Transcript Urban Finances to Facilitate Effective Urban Services: A Case Study

Urban Finances to Facilitate Effective
Urban Services: A Case Study of
Bangladesh
Sadiq Ahmed
Policy Research Institute of Bangladesh, April 22-25
Table of Contents
 Urbanization and Development
 Urbanization Experience in Bangladesh
 Urbanization Constraints
 Severity of the Urban Financing Constraint
 Towards an Urban Financing Strategy
2
Urbanization and Development

countries
are
more
urbanized, and their urban
areas
have
higher
economic densities, than
low-income
countries
(Figure 1 from World
Bank).
 The correlation between
urbanization and GDP is
indicative
of
the
productivity advantage of
urban areas
3
Urb. Econ Density, 2000 (Non-farm GDP USD/Km2)
 High- and middle-income
Figure 1: Urbanization, Urban Economic Density and GDP:
Cross-Country Correlations (2000)
10 Millions
8
low income
lower middle income
upper middle income
upper income
Chile
6
Malaysia
4
Sri Lanka
Thailand Indonesia
China
Pakistan
Turkey
Egypt
UMI
2
LMI
LI
0
Australia
32;1
51;2
68;3
Brazil
Colombia
0
20
40
60
80
100
Urbanization, 2000 (Share of Urban Population, geography-based)
Urbanization and Development
urban-rural output and productivity
differentials are larger than the
population density differential.
 Population density in urban areas is
Population Density
2,000
1,776
1,600
People per Km2
 Bangladesh is no exception. The
1,200
951
806
800
400
twice as high as in rural areas, but
urban economic density is eight
times as high as rural economic
density.
0
Urban
Rural
National
2,000
GDP/person
1,600
1,532
1,200
 The average GDP per capita in urban
areas is almost four times as high as in
rural areas
715
800
397
400
0
Urban
(Source: World Bank and BBS)
3,000
Economic Density
2,720
GDP per Km2 ('000)
2,500
2,000
1,500
1,000
680
320
500
0
Urban
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Productivity
Rural
National
Rural
National
Bangladesh Path to Middle Income Status and Urbanization
Figure 3: Urbanization and The
paths to MIC status for
Bangladesh (Figure 3)
 Scenario A emphasizes highervalue added production in
Dhaka
and
Chittagong.
Scenario B stresses non-farm
diversification outside the two
main cities. (Source World Bank)
 While both paths are possible,
Scenario A is more risky.
Path to MIC – A 2021 Scenario Analysis
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Urban Economic Density, 2000 (Urb GDP USD/Km2)
 Two possible spatial economic
10 Millions
low income
lower middle income
8
upper middle income
upper income
Bangladesh
6
BGD
51;8
UMI
BGD
2
A
B
Bangladesh
Today
4
Bangladesh
LMIC-status
outcomes
25;2.5
LI
LMI
51;2
68;3
BGD
90;2.5
32;1
0
0
20
40
60
80
100
Urbanization, 2000 (Share of Urban Population, geography-based)
Urbanization and Development
 Private sector investment is necessary to accelerate growth.
 Urban areas are attractive locations for firms because they
provide better access to factor and goods markets, infrastructure,
and proximity to services.
 But urban centers also tend to be costly locations as
agglomeration economies increase the cost of land and wages.
 If urbanization is not properly managed, it can lead to traffic
congestion, pollution and inefficiencies in service provision.
These could choke off the growth engine.
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Urbanization Experience in Bangladesh
 Between 1961-2011, the Bangladeshi
Figure 4: Urbanization in Bangladesh
population nearly tripled in size,
growing from 55 million to 150 million
(Fig 4)
140
Bangladesh Population (ml)
120
Urban Population (ml)
100
 The urban population increased nearly
80
twenty-fold, galloping from less than 3
million in 1961 to over 43 million in
2011 (Fig 4).
60
55
20
2.6
0
1961
2011
Figure 5: Share of urban population
45
40
35
30
25
20
15
10
5
0
1961
7
43.3
40
 Owing to these population dynamics,
the share of urban population grew from
around 5% in 1961 to 30% in 2011. It is
projected to reach 40% in 2021 (Fig 5).
150
160
2011
2020
Primacy of Capital City Dhaka
 A major factor underlying
urbanization
in
Bangladesh is the heavy
concentration of urban
population in the capital
city of Dhaka (Figure 6).
 Dhaka is now the18th
largest metropolitan city
of the world (Figure 7)
(source:Worldatlas; Google)
8
35
Figure 6: Primacy of Dhaka (share of
32.6
urban population %)
30
25
20
15
8.6
10
5
2.4
1.6
Khulna
Rajshahi
0
Dhaka
40
35
30
25
20
15
10
5
0
Chittagong
Figure 7: World's Largest Metropolitan Cities,
2012 (million)
Urbanization Has Been Haphazard
 While the urban areas, have been the leading growth centers of Bangladesh,
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urbanization has been haphazard.
