Local Government Finance is Development Finance #3

Dear friends and colleagues

Welcome to #3 of the Local Government Finance blog – which will come out once or twice a week. Not everyone gets it – but many support our assertion that local government finance is development finance.

We are in the middle of the (virtual) High Level Political Forum (a UN review of progress towards the Sustainable Development Goals) where the role of local governments in Covid19 Response and Recovery is being highlighted. This week the Global Taskforce on Regional and Local Governments issued the following declaration and on Monday 13th June the taskforce be co-organised the third edition of the Local and Regional Governments’ Forum with UN DESA, UN-Habitat, UNDP and the Executive Office of the UN Secretary General. The overall objective of the Local and Regional Governments Forum is to produce a fruitful debate and strong commitments from local and regional governments, national authorities and the international community to support a transformative bottom-up process grounded on multilevel governance based on the achievement of the SDGs in the aftermath of the COVID19 crisis, while contributing to the Decade of Action. You can catch a recording of the session here.

LISTEN

This week’s posting is more focused on the RECOVERY. Local governments are key to driving the recovery, despite limited financial resources and mandates there is a lot that they can do, as this (very short) video from Tanzania demonstrates…

But what is the INVESTMENT AGENDA for INCLUSION. What does an inclusive capital expenditure programme or an inclusive local economic development strategy look like. The video provides one small example, yet the challenge is to make sure that this economic recovery is INCLUSIVE. How to do this through INCLUSIVE CITIES will be discussed at the High-Level Political Forum on 15th July at 8.00am. Please register for the event Here All are welcome… A flyer is attached to this message.

On a substantive level the meeting will discuss how Rapid urbanization in many developing countries is becoming a significant challenge for governments, particularly local governments to whom citizens turn for ensuring access to basic services and urban governance.  Meeting the demand for infrastructure and services, ensuring inclusive territorial governance, and promoting inclusive local economic and social development are essential for inclusive growth of cities in the developing world, yet local governments themselves often lack the fiscal space and authority for development planning. Unless local government are empowered (including financially empowered) to make inclusion a priority in their agendas, and unless urban infrastructure investments are designed with the needs of all citizens in mind (not just the mobile, not just those with spending power, and not just those with formal, regular jobs) cities can become the location of ever widening inequalities and associated increases in extreme poverty and insecurity.

By ensuring that access to local leadership, provision of public services, access to public space, and availability of finance, among other things, to wide segments of the population, including women, urban poor, youth, migrants etc. cities in developing countries can provide greater opportunities for leveling the playing field and for sustainable and equitable development and growth. For instance, improved street lighting, safe transportation, childcare services, vocational training, smooth access to the jobs market and municipal access to concessional finance are examples of solutions that can increase women’s economic empowerment opportunities in developing cities. At the same time informal employment is far more prevalent in developing countries, the significant numbers of men and women in the informal economy, are vulnerable to economic downturns and emergencies. Responses such as social safety nets, job security and benefits are largely absent for these workers.

Join us to hear some examples of how city leaders are promoting inclusion within developing cities and making sure it is locked in through investment plans as the cities grow. We will also hear from funds and development finance institutions on what steps they are taking to make inclusion a priority in urban investments and projects and what measures are being used to assess this. The Side Event will conclude with a brief discussion with panelists and question and answer with participants.

Agenda:

Opening remarks: Judith Karl, Executive Secretary, UNCDF

Moderator: David Jackson, Director, Local Development Finance, UNCDF

Panelists:

·       Honorable Madam Noraini Binti Roslan, Mayor of Subang Jaya, Malaysia

·       Khomotso Letsatsi, Chief Officer: Municipal Finance, Fiscal Policy & Economic Growth, South African Local Government Association (SALGA)

·       Michael Wodzicki, Director, Strategies and Development, Federation of Canadian Municipalities (FCM)

·       Frederic Audras, Head of Urban Development Division, Agence Française de Développement (AFD)

·       Tehmina Akhtar, Deputy Director, Local Development Finance, UNCDF

Looking forwards to seeing you at the meeting.

David Jackson

Director, Local Development Finance

United Nations Capital Development Fund

Local Government Finance is Development Finance #2

Dear friends and colleagues

Welcome to #2 of the continuation of Local Government Finance blog –  which will come out once or twice a week. Not everyone gets it – but many support our assertion that local government finance is development finance. This includes those participating in the Webinar held on Thursday July 2nd that explored how the Coronavirus will affect municipal finance investment projects. It was a delightful privilege to be joined by some very distinguished guests. If you missed the broadcast you can click the link below to listen in or read the summary below.

