For decades, there has been a worldwide trend of decentralizing political, administrative and fiscal authority from central to local governments. This trend continues today on all continents, especially in developing countries. The rationale for decentralization is that government should be as close to the people it serves as possible in order to be more efficient, transparent and responsive. While most observers agree that decentralized governance is generally more desirable than central rule, the problem is that local governments in developing countries are often ill equipped to adequately carryout their new responsibilities, especially in the fiscal sphere.
Concurrent with the decentralization trend, urban areas are becoming increasingly more important as hubs of economic production and as population centers. The population in cities in the developing world is projected to double and reach four billion by 2030. In many developing countries, urban infrastructure and services are already stretched beyond capacity. As a result, urban economic growth can suffer because people do not have access to adequate infrastructure and services in order to establish or grow businesses. The quality of life can also decrease when basic services, such as water and sanitation systems, do not operate properly or are absent altogether.
In order for cities to be able to better manage rapid growth while at the same time maintaining an enabling environment for economic development and a safe, livable environment for its inhabitants, local officials in many countries will, among other actions, need to improve their financial household. This is a basic first step before accessing greater financing for urban infrastructure and other municipal services.
Municipalities generally have three different sources of funding through which they finance their operating and capital planning budgets: 1) own-source funding which comes from local taxation, fees and charges, 2) intergovernmental transfers which are funds transferred from the central to the local level and 3) money that cities borrow, such as through bonds or other forms of credit.
Given the rapidly expanding disparity between the demand for urban services and the ability of local governments to provide those services, there is a tremendous need for greater funds to invest in expanded and improved services. Successful technical assistance programs aimed at increasing the financing of urban services include:
- Improving overall municipal financial management;
- Improving municipal revenue streams (own-source and transferred); and
- When appropriate, facilitating municipal borrowing.