Space – The Final Frontier: Its closer than you think

Welcome to the latest local government finance blog from United Nations Capital Development Fund. Finance ministries, Central Bankers, and Local Governments from a group of developing countries are meeting this Thursday November 5th Local Finance Initiative annual board meeting to discuss strengthening domestic capital markets and promoting investment in local economic development by domestic banks.

This is the first of three blogposts leading up to the global board meeting which will highlight some of the local development finance issues that will be addressed. Today’s post is about how the Local Finance Initiative applies geographical economics to finance at the (real) frontiers. Tuesday’s post is on financing local economic transformation. Wednesday’s post is about financing urbanization,

Fans of Star Trek will recall the original series featuring a collection of planet Earth’s best and brightest including Lieutenent Nyota Uhura, Lieutenant Hikaru Kato Sulo and their colleagues venturing beyond our solar system “To explore strange new worlds. To seek out new life and new civilizations. To boldly go where no one has gone before”

Space is not only a galactic frontier, it remains a terrestial one. The continuing pandemic and our different responses to it demonstrates that places and spaces remain unique across the globe. Whilst ideas and money flow across some frontiers at the speed depicted as science fiction in Star Trek 50 years ago, paradoxically sometimes the people who thought those ideas or whose labour made that money find that frontiers remain stubbornly terrestial, especially if they are seeking new lives.

In economics space is also a frontier. Orthodox economic theory is often spatially blind and dismisses the effects of space and place as market imperfections or market failures. In this way, abstract theory supposes a world without space and distance and sees their existance as a nuisance that gets in the way of its assumptions about how markets should “ideally” operate. By contrast, Local Economic Development takes locational specificity as the starting point and builds outwards on the foundation of local resources (human, environmental and financial). This is why whilst everything happens somewhere, not all development is local development. John Tomaney explains this well in the Capital LoCAST podcast earlier this year. Leonardo Romeo puts it like this…

Clearly it [Local Development] is not just development that happens locally (as all development ultimately does), but rather development that leverages the comparative and competitive advantages of localities and mobilizes their specific physical, economic, cultural, social and political resources. Said differently, in the expression local development the adjective local does not refer to the where, but to the who and the how of development promotion. It refers to the actors that promote it and the resources they bring to bear on it. Development is local if it is endogenous, open and incremental, that is: if it makes use of locality-specific resources, combines them with national/global resources and brings them to bear on the national development effort as additional benefit in a positive sum game.(Romeo, The Imperative of Good Local Governance, Chapter 3: 2013)

Frontiers are a great opportunity for local development because the latent place based economic potential is often untapped. In many places the road becomes less trafficked and the economic activity less noticeable in frontier regions. Cross border trade means sealed containers travelling between crossing the border rather than actual trade between the local economies of the border regions on each side of the frontier.

Each side of the frontier is a different economic space with different factor endowments that can complement those on the other side. The opportunity for arbitrage can also exist. The regulatory environment and availability of capital is different on each side. In theory, this presents opportunity. In practice however border regions can be poorer than other parts of the country and often face inwards towards the hinterland rather than outwards towards the opportunities across the frontier. Yet, there are also cases where the frontier does act as a magnet to economic activity.

How can we promote economic development in frontier regions of developing countries? This issue becomes more critical in the light of the recent report from the United Nations Committee for Development Policy which calls for the building of productive capacity in the least developed countries as part of the economic recovery from COVID-19. For the reasons outlined above, frontiers provide a specific set of circumstances that can provide the foundation for a local development finance approach that puts space and place at the heart of the matter.

With the generous support of Luxembourg, Sweden, Switzerland UNCDF, with other UN agencies, has been working in cross border areas for over a decade. This blog entry provides three recent examples that succintly but vividly explain how local development finance in frontiers can have a rapid catalytic effect, sparking exponential increases in living standards. Exactly what the world will need to recover from the Coronavirus

Tanzania – Burundi frontier

Look at a map of the world. Many frontiers follow natural features such as rivers or ridges, others are straight lines drawn during negotations far from the terrain. Communites and economies have been divided by these lines and the new political realities that they produce. Kakonko, on the border between Tanzania and Burundi is one example of how borders imposed from outside reduced pre-existing trade patterns.

