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Cities are in the
midst of three major trends; first, increasing
globalization requiring quality infrastructure to
attract investments, second, decentralization of
responsibilities, often not matched by delegation of
powers, and third, a continual flow of poor people
whose contribution to the economy is rarely matched
by their access to services. To respond to these
challenges cities need to be transformed into
proactive developers of infrastructure rather than
passive service providers. The first step towards
such a transformation is a city development strategy
incorporating the means of financing the city’s long
term goals.
Specifically, when
cities embark on their CDS, a financial stocktaking
of their revenue streams enables them to prioritize
their investments and the means of financing should
be an essential part of the strategy. Similarly, in
supporting slum upgrading, cities need to work with
communities to ensure their investments in the slums
are in conjunction with shelter improvement
activity. Financing investments in public goods and
facilitating community home improvement activity is
an integral part of the CDS process.
Clearly, the financial
implications of the huge backlog in infrastructure
and shelter, makes obvious the proposition that
current taxes, user charges or ad-hoc external
grants cannot bridge the deficits in any reasonable
manner. The situation requires cities to generate
revenues and leverage private domestic capital. Long
term debt is clearly required as most infrastructure
assets, especially environment enhancing
investments, such as water, wastewater and solid
waste management, provide benefits over time and
across city boundaries. Therefore for the
sustainability of investments, the link between city
infrastructure needs and domestic capital has to be
strengthened. Policies to strengthen this link need
to be based on country specific decentralization
systems and the stage of financial market
development.
For most cities in the
developing world, the sources of municipal debt have
been limited usually to governments,
government-owned financial institutions, or finance
raised on the basis of guarantees issued by the
state. Since the 1990s, however, larger cities in
countries such as Mexico, South Africa and India,
have raised debt for municipal infrastructure by
accessing capital markets based on credit ratings
through issuing debt instruments of varying tenors
on a non-guarantee basis. Further still, in Mexico
and some Indian states, small and medium cities
have, by pooling financing needs, generated credible
financing demands which markets have responded to.
In other countries, government owned domestic
financial institutions which lend to cities are
making efforts to become more market oriented by
mobilizing private capital for public infrastructure
These recent developments have yet to be
institutionalized in most economies, and are not
mainstreamed into the city investment process.
To facilitate more
market based financing, concrete actions from
national governments; the cities themselves and
lenders are needed. On the supply-side, namely from
the lenders’ perspective, constraints include the
lack of a transparent accounting system, near
absence of collateral, and project revenue streams
which rarely match commercial debt costs.
From the standpoint of
cities, significant impediments include the high
transaction costs of commercial finance, the absence
of a level playing field in terms of fiscal
incentives for municipal debt, and limited
experience of lenders/rating agencies in structuring
security mechanisms that are not based on
traditional instruments such as collateral or
guarantees.
The need, therefore
for national level policy actions to enable a new
market for private capital to finance public
infrastructure in a sustainable fashion is clear.
For a significant debt market, national level policy
actions would include establishing a regulatory
framework for municipal debt, rule based and
predictable revenue transfers, and a deepening of
the capital markets by encouraging tradability. In
federal structures, where regions have urban
responsibilities, municipal reform, through modern
accounting systems, specified cost recovery
mechanisms grounded in the consent of the governed,
and benchmarks for permission to borrow, are often
necessary steps. Identifying a set of agreed
internal actions and demonstrating a clear revenue
stream would provide greater voice for cities while
negotiating with commercial finance.
There appears to be a
clear need for defining frameworks for cities,
national governments and their development partners
in defining country specific municipal finance
strategies. Apart from mainstreaming financing in
the regular CDS and slum upgrading process, the
Cities Alliance as a learning alliance, is committed
to contributing to and learning from cities’
endeavors to assimilate good practices in financing.
With this objective,
Alliance members have recently established a
Municipal Finance Task Force
(MFTF) which includes experts and practitioners
from the rating agencies, private sector financial
institutions, and bilateral and multilateral banks
and development agencies. The MFTF is helping to
analyze and share the knowledge and experience of
cities which have successfully mobilized long term
private capital and the frameworks which need to be
in place at all levels of government to facilitate
this process. In parallel the Alliance is also
supporting the initiative of
United Cities and Local Governments (UCLG) to
establish both a global and regional commissions of
mayors on municipal finance which will interact with
the MFTF and help broaden and deepen the engagement
of cities in improving these instruments and their
application their application.
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