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«Prepared by Professor Jeremy Gorelick March 8, 2016 INTRODUCTION1 The Third United Nations Conference on Housing and Sustainable Urban Development ...»

-- [ Page 1 ] --

Funding Capital-Intensive Urban

Projects: Enabling Cities to

Employ Municipal Finance Tools

Issue Brief

Prepared by Professor Jeremy Gorelick March 8, 2016

INTRODUCTION1

The Third United Nations Conference on Housing and Sustainable Urban Development (Habitat III), is scheduled for

mid-October 2016. This gathering of heads of state, planned to take place in Ecuador, has been called to “reinvigorate the global political commitment to the sustainable development of towns, cities and other human settlements, both rural and urban.” The outcome of this summit will be the “New Urban Agenda,” which will set a new global strategy around urbanization for the next two decades. As the lack of financing for projects poses one of the greatest challenges for cities around the world, municipal finance practitioners have a rare opportunity at Habitat III; to present compelling reasons for heads of state to support cities in the developing world to employ best practices from the developed world.

Essentially, decentralization of borrowing authority to sub-national government and fiscal sustainability at the national level are two issues in permanent tension in public financial management. On the one side of the argument, it is desirable to give sub-national authorities room for raising their own financial resources in order to finance capital investment. On the other hand, the lack of institutional capacity, history of sub-national government defaults in some decentralized systems, and the political lack of effective controls give central or national governments substantial arguments to restrict sub-national autonomy.

In the months leading up to Habitat III, the international community has the opportunity to consider the challenges, obstacles and potential answers that can help to unlock financing for the core needs of municipalities. This financing will be crucial for the successful delivery of Sustainable Development Goal (SDG) 11, on Sustainable Cities and human Settlements, but stimulating financial success in cities will also lead to collective delivery of many of the other SDGs (including poverty, hunger, clean water & sanitation, decent work & economic growth, and others).

The HIII Thematic Conference on Financing Urban Development (9 – 11 March) represents one of the first opportunities for the world’s leading policymakers and practitioners of municipal finance to dialogue with each other on some of these The United Nations Sustainable Development Solutions Network has commissioned Professor Jeremy Gorelick of the Johns Hopkins University to advise its staff and associated donors/supporters in the development of a set of resources for cities that can benefit from a comprehensive repository of information and best practices as part of a larger effort to source financing for capital-intensive projects. The following is a synthesis of his research and comments from esteemed colleagues at a conference on municipal finance hosted by SDSN and coordinated by the Ecological Sequestration Trust at the Rockefeller Foundation’s Bellagio Centre in Italy in March 2016.

thorny issues. The United Nations Sustainable Development Solutions Network (SDSN) plans to help stimulate the debate and to provide evidence and practical policy recommendations on municipal finance to aid the discussion. Over the coming months, SDSN will sponsor an ongoing dialogue on municipal finance to help frame some of these

concerns. Topics for discussion will include how to:

1) Advance the agenda: Some argue that the language adopted at Habitat II empowered cities to a greater extent than the ideas suggested for Habitat III. Is this a valid argument? If so, what edits on ideas/language should experts propose?

2) Differentiate between cities: Municipal finance cannot, and should not, be approached with a “one-size-fits-all” framework. Although many typologies for sorting cities can be suggested, some options provide better answers than others. To achieve the best sample, which characteristics should be used to describe cities? Does this definition reflect the current traits outlined under the SDGs and Habitat III?

3) Allay the concerns of central governments: To mitigate the fears of central governments relative to borrowing by local governments that may, constitutionally, appear as a balance sheet obligation of the national treasury, the constitution may set debt limits for sub-sovereign borrowers. Is this a reasonable mechanism?

Does this type of “paternalistic” engagement by the sovereign create an implicit guarantee for sub-sovereign governments, creating an unsustainable system that is rife with moral hazard?

4) Manage expectations from financiers: What are the pre-requisites that public financial institutions expect from cities seeking financing for capital-intensive projects? How do these differ from the expectations of private financial institutions/individual investors? What role can central governments play in helping cities to meet these expectations?

5) Ensure transparency and empowerment in decision-making: Even after a city successfully develops a compelling proposal for a capital-intensive project requiring external finance, there is no guarantee that municipal leaders will make decisions in the best interest of the city’s long-term financial needs. This most often occurs when cities’ priorities are re-directed by development finance institutions and private funders offering available capital for initiatives that do not reflect those priorities identified by the city’s leadership or its constituents. What is the role for an independent, “honest broker” in the system? How can the international development community assist cities to make more informed decisions about the most appropriate financing tools to ensure long-term sustainability?





6) Ensure environmental and social sensitivity: While all of the SDGs are vitally important, many members of the international community are concerned that unfettered access to financial resources for municipal projects, particularly infrastructure initiatives, can occur without responsible consideration of damage (whether intended or unintended) to the environment, in violation of climate action (SDG 13). What protocols should cities adopt to guarantee that cities develop sustainably (SDG 11), incorporate elements of affordable and clean energy (SDG 7), and maintain or improve the balance of our ecosystems both below water (SDG 14) and on land (SDG 15)?

Further, what protocols can cities adopt to encourage improvements in economic and social sustainability, including more economic opportunities (SDG 8) and an end to poverty (SDG 1)?