The good news is that this is changing, and fast. A local development finance approach is driving public and private investments that are quickly strengthening the local economy and raising household incomes. The Kakonko Cross Board Market will have more than 23 new buildings in the village for trade and public services (e.g. Police Gender Desk, immigration services). Over 150 youth and women have been allotted permanent trading stalls. More than 100 women in Muhange Women Cooperative Group have benefitted from trainings on good agricultural practices, post-harvest handling and storage, access to finance, access to markets, and gender awareness. The Kakonko District Council’s own source revenue from this area is also expected to increase fourfold in one year of operation.

Don’t take my word for it – the short video above provides inspiring details..

Full credit to the Tanzania One UN fund for their support of the Kigoma Joint Programme in which this approach is embedded.

Burkina Faso – Niger frontier

Cross frontier local economic development in the Sahel

Security concerns often hold back a frontier economics approach. Traficking, (unwanted) migration, contraband and terrorism are real. Yet if designed correctly, local development can mitigate these concerns. A recent example is in West Africa’s Sahel region where UNCDF worked with the ECOWAS peacekeeping operation, UEMOA monetary union and the governments of Burkina Faso, Mali and Niger. At the confluence of these three countries security concerns overlapped with the nomadic cattle trade and it was possible to boost the traders and other local families whilst reducing security risk by investing in cross border value chains taking advantage of factor endowments on each side. The diagram below illustrates the interlinking of investments in border economic activity stimulated by the local development finance intervention.

UNCDF invested of $260 000 to pilot this process of cross-border local development to support for the implementation of pastoral infrastructures.

Full credit to the government of Luxembourg for supporting UNCDF and the Sahel countries to make this happen.

Cambodia – Thailand frontier

Municipal solid waste disposal in Poit Pet

The current pandemic means that Cambodia is keen to accelerate its economic integratation with its neighbours and diminish its relieance on global value chains. Poi Pet, on the border with Thailand, expanded from 43,000 inhabitants in 1998 to 90,000 in 2008 and over 140,000 today. Vehicle parts manufacturing in Poi Pet is supplied by cheap electricity from Thailand. The long closed international rail link was re-established in 2018. The local government in Poi Pet is struggling to keep pace with the rapid increase in waste.

The government and UNCDF are working on an innovative Public Private Partnership for a $30m waste to energy project in Poi Pot which will simultaneously fix the waste problem and generate power for the expanding economy. This uses incineration with energy recovery technology and is expected to have an annual waste processing capacity of 50,000 tons and an electricity generation output of 25,000 MWh per year. The plant will also supply steam for nearby processing industries. The financial structuring includes creative solutions that build on the border location.

Full credit to the governments of Sweden and Switzerland for supporting UNCDF and Cambodia to make this happen.

Finally, whilst borders are often the result of past conflict they present great opportunities for peacebuilding. The European Union began with cross border trade along the River Rhine borders following the devastation of the 1939 – 1945 war.

Working with the Swiss and German governments, UNCDF is also supporting cross border trade and development in another area – Ground Water Management and Water Basin Management with a strong focus on peacebuilding through the sharing of water resources. But that is a subject for another blog – watch this space!

International Municipal Investment Fund news…

Technical Assistance Facility to be launched at 75th Anniversary of United Nations at Global Governance Forum Thursday 17th September

Dear Friends and Colleagues,

Following a long northern hemisphere summer the Local Development Finance blog has returned… After the initial COVID-19 responses, the focus of many local governments has largely moved to the monumental challenge of driving economic recovery, rebuilding local fiscal space and mitagating the continuing effects of this global pandemic whose impact is most acutely felt at the local level.

One critically important feature is that long term development plans and capital investment programmes must continue. This blog unites those who understand that local government finance is development finance and that local investment is a vehicle to accelerate the achievement of Agenda 2030. Our recent roundtable with cities and Development Finance Institutions discussed how the Covid-19 crisis has not halted work on high impact local investments but it has altered some of the calculations (see previous blog entry).

