A recurrent theme at this year’s Habitat III conference in Quito, Ecuador, municipal finance is a hot, if unsexy topic, among the world’s local and state governments. With several references to the issue in the New Urban Agenda, many events at the conference are attempting to inspire innovative means of city funding, as the world hurtles towards an increasingly urbanized future. Leading a session on municipal finance in least developed countries, David Jackson, Director of Local Development Finance at UNCDF, goes as far as calling the New Urban Agenda a “New Urban Imperative” especially when taking in consideration the rapid urban growth in Africa and Asia. Without decentralization and new modes of municipal finance, he says, “secondary cities will not be able to stand-up, provide jobs or a high quality of life, nor meet the Paris climate change agreements.” Speaking at a different event, entitled Urban Finance, Germany’s State Secretary Gunther Adler explains that no person should live in worse conditions than others in their country, “just because their city doesn’t have money.” Reiterating the need for financial decentralization – something Germany excels at – the German panel are, however, very aware that their model is not easily transferable to other countries and economies. So, what can cities that don’t have the luxury of Germany’s forward thinking politics or massive economic clout do to finance their own urban development?
Working together with the UN-DESA, the UNCDF are working on a project that aims to make the implementation of the Addis Ababa Action Agenda (an ambitious plan to change typical and often unsustainable modes of financing development) and the Sustainable Development Goals more achievable through municipal financing. The culmination of this project will be a series of policy recommendations and the building of regional hubs to facilitate partnerships and support national actions plans for LDCs (Least Developed Countries) to strengthen municipal finance. While the publications of the findings are due in early 2017, some issues have already become abundantly clear. Daniel Platz, Financing Officer at UN-DESA’s Financing for Development Office, admits that it’s “delicate for the UN to decentralize to a sub-national level,” but describes an increasing willingness to do so nonetheless. He also notes that there are various understandings of what municipal finance means, especially in African LDCs, and that “the big elephant in the room is the political economy” aspect of allowing cities autonomy in their financing.
This latter point is something Khady Dia Sarr, Program Director at the Dakar Municipal Finance Program, knows very well. While Germany, for example, has given its municipalities constitutionally guaranteed rights to regulate their own financial affairs – “municipalities even have the right to sue the state if they feel this is compromised,” reiterates State Secretary Adler – LDCs often suffer at the hands of national politics. Case in point is Dakar’s first municipal bond, a potential landmark move in the Senegalese city, which was blocked by the national government just two days before its issuance. The $40 million bond had been earmarked for infrastructural projects in the city, including a new, formal marketplace that would allow the city to tax vendors to bring even more revenue for the municipality. The Dakar Municipal Finance Program had undertaken a huge effort to get its economic affairs in order ahead of the bond’s issuance and despite the political hurdle, Khady Dia Sarr and in doing so, her team’s experience offers some lessons for cities looking to go the municipal bond route.
Transparency in city finances and inclusive local policies are the top recommendations Dia Sarr makes. “Let them know it’s they’re city,” she explains during Habitat III, indicating that popular support for new modes of financing city development can be instrumental. She also explains that through various capacity building programs within the local government, Dakar was able to strengthen its ability to engage with investors, banks and other lenders. Many developing cities, where the informal economies are often large and unregulated, suffer from the inability to collect taxes – a key source of municipal revenue as prescribed by UN-DESA UNCDF’s ongoing study. The Dakar Municipal Finance Program has worked with the World Bank to “straighten up tax revenues,” as Dia Sarr puts it, and is now implementing the recommendations that emerged.
Mayor Daviz Sinango from the city of Beira, Mozambique, explains that his city suffers from a similar problem in tapping local sources of revenue. “The electricity company collects the money for waste collection and the water company collects money for water sanitation. The total is unknown – they just forward the municipality an amount every month,” he says. Meanwhile, the city is only forwarded 1.5% of the national government’s total revenue, irrespective of needs. This is in stark contrast with Germany’s model of municipal finance, which is built on “the principal of solidarity. Stronger cities assist weaker ones,” as State Secretary Adler explains. Nevertheless, international developmental financing experts including Klaus Gihr, from Germany’s KfW and Stephen Matzie, from USAID, encourage developing cities to explore more ways to tap into local sources of capital. Gihr points to domestic capital markets, such as social insurance and pension funds, as potential sources of municipal financing that can circumvent unsustainable sources, such as development grants, as well as tricky political systems. “There’s $1 trillion in African pension funds,” he explains, to which David Jackson remarks: “If you’re investing in a pension you should be willing to invest in an environment you’d want to retire in!”
Matzie agrees that local sources of capitals, especially in LDCs, need to be unlocked, especially where national politics can stand in the way of foreign investment or intergovernmental transfers. Nevertheless, he echoes Dia Sarr’s experienced-based recommendations that “financial management of a city needs to be transparent. It’s not about reinventing accounting or auditing, but creating a system-wide approach to align policies.” This, the USAID representative explains, is a political challenge but can mobilize local private investments.