Around the world, countries are envisioning and implementing recovery packages to foster a green and just growth after the Covid-19 pandemic emergency. In this context, reorienting infrastructure investment to respond to the most pressuring social and environmental needs will be a key to get the recovery right. However, to properly unlock the economic potential of infrastructure investments, countries should emphasis the local dimension in their investment strategies, providing subnational entities with the right tools and frameworks. Subnational governments are key players in all phases of an infrastructure project and they can be a bridge between the needs of local communities and national investment strategies due to a reduction of information asymmetry. Subnational governments, such as municipalities and regions, account indeed for more than half the investment in infrastructure in the EU and in OECD countries.[1] Similarly, the Asian Development Bank stresses that subnational entities are central actors in the provision and financing of infrastructure in developing countries.[2]

However, the COVID-19 emergency has had a disproportionally stronger impact on the public finances of subnational governments as they have experienced a rise in expenditure and a fall in revenue.[3] Furthermore, driven by mega-trends, such as urbanization, demographic shift and climate change, subnational governments will be increasingly facing long-term challenges to develop, financing and maintain their infrastructure needs.

Despite their fundamental role, subnational governments traditionally lack financial resources and technical capabilities to properly manage the full cycle of an infrastructure project. According to a survey of the OECD, only 7 per cent of subnational governments – mainly large metropolises and regions – have reported a solid increase of private participation in infrastructure investments since 2010. This is due to the higher revenue risks and sub-sovereign risks perceived at a local level as management capacity could be weaker. It is no surprise then that most public-private partnerships (PPPs) are allocated to larger and sovereign-backed projects, rather than to local infrastructure projects. As subnational governments tend to face greater barriers in attracting private investments, their spending capacity is highly dependent on central state financing.

There is then the need for active local finance policies. Subnational governments could adopt a range of innovative solutions to increase their spending capacity and, ultimately, increase their ability to attract private investments. Each country should evaluate, together with subnational governments, if and which instrument could be relevant and appropriate with a case-to-case approach. Nevertheless, the availability of funding and financing does not mean the proper planification and implementation of infrastructure investments. A parallel priority should be directed to support subnational governments in improving their technical capabilities and increasing the coordination across level of governments. A balance between local and central decisions is critical.  Further and improved coordination and cooperation among subnational entities and with central government could positively affect the overall effectiveness of local interventions.

Covid-19 recovery programmes provide a unique, historical opportunity to incorporate the local dimension of infrastructure to address long-term challenges – such as the green and the digital transition – while tackling subnational government’s infrastructure capacity. These policy objectives can only be achieved if subnational governments are continually supported to improve their funding and financing availability as well as management capacity. However, so far, it seems that subnational governments have not been properly involved on the preparatory work of national recovery plans. According to the European Committee of the Regions, for example, only a few EU member states consulted local and regional authorities when preparing their own national Recovery and Resilience Plans and, even less, incorporated their inputs in the national strategy. [4]

This approach has been a missed opportunity. Nevertheless, much can still be done to rethink local development and local finance policies in the framework of the recovery plans. In parallel with the implementation of the recovery plans, national governments and international institutions should improve their actions to support subnational governments in increasing financing and management capacity. Such efforts are already in place, but to properly seize the opportunity of the recovery packages, tailoring national strategies to local conditions and providing subnational governments with the right tools are key actions to ultimately foster a fair recovery.

 

[1] Dorothée Allain-Dupréi, Claudia Hulberti and Margaux Vincent, “Subnational Infrastructure Investment in OECD Countries: Trends and Key Governance Levers”, in OECD Regional Development Working Papers, No. 5 (2017), https://doi.org/10.1787/e9077df7-en; EIB, Investment Report 2018/2019. Retooling Europe’s Economy, Luxembourg, EIB, July 2019, https://op.europa.eu/s/oQov.

[2] Priyanka Sood, Marshall M. Mays and Michael R. Lindfield, “Subnational Finance for Infrastructure: Potential Roles and Opportunities for ADB”, in ADB Sustainable Development Working Paper Series, No. 20 (April 2012), https://www.adb.org/node/29768.

[3] OECD, “The Impact of the COVID-19 Crisis on Regional and Local Governments: Main Findings from the Joint CoR-OECD Survey”, in OECD Development Papers, November 2021, https://doi.org/10.1787/ fb952497-en.

[4] https://cor.europa.eu/en/news/Pages/post-COVID-recovery-plans-.aspx