Municipal Finance and Urban Development

Serageldin and others: Municipal financing and urban development i

United Nations Human Settlements Programme (UN-HABITAT)

Nairobi, 2008

Human Settlements Global Dialogue Series, No. 3

Municipal financing and urban development

Mona Serageldin, David Jones, François Vigier and Elda Solloso

With the assistance of:Shannon Bassett, Balakrishna Menon, Luis Valenzuela

Center for Urban Development Studies, Harvard Design School, Cambridge, United States of America

ii Human Settlements Global Dialogues Series, No. 3

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Human Settlements Global Dialogue Series, No. 03.HS/938/07E.ISBN 978-92-113-1914-9 (this volume).ISBN 978-92-113-1924-8 (Human Settlements Global Dialogue Series).

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Serageldin and others: Municipal financing and urban development iii

Contents

1. Introduction ....................................................................................................1

1.1 Currentissuesandchallenges...............................................................2

I.2. Outlineofthepaper..............................................................................4

2. Municipal finance and urban development .................................................6

2.1. Generaltrendsinfiscaldecentralization...............................................7

2.2. Theevolutionoffinancialsystemstowardsmoretransparency

andaccountability...............................................................................10

3. Patterns and trends in municipal budgeting .............................................28

3.1. Relianceoncentraltransfers...............................................................30

3.2. Controloflocalrevenuegenerationbyprovincial/regional

government.........................................................................................32

3.3. Buildinglocalcapacitytoraiseandmanageownrevenue

sourcesinWestAfrica........................................................................38

3.4. Mandatingresponsiblemunicipalfinancialmanagement...................40

3.5. Lackoffundsformaintenanceofexistingassets...............................42

3.6. Capitalinvestmentprogrammesandbudgets.....................................42

3.7. Theimpactofpopularparticipationontheallocationofcapital

investments:ParticipatoryBudgetinginBrazil..................................43

4. Performance of major sources of municipal revenue ...............................49

4.1. Taxesonpropertyandbusinessactivities...........................................50

4.2. Challengestoimprovedmunicipalrevenue.......................................53

4.3. TaxesonIncome.................................................................................56

4.4. Userfees.............................................................................................56

4.5. Bettermenttaxesanddevelopmentexactions.....................................57

4.6. Borrowinganddebtservicemanagement...........................................59

4.7. Municipalfinancialmanagementunderadverseeconomic

conditionsandstructuraladjustment..................................................64

5. Special funding sources and targeted funds ..............................................71

5.1. MunicipalDevelopmentFunds...........................................................71

iv Human Settlements Global Dialogues Series, No. 3

5.2. Regional/Statefundsforurbanandregionaldevelopment.................81

5.3. Specialfunds.......................................................................................91

6. Private-sector financing of municipal infrastructure and services .........96

6.1. Privatizationofmunicipalservicedelivery........................................96

6.2. Themajorissuesinvariousregions....................................................99

7. Joint funding of infrastructure and urban services ................................103

7.1. Jointfundingofcommunity-basedinitiativesforthedeliveryof

basicservices....................................................................................103

7.2. Newtrendsinpartnershipsforlocaldevelopment...........................104

7.3. Tappingmigrantremittances............................................................108

7.4. Buildingthecapacityofmunicipalitiesandimprovinglocal

financialmanagement.......................................................................112

8. Concluding remarks .................................................................................. 118

8.1. Decentralization,municipalperformanceandaccountability..........119

8.2. Abilityofmunicipalitiestoprovideservicedlandand

basicservices....................................................................................120

8.3. Localcapacitytomeetthegoalsofsustainabledevelopment..........124

8.4. Privatizationofmunicipalservicesandtheneedtolink

formalandinformalprovidersindevelopingcountries...................125

8.5. Buildingthecapacityofmunicipalitiestofundlocal

development......................................................................................127

List of references ..............................................................................................128

Appendix. List of Cases Reviewed by Region ...............................................139

Serageldin and others: Municipal financing and urban development v

List of boxes

Box1. Developmentandequalizationstrategiesunderadverseeconomic conditions:Indonesia’sfiscaldecentralizationprocess.................15

Box2. Brazil’sfiscalresponsibilitylaw....................................................41

Box3. Multi-yearcapitalinvestmentplanning,Szczecin,Poland...........44

Box4. TheroleofSpecialPurposeVehicles(SPV)inChina...................65

Box5. Cross-subsidiesinBotswana.........................................................68

Box6. FINDETER,Colombia..................................................................75

Box7. TheMunicipalDevelopmentFundofGeorgia..............................78

Box8. TheTamilNaduUrbanDevelopmentFund(TNUDF),India.......83

Box9. TheKommuninvestCorporation,Sweden....................................86

Box10. Linkingformalandinformalsystems:Cotonou,Benin..............105

Box11. GénesisEmpresarial,Guatemala.................................................106

Box12. TheValledeSulaRegion,Honduras...........................................111

Box13 Cuenca,Ecuador:“Improveyourneighbourhood”programme..113

Box14. Africa’sMunicipalDevelopmentProgramme(PDM)................115

vi Human Settlements Global Dialogues Series, No. 3

List of tables

Table1. DistributionofBrazilianmunicipalities’averagerevenues(by populationsize)............................................................................10

Table2. DistributionofrevenueandtaxcollectioninBrazil(2003)........11

Table3. Russia:localgovernmentexpendituresintheconsolidated nationalbudgets...........................................................................14

Table4. Structureofmunicipaloperatingrevenueandexpendituresin selectedWestAfricancountries(%)............................................18

Table5. India:theroleoftransfersinmunicipalfinances(2001/2002)....33

Table6. Distributionofrevenuesbetweenbudgetsatalllevelsin Russia(%ofGDP).......................................................................35

Table7. StructureofRussianmunicipalrevenues(1996-2002-in%).....36

Table8. Functionalstructureoflocalexpenditurebudgetsinthe RussianFederation(%)................................................................37

Serageldin and others: Municipal financing and urban development vii

List of acronyms

ACFA AlbertaCapitalFinanceAuthorityAMC AhmedabadMunicipalCorporationAREB AssociationofWaterVendorsBCIE CentralAmericanBankforEconomicIntegrationBISE BankforSocioeconomicInitiativesBOOT Build/Own/Operate/TransferBOT Build/Operate/TransferBRA BostonRedevelopmentAuthorityBRL BrazilianrealCBOs Community-BasedOrganizationsCIDA CanadianInternationalDevelopmentAgencyCIP CapitalInvestmentProgrammeCIS CommonwealthofIndependentStatesCMZRB Czech-MoravianGuaranteeandDevelopmentBankCOP ColombianpesoDAK SpecificPurposeGrantsDAU GeneralPurposeGrantsDBSA DevelopmentBankofSouthernAfricaDGI DirectionGénéraledesImpôtsECOLOC LocalEconomicRevitalizationProgrammeinWest

AfricaFDU ParanáStateUrbanDevelopmentFundFFDU FundforUrbanandInfrastructureDevelopmentFIA Inter-AmericanFoundationFINDETER FinancieradeDesarrolloTerritorialFNDR NationalFundforRegionalDevelopmentFPM ParticipationFundforMunicipalitiesFPS SocialandProductiveInvestmentFundFUNDE NationalFoundationforDevelopmentFUSAI SalvadorianFoundationforIntegralSupportGDP GrossDomesticProductGEL GeorgianlariGTZ GermanTechnicalCo-operationHIPC HeavilyIndebtedPoorCountriesIADB Inter-AmericanDevelopmentBankIADF InternationalAssociationofDevelopmentFundsIBAM InstituteofMunicipalAdministration

viii Human Settlements Global Dialogues Series, No. 3

ICMS TaxonServicesandCirculationofGoodsIDA InternationalDevelopmentAssociationINR IndianrupeeMDFs MunicipalDevelopmentFundsMDGs MillenniumDevelopmentGoalsMIP MunicipalInfrastructureProgrammeMUFIS MunicipalFinanceCompanyNBI UrgencyofNeedIndexNGOs Non-GovernmentalOrganizationsPAD LocalGovernments’OwnRevenuesPDM PartnershipforMunicipalDevelopmentPDSF PublicDebtServiceFundPRODEL NationalProgrammeforDecentralizationand

LocalDevelopmentPROMUNI MunicipalInfrastructureFinancingProgrammePWLB PublicWorksLoanBoardSANEPAR SanitationCompanyoftheStateofParanáSBEE BeninWaterandElectricityCompanySEWA Self-EmployedWomen’sAssociationSIDA SwedishInternationalDevelopmentCo-operation

AgencySPVs Special-PurposeVehicleTIF TaxincrementfinancingTIPS TreasuryInflation-ProtectedSecuritiesTNUDF TamilNaduUrbanDevelopmentFundUDIC ShanghaiUrbanDevelopmentInvestmentCorporationUEMOA WestAfricanEconomicandMonetaryUnionULB UrbanLocalBodyUN-HABI-TAT

UnitedNationsHumanSettlementsProgramme

UNDP UnitedNationsDevelopmentProgrammeUSAID UnitedStatesAgencyforInternationalDevelopmentUSD UnitedStatesdollarVAT ValueAddedTaxVRA VirginiaResourcesAuthorityZAR SouthAfricanrandZMVS MetropolitanAreaoftheValledeSula

Serageldin and others: Municipal financing and urban development ix

Abstract

Thispaperaddressesthewiderangeofproblemsthatmunicipalauthoritiesfaceinfinancingurbandevelopmentastheyrespondtothechallengesofmajorshiftsintheireconomicbaseresultingfromfallingtradebarriersanda globalizing economy. The main emphasis is on developing countries,where the challenges are the greatest and the resource constraintsmostacute.Usingcasestudies to reflect thewidedifferences in thedegreeoffiscaldecentralizationandfinancialautonomythatexistamongcountriesinanyparticularregion, thepaperfocuseson thechallengesfaced, localfinancialmanagementandperformance,partnerships toaddresspressingurbanissues,andemergingtrendsinthefinancingofcapitalinvestments.The paper highlights creative initiatives in emerging, transitional andadvancedeconomies.Althoughthefocusisonfinance,selectedinitiativestendto:promotedemocraticlocalgovernance;fosterpartnershipsinvolvingcommunities and stakeholders in urban development initiatives; andstrengthenthecapabilitiesandresourcesoflocalgovernmentsasthepivotalpartnersinthedevelopmentprocess.Thepaperdocumentstheemergenceofseveralimportantnewtrends:thebroadeningoflocallygeneratedrevenuesources; the strengthening of local financial management, the growingrelianceonpartnershipstofinancecapitalinvestments,andenhancementstopromoteaccesstolong-termcreditformunicipalities.Particularimportancehasbeengiventothedocumentationofnovelwaysoftappingprivatesectorresources,suchasstrategicpartnershipsandlocaldevelopmentfunds.

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Acknowledgements

This report drew on many sources to ensure wide institutional andgeographiccoverage:Multilateralandbilateraldevelopmentorganizationsincluding theWorldBank, IADB,CIDA and SIDA; non- governmentalorganizationsincludingtheIADF,FINDETER,IBAM),FUSAIandGénesisEmpresarial; and selected local authorities/municipalities.Likewise,wewish toacknowledge the informationanddocumentsreceivedfromUN-HABITATstaffandmembersoftheGlobalResearchNetworkonHumanSettlementsandotherspecializedexpertsinvariousfields.

Inparticular,thecontributionsanddocumentsprovidedbyEduardoRojas(IADB),KeshavVarma,SoniaHammamandPatriciaAnnez(WorldBank),JeanPierreM’Bassi (PDM),WassalaNimaga andTedDregeer (CIDA),AlfredoStein(SIDA),AnthonyPellegriniandStevenThomas(IADF)wereinstrumentalinidentifyingoutstandinginitiatives.

For their assistance in the documentation of initiatives we also wish tothankJayshreeShahria,AbhaJoshi-GhaniandManishaChaudhry(WorldBank); JulianJaramilloandXimenaSanchez (FINDETER); JohnAvault(BRA);SamTyler(BostonMunicipalResearchBureau);MarkDietlinandLarryBraman(CityofBoston);VivianLeo(BostonCityHallTreasurer);KenBarnes;FrançoisdeBremaeker(IBAM);AnaMaríaPineda(FUSAI);andAdeladelRizzo(GénesisEmpresarial).

Note

This paper was prepared as a background paper for:Global Report on Human Settlements: 2005 Financing Urban Shelter.AsummaryofthepaperwasincludedasChapter3oftheGlobalReportunderthetitle:FinancingUrbanDevelopment.

Serageldin and others: Municipal financing and urban development xi

About the authors

MonaSerageldinisvicepresidentoftheInstituteforInternationalUrbanDevelopment.SheisalsoanAdjunctProfessorofUrbanPlanningattheHarvardUniversityGraduateSchool ofDesignwhere she has been amemberofthefacultysince1985.Shehasover30yearsofprofessionalandacademicexperienceintheUnitedStatesandabroad,andhasworkedonprojectssponsoredbyvariousinternationalorganizationsinEasternEurope,theMiddleEastandNorthAfrica,sub-SaharanAfrica,CentralAsia,LatinAmerica,andtheCaribbean.Dr.Serageldinspecializesinlocaldevelopment,strategicplanning,socialinclusion,policyandprogrammeassessment,andmunicipalfinanceofurbandevelopment.Herapproachto urban planning andmanagement emphasizes participation, strategyperformanceandcapacitybuilding.SheleadstheInstitute’sinvolvementinspecializednetworksincludingUN-HABITATBestPracticesandLocalLeadership Programme,UN-ECOSOC, theMicro-credit Summit, andtheCulturalHeritageandDevelopmentNetworksanditsparticipationintheCoalitionforSustainableUrbanization.

David Jones is a Research Fellow at the Institute for InternationalUrbanDevelopment.Hehasover25yearsofexperienceaspractitioner,educator,consultantandpublishedauthor,infinancialandadministrativemanagement.Hehasprovidedassistancetocentralandlocalgovernments,development institutions, public utilities and companies in over 50countries.From1987to2005,hewasaResearchFellowandpart-timeinstructor at the Center for Urban Development Studies at HarvardUniversity.HealsotaughtpublicfinanceatGeorgeMasonUniversity,VirginiaandattheWorldBankInstitute.For17yearsattheWorldBank(1970-1987), he was a Senior Financial Analyst and then FinancialAdvisorforpublicutilities,watersupplyandurbandevelopmentprojects,whilst initiating improved financial management. He is a CharteredCertifiedAccountantandaCharteredPublicFinanceAccountantoftheUnitedKingdom,andistheauthorofthebook:MunicipalAccountingforDevelopingCountriesjointlypublishedbytheCharteredInstituteofPublicFinanceandAccountancyandtheWorldBank.FrançoisC.D.VigieristhePresidentoftheInstituteforInternationalUrbanDevelopment,a

xii Human Settlements Global Dialogues Series, No. 3

non-profit corporation incorporated in 2005 in theCommonwealth ofMassachusetts.AmemberoftheHarvardUniversityfacultysince1962,Dr.Vigier is theCharlesDyerNortonProfessorofRegionalPlanningemeritusattheHarvardGraduateSchoolofDesignwherehewasalsothe Director of the School’s Center for Urban Development Studiesfrom1987to2005.HewastheChairmanoftheDepartmentofUrbanPlanningandDesignfrom1992to1998.Hecombines45yearsofactiveprofessionalpracticeintheUnitedStatesofAmericaandabroadwith40yearsofteaching.Dr.VigieristheeditorofSprawl:BeyondtheRhetoric(2000,withNicolasRetsinas),andTheNewPlanningAgenda(1996).HeistheauthorofHousinginTunis(1987),ChangeandApathy(1970)aswellasnumerousarticlesonplanning.In1995,hewasmadeaKnightoftheNationalOrderofMerit(France).

Elda Solloso-Rodríguez is a Junior Professional Associate in theSouthAsiaEnergy and InfrastructureDepartment at theWorldBank.ShereceivedherMaster inUrbanPlanningfromtheGraduateSchoolof Design at Harvard University and was a Research Fellow at theUniversity’s Center for Urban Development Studies for three years.SheworkedwithMonaSerageldinonanumberofreportsfortheUNMillenniumProject,UN-HABITATandtheWorldBankUrbanResearchSymposiumandalsopreparedbackgroundmaterialandproposalsfortheCenter’sactivitiesinIreland,theUnitedStatesandLatinAmerica.From1998to2000,Ms.Sollosostudiedregionalplanningin theUniversityofParisX-Nanterre.Herprimaryresearchinterestsaresocialinclusionissuesinurbandevelopmentandinnovativeapproachestourbanplanningandmanagement.

Correspondingauthor:MonaSerageldinVicePresident,

InstituteforInternationalUrbanHarvardDesignSchool48QuincyStreet,Cambridge,MA02138,UnitedStatesofAmerica

E-mail:[email protected]:http//www.i2ud.org

Serageldin and others: Municipal financing and urban development 1

Municipal financing and urban development

1. Introduction

This paper addresses the wide range of problems that face municipalauthoritiesinfinancingurbandevelopmentastheyrespondtothechallengesofmajorshiftsintheireconomicbaseresultingfromfallingtradebarriersandaglobalizingeconomy.Concurrently,thedevolutionofadministrativeandfinancialresponsibilityfromcentralgovernmentshasforcedmunicipalauthorities to financeagrowingproportionof their recurringandcapitalexpenditures at a time when, in most countries, migrants constitute agrowingproportionoftheirpopulation.Localauthoritieshavehadto:(1)enhancetheireconomiccompetitiveness;(2)meetthedemandsforpublicservices; (3) expand and diversify the local tax base; and (4) generatefunding for capital investments.Municipalities are but one actor in thefinancing of urban development, but inmanyways they are the pivotalonebecauseoftheirstatutorypowersandtheirabilitytoactonallsectorswithin a defined geographic space. Households and private enterprisesarethedevelopersandbuildersofurbancommunitiesandtheownersandoperatorsofeconomicactivities.Butunless themunicipalitycandeliverthesupportiveinfrastructureandservicestheyneed,orderlydevelopmentwillbe impaired. Indevelopingcountries, therapidpaceofurbanizationandlargemigratoryflowshaveincreasedthepressureonlocalgovernmentspendingforurbandevelopment.Inmostofthesecountries,decentralizationlawswereenacted in the1980sand1990samid fiscaldeficits, financialcrisesandpoliticalunrest,erodinglocalrevenueanddisruptingaccesstofundsforcapitalinvestment.

In thispaper, theemphasis isplacedondevelopingcountries,where thechallengesarethegreatestandtheresourceconstraintsthemostacute.TheyaretheareasfocusedonbytheMillenniumDevelopmentGoals(MDGs)andassociated2015targetsadoptedin2001(TheMillenniumProject,2003).Reaffirming theworldcommitment toaddress thegrowingdisparities inincomeandwealthacrossandwithincountries,multilateralandbilateraldevelopment organizations aremaking poverty reduction a priority.The

2 Human Settlements Global Dialogues Series, No. 3

successoftheseeffortshingesondemocraticlocalgovernance,partnershipsinvolvingcommunitiesandstakeholdersinurbandevelopmentinitiatives,andstrengtheningthecapabilitiesandresourcesoflocalgovernmentsasthepivotalpartnersinthedevelopmentprocess.

1.1 Current issues and challenges

Inadvancedcountries,thecombinationofstronglocaltaxbases,structuredcentral/local fiscal relations and well-targeted transfers give localgovernmentsthemeanstodrivetheirowneconomic,socialandphysicaldevelopment,partnerwithprivatesectorentitiesondevelopmentinitiativesandworkwithNGOsonsocialprogrammes.Theirfiscalresourcesallowthem to access a range of financing sources, ranging from specializedmunicipal credit institutions and privately managed local developmentfunds to commercial banks and international capital markets. Throughstrategiccapitalinvestments,theyareabletomanagegrowthpatternsandimprovetheurbanenvironment.

In transitional economies, the evolution of municipal finance for urbandevelopment reflects the path followed by each country as it integratesintotheglobaleconomy.Thesequencingofthereformsaffectinglegalandinstitutionalframeworksandeconomicsectorsisofparamountimportance.Political,administrativeandfiscaldecentralization,changesinpublicandprivaterolesandresponsibilities,devolutionoffunctionalresponsibilities,adjustments in central transfers and privatization of land and propertyownership, all affect the capacity of municipalities to deliver servicesandmanageurbandevelopment,workwith localcommunitiesandenterinto partnershipswith the private sector. In general, they havemanagedtheir finances responsiblyand launched jointly fundedprogrammeswithresidentsanddeveloperstoimproveinfrastructureandhousing.

Majorcitiesseektocompeteintheregionalandglobaleconomy.Theystrivetomanagetheirfinancesresponsibly inorder toattractprivate investors,obtaininvestment-gradecreditratingsandaccesscapitalmarkets.Wherelocalauthoritiesarenotempoweredtoborrow,asinChina,theyhavefound


off-budgetmethodsandinstrumentstoobtainthefinancingneededtodriveandimplementurbandevelopmentstrategiesandmajorprojects.

In developing countries, municipal finance suffers from the fiscallydestabilizing effects of asymmetrical decentralization.Where devolutionis proceeding according to a planned legal, institutional and regulatoryframework, local authorities benefit from more predictable financesand, in many ways, greater discretion. Successive ad hoc adjustmentsto correct imbalances tend to disrupt municipal financial management.Inallcases, localauthorities indevelopingcountries lack thesupportiveframework enjoyed by their counterparts in advanced countries. Theymust be creative and experimentwith innovative approaches if they areto meet their economic and social objectives, particularly in generatingemployment,expandingservicedelivery,upgradingtheurbanenvironmentand improving living conditions for poorer communities. Government-sponsoredMunicipalDevelopmentFundshaveprovidedsomemunicipalauthorities with resources for specific categories of projects, includingrevenue-producingservicesandinfrastructure.Socialprogrammescontinueto relyoncentral fundingandon support frombilateral andmultilateralorganizations.Lackofaccesstolong-termfinancinghamperstheirabilityto fundurbandevelopment.Thebestmanagedmunicipalities havebeenabletolaunchandsustainremarkableinitiativesworkingwithhigherlevelsofgovernment,privatebusinesses,NGOsandCBOsaswellasbilateralandmultilateralorganizations.

In poorer countries, local authorities are heavily dependent on centralgovernmenttransferstopluganydeficitsintheiroperatingexpenditures,andongrantsfromdonorstoaddresstheirmostpressingenvironmentalandsocialproblems.Externalfundsarethemainsourceoffinancingtoupgradeandexpandinfrastructureandurbanservices.Decentralizationpolicieshavedevolvedfunctionalresponsibilitieswithoutthefiscalresourcesneededtodischargethismandate.Thegeneralpovertyofthepopulationerodeslocalrevenue, which relies on amultiplicity of low-yield taxes and fees thatarecumbersometomanageanddifficult tocollect.Theirperformance isfurtherdepressedbychaoticurbanizationandtheproliferationofinformalactivities.


TheMDGshaveopenedupnewopportunitiesforpoorcountriestoaccessfunding through theHeavily IndebtedPoorCountry initiatives forsocialand environmental programmes.Municipalities can benefit directly andindirectlyfromthesefinancial resources.However, lackof technicalandmanagerial capacity hampers their ability to make efficient use of thefundingtheyreceive,letalonetoleveragethefunds.

I.2 Outline of the paper

Thediscussionofmajorissuesandtrendsaffectingmunicipalities,withanemphasisontheirabilitytoprovideservicesandfinanceimprovements,ispresentedinfivesectionsasfollows:

• MunicipalFinanceforUrbanDevelopment

• PatternsandTrendsinMunicipalBudgeting

• ThePerformanceofMajorSourcesofMunicipalRevenue

• SpecialFundingSourcesandTargetedFunds

• PrivateFinanceofMunicipalInfrastructureandServices

Therearenoglobalorregionalstatisticsontheexperiencesofmunicipalitieswhenmanaging their finances under these circumstances; this is due tothewidedifferencesinthedegreeoffiscaldecentralizationandfinancialautonomythatexistacrosscountriesinanyparticularregion.Withthefewexceptionspresentedinthispaper,nationalstatisticsonmunicipalfinancearealsolacking.Thisdearthofbasicdatahasdictatedastructurethatfocuseson the challenges faced, local financial management and performance,partnershipstoaddresspressingurbanissues,andemergingtrendsinthefinancingofcapitalinvestments.

In an interconnected regional and global context, networks provide thechannelsfortheexchangeofexperiencesandthetransferandadaptationof successful concepts andmechanisms.Hence, the importancegiven tocreativeinitiativesinthevarioussectionsofthepaper.Thecasespresentedhave been selected to provide broad geographic coverage of interestinginitiatives addressing the challenges of municipal financing of urban


development.Particular importancehasbeengiventothedocumentationofnewsourcesoffinancingcapableoftappingprivateresources,suchasstrategicpartnershipsandlocaldevelopmentfunds.

Although differences clearly exist between developing, transitional andadvancedcountries,thereareequallystrikingdifferenceswithineachregion.Anin-depthreviewofstudiesandreportsconductedbynationalinstitutionsandbilateralandmultilateralaidorganizationspermittedtheselectionofaseriesofcasesthatdescribetherangeofissuesfacedbymunicipalities,howtheyhaverespondedtothem,theircapacitytoidentifyandworkwithstrategicpartners,thedifficultiesencounteredandtheresultsachieved.Thefactthatcountriesindifferentpartsoftheworldhavedevelopedcomparableapproachesillustratestheemergenceofseveralsignificantnewtrends:thebroadeningoflocallygeneratedrevenuesources;thestrengtheningoflocalfinancial management; partnerships to finance capital investments; andenhancementstopromoteaccesstolong-termcreditformunicipalities.Thecasesdescribedinthefollowingchaptersillustrateinnovativeapproachestoaddressthesechallenges.Somehavereceivedinternationalrecognitionas“bestpractices”.


2. Municipal finance and urban development

Decentralization,globalizationandthepriorityplacedonpovertyreductionasamajorobjectiveofsustainabledevelopmenthavehighlightedthecriticalroleoflocalgovernmentandtheimportanceofbuildinguptheirtechnical,managerialandfiscalcapacities.Globalizationhasalsohadanimpactonpublicfinances.Thefiscalcapacityofgovernments inmanypartsof theworldwasadverselyaffectedbythedeclineintaxratesonrelativelymoremobilefactorsofproductionasaresultoftradeagreements,competitionandareducedroleforcentralgovernment.Inthepoorercountries,governmentexpenditureson social programmes, includinghealth, education,welfareand poverty reduction, are being scaled back due to lack of resources,heavyindebtednessandinsufficientfundingfromoutsidesources,therebyunderminingtheachievementoftheMillenniumDevelopmentGoals.

In 2004, the International Commission on the Social Dimension ofGlobalizationrecommendedfairrulesformultilateraltradeandproductionsystems, better international policies regarding global resources, andmore accountable multilateral institutions to address social imbalancesandorganize financial networks.The commission enjoinedgovernmentsto establish property rights, promote gender equality and ensure labourrights. It advocated fostering opportunities for national and cross-bordernetworking, co-operation and exchange among local authorities, andinstituting policies that support and empower local communities. Theserecommendationshaveimplicationsforlocaldevelopmentpolicies,socialinclusionprogrammesandmunicipalfinance.

Two major emerging issues are affecting the performance of localauthoritiesinbothindustrializedanddevelopingcountries.Thefirstisthegradualdevolutionof theresponsibilityfor infrastructureinvestmentandthe delivery of services to local government, a trend that has increasedtheir fiscal burden. In some countries, such as Brazil and Indonesia,municipalities have taken advantage of this new autonomy to developinnovative approaches – participatory budgeting in Porto Alegre andother Brazilianmunicipalities, and thematching grants provided by thecentralgovernment to Indonesianmunicipalities that showedgood fiscal


capacitiesaswellasmetspecifiedneedcriteria.Inotherpartsoftheworld,overcoming a tradition of centralized administration is proving difficult,particularly inmanyAfrican,AsianandformerCIScountries.Theothermajor issueaffecting theperformanceof localgovernment is therapidlyevolvingrelationshipbetweenlocalandregionalfiscalauthorities.Whilethere is a relatively smooth transition to a complementary role betweenregionaland localauthorities in theEuropeanUnion, the situation is farlessclearindevelopingcountries,withtheexceptionofIndiaandRussiawhereState/provincialgovernmentexercisesahighdegreeofcontrolovermunicipalfinance.

Worldwide, there are substantial variations in both the sources of localrevenuesandtheautonomyoflocalgovernmenttodeterminethescopeandrateoflocaltaxes.Centraltransfersarestillthemainsourceofrevenueformunicipalities,althoughtheircontributionisdiminishinginNorthAmericaandtheEuropeanUnion.Withtheexceptionofadvancedcountries,mostlocalsourcesofrevenuearestilldeterminedandcollectedbythecentralgovernment,leavinglittleopportunityforlocalauthoritiestoassessoftensignificant local economic activities in order to fund improvements insocialservicesorinvestintheinfrastructurerequiredforsustainableurbandevelopment.

2.1 General trends in fiscal decentralization

Whileeachcountryischartingitsowneconomicandsocialdevelopmentpath,shapedtosomeextentbyhistoryandtraditionbutdeterminedmostlybycontemporarypoliticalandeconomicfactors,decentralizationhasbecomeaworldwidetrendunderlyingthevariousapproaches.Whereprogressive,planned devolution has taken place, as in Europe, the reallocation offunctionsamongthevarious tiersofgovernmenthasbeenguidedbytheconcept of subsidiarity. Where political pressure has been the drivingforce,devolutionhasproceededinasporadicmanner,resultinginseriousimbalances between responsibilities and budgeting powers. In general,effectivecontroloverrevenuehaslaggedfarbehindtheexpandingscopeofmunicipalresponsibilities.Despitetheseconstraints,localauthoritiesare


takingaleadrolestemmingfromtheirstatutorypowersandtheirabilitytoactacrosssectorboundariesinadefinedgeographicspace.

Assemblingcomparative informationonmunicipal finances isadifficulttask.GovernmentfinancestatisticscompiledbytheInternationalMonetaryFund only provide aggregate figures on revenues and expenditures forall sub-national entities combined. Research on decentralization andinter-governmental fiscal relationswere undertaken by theWorld Bank,regional development banks and other international organizations in thelate1990s.Thesecomprehensivestudieshavenotbeenupdatedbecauseof the difficulties and high cost of assembling data for a large numberofmunicipalities.Recent statistics are only available in countrieswheredecentralization and municipal development programmes are currentlyunderimplementation,aswellasincountrieswherespecializedinstitutionsandassociationsofmunicipalitiesarecompilingsuchinformation,asinthecaseofBrazilandWestAfrica.

The rising share of total public expenditures channelled through localauthorities testifies to the expanding scope of their responsibilities. InIndonesia, local government expenditures jumped from 17 per cent in2000to28percentofpublicexpendituresin2001followingtheenactmentof decentralization laws (Shaw and Thompson, 2002). However, widevariations in degrees of decentralization and fiscal capacities across andwithinregionsprevail:fromunderfivepercenttoover15percentinLatinAmerica;fromlessthan10percenttomorethan50percentinAsia;andfromaround10percentinNorthAfricatounder10percentinSub-SaharanAfrica,exclusiveofSouthAfrica,whereprovincialandlocalgovernmentsaccountfor29percentand21percentofpublicexpenditures,respectively(ShawandThompson,2002).Incompletefiscaldataandunevengeographiccoveragewithinsub-regionsprecludeattemptsatmeaningfulaggregation.Giventhewidevariationsencounteredinanyoneregion,averageswouldbeunrepresentativeofmostsituationsandhavelimitedcomparativevalueacrossregions.

In developing countries,municipalities lack the sophisticated supportiveframeworkfromwhichtheircounterpartsintheadvancedcountriesderivetechnical and financial assistance. Furthermore, their fiscal autonomy is


often constrained by the mismatch between devolution of control overexpendituresanddevolutionofcontroloverrevenue,curbsonborrowing,capsonparticularcategoriesofexpenditures,andlimitsontheirdiscretionto reallocate funds among budget categories.Overcoming a tradition ofcentralized administration is a challenge, particularly in manyAfrican,AsianandformerCIScountries.Centralrecordingoftransactionsrelatingtowealth-producingassets,includinglandregistrationandcontrolofhigh-yieldtaxbases,haslargelynotbeendevolved,norisitlikelytobedevolvedinthenearfuturesincecentralgovernmentsarestrivingtostrengthentheirownfinances.

Providingadequatefinancingfortheexpandingscopeoflocalresponsibilitiesrequireschangesintaxationpoliciesandinter-governmentalfiscalrelations,thedevelopmentofmunicipalcreditmarketsandaccesstolong-termcredit,together with rationalized expenditure patterns and improved municipalfinancialmanagement.Major challenges thatmust be addressed includethefollowing:

• Largenumbersofsmaller,financiallyweakmunicipalities

• Asymmetricaldecentralization

• Retrenchmentofcentralgovernmenttransfers

• Weaklocalrevenuesources

• Lackofstrongdomesticcapitalmarkets

• Impedimentstothedevelopmentofmunicipalcreditinstitutions

• Inadequatecapacityandrulesforsoundfinancialmanagementatthelocallevel

• Lackofmechanismstofinanceurbancapitalinvestment

• Lackoffundsforthemaintenanceofexistingassets

Despite theseconstraints,democratic localgovernancehasenabled localgovernment to address poverty and exclusion, establish participatoryprocesses,implementmulti-sectorprogrammesandenterintopartnershipagreements with private enterprise, NGOs and CBOs to promote jobcreationandfostersocial inclusion.Mostrecently,conceptsof“rights to


thecity”and“accesstourbanservices”haveexpandedandreinforcedtheinteractionbetweenlocalgovernmentandcivilsociety.

2.2 Balancing national and local perspectives in fiscal decentralization: the experiences of Brazil and Bolivia

InBrazil, the 1988Constitutiondefined the powers ofmunicipalities asfederalentitiesandstipulatedtheirshareofnationalandregionaltaxreceipts.Inter-governmental transfers to municipalities increased accordingly,accountingforanaverage51.3percentoftotalrevenuein1989and66.7percentin2003.Centraltransfersdeclinedfollowingthe1998financialcrisis,buthavegraduallyrecoveredsince.However,theirrelativesizecomparedwithtotallocalrevenueisafunctionofthelocality’ssize.Anestimated50per centofBrazil’s 5,559municipalitieshavepopulationsbelow10,000andareeconomicallyveryweak(seeTable1).

