Addis conference sharpens discussion on municipal tax capacity

ADDIS ABABA — Following six months of negotiations, the third International Conference on Financing for Development last week finalized a framework for a new era in development finance. In particular this included new mechanisms to try to pay for the massive costs associated with the new Sustainable Development Goals (SDGs), to be finalized in September.

In line with the enormity of the aims of the coming two decades of development — collectively known as the Post-2015 Development Agenda — the negotiations and surrounding debates were extraordinarily complex and wide-ranging. One of the key issues to bubble to the top of these discussions was a notoriously unglamourous one: the importance of taxes, both at the national and municipal level, for funding development in poor countries.

In order for this new development agenda to succeed, government negotiators were told in Addis, municipal financing will need to be included on the international agenda. This is an issue that has received increased attention in recent months, but it remains a hard sell for many national governments keen not to give up fiscal power to decentralized authorities.

At a side event on the issue on 14 July, Marco Kamiya, an urban economist at UN-Habitat, said his organization is discussing the inclusion of urban municipal financing in the SDGs. The issue will also likely receive key focus in next year’s Habitat III conference on cities. For now, Kamiya and urbanists worldwide are looking particularly at the SDGs’ landmark proposed Goal 11, the urban SDG — the first globally agreed goal specifically on urban areas.

Goal 11 is now almost assured to be included in the SDGs. As such, UN-Habitat and others are focusing on a process, currently underway, to prepare clear targets and indicators by which national governments’ progress on strengthening sustainable urbanization can be tracked. These include the level of local revenues and the amount of taxes cities are collecting.

In many developing countries, there remain significant structural obstacles to greater ability both to raise revenue and to spend those monies, especially at the city level. These go well beyond the simple fact that most city authorities do not have legal powers to tax and spend on their own.

The challenges of financing sustainable urbanization include the massive, ongoing importance of the informal sector, which in certain instances can make up some 70 percent of the economy. The widespread lack of proper land titles also inevitably leads to a significant reduction in land taxes. And cronyism and impunity likewise can result in powerful entities and individuals avoiding paying taxes — a condition of “state capture” by elites that not only reduces revenues but also leads many common citizens to question the value of paying their own taxes.

Kamiya points particularly to the need for advances in land registration. This can be a catalyst in reorganizing property taxes, he said, and can bring immediate increased revenues to municipalities in just a year or two. In some cases, he said, such a process can double revenues for cities.

Addis Tax Initiative

In the end, the Addis conference failed to conclusively reach agreement on tax issues among the 193 member states, and several civil society groups expressed frustration that the summit did not result in a stronger global tax body. It did, however, see the launch of a multilateral programme, the Addis Tax Initiative, which had been a major priority for some of the most prominent traditional donor governments.

Currently, the initiative includes more than 30 countries and organizations, including the European Union, the United States, host Ethiopia and others. The undertaking also has some high-profile supporters, including the African Tax Administration Forum, the Bill & Melinda Gates Foundation, the International Monetary Fund, the World Bank and the Organization for Economic Cooperation and Development (OECD).

Among other issues, Addis Tax Initiative pledges members to collectively double their technical cooperation in the area of domestic resource mobilization and taxation by the end of this decade. Member countries are also expected to restate their commitment to strengthening domestic resources as a key means of attaining the SDGs and, more broadly, inclusive development.

Sufian Ahmed, Ethiopia’s finance minister, told Citiscope the objective of the new initiative is to help developing countries take in taxes that they might otherwise be unable to collect. That includes through international tax cooperation, which thus far has been restricted to the 34 member countries of the OECD, all highly developed nations.

“This initiative will make sure developing countries will also have their voices heard — they will be engaged in international tax cooperation,” said Ahmed.

The initiative will focus particular energy on ensuring that multinational companies are paying taxes to their host governments. Currently, global tax arrangements make available no means of exchanging this information, while multinational corporations are seen as a key potential source of new revenues for developing countries — and, perhaps, the cities in which those companies are operating.

Ahmed cautioned, however, that the Addis Tax Initiative is an agreement among sovereign countries, and as such it will be up to individual national governments to decide on specific modalities. Indeed, currently the undertaking’s framework does not include any reference to municipal-level financing — at least not yet.

“We are happy to have reached such broad commitment to strengthen [domestic resource mobilization] among a wide range of partner countries, international organizations and private sector foundations,” said a spokesperson for the International Tax Compact Secretariat, a key supporter of the new initiative. “Since the initiative was only recently launched, the ways of implementing the ambitious common goals remain to be collectively negotiated among the partners.”

Some supporters are already looking to continue the initiative’s discussions in fast-approaching international discussions. Tedros Adhanom Ghebreyesus, Ethiopia’s foreign minister, notes that while the conference did make some progress around taxes and other issues, the Addis talks were only a precursor to negotiations that will happen later this year — at the SDGs summit in September and at the Paris summit on climate change starting in November.

The Addis conference also saw the unveiling of a new programme, by the OECD and the U. N. Development Programme, to strengthen developing countries’ capacity around carrying out tax audits. The Tax Inspectors Without Borders project is already being piloted in Albania, Ghana, Senegal and other countries.

Slum assets

Of course, there are significant obstacles remaining. In any discussion on strengthening local tax opportunities in major urban areas in developing countries, for instance, the focus must eventually return to slums. In many African countries, after all, more than two-thirds of the population can be classified as living in slums.

“The SDGs need clean indicators for urban areas, especially slums, like access to basic services, such as water, electricity, connectivity, reduced commuting time, deployment of public goods and infrastructure,” said Kamiya, the economist. “In UN-Habitat, we’re advocating measures in slum-upgrading that can be a starting point to dealing with slum issues.”

UN-Habitat is the lead agency on next year’s Habitat III conference. That summit’s outcome, a 20-year urbanization strategy called the New Urban Agenda, will almost certainly take on this issue directly. Kamiya said an integrated urban policy is needed by national governments and international organizations alike.

If not dealt with, slums can be like squatters, Gabriel Negatu, a regional director at the African Development Bank, warns — informal settlements to which it is difficult to provide services and even harder to move. For many countries, this is already creating a strategic dilemma.

“We have to keep the social and financial glue of slums when developing them — it’s not a choice,” Negatu said. While slums can be a real source of financial resources, he added, their presence in the informal sector means cities don’t capture that those taxes and other forms of revenue.

This is a point that Joris Van Etten, a program coordinator for the Cities Development Initiative for Asia (CDIA), has long been keen to emphasize. CDIA, founded in Manila in 2007, was formed with a view to providing assistance to medium-sized Asian cities in order to bridge the gap between their development plans and the implementation of their infrastructure investments.

“About 80 percent of revenue some of the Asian countries I’ve seen are generated from cities,” he said. “What I’ve seen stunts cities isn’t the lack of funds to develop them, but good projects to make them more dynamic and liveable.”

See the rest of Citiscope’s Financing for Development coverage here. For full coverage of the conference from the International Institute for Sustainable Development, see here.

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Elias Gebreselassie

Elias Gebreselassie is an Addis Ababa-based journalist reporting on economic and social issues.