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 guarantee mechanisms can empower cities and local governments.

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.

Guarantees are a financial instrument to unlock public and private funding for local infrastructure by mitigating risks, increasing investor confidence in cities and local governments, and bringing down the cost of capital for municipal borrowing. In particular, concessional or publicly-funded guarantees for subnational governments can significantly accelerate transformative investments at the local level.

The COVID-19 pandemic has presented a new, unprecedented source of investor risk that is depressing business confidence to historic lows. According to the World Bank, global foreign direct investment fell by 42% in 2020, from $1.5 trillion in 2019 to an estimated $859 billion—the lowest level since the 1990s. Against the backdrop of the COVID-19 pandemic and declining investments, it is critical now more than ever to unlock private financing for developing economies by mobilizing a diverse set of instruments, including guarantees.

Read about Guarantee Funds for Cities on this policy brief.