Financing Metropolitan Governments

Hanoi 2010Heritage plays a critical role in the very fabric of our cities.  In order to appreciate and protect its true value we must also ensure we have financing for metropolitan governments in place.  The Lincoln Institute of Land Policy has released a critical report addressing this global issue.

The recently published policy focus report; Governing and Financing Cities in the Developing World by Bahl and Linn (2014) comprises research which has been the basis for a webinar series on governance and finance produced by the World Bank. The report is published by the Lincoln Institute of Land Policy, which was founded in 1974, is "a private operating foundation and think tank with an international scope and focus on global urbanisation, urban planning, and tax policy as it relates to land."

(Lincoln Institute blog dated 21 May 2014; "George McCarthy new president of the Lincoln Institute: At Lincoln House May 2014").

Bahl and Linn make the point that big cities generate the most dynamic economic development, the strongest links to the global economy, and the resources to help poorer countries become more competitive and prosperous. Big cities also draw migrants who need jobs and housing, leading to demands for better infrastructure and social services, increased congestion, environmental damage, and social problems. Governments of cities face two key challenges:

  1. How to capture a share of the economic growth to finance the needed expenditures,
  2. How to manage cities so that the urban economy functions efficiently, services are delivered cost-effectively to all, and citizens have a voice in governing the city.

The authors identify two fundamental challenges:

  1. How to manage complex vertical and horizontal urban governance structures,
  2. How to raise the finances to promote efficient, equitable, and sustainable metropolitan growth.

Hanoi 2010The report explores local revenue instruments, with a focus on property-based local taxes and user charges, as well as external revenue sources such as intergovernmental transfers, borrowing, public-private partnerships, and international assistance.

Among the conclusions drawn by Bahl and Linn are:

  • Developing country governments tend to be more centralized; their metropolitan areas tend to be more fragmented; their cities are less self-financing and, hence, more reliant on transfers; they borrow less and have fewer PPPs; and they rely more on external aid financing, especially in the poorest countries.
  • There are few lasting, overall success stories of metropolitan governance and finance in developing countries. Hong Kong and Singapore have had tremendous and sustained success, but they are special cases due in part to their status as city-states. Bogotá and Shanghai have also become successful cities in recent decades, but significant problems now confront both cities due to changes in city management (Bogotá) or a build up of legacy issues, including congestion and pollution (Shanghai).
  • Too few central governments have clear strategies for supporting the development of the metropolitan areas in their countries. With few exceptions - for example, Astana, Kazakhstan - national-level authorities do not focus on developing visions and strategies for their metropolitan areas; rather, they deal with them in an often-undifferentiated manner from other local or regional jurisdictions.
  • Political economy is at the heart of the metropolitan finance problems in both developing and industrial countries. Entrenched interests preserve the status quo by means of short-term time horizons and misaligned incentives which result in putting off difficult decisions; and corruption in and around government undermine effective public service provisioning and financing.
  • Hanoi 2010Some innovative financing and management practices have emerged. These include the use of information and communications technology (ICT) and geographic information systems (GIS) in land use planning and property taxation; land value capture; metropolitan bond issues; municipal development funds for channelling grant and loan finance together with capacity-building assistance; and PPPs in infrastructure finance and alliances in slum improvement.

The Lincoln Institute policy report states that that there are no blueprints or silver bullets. The ideal metropolitan area of the 21st century should endeavour to have the following characteristics:

  • decentralized authority and consolidated government at the metropolitan level;
  • self-financing, relying on a combination of well-designed and well-administered property taxes, non-property taxes, and user charges;
  • capital investment needs financed by well-regulated borrowing and public-private partnerships and;
  • limited reliance on grants.

Paul Rappoport -Heritage 21 - 30 September 2014

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