Three barriers to municipal finance—and how to overcome them to create jobs and growth

Cities in low- and middle-income countries are growing fast—but their ability to finance the infrastructure and services needed to support people and jobs is lagging behind.

The consequences are real: without better roads, transit, water, energy, and housing, cities struggle to deliver basic services or attract investment, limiting job creation and economic opportunity. That's because urban infrastructure lays the foundations for employment, business development, and economic growth.

As detailed in our new World Bank Group report, Unlocking Subnational Finance: Overcoming Barriers to Finance for Municipalities in Low- and Middle-Income Countries, investment needs in urban infrastructure amount to 2–4% of GDP annually. Yet actual spending is far below this benchmark: in India, for example, urban infrastructure investment is just 0.7% of GDP—less than half of what’s needed to meet demand and unlock broader economic potential.

The Missing Piece: Repayable Finance

Public budgets and development finance alone cannot close this gap. To accelerate job creation through infrastructure investment, cities must access repayable finance—particularly from the private sector—through municipal borrowing and public-private partnerships (PPPs).

Yet progress has been limited. Most low- and middle-income countries have negligible municipal borrowing levels, typically below 2% of GDP. Between 2015 and 2023, municipalities in low- and middle-income countries (excluding China) attracted just 3% of all PPP investment—despite the proven link between urban infrastructure delivery and local job creation.

What’s Holding Cities Back?

The Unlocking Subnational Finance report identifies three major barriers to mobilizing commercial finance:

1. Demand-side constraints: Many municipalities lack creditworthiness and the capacity to structure viable projects that can create long-term jobs and returns. Only 3 of the 100 largest cities in developing countries have an international investment-grade credit rating, and just 35 have issued municipal bonds. Weak financial management and poor cost recovery further undermine investor confidence.
   
   
2. Regulatory hurdles: Legal and regulatory frameworks are often unclear or overly restrictive. In Brazil, for example, tight controls imposed after past financial crises restrict municipal borrowing, whereas in India, an ad hoc approval process adds uncertainty. Meanwhile, gaps in PPP regulations in countries like Türkiye and South Africa limit private participation.
   
   
3. Supply-side challenges: Shallow financial markets and limited investor appetite constrain private investment. Public financing tools—such as credit enhancements or public sector lending—can help, but if poorly designed, they may crowd out private capital.
   
   

How to Unlock Urban Investment and Create Jobs

A step-change in infrastructure investment, and the jobs that come with it, requires action at both local and national levels. Cities and national governments should:

• Build stronger municipal finance systems: Improving financial transparency, strengthening local revenue collection, and enhancing project preparation capacity are critical to attracting private finance. National governments can play a catalytic role by modernizing fiscal transfers and incentivizing local performance. Local governments can strengthen their credit quality.
  
  
• Reform borrowing and PPP frameworks: Clear, stable regulatory environments give investors the confidence to partner with cities on long-term infrastructure projects that generate employment.
  
  
• Mobilize private capital: Well-calibrated credit enhancements, guarantees, and blended finance can attract investors—but should complement, not replace, broader structural reforms that enable sustainable financing. Interventions should be carefully designed to enhance, not displace, private investment.
  
  

Empowering Cities at the Spring Meetings

The report was launched at a side event during the 2025 World Bank Group–International Monetary Fund (IMF) Spring Meetings, attended by over 150 stakeholders, including city leaders, government officials, and private investors.

City leaders shared how repayable finance—through borrowing and PPPs—has enabled them to deliver large-scale infrastructure projects that created hundreds of thousands of jobs. Many of these initiatives were supported by World Bank Group financing and technical assistance. Panelists emphasized that building municipal capacity remains key to unlocking further investment and employment opportunities.

A key outcome of the event was the World Bank Group’s pledge to streamline city access to its full suite of support—from the World Bank, International Finance Corporation (IFC), and Multilateral Investment Guarantee Agency (MIGA)—under a more cohesive “One World Bank Group” approach, coordinated by its Subnational Finance Taskforce.

The Path Ahead: Cities as Engines of Job Creation

Cities are at the heart of economic opportunity—but without greater access to repayable finance, they risk falling short of their potential to create jobs and improve lives.

The time to act is now. National and local governments, development banks, private investors, and development partners must collaborate to overcome financing barriers and empower cities to deliver infrastructure that fuels job creation and inclusive growth.