Table 1. Distribution of Brazilian municipalities’ average revenues (by population size)

Population(000)

Total revenues (million real)

Tax receipts (%)

Transfers (%) Other (%)

1989 2003 1989 2003 1989 2003 1989 2003Lessthan2 0.8 3.3 1.1 2.3 70.8 90.9 28.1 6.8

2to5 1.0 3.8 1.5 2.6 72.5 89.4 26.0 8.05to10 1.2 5.5 2.7 4.2 70.3 85.9 27.0 9.3

10to20 1.9 9.3 3.7 4.8 68.5 85.8 27.8 9.420to50 3.6 18.4 6.6 7.5 67.2 80.2 26.2 12.3

50to100 10.0 44.4 8.9 12.2 62.5 73.4 28.6 14.4100to200 22.2 107.6 10.9 14.0 61.5 64.6 27.6 21.4200to500 48.8 222.9 16.5 20.4 58.0 61.1 25.5 18.5

500to1000 118.6 530.9 18.3 20.5 53.2 62.4 28.5 17.11000to5000 241.9 1349.0 28.8 25.0 46.2 52.3 25.0 22.7

Morethan

5000

2946.4 9240.6 22.6 37.8 32.4 42.7 45.0 19.5

Source: IBAM 2002, 2004.


1. ExchangerateasofDecember2,2004:1.00BRL=USD0.366233

The Participation Fund for Municipalities (FPM) receives from thecentralgovernment22.5percentof the revenuecollectedfromtaxesonincomesandindustrialproducts.Thedistributionformulafavourssmallermunicipalities,whichreceiveahigheramountofresourcesonapercapitabasis.TransfersfromtheFPMaretheprimerevenuesourcefor81percentofthemunicipalities,andin28percentofthemaccountforover50percentofallcurrentrevenues.In2003,FPMdistributedatotal22.9billionBrazilianreales(BRL)(orUSD8.4billion1).Thecentralgovernmentalsotransferstothemunicipalities50percentoftheTaxonRuralProperty,butthisamountrepresentsonlyasmallpercentageoftotalrevenue.

The States transfer to the municipalities 25 per cent of the revenuecollectedfromtheTaxonServicesandCirculationofGoods(ICMS).EachmunicipalityreceivesashareoftheICMScollectedwithinitsjurisdictionand accounting for 75 per cent of the total transferred. This allocationmethodfavours largerandstrongermunicipalities.Theremaining25percent is computed according to a formula based on population size andothercriteria.In2003,ICMStransferstotalledBRL30.6billion(USD11.2billion).TheStatesalsotransfertothemunicipalities50percentoftheTax

onVehiclestheycollect(seeTable2).

Table 2. Distribution of revenue and tax collection in Brazil (2003)

Government tier Total revenue Collected taxes

BRL billion % BRL billion %Centralgovernment 918.5 72.9 470.0 67.4Stategovernment 209.3 16.6 189.2 27.2Municipalauthority 132.2 10.5 37.4 5.4Total 1,260 100 696.3 100

Source: IBAM, 2004.

MunicipalfinancesreflectBrazil’sregionaldisparities.TheNorthandNorth

EasternpartsaremuchpoorerandlessdevelopedthantheSouth.Massive

emigrationtosoutherncities,particularlySãoPaulo,deprivesthenortheast

of its working-age population. The main household sources of income


are remittances and pensions.Municipal resources are very limited and

entirelydependentoncentraltransfers.Significantcapitalinjectionsfrom

outsidesourcesareneeded to launchandsustaindevelopment initiatives

(Bremaeker,2004).

Bolivia’sDecentralizationLawillustratesanambitiousattempttocoordinateinter-governmental fiscal relationships within the context of povertyreduction efforts. Bolivia’s annual per capita income is approximatelyUSD1,000. About 50 per cent of the poor live in urban areas. Theirnumberswereswollenbymigratoryflowsduringtheeconomiccrisesofthe1980sand1990s.Thisrapidurbanizationofpovertyisputtingpressureon municipalities to deliver basic services. In 1994, Bolivia’s PopularParticipationLaw(LPP)created312newmunicipalitiesandrestructuredinter-governmental transfers.The role ofmunicipalities in the provisionof services was expanded. In addition to their responsibilities for themanagementofhealthcare,education,cultureandsports,accessroadsandmicro-irrigationprojects,20percentofthetotalnationaltaxcollectionistransferredtomunicipalities.Sincethetransferisbasedonpopulationsizeaccordingtothe1992census,lackofupdatedpopulationcountspenalizesthoseareasexperiencinghighdemographicgrowth.Inmunicipalitieswithapopulationover50,000,transfersaccountfor50percentoftotalrevenue,whileinmunicipalitieswithapopulationunder15,000theyaccountfor95percent.ThefinancialweaknessofthesmallerBolivianmunicipalitiesisunderscoredbythefactthatasmuchas70percentoftotallocaltaxesarecollectedinonly10municipalities.Thesmallermunicipalitiesareunabletomeet thedemand for social services, and typically face theadditionalchallengeofsupportingimpoverishedruralpopulations.

Bolivia’s National Policy of Compensation regulates capital transfers,targetingthemtoprioritysectorsforsocialdevelopmentandtostrengthenmunicipalcapacitytofundcapitalinvestmentsthatimprovelocalservices.Concomitantly, the policy imposes controls over municipal debt. Eightprioritysectorshavebeenidentifiedthroughconsultationwithstakeholdersfrom all over the country; they include healthcare, education, basicservices,productiveinfrastructure(suchasirrigation),ruralaccessroads,


rural electrification, the environment, natural resource management andinstitutionalstrengthening(Brakarz,2003).

2.2.1 Reconciling development and equalization policies in fiscal decentralization

Charting an appropriate course for decentralization that doesnot disruptthe delivery of basic services and other functions devolved to the locallevel is a challenging task. The difficulties encountered often require aprocessofsuccessiveadjustmentstocorrectseriousimbalancesthataffecttheeconomicandsociallifeofthepopulation.Indonesia’sexperiencewithfiscaldecentralizationdemonstratesthatitispossibletoundertakeaphasednational reformprogrammewith policies that reflect national disparitiesand modulate the central government’s role to address inequalities andnationalpriorities(seeBox1).

2.2.2 Restructuring the frameworks for regional/local fiscal relations

IntheEuropeanUnion,theroleofregionalauthoritieshasbeenredefinedandtheirpowersincreased,toreflectasupranationalspacewhereeconomicgrowthisshapedbyglobalizationandspatialdevelopmentisstructuredbynetworksofcitiesandtransportationcorridors.Localauthoritiesmustaligntheirplanstoregionalstrategiesinordertoaccessfundingforawiderangeofsupportprogrammes.Indevelopingcountries,provincestendtoactasanintermediatetierwithvaryingdegreesofauthorityoverlocalgovernment.In transition countries, the situation is often exacerbated by resentmentanddistrust.Todefusetensionsandpromotecollaboration,rolesmustberedefined, overlapping competences sorted out and new frameworks forfiscalrelationsestablished.Theprocessisneithereasynorsmooth.

India and Russia present interesting and contrasting cases where theprovincialgovernmentsexerciseahighdegreeofcontrolovermunicipalfinance.TheRussianFederationandtheCIScountriesareatdifferentstagesinthetransitionfromcentrallyplannedtodecentralizedmarketeconomies.Their legal and institutional frameworks are still in a stateof flux.Newlawsandregulationscanalterinter-governmentalrelationsandchangethe


scopeoflocalpowersandresponsibilities.InRussia,the1994fiscalreformputmunicipalfinanceunderthecontrolofregionalauthorities.From1996to2002,theTaxandBudgetCodeswererestructuredandrevisedseveraltimes.Regionsstilldonotadheretouniformpracticesregardingthesharingofrevenuewiththeirmunicipalities,themajorsourcesoftransfersbeingprimarilyValueAddedTax(VAT)andtaxesonprofitandincome(seeTable3).

Successivereformshaverestrictedthefiscalautonomyofmunicipalitiesandcreated serious imbalancesbetweenbudget authorizations andmandatedresponsibilities. Some municipal budgets rely on regional equalizationtransfers, while others rely on proceeds from regulated taxes. There isno clear assignmentof functional and fiscal responsibilities between thevarioustiersofgovernmentinRussia.Ad hocassignmentoffunctionstomunicipalitiespersisteduntil thestructureofgovernment responsibilitieswascodifiedinthelate1990s.Federalandregionalexpendituresgrewastheseauthorities tookoversomeof thelocalresponsibilities.Inpractice,localgovernmenthaslittleautonomyindecisionsregardingservicedelivery(Chernyavsky,2002).

India has experienced rapid economic growth since 1990 at an averageannualrateof4.3percentinrealterms.Constitutionalamendmentsin1992andsubsequentdecentralizationlawshavegivenurbanlocalbodies(ULBs)substantialpoliticalautonomy.However,politicaldevolutionhasnotbeenmatched by fiscal decentralization.The States are still heavily favouredfiscally,whilethelocallevel,comprisedof3,682ULBsand247,033rural

Table 3. Russia: local government expenditures in the consolidated national budgets

Year Share (%)

1995 37.61997 31.71998 29.81999 27.52001 26.7

Source: Chernyavsky, 2002.


Box 1. Development and equalization strategies under adverse economic conditions: Indonesia’s fiscal decentralization process

Starting in 1997, Indonesiawent through an economic recession, afinancialcrisisandpoliticaldisturbancesthaterodedtheimprovementsinlivingstandardsachievedoverthepreviousdecades.Thecurrencywasdevaluedbyover80percent,GDPcontractedby13.8percent,thelevelofpovertydoubledandpoliticalstrifeerupted.Priortotheyear2000,anddespiteitsdiversityandsize,thecountryhadahighlycentralizedadministrativeandfiscalsystem.Thecentralgovernmentcollected94percentofgeneralgovernmentrevenueandfunded60percentofsub-nationalspending.Transfersincludedacombinationof subsidies, earmarked grants and shared taxes from central andprovincialgovernments.

Inthemajordrivetodecentralizethecountry,from1999to2001,theshare of public expenditures channelled through local governmentsrosefromaround17percent toover30percent; two-thirdsof thecentral government’s civil servants were reassigned to the locallevel; and more than 16,000 service facilities were transferred todistrict governments across the country without major disruptionto government services. Since then, Indonesia has continued todecentralizemorecautiouslycorrectinganyimbalancesandaddressingmajorconcernsasitproceeds.Decentralizationlawsin1999devolvedwideresponsibilitiestolocalgovernmentinurbanandruraldistricts.Cities and villages are now responsible for providing healthcare,education,publicworks,communicationsandthemanagementoflandandotherenvironmentalresources,aswellassupporttoagricultural,manufacturingandcommercialactivities.Furtherregulationsenactedintheyear2000mandatedtheprovincestoundertakefunctionsthatlocalitiesareunabletoperform.Nevertheless,localauthoritieshaveachievedasignificantdegreeofautonomyandtheirappointedheadsreporttoelectedlocalassemblies.Thedevolutionofresponsibilitieswasmatchedbythedevolutionofcontroloverexpenditures,butthedecentralizationofrevenuedidnotfollow. In2001,theroutinetransfersofthepast(largelyusedtopaythesalariesoflocalcivilservants,along


withgeneraldevelopment transfers)havebeenreplacedbyGeneralPurposeGrants (DAU) currently set at 25.5 per cent of net centralgovernmentdomesticrevenues,andsplitbetweenlocalgovernmentsandtheprovincesona90:10basis.Theallocationformulaisbasedonfiscalneedsandcapacities.Expenditureneedsarebasedonanindexoffourweightedindicators:population,area,povertylevelandprices,whilefiscalcapacityismeasuredbycollectionsofownrevenueandsharedtaxes.TheDAU,whichaccountedfor71percentoftotallocalgovernment revenues in 2001, is the most important equalizationmechanism.

TheSpecificPurposeGrants(DAK)arematchinggrantsforcertainregionsbasedonurgencyofneedandnationalpriorities.Theallocationformula is still in the process of finalization. The shared revenuesinclude taxesfromland, feesonproperty transactionsandrevenuesfromnaturalresources.Theregulationsspecifytheportiondistributedtoprovincesanddistricts.In2001,sharedrevenuesrepresentedaround12.7 per cent of revenue in urban localities, andmay contribute towidenregionaldisparitiessinceresource-richjurisdictionsreceivethebulkofthetransfers.

Localgovernmentsownrevenues(PAD)arederivedfromtaxlevies,profits of local government-owned enterprises and other levies. In2001, the own revenues of urban municipalities were estimated ataround9.7percentoftotalrevenues.In2004,localgovernmentwasempoweredtoinstitutenewtaxesuponsatisfyingcertain“goodtax”criteria,andtosetlocaltaxratesthoughwithintheceilingsstipulatedbytheregulations.

Twomajorimpedimentsimpairlocalrevenueexpansion,namelythelackofamajor, locallycontrolled taxbase,and theproliferationoflow-yieldtaxesandlevies.Sincerevenuefromlandandpropertytaxescontinuestoflowtothecentralgovernmentbeforebeingredistributedtotheprovincesandregions,localgovernmenthasresortedtolevying

Box 1. (continued).


amultiplicityoflow-yieldtaxesandcharges.Theirproliferationledtoarecentrevisionmandatingcentralapprovalofnewsocialtaxes.

Inviewof thehardships enduredby impoverishedpopulations, thecentralgovernmentin2003decidedtoreinstatethetargetedtransfersforbasiceducation,health,andinfrastructureservices.Inparallel,aseparate“povertyalleviationgrant”fundedthroughtheWorldBankwasprovidedtolocalauthoritiesforcapitalinvestmentsthatcontributetopovertyalleviation.AccesstothegrantisconditionalonpartnershipwithCBOsinthepreparationofproposals, theselectionofprojectsandtheimplementationofactivities,aswellasonadoptingprovisionsensuring that communities participate as full partners in decisionsregardingtheallocationoffunds.

Source: Chakeri and Lewis, 2004; Menon and others 2003; World Bank, 2003a.

bodies,remainsquiteweak.ULBsareunabletofundlocalinfrastructureandservicesoutofcentralandStategovernmenttransfersalone.

DecentralizationdidnotsignificantlychangetherevenuebaseforIndianmunicipalities.RevenuegenerationisstillregulatedbyStategovernments.Settingorcappingoftaxratesandcontrolovermunicipalexpenditureandtaxation are common. State governments can borrow freely, unless theyhaveoutstandingloansortheloansrequiresovereignguarantees.MunicipalcorporationsmustobtainStategovernmentapprovalpriortoissuingdebt.

Thechallengesfacedaredauntingbutthestakesarehigh.Itisestimatedthat Indian cities and towns have a potential of producing 70 per centof the country’s gross domestic product by 2020, but lack the servicesneededtorealizethispotential.TheNationalSampleSurveyOrganizationestimatesthatonly45.8percentofurbanhouseholdshavetapwaterwithinthepremises;25.5percentofhouseholdshavenoaccesstolatrines;andonly18percentofhouseholdsareservedbymunicipalgarbagecollection(PrakashMathurandThakur,2004).

Box 1. (continued).


2.2.3 Dealing with economic marginalization and social hardship

Largely marginalized from the global economy and with the notableexceptionofSouthAfrica,Sub-SaharanAfricancountriesarebearingthebrunt of the social cost of globalization. Rapid urbanization, civil strifeandwarscompoundtheimpactsofeconomiccrisisandnaturaldisasters.Municipalities find they are unable to plan and implement projects anddeliver services to impoverished populations, let alone formulate viabledevelopmentstrategies.Yet,decentralizationhasbeenproceedingmoreorless smoothly since themid-1980s. In the countries of theWestAfricanEconomic and Monetary Union (UEMOA), and despite their lack ofadequate technical, managerial and fiscal resources, local governmenthas become the prime providers of services and investment in basicinfrastructures.Eventhoughtransfersfromthecentralgovernmentarestilldominant, the contribution of local taxes has been growing steadily.By2003,thecontributionoflocallycollectedrevenuetomunicipalbudgetsintheregionrangedfromalowof45percentinCôted’Ivoiretoahighof80percentinNiger,amarkedimprovementoverpreviousyears(seeTable4).

Table 4. Structure of municipal operating revenue and expenditures in selected West African countries (%)

Operating revenues

Benin Burkina Faso Mali Côte d’Ivoire

1996 2000 1996 2000 1996 2000 1996 2000

Municipaltaxes 4 22 4 2 4 19 4 6Transfers 50 51 53 58 60 54 65 45Statesubsidies 12 3 0 0 1 14 13 14Landrevenues 2 3 9 17 0 3 1 1Servicesrevenues 2 10 9 9 33 7 11 14Other 11 11 25 8 5 3 5 9ExpendituresCapitalexpenditures 20 28 30 39 30 34 20 18Personnel 31 23 23 16 26 24 17 20Others 49 49 47 45 44 42 63 62

Source: PDM 1996, 2000.


Eventhoughrecurrentoperatingexpendituresarethelargestcomponentoflocalbudgets,therehasbeenasteadyriseincapitalexpendituresfinancedfromlocalresources.Theyvaryconsiderablyfromyeartoyearasafunctionofboth thecollection rateof local taxesand theavailabilityof transfersandsubsidiesfromthecentralgovernment.Insomeinstances,thecentralgovernmenthascreatednewmechanismstoencouragelocaldevelopmentandprovidesupplementaryresources:forexample,thepurposeofBenin’sproposed Inter-communal Solidarity Fund is to promote the balancedsocioeconomicdevelopmentofmunicipalities.

Generally, financial autonomy is related to the size of a municipality.In Burkina Faso, for example, smallermunicipalities tend to operate ata deficit,while larger cities of 50,000 inhabitants ormore balance theirbudgetandhavepercapitainvestmentratesroughlytwicethoseofsmallermunicipalities.

Althoughfiscaldecentralizationalsostartedinthe1980sinEastAfricancountries, it only gainedmomentum from themid-1990s onward.Widevariationsprevailthroughouttheregion.Intheyear2000,Ethiopia’sStategovernments accounted for 31.2 per cent of total public expendituresand raised 18.9 per cent of revenue,whileUganda’s local governmentsaccounted for 28 per cent of expenditures but raised less than eight percentofrevenue.SouthAfrica‘sprovincialgovernmentsaccountedfor46percentoftotalexpendituresbutraisedanaverageofonlyfourpercentof their revenues,while local governments accounted for 25per cent ofpublic expenditures,but raised92per centof their revenues.Functionalresponsibilities alsovaryacrosscountries. InEthiopiaandSouthAfrica,State/provincialgovernmentisresponsibleforhealthcareandeducationand,inthecaseofSouthAfrica,welfare.Inmostothercountries,thesefunctionsarestilldischargedbycentralgovernmentandNGOshavesteppedintofillthegapsleftbyinadequatedeliverysystems.

Thelocalrevenuebasesalsodifferacrosscountries.EthiopianStatesrelypredominantlyonsharedtaxes(personalincome,business,andsalestaxes,excise).InKenya,localgovernmentreliesonpropertytaxand,sincethelate1980sonlocalpayrollandbusinesstaxes.InUganda,themostsignificantsourcesoflocalrevenueareincome,wealthandpolltaxes;thepropertytax


isonlysignificantinthelargerurbancentres.InSouthAfrica,provincialgovernmentgenerates revenue frommotorvehicle fees,hospital chargesandmorerecently,gambling.Localgovernmentdependsonsurplusesfromservices,mainlyelectricityandwatersupply,propertyratesand, inlargemetropolitanareasanddistrictcouncils,abusinesstax.

InallcountriesinSub-SaharanAfrica,centraltransfersprovidethemainsource of local finance. Ethiopia uses a single-block transfer schemebasedonacomplexformula.InFY2000,Kenyaadoptedatransfersystemdistributing five per cent of income tax revenues to local government.In South Africa, the national government transfers to provinces andmunicipalities an unconditional block grant, known as the “equitableshare”,basedonthesizeofthepopulationlivingbelowthepovertyline.Thistransferfundsmorethan95percentofprovincialexpenditures,butlessthan10percentofmunicipalexpendituresonaverage.TheMunicipalInfrastructureGrantprogrammeandother conditional transfers, someofwhichareoff-budget,fundcapitalexpendituresoninfrastructureandurbanservices(MunicipalDevelopmentProgramme,1996,1997,1998,2002,).In1995theSouthAfricangovernmentlaunchedtheMunicipalInfrastructureGrantProgramme2to“ensurethatallcommunitieshaveaccesstoatleastabasiclevelofservice.”Theprogrammefundsallcategoriesofinfrastructureas well as some community facilities, and devotes a percentage of thecost of every project to build the technical and managerial capacity ofmunicipalities.

The MIFG programme offers household grants to cover basic servicescosts. Itaims to reachpoorurbanandruralcommunities.Theallocationformula combines three indicators to assess needs: number of familiesearning less than 800 rand (ZAR) permonth, lack ofwater supply, andrate of unemployment in the community. To ensure their involvement,the communities must make all funding requests, and municipalitiesplayamajor roleas theyprioritize the requests. It is then forprovincialgovernments to review their eligibility and submit the proposals to the

2 In1998,MIPwasrecognizedasaBestPracticeunderUN-HABITATBestPracticesandLocalLeadershipProgramme.


nationalgovernment.Thegrantsaredisbursedtothecommunitythroughthemunicipality.Structuredforgeographicoutreachandspeedofdelivery,theprogrammehascompletedover2,500projects.In1998,thegovernmentexpanded theprogramme’s scope to reinforce linkswith local economicdevelopment, and the budget has steadily grown, reaching ZAR2,357millionin2003/2004.Atthetimeofwriting,thiswasthelargestandmostambitiousprogrammeofitskindintheworld3.

2.3 The evolution of financial systems towards more transparency and accountability

Accountabilityforperformanceisacornerstoneofgoodgovernanceanda major financial management tool. It places as much emphasis upontransparency as upon finance. Increasingly, mayors, councils and citymanagers are held accountable for financial outcomes, as well as forthequalityof the services theydeliver and theprojects they implement.Democratic local governance has fuelled increasing demands for localempowerment and for greater public participation in determining howpublic revenues are raised and spent. From conventional public budgethearings toparticipatorybudgeting,peoplearedemandingavoice in theresourceallocationproceduresandsupervisionofimplementation.

Demands for greater accountability and transparency by voting andtaxpayingconstituencieshavecombinedwithconstraintsonthefinancialresources available to the public sector to fuel political pressures forimprovedmunicipalfinancialmanagement.Reformofexistingsystemsandtheintroductionofnewerconceptsandtechniqueshaveprovidedvaluablealternatives in financing and operating public services.Reform has alsoopenedthepublicsectormorewidelytomanyinnovationsandefficienciesthat hitherto were largely confined to the private sector, promptinggovernmentstoimprovetheiraccountingandbudgetingroutines.

3 Unpublished updated information graciously contributed by MIP project officers. Quoted inSerageldinand others(2003)Local Authority driven interventions and processes


As recurring expenditures have increasingly come to dominate budgets,techniquesfordeterminingexpendituresandmeasuringactualperformancehavebeendevelopedandincorporatedintobudgetaryroutines.Bestpracticedemandsthatcapitalexpenditurebebudgetedandaccountedforseparatelyfrom recurring operating expenditures; that operating expenditures befinanced from fees, charges, regular taxes, regular shared revenues andrecurrent government grants, and not allowed to exceed these currentrevenues, and that borrowing (when permitted by law) be restricted tofinancingcapitalinvestments,withthepossibleexceptionofmakingupfortemporarycash-flowshortages.TheseprinciplesoffinancialmanagementareincreasinglyworkedintopublicfinancelegislationasitrelatestoState/provincial and local budgeting; they provide a framework for financialmanagementandassessmentofperformancewhereby localofficials andelectedrepresentativesareheldaccountablefortheirownactions.

Untilveryrecently,practicehasvariedacrosscountriesintermsofscopeandeffectiveness.Accountingsystemsforthoseactivitiestobefundedfromgeneralrevenuesareoftenmuchsimplerinformbutcoverawidevarietyoffunctionaldomains.Unfortunately,inmanycountries,andparticularlyindevelopingcountries,localfinancialsystemstypicallyfallfarshortofthestructureandrigorneededtoprovideinstrumentsandindicatorsforpolicyformulation,resourceallocationsandstrategiccapitalinvestmentdecisions.With many accounting systems currently in use in State/provincial andlocalgovernmentinvariouscountries,incompletenessisthetypicalstateof affairs. Therefore, unit costs and other indicators derived from thesenumerical datawill not usually account for the totality of the resourceseithercommittedorconsumed.

Because of the importance of proper, functioning capitalmarkets to theworldeconomy,concernhasbeenfocusingmuchmoreonthedevelopmentand implementation of accounting practices within the private than thepublic sector.Awhole range of international accounting standards havebeenpromulgatedbytheInternationalAccountingStandardsBoardfortheprivatesector.Discussionsarecurrentlyinprogresstowidentheirscopetocertaincountrieswhich,untilnow,havenotfullyrecognizedthem.TheseincludetheUSA,theUKandCanada.


ThePublicSectorCommitteeoftheInternationalFederationofAccountantshasonlyrecentlybeguntoissuewhatisknownastheInternationalPublicSectorAccountingStandards.Adherencetothesestandardshasmetwithsome resistance because central governments are reluctant to yield anydegreeofsovereigntytointernationalbodies.Furthermore,therangeandcomplexity of their functions require sophisticated systems of financialaccounting that tend to overwhelm the capacity of government financeandbudget staff.Thenew system is evenmore of a challenge for localgovernment.

Municipal financial accounting systems rely on two main formats. Forrevenue-producing functions, the financial accounting systems are oftenquitesimilartothoseusedinprivatesectorenterprises,particularlywhenthe activities are performed by an entity that is legally separate fromcore functions though funded from budgeted general revenues. Underthe influenceofdecentralizationandeconomic transition, thenumberofcategoriesandentitiesfinancedthroughoff-budgetsourceshasmultipliedduring the past decade, particularly inEasternEurope. Some have beenestablished specifically for the purpose of circumventing constraints ofState/provincialandlocalgovernmentsonfinancialautonomy,ashappenedinChinaandisnowoccurringinIndiaandelsewhere(FreerandPetersen,2004).

2.3.1. New trends in local financial management: Performance-based budgeting and accrual accounting

Performance-monitoring for local government began to take off in themid-1980s,withtheUKandtheUSAleadingtheway.Individualcouncilsbegantodevelopperformanceindicators,althoughthesetendedtomeasurewhatwasmeasurable rather than settingmarkers for theachievementofspecified objectives. Elsewhere in Europe, governments have taken toperformance-monitoring,althoughnationalmandatedsystemshavelargelybeen avoided. No matter how tight the definitions, the indicators usedmusttakeintoconsiderationthedifferentwaysinwhichservicedeliveryis organized. Data variations will sometimes arise on the sole basis ofdifferentinterpretations,ratherthandifferencesinsubstantialperformance.


Futuresuccessmaywelllieinlocalindicators,benchmarkedagainstsimilarjurisdictions,ratherthannationaldata.

Performance indicators should reflect local objectives, be understoodand supported by local officials, and integrated in performance reviewsystems.Usingsimplifiedperformanceinformationtoconsultandinvolvecommunitieshashelpedcitiesengagecitizensinshapingthefutureoftheircommunities,ashappenedinSãoPaulo,BrazilandBogotá,Colombia.

A distinction should be made between performance measurement andperformance budgeting. “Performance budgeting“ accounts for themeasurementofoutputsrelativetothecostofinputsbaseduponthebestdeterminationofcostspossiblewiththedataathand.Whenperformancemeasurements arebasedonunit costs, theirusefulness forperformance-basedbudgetingdependsonthedegreetowhichcostcomputationsforbothbudgetaryestimatesandreportedfinalresultsareconsistentwithandaccountfortotaleconomicresourceconsumption.Thoseperformancemeasurementsnotbaseduponunitcostsareusedforavarietyofmanagementpurposes,butarenotdirect,integralcomponentsofperformance-basedbudgeting.

Data produced for the purposes of performance measurement must bereviewed by senior finance and budget officials, aswell as other seniorofficials in managerial positions, to ensure that selected indicatorsdevelopmentgoalsandobjectivescorrelateandthatallcriticalinputsandservicesarecovered.Municipalfinanceismoreandmorefocusedonthesourcesandmodalitiesofsecuringfundingforprogrammesandprojectstoleveragescarcelocalresources.Atthesametime,accountingpracticesareincreasinglyshiftingtheirownfocusawayfromthemannerinwhichfixedassetsarefinanced,concentratinginsteadonthefinancialcostsoftheresourcesconsumedbytheuseoftheseassetsinservicedelivery.

Plans, programmes and budgets are primarily concerned with inputs,whereasthepublicisconcernedwithoutputs.Forexample,inthesupplyofwater,plans,programmesandbudgetsareconcernedwithsupplysources,treatment, transmissionanddistribution.Thecustomer isconcernedwiththe quality and cost of potable water flowing from a tap. Performancereflectsbothoutputs(theservicesandproductsdelivered)andoutcomes,i.e.,thedegreeofusersatisfactionwiththeoutputs.Performancebudgeting


must be complemented by a participatory assessment of policies andprogrammes. This requires credible monitoring and financial reportingsystems. Incorporating these features canbedone in a strategicmanner,givingservicemanagersareasonabledegreeofflexibilityanddiscretiontomakechangestoservicedeliverymethods,duringthecourseofthebudgetperiod,inordertoensurethatfinaloutcomesarecloselyinlinewiththebudget.

Performancemeasurementallowsareviewofthebudgewhereoutputsarerelated tospecificmunicipaldevelopmentobjectives. Inmoredevelopedbudgetsystems,measurementoffinancialperformanceagainstthebudgetisonlyastartingpoint.Manysophisticatedperformancemeasureshavebeendeveloped,whichallowmuchbetterdecision-makingabout thequantity,thequalityandthevalue-for-moneyofservicesbeingprovided.

Tomeet the objectives of accountability and transparency, performance-budgeting systems are moving away from cash-based “receipts andpayments”toaccrual-based“incomeandexpenditure”accounting,therebyshiftingthefocusfromcashexpenditurestocosts,intermsofconsumptionofeconomicresources.Costs–intermsofresourceuse–ofanybusinessorpublicactivitymustincludeexpendituresontheoperationandmaintenanceof all premises, plant and equipment administration and management,including taxes, and the capital cost recovery of all fixed and workingcapital.Areasonablemargintocovercontingenciesandriskscanbeadded.Most financial budgets and accounting statements in theworld’s publicsectorarestillpreparedandreportedonacash-flowbasis,impairingtheirusefulness for performance measurement. However, in some countries,lawsarecomingintoforcetorequiretheuseofaccrualaccounting,whichisgreatlyfacilitatedbycomputerization.

For somepublic services (inparticularwater supply, sewerage,drainageandtransport),operationandmaintenancecostsrepresentsmallinputsintermsofeconomicresourceuse,comparedwiththemassivequantitiesofland,buildings, infrastructure andequipment that are in constantuse, tokeepthesystemsfunctioning.Yet,despitethismassiveinputoffixedassetstherehasbeenagreatreluctance,allovertheworld,toaccountfortheiruse.Consequently,publicservicedecisions,especiallywithrespecttopricing


of services, are oftenmadeon thebasis of cash flowdata for operatingexpenses.

Currently, the need for comprehensive cost analysis and accounting forfixedassetsisbetterrecognized.Depreciationcostsarechargedinoperatingstatements.Thenetworthoffixedassetsisperiodicallyrevaluedtotheircurrent values and the operating statements are charged with notionalinterest,reflectingtheopportunitycostofcapitalinvested.

Reformofexistingsystemsandtransitiontonewerfinancialsystemsusuallytakeseveralyearstoimplement.Toprepareandupdateaninventoryoffullyrecorded and valued fixed assets, the local government or other servicedeliveryunitneedsspecializedpersonnelwhichtheymaynotnecessarilyhave. They must either build this capacity, or procure the services bycontractingout.

Local governments in some advanced countries are adopting cost-basedaccountingtoincludethecostofcapitalintheconsumptionofeconomicresources, inresponsetocentralgovernmentrequirementsforcost-basedperformancemeasurement.However,inthosedevelopingcountrieswhererevenue collection is inadequate, municipal budgeting ceases to be aninstrument of sound financial planning andbecomes another vehicle forlocalpoliticalmanoeuvres.Progressisbeingmadeworldwidetowardsmoretransparent localfinancialmanagement.Forexample, twoof theworld’slargest countries,Russia and Indonesia, haveverydifferent cultures andhistories.Yet,eachoneoverthepastfewyears,haspromulgatedlegislationrequiring theuseoffullaccrualaccountingbyState/provincialand localgovernments. In Russia, St. Petersburg and a few other major citiesembarkedonthiscourseinthe1990s.AshousingandshelterareamongRussia’smost pressing social concerns, related financing and budgetingmust undergo a complete overhaul. In Indonesia, capacity-building ishelpinglocalauthoritiesimplementaccrual-basedbudgeting,butprogressisstillslow.

Less ambitious trends have appeared in smaller countries. For example,Macedoniain2003conductedaseriesofnationalseminarssponsoredbyUNDPon:“StrengtheningLocalSelf-governingInstitutionsthroughCapitalDevelopment,TransparencyandFinancialAccountability”,inabidtobuild


capacitypriortoreformoflocalfinancialsystems.Inthepoorercountries,donor-sponsored fiscal decentralization includes the development andinstitutionalizationofaccountingreformstoensurethatthesystemsmeetdonorrequirements.Capacity-buildingisextendedtolocalgovernmentstoensureproperimplementationofthenewsystems,oftenstartingwithpilotinitiatives(Jones,2003;JonesandWagstaffe,2002;Jones,2004).


3. Patterns and trends in municipal budgeting

Themunicipal budget reflects policies and strategies for the delivery ofmandatoryandlocallyapprovedpublicservices.Itsstructureshouldmakeitaninstrumentofmunicipalmanagement.Thebudgetshouldbecapableofdemonstratingtheextenttowhichthebudgetedfinancialresultshavebeenrealized, the intended activities performed and the anticipated outcomesachieved. Lack of financial management skills at the local level oftenimpedesthepreparationofaccurateandcomprehensivebudgets.Inmanycountries, local budgets are just lists of cash receipts andpayments thatarenotcategorizedinanyusefulway.Often,thereisnocleardistinctionbetween operating and capital expenditures. Budgets respond primarilyto themayor’spriorities, requestsbycouncillors,potential funding fromhighertiersofgovernmentandoutsidesources,andelectoralpromises.

