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UCLG Policy Paper on Local Finance DISCUSSIONS

This policy paper discusses the challenges faced by local governments in accessing credit for infrastructure development, and proposes solutions to improve their access to funding. The paper highlights the mismatch between urban expansion and investments in local public infrastructure, as well as the need for efficient fiscal decentralization frameworks. The paper also explores the constraints and opportunities regarding access to credit for local governments.

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UCLG Policy Paper on Local Finance DISCUSSIONS

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  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. 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 Structure of the Support Paper / Meeting

  3. 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 Structure of the Support Paper / Meeting

  4. Introduction (1/5) Background • Three long-terms trends that have changed and are still changing our world : URBANIZATION AND DEVELOPMENT DECENTRALIZATION GLOBALIZATION

  5. Introduction (2/5) Urbanization and Development Mayday: May, 23 2007

  6. Source: David Satterthwaite Introduction (3/5) Urbanization and Development

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

  8. Introduction (4/5) Decentralization • Latin America • long tradition of centralized government • reforms starting in late 1980’s • Africa • movement away from centralized colonial regimes • democratic reforms starting in late 1980’s • Asia • movement away from centralized colonial regimes • NIS - CEE • transition starting in late 1980’s

  9. Introduction (4/5) Globalization

  10. Introduction (4/5) Globalization

  11. 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 Structure of the Support Paper / Meeting

  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. 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? The Challenge: Investments in Local Public Infrastructure do not Match Urban Expansion

  14. 1/ The Context (1/16) a) A rapid urban population growth,

  15. 1/ The Context (2/16) especially in Asia and Africa, and in small and medium cities

  16. The Context (3/16) …which requires massive investment in local public infrastructure. • Consequences of insufficient investments:

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

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

  19. Remittances: Foreign workers send about $200 bn per year back to their native countries. 1/ The Context (6/16) What is $200 Billions per year?

  20. 1/ The Context (7/16) …Needs that will increase if cities continue their sprawl…

  21. 1/ The Context (8/16) Obvious at the local level, but also at the national level 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.

  22. PPP: Have private firms co-financing or co-investing in urban public infrastructure. Have National or Local Public Enterprises/Utilities 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. 1/ The Context (9/16) b) State of Local Finance. What are the funding options available?

  23. 1/ The Context (10/16) PPP / Private Participation in Infrastructure

  24. 1/ The Context (11/16) PPP / Private Participation in Infrastructure

  25. Customers Customers Utility Utility Local Government National Government National Government Local Government Donor agencies / Banks 1/ The Context (12/16) National or Local Public Enterprises/Utilities Before After

  26. 1/ The Context (13/16) Land and Asset Management • 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

  27. 1/ The Context (14/16) Funding through development banks - Lending of Multilaterals: WB (about $8 bn)… No Direct Lending towards LGs except EBRD Any Strategy for LGs Expansion?

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

  29. 1/ The Context (16/16) Linking domestic capital to local public investment.

  30. 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 Structure of the Support Paper / Meeting

  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. 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 OUTLINE

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

  34. UNITED STATES:URBAN GROWTH & INVESTMENT

  35. UNITED STATES 1860 - 1920 (3)

  36. UNITED STATES:NET STATE & LOCAL DEBT

  37. Foundation and pillars of efficient fiscal decentralization frameworks

  38. 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) UN-HABITAT: DRAFT GUIDELINES ADEQUATE RESOURCES

  39. 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) UN-HABITAT: DRAFT GUIDELINES DIVERSIFIED RESOURCES

  40. 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) UN-HABITAT: DRAFT GUIDELINES AUTONOMOUS RESOURCES (1)

  41. 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) UN-HABITAT: DRAFT GUIDELINES AUTONOMOUS RESOURCES (2)

  42. local decisions will lead to the quantity, quality, cost and mix of services that most closely match local needs and preferences WHY DECENTRALIZE?

  43. Quantity and quality of services Cost of services Mix of services Assignment of functions Revenue assignment Property Budget Building blocks for effective fiscal autonomy

  44. 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 RISKS TO EFFECTIVE FISCAL AUTONOMY

  45. Towards fiscal autonomy in countries in transition

  46. EASTERN EUROPE & CENTRAL ASIA

  47. EASTERN EUROPE:STRUCTURE OF LOCAL REVENUE

  48. ALBANIA – BULGARIA – ROMANIA (1)

  49. 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 NET LOCAL DISCRETIONARY REVENUES

  50. ALBANIA – BULGARIA – ROMANIA (2)

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