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Financing
Metropolitan
Governments
in Developing
Countries
Financing
Metropolitan
Governments
in Developing
Countries

Edited by
Roy W. Bahl
Johannes F. Linn
Debor ah L. Wetzel
© 2013 by the Lincoln Institute of Land Policy

All rights reserved.

Library of Congress Cataloging-in-Publication Data

Financing metropolitan governments in developing countries / edited by Roy W. Bahl, Johannes F. Linn,
Deborah L. Wetzel.
pages cm
Includes index.
ISBN 978-1-55844-254-2 (alk. paper)
1. Municipal fi nance—Developing countries. 2. Finance, Public—Developing countries. 3. Local
taxation—Developing countries. 4. Municipal government—Developing countries. 5. Municipal
fi nance—Developing countries— Case studies. 6. Finance, Public—Developing countries— Case
studies. 7. Local taxation—Developing countries— Case studies. 8. Municipal government—
Developing countries— Case studies. I. Bahl, Roy W. II. Linn, Johannes F. III. Wetzel, Deborah L.
HJ9695.F663 2013
352.4'216091724—dc23 2013001063

Designed by Westchester Publishing Ser vices

Composed in 10.5/13 Minion, by Westchester Publishing Ser vices in Danbury, Connecticut.


Printed and bound by Puritan Press Inc., in Hollis, New Hampshire.

The paper is Rolland Enviro100, an acid-free, 100 percent PCW recycled sheet.

MANUFACTURED IN THE UNITED STATES OF AMERICA


Contents

List of Illustrations vii


Foreword xi
DOUGL A S H. KE ARE

1 Governing and Financing Metropolitan Areas in the


Developing World 1
ROY W. BAHL, JOHANNES F. LINN, and DEBOR AH L . WE T ZEL

2 Metropolitan Cities: Their Rise, Role, and Future 31


SHAHID YUSUF

3 Metropolitan Cities in the National Fiscal and


Institutional Structure 57
PAUL SMOKE

4 The Decentralization of Governance in Metropolitan Areas 85


ROY W. BAHL

5 Institutions and Politics of Metropolitan Management 107


INDER SUD and SERDAR YIL M A Z

6 Metropolitan Public Finance: An Overview 135


RICHARD M . BIRD and ENID SL ACK

7 Property Taxes in Metropolitan Cities 159


WILLIA M J. MCCLUSKE Y and RIËL C . D. FR ANZ SEN

8 Local Nonproperty Revenues 183


JORGE M ARTINE Z- VA ZQUE Z

9 Grant Financing of Metropolitan Areas: A Review of Principles


and Worldwide Practices 213
ANWAR M . SHAH

10 Metropolitan Public Finances: The Case of Mumbai 243


ABHAY PE THE

11 Paying for Urbanization in China: Challenges of Municipal Finance


in the Twenty-First Century 273
CHRIS TINE P. WONG
vi n Contents

12 Metropolitan Governance and Finance in São Paulo 309


DEBOR AH L . WE T ZEL

13 Metropolitan Infrastructure and Capital Finance 339


GREGORY K . INGR A M , ZHI LIU, and K ARIN L . BR ANDT

14 Slum Upgrading 367


M ARIA E. FREIRE

15 External Assistance for Urban Finance Development:


Needs, Strategies, and Implementation 393
HOMI KHAR A S and JOHANNES F. LINN

Contributors 421
Index 423
About the Lincoln Institute of Land Policy 431
Illustr ations