Much of the economic growth has concentrated in Dhaka and Chittagong putting
heavy pressure on land prices that has now become a binding constraint to
manufacturing sector growth.
Land prices in Dhaka have grown by almost 100% per year between 1972 and 2012,
making housing unaffordable for low-to-middle income group
Transport congestion has reached nightmare proportions in Dhaka. It takes an
average of 2 hours to commute to work each way within 7-8 kilometer distance.
Mass transit options are virtually absent.
Weak zoning laws and poor parking enforcement adds to the chaotic city
growth/layout and traffic nightmare
Poor Urban Services
 Owing to housing scarcity, a huge slum population has grown, especially in Dhaka,
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where quality of life is unbearably low. Slum growth has also contributed to serious
law and order problems.
Adequacy of basic services such as water and sanitation is a serious problem. For
example only 35% of the population has access to tap water.
In almost all the urban centers (except Dhaka) there are no sewers and a large number
of households lack connection to septic tanks. Most human excrement and waste
water ends up in rivers, streams, canals and ditches, untreated.
Most urban centres face problems with the collection and disposal of solid wastes.
Noise and air pollution have reached stressful proportions.
The combination of water and air pollution contributes to serious health hazards in
urban areas.
Poor Quality of Urban Life
 The list of problems makes
Bangladeshi cities very
unlivable.
 Mercer city livability
index ranks Dhaka as the
most unlivable megacity
(Table 1).
 Economics Intelligence
Unit (EIU) city livability
ranking for 2013 confirms
this.
Table 1: Mercer 2012 City Livability Rankings (221 Cities)
Cities
Tokyo
Jakarta
Seoul
Delhi
Shanghai
Manila
Karachi
New York
Sao Paulo
Mexico City
Cairo
Beijing
Osaka
Mumbai
Gangzhou
Moscow
Los Angeles
Dhaka
Source Mercer Website
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Rankings
44
140
75
143
95
128
190
44
115
120
141
109
57
146
N/A
154
58
204
Urbanization Constraints
 Several factors constraint urban development in Bangladesh.
 Legal framework for local government institutions (LGIs) has evolved in a
stop-go fashion. Some orderly shape emerged only in recent years with 5
tiers: 2 concerning urban areas and 3 concerning rural areas. The two urban
LGIs are: municipalities (small towns) and city corporations (large cities).
Clarity on responsibilities and financing is lacking
 The demarcation of functions is unclear and overlapping.
 The governance structure in theory is democratic and elections based but in
practice LGIs have little autonomy and are controlled by the national
government .
 There is very little financial autonomy that creates much of the dependency
syndrome on national government
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Confused Overlapping Mandates
 The picture of urban service
delivery in Dhaka illustrates the
confused
and
overlapping
mandate problem with urban
management (Figure 8).
 There are as many as 9
specialized institutions and
several line ministries providing
urban services with little or no
coordination,
overlapping
mandates, weak capacities and
financial limitations.
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Weak Financial Autonomy
 Poor governance and weak financial autonomy are the two
most fundamental constraints.
 Under the Legal Framework, urban LGIs can obtain resources
from a number of sources: (a) property tax; (b) rents from
markets owned by LGIs; (c) fees from licenses issued to
traders and non-motor vehicles; (d) fees from advertisements,
cinema and entertainment; (e) sale of property/assets and (f)
grants and loans from the government.
 Other than property tax, all other taxes are assigned to the
national government.
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Severity of the Urban Financing Constraint
 Table
2 summarizes the
evolution of urban finances.
The highlights are:
--Government transfers account
for some 54% of total urban
LGI resources.
--Charges and fee account for
30%.
--Taxes account for only16%
--There
is
no
market
borrowing.
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Table 2: Bangladesh Urban Finances (Million Taka)
Items
Taxes
Charges and Fees
Total Own Resources
Government transfers
Total Resources
Total Spending
1974
27
57
84
33
117
110
1978
88
112
200
58
258
261
1992
995
681
1676
1319
2995
2984
2001
3027
2360
5387
8909
14296
14296
2011
8154
15103
23257
27802
51059
51059
Financial Autonomy of Urban LGIs: Share in total
government spending
 A major indicator of financial autonomy is
the share of urban LGIs in total government
spending. Despite some progress, urban
LGIs account for only 4% of total
government spending (Figure 9).
 In terms of GDP, they account for less than 1
% (Figure 10).
 The powerful government regulator, the
Ministry of Local Government, controls and
manages most urban and rural development
public spending.
