Policy paper

FCDO response to Independent Commission for Aid Impact’s review of UK aid for sustainable cities

Published 19 September 2024

The Government welcomes ICAI’s review of the UK’s aid for sustainable cities between 2015 and 2022. With an ever-increasing proportion of the world’s population living in urban areas, cities are more essential than ever to achieving our objectives on climate change, development, economic growth, and the SDGs.

We share ICAI’s assessment of the opportunities as well as risks that increasing urbanisation brings. Our programmes focussed on cities and urban development aim to support national and city governments to address the complex challenges of providing services to absorb rapidly-growing populations while reducing their contribution and vulnerability to climate change.  The review finds UK support is aligned with the Sustainable Development Goals (SDGs) and with needs and priorities of our partners and has been effective.  It suggests a number of areas for improvement, particularly in relation to coherence across UK government and communication with international partners.  We have already taken steps to address these issues.

We accept five of the seven recommendations and partially accept the remaining two. Working with BII and PIDG, we will examine lessons learned from other DFIs approaches to investing in affordable housing. We do not agree that the UK should develop mechanisms for reimbursement for technical advisory services for sustainable cities in middle-income countries.  We work in close partnership and many national and city governments already contribute in-kind through their time and facilities.  Seeking cash contributions could reduce UK opportunities to influence policy.  However, we will be more systematic about considering and recording contributions.

Recommendation 1: accept

The UK needs to conduct a portfolio-wide performance evaluation of its interventions to support sustainable cities to better understand what has been effective, both in central and country-based programming, and to assure value for money.

Response: accept

We welcome the report’s findings that UK aid for sustainable cities is generally effective and relevant, and accept that there is potential for stronger evaluation, monitoring and learning across the portfolio. Throughout all stages of the programme lifecycle, the FCDO scrutinises value for money (VfM) in aid programmes. We accept that a portfolio review could enhance VfM by allowing comparisons across programmes.

We have started to pull together information on the sustainable cities portfolio from which we will be able to assess and compare the quality of the evidence on effectiveness and value for money. We will also look to carry out a thematic evaluation through our Evidence Fund later in the year, subject to resource availability. The FCDO’s UK Centre of Expertise in Green Cities and Infrastructure (GCI) will be central to bringing together learning from across the FCDO and wider HMG network.

Once an International Climate Finance monitoring, evaluation and learning has been procured in 2025, we will explore whether there are evidence gaps and sufficient data available for a further portfolio level evaluation of sustainable cities. Such an evaluation could include VfM of different delivery channels. It will build on FCDO and HMG scrutiny of VfM throughout all stages of the ODA aid programme lifecycle.

Recommendation 2: accept

Following the portfolio evaluation, FCDO should convene UK departments and external partners in a collective strategic planning process for sustainable cities work.

Response: accept

We look forward to involving all relevant HMG departments and our valued external partners in a process to develop a more strategic approach to UK sustainable cities work, after a portfolio evaluation.

The FCDO has already taken steps to formalise cross-government cooperation on sustainable cities priorities, including through establishing a strategy board with key departments. This will be a key forum throughout and following the portfolio evaluation.

The 2023 International Development White Paper contains the UK’s first public commitment on sustainable cities: to “work with cities to create infrastructure services that are resilient and sustainable and help realise their potential to drive growth and create jobs”.  We will work with UK departments and external partners to objectives and policies that can deliver this goal.

Our UK Centre of Expertise on Green Cities and Infrastructure brings together expertise across UK government departments and agencies, private sector and academia.  It was established recently and is currently supporting cities across Africa, Asia and Latin America.  It is intended to drive greater coherence.

The FCDO’s new Climate, Environment, Infrastructure and Energy Cadre will allow even closer working between our climate and cities specialists.  The FCDO has a policy-focused group that brings together climate, transport, infrastructure and water and sanitation specialists.  We will look at what more the cadre and coordination bodies can do to strengthen joint working.

Design of the fourth International Climate Finance strategy is in train and we will work across HMG to see how the cities activities can be better aligned with its priorities

Recommendation 3: partially accept

British International Investment (BII) and the Private Infrastructure Development Group (PIDG) should develop a credible model for supporting affordable housing for people in the bottom 40% income category in any country, drawing on learning from other development finance institutions and the development capital portfolio.

Response: partially accept

BII and PIDG investments balance many different dimensions of impact. On housing, these have prioritised through: inclusive design (e.g. women’s safety and disability access); climate resilience and sustainable energy usage (for instance, through IFC EDGE certification); attracting private sector investment; enabling increased private capital mobilisation; and market transformation.

The experiences of both BII and PIDG suggest that, in the countries where they invest, there is not a commercially sustainable model for providing housing for those in the bottom 40% income category without an element of public subsidy. The core mandates of both BII and PIDG are to support economic transformation through private sector investment and development. PIDG has a specific mandate to mobilise private sector finance into its investments.  As such, both organisations require a viable commercial opportunity – either a business or project – into which they can invest. To ensure both organisations generate a demonstration effect – which would lead to an increase in housing supply in the long run by encouraging the entry of new developers – they both have financial return requirements. There are unlikely to be viable investment opportunities in the housing segment aimed at those in the bottom 40% income category which align with BII and PIDGs financial return requirements. We expect that concessional finance or grant mechanisms would be needed to deliver this recommendation and it is not clear that the main investment portfolios of BII and PIDG would be the right vehicles for the deployment of such subsidies.

