uclg policy paper on local finance discussions

UCLG Policy Paper on Local FinanceDISCUSSIONS

Technical Meeting on Local Finance, Barcelona, 11-12 June 2007

Thomas Meekel, Project Manager, CGLUJuliana Pigey, The Urban Institute

Structure of the Support Paper / Meeting

• Background: Three long-term trends that have changed and are still changing our world

1/ The Challenge: Investments in Local Public Infrastructure do not Match Urban Expansion

2/ Towards Efficient Fiscal Decentralization Frameworks!

3/ Access to Credit for Local Governments: Constraints and Opportunities

• Objective: Improving Access to Credit for Local Governments: A Call for Action

Background

Introduction (1/5)

• Three long-terms trends that have changed and are still changing our world :

URBANIZATION AND DEVELOPMENT

DECENTRALIZATION

GLOBALIZATION

Urbanization and Development

Introduction (2/5)

Mayday: May, 23 2007

Urbanization and Development

Source: David Satterthwaite

Introduction (3/5)

Decentralization

Introduction (4/5)

A worldwide process

In all regions / At the same time

Decentralization

Introduction (4/5)

• Latin America– long tradition of centralized government– reforms starting in late 1980’s

• Africa– movement away from centralized colonial regimes– democratic reforms starting in late 1980’s

• Asia– movement away from centralized colonial regimes

• NIS - CEE– transition starting in late 1980’s

Globalization

Introduction (4/5)

UCLG Policy Paper on Local Finance

I. THE CHALLENGE: INVESTMENTS IN LOCAL PUBLIC INFRASTRUCTURE DO NOT MATCH

URBAN EXPANSION



The Challenge: Investments in Local Public Infrastructure do not Match Urban Expansion

a/ The context :A rapid urban population growth and urban growth pattern which requires massive investments in local public infrastructure.

b/ Situation Scheme: State of Local Finance.

What are the funding options available?

a) A rapid urban population growth,

1/ The Context (1/16)

especially in Asia and Africa, and in small and medium cities


…which requires massive investment in local public

infrastructure.• Consequences of insufficient investments:

The Context (3/16)

REGION Lacking Water Lacking SanitationAfrica 100-150 M 150-180 M

35%-50% 50%-60%Asia 500-700 M 600-800M

35%-50% 45%-60%80-120 M 100-150M20%-30% 25%-40%

Source: 2007 State of the World, p. 27, The World Watch Institute

Number (Million) and Share of Urban Dwellers Lacking Adequate Provision of Water and Sanitation, by Region, 2000

Latin America and the

…but how much indeed would be needed?

• Demand for urban infrastructure?

Nobody knows, but everyone guesses…

• Estimated Infrastructure Needs (development and maintenance) in Developing countries for the next 25 years:

$600 billion per year (WB)– Urban infrastructure = Approx. one-third of this total?

– MDG Target 11• $67 bn for 100 million slum dwellers

• $20 bn per year for the 400 mn new slum dwellers by 2020.

– Francophone West Africa: $$1 Billion per year.

The Context (4/16)

What is $200 billion per year?


– 90% of the World GDP in 2005 ($44.645 billion) is generated in 55 countries,

• OCDE : $33.687 billion (USA $12.4 trillion)• Middle Income: $ 8.5 trillion (5.5% = $460 bn)• Low Income : $ 1.4 trillion (7% = $100bn)

– Embezzlement: $100 to 180 bn accumulated since 70’ (on average $5 bn per year).

– Monetary Reserves of the Bank of China in 2006: about $1.2 trillion…

What is $200 Billions per year?


Remittances: Foreign workers send about $200 bn per year back to their native countries.

…Needs that will increase if cities continue their sprawl…


Obvious at the local level, but also at the national level


Correlation between geographic concentration of population and public infrastructure stock in OECD countries

Source: Kamps (2004) for infrastructure stock as a proportion of GDP and OECD (2005) for the geographic concentration index. Groningen Growth and Development Centre (2006) data base was used for high-income countries based on GDP per capita in purchasing power parity terms. Countries included are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom and United States.

b) State of Local Finance. What are the funding options available?


