During the 2018 summer semester, Mundus Urbano 2017/19 student Rudolf du Plessis had the opportunity to work part-time in a “Werkstudent” position at the KfW Development Bank in Frankfurt. As a part of the Environmental and Social Compliance Centre, he had the opportunity to work closely with issues related to sustainable development, particularly in relation to infrastructure development projects. This written piece reflects on the relation between urban development, climate change and the role of international development financiers.
A bridge over the Tana river in Kenya. Source: SGT R.A. Ward, U.S. Marine Corps, Wikimedia Commons
Many cities globally are facing increasing infrastructure deficits as rapid urbanisation, climate change and slow global economic growth is increasing the need for cities to meet existing infrastructure backlogs. At the same time, there is increasing demand for new infrastructure that is climate resilient, sustainable and adaptive. In the global south, rapid urbanisation means that cities are finding it increasingly difficult to meet existing infrastructure backlogs with traditional funding sources such as service rates, property taxes and national grants. Given existing shortfalls in urban infrastructure finance, cities are increasingly in need of capacity building, financial resources and expertise in order to develop infrastructure that can assist cities to mitigate and adapt to the effects of climate change. It is in this intersect that the role of national and multilateral development finance institutions and their unparalleled experience in project finance, consulting and programme management has much to offer cities in the global south.
However, in order to be sustainable, the onus will be on cities to ensure future sustainability and resilience through comprehensive capacity building as the donor environment is shifting towards multipolarity. This article aims to provide an overview of the role of Development Finance Institutions (DFIs) and local governments in a changing development finance landscape.
Growing Infrastructure Deficits
Currently, roughly 200 million people, or 62% of Sub-Saharan Africa’s population, live in slums. This disproportionate growth in informal areas is leading to increasingly unmanageable pressure on existing infrastructure – and governments are struggling to cope with growing demand for basic services. While Sub-Saharan African countries are advancing in terms of infrastructure provision, rapid urbanisation and ageing infrastructure networks are increasingly contributing to infrastructure and service backlogs. For example, according to the African Centre for Cities, while urban access to electricity decreased from 58% in 2005 to 57% in 2008, the absolute number of users increased by around 10 million during the same period.
At the same time, cities globally are becoming increasingly vulnerable to effects of climate change. Cities in low-lying areas in developing and developed countries alike are experiencing increasing incidences of disasters such as flash floods, coastline erosion and droughts. Cities such as Shanghai, Kolkata, and Dhaka are as vulnerable to natural disasters as those in developed regions such as Tokyo, Amsterdam and Miami. However, a key difference between cities in developed and developing regions is the ability of these cities to mitigate risks and adapt to climatic changes with appropriate infrastructure. For example, while a majority of Rotterdam is built on or below sea level, the introduction of adaptive infrastructure such as ‘water plazas’ and floodgates has allowed the city to become increasingly resilient to floods. Conversely, ageing infrastructure and uncontrolled urban expansion has led to cities such as Dar Es Salaam and Dhaka becoming increasingly exposed to floods and droughts.
Coastal cities such as Dar Es Salaam are particularly vulnerable to floods. Source: Chen Hualin, Wikimedia Commons
The reason for this infrastructure shortfall is not only found in a lack of financial resources and funding – but in local and national government capacity to develop the requisite knowledge needed to develop these projects. Environmental Impact Assessments (EIAs), pre-feasibility studies to ensure ‘bankability’ and project preparation facilities are all critical steps towards implementing any infrastructure projects. These capacities are often in short supply at the local and even at national levels, particularly in the sub-saharan African context.
The role of DFIs
In order to allow countries with low capacities to access funding for costly development projects, traditional development finance institution such as the World Bank, the KfW and the African Development Bank offer ‘package’ deals that combine low-interest loans with decades of consulting and research experience to ensure the environmental, social and economic sustainability of infrastructure projects. These institutions have over the past decade played an increasing role in assisting local and national governments in providing basic services as well as infrastructure to improve urban resilience and adaptability in urban areas. This is done in a number of ways, ranging from development policy support to infrastructure development – in combination with consulting, research and capacity development experience.
An exemplary project in this regard is the KfW and World Bank’s projects to improve adaptability and resilience in Beira, Mozambique. Currently, Mozambique is experiencing increasing incidences of floods, erosion, cyclones and droughts and is one of the countries most affected by climate change globally. The KfW and the Word Bank have therefore supported development projects in Beira that foster inclusive, participatory and climate adapted urban development. During the first phases of the project, the KfW financed sluice structures and urban waterway rehabilitation projects in the River Chiveve to enable natural drainage and allow for flow regulation. To compliment these measures, backwater areas were rehabilitated in order to increase resilience to flooding. In the second phase of the project, polluted riverbank areas were converted into public green spaces that include sport facilities, a botanical garden, commercial spaces and water and sanitation facilities. Tfdarfhis allowed for a greater sense of community ownership, which can lead to greater sustainability and longevity of the project.
