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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
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
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)
Globalization
Introduction (4/5)
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
UCLG Policy Paper on Local Finance
I. THE CHALLENGE: INVESTMENTS IN LOCAL PUBLIC INFRASTRUCTURE DO NOT MATCH
URBAN EXPANSION
Technical Meeting on Local Finance, Barcelona, 11-12 June 2007
Thomas Meekel, Project Manager, CGLUJuliana Pigey, The Urban Institute
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
1/ The Context (2/16)
…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?
1/ The Context (5/16)
– 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?
1/ The Context (6/16)
Remittances: Foreign workers send about $200 bn per year back to their native countries.
…Needs that will increase if cities continue their sprawl…
1/ The Context (7/16)
Obvious at the local level, but also at the national level
1/ The Context (8/16)
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?
1/ The Context (9/16)
• 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
1/ The Context (10/16)
PPP / Private Participation in Infrastructure
1/ The Context (11/16)
Local Government
Customers
Donor agencies /
Banks
National GovernmentUtility
Before After
National or Local Public Enterprises/Utilities
1/ The Context (12/16)
Local Government
Customers
National Government
Utility
Land and Asset Management
1/ The Context (13/16)
• 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
1/ The Context (14/16)
- Lending of Multilaterals: WB (about $8 bn)…
No Direct Lending towards LGs except EBRD
Any Strategy for LGs Expansion?
Funding through ODA
1/ The Context (15/16)
- ODA
Linking domestic capital to local
public investment.
1/ The Context (16/16)
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
• Improving Access to Credit for Local Governments: A Call for Action
UCLG Policy Paper on Local Finance
II. TOWARDS EFFICIENT FISCAL DECENTRALIZATION FRAMEWORKS
Technical Meeting on Local Finance, Barcelona, 11-12 June 2007
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
(D.7 Draft Guidelines Decentralisation & Strengthening Local Authorities)
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
(D.10 Draft Guidelines Decentralisation & Strengthening Local Authorities)
• 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
(D.12 Draft Guidelines Decentralisation & Strengthening Local Authorities)
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
(D.16 Draft Guidelines Decentralisation & Strengthening Local Authorities)
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
(D.18 Draft Guidelines Decentralisation & Strengthening Local Authorities)
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
ALBANIA – BULGARIA – ROMANIA (2)
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
ALBANIA – BULGARIA – ROMANIA (3)
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
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
• Improving Access to Credit for Local Governments: A Call for Action
UCLG Policy Paper on Local Finance
III. ACCESS TO CREDIT FOR LOCAL GOVERNMENTS: CONSTRAINTS AND
OPPORTUNITIES
Technical Meeting on Local Finance, Barcelona, 11-12 June 2007
Thomas Meekel, Project Manager, CGLUJuliana Pigey, The Urban Institute
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
3/ Access to Credit (1/5)
• 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
3/ Access to Credit (1/5)
• 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.
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
UCLG Policy Paper on Local Finance
IV. OBJECTIVE: IMPROVING ACCESS TO CREDIT FOR LOCAL GOVERNMENTS: A CALL FOR
ACTION
Technical Meeting on Local Finance, Barcelona, 11-12 June 2007
Thomas Meekel, Project Manager, CGLUJuliana Pigey, The Urban Institute
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
4/ A Call for Actions (2/5)
• 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
4/ A Call for Actions (1/3)
• 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
4/ A Call for Actions (3/5)
• 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
4/ A Call for Actions (3/5)
Information campaign
Lobbying actions towards Bilateral and multilateral
MDF tracker with CA
Other Recommendations
4/ A Call for Actions (4/5)
• 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
4/ A Call for Actions (4/5)
UCLG Mandate
• advocate and support fiscal decentralization as well as reform of access to funding
4/ A Call for Actions (5/5)
www.cities-localgovernements.org