In spite of continued reliance on central government transfers, locallygeneratedrevenueshaverisensteadily.Transfersaccount for thebulkoflocalresourcesinmostcountries,particularlyforcapitalinvestments,andareusuallybasedonaredistributionofcertaincentrallycollectedrevenues:apartialredistributionofVAT,entitlementgrantsforrecurringexpenditures,andgrantsforspecificprojects.Transfersbridgethegapbetweentherevenue-raisingcapacityofmunicipalitiesandmandatory localexpenditures.Thethreemainsourcesoflocalrevenuesarethepropertytax,ataxoneconomicactivities(includingsalestax)anduserfeesforservices.Althoughlocallybased,andthereforereflectingtherangeofeconomicactivitiesfoundinalocality,thesetaxesareoftensetatthenationalorregionaltier(asisthecaseinIndia),andmaybecollectedbyacentraladministrationonbehalfofmunicipalities.InseveralWestAfricancountries,thecentralgovernmentretainsaportionofthetaxcollected.Avarietyoflow-yieldlocaltaxesarealsotobefound,oftentheholdoversfromthecolonialera.

Efficienttaxcollectionisadauntingproblem,particularlyinpartsofthoseareas of the world experiencing rapid urbanization. Lack of up-to-daterecordsand inadequately trainedpersonnel, togetherwith theprevalenceofinformalhousingandofunstructured,“floating”economicactivities,aremajorobstaclestoincreasedfinancialself-relianceoflocalgovernment.This


haspreventedthedevelopmentofmulti-yearcapitalinvestmentstrategies,whichareindispensableiflocalauthoritiesaretobeinapositiontoensureanadequatesupplyofservicedland,thedeliveryofimprovedservicesand,generally, tomeet thegoalsofsustainableurbandevelopment.Therearenotableexceptionswheremunicipalitieshavebeensteadilyincreasingtheefficiencyoflocaltaxcollection.InBrazil,aseriesofreformsculminatingin the enactment of the 2000 Fiscal Responsibility Act redefined theresponsibilities of State/provincial and local government by imposingfiscalmanagement standards, spending limits on personnel expendituresand mandating the preparation of capital improvement programmes. InAfrica,UEMOAcountrieshavesignificantly increased theyieldof localtaxes, including assessmentsonproperty improvements andon informaleconomicactivities.

Salaries, wages and supplies are the principal expenditures of localauthoritiesandleavefewresourcesforthemaintenanceofexistingassetsandthecapitalinvestmentsrequiredtofinanceurbandevelopment.InmostcountriesinAfrica,AsiaandLatinAmerica,municipalitiesarenotabletoborrow long-term fundson thecapitalmarkets and insteadmust relyontargetedtransfersforcapitalinvestment.Thismaybeduetolegalconstraintsoralackofthetechnicalandmanagerialskillsneededtoidentifypotentialfundingsources.Asaresult,mostlocalcapitalbudgetsreflectimmediateneedsorpoliticalexpediency,ratherthanlong-termdevelopmentstrategies.Brazil’sparticipatorybudgeting,firstestablishedinPortoAlegrein1989,isanotableexceptionandisbeingwidelyemulated.Theschemeaddressedimmediateaswellas strategicneeds,providingsignificant infrastructureandservice improvements topoorercommunities.Somecitieshavealsobeenabletodevisecoherentstrategiestoensurethatastreamofrelativelysmall annual capital improvements became an integral component of along-term development strategy. A rolling four-year capital investmentprogramme, has allowed the city of Szczecin, Poland to improve itsfinancialmanagementstandardstothepointwhereitbecameattractiveforlocalandforeigninvestors,obtainingacreditratingandborrowingthroughcommercialfinancialinstitutions.


3.1 Reliance on central transfers

Inter-governmental fiscal transfers include three components: (i) sharedtaxes,suchasincomeandVATtaxesthataremoreefficientlymanagedatthenationalorregionallevel;(ii)distributionalgrantstosomewhatequalizemismatched needs and resources among local governments; and (iii)specific-purposegrants.OthercontributionsfromcentralorState/provincialgovernmentstosupportlocalbudgetsarecommonacceptedpractice.Thesead hocgrantstoplugunplanneddeficitsareoftenprovidedonapiecemeal,year-to-year basis and, togetherwith private debt, contribute to nationalfinancialcrises,asinSouthEastAsiain1997andBrazilin1998.

Inmost developing countries, local authorities have little understandingofredistributionformulasorrulesgoverningcentraltransfers.Hence,thetendencytoconsidertheseasgrantstobalancethelocalbudgetirrespectiveof their economic or social purpose. Operating expenditures, oncedetermined, are relatively inflexibleanddifficult toadjust in the faceofadverseshort-termchangesinfinancialcircumstances,whichencourageslocalauthorities tocutbackordeferoutlaysonmaintenanceandcapitalexpenditures. The environmental and social impacts of infrastructureneglectordelayedmaintenance includebreakdownsanddeteriorationofexistingsystems,waterlossesandperchedwatertables,contaminationandcorrosion.

Since estimatesof grant and revenue-sharing allocations arehardly evermade available to local authorities in adequate time for them topreparetheirownannualbudgets,thepracticeistoassumeamountsequivalenttothepreviousyear’stransferswithoutanyassurancethatthebudgetamountswillactuallymaterialize.Fluctuationsincentraltransfersinvariablyleadtoad hocbudgetcuts,orunplannedexpendituresifthefundscannotberolledover to thefollowingyear.Whether theobjective isgreaterefficiencyincollectionorgreater fairness indistribution, central fundingwill usuallybe accompanied by some measure of control or supervision over therelevant local activities.Cumbersomecontrols encourage corruption andpoliticizationofallocationdecisions.Theycanalsobecomestiflingoflocalinitiativeandnegatesomeofthebenefitsofdecentralizationanddemocraticgovernance.


Estimatingrevenueforbudgetingpurposescannotbeseparatedfromlocalpolitics.Evenwhensomefinancialdatacanbereliedon,thecomputationofrevenuesisfrequentlytweakedtoobtainthehighestpossibletransfersandgrantsundertheallocationformulasappliedbycentralorState/provincialgovernments.Revenuesareunderstatedwhentransfersaregrantedtoplugforecastedbudgetdeficits,orwhenredistributionformulasfavourlocalitieswith lower revenue-generating capacity. Revenues are overstated whentransfersarerelatedtotheperformanceoflocalrevenuecollection.

In Indonesia, decentralization has expanded local government currentrevenue4. Between 1999 and 2002, current revenue in nominal termsgrewbyafactorof3.4atanaverageannualrateof57percent.Centralgovernmentgrantscontributeadominantthoughslightlydecreasingshare,from76percentin1999-2000toabout69percentin2002.Meanwhile,thecontributionofsharedrevenuegrewfromunder13percenttoover18percentin2002.Thecontributionoflocalrevenuesourcesdeclinedsteadilyfromabout13percentin1997-1998tolessthansevenpercentin2001.

From1999to2002,localgovernmentexpendituresinIndonesiahaverisenbyafactorof3.3atanaverageannualrateof55percentinnominalterms.Capitalspendingincreasedby60percentannually,slightlyoutpacinga52percentincreaseinoperatingexpenditure.However,theoverallstructureof localgovernmentexpenditurehasbarelychanged.Wagesare still thedominantcomponent,althoughitssharehasdecreasedslightlyfromover50 per cent to under 45 per cent of total expenditure.Conversely, otherrecurrentexpenditureshaveincreasedsomewhat,from17percenttoabout21percentofthetotal.

In 2004, the five major sources of local revenue were: (1) centralgovernmenttransfers(DAU,DAKandothers);(2)ownrevenues(PAD);(3)carry-overs;(4)borrowings;and(5)otherrevenues(e.g.,transfersfromprovincialgovernments).Themajorcomponentsoflocalexpenditureare:(1) civil service salaries, purchases of goods, travel expenditures, loaninterest payments, others; (2) unforeseen expenditures; (3) assistance to

4 “Currentrevenue”asusedheredoesnotincludecarryoversfrompreviousyears.


regions and communities in the jurisdiction; (4) reserve funds; and (5)developmentexpenditures.

Amongdevelopment expenditures, themost notable categories are tradeandtransportation(about11percentoftotalexpenditurein2002),regionaldevelopment (6.4 per cent), state apparatus (5.7 per cent) and education(5.0percent)(WorldBank2003b;Menon,2003;ChakeriandLewis,2004;FreireandPetersen,2004).

3.2. Control of local revenue generation by provincial/regional government

Despitethewidedifferencesineconomic,demographic,socialandculturalcircumstances, India – a rapidly developing economy – and Russia – acountry in the midst of a difficult transition – have both opted to giveprovincial/Stategovernmentcontroloverthetaxesthatmunicipalitiescanlevyandcollect.

In India,octroi (a traditional tax on the entry of goods into an area forconsumption,useorsale)isappreciatedasabuoyantsourceofrevenuebymunicipalgovernment,butisalsoviewedasabarriertofreetradeandisbeingphasedout.OnlyGujarat,MaharashtraandPunjaballowmunicipalitiestolevyoctroi.ThelatterStatehastakenadecisiontoabolishitandisexploringthepossibilityofsubstitutinganewtaxcalledtheLocalAreaDevelopmentTax.Abolishingoctroiwithouta substitute tax inplacehas substantiallyerodedtherevenueofmunicipalitiesinsuchStatesasHaryana,Orissa,andRajasthan,wherepercapitareceiptsfellfromahighof272Indianrupees(INR) in 1997/1998 to INR80 in 2001/2002. Other local taxes includethoseonlandandbuildings;animalsandboats;tolls;professions,trades,employmentandentertainment;butfewmunicipalitieshavethecapacitytoactivateallthetaxrevenuesourceswithintheirpowers.

Transfers and shared taxes bridge the gap between the revenue-raisingcapacity of municipalities and their expenditure needs. These transfersinfluencetheirspendingpatternsandhelpreducegeographicinequalities.State/provincial transfers are a major component of municipal revenue,contributing an average 31.7 per cent in 2001/2002, including assigned


revenues,compensatorygrants, revenue-sharingarrangementandgrants-in-aid.Thesetransfershaveincreasedbyafactorof1.7between1997/1998and2001/2002.UnlikeBrazil, Indiahasnostatutoryprovisionsdefiningthemodalities of State transfers tomunicipalities.This accounts for thewidevariationsobservedamongtheStatesandthelackofstabilityinState-municipalityfiscalrelations.Statefinancialresourcesarenotstrainedbytheirtransferstomunicipalities,sincetheseaccountforonly2.43percentoftheirbudget.Theallocationcriteriaincludeindicatorsofsize,fairness,needandefficiency(seeTable5).

The expectation that functional devolution will be accompanied by acorrespondingtransferoffiscalpowershasnotbeenfulfilledinIndia.Inter-governmentalrelationscontinuetobecharacterizedbyunpredictabilityandinstability.Lackofdistinctionbetweenthecapitalinvestmentaccountandthegeneralrevenueaccountintransfersaddstotheconfusioncausedwhentransfersareaccountedforunderthesameheadings,whetherornottheyhavebeenpreviouslyincludedintheplan.ThefiguresfortotalpercapitarevenueandpercapitalocalrevenuesinselectedStatesillustratethewidevariationsexistingacrossregions.

Table 5. India: the role of transfers in municipal finances (2001/2002)

State Transfers (INR million)

% of Total municipal revenue

Per capita transfers (INR)

Maharashtra 94,177 13.8 239.6UttarPradesh 77,488 74.5 232.1Karnataka 60,859 51.9 347.7Rajasthan 51,703 83.3 403.5TamilNadu 46,770 33.7 180.7Gujarat 31,395 17.8 175.5Kerala 17,949 44.5 296.9Punjab 8,489 10.1 105.1Orissa 8,047 44.2 153.8Haryana 7,892 39.5 135.5Bihar 5,559 62.0 64.4Assam 1,624 29.7 65.1Goa 941 33.6 258.6

Source: Prakash Mathur and Thakur, 2004.


Since1991, tax reforms in Indiahave reduced income tax rates, customdutiesandexcises,andsimplifiedthesystemaheadofeffortstoinstituteavalue-addedtax(VAT).Thesereformsdidnotextendtomunicipalities.Municipal revenuehas risen at an average annualgrowth rateof 10percent, but this is not enough to deliver services at acceptable levels, asevidencedbyanaverageexpenditurelevelestimatedatINR577percapitain2001/2002.Municipalities in severalStates includingBihar andUttarPradesharealmostentirelydependentontransferstooperatelocalservices.Thisdependencyhasrisenoverthepastfiveyears,primarilyinHaryana,OrissaandRajasthan.Intheoctroi-levyingStatesofGujarat,MaharashtraandPunjab,transfersasaproportionoftotalmunicipalrevenuesarelowbuthavebeenrisingwiththeabolitionofoctroiduetocompensatorygrants.

Thelargevariationprevailingamonglocalitiesunderscorethelinkbetweenurbanization,economicstrengthandfiscalcapacity.MunicipalitiesinBihargeneratedanaverageof INR39.5percapitacomparedwith INR1,493 inMaharashtra and a country-wide average of INR482.Many States haveposted high annual growth of own revenues. Between 1997/1998 and2001/2002, Kerala, Karnataka, Maharashtra, Gujarat, Punjab and TamilNadu were among the better performing States, while Assam, Bihar,Haryana, and Rajasthan were found lagging. In the stronger States, themunicipalities contributed 82.2 per cent of the total increase in publicrevenue.Overallmunicipalrevenuesrose inparallelwith the increase intheState’sGDP.

DisparitiesamongIndia’smunicipalitiesareextraordinarilylargeandhaveincreasedinthefirstphaseofthedecentralizationprocess.In2001/2002,municipalitiesinMaharashtrawithashareof14.4percentintotalurbanpopulationaccountfor48.5percentofthetotalmunicipalrevenuesinIndia:12percentinGujarat,7.6percentinTamilNadu,6.2percentinAndhraPradesh,5.9percentinKarnatakaand4.6percentinPunjab.TheremainingStates,withover50percentofthecountry’surbanpopulation,accountforonly15percent.Municipalitieslevyuserfeesbutthechargesdonotseemtoreflectthecostsofprovidingtheservice.MunicipalitiesinGujaratandMaharashtrahavetakenonthelargestrangeofresponsibilities,includingwatersupply,sewerage,hospitals,transportandotherservices.Octroitaxes


providethemwiththerevenuesneededtooperatetheseservices(PrakashMathurandThakur,2004).

InRussia,municipalitiesaccount for less than10percentof revenue inthe consolidated federal budget.The increase in the shareof the federalgovernmentisinpartduetothediscontinuationofVATtransfersandtherestructuringofthedebtofsomeenterprisesand“organizations”.Whilethebudgetofregionalgovernmentsincreased,municipalities”revenuesweresharplycutback–fallingfrom10.9percentin1997to6.5percentin2002–asthe1998financialcrisissubstantiallyreducedpublicreceiptsandledtoashiftofrevenuesfromlocaltoprovincial(oblast)budgets(seeTable6).

Table 6. Distribution of revenues between budgets at all levels in Russia (% of GDP)

Years Federal budget

Federal budget (excl.

transfers)

Regional budgets

Regional budgets

(excl. transfers)

Local budgets

1992 18.8 n/a 6.8 n/a 7.01993 13.1 n/a 8.4 n/a 8.21994 13.6 n/a 9.7 n/a 8.51995 14.2 n/a 7.5 n/a 7.31996 12.8 10.8 9.1 4.9 10.21997 13.8 10.8 10.4 6.6 10.91998 11.9 9.7 8.9 6.3 8.71999 12.9 11.3 8.3 7.1 6.82000 16.0 14.6 10.0 8.7 6.42001 17.5 15.1 10.1 7.8 6.22002 16.3 13.5 10.9 8.3 6.5


InRussia, localgovernment is legallyallowed to levy22different taxesandfeesthatareconsideredown-revenuesources(butincludingthosetaxessharedwithfederalandregionalgovernment),inadditiontolocalfeesandthe sale of assets.Transfers as a budget heading cover the annual shareoffederalandregionaltaxesnegotiatedandassignedtolocalbudgets,aswell as equalization grants for redistribution purposes. The structure ofmunicipalrevenueoversevenyearsisshowninTable7.


Availabledataisneithercompletenoruniform.Fortheyear2000,figureswereavailablefrom48citiesonly.Overall,from1996to1999,theshareoftaxrevenuesgrewinRussiawhiletheshareoftransfersdeclined.However,from1999to2001theshareoftransfersfromthefederalbudgetgrewto80percent,asmunicipalitiesandlocalbudgetsbecamemoredependentontransfersasasourceofrevenue.Fiscalimbalanceshaveincreasedinsomeregions,most notably in theVolgaFederalDistrictwhere, in theKomi-Permyatskyautonomousokrug,80percentofmunicipalexpendituresarefundedbytransfers.

Income tax has been the main source of transfer revenue for Russianmunicipalities from 1997 to 2002. However, the Law on Financial Principles requires that at least 50 per cent of income tax revenues betransferredtolocalbudgets,thoughitfallsshortofspecifyinghowtheyaretobe allocated among sub-national entities. Inpractice, local authoritiesnegotiatetheseallocationswithregionalgovernmentintheannualbudgetcycle.Thesignificanceoftheprofittaxasasourceoflocalrevenuegrewafter1998whenVAT transferswerediscontinued.Localauthoritiesalsonegotiate their shares in profit tax revenues with regional government.Giventheseuncertainties,municipalitiesmustcontendwithinstabilityandlackofpredictabilityintheirfinancialresources.AsshowninTable7,the

Table 7. Structure of Russian municipal revenues (1996-2002 - in %)

Revenues/years 1996 1997 1998 1999 2000 2001 2002

Taxrevenues,

including:

59.5 60.5 63.6 69.4 68.2 61.2 53.5

VAT 7.1 7.5 7.9 6.8 5.3 0 0Profittax 11.5 9.3 9.1 14.6 13.5 16.7 10,9Incometax 16.95 18.2 18.4 16.6 16.8 21.1 23.3Propertytaxes 9.2 8.9 10.0 7.8 6.2 6.7 7.1Salestax - - 0.02 2.8 2.9 2.8 2.5Localtaxes* n/a n/a 11.2 13.4 14.9 5.1 3.1

Non-taxrevenues 2.4 2.2 3.7 3.6 3.5 4.3 6.0Transfers 37.8 37.3 32.5 26.7 28.3 34.2 40.5Municipalities’own

revenues

- - 24.92 27.6 27.5 18.9 18.7

*This excludes individual property tax, but includes land tax



municipalities’ own revenues include property taxes, the sales tax, localtaxes (including land tax)aswell as shares inVAT,corporateprofit andindividualincometaxessetbyfederallaw.Theserevenuesdeclinedsharplyafter2001,whenthehousingandcommunalservicetaxeswereabolished.

Thedistributionof taxrevenues forbudgetpurposeshighlights thewidevariations that prevail, due to the combined effect of regional economicstrength,theindividualcircumstancesofeachmunicipalityandtheunevensystem of inter-governmental fiscal transfers in force in each region.Similarly,municipalexpenditurepatternsreflectsuccessiveadjustmentsindevolutionpolicies.Theirfunctionalstructureoverthe1996-2002periodisshowninTable8.

Table 8. Functional structure of local expenditure budgets in the Russian Federation (%)

Expenditure items/years

1996 1997 1998 1999 2000 2001 2002

Localadministration 3.3 4.3 5.3 5.7 6.0 6.5 6.7Infrastructureand

economicactivities

8.3 6.6 7.0 6.3 5.7 10.5 9.9

Housingandcommunal

services

26.6 27.0 30.3 27.4 28.9 24.6 19.5

Education 25.6 26.2 28.1 28.1 28.0 28.0 33.2Culture,artsandcinema 2.1 2.1 2.3 2.5 2.8 2.6 3.0Publichealthandfitness 14.5 14.5 15.0 15.8 16.0 14.9 15.5Socialpolicy 7.2 6.3 5.7 5.5 4.8 6.5 7.6Otherexpenditures 12.4 13.0 8.6 8.7 7.8 6.4 4.6Totalexpenditure 100 100 100 100 100 100 100


Expenditure patterns exhibit greater stability than might be expected.Emerging trends include increased expenditures on administrationand a levelling on housing and communal services, due to new federallegislationthathaseffectivelyincreasedresidents’contributions.Spendingpatterns remained constant from1999 through 2001 inmajor categoriesofmunicipalexpenditures(housingandutilities,educationandhealth)aswellasinsmallersocialcategories.In2001,thesespendingitemsincreasedsharply.Changesintheaccountingsystems,wherebycapitalinvestmentinthehousingandutilitysectorswererecordedasspendingintheindustrial,


energyandconstructionsectors,artificiallyincreasedlocalexpendituresonthesecategories.

Morethan120federallawspassedsince1999callforprovidingsubsidiestospecificpopulationgroups.Regionalandlocalauthoritiesareexpectedtopayfor37categoriesofsubsidiesandbenefits.Thefiscalimpactofthesemandateshasnotbeenadequatelyassessed.Thelargestfederalmandatesareestimatedat3-4percentofGDP,or20-25percentoftheconsolidatedregional and local budgetsof theRussianFederation.Themost onerousmandate is a regulation on civil servants salaries. InNovember 2002, along-overdueresolution increasedsalariesbya factornotexceeding1.7.Regionsweretobecompensatedfortheadditionalexpensesincurred,butintheendfederaltransfersmetonlyabout10percentoftheaddedcost;thisforcedregionalauthoritiesandmunicipalitiestotrimexpendituresonotherbudgetitems,startingwithdeferralofbadlyneededmaintenanceofexistingassetsandcurtailedcapitalinvestment(Chernyavsky,2002).

3.3 Building local capacity to raise and manage own revenue sources in West Africa

InsharpcontrasttothesituationprevailingamongdevelopingcountriesinEastAsiaandEastAfrica,municipalitiesinUEMOAmustrelyonlocallycollectedrevenue,whichrangesfrom45percent(Côted’Ivoire)to85percent(Niger)ofmunicipalbudgets.Thetwoprincipalrevenuesourcesarethecommercialtax(47percent)andthepropertytax(24percent).Othersourcesarechargesforpublicservices(19percent)andrevenuesderivedfromleasingpubliclands.Inthecaseofcommercialandpropertytaxes,itislefttonationallegislation,ratherthanlocalauthorities,todeterminetheassessmentrate,andthecentraladministrationisresponsibleforcollection.Therefore, the central administration is responsible for the preparationandperiodicupdateoftaxrolls,sendingouttaxbillsandenforcementofcollection.Thissystemwasdesignedtomakeupforalackoflocalcapacity,particularly in smaller municipalities, but tends to lag behind changingconditions; this often results in under-taxation in those municipalitiesexperiencingrapideconomicdevelopmentorspatialexpansion,ascadastralrecordsrarelykeepupwithnewdevelopment.


Commercialtaxistheoreticallyleviedonalleconomicactivitiesandassessesseparatelytherentalvalueoffixedcapital(premisesandequipment)andthevalueofoutput.Thefixedcapitalassessmentratevariesconsiderablyfromcountrytocountry:fromsixpercentto12percentinSenegal,andtwopercentandsixpercentinTogo;inBenin,fivepercentforthepremises,sixpercentforheavymachineryand10percentforotherequipment;andauniform10percentrateinBurkinaFaso,MaliandNiger,thoughwiththeoddmodulationincertaincases.

Taxauthoritiesusevariouscriteriatoassessoutputvalue:volumeofsalesinSenegal,TogoandBurkinaFaso;volumeofsales,locationoftheactivityandvalueofimportsinBenin;natureandlocationoftheactivityandsalesvolumeinCôted’Ivoire;andnatureandlocationinMali.Eventhoughthistaxisbasedonpurelylocaleconomicactivities,insomecountriescentralgovernmentretainspartoftheyield:64percentinCôted’Ivoireand50percentinTogo.InMali,40percentisredistributedtotheregionsandtoruralareas.

AllUEMOAcountriesassessproperty taxbasedon thecalculatedrentalvalueof improvements.Only threecountries–Benin,Côted’IvoireandSenegal–taxundevelopedland.Variousformulasareusedtocalculatethetaxablevalueofimprovements,andmostcountriesexemptfromtaxationa fixed percentage of the value of residential property.The tax rate canvaryaccordingtolocation(Benin),thebuildingtype(Côted’Ivoire),orthecomfortstandardsofaresidence(BurkinaFaso).Senegal,NigerandTogouseauniformrate.Propertyownersaregenerallyresponsibleforpayingthetax,althoughsomecountriestaxtheholderofausufruct(Benin,NigerandSenegal)or,alternatively,theoccupant(Niger)orbeneficiary(Senegal).Asisthecaseforcommercialtax,insomecountriescentralgovernmentretainsashareofthepropertytaxyield:10percentinBenin,40percentinNiger,50percentinTogoand72percentinCôted’Ivoire.

A recent evaluation of local revenues by the Partenariat pour le Développement Municipal (PDM, 2003) points out a number ofweaknesses in local taxation practices that impede the ability of localgovernmentstoundertakenecessarypubliccapitalinvestments:


• Thecomplexityofasystemthatisbasedonamultitudeofleviesthatareoftendifficult tocollectandplace the taxburdenonalimitednumberofactivities.

• Theinabilityoflocalgovernmentstosettheirowntaxrates,whichstandsinthewayoflocalinitiativestoundertakeimprovements.

• Inadequateorobsoleteinformationontaxableactivitiesallowingasignificantproportionofthepopulationtoescapelocaltaxes.

Asaresult,localauthoritiesinAfrica’sUEMOAareastillrelyheavilyontransfersfromthecentralgovernment.Thislackoffinancialautonomyhasimpededtheirabilitytoassumefullself-governanceanddefineappropriateandlargelyself-financeddevelopmentstrategies(MunicipalDevelopmentProgramme,1996,1997,1998,2000,2001,2002,2003).

3.4 Mandating responsible municipal financial management

The decision-making authority and financial autonomy that localgovernmentsobtainthroughdecentralizationpoliciesdonotnecessarilyleadtoresponsiblefinancialmanagement,astheexperienceofmanydevelopingcountriesdemonstrates.FromBrazil toMorocco to India,municipalitiesarerunningbudgetdeficits.Inthosecountrieswheretheyareempoweredtoborrow,manyhaveaccumulateddebtwhichtheyareunabletorepay.

InSouthAfricaandBrazil,theconstitutiongrantsmunicipalitiesspecificpowers and fiscal resources. This privileged status gives those widedecision-makingpowersanddiscretionintheiruseofrevenues.InBrazil,dynamic mayors have used their new constitutional authority to launchreforms and innovate in areas critical to sound municipal governance,including(1)ParticipatoryplanningandmanagementinPortoAlegre;and(2) Partnershipswith private enterprise,NGOs andCBOs for economicand social development initiatives, in SantoAndré, BeloHorizonte andRecife, among others.Unfortunately,manymore have failed tomanagetheiraffairsresponsibly,forcingthefederalgovernmenttostepinandreinintheirrunawayfinances(seeBox2).


Box 2. Brazil’s fiscal responsibility law

InBrazil, theprivileged statusofState andmunicipalgovernmentsunderthe1988constitutionstrengthenstheroleofmayorsandgovernorsin the national administrative framework. However, these sameconstitutionalguaranteeshavealsoprovidedanimpetusformunicipalmismanagement, includingaproliferationofmunicipalities throughfragmentationtoreach5,559in2003.Dependencyoncentraltransfersand shared revenue combineswith excessive politicization of localgovernancetoencourageashort-termfocusandawidespreadlackofcoherenceandcontinuityinmunicipalmanagement.CombinedwithafiscalstabilityprogrammeadoptedinOctober1998,theconstitutionalamendment established rules for responsible fiscalmanagement; inMay2000,the“FiscalResponsibilityAct”setoutrulesandstandardsforresponsiblefiscalmanagement.Forthethreetiersofgovernment,thelawmandatesmulti-yearbudgetingwithfiscaltargets,contingentliabilities and cost controls, along with balanced-budget principlesandincentivestomobilizeownresources.

The law caps expenditures on personnel at 60 per cent and relatesthemtotaxrevenue.Ontheotherhand,expendituresoneducationaremandatedatnolessthan25percent.Thelawlimitsborrowingtothefinancingofcapitalexpenditures,with thesettingasideofadequatereservestooffsetincreasesinlong-termfinancialobligations.Thelawalsomandatespublicaccesstofiscalandbudgetaryinformation.

In2001,“TheStatuteoftheCity”establishedgeneraldirectivesforurbanpolicies,mandatingregularizationofinformalsettlementsandupgradingofthelivingenvironmentinareashousinglower-incomecommunities. These national priorities are, in turn, reflected inmunicipalbudgets.

Source: Serageldin and others 2003.


3.5 Lack of funds for maintenance of existing assets

Indevelopingcountries,asymmetricaldecentralizationhas led toseriousimbalances.Thefundingprovidedbarelyallowsfor thedeliveryofpoorqualityservicesorinadequatecoverageofsettlementswithinthejurisdiction.Localgovernmentsmustlooktoothersources,domesticandexternal, tosupplementtheirown.

Given that they directly impact on day-to-day activities, operatingexpendituresarealmostalwaysperceivedas themosturgent. Invariably,priorityisgiventopayrolls.Nextarethosesuppliesandservicesconsideredto be urgently needed. Priority operating expenditures and financialconstraintsfrequentlyleadtodefermentofmaintenanceofexistingassets.Unlikecapitalinvestments,forwhichavarietyofexternalsourcesoffinancecan be found, funding for themaintenance of existing assets is lacking.Even as it continues to perform, existing infrastructure deteriorates andbecomes less efficientwith the passingof time.Preventivemaintenanceisincreasinglyconvertedintocrisismanagement,impairingthefunctionalefficiencyofmanycitiesinthedevelopingworld.Particularlyinthelargerurban centres, authorities must purchase expensive parts from currentrevenue and delay the renewal of plants, facilities and networks.Wheninfrastructureprojectscarryoutstandingdebt,debtserviceoftenpre-emptsnecessarymaintenanceoftheassets.Thecasesreviewedherehighlighttheenvironmental and social consequencesof thedeferredmaintenanceandneglectofexistingassets.

3.6 Capital investment programmes and budgets

Capitalinvestmentscanbefundedfromcentralorregionalgrants,asinthecaseofSouthAfrica’smunicipalinfrastructuregrant,orbydonors,mostlyforsocialdevelopmentandenvironmentalimprovements,orbyborrowingfrommunicipal development funds and capitalmarkets. In addition, thepotentialcontributionoflocalstakeholdersandcommunitiesshouldnotbeoverlooked.

Municipalitiesmustacquire the technicalandmanagerialcapacity to tapexternalsourcesandidentifystrategicpartnerstohelpfinanceavarietyof


projects.Thisimpliesacapacitytolayerplansintocomponentsforwhichorganization, financing and implementation can be separately structuredand executed. Layering maximizes leveraging of local resources, butrequiresacapacitytocoordinateinputsandcashflowstoensurecoherenceandintegrityofplannedactivities.

Capitalinvestmentbudgetsareamajorundertakingforlocalgovernment.Capitalbudgetsareoftennotwelllinkedtodevelopmentstrategiesandspatialplans,orsuchplansmaynotexistormaybemerewish-listsofprojects.Criteriafortheprioritizationofcapitalexpenditureinclude(i)urgencyofneed,(ii)politicalsignificance,(iii)economicefficiency,(iv)availabilityoffunding,(v)implementationcapabilities,(vi)operationandmaintenancecostsof thecompletedassets,or life-cyclecosting, ifa localauthorityistoensurethattheassetsandrelatedactivitieswillcontinuetooperateoverlongerperiods.Inmanyinfrastructureprojects,therelationbetweencapitalinvestmentsandoperation/maintenancecostsisnotadequatelyconsidered,andhardlyeveraccountedfor,whenchoosingamongavailableoptions(seeBox3).

3.7 The impact of popular participation on the allocation of capital investments: Participatory Budgeting in Brazil

TheemergenceandspreadofParticipatoryBudgetinginBrazilisrootedinalegalmandaterequiringpopularparticipationinlocaldecision-making.As a result, municipalities have introduced a number of mechanisms,rangingfrompresentationofbudgetproposalsforpubliccommenttotheactualinvolvementofresidentsindecision-making.ParticipatorybudgetingwasfirstintroducedinPortoAlegrein1989,givingthecityinternationalrecognition as a leader in “popular democracy” with regard to localgovernance.The concept has now been adopted by about 180Brazilianmunicipalities and is spreading beyond borders toArgentina, Uruguay,Peru,Ecuador,Colombia,Bolivia,MexicoandChile.Morerecently,citiesinotherpartsoftheworldhavealsobeenexperimentingandadaptingtheproceduretotheirlocalconditions.


Box 3. Multi-year capital investment planning, Szczecin, Poland

During Poland’s transition period, priority was given to capitalinvestments such as road construction and maintenance, watersupply and sewerage systems, revitalization of communal housing,and improved education and healthcare facilities. Szczecinwas thefirstPolishcitytolinkitsdevelopmentstrategytoafour-yearcapitalinvestmentprogramme(CIP).ApprovedbytheCityCouncilin1997,theCIPprovedtobeoneofthemostimportantinstrumentsoffinancialmanagementduringthetransition.Itallowedthecitytodetermineitsfinancialanddevelopmentcapacityandprepareforecastsforlocalandforeigninvestors.

InMarch1998, theCityCouncil adopted a resolutiondetailing theprinciples governing the preparation of the CIP, and establishedprocedures, along with criteria for prioritization and selection ofprojects.Thecriteriaincluded:assessmentofexistingneeds;linkagesto the city development strategy; technical aspects of projects;implementation costs; financing capacity based on the city budget;andsourcesandconditionsofpotentialexternalfinancing.

Theprogrammeidentifiedeachitemofcapitalexpenditurebyyear,disaggregatedbyproject,programmeanddepartmentincharge.TheCIPspecifiedthesourcesoffundingforeachcategory,andproposedfinancingmethods.Overitsfour-yearduration,theCIPissubmittedtotheCityCouncilforannualapproval.The‘yearone”CIPisintegratedintothemunicipalbudget.

Capitalinvestmentaccountedfor39percentofthemunicipalbudgetinFY2000and43percentin2003Largeinvestmentsoninfrastructure(primarily highways) and roadswere required for the expansion oftheurbanizedarea,theregenerationofobsoleteindustrialzones,andgreenfieldhousingdevelopments.Theseinvestmentscouldnolongerbefundedfrombudgetsurpluses.Borrowingfromcommercialbankstofinancepriorityprojectsgraduallyincreasedthedebtserviceburdentounsustainablelevels,reaching25percentofrevenues.Intheyear2000, the municipality was forced to curb borrowing and sharplyreduceexpenditures.


