Thank you Slaven for letting us know and for posting your summary points from the discussion. It looks great to me; and I am glad that the organizers seem to be taking our comments and input seriously. 

Rob Wheeler

Hola Rob!  leído y comprendido el mensaje. Que rico seguirnos comunicando. Un saludo especial Luz.

Buenos días!!! Muchas gracias por la información y por permitir  participar en el diálogo.  Es importante aclarar que la falta de recursos  propios hace parte de círculos vicioso en la generación de recursos por parte de las administraciónes.por eso es tan importante el trabajo en red y en equipo con equidad e igualdad de condiciones para ayudar a cuidar al planeta.
Pues de nada sirve un plan en solitario, pues tiene que ser con la voluntad de todos y todas tanto gobierno como lidreresvde otras organizaciones.
Un abrazo.

In regards to the challenges that urban authorities face, unfortunately most local governments either do not know about or do not know how to implement many of the best policies in order to be able to mobilize financial resources for urban development, such as for Land Value Taxation or Capture, nor do they understand how much more beneficial it can be to place taxes primarily on land rather than on buildings or as is more often done on the two as one combined value or commodity. Nor do governments or the people in a community usually understand the enormous amount of revenue that can be raised through this type of a shift in tax policy – given that land rent typically amounts to  about 1/3 of GDP. 

In fact looking through the UN Habitat website I cannot even find where the agency is addressing and supporting Municipal Finance. It does not seem to be listed as a topic, project, or program area. I don’t see how this can be the case, but I guess it is. Which is why it is essential that UN Habitat be tasked in the Habitat 3 Outcome Agreement both with supporting and assisting local governments and authorities with Municipal Finance but also with developing and implementing Land Value Capture/Taxation Policies, while also assisting countries to put in place legislation and policies enabling such policies at the national level. 

Similarly there is usually a failure to educate the public about what a great win-win solution this policy can provide, in part by getting the incentives right for creating a prosperous, just, sustainable and compact community, etc. In addition there is often a lack of awareness and with this the support needed so that one can hire the personnel required to implement and carry out the new policies and then to be able to capitalize from the resulting return on the investment.

For these reasons the International Union for Land Value Taxation is initiating an SDG/LVT Cities Initiative to support the implementation of the needed policies in a limited number of municipalities and to then demonstrate what is possible. The IU includes many professionals and consultants that can help to educate both the public and public officials and can train them in implementing the policy. The GLTN’s Policy Guide should also be most helpful in this regards. It is hoped that UN Habitat will work with the IU and others to support the implementation of such policies; and that it be tasked through the Habitat 3 outcome agreement with doing so. 

Muchas gracias por su correo. Pero no tengo planes para asistir al foro urbano onu hábitat 3.
Solo quiero exponer mi punto de vista en el predialogo. No cuento con los recursos económicos para asistir.
Creo que no se pueden olvidar que el calentamiento global es un hecho y tenemos que actuar para mediar en la salvación del planeta.
Saludos Luz.

Ananda and Slaven,

Thank you for your efforts in moderating and facilitating the discussions and for your helpful questions. I/we would like to know what the outcome will be from this Urban Dialogue discussion? In other words how will the results from it be used? Are you planning to draft a report on it that will be given to the governments or those participating in the Mexico City meeting? Will there be a report or some type of a chair’s summary that is produced from the Mexico City meeting and will our input be considered and included somehow in that? Will the input from this dialogue be used in some other way to inform the outcome of the Habitat 3 process? Please let us know what your plans are for any of this.

Thank you,

Rob Wheeler, Global Ecovillage Network and the Commons Cluster

Ananda, friends, and associates,

 You ask in a question during the discussion below why land value capture has not gained more popularity. I have replied to the question in the dialogue where it appears below. However, here is a shorter response with 3 primary suggestions for the Habitat 3 and Mexico City Outcome Documents. 

