Financing Metropolitan Governments Bahl Linn in Developing Countries Wetzel Edited by Roy W. Bahl, Johannes F. Linn, and Deborah L. Wetzel Financing Metropolitan Governments Governments Metropolitan Financing or the first time in human history, more people live in urban rather than rural Fareas; the number of metropolitan cities in developing countries far exceeds those in advanced economies; and the governance of megacities is of greater importance as national finances have become precarious. This book skillfully weaves together the theory and history of metropolitan finance with illustrative case studies, which offer deep insights into metropolitan financial governance in Brazil, India, and China, among in other countries. The authors address the politics of metropolitan government, the mys- Developing Countries Developing teries of the underutilized instrument of the property tax, and the question of financ- ing urban infrastructure. This is an indispensable volume for policy makers and for those who care about the future of metropolitan cities. — Rakesh Mohan Executive Director, International Monetary Fund he economic and political future of the developing world depends crucially on the Tongoing processes of urbanization. The essays in this volume, by leading scholars Financing Metropolitan intimately associated with these issues, provide a deep analysis of the critical role of metropolitan governance and financial structure in urbanization. It is the best treatment available: a wide-ranging and penetrating exploration of both theory and practice. Governments in — Wallace E. Oates Professor of Economics, Emeritus Developing Countries University of Maryland Edited by his well-written and informative book will put local governments, especially in Roy W. Bahl, Johannes F. Linn, and Deborah L. Wetzel Tmetropolitan areas, on the map of public finance, where they belong. The impor- tance of global and local public finance has grown world-wide along with national pub- lic finance, which has received most of the attention in the past. This book will surely contribute to that change. It contains a wealth of hard-to-get information on issues that range from how particular cities are financed to the complex fiscal arrangements in China. It is definitely a must-read book for public finance scholars. — Vito Tanzi Former Director of Fiscal Affairs, International Monetary Fund Cover design by Joyce Weston Cover photographs (top): iStockphoto/Celso Diniz Photography ISBN 978-1-55844-254-2 (bottom): iStockphoto/Dominique Landau Financing Metropolitan Governments in Developing Countries Edited by Roy W. Bahl Johannes F. Linn Debor ah L. Wetzel © 2013 by the Lincoln Institute of Land Policy All rights reserved. Library of Congress Cataloging- in- Publication Data Financing metropolitan governments in developing countries / edited by Roy W. Bahl, Johannes F. Linn, Deborah L. Wetzel. pages cm Includes index. ISBN 978- 1- 55844- 254- 2 (alk. paper) 1. Municipal fi nance— Developing countries. 2. Finance, Public— Developing countries. 3. Local taxation— Developing countries. 4. Municipal government— Developing countries. 5. Municipal fi nance— Developing countries— Case studies. 6. Finance, Public— Developing countries— Case studies. 7. Local taxation— Developing countries— Case studies. 8. Municipal government— Developing countries— Case studies. I. Bahl, Roy W. II. Linn, Johannes F. III. Wetzel, Deborah L. HJ9695.F663 2013 352.4'216091724—dc23 2013001063 Designed by Westchester Publishing Ser vices Composed in 10.5/13 Minion, by Westchester Publishing Ser vices in Danbury, Connecticut. Printed and bound by Puritan Press Inc., in Hollis, New Hampshire. Th e paper is Rolland Enviro100, an acid- free, 100 percent PCW recycled sheet. MANUFACTURED IN THE UNITED STATES OF AMERICA Contents List of Illustrations vii Foreword xi DOUGLAS H. KEARE 1 Governing and Financing Metropolitan Areas in the Developing World 1 ROY W. BAHL, JOHANNES F. LINN, and DEBORAH L. WETZEL 2 Metropolitan Cities: Th eir Rise, Role, and Future 31 SHAHID YUSUF 3 Metropolitan Cities in the National Fiscal and Institutional Structure 57 PAUL SMOKE 4 Th e Decentralization of Governance in Metropolitan Areas 85 ROY W. BAHL 5 Institutions and Politics of Metropolitan Management 107 INDER SUD and SERDAR YILMAZ 6 Metropolitan Public Finance: An Overview 135 RICHARD M. BIRD and ENID SLACK 7 Property Taxes in Metropolitan Cities 159 WILLIAM J. MCCLUSKEY and RIËL C. D. FRANZSEN 8 Local Nonproperty Revenues 183 JORGE MARTINEZ- VAZQUEZ 9 Grant Financing of Metropolitan Areas: A Review of Principles and Worldwide Practices 213 ANWAR M. SHAH 10 Metropolitan Public Finances: Th e Case of Mumbai 243 ABHAY PETHE 11 Paying for Urbanization in China: Challenges of Municipal Finance