Best wishes

David Jackson,

Director, Local Development Finance

United Nations Capital Development Fund

 CLICK HERE TO LISTEN TO THE WEBINAR

To listen enter the following Password: 5s.a375b

READ A SUMMARY OF THE WEBINAR BELOW

David Jackson Director, Local Development Finance, UNCDF – Introduction

David Jackson stated that the session will focus on looking ahead beyond the immediate pandemic at the investment horizon of the next 24 months. He stated that

“in this world of reduced fiscal space, reduced local receipts, reduced local tax revenue, sometimes reduced local transfers from central government to local government and reduced economic activity there is a need to rebuilt all of these. In the meantime urbanization is not going to slow down specially in sub-Saharan Africa. This Webinar will explore the investment climate of the moment.”

“Urbanization continuing at a very rapid rate, Africa should no longer be thought of as a rural continent, African cities are growing, especially intermediary cities.”

“Africa requires the Investments to make sure that is urbanization is accompanied by increases in productivity, increases in livelihood and increases in the quality of life as well as environmental sustainability so that it can be the springboard to an environmentally sustainable, livable, healthy and prosperous continent.”

That is the challenge of Municipal Finance, of Local Government Finance, of investment finance in urban areas in Africa. This is the challenge we are taking on. The pandemic is here to stay and has affected our work. We will have perspectives from Mayor’s and investors on the investment climate, and how the COVID pandemic has affected their pipelines, what practical measures and policy guidelines are required, and more…”

He then introduced the Mayor’s who provided introductory remarks…

Mayor of Kumasi- Honorable Mr. Osei Assibey Antwi, Mayor of Kumasi, Ghana

Kumasi is strategically located in Ghana, everyone having to go the northern part of the country has to go through Kumasi, people coming from Burkina Faso, Ivory Coast are going to the city.

Every day more than 1,5 million people are adding up to the already congested number of inhabitants that transit and rest in the city.

The hotel business has been helping us a lot economically, the hospitality industry was booming, the number of hotels in Kumasi outnumbers the number of hotels in Accra the capital City.

Kumasi is home of the largest market in West Africa and is the oldest city in Ghana, it has always been a place of business and transit and commerce since more than 300 years

COVID-19 has really affected Kumasi, all the regions around are not bringing trade anymore , the borders are closed , the trade has dropped down significantly , items coming from Nigeria, Ivory Coast, Ghana, Burkina Faso , import /export  and trade links have diminished every source of revenue of the city.

Kumasi generates revenue from business operating permits, property rates, and fines and taxes it applies on the trade, these are our internal general funds and then from the central government support via the common fund which is drastically down.

Since COVID-19, the budget is down 30%, ($2 million are not available anymore) and this has affected all our projects.

The Central government has assisted us in getting funds of several million Euros which are used for the completion of a market, this project is ongoing, but another project of $20m has been stalled. We are the only city in Ghana which has benefited from that help from the central government.

More than 15 % of the expenditures are spent on COVID related issues, the central government is really constrained too and can’t provide a lot a support, most of its funding is now dedicated to health issues. Municipal funding is very important for us and we want to insist on the importance of it, we are in process to be able to borrow soon and this will change a lot of things for Kumasi.

Honorable Ms. Yvonne Aki-Sawyerr, Mayor of Freetown, Sierra-Leone

Mayor Yvonne presented the fiscal challenges that Freetown has been facing. Overall the investment climate in the city has been hard hit by the pandemic. There has been a shift in donor related funding from traditional projects to COVID-19 focused activities. For example, with limited funding from partners and private sector, Freetown has developed a comprehensive plan providing direct support for communications, preventive measures and community care.

However, the two main revenue sources – fiscal transfers from central government and own source revenue have experienced a significant downturn. The city has not received any Inter Governmental Fiscal Transfers at all this year and traditional Own Source Revenuewhich mainly came from property rates has been lost. She gave an example of Freetown’s innovation in digitizing their property rate system, geo mapping the entire city and building an automated point-based system linking into the banking system, which ensures transparency and accountability. The system allows the identification of payments made by wards and allows residents to participate in determining how the 20% of the revenue raised in the wards would be used. But one challenge the city faced was to issue property rate demand notices in this difficult time. She stressed the importance of support from the political leadership of the national government.

In summary, Mayor Yvonne made the point that the local challenges are also a national priority. During and post COVID-19 time, the most important element that needs to be elevated is the ability for cities to access financing without having to go through national government, whether it is financing from development partners or putting in place a structure or legislation that allows cities to make decisions. Cities need flexibility and assurance that cities who make commitments to deliver services as part of the leadership campaign have access to finance.