First I believe you are right that most people, even within government, do not know about it; and where they do know about it there are few examples, particularly in the developing world, of how well the policy can work and how much revenue can be brought in. So I have to wonder, why hasn’t UN Habitat done more to promote this policy and to see that it is being considered and implemented? But more to the point, what can be done now to ensure that people within government do know about it and to ensure that UN Habitat does take a more active role in promoting and supporting it? 

As noted in the discussion, land value taxation or capture is included as a primary policy recommendation in both the UN Habitat founding document and in the Habitat 2 Istanbul Outcome Agreement, as well as the Habitat 3 policy issue and framework papers. The international community thus needs to scale up support for the policy so that it is not just again a recommendation in the outcome agreement for Habitat 3; but instead ensures that the support is provided so that it will actually be implemented. I would thus suggest that the following recommendations be included as a primary outcome of the Mexico City thematic consultation on Financing Urban Development and then in the Habitat3 Outcome Document:

⁃Direct the United Nations through UNHabitat to establish some type of a program or partnership initiative to focus on implementing LVT/C policies

⁃Recommend that UNHabitat be tasked with coordinating and supporting efforts to implement LVT/C policies

⁃Recommend that UN Habitat work with the SDG/LVT Cities Initiative to do a study on the success and effectiveness of the program in raising funds to support sustainable urban development and ensure that adequate resources are made available to meet the basic human needs of all.

This last recommendation refers to an SDG/LVT Cities Initiative that the  International Union for Land Value Taxation is putting forward. The IU is now developing the program proposal and project for such an SDG/LVT Cities Initiative. We will be reaching out to governments and municipalities and inviting them to participate in it. Our intention is to work with at least 5 to 10 cities initially to implement Land Value Taxation and to then use much of the additional revenue raised to support efforts to achieve the Habitat 3 outcome agreement and the Sustainable Development Goals. These cities will then become examples for how well the policy can work in actual practice and will demonstrate how successful the policies can be. 

The IU is also offering its services and its willingness to work with cities and governments to help them implement the policy. 

Thanks again for the question,

 Rob Wheeler

A revenue stream that should be considered is local green bonds. There are some interesting examples out there such as cities like Johannesburg and sub national governments such as California. The total green bond market in 2014 was USD35 billion of that the World Bank has estimate since 2008 it has issued USD 8.5 billion of Green Bonds (see https://treasury.worldbank.org/cmd/htm/GreenBondIssuancesToDate.html ). This is a drop in the ocean in Green Bond possibilities to accelerate the SDGs and to address climate change.

The IFC is also engaged in the development of local capital markets (including in China, India, Peru and Zambia). This is a way to create access to long-term, local-currency finance.

Maurice Strong advocated for Rio+20 an ‘Earth Bond’ at the IFC to insure the creation of local bond markets in fragile states and LDCs. This might be worth revisiting.

Underpinning green bonds is the fact that more and more investors are looking to integrate environmental, social and governance (ESG) factors into their fixed-income investment portfolios.  The share of investment subject to ESG considerations remains small relative to global capital markets, at 7 per cent or US$ 611 trillion of investments in the US$ 12,143 trillion global capital market in 2010. It is clear that there are trillions in the capital market which could be focused on helping us to move quicker to living on the planet in a more sustainable way.

Habitat III should promote as an outcome an initiative working with the finance sector, and development banks to develop a toolkit to help cities and sub-national governments access to the capital market opportunities. 

A challenge is access to the Green Climate Fund. Habitat III could recomend a Local and Sub-national window for the Clean Development Mechanism, the Green Climate Fund, the Adaptation Fund and the Global Environment Facility

Uno de los principales retos que enfrentan los gobiernos locales para la atracción de recursos financieros para el desarrollo radica en la limitada capacidad para la elaboración de proyectos técnicos que le den forma a las aspiraciones de desarrollo urbano de las ciudades. Sin ellos, es prácticamente imposible acceder a los esquemas de financiamiento.

Se requiere, por lo tanto, fortalecer las áreas técnicas de las administraciones locales y fomentar la creación de bancos de proyectos que permitan ir definiendo los criterios de crecimiento.