In considering the best way to support the decision-makers at Habitat III, experts should not forget the language of the Istanbul Declaration on Human Settlements adopted from the deliberations in Turkey that states (in paragraph 12, bold

added):

We adopt the enabling strategy and the principles of partnership and participation as the most democratic and effective approach for the realization of our commitments. Recognizing local authorities as our closest partners, and as essential, in the implementation of the Habitat Agenda, we must, within the legal framework of each country, promote decentralization through democratic local authorities and work to strengthen their financial and institutional capacities in accordance with the conditions of countries, while ensuring their transparency, accountability and responsiveness to the needs of people, which are key requirements for Governments at all levels. We shall also increase our cooperation with parliamentarians, the private sector, labor unions and non-governmental and other civil society organizations with due respect for their autonomy. We shall also enhance the role of women and encourage socially and environmentally responsible corporate investment by the private sector. Local action should be guided and stimulated through local programmes based on Agenda 21, the Habitat Agenda, or any other equivalent programme, as well as drawing upon the experience of worldwide cooperation initiated in Istanbul by the World Assembly of Cities and Local Authorities, without prejudice to national policies, objectives, priorities and programmes. The enabling strategy includes a responsibility for Governments to implement special measures for members of disadvantaged and vulnerable groups when appropriate.

To foster development in practical terms and to help heads of state to ensure that the sub-sovereign governments are well-equipped to make responsible decisions and understand how best to make decision about funding capital-intensive projects, SDSN is developing a set of tools for cities eager to embark on municipal finance programs. The following pages contextualize SDSN and its mandate as well as summarize much of the general discourse on municipal finance, particularly within the context of the developing world.

GLOBAL CONTEXT

Urbanization is causing a historic global demographic transformation that will be one of the biggest drivers of economic st growth in the 21 century. Today, one-half of the world’s population lives in cities that generate more than 80 percent of global Gross Domestic Product (GDP).

One-third of the world's urban population resides in developing countries, and this portion is growing rapidly. The share of the national population that is urban in lower-middle-income countries stood at 39 percent in 2015 and at 30 percent in low-income countries. By 2050, these figures are expected to be 57 and 48 percent, respectively. While only about one-tenth of the world's largest urban areas are in the world’s Least Developed Countries (LDC), thirty of the thirty-five most rapidly growing large cities worldwide are located in LDCs. In other words, the world’s fastest expanding urban agglomerations are now in the Global South.

Of course, the challenges of municipal finance are not limited solely to developing countries. As evidenced in the United States democratic presidential debate (6 March 2016), the degradation of municipal infrastructure in cities like Flint, Michigan, are emblematic of a crumbling of urban services around the world. Cities in the developed world face equally difficult challenges in attracting investments to close the gap between critical infrastructure needs and available resources.

Moreover, the United Nations Department of Economic and Social Affairs (UN DESA) noted in its 2014 Revision of the World Urbanization Prospects that In 1990, there were ten “mega-cities” with 10 million inhabitants or more, which were home to 153 million people or slightly less than seven per cent of the world’s urban dwellers. In 2014, there were 28 mega-cities worldwide, home to 453 million people or about 12 per cent of the world’s urban dwellers. Of today’s 28 mega-cities, sixteen are in Asia, four in Latin America, three in Africa, three in Europe and two in Northern America. By 2030, the world is projected to have 41 mega-cities each with 10 million inhabitants or more.

Regardless of the part of the globe under consideration, the magnitude of the urban demographic shift is staggering.

Rural to urban migration, combined with the effects of urban population growth, could add another 2.5 billion to the world’s urban population by 2050. Close to 90 percent of this increase will be in Asia and Africa. Further, urban growth is not limited to capital cities, but is having a profound impact on secondary cities and towns as well. UNDESA reports that close to half of the world’s urban dwellers reside in settlements of less than 500,000 inhabitants (compared to around one-eighth living in mega-cities with over 10 million inhabitants).

The future development of emerging markets now depends significantly on how well urbanization is managed in cities and towns. If well managed, cities can be engines for economic growth and for expanding access to basic services for McKinsey Global Institute, Urban World: Mapping the Economic Power of Cities, 2011.

United Nations Department of Economic and Social Affairs, World Urbanization Prospects: The 2011 Revision.

United Nations, Department of Economic and Social Affairs, World Urbanization Prospects: The 2014 Revision.

UN, World Urbanization Prospects: The 2014 Revision.

large sections of the population. But while the developing world is urbanizing faster than the developed world, to date, the correlation between urbanization and economic growth has been weaker in developed countries.

Urban life offers benefits compared to rural life, and these are driving urbanization. Economic opportunities are more diverse (especially in countries where agricultural employment is declining), education and health care are more accessible, and gender roles may be less restricted. But urban life also has its drawbacks, including crime, crowding, and the cost of living. And while cities offer individuals unique opportunities to build resilience, their growth can also create new vulnerabilities to a range of hazards.

As a result, managing cities and urban growth has become one of the pressing development challenges of the 21st century. It will be a major factor in the success of the Sustainable Development Goals and in propelling the transition of countries from low-income to middle-income status.

There is abundant evidence that developing countries are unprepared for the scale of urbanization that is taking place and are struggling to face the challenges of urban growth. Urbanization takes place in the average emerging city without control of land use or provision of adequate services; traffic congestion wastes productive time and pollutes the air; poor populations are concentrated on sites subject to a myriad of hazards; and disparities between rich and poor create social tensions and insecurities that can turn the hopeful vision of life in a modern city into a nightmare, especially for the poor. The economic potential of cities will not be fully realized until city governments have both the tools to manage the development challenges being thrust upon them and the resources to improve economic, environmental, and social conditions.

FINANCING NEW INFRASTRUCTURE SUSTAINABLE DEVELOPMENT CITIES: THE

AND IN

INVESTMENT OPPORTUNITY



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