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Programming Considerations of Urban Finance
Improving Overall Municipal Financial Management
A basic pre-requisite for accessing market-based financing for urban services is sound financial management practices. Improving core financial management at the municipal level is an essential first step to improving service delivery by ensuring that scarce financial resources are utilized effectively. Good financial management practices will ensure greater accountability, transparency and better fiscal management.
Improving local financial management is a cornerstone to increasing financing for urban services. Work in this area often focuses on the budget process, including budget preparation, public involvement, budget execution, capital investment planning and measuring results. Assistance aimed at strengthening local government financial management might focus on the transition into performance-based budgeting, which is budgeting for the delivery of a particular program and focusing on the purpose of the program and its outcome rather than the components of the program.
To promote greater transparency and accountability in the budget process, local governments need help to increase public participation. Here, the idea is that citizens should have more opportunity to voice what they believe should be budget priorities. There are various ways that municipalities can improve communications and make information about the budget process more accessible to the public as well as ways in which citizens can directly participate in the process itself. This in turn helps to increase public oversight of local government spending and can help to decrease local-level corruption.
Other ways to improve the budget process include the use of technology and the customer satisfaction surveys. USAID's local government activities frequently provide local governments with information technology to assist with the budget function. USAID often provides the necessary software, translates it for the local context and provides training on how to use it. Citizen or customer satisfaction surveys can be used by local governments to establish baselines of the quality and quantity of local service delivery. This survey is repeated on a regular basis to determine if citizen satisfaction with urban services is improving. Feedback from the survey allows local officials to make better decisions in formulating their budgets.
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Improving Municipal Revenues Streams
Municipal revenues can include both own-source revenues and inter-governmental transfers. Many USAID programs aim to strengthen municipalities' ability to improve their various sources of revenue which can include a range of local taxes and fees including property tax, user fees and tariffs, or service fees. In the area of own-source revenues, many USAID programs, for example, work to help municipalities create property cadastres and taxpayer databases for purposes of being able to better levy and collect property taxes. Beyond own-source revenues, local governments may receive a significant portion of their revenues through inter-governmental transfers. USAID's local governance programs frequently work with host countries at the national level on legislation and formulas which determine how funds flow from the central to the local levels. The objective for working on intergovernmental transfers is to assist host governments in determining, for example, what share of which taxes should flow to local governments and how these transfers should be calculated taking into consideration factors such as population, contribution to the national GDP and other factors. The goal is to provide municipalities with a fair share of the national budget in a timely, transparent and predictable manner so that they are better able to plan and budget.
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Municipal Borrowing
Most municipalities will never have the level of resources, either own-source or transferred, necessary to satisfy their infrastructure needs. Donor funding will also never be sufficient to cover all the capital improvement needs of the world's developing cities. Cities in developing countries will therefore have to access funding from private capital markets in order to pay for much of the cost of growth, just as cities all over the developed world do today. For this reason, the Urban Programs Team provides support to USAID missions that wish to work with host nation cities in helping them access capital from private markets.
For those municipalities and sub-national entities that are creditworthy, domestic capital markets can be an important untapped source of financing. In this area of work, USAID helps local or national governments structure financial vehicles that could allow a city to incur and service a debt. USAID helps analyze the legislation that regulates sub-sovereign debt and, if necessary, propose changes to facilitate municipal borrowing. USAID also explores how to help improve the creditworthiness of municipalities to increase investor confidence and to lower the cost of borrowing. Possible credit enhancement techniques are identified to improve investor comfort and further reduce the cost of capital. Revolving funds and bond banks which include both leveraged and non-leveraged facilities can provide an alternative source of financing for smaller municipalities and less creditworthy borrowers. Because capital is raised for a group of cities and various investments in the case of a leveraged fund, the risk to investors, and therefore the cost of borrowing is lower. Non-leveraged facilities can be a good tool for conditioning local governments to the market and help transition from a reliance on capital grants to more market-based sources of financing. In the case of larger municipalities or identified "bankable" projects, municipal bonds or commercial loans may be appropriate financing vehicles. In short, the objective is to create mechanisms to connect sub-national governments, which are willing and able to borrow, with potential lenders to finance the cost of orderly urban growth.
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