• PPP: Have private firms co-financing or co-investing in urban public infrastructure.

• Have National or Local Public Enterprises/Utilities finance and develop local public infrastructure.

• Land and asset management as a way to finance local public infrastructure.

Funding through ODA and development banks.

Linking domestic capital to local public investment.

PPP / Private Participation in Infrastructure


Local Government

Customers

Donor agencies /

Banks

National GovernmentUtility

Before After

National or Local Public Enterprises/Utilities


Local Government

Customers

National Government

Utility

Land and Asset Management


• Land Management:– Financial Tools related:

• Development Charge

– Prerequisites:• Inventory / Cadaster• Urban Land Reform: Time, Money, Political Will

• Property Management:– Financial Tools related:

• Lease/ Rent/ Concessions/Sale

– Prerequisites:• Inventory• Global Strategy

Funding through development banks


- Lending of Multilaterals: WB (about $8 bn)…

No Direct Lending towards LGs except EBRD

Any Strategy for LGs Expansion?

Funding through ODA


- ODA

Linking domestic capital to local

public investment.







• Improving Access to Credit for Local Governments: A Call for Action


II. TOWARDS EFFICIENT FISCAL DECENTRALIZATION FRAMEWORKS


Juliana H. Pigey, The Urban Institute

OUTLINE

• The road from urbanization to efficient public investment passes through effective local fiscal autonomy

• Foundation and pillars of efficient fiscal decentralization frameworks

• Towards fiscal autonomy in countries in transition

The road from urbanization to efficient public investment passes through effective local fiscal autonomy

UNITED STATES:URBAN GROWTH & INVESTMENT

US, 1860 -1930, Urban Growth and Public Investment

0

10

20

30

40

50

60

70

80

Year

Pers

on

s (

in m

illi

on

s)

0

500

1000

1500

2000

2500

US

do

llars

(in

mil

lio

ns)

Urban Population

Public Investment

UNITED STATES 1860 - 1920 (3)

US, 1870-1920

0200400600800

1,0001,2001,4001,6001,800

Year

Mill

ion

s o

f D

olla

rs

National PublicInvestment

Total State Debt

UNITED STATES:NET STATE & LOCAL DEBT

0.0

500.0

1,000.0

1,500.0

2,000.0

Evolution of State and Municipal Debt 1870 - 1902

Federal States Cities, towns, counties, school districts

Foundation and pillars of efficient fiscal decentralization frameworks

UN-HABITAT: DRAFT GUIDELINES ADEQUATE RESOURCES

• Local authorities should be entitled … to adequate resources or transfers, which they may freely use within the framework of their powers

(D.10 Draft Guidelines Decentralisation & Strengthening Local Authorities)

• Local authorities’ financial resources should be commensurate with their tasks & responsibilities and ensure financial sustainability and self-reliance


UN-HABITAT: DRAFT GUIDELINES DIVERSIFIED RESOURCES

• Local authorities should have access to a broad variety of financial resources to carry out their tasks and responsibilities


• Taxes which local authorities .. levy, or .. of which they receive a guaranteed share, should be proportional to their tasks and needs and of sufficiently general, dynamic, .. flexible nature to enable them to keep pace with their responsibilities


UN-HABITAT: DRAFT GUIDELINES AUTONOMOUS RESOURCES (1)

• A significant portion of the financial resources of local authorities should derive from local taxes, fees and charges … for which they have the power to determine the rate, notwithstanding their possible framing (tax brackets).. (D.11 Draft Guidelines Decentralisation & Strengthening Local Authorities)

• As far as possible, financial allocations to local authorities from Governments should respect their priorities and shall not be earmarked for specific projects. The provision of grants shall not remove the basic freedom of local authorities to exercise policy discretion within their jurisdiction


UN-HABITAT: DRAFT GUIDELINES AUTONOMOUS RESOURCES (2)

• For the purpose of borrowing for capital investment, local authorities should, within guidelines and rules established by Governments and the legislation, have access to the national and international capital markets


WHY DECENTRALIZE?

local decisions will lead to the quantity, quality, cost and mix of services that most closely match local needs and preferences