Development finance institution also have a role to play in terms of building local capacity and governance infrastructures. This is exemplified in projects such as the KfW’s support for decentralisation in Benin through the creation of the Fonds d’Appui au Développement des Communes (FADeC) budget transfer mechanism that allows for local governments to decide where allocate funds and invest funds according to local needs rather than national governments. This project also aims to build and strengthen local institutions that monitor the use of local funds and quality of infrastructure projects. Among other initiatives, this is achieved by carrying out audits in 77 municipalities in Benin in order to monitor whether public funds are benefiting local communities.
These projects highlight that although interventions in the built environment are critical, it is equally important that institutional support, local ownership and adequate management be fostered to ensure sustainable and adaptive infrastructure initiatives achieve their goals. This approach is echoed by scholars of sustainable development such as Jeffrey Sachs, who argues that in order to achieve development outcomes as outlined by the UN Sustainable Development Goals (SDGs), cities will require “good governance, public finance, and effective institutions”. This is critical in order to allow for cities to identify and deliver solutions in the age of climate change.
Shifting roles of DFIs and Multilateral Development Banks (MDBs)
However, while the role of MDBs remains important, as illustrated in the project above, these institutions are now in competition with emerging funders and increasingly the private sector. This emerging dynamic may have significant impacts on the development finance industry. While increasing competition may be a good thing from the perspective of borrowers as funders offer more innovative products and better terms. However, increased competition may lead to a ‘race to the bottom’ in terms of environmental and social governance as funders relax conditionalities in order to become more competitive. This is a criticism that has been levelled at the World Bank’s new Environmental and Social Framework that emphasises the use of countries’ own systems – as opposed to World Bank systems that are often perceived as too stringent. This shift will have wide ranging impacts – as smaller institutions such as the KfW similarly make use of World Bank guidelines.
While it is important that development financiers and governments continue to engage constructively to find beneficial modes of cooperation for all stakeholders, it is critical that local and national governments maximize the benefits accrued to them when dealing with development financiers such as the World Bank and the KfW. This is particularly relevant when considering the low levels of local capacity when planning for climate adaptive and resilient cities.
Development financiers and national entities should work together to enhance capacity building to ensure that greater competition between traditional and emerging funders does not translate into weaker standards and projects of lower quality. Capacity building should be widely promoted by development financiers such as the World Bank and KfW rather than simply suggested – while capacity building initiatives by these institutions should support and strengthen local government’s existing capacity-building initiatives.
Development finance institution should increase engagement with regional forums such as the Southern African Development Community (SADC) to provide opportunities for countries in the broader region to benefit, even if they are unwilling or unable to make significant domestic capacity-building commitments. These capacity-building efforts must be underpinned by a shift from project-specific capacity building initiatives towards greater technical assistance initiatives focused on local staff. Borrowing countries and local entities should also seek to expand their engagement with ongoing project preparation and capacity-building initiatives by MDBs such as the Global Infrastructure Facility, which will help to ensure that local capacity is sufficient to deal with projects marketed for private sector investment.
Furthermore, greater emphasis should be placed on decentralisation in order for cities to acquire sufficient resources from domestic sources (such as rates and taxes) in order to provide basic infrastructure such including schools, hospitals and clinics, drinking water and sanitation and access to affordable electricity. The KfW’s support for decentralisation in Benin is exemplary of such an initiative.
The changing dynamics between local and national governments and development financiers may hold significant implications for cities increasingly vulnerable to the effects of climate change – on the one hand, this may encourage countries to improve standards, improving overall environmental and social governance, while this may also lead to increasingly unsustainable forms of infrastructure as banks compete for business. Cities should become aware that while increasing competition between funders may mean better rates and fewer conditionalities, it can also mean greater opportunities for capacity building.
While development banks are increasingly shifting towards ‘loosening’ conditionalities, countries will have to improve in-house capacity to ensure infrastructure is sustainable, resilient and adaptable. This will not only allow for countries to access funding from a broad range of sources, but also to ensure that local communities are more resilient against the rapidly shifting weather patterns and climate change.
In the urban era, cities will be at the frontlines in the fight against climate change – and they will need all the help that they can get.
Rudolf du Plessis is a Mundus Urbano student from South Africa. Before joining MU he was a researcher for the South African Institute of International Affairs’ Economic Diplomacy Programme, where his work focussed on African infrastructure development and the role of Multilateral Development Banks, Development Finance Institutions and emerging funders such as China. He holds a degree in International Relations from the University of Pretoria and a Masters degree in China studies focussing on China’s trade and investment policies. His research includes the role of development finance in cities in the global South, Green Finance and infrastructure development.