The FCDO will work with BII and PIDG to continue exploring this issue and will consider lessons learned from other DFIs to see if there are models of provision that can support investment in affordable housing for those in the bottom 40% income category in developing countries.

Recommendation 4: accept

The UK should better align its technical assistance in urban settings with securing private and public finance.

Response: accept

Across our sustainable cities programmes we already align our technical assistance with securing private and public finance in many cases.  The £48m Green Cities and Infrastructure Programme is focussed on addressing the infrastructure gap at city as well as national level through technical assistance for planning and investment design.  The £52m Cities and Infrastructure for Growth programme, which closed in 2023, mobilised £1.2bn in public and private finance.

The Urban Climate Action Programme (UCAP) is supporting infrastructure projects with technical assistance to access private and public finance.  For example, in Freetown, Sierra Leone, pitching documents are prepared under UCAP and investor roadshows have been organised with manufacturers and potential investors.

The Sustainable Urban Economic Development Programme in Kenya provides expertise in 12 of Kenya’s secondary cities to develop a pipeline of investible projects through market testing, feasibility studies, and investor engagement.  It provides small amounts of low-interest finance bring private investment into climate-resilient infrastructure.

The Tanzania Urban Resilience Programme has strengthened a range of World Bank investments in the country.

Green Growth Nepal will provide TA to clusters of city governments to improve urban development and infrastructure management, and to access private or blended (public and private) finance.

PIDG regularly utilise TA to support the development of their investments, deepen impact and strengthen commercial viability to enable infrastructure projects to attract private sector investment.

However, we can go further to mobilise private and public finance.  We will review the finance mobilisation activities through our portfolio review (including BII and PIDG) and seek to strengthen the alignment of programmes and our international partners.  A research programme is being designed that will gather evidence on generating private finance for infrastructure.

Recommendation 5: accept

The UK should rebalance its investments in climate action in urban settings towards climate adaptation (relative to mitigation).

Response: accept

The UK Government’s mission is to create a world without poverty on a liveable planet.  Even if we achieve strong reductions in emissions now, baked-in climate change is set to impact economic growth and sustainable development for many years.  We agree that building resilience to climate impacts through adaptation in urban settings is critical, alongside maintaining high ambition on mitigation.

We welcome this finding, especially on delivering co-benefits of poverty reduction and resilience, and will incorporate it into our portfolio evaluation.  We will look at where a rebalancing might be achieved.  Our cities work in many of the most climate vulnerable countries in the work focusses increasingly on adaptation, including in countries such as Ghana, Mozambique, Nepal, Philippines and Vietnam.

Recommendation 6: accept

The UK should support development and investment in urban nature-based solutions (NbS) as a key solution for climate adaptation and resilience in developing countries.

Response: accept

The Government recognises that NbS are an important part of addressing the climate and nature crisis. We are committed to supporting the delivery of key international commitments on NbS, including in the Kunming-Montreal Global Biodiversity Framework and UAE Framework for Global Climate Resilience.   As ICAI’s report acknowledges, HMG has supported the development of NbS projects.  It has been a small but increasing proportion of our overall portfolio.

We are already increasing focus on nature in urban programming, for example supporting coastal cities in Mozambique to reinforce their natural storm defences, under the Green Cities and Infrastructure programme and by addressing water insecurity for industry, cities and infrastructure under the newly launched Water Security Programme. The UCAP programme is supporting NbS in Malaysia and South Africa.  The Dar Metropolitan Development Project in Tanzania is providing funding towards the development of a durable NbS for Dar es Salaam’s Msimbazi River Basin.  We continue to work with multilateral development banks to scale up and report their nature finance, including for NbS, in line with their COP26 Joint Nature Statement and Common Principles for tracking ‘nature positive’ investments.

However, we agree that we can go further and will make efforts to increase NbS interventions, especially in lower income countries.

Recommendation 7: partially accept

The UK should develop mechanisms for seeking reimbursement, or co-finance in cash or kind, from the partner country for its technical advisory services for sustainable cities in upper- and middle-income countries.

Response: partially accept

Central to the UK’s approach to delivering technical assistance is working in partnership with developing countries. Our sustainable cities programmes are developed through close working with partner governments, ensuring that projects meet local need and can be delivered by our partners using domestic expertise and resource.

Under the Green Cities and Infrastructure UK Centre of Expertise model, we deploy UK technical experts to support partner countries with sustainable infrastructure and urban projects. In many cases partner governments offer support in-kind such as offering their own staff time and providing office space for UK experts.

Our provision of technical assistance helps us build long-term relationships with partners, with wider intangible benefits for the UK.  Requiring cash contributions could lead to governments turning to other partners and the UK losing mutually beneficial opportunities.

Partner governments such as South Africa contribute significant internal budgets allocated via staff time and spending for project implementation, which guarantees impact of the technical assistance provided by the UK. Our funding can look negligible compared to public budgets but offers noticeable impact by improving approaches to city planning and influences investment decisions for urban infrastructure. In some cases, financial commitments are informed by ODA funded technical assistance on long-term financial planning and can result in better outcomes for public funding.

We could do more, however, to record partner contributions in-kind and to assess more systematically when considering support, whether cash contributions are desirable.