Thinking Big and Small

8 Jan 2019

City Finance as a Cornerstone for the 2030 Agenda

Providing essential public infrastructure and services to support sustainable development is not a task for central governments alone. The responsibility of delivering essential public services and infrastructure also falls upon the shoulders of local governments. Local governments can account for up to half of the total public expenditure nationwide in many developing countries. In large developing countries, like China, local governments’ share in public expenditure can be as high as 85 per cent.

Local governments spend most of their resources on cities, where population and economic activities also concentrate. The rapid urbanization of the Asia-Pacific region further adds to the fiscal pressure. 940 million people moved into Asia-Pacific cities between 2000 and 2015, with an additional 160 million expected to move in by 2025. Taken together, this is almost the entire population of Africa! The financing needs to provide urban infrastructure, public services, jobs and livelihood at such a scale within a short period is well beyond the fiscal capacity of most city governments in the region.

However, there is no simple fix or one-size-fits-all strategy to address this challenge, and the policy considerations should go beyond the narrow scope of finding more money at the local level. The amount of revenues required, the revenue tools that can be used, and the optimal design of fiscal regulations all hinge upon a fundamental question: which level of government is responsible for what public functions with which sources of revenue? In most cases, such decisions are made by central or state governments, way outside the jurisdiction of city governments, and require coordination among different ministries and departments.

ESCAP has been advocating for a more holistic yet nuanced approach for city financing and for coordinated reforms at both central and local government levels. In our view, city finance should be an important and integral part of the overall strategy on financing for sustainable development and should be mainstreamed into the global financing for development debate. At the same time, the limitations of a one-size-fits-all approach based on “international best practices” should be fully recognized, when policies are deeply shaped by local laws, institutions, social-economic dynamics and the history of path-dependent reforms.

The good news, though, is that the Asia-Pacific region is not short of potential reform options and revenue tools that local governments can explore. Rationalizing the division of labor and expenditure responsibilities between different levels of governments to ensure clarity, efficiency and accountability could be a good start. Strengthening the coordination among local governments in the same metropolitan labor market area for greater economy of scale in both public expenditure and revenue mobilization is another promising reform direction.

Improving the performance of existing local taxes, like the property tax, should always be on the reform agenda, but alternative revenue options such as service charges or a local piggyback on a broad-based central government tax, like a local surtax on VAT/GST, could also be explored. In particular, value capture, in the form of sales of building rights and betterment contributions, has the potential of becoming an important complementary revenue source for Asia-Pacific cities, where urbanization and economic growth have sustained a real estate boom. Compared to property tax, value capture can bring the revenue stream forward, allowing governments to recover part of the property value increase for future public investment more quickly.

At ESCAP, we are trying to generate greater awareness of the importance of public finance for cities and promote concrete changes to support sustainable development in the region. Our 2017 comprehensive review paper shed light on the main financing challenges and reform options for metropolitan cities in the Asia-Pacific region. This was followed by three in-depth case studies on Beijing, Manila and Mumbai in 2018, to better understand policy choices in different local contexts their respective pros and cons.

The research provided a solid knowledge base for our workshop on resource mobilization for Asia-Pacific cities in Nov 2018, where 24 policy makers participated. It was an initial effort by ESCAP to conduct more systematic capacity building on the subject with first-hand knowledge on what has been tried, how it has turned out, and what reforms could potentially be pursued.

For more information contact the authors.