The transfer of the responsibility for education to local authoritiesfurther strained their operating budgets. Polish municipalities hadto scramble and reshuffle budgets to adjust to the existing system,andfacedevengreaterfiscalchallengestoupgradeandbringittothestandardsprevailingintheEuropeanUnion.Thosemunicipalitiesbentonspendingand investing in theireducationsystemshad to reduceotherexpenditures,defermaintenanceandcurtailcapitalinvestments.Szczecinexperienceditsfirstbudgetdeficitsin1998and1999.

Investmentsinenvironmentalinfrastructure(watersupply,sewerageand treatment plants) are becoming important as Eastern EuropeancountriesgraduallymovetowardscompliancewithEuropeanUnionguidelines.Publicinvestmentinhousingismostlyfornewresidentialland development.Affordable housing and renovation of the olderhousingstockareco-financedbygrantsfromthecentralgovernment.Two non-profit social housing agencies created by the SzczecinmunicipalitycanaccessloansonfavourabletermsfromtheNationalHousingFundtobuild,renovateandmanageaffordablehousing.

Communal housing repairs and modernization are managed by anindependentbudgetaryunit and fundedby rent collection.TheCIPbudget currently exceeds the municipality’s financial capacities.Mobilizing and leveraging non-municipal resources in the form ofcredits,grantsandprivateinvestmentshasbecomenecessarytosustaintheSzczecin’seconomicdevelopmentandlivingenvironment.

TheSzczecinmunicipalityhasmanagedtosecurecompetitivecentralgrantsandcredits.Partnershipsbetweenthemunicipalityandprivatedevelopers,homeowners’associations,streetassociations,educationalgroups and cultural associations have enabled the city to launchcommunity-based programmes to improve living standards. Theprivatepartnerscontribute35percenttowardspublicworks,housing,cultureandsocialcare,andcloseto83percenttoimprovehealthcareandeducationalfacilities.

Box 3. (continued).


TheCIPprovidedSzczecinwithaformaldecision-makingmechanismcombinedwithaninstrumentforfinancialmanagementandastrategictoolforreportingandmonitoringtheperformanceandimpactsofcapitalinvestments. The CIP has improved co-operation and communicationamongdepartmentsandagencies,involvingcitizensintheselectionandprioritizationofprojectsandpromotingpartnershipswithcitizensandprivate enterprises. Sound financialmanagement has gone somewaytowards earning Szczecin an ‘investment grade” rating of BBB- andBBB+bytwointernationalratingagencies(Standard&PoorsandFitchIBCA).

Source: Harvard University, Graduate School of Design, 2002.

inotherpartsoftheworldhavealsobeenexperimentingandadaptingtheproceduretotheirlocalconditions.

Participatory Budgeting gives residents a voice in the annual allocationof capital investments. It isbasedonadelegationof statutoryexecutivepowersregardingthepreparationofthemunicipalbudget,andislaunchedattheMayor’sinitiative.Thereisnosimilardelegationofauthorityfromthelegislativebranch,andthecitycouncilremainsthestatutoryauthorityinchargeofformalapprovalofthemunicipalbudget.

ParticipatoryBudgetinghasfourdefiningfeatures:

• It ensures representation of residents, in each sub-area within thejurisdiction,inthedecision-makingprocess.

• It holdsmunicipal officials to account on the achievements of theprevious year’s budget and to provide estimates of revenues andexpenditures for the upcoming year, in order to determine budgetallocationsforcapitalinvestments.

• It is structured to ensure transparency, through direct popularparticipationandanopenvotingsystem.

Box 3. (continued).


• Itensuresobjectivity, throughtheuseofquantitativecriteriafortheprioritizationoffundingrequestsandtheallocationofresources.

ParticipatoryBudgetingisprimarilyaninstrumentforempowermentandsocial inclusion. Participation and social impact are its most importantdimensions.Itcoversallcapital investments,whichtypicallyrangefromfive to15percentof the totalbudget inBrazilianmunicipalities. It isaflexibleinstrument,sincetherulescanbeamendedattheendofeachbudgetcycle,thoughadmittedlytheycannotbechangedduringthecycle.

Popularassembliesarethecornerstoneofthebudgetingprocess.Attendancehasgrown steadilyover theyears, inparallelwith thegrowthof capitalinvestments and as the importance of participation became evident to awiderspectrumofthepopulation.Thedynamicsofattendancearecomplexandreflectthestrategiesandtacticsofgrassrootsorganizationsandsocialmovements;theyarealsoareflectionofthemobilizationeffortsofgroupswhowanttopressforspecificdemands,andofthedegreeofcoordinatedactionwithinthecommunity.Outreachatthecommunitylevelisneededtofosterparticipationoflow-incomegroupsforwhomthecostofattendanceishigh.Thisentailsasignificantcommitmentofresourcesonthepartofthemunicipality,particularlyintermsofpersonnel.BraziliancitieslikeBeloHorizonteandSantoAndrébothrelyoncivilsocietyforthisoutreachandmobilizecommunityassociationsforthetask.

Participationindecisionsregardingtheallocationofmunicipalfundsforprojectsfostersashiftinthelocalpoliticalculture,onefromconfrontationandcorruptpoliticalbargainingtoconstructivecivicengagementinlocalgovernance. Even though different priorities are selected in each cycle,recurring themes are evident in the consistent ranking of “housing,”“education,”“streetpaving”and“basicsanitation”amongthetoppriorities.Inallmunicipalitiesreviewed,theproportionofcapitalinvestmentsservinglowerincomecommunitieshasincreased.

BeloHorizontehas instituteda two-yearparticipatorycapital investmentbudget, interlinkedwithaparallelprocess for thehousingcomponentofthebudget.Halfofthemunicipality’scapitalinvestmentbudgetisdividedequally among the nine districts. The other half is targeted to improveconditions in communities where quality of life is poor. A number of


technicalcriteria,guidelinesandregulationscomeintoplay,includingthedevelopmentstandardsthatmustbemetifaprojectistobesubmittedforfundingunderparticipatorybudgeting.Documentation,demonstrationofneedandapprovalbyrelevantlocalagenciesaremajorpre-requisites.

Allocationproceduresaregenerallybasedonatwo-stepprocess.Capitalinvestmentsarefirstallocatedamongsectors,andthenredistributedacrossindividualsub-areasinthemunicipality,underaformulacombiningvotingpatterns, indicators of service deficiency and population size. Resourceallocationproceduresensurethatmostbudgetcategoriesreceiveresourcestomeetthehighestpriorityneedsofthecitizens,tobalancebetweenurbanand rural interests, and to favour smaller size communities. In thequestfor comprehensiveness and objectivity, the formula for the computationofdeficiencycanbecomplicated.Despite theircomplexity,participatorybudgetingrulesaregenerallyviewedasfairandobjectiveandtheirworkingswellaccepted.Thebenefitsofpopularparticipationinlocalgovernancefaroutweighanylackofscientificrigorinthemethodology.

ParticipatoryBudgetinghasbuilttrustandfosteredco-operationbetweenmunicipalities, socialmovements andCBOs by creating a space for thedisenfranchisedtoparticipateintheallocationoflocalresources.Itsimpactonurbanizationanditseffectivenessintermsofsocialinclusiondependontheresourcesthatcanbemobilizedforcapitalinvestment,sothatpeoplecanhopethattheirlivingconditionswillimproveinanot–too-distantfuture(Serageldin,2003).


4 Performanceofmajorsourcesofmunicipalrevenue

Locallygeneratedmunicipalrevenuesfallintothreebroadcategories:taxonpropertyandeconomicactivities;userfeesforthedeliveryofservicesandtheimprovementofinfrastructure;andborrowingtofinancelong-livedinvestments–generally,infrastructure.Whilewell-managedmunicipalitiesmaintain a proper balance across these categories, the rapid pace ofurbanizationindevelopingregionsoftheworld,institutionalconstraintsandweakmanagementhavecombinedtoslowtheeffortsoflocalgovernmentstoincreasetheirfinancialautonomyaspartofdevolutionfromthecentraltothelocaltier.Increasingtheyieldoflocallygeneratedrevenueis,therefore,themajorchallengefacedbyalldevelopingcountries.Inabilitytodosoisapparentinthefactthatmostmunicipalitiesoperateatadeficitthatismadeupbytransfersfromthecentralgovernment.

Taxeson realpropertyand, toa lesserextent,businessactivitiesare themajorpotentialsourcesoflocalrevenue.Acombinationoffactors(rangingfrom technical issues, such as the lack of computerized databases, tocomplexlegalissuesofpropertyrightsundertraditionalandmoderntenurepatterns)havekepttheyieldoftaxesonrealpropertyandbusinessactivitiestoalowlevel.Moreimportantly,valuationsdonotreflectpropertyvaluesas a result of investments in infrastructure and urban projects.With theexceptionofNorthAmericaandtheEuropeanUnion,mostmunicipalitieshavenoadequaterecordsthatreflectchangingpropertyvalues.Developingcountriesdonotcollectdataonthevariousformsofphysicaldevelopmentoccurringonurbanfringes.Collectionratesinthesesettlementsareoftendisappointingifanyand,assuch,registeredpropertiesandformalbusinessesbeardisproportionatesharesofthetaxburden.

Thepricestructureofuserfeesmustreflectsocialconcernsand,forthemostpart,doesnotcovertherecurringcostsofdeliveringtheservice,letalonetheamortizationofcapitalcosts.Asaresult,mostdevelopedcountrieshavemovedtowardmoresophisticatedmeansofrecoveringavaryingportionof the public costs induced by private development. They range frombettermenttaxes,assessedoneitherorbothexistingandnewdevelopment,


toexactionstofundsocialprogrammes.IntheUnitedStatesandsincethemid-1980s,theproceedsofthelinkageprogrammethatmandatespaymentsbydevelopersof largercommercialdevelopmenthave financedboth theconstructionofaffordablehousingandjobtrainingforresidentsoflower-incomeneighbourhoodsinSanFranciscoandBoston.

The financingof capital investments through long-termbond issues is awell-establishedpracticeindevelopedcountries,andthetrendisspreadingtootherpartsoftheworldexceptinsituationsofhighinflation,structuraladjustmentor economic recession.However, access to financialmarketsrequiresefficientmunicipalfinancialmanagementandskills.Ininstanceswheremunicipalitiesarenotallowedtoborrow,ofteningeniousalternativemechanisms have been used; one of them separates revenue-producingactivities from the general budget, allowing a municipality to borrowagainstfuturerevenue,asisthecasewithChina’sSpecialPurposeVehicles(SPVs).Similarly,manyUScitiesusetaxincrementfinancing,wherethetaxrevenueinducedbynewdevelopmentisallocatedtoserviceandrepaythebondsissuedbyamunicipalitytoprovideimprovedinfrastructuresasneeded.

4.1 Taxes on property and business activities

In developing countries, property tax has the potential to rank amongthemajor sources of local revenue. Its administration demands genuinereal-estate valuation capability to perform periodic revaluations of alltaxablepropertyoveramaximumperiodofaboutfiveyears.Settingupacomputerizedsystemcapableofmaintainingpropertyandvaluationrecordsgreatlyfacilitatesthistask.Wherethesecapabilitiesexist,thenextstepistoensurethattheassessedvaluationsofallpropertiesmaintainsareconsistentwith each other andwithmarket trends. Inmany developing countries,propertyrecordsarekeptmanuallyandvaluationexperts find itdifficulttokeepupwithrapidurbanization.Taxvaluationsdonotfullykeeppacewithactualvalues,andanincreasingproportionofagivenurbanizedareaisnotincluded.Inrapidlygrowingcities,cadastralrecordsareobsolete,oronlycoveralimitedpartofthecity,orareunabletokeepupwithchangesintheuseofland.Exceptforsomeregularizedsettlements,informalareas


andsquattersettlementsarenotincluded;thesepropertiesarenottitledorregisteredand,therefore,nottaxed.

However,thereareexceptionstothesegeneralpatterns.InEgypt,alongtradition of quasi-autonomous management of the tax administrationallowsforthetaxingofrealestate,whetheritisregularizedorregisteredornot. In Indonesia, anoccupancy tax is levied, ensuring some revenueinsituationswherepropertyownershipisunclearorcomplex.InpartsofWestAfrica,asimpleadressagesystem,locatingandnumberingpropertiesbystreetaddress, isusedasanexpeditiousalternative tocadastres.Thismethodallowsspeedy,efficientregularizationofinformalsettlementsandregisteringofproperty,whichprovidethebasisfortaxation.

Taxes on other types of personal property, mostly vehicles, are usuallycollectedbynationalorprovincialauthorities.For instance, in theUSA,municipalitiescollecttheseexcisetaxesbasedontherecordscompiledbyStateregistries.IntheMiddleEast,NorthAfricaandWestAfrica,centralgovernmentscontrolmunicipalfinances.Theyprovidetransfersharedandredistributed revenues and directlymanage the high-yield tax bases andrevenuecollection(includingpropertyandcommercialtaxes).Becauseofthesizeandroleoftheinformaleconomy,andtheprevalenceofuncontrolledurbanization,formalrealestateandbusinesssectorsareheavilyburdenedbytaxation.Productiveandbeneficialuseofaproperty,aswellasitscapitalappreciation, are taxed.Owner-occupiedand rentalhousing, commercialpremisesandlocalesusedforworkshopsandotherproductionactivities,togetherwiththeincomegeneratedbytheseassets,aresubjecttooneformoftaxationoranother.

Despitethesecumbersomelevies,thetaxyieldfromtherealestatesectorislowrelativetothemarketvalueoftheassetsandtherateofappreciationof serviced and non-serviced land. This situation is prevalent amongdevelopingcountriesduetoacombinationofsixfactors:

• Complextenuresystems,withlayersofprimaryandsecondaryrightsderivedfromcustomaryrulesandsuccessiveadjustmentsof past/colonial legal and institutional frameworks. Inheritancelawsandfragmentationofpropertyinhistoriccentresandolder


neighbourhoods compound the problems of updating records,identifyingtaxpayers,andbillingandcollectingtaxes.

• Centralgovernmentscontrolhigh-yieldtaxbasesandtherecordingofwealth-producingassets,includinglandregistries.Highfeesandcumbersomeadministrativeproceduresdiscourageregularizationandtheissuanceoftitlesininformalsettlements,increasingthecostofupdatingthosevaluationsandtaxrollsstillmanagedbybranchofficesofcentralauthorities.Additions,renovationsandconversionsareunreportedanduntaxed.Monitoringissporadicfor lack of cadastral information and updated records.Despiteregulationsmandatingcollaborationandco-ordinationbetweenthevarioustiersofgovernment,centralgovernmentofficialsarereluctanttoworkwithmunicipaldepartments.

• In many countries, the central allocation (including grants,sharedtaxesandtargetedtransfers)isnotrelatedtolocallyraisedrevenues;rather,itisredistributedaccordingtopopulationsize,social fairness, geographic balance and development potential.The relative weight assigned to these criteria varies acrosscountriesandwithincountriesovertime,inresponsetochangesinthemacro-contextandpoliticalclimate.

• Taxation systemsbasedon real or imputed rental value, ratherthan capital value, understate the value of the assets; on topof this, rent and tenant protection regulations further depresspropertyassessmentsbasedonrentalvaluation, therebyaddingtotheerosionofthemunicipaltaxbase.Interestingly,themarketvalueisnotaffected,becausethecapitalvalueofaproperty issplitbetweenan“ownership”componenttransactedontheformalmarket,andan“occupancy”componentsettledwithkeymoneysharedbyowners,rentersandbrokers.

• Tax rebates and exemptions granted to encourage specificsegments of the housingmarket (multi-family rental units, co-operatives,etc.)ornewurbandevelopment.InNorthandWestAfricancountries,exemptionsfromoneormoretaxesaregrantedforperiodsrangingfromthreetofifteenyears.


• The treatmentof informaldevelopmenton theurbanfringe. Inmost countries, these settlements are not taxed until they areregularized.Inafewothers,includingEgypt,informalsettlementsareassessedbythetaxadministration(i.e.,acentralgovernmentagency) independentlyof status, since regularization is a localfunction. Property owners readily pay these taxes, as they arenot burdensome and can be used to document occupancy andpossessionofurbanlandandbuildings.

Given their buoyancy and significance to local revenues, taxes oncommercial activities tend to overburden formal private enterprises. Forinstance,therearetaxesonlicensestooperatethebusiness,ontheexerciseofaprofessionoroccupation,ontherentalvalueofthepremises,andontheincomederivedfromthebusinesses,amongothers.Inmanycountries,market-stall holders usually pay a flat rate, except in instances wherehawkersandotherinformalactivitiesescapelocaltaxation.

4.2 Challenges to improved municipal revenue

India,Morocco andCôte d’Ivoire exemplify the challenges encounteredby developing countries when looking to enhance the performance ofmunicipal revenue sources. In Morocco, shared and redistributed taxescontributecloseto70percentoftherevenueallocatedtolocalgovernment,principallyfromVAT,commercialandoccupationaltaxes.Propertytaxes,servicefeesandmarkettaxesprovidethebulkoflocallyraisedrevenues.Metropolitanandprovincialauthoritiescollectchargesfortheservicestheyprovideandhaveseparate taxingpowersonmarketactivities.Moroccanlocalauthoritiesraiseabout20percentoftheirrevenuesfromavarietyofsmalltaxesandfees.Localbudgetsarebalancedonacashbasis,withverylimitedsurplusesavailableforcapitalexpenditureorpayingtheaccumulatedarrearsowedtoregionalpublicutilitycompanies.Thisoutstandingdebtisusuallyconsolidatedintoshort-termloans.Budgetsdocumentrevenuesingreatdetail,buttendtolumpexpendituresbycategoriesofinputthatarenotrelatedtospecificactivitiesandservices.


Almost all themunicipalities inMorocco are running operating deficitscoveredbycentraltransfersthatconsistoftwocomponents:alumpsum,dependingontheclassificationofthelocalitythataccountsforaboutonethirdof the transfer;anda redistributionformulausingfiscal revenueasanindicatorofrelativeaffluence,thataccountsforabouttwothirds.Theredistribution of commercial license taxes penalizes economically morebuoyantmunicipalities.Capitalinvestmentsarealmostentirelydependenton transfers fromcentralministriesand internationaldonor funding; thisresultsinanopportunisticapproachtoprojectfinance,whichunderminesrational development strategies and plans to improve the functionalefficiencyand livingstandardsofcities.The“capital investment”part isoften leftblank in themunicipalbudgetwhen submitted for approval totheMinistriesofInteriorandFinance.TheMunicipalDevelopmentBankallowslocalitiesanannualdebtserviceburdenof40percentofrecurrentrevenue.Thisisaveryliberallimit,comparedwiththeceilingprevailingindevelopedcountrieswhereamaximumof15to20percentistheusuallevel.Mostof thedebt incurred is for infrastructure, transport terminals,road construction,markets and urban development (HarvardUniversity,1997-1998).

Since2000,Indialaunchedseveralmeasuresaimedatimprovingthefinancesof municipal governments. In 2001, bonds issued by local authoritieswere exempted from income tax and three new municipal funds wereestablished:theUrbanReformsIncentiveFund;theCityChallengeFund,andthePooledFinanceDevelopmentFacility.Theobjectivewastoprovidemunicipalities with the capital needed to improve services and enhancethe functionalefficiencyofurbancentres.TheUrbanReforms IncentiveFund encompasses incentives to undertake structural reforms, including:repeal of theUrbanLandCeiling andRegulationAct; rationalizationofstampduty;reformofrentcontrollawstoremovecontrolsonnewleases;computerizationofpropertyregistration;andreformofpropertytaxsothatitmaybecomeamajorsourceofrevenueforurbanauthorities.

InWestAfrica,relianceoncentralgovernmentinallmattersoftaxassessmentandcollectiondoesnotallowcommunesanysignificantimprovementsinrealestatetaxyields.Centralauthoritiesareparticularlyunwillingtohelp


themupdatetaxrollsandimprovecollection.InAbidjan,Côted’Ivoire,therealestatesectorisoverburdened.Therearenolessthanninedirecttaxesonurbanproperty,exclusiveoftaxationofrentalincome.FourbasictaxesareleviedandcollectedbytheMinistryofFinance’sDirection Générale des Impôts (DGI – inland revenue),which transfers to the communes aportionofthereceiptsaccordingtoaspecificformulaforeachtax.Thetaxonbuiltpropertyisthemainstayofthetaxationsystem.Otherrealestatetaxesincludethetaxonunbuiltproperty,ataxonunder-developedurbanpropertytodeterspeculativelandholding,andataxonpropertybelongingto real estate developers and building societies. Municipal councils canlevysupplementalchargesnottoexceed20percentofthetax.Twospecial-purposetaxesearmarkedforinfrastructuremaintenancearealsoleviedonallbuiltproperty,andnotemporaryorpermanentexemptionsaregranted:sanitation tax is collectedbycentralgovernment,while themunicipalitycollectstaxforroadmaintenanceandrefuseremoval.Communescanlevyadditionaltaxesonrealestate,whicharecollectedontheirbehalfbytheDGI,including:ataxonnetincomefrombuiltproperty;ataxonthecapitalvalueofundevelopedproperty;andataxontherentalvalueofpremisessubjecttothecommerciallicensefeespaidtocentralgovernment.

TherapidurbanizationexperiencedbyAbidjanbetweenthe1970sand1980shasnotbeenmatchedbyacommensurateexpansionofthetaxbase.Threefactorscontributetotheerosionofthetaxbase:(i)temporaryexemptionsgrantedtonewconstructionforoverlylongperiods,rangingfromfiveto20 years; (ii) central government control of tax rolls and rates; and (iii)theproliferationofinformaldevelopmentontheurbanfringethroughtheunauthorizedsubdivisionoftriballand.Inthoseyears,buildingsininformalsettlementswere not legally recognized or taxed.When a regularizationpolicywasadoptedin1977,theprocesswastoocumbersomeandlengthy.DGI estimates the performance of real estate taxes as ranging between20and30percent.Highratesdiscouragecompliance.Ontopofthis,thehardships deriving from structural adjustment, prolonged recessions andcivil strife promote widespread evasion. In low-income communities,absentee landlords typically live in higher-income neighbourhoods andignoretaxbillssenttodifferentaddresses.Aregulationmandatingtenantstopaythetaxiflandlordscannotbeidentifiedorlocatedisnotenforced.


Furthermore,inoutlyingcommunes,taxcollectorsareunableorunwillingto locate and access properties fronting on unpaved streets, particularlyduringtherainyseason.

CommercialtaxesarethemainstayofmunicipalfinanceinWestAfricancities.InAbidjan,theyaccountforover50percentoflocalrevenue.Therearetwomaintaxes:thepatenteleviedbytheDGIonlargerbusinesseswithannual sales abovea specified threshold; and the taxe forfaitaire, a flat-rate tax leviedonsmall retailersandcraftsmenandcollecteddirectlybythecommunes.Smallshopsandworkshopspayonamonthlybasis,whilestreetvendorspayadailyfeeforaticketwhichallowsthemtotradeonthesidewalksorinthedesignatedmarketareas.InAdjamé,outsideAbidjan,thetaxe forfaitairehasgenerated57.8percentofmunicipalrevenue,whilethepatentehasbeencontributingadecliningsharemainlyduetoinefficientcollection.

Centralauthoritiestendtoviewlocalcommercialtaxesastoonumerous,difficult tomanageandenforce,and low-yield incomparisonwithotherformsoftaxation.Yet,theircontributiontolocalfiscalrevenuecannotbeoverlooked.Incase theyareabolished,asubstituteandequallybuoyant,locallycontrolledtaxmustbeinstituted(Serageldin,1990).

4.3 Taxes on Income

At the local government level, taxes on income are not as common astaxesonproperty.However, insomeinstances,provincialgovernment isauthorized to collect income tax and local governmentmay be allowedtoassessa surchargeon the income tax leviedbyprovincialandcentralgovernment.Alternatively, a fixedproportionof thenational income taxmaybetransferredtothelocallevel.

4.4 User fees

Pricingofuser fees is amatterofpublicpolicy. Inmanycases, chargesareleviedatlessthantheirfinanciallyefficientprices.Balancingfinancialand social factors,governmentsat all levelshaveput inplaceanumber


ofschemestoalleviatethehardshipssufferedbythepoor.Thethreemostcommonlyusedare:(i)allowingaminimumconsumptionlevelpercapitaor household freeof charge, as inSouthAfrica; (ii) subsidizing chargesforlowerincomepopulations;and(iii)establishingapricingstructurethatisnotdiscriminatoryforsmallusers.Social,economicandenvironmentalargumentshavebeenadvancedforpricingpublictransportationatlessthanfull-cost recovery.Forwatersupply,socialconcernsand, inmanycases,reassertion of pre-colonial traditions and religious beliefs have thwartedattempts to raiseprices to financially sustainable levels since the1980s.Under structural adjustment programmes, price increases have led tocontentiousdebatesandcivildisturbances.

Mostrecently,thedebateoverthepricingofessentialserviceshasacquiredanewdimensionbecauseofNGO-ledmovementsadvocatingalegal“rightto the city”.This right includes access tourban landandurban servicesfor all residents.Thedebate isongoing inmanypartsof thedevelopingworld. Nevertheless, there is some consensus regarding the desirabilityof charging for apublic service evenwhen the charge cannot cover fullcosts. In most circumstances, user charges are not devised to take intoaccount the recovery of capital investments, even where an operationalprofitmaterializes. Expansion of services usually takes precedence overmaintenance of systems, with political pressure and rapid urbanizationweighingheavilyinthesedecisions.

4.5. Betterment taxes and development exactions

In advanced countries, an array of impact fees and betterment taxescompensate local authorities for the additional expenditures incurred toextend infrastructureand services tonewurbandevelopmentprojectsortoupgrade services in theurbanizedarea.These feesarealso structuredtorecapturepartoftheunearnedincrementinrealestatevaluesresultingfrompublicinvestment.Becausetheyarepayableovertermsofupto10years,bettermentleviesdonotdirectlyprovideimmediatefundingforthecapital investments. Revaluation of properties affected by public worksimprovements makes a major contribution towards municipal revenuethroughpropertytaxassessments.


In the USA, cities have developed an interesting mechanism referredto as linkage, a scheme that leverages funds from the profits derivedby real estate developers in the city’s growth nodes. Linkage schemesessentially tapprivatecapital to fund socialprojects.Linkageauthorizesa municipality to impose impact fees on developers requiring zoningapprovalforproposedurbanprojects; thefeecantaketheformofeitherapaymentoranin-kindcontributiontothemunicipality.TheconceptwasfirstintroducedinSanFranciscoin1982,andadoptedinBostonin1983where it was institutionalized by the Massachusetts State legislature in1987.Under thescheme,developersofallnewcommercial, retail,hotelorinstitutionalstructures,includinghospitalsanduniversities,withafloorareaoveracertainsizepayanexactionfee.InBoston,thefeesubsidizestheconstructionofaffordablehousing(elsewhereinthecity)andjobtraining,with a requirement that20per centof any linkagepaymentbe reservedfor use in the area surrounding the development. The rationale behindthescheme is that there isadirect linkbetween theconstructionofnewcommercialspaceandtheincreaseindemandforaffordablehousinginthecity,derivingfromtheinfluxofworkersemployedinthenewcommercialdevelopment.

InBoston,developerssignaDevelopmentImpactProjectagreementwiththeBostonRedevelopmentAuthority (BRA) for real estate projects thatincludeeitheranexpansion,significant rehabilitationofpropertyornewconstructionwithafloorareaof100,000squarefeet(9,290m²)andrequireazoningamendment.Alinkagefeeisleviedoneachadditionalsquarefootoffloorspaceinexcessofthe100,000squarefeetceiling.In2004,linkagefeesamountedtoUSD8.62persquarefoot,outofwhichUSD7.18subsidizedaffordable housing andUSD1.44went to job training. This rate can beadjustedeverythreeyearstoreflectinflation.Thescheduleofpaymentsisspreadoutoversevenyearsfordowntownprojectsand12yearsforprojectsinotherareas,andthefeesaredepositedinaSpecialFundforAffordableHousing and Training. Alternatively, developers may choose to buildaffordablehousingprojectsorcreatea jobtrainingprogramme.Between1987 and 2004, linkage generatedUSD79.6million for housing, adding7,604 units to the city’s housing stock, 6,116 ofwhichwere affordable.TheschemealsogeneratedUSD15.2millionforjobtrainingandawarded


USD12.9millionto190differentjobprogrammes,suchasschool-to-work,family literacy or workplace-based education, creating over 1,000 jobs(BostonHousingAuthority/BostonRedevelopmentAuthority,2000,2002,2004;Avault,ConsalvoandLewis,2000).

Linkage feesandotherdevelopmentexactions require thata legalurbanplanningframeworkbeinplace,thattherulesbelegallyauthorizedandtheprocedurestransparent.Furthermore,theurbaneconomymustbebuoyantenough if theprogramme isnot toactasadisincentive todevelopment.Many developing countries have instituted betterment fees and requiredeveloperstocontributetothecostsofprovidingnewservices.Theycouldbenefitfromthelinkageconceptasawayofredistributingthebenefitsofgrowthduringperiodsofrapideconomicdevelopment.

4.6 Borrowing and debt service management

Fundingforcapitalinvestmentrequiresaccesstolong-termborrowingontermsbroadlyrelatedtotheworkinglivesoftheassetstobefinanced.Debtservicecanthenbefundedonanannualbasis:frominternallygeneratedfundsforrevenue-earningservices,orfromgeneralrevenuesfortax-borneservices.Usersofthoseservicesprovidedbypublicassetsareexpectedtopayforcurrentuseaswellasanappropriateshareofthefixedassetcosts,overthefullworkinglivesofthefacilities–asituationthatisrarelythecaseindevelopingcountries,orinmanyadvancedcountriesforthatmatter.

Insituationsofhighinflation,economicrecession,structuraladjustmentandotherconstrainingfactors,long-termborrowingistypicallynotavailable.Thestandardsolutionistoaddtheexpectedinflationratetothe“real”costofmoney(“real”interestrate=nominalinterestrateminuscurrentinflationrate) adopt variable rates, or index either the principal or the annuitypaymentstotheinflationrate.Alternatively,domesticloansarelinkedtoastableforeigncurrency,ashashappenedinmanyLatinAmericancountries(Serageldin,1995).

Severalcountrieshave indexedsomeof theirdebt instrumentsandotheraccountinginformation,suchasassetvaluation,inavarietyofways.Inthe1970s,Israelissuedpublicsectordebtinstrumentsoftwotypes.Thefirst


usedabasic(approximatingtoreal)interestratethatwouldsubsequentlybeadjustedbyapriceindex.ThesecondwasdenominatedinUSdollars,sothatreturnstolenderswouldincludeanylossesresultingfromchangesintheforeignexchangerate.

Inthe1970s,itwascommonpracticeforcountriesinLatinAmerica,suchasBrazil,toissuemanydifferenttypesofindexeddebtinstrumentswhereabasicinterestratewassubsequentlyadjustedforinflation.Morerecently,theUSFederalGovernmenthasissuedindexedbonds,referredtoas“TreasuryInflation-ProtectedSecurities”(TIPS)wheretheprincipalisadjustedbytheconsumerpriceindexeverysixmonths.InBrazil,theinflationindexationsystem,whichwasdevelopedandextendedtomostmarketsbetween1964and1970,wasincreasinglyblamedforcontributingtothecontinuationanddramaticaccelerationofinflationinthe1980sandearly1990s.Brazillostaccesstoforeigncapitalmarketswhiledomesticborrowingtofinancethegrowing public-sector deficit became increasingly expensive (Library ofCongressCountryStudies:Brazil,1997).

4.6.1. Management and control of short-term borrowing

Intheabsenceoflong-termfinancing,localgovernmentshavetendedtouseshort-termcommercialdebtwheretheoptionisavailabletothem.Short-termborrowingbymunicipalauthoritiesisnormallylimitedtofundingcapitalinvestment.Inmanycountries,someauthoritieshavesoughtcontinuouslyto roll over short-term debt used to fund capital expenditure. Debt hassometimesbeenusedtoplugrecurrentbudgetarydeficitsorforshort-termcashflowmanagement.Accumulateddebtmustbebroughtundercontrolandrefinanced,otherwiseitcanleadtofinancialcrisis.

In the mid-1990s, a series of Russian laws established rather liberalborrowingrulesforsub-nationalentities,authorizingmunicipalitiestoissuebonds and lottery tickets, extend and take out loans, and open accountswithbanksandotherfinancialandcreditinstitutions.Municipalitiestooktoborrowingfromregionalauthoritiestoplugdeficits,issuingmunicipalbondsandcontractingshort-termloansfrombanks.Eventually,municipalfinancialmismanagementandindebtednessledtotherevocationoftheselaws.Followingthe1998financialcrisis,alaw“On Specificity in Issuance


and Circulation of State and Municipal Securities and the Budget Code”prohibitsmunicipalitiesfromcontractingexternaldebtordebtobligationsexceeding10years.Issuanceofdebtobligationsislimitedtothefinancingof capital investment. Though justified by the need to curb runawaymunicipalfinances,theserestrictionsactasaconstraintonthefinancingoflocalpublicinfrastructureprojectsinRussia(Chernyavsky,2002).

InIndonesia,intheaftermathofthe1997financialcrisis,widespreaddefaultonoutstandingloansfromtheNationalDevelopmentFundstillneedtoberesolvedandthestabilityofthebankingsystemfullyrestoredbeforetheissueofborrowingcanbemeaningfullyaddressed.Inthemeantime,regionalgovernmentdependsondonorandsovereignloanfunds(primarilyfromtheWorldBankandtheAsianDevelopmentBank)forregionalinfrastructureprojects.Despitefavourableloanterms,arrearsreached40percentin1998.Regional and local government was considered financially too weak tobenefitfromtheregulatoryframeworkauthorizingsub-nationalentitiestoborrowonthefinancialmarkets.Intheperiodleadingtothe1997financialcrisis, private investors preferred to seek concessions and build-operate-transfer(BOT)contracts,fuellingariskyrelianceonoffshorefinancing.