Gracias Juan Alfredo. Concuerdo plenamente. Por lo pronto, la ausencia de buenos proyectos en ocasiones se manifiesta de manera aún más explícita cuando, aún en presencia de financiamiento, los recursos se sub-ejectuan por falta de capacidad para llevarlos a cabo. Éste es, por cierto, uno de los principales argumentos utilizados en contra de las iniciativas descentralizadoras (de decisiones y presupuestos).

¿Qué retos enfrentan las autoridades urbanas locales para movilizar recursos financieros para el desarrollo urbano en los países en desarrollo? ¿Cuáles son algunas soluciones a estos retos?

Adicional a lo ya comentado por otros participantes, llamo la atención sobre los siguientes desafíos, los cuales son presentados yendo de aquellos que necesitan menos recursos para ser resueltos a aquellos mas complejos que acaso dependerían de la realización de otros y por tanto de mas recursos:

1) Asegurar una participación ciudadana eficaz y proactiva a la hora de elegir gobernantes, en la elaboración de los planes y proyectos, en la gestión de los recursos y en el seguimiento de objetivos, planes y proyectos.
2) Asegurar la transparencia de la actuación administrativa en todas las etapas de gestión de recursos.
3) Contar con un marco legal claro que habilite a las autoridades locales para gestionar los recursos necesarios para el desarrollo.
4) Regularizar la tenencia del suelo.
5) Contar con un plan de desarrollo urbano y económico viable (que se pueda realizar con los medios disponibles), factible (que incluya proyectos realizables con los recursos asegurados) y sostenible (que permita la generación de riqueza y la participación de la ciudad en una parte de esa riqueza). Este plan, además de concentrarse en la solución de los problemas mas importantes, es la primera condición para que el desarrollo urbano propicie el desarrollo económico.
6) Asegurar, de acuerdo al Plan, la disponibilidad de infraestructuras de base en términos de transporte, comunicaciones, servicios públicos, así como con infraestructuras sociales que permitan el desarrollo del capital humano.
7) Implementar mecanismos de financiamiento, tales como la captación de plusvalías, que permitan a las autoridades locales recuperar una parte de la riqueza creada gracias a la inversión de fondos públicos.
8) Incentivar la participación del sector privado.
9) Racionalizar y hacer imputable la actuación de los responsables de la gestión de recursos públicos.

Cada respuesta debe acomodarse a su contexto sin olvidar que que las ciudades son el núcleo de una economía interconectada e interdependiente.

One key component in developing land-based finance instruments is public support. This is especially true for instruments that target the “unearned increment” in land value. The city of Cuenca (Santa Ana de los cuatro rios de Cuenca), Azuay Province, Ecuador, provides a useful case study in this regard.

Municipalities in Ecuador are assigned the urban and rural property tax along with a few other taxes. Subnational governments are also granted the authority to create or modify both the base and the rates for taxes to pay for community improvements, including special assessments (Contribución Especial de Mejoras or CEM). Aulestia and Rodríguez (2013) draw a clear distinction in the orgin and purpose of the property tax and the CEM. The property tax is based on the total value of the real property which by law should be updated every two years. The CEM on the other hand is intended to allow the public to share in the private increase in land value resulting from public investments.

For over a decade Cuenca has successfully employed the CEM to fund its neighborhood improvement program. Public engagement has been central to this success. The residents of the city sector seeking public improvement address a formal request to the city. The request asks for the inclusion of their neighborhood in the programming of road improvements, the installation of basic services, street lighting, green spaces or police units. Residents understand from the beginning that carrying out the requested project will result in a required CEM.

Beyond the technical supervision of the project implementation provided by the city, social oversight is a key component of the program. The benefitting community elects a supervisor among its members, whose judgments must be incorporated into the audit report. This allows a link between contractor, community, and municipality. It channels community concerns and tracks compliance with environmental policies.

