Rethinking City Revenue and Finance
The worldwide gap in infrastructure investment has been well documented for many years. In 2018, the Global Infrastructure Hub estimated a $15 trillion global investment gap in the years to 2040 that will have to be filled and surpassed if we are to make infrastructure net zero and resilient to climate impacts.
Cities face major barriers such as a lack of institutional capacity and expertise, limited engagement with the private sector, lack of access to international finance, exchange-rate risks caused by an unstable forex regime and insufficient funding for emergency situations.
This report is informed by a survey of 10 city administrations that highlighted the challenges and shifts in priorities due to the pandemic. As part of this survey, we also gained their perspectives on potential revenue streams, planned initiatives and the policy interventions required to ensure a speedy and just recovery. It became apparent that two factors – cities’ political autonomy and their financial self-sufficiency – determine how well they meet current challenges. Looking at these factors enabled us to deduce four typologies for urban financing that cities typically epitomize: self-reliant, aspiring, striving and dependent.
City infrastructure projects play a crucial role in shaping transformative impacts, such as boosting resilience, addressing climate change, improving inclusivity and enabling digital urban infrastructure. Regardless of which typology they may fall under, cities need to re-evaluate traditional mechanisms and start to draw on new and innovative approaches to revenue and financing.
The capacity of cities to develop their financial sustainability and resilience depends on their ability to access a diverse range of revenue sources to pay for urban infrastructure as well as their service delivery investments for implementation, operations and maintenance. The surest path to achieving this is to combine own-source revenues at the local and national level with private-sector investment, and to a lesser extent philanthropy and international finance.
Cities will need to incentivize private investment through new partnerships and creative financing solutions that are relatively untested in developing countries or limited to certain sectors. Such solutions include market-based instruments (e.g. tax-increment financing), policy-based tools (e.g. exactions and impact fees) and blended finance. Green infrastructure bonds are relatively new but gaining traction as a cost-effective way of improving the built environment.
A city’s regulatory and planning actions can either help or hinder its ability to mobilize investment for public-private collaborations.
Finally, a city’s ability to tap financial markets is a combination of a country’s level of decentralization, whether it has the legal right to borrow, and if it can generate sustainable revenues and promote bankable projects. While national policies determine a country’s degree of fiscal decentralization, creditworthy cities tend to exist in jurisdictions with clear rules governing tax sharing and transfer payment arrangements between national governments and local authorities. This legal framework is further enhanced by clear policy guidelines, statutory limits and transparent approval mechanisms for local government borrowing.
This report proposes the following five guiding principles and four cross-cutting strategic enablers to support cities across typologies in sound financial management practices:
Access the full report here: https://www3.weforum.org/docs/WEF_C4IR_GFC_on_Cities_Finance_2022.pdf
or download the attached PDF of the report.