly affects the most advanced countries as well, is reflected in a shortage of affordable housing for a growing proportion of the already urban population, including in Europe and the United States.

A second question then emerges: “If there is a shortfall in the capacity to mobilise, or in the allocation of, the resources needed to finance cities, what public policy should be adopted to address this situation?”

By adopting the New Urban Agenda in 2016, the Habitat III conference in Quito correctly diagnosed this situation and set out the ambition of making cities worldwide drivers of sustainable development.

The central idea adopted in this agenda is that cities must be financed in proportion to their needs. While this comes at a cost, cities also represent an investment in the future and in development, as the city itself generates economic value. Investment in cities can therefore unlock local resources.

In addition to the resources identified in the preceding period, the New Urban Agenda mentions public–private partnerships and the management of municipal assets, expenditure and investment.

However, the combined total of all these resources remains, overall, far below the annual investment requirement, estimated at between USD 4.5 trillion and USD 5.4 trillion per year until 2030, while the annual amounts mobilised are around USD 800 billion.

Furthermore, another question remains concerning the financial resources available: how can they reach the city level and turn urban projects into bankable projects? The question can therefore be reformulated as follows: “Have the recommendations adopted in Quito as part of the New Urban Agenda translated into progress in financing cities?”

To measure these changes, reliable financial data series on cities outside advanced countries are scarce and often incomplete. Although it is difficult to establish reliable data on changes in cities’ resources, it is worth examining examples such as Kigali and Lagos, which show real progress over the last ten years.

Kigali

Financial year / indicator	2016/17	2024/25
Own-source revenue	12.5	54.5
Transfers	3.6	21.9
Borrowing	2.00	—
Total budget	22.2	263.6
Current expenditure	7.22	48.9*
Development investment	≈14.95
Population	≈1.15 M	≈1.9 M
Own-source revenue per inhabitant	≈10,900 RWF	≈28,700 RWF
Financial autonomy*	56.4%	—

In billions of Rwandan francs. RWF 1,000,000 = EUR 580

*In 2020–21

Kigali’s 2024/25 annual report is the best recent source. The city reports RWF 54.5 billion in own-source revenue, or 91% of its RWF 60 billion target. Own-source revenue has thus increased by a factor of 4.4, from RWF 12.49 billion in 2016/17 to RWF 54.5 billion in 2024/25.

This own-source revenue represents 20% of the overall budget, with the remainder made up of grants and borrowing, which constitute the city’s main resources.

Even with RWF 54.5 billion in own-source revenue, Kigali must therefore mobilise public transfers, concessional financing, development partners and private capital to finance its urban programme. The gap between local resources and urban investment needs remains considerable.

The 2024–2029 development strategy confirms that Kigali seeks to finance its development through a combination of own-source revenue, government transfers, loans and development partners; the overall investment requirement for this period is estimated at RWF 1,724 billion.

Lagos

Year	Own-source revenue / IGR	FAAC transfers	Borrowing	Budget / total revenue	Observation
2016	₦300 bn	₦170 bn	Substantial	—	Starting point
2024	₦1,164.6 bn forecast	₦596.6 bn	₦387.1 bn	₦2,243.0 bn	Sharp increase in IGR

In billions of Naira. NGN 1,000,000 = EUR 650

Lagos is an African exception: unlike most African municipalities, the state government has considerable fiscal capacity, particularly through personal income tax, and can access the bond market. Lagos is also considering issuing green bonds.

The progress made between 2016 and 2025 results from several factors: a considerable broadening of the tax base; digitalisation of collection; the growing importance of land and property taxation; mobilisation of own-source revenue by Lagos State; regular use of the bond market to finance infrastructure; and continued substantial capacity to mobilise federal transfers.

Lagos has also developed relatively sophisticated access to market financing: its third bond programme, registered in 2016 for NGN 500 billion, led to several issues, including NGN 100 billion in 2020 and NGN 137.3 billion in 2021.

Lagos therefore provides an excellent African example of the shift from relatively strong dependence on transfers towards a combination of own-source taxation, transfers, debt, land-based resource mobilisation and infrastructure financing.

A new question emerges from this finding: “Do development partners influence changes in local taxation, access to credit and climate finance?”

For a majority of international partners, the aim is no longer merely to finance sustainable cities, but to make urban investment the main vehicle for climate finance. The aim now is to finance cities’ climate transition.

In the introduction to the World Cities Report, the links between the climate agenda and the urban agenda are clearly established: they are two sides of the same coin.