TABLES

1.1 Fiscal decentralization: International comparisons for the 2000s 11


3.1 Basic urban and institutional profiles 59
3.2 Levels of government and administration 61
3.3 Decentralization and subnational government policy 62
3.4 Decentralization frameworks 64
3.5 Local functional assignments and expenditure shares 66
3.6 Subnational revenues: Local/municipal own-source revenues
and shared taxes 68
3.7 Intergovernmental transfers 71
3.8 Local government borrowing frameworks 72
3.9 Subnational elections and assemblies 75
3.10 Subnational budgeting and staffing discretion 76
5.1 Ser vice delivery responsibilities of select metropolitan
city governments 110
5.2 Local government revenue and expenditure autonomy in select
metropolitan cities 112
5.3 Institutional electoral arrangements for local council 114
5.4 Topologies of city governance models 116
5.5 Discretion over civil ser vice and employment 122
5.6 Local electoral accountability: Select examples 125
7.1 Importance of the property tax in select metropolitan cities 160
7.2 Importance of metropolitan property tax in select
developing counties 161
7.3 Real growth in per capita property tax revenues in select metros 161
7.4 The importance of residential properties in the tax base 165
7.5 Property tax performance in select cities 174
7.6 Treatment of vacant/unoccupied properties 177
8.1 Metropolitan areas surveyed, by income level 199
8.2 Main types of taxes, with example cities by income level 200
8.3 Distribution of tax revenues for select cities, for the most
recent year available 204
8.4 Advantages and disadvantages of observed local taxes 206
9.1 Grant financing of unified and city-state metro areas 226
9.2 Grant financing under horizontally coordinated or fragmented
metro governance 230
viii n List of Illustrations

9.3 Summary statistics on grant financing of metropolitan areas,


by country typology 235
10.1 Per capita expenditures in 1999–2000 prices 249
10.2 Composition of MCGM expenditures 250
10.3 Per capita own-source revenue in 1999–2000 prices 251
10.4 Breakdown of own-source revenue by item 252
10.5 Buoyancy of octroi and property taxes 253
10.6 Other revenues as percentage of total revenue receipts 255
10.7 Revenue expenditures as percentage of revenue receipts 256
10.8 Borrowing capacity of ULBs, 2007–2008 256
10.9 Non-ULB public investments in MMR, 1999–2000 prices 259
10.10 MMR balance sheet: Expenditures and revenue sources 261
10.11 Zonal population growth and proportion of slums in Mumbai city 263
11.1 Global logistics performance index scores, February 2010 275
11.2 China’s urbanization and industrialization 277
11.3 Distribution of urban local governments by administrative rank
and size, 2009 279
11.4 Growth of urban local governments by administrative rank,
1980–2010 280
11.5 Distribution of budgetary expenditures by level of
government, 2007 282
11.6 Composition of budgetary expenditures 283
11.7 Tax assignments in China 285
11.8 Sharing rates by tax type between province and prefecture levels 285
11.9 Sharing rates between municipalities and their subordinate
counties in Liaoning 286
11.10 Composition of tax revenues at each administrative level, 2007 286
11.11 Fiscal trends by tier of government 287
11.12 Revenues from land transfer 290
11.13 A composite picture of prefectural-level municipalities
budget, 2010 293
11.14 Revenue composition of Guangzhou and Shanghai, 2009 293
11.15 Composition of fiscal expenditures in Jiangyin municipality,
2009 295
11.16 Composition of budgetary expenditures by broad category 295
11.17 Sources of finance for fi xed investment 297
11.18 Investments by source and by sector, 2007 298
11.19 Sources of fiscal funds for urban maintenance
and construction, 2008 299
11.20 Urban public infrastructure construction investment
by sector, 2008 299
11.21 Local investment corporation debt, year-end 2010 302
12.1 Distribution of operating revenues within the SPMR, 2009 320
12.2 Distribution of operating expenditure within the SPMR, 2009 321
12.3 Current revenues and expenditures of São Paulo municipality,
2004–2010 323
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List of Illustrations n ix

12.4 Evolution of transfers to São Paulo municipality, 2004–2010 326


12.5 São Paulo municipality’s planning instruments 329
12.6 Planned and executed 2010 budget for São Paulo municipality,
by function 332
12.7 Intrayear changes in São Paulo municipality’s transport budget 333
13.1 Regressions of log per capita infrastructure measures on log PPP,
income, and percentage of population urban 341
13.2 Unit costs of infrastructure investment in 2010 and thereafter 342
13.3 Investment and maintenance in infrastructure and national income 343
13.4 Top 10 PPI recipients among developing countries, 2001–2008 352
13.5 Property tax performance in select country groups, 2000s 358
14.1 Population living in slums 369
14.2 Investment requirements and potential sources of funding,
2005–2020 370
14.3 Examples of community-based approaches to slum upgrading 372
14.4 Slum upgrading finance options 373
14.5 Budget revenue per capita, 1998 374
14.6 World Bank shelter loans, 1992–2005 375
14.7 The do’s of slum upgrading finance 389
15.1 Regression results for urban aid, 1995–2008 399
15.2 Key features of urban project evaluations and reviews 402

