Global urbanization scenarios are diverging. Urban growth trends in developing and developed countries are different. Developed countries experienced rapid urbanization, but the rate is slowing down; however, developing countries are experiencing rapid urbanization. Because of this, the cities in the world are confronted by challenges such as climate change and scarcity of resources, hence the importance of sustainable funding mechanisms in aiding resilient and sustainable urban development. Urban finance plays an important role in aiding the infrastructure, housing, and services required by the city, but being sustainable.
Sustainable Funding Mechanism
Cities of the world contain over half of the population because of facilities, such as infrastructure, housing, employment opportunities, and much more. Expansion calls for new methods of addressing the expanding population’s need to fund the developing infrastructure, like transportation, water infrastructure, and parks. Traditional funding through taxation is insufficient, and reliance on borrowing threatens to make the city financially unviable in the long run. Sustainable funding mechanisms are those financial instruments, strategies, or systems that introduce regular, long-term, and eco-friendly support funding to finance urban infrastructure, services, and development without imposing a burden on future generations.
Innovative Funding Mechanisms
1. Green Municipal Bond
Green municipal bond is a fixed-income debt security used in raising funds in the debt capital market, issued by the city government or the local administration. They allow the cities to borrow funds from the investors and repay them in the future along with interest, just like the traditional municipal bond, but the funds must be utilized only on green projects that bring environmental value.
Green municipal bonds have many benefits. They help the cities synchronize their development with national and global sustainability goals. They also attract the ESG investors, which enhances access to likely capital at a competitive interest rate. The payments may also be spaced out over a period of time, which reduces the short-term financial strain on the city. But these connections are confronted with some challenges, like good credit ratings, well-defined project plans, and reporting environmental policies at regular intervals. Nepal has progressed a long way in green finance with the launch of green bonds. In 2025, Nepal Infrastructure Bank Limited (NIFRA), with support from the Global Green Growth Institute (GGGI) and Korea International Cooperation Agency (KOICA), obtained all the regulatory approvals for the country’s first-ever public issue of a Green Bond.
2. Public-Private Partnerships (PPPs)
Public-private partnership (PPP) refers to an agreement between a government agency and a private company whereby finance, construction, and operation of infrastructure projects, such as mass transit systems, parks, and exhibition centers, can be carried out. Through PPP, the public sector is able to draw on the money, expertise, and efficiency of the private sector. Further, PPPs enable improved risk-sharing by transferring responsibility to the most capable party—whether it is financial, technical, or operational risk. The model can also enable faster delivery of the project and improved long-term asset management since infrastructure is maintained operational and economic in the long run. One of the strengths of PPPs is that they make sure that they structure the private investment into public infrastructure, and this helps to ease the government’s financial burden.
PPP has been gaining traction in Nepal as well, particularly in sectors where public investment has been short of demand. An example of this kind is the Kathmandu Valley Wastewater Management Project, where the role of the private sector in upgrading and running wastewater treatment plants as well as sewer systems is involved. Supported by the Asian Development Bank (ADB), the project has improved urban sanitation and environmental health in the valley. Another example is the Dhulikhel Solar Mini-Grid Project, where a private firm in collaboration with the government installed and operated a solar power system that supplied electricity to nearby villages and government buildings. These examples demonstrate that PPPs are being successfully used in Nepal in order to enhance the accessibility of basic services, enhance the quality of infrastructure, and promote sustainable urban development.
3. Land Value Capture (LVC)
Land Value Capture (LVC) is a funding mechanism by which governments capture some of the added value to land that is caused by public investment or change in regulation. When a city constructs infrastructure like roads, transit, parks, or public facilities, it typically increases the value of nearby properties. LVC ensures that some of this unearned value contributed to land that otherwise accrues to private landowners is instead recaptured and returned to the public purse to fund more development or infrastructure upgrading. In this manner, a more equitable distribution of the urban expansion and public spending-generated benefits is obtained.
The primary benefit of LVC is that it provides the cities with a long-term source of finance unaffected by increasing general taxes or accumulating debt. It allows the local authorities to reinvest in services and infrastructure and ensure that private developers and landowners who gain from public investment pay for it. LVC can also create more compact, transit-oriented, and sustainable urban development as it triggers investment in these locations with high development value. By linking the investment in infrastructure to the generation of value locally, LVC also increases financial responsibility and aligns public and private interests.
In Nepal, land value capture institutions have also begun to gain momentum, especially in rapidly expanding municipalities. A relevant example is from Lalitpur Metropolitan City, where they have experimented with imposing development fees and landowner contributions that benefit from new road extensions and utility installations. Although not a full-scale institutionalized LVC model, it demonstrates the potential for applying the values of value capture in funding local infrastructure. Similarly, the Kathmandu Valley Development Authority has considered the lines of applying improvement levies and land pooling in urban extension areas—techniques in harmony with LVC philosophy. Such a preliminary attempt points towards the fact that with appropriate policies and legislative regime, LVC may be a viable funding tool for Nepalese cities to encourage sustainable urban growth without straining municipal budgets or relying solely on foreign assistance.
References
- https://oneplace.fbk.eu/financing-energy-efficiency/financing-energy-efficiency/transnational-methodological-framework/financing-models-for-energy-efficiency/green-municipal-bonds/
- https://gggi.org/nepals-first-public-issuance-of-green-bond-nifra-secures-regulatory-approvals-with-gggi-and-koicas-support/?utm_source=chatgpt.com
- https://www.investopedia.com/terms/p/public-private-partnerships.asp
- https://www.adb.org/projects/documents/nepal-43524-014-4
- https://www.urbanwateratlas.com/2023/04/28/increasing-infrastructural-capacity-in-kathmandu/
- https://www.adb.org/news/20-million-grant-spur-private-sector-solar-power-investment-nepal
- https://www.researchgate.net/publication/248524066_Implementation_experiences_of_land_pooling_projects_in_Kathmandu_Valley
- https://www.researchgate.net/publication/360275348_Land_Pooling_in_Nepal_Promises_and_Pitfalls
- https://www.wri.org/insights/developing-cities-need-cash-land-value-capture-can-help
- https://theannapurnaexpress.com/news/whats-driving-up-land-prices-along-the-fast-track-5421/