 There is no legal framework for government
transfers and as such they are not predictable
because
5
Figure 9: Urban LGI spending as % of
total Government Spending
4
3
2
1
0
1974
0.7
1978
1992
2001
2011
Figure 10: Urban LGI Spending as % of
GDP
0.6
0.5
0.4
0.3
0.2
0.1
0
1974
16
1978
1992
2001
2011
Urban LGI Financial Autonomy: Weak Tax Handles
 Urban LGIs account for less than 3%
of total government revenues (figure
11).
 This is mainly by design as almost all
potent sources of revenues are
controlled at the national level.
 The only tax source assigned to urban
LGIs is the property tax. Yet, yields are
insignificant. LGIs do not have the
legal authority to modify the base or
the rates.

Figure 11: Urban LGI Own Resources as % of
total Government Revenues
3.5
3
2.9
2.44
2.5
2.21
2
1.74
1.68
1978
1992
1.5
1
0.5
0
1974
17
2001
2011
Fiscal decentralization: International Comparison
 A
review of international
evidence suggests that Bangladesh
is fiscally amongst the most
centralized countries in the
world.
 Spending by all LGIs (urban and
rural) account for 19-28% of
total government spending in
other countries as compared with
only 7% in Bangladesh.
 Taxes similarly are heavily
centralized in Bangladesh
Table 3: Fiscal Decentralization: International Comparison for the 2000s
Developing
countries
Industrial
countries
Bangladesh
Subnational government
expenditures
% of total
% of GDP
government
expenditure
18.8
5.1
(n=16)
(n=20)
27.8
13.9
(n=26)
(n=26)
6.9
1.13
Subnational government taxes
% of total taxes
% of GDP
11.4
(n=16)
22.7
(n=24)
1.6
2.3
(n=20)
6.4
(n=25)
0.16
Source: Financing Metropolitan Governments in Developing Countries. Bahl, Linn and Wetzel, 2013
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Consequences of Centralized Fiscal Framework
 Low resources owing to weak fiscal decentralization contributes to poor capacities of
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urban LGIs to deliver services.
Inadequacy of staffing in both quantity and quality is a major bottleneck.
Political patronage and centralized decision-making on urban spending results in poor
accountability of city governments
Transfers have no legal basis and are discretionary. Government control over revenues
and spending essentially means that elected urban city managers belonging to opposition
have little control over service delivery.
Even in cities that have managers who belong to the party in power, service delivery is
constrained by inadequacy of resources.
The scope for innovative financial solutions at the local level is limited by the weakness of
the property tax design and absence of public borrowing by LGIs.
Towards an Urban Financing Strategy
 Reform of both urban governance and urban finances is critical for
improving the pattern of urbanization and urban services in
Bangladesh.
 Strong political will of the national government is essential. There are
reform champions like the Finance Minister and there is some hope
that this might indeed happen.
 In particular, fiscal decentralization is key to establishing accounting
LGIs at both the urban and rural levels.
 The strategy for urban financing needs to combine taxes, service
charges, predictable transfers and responsible borrowing.
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Tax Reforms and Fees
 The first stage should focus on a major revamping of property taxes.
 A properly designed property tax could yield 1.0-1.5% of GDP
equivalent of tax revenues that will revolutionize urban LGI
financing. This compares with a mere 0.16% of GDP yield presently.
 Service fees and charges have grown significantly over time, but they
still account for only 0.14% of GDP. With better service, urban
LGIs should be able to increase resources from this source
equivalent to about 0.5% of GDP.
 Together, these could help jump-start the fiscal autonomy of urban
LGIs in a substantial manner.
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Reform of Government Transfers
 Government
transfers must be reformed to assign greater
transparency and predictability of the transfers. The transfers will also
need to match assigned responsibilities.
 There should be a much better balance between spending by central
ministries and LGIs based on a clearly articulated devolution of
responsibilities and matching transfers that is enshrined in the legal
framework
 There is a considerable body of international experience that could
help with the design of a proper transfer system that will work in the
Bangladesh context. Basic principles include factors relating to
population, poverty, endowment and performance.
 A two-tier transfer system combining equity and incentives
(performance ) is also possible.
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Reform of Urban LGI Borrowings
 Presently, all transfers, either grant or loans, come from the national
budget. The restriction on local borrowing is understandable in the
present environment of weak finances and poor capacities of urban
LGIs.
 Over time as urban LGIs gain experience and capacity, the
Government may want to rethink its policy for their borrowings. Such
borrowings could be important for delivering infrastructure.
 Again, there is considerable international experience and Bangladesh
can learn from those.
 In general the loan financing has to be done responsibly focused on
well-designed projects and in line with debt servicing capacity of the
concerned LGI as well as ensuring consistency with national debt
management.
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