FIGURES

1.1 Rural and urban population by major regions, 1950, 2011,


and 2050 2
9.1 Own-source financing of metropolitan expenditures by type
of metro governance 232
9.2 Metro areas with more than 66 percent grant financing 237
10.1 ULB expenditures as percentages of total MMR expenditures 249
10.2a Regional map of Mumbai 264
10.2b Zonal map of Mumbai 265
11.1 Urbanization rates in China 274
11.2 China’s population growth by decade, 1950–2010 277
11.3 Structure of government in China, 2010 279
11.4 China’s comprehensive budget 292
11.5 Composition of subnational revenues by source 292
11.6 Subnational percentages of budgetary expenditures and investment 297
11.7 General Corporation of Shanghai Municipal Property 301
12.1 The São Paulo metropolitan region 310
12.2 Structural transformation in São Paulo 312
12.3 Population growth by district in the SPMR 313
12.4 Per capita income in the SPMR and other metro areas 314
12.5 The evolution of poverty in the SPMR and other metro areas 314
12.6 The evolution of inequality in the SPMR and other areas 315
12.7 Evolution of fiscal balances in São Paulo municipality, 2004–2010 322
x n List of Illustrations

12.8 Composition of São Paulo municipality government revenue


and expenditure, 2010 324
12.9 Evolution of capital expenditures in São Paulo municipality 327
12.10 Evolution of São Paulo municipality’s debt and debt ser vice 328
13.1 The sectoral mix of infrastructure varies with country
income group 342
13.2 Infrastructure stocks across sectors are highly correlated
within countries 345
13.3 Infrastructure sector performance varies within countries 346
13.4 Infrastructure share of ODA and IBRD/IDA commitments 349
13.5 PPI is much larger than development assistance 349
13.6 International infrastructure investment varies by sectors and source,
1990–2008 350
13.7 PPI is becoming less regionally concentrated 351
13.8 China is a significant infrastructure financier in
sub-Saharan Africa 354
13.9 Non-OECD investors increase role in sub-Saharan Africa
infrastructure 354
14.1 Housing subsidies by delivery mechanism in Chile 379
14.2 Sources of slum upgrading finance 382
15.1 Urban aid commitments, 1995–2008 396
15.2 Urban aid commitments as percentage of total aid, 1995–2008 397
15.3 Urban aid commitments by donor, 1995–2008 398
15.4 Urban aid commitments by recipient, 1995–2008 400

BOXES

1.1 Provincial-level cities 7


1.2 Data limitations 12
1.3 Property transfer taxes 14
9.1 Better practices in grant financing of metropolitan areas 233
12.1 São Paulo’s proactive approach to environmental issues 336
13.1 Privatization and competition can improve efficiency:
The case of Rio’s subway and suburban rail 347
13.2 South-south infrastructure finance: Chinese investment
in sub-Saharan African cities 353
13.3 Developing cities use a variety of financing instruments for
urban rail 357
14.1 Chile: A housing policy focused solely on up-front subsidies 379
15.1 Municipal credit in Colombia: FINDETER 408
15.2 Evaluation of donor support for urban development in Bangladesh 414
Foreword

