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Plotting a Course Towards External Financing for Nature-based Solutions in Cities

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By Ingrid Coetzee, Kobie Brand

Senior Manager, Biodiversity and Nature-based Solutions, ICLEI Cities Biodiversity Center (CBC); Director, ICLEI-CBC

January 2018

Iclei infographic jan 2018This think piece highlights some of the challenges faced by cities in securing external funds to address rapid urbanization challenges, and for nature-based solutions in particular, and points to the need for “bringing nature into local fiscal policy”. This is the third in a series, created in partnership by ICLEI CBC and The Nature Conservancy.

The challenge of rapid urbanization

The United Nations’ World Cities Report 2016, Urbanization and Development: Emerging Futures, predicts that by 2030 two-thirds of the world’s population will be living in cities. It further forecasts that the urban populations of developing countries will have doubled and that the area covered by cities could triple. This report also points out that for megacities, the greatest growth will take place in the developing regions, and that medium and small cities (with less than one million inhabitants) are the fastest growing urban centres.

In a rapidly urbanizing world, both city governments and the natural resources that we all depend on, are under pressure to meet increased demand for infrastructure, land, water and other requirements. In addition, rapid urbanization trends will increase resource consumption patterns and greenhouse gas emissions, which will further exacerbate climate change impacts.

Meeting these increasing demands places strain on the financial resources of cities. At the local level, budgets and policies for addressing development and infrastructure challenges, as well as climate adaption and disaster reduction strategies, are determined by a complex mix of growth and development priorities, fiscal systems, legal mandates, institutional factors and political will. Financing for infrastructure development and service delivery in local governments relies largely on intergovernmental transfer payments, grants, subsidies, taxes and other sources that are unsustainable in the long run.

An aerial view of the city of Rio de Janeiro. Photo © iStock/EduLeite
An aerial view of the city of Rio de Janeiro. Photo © iStock/EduLeite

Why do external investments remain low at city level?

It is commonly recognized that while the “money is there”, actual investment into “green”, low carbon, climate resilient projects remains very low and even completely out of reach for most cities. The reasons are complex: In certain parts of the world, the capacity of city governments to secure additional external funds is often hampered by a lack of capacity and limited access to external funding due to poor credit ratings. Another reason is the lack of “bankable” projects. Cities’ appetites for venturing outside of their normal revenue streams and fiscal allocations, with associated budgeting and reporting processes and cycles, remain relatively low. Supported by traditional public service planning frameworks and a “business as usual” outlook, government officials are often not expected nor encouraged or equipped to create attractive, innovative, profitable and sustainable business propositions which would draw new public and private investors to the table. Traditionally, the focus is more on day-to-day basic service delivery and maintenance than to test, transform, disrupt and co-create innovative projects that would redefine our cityscapes and systems. And in some countries, public finance policy and regulatory requirements also contribute to low external investment at city level.

However, this is changing. Today there are thousands of cities that understand the value of creative and integrated development plans that will give them a competitive edge, create sustainable value and increase the quality of life for their communities. One such community is our growing ICLEI network of over 1 500 cities and other subnational governments, large and small, who have all embraced sustainability as part of their futures. And for many of these trailblazers, working with nature is no longer optional. A thriving, and often improved and expanded, natural environment of green corridors, healthy ecosystems, ample and safe green open spaces, food gardens, green and blue infrastructure and accessible, easy, daily community engagement with nature, is deeply embedded in the vision of these cities.

"Fiscal policy lies at the heart of creating an enabling environment for embracing sustainability, and nature-based solutions in particular, as integral to addressing the multiple challenges associated with rapid urbanization."

Making room for nature

Fiscal policy lies at the heart of creating an enabling environment for embracing sustainability, and nature-based solutions in particular, as integral to addressing the multiple challenges associated with rapid urbanization. Our cities, especially those fast-growing urban nodes in Asia and Africa, urgently need to rethink the way in which they approach, plan and prioritize budgets. City governments need to work with nature – rather than against it – when planning and building our cities. In order to make this shift towards working with nature and adopting nature-based solutions, the very principles that underpin planning, budgeting and fiscal policy at local level, need to be reviewed or, in many instances, completely turned around.

This means that city governments’ fiscal policies and budgets need to embrace principles such as decoupling natural resource use and environmental impacts from economic growth, and recognizing the interdependence of people, nature and the economy. These principles are advocated in the Quintana Roo Communique on Mainstreaming Local and Subnational Biodiversity Action, adopted at the 5th Global Biodiversity Summit of Cities and Subnational Governments held in parallel with the United Nations Biodiversity Conference in Cancun, Mexico, in December 2016. Greening fiscal policy opens the door for innovative fiscal reforms that can introduce new revenue streams for nature-based solutions. For example, to better deal with the challenges associated with a warming climate, urban heat island effect and poor air quality, Stuttgart introduced tax incentives and tailored financial programmes to promote the city’s green roof expansion strategy. And Seattle has established an independent Seattle Parks District with taxing authority to levy taxes to reduce the strain on future city budgets for parks maintenance and establishment.

It also means that city governments should compare the full long-term cost of “free” ecosystem services that are healthy and well-maintained with the cost of the loss of hard/conventional engineering solutions. In other words, city governments need to make a paradigm shift from the dependency on conventional quick-fix options to green and blue infrastructure solutions, “tinkering” and biophylic design options, as well as other nature-based approaches. Cities need to think differently about where to seek the best return on investment. They should identify the direct and indirect contributions of nature-based solutions, such as the economic value of ecosystem services, and mainstream this into policy and decision-making on infrastructure investment and development. For example, air pollution is Beijing’s greatest environmental problem. The air purification and temperature regulating services of forest ecosystems surrounding Beijing have been valued at around 1.03 billion euro annually (based primarily on avoided air pollution charges and electricity savings). Faced with the challenge of deteriorating air quality, the local Beijing government initiated a program in 2012 to invest around US$4.7 billion in planting 67 000 hectares of trees around Beijing over the next few years.

Cities can also expand the available funding envelope by sharing the financial burden through collaboration and adopting nature-based solutions. One such example is uMngeni Ecological Infrastructure Partnership, consisting of the eThekwini Metropolitan Municipality (Durban), neighboring local authorities, including the city of Pietermartizburg and uMgungundhlovu District Municipality, as well as South African provincial- and national authorities, civil society organizations, academia, and major industry and business sector associations. The Partnership was born out of a realization that engineering solutions were too costly and not able to solve the problem of providing clean potable water and furthermore, that the solution required collaboration between multiple actors to secure green infrastructure investments and improve water security in the greater uMgeni catchment.

While the financing of nature-based solutions by cities remains a challenge, the multiple challenges associated with rapid urbanization have led to a growing realization that innovative finance options, which support nature-based solutions, are imperative to improving sustainability and resilience. Changing the course of local fiscal policies and budgets in support of nature-based solutions requires courage and foresight. These are qualities that characterize many cities and will ensure a sustainable future for urban communities.

For more information on investing in nature for resilient cities and ICLEI's Cities Biodiversity Center, click here.