Improvement costs are allocated to land owners based on both street frontage and changes in property valuation. To make the financial burden more bearable, landholder payments are spread over seven years with discounts for prompt payment. Proceeds from the program are reinvested in new projects.

Over 1,800 construction contracts have been carried out using this CEM approach with a total investment value over US$106 million. Equally important, 90% of citizens pay their contributions before the 4th year.

Aluestia and Rodríguez observe that the success of Cuenca stems from four key factors:

• A shared responsibility between citizens and the municipality for financing urban development. This sharing is based on clearly defined rules that are known by the population in advance.
• Political stability and continuity of the programs implemented by previous governments.
• Institutional credibility in the eyes of citizens, builders and financiers. Citizens, contractors and lenders trust that the city administration will deliver on its commitments.
• Active citizenship that participates in the process, is vigilant in taking oversight, and fulfills its obligations.

Thanks Larry for your post. You mentioed that “the property tax is based on the total value of the real property which by law should be updated every two years”. What’s your assessment on how accurate theses assessment are, if they are effectively carried out every two years and to what extent do the updates make up as to assessed values to be close enough to real market values?

Along with the land value capture as mentioned by the International Union for Land Value Taxation (which have as a pre requisite the existence of a well-functioning property tax system as Mathew pointed out last week), another way of adding resources for urban development are infrastructure provision requirements that need to be fulfilled by the developer of the land, most especially when zoning is being changed.

Conditioning development in areas that are being transformed (following Lars’ comment) to the provision of infrastructure may help internalizing externalities and it is by itself a value capture technique.

What experiences can you share along this notion of setting conditions in order to develop projects in areas which now may offer better commercial perspectives given changes on land use regulations?

Local urban authorities are searching for a sustainable and equitable source of public finance, one that can fund infrastructure, education and other public goods while also addressing poverty, wealth inequality and the need for affordable housing for all.

As stated in the Vancouver Action Plan – the 1976 founding document for UN- Habitat:

Social justice, urban renewal and development, the provision of decent dwellings and healthy conditions for the people can only be achieved if land is used in the interests of society as a whole…. Excessive profits resulting from the increase in land value due to development and change in use are one of the principal causes of the concentration of wealth in private hands.

Taxation should not be seen only as a source of revenue for the community but also a powerful tool to encourage development of desirable locations, to exercise a controlling effect on the land market and to redistribute to the public at large the benefits of the unearned increase in land values…

The unearned increment resulting from the rise in land values resulting from change in use of land, from public investment or decision or due to the general growth of community must be subject to appropriate recapture by public bodies (the community).

Many cities and towns have underutilized vacant lots, shoddy dwellings, and abandoned buildings. Land speculators sometimes hold onto these properties for many years, hoping that someday they can be sold for a high rate of return. All of these negative situations can be remedied by capturing the land rent that society as a whole generates while removing taxes from wages and production correctly harnesses incentives for private improvements and at the same time secures a revenue source that adequately funds infrastructure and other needed public goods.

I live in Oslo, a fast growing city and a city which is developing  strategies for transforming the urban fringe from an industrial area to an expansion of the mixed used inner city. To make this possible it will be necessary to invest heavy in infrastructure. On the other hand the transformation will, over time, have huge impact on land values. My city have now an opportunity to couple a land value increasing plan (based om changes in opportunities for real estate development and the perceived and real attractively of the area ) with land value decreasing demands (contributions to necessary  infrastructure). Good strategies, and good rhetoric, for land value capture is therefore essential.

One major part which is planned transformed is called Hovinbyen. The scale of the planned transformation is up to 2,5 mill m2 commercial and up to new 40 000 apartments. Another important prerequisite is that almost all the development will be commercially driven and the owner structure is mainly private, very fragmented with mostly small properties.

