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UCLG Policy Paper on Local Finance DISCUSSIONS. Technical Meeting on Local Finance, Barcelona, 11-12 June 2007 Thomas Meekel, Project Manager, CGLU Juliana Pigey, The Urban Institute. Background: Three long-term trends that have changed and are still changing our world

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Uclg policy paper on local finance discussions

UCLG Policy Paper on Local FinanceDISCUSSIONS

Technical Meeting on Local Finance,

Barcelona, 11-12 June 2007

Thomas Meekel, Project Manager, CGLU

Juliana Pigey, The Urban Institute


Structure of the support paper meeting

Background: Three long-term trends that have changed and are still changing our world

1/ The Challenge: Investments in Local Public Infrastructure do not Match Urban Expansion

2/ Towards Efficient Fiscal Decentralization Frameworks!

3/ Access to Credit for Local Governments: Constraints and Opportunities

Objective: Improving Access to Credit for Local Governments: A Call for Action

Structure of the Support Paper / Meeting


Structure of the support paper meeting1

Background: Three long-term trends that have changed and are still changing our world

1/ The Challenge: Investments in Local Public Infrastructure do not Match Urban Expansion

2/ Towards Efficient Fiscal Decentralization Frameworks!

3/ Access to Credit for Local Governments: Constraints and Opportunities

Structure of the Support Paper / Meeting


Background

Introduction (1/5) still changing our world

Background

  • Three long-terms trends that have changed and are still changing our world :

URBANIZATION AND DEVELOPMENT

DECENTRALIZATION

GLOBALIZATION


Urbanization and development

Introduction (2/5) still changing our world

Urbanization and Development

Mayday: May, 23 2007


Urbanization and development1

Source: still changing our worldDavid Satterthwaite

Introduction (3/5)

Urbanization and Development


Decentralization

Introduction (4/5) still changing our world

Decentralization

A worldwide process

In all regions / At the same time


Decentralization1

Introduction (4/5) still changing our world

Decentralization

  • Latin America

    • long tradition of centralized government

    • reforms starting in late 1980’s

  • Africa

    • movement away from centralized colonial regimes

    • democratic reforms starting in late 1980’s

  • Asia

    • movement away from centralized colonial regimes

  • NIS - CEE

    • transition starting in late 1980’s


Globalization

Introduction (4/5) still changing our world

Globalization


Globalization1

Introduction (4/5) still changing our world

Globalization


Structure of the support paper meeting2

Background: Three long-term trends that have changed and are still changing our world

1/ The Challenge: Investments in Local Public Infrastructure do not Match Urban Expansion

2/ Towards Efficient Fiscal Decentralization Frameworks!

3/ Access to Credit for Local Governments: Constraints and Opportunities

Objective: Improving Access to Credit for Local Governments: A Call for Action

Structure of the Support Paper / Meeting


UCLG Policy still changing our worldPaper on Local FinanceI. THE CHALLENGE: INVESTMENTS IN LOCAL PUBLIC INFRASTRUCTURE DO NOT MATCH URBAN EXPANSION

Technical Meeting on Local Finance,

Barcelona, 11-12 June 2007

Thomas Meekel, Project Manager, CGLU

Juliana Pigey, The Urban Institute


The challenge investments in local public infrastructure do not match urban expansion

a/ The context :A rapid urban population growth and urban growth pattern which requires massive investments in local public infrastructure.

b/ Situation Scheme: State of Local Finance.

What are the funding options available?

The Challenge: Investments in Local Public Infrastructure do not Match Urban Expansion


A a rapid urban population growth

1/ The Context (1/16) growth pattern which requires massive investments in local public infrastructure.

a) A rapid urban population growth,


Especially in asia and africa and in small and medium cities

1/ The Context (2/16) growth pattern which requires massive investments in local public infrastructure.

especially in Asia and Africa, and in small and medium cities


Which requires massive investment in local public infrastructure

The Context (3/16) growth pattern which requires massive investments in local public infrastructure.

…which requires massive investment in local public infrastructure.

  • Consequences of insufficient investments:


But how much indeed would be needed

Demand for urban infrastructure? growth pattern which requires massive investments in local public infrastructure.

Nobody knows, but everyone guesses…

Estimated Infrastructure Needs (development and maintenance) in Developing countries for the next 25 years:

$600 billion per year (WB)

Urban infrastructure = Approx. one-third of this total?

MDG Target 11

$67 bn for 100 million slum dwellers

$20 bn per year for the 400 mn new slum dwellers by 2020.

Francophone West Africa: $1 Billion per year.

The Context (4/16)

…but how much indeed would be needed?


