A lot of processes in cities depend on the financial resources of the municipal and national government. But how can these resources be generated? How can cities make money, how can they save money? And what role does urbanisation play? We talked to Rüdiger Ahrend, Head of the Urban Policy Programme at the OECD, about how cities can approach these challenges.
Mr. Ahrend, I was at a panel recently where people argued that poor housing in many countries resulted from a lack of financing but then someone got up and said, actually in China, we do have a lot of money but we still have terrible housing. How much really depends on how much money a city has?
Obviously governments need money to build houses, but in a lot of cities, the housing prices are way higher than the construction costs and reflect that the housing supply is insufficient in comparison to the housing demand. In those situations, what is perhaps even more important than finance is that more housing can actually be constructed so a city remains affordable and liveable. Housing and land use regulations are therefore also an important ingredient that is often overlooked.
And what can local governments specifically do to enhance the productivity of citizens and therefore the financial growth of the city?
It is well known that economic productivity increases with the size of a city. As a result, we have a so called agglomeration benefits. It means that when you have larger cities, the people there are more productive — but when these cities are not functioning well, then obviously the benefits that can potentially originate from the agglomeration do not occur.
So, given that it is in a way easier to deal with the problems of agglomeration like congestion or pollution, the easiest way to improve the productivity in the city is probably by trying to make the city function better. What needs to be done depends on the development level of the city. Making a city function better can simply mean to ensure that waste is collected, that people have electricity and water, or it can extend to making sure that there is an efficient transport system, that the level of pollution is kept low and so on. Obviously we should also try to have low levels of pollution and well-functioning public transport in poorer cities, but there are other things that need to be prioritised and financed there first.
And are there any options for cities in developing countries to gain access to financing apart from foreign funds that are allocated to them?
I think that the attitude of waiting for foreign financing is a very unhealthy attitude. I understand that part of the large infrastructure needs in the developing world will need to be financed by foreign investors. However, cities in developing countries will need to rely more on using their own financial resources. Unfortunately, in a lot of cities, these resources are not collected and used sufficiently. There is a huge potential for using property taxes. There is also a huge potential for value capture because when local governments upgrade the infrastructure in certain parts of these cities, the value of the surrounding properties goes up simultaneously by a huge amount of money. There is no reason why the benefit should go to private owners whereas all the costs are borne by the city. If cities manage to retain part of the amount by which the houses in the area surrounding the new infrastructure increase in value, then new infrastructures could be financed with that money.
Also, on a more basic level, a lot of countries still miss out on the opportunity to have property tax revenues because they do not have a cadastre. So there are some very basic things that cities are not doing, partly because of a lack of capacity but very often also because of a lack of political will. Taxing citizens is an unpopular thing to do, but cities need to understand that if they want to have this infrastructure, it has a certain value and needs to be paid for. Consequently, people have to pay for it and governments have to start taxing people, instead of waiting that somehow money from abroad will finance that. That may be a bit of a provocative attitude from my side, but the high level of infrastructure and amenities in certain countries are only achieved because these countries’ tax levels are relatively high. If governments are not taxing, they cannot spend – it is as easy as that.
Is there a way that cities can actually benefit from urbanisation, or is it just a negative effect?
Urbanisation as such is a phenomenon that can be very useful for multiple reasons. The first one – as I mentioned before – is that people in cities are more productive than in smaller towns or in the countryside. This process started in Europe with the Industrial Revolution and is now also on-going in the developing world, so there is huge potential here. But then again, it is not just living in a place with a higher population density that makes people more productive. People also need to live in a functioning city. Therefore, it is really important that the process of urbanisation is well-managed, that infrastructure is put in place and that there is a certain level of foresight in planning processes.
There are some countries that say “We do not want urbanisation because it is going to have a negative effect on our cities and they are trying to prevent it. This is a self-fulfilling prophecy. If cities are trying to prevent urbanisation, they are not investing in the required infrastructure, they are not trying to manage the process, and then the outcome obviously is going to be negative. So what cities need to do and what countries need to do is to be willing to embrace urbanisation, they need to manage it and they need to make sure that in the process of urbanisation, well-functioning cities are built.
What did you take away from Quito and from the New Urban Agenda for yourself?
The OECD was very much involved in the process of the New Urban Agenda. It was co-leading one of the study groups, the one on national policies, and I think that national policies will be a very important tool for the implementation of the New Urban Agenda. Now, what I took away from Quito is that I think every 20 years is not enough. I think there should be a meeting maybe every 10 years where we can take stock and see what has been implemented and where there is still room for improvement. Obviously, nobody wants to be negotiating a new urban agenda every 5 or 10 years, but we could have intermediate meetings where you can try to monitor and see how things are progressing.