How National Development Banks can drive climate-smart solutions in cities during COVID-19 and beyond

By Priscilla Negreiros

No economy can achieve resilient and climate-smart economic growth without empowered cities. With the COVID-19 pandemic, the importance of cities is greater than ever. Urban areas will be severely impacted by the current crisis, with drastic economic consequences in the medium to long term in addition to the significant human and social losses. Cities have a higher risk of spreading diseases due to high-density population. They also serve as travel hubs, increasing transmission rates and are home for many vulnerable populations, which – particularly in developing countries – often live in informal settlements with little or no access to sanitation and hygiene facilities.

Despite this, cities cannot lose momentum in addressing the global threat of climate change, which could have an even greater impact on the economy in the long term. Before COVID-19, cities were already in need of more investment to face the climate emergency, and now they are losing substantial revenues from locally generated sources and are needing to divert funds elsewhere. Cities need urgent access to credit, and National Development Banks (NDBs) can help.

NDBs are an important development tool during economic crises. Historically, NDBs were created to fund post-war reconstruction in Europe (e.g. KfW in Germany) or to boost industrialization in developing economies (e.g. BNDES in Brazil). They all share the same principle of supporting national governments to counteract the pro-cyclical nature of the private financial system. Throughout the 2007/08 economic crisis, NDBs played a vital role when commercial bankers rationed credit and reduced global investments.

Although NDBs vary in size, performance, and objectives, they often have a unique capacity to reach sectors not sufficiently funded by private financial institutions, such as green infrastructure, renewable energy, and energy efficiency. This makes them a relevant actor in the global development agenda. Taking into account the increasingly central role of cities as drivers of economic growth and as part of the global response to climate change, NDBs should substantially increase their investment in projects led by cities.

According to the recent think piece published by the Cities Climate Finance Leadership Alliance about the role of NDBs in city-level climate finance, NDBs have potential to unlock needed investment into cities as they: (1) have a generally singular domestic focus with a deep understanding of national and regional investment challenges and opportunities; (2) can utilize public and private funding sources, providing state guarantees to cheaper access to markets; (3) have the advantage of financing in local currency; (4) can pool different types of funding in blended finance structures and catalyze private sector investment.

So, why are NDBs not doing more to address cities’ needs?

NDBs are not a viable option for every city. Even estimating the number of NDBs is a difficult endeavour. Yet, most of the approximately 250 existing NDBs worldwide are found in middle-income countries (60%), while only 8% are located in low-income countries, and around 30% in high-income countries. Likewise, most NDBs are small, except for the ones in China, Germany, Brazil, India, and South Africa, which hold approximately three-fifths of the USD 5 trillion in assets estimated as being held by NDBs (considerably more than the just under USD 1 trillion held by Multilateral Development Banks [MDBs).

The structure of an NDB can also vary greatly. Some are fully owned by national governments, while others are semi-private; some have wide mandates, while some are specialized in one sector; and some NDBs are more or less independent from government-controlled boards. All of these factors influence how NDBs establish their mandates, most not having clear programs to promote and identify climate-resilient infrastructure projects, let alone urban-related ones. Also, legal constraints and political disputes might disengage municipal governments from using these funding sources.

Yet, there are good reasons to think that NDBs should provide critical support to cities. For that to happen, some actions must be taken to increase the role of NDBs in urban-resilient and climate-smart investment.

NDBs can start by addressing climate-related investments in their mandates and/or strategies, including for climate-smart urban infrastructure. Reviewing mandates and setting climate and resilient urban targets will not necessarily generate an instantaneous change, but it will certainly support the translation of plans into concrete project pipelines. National governments must make sure the regulatory framework conditions are in place to allow subnational entities to access NDBs. The collaboration between NDBs and their relevant national and local governments is the key to success.

Also, NDBs must strengthen their technical capacity to assist cities in structuring projects by developing and deploying product offerings that suit cities’ needs, such as project preparation facilities and risk mitigation mechanisms. Most cities lack the required capacity to manage projects, lead infrastructure procurement, and identify climate finance instruments. Although there are many urgent projects in the pipeline, particularly in adaptation measures, city-level projects are commonly identified as “non-bankable” by investors.

Cities must have access to project preparation facilities that can assist in building feasibility studies and scaling the needed finance. By investing in project preparation assistance and risk mitigation instruments, NDBs can be an important partner for increasing the number of bankable projects, which would help to respond to the COVID-19 economic crisis.

Another solution: NDBs should increase their access to concessional development finance by seeking accreditation and support from Multilateral Development Banks. This would allow NDBs to provide cities with the needed grants for technical assistance in project preparation and guarantees, and to lend at concessional rates and for longer durations.

Cities will face one of the biggest challenges of the century in the coming months and years: they will have to repair their economies while fighting for the health of their people and climate. While all actors in this equation will be essential, NDBs will have a large role to play as key city-level support.