Municipal Finance: Innovation and Collaboration

Report

The dialogue was moderated by Mr. Anwarali Versi, Editor, African Business, United Kingdom of Great Britain and Northern Ireland. The speakers were Ms. Jacqueline E. Schafer, Assistant Administrator, Bureau for Economic Growth, Agriculture and Trade, USAID, United States of America; Ms. Ruth Lamine Mbassa, Director-General of Finance, City of Douala, Cameroon; Ms. Zenaida Moya, Mayor, Belize City, Belize; Mr. Jawaid Akhtar, Managing Director, Karnataka Urban Infrastructure Development and Finance Corporation, Bangalore, India; Mr. Júlio Ribeiro Pires, Secretary of Planning and Budget, Belo Horizonte, Brazil; Mr. Brian Field, Senior Economist, European Investment Bank; Mr. Michael Lippe, Senior Urban Advisor, Transparency International and the Partnership for Transparency Fund; Mr. Lin Guoqiang, Mayor, Nanning City, Guangxi Zhuang Autonomous Region, People’s Republic of China; Ms. Sagira Tayeb Ansari, former pavement dweller from Mumbai, India; and Ms. Katherine Sierra, Vice-President and Head of Network for Infrastructure, World Bank.

The major issue discussed was that municipalities around the world were facing a paradox: the need for a strong fiscal base to create and maintain infrastructure and services; and the pressure to lower taxes to attract foreign and domestic investment. Despite those constraints, there were around the world many experiences, reforms, innovations and partnership arrangements which could serve as a remedy. They included public-private partnerships in the provision of urban infrastructure and services that allowed municipalities to finance their increasing expenditures better and manage their financial systems in a more transparent and efficient manner.

The main objective of the dialogue was to provide a platform for sharing experiences on innovative ways and partnerships for enhancing municipal finance for the sustainable provision of services. The dialogue was organized in three segments, with speakers addressing the following specific questions:

Enhancing municipal revenue and access to resources;

Innovative approaches to financing infrastructure and provision of urban services;

Reform in institutional and regulatory frameworks to enhance municipal finance.

The Moderator opened the debate by saying that sustainable financing mechanisms had become an urgent requirement for urban development. A video highlighting the major issues of the dialogue was shown to the audience.

Enhancing municipal revenue and access to resources

Ms. Schafer urged local governments and utilities to become creditworthy and consumer‑oriented and pointed to innovations in market-based financing for urban infrastructure in India and Mexico.

Mr. Mbassa presented the case of Douala Municipal Bonds, one of the first of such experiences in sub-Saharan Africa. He highlighted the need for strong management and the financial reforms necessary for accessing the market.

Ms. Moya spoke of the principles promoted by the Commonwealth Local Government Forum to strengthen local government finance and stressed the need to build the capacity of local governments to deliver services and to negotiate with the national governments.

The ensuing debate focused on effective structural reforms in financing and management in order to enhance access to market capital; building self-financing mechanisms such as land-based methods for capturing the enhanced value of land resulting from public infrastructure development; improving the credit rating of cities, including measures to establish benchmarks in order to build investor confidence; legislative changes to empower cities to borrow; and the need for establishment of local credit enhancement facilities.

Innovative approaches to financing infrastructure and provision of urban services

Mr. Akhtar presented the case of a pooled municipal bond for eight cities in the Bangalore Metropolitan Area for a major water and sewerage project. He emphasized that shrinking state support presented an opportunity to build sustainable and market-based financing for cities. To overcome the constraints of technically and financially weak municipalities, the state government had set up a pooled finance trust as an intermediary mechanism to facilitate the financing of the project. The bond was rated and had several layers of credit enhancement, including one from USAID.

Mr. Peres outlined participatory budgeting in Belo Horizonte, Brazil. Many citizens directly contributed to making decisions on city expenditures. The city was planning to expand the level of participation further through the use of information and communications technologies.

Mr. Field explained how the European Investment Bank managed a large investment portfolio both in Europe and in developing countries. He also presented the successful case of e-Thekwani (formerly Durban), South Africa, which had implemented comprehensive financing reforms. He highlighted the factors that had allowed e-Thekwani to succeed: coherent and long-term plans for integrated infrastructure; interconnectedness of investment; public participation; strong leadership; and sustainable internal cross-subsidy mechanisms between municipalities within the metropolitan area.

The debate highlighted the following issues:

Technical assistance to support municipal finance reforms was critical;

Caution must be exercised while promoting market finance to protect the interests of the poor and local governments during negotiations with banks;

The spending capacity of the funds (both internal and external) was very weak and needed to be strengthened;

Leakages in expenditure must be plugged;

Relevant ISO certification for local governments and utilities should be applied;

The participation of citizens in revenue mobilization and not just in expenditure management was necessary;

Large and small cities needed to pool together in order to reduce risks and interest rates;

Intergovernmental fiscal transfers needed to be enhanced and made predictable;

The revenue-raising authority of cities must match functional responsibilities;

The urban poor must benefit from innovative, market-based financing.

Reform in institutional and regulatory frameworks to enhance municipal finance

Mr. Lippe stressed that transparency and accountability were key to creating and sustaining public confidence in municipal finance systems. The key to achieving transparency and accountability was leadership at all levels. He emphasized the need for both internal accountability systems and external mechanisms for involving civil society organizations in order to improve transparency.

Mr. Lin Guoqiang presented the experience of Nanning City. He stressed that the city strove to balance the needs of citizens for urban services with the need to attract investors by reducing taxes. The city used multiple sources of revenue, including land-based taxes, sale of development rights, and unified management systems to reduce the cost of services.

Subsequent interventions from the floor highlighted the following:

Excessive regulations could hinder the speedy utilization of available resources;

A greater share of national tax revenues should be allocated to municipal authorities for the provision of basic urban services;

The promotion of better governance through public disclosure of municipal finance accounts and strong public participation in municipal management was necessary.

Ms. Sagira, a former pavement dweller from Mumbai, India, presented her experience. The video shown at the beginning of the dialogue had featured her journey spanning 32 years from pavement dweller to homeowner. She stressed the importance of organizing communities through savings schemes in order to negotiate with state and municipal authorities. By doing so, her own community had been able to influence the introduction of pro-poor policy and large-scale investment in infrastructure in order to scale up home improvements for low-income households.

Ms. Sierra summarized the key areas of consensus of the dialogue as follows:

There was a need for sound legal frameworks to allow fiscal decentralization that matched resources with the functional responsibilities of cities;

Governments needed to avoid unsustainable debt crises through good municipal borrowing legislation;

Central and provincial governments should promote larger and more predictable intergovernmental transfers;

Domestic capital was the key financial mechanism for sustainable urbanization;

International donors could play a catalytic role through capacity-building support, transition funding until cities became creditworthy and credit-enhancement support, including financial guarantees;

Municipal authorities should be made creditworthy through strengthening their capacity to manage budgets transparently, use available resources efficiently and speedily, and also to reduce leakages;

Cities should formulate and implement coherent and integrated development plans;

Cities should mobilize land-based resources to capture enhanced values, and should enhance the municipal tax base and make utilities consumer-oriented and financially viable;

Citizen participation should be enhanced through measures such as participatory budgeting;

All lenders must be “part of the solution” through wider engagement and promotion of sound governance frameworks;

All lenders should use measures such as credit ratings and relevant certifications;

International lenders should provide transition-phase funding while cities gained capacity to borrow in local markets in sustainable ways.

The dialogue concluded that the challenge for the future was to shift from reliance on international development finance to tapping into local capital markets. Progress in achieving that goal would be a measure of success towards sustainable urban development.