 Here are some reflections connected to financing (and situations where land value is expected to increase a lot over time):

• Average yield is in Hovinbyen is 6-7 %, (prime estate in the inner city 4,25%-4,5%). The development of the area will reduce yield. A decrease in average yield of 1% (a cautious estimate in a 15 year period) will increase property value for commercial building with almost 20%. Have other cities used this argument for increasing demand for contributions to infrastructure over time when properties are being transformed? Which strategies have been implemented and how has the real estate marked been affected?
• It highly likely that the difference between indexes for building/developing costs and property costs will change over time and that the gap will increase as a result of transformation of the urban fringe. If level of contribution to infrastructure is connected to the changes between these two indexes it will probably have a stabilizing effect on land values and the speed of the transformation process. Increases in housing/commercial prices compared to building costs will increase level of contribution to infrastructure at therefore reduce increase in land values. Decrease in housing/commercial prices compared to building costs will decrease level of contribution to infrastructure at therefore reduce decrease in land values and diminish the reduction in building activity. The core idea of this strategy is that level of contributions to infrastructure in connected to changes in land value over time and that this sharing of the land value growth will be known and calculated in real estate transactions and therefore make large levels of contributions possible in the long run. Have other cities used this strategy for increasing the contributions to infrastructure when properties are being transformed? Which strategies have been implemented and how has the real estate marked been affected?

Thank you very much to Matthew, Enid, Larry, Michael, and Carlos for your valuable contributions during the first week of this e-discussion on financing urban development. We had a total of 21 responses to three specific questions that I have posted. During the second (last) week of discussion I would encourage all to enrich the discussion with some specific examples drawn from developing countries to the questions.  I look forward to another week of discussion with you all.

Gracias Carlos por sus entradas .

Es cierto que es necesario que haya voluntad política por parte de las autoridades locales para planificar el desarrollo urbano correctamente. Es no sólo las autoridades locales , sino también a los gobiernos nacionales , a través de sus ministerios de planificación nacional , las finanzas y el desarrollo económico , deben ser estrechamente involucrado en los procesos de desarrollo urbano . Por eso cada país debe contar con una política nacional de planificación urbana para sus ciudades y pueblos .

Pero la pregunta clave aquí es – ¿cómo pueden las autoridades locales movilizar más recursos financieros que necesitan para la prestación de servicios públicos a sus habitantes ?

Thank you Michael and Matthew for your contributions

 Someone mentioned earler about land-based financing. Land value capture (sharing) is a land-based financing tool used in many developed countries and in some developing countries as well to raise municipal revenue. But it is hardly used in cities in Africa and in most countries in Asia. Most people in these countries are not evan aware of this tool. Why has it not gained any popularity in some regions/countries?

Ananda, friends, and associates,

You ask why land value capture has not gained more popularity. First I believe you are right that most people, even within government, do not know about it; and where they do know about it there are few examples, particularly in the developing world, of how well the policy can work and how much revenue can be brought in. 

I have represented the Global Ecovillage Network at the United Nations for 15 years and have been one of the principle organizers of the Commons Cluster of the NGO Major Groups. I have participated actively in the Financing for Development processes and also the Commission and now High Level Political Forum on Sustainable Development. I cannot remember hearing anyone talk at the UN about the benefits that could come from adopting Land Value Capture or Taxation other than those who understand this policy and that participate with us in the Commons Cluster. And yet it is a primary policy recommendation from the UN Habitat agreements and founding document. 

I thus have to ask why hasn’t UN Habitat done more to promote this policy in other fora at the United Nations and why hasn’t it done more itself to see that it is being considered and implemented? But more to the point, what can be done now to ensure that people within government do know about it and to ensure that UN Habitat takes a more active role in promoting and supporting it? I include some suggestions on this below.