What is 200 billion per year

90% of the World GDP in 2005 ( growth pattern which requires massive investments in local public infrastructure.$44.645 billion) is generated in 55 countries,

OCDE : $33.687 billion (USA $12.4 trillion)

Middle Income: $ 8.5 trillion (5.5% = $460 bn)

Low Income : $ 1.4 trillion (7% = $100bn)

Embezzlement: $100 to 180 bn accumulated since 70’ (on average $5 bn per year).

Monetary Reserves of the Bank of China in 2006: about $1.2 trillion…

1/ The Context (5/16)

What is $200 billion per year?


What is 2 00 billions per year

Remittances: Foreign workers send about growth pattern which requires massive investments in local public infrastructure.$200 bn per year back to their native countries.

1/ The Context (6/16)

What is $200 Billions per year?


Needs that will increase if cities continue their sprawl

1/ The Context (7/16) growth pattern which requires massive investments in local public infrastructure.

…Needs that will increase if cities continue their sprawl…


Obvious at the local level but also at the national level

1/ The Context (8/16) growth pattern which requires massive investments in local public infrastructure.

Obvious at the local level, but also at the national level

Correlation between geographic concentration of population and public infrastructure stock in OECD countries

Source: Kamps (2004) for infrastructure stock as a proportion of GDP and OECD (2005) for the geographic concentration index. Groningen Growth and Development Centre (2006) data base was used for high-income countries based on GDP per capita in purchasing power parity terms. Countries included are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom and United States.


B state of local finance what are the funding options available

PPP: Have private firms co-financing or co-investing in urban public infrastructure.

Have National or Local Public Enterprises/Utilities finance and develop local public infrastructure.

Land and asset management as a way to finance local public infrastructure.

Funding through ODA and development banks.

Linking domestic capital to local public investment.

1/ The Context (9/16)

b) State of Local Finance. What are the funding options available?


Ppp private participation in infrastructure

1/ The Context (10/16) urban public infrastructure.

PPP / Private Participation in Infrastructure


Ppp private participation in infrastructure1

1/ The Context (11/16) urban public infrastructure.

PPP / Private Participation in Infrastructure


National or local public enterprises utilities

Customers urban public infrastructure.

Customers

Utility

Utility

Local Government

National Government

National Government

Local Government

Donor agencies / Banks

1/ The Context (12/16)

National or Local Public Enterprises/Utilities

Before

After


Land and asset management

1/ The Context (13/16) urban public infrastructure.

Land and Asset Management

  • Land Management:

    • Financial Tools related:

      • Development Charge

    • Prerequisites:

      • Inventory / Cadaster

      • Urban Land Reform: Time, Money, Political Will

  • Property Management:

    • Financial Tools related:

      • Lease/ Rent/ Concessions/Sale

    • Prerequisites:

      • Inventory

      • Global Strategy


Funding through development banks

1/ The Context (14/16) urban public infrastructure.

Funding through development banks

- Lending of Multilaterals: WB (about $8 bn)…

No Direct Lending towards LGs except EBRD

Any Strategy for LGs Expansion?


Funding through oda

1/ The Context (15/16) urban public infrastructure.

Funding through ODA

- ODA


Linking domestic capital to local public investment

1/ The Context (16/16) urban public infrastructure.

Linking domestic capital to local public investment.


Structure of the support paper meeting3

Background: Three long-term trends that have changed and are still changing our world

1/ The Challenge: Investments in Local Public Infrastructure do not Match Urban Expansion

2/ Towards Efficient Fiscal Decentralization Frameworks!

3/ Access to Credit for Local Governments: Constraints and Opportunities

Improving Access to Credit for Local Governments: A Call for Action

Structure of the Support Paper / Meeting


Uclg policy paper on local finance ii towards efficient fiscal decentralization frameworks

UCLG Policy still changing our worldPaper on Local FinanceII. TOWARDS EFFICIENT FISCAL DECENTRALIZATION FRAMEWORKS

Technical Meeting on Local Finance,

Barcelona, 11-12 June 2007

Juliana H. Pigey, The Urban Institute


Outline

The road from urbanization to efficient public investment passes through effective local fiscal autonomy

Foundation and pillars of efficient fiscal decentralization frameworks

Towards fiscal autonomy in countries in transition

OUTLINE


The road from urbanization to efficient public investment passes through effective local fiscal autonomy


United states urban growth investment
UNITED STATES: passes through effective local fiscal autonomyURBAN GROWTH & INVESTMENT


United states 1860 1920 3
UNITED STATES 1860 - 1920 (3) passes through effective local fiscal autonomy


United states net state local debt
UNITED STATES: passes through effective local fiscal autonomyNET STATE & LOCAL DEBT


Foundation and pillars of efficient fiscal decentralization frameworks


Un habitat draft guidelines adequate resources

Local authorities should be entitled … to adequate resources or transfers, which they may freely use within the framework of their powers

