If debt financing is an option, the municipality will need to assess whether the PCE will generate sufficient revenues to cover debt service. Risk assessment, as well as sensitivity testing under scenarios where revenue projections fail to materialize, is prudent to ensure that the municipality will be able to meet its financial obligations. In cities where debt financing is an option, legal regulations and internal procedures governing borrowing will play a role in assessing whether debt financing is a viable alternative for the PCE. For example, planners who designed a city extension in Iloilo, Philippines, could count on good compliance with property taxes from residential and commercial developments in the PCE. This opened the option of borrowing to finance a portion of public investments with plans to pay debt service through property tax revenues. This borrowing will comply with debt service limits established by the legal code.
After an initial attempt to match costs and funding, adjustments may need to be made to achieve financial feasibility. These adjustments can fall into three categories: changes to planned expenditures, development of alternative financing strategies, or changes to implementation phasing.
Changes to planned expenditures
It may be necessary to alter the plan or forgo some planned improvements due to their cost. This prioritization process must consider economic, social, and environmental goals. The views and priorities of key stakeholder groups, including vulnerable populations such as women, youth, and low-income households, should be considered.
One example of adjusting planned expenditures is the PCE in Rubavu District, Rwanda. The initial plan far exceeded the district’s capital budget. To improve feasibility, UN-Habitat recommended that the three largest capital costs be reduced. The first was the piped sewerage system originally planned, which would require huge investments, including a costly wastewater treatment facility. Instead, subsidies for high-quality on-site sanitation would reduce capital costs while still providing adequate sanitation for the city. As the city grows economically and in population, both the need and the revenue for a piped sanitation system will increase.
The second major planned expense was for social housing. UN-Habitat recommended that instead of providing fully built houses for low-income house-holds, the district could instead facilitate access to low-cost serviced land, allowing households to build incrementally on well-planned plots that will transform over time. Under such an arrangement, the dramatic reduction of costs would allow the district to reach more households while ensuring that funding for basic infrastructure and services remains. While housing quality will likely be low at first, access to services and security of tenure provide stability for gradual self-upgrading. At the same time, the lowest-income families may still need support to obtain a basic dwelling.
The third major cost reduction was based on the idea that the district doesn’t need to pave all Phase I roads immediately, but can leave local connections unpaved as well as some of the width of major roads. Importantly, adequate space for street paving and widening for the long-term transformation of the district will still be reserved and protected from private development. In cases like Rubavu, less-than-ideal services should be planned in a way to allow for upgrading at a later stage of development.
Another example of alterations to an extension plan based on financial analysis is the City of Galt, California, U.S.A. Galt is a small agricultural town, but in 2011 decided to update its land use plan due to projected population growth that will likely more than double the city’s size by 2030. The city analyzed the public expenditures and revenues associated with a residential expansion plan and found that its initial plan was not financially feasible. From there, the City considered alternative scenarios involving higher densities and a mixture of uses, and deter-mined that mixed-use development was the best option from the standpoint of public finances, providing enough revenues to complete payback of public loans within the required 30-year time limit. The financial model showed a fiscal gap of approximately US$600 per unit for the original fully residential plan, showing that the city could implement it only with additional fees totaling $600 per new unit.
Development of alternative financing strategies
A planned city extension provides an opportunity to pilot new financing strategies. Because the government will be creating value through good planning and public services, this value can be leveraged to generate public revenues or in-kind private sector contributions. The municipality should consider the possibility of developer exactions and public–private partnerships, in addition to land-based financing instruments such as betterment levies and sale of development rights. In most cases, some of the PCE’s residents will be less able to bear the burden of taxes and fees than others. This should be incorporated into financial planning for the sake of both financial feasibility and social equity. A community serving only middle- to high-income households does not serve the core purpose of a PCE, which is to serve as an alternative to informal, unplanned, and unserviced development. If the PCE excludes poor households, they will settle elsewhere.
Piloting of new financial instruments may require creation of a new agency or coalition with capacity to manage implementation, such as a municipal development corporation or a special purpose vehicle. If the municipality lacks authority or capacity to use new financial instruments, the new agency may need to exist at a higher level of government, with municipal representation.
Changes to implementation phasing
The buildout of infrastructure and services can be spread over time to reduce the financial burden and make revenues from the initial phases available for reinvestment in later phases. This can be particularly useful where investments in Phase I will provide a substantial increase in local revenue. Some PCE-wide investments will be necessary early on (for example, connector roads or a solid waste facility), while others may be built out at a pace to match population growth and avoid unplanned development spillover.
Typically, delineating road and public space reserves for the entire extension during the first phase of implementation is a shrewd tactic to ensure that if unplanned development does occur, public spaces will be protected. It can be legally, financially, and socially difficult to reclaim this space later if it becomes occupied.