I want to tell you first though about a most unfortunate occurrence related to this. Some years ago a modest amount of funding was provided by UN Habitat’s Global Land Tools Network to one of the lead advocates of land value tax (aka resource rent for public revenue), Alanna Hartzok, who is now the administrative director for  the International Union for Land Value Taxation.  She developed a thorough and detailed online course titled Land Rights and Land Value Capture working with 24 expert colleagues of hers from nine countries. Alanna did a great job of pulling together the resources needed for countries and municipalities to implement LVT and for people to be trained in how to do so.  The Terms of Reference for the Development of the GLTN Tool on Land Value Taxation that details Alanna’s contract and what the course includes is here: https://www.earthrights.net/projects/globallandtool.html

Immediately after completing the project Alanna began discussions with her immediate director at the UN Habitat GLTN about developing training programs for policy implementation. Unfortunately, at that point someone at a higher level at UN Habitat decided to reject and thus not use any of the contents of the 500 pages of Alanna’s and her colleague’s extensive work. This was done abruptly, unexpectedly and with no substantive reason given for this action and with no discussion about what might still be changed or needed in order to make use of this valuable work.

Thus the international community and governments around the world lost an important opportunity to promote, support and train people in the implementation of the land value tax policy that was strongly recommended as a key policy approach since the very beginning of UN Habitat, as stated in its founding document – the Vancouver Action Plan, and reinforced at Habitat 2 in Istanbul. 

Fortunately, Alanna retained the rights to make use of the course and all the documents she had developed.  Over the next few years around 900 people from 85 countries enrolled in the Land Rights and Land Value Capture online course.  But due to lack of resources some of the interactive features that enabled teachers and students to communicate with each other and to answer the questions in the course are no longer operable. However you can still access the course materials for the 500 page body of work at: www.earthrights.net/wg.

The course included a number of case studies or SWOT Analyses describing many of the primary places where LVT has been implemented and the results they have had – though some may be a bit outdated now. Again unfortunately however most people, even within governments and even within the countries and communities where it has been implemented, do not know about these studies and examples. In short governments in general have done a poor job at promoting the policy and explaining how and why it works and provides such excellent benefits, even where it has been implemented. 

So, now, what can be done about this. I suggest a couple of primary things. First, the international community needs to scale up support for the policy so that it is not just a recommendation in the outcome agreement for Habitat 3; but instead must assure that the support is provided so that it will actually be implemented. I would thus suggest that the following recommendations be included as a primary outcome of the Mexico City thematic consultation on Financing Urban Development and then in the Habitat3 Outcome Document:

⁃Direct the United Nations through UNHabitat to establish some type of a program or partnership initiative to focus on implementing LVT/C policies

⁃Recommend that UNHabitat be tasked with coordinating and supporting efforts to implement LVT/C policies

⁃Recommend that UN Habitat be asked to work with the SDG/LVT Cities Initiative to do a study on the success and effectiveness of the program in raising funds to support sustainable urban development and ensure that adequate resources are made available to meet the basic human needs of all.

This last recommendation refers to an SDG/LVT Cities Initiative that the  International Union for Land Value Taxation is putting forward. The IU is now developing the program proposal and project for such an SDG/LVT Cities Initiative. We will be reaching out to governments and municipalities and inviting them to participate in it. Our intention is to work with at least 5 to 10 cities initially to implement Land Value Taxation and to then use much of the additional revenue raised to support efforts to achieve the Habitat 3 outcome agreement and the Sustainable Development Goals. These cities will then become examples for how well the policy can work in actual practice and will demonstrate how successful the policies can be. 

The IU is also offering its services and its willingness to work with cities and governments to help them implement the policy. 

Professors Larry Walters and Michael Cohen lay out many of the challenges that cities face in implementing such policies in this eDialogue below. Larry’s suggestions for what is needed to address these challenges are essential. The IU is thus prepared to help countries and municipalities address them as a part of the SDG/LVT Cities Initiative as well.

Thanks,

Rob Wheeler

It is worth remembering that the world’s most popular and successful land based financing tool is the value-based property tax.  The idea is simple (though implementation often runs into political barriers or capacity constraints) – as property increases in value, it is periodically reappraised, and as the value goes up, so do local tax revenues.  Where the value increases rapidly in a particular area, for example because of public investment in extending utility lines, a highway interchange, or a light rail system, the increase in value of the surrounding properties is captured in proportion to the overall rate of taxation.  In this context, regular re-valuation becomes especially important.