(D.10 Draft Guidelines Decentralisation & Strengthening Local Authorities)

Local authorities’ financial resources should be commensurate with their tasks & responsibilities and ensure financial sustainability and self-reliance

(D.7 Draft Guidelines Decentralisation & Strengthening Local Authorities)

UN-HABITAT: DRAFT GUIDELINES ADEQUATE RESOURCES


Un habitat draft guidelines diversified resources

Local authorities should have access to a broad variety of financial resources to carry out their tasks and responsibilities

(D.10 Draft Guidelines Decentralisation & Strengthening Local Authorities)

Taxes which local authorities .. levy, or .. of which they receive a guaranteed share, should be proportional to their tasks and needs and of sufficiently general, dynamic, .. flexible nature to enable them to keep pace with their responsibilities

(D.12 Draft Guidelines Decentralisation & Strengthening Local Authorities)

UN-HABITAT: DRAFT GUIDELINES DIVERSIFIED RESOURCES


Un habitat draft guidelines autonomous resources 1

A significant portion of the financial resources of local authorities should derive from local taxes, fees and charges … for which they have the power to determine the rate, notwithstanding their possible framing (tax brackets).. (D.11 Draft Guidelines Decentralisation & Strengthening Local Authorities)

As far as possible, financial allocations to local authorities from Governments should respect their priorities and shall not be earmarked for specific projects. The provision of grants shall not remove the basic freedom of local authorities to exercise policy discretion within their jurisdiction

(D.16 Draft Guidelines Decentralisation & Strengthening Local Authorities)

UN-HABITAT: DRAFT GUIDELINES AUTONOMOUS RESOURCES (1)


Un habitat draft guidelines autonomous resources 2

For the purpose of borrowing for capital investment, local authorities should, within guidelines and rules established by Governments and the legislation, have access to the national and international capital markets

(D.18 Draft Guidelines Decentralisation & Strengthening Local Authorities)

UN-HABITAT: DRAFT GUIDELINES AUTONOMOUS RESOURCES (2)


Why decentralize

local decisions will lead to the quantity, quality, cost and mix of services that most closely match local needs and preferences

WHY DECENTRALIZE?


Building blocks for effective fiscal autonomy

Quantity and quality of services and mix of services that most closely match local needs and preferences

Cost of services

Mix of services

Assignment of functions

Revenue assignment

Property

Budget

Building blocks for effective fiscal autonomy


Risks to effective fiscal autonomy

mismatch of responsibility and financing and mix of services that most closely match local needs and preferences

unfunded mandates

no ability to determine tariffs for service provision

unclear, inconsistent rules

frequent modification of shares of national taxes

frequent changes to finance structure determined through annual budget laws

accountability

not clear who is responsible to local community for tax decisions

incentives

no hard budget constraint

budget is a negotiating position to gain funds from government

RISKS TO EFFECTIVE FISCAL AUTONOMY


Towards fiscal autonomy in countries in transition and mix of services that most closely match local needs and preferences


Eastern europe central asia
EASTERN EUROPE & CENTRAL ASIA and mix of services that most closely match local needs and preferences


Eastern europe structure of local revenue
EASTERN EUROPE: and mix of services that most closely match local needs and preferencesSTRUCTURE OF LOCAL REVENUE


Albania bulgaria romania 1
ALBANIA – BULGARIA – ROMANIA (1) and mix of services that most closely match local needs and preferences


Net local discretionary revenues

authority to set the rate for local taxes and fees and mix of services that most closely match local needs and preferences

predictable transfers and tax shares assigned transparently, objectively

no budget review at higher levels

net of own revenues “clawed back” through unfunded mandates

NET LOCAL DISCRETIONARY REVENUES


Albania bulgaria romania 2
ALBANIA – BULGARIA – ROMANIA (2) and mix of services that most closely match local needs and preferences


Albania bulgaria romania 3
ALBANIA – BULGARIA – ROMANIA (3) and mix of services that most closely match local needs and preferences


Albania fiscal decentralization with autonomy
ALBANIA – FISCAL DECENTRALIZATION and mix of services that most closely match local needs and preferences WITH AUTONOMY


Structure of the support paper meeting4

Background: Three long-term trends that have changed and are still changing our world

1/ The Challenge: Investments in Local Public Infrastructure do not Match Urban Expansion

2/ Towards Efficient Fiscal Decentralization Frameworks!

3/ Access to Credit for Local Governments: Constraints and Opportunities

Improving Access to Credit for Local Governments: A Call for Action

Structure of the Support Paper / Meeting


UCLG Policy still changing our worldPaper on Local FinanceIII. ACCESS TO CREDIT FOR LOCAL GOVERNMENTS: CONSTRAINTS AND OPPORTUNITIES

Technical Meeting on Local Finance,

Barcelona, 11-12 June 2007

Thomas Meekel, Project Manager, CGLU

Juliana Pigey, The Urban Institute


Long term debt is needed

Loan Maturity from 10 to 20 years, close to the physical life of the infrastructure

However often difficult to access:

General concerns expressed by LGs

Small and medium size municipalities

Credit markets not developed enough to serve LGs.

