EU municipalities and the twin challenges of digitalisation and climate change

Debora Revoltella

Peter McGoldrick

Fiscal austerity has bequeathed a legacy of infrastructure gaps across EU Member States and allowed needs arising from the twin transition challenges of climate change and digitalisation to outpace investment. Municipalities have an important role to play in addressing this, not least for the following reasons. First, they contribute a large share of economic value added and emissions. Second, they play an important role in infrastructure investment and the provision of related services. Third, they understand local conditions, notably investment gaps, priorities and challenges.

Based on the results of the 2020 EIB Municipality Survey, this article considers municipalities' investment needs and the type of hurdles they face and capacities they need to build to address these.

A decade of fiscal austerity that followed the global financial crisis disproportionately fell on public capital expenditure. The impact was particularly noticeable at the local level. Coinciding with a recovery of infrastructure investment in 2018, however, was the realisation that addressing the twin transition challenges raises investment needs well above what hitherto had been appreciated.

Important infrastructure gaps remain at the municipal level in spite of rising investment . From 2017-2019, municipalities increased investment across a range of infrastructure types, notably digital (69% of respondents), followed by social infrastructure(57%) and climate change mitigation (CCM, 55%). (cf. Figure 1) Still, ever y second municipality identified gaps in more than three major infrastructure categories. Around two-thirds identified gaps for each of climate change mitigation (69%) and adaptation (CCA, 65%), while every y second did so for each of urban transport and digital infrastructure. As regards social infrastructure, ever y second municipality identified lack of social and affordable housing as an issue.

The survey suggests that the incidence of municipalities identifying infrastructure investment gaps declines with higher levels of regional economic development. Especially the lesser -developed regions in the EU identify gaps in what might be termed basic infrastructures, such as urban transport and water & waste utilities while lack of social & affordable housing and healthcare facilities affect two-thirds and half of these, respectively.

Looking ahead, municipalities expected further increases in investment from 2020 through 2024, notably related to climate change, digitalisation and social infrastructure. In addition, an important share of municipalities revised upwards their investment plans for social and digital infrastructure in the wake of the pandemic. Some two-thirds of municipalities intended to increase investment in each of CCM, CCA, and digitalisation; every second one was looking to increase investment in social infrastructure. The increased emphasis on climate change really stands out, however, notably for lesser-developed regions, which record the biggest swing in this direction.

As municipalities look to fill their investment gaps, they face financial and non-financial hurdles. (cf. Figure 2) Asked about the barriers to investment, municipalities identified lack of funds as the most important barrier to municipal infrastructure investment. This affected three-quarters of municipalities; indeed, every second municipality identified it as a major barrier. The principal non-financial barriers are lack of technical capacity and regulatory red tape, notably length of process and uncertainty.

Figure 1: Investment gaps (self-assessed), share of municipalities by asset

Municipalities have some way to go in terms of building the administrative capacity required to take on climate or digital challenges. Two-thirds of municipalities lack green capacity, such as implementing green budgeting or procurement, and over 40% have poorly developed digital capacity, such as facilitating digital payment for public services. From a cohesion perspective, a concerning finding is the lag by regions with below-average income: 80% have poorly developed green capacity and one in two has poorly developed digital capacity. Most regions are keen to build capacity, however.

Figure 2 : Investment barriers, share of municipalities

The public sector has an important role to play in equipping our societies for the post-pandemic new normal, with local conditions and actors as critical factors. The EU's provision of Next-Generation Funds will help Member States fund their National Recovery and Resilience Plans, notably projects aiming at limiting climate change and its impact as well as driving digitalisation. This is a huge undertaking. National administrations have performed major tasks of identifying relevant projects and structural reforms. Implementing these and other projects over the coming years will require the mobilisation not only of investment goods but also of technical capacities to package and implement projects as well as administrative capacities to procure and coordinate resources.

Figure 3: Administrative capacity

Technical capacities are often scarce and requirements can be rather specific, especially when it comes to the twin challenges. Climate change adaptation, for instance, can mean something very different for different geographies, even within a specific region. Moreover, it can make economic sense to share capacities across regions, notably when one can group a number of smaller dispersed projects. The EIB's experience with the European Investment Advisory Hub highlights the importance of identifying technical capacity needs and locating relevant existing capacities.

Public development banks and institutions can play an important role in overcoming financial and non-financial hurdles. Adherence to a set of common standards, such as the EU taxonomy for sustainable activities, is important. The EIB Group, in its transformation to the EU Climate Bank, is committed to undertaking a number of concrete and substantial measures. For instance, it will increase the share of Environmental Sustainability and Climate Action in our overall lending to at least 50% by 2025. As regards support to municipalities, the various instruments offered include: JASPERS, which helps cities and regions absorb European funds through top-quality projects. URBIS,which is a new dedicated urban investment advisory platform, assisting urban authorities to facilitate, accelerate and unlock urban investment.City Climate Finance Gap Fund(Gap Fund), which helps city authorities to build a pipeline of high-quality, climate-smart urban investments, with a focus on early and often underfunded stages of project preparation. In the area of Circular Economy Projects, the EIB is developing a number of initiatives, building on the circular City Funding Guide. The European Investment Advisory Hub will also play an important role in identifying, screening and structuring investment projects supported by the EUJust Transition Mechanism, which will help the towns and regions most dependent on mining and high-emission industries to address the socio-economic challenges resulting from the transition to a low-carbon economy.