Building blocks for effective fiscal autonomy

• Quantity and quality of services

• Cost of services

• Mix of services

• Assignment of functions

• Revenue assignment

• Property

• Budget

RISKS TO EFFECTIVE FISCAL AUTONOMY

• mismatch of responsibility and financing unfunded mandates no ability to determine

tariffs for service provision

• unclear, inconsistent rules frequent modification of

shares of national taxes frequent changes to

finance structure determined through annual budget laws

• accountability not clear who is

responsible to local community for tax decisions

• incentives no hard budget constraint budget is a negotiating

position to gain funds from government

Towards fiscal autonomy in countries in transition

EASTERN EUROPE & CENTRAL ASIA

Fig. 1.1-Local Government Expenditures as a share of General Gov. Spending

111212

1617

192020

2222

242525262727

303031

343435

3740

4244

59

0 5 10 15 20 25 30 35 40 45 50 55 60 65

Slovenia (2003)Slovak RepublikCroatia (2001)Albania (1998)

Romania (2001)France (2002p)Bulgaria (2002)

Lithuania (2003)Azerbaijan (1999)

Czech Republic (2003)Kyrgyz rep. (2001)

Estonia (2002)Hungary (2002)Moldova (2002)

United Kingdom (2002)Latvia (2003)

Italy (2000)Ukraine (2001)

Tajikistan (2001)Netherlands (2002)

Poland (2002)Georgia (2001)Finland (2001)Belarus (2002)

Kazakhstan (2002)Sweden (2001)

Denmark (2002)

EASTERN EUROPE:STRUCTURE OF LOCAL REVENUE

Table D.3 Shares of Subnational Government and Composition of their Revenues (country comparison-data 2001/3)

Expenditure

RevenueOwn-Taxes

Tax-Sharing

General Purpose

Specific Purpose

Czech Rep. 21.0 18.3 20.8 3.9 43.8 36.3 0.0 16.0 100.0Hungary 23.0 23.7 26.7 16.3 16.8 17.0 1.7 48.2 100.0Poland 31.0 27.6 28.8 10.6 14.4 24.6 30.5 19.9 100.0Estonia 21.0 19.7 22.1 6.3 62.1 9.1 13.4 9.1 100.0Latvia 24.0 23.1 25.0 0.0 66.2 14.1 5.8 13.9 100.0Lithuania 20.0 19.6 22.8 0.0 91.0 4.8 2.3 1.9 100.0Bulgaria 23.1 18.8 18.6 0.0 47.1 13.4 32.4 7.1 100.0Romania 12.0 9.6 11.7 6.1 64.1 14.9 0.0 14.9 100.0Slovenia 12.7 11.6 11.9 10.6 49.4 17.5 15.9 6.6 100.0Slovak Rep. 7.5 7.1 5.0 22.8 39.5 19.3 0.0 18.4 100.0Average 19.5 17.9 19.3 7.7 49.4 17.1 10.2 15.6 100.0Croatia 1

12.0 10.4 10.0 3.0 53.0 29.0 0.0 15.0 100.0Sources: Ebel, R. D & S. Yilmaz, On the Measurement and Impact of Fiscal Decentralization, WBI, 20021 World Bank staff estimates based on Dubravika J. Alibegovic (2004, table 8) and EIU.

Country GFS

Composition of sub-national revenuesTax revenue Grant

Non-tax Revenue

Total

Shares in Consolidated

ALBANIA – BULGARIA – ROMANIA (1)