While theGovernmentof Indonesiagrappledwith the restructuringofamassivepublicdebt(USD132.2billion,amountingto80percentofGDP),thefinancialmarketshadtoabsorbrecapitalizationbonds.Theweaknessof local government finances and their reliance on transfers and sharedrevenue,withown-source revenueonly contributinganaverage fivepercentoftotalresources,promptedtheMinistryofFinancetoprohibitallnewborrowingfrombothdomesticandforeignsources.Theonlyexceptionsareborrowingthroughon-lendinginstitutions,forshort-termworkingcapitalorprofitable,locallyownedenterprises.Sincelocalgovernmentshavenotyetbeenauthorizedtolevynewsourcesofrevenue,theirfinancialsituationremainsweak(WorldBank,2003;Menon,2003;ChakeriandLewis,2004;FreireandPetersen,2004).

In Sub-Saharan Africa, South Africa and Zimbabwe have led thedecentralization process.Regional governments in the two countries areempowered to borrow to finance capital investments. In Uganda, localauthorities are allowed to borrow but have refrained from doing so for


lack of amunicipal development bank. Inmost other countries, currentdebtburdensand legalconstraints impede thedevelopmentofmunicipalfinancialinstitutions.

4.6.2 Credit enhancement, access to financial institutions and capital markets

Local government needs sophisticated debt management capability todrawontheavailablerangeoffinancialoptionsandinstrumentstofinancecapital investment needs. These capabilities are not currently prevalentamongmanylocaladministrationsinthedevelopingworld.Tostrengthenlocalfinancesandenhancemunicipalaccesstomedium-andlongertermcredit,sharedrevenuesareregardedaspartofthelocalresourcesavailabletoservicedebtandcanbepledgedascollateral.Thisentailsthatlenderscanputuptheserevenuesasguarantees,andcentralgovernmentcanwithholdthem from municipal borrowers and authorize lenders to intercept thetransfersinordertosettleanyarrearsondebtserviceobligations.

International capital markets and multilateral financial institutions havefocusedonEastAsia’screditmarket,inlightofthestrengthoftheregionaleconomy, anchored by Japan and China, and theAsian countries’ ownperformanceastheyreboundedfromthe1997financialcrisis(FreireandPetersen2004;WorldBank2003).However,thesecountriesoffersharplycontrasting financial environments.The Philippineswas one of the firstAsiancountriestodevolvefunctionsandresourcestolocalauthorities.The1991Codeallowed localities tocreatenewownsourcesof revenueandgavethemborrowingpowers.Municipalitiesandprovincesareauthorizedto issue bonds to finance self-liquidating, income-generating projectsenhancing the quality of life in the city. Two government-owned banksand two municipal development funds provide local government withcredit.AsteadyflowofgenerouscentraltransfersandthepowerofState-owned financial institutions to intercept these transfers inorder to settlearrearshaveallowed themunicipalcreditmarketanda limiteddomesticbondmarkettooperate.Aspecializedbondinsurancecompanyenhancesthecreditworthinessofborrowingmunicipalities.Alimitondebtserviceceilingssetat20percentofrevenuescombineswithrestrictionsonbond


issuancetopreventexcessiveborrowing.Since1991,13localauthoritieshaveissuedbonds,mainlyforhousingprojectswiththeremainderfundingpublicmarkets,portsandportterminals(FreireandPetersen2004;WorldBank 2003). By contrast, Vietnam has barely started on the transitionpathand localauthorities therehave little fiscalautonomy.Borrowing isrestricted to capital expenditures and theStatebankcanextend loans tolocalitiesforonlyupto30percentofprojectcosts(FreireandPetersen2004;WorldBank2003).

InIndia,theAhmedabadMunicipalCorporationbecamethefirstmunicipalauthority to issue bonds on the capital market.A number of municipalentities andparastatals have since accessed thedomestic capitalmarket,withtheback-upofcreditratingagencies.Ofthese,ninemunicipalitieshavesofarbeenabletoissuebondswithoutrequiringaguaranteefromtheStategovernmentorabank,astraditionallyrequiredbylendersfrommunicipalentities.TheseIndianmunicipalitiescanraisefundsonthestrengthoftheirowncreditrating.

India’sFinanceCommissionhasrecommendedseveralmeasurestoshoreup financially weak municipalities, focusing on the rationalization ofinter-governmentalfiscalrelationsthroughthefollowingfourtechniques:(i) the transfer of specific amounts of revenue to municipalities, as inHimachalPradesh;(ii)transferringdesignatedsharesoftaxesraisedlocallybut collected by State governments, includingmotor vehicle taxes as inTamilNadu;(iii)sharingofapoolofStaterevenuesexcludingloans,asin Karnataka, Madhya Pradesh, and Tamil Nadu; and (iv) increasingthe participation of the private sector in improved service delivery andcollectionofusercharges,asinAndhraPradeshwheretheshareoflocalbodies in State revenue increased from 39.2 per cent to 40.9 per cent.Furthermore,the11thFinanceCommissionissuedguidelinesin2004/2005recommendingamunicipalgrantprogrammetostrengthendecentralizationandprovideincentivesforlocalresourcemobilization(PrakashMathurandThakur,2004).


4.6.3. Income-generating enterprises

Local government can establish separate income-generating enterprisesto enhance overall revenue-generation capability. The advantage ofincome-generatingenterprisesisthattheiractivitiescanbeaccountedforindependentlyofgeneraltax-borneactivities.Theroleofrevenue-earningenterprises is not, normally, to generate contributions to general publicrevenues,but rather to removeopen-ended relianceuponsuch revenues.Thisalternativealsohighlightsthefullcostsofoperation,sothatthesemaybemore appropriately covered with user charges and carefully targetedsubsidies.

In China, formal budgets account for only half of local governmentfinancial activity, due to significant off-budget financing. Own-revenuesources consist of special fees, taxes, profit distributions from locallyownedenterprises,landleasesandtaxesonbusinessenterprises(VATandincome).Propertytaxonurbanandrurallandgeneratesameagretwopercentof localrevenue,whilethebusinesstaxcontributes34percent,butexactsaheavyburdenonbusinessesasitrepresentsabouthalftheirprofits.Sincetheyhavenoborrowingpower,municipalitieshaveresortedto theingeniousmechanismofcreatingindependent,wholly-ownedcompanies,whoseactivitiesareoff-budget,toprovidefundingfordevelopmentprojects,particularlyinfrastructure.Theseso-called(SPVs)areallowedtoborrowoncapitalmarketsandusetheiroperationalrevenuestoamortizethisdebt.InChina,theyhavebecomeamajorinstrumentintheimplementationoflarge-scaleurbandevelopmentprojects(seeBox4).

4.7 Municipal financial management under adverse economic conditions and structural adjustment

InmostAfricancountries, the taxbaseof local authorities is inadequatetomeetexpenditures.High-yieldtaxes,namelyVATandtaxesonincome,salesandbusinessarecontrolledbycentralgovernment,whilemunicipalauthoritiesderivetheirrevenuefrompropertytaxesandchargesonservices.Municipalities are not empowered to set tax rate structures or launchenforcement procedures. Inadequate technical and managerial capacity


Box 4. The role of Special Purpose Vehicles (SPV) in China

Municipalities inChina have no borrowing power and rely on off-budget entities to secure the funding they need for investment,primarily in infrastructureprojects.TheseSpecialPurposeVehiclesarewholly-ownedcompaniesoperatingonaquasi-commercialbasis.Like State-owned enterprises, the SPVs raise funds by borrowingfromState-ownedbanksandundertakeinvestmentprojectsonbehalfof provincial andmunicipal authorities. They can obtain financingfromtheChinaDevelopmentBankfortermsoffiveto10years,andfromcommercialbanksforthreetofiveyears.Becauseoftheiroff-budgetstatus,accountingandreportingsystemsarenotstandardized.Localgovernmentsareprohibitedfromguaranteeingtheirloansandtheextentoftheirindebtednessisamajorconcern,asChinastructuresitsdomesticfinancialmarketsandcomestoplayasignificantroleontheinternationalcapitalmarkets.

SPVsandthecompanies theyowncanissuebondstofinancelocalprojects and locally owned enterprises.The bonds are viewed as acontingent liability of the parent local government and are usuallybackedeitherbyassetstransferredtotheSPVsbythemunicipality,or by the revenue streamof a self-sustaining project.Though non-performing loans have not yet been adequately dealt with, due tocontinuedlendingtounprofitableState-ownedenterprisesbyChina’sfournationalbanks,thedomesticcapitalmarketcontinuestofinanceSPVsandthecompaniestheyown.

In China’s booming economy, dynamic cities can use the SPVconceptincreativewaystofinancelarge-scaledevelopmentprojects.TheShanghaiUrbanDevelopmentInvestmentCorporation(UDIC),ownedbythecity,hasissuedbondsonthefinancialstrengthofthemunicipalitytofinanceinfrastructureandtransportationprojects.Theimplicit guaranteemeans that the citywill not allowUDIC to fail.Thecityhasalsocreatedanon-lendingfacilitywithinUDICtohelpsuburbanmunicipalitiesmeettheirsharesofregionalprojects,startingwithprojects tocontrolwaterpollution.TheShanghaiMunicipality


contributestoobsoletevaluations,poorcollectionsanddeficientfinancialmanagement.Centralgovernmentandparastatalorganizationsoftenowecitieslargearrears.

InAfrica,transfersfromhighertiersofgovernmentlackstability,transparencyandpredictability–theyaresubjecttosuddenreductions.Withthenotableexception of SouthAfrica, specialized municipal finance institutions inSub-SaharanAfrica are underdeveloped.Most local authoritiesmay notissuegeneralobligationbonds,butcanissuerevenuebondstofinanceself-sustainingprojectsandmaybeabletoobtaincreditasthedomesticcapitalmarketsdevelopintheregion.InBotswana,municipalitiesreceive40to60percentoftheiroperatingbudgetasaformula-basedblockgrantandthetotalityoftheircapitalinvestmentbudgetfromthecentralgovernment.Kenyausesformula-basedblocktransfers;Malawi,general-purposeblockgrantsandspecificpurposetransfers;inNigeria,federaltransfersincludeformula-based grants and targeted transfers; inUganda, the constitutionprescribesthatlocalitiescanreceiveblock,specific-purposeandequalization

grants,butthesituationonthegroundisunclear(Mosha,2004).

Almost allAfrican local authorities receive shares of taxes collected bycentral government, but there are wide variations across countries: inKenya,theyareallocated20percentofthetaxleviesonroadfeesandfivepercentoftheannualincometax;inUganda,theLocalGovernmentActof1997stipulatesthat35percentoftotalrevenueistobetransferredtodistricts,butitisnotevidentthatanystatutorytransfershaveactuallytaken

hasfinancedUSD3.5billionoutoftotalcapitalinvestmentsestimatedat USD4.85 billion. UDIC is creating a fiduciary institution thatwill issuebonds tomakeup for thebalance.Although the strengthof the Shanghai Municipality is unequalled among Chinese localauthorities,theUDICinitiativemayofferamodelthatcanbeadaptedin other districts and regions to financeprojects involvingmultipleadministrativejurisdictions.

Source: Freire and others 2003; World Bank, 2003.

Box 4. (continued).


placeinwholeorinpart;andinMalawi,nointer-governmentaltaxsharingsystemisinoperation(Mosha,2004).

Despite its role as a critical source of local revenue, property tax is farfromproviding itspotentialyield inAfrica. InKenya,Uganda,TanzaniaandZambia,valuationrollsareincompleteandobsolete.Thoughalreadyexempted from some taxes, cash-strapped government agencies delaypaymentof transfersandgrants,whileresidentsareangeredby thepoorquality of urban services and refuse to pay for them. Land-consumingindustrial and commercial projects benefit from tax exemptions, as dogreenfield housing estates. The use of income tax as a source of localrevenueislimited.Whereitexists,asinUgandaandTanzania,performanceiscrippledbytheproliferationofinformalactivities,compellingauthoritiestochargeflatratesonself-employedindividuals.TradelicensesandfeesaresignificantsourcesoflocalrevenueinbothEastandWestAfrica.Increasingthesefeeshasprovedratherunpopularandledtowidespreadevasion.FewmunicipalitiesinAfricaownincome-generatingenterprises,andthosethatexistdonotcontributesignificantlytolocalfinances.

Userchargesforservicesarelow,thebillingsinefficientandthecollectionsinadequatetocoverthecostofprovidingtheservices.Inmanycases,centralandlocalgovernmentsrefusetoincreaseuserfees,outoffearofangeringpoliticallypotentconstituenciesortriggeringcivildisturbances.Similarly,local authorities are often unwilling to enforce collection of politicallysensitivetaxes.Providingservicestopoorsectionsofthepopulationposesamajor challenge. Local initiatives include freeminimum consumptionandgrantsforbasicservices,as inSouthAfrica,orcross-subsidiesas inBotswana,tosecureamoreequitablefeeschedule(Box5).

4.7.1 Tax increment financing

Tax increment financing (TIF)was first introduced in theUSA and hasbecomeincreasinglypopularamonglocalauthoritieseagertofindoff-budgetresourcesforurbandevelopmentprojects.TIFinvolveseconomicallyandfinanciallyviableprojects, suchas themixed-useprojects and industrialandofficeparkswhichtheschemehasextensivelysupported.Arevenue-generatingstrategyforbuoyanteconomies,TIFcanbecomedysfunctional


Box 5. Cross-subsidies in Botswana

Botswanaencapsulatesthedifficultiesinimplementingdecentralizedfiscal policies under adverse economic conditions. Local authorityreforms have devolved responsibility for constructing and managinga largepartof thecountry’s social infrastructureandawide rangeofservices. Local authorities prepare a six-year development planconcurrentwiththesix-yearNationalPlan.Onceaplanisapproved,funds are guaranteed by the central government, ensuring that anyprojectsstartedareeventuallycompleted.

Municipalauthoritiesarefundedthroughtheirownrevenuesources:revenuesupportgrants, referred toas“deficit”grants;developmentgrants;andloansfromBotswana’sPublicDebtServiceFund(PDSF),whicharefrozenatthepresenttime.Localcouncilschargeaflatfeeforurbanservices,accountingfor1.2percenttothreepercentoftotalrevenue.Otherchargesaredirectlylinkedtousagesuchassanitation,waste removal, education and cost-sharing charges in health.Bettermentfeesarealsoleviedonnewurbandevelopment,primarilyservicedsitesandbuildingplots.InBotswana,localgovernmentisnotempoweredtoborrowonthedomesticcapitalmarket.Furthermore,localauthoritiesarerequiredtoseekauthorizationfromtheMinisterofFinancetospendanyamountexceeding10percentofthebalanceintheirGeneralFundAccount. Thiscreatesaparadoxicalsituationwhere cash-strapped municipalities accumulate surpluses in theirGeneralFundAccount,andthenationalgovernmentusestheseforcedsavingsforitsownpurposes.ThefundsaredepositedwiththeBankofBotswanaandthelocalcouncilcanonlyusetheinterestgenerated.

The country’s capital, Gaborone, exemplifies the challenge citiesface in meeting the requirements of rapid urban growth with theirlimited resources.Transfergrants cover approximately60per centofthe recurrent budget and the bulk of capital investments. They havebeen rising over the years due to the growing cost of operation andmaintenanceof infrastructure andexpenditureson social security andwelfare programmes. The revenue from rates and property taxes


accountforaround25percentoftotalrevenue,assquattersettlementsrepresent 53per cent of the total housing stock in the city.Valuationrollsareincomplete,andobsoleterecordsimpairbillingsandcollections.Furthermore,centralgovernmentandparastatalorganizationsdonotpaythetaxestheyowethemunicipality,andtheirarrearsrosefromUSD2.4million in 1999 to USD 6.4 million in the year 2000, plus USD0.7millionaccumulated interest.Thecity taxescommercialpremisesandleviesbusinesstaxesonlicenses,marketstallsandfoodvendors,aswellasentertainment.Thesetaxesareeitherannualflatratetaxesorpayableonuseofservices.Lowassessments,highdefaultratesandthesizeofthe informal economy, combinewith theproliferationofunregisteredbusinessesandinadequaterecordstoeroderevenuepotential.

The Water Utilities Corporation operates Gaborone’s water supplysystem,butthecityCouncilisresponsibleforsanitation,extendingthewater-bornesystemtolower-incomecommunitiesatacostofoverUSD20million. Even a sharp increase in sewer connection rateswill notrecoupthiscost.Thecity’ssolidwastecollectionanddisposalsystemistobeprivatized.Botswana’scapitalhaslaunchedanambitiousupgradingprogrammefinancedinpartbyservicelevies.TheCouncil’sinabilitytocollectarrears isprompting theoutsourcingof loanmanagement tofinancialinstitutionsorprivatecompanies.Tomeetitsobligations,thecitycanonlyborrowfromthecentralgovernmentthroughtheCapitalAccount. In FY2000, the City of Gaborone owed seven million USdollars,payableover25yearsataninterestrateof14.6percent.

Source: Mosha, 2004.

during downturns when receipts plummet, or tend to collapse duringprolongedrecessions.

TIFallowsStateandlocalauthoritiestomeettheupfrontcostsofcapitalinvestments in infrastructure andother improvements that are needed tobring idle assets, particularly vacant land, into productive use throughborrowing.TIFbondsarerepaidfromrevenuesgeneratedbytheadditional

Box 5. (continued).


taxreceiptsonrealestate,personalproperty,andbusinessesdevelopedbytheprivatesectorthroughuseofpublicassets.

Itisassumedthatreceiptswillbesufficienttoservicethedebtaswellaspaytheoperationandmaintenanceexpensesofthenewinfrastructure.Thering-fencedstatusofaTIFdistrictentailsthatbondproceedscanonlybespentonexpenditureswithinthedelineatedboundariesoftheTIFdistrict.ScalingdownordeferringsubsequentphasesoftheprojectdonotreleaseTIFbondproceedsforuseasgenerallocalrevenue.

The TIF concept carries significant risks. Estimates of incremental taxreceiptstobederivedfromnewdevelopmentsarespeculative.Theymaynotmaterializetotheextent,orinthetime-frame,anticipated.Insuchcases,thelocalgovernmentisforcedtoissuegeneralobligationbondstocovertheshortfall,therebyincurringnewdebttoserviceoff-budgetborrowing.Thenewactivitieswillplacedemandsonpublicservices:education,health,solidwastemanagement,policing,andrecreational facilities; thesecarryfurthercapital,operationandmaintenancecoststhatcannotbecoveredbytheTIFbondproceedsandmaynotbemetbytheadditionaltaxrevenue.Imposingimpactfeesorexactionsondevelopersandinvestorswillworkatcross-purposeswiththeneedtoacceleratethepaceofprivateinvestmentinordertoensurethefinancialviabilityofthedevelopment.


5.SpecialfundingsourcesandtargetedfundsWithdecentralization,municipalitieshavebecomeincreasinglydependentontheavailabilityoflong-termcapitalsourcestofinancethepurchaseorconstructionoffixedassets.Yet,financingofadequatematuritycontinuestobeascarcecommodityindevelopingcountries.Availablefundinghasbeenlargelyconfinedto:

• Grantsoroccasionallong-termloansfromcentralgovernment

• Loanfundssponsoredorpartiallyfundedbycentralgovernment

• Loans or credits from multi-lateral or bi-lateral developmentorganizations

• Targeteddomesticandforeignbondissues.

Fundingfromthesevarioussourcesisnotonlylimitedwhencomparedwiththeneedsoflocalgovernment,buttendstobeallocatedprimarilytoafewlargemunicipalitiesor tospecificcategoriesof infrastructure.Exceptforloansfromcentralgovernment,mostothersourcesdrawonforeignfundingwhich,inadditiontostandardinterestcosts,carriesforeignexchangerisksthatcannoteasilybebornebylocalauthorities.

5.1 Municipal Development Funds

ManycountrieshaveestablishedMunicipalDevelopmentFunds(MDFs)to provide regional and local governments with much-needed capital.ThePublicWorksLoanBoard(UK)andtheCréditFoncier(France)areamongtheoldestandhaveservedasmodelsforothercountries.Typically,MDFs have been sponsored by central governments, with internationaldevelopment organizations initially participating in the creation of theseinstitutions. Some poorly managed MDFs have collapsed, while othershave been sustained and continue to finance development projects.Yetothers have managed to leverage local capital contributions, and a fewhaveevolvedintosuchnoteworthyinstitutionsasColumbia’sFinanciera de Desarrollo Territorial (FINDETER) and the Development Bank ofSouthernAfrica(DBSA).


Thebasicoperationofamunicipaldevelopmentfundisstraightforward.Itsinitialcapitalizationistypicallyprovidedbythecentralgovernment,ideally,in non-returnable funds.Where provided in the form of debt, eventualrepaymentmaycausethefundtoimplodeunlessthedebtcanberefinancedfromothersources.Adequatenon-returnablecapitalcanbeenhancedbythegovernment,orotherprovider,allowingtheMDFtoretainearningsratherthanpayingsomeformofdividend.CapitalizationofaMDFcanattimesentailusingthecontributedcapitalascollateralforlong-termborrowings.Unless a robust relationship of equity to debt ismaintained, the risk ofinstabilityandeventualimplosionremains.

5.1.1 The Public Works Loan Board, UK

TheUKPublicWorksLoanBoard (PWLB)was established as early as1793andwasinstitutionalizedasapermanentbodyin1817.Ithasservedasamodelforsubsequent“localgovernmentloansfunds”and“municipaldevelopmentfunds.”PWLBdrawsontheNationalLoansFundtofinancelocalauthoritiesandothereligibleentities.ItsBoardof12Commissionersis appointedby theCrown for four years; they review loan applicationsfromlocalauthoritiesandotherbodiesandcollectrepayments.Atpresent,nearlyallborrowersarelocalauthorities.TheCommissionersarelegallyrequired,beforegrantingaloan,tosatisfythemselvesthatanauthorityhasthecapacityforserviceandrepayment.RatesofinterestaredeterminedbytheTreasury.ThePWLB’srecordofdebt-collectionhasbeenexemplary.Allsecuritiesrankequallywithoutanypriorityandarechargedindifferentlytoalllocalrevenues.ThePWLBhasmadeasubstantialcontributiontopost-WorldWarIIreconstructionandtotheconstructionofcouncilhousingintheUK.

In1945,theLocalAuthoritiesLoansActrequiredvirtuallyallborrowingtobefromPWLB.Thisrestrictionwasliftedin1952andby1955thePWLBbecamelenderoflastresort,asonlythelargestlocalauthoritieswereabletoborrowon theprivatecapitalmarkets.Subsequently, tighter access toPWLB loans, combinedwith the inability of smaller local authorities toobtain long-term credit, caused local authorities to rely upon excessiveshort-termborrowingthroughloanspoolingorsinkingfunds.Whenloans


becamedue, theyweresimplyrolledover.Minimumrevenueprovisionswere based on asset lives and included in annual budgets, ensuring thatloanswouldbegraduallyrepaidovertheagreedperiod.By1963theBritishTreasury,alarmedattheamountoflocaldebtheldinshort-terminstruments,restrictedtemporaryborrowingtonomorethan25percentofeachlocalauthority’sdebtportfolio.AccesstothePWLBwasrelaxedandmorelocalauthoritieswereallowedtoissuebonds.

Duringthe1980s,newcontrolsonthefiscaldiscretionoflocalauthoritieswereintroducedinabidtocurboverspending.In1981,capitalexpenditurehad tobecontrolledbyannualallocations.Capital receiptsgeneratedbyprivatizationsalesweredesignatedforcapitalinvestmentsortorepaylong-termdebt.The“BlockGrant”wascalculatedtopenalize“high-spending”local authorities. In 1984, rate limitation capped the levymade by anycouncilwhichthecentralgovernmentconsideredtobe“overspending.”Inthe1990s,theHousingRevenueAccountwastreatedasaseparatefundandnotransferswereallowedfromlocaltaxesorrevenuestosubsidizetenantrents.In1995,capitalcontrolswereextendedtocompaniescontrolledorinfluenced by local authorities and until 1998 some capital receipts hadtobesetasideas“provisionsforcreditliabilities”.However,by1999theearliercapping limitsonrate levieswerereplacedbymulti-yearreviewsoflocalbudgets,withrestrictionsontaxesasalastresort.Fundingcapitalinvestmentsolelythroughgrantscancreateincentivestoinvestinnewassetsandneglecttherepairandmaintenanceofexistingones.Thisisprobablythereasonwhyinacapital-scarcesituation,thetendencyistoover-investinfixedassets(IADF,2004;Jones,2004).

5.1.2. Financiera de Desarrollo Territorial (FINDETER), Colombia

Providing long-term funding sources which municipalities can accessto finance capital improvements requires more than the creation andcapitalizationofaspecializedinstitution.Thelong-termviabilityofsuchaninstitutiondependsonitsstabilityasaborrower,onaccesstothedomesticandevenpossiblyinternationalfinancialmarkets,andontheinstitution’sabilitytorecoverloansfromindividualborrowers.Localgovernmentlack


ofexperienceindebtmanagementhasoftenresultedindelayedrepaymentoroutrightdefault.Therefore, ifaMDFis tosucceed,creditavailabilitymust bematched by financialmanagement capacities among borrowingmunicipalities.Throughacombinationofcredittobothpublicandprivateentitieswiththeassessmentoftheirborrowingcapacityandstrengtheningoftheirmanagerialcapacity-building,Colombia’sFINDETERhasenableddevolved authorities to access private markets to finance most of theircapitalinvestmentsneedsunderfavourabletermsandconditions(seeBox6).

5.1.3. The Municipal Development Fund of Georgia

Establishedin1997,theMunicipalDevelopmentFundoftheRepublicofGeorgiawaspartofabroadermunicipaldevelopmentanddecentralizationinitiative to fund capital investment in the repair and rehabilitation ofmunicipal infrastructureandserviceequipment. Its successdemonstratesthatwithadequateappraisalofprojectfundingapplications,awell-managedMDFcanbesustainablewithoutadditionalcapitalization,evenunderthedifficultadjustmentsexperiencedbyformerCIScountries(seeBox7).

5.1.4. The Alberta Capital Finance Authority, Canada

TheAlbertaCapitalFinanceAuthority(ACFA)wasestablishedin1956asanon-profitentity.Underitsenablinglegislation,theProvinceofAlbertaguaranteesACFA debt. The Board of Directors includes the LieutenantGovernoroftheprovinceandfiveappointedrepresentativesoftheClassAshareholder.EachoftheothergroupsofshareholderselectsonedirectortotheBoard.Bytheendof2003,ACFAassetstotalledUSD4.05billion.ItsloanportfoliostoodatUSD3.94billion,whileitsownoutstandingdebtwasamountedtoUSD3.97billion.ACFA’screditisratedAAAanditraisescapitalintheCanadianandforeignfinancialmarkets.

The majority of ACFA borrowers are municipalities. Their financialconstraints include balanced budgets and debt service limits.Borrowingtermsrangefromthreetoasmanyas30years.Amortizationandmaturitytermson loansmustbe in tunewith theworking life-cyclesofprojects;theseincludewaterandsewerfacilities,roadsandbridges,transportation,


Box 6. FINDETER, Colombia

InColombia,decentralizationhasgivenmunicipalitiesstrongrevenue-generation powers along with responsibility for urban services,includingwaterandsanitation,streetlighting,educationandhealth.Increases in the local share of national taxes have boosted centraltransfersandimprovedinlocalrevenuegeneration,butmunicipalitiesareunabletoaccesslong-termfundingforcapitalinvestmentsonthedomesticcapitalmarket.Sincetheyholdmostlyshort-termliabilities,financialintermediariesarereluctanttoprovidelong-termfinancing,especiallytomunicipalitieswithnotrackrecordofadministeringlong-termdebt. In 1990, to address this problem,Colombia restructureditsFund forUrbanand InfrastructureDevelopment (FFDU),whichoperatedfromwithinamortgagebank,andestablishedaMunicipalDevelopmentFund,knownasFINDETERwithsponsorshipfromtheIADBandtheWorldBank.UnlikeconventionalMDFs,FINDETERis a second-tier lender which rediscounts loans granted by privatebankstomunicipalborrowersforcapitalprojects.

Since 1990, FINDETER has approved loans totalling 4.18 trillionColombian pesos (COP) while the amount disbursed did not exceedCOP2.61 trillion (62.4 per cent). Between 1990 and 1999, the totalvolumeofapprovedloansgrewfromCOP37billionto413.5billion.The financial crisis of 1999-2001 resulted in a sharp reduction inFINDETERloanapprovals(toCOP229billion).By2001,newlawswerepassedthatstreamlinedinter-governmentaltransfersandfreedupextrarevenuestoaddressfiscalimbalances.FINDETER’soperationswererestructuredandstreamlinedaswellforimprovedefficiencyandeffectiveness. Over time, FINDETER has evolved from a municipaldevelopmentfundthatdisbursedcreditatsubsidizedrates,toafinancialinstitutionthatprovidescreditatmarketrates.Loanapprovalhasbeendevolved to the participating commercial banks, reducing the timeneededtoobtaincreditfromupto18monthstoaroundsixmonths.Inrecognitionofthegrowingscopeforpartnershipsinlocaldevelopment,therangeofborrowerswasexpandedtoincludepublic/privateandprivatesectorentities.Clientsnowincludedistrictandmetropolitanauthorities,privatecompaniesandNGOsthatprovideeducation,culturalandotherpublicservices.


In 2003, FINDETER-approved loans totaled COP1.02 trillion, a64.1percentincreaseoverthepreviousyear.ThissignificantgrowthwasmadepossiblebyLaw795of2003,whichexpandedtherangeofcapital investments thatFINDETERcouldfinanceto includetheenvironmentalfield,;thelawalsobroadenedtherangeofborrowersand extended credit to leasing operations. Furthermore, a so-called“Automatic Rediscount” Scheme” authorizes intermediary banksdirectlytoapprovecreditstofinanceeducationandservicesprojects.FINDETER will typically lend the entire project amount. Loansmaturitiesaremuchlonger,upto12years,andgraceperiodsofupto three years are often built into amortization schedules. Between1990 and 2004, basic services accounted for the bulk ofmunicipalborrowing from FINDETER, with urban services accounting for37 per cent of disbursements, roads and transport for 30 per cent,and educational facilities for 13 per cent.As a second-tier lender,FINDETERrediscountsupto100percentofloansmadetodevolvedauthoritiesbycommercialbanks,butdoesnottakeonthecreditrisk.Commercialbanksareresponsiblefortheirownprojectappraisalsandcarrytheirowncreditrisks.Loanscarryavariableinterestrateandflatfeesarechargedformonitoringandloancommitment.

FINDETER fully covers its own operating costs, foreign exchangeand credit risks, and produces a positive return on investment. Anumberofarrangementssubstantiallyreducerisk.CommercialbanksareliabletoFINDETERiftheirborrowersdefault,andanymunicipalrevenuepledgedasloanguaranteetothebankscanbeusedtorepayFINDETER.Furthermore,thepercentageofmunicipalrevenuesthatcanbepledged iscappedand lowerboundsare setondebt servicecoverage ratios. Municipal infrastructure loans cannot exceed amaximumloan-to-valueratioof70percent,andamunicipalitythatdefaults on a FINDETER-backed loan is barred from new fundingthroughFINDETER.

Box 6. (continued).


land purchase, buildings, vehicles,machinery and equipment aswell asairport infrastructure, irrigation works, energy efficiency projects andparking(AlbertaCapitalFinanceReport:IADF,2004).

5.1.5. The Development Bank of Southern Africa

TheDevelopmentBankofSouthernAfrica(DBSA)wasestablishedin1983.ItiswhollyownedbytheRepublicofSouthAfrica.Itwasreorganizedafter1994withamissiontomobilizeandprovidefinanceandexpertise,aswellas to establish partnerships to develop infrastructure and improve livingstandards in SouthernAfrica.DBSA total assets are valued atUSD3.41billion,withtotalborrowingsofUSD1.57billion.Thebank’screditratingsareexcellent,partlythankstoanuninterruptedstringofnetsurplusessincecreation,andtotalcapitalizationstandsatUSD1.71billion.DBSAdoesnotpaytaxesordividendstothegovernment.Bondissuanceinlocalcurrency

Althoughitowns86percentofFINDETER’scapital,theColombiangovernment does not guarantee bonds issued by the fund; and at adifference to itspredecessorFFDU, localgovernmentand financialintermediaries are not compelled to buy FINDETER bonds.FINDETER’sfinancialstrengthhasbeenshoredupbyrecentchangesin the management of inter-governmental transfers. Under thesearrangements,sharedrevenuesareusedaspartoftheloansecurities.In addition, however, FINDETER is granted power of interceptionover the transfers of these revenues. Interest rates declined and theshare of private capital increased. BetweenAugust 2002 and June2004, 64.75 per cent of FINDETER’s resources originated in thepublicsector(COP954,281billion)and35.25percentintheprivatesector (COP519,579billion). FINDETER remains critical to small-and medium-size municipalities, for whom it sets a ceiling onthemaximum interest rate banks can charge on the loans the fundrefinances.

Source: FINDETER, 2004; Freire and Petersen, 2004.

Box 6. (continued).


Box 7. The Municipal Development Fund of Georgia

InthisCaucasiancountry,accesstofinancebylocalauthoritiesandutilitieshasbeenthemainchallengetoeffortstoreversethedeclineinlivingstandardsarisingfromthebreakdownofbasicurbanservices.TheMDFsupervisoryboardisappointedbythecountry’spresidentand the fund is supervised by theMinistry of Finance. It is set upasaself-fundedrevolvingfundthroughthemobilizationofdomesticandexternalcapitalresources.ThestartupcapitalwasprovidedbyaUSD1.5millionloanfromIDA.RepaymentsbyborrowersandlimitedfinancingfromgovernmentareexpectedtoprovidefortheservicingofdebtowedtoMDF.

Apreliminaryassessment in2002showed thatMDFfundingof83capital investment projects worth about USD 17 million resultedin significant improvements in the quality of municipal servicedeliveryinthe12participatinglocalauthorities.Around55percentofMDFfinancialresourceswenttorehabilitationofurbanroadsandanother20percenttoimprovedwatersupplyandseweragesystems.More generally, the assessment highlighted the link betweenMDFperformance and the technical and managerial capacity of localgovernment.TogainaccesstoMDFfinancing,localauthoritiesmustidentify feasible capital investments and demonstrate their capacityto repay. TheMDF assists in the preparation of proposals. Localauthoritiesmustimproverevenuecollection,budgetingandfinancialmanagement.InGeorgiabetween1998and2000,budgetaryincomeincreasedby30percentanddebtcapacitybyafactorof2.5,thankstoacombinationoftrimmingadministrativecosts,adoptionofcompetitiveprocurementproceduresandcreationoffinanciallyautonomouslocalutilitycompanies.

