The SDGs will not be achieved without local financing
July’s Financing for Development conference is paying new attention to city-level development financing. But local authorities are still not recognized as central to the debate.
The intensive discussions taking place on the new sustainable development agenda will not mean much without adequate financing and renewal of financing mechanisms. The outcomes of the Financing for Development conference, taking place next month in Addis Ababa, Ethiopia, are therefore crucial to a range of upcoming major agreements: the Sustainable Development Goals, a potential climate accord in December and next year’s Habitat III conference on cities.
UCLG is focused on bringing the voice of local and regional governments to these processes. Cities and territories are where people live, where poverty is tackled, where prosperity is generated, where health and education services are provided, and where ecosystems are protected on the ground. Massive public and private investments will be necessary to improve access to basic services in these areas in order to eradicate poverty, cope with the impacts of climate change and prepare cities to host 2.5 billion new urban residents over the next three decades, mostly in developing countries.
According to a number of studies, the amounts currently dedicated to these investments will have to be doubled over the next two decades in order to meet this challenge. In preparation for the Addis Ababa conference, the report of the U. N.’s Intergovernmental Committee of Experts on Sustainable Development Financing estimated global investment needs at USD 5-7 trillion annually — around twice what is currently dedicated. Sub-Saharan Africa, for instance, will likely need some USD 92 billion over the next 20 years, yet today such investments reach barely USD 45 billion.
Taking the additional costs of climate change into account, dedicated amounts should be tripled. According to a 2013 estimate by the World Economic Forum, the “investment gap” in green infrastructure could be as high as USD 700 billion a year. Likewise, the International Energy Agency says that nearly USD 360 billion is invested annually to cope with the consequences and challenges of climate change — a massive figure, yet little more than a third of the USD 1 trillion a year needed through mid-century.
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We are currently seeing a global decentralization process, one characterized by the transfer of key responsibilities to local and regional governments in terms of provision of basic services but without devolution of the corresponding human and financial resources. As a result, “many of the investments to achieve the SDGs will take place at the sub-national level and be led by local authorities,” according to the U. N. secretary-general’s “Synthesis Report” on the post-2015 agenda, released in December. Yet the preparatory process for the Financing for Development conference has paid little attention to the related concern: issues linked to local financing, even as local elected officials are not included in the official negotiating groups.
In response, the Global Task Force of Local and Regional Governments, an umbrella group of over 30 networks facilitated by UCLG, is mobilizing member states and its accredited partners to support the implementation of adapted financial mechanisms at the local level. Local finance is the missing link in sustainable development finance, and the Financing for Development conference must lead to mechanisms that unlock the economic potential of urban areas and territories.
Financing the city
The mobilization of local and domestic resources will likely be crucial to the future of many countries undergoing rapid urbanization. High-level conversations today use the term “endogenous” resources to encompass the range of this issue.
In essence, this means that the city must be facilitated to better finance the city. This could include strengthened support for local financing in relation to land and property income as well as the productive urban economy. The history of urban development proves the potency of this opportunity.
“Local finance is the missing link in sustainable development finance, and the Financing for Development conference must lead to mechanisms that unlock the economic potential of urban areas and territories.”
Currently, mechanisms that would enable local public authorities to mobilize part of the wealth produced within their jurisdiction to be reinvested in local development are not in place in many low- and middle-income countries. Local taxation remains underdeveloped, and conditions to capture a portion of the capital gains in land value and economic activities are often not met.
In the late 2000s, local governments spent around USD 3,000-4,000 per person annually in the United States and Europe but just USD 36 in Africa. In Eurasia, the average annual budget for local governments in terms of expenditure per person is around USD 232; in Latin America, it’s USD 133; and in low- and middle-income countries in Asia, this figure is just USD 92.
Local governments generally lack the buoyant tax sources that would produce revenue growth in line with the fact that their responsibilities have increased due to the combination of rapid urbanization, the local impacts of climate change and disaster risks. The vast majority of taxable goods and services are often concentrated at the national level, and systems of redistribution to local governments through transfers and grants do not guarantee equitable distribution.
Therefore, diversifying and expanding local tax bases is clearly needed. And in fact, there are already models here: Some countries do allow local authorities to benefit from national economic growth through the taxation of economic activities, people’s income or local sales.