Designing, managing and planning urban renewal through a climate-focused approach completely changes the very conception of what population settlement investment represents.

Reuse, local materials, the circular economy and, more generally, investments in urban adaptation and in mitigating cities’ impact on climate disruption are at the heart of the new initiatives.

The search for the additional resources needed to cover cities’ investment requirements is therefore now turning towards climate finance.

Taking climate constraints into account changes the way cities are produced, insofar as it prioritises resource efficiency in construction methods and consideration of a programme’s entire life cycle.

However, although this new approach should theoretically be more economical, this remains to be demonstrated across a sufficient number of completed projects and also requires production sectors to adapt to this new approach.

The problem is not solely the volume of international aid, but cities’ ability to turn their local resources and public transfers into investment capacity and financial leverage.

This approach echoes the OECD’s more recent findings: subnational governments still face severe resource shortages in achieving the SDGs, while the annual climate financing gap for cities in emerging economies is estimated at around USD 350 billion.

The OECD views African urbanisation as an unprecedented demographic and spatial transformation, but also as a historic opportunity for development.

By 2050, African cities are expected to accommodate around 700 million new residents, bringing the urban population to approximately 1.4 billion. The urbanisation rate would reach 64%, and around 80% of Africa’s population growth would be absorbed by urban areas.

The central problem is therefore no longer whether Africa will urbanise, but how it will manage this urbanisation.

African urbanisation is a historic opportunity, but it will become a driver of development only if cities acquire the planning, governance and financing capacities needed to support their expansion.

Africa is urbanising rapidly while its institutional and financial capacities remain insufficient to plan and finance this transformation. The challenge is therefore not simply to build more infrastructure. Planning, governing, financing, building and maintaining must all take place simultaneously.

In summary, if the gap between the resources needed and those mobilised for cities is ever to be closed, advocacy must continue to ensure that emerging cities, largely produced by residents themselves, are increasingly taken into account in the international development agenda and benefit from powerful financing mechanisms.

Financing residents themselves should therefore be at the heart of development objectives for the years ahead and become a standalone Sustainable Development Goal.

The mortgage refinancing system established by Shelter Afrique Development Bank with the African Development Bank and Africa-Re provides a good illustration of this approach. The widespread establishment of dedicated funds, financed by the savings of economic actors and residents themselves, offers a path towards progress in the coming period.

It takes up Jean-Marie Cour’s original idea of “population settlement investment”, in which it is the development of the city itself—and not the economic development it generates—that drives cities’ own growth and financing.

The diagram [AI-generated] highlights the role of local financial institutions and real estate professionals in the mechanisms for financing urban production.

To strengthen the skills of these key actors, several training programmes led by WAEMU, with World Bank support, and by CAHF, with AFD support, have focused on training these actors to establish effective financing mechanisms. Their development is a necessary condition for professionalising the occupations involved in producing the city.

In sum, it is by building on the dynamics of population settlement in cities—particularly residents’ production of their own housing—on well-trained professionals, by capturing land rent to carry out population settlement investments, and by using international resources and local taxation to support and leverage this dynamic, that African cities will be able, in the coming period, to produce transitional and incremental urban development offering a basic living environment.

This will make it possible to await a catching-up process that will come later, once the demographic and urban transition is complete and the development process specific to each region, particularly in Africa, has been set in motion.

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References

AdP – Villes en Développement (bulletins)

Financing Urbanisation and Decentralisation

Medium-Sized Cities

Urbanisation and Financialisation

Towards a Post-2030 Housing SDG

AFD

Thierry Paulais, Financing African Cities: The Challenge of Local Investment

UN-Habitat

Habitat III – Financing Sustainable Urban Development

World Cities Report

Unlocking the Potential of Cities – Financing Sustainable Urban Development

Local finances

City of Kigali – Budget and Publications

Lagos State – 2024 Budget

International institutions

OECD – Africa’s Urbanisation Dynamics

World Bank

Shelter Afrique Development Bank

International Finance Corporation (IFC)

West African Economic and Monetary Union (WAEMU)

Centre for Affordable Housing Finance in Africa (CAHF)

International alliances

Covenant of Mayors in Sub-Saharan Africa

Cities Climate Finance Leadership Alliance

Global Covenant of Mayors for Climate & Energy

UCLG Africa and the African Development Bank

Foresight

Valérie Clerc, Laure Criqui and Guillaume Josse, Autonomous Urbanisation: Towards a Different Approach to Urban Action in Informal Settlements

This article written in French was translated using a.i.