Even under optimistic assumptions, only about 30 local authoritiesandutilitieswereabletoborrowfromMDFintheshort-andmedium-term,andtheirtotalborrowingcapacitywasunlikelytoexceedfourmillionGeorgianlaris(GEL)(orUSD2.0million).Inabidtokeepitscustomerbaseaslargeaspossible,whileaddressinganaccelerating


deterioration of municipal infrastructure and services, MDF offersfinancingthatcombinesloanswithmatchinggrantsmadepossiblebyaccesstoIDAfunding.MDFloanscanonlybeusedforrehabilitationofexistinginfrastructure,includingreplacementofequipment.Theycannotbeused for landacquisition,purchaseofvehiclesorbudgetsupport(includingworkingcapitalforcommercialenterprises).

A new IDA credit provided USD13.1 million towards additionalcapitalizationofUSD24.8million;USD6.7million is tobederivedfromloanre-flows(principalandinterest,netofoperatingexpenses),which in2002-2003 totaledUSD5.7million,andanadditional fivemillionUS dollars will be provided by borrowing local entities inthe form of upfront contributions.MDF extends financing in localcurrency for a maximum USD600,000 equivalent. Borrowers areexpectedtomeet20percentofprojectcosts.MDFprovides40percentasagrantapprovedbytheGovernmentofGeorgiaandfundedthroughIDA.Theremaining40percent isextendedasa loanover10yearsatafixedannualinterestrateof15percent,withaone-yeargraceperiod.Eligibility requirementsare thatdebtservicedoesnotexceed25percentofprior-yearoperatingsurplusandtotaldebtdoesnotexceed60percentofordinaryincome.Arrearsonsalariesmustnotexceed10percentoftotalincomeandtransferpaymentstoplugunplannedbudgetdeficitsmustbelessthan25percent.ThisstructureisexpectedtoensureMDF’sfinancialsustainabilitywhilepromotinglocaldevelopment,fosteringsoundmunicipalfinancialmanagementandimprovingthequalityofthelivingenvironment.

Source: Medlock, 2004.

Box 7. (continued).


is its current main source of funding. DBSA also receives loans frominternationaldevelopmentfinancialinstitutions.

DBSAmakesgrants,lends,invests,underwritescapitalissuesandarrangesother typesof funding.Asapartner toborrowers, it actsasacatalystandprovidesassistance.TotalloanapprovalstodatestandatUSD4.45billionanddisbursementsatUSD3.93billion,withinvestmentsindebtandequityfundsamountingto902millionSouthAfricanrand(SAR)(oraboutUSD115million).Some75percentofDBSAlending iswithinSouthAfrica,withtheremainderinothercountriesintheregion.About60percentofloansgotowater,energy,roadanddrainageprojects;15percenttocommercialprojects;theremainderisforeducation,sanitationandsocialinfrastructure(Robinson,2004a).

5.1.6. The Philippine Municipal Development Fund

ThePhilippineMunicipalDevelopmentFundisaninitiativeoftheWorldBank and other donor institutions. Established in 1984, the PhilippineMunicipalDevelopment Fund provides both loan and grant funding forcapital developmentprojects.For largeprojects, grant funding canmeetup to70per centof thecapital cost.Loansare tied togrants invariousstructuredways.

Localgovernmentwaterandsanitationprojectsmustbeprivatelymanagedand under “design, build, operate” arrangements. Local authorities useoperators’ leasepayments to service thedebt contracted for the relevantproject. A parallel initiative, undertaken with the Land Bank of thePhilippines,hasaddedseweragecomponentstosomeofthewaterprojects.Raisingtherevenueneededtomeetdebtserviceobligationshasprovedachallengeforthisinitiative,asseweragechargesaredifficulttoenforce.

An important stated purpose of the MDF was to attract private capitalfor local infrastructure funding.Programmeadministrators sought soundprojects and creditworthy local authorities where governments werereluctanttoriskdamagingtheircreditratingsthroughborrowingsonprivatemarkets at commercial interest rates. Banks have a marked preferencefor shorter debtmaturities than are appropriate for the economic life of


infrastructure,andareunwillingtoaddressthecash-flowissuesresultingfromshortamortizationschedules.

The Bankers’ Association of the Philippines has voiced concern overinsuringmembersagainstthecreditrisksassociatedwithlendingtolocalgovernment.ALocalGovernmentUnitGuaranteeCorporation has beencreatedtoguaranteeloansandratethecreditofindividuallocalauthorities.Bymid-2003,theentityhadguaranteedsomeUSD33millionworthofloans.Theunit’scapitalization(aboutsevenmillionUSdollars)isstillsmall,butissupplementedbyuncalledcapitalpledgedbyover20participatingbanks.However,debtmaturitiesinlinewiththelifecycleofpublicinfrastructureprojectsarestilllacking(IADF,2004;FreireandPetersen,2004).

5.2 Regional/State funds for urban and regional development

Incountrieswheretheregional/Stateauthoritieshavebroadcompetencesandaroleingovernancewithcommensuratefinancialresources,theycancreate special funds to support municipalities within their jurisdictions.Countrieswithafederalstructurehaveledthistrend,asillustratedbytheoutstandingexamplesofTamilNadu,India,aswellasParanácidadeandParaUrbe,bothinBrazil.

5.2.1 The Tamil Nadu Urban Development Fund (TNUDF), India

In India, fiscal responsibilities have largely remained under centralgovernment control, as State and local expenditures are notmatched byown-sourcerevenues.Untilveryrecently,onlythelargestlocalauthorities(municipalcorporations)hadsignificantborrowingpowers,whilesmalleroneshadvirtuallynopowertoborrowforcapitalexpenditureandverylittleauthoritytoraiselocalrevenues.InTamilNadu,theUrbanLocalBodiesActof1998broughtalloftheState’surbanmunicipalitiesundercommonlegislationwith respect to their powers to borrow. Such borrowingmaytaketheformofdebentures(bonds)securedonlocalgovernmentassetsorrevenues.However,debtservicemustbepayablefromdesignatedrevenues,suchasuserchargesorescrowed taxcollections.TheTNUDFisunique


in that it hasmanaged to evolve over the years from a State-controlledandmanagedfundintooneofthemostcreativelocaldevelopmentfunds,offeringarangeofinnovativefinancialproducts(seeBox8).

5.2.2 The role of the States in urban development finance in Brazil

Their pre-eminent role in a federal system gives States in Brazil theresponsibilityandpowertoassistmunicipalitiesintheirtransitiontofiscalautonomy.TworecentdevelopmentsinParanáStateillustratetheevolutionof a municipal development fund from a purely financial institution toone that takesanactive role inbuilding localcapacity through technicalassistanceinprojectevaluation.

The first, Paranácidade, was established in June 1996 as a non-profitautonomous entity to promote urban and regional development. It tookover the functions of the Paraná StateMunicipalAssistance Foundationand manages the Paraná State Urban Development Fund (FDU) thatprovidesfinancingformunicipalcapitalinvestmentthroughouttheState.Paranácidadealsoprovidestechnicalassistancetostrengtheninstitutionaldevelopment at municipal level. Specific areas of assistance includeadministrative,humanresource,taxandfinancialmanagementaswellasurbanplanningandinformationsystems.ParanácidadeissupervisedbytheStateSecretariat ofUrbanDevelopment, and is accountable to theStatelegislature.Thefundassistsmunicipalitieswithprojectidentificationandimplementation.Thishas increasedoperational efficiencyand fosteredasenseofownershiponthepartofmunicipalities.

TheFDUrunsanurbandevelopmentprogramme(ParanáUrbano)fundedby a loan from the IADB.From1996 to 1999,ParanáUrbano financed2,356projectsofwhich1,942werecapitalinvestmentand414dealtwithinstitutionaldevelopment.Basicinfrastructureaccountsfor84percentofprojects,with street paving,water and sewerage and purchase of heavyequipmentdominatingfundingrequests.Overall,380outofthe399ParanáStatemunicipalitieshavebenefitedfromParanáUrbano.Theprogrammealso funds public agencies operating at the regional and city level. TheSanitation Company of the State of Paraná (SANEPAR), established in


Box 8. The Tamil Nadu Urban Development Fund (TNUDF), India

TheTNUDFhasevolvedfromamunicipaltrustfundtooneestablishedandmanagedbythepublicandprivatesectors.Theinitialfund,knownas theMunicipal Urban Development Fund, was financed entirelybythepublicsector toreducethemassivebacklogof infrastructureinvestmentandimprovethedeliveryofbasicurbanservices.Itwaslaunched in 1988 with a concession loan from the InternationalDevelopmentAssociation(IDA).

In1996,inordertoachievemanagerialefficiencyandattractprivatecapital for urban infrastructure, the fund was converted into anautonomous financial intermediary.Establishedasa trust fundwithprivateequityparticipation, theTNUDFwasthefirstpublic-privatepartnershipinIndiathatprovidedlong-termmunicipalfinancingforinfrastructurewithoutguarantees.Insteadofmerelychannellingpublicfunds,thepurposeistoattractfinancingfromtheprivatesector.ThefundalsomanagesaseparategrantfundownedbytheStategovernmenttofinancepovertyalleviationprojects.TheTNUDFismanagedbyaprivate corporation, theTamilNaduUrban Infrastructure FinancialServices Ltd. Financial institutions have committed to provide anamountequal to44percentof the initialcontributionof theTamilNaduStateGovernment.TheFund’sManagementBoardiscomprisedof representatives from the State government and participatingfinancialinstitutions.Borrowersarerequiredtosticktoconservativefinancial management practices and to meet performance targets,including for debt service reserves andmaking appropriate sinkingfundcontributions.

Thefund’sdebtfinancingdependsmainlyuponthesurplusesofthemunicipalborrowers,asituationsimilartorevolvingfundsinEuropeand theUSA.TheTNUDF ismaking a significant contribution tocapitalinvestmentneedsforlarge,lumpyandnon-revenue-generatingprojects.Formanysmalllocalgovernmentsthatareunabletoaccessthe markets directly, the fund provides a pooling mechanism andindirect access together with enhanced credit. Such arrangements


1963,provideswatersupply toabout98percentof thepopulation.Theutility covers its costs, includingcapitaldepreciation,without anydirectsubsidies from the government. SANEPAR relies on loans from publicfinancialinstitutionsincludingFDU/Paranácidade.UnderParanáUrbano,SANEPAR received a BRL60 million loan to extend the reach of theseweragesystem.

Paranácidadehas developed its own software to compute the borrowingceilingforeachmunicipalityunderthefederalLawofFiscalResponsibility.MunicipalitiesmustputuptheirmandatedState transfersascollateral incaseofdefault.Thisguaranteecombineswithactive involvementof theregionalmunicipal associations to ensure that non-performing loans arequasiunknown(IADF,2004).

Another Brazilian State, Pará, has also established a dedicated fund tofinance programmes and projects that promote economic developmentand mitigate regional disparities. The Economic and DevelopmentFund transfers someUSD25million annually to eligiblemunicipalities.These non-mandated, discretionary transfers require only modest localcounterpart contributions. The fund channels resources through ParáUrbe, a multiphase programme that supports municipalities undergoinginstitutionaladjustmentandenablesimplementationofInstitutionalActionandInvestmentPlansinallmunicipalities.Throughdiscretionarytransfers,theStateofParápromotesmunicipaltaxrevenue,morerationalmunicipalspendingandcompliancewiththeLawofFiscalResponsibility.TheParáUrbeprogrammeisadministeredbytheStateofParáDepartmentofUrbanandRegionalDevelopment,andreceives40percentofthefundsallocatedto theEconomicandDevelopmentFund.Thebalance is financedbyanIADB loan to the State and by other State resources.The purpose is to

can be especially appropriate for sewerage projects, which requiresubstantialfundsoverrepaymentperiodsof20yearsormore.

Source: Freire and others, 2004; INTA, 2004; Singh,2004;World Bank 2003, 2004.

Box 8. (continued).


make the Pará Urbe programme a permanent system of non-mandated,matching-granttypesoftransfertomunicipalitiesforcapitalinvestmentsininfrastructureandlocalandregionalservices,withaviewtopromotinginter-municipalcompactsandcollaborativeaction(Riettiandothers2002).

5.2.3. Local partnerships for the establishment of Development Funds

Macro-economicconditionsallowing,opportunitiesmayopenupforjointactionandpartnershipstoaccessfundsforcapitalinvestment.Indevelopingcountries,andbeyondenhancingthecapacityoflocalauthoritiestoobtainfunding on favourable terms, central government leadership, guidanceand participation are critical to the ability of smaller municipalities tofinancecapitalinvestments.Inpoorercountries,strongexternal,technicaland financial support, mostly from donors, is needed to help mobilizestakeholderstosetupdevelopmentfunds.Localgovernmentsmustalsobelegallyempoweredtocreatesuchfunds.Alternatively,thefundcanprovidethemechanismneededtoovercometheregulatoryconstraintshamperingthe municipalities’ ability to finance capital investments. The examplesdescribedbelowillustratethepotentialoftheselocalpartnerships.

5.2.4 The Kommuninvest Corporation, Sweden

In Europe,municipalities are empowered to engage in collective, inter-municipalinitiatives.SwedishmunicipalitiesusedthisapproachtoestablishtheKommuninvestCorporationthroughwhichtheycouldraisefundsonthecapitalmarkets(seeBox9).Asfortheconceptofpooledfinancing,ithasbeenimportedandadaptedbyleadingmunicipaldevelopmentfundsindevelopingcountries,asintheaforementionedcaseofIndia’sTamilNaduUrbanDevelopmentFund.

InCentralAmerica,nationaleconomicconstraintscombinewiththegeneralpovertyofthepopulationandtheweaknessofmunicipalinstitutionstocallforoutsidepartnerswhensettingupdevelopmentfunds.


Box 9. The Kommuninvest Corporation, Sweden

The Kommuninvest Corporation is a co-operative association ofmunicipalities established in 1986 in Sweden by 10municipalitiesand the Örebro County Council. All Swedish municipalities canjoin the association.Wholly owned by its member municipalities,Kommuninvestprovidesfundingforarangeofcapital investments,including infrastructure and educational improvements. Lendingterms are the same for all member municipalities, irrespective ofloan size. Kommuninvest raises funds through bond issues on theEuropean, Swedish and Japanese capitalmarkets.The co-operativenatureoftheventurekeepsoverheadstoaminimum.Intheyear2000,Kommuninvestwasabletoissuea500millioneurobond,itslargestsingleissuetodate.Theaverageinterestrateonloansgrantedin2003was4.2percent,downfrom4.84percentin2002.Kommuninvestprovidesmembermunicipalitieswith35percentoftheirtotalborrowedfunds.ItisthelargestmunicipallenderinSweden

The members of Kommuninvest Co-operative Society must signboth joint and separateguarantees to cover all of the creditmarketcompany’sobligations.Itssolidfinancialconditionisstrengthenedbythemunicipalities’ right to levy taxes, a constitutionallyguaranteedright that contributed to Kommuninvest’s AAA credit rating onbonds denominated in foreign currencies. Swedish municipalitiesare currently slowing down on new capital investment and mostborrowingis torefinanceoldloans. Membershipisconditionedbythemunicipalities’ ability tomeet fivemajor parameters: availableand prospective liquidity, financial flexibility, financial capacity,obligationsandcommitments,andexternalfactors.

Source: Winter, 2004.


5.2.5 The Nejapa Local Development Fund, El Salvador

AtownlocatedintheSanSalvadormetropolitanarea,Nejapaisexperiencingvery rapid expansion. Some 79 per cent of the 30,000 residents areconsidered“poor”,with48percentlivingin“extremepoverty”.Amajorityliveinslumsandsquattersettlementswhere38percentareovercrowded,84percentlackwatersupply,and49percenthavenoelectricity.

ALocalDevelopmentFundwasestablishedin1997togenerateasustainedflowofresourcesforlocalcommunityinitiativestopromoteandcoordinatetherolesofmajorstakeholders,andtofosterconsensusandcollaborationforsustainabledevelopment.ACompensationFundwassetup,providingseed capital to enable the municipality to launch economically viableprojects. This fund helped overcome national regulations that constrainlocalgovernmentabilitytopre-financeinvestments.

The Local Development Fund is managed by a board of membersrepresenting various stakeholders: one central government official, twomunicipalofficials,fourrepresentativesofthetwomajorlocalenterprises(theNejapaPowerCompanyandEMBOLSAVA(representingCoca-Cola)),tworepresentativesoftheAssociationforthedevelopmentofNejapa,twomembersofFUSAIandFUNDE(NGOs)and tworepresentativesof theFIAandSIDA.ThefundhasmobilizedUSD814,297,ofwhich64percentin internationalco-operationgrants,with theprivate sectorproviding17percent,otherlocalstakeholders12percent,themunicipalityfourpercentandthecommunitythreepercent.TheMunicipalityintendstocontributeabout 20 per cent over time, as central transfers to local authorities areexpected to increase substantially under El Salvador’s recently adopteddecentralizationprogramme.

The Nejapa fund has developed 12 projects requiring investments ofUSD368,682. The projects directly benefit 53,753 individuals andorganizationsinthepublic,privateandsocialsectors.In1998and1999,the fund financedprojects for environmental recovery (reforestationandwater-relatedprojects),infrastructure(bridgeconstructionandelectricity),housing,andsocialservices(RodriguezandGarcia,2000).


5.2.6. The Czech-Moravian Guarantee and Development Bank (CMZRB)

TheCMZRBistheonlydevelopmentbankintheCzechRepublic.Itextendsfinancing to small- andmedium-sized enterprises and tomunicipalities,mainlyforeconomicdevelopment,housingconstructionandreconstruction,andinfrastructureprojects.

TheMunicipal Finance Company (MUFIS) was founded as an affiliateof the Czech-Moravian Guarantee and Development Bank in 1994 tomanageaProgrammeAgreementsignedbetweentheCzechRepublicandtheUSAto introduceaHousingGuaranteeProgramme.Theschemehasbeen implemented as aProgrammeofMunicipal InfrastructureFinance.TheCMZRBownsa49percentshareofMUFIS,theMinistryofFinancea similar share and theUnionofTowns andCommunities of theCzechRepublictheremainingtwopercent.TheobjectivewastoencouragetheCzech banking system to provide long-term loans at acceptable rates tosupportthedevelopmentofmunicipalinfrastructure.

Under theprogramme,112loansinexcessof1.4billionkorunas (CZK)(orUSD45million)havebeenprovidedinsupportof122housing-relatedprojects.Theborrowersaremunicipalitiesorassociationsthereofaswellaslocalutilities.TheloansareforuptoCZK100milliononfixedinterestoveramaximumof15yearswithanegotiablegraceperiod.

Eligibleprojectsmustbehousing-relatedandinvolvethefollowing:

• Construction and reconstruction of technical infrastructurenetworksforhousingprojects;

• Constructionorreconstructionofseweragesystems,wastewatertreatmentplants,andlandfills;

• Conversionorimprovementofheatingsystems;

• Constructionandrefurbishmentofcommunalrentalapartments,housingestates,andhomesforsenioranddisabledcitizens;

• Constructionorimprovementofin situroadsandpublictransportinfrastructure(Robinson,2004b).


5.2.7. The Virginia Resources Authority (VRA), United States of America

In 1984, recognizing a growing need for environmental infrastructurethroughouttheterritory,theVirginiaGeneralAssemblypassedlegislationtoestablishtheVirginiaWaterandSewerAssistanceAuthoritytofinanceinfrastructureprojects.In1988,thisbecametheVirginiaResourcesAuthority(VRA)toreflectitsexpandedrangeofinfrastructurefinanceoptions.TheVRAwasinitiallycreatedtoissuebondsforsolidwasteprojectsbutisnowauthorizedtofinancewater,sewer,solidwaste,airports,publicsafetyandbrownfields remediation projects through theVirginia Pooled FinancingProgramme.TheVRAhasissuedoverUSD1,500millioninbondstofundprojectsthroughoutVirginia.

ThelegislationhasbeenfurtheramendedtoallowVRAtoserveasfinancialadministratorandmanagerfortheState’sthreefederally-fundedrevolvingloanfunds:theVirginiaWaterFacilitiesRevolvingFundin1986,theVirginiaWaterSupplyRevolvingFundin1987,andtheVirginiaAirportsRevolvingFund(VARF)in1999.TogetherthethreefundshaveraisedoverUSD1.1billiontofinanceover350wastewater,drinkingwaterandairportprojects.Inaddition,VRAco-administers theCombinedSewerOverflowMatchingFundwiththeVirginiaDepartmentofEnvironmentalQuality.FundingfortheVirginiaWaterFacilitiesRevolvingFundandtheVirginiaWaterSupplyRevolvingFundisprovidedthroughUSEnvironmentalProtectionAgencygrantsthatrequireStatematchingfunds.FundingfortheVirginiaAirportsRevolvingFundisdeterminedbytheState’sGeneralAssembly.

TheVRA’sBoardofDirectorscomprisessevenmembersappointedbytheStateGovernorandconfirmedbytheGeneralAssembly,andfourex officiomembers,representingtheagenciesinvolved.TheBoardsetsadministrativepolicyandapprovesloansforborrowersunderVRAbondprogrammes.TheVRAcompleteditsthirdissueoftheVirginiaPooledFinancingProgrammeonNovember17,2004.Thusfar,ninelocalitiesandserviceauthoritieshadborrowed just underUSD58million to financewater, sewer and publicsafetyprojects;intheprocesstheytookadvantageofablended“Aaa/AA”ratingfrombothMoody’sandStandard&Poor’sratingagencies.


For most municipalities, the VRA programme offers among the mostattractive interest rates in the market. This is in addition to savings onissuance costs.On average, savings exceed 70 per cent, comparedwithsingle-projectfinancing.TheVRApassesalongtolocalgovernmentsthesavingsaccruedfromthepooledapproach.Itdoesnotimposeanup-frontbond issuance fee.Moreover, annual loan servicing fees are reduced byabout20percent.Throughaspecialarrangementwithacommerciallendinginstitution,allpooledloanborrowersareeligibleforinterimfinancingatcompetitiverates,andtheinterestcostscanbecapitalizedoncelong-termfinancingissecured(Thomas,2004).

5.2.8. Local development banks and funds offering credit to both public and private borrowers

Somefundingentitiesthatbeganas“municipaldevelopmentfunds”havenowevolvedintomixedcorporatefinanceinstitutions.Thesemaybepubliccorporations,public-privatepartnershipsorwhollycommercialinstitutionssimilartoinvestmentbanks.Inthecaseofwhollycommercialinstitutions,capital israisedbyissuingsharesonthemarketandshareholdersexpectto receive either dividends or enhanced share values. Borrowing is oncommercialterms.Withsupportoffavourablecreditratings,interestratesarecompetitiveandsustainable.Theseinstitutionsareinastrongpositionto demand and impose hard budget constraints upon borrowing localgovernments.

The impressive growth and diversity ofmunicipal financing institutionsled in the year 2000 to the creation of the InternationalAssociation ofDevelopment Funds (IADF), headquartered in Washington, DC. It hasa current membership of over 150 institutions. IADF provides linkagesbetween the funds and well-known financing institutions, as well aswith credit-rating agencies. It is assembling an invaluable library ofoperatingtechniquesonsub-nationalcapitalfundingandrelatedfinancialmanagement.


5.2.9. The Bank for Socioeconomic Initiatives (BISE), Poland

In the face of asymmetrical fiscal decentralization and economicrestructuring,PolishmunicipalitiesraisetheneededfundstomeetcapitalneedsmainlyfromlocalbanksandtheNationalFundforEnvironmentalProtection,aswellasspecializedEuropeanfinancialinstitutionssuchastheNordic InvestmentBank, theEuropeanInvestmentBankandspecializedEuropeanUnionfundsforeligibleprojects.EntryintheEuropeanUnionisexpectedtoleadtoalargerroleforEuropeaninstitutionsinPoland.TheBISEisaprivatebankfinancingprojectsthatcreatenewjobs.Itfocuseson small- and medium-size enterprises as well as municipal and otherlocalauthorities.Since1993, theBISEhasfinancedover1,200projects,including water supply, solid waste collection and disposal technology,schoolconstructionandmodernization.Typically,lendingisshorttermandBISEcarriesnosubstantiallong-termliabilities.

TheBISEderivesitsfundingfromseveralinternationalfinancialinstitutionsincludingtheWorldBank,theDevelopmentBankoftheCouncilofEurope(forloanstosmall-andmedium-sizeenterprisesandlocalauthorities)andtheNordicInvestmentBankforlong-termloanstolocalauthoritiesthatfitthelife-cycleoftheircapitalassets.

TheBISEissubjecttonationalcontrolsonbanklendingoperationsandtotherulesforpublicprocurementandcompetitivebidding.Thebankworksmainlywith smaller localauthorities,aconstituencycomprisedof2,800communesand300towns.Itslargestmunicipalclientisatownof150,000people.Thebank’sfocusonthisspecificmarketaccountsforanaverageloansizeofaboutUSD300,000onaprojectsizeofaroundUSD800,000intownswithapopulationof30,000(Medlock,2004).

5.3 Special funds

Social Investment Funds were introduced in several countries in LatinAmerica,AsiaandAfricaover the lastdecade to financeprojectsaimedat social development and poverty reduction. Environmental Funds aresimilarly structured but focus on environmental management, pollutioncontrolandthepreservationofnaturalresources.


5.3.1. Bolivia’s experience with Social Investment Funds

BoliviahastriedtoimprovetheperformanceofitsSocialInvestmentFundbyintegratingitintothesystemofinter-governmentalfiscaltransfersaimedatpromotingdecentralizationand redistributionof fiscal revenues to thepoorerareas.Externaldonationsandcreditarethemainfinancialsourceofthefunds,whichco-financeanestimated30percentofmunicipalcapitalinvestment.

International co-operation funding is administered by Bolivia’s Socialand Productive Investment Fund (FPS)which consolidates two nationalinvestment funds: the FIS and the Local Development Fund. The FPSpools international co-operation funds and distributes them among themunicipalitiestofinanceprojectsinnationalprioritysectors.Thesegrantsare generally non-refundable. Bolivian municipalities have been splitinto fivegroupsaccording toan“urgencyofneed” index (NBI).For anindividualmunicipality,thehighertheNBIforaspecificservice,thehigherthetransferwillbeandthelowerthecounterpartfundingrequired.

Attheapexofthesystem,theUniqueDirectoryofFundsguidesFPSpolicyand coordinates the grants provided by the social and local investmentfunds,aswellastheloansprovidedbyBolivia’sNationalFundforRegionalDevelopment (FNDR).Municipalitiessubmitprojects thatare rankedbyreference to their InstitutionalAdjustment Plans,which are prepared byFNDR incollaborationwithmunicipal teams. Inorder tobeeligible forinvestmentfunds,themunicipalitymustsignagreementswiththenationalfunds and commit to allocate money in accordance with the approvedfinancialstrategy.FPSdistributesgrantfundsaccordingtoacompensationpolicy formula and the funds are included in the annual budget. FNDRloans are provided for eligible projects on the basis of amunicipality’screditworthiness. The FNDR monitors the projects’ financing schemesandhasdevelopedacomprehensivedatabasetoassesstheperformanceofmunicipalfinance.

During the 1990s, Bolivian municipalities made extensive use of theirborrowing powers, and often imprudently so. By 1997, theMinistry ofFinanceshadtoimposeconstraintsonborrowing:thedebtceilingwassetat200percentofthepreviousyear’smunicipalrevenue,andtheannual


debtservicemustnotexceed20percentofthatsamerevenue.Twoyearslater,manyBolivianmunicipalitieseitherexceededthislimitorwerecloseto surpassing it. This situation led the Ministry in 2001 to introduce aProgrammeofLocalDevelopmentandFiscalResponsibilityinabidtosortoutthefinancialsituationofindebtedmunicipalities.WithsupportfromaUSD87.3millionIADBloan,theprogrammefundssocialandproductiveprojects through FPS, and other urban projects through FNDR credits.To access these funds,municipalitiesmust submit fiscal adjustment andinvestmentplans,identifyingweaknessesandassessingneeds.

Byblendinggrantsandloans,theprogrammeseekstoimplementstrategicactions that support decentralization, increase local resources and fostersound fiscal management; it also looks to promote involvement of theprivatesectorinmunicipalfinance.Toachievetheseobjectives,Bolivia’sProgrammeofLocalDevelopmentandFiscalResponsibilityhelpsbuildthetechnicalandmanagerialcapacityofmunicipalities,withspecialemphasison fiscalmanagementaswellasonadministrationofpropertycadastresand tax rolls.The programme also sponsors credit ratings for themajormunicipalities,aprerequisiteforbondissuance(Brakarz,2003).

5.3.2. Special funds financed by debt swaps and discounted debt under the HIPC initiative

In a formal sense, as commonly used in financial markets, debt swapsareusedbytwoormorepartnerstoexchangelegalliabilitiesforalreadyincurreddebt.Eachpartnercarriesfinancialobligations,butthetransactionis mutually advantageous in terms of meeting some strategic objective.Debt swaps are also used in an entirely different context when centralgovernmentsorotherpublicentitiesindevelopingcountrieshaverunupforeigndebtobligationsthathavebecomeeitherveryburdensomeortotallyunsustainableunderchangedmacro-economiccircumstances.

Tofurthertheirinternationaldevelopmentaidgoalsandassistancetopoorercountries,creditorcountriescanalsoagreetodiscountthedebtandallowindebted governments to repay the balance in local currency. The debtserviceproceedsofthese“swap”arrangementsaredepositedinafundtosupportnewlocalcapitalinvestmentortopromotestrategicobjectivesofa


socialorenvironmentalnature.Oneofthefirstsuch“swaps”involvedCostaRica’sdebtandhelpedpreservetherichecosystemofitsnationalrainforestreservations. More recently, “swaps” have been used to fund povertyalleviation initiatives in accordancewith theCountryPovertyReductionStrategyinHeavilyIndebtedPoorCountries(HIPC)(WorldWildlifeFund,2003).Ingeneral,anagreementonsocialobjectivesrequirescompliancewithnationalprioritiesandstipulatesthatprojectsbeundertakenbyNGOs.InEgypt,aspecialfundfordebtowedtoSwitzerland,ItalyandGermanyhasbeensetuptofinanceruraldevelopment,jobopportunitiesforwomen,and environmental improvements. Projects are to be implemented byprivateenterprisesandcivilsocietyorganizations5.TheHeavilyIndebtedPoorCountriesinitiativewassetupin1996bytheWorldBankandIMFtohelpalleviatedebtindevelopingnations.ThedebtcancelledtodateisestimatedatUSD36.3billion,orlessthan10percentofthetotal(IMFandWorldBank,2000).

AspartoftheHIPCinitiative,theBolivianStrategyforPovertyReductionenhances the role of local authorities in improved service delivery toimpoverishedpopulationsandinlocaldevelopment.Thestrategyreliesonmunicipalities todevelopand implement actionplans to reducepoverty.SomeUSD20millionistransferredannuallytolocalauthoritiestoinvestinBolivia’seightnationalprioritysectors.TheredistributionformulafortheallocationofHIPCfundsunderscores theprogramme’sfocusonpovertyalleviation.Toensuregeographiccoverage,30percentoftheresourcesareevenlydistributedacrossthesecondtierofgovernment,thedepartments,andwithintheseamongthemunicipalitiesaccordingtotheaforementionedindex of urgency of need (NBI). The remaining 70 per cent is directlydistributed amongmunicipalities according to theirNBI ranking.Whilethecapitalinvestmentsectorsarepredetermined,themunicipalitiesarenotunderanyobligationtopresentspecificprojectstoobtainfunds.Inotherwords,HIPCresourcesareconsideredasanintegralpartofnon-conditionalinter-governmental transfers. In Bolivia the allocation process includedextensiveconsultationwithmajorstakeholdersandfocusedonthepotentialroleofCBOs,“productivegroups”andindigenouspopulations.

5 InformationcommunicatedbyEgyptianmissionattheUN,July2004


Thesuccessofthestrategyhasbeenunderminedbystructuralimpediments:(1)Thenationalstrategybecameahostagetopolitics,resultinginalackof continuity as successive revisions led to changes in approaches andinstruments;(2)SystematicmonitoringofthePovertyReductionStrategywashaltedin2003;(3)EventhoughtheHIPCinitiativereducedBolivia’sdebtserviceburdentoaboutUSD1.57millionannuallyfor15years, thereliefwasnotsustained.Boththedomesticandforeigndebthasrisenandisreachinglevelssimilartopre-HIPCinterventionlevels.ThesestructuralimpedimentshamperBolivia’sabilitytomeettheMillenniumDevelopmentGoalsby2015(Brakarz,2003;ControlSocial,2004).


6. Private-sector financing of municipal infrastructure andservices

6.1 Privatization of municipal service delivery

6.1.1 Overview and main features

Startinginthe1980s,“privatization”becameaninternationaltrendembracedbycountriesallover theworld.Thiswaspromptedby internationalandbilateraldevelopmentorganizationsadvocatingthegreateruseofprivatesector entities as awayof improvingefficiencyandeffectiveness in thedeliveryofpublicservices..Thistrendwassustainedbyinstancesofpolicyandregulatoryfailure,bureaucraticimpediments,publicsectorinefficienciesandineffectivenessofpublicdeliveryofservices.Dependingontheprojectortheserviceunderfocus,therewasagradualrecognitionandacceptanceofthefactthatprivateenterprise,NGOsorCBOscouldundertakethetaskmoreefficientlyandwithgreatereffectivenessthanpublicauthorities.

Thetrendstartedwithmassiveprivatizationofpublicutilities–electricity,telephone, transport, gas, etc. – throughout the world, with little regardfor the impact of these transfers on the poor, or for the fact that someutilitieswere naturalmonopolieswhere the discipline of competition (amajorjustificationforprivatization)wassubstantiallyabsent.Mostofsuchprivatization involved industries thatwere controlled by top- or second-tiergovernments. Inmany instances, andalongwith its servicedeliverycapability,theprivatesectorhasbeenabletosupplymuch-neededcapitalinvestment,whichwasraisedthroughmethodswhichforvariousreasonswerenotavailabletothepublicsector.Unfortunately, insomecases, theoutcomeshavenotmatchedexpectations.Thereisalargebodyofliteraturediscussing these issues, and a review of the privatization experience isbeyondthescopeofthispaper.

Privatizationofpublicservicedelivery requiresmanyyearsofoperationforcomprehensiveandrobustevidencetoemergeregardingtheextentofsuccessorfailure.Morerigorousanalysisisneededtodetermine,ineach


situation,whetherprivateprofitsaregeneratedthroughgenuineeconomicefficiencyofoperations,orbyallowingtheplantandequipmenttocontinuedeteriorating, or by raising prices to levels beyond themeans of lower-income communities as happened in some Latin American countries.Moreover,theabilityofprivateoperatorstocashoutorwithdrawallowsthem to increase profits by under funding or deferring expenditures onreplacement and preventive maintenance. When the private contractorwalksawayfromessentialservices,thepublicsectorhastopickupthesefunctions.