David Jackson then moved to question the panel members.

Question to Jaffer Machano

Jaffer, you are heading the technical assistance facility for the International Municipal Investment Fund you began doing this before the COVID-19 pandemics struck. Are you worried now that you’re not going to have enough projects to provide to Emanuelle Nasse Bridier (fund manager from Meridiam)  when the fund is capitalized?

Jaffer Machano Municipal Investment Finance Programme Manager, UNCDF  

Jaffer Machano:

To the contrary ,what we are seeing from our discussions with cities is exactly what the mayors have described the need for investment continues and the projects are there and we are on the ground in both of these cities in Freetown and in Kumasi  but the challenges to market have been complicated.

One of the major issue of course for sub-Saharan Africa is that the sub sovereign market technically doesn’t exist outside a few pockets like South Africa, Egypt and to some extent Mauritius.

This is why the legislation that the Mayor of Kumasi has mentioned that it’s in advanced stages for Ghana will be revolutionary for Ghana because that will allow for capital to circulate ,as the Mayor  of Freetown  has suggested and go directly to the cities in order to be consumed in line with the needs of social services. I am not worried in terms of projects but I’m worried in terms of the route that projects will have to pass to bankability and access to capital

Emmanuelle Nasse Bridier: Head of Urban Resilient Infrastructure, Meridiam

There is a good news, we have seen an increasing appetite and interest for infrastructure at a city level , clear willingness of private sector to be involved in the financing of what matters for the cities.

The investment industry have a clear understanding and realize the need  to  invest much more at the city level and  in infrastructure to cover the needs of the population.

We are seeing this trend in surveys too ,  investors are increasing allocations to infrastructure, but now the investment community needs to find a way to invest in projects which make sense for the cities but which are also which are bankable and valuable. How to find projects which can cover the needs of the population while contributing to the economy and recovery and that attracts private sector investors to provide investment capacity despite the perceived risk.

We need to find solutions that involved blended finance  and crowd-in additional counterparties with their capacity to take the risk and to fuel the source of funding  while covering the risks that private sector investors cannot take.

This is a matter of cooperation, preparation and  working all together to fuel the capacity to crowd in private investors

Overall, we have a long list of project, financial solutions and innovation and we are optimistic on the capacity to find solutions because the need is urgent and there is existing funding capacity to be deployed.

Mr Frederic Audras : Head of Urban Development Division, AFD

In 2008 AFD financed directly the city of Dakar without any guarantee from the national treasury and it worked, its was an innovative experience, we did an evaluation of this project financing and it was well evaluated.

After this crisis its really hard to present to a bank board or credit committee to present a new financing project, even it concerns a very important city

We are thinking of developing new guarantee instruments to encourage local banks to address the needs for finances of local authorities investment programs, to mobilize more financing resources for public infrastructure specially in Africa .

We are launching a partnership with the EU to this effect.

This initiative (Cityriz) aims at creating or developing domestic lending markets for local governments in Africa. Cityriz consists of partial guarantee on loans extended to local governments by domestic banks, with the purpose of channeling more financial resources to these entities that are so far underserved by the banking sector.

Cityriz will also lead to longer maturities and better interest rate offered by banks to local governments so that the latter can more easily fund their infrastructure needs such as roads rehabilitation, drainage, economic and social infrastructure, schools, health centers, public space, water supply, sanitation and solid waste management, etc. Priority will be given to investments with climate co-benefits.

The guarantee mechanism will also go with a technical assistance meant to help banks to develop internal tools and processes to address the local government market in Africa.

Targeted loans under CITYRIZ is €100M over the next four years.

Mr. Tshepo Ntsimane, Head, Metros, Intermediate Cities and Water Boards, DBSA

Tshepo highlighted the need for collaboration between domestic financial institutions and international development financing institutions given the impact of COVID-19. The recent sovereign downgrade of South Africa has made it difficult for DBSA and municipalities in South Africa to raise cost-effective funding for much needed urban infrastructure funding. There is a huge need to collaborate with good and strong rated international agencies such as AFD, AfDB, and IFC, which can reduce the cost of funding infrastructure in South Africa.

Furthermore, he stated that DBSA as the largest lender in municipal space in South Africa, its funding comes from domestic bond issuance and borrowing from commercial banks and international DFI partners. Following Johannesburg’s pioneering example, there are now 4 cities in South Africa that have issued municipal bonds. DBSA has been working to partner with government and private sector to increase private investment in municipal infrastructure to lengthen the maturity profile and deepen the capital markets. DBSA also works with international partners and institutional investors to bring credit enhancement into the domestic market to promote private sector participation in the market.

