4 Ways to Unlock Local Government Finance for Sustainable Development

On April 14, 2026, members of the Committee of Experts on Public Affairs (CEPA), an advisory body to the United Nations Economic and Social Council (ECOSOC), including Professor Paul Smoke, Acting Director of NYU’s Center on International Cooperation (CIC), presented a paper entitled “Governance and institutional perspectives on strengthening resource mobilization for the Sustainable Development Goals— Improving public resource mobilization through public financial management reform, fiscal decentralization and innovative development.”

Among other topics, the paper examines the role of local government finance as a vector for development finance. David Jackson, a Non-Resident Fellow at CIC, was on the panel to provide recommendations as an external observer to strengthen this role. An edited version of the recommendations follows below.

They will be discussed at the upcoming CIC side event during the 2026 Financing for Development Week (FFD Week) on Tuesday, April 21 (for more info and to RSVP, visit our website).

1. The importance of institutionalizing and scaling up mechanisms that deploy intergovernmental fiscal transfers for climate finance, in particular, climate adaptation and environmental resilience.

Subnational governments have a comparative advantage and an institutional mandate in this area. It often involves public infrastructure investment and maintenance that reduce risk and provide indirect but significant support to local economic and social activity and therefore to local (and national) fiscal space. This is important because, according to the 2024 Climate Policy Institute (CPI) State of Cities Climate Finance report, only 10 percent of the total volume of urban climate finance goes to adaptive infrastructure.

Fortunately, there is now a global standard (ISO 14093) for the deployment of “performance-based climate resilient grants” (PBCRG) to local governments through national systems. These are semi-conditional transfers. Conditional on building resilience, but fungible across sectors and departments at the local level.

The Green Climate Fund has already provided resources to governments and development banks (Cambodia, Benin, Bhutan, the West African Development Bank) for the scale-up of these PBCRG systems, and the World Bank has implemented similar programs, such as the Financing Locally Led Climate Action (FLoCCA) program in Kenya and a similar initiative in Tanzania. The UN Capital Development Fund (UNCDF) has supported PBCRGs in multiple countries with over $100m since 2014 through the Local Climate Adaptive Living Facility. Finally the Least Developed Countries Initiative for Effective Adaptation and Reslilence also deploys funding in multiple countries based on the PBCRG model.

These mechanisms, which instrumentalize intergovernmental fiscal transfers for the purposes of climate adaptation and resilience, offer opportunities to blend local, national, and global fiscal resources to effectively reduce risk and increase fiscal space through strategic public goods and infrastructure. They have fewer overheads, build national and local capacity, and are often more effective and sustainable than individual projects.

2. The relevance but continued limitations of guarantee facilities due to the constraints of the International Monetary Fund (IMF) 2008 System of National Accounts (SNA)

These specify that liabilities by many public entities, including subnational governments and utilities, are contingent liabilities on the sovereign government accounts. This factor constrains central banks and finance ministries from permitting local borrowing, even for viable projects.

One potential solution would be the creation of regional guarantee schemes in which sovereigns and international development partners contribute to a pooled risk facility that provides guarantees for viable and transformative urban and local infrastructure, classified as “off-balance sheet” for sovereign debt calculations. This may work best in regions that share common capital markets, currency unions, and other reduced restrictions on capital flow. This idea merits further examination and may also require a deeper analysis of the consequences for national accounting.

3. The potential role of domestic currency, local government revenue, and general obligation bonds as instruments to deepen and broaden local capital markets, reduce borrowing, and provide finance for local infrastructure

There are relatively few examples, however. In theory, they reduce the need for sovereign borrowing, recycle savings into increasing productive capacity, and deepen local capital markets, potentially strengthening local currencies.

One reason this option is not pursued more widely is that, by definition, bonds can be issued only by financially autonomous agencies. While many local institutions have this freedom by statute, it is often limited in practice. Other constraints, such as capacity and creditworthiness, can potentially be addressed through project structuring using ring-fenced special-purpose vehicles.

In 2024, the Tanga Urban Water and Sanitation Authority issued a local-currency green bond on the Dar es Salaam Stock Exchange in Tanzania for the refurbishment of the water supply. This was oversubscribed, including by Kenyan investors. The bond issue did not carry a sovereign guarantee and, therefore, in theory, avoided the limitations described earlier. Context is critical, but this option provides another pathway where appropriate.

4. Better Infrastructure Asset Management

Over 70 percent of the cost of an infrastructure asset is during the use and disposal phase, according to the UN Handbook on Managing Infrastructure Assets for Sustainable Development, published by the UN Department of Economic and Social Affairs (UNDESA). Yet the focus of development finance is often on the construction phase, and there may be institutional and other incentives to favor the new over the existing.

Improved infrastructure asset management by both central and local governments can play a measurable role in boosting fiscal space while increasing environmental resilience. Indeed, if linked to performance measures such as transfers aligned with the ISO 14093 mentioned above, or to performance measures connected to a bond issue, this option can provide a cost-effective and efficient answer to address local transformative infrastructure challenges.

The CIC side event during the FFD week will discuss these and other proposed reforms to the global financial architecture to make it more conducive to local government finance. RSVP on the CIC website today!