OCDE (78 pages).
This report provides an overview of funding and financing instruments available to support infrastructure investment in cities and regions. Subnational governments have a critical role to deliver, operate and maintain infrastructure, and to invest to help drive the recovery from COVID-19. In recent years, many subnational governments have introduced innovations in the types of instruments used to access funding and financing. Highlighting examples from G20, OECD and non-OECD countries, this report presents a framework to differentiate funding and financing instruments, including by type of instrument, and their use, and outlines essential framework conditions that are needed to support subnational governments, The report was submitted to the G20 Infrastructure Working Group under the Italian Presidency and key findings were presented at the G20 High-level Conference on Local Infrastructure in Genoa, Italy on 27 September 2021.
Subnational governments – state, regional, and local – are major infrastructure investors, responsible for almost 60% of public investment in G20 countries. In many countries, they have primary responsibility for essential public infrastructure and service provision, including for water, waste, education, healthcare and transport. These governments are well placed to design and implement placebased policies that respond to local needs, match citizens’ preferences and help address global challenges at a local level.
Subnational government infrastructure investment needs to be future-proof to support an inclusive, sustainable and resilient COVID-19 recovery. The COVID-19 crisis, and subsequent social and economic crises, have revealed and exacerbated spatial disparities in infrastructure and services. The crisis has also accelerated awareness of, and momentum on, the need to act on climate and demographic challenges and address digital divides. Current fiscal stimuli, much of which are being used to support infrastructure investment by subnational governments, need to align with long-term policy objectives and should avoid locking-in carbon-intensive infrastructure that will exist long into the future.
Unlocking private finance requires clear sources of funding and a whole-of-life view of infrastructure costs. While much attention has been paid to the importance of mobilising private finance (bonds, loans, etc.), this report calls for focus on securing both financing and funding (taxes, user charges, asset revenues, etc.) resources. Subnational governments need to have sufficient funding available for the entire lifecycle of infrastructure, including for construction, operations, maintenance and the repayment of finance. Identifying whole-of-life funding sources when making an investment can ensure infrastructure will be well operated and maintained, and, critically, it can improve access to finance.
To increase infrastructure investment, subnational governments can look to innovate in the type and use of funding and financing instruments. What is considered an innovation depends on national and local contexts, and current practices. Indeed, while some of the funding and financing innovations for subnational governments highlighted in this paper may be common-practice in some countries, they may be innovative, or not widely understood, in others. To foster greater awareness across subnational governments, this paper highlights six areas of innovation related to funding and five areas related to financing, drawing on examples from G20, OECD and non-OECD countries.
The paper also highlights two ‘investment approaches’ that subnational governments can adopt to undertake infrastructure investments. In this report, the ‘investment approach’ refers to the method by which an infrastructure investment is undertaken. The two approaches detailed in this report are the use of state-owned enterprises (SOEs) and public-private partnerships (PPPs) – a third approach, the use of traditional public procurement is not covered. The choice of investment approach is largely independent from the choice of funding and financing instruments. A traditional public procurement can be financed privately through a green bond, while a PPP can be supported by significant public funding.
Essential framework conditions need to be in place to unlock the use of funding and financing instruments and support subnational government infrastructure investment. As highlighted by the Recommendation of the OECD Council on Effective Public Investment Across Levels of Government, framework conditions need to be in place to support quality infrastructure investment at all levels of government. These conditions relate to (i) the fiscal space and financial capacity of subnational governments; (ii) the investment capacities within subnational governments, including having sufficient human resources with appropriate expertise; (iii) the coordination and cooperation mechanisms among and across levels of government, including inter-municipal cooperation mechanisms to ensure investment is undertaken at the right scale; and (iv) the regulatory and legal frameworks, which are required to use certain funding and financing mechanisms or investment approaches. As public investment is a shared responsibility across levels of government, policy actions need to be coordinated across levels of government to support quality infrastructure investment.
This paper demonstrates a continued need to focus on the specific challenges and opportunities relating to subnational government infrastructure investment. This report highlights that focusing on funding and financing innovations and the framework conditions for subnational governments can help to unlock infrastructure investment.