Privatization of local services entailed changes to existing proceduresandtheintroductionofnewmodalitiesofsupplyanddeliveryofservices,includingthecontractingoutofallorpartofindividualservices,public-private partnerships, franchises, and forcing internal service units tocompeteonacommercialbasisashappenedinEasternEurope.However,the scope for privatization at the local level was limited to a relativelysmallnumberofservices.Theseincluded:public transport,watersupply(thoughnotoftenenoughassociatedwithsewerageandsanitation),solidwastemanagement,andsundryactivitiesincludingjanitorialandcleaningservices,informationprocessingandaccounting,landscaping,andvehicleandplantmaintenance.Thesuccessoftheoutcomesdependsonspecificcircumstancesandtherespectiveperspectivesofthemajorstakeholders.

In the larger urban centres of developing, transitional and advancedcountries, privatization has effectively if gradually transferred revenue-producingservices,includingwatersupplyandsolidwastemanagement,to specialized multinational firms serving many local authorities(Brocklehurst,2001).Althoughnotcompletemonopolies,thelargesizeofmanyfirmsallowsthemtoresorttopredatorypricingtosecurecontractsinnewlocationsandtoexactsubstantialindemnitiesandguaranteesfromlocalgovernments.Manyoftheactivitiesarecapital-intensiveandthehighentryandexitcostsmakeitdifficultforpotentialcompetitorstocompeteagainstentrenchedinterests.Concessionsgrantedtoforeignenterprisesalsoinhibitanysubstitution,sincecancellationofthecontractforunsatisfactoryperformancecarriesheavypoliticalandfinancial risks.Thecontractor isusuallycompensatedandthesponsoringforeigngovernmentplacated.


6.1.2. Impact on local financial management

Privatizationrequireschangesinlocalgovernmentfinancialmanagement.Conventionalcontracting-outproceduresandoutsourcingarenowreferredtoas“public/privatepartnerships”.Reversingoralteringaparticularmodeofservicedelivery–public,privatelyprovidedorcontractedout–isnotastraightforwardtask.Manyactivitiesarecapital-intensiveorhavesignificantinstitutional implications. These entry or exit costs can be quite high,makingitdifficultforpotentialcompetitorstocompeteagainstentrenchedinterests,ashappensinmanyconcessionsituationsindevelopingcountries.Privatization, and for that matter the awarding of concessions, has notbeendevoidofcorruption,includinglowerinitialbidpricestosecurethecontract,followedbylaterrequestsforcontractamendments.

Atboththenationalandlocallevels,privatizationprovidesanexpedientwayaroundconstraintsonothertypesoffinancing,especiallyforcapitalexpenditureswhererestrictionsonpublicsectorborrowingwereinforce.Perceivedeconomicefficiencycontrastedwiththewastefuluseoflabourinmany public sector areas, facilitating cost savings alongwith qualityimprovements.However,aportionofthose“wagesandsalaries”thatwerepreviously recorded under “administration” was shifted to “expenditureon services” in budgets and accounts and recorded as “payments tocontractors”.

To some extent, privatization has brought about transparency andaccountability on the part of local governmentwith respect to financialmanagementandrigorousbudgetpractice.Ithasforcedgreaterattentiononcostrecognitionandcontrol,leadingtoimprovedaccountingandagreaterconcernwithcostrecoveryandpaymentcollection,whereitwaspreviouslyassumedthatanyshortfallswouldautomaticallybecoveredfromgeneralpublicrevenues.

The financial discipline and commercial outlook of competing privateenterprise forced public administrators to lower costs, achieve greaterefficiencyandimprovethequalityofoutputs.Openinguppublicservicestomarketparticipationcreatedmoreopportunitiesforcompetition in thedelivery of these services. The private sector ushered in valuable, newandwelcomeservicesandlabour-savingtechnologiesinabidtoachieve


greater“returns”onthehugeamountsofcapitalinvestedinutilities.Whileprivatizationhasforcedgovernmentstoexamineentrenchedpracticesandtoconsideralternativesfortheiralterationorreplacementwithconsiderablesuccess, it is nopanacea.There aremanywaysof involving theprivatesector in public service delivery on a rational basis short of outrightprivatization.

Public-privatepartnershipsrequiresignificantdelegationofauthoritybutcanbeveryproductive.Locallybasedpartnerships involvingCBOsandmicro-enterpriseshaveresultedinmoreempowermentandsocialinclusion.Solidwastemanagementandrecyclinghavebecomeprimemechanismsforthesimultaneouspromotionofenvironmentalandsocialobjectives.Manyaward-winningschemescanbefoundaroundtheworldsuchasinSantoAndré,Brazil,andthe“Scavengercommunities”inSouth-Africa’sNorth-WestProvince.Furthermore, inpoorcountries labour-intensiveactivitiesare significant sources of productive employment; partnerships betweenlocalauthorities,communitiesandmicro-enterprisescanhelpachievetheseobjectives.

6.2 The major issues in various regions

Localgovernmentboundarieshaveevolvedovertime,shapedbyhistoryandtradition.Theyhaveoftenundergoneadhocadjustmentsforpolitical,economicandsocialpurposes.The“redistricting”inSouthAfrica–referredtoas“demarcation”–reducedthenumberofmunicipalitiesfrom806to284inordertoenhancefinancialviabilityaswellastechnicalandmanagerialcapacity.Thereishardlyeverperfectcongruencebetweenoptimalsizesandlocationsofjurisdictionsforthepurposesofservicedeliveryandrevenuegeneration.Thisisparticularlythecasewhenlargeassets,suchasstadiums,shopping centres, transport stations and airports fall within one localjurisdiction thatderives significant tax revenues from them.Against thisbackground,andforeachoftheservicesitdelivers,itbecomesincumbentuponeachlocalitytoconsiderwhetheritshouldmanageitonitsown,orcombine some services with one or more neighbouring municipalities.Eitherseparatelyorjointly,localauthoritiescanoutsourcethemanagementand delivery of one or more services to private operators, non-profit


organizationsorcommunitygroups.InEurope,therearestrongincentivesforinter-communalcompactsandinsomeinstances,asinFrance,nationallegislationmandatesco-operationinthelargerurbancentres6.Intransitionalanddevelopingcountries,localauthoritiesarereluctanttoengageinjointaction, which typically requires some delegation of powers and sharingofrevenues.InLatinAmerica,politicalaffiliationscreatedivisiveforcesimpedingthedevelopmentofjointactivities.

Many local authorities in developing countries have opted to establishseparateoperatingunitsforsomeserviceswiththeirownassets,staffingandmanagement.Theseenterprisesaremanagedbya“board”oracommitteewherethemunicipalityisrepresented.Intransitionalcountries,thesesemi-independententitieswereviewedasanintermediatestepintheprocessofprivatization.Thiswasparticularlythecaseforhousingmaintenanceandsolidwastemanagement. Similarly, the various jurisdictions can choosejointly to contract out combined service “packages” to a private sectorentity,whichmightbeeitherpubliclyorprivatelymanagedorsupervised.Theorganizational structurewill alwaysbeamajor concern, alongwithrepresentationofpartnersindecisionsregardingallaspectsofmanagementandfinances.

In many cities, formal privatization has not benefited lower incomecommunities.Thisemphasizestheneedforthepublicsectortoplayaroleinthedeliveryofessentialservices.Theabolitionof“social”chargesandother forms of subsidization of minimum consumption levels for basicservicesistroubling,aspoorurbanfamiliesareoftenunabletopayeventheminimumchargesrequiredforaccesstobasicinfrastructureandservices.Thissituationhaspromptedtheemergenceofparallelsystems,rangingfromwell-managedfacilitiessponsoredbyNGOsandcharitablefoundationstohighly inadequate,poorly run initiativesoperatedonanad hoc basisbylocalgroupswithorwithoutoutsidesupport.

6 Loi du 12 juillet 1999,commonlyreferredtoasLoi Chevènementandsubsequentrevisions.


6.2.1 Granting concessions for the operation of revenue earning services: the experience of Abidjan, Côte d’Ivoire

Abidjan,Côte d’Ivoire, has a long history of privately operated utilitiesand services under the “concession” regime. Before the disruptions andchaotic environment brought about by wars and civil strife, Abidjan’sservicesfunctionedremarkablywellcomparedwiththesituationprevailingin neighbouring countries. Communes within Abidjan’s administrativeboundariespaidthecityanannualcontributionfortheservicesprovided,accordingtoaformulacombiningpopulationandrevenue.

AFrenchwatercompany,SODECIhadtheconcessionfortheoperationofthewatersupplysystem.Itwasalsoawardedacontractforthemaintenanceofthesewerageanddrainagenetworks.Thesecontractscontainedclausesthatshieldedthecompanyandshiftedanyriskinvolvedintheoperationofthesystemtothegovernment.Eventhen,subsidizedconnectionsforpoorhouseholds were abolished under the StructuralAdjustment Programmeand thevastmajorityof lower income rentersnowpurchasewater fromproperty owners, shopkeepers and water vendors. The company wasentitledbycontract tocompensation foranydiscrepancybetweenactualconsumptionandtheestimatesdevelopedbytheIvorianWaterDirectorate(the basis for the negotiation of concession contracts); yet the companycontendedthatmaintenanceofunderutilizedsystemswasinefficient,andperiodicallyshutsoffthemainssupplyingareaswithhighconcentrationsoflow-costrentalhousingandsquattersettlements,inafutileattempttoputwatervendorsoutofbusiness.

Thecompany’sperformance regarding themaintenanceof the sanitationnetwork has been seriously inadequate. Frequent obstructions, mainlyduetodefectivesolidwastemanagement,werenotattendedtopromptly,althoughlocalauthoritieswerechargedhighfeesfortheservice.However,thecompany’ssunkinvestmentinplantandequipmentanditspresenceonthegroundgaveitavirtualmonopoly,ascompetitorswereunabletomatchthetermsitoffered.


Abidjan’ssolidwastemanagementhasalsobeenprivatized.Thevariouscompanies in charge tended to the primary road network and the mainmarket areas.However, their truckswere ill adapted to thehighorganiccontent of the wastes. The service was too infrequent for an equatorialcountry.Garbagespilling fromoverflowingdumpsterswasnotcollected(Serageldin,1995).


7. Joint funding of infrastructure and urban services

Local authorities have been major participants in capital developmentprojects.Intransitionalcountries,privatizationbecameastrategicobjectivefrom the early 1990s onwards. Private sector entities are now involvedin most local government functions through outsourcing, contracting,concessionsandpartnershipagreements.

In China, provincial and local authorities increasingly look to public/privatepartnership as anoption to fundor implement infrastructure andurbandevelopmentprojects.PartnershipswithprivateinvestorsrangefromthegrantingofconcessionstojointventureagreementstoBuild/Operate/Transfer (BOT) or Build/Own/Operate/Transfer (BOOT) schemes. Thepublic sector provides land for urban development and the constructionof infrastructureandfacilities(mostlynewhigh-gradehighwaysand tollroads),aswellasrepayableequityorloans.Theprivatepartnersprovideequityandshareholderloans.ConcessionsandBOOTagreementsaremoreattractivetoprivateandforeigninvestorsforanumberofreasons:theycanoffersecurityintheformofguaranteesofminimumrevenueorprofit,lossprotection,repaymentofcapital,taxexemptionsandotherfiscalincentives,togetherwithpreferentialloanrepaymentterms.Provincial/Stateauthoritiescanuseassetsandrevenue-backedsecuritiestofinancetheirsharesintheinvestment.

7.1 Linking formal and informal systems and providers

Of special interest to poor countries are solutions based on partnershipsbetweenmunicipalities,NGOsandCBOs. In thesecountries, integratingpoor communities into the city fabric and giving them access to basicservicesishamperedbyseveralfactors:thespreadofchaoticurbanization,mounting population densities in the central zones, the obsolescence ofexistingconventionalsystems,and the lackof resources tomaintainandupgradeexistingsystems.Toimprovelivingconditionsforunder-servicedcommunities,systemsandnetworksusingdifferenttechnologiesandservingdifferentpopulationgroupsandgeographicareasmustbeinterlinked.Solid


wastemanagementisoneoftheservicesmostaffectedbytheneedtomergetraditionalsolutionswithmoderntechnologies.

In West African cities, potable water supply is another area that canbenefit from this approach. Award-winning programmes in Cotonou,Benindemonstratetheimportanceoflinkingformalandinformalserviceproviders(seeBox10).

7.2 Joint funding of community-based initiatives for the delivery of basic services

Micro-creditinstitutionshavemostlyfocusedongivingmicro-entrepreneursthecredittheyneedtostartupandexpandtheirbusinesses.Recognizingthe importance of home-based income-generating activities, particularlyfor women, these institutions began to offer loans for housing. Theygraduallyexpandedtheir lendingrangetohelppoorfamiliesaccesslandandbasicinfrastructureservices.Today,theyhavebecomemajorpartnersinmunicipalinitiativestoimprovethelivingconditionsofpoorhouseholdsinbothurbanand ruralareas.Thepotentialof thesepartnerships isbestillustrated by the experiences of Guatemala’s Génesis Empresarial, thePROMUNI programme and the partnership between the AhmedabadMunicipalCorporationandSEWAMahilaTrusttoupgradeslumsthroughtheParivartanprogramme(seeBox11).

InAhmedabad,themajorcommercial,industrialandfinancialcentreintheStateofGujarat,India,45percentofthepopulationof3.5millionliveinslumsandunder-servicedareas.Constrainedbybudgetdeficitsandtheneedtoimprovefinancialmanagement,theAhmedabadMunicipalCorporation(AMC)embarkedonaseriesofreformsthatwoninternationalrecognitionfor their achievements. The next step was the launch of the Parivartanprogrammetoimprovelivingconditionsintheslums(seeBox12).


Box 10. Linking formal and informal systems: Cotonou, Benin

InCotonou, deployment of a solidwastemanagement schemewasconceived as an environmental initiative. The service is runby anNGO that employs local youths to collect the waste. Subscriberspay monthly fees for the service. Two committees comprised ofcommunityresidentsdeviseplans,definetheresponsibilitiesofeachpartner,andmonitortheoperationoftheservicewithtechnicalsupportfromtheNGO.Themunicipalityisresponsiblefortransportingwastefrom dumping stations to the disposal sites, in compliance withenvironmentallysoundpractices.

TheNGOpromotesrecyclingbycommunitygroups,mostlywomen.Theydosothroughecologicallysoundpractices,includingbiologicaltreatmentofpollutedrunoffwaterandcompostingoforganicwastes,inabidtoreducethenumberofdumpsitesfrom30tofive.Bilateralaid from GTZ-MEHU provided start-up funds for the scheme in1995.Inthefirstfiveyearsofoperation,80percentofthepopulationsubscribedtotheservice.Collectionrateswereontheorderof95percent;and200permanentjobswerecreated.Acommunitybankenablesfemale recyclers to accessmicro-credit and expand their activities.The Partnership for Municipal Development (PDM), a regionalorganization, has provided the municipality with capacity buildingandtechnicalsupport,facilitatingthelaunchandinstitutionalizationofthescheme.

In1998,thepipedwatersupplysystemoperatedbytheBeninWaterand Electricity Company (SBEE) served less than 50 per cent ofCotonou. Only 16 per cent of householdswere directly connectedand 32 per cent purchased potable water. The PDM encouragedthemunicipality towork jointlywith informal vendors in order toensure affordable delivery of potable water to poor settlements intheperipheralurbanwetlands,wherehalf thecity’spopulationlive.Thisentailedreachingouttothevendors,gettingthemorganizedandbuildinguptheircapacities.AformalAssociationofWaterVendors


(AREB)wascreatedgrouping300vendors,acoregrouprepresenting20percentofpotentialmembers.

TheMunicipalityandtheSBEErecognizeAREBasaformalpartner,and theutilitygrantsAREBmemberspreferentialpricing forwaterpurchases.AsurveyofAREB-operatedfountainsshowedundisruptedservice and improved quality. The municipality is constructing 24public fountains in non-regularized settlements and they will beoperatedbyAREBmembers.ThePDMactsasmediatorandfacilitatorto overcome the conflicts and distrust prevailing between smallvendors,SBEEand themunicipality. PDMisplanning to replicatethispartnershipconcept inotherWestAfricancities to improve thedeliveryofservicestothepoor.

Source: Seradelgin and others, 2003.

Box 10. (continued).

Box 11. Génesis Empresarial, Guatemala

Génesis Empresarial was established in 1988 to improve livingconditionsforlow-incomeruralcommunities,providingmicro-creditforaccesstoinfrastructureservices.Génesisloansarenotsubsidizedandtheinterestrateschargedreflectthecostsofthefundsobtainedfromvarioussourcesofcapital.Currentratesrangefrom21percentonfundsfromtheCentralAmericanBankforEconomicIntegration(BCIE)to30percentonfundsfromcommercialbanksandGénesisownfunds.In1993,GénesisEmpresarialenteredintoanagreementwithBCIEthroughitsPROMUNIfundtoextendfinancingtoprojectsfor the introduction of electricity,water and other services to ruralcommunities.Participationintheprogrammerequiresthatatleast90percentofresidentsagreetorequesttheservice.Theprogrammeisimplementedthroughgroupsoffourto12families,withloansrangingfromUSD120toUSD450perhouseholdandrepaymentoveronetofouryears.


Collective liability and submission of a documented land title heldby one household in each participating group are the conditionsfor eligibility.Repayments aremonthlywith anoption to pay afterharvests,andarerunningatarateofover92percent.Génesisassistsborrowers all along the process: organizing themselves, registeringtheprojectcommitteewith the localauthorities,preparingtechnicalreports, applying for matching grants and credit, interacting withcontractors, and managing group loan accounts. Because of thefinancialburdenoftechnicalassistance,PROMUNIdidnotachieveapositivereturnoninvestment(andthenonly1.2percent)until1998.

From1993-2000, the programme supported the development of 79projects reaching 9,000 residents in 143 communities in variousdistrictsacrossGuatemala.Thetotalamountlentwasover32millionquetzals (GMQ) (orUSD4.1million).From1988 to2002,Génesisworked with close to 83,000 clients and granted 129,000 loansamountingtoUSD184million.TheaverageloanamountwasUSD489withadefaultratearoundeightpercent.AsofDecember2002,theprogramme served 35,452 clients carrying USD17.3 million worthof loans (see Table 6.1).A Génesis client, San Juan SacatepéquezMunicipality(population:137,136)islocated31kmfromGuatemalaCity.GénesislentUSD323,600tointroduceelectricitytoallbuttwoofSanJuan’s25communitieswithacombinedpopulationof9,825.Génesisisnowprovidingthemwithcredittointroducepotablewater,improvehousingandfostersmallandmicro-enterprises.

Source: Búcaro and Edgar, 2003; Serageldin and others, 2001.



7.3 New trends in partnerships for local development

In developing countries, where decentralization is a recent or ongoingprocess, municipalities are particularly reluctant to delegate authorityor share revenue with peer entities. This reluctance accounts for thedifficulties encountered in getting municipalities to collaborate on jointinitiatives.Formalizing collaboration throughnegotiated agreements andinter-municipalcompactsisanevenmorechallengingtask,astherearenoinstitutional incentivesfosteringstrategicassociationsother thanthroughexternalaidentities.Thesuccessfulinitiativesmostlyfocusoneconomicdevelopment, as in the case of theABC Region in Greater São Paulo,Brazil,wheresevenmunicipalitiesmustcopewitheconomicrestructuring,particularly the rebuilding of the local economy based on new growthsectors following the decline of the automotive industry (Santo AndréMayor’sOffice,2003).

The difficulties in mobilizing and structuring alliances of stakeholdersto promote local development are illustrated by experiences in CentralAmerica.Inpoorregionsbypassedbydevelopment,programmespromotingdevelopmentmustalso foster social inclusion. Inter-municipal initiativescansignificantlyenhancetheeffectivenessoftheseefforts,asinthecaseoftheValledeSulaMetropolitanAreastrategicassociationinHonduras.Thechallengeistoovercomedistrustandapprehension.Theparticipatoryprocessrequiredtoreachconsensusonobjectives,operatingmodalitiesandactionplanstakesanywherefromtwotothreeyears,andtheinstitutionalframework must be organized before any activities can be launched.Implementation of partnership agreements often requires the creation ofa large number of assemblies, committees, boards and delegations thatmaybecomecumbersometothepointofreducingtheeffectivenessofthealliances.

7.3.1 Alliance of stakeholders to drive local development: San Andrés Valley, El Salvador

San Andrés Valley is located four kilometres from the San Salvadormetropolitanarea;itincludes11municipalitieswithatotalpopulationof368,358.Itsprofileisfairlytypical,withlargestretchesofagriculturalland


and industrial activities, particularly “maquiladoras” (sweatshops), andhas thepotential to developnewagro-industries and tourism.This is animmigrationareawheresustainedgrowthputslandunderstrongpressure,leading to chaotic urbanization.Some1,000 firms are established in thearea, of which themajority aremicro-enterprises employing up to fourworkers.

In 1993, theSanAndrésFoundation launched a participatoryprocess toprepareaplanforthedevelopmentoftheregion,andcreatedanallianceofstakeholderstodrivetheprocess.Representativesof200organizationsparticipatedinthepreparationoftheplan,whichwascompletedintheyear2000.Themajorissuesaddressedincluded,regionalplanning,education,cultureandrecreation,theenvironment,publichealthandlocaleconomicdevelopment.

A Management Group for the development of the San Andrés Valleybrought together the various stakeholders to implement the plan. TheNational Foundation for Development (FUNDE) and the SalvadorianFoundation for Integral Support (FUSAI) facilitated the process. TheManagementGroupcomprisedrepresentativesof10localauthorities,25governmentinstitutions,13NGOs,12CBOsand18firmslocatedinthevalley,whoallformallycommittedthemselvestotakeonresponsibilitiesforplanimplementationinaccordancewiththeguidelinesestablishedbyageneralassembly.ACo-ordinationCommission,effectivelytheboardofdirectors,wascreatedtoensurethesmoothfunctioningoftheallianceandfacilitatecross-sectorschemes.WorkgroupstookonspecifictasksandthemanagementoverseestheimplementationoftheagreementsreachedbytheBoardofDirectors.

AshareoftherevenuegeneratedbytheSanAndrésValleyOfficeofPlanningisallocatedtotheManagementGroup.TheAssociationofMunicipalitiesprovidesfinancialandtechnicalsupporttohelpensurethecontinuityofthealliance.Between2002and2003,USD66,000wasmobilized to financemunicipal development projects. TheManagementGroup has promotedawarenessofandcompliancewiththenormsandregulationsestablishedbytheRegionalDevelopmentPlan.Thegrouphasenhancedperceptionsoftheareaasagoodlocationforprivateinvestment,andcreatedattractive


conditions for environmentally sensitive investors. An EnvironmentalCommitteeof23enterprisesbalancesincomegenerationandprotectionoftheenvironment.Localgovernmentisstrengtheningitsownmanagementcapacitiesandfourmunicipalitiesareimplementingajointactionplanforlocal and regionaldevelopment.Civicgroup involvement ingovernancehasgiventheareathesocialvisionitsorelylacked.AnotherbenefitwasthatitmadeiteasierfortheManagementGrouptoencouragemicro-enterprisesandtocurbanyhousingprojectsthatdisregardedenvironmentalregulations(FUNDEandFUSAI,2004).

7.3.2 Decentralizing investment in urban development in Central America: the PRODEL programme in Honduras

InHonduras,municipalitieshaveaccesstofourmainsourcesofrevenue:servicefees,sixlocaltaxes(withthepropertytax,incometaxandsalestaxaccountingforover40percentofrevenues),centralgovernmenttransfers,andborrowingthroughtheissuanceofbonds(subjecttoCentralBankandMinistryofFinanceapproval).Onlythelarger,financiallysoundercitieshaveaccesstobilateralandmultilateralfunding,giventhepresentstateofdevelopmentoflocalfinancialmarkets.

The National Programme for Decentralization and Local Development(PRODEL)hasexpandedthescopeofmunicipalities’responsibilitiesfromadministrativeandmanagerialtaskstopromotionofsocialandeconomicdevelopment.PRODEL-sponsoredstrategiesofmunicipaldecentralizationare adapted to the degree of development and the local circumstancesof eachmunicipality or association thereof,while reinforcing efficiencyandtransparency.In1998,onlyeightpercentofthemunicipalitieswereconsidered“developed”,theremainderbeingclassifiedasunder-developedorlagging.Only25percentofthemunicipalitiesinHondurasareabletofulfilthefunctionsandresponsibilitiesimpliedinthetransferofcompetencesand resources under PRODEL; but the fundamental premise is that the“viciouscircleofnodecentralizationforlackoflocalcapabilities”canbebroken.

PRODEL has identified 40 municipalities that are able to handle adecentralizedprogrammeofpubliccapitalinvestmentsintheshortrun.The


restrequirecapacitybuildingiftheyaretoimplementprojectsfundedbytheHonduranFundforSocialInvestment.Theso-called“Mancomunidades”are associations of municipalities facing common challenges but whichconformtotheprincipleofsubsidiarity.Today,48MancomunidadesoperateinHonduras,addressingbasicservicedelivery,environmentalmanagement,culturalandethnicissuesandotherareasofcommoninterest.Theyhavebecomeanewintermediatetierofgovernmentbutarestillvulnerabletopoliticalpressuresandsocialchanges,ontopofbeingconstrainedbylocalcapacities(seeBox12).

Box 12. The Valle de Sula Region, Honduras

The Valle de Sula Region houses 25 per cent of the Honduranpopulation,generating55percentofthecountry’sGDPand40percent of exports. Economic development is concentrated in specificareas. Far from benefiting from inflows of low-income migrants,manymunicipalities, including San Pedro Sula, are unable to dealwith the increased demands on housing, infrastructure, servicesaswell as productive and social facilities. This situation promptedthe establishment of the first Mancomunidad in Honduras, theMetropolitanAreaof theValledeSula (ZMVS), in1993.This isapermanent,self-managed,non-profitorganizationwhosegoalsaretopromotebalanced regionaldevelopment and to improve thequalityoflifeofresidents.The17municipalitiesintheZMVS(11foundingmembersin1993werejoinedbyanothersixintheyear2000)featurevarious degrees of institutional development, budget resources andfiscalcapacity.

Within the ZMVS, it is for the Mayors’ Assembly to formulatepolicy,withtheExecutiveDirectioninchargeofimplementation.ADecentralizationandMunicipalDevelopmentprojectfundedbySIDAandimplementedbyUNDPhasproducedasharedregionalvisionforintegrated sustainabledevelopment.Themost notable aspect of theplan is that it integratesorganizedcivilsociety into theformulationand implementation of regional development projects. Increasing


7.4 Tapping migrant remittances

Manuel Orozco’s work on immigrant Latino communities in the USAhighlightedtheemergenceinthe1990sofhometownassociationsamongemigrantcommunities.TheseassociationscombinesocialfunctionsintheUSAwithcoordinatedeffortstosupporttheirhometownsinLatinAmerica.Hometownassociationsaresmall,private,voluntaryorganizationslackingformalorganizationalstructures.Between20percentand30percentofmigrantscontributetothesecollectiveremittances.Aninterestingfeatureistheevolutionofthesupporttheyfundthoughcharitableactivities,mainlylinked to theChurch, and the shift towards improved infrastructure andservicesprojects in theirhometownsandvillages.These includepotablewater, sanitation, street paving aswell as community facilities (schools,healthcentres,parks).Theseprojectscanleadtoproductivepartnershipsbetweentheassociations,localauthoritiesandCBOstomeetcommunityneeds.

Mexico has taken the lead in recognizing the potential of hometownassociations and in attracting their investments by offering incentives tofinancedevelopmentprojects.Special hometowndevelopment funds arecreatedtoleverageassociationfundswithgrantsfromState,federaland,morerecently,municipalgovernments.Zacatecas,Jalisco,andGuanajuato– a region of high emigration –were the firstMexicanStates to set upsuchfundstosupport“employment-generatingprojects”,mainlygarmentfactories. Jobs were created and contributing emigrants’ relatives were

ZMVSrevenuesourcesisthetoppriority.ZMVSisfundedthrougha0.5percentassessmentoneachmunicipality’sannualrevenues,anamountinsufficienttocoveroperatingcosts.TheForoValledeSula2020strategicplanfocusesonaccesstobasicservices,efficientandrationaluseofpublicresourcesintheregion,andcreatingsynergiesamongstakeholders.

Source: Funes, 2002.



Box 13. Cuenca, Ecuador: “Improve your neighbourhood” programme

InEcuador,Azuayistheprovincewiththehighestrateofemigration.Between 1990 and 2002, some 249,000 people left the province,accountingfor45.3percentof thenational total. In theyear2000,Ecuadorian emigrants remitted USD1.3 billion, of which USD600million went to the Azuay province. The municipality of Cuencareceives aroundUSD400 toUSD500million annually.The city ofCuencahasbecomeamagnet,actingasagatewayforthosewhowanttoleavethecountryandtheAndeanregion.

Thecityhaslaunchedthe“ImproveyourNeighbourhood”programmetocapturemigrants’remittances.Theschemeservices“consolidated”neighbourhoods (i.e., those with a high percentage of privatelyowned housing), providing or improving infrastructure, plantingtrees and paving streets.Neighbourhood residents submit a requestfor improvements to the municipality, either directly or throughtheir neighbourhood organization. The municipality undertakes thetechnicalstudiesandcalculatesthecostsfortheresidents.Theschemeawards“Publicworkspackages”ofUSD30,000toUSD40,000tolocalengineersandbuilderswhooperateassmallcontractors,hiringlaboranddeliveringtheworkswithin60days.Propertyownersarechargedashareofthecost(basedonlotfrontage)andpayableoverfiveyears,plusa12percentmanagementfee.A15percentdiscountisofferedforprepaymentofthefullamount.Todate,repaymentratesarecloseto98percent.Themunicipalityworkswithlocalbankswhichgrantloans at slightly below-market interest rates (around 11 per cent in2003).Thefundsareusedtopaytheengineersorbuildersundertakingthepublicworks.Propertyownersmaketheirpaymentsdirectlytothebankor,insomecases,tothemunicipality.

given preference in hiring. Nevertheless, the projects perpetuate thedeplorablefeaturesofthe“maquiladoras”system.Similarly,SanSalvadorhasmanagedtoattractremittancestofundinfrastructureandurbanservicesprojects by giving hometown associations voting rights in the city’sparticipatorybudgetprocess(seeBox13).


The programme has achieved impressive results. Between 2000and2003,more than700smallcontractorsdelivered improvementsvalued at aboutUSD21million.Over 90 kmof urban streets havebeenpavedandserviced.Theprogramme’spopularitystemsfromitsimpact on the quality of the living environment and the impact onpropertyvalues.AhouseoriginallyvaluedatUSD20,000couldnowsell forUSD35,000 – at a cost of “only”USD1,500 to the owner.Furthermore,thecity’sattractivenessforexternalcapitalinvestmentsandfortourismisenhanced.

Source: Serageldin and others, 2003.

Box 13. (continued)

7.5 Building the capacity of municipalities and improving local financial management

Lack of experience and a dearth of statistical and spatial informationhave proved to be themain obstacles to effective transfers of planningresponsibilityfromcentraltolocalgovernment.InCentralandWestAfrica,thePartnership forMunicipalDevelopment (PMD–orPDMinFrench)was created in 1991 as a joint initiative betweenAfrican governmentsand bilateral and international donors. Its mission is to support thedecentralizationofplanningandfinancialresponsibilitiestolocalauthorities.PMDprovides informationondevelopment trends, supports institutionalreforminitiatives,offerstechnicalassistanceandbuildsthetechnicalandmanagerialcapacitiesofmunicipalities.Ofthe24countriesintheregion,

15aremembers(seeBox14).

PDM’s achievements demonstrate the need to build the capacity ofweakmunicipalities to establish participatory schemes, improve servicedelivery and urban governance, mobilize stakeholders, engage citizensand enter into partnerships to improve living conditions and promotingeconomicdevelopment.PDM’ssuccessalsohighlightstheneedtoprovidemunicipalities with the longer-term technical, managerial and logisticalsupport they need to develop, implement and monitor strategic actionplansandpublicinvestmentprogrammes.institutionisthemosteffective


Box 14. Africa’s Municipal Development Programme (PDM)

In1997PDMandClubduSahellaunchedajointinitiative,theLocalEconomicRevitalizationProgrammeinWestAfrica(ECOLOC).Thepurposewastostrengthenthecapacityoflocalgovernmentstoplanandmanage their economic and spatial development in the contextof the decentralization of urban governance from national to localgovernments.PDMfocusesonthefollowingthreeareas:

• Documenting local economic and social conditions in theirsub-regionalenvironment toprovide localofficialswith thequantitative and qualitative reference framework necessaryto make informed development decisions. The workinghypothesis is that national economies are made up ofdistinctlocalcomponentsconsistingofurbanpolesandtheirhinterland.

Documenting these areas is a prerequisite for the formulation of acoherentandsustainabledevelopmentstrategy.

• Evolving a consensus among local stakeholders on thenatureofadevelopmentframework.Inordertodoso,localcommitteesrepresentingmayors,businessandunionleaders,andrepresentativesofcivilsocietyoverseethedocumentationworkandparticipateintheelaborationofaLocalDevelopmentFrameworkconsistingof:

- A common diagnosis of the recent evolution of the area,including strengths and weaknesses. The emphasis is ontheinter-linkagesbetweentheurbanareaanditshinterland,between public improvements and private investment, andamong economic activities. Special emphasis is placed onthefiscalautonomyofthemunicipality.

mechanismwhichbilateralandmultilateraldevelopmentorganizationscanthinkof if theywant to give poor countries a better chance tomeet theMillenniumDevelopmentGoals.


Box 14. (continued)

- Acommonstrategicvisionforthedevelopmentofthelocaleconomyandensuringitscompetitivenessattheregionalandnationallevel.

- A set of priority objectives to develop high-potentialeconomicactivitiesandimprovethequalityandefficiencyofinfrastructureandpublicservices.

- Apubliccapitalinvestmentstrategybasedonthemobilizationoflocalresourcesandanequitablesharingofcapitalinvestmentcostsbetweenthepublicandprivatesectors.