in the Twenty- First Century 273 CHRISTINE P. WONG vi n Contents 12 Metropolitan Governance and Finance in São Paulo 309 DEBORAH L. WETZEL 13 Metropolitan Infrastructure and Capital Finance 339 GREGORY K. INGRAM, ZHI LIU, and KARIN L. BRANDT 14 Slum Upgrading 367 MARIA E. FREIRE 15 External Assistance for Urban Finance Development: Needs, Strategies, and Implementation 393 HOMI KHARAS and JOHANNES F. LINN Contributors 421 Index 423 About the Lincoln Institute of Land Policy 431 Metropolitan Public Finances 10 The Case of Mumbai ABHAY PETHE Conceptual-Contextual Background Urban spaces in India are increasingly important (Mohan 2007). Th e future of India is signifi cantly urban since globalization requires global city spaces. Th is chapter is informed by the conviction that governance is key in considering issues related to both interurban and intraurban institutions and organizations and in- volves agents, agencies, and their interactions. Metropolitan government is an artifi cial, rather than organic, conceptual construct and should be considered as an emergent system, more complex than cities, generated by and generating inter- actions among many public and private organizations and civil society. Such evolving metropolitan governance in India resembles a “polycentric governance” system (see Pethe, Gandhi, and Tandel 2011; Pethe et al. 2012; Pethe, Tandel and Gandhi 2012). Over the last few de cades, India’s pattern of urbanization has become distinctly top- heavy, as evidenced by the rapid growth of urban agglomerations and increased Th e author acknowledges several persons for their help and support with the data and substantive insights. Th e author specifi cally thanks the offi cials of Mumbai Metropolitan Region Development Authority, Directorate of Economics and Statistics, Maharashtra Housing and Area Development Authority, Department of Municipal Administration, Mumbau Transformation Support Unit, and Maharashtra Economic Development Council, as well as Rakesh Mohan, Vidyadhar K. Phatak, Mala Lalvani, and Sunil Bhandare. Sahil Gandhi and Vaidehi Tan- del, research assistants for this work, deserve a special word of appreciation. Th e author would also like to thank Sirus Libeiro for GIS assistance. Th e interactions with participants of the Conference or ga nized by the Lincoln Institute of Land Policy and Brookings Institution on July 11– 12, 2011 at Washington DC, as well as comments received via the mail, have improved the chapter. Some academics (see, e.g., Sassen 2010) believe we have reached a tipping point where cities and city- states are becoming more important economic categories than nation- states, which are becoming less important, if not re- dundant, because of global capital and technology. n 243 n 244 n Abhay Pethe numbers of cities with populations of 1 million or more (Kundu 2006). Th e signifi - cant agglomeration economies arising from large metropolises feed into the econ- omy in the form of higher economic effi ciency and productivity growth (Mohan 2006). Th e passage in India of the 73rd and 74th constitutional amendment acts (CAAs) in 1992– 1993 was a signifi cant reform addressing decentralization. It was meant to improve the management of local governments and to promote better public ser- vice delivery. Th e pro cess of decentralization, however, remains far from satisfactory in the de facto sense and lacks true empowerment of urban local bodies (ULBs). Decentralization in major urban regions is further complicated by the strong pres- ence of central and state governments, via their parastatals, in providing urban infrastructure. In an attempt to understand public fi nance in metropolitan regions, this chapter presents an analysis of the issues faced by one of the most important urban ag- glomerations in India: the Mumbai metropolitan region (MMR). Slack (2007, 15) terms the governance structure in Mumbai the “one- tier fragmented government model.” It is important to recognize linkages with and participation of the central and state governments in the region. Th is direct participation can be attributed to the fact that the region contributes 70 percent of state- level and more than 11 per- cent of national- level tax revenues. Th e MMR may be characterized as the “goose that lays the golden egg,” a strong economic engine that creates a stake for the higher levels of governments to remain invested in the region so that growth is sustained. However, given the set of problems the region faces in terms of inadequate infra- structure and poor livability, the extent of investments in the region by higher- level governments is not in sync with the level of return that accrues to them. Th is chap- ter highlights the structure of public fi nance and governance in MMR and consid-