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Bridging the local finance gap
Of every €10 in public spending in the EU, €6 of it is spent by local and regional governments. That means that when we think about how public money is being spent, saved, leveraged or invested, cities are a vital part of the conversation. With that kind of spending power, cities have the opportunity to affect the European and even the global market.
For example, when Barcelona starts looking for construction contracts that use electric machines instead of the usual fossil-fuelled ones, companies start adjusting their stock to include electric diggers, which are then more likely to be used in other sites too. These positive knock-on effects make it vital that cities leverage their budgets to spark innovation and sustainable practices.
However, compared to their ambitions and what is asked of them, from boosting local prosperity and fostering social inclusion to meeting climate goals, there is a big gap in local budgets – which means that anyone serious about these issues must get serious about empowering local governments both to increase those budgets and to help them increase their impact with what they have available.
Long-term investment, skills for the green transition, and innovation are key to ensuring that our cities have the economic and human resources to deliver on ambitious local and European initiatives. As change-makers and hubs of innovation, cities are the places where these developments happen, but more engagement, funding and flexibility from the EU will be vital to boost local initiatives.
For example, when Barcelona starts looking for construction contracts that use electric machines instead of the usual fossil-fuelled ones, companies start adjusting their stock to include electric diggers, which are then more likely to be used in other sites too. These positive knock-on effects make it vital that cities leverage their budgets to spark innovation and sustainable practices.
However, compared to their ambitions and what is asked of them, from boosting local prosperity and fostering social inclusion to meeting climate goals, there is a big gap in local budgets – which means that anyone serious about these issues must get serious about empowering local governments both to increase those budgets and to help them increase their impact with what they have available.
Big Buyers
The EU’s Big Buyers Working Together initiative, supported by Eurocities, helps cities leverage their collective purchasing power and market influence to foster innovative, environmentally friendly goods and services in Europe. Cities work together to improve their procurement practices so that they can get the most out of the money they spend. This phase is focused on zero-emission construction sites, heavy-duty electric vehicles, circular construction materials, and digital solutions in the healthcare sector.
The wrong direction
At the moment public investment is going in the other direction. Records from 2008-2019 show a worrying decline across the EU, one that is most pronounced in southern and eastern EU countries. At the same time, the rising cost of non-investment spending, that is, paying for day-to-day running costs, is getting higher. Essentially, cities are being forced to spend more on immediate needs, which risks leaving not enough for important future investments like infrastructure and public services.
While in many cases national governments are devolving more responsibilities to cities, asking them to do more, cities often do not receive the funds commensurate with achieving this. Their fiscal autonomy, that is, their ability to decide how they manage their money, is also very limited in comparison to the national level.
This situation severely impacts how cities can support vital investments in important areas such as environmental protection, where local authorities manage 80% of spending, and educational initiatives. Cities face substantial public investment gaps, notably in climate action and infrastructure, with a stark contrast between available resources and the needs for tackling urban challenges such as migration, urban poverty, and sustainable mobility.
The green transition will not be achieved with isolated investments, but with long-term, transformational investments for cities.
– Laia Bonet, Deputy Mayor of Barcelona
The role of European Institutions
The EU has a big influence on cities’ finances, offering a mix of budgetary support, grants, and rules on fiscal policy that affect sustainable growth. EU initiatives, such as InvestEU, as well as EU Cohesion Policy and other funding pots, are designed to stimulate investment, for example by bridging the gap between public and private funding. InvestEU alone, backed by an EU budget guarantee of €26.2 billion, aims to unlock over €350 billion in investment. However, the real challenge lies in simplifying the access to EU funds and enhancing cities’ ability to use them effectively.
As outlined in a guest essay by Ambroise Fayolle, the European Investment Bank (EIB) also offers financial and advisory support for cities’ sustainable and innovative projects, from enhancing public transport systems to retrofitting buildings for energy efficiency. Indeed, between 2018-2022, the EIB invested about €83 billion in urban projects, making up almost a third of its total lending. The EIB is particularly focused on projects that align with the EU’s climate goals, emphasising green infrastructure and renewable energy investments.
Looking ahead, the EIB intends to align its support more directly with the European Green Deal and digital transformation. This will involve a greater focus on smart city technologies and digital infrastructure, alongside enhanced advisory services to better support cities in project development and funding to tackle urban financing challenges and give cities the tools for sustainable growth.
