UCLG Policy Paper on Local Finance DISCUSSIONS

1
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

2
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

3
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

4
Background
Introduction (1/5)

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

URBANIZATION AND DEVELOPMENT DECENTRALIZATION
GLOBALIZATION
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Urbanization and Development
Introduction (2/5)
Mayday May, 23 2007
6
Urbanization and Development
Introduction (3/5)

• Source David Satterthwaite

7
Decentralization
Introduction (4/5)
A worldwide process
In all regions / At the same time
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Decentralization
Introduction (4/5)

• Latin America
• long tradition of centralized government
• reforms starting in late 1980s
• Africa
• movement away from centralized colonial regimes
• democratic reforms starting in late 1980s
• Asia
• movement away from centralized colonial regimes
• NIS - CEE
• transition starting in late 1980s

9
Globalization
Introduction (4/5)
10
Globalization
Introduction (4/5)
11
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

12
UCLG Policy Paper 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

13
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?

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a) A rapid urban population growth,
1/ The Context (1/16)
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especially in Asia and Africa, and in small and
medium cities
1/ The Context (2/16)
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which requires massive investment in local
public infrastructure.
The Context (3/16)

• Consequences of insufficient investments

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but how much indeed would be needed?
The Context (4/16)

• Demand for urban 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.

18
What is 200 billion per year?
1/ The Context (5/16)

• 90 of the World GDP in 2005 (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

19
What is 200 Billions per year?
1/ The Context (6/16)

• Remittances Foreign workers send about 200 bn
  per year back to their native countries.

20
Needs that will increase if cities continue
their sprawl
1/ The Context (7/16)
21
Obvious at the local level, but also at the
national level
1/ The Context (8/16)
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.
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b) State of Local Finance. What are the funding
options available?
1/ The Context (9/16)

• PPP Have private firms co-financing or
  co-investing in urban public infrastructure.
• Have National or Local Public Enterprises/Utilitie
  s 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.

23
PPP / Private Participation in Infrastructure
1/ The Context (10/16)
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PPP / Private Participation in Infrastructure
1/ The Context (11/16)
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National or Local Public Enterprises/Utilities
1/ The Context (12/16)
Before
After
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Land and Asset Management
1/ The Context (13/16)

• 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

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Funding through development banks
1/ The Context (14/16)

• - Lending of Multilaterals WB (about 8 bn)
• No Direct Lending towards LGs except EBRD
• Any Strategy for LGs Expansion?

28
Funding through ODA
1/ The Context (15/16)

• - ODA

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Linking domestic capital to local public
investment.
1/ The Context (16/16)
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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
• Improving Access to Credit for Local Governments
  A Call for Action

31
UCLG Policy Paper on Local FinanceII. TOWARDS
EFFICIENT FISCAL DECENTRALIZATION FRAMEWORKS

• Technical Meeting on Local Finance,
• Barcelona, 11-12 June 2007
• Juliana H. Pigey, The Urban Institute

32
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

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

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UNITED STATESURBAN GROWTH INVESTMENT
35
UNITED STATES 1860 - 1920 (3)
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UNITED STATESNET STATE LOCAL DEBT
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• Foundation and pillars of efficient fiscal
  decentralization frameworks

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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)

39
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)

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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)

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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)

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WHY DECENTRALIZE?

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

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Building blocks for effective fiscal autonomy

• Quantity and quality of services
• Cost of services
• Mix of services

• Assignment of functions
• Revenue assignment
• Property
• Budget

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A CONSTANT FIGHT
Recettes
Dépenses
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RISKS TO EFFECTIVE FISCAL AUTONOMY

• mismatch of responsibility and financing
• 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

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DECENTRALIZATION HASINFRASTRUCTURE IMPLICATIONS

• Transfer of key services which depend on capital
  infrastructure
• Water, wastewater
• Solid waste
• District heat / gas systems
• Roads, bridges
• Assets of social sector
• Transfer of responsibility for maintenance,
  rehabilitation, reconstruction and construction
  of these capital assets

47
TRANSFER OF INFRASTRUCTURE HAS INVESTMENT
IMPLICATIONS

• Depreciated and inefficient assets
• deferred maintenance
• Insufficient service coverage
• quantity and quality
• Unfinished projects
• Environmental protection implications
• EU requirements

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WHAT IS CREDITWORTHINESS? (1)

• demonstrated ability and willingness
• to repay loans / liabilities
• contracted by the local government

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WHAT IS CREDITWORTHINESS? (2)

• Debt carrying capacity How much a LG is able to
  set aside to make annual debt service payments
• Operating savings Current revenues minus
  current expenditures

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CONDITIONS FOR CREDITWORTHINESS (1)

• External factors
• stable macroeconomic conditions
• general economic performance / GDP
• public sector balances / deficit
• inflation
• Decentralization building blocks
• stable predictable intergovernmental fiscal
  flows
• stable assignment of functions

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CONDITIONS FOR CREDITWORTHINESS (2)

• Local government finance specific
• sound financial management
• generate consistent operating surplus
• reliable, timely and transparent disclosure of
  local government financial information
• collateral / guarantees to reduce credit risk
• Project specific
• local development / investment priorities
• prepare / design credible investment projects
• develop feasible financing plan

52
LOCAL GOVERNMENTS VIEW

• Local choices (political will, management)
• services vs. investment
• tax burden
• tolerance for risk
• External risks
• performance of the economy
• change in government policy

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LENDER OR INVESTORS VIEW

• Not under local control
• policy risk
• economic risk
• Within local control
• information risk (disclosure)
• associated credit risks
• local risk (political will, management)

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• Towards fiscal autonomy in countries in
  transition

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EASTERN EUROPE CENTRAL ASIA

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EASTERN EUROPESTRUCTURE OF LOCAL REVENUE

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ALBANIA BULGARIA ROMANIA (1)
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NET LOCAL DISCRETIONARY REVENUES

• authority to set the rate for local taxes and
  fees
• predictable transfers and tax shares assigned
  transparently, objectively
• no budget review at higher levels
• net of own revenues clawed back through
  unfunded mandates

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ALBANIA BULGARIA ROMANIA (2)
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ALBANIA BULGARIA ROMANIA (3)
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ALBANIA FISCAL DECENTRALIZATION WITH AUTONOMY
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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
• Improving Access to Credit for Local Governments
  A Call for Action

63
UCLG Policy Paper 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

64
Long term debt is needed!
3/ Access to Credit (1/5)

• 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.

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The need for intermediaries
3/ Access to Credit (1/5)

• 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)

66
Limitations of MDFs
3/ Access to Credit (1/5)

• The following have been observed
• 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.

67
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

68
UCLG Policy Paper 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

69
Improving Access to Credit for Local Governments
4/ A Call for Actions (1/5)
Source Petersen, Building Local Credit Systems,
2000
70
Recommendations on the Demand Side
4/ A Call for Actions (2/5)

• Improve Fiscal Decentralization Frameworks
• 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

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Recommendations on the Demand Side
4/ A Call for Actions (1/3)

• PROJECTS POLICY ORIENTATIONS
• 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

72
Recommendations on the Supply Side
4/ A Call for Actions (3/5)

• Support Reform of Current Financing Tools
• 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

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Recommendations on the Supply Side
4/ A Call for Actions (3/5)

• Information campaign
• Lobbying actions towards Bilateral and
  multilateral
• MDF tracker with CA

74
Other Recommendations
4/ A Call for Actions (4/5)

• Reform Local and National Public Utilities
• 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

75
Other Recommendations
4/ A Call for Actions (4/5)
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UCLG Mandate
4/ A Call for Actions (5/5)

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

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