• ImplementationoftheLocalDevelopmentFrameworkthrougha reorientation of municipal capital investment policies;mobilizationoflocalresources,includingparticipationoftheprivate sector andNGOs; identificationof andnegotiationswith foreign donors; applying for grants from the centralgovernment.

Local development frameworks were prepared for eight cities andtheirhinterlandinthefirstthreeyearsoftheECOLOCprogramme.Workonanadditional20citieswaslaunchedin2001-2002.ThePDMprovides technical assistance to individual communities monitorsmunicipalfinance;publishestheresultsofitsstudies;organizestopicalworkshopsandcapacitybuildingprogrammesoncurrentdevelopmentissuesinWestAfrica,includingtheimplementationofdecentralizationpoliciesinthevariouscountries;andhascreatedaWebsitewithaccesstoanexpandingdatabase.LocalgovernmentsvaluePDMassistanceinorganizingpartnerships to improve thedeliveryofbasicservicesandinenhancingmunicipalfinancialmanagementandperformance.Since2000,PDMhasorganizedthe“Africities”annualsummitthatbringstogetherseniorgovernmentofficials,NGOs,privateinvestors,academicinstitutionsandbilateralandinternationaldonors.PDMhassupportedlocalinitiativesandassistedmunicipalitiesintheirefforttomeettheirnewresponsibilitiesunderadecentralizedframework.


PDMworkissponsoredbyFrenchco-operationservices,theCanadianInternationalDevelopmentAgency(CIDA),theWorldBank,theGermanco-operationagency(GTZ),theUnitedStatesAgencyforInternationalDevelopment(USAID)andtheCanadianFederationofMunicipalities.

Source: CIDA, 2003

Box 14. (continued)


8 ConcludingremarksTogether with decentralization, democratic local governance and theeconomicandsocialimpactsofglobalizationarethemajorfactorsthatareaffectingmunicipalfinanceandreshapingthewayurbandevelopment isfinanced.Asymmetricaldecentralizationhaspresentedlocalgovernmentswithamajorchallenge:howdotheyfunddevolvedfunctionalresponsibilitiesin the face of inadequate transfers from central government and limitedaccess to funding fromother sources?Democratic local governance hasfuelledgrowingdemandsforaccountabilityandtransparencyinmunicipalmanagement,particularlyasregardstheallocationofscarcelocalresourcesand their performance. Globalization has compounded uneven spatialdistribution of economic activity andwidened disparities in income andwealthacrossregions,countriesandwithincountries,andtheseinequalitiesaffecturbancentresaswell.Somebenefitfromaprivilegedlocationwhileothersarebypassed.Theseimbalancesarefurtherdeepenedbythesocialdimension of globalization, which has exacerbated poverty and led tomassivepopulationmovements.

Municipalitiesarehardpressedtofindtheresourcesneededtofundurbandevelopmentpoliciesthatfosterpovertyalleviationandsocialinclusion.Thischallengeisfurthercompoundedbythegrowingconcentrationofwealthintheprivatesectorbroughtaboutbyglobalization,theconcomitantcutbackin government expenditures, and the disengagement of the internationalcommunity from urban issues in developing countries. Municipalitiesmust learn to tap into private resources and access capital markets inorder to finance the delivery of urban services and urban developmentprogrammes.

Partnership with the private sector has become as much of a necessityasit iswithNGOsandCBOs.Thevariousmodalitiesofprivatizationofmunicipalfunctionsandservices,theevolutionofmunicipaldevelopmentfundsandthediversificationoftheirservices,togetherwiththeemergenceand rapid growth of private local development funds, have opened upnew opportunities that municipalities must tap into in order to financedevelopment.


8.1 Decentralization, municipal performance and accountability

Withtheexceptionofadvancedcountries,whereatleastthelargercitieshave a long experience of managing their finances, the devolution offunctional responsibilitieshaspresented localgovernmentswith amajorchallenge,oftencompoundedbyadverseeconomicandpoliticalconditions.InEasternandCentralEurope,factorssuchaslocalpoliticalautonomy,linkstotheWestandparticipationinregionalandinternationalnetworks,havehelpedcushiontheburdensofdevolution,ashasprospectivemembershipof the European Union. Grants extended to promote social, economicand environmental objectives have provided much-needed funding forurbanprojects. InAfrica,AsiaandLatinAmerica, transfers fromcentralgovernments have declined steadily, particularly for large cities, andchartinganappropriatecoursefordecentralizationwithoutdisruptingthedeliveryofbasicservicesdevolvedtothelocallevelhasprovedachallenge.Only a few countries have formulated successful policies to redistributeresources that are more efficiently collected at the national level andequalizetheburdenonmunicipalitiesthatareeconomicallyweakorfacehigherpercapitaexpenditures.Effectiveinstrumentsusedtofostersmoothdecentralizationinclude:

• Localstatutoryrightsguaranteedbytheconstitutionorbynationallegislation.

• Mandatorytransferofsharedtaxrevenues.

• Formula-based redistribution favouring smaller and fiscallyweakermunicipalities.

• The sharing of fiscal revenue through formulas that take intoaccounttheincidenceofpoverty.

• Inter-governmental agreements and inter-municipal compactsandjointinitiatives.

TheexperiencesofBrazil,BoliviaandSouthAfricastandoutinthisrespect.Other countries, such as Indonesia, have had to undertake successiveadjustmentstocorrectseriousimbalancesthataffecteconomicandsociallife.


Evenmunicipalitiesinverypoorcountrieshavemadeconsiderableeffortstoreducetheirrelianceondwindlingtransfersfromcentralgovernments.Despiteadverseeconomicconditions,many localauthorities inEastandWestAfricahavemanagedtoincreasethecontributionoflocallycollectedtaxes.InUEMOAcountries,thesetaxesnowaccountforcloseto50percentofmunicipalrevenue–asignificant increaseoverarelativelyshorttimespan.InBurkinaFaso,thecommunesdonotreceiveanytransfersfromthenationalgovernment.

A growing demand for accountability and transparency in municipalbudgetinghasaccompaniedpoliticalandfiscaldecentralization.There ismarkedtrendformorerigorousfinancialmanagement,clearproceduresfortheallocationofresources,andtheparticipationofresidentsindecisionsaffecting their communities. Of particular interest is the transparencymandated by the Brazilian legislation and the spread of participatorybudgeting,firstinstitutedinPortoAlegre,tomunicipalitiesinBrazilandotherLatinAmericancountries(Serageldin,2003).

Accountabilityrequiressomemeasurementofperformanceand,sincethemid-1980s,localauthoritiesinWesternEurope,theUKandtheUSAhavestarted tomeasure the real costs of delivering public services.Accrual-based, multi-year budgeting provides more or less robust indicatorsof performance and is becoming a more popular alternative to thetraditional cash-flow based local budgets. In developing countries,mostmunicipalities lack the capacity and resources required for sophisticatedmonitoringoffinancialperformance.Nevertheless,publicizingevenbasic,quantitativeandqualitativeindicatorsenhancescommunityunderstandingofurbanmanagementanddevelopmentchallenges,andpromotescitizenparticipationinlocalgovernance.

8.2 Ability of municipalities to provide serviced land and basic services

Theeffectivenessofmunicipalauthoritiestoimprovethesupplyofservicedlandandtodeliverbasicservicesisclearlyafunctionofboththepaceofdevelopmenttheyfaceandthecountry’slevelofeconomicdevelopment.


Generally,thedevelopedandsometransitionalcountrieshavethefinancialand administrative resources tomanage development and provide urbanresidentswith awide range of services. Stable or declining populationshave facilitated this task. In contrast, developing countries have for themostpartbeenunable tokeepupwith thedemand for serviced land,orprovideadequatebasicservicestoresidentsoftheirrapidlygrowingurbancentres.Thefourmajorobstaclestheyfacearethefollowing:

• Shrinkingcentralgovernmenttransfers;

• Inadequatelocaltaxbasestopayforthedeliveryofservicestoagrowingpopulation;

• Inadequateinstitutionalcapacitytopreparemid-andlong-termdevelopmentstrategiesandthecapitalimprovementprogrammesnecessarytoimplementthesestrategies;and

• Limited if any access to capital resources for investments ininfrastructure.

Sourcesofmunicipalrevenuevarywidelyacrosscountries,withpropertytaxthemostsignificant,followedbyfeesforservices.Manycountriesalsolevytaxesoneconomicactivitiesaccordingtovaryingformulas;taxesonincomearerare.Othercountriesfeaturemultiplelow-yieldassessmentsandfeesthatcontributelittletoshoreuptheirfinances.Partialredistributionofcentrally collected taxes – such asVAT, entitlement grants for recurringexpenditures, and designated grants to either equalize disparities amongmunicipalities or carry out specific projects – is another source inmostcountries,thoughtovaryingextents.

Fewmunicipalitieshavecompleteauthorityovertaxation.Ratesareoftensetbynationalorregionalauthoritiesand,asisthecaseintheMiddleEast,NorthAfricaandWestAfrica,propertytaxesmayevenbecollectedbyacentralauthorityandonlypartiallyredistributedtothemunicipality.Whethercollectednationallyorlocally,yieldsareoftenproblematic.Adearthofup-to-datecadastralinformationandthesizeoftheinformalsectoraremajorimpediments to property tax collection, particularly in those localitiesexperiencingrapidexpansion.Consequently,adisproportionatetaxburdenisbornebyexistingpropertiesandformaleconomicactivities,whilenew


development escapes taxation. Similarly, increases in private propertyvalues, often the result of public improvements, are rarely captured duetoobsoletetaxrollsandinadequatecapacitytorevalueproperties.Theseconditions erode municipal revenues, depriving local authorities of thefundsneededtoincreasethesupplyofurbanlandandextendinfrastructurenetworks.Inadequatelocalrevenuealsoimpairsmunicipalabilitytoaccesscapitalmarketsandenterintopartnershipagreementswithprivateentities,NGOsandCBOstoimplementurbandevelopmentinitiatives.

Userfeesprovideasignificantportionofmunicipalrevenues,particularlyindevelopedcountries.Widespreadastheymaybe,userfeeyieldsindevelopingcountrieshaveusuallybeenlowerthanoperatingandamortizationcosts;thisisbecausemanygovernmentshavesetratesbelowtheireconomiclevelinordertoalleviatehardshipsonthepoor.Evenwealthycountrieshavefounditnecessarytosubsidizethecostofpublictransportationforenvironmentaleconomic and social reasons. In developing countries, NGO-led socialmovementshaveadvocatedtheprovisionoffreeorsubsidizedservicestolower-incomeandpoorfamilies.Apartfromitsmoralmerit,thisapproachwouldentailasignificantincreaseincentraltransferstolocalauthoritiesandserviceproviders, if the systemswere tobe sustainedandoperatingdeficitsplugged.

Agenerallackofresourcesanddifficultaccesstocapitalmarketsimpedethe development of long-term capital improvement programmes. Theexceptioninthisrespect is thesetofmunicipalreformsinBrazil,whichimposedfiscalmanagementstandards,limitedpersonnelexpendituresandmandatedthepreparationofmulti-yearcapitalimprovementprogrammes.Elsewhere, multi-year budgets are introduced gradually as a mandatoryrequirementundernationalpublicfinanceregulations.

Financial constraints are reflected in twowidespread trends: the lack offunds for themaintenance of existing assets, and the inability of manymunicipalities to undertake the capital improvements needed to keepupwithurbangrowth, letaloneguideurbanizationanddevelopment.Whilesomecountrieshaveprovidedgrantsforcapitalinvestmentininfrastructure,centralfundsareinshortsupplyinmostpartsofthedevelopingworldand


areoftenchannelled to largercities.Asa result, it isnotuncommon forexistinginfrastructuretodeteriorateduetolackofmaintenance.

In developing countries,medium- and small-sizemunicipalities lack thetechnicalskillstodevelopthecoherenturbaninvestmentstrategiesrequiredtoaccessgrantsand loansfromdonorsandMDFs.SantoAndré(Brazil)and Szczecin (Poland) stand out as successful examples of a forcefulcommitmenttoimplementthereformsneededforfinancialplanningandmanagement, andadeterminedeffort to leverage local resources, accesscreditandobtainfundingfrommultilateralandbilateralorganizations.

Long-termcredit iscritical to theabilityofmunicipalities to fundurbandevelopment.TheperformanceandimpactofMDFssuchasFINDETERinColombiaandtheTNUDFinIndiademonstratethatacombinationofcredit and technical support to local authorities can result in significantimprovementsintheprovisionofinfrastructure.Insituationswherelocalgovernmenthas encouragedcitizen involvement indecision-making, theservicing of lower-income areas has made remarkable progress, as theexperienceofparticipatorybudgetinginPortoAlegreandBeloHorizonteinBrazildemonstrates.

Inanattempttocircumventlegal,regulatoryandfiscalconstraintsontheirbudgetsandcapitalinvestments,localgovernmentsinbothdevelopedanddeveloping countries are looking into off-budget alternatives. Examplesincludespecialpurposevehicles(asinthecaseofChina),andassessmentandimpactfeesthroughwhichprivatedeveloperspayforpartofthepublicinfrastructureneededfor theirprojects (acommonpractice in theUSA).Taxincrementfinancingisanothercreativeconceptwhichmunicipalitiesuseacross theUSAtoborrowoutside thestatutory limits setongeneralrevenuebonds.The“linkage”programmefirstlaunchedinSanFranciscoextendsthisprincipletonon-infrastructurepublicprogrammes,namelytheconstructionofaffordablehousingandjobtraining.


8.3 Local capacity to meet the goals of sustainable development

Theabilityoflocalgovernmentstomeettheenvironmentalandsocialgoalsofsustainabledevelopment,andinparticulartoaddressissuesofpovertyand social inclusion, depends on their technical, managerial and fiscalcapacities aswell ason their ability to involve local stakeholders in thedevelopmentprocess.Inmanypartsoftheworld,globalizationhasaffectedthefinancialresourcesofbothnationalandlocalgovernments,astaxableeconomic activities moved to other locations. The situation is furthercompoundedbytheincreasedlocalfiscalburdenresultingfromtheshiftingofresponsibilityforinfrastructureinvestmentandthedeliveryofservicestolocalgovernments.Furthercomplexityisintroducedbynewdevelopmentoverlappingmunicipalboundaries and imposinganunexpected financialburdenonthoseareashousingpoorerpopulationsorhostingimmigrants.Households in theseunder-servicedcommunitiesandoutlyingareas findthemselvespayinghigherunitcostsforinferiorqualityservices.

Inmanycountries,high-yieldtaxbasesarestill largelycontrolledbythecentralgovernmentandarenotlikelytobeturnedovertothelocallevelinthenearfuture.Althoughlocalauthoritiesarenominallyresponsibleformanagingtheirownaffairs,theirrealautonomyisrestrictedbythedominantrole that national governments continue toplay indetermining the localtaxbase,settingthetaxrates,andthecollectionandredistributionoftaxrevenue.Municipalities are facedwith amismatch between their newlyacquiredresponsibilitiestoprovideservicesandfundcapitalimprovementsandalackofcontroloftheirrevenuesources.TheconsequentscalingbackofpublicexpendituresonbothcapitalinvestmentandsocialprogrammesishavinganadverseeffectonurbandevelopmentandimpedingachievementoftheMDGs.

In developing countries, the deterioration of existing infrastructure andthe inability tomeet thedemandscreatedbyrapidurbanizationhaveledto chaoticurbanization, theproliferationof informal settlements and theemergenceofinformalprovidersofbasicservices.ThishasbeenthecaseparticularlywithwatersupplyinTanzania,Botswana,Kenya,MauritaniaandBenin.NGOshavecontributedtothealleviationofhardshipsendured


by the poor by providing themwith some services. Their interventionshavetargetedspecificcommunitiesselectedinaccordancewiththeirownobjectivesandcriteria.

Programmesaddressingthesocialdimensionofurbandevelopmentarestilllargelydependentoninter-governmentaltransfersorinternationalaid.Debtswapsanddiscounteddebtunder theHIPC initiativeareonlybeginningto be used to finance environmental and social programmes. Bolivia isanexceptionalcasewherefundsarechannelledthroughlocalauthorities.Their integration into the pool of resources available to finance urbandevelopmentcouldopenupnewperspectiveswellworthexploring.

Sustainableurbandevelopment requires significantcapitalandoperatingexpenditures,particularlyinsituationswhereurbanexpansionrequiresthecorrespondingprovisionofurbanservices.Furthermore,makingservicesavailable to low-incomefamiliesnecessitatessubstantialsubsidieswhichmunicipalitiesareunabletogeneratefromtheirownrevenues.Unlesstheinequalitygeneratedbyglobalization,decentralization,central/localfiscalrelations,andthedynamicsofurbangrowthareaddressed,thesustainabilityof urban development, particularly in developing countries will remainhighlyproblematic.

8.4 Privatization of municipal services and the need to link formal and informal providers in developing countries

Privatizationatfirstelicitedexpectationsthatmanypublicfunctionscouldbe more efficiently performed by the private sector. This takes severalforms:spinningoffserviceunits,outsourcingorcontractingoutspecializedfunctions,grantingmulti-yearconcessions,enteringintoBOOTagreementsoroutrightsaletotheprivatesector.Inmanycountries,revenue-generatingenterprisessuchastelecommunications,gasandelectricity,watersupply,andpublic transporthavebeensoldoff toprivateentities. Indevelopingandtransitionalcountries,privatizationwasadvocatedbyinternationalandbilateralorganizationsasawayofimprovingtheefficiencyanddeliveryof


publicservices,tappingintotheabilityoftheprivatesectortoraisecapitalinmarketsthatwereclosedtopublicbodies.

Privatizationisbynowawell-establishedtrend.Despitesomemisgivingsregardingtheprivatizationofmunicipalservicesindevelopingcountries,the trend is not likely to be reversed. However, enthusiasm has beensomewhattemperedandthemomentumsloweddown.Thewearinessstemsinpartfromthefactthatvariousformsofprivatizationexperiencedinsomecountrieswereassociatedwithcorruptionandthetransferofpublicassetstoinfluentialindividualsandmultinationalcorporations.Inothercases,theexpectedbenefitsintermsofhigherqualityservicesdidnotmaterialize,orfailedtoreachthepoorersegmentsofthepopulation.

In both advanced and developing countries, specialized multinationalfirmshavesecuredconcessionsfor themanagementofwatersupplyandsolidwastecollection.Sizeandpolitical influencehaveallowedthemtosecure favourable terms frommunicipalities.Concerns are being voicedand protests have erupted in some countries. Public authorities are nowexercisinggreater cautionwhen reviewing the rationale forprivatizationof specific functions and services and thinking through their socialimplications.Greaterimportanceisplacedontransparencyintheawardofcontractsandconcessions,andonthemonitoringofperformance.

Atthelocallevel,contractingoutsomeaspectsofservicedeliveryisthemost common form of privatization. It is often referred to as a public-privatepartnership,despitethefactthatthe“private”partydoesnotshareinthefinancialrisk.Privatizationhasgenerallybeenabletoservesegmentsofthepopulationsthatareabletopay,butlower-incomeareasareusuallyunderservedonaccountoftheirinabilitytopay.

Evidencesupports thewidelyheldviewthatpeoplearemoreinclinedtopayprivateoperators,butmaybelesswillingtopaygovernment,therebyboosting the performance of privately managed services. However, thefailuretodeliveronpromisesofgreaterefficiency,higherqualityservicesandconsumerchoiceerodessupportforallformsofprivatization.Peopleoptoutofexistingsystemsthatfailthem.Theyrefusetopayforinadequateservicesandseekalternatives.Inpoorcountries,relianceoninformalserviceprovidersandvendors,unauthorized tappingofgroundwaterofdubious


qualityandillegaldumpingofrefuseperpetuateunsanitaryconditionsandpoorhealthrecords.

Indevelopingcountries,andparticularlytheverypoor,thereisanurgentneed to address inequalities in access to basic services.This is an issuethat privatization will not resolve. Such disparities arise from a legacyofinadequateurbanpoliciesandineffectiveresponses,whichthecurrentdynamicsofurbandevelopmentcanonlycompound.Manygovernmentsdo provide subsidized access to poor families and some, like SouthAfrica, extend these subsidies to minimum consumption levels. In themanydevelopingcountries,linkingformalandinformalserviceprovidersremains themost effectiveway of providing and improving services tolower-incomecommunities.

8.5 Building the capacity of municipalities to fund local development

Strengthening the capacity of municipalities to plan and manage theireconomic, spatial and social development remains a major challengeworldwide, as do publicizing successful approaches and providing theinstitutionalframeworktosupportreform.Inadverseeconomicconditionsor institutionally fragile environments, building the capacity of weakmunicipalities requires long-term support that must be provided bystronglocally-basedinstitutions.TheachievementsofthePartnershipforMunicipalDevelopment,jointlyfundedbyAfricangovernments,bilateralandmultilateralorganizations,demonstratethepotentialofthisapproach.Sponsoring local capacity-building institutions is an effective way offosteringtheachievementoftheMillenniumDevelopmentGoals.


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Appendix. List of Cases Reviewed by Region

Africa

East Africa

2004EastAfricanRegionDecentralizationandMunicipal FinanceContext

2004BotswanaandGaborone

West Africa

2004WestAfricanRegionDecentralizationandMunicipal FinanceContext

2003Benin:ProgrammefortheProtectionoftheEnvironment andWater(Cotonou)

2000Côted’Ivoire:Abidjan

Southern Africa

2004SouthAfrica:DevelopmentBankofSouthAfrica(DBSA)

2003SouthAfrica:MunicipalInfrastructureProgram(MIP)

Arab States

1998Morocco:MunicipalDevelopmentBankandFez

2004Egypt:DebtSwap

Asia

East Asia

2004IndonesiaDecentralizationandMunicipalFinanceContext

2004China:SpecialPurposeVehicles(SPV)

2004Philippines:PhilippineMunicipalDevelopmentFund

2004Vietnam


South Asia

2004IndiaDecentralizationandMunicipalFinanceContext

2003India:Ahmedabad,Parivartan

2004India:TamilNaduUrbanDevelopmentFund(TNUD)

Europe

Eastern Europe

2004CzechRepublic:MunicipalFinanceCompany(MUFIS)

2004Georgia:MunicipalDevelopmentFund

2004Poland:BankforSocioeconomicInitiatives(BISE)

2003Poland:SzczecinCapitalImprovementProgram

2004RussiaDecentralizationandMunicipalFinanceContext

2004Slovakia:LocalGovernanceandfiscalDecentralization

Western Europe

2004Netherlands:BNG

2004Sweden:KommunninvestCorporation

2004UK:PublicWorksLoanBoard

Latin America and the Caribbean

Central America

2002ElSalvador:LocalDevelopmentFundofNejapa

2004ElSalvador:SanAndrésValleyManagementGroup

2004Guatemala:GénesisEmpresarialFoundation

2003Honduras:Decentralization(PRODEL)

2002Honduras:MancomunidadMetropolitanAreaValle deSula(ZMVS)


South America

2003Bolivia:Decentralization,SocialInvestmentFundsand StrategyforPovertyReduction

2004BrazilDecentralizationandMunicipalFinanceContext

2002Brazil:HousingandParticipatorybudget,BeloHorizonte

2002Brazil:HousingandParticipatorybudget,PortoAlegre

2004Brazil:Paranácidade

2002Brazil:ParáUrbe

2004Brazil:SãoPauloActionCentre

2004Colombia:FinancieradeDesarrolloTerritorial(FINDETER)

2004Ecuador:CuencaImproveyourNeighbourhoodProgram

North America

2004Canada:AlbertaCapitalFinanceAuthority

2004US:TheBostonLinkageProgram

2004US:TaxIncrementFinancing(TIF)

2004US:VirginiaResourcesAuthority(VRA)

Totalnumberofcases:43

Members of the HS-Net Advisory Board

(whoarealsothemainrefereesoftheHumanSettlementsGlobalDialogueSeries)

2007-2009

Dr. Winnie Mitullah HS-Net ChairInstituteofDevelopmentStudies,UniversityofNairobi,Nairobi,Kenya

Dr. Graham Tipple HS-Net Vice ChairSchoolofArchitecture,PlanningandLandscape,NewcastleUniversity,NewcastleuponTyne,UK

Prof. Samuel Babatunde AgbolaDepartmentofUrbanandRegionalPlanning,FacultyoftheSocialSciences,UniversityofIbadan,Ibadan,Nigeria

Prof. Aloysius MoshaDepartmentofArchitectureandPlanning,FacultyofEngineering&Technology,UniversityofBotswana,Gaborone,Botswana

Prof. Louis AlbrechtsInstituteforUrbanandRegionalPlanning,CatholicUniversityofLeuven,Leuven,Belgium

Dr. Deike PetersCenterforMetropolitanStudies,BerlinUniversityofTechnology,Berlin,Germany

Prof. Suocheng DongInstituteofGeographicSciencesandNaturalResourcesResearch,ChineseAcademyofSciences,Beijing,People’sRepublicofChina

Prof. Elliott SclarCentreforSustainableUrbanDevelopment,ColumbiaUniversity,NewYork,USA

Dr. József HegedüsMetropolitanResearchInstitute,Budapest,Hungary

Dr. (Ms) Dina K. ShehayebHousingandBuildingNationalResearchCenter(HBNRC),Cairo,Egypt

Prof. Alfonso IrachetaProgramofUrbanandEnvironmentalStudies,ElColegioMexiquense,MexicoCity,Mexico

Prof. Richard StrenCentreofUrbanandCommunityStudies,UniversityofToronto,Toronto,Canada

Mr. A. K. JainDelhiDevelopmentAuthority,NewDelhi,India

Dr. Belinda YuenSchoolofDesignandEnvironment,NationalUniversityofSingapore,Singapore

Ms. Paola JironHousingInstitute,UniversityofChile,Santiago,Chile

HS-Net Secretariat

PolicyAnalysisBranch,MonitoringandResearchDivision,UN-HABITAT

http://www.unhabitat.org/categories.asp?catid=328

Naison Mutizwa-MangizaChief

Ben C. ArimahHumanSettlementsOfficer

Inge JensenHumanSettlementsOfficer

Edlam Abera YemeruHumanSettlementsOfficer

Nelly W. Kang’etheStaffAssistant

Naomi Mutiso-KyaloSecretary

The UN-HABITAT Lecture Award

TheUN-HABITATLectureAward is an annual award organized by theGlobalResearchNetwork onHuman Settlements (HS-Net) to recognizeoutstanding and sustained contribution to research and thinking in thehumansettlementsfield.Uponselection,theAwardwinnerwillbeinvitedtodeliverathought-provokinglectureduringasessionoftheWorldUrbanForumoranothermajorinternationalevent.TheAwardwinnerwillalsobepresentedwithacommemorativeplaqueengravedwithhis/hernameandaprizeof$10,000.TheAwardseekstostimulateglobaldialogueonhumansettlementsissuesand capture and disseminate new thinking and trends in addressing themulti-faceted challenges of sustainable human settlements. Furthermore,theAwardisdesignedtoenhancethevisibilityoftheHabitatAgendaandofhumansettlementsissuesingeneral.ItalsokeepsUN-HABITATuptodatewithcurrentresearchandthinkingonhumansettlementstherebyenrichingthecontentoftheGlobal Report on Human Settlements.The Lecture Award is open to any individual with an outstanding andsustainedtrackrecordofresearchinthehumansettlementsfield,bothurbanandrural.Theidealcandidatewill:1). Havemadeasignificantandoriginalcontributiontohumansettlements

research,thinkingandpractice;2). Have a sustained record of research and publication in reputable

refereedjournals,orintheformofbooksandbookchapters;3). Have a substantive reputation, evidenced by widespread peer

recognition,eithergloballyorregionally;4). Be engaged in innovative research on current human settlements

issues;and5). Beacitizenorpermanentresidentofacountryintheregiondesignated

fortheLectureAwardfortherelevantcalendaryear.

Institutionsorindividualscannominatecandidatesfortheaward.Individualsmay also nominate themselves. TheHS-NetAdvisory Board, composedof experienced researchers in the human settlements field, serves as theselectioncommitteefortheaward.ThethemeforthelecturemayberelatedtothethemeofanupcomingGlobal Report on Human Settlements,oritmaybeatopicalissue,asdeterminedbytheAwardwinnerinconsultationwiththeHS-NetAdvisoryBoard.Thelectureiswidelydisseminatedthroughvariousmedia,andawrittencopyofthelectureispostedattheHS-Netwebsite.

For further information, and to nominate candidates, visit the HS-Net website at http://www.unhabitat.org/hs-net

UN-HABITAT Lecture Award winners

Year Award winner Title of lecture

2006 JohnFriedmann

Thewealthofcities:Towardsanassets-baseddevelopmentofurbanizingregions

2007 MarthaSchteingart

UrbanproblemsandpoliciesinLatinAmerica:Truthsandfallacies

Visit the HS-Net website at http://www.unhabitat.org/hs-net to access a copy of the lecture.

TheHS-NetSecretariatwelcomes submission ofmanuscriptsforconsiderationatanytime.Bysubmissionofamanuscript,anauthorcertifiesthattheworkisoriginalandisnotbeingconsideredsimultaneouslybyanotherpublisher.Itisexpectedthatpaperswillreflectthewidespectrumofdisciplinesfoundwithinthe human settlements field. The submission of papers from practitionersandscholarsinthefieldwhorepresentthepolicycommunityaswellastheacademic commun¬ity is encouraged.Articles should be methodologicallyrigorouswitheitherquantit¬ativeorqualitativesophisticationasnecessary.Allcontributionsarerefereed.Onlythosereceivingfavourablerecommendationwillbeacceptedforpublication.Manuscriptsshouldbetypedononesideofthepaper,doublespaced,withamplemargins,andbearthetitleofthepaperandname(s)oftheauthor(s)onaseparatesheetofpaper.Allpagesshouldbenumbered.Papersshouldnormallybe 15,000 to 20,000words in length, and should bewritten in theEnglishlanguage.Onlymanuscriptssubmittedelectronically(usingMSWord)throughtheHS-Netwebsite(athttp://www.unhabitat.org/hs-net)willbeaccepted.Manuscripts should contain a list of all acronyms and special terms used.Section headings should be numbered (e.g., I.A.1.a.i.). Do not abbreviatenamesofcountries,geographicalregionsorareas.Reduceotherabbreviationstoaminimum.Use“percent”insteadof“%”,unlessitisinaquote.Tables, graphs, maps, diagrams, and other illustrations essential to thesubject of the paper should be submitted (in black and white only— nocolour illustrationwill be accepted) in a condition suitable for publication.Eachoftheseshouldbenumberedconsecutivelyandreferencedinthetext.Footnotes should be used only for substantive observations and should benumberedconsecutively.Endnotesshouldnotbeused.References to books, articles and statistical sources should be identified attheappropriatepointinthetextbysurnameofauthor,yearofpublicationand(where appropriate) page reference, as follows: “UN-HABITAT (2003:23)”or“ (UN-HABITAT,2003:23-25)”. Incaseswhere therearemore thanonereference to an author in the same year, distinguish them by use of letters(a,b,c)attachedtotheyearofpublication:(e.g.,“2003a”). Quotationsinthetextshouldhavedoublequotationmarks.Ifaquoteismorethanthreelines,itshouldbeindented.Allreferencesusedinthetextshouldbelistedinfullattheendofthepaperasindicatedbelow.Allitemsshouldbealphabeticallylistedbyauthor’ssurnameandinitial,(providingthefulllistofmultipleauthors),dateofpublication,fulltitleofbook,publisherandplaceofpublication.Forjournalarticlesprovideauthor’ssurnameandinitial,date,fulltitleofarticleandofjournal,volume,numberandpagereference.Titlesofjournalsshouldnotbeabbreviated.URLsshouldbeincludedwhenavailable.

Human Settlements Global Dialogue Series: Guidelines for contributors

Berner,E.,(2002),“Learningfrominformalmarkets:innovativeapproachestolandandhousingprovision”,inWestendorff,D.andEade,D.,(eds.),Development and cities: Essays from development in practice,Oxfam,Oxford,pp.226-247.

Payne,G.,(1996),“Strategiesforenablinginformalsettlerstoobtaindecenthousing”,PresentationtotheNGOworkshoponHousingforLow-IncomeGroupsattheSecondUnitedNationsConferenceonHumanSettlements(HabitatII),June1996,Istanbul.

_____andMajale,M.,(2004),The urban housing manual: Making regulatory frameworks work for the poor,Earthscan,London.

Tipple, A.G., (1996), “Housing extensions as sustainable development”,HabitatInternational,vol.20,No.3,pp.367-376.

UN-HABITAT (United Nations Human Settlements Programme), (2003),Rental housing: An essential option for the urban poor in developing countries, Nairobi. Available at http://www.unhabitat.org/programmes/housingpolicy/pubrental.asp.

Manuscripts should be submitted alongwith, on separate sheets of paper,two abstracts of maximum 50 words and 250 words respectively (to beusedbyUN-HABITATforpromotionalpurposes).Thelongerofthetwoab-stractsshouldcontainasummaryofthefollowingaspectsofthepaper:(a)objective(s);(b)methodologyused(ifthisisconsiderednecessarybytheau-thor);(c)mainfindings;and(d)fivekeywords.Author(s)shouldalsosubmit,onaseparatesheetofpaper,ashort review(200wordsmaximum)ofhis/herpreviouspublications,presentoccupationandresearchinterests;andappro-priatecontactdetailsoftheauthor(s),whichshouldcontain(atleast),name,designation,institutionofemploymentande-mailaddress.Proofswillbesenttoauthorsbeforethepaperispublished.Theyshouldbecorrectedandreturnedtothepublisherwithinoneweek.Majoralterationstothetextcannotbeacceptedatthisstage.Authorsofpapersacceptedforpubli-cationwillreceivetencopiesofthepublishedpaperfreeofcharge.Copyright.Itisaconditionofpublicationthatauthorsvestcopyrightintheirarticles,includingabstracts,inUN-HABITAT.Thisenablesustoensurefullcopyrightprotectionandtodisseminatethepaper,tothewidestpossibleread-ershipinprintandelectronicformatsasappropriate.Authorsmay,ofcourse,usethearticleelsewhereafterpublicationwithoutpriorpermissionfromUN-HABITAT,providedthatacknowledgementisgiventoUN-HABITATandtheHumanSettlementsGlobalDialogueSeriesastheoriginalsourceofpublica-tion,andthattheHS-NetSecretariat(e-mail:[email protected]).Authorsarethemselvesresponsibleforobtainingpermissiontoreproducecopyrightmaterialfromothersources.

Documents

Municipal Finance and Urban Development