One of the several things I did to prepare to write this foreword was review the
original volume of Bahl and Linn, which came out in April of 1992, titled Urban Pub-
lic Finance in Developing Countries, including the foreword that I prepared for that
volume. In the foreword I stated, “When the World Bank initiated this research pro-
gram on urban public finance in the early 1970s, Roy, Johannes, and I found it diffi-
cult to raise much interest in the topic.” Fortunately, over the years, much of the work
by Bahl and Linn on urban public finance in developing countries has reached wide
audiences in academia and developing countries. Their book distilled the lessons
learned during many years of work by themselves and a growing cadre of others who
were prompted by the funding of the World Bank’s initial research projects and field-
work during that early period. As a result, our main objective of providing the basis
on which further research and operational work could build was largely achieved.
Now, more than 20 years down the road, the audiences have expanded, and the
knowledge base has been greatly extended, deepened, broadened, and, perhaps most
impressive, pushed into several new dimensions of importance. For example, 20 years
ago we could not have produced a chapter on the role of metropolitan cities in na-
tional economies (Shahid Yusuf); on their place in the national fiscal structure (Paul
Smoke); on institutions and politics (Inder Sud); or on infrastructure and capital
markets (Greg Ingram et al.).
Further, a large core of a new generation of specialists—drawing on the initial
and continuing work of Bahl, Linn, Richard Bird, Charles McLure, and others—
has continued to grow up around the world, and the ability to administer modern
revenue systems is in place in many locations. There has been some improvement
in governance and finances of metropolitan areas, including better expenditure as-
signments, the implementation of buoyant revenue systems in some places, borrow-
ing to finance urban infrastructure, and, most of all, more elected representation
in many regions.
Metropolitan planning has become a reality in most large urban areas, even though
the planning agencies are ineffective in moving things forward and generally in
linking their plans with the fiscal and financial aspects of metropolitan government.
There are also a growing number of success stories in metropolitan fi nance and
management that, together with the now accumulated experience and proper efforts
and support, could be extended to an even broader array of forward-looking pro-
grams to address the growing public service needs of metropolitan-area populations.
Nevertheless, an honest look at what use has been made of the now very substan-
tial knowledge base reveals that the response has not been heartening. As documented
xii n Foreword

in this volume, sweeping metropolitan-area fiscal reforms have been few and far
between; the urban policy reform agenda is still a long one; and there is a reasonable
prospect that closing “knowledge gaps”—the gaps between what we know how to
do and what is actually being done—will continue to be difficult and slow. The fol-
lowing are some of the most worrisome areas where such gaps exist, judging by the
evidence presented in this volume.
We have not developed the ability to govern effectively the metropolitan regions
that have become the most important concentrations of people on Earth. National
and state (or provincial) governments shackle city and metropolitan governments
and/or neglect their problems. Add to this frequent conflict, or at least a lack of co-
ordination, among the many different authorities. Gross inefficiencies continue to
plague delivery of most ser vices in most metro areas. Metropolitan revenues remain
gravely insufficient despite rapidly burgeoning needs and a growing tax base. Appro-
priate transfer systems that reflect the differences between metros and other local
governments have, in general, not yet been implemented. Huge infrastructure defi-
ciencies persist or, in developed countries, have emerged; and there are few signs
they might be addressed on anything approaching sufficient scale anytime soon.
The same is true of basic social ser vices. Some countries and cities are scram-
bling to address these problems, but often outside any context of a metropolitan
fiscal strategy. Perhaps of greatest concern, the data that might help elucidate these
and related problems so that more appropriate or politically palatable solutions
might be designed remain largely absent or inadequate.
One must ask why the going has been so slow for so long. This is a matter we pon-
dered, to little effect, in 1992 and again in this volume. Now, after the wholly worth-
while investment of so much more time, effort, and money, it would be a grave error
to be again naively hopeful about the future or to fall back on the excuse that devel-
opment takes time, though of course this is true. So, though it may be presumptuous,
I suggest that we contemplate a serious investigation of this “failure on the action
front,” along the following lines.
Quite a few thoughts about what has held things back emerge from these chap-
ters. A complex set of government weaknesses, a lack of democratic participation,
and the nature of politics have played important parts. One important aspect is the
urban versus rural struggle, both for political power and influence and for the
resources to meet respective needs. In addition, higher-level (federal and state or
provincial) government officials fear that they might lose control of things if too
much autonomy is given to (sometimes capable and ambitious) metropolitan mayors.
However, by far the dominant reason for lack of progress is that the central impor-
tance of cities, of urban agglomerations, remains far too imperfectly understood by
most people, including many extremely well-meaning people: advocates of allevi-
ating rural poverty; many environmentalists; and, above all, most of the influential
policy makers who might be able to get the ball rolling. As a result, though the inter-
est in urban matters has tended to cycle up and down, it has seldom been and has
never remained a top priority. Substantial progress has been made on certain aspects
of the urban “problematique,” including municipal and metropolitan finances. How-
ever, sustained progress on a broad front toward smarter growth, creating more
sustainable cities, and alleviating grave pollution problems—including global
Foreword n xiii