Local Government Revenuesas Percent of GDP

4.7%

4.4%

8.9%

6.2%

2.8%

6.1%

0%

5%

10%

1999 2000 2001 2002 2003 2004

Albania Bulgaria Romania

NET LOCAL DISCRETIONARY REVENUES

• authority to set the rate forlocal taxes and fees

• predictable transfers and tax sharesassigned transparently, objectively

• no budget review at higher levels

• net of own revenues “clawed back”through unfunded mandates


Net Local Discretionary Revenues as of Percent of GDP

1.8%

0.0%

1.6%

0.2%

1.4%1.1%

0.0%

1.5%

3.0%

1999 2000 2001 2002 2003 2004

Albania Bulgaria Romania


Net Local Discretionary Revenues as a Percent of Total Local Revenues

62.4%

41.3%

1.0%

23.6%

2.7%

50.3%

18.8%

0%

20%

40%

60%

1999 2000 2001 2002 2003 2004

Albania Bulgaria Romania Czech Republic

ALBANIA – FISCAL DECENTRALIZATION WITH AUTONOMY

% of Total Local Taxes and Fees over Total discretional revenues

21.2

41.9

40.1

24.9

10

20

30

40

50

2001 2002 2003 2004






• Improving Access to Credit for Local Governments: A Call for Action


III. ACCESS TO CREDIT FOR LOCAL GOVERNMENTS: CONSTRAINTS AND

OPPORTUNITIES



Long term debt is needed!

3/ Access to Credit (1/5)

• Loan Maturity from 10 to 20 years, close to the physical life of the infrastructure

• However often difficult to access:– General concerns expressed by LGs– Small and medium size municipalities– Credit markets not developed enough to

serve LGs.

The need for intermediaries


• Why Private markets and banks dot not mechanically provide long term debt for LGs?

• Transaction costs / size of the loan

• Mismatch between short term deposits/ long term loans

• Local public infrastructure long term financing has been therefore often supported:– Public Banks– Specialized institutions for long term financing to

LGs in developing countries: • Municipal Development Funds (MDFs)

Limitations of MDFs


• The following have been observed:– High interest rate – High unused liquidities– Dependent on Central Government– Not serving small and medium

municipalities

• LGs must be more proactive in monitoring performance of MDFs.


IV. OBJECTIVE: IMPROVING ACCESS TO CREDIT FOR LOCAL GOVERNMENTS: A CALL FOR

ACTION



Improving Access to Credit for Local Governments

4/ A Call for Actions (1/5)

Source: Petersen, Building Local Credit Systems, 2000

Recommendations on the Demand Side


• Improve Fiscal Decentralization Frameworks :– Towards National Governments:

• Enhance dialogue and partnership with LGs• End unfunded mandates • Provide clear rules and regulations towards LGs• Reform state administration in link to decentralization• Fair and PREDICTABLE transfers and greater access to

buoyant taxes• Environment conducive to LG access to credit

– Towards Bilateral and Multilaterals:• Support fiscal decentralization reform at the national level

– Towards LGs:• Improve Own revenue generation• Improve Accountability and Transparency

Recommendations on the Demand Side


• PROJECTS ; POLICY ORIENTATIONS

– Sharing experiences amongst members on local finance

– Building Knowledge on local finance:• CA proposal: Fiscal Decentralization tracker• Global Observatory on Local Finance?

– Support national associations in enhancing dialogue with State

– Lobbying campaigns towards international and national partners:

• a fixed objective for ODA channeled to LGs? • Associate LGs in the design of TA tools

Recommendations on the Supply Side


• Support Reform of Current Financing Tools:– Towards National Governments:

• Enable Local Public Borrowing• Transforming Municipal Development Funds (MDF) • Promote development of domestic financial markets

– Towards Bilateral and Multilaterals:• Develop a consistent strategy to address the investment

needs of small and medium municipalities.• Support reform of MDFs.• Lengthen the term of debt.

– Towards LGs:• Pooling of LG demands and resources • Develop credit policy support and tools• Explore the feasibility of a World Bank of Cities

Recommendations on the Supply Side


Information campaign

Lobbying actions towards Bilateral and multilateral

MDF tracker with CA

Other Recommendations


• Reform Local and National Public Utilities:– Price Reform: Aim for Cost Recovery Fees– Develop Social subsidies for the Poor

• Link Urban Planning and Local Finance:– No need to make careful planning if not implemented– Partnering for long term– Fiscal Tools against Urban Sprawl

• Explore the possibility to develop National Contracts Agreements:– Ensure Commitment of all partners around the same

overall objective / indicators for each partner

Other Recommendations


UCLG Mandate

• advocate and support fiscal decentralization as well as reform of access to funding


www.cities-localgovernements.org

http://www.cities-localgovernements.org/



uclg policy paper on local finance discussions

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