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Financing sustainable urban development
How can African cities access investment financing, and what
conditions are necessary to capture public and private
resource inflows?
Roland White
Global Lead: City Management, Governance and Finance
East and Central African Cities Development Forum, 25 May, 2016
The status quo…
8
Africa is urbanizing…
Very rapidly…
but late and at low incomes
African population growth
Income and year of shift to urban majority
1,200
100%
90%
1,000
800
% urban population
Population (millions)
80%
600
400
70%
60%
50%
1961
1981
2009
LAC
MENA
EAP
2012
SSA
40%
30%
20%
200
10%
1990
2000
2010
Urban
2020
Rural
2030
2040
0%
0
1000
2000
3000
4000
GDP per capita (constant 2005 USD)
5000
6000
Infrastructure investment is not keeping up with urban population growth
For example, urban water supply: coverage is declining as the urban population grows…..
95
85
Sub-saharan Africa - %
of urban population
using improved piped
water
South Asia - % of urban
population using
improved piped water
% urban population
75
65
LAC - % of urban
population using
improved piped water
55
Sub-saharan Africa - %
urban population
45
35
25
1990
2000
Year
2010
Source: Progress on drinking water
and sanitation, 2012 update
(UNICEF/WHO)
4
Africa’s fiscal and financing systems for urban development and
management are weak and its cities are greatly under-resourced
A sample of SSA cities outside of South
Africa indicates a range of city government
expenditures of $6.50- $45.22/capita/annum
(total) $0.29 - 15.40/capita/annum (capex).
This compares with amounts of between
$731.00 - 1,024.00/capital/annum (total)
and $138.00 - $211.00/capita/annum
(capex) for South Africa cities of
comparable sizes
$50.00
$45.00
$40.00
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
Blantyre
Lusaka
Maputo
Maseru
Annual operating expenditure
Dar
Dakar
Accra
Bamako
Annual Capital Expenditure
5
Local governments have varied expenditure assignments and account
for varying proportions of total public sector expenditure
25%
20%
15%
10%
5%
0%
Cote d'Ivoire
Ghana
Kenya
Malawi
Mozambique
Nigeria
South Africa
Uganda
Tunisia
LG expenditure as % of GDP
0.4%
0.8%
3.3%
1.2%
0.6%
2.2%
8.4%
3.6%
1.7%
LG expenditure as % of national expenditure
2.0%
2.9%
9.7%
3.3%
2.0%
16.9%
21.8%
16.0%
4.7%
LG expenditure as % of GDP
LG expenditure as % of national expenditure
But tends to be lower than in other regions…
35%
30%
25%
20%
15%
10%
5%
0%
Mongolia
Thailand
Columbia
Brazil
Chile
Canada
Japan
U.K.
Germay
LG expenditure as % of GDP
3.9%
3.6%
7.0%
7.3%
2.7%
8.6%
16.7%
12.4%
7.5%
LG expenditure as % of national expenditure
11.1%
15.2%
23.4%
19.8%
11.9%
20.6%
29.3%
27.3%
17.2%
LG expenditure as % of GDP
LG expenditure as % of national expenditure
Typically, own source revenue assignments are limited…
100%
75%
50%
25%
0%
Cote d'Ivoire
Ghana
Kenya
Malawi
Mozambique
Nigeria
South Africa
Uganda
Tunisia
OSR as % of LG revenue
20%
20%
12%
25%
38%
2%
70%
1%
16%
transfer as % of LG revenue
79%
80%
88%
75%
40.0%
98%
30%
93%
80%
transfer as % of LG revenue
OSR as % of LG revenue
And yields are low…
Malawi City Council OSRs, 2011-12 to 2013-13
5,000
100.0
4,500
90.0
4,000
80.0
3,500
Other OSRs
70.0
All Cities
2,500
Lilongwe
Market fees
60.0
%
Kwacha
3,000
50.0
Fees and Service Charges
40.0
Property rates
Blantyre
2,000
Mzuzu
1,500
Zomba
1,000
30.0
20.0
500
10.0
2011-12
2012-13
Year
2013-14
2011-12
2012-13
Year
2013-14
Grant proliferation and LG fragmentation are increasingly pervasive
Uganda
100%
90%
1997/8
1997/8
45 Districts
10
conditional
grants
80%
70%
60%
50%
40%
30%
20%
2014/15
10%
0%
Uganda
Tanzania
Unconditional
Kenya
Conditional
South Africa
133 districts &
municipalities
2014/15
46
conditional
grants
10
Significant private financing for infrastructure
investment is possible in very few countries
Outside of South Africa, city governments cannot source debt finance for infrastructure and even apparently
“creditworthy” cities have been unable to do so (e.g. the “Dakar bond”)
There are few examples of “urban” PPPs, and there has been mixed experience in those cases where these
have been attempted e.g. DAWASA in Dar es Salaam; SWM PPPs in Somaliland and Kampala
Land Value Capture instruments have not yet emerged as a feature of the African city financing environment
In a number of countries, LGs suffer from chronic fiscal difficulties
Malawi Council debt 2006 – 2011 (ZMW m)
800
700
667
Lusaka
600
Kitwe
500
Ndola
400
Kabwe
300
Chongwe
200
150
100
0
Kafue
61
All Councils
7
2006
2011
An agenda for action
A. Own source revenues
B. Fiscal transfers
C. External resources (borrowing, PPPs) and Land Value Capture
A. Enhance Own Source Revenues
1. Improve city revenue mobilization from existing sources
using available technologies
• Tanzania secondary cities and the LGCRIS
• KCCA and the eCity system
2. Address the systemic constraints of existing OSR sources
• Eliminate the owner-occupancy Property Tax
exemption in Uganda
• Shift to mass valuation property tax systems in East
African cities
3. Develop and devolve additional local tax revenue sources
• Land leases and property tax in Ethiopia
• Reverse fiscal centralization in Zambia
• Introduce tax sources such as property tax (where it
does not exist) and Development Charges across
African cities
Preliminary Results of LGRCIS, Tanzania