warming—has been lacking, as has progress toward reforming municipal and met-
ropolitan fi nances so that the resources might become available to deal with these
and other important matters.
In view of these obstacles, it would be putting the cart before the horse to insist
that solutions to this host of problems should start with the emendation of munici-
pal and metro finances. Rather, I believe, the search for a way forward will need to
start with a better understanding of the overall urban dilemma and that it cannot be
successfully addressed on an item-by-item basis. Cities, especially large metropolitan
areas, are where our greatest economic and social opportunities lie and where our
most threatening economic and social problems manifest, the former under-
exploited and the latter aggravated by inadequate and counterproductive policies
and actions.
Fortunately, there has been substantial progress in urban research since the early
1990s. This has been admirably summarized by perhaps the single greatest con-
tributor to this progress, Edward Glaeser, in his outstanding book Triumph of the
City (2011). In this very readable book, Glaeser comprehensively treats the (limited)
nature of cities’ “triumph”: in spite of the many obstacles, people will come to cities
and become “richer, smarter, greener, healthier, and happier” as a result. He also
demonstrates the many contributing reasons for this triumph over adversity, em-
phasizing that, at its core, the indomitable strength of cities is due to the edu-
cation, knowledge, and skills of its residents (importantly, including those added
via immigration) and the cities’ functions in bringing these residents together most
productively. He suggests the elements of what can be the path toward a future where
the triumph of the city might no longer be limited—if we will have the sense, and
can mobilize the will, to take it.
Some influential opinion makers have come to understand the issue at hand. In
an op-ed in the New York Times on December 5, 2012, titled, “How Cities Can Save
China,” Henry M. Paulson Jr., former chairman of Goldman Sachs, former U.S. trea-
sury secretary, former chairman and still an important force in the Nature Con-
servancy, wrote: “A flawed system of municipal finance is driving debt . . . while un-
sustainable urban planning has yielded polluted cities that are destroying China’s
ecosystems. . . . Cities can, however, be part of the solution.” And what he says is true
not merely about China (though it is surely nowhere else demonstrated in bolder
relief), but everywhere. It is around such an appreciation as this that a successful
approach might be organized.
What seems to me the only realistic path out of the current dilemma, not just
for metropolitan and city fi nance but for the urban problematique, is for there to
emerge—to be encouraged to emerge—a powerful urban coalition that can begin
to force change and to evolve a strategy to interest and eventually involve the requi-
site actors. Perhaps this could begin with the C40 Cities Climate Leadership Group,
currently chaired by Michael Bloomberg, particularly if it could adopt a more com-
prehensive view of the problem and its agenda. And perhaps such a group, abetted
by the international development banks and a number of other organizations, might
prevail upon the G20 to make these concerns central in its agenda. Success along
such lines would greatly strengthen the demand for action on the metropolitan and
municipal finances front.
xiv n Foreword

At the same time, a push could come from the supply side of ideas, with research
started now, building on the chapters in this volume, that could lead to the publica-
tion of another volume in the future. The new agenda could include, among other
things, research focused on urban institutions, management, and political issues and
on more effectively accessing capital markets. Additionally, the agenda could cover
case studies on positive trends and developments, including factors that have im-
peded or disrupted progress in metropolitan management and finance. Such a com-
prehensive program, presumably under U.N. auspices, could at last confidently build
the database to support research on these and other critical urban problems.
And, finally, a serious effort might be made to persuade the World Bank to part-
ner with the relevant regional development banks and perhaps other institutions to
initiate a large pilot program on metro finance reform in a promising metropolitan
region. Such a partnership might undertake the arduous task of discovering a re-
gion that appears to meet most of the several exacting preconditions for success, or
work with the relevant actors in the region and at the national level until the
groundwork for potential success can be laid down.

DOUGL A S H. KE ARE
Former Visiting Fellow
Lincoln Institute of Land Policy
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