Financing sustainable development: the role of cities as the key for necessary investments

By |2023-12-19T11:45:11+01:00July 21st 2016|Finance, Good Governance|

In order for cities to be able to fulfil their role as actors and spaces for sustainable development, they require solid financing. The growing need for investment in respect of infrastructure poses a great challenge for cities across the globe to find new ways for them to be able to increase their often scarce resources.

More and more people across the world are migrating towards cities – with many problems accompanying them: enormous mountains of rubbish, high levels of air pollution, overloaded sanitation facilities, kilometre-long traffic jams or growing slums are only a handful of the side effects of rapid urbanisation. As a result, cities are becoming more and more like centres in which global challenges such as the fight against poverty, inequality and the consequences of climate change have to be overcome. So that they are able to overcome these challenges, cities must be given a large amount of funding. Smart investments in infrastructure and services are the key to sustainable development. However, many places do not receive enough funding.

Lacking 1 billion US dollars every year
1 billion US dollars – this is the minimum amount that is lacking in investments in cities across the world every year, according to a study by the Boston Consulting Group.1 Particularly in emerging and developing countries, where the urban population is growing most rapidly, cities have a lot less funding available than what they would actually need for their infrastructure.

Underfunding can be seen across all areas. Municipalities cannot function properly and look after the needs of the inhabitants. There is an insufficient amount of educational and social facilities, such as nurseries, schools and hospitals. Roads and public transport infrastructure cannot be constructed; public transport is only in limited operation. Even basic services, such as the provision of clean drinking water and electricity, or the removal of rubbish and waste water, are often not available, or are very inadequate. And the housing shortage in some locations has also resulted in people having to build their own roofs over their heads, which are often makeshift ones made out of cardboard and corrugated steel. For the inhabitants of these cities, many things that represent a liveable city remain far off.

Government contributions are important sources of revenue
Given the enormous need for investment, it is clear that many cities will lose out on their own growth in the long term if they do not succeed in solving their financial problems. They receive a large proportion of their financial resources from contributions from national governments, which will continue to be a main source of revenue in many places in the future as well. A study by the Commonwealth Secretariat in 20142 came to the conclusion that in developing countries, more than 60% of costs at a regional and municipal levels will still be financed by government transfer services, despite increasing decentralisation. In order to have a certain level of planning security, cities are dependent on the government allocating these funds according to objective criteria and making predictable promises. In practice, contributions are often too unreliable, managed by political interests or are opaque.

Cities need the opportunity to secure their own revenue
National regulations should also contribute to cities being less dependent and having the chance to generate revenue themselves. If this is the case, and cities have the right to manage their own costs, local taxes such as business, property, wealth or environmental taxes can be raised or utilities fees introduced, for example for administrative services, public transport of the supply of water and electricity. Even leasing or selling buildings or properties could also increase their coffers.

Nevertheless, many cities still have problems exploiting this potential, even if they are permitted by law to earn their own revenue. The blame for this lies in a lack of experts and resources to complete a thorough analysis of the revenue base for the city. So that cities are able to sell or tax land, this has to initially be recorded and registered. The same applies for user charges. Charges can only be calculated for water or power connections that have been registered and the usage of which is actually recorded. Added to the required technical and administrative effort, legal problems are frequently involved. For example, if land is intended for sale which does not have the land rights to it fully settled. Even in cities in developing countries, many people live in informal settlements with unsettled or uncontested ownership status. They often remain excluded from registration processes. In addition, the inhabitants of the informal settlements usually do not trust the municipalities because they often deny them legal recognition and threaten them with expulsion.

Exploring new directions
Furthermore, the financial need for new or developing infrastructure is so high that investment from pure own resources and state contributions is not possible, but also external, debt-based sources have to be used if necessary. While it is already normal practice in most industrialised countries for cities to operate in the financial markets to attract loans or bonds to the country, mobilising investors in cities in emerging and developing countries hardly works, or does not work at all. Many experts believe that there would be enough money on the financial markets to cover the enormous need for investment in the cities. Actors such as commercial banks, infrastructure funds, small investors or even institutional investors such as insurance companies or foundations, for example, collectively possess the relevant resources to close the financial gaps in the cities. Even partnerships with the private sector may help: provided that they are based on clear and fair rules that do not additionally affect the cities, they are in the position to contribute towards the initial investment for projects, but also to reduce the costs for the operation or maintenance of facilities, and therefore to relieve the cities.

Access to financial markets is often difficult
Why do so few cities still not exploit the opportunities from external financial sources? For one thing, they are often confronted with the problem that they are simply not attractive enough to potential investors. Investors need to have the assurance that they will not only recoup their invested capital, but also receive an adequate return as well. This also includes a reliable revenue base, a healthy debt policy and effective accountability and control mechanisms in the cities in need. Professional and transparent financial management is required, which is still a long way off in many cities. That is why few cities in emerging and developing countries receive a good credit rating.

Alongside this, access to foreign finance is defeated, particularly by legal framework conditions. Many national governments take a critical view on investments at a local level from third parties and thwart initiatives such as listing municipal bonds on the capital market.

More autonomy is the key factor
Which reforms need to initiated most urgently so that cities can receive more funding in future and as a result are able to invest more in development, is generally a difficult question to answer. The initial situation not only varies from country to country, but even from city to city there are significant differences: a mega city with more than 10 million residents in Asia for example, faces very different challenges to those in a medium-sized or smaller city in East Africa.

A key approach is the development and expansion of competent and efficient administrative and personnel structures. Cities can only improve their budget maintenance and financial provisions if administrative employees and policy makers are properly trained for this task. As part of this, international development collaboration can make an important contribution and support cities with knowledge transfer and training opportunities on financial management, budget maintenance and accounting.

What also appears to be equally important is more autonomy. Many decisions that directly affect cities are still predominantly made at national level. National governments that wish to support their cities and equip them better financially should therefore not merely provide reliable transfer payments, but formulate framework conditions in such a way that cities are able to raise revenue themselves, and can enter the search for alternative sources of funding, by shifting the responsibility for tax management to a local level or legalising finance from external investors.

Support from the international community
Considering the importance that the issue of finance has on global sustainable development and the future of cities, it is also at the top of the priorities list for the international community. Financial measures for implementing the agreed development targets of Agenda 2030 were discussed at the 3rd International Conference on Financing for Development in July 2015 in Addis Ababa. In the final statement, the Addis Ababa Action Agenda (AAAA), the conference participants agreed that a significant proportion of the costs and investments for sustainable development have to be negotiated at a sub-national level, and municipal and local governments need more resources. For the first time, cities and the regional level are being recognised as central actors in a final document of a United Nations Conference on Financing for Development. However, the document only contains a small number of concrete promises and initiatives from participating countries in respect of how they want to strengthen the sub-national level.

The Habitat III process and New Urban Agenda (NUA) offers a great opportunity to further promote the issue and commence concrete initiatives for better financing in cities. The provisional draft of the NUA incorporates the necessity for financial resources at the local level in every section and reflects important aspects to strengthen municipal financial management, fiscal decentralisation and access to external finance. The German Federal Government continues to collaborate with its partners in the international community within conferences, resolutions and debates, so that cities in the NUA and also development actors are recognised internationally, and the concepts already drawn up for the improved financing of cities is developed further and enshrined in concrete measures.

1. The Boston Consulting Group (2013): Commonwealth Secretariat (2014): Bridging the Gap. Meeting the Infrastructure Challenge with Public-Private Partnerships.
2. Commonwealth Secretariat (2014): Intergovernmental Fiscal Transfers in Developing Countries. Case Studies from the Commonwealth.