Ten Strategies for Project Preparation Facilities to Finance Small Cities

A new CPI blog identifies ten practical approaches that Project Preparation Facilities can use to help small and intermediary cities in low- and middle-income countries access climate finance. Small and intermediary cities face disproportionate barriers including limited staff capacity, small project sizes, and poor creditworthiness that standard PPF programmes are not designed to address.

As of 2020, 58% of urban residents in low- and middle-income countries lived in cities with fewer than one million inhabitants, and two-thirds of Africa's urban population growth through 2040 will occur in small and intermediary cities. Yet these cities struggle to prepare bankable projects because municipal staff lack capacity, project sizes fall below lender thresholds, and statutory borrowing limits prevent commercial financing. Climate infrastructure such as renewable energy and electrified public transport carries higher upfront costs and longer payback periods that commercial banks will not support.

CPI's recommendations span three problem areas. To address capacity gaps, PPFs should create dedicated calls for small city proposals with simplified documentation and provide early-stage scoping support. For project size constraints, PPFs can design aggregation models that pool similar projects and facilitate partnerships with national development banks. To overcome poor creditworthiness, PPFs can support blended finance design, public-private partnerships that avoid municipal borrowing, and land value capture mechanisms as longer-term revenue strategies. Community-based finance instruments are also identified as a complementary tool.

CPI notes that some recommendations, such as land value capture, require long-term commitments and enabling regulatory environments, while others can accelerate project preparation in the near term. The blog was originally published on the Green Finance Platform and draws on research by the Cities Climate Finance Leadership Alliance, which has highlighted the significant potential of aggregation models in expanding small city access to climate finance. Implementation of these approaches collectively positions PPFs to fill resource gaps that have historically sidelined smaller municipalities.

Key figure — 58% of LMIC urban residents live in cities under 1 million people