Pakistan’s urban informal sector (IS) has been the subject of increased attention in recent years. In light of national policy failures and the rapid growth of the IS, this study asks whether there are differences in the political will and capacity in engaging the IS between upper and lower tiered state actors, and whether this engagement can be in a sustainable manner. The social contexts of housing, water and sanitation, transportation and labor conditions are examined in the cities of Lahore and Karachi to assess the experiences of the urban informal sector’s engagement with the state. A survey of state and non-state actors is carried out in field interviews to obtain the perspectives of state policies towards the IS as well as to understand the processes, constraints and possible solutions to engaging the IS. Evidence from the study supports the hypothesis that lower tiers of the state are capable of engaging the IS, but due to constraints from upper levels, are unable to do so. The study’s findings suggest that the combination of grassroots civil society efforts in mobilizing the urban IS alongside the provision of well resourced, accountable capacities of lower tiers of municipal government can generate low cost sustainable solutions to urban service delivery. Evidence also points to the benefits of civil society’s engagement with lower tiers of government to ensure that upper-level bureaucrats are held accountable for ill-conceived policy and its failures. The research shows that before success in national and provincial policy reforms can be expected, emphasis of policy has to be on the recognition and development of interactions between the IS and lower tiers of the state.