Mr. Kevin Nelson, Urban Team Lead, Land and Urban Office, USAID

Kevin stressed the connection of Own Source Revenue and investment from the perspective of USAID’s shift programmatically and operationally. He first talked about the connectivity between financing and public policy that guides service delivery. In the context of COVID-19, USAID has been focusing on linking urban planning and public health needs as part of the COVID-19 24-month response. From the angle of social contract and innovative development finance, they highlight the role of Own Source Revenue in the urban service delivery model. There has been greater articulation in connecting governance and USAID’s support in policy advisory to enhance cities’ financing self-reliance, specifically in terms of Own Source Revenue and domestic resource mobilization. For example, USAID is implementing a project in Ethiopia supporting local government in home grown economic growth strategy. He also underlined the importance of building a vicious cycle of investing in SMEs using guarantee mechanisms so that they can invest back into revenue streams. One example is a solid waste management project in Southeast Asia, which capitalizes on a fund of US$150 million. It will not only promote local business growth, but also drive city’s economic development.

Ms. Lisa Da Silva, Global Cities Lead, IFC

Lisa concluded the panel discussion by emphasizing that post-COVID-19 municipal investments will take different forms with different stakeholders in each city. COVID-19 is impacting municipal finance heterogeneously, depending from the revenue base and level of fiscal autonomy. It is expected to see a significant reduction of availability of funding and a scale back in capital expenditure. With a very limited budget next year, cities have to be strategic about investments and there is no one-size-fits-all solution for local governments. Furthermore, she suggested that cities can explore new streams of revenue such as fees for tech-based services. Where regulations allow, responsible fiscal decentralization should be promoted, which will allow cities for borrowing or PPPs.

In addition, governance and risk diversification are two important aspects of local government finance. Governance is important for creating ways to mobilize resources and for building economic resilience and financial strengths. Risk diversification will provide comfort for domestic financial institutions and mitigate loss. She also stimulated thinking around land value capture opportunities. How can cities partner with private sector in projects? How can cities become an investor and contribute land as part of a project and share revenue stream of the project over a longer time. In conclusion, resilience and green economic recovery is what investors look for.

Summing up David Jackson committed UNCDF to work with the panelists on the policy and structural reforms required for a global financial ecosystem that works for cities and local governments, which becomes more critical in the light of the current pandemic and its recovery. After all, Local Government Finance is Development Finance and the pandemic has taught us not only who are the true essential workers, but what are the essential public insititutions for our collective common good. Watch this space for more details.

Local Government Finance is Development Finance #1

Dear friends and colleagues,

Welcome to the continuation of the COVID-19 Local Government Finance blog. Over the last few weeks we have received widespread feedback about our sequence of blogs and guidance notes on the local government finance response to COVID-19. The common denominator is confirmation of the title of this blog. Not everyone gets it – but most respondents have supported our assertion that local government finance is development finance. This includes using Operational Expenditure Block Grants as a means to accelerate the response to and economic recovery from the pandemic as highlighted in Edition 4 of the Local Government Finance COVID-19 guidance note, it includes applying Intergovernmental Fiscal Transfers to accelerate climate resilience as in the 15-country Local Climate Adaptive Living Facility, it includes financing sustainable cities with sub-national blended finance through the International Municipal Investment Fund, and it includes building state institutions in Somalia from the bottom up through the Joint Programme on Local Governance. The purpose of this blog is to tell the story of local government finance as development finance by highlighting policy reforms, investments and other happenings in the world of local government finance.

Are you:

  • a local government representative or official seeking to deliver benefits for citizens that you serve?
  • a politician, government official or international development professional interested in accelerating Agenda 2030 and the achievement of the Paris Agreement targets?
  • an interested individual who would like to understand better why local government finance is development finance?

If you answered yes to any of the above questions, then you may find this blog useful.

The Editorial of the Financial Times of Tuesday 30 June 2020 gets it, declaring that “Local governments deserve national help” and stating:

“The difficult balancing act between local autonomy and financial responsibility long predates Covid-19, and presents different challenges from one country to another. But in the special circumstances of locked-down economies, all countries face a similar risk; that subnational fiscal constraints can become the Achilles heel of the otherwise well-judged national economic rescue packages launched to offset the economic damage.”

National governments have realized that in supporting businesses and individuals, “moral hazard” and the risk of rewarding past irresponsible behavior should be far down their list of concerns. The same judgement should apply to their own local governments” (Financial Times editorial, Tuesday 30 June 2020.)

Powerful words. Indeed, why should businesses get bailed out whilst fiscal space is sucked out of local economies and societies, leaving citizens to pick up the bill in terms of higher taxes and lower levels of services? At the local level the private sector requires an engaged, liquid and confident local public sector to provide the enabling environment for it to flourish. This will be critical in the economic recovery from the pandemic during which many local governments will be simultaneously maintaining local services whilst leading economic development strategies to rebuild local fiscal space and local employment – sometimes by exploring new markets and areas of economic activity.

The Local Government Finance COVID-19 Guidance Note highlights the essential role local governments are playing in the response to the pandemic. The United Cities and Local Governments and UN Habitat live learning series has reminded us that the crisis has not only exposed who are truly the essential workers. It has also reminded us of what are the essential institutions – including often overlooked local governments.

Lessons from local economic development practice are that living standards rise when value chains retain value in the local economy and create clustering, specialization and positive externalities. This requires targeted investment and increases in productivity that usually accompany the urbanization process. Jean Pierre Mbassi, President of United Cities and Local Governments – Africa, explains in a recent podcast interview that the current rapid urbanization in Africa is characterized by low increases in productivity and that the continent is not yet reaping the full potential of its growing cities. This is critical because Africa’s urbanization is accelerating, for example the growth rate of Lagos is illustrated by figure 1. This pattern of rapid urban population increase is repeated in all countries, in intermediary cities as well as larger ones. Many places that were small towns within living memory now have populations of over 1 million inhabitants (see figure 2).

Figure 1. Urbanization Growth in Lagos (1950 – 2035)

Data source: UN World Urbanization Prospects 2018 – Annual Urban Population at Mid-Year (thousands)

Figure 2. Urbanization Growth in Africa (1950 – 2050)

Data source: UN World Urbanization Prospects 2018 – Annual Urban Population at Mid-Year (thousands)

In the context of the recovery from the pandemic this is an issue of national importance for Africa’s governments. UNCDF is hosting a webinar from 9:00 AM to 10:30 EST on 2nd July  to explore how urban investment finance is impacted by the crisis. We will be asking the following questions. Will investment pipelines be put on ice? Will they be accelerated? Will the policy and financial environment make it easier or more difficult to bring sub-national blended finance projects forwards? Will the type of investment change to prioritize projects that not only generate a revenue to repay the finance, but also contribute to rebuilding local fiscal space? Finally, how can the recovery be as green and sustainable as possible?

We will be exploring these questions in the webinar. The webinar will begin with presentations by the Honorable Mr. Osei Assibey Antwi, Mayor of Kumasi, Ghana and Honorable Ms. Yvonne Aki-Sawyerr, Mayor of Freetown, Sierra Leone who will outline the current investment climate in their cities and the state of their capital investment plans.

  • Kumasi, population 2.5 million, is the capital of the Ashanti region, a formerly independent kingdom pre-dates the formation of Ghana by 100 years. The city has a rich cultural heritage that is particularly evident in smaller surrounding towns. Trade, textiles, farming and mining are leading industries in Kumasi. It is among the largest metropolitan areas in Ghana
  • Freetown is Sierra Leone’s capital city and the seat of government. It is the largest city in Sierra Leone and the engine of Sierra Leones economy, creating 30% of the country’s GDP despite housing only 15% of its population, and occupying less than 0.5% of the national land mass. With over one million residents, and a growth rate of 4.2% per annum, Freetown’s population is expected to double by 2028

Then the panel constituted of Mr. Jaffer Machano, Municipal Investment Finance Programme Manager at UNCDF; Mr. Frédéric Audras, Head of Urban Development Division of AFD; Mr. Kevin Nelson, Urban Team Lead, Land and Urban Office at USAID; Mr. Tshepo Ntsimane, Head – Metros, Intermediate Cities and Water Boards at Development Bank of Southern Africa (DBSA); and Ms. Emmannuelle Nasse Bridier, Head of Urban Resilient Infrastructure at Meridiam, will outline their responses to the questions raised above and the presentation by the mayors. Finally Ms. Lisa Da Silva, Global Cities Lead of the International Finance Corporation (IFC) will provide an initial response to the panel discussion.

I look forwards to moderating the webinar and seeing many of you online. For those that cannot make it, we will be offering a live follow up session later that will include an online question and answer session that can dive deeper into the questions raised.

Best wishes and stay safe,

David Jackson,

Director Local Development Finance,

United Nations Capital Development Fund