Overview of municipal finance

Cities are a driving force of the 21st century. Through bringing large numbers of people into close proximity, they spark economic growth, foster innovation, and generate prosperity. But they face the pressing challenges of creating a livable environment for their residents, enabling economic activity that benefits all citizens, and fostering urban development that is environmentally sustainable, equitable, and resilient to disruptive forces. Particularly urgent is the need to finance this development: To achieve the Sustainable Development Goals, an estimated $3 trillion to $4 trillion is needed annually. In an increasingly urban world, cities play a pivotal role in closing this financial gap.

Overview of the publication

Finance for City Leaders is organized into three parts: Principles of Municipal Finance (Chapters 1–4), Designing Financial Products (Chapters 5–15), and Crosscutting Issues (Chapters 16–18).

In Chapters 1 and 2, Dominic Burbidge and Nic Cheeseman set the context for the rest of Finance for City Leaders. They lay out the guiding principles of municipal finance, explain why municipal finance matters, and introduce a number of tools for raising local own-source revenues discussed in greater detail in Part 2.

Chapter 3 by Michael Lindfield, Marco Kamiya and Huascar Eguino, discuss the challenges local governments face such as insufficient and unreliable transfers from central government, poor tax collection, weak fiscal management and others. The authors then give general recommendations to address these challenges including the mechanisms on how to improve outdated governance systems, enhance endogenous and exogenous revenues and build better local financial asset management systems.

Chapter 4, authored by Armando Morales, Daniel Platz, and Leonardo Elias Letelier, examines the theory behind, arguments for and against, and success factors of fiscal decentralization. The authors argue that fiscal decentralization is an important component of sustainable and autonomous municipal finance, and that it must take place within a regulatory and legal context that empowers municipal governments while also holding them responsible for their expenditures and own-source revenue.

Part 2 (Designing Financial Products) begins with Chapter 5, by Lourdes Germán and Elizabeth Glass, who discuss non-tax own-source municipal revenues. They introduce a number of non-tax tools for generating own-source revenues including, among others, user fees, fines, and land use fees. This chapter argues that non-tax own-source revenues are essential to boosting municipal revenues and supporting municipal fiscal autonomy.

In Chapter 6, John Probyn and Joshua Gallo discuss the concept of creditworthiness and its importance to cities in establishing long-term financial sustain-ability and receiving improved terms of financing from the capital market. They provide an overview of different concepts in regards to creditworthiness and what a city needs to demonstrate to be deemed creditworthy. There is also a brief review on a sample of rating agency criteria, differentiated as those under the direct mandate of a city and those that are exogenous to the local government.

In Chapter 7, Devashree Saha and Skye d’Almeida argue that green municipal bonds are an effective financing tool for projects that stand to benefit both the environment and society. The authors begin by explaining what green bonds are and examine the current state of the green bond market. The last half of the chapter reviews some of the challenges to obtaining green municipal bonds and how municipalities can access this important source of financing.

Chapter 8, by Lars M. Andersson and Pavel Kochanov, discusses pooled financing mechanisms in which a group of municipalities aggregate their borrowing needs and raise their total financing needs together on the capital market. The authors argue that this form of raising capital is especially important for small to medium-sized cities to be able to access long-term and fairly priced debt.

In Chapter 9, Le-Yin Zhang and Marco Kamiya discuss the pros and cons of public–private partnerships (PPPs). The authors argue that PPPs are important financing mechanisms that have had widespread success in both developing and developed countries. Despite having their own set of regulatory challenges, they have proven to be a powerful tool for financing important infra-structure projects.

Chapter 10, by Liz Paterson Gauntner and Miquel Morell, develops a methodology for financing planned city extension (PCE). The authors argue that PCE provides the necessary framework for sustainable urban growth, which must be implemented following a “three-pronged approach,” incorporating urban planning and design, rules and regulations, and public financial management.

Chapter 11, by Siraj Sait and Dr. Rami AbdelKafi gives an overview of Islamic Municipal Finance, detailing its growth and prominence over the past two decades. The author’s differentiate between Islamic Finance to different forms of conventional finance and discuss why Islamic Finance matters in the global context. Lastly, they examine the different types of Islamic Bonds (Sukuks) and describe how they generally work.