To be more accessible to cities, these institutions must take a more streamlined approach to financing, from simplifying access to financing information and support for cities to linking with national initiatives and EU Cohesion Policy. Funding should also be better tailored to meet the financial needs of city projects, involving cities more directly in decision-making and working with local financial intermediaries. The EU could even explore different approaches to taxation, such as targeting multinational companies, especially those contributing significantly to environmental issues, to fund climate initiatives in cities – something called the ‘polluter pays principle.’
To better leverage existing and future funding opportunities, cities will also need to see an increase in peer-to-peer knowledge exchanges and technical assistance to increase their capacities in this area. Lack of internal capacity can be a significant barrier to engaging with the private sector as well as to applying for financing opportunities from the EU, EIB and similar institutions.
We are past wishing. If cities are to achieve the just transition and climate targets – and if cities cannot, then Europe cannot – we must not be constrained from making the necessary investments.
– Dario Nardella, Mayor of Florence
Innovating better
While innovation is not a panacea for lack of funding, innovative ways of financing local investment, such as ‘green bonds’ for environmental projects, could help cities bridge the gap between the investments they need to make and the budgets they have available.
As highlighted in the Eurocities Pulse Mayors Survey, 85% of respondents revealed that without innovation, their cities will not have sufficient resources to deliver on local priorities.
Green bonds allow people to invest in a sustainable local future. If a city wants to set up solar panels, for example, it can sell green bonds. Investors who want to make money while supporting good causes can buy the bonds, with the city promising to pay them back over time, plus interest. The city becomes a better place to live, and the investors get to help the environment while eventually getting their money back.
Learning from the community
Through the EU-funded Prospect+ project, Eurocities works with cities to enhance energy efficiency with innovative financial strategies, like energy performance contracting, crowdfunding and soft loans. Cities have limited budgets and need strategies for when subsidies run out. The Prospect+ mentoring programme pairs cities to promote effective financial tools that optimise limited budgets in areas including public and private buildings, public lighting, transport, and cross-sectoral initiatives. Eurocities runs the project’s Community of Practice where cities can share best practices, discover new financing schemes, and address barriers to timely and optimal investment.
We started early because we think that municipalities have a responsibility to make things happen when the market is not ready for it yet.
– Peter Årnes, Gothenburg Sustainable Waste and Water Department
Cities across Europe are using innovative financing to drive their sustainable development goals, with places like Helsinki, Malmo, Lyon, Braga, and Valladolid engaging in diverse and creative initiatives. Helsinki has created a dynamic ecosystem at the Maria 01 startup campus that brings together tech startups, venture capitalists, and established corporations to foster economic growth and technological advancement.
Cities like Malmo and Lyon use financial instruments such as green bonds to fund a variety of sustainability projects, from green buildings to renewable energy initiatives. In Malmo, green bonds have been used to generate €500 million in investments since 2017. Valladolid’s partnership for solar panel installations further illustrates the innovative ways cities can engage communities and promote renewable energy. In Braga, the use of Public-Private Partnerships for green and digital projects leverages private sector resources and expertise in public projects.
The work that has been done by our companies, in connection with universities and research centres, has mostly been financed by innovation programmes at the European level.
– Ricardo Rio, Mayor of Braga
Working with the private sector
Public-private partnerships combine the strengths of both to finance, build, and operate projects that might otherwise be beyond the reach of public funds alone. Cities use such partnerships to leverage private investment to develop and maintain critical urban infrastructure. This includes transportation systems, water and sanitation facilities, energy projects, and broadband networks.
Partnerships with the private sector can stimulate the local economy, create jobs and help the environment and society. For example, partnerships focused on energy efficiency can lead to the retrofitting of public buildings with sustainable technologies. This reduces energy consumption and carbon emissions, lowers municipal bills, and encourages the development and retention of local skills.
Key considerations for successful public private partnerships include ensuring transparent and fair procurement processes, setting clear and measurable outcomes, managing risks effectively, and maintaining a focus on long-term sustainability over short-term gains. By creating favourable conditions for private investment, including clear regulatory guidelines and risk-sharing mechanisms, cities can attract private funds for infrastructure, technology, and sustainable development projects.