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 United Nations Human Settlements Programme (UN-HABITAT) Nairobi, 2008 Serageldin and others: Municipal financing and urban development The designations employed and the presentation of the material in this report do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area, or of its authorities, or concerning delimitation of its frontiers or boundaries, or regarding its economic system or degree of development. The analysis, conclusions, and recommendations of this report do not necessarily reflect the views of the United Nations Human Settlements Programme or its Governing Council. This material is copyrighted. Excerpts from the text may be reproduced without authorization, on condition that the source (© UN-HABITAT) is indicated and that the HS-Net Secretariat is notified (by e-mail, to [email protected]). Cover design: UN-HABITAT. Printing: UNON Print Shop, Nairobi. Copyright ©: UN-HABITAT. Nairobi, 2008. 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). An electronic version of this publication is available from the UN-HABITAT website at http://www.unhabitat.org/hs-net. UN-HABITAT publications can be obtained from our Regional Offices or directly from: UN-HABITAT Information Services Section Box 30030, GPO Nairobi 00100, Kenya Tel: +254 (20) 7623477; Fax: +254 (20) 7623477/7624266/7624267 E-mail: [email protected]; Website: http://www.unhabitat.org/ ii Human Settlements Global Dialogues Series, No. 3 Contents 1. Introduction ....................................................................................................1 1.1 Current issues and challenges ...............................................................2 I.2. Outline of the paper ..............................................................................4 2. Municipal finance and urban development .................................................6 2.1. General trends in fiscal decentralization ...............................................7 2.2. The evolution of financial systems towards more transparency and accountability ...............................................................................10 3. Patterns and trends in municipal budgeting .............................................28 3.1. Reliance on central transfers ...............................................................30 3.2. Control of local revenue generation by provincial/regional government .........................................................................................32 3.3. Building local capacity to raise and manage own revenue sources in West Africa ........................................................................38 3.4. Mandating responsible municipal financial management ...................40 3.5. Lack of funds for maintenance of existing assets ...............................42 3.6. Capital investment programmes and budgets .....................................42 3.7. The impact of popular participation on the allocation of capital investments: Participatory Budgeting in Brazil ..................................43 4. Performance of major sources of municipal revenue ...............................49 4.1. Taxes on property and business activities ...........................................50 4.2. Challenges to improved municipal revenue .......................................53 4.3. Taxes on Income .................................................................................56 4.4. User fees .............................................................................................56 4.5. Betterment taxes and development exactions .....................................57 4.6. Borrowing and debt service management ...........................................59 4.7. Municipal financial management under adverse economic conditions and structural adjustment ..................................................64 5. Special funding sources and targeted funds ..............................................71 5.1. Municipal Development Funds ...........................................................71 Serageldin and others: Municipal financing and urban development iii 5.2. Regional/State funds for urban and regional development .................81 5.3. Special funds .......................................................................................91 6. Private-sector financing of municipal infrastructure and services .........96 6.1. Privatization of municipal service delivery ........................................96 6.2. The major issues in various regions ....................................................99 7. Joint funding of infrastructure and urban services ................................103 7.1. Joint funding of community-based initiatives for the delivery of basic services ....................................................................................103 7.2. New trends in partnerships for local development ...........................104 7.3. Tapping migrant remittances ............................................................108 7.4. Building the capacity of municipalities and improving local financial management .......................................................................112 8. Concluding remarks .................................................................................. 118 8.1. Decentralization, municipal performance and accountability ..........119 8.2. Ability of municipalities to provide serviced land and basic services ....................................................................................120 8.3. Local capacity to meet the goals of sustainable development ..........124 8.4. Privatization of municipal services and the need to link formal and informal providers in developing countries ...................125 8.5. Building the capacity of municipalities to fund local development ......................................................................................127 List of references ..............................................................................................128 Appendix. List of Cases Reviewed by Region ...............................................139 iv Human Settlements Global Dialogues Series, No. 3 List of boxes Box 1. Development and equalization strategies under adverse economic conditions: Indonesia’s fiscal decentralization process .................15 Box 2. Brazil’s fiscal responsibility law ....................................................41 Box 3. Multi-year capital investment planning, Szczecin, Poland ...........44 Box 4. The role of Special Purpose Vehicles (SPV) in China ...................65 Box 5. Cross-subsidies in Botswana .........................................................68 Box 6. FINDETER, Colombia ..................................................................75 Box 7. The Municipal Development Fund of Georgia ..............................78 Box 8. The Tamil Nadu Urban Development Fund (TNUDF), India .......83 Box 9. The Kommuninvest Corporation, Sweden ....................................86 Box 10. Linking formal and informal systems: Cotonou, Benin ..............105 Box 11. Génesis Empresarial, Guatemala .................................................106 Box 12. The Valle de Sula Region, Honduras ...........................................111 Box 13 Cuenca, Ecuador: “Improve your neighbourhood” programme ..113 Box 14. Africa’s Municipal Development Programme (PDM) ................115 Serageldin and others: Municipal financing and urban development List of tables Table 1. Distribution of Brazilian municipalities’ average revenues (by population size) ............................................................................10 Table 2. Distribution of revenue and tax collection in Brazil (2003) ........11 Table 3. Russia: local government expenditures in the consolidated national budgets ...........................................................................14 Table 4. Structure of municipal operating revenue and expenditures in selected West African countries (%) ............................................18 Table 5. India: the role of transfers in municipal finances (2001/2002) ....33 Table 6. Distribution of revenues between budgets at all levels in Russia (% of GDP) .......................................................................35 Table 7. Structure of Russian municipal revenues (1996-2002 - in %) .....36 Table 8. Functional structure of local expenditure budgets in the Russian Federation (%) ................................................................37 vi Human Settlements Global Dialogues Series, No. 3 List of acronyms ACFA Alberta Capital Finance Authority AMC Ahmedabad Municipal Corporation AREB Association of Water Vendors BCIE Central American Bank for Economic Integration BISE Bank for Socioeconomic Initiatives BOOT Build/Own/Operate/Transfer BOT Build/Operate/Transfer BRA Boston Redevelopment Authority BRL Brazilian real CBOs Community-Based Organizations CIDA Canadian International Development Agency CIP Capital Investment Programme CIS