The main challenge facing local government is how to create the conditions for mobilizing private sector resources to finance infrastructure and construct the appropriate facilities. This is not an abdication of public sector responsibility—quite the opposite, in fact. Local governments need to set standards, develop enforceable procedures, and anchor development fees/levies in specific by-laws/ordinances. They must establish dedicated organizational and institutional frameworks to manage infrastructure development in a way that enables them to harness often-hidden local economic resources.
Developing and implementing such a strategy of action should have four primary components: a feasibility analysis, authorizing legislation, financing strategies, and organizational platforms for local development.
A feasibility analysis determines not whether infrastructure development is feasible in a given city, but rather how it can be designed to be feasible. This type of analysis involves:
- Assessing the scope of need of different types of infrastructure (roads, sewage treatment, water treatment, waste disposal, power generation, etc.). This needs to be based upon population projections, the number of housing units, and existing infrastructure capacity. This assessment must also identify the city’s strategic assets and assess what types of infrastructure are needed to link these assets to each other and to different population groups.
- Assessing the economic capacity of the different populations moving into the city. This entails determining how much different communities can pay for housing and related infrastructure, what share of the housing costs would go towards infrastructure, and what part of infra-structure costs residents should pay versus what part should be transferred to the business sector.
- Determining the standards and technologies best suited to meet the demands for urban growth for both residents and businesses.
- Estimating the overall costs for the different types of infrastructure required, as well as specific costs for different geographic and socio-economic areas.
It is important to ensure that the municipal level of infrastructure planning dovetails with regional- and national-level infrastructure projects. This is critical both for ensuring that infrastructure development is coordinated and to properly divide the different levels of funding responsibilities.
In the past, infrastructure solutions—septic tanks, wells, runoff drainage, and even dirt roads—were tenable at the household level. But this is no longer feasible given today’s rapidly growing urban areas. Although there are regional/county-level initiatives for water purification, sewage treatment, and other types of infrastructure, the legal authority for local government to set and enforce standards is often weak. Equally, if not more critically, there are often no legal mechanisms for local government to finance the cost of infrastructure construction. (For example, there are no legislated provisions for deficit financing or for entering international financial markets.) In many instances, there are no legal statutes that give local governments the authority to make provision of infrastructure, or payment for the provision of infrastructure (through development fees), a condition for approval of building permits.
The transition here is not only one of setting and enforcing standards, but a change in the position and role of local government. It places the burden of infrastructure provision on the municipality and necessitates that it has the authority to finance infrastructure development. In the reality of devolution, local government today is often already accountable to the residents, but without the tools to deliver.
Passing a bill for the levying of development fees is one possible legislative remedy. Such a bill would not only integrate the different legal anchors, but also give the municipal government a mechanism for enforcement. Local government legislation (ordinances or bylaws) is needed to mandate development fees and give local government the authority to do the following:
- To make granting a building permit conditional upon payment of a development fee or provision of the infrastructure as set by municipal standards (secured by some form of collateral or bank guarantee).
- To give the municipality the authority to levy development fees for roads, water supply, sewage treatment, and drainage, and for these fees to be paid to the local government in a closed account (specifically for the given area of development or the related regional system) in keeping with the pace of infrastructure construction. This is to be done in stages and kept in accounts separate from the regular local budgets.
- To give the municipality the power to finance infrastructure through different mechanisms— bank loans; bonds; joint ventures; build, operate, transfers (BOTs)—that are based upon investment today against future generation of revenues. This type of legislation also needs to include the institutional safeguards and economic guarantees that provide investors with the security needed to protect their investment.
The intention here is not necessarily for local government to go into the business of infrastructure construction across the board, but rather to give it the authority to do so when private developers do not meet standards. Private developers may very well be the ones to construct community sewage treatment or lay pipes to connect to regional sewage treatment systems, but a municipality needs to have the option to contract out for the construction of infrastructure when the developers cannot provide adequate solutions or when the solutions are required at the regional or sub-regional level. Developers will need to pay the municipality a development fee for those infra-structure components that they themselves are not providing.
Infrastructure development requires a comprehensive approach. Cities are far from homogeneous; different socio-economic circumstances greatly influence citizens’ and businesses’ ability to pay for infrastructure costs. Additionally, many elements of infrastructure cut across geographic and demo-graphic boundaries. Likewise, different groups have different levels of use even of the same type of infrastructure. This requires mixed funding sources and differential fees that are equitable and progressive (see Table 1).
Funding sources can in part be based upon the ability of economically wealthier populations to contribute, especially with regard to regional-level infrastructure such as water and sewage treatment plants or trunk roads. At the same time, donor funds or national development budgets can help close the gap between actual costs and economically weaker populations’ ability to pay the full amount.
Not only is there a need for differential funding sources, there is also a need for different tracks of implementation. Take the example of a water treatment plant:
- The local government (or local infrastructure authority or other development entity) can provide the necessary infrastructure using the income from a development levy to construct a new plant or expand central systems.
- A private developer (housing estate or business centre) could construct a neighbourhood treatment facility under local government supervision/regulation, and the water treatment development levy would be reduced by the value of the treatment facility built by the developer (e.g., by 70–80 per cent). The remainder of the fee would cover other costs beyond the neighbourhood level for water supply.
- The development levies serve as the source of funding for build, operate, and transfer (BOT) of a regional water treatment facility that could also include an operational income and manage-ment component.
The underpinnings of this overall infrastructure financing and development strategy are well established in many cities throughout the world, but almost exclusively in developed countries where there is a longstanding practice of municipal government having the mandate and statutory authority to provide infrastructure. In such localities the economic model is straightforward. The local government invests in planning, which delineates scope, location, technologies, stages/timing, and costs of different infrastructure components. Based upon these plans it is possible to set development fees or taxes to be paid by developers of housing projects or commercial ventures. Once these steps have been taken there are many ways of securing interim financing, ranging from municipal bonds to commercial bank loans. Thus infrastructure provision can be ensured.
There are already a number of variations on this theme that can be adopted and adapted. They range from full privatization of certain local government functions (as is often the situation with solid waste and liquid waste management) to contracting out for very specific planning or construction projects where the local government purchases services from private sector vendors.