In Chapter 12, Lawrence C. Walters and Liz Paterson Gauntner review the instruments commonly used to engage in land value sharing and raise revenue based on land value and land attributes. The authors argue that while both theory and practice support the use of land-based revenue sources, challenges to successful land value sharing must be understood when implementing it.

In Chapter 13, Greg Clark, Tim Moonen, and Doug Carr examine the role of real estate development in developing cities. The chapter begins with a discussion of the merits of managed urban growth, followed by an explanation of how cities can use planning and asset management to create and capture value. The authors then assess the emerging role of city growth planning and the need for analytical frameworks for intelligent planning, followed by an overview of the role and value of coordinated land use planning. The chapter then explores ways in which public authorities can attract private capital co-investment, which is followed by a discussion of the need to acknowledge underlying issues that often affect real estate investment in developing cities. The chapter concludes with an examination of the role of real estate planning and development in making cities competitive.

Chapter 14, authored by Dmitry Pozhidaev and Mohammad Farid, provides an overview of tools for improving capital markets for municipal finance in least developed countries (LDCs). After examining the various methods of using capital markets for municipal finance in LDCs, the authors describe financial and non-financial mechanisms most suitable for municipalities in LDCs. The chapter concludes with a discussion of the decision-making process and specific steps used by municipalities to access market-based funds (conventional or otherwise).

Yoel Siegel and Marco Kamiya conclude the second part with Chapter 15 on local infrastructure development funds in small and medium-sized cities. The chapter presents both a background and implementation framework for financing local infrastructure using local infrastructure development funds. The authors emphasize the need for an appropriate legal and regulatory framework for infrastructure development funds, as well as a comprehensive approach to long-term sustainable financing.

Part 3 concludes the book with three chapters on crosscutting issues. In Chapter 16, Kerstin Sommer, Katja Dietrich, and Melissa Permezel explain how financing participatory slum upgrading promotes inclusive urbanization, adequate living conditions, and prosperity for all. They also examine the challenges of creating inclusive urban spaces and detail UN-Habitat’s Participatory Slum Upgrading Programme, a promising template that exemplifies many of the concepts discussed in the chapter.

Chapter 17, by Taib Boyce, Sonja Ghaderi, Brian Olunga, Javan Ombado, Rocío Armillas-Tiseyra, Judith Mulwa, Douglas Ragan, Imogen Howells, and Hazel Kuria, explains how youth, gender, and human rights—major mandates of the United Nations and issues at the core of the Sustainable Development Goals—relate to municipal finance and why they matter for city leaders. The chapter offers frameworks and specific examples to help city leaders incorporate these issues into their local agenda for promoting city prosperity.

Chapter 18, authored by Younghoon Moon, Marco Kamiya, and Yasuo Konishi, examines local economic development from the perspective of spatial analysis and urban layout bringing value chains and supply analysis into the urban development realm. The chapter introduces an innovative local economic development methodology to help city leaders spur economic growth, promote competitive sectors, and generate jobs, which provides the foundation for sustainable local own-source revenue generation.

Notes of appreciation

A majority of the chapters in this handbook were made possible by voluntary contributions; our greatest gratitude goes to the authors. Ranking from very senior to young researchers, they have combined their experience and insight with great tenacity and dedication. To all authors we extend our sincere appreciation.

This publication would not have been possible without financial contributions from UN-Habitat, sponsorship from International City Leaders, and Oxford University, and the support of UN-Habitat Executive Director Dr. Joan Clos, who is a major advocate of getting the finances right as part of sustainable development policies. We also extend special recognition to UN-Habitat’s former Urban Economy branch coordinator, Gulelat Kebede, whose support was decisive in moving this project forward.

We received technical contributions from authors from Oxford University, African Studies Center; Bartlett Development Planning Unit, University College London; Jones Lang LaSalle (JLL); C40 Cities; the Brookings Institution; and the International Monetary Fund. The ideas provided in this handbook do not compromise their organizations.

We thank all contributors, sponsors, and partner organizations for making this publication possible.

Marco Kamiya is coordinator of the Urban Economy branch of the United Nations Human Settlements Programme (UN-Habitat).
Le-Yin Zhang is a senior lecturer and course director of M.Sc. Urban Economic Development at the Bartlett Development Planning Unit of University College London.