Thank you Matthew

In a previous posting you mentioned that generating revenue from own local sources and transfers from the central government are the two main options for local authorities to generate financial resources. Borrowing is also another option for local authorities to mobilize financial resources (not municipal revenue) for investing in infrastructure.  Then there are a whole lot of other mechanisms through which local authorities can mobilize funds – municipal development funds, institutional investors such as pension funds, corporate bonds, equity market, public-private partnerships etc. Could you share with us some examples in developing countries?

Hi Ananda!

It is important to understand that borrowing is a tool to use tomorrow’s revenues today. The same with PPPs, financing leases, tax increment financing, and almost every other tool that is talked about. They depend on a predictable future revenue stream. I think it is very important to distinguish between the tools that bring money in: taxes, fees, charges; and the quite different tools that let a city use those revenues in advance, such as borrowing, PPPs, etc.

Because national and local governments inevitably have limited current resources, the question of how to finance “lumpy” expenditures on big urban infrastructure projects is ever present. One obvious option is to set aside a little money each year from operating surpluses, so that capital is available when it is needed. In practice, this is rarely done. Even if there is a capital fund of some sort, at any given time, there will always be more demand for investment resources than there is available capital – no city’s infrastructure is ever finished. Ideally, cities should have capital investment planning processes that anticipate investment needs in each of their major infrastructure systems, processes which set priorities and develop overall financing strategies.  

Given a sound revenue framework (the public task), it is possible to consider structures by which private capital can be used to finance urban infrastructure. Private investment in public infrastructure eases the demands on national budgets, and allows cities to leverage their current resources, thus building more infrastructure, and faster, than could be done on a pay-as-you-go basis out of current revenues.  Private funds can be used to develop urban infrastructure in at least three different ways:

 1. Direct private investment: where a private actor identifies a potentially profitable investment in infrastructure or services which happens to serve a public purpose, national or local government may not need to be financially involved, although there would still be regulatory and land use considerations. Examples of attractive investments for the private sector can include bus systems, railways and ports, utility infrastructure (e.g. electricity, gas and telecommunications), and entertainment facilities (e.g. theaters, stadiums, and sports facilities). Obviously, this approach leaves most of the risk, and most of the reward, to the private sector. It works best in situations where demand is elastic – that is to say, when customers have a choice of using the privately provided service or not.

2. Public private partnerships (PPPs): when a private firm is not prepared to make a direct investment without the participation of the municipality, a public private partnership can sometimes mobilize private capital for investment (usually along with design, construction, or operation expertise). Typically, the municipality sets service standards and agrees to use its authority to regulate tariffs or set tax rates to ensure the private partner can recover its investment with an appropriate return. This approach has many variants, and can allocate the risk between the public and private sector as agreed between the parties, and subject to whatever legislation exists. An important question in a PPP is who takes the risk of permitting and construction processes.

3. Municipal borrowing: where there is no possibility of attracting direct private investment, or where the public sector chooses to retain full accountability and responsibility, it can still make use of private capital if it has the capacity and legal authority to borrow money, either in the form of a loan or through issuing municipal bonds. This approach leaves most of the risk to the public sector: the lender usually would have no involvement in operations or revenue collection. Any of these three structures can be used across the municipality, or in specific geographical sub areas. So, for example, an urban renewal partnership might involve both municipal borrowing for roads, water, sewer and electricity, to be repaid from incrementally increased property tax revenues; and also direct private investment in other facilities and services. 

There are fundamentally only two types of local revenue:

1.  Own source revenues from taxes, fees and charges, and (sometimes but usually not sustainably) the sale or lease of public assets; and

2.  Transferred revenues froma higher level of government.

Own source revenues are much preferred, from a local perspective, because the city that raises its own revenues is the master of its fate. But as others have commented, local governments often depend on the constitution or national legislation to authorise the necessary revenue instruments.

