Boundaries of urban infrastructure and markets for labour and goods typically extend beyond administrative boundaries, especially in rapidly growing urban areas. This metropolitan-administrative mismatch poses several challenges for effective financial planning and management. This is mainly because local capacity to manage complex financing is often constrained by the relatively small size of administrative entities in a metropolitan region. On top of this, it is extremely difficult to resolve this issue, since administrative boundaries are notoriously difficult to change.
This situation provides a strong rationale for project finance arrangements that cut across municipal boundaries. Since economies of scale often apply in the provision of infrastructure and services, metropolitan cooperation can reduce the costs of regional-level services such as waste disposal, power generation, or large investments in regionally significant projects such as sanitary landfills, water treatment plants or specialized hospitals.
Besides economies of scale and limited local capacity, there are other justifications for the establishment of institutions that are designated for coordinating numerous administrative units. For example, economic incentives and regulatory frameworks including tax policies, business regulations, and subsidies can have spatially distorting impacts if applied unevenly across an urban economy. Competition between municipal juris-dictions can undermine regional collaboration and exacerbate spatial inequality, reinforcing pockets of poverty and isolation and creating social instability in the longer term.
Consequently, given the diverse and jurisdictionally fragmented nature of metropolitan economies, a regional coordinating institution is an important component for an effective urban financial system. Such coordination can manifest in various types of coordinating entities. A more effective model may be the voluntary formation of metropolitan councils, secretariats or authorities. These higher-level arrangements would have to be complimented by metropolitan-wide service providers managed on a corporatized or concession basis. Precedents for both forms (voluntary councils and metropolitan boards) exist in most countries and can largely be undertaken under existing legislation.
To transition from ineffective current practices, national policy needs to encourage the formation of either metropolitan districts or voluntary, but legally binding, coalitions linking local governments in an urban agglomeration with a view of building financially viable entities that can sustainably plan for and finance the needed urban services. To support this national priority, key reforms/actions should be implemented to ensure the effective use of local and regional finances and assets at the metropolitan level. Some of these actions could include the approval of legal provisions to create metropolitan entities with some degree of financial autonomy or the establishment of specialized institutions to coordinate specific sectors.
Various financing arrangements
A primary rationale for decentralized finance and service provision is responsiveness to local demands and priorities. There is a trade-off between local-level responsiveness and the benefits of regional coordination when consider-ing which administrative level can best administer any financial management function.
With respect to the geographical scope, the area involved needs to include at least the built-up area of the urban core, but preferably the economic hinterland of the urban area as well. This is important 1) to prevent adjacent jurisdictions from ‘free riding’ on city services and infrastructure and 2) so that all households and enterpris-es benefiting from these can contribute to their development and maintenance through taxes on income or assets or through user charges.
Metropolitan financing will often involve differ-ent levels of government. Although it might seem to be efficient for lower administrative units to be responsible for all the provision of public goods and services; there are some conditions where higher administrative units are more efficient. This is because for some provisions, economies of scale might exist; making it more cost effective if they were delivered on a broader basis. Economies of scope might also be prevalent, making national bureaucracies more efficient providers than local bureaucracies, due to the central government’s ability to attract more qualified people.
Now, the question is, which services or sectors lend themselves more to decentralization, and which do not? According to Prud’homme, three characteristics are relevant when answering this question. These are the ‘externability’ of the services, their ‘chargeability,’ and their ‘technicity.’
The externability of a service refers to the external effects and geographical spillovers associated with the service. Some infrastructure services, such as highways or power production, matter very much outside the area in which the infra-structure is located or the service provided. In such cases, where the externability of the service is large, it should be provided at a higher administrative scale.
Chargeability of a service refers to the ease with which the services can be financed by local revenue sources. The greater the ability to charge for a service, the easier it is to decentralize it.
The technicity of a service, on the other hand, refers to the degree of technical and manage-rial expertise required to provide the services. Garbage collection is much easier to provide than bulk clean water. The lower the technicity of a service, the easier it is to decentralize because economies of scale and scope associated with its provision will be less important, and therefore the potential production efficiency losses will be minimal.
Given the above, the table below shows a general metropolitan finance arrangement among different layers of governments.