3/ Access to Credit (1/5)

Long term debt is needed!


The need for intermediaries

Why Private markets and banks dot not mechanically provide long term debt for LGs?

Transaction costs / size of the loan

Mismatch between short term deposits/ long term loans

Local public infrastructure long term financing has been therefore often supported:

Public Banks

Specialized institutions for long term financing to LGs in developing countries:

Municipal Development Funds (MDFs)

3/ Access to Credit (1/5)

The need for intermediaries


Limitations of mdfs

The following have been observed: long term debt for LGs?

High interest rate

High unused liquidities

Dependent on Central Government

Not serving small and medium municipalities

LGs must be more proactive in monitoring performance of MDFs.

3/ Access to Credit (1/5)

Limitations of MDFs


Structure of the support paper meeting5

Background: Three long-term trends that have changed and are still changing our world

1/ The Challenge: Investments in Local Public Infrastructure do not Match Urban Expansion

2/ Towards Efficient Fiscal Decentralization Frameworks!

3/ Access to Credit for Local Governments: Constraints and Opportunities

Objective: Improving Access to Credit for Local Governments: A Call for Action

Structure of the Support Paper / Meeting


UCLG Policy still changing our worldPaper on Local FinanceIV. OBJECTIVE: IMPROVING ACCESS TO CREDIT FOR LOCAL GOVERNMENTS: A CALL FOR ACTION

Technical Meeting on Local Finance,

Barcelona, 11-12 June 2007

Thomas Meekel, Project Manager, CGLU

Juliana Pigey, The Urban Institute


Improving access to credit for local governments

4/ A Call for Actions (1/5) still changing our world

Improving Access to Credit for Local Governments

Source: Petersen, Building Local Credit Systems, 2000


Recommendations on the demand side

Improve Fiscal Decentralization Frameworks : still changing our world

Towards National Governments:

Enhance dialogue and partnership with LGs

End unfunded mandates

Provide clear rules and regulations towards LGs

Reform state administration in link to decentralization

Fair and PREDICTABLE transfers and greater access to buoyant taxes

Environment conducive to LG access to credit

Towards Bilateral and Multilaterals:

Support fiscal decentralization reform at the national level

Towards LGs:

Improve Own revenue generation

Improve Accountability and Transparency

4/ A Call for Actions (2/5)

Recommendations on the Demand Side


Recommendations on the demand side1

PROJECTS ; POLICY ORIENTATIONS still changing our world

Sharing experiences amongst members on local finance

Building Knowledge on local finance:

CA proposal: Fiscal Decentralization tracker

Global Observatory on Local Finance?

Support national associations in enhancing dialogue with State

Lobbying campaigns towards international and national partners:

a fixed objective for ODA channeled to LGs?

Associate LGs in the design of TA tools

4/ A Call for Actions (1/3)

Recommendations on the Demand Side


Recommendations on the supply side

Support Reform of Current Financing Tools: still changing our world

Towards National Governments:

Enable Local Public Borrowing

Transforming Municipal Development Funds (MDF)

Promote development of domestic financial markets

Towards Bilateral and Multilaterals:

Develop a consistent strategy to address the investment needs of small and medium municipalities.

Support reform of MDFs.

Lengthen the term of debt.

Towards LGs:

Pooling of LG demands and resources

Develop credit policy support and tools

Explore the feasibility of a World Bank of Cities

4/ A Call for Actions (3/5)

Recommendations on the Supply Side


Recommendations on the supply side1

Information campaign still changing our world

Lobbying actions towards Bilateral and multilateral

MDF tracker with CA

4/ A Call for Actions (3/5)

Recommendations on the Supply Side


Other recommendations

Reform Local and National Public Utilities: still changing our world

Price Reform: Aim for Cost Recovery Fees

Develop Social subsidies for the Poor

Link Urban Planning and Local Finance:

No need to make careful planning if not implemented

Partnering for long term

Fiscal Tools against Urban Sprawl

Explore the possibility to develop National Contracts Agreements:

Ensure Commitment of all partners around the same overall objective / indicators for each partner

4/ A Call for Actions (4/5)

Other Recommendations


Other recommendations1

4/ A Call for Actions (4/5) still changing our world

Other Recommendations


Uclg mandate

advocate and support fiscal decentralization as well as reform of access to funding

4/ A Call for Actions (5/5)

UCLG Mandate


www.cities-localgovernements.org reform of access to funding


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