Lessons from Ecuador: How developing countries can raise crucial finance for sustainable urban development

As climate change increasingly threatens populated urban areas, cities need to be at the forefront of pioneering sustainable urban development and nature-positive transitions to mitigate environmental challenges. Projects crucial for protecting growing urban centres from the dangers of climate-related threats are being stymied by a lack of innovative financing solutions, however. This finance would allow otherwise resource-stretched municipal governments to tackle these threats.

Local governments in most countries – and particularly in the developing world – have limited fiscal capacity. They are heavily reliant on transfers from national governments, as well as the revenue they generate from taxes and fees, for which compliance and collection are often problematic. With few exceptions in the developing world, they do not have access to extra capital project funds for sustainable urban development, such as from the issuance of municipal debt.

This financial constraint is a significant challenge, especially considering that urban populations in these nations are growing rapidly. Many also face imminent climate-related threats from rising sea levels, flooding and extreme weather events such as droughts. In Africa, for instance, urban populations are expected to nearly triple by 2050, while six of the eight regions most affected by climate change are in Africa.

From complex regulatory bureaucracy to stark inequalities in access to global financial flows, municipalities across the world are navigating a labyrinth of obstacles to secure the necessary funding for vital climate-related projects and sustainable urban development.

Among the most pernicious of these obstacles is the difficulty in structuring long-term financing agreements that align with the risk appetite and funding capacity of investors. Multilateral development banks are, in principle, able to navigate these challenges. In practice, however, many still need to overcome their limited experience in successfully aligning interests across the stakeholders of large sustainable infrastructure projects in order to deploy financing at the municipality level.

Like many cities in the developing world looking to tackle major infrastructure improvements, the city of Quito, Ecuador’s capital and its largest city, faced daunting challenges when it decided to build the country's first underground rapid transit system around a decade ago. Between 2000 and 2013, the population of Quito expanded by 3.8% annually, and that expanding population needed to be able to move about the city more efficiently and sustainably. At that point, Quito had a network of five bus rapid transit systems, which were insufficient to mobilize a growing population.

Cities around the world face several obstacles when trying to access finance for sustainable urban development. Some are banned from international borrowing altogether. Others require a national government’s sovereign guarantee, which is often not granted due to political rivalries.

Quito faced such challenges initially, but public support finally helped to make its transport project possible. Quito Metro Line One is now 22.5 km long and serves 15 stations. The all-electric underground line can provide as many as 400,000 rides a year and forms the backbone of Quito’s public transport system by connecting the bus rapid transit corridors and conventional bus networks.

The metro’s construction generated 5,000 direct and 15,000 indirect jobs, and part of its mission is to enhance access to employment, with around 760,000 jobs within its area of influence. The metro has cut the commute from the northern part of the city to the southern part to a little over half an hour, a daily saving of almost an hour for transit riders and half an hour for those who previously used private cars.

The total cost of the project was $2 billion and, unlike many developing world cities, Quito was able to assemble an innovative package of finance through the World Bank, the Inter-American Development Bank, the Development Bank of Latin America and the Caribbean and the European Investment Bank.

One key to its success was the active participation of the financial institutions involved. These institutions not only provided loans but also played major technical oversight and assessment roles.

This participation made a considerable difference because the regulations governing the project mandated by the financial institutions themselves were much stricter than what was required by national law. This made the project’s development more complex, but eventually allowed it to run efficiently, meet higher quality standards and receive international recognition.

The Quito metro modernized the city’s transport infrastructure and simultaneously slashed the city’s carbon footprint. It already significantly reduces travel time and traffic congestion, lowering the operational costs of the transport service, enhancing connectivity, security and comfort and decreasing emissions of greenhouse gases and other pollutants.

The metro project also adhered to strict environmental standards. This was the first instance of environmental remediation on gasoline-contaminated aquifers in a major Latin American city. Over one million tonnes of soil from the metro excavation were used to landscape a park – Parque Bicentenario – at Quito’s former airport. An old mine was also repurposed into a park using waste materials from the excavation.

Quito's success offers valuable insights into what’s possible when cities are willing to collaborate more closely with multilateral development banks to create financing agreements for sustainable urban development.

The strategy employed by Quito could serve as a blueprint for other budget-stressed municipalities in developing countries that are looking to achieve a proverbial paradigm shift in their quest for financing to mitigate environmental challenges.

This article is part of Nature Positive: Leaders’ Insights for the Transition in Cities, a report by the Global Commission on Nature-Positive Cities offering a range of strategies and practical solutions adaptable to diverse urban environments and supporting a shift towards nature-positive city developments.

Nature-Positive Cities is an initiative by the World Economic Forum, in collaboration with Oliver Wyman.