12,000.00
90.00%
80.00%
10,000.00
70.00%
8,000.00
60.00%
50.00%
6,000.00
40.00%
4,000.00
30.00%
20.00%
2,000.00
10.00%
0.00
0.00%
Arusha CC Mtwara Mbeya CC Tanga CC Mwanza Dodoma Kigoma
MC
CC
MC
Ujiji MC
Before LGRCIS, OSR for FY2013/14 (TZS Million)
After LGRCIS, OSR for FY 2014/2015 (TZS Million)
% increase - from FY2013/14 to FY 2014/2015
B. Strengthen the fiscal transfer system
1. Expand the aggregate flow of fiscal transfers to reverse
and close fiscal gaps
• E.g. SA vs Uganda
2. Rationalize the fiscal transfer system to reduce the
number of transfers
3. Shift fiscal transfer allocations to transparent, formulabased systems which reflect policy principles such as
equity and urban funding needs
4. Support financing of activities with positive externalities
with carefully targeted and designed earmarked grants
e.g. urban environment/natural asset protection
Fiscal transfer reform in Uganda
• Reduced the number of grants from 58 to
20 for FY 2016/17
• Will introduce a formula-based system for
main sector grants (Health; Education)
phased in over 5 years from 2017/18
• Led by Ministry of Finance; strong
technical and financial support from
donors such as the World Bank
• Will add a performance element to a
number of the key grants
C. Mobilize external resources and LVC instruments
South Africa - Growth in Long Term Municipal Borrowing
(R billion)
1. Municipal borrowing
•
•
•
•
•
•
Is not an additional revenue source – it converts future
revenues into current capital
Cannot, therefore, resolve fundamental vertical fiscal
gaps
Rests on four fundamentals
 The IG fiscal system, which determines municipal
revenue capacity
 The quality of municipal accounts, financial data
and management
 The supply of credit i.e. the character of the
domestic financial sector/capital markets
 The regulatory framework that intermediates
investors and borrowers
Sustainable borrowing requires that threshold
conditions are met across all four areas
African experiments with trying to stimulate borrowing
through government-led Municipal Development Funds
have generally not been successful
Replicating the SA experience across the continent will
require significant reform to achieve the necessary
threshold conditions
50
45
40
35
30
25
20
15
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
C. Mobilize external resources and LVC instruments
2. Public-Private Partnerships
•
•
•
Require significant returns to investors if they are to be used as a means to attract investor finance; this has to be secured by
adequate revenue streams, hence pricing of services (or government subsidies)
Require robust regulatory frameworks and relatively sophisticated capacity to negotiate and manage
May be easiest to progress where initial capital investment requirements (hence investor risk) is relatively low, and where
cities can regulate by contract where they have full jurisdiction e.g. solid waste removal
3. Land Value Capture instruments
•
•
Encompass a wide range of instruments from Development Charges and the Sale of Development Rights (SDR) to Tax
Increment Financing (TIFs) and Special Assessment Districts (SADs)
Require a range of conditions and capacities to function effectively
 even the simpler systems (such as SDR and Land Readjustment) rely on robust underlying planning, zoning, legal rights
and pricing systems
 the more sophisticated (such as TIFs) require well-functioning property registries and administration systems, a
vibrant real estate market an enabling regulatory framework and creditworthy debt-issuing entities
Take-away messages…
1. The financing systems for most African cities are
badly broken
•
there is a fundamental disconnect between the
fiscal resources city governments have access to
and the investment and management challenges
that they face
2. Fix the fundamentals
•
•
•
•
there is no short-cut to delivering the step-change
that is required
the basic financing systems on which successful
cities across the globe rely need to be much
further developed in Africa
there are some good experiences to build on e.g.
OSR mobilization in Tanzania, Kampala; SWM PPPs
in Somaliland; the Dakar bond
there is an inevitable sequence: tapping significant
private financing flows depends on the underlying
fiscal and institutional systems being developed
3. City governments can do important things now,
but many of the core policy levers lie in central
government hands
ACTION
OWN SOURCE REVENUES
• Improve city revenue mobilization from existing sources
• Address the systemic constraints of existing OSR sources
• Develop and devolve additional local tax revenue sources
FISCAL TRANSFERS
• Expand the aggregate flow of fiscal transfers
• Rationalize the fiscal transfer system
• Shift fiscal transfer allocations to transparent, formulabased systems
• Support financing of activities with positive externalities
with carefully targeted and designed earmarked grants
EXTERNAL RESOURCES AND LVC
• City borrowing
• Devolve revenue sources so cities can service debt
• Improve municipal accounting systems and FM
• Develop municipal borrowing regulatory framework
• PPPs
• Develop PPP regulatory frameworks
• Develop PPP projects and source preparation and
negotiation capacity
• LVC
• Develop the regulatory systems for LVC instruments
• Develop the operating systems for LVC
CG
MG
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X