Among the 17 SDGs, most of which reflect traditional objectives (access to water, energy, health), N° 11 is worth looking at more closely: “Make cities and human settlements inclusive, safe, resilient and sustainable”. This is an overriding objective in view of the development of cities, but it will not be possible to achieve it without optimizing their financing mechanisms.
Why cities and sustainable development are now inextricably linked
The introduction of this goal marks a very significant development by recognizing, for the first time, the crucial role that local authorities will be playing in the global sustainable development agenda. Indeed, traditional ODA was mainly, and continues to be, a policy whereby both determining needs and coming up with responses are State prerogatives.
Yet the world has changed since the Cold War. On all continents, two revolutions have been combined to varying extents and have turned local authorities into key actors in sustainable development policies.
The first of these revolutions is rapid urbanization which, for the first time in the history of mankind, has led to over 50% of the world’s population living in cities. What was mainly confined to Northern hemisphere countries in the first half of the 20th century is becoming a global reality. For example, while Africa had 2 cities with a million inhabitants in 1960, there were 25 in 2000 and they have more than doubled in number since. In practical terms, this means that a large part of Africa’s development in the coming decades will depend on the actual capacity of several dozen cities to successfully implement public policies, allowing hundreds of millions of new city dwellers to be received in sustainable and inclusive conditions (ecologically, socially, economically and financially).
The second revolution is that of decentralization which, over the past 30 years, has led to an increasing devolution by States towards local governments of competences that ensure the quality of daily life (water, sanitation, waste management, housing, urban development, green spaces…). Cities and their representatives, because they are the first level in the design and implementation of public policies, are consequently today on the front line for the implementation of the SDGs. Cities from both the North (Paris) and South (Fortalezza, Johannesburg…), are often ahead of governments in implementing territorial strategies to fight against climate change.
Give cities the means to take action
The paradox lies in the fact that at the very moment when this responsibility is beginning to be recognized, most local authorities around the world still do not have access to appropriate financial resources to meet the challenges they face in terms of tax revenues, transfers from national budgets or private capital, whereas 80% of GDP is today generated by cities in the North and South alike. In Africa, for example, it is estimated that there is a gap of 1 to 25 between the resources potentially available to cities and local investment needs.
Consequently, one of the priorities of the international community must be to redress this