Financing the Future: How L&MIC Cities Can Access Capital for Infrastructure Growth

The World Bank’s 2025 report highlights the severe financing gap faced by municipalities in low- and middle-income countries and the urgent need to scale up repayable finance through reforms in local revenue systems, regulatory frameworks, and market development. It advocates coordinated action by governments and development partners to unlock sustainable urban infrastructure investment.

The 2025 World Bank report developed by the Bank’s Subnational Finance Task Force in collaboration with research institutions including the Urban Institute, Brookings Institution, and the City Climate Finance Leadership Alliance (CCFLA), exposes a critical obstacle to sustainable development: the inability of cities in low- and middle-income countries (L&MICs) to finance essential infrastructure. Urban infrastructure investment needs are estimated at 2% to 4% of L&MIC GDP per year, translating into a staggering annual financing requirement of up to USD 2 trillion. However, actual investment remains a fraction of this, with the financing deficit stretching as wide as 3% of GDP in some countries. With traditional fiscal sources and international aid already stretched thin, the report makes a compelling case for scaling up the use of repayable finance, including loans, bonds, and public-private partnerships (PPPs), to close this urban infrastructure gap.

A Sparse Landscape of Municipal Borrowing

Despite the growing need, the volume of finance flowing to municipalities remains critically low. Municipal debt in most L&MICs accounts for less than 2% of GDP, and in many countries, it barely exists. South Africa is the only country in Sub-Saharan Africa where local governments engage in meaningful borrowing. In South Asia, India has some activity, but the stock of municipal debt stood at only 0.08% of GDP in 2021. Latin American countries such as Colombia and Brazil have more developed frameworks, yet most municipal debt remains concentrated in a handful of large cities and still falls well short of potential. Even in countries with regulatory systems allowing borrowing, the vast majority of municipalities remain excluded due to a lack of creditworthiness or limited capacity.

Instead of tapping into private markets, municipalities rely heavily on public financial institutions. Institutions like the Development Bank of Southern Africa (DBSA), Findeter in Colombia, and İlbank in Türkiye account for the lion’s share of lending to local governments. The private sector plays only a peripheral role, and municipal bonds are rare. India’s housing finance agency, HUDCO, for instance, dominates urban lending, often with state guarantees, crowding out private banks.

PPPs: The Unrealized Promise of Private Capital

Public-private partnerships, while frequently championed as a tool for urban infrastructure financing, remain grossly underutilized. The World Bank’s Private Participation in Infrastructure (PPI) database shows that municipal PPPs accounted for only 3% of total PPP investment in L&MICs from 2015 to 2023. In India, municipal PPP activity has significantly declined over the past decade. Most urban PPPs require heavy fiscal support due to low cost-recovery from user fees. A study of Tamil Nadu, one of India’s most urbanized states, found that most PPPs were funded through viability gap financing and availability payments, with minimal private capital at risk.

In contrast, Colombia stands out as a rare bright spot. The Bogotá Metro Line 1 and RegioTram commuter rail, structured with support from international partners like the World Bank and Chinese investors, illustrate how cities can engage in complex PPPs. However, such successes remain exceptions, and most L&MIC cities lack the institutional and financial frameworks to attract sustained private investment in urban projects.

Structural Barriers: Demand, Regulation, and Market Readiness

The report identifies a trifecta of structural barriers to municipal finance: weak demand, restrictive regulation, and underdeveloped capital markets. On the demand side, many municipalities suffer from low revenues, poor financial management, and weak project execution capacity. Property taxes, a key revenue source, yield just 0.17% of GDP in India and 0.3% in Mexico, far below the OECD average. Municipalities also lack autonomy, with higher tiers of government retaining control over investment decisions and fiscal transfers.

Regulatory frameworks, often established in response to past crises, can unintentionally stifle borrowing. Brazil’s Fiscal Responsibility Law and India’s ad hoc state-level borrowing approvals create an uncertain and often prohibitive environment for municipalities. In Türkiye, İlbank’s monopoly on certain financial mechanisms discourages competition. South Africa offers a more encouraging example: a robust regulatory environment and clear rules enabled cities like Cape Town to secure substantial loans, including a USD 150 million IFC deal in 2024.

Capital markets, meanwhile, remain shallow, and investor appetite for municipal debt is limited. Government financial institutions fill the void, but this can discourage private entrants. Even where GFIs succeed, their dominance may undermine market development. The report cautions that unless designed carefully, supply-side interventions like concessional loans or guarantees risk distorting markets and reinforcing public monopolies.

Building a Path Forward for Resilient Urban Finance

The report proposes a comprehensive three-pronged strategy to unlock municipal finance. First, demand-side reforms are crucial. National governments must improve local revenue frameworks, support cost recovery through tariffs and taxes, and strengthen municipal financial management. Municipalities should invest in building internal capacity for project design, planning, and execution. Second, regulatory reforms are needed to enable safe and predictable access to repayable finance while protecting against fiscal risks. Clear borrowing rules, transparent approval processes, and robust systems for managing municipal defaults are essential. Third, carefully designed supply-side interventions can demonstrate viability and attract private capital. This includes credit enhancements, risk guarantees, and viable partnerships with GFIs that promote, rather than suppress, private sector engagement.

Development partners are called to play a catalytic role by supporting national policy reforms, strengthening municipal institutions, and helping municipalities access credit markets. By providing both technical assistance and financial instruments, international agencies can help cities move from fiscal dependency to financial resilience. Ultimately, the report makes a compelling case that unlocking subnational finance is not only a technical challenge but a development imperative. Without creditworthy, empowered municipalities, the promise of inclusive, sustainable urbanization will remain out of reach for millions in the Global South.