Ahead of the upcoming third conference of the Malaga Global Coalition for Municipal Finance from 5-6 October 2023 to be held in Malaga, Spain, the United Nations Capital Development Fund (UNCDF) is producing a policy brief series featuring the five areas of the Malaga Coalition agenda. This policy brief is highlighting how Domestic Capital Markets are bridging the local infrastructure Financing Gap

The Malaga Global Coalition for Municipal Finance created by UNCDF and UCLG in collaboration with FMDV advocates for a global financial ecosystem that works for cities and local governments. Based on the outcomes of the first two Malaga Coalition Conferences, five elements of the financial ecosystem have been identified as the policy agenda towards the Third Conference: intergovernmental fiscal transfers, own source revenue, domestic capital markets for long-term debt financing, city friendly equity finance, and a guarantee fund for cities.

These five interlinked elements will create an ecosystem for sustainable subnational financing, ensuring that external investment is balanced with strengthened local revenue and capital markets, and further reinforced with mechanisms to defray sovereign credit rating risk.

Investing in city infrastructure is integral to most development strategies, and it is well recognized that such investments contribute to economic growth and human well-being. For example, improved roads and transportation allow for greater mobility of people, goods and services; cleaner water and sanitation lower morbidity; and green spaces improve sustainability.

However, the current level of traditional financing mechanisms alone cannot deliver the necessary volume of local investments due to growing populations and the associated high demand for public services, increasing land values, and expanding local fiscal space. Reforms to improve both assigned and own sources are important if local governments are to be empowered to take proactive decisions on infrastructure rather than continue as passive responders to scattered grants.

These reforms are a first step towards empowering local governments to blend public sources of finance with private sources, so local public goods, such as infrastructure projects, can be created on a scale that lifts the city to higher growth in an equitable and environmentally responsible manner. Given the gaps between the investments needed and the available public sources of finance, blended finance becomes critical, and a key component of the package is access to capital markets by cities and local governments. In particular, local government borrowing and the issuance of municipal bonds would play a key role in achieving sustainable and transformative infrastructure finance by attracting investments at scale.

Read about Domestic Capital Markets on this policy brief.