Allowing cities to access part of the value of public land — particularly that originated by public investments, for instance in roads or new equipment — is another very promising way to finance urban investments. This is especially important in countries undergoing rapid urban growth.
By producing substantial immediate revenue that enables the reduction of dependency on debt, this type of financing is well suited to growing cities. It also helps to enhance the efficiency of urban land markets and to direct urban growth toward areas most suited to effectively accommodate that expansion. Recent experience suggests the value-added contribution of land could represent between 10 and 50 percent of public investment made in the context of development or urban restructuring projects.
Infrastructures and basic services
Whether through direct loans or private capital contributions (including in the form of special purpose companies, public-private partnerships or infrastructure facilities), local governments must have access to long-term financing to cover investment needs.
In many low- and middle-income countries, however, borrowing by local governments remains legally constrained. Restrictive institutional frameworks, weak creditworthiness and local administrative constraints curb access to finance for local governments outside of metropolitan areas and large cities.
“The only way for local elected officials and representatives to take part in the official negotiations is to be part of national delegations, whereas many mayors and local elected officials want to commit and get involved on this issue. The conference is setting aside no dedicated time slot to discuss local finances or rapid urbanization.”
Regarding reimbursable resources, private investors and financial institutions require the sound financial management of local governments, its long-term stability and ability to generate revenue sustainably. In the same vein, in directly funding a public service, investors conduct “due diligence” to ensure performance and long-term profitability.
In this context, providing increased institutional capacity to local governments should be a priority in both the national and international agendas. Legal, institutional and financial decentralization frameworks are critical to create enabling environments for local authorities. Particularly with risk and creditworthiness given such significant priority, commitments by central governments to support local governments is indispensable, having a direct impact on local authorities’ access to adequate resources.
International and regional development banks also have a role to play in financing the infrastructure needed for basic services in urban areas. But again, these banks rarely grant credit directly to local governments.
Nonetheless, even beyond direct financing, international financial institutions have a critical role to play in supporting decentralization reforms. Such reforms can lead to the creation of legal and regulatory frameworks for public-private partnerships, provide grants and credit enhancements for the development of infrastructure projects, secure investors and help to develop subnational debt markets.
Finally, there are also important implications here for this year’s main negotiations. Local governments’ access to global, regional and national climate-change-financing mechanisms — for instance, the Green Climate Fund or the Global Environment Facility — can indeed trigger investments in adaptation infrastructure.
The Addis Ababa conference is not the first to focus on development financing. Yet past summits — in 2002 in Monterrey, Mexico, and in 2008 in Doha — did not mention the local level as strategic. Further, local stakeholders were absent from the negotiations.
Fortunately, this has changed in the run-up to the Addis talks. Since the launch of preparations for the third conference, increased attention has been paid to municipal finances, including in the draft negotiating text. This is due largely to the joint commitments of networks of local and regional governments, U. N. agencies and member states such as France, Germany and Ethiopia. (While the latest draft is not yet available online, the text released 2 June is available here.)
Currently, Paragraph 33 of the Addis Ababa draft accord promotes more financial autonomy and integrated urban planning at the local level as key to sustainable development. It underlines the importance of urban-rural linkages as well as the strengthening of debt management and municipal bond markets or financial institutions, when appropriate. References to local authorities have also been included with regard to mechanisms for monitoring progress and accountability (Paragraph 123) and within the introduction to what is being called a new Global Partnership for Sustainable Development (Paragraph 10).
However, the conference’s global framework still does not recognize local authorities as crucial to these debates. The only way for local elected officials and representatives to take part in the official negotiations is to be part of national delegations, whereas many mayors and local elected officials want to commit and get involved on this issue. The conference is setting aside no dedicated time slot to discuss local finances or rapid urbanization.
This is in stark contrast to the fact that two other important non-state actors — civil society and business — have been given specific roles and allocated seats at the roundtables, alongside the national delegations.
Such a gap is worrisome. The Financing for Development conference is a critical step on the way to defining the Post-2015 Development Agenda, after all. Yet it will not reach its objectives without devoting substantive attention to local financing and offering bold new recommendations for strengthening related systems.
Update: Local governments’ agenda at the FFD conference can be found here.