With appropriate instruments, almost all of the world’s cities can raise their own revenues.  Cities have the most wealth, which can be subjected to property taxes; the highest earnings, which can be subjected to income taxes; and the most commercial activity that can be subjected to business taxes.  Where these instruments are not authorised to local governments, it is difficult or impossible for cities to solve their own financial problems.

————-

I often hear people speak of borrowing as though it were a source of revenue.  It is not.  Borrowing is a way to use tomorrow’s revenues today.  It is a way to deal with the lumpy cost of big-ticket infrastructure.  If treated as a source of revenue, it can cripple and impoverish a city.  Only where a city’s revenue situation is stable, predictable and adequate, it is reasonable to speak of borrowing for infrastructure. 

Uno de los principales desafios que enfrentan los gobiernos locales frente al reto del desarrollo urbano, creo principalmente que es la voluntad politica del gobierno local en invertir en planeacion urbana, hoy las ciudadades enfrentan un desorden en cuanto a su planeación, exiten Planes de Desarrollo Urbano sin vigencia. Es importante que dentro de la agenda en politicas publicas urbanas se busquen mecanismos para los gobiernos locales puedan acceder a recursos o financiamiento para poder invertir en planeación, no solo en obra publica, si no tratar de desarrollo politicas publicas con inclusion social.

The central position of local authorities needs to be placed within the wider context of the role of local government in assuring the productivity of urban economies as the basis for urban residents to earn reasonable incomes and to achieve equity in the distribution of opportunities and services. With more than 60% of GDP coming from urban-based economic activities it is essential that local governments function well. In this context, they face three major constraints: the inadequacy of own-revenue sources, the unreliabaility of central government transfers, and the weakness of their financial management. Many local governments have neither the financial resources or the technical capacity to perform these functions. One of the major purposes of Habitat III is to convince national governments that they must play an active, positive role in strengthening local governments to play their essential roles. 

Thank you very much Larry for your contribution. 

Yes, building capacity of local authorities is very important. In many cases, building capacity of local authorities within existing legal and institutional frameworks alone can significantly contribute to improving revenue-generating capacity of local authorities. For example, by automating/computerizing municipal accounting and billing procedures many local authorities in developing countries can increase their revenues significantly. This will also improve transparency and accountability.

There could me many other similar strategies??

From my experience, local authorities face at least the following challenges in mobilizing financial resources:

1)      There is often a lack of appropriate enabling legislation. Central governments are often reluctant to devolve revenue sources to the local level or to enable local governments to enact revenue-generating policies. Central governments are often quite willing to delegate responsibility for service provision, but all too frequently do not provide local urban leaders with the fiscal policy tools necessary to generate additional revenue.

2)      There is often a severe lack of public trust. Those who would be expected to pay the taxes and fees to support local initiatives do not trust that the monies they pay will be used within the community, will be used wisely, and will be spent as promised. As a result, they either resist new revenue efforts or simply do not pay their taxes.

3)      There is often a lack of administrative capacity, especially in mid-sized and smaller urban areas. Local authorities often face administrative procedures that are inadequate and/or inefficient. Many also have shortages in trained personnel needed to effectively carry out the tasks essential for revenue generation and management.  

Addressing these challenges will require concerted action on several fronts.

A)      Central governments need to review carefully their legal framework for local government revenue generation. Reforms to this framework should focus on land-based revenues as the foundation for local tax systems; on charges for services delivered to the extent possible; and on a system of central government transfers that is tied to local need and administrative performance (including budget performance).

B)      Public trust can be fostered most effectively through public engagement and complete transparency. If the public is meaningfully involved in determining local spending priorities, they are more likely to support the revenue policies that will be needed to fund those priorities. Transparency in revenue collection will foster confidence that all taxpayers are treated fairly. Transparency in expenditure management will build trust that funds collected are managed and spent according to plan.

C)      Building local capacity will require both training and the commitment of sufficient resources. Training will need to include management training on efficient process design, effective coordination of activities that involve multiple stages and often multiple entities within the government, and financial management. Resource commitments should appropriately provide both an adequate number of trained staff and compensation levels sufficient to minimize petty corruption.