The global pandemic has hit towns and cities hard and the global recovery will be urban. On the 75th anniversary of the United Nations it is useful to reflect on the changed demographics of the world and the type of financial arrangements and institutions that are now required. When the UN began the world was predominatly rural with only 30% of people living in urban areas. By 2010 we reached a 50/50 share. Today around 66% of us live in towns and cities – a complete reversal of the situation at the founding of the United Nations.

This reality required a refreshed development paradigm and innovative financial thinking. In 2016 the New Urban Agenda was adopted at the United Nations Conference on Housing and Sustainable Urban Development (Habitat III) in Quito, Ecuador. It was endorsed by the United Nations General Assembly in December 2016. UNCDF shared its reflections on development financing and cities in the New Urban Imparative for Secondary Cities and increased its capacity in local infrastructure finance. UNCDF and UNDESA also published best practice case studies in Financing Sustainable Urban Development in the Least Developed Countries. In 2018 UNCDF began working with development finance institutions and United Cities and Local Governments (UCLG) in the Malaga Coalition for a global financial ecosystem that works for cities and local governments.

Malaga coalition inaugral meeting – 2018

At the first meeting of the coalition in 2018, UCLG President Parks Tau argued that “it is time for the international community to admit the insufficient allocation of resources to meet the challenges of sustainable urban development“. With regards to the Financing for Development the UCLG President also stressed the need to monitor the commitment made by Member States in paragraph 34 of the Addis Ababa Action Agenda. Within the framework of the global agendas, Local and Regional Governments investment and budgeting are part of the needed paradigm shift. From the local level, innovative practices emerge, such as implementing inclusive and participatory decision-making mechanisms (SDG 16.7) or enhancing financial instruments to access Climate Finance such as the Local Climate Adaptive Living Facility (LoCAL).

It was agreed that a dedicated local government friendly investment fund would contribute to the goals of the coalition by making capital available at the right price and in the right format for local investments with high impact. Such a fund would also contribute to policy and regulatory reform through demonstration investments that could be replicated by others, particularly in co-financed with domestic financial institutions.

By the second meeting of the coalition in 2019, UNCDF and UCLG, with their technical partner FMDV had begun the International Municipal Investment Fund initiative to channel private sector finance from pension funds and other investors towards impactful projects sponsored by cities and local governments. Each project will deliver a measurable impact towards Agenda 2030 (the Sustainable Development Goals) and the Paris Agreement. The fund will be dedicated to developing country cities and will demonstrate practical examples of how expanded local fiscal space can drive development.

During 2019 UNCDF completed the transparent selection process for the third party fund manager. The coalition partners also began work on the submissions from an initial city self-assessment and open call for projects issued through the UCLG network. At the UCLG congress in Durban, November 2019 it was announced that Meridiam was selected as the Fund Manager for the International Municipal Investment Fund.

UCLG President Parks Tau and UCLG General Secretary Emilia Saiz at Durban Congress 2019

In January 2020 UNCDF launched the prospectus for the Technical Assistance Facility for the IMIF (IMIF-TAF) and provided some initial funding to enable work to begin on the IMIF pipeline. Thanks to the generous support of Sweden and Switzerland (through the BluePeace initiative) the IMIF – TAF is now operational. It uses UNCDF’s local development finance “dual key” pipeline management and investment structuring process – which in 2019 was awarded by the International Finance Corporation in the financial product innovation category at the SME finance awards. For the IMIF, the process is adapted to local government led infrastructure finance.

On Thursday 17th September 2020 at 09.25am New York time IMIF Technical Assistance Facility will be formally launched at the Global Governance Forum taking place during the UN General Assembly. The session of the Forum, chaired by Gro Harlem Bruntland former Prime Minister of Norway, will highlight noteable sustainable development partnerships on the occasion of the 75th Anniversary of the United Nation’s.

It is fitting that one of the chosen partnerships recognises that the world is now two thirds urban. Agenda 2030 is an urban agenda. The route to the SDGs is not an elevated expressway on concrete pillars; rather it is a winding route that passes through every town and city and builds sustainability, resilience and better living as it goes.

In two short years the inspiration of the first Malaga coalition meeting is becoming a reality. Many thanks to the numerous governments, cities and partners for the leadership, support and hard work that has coalesced to make this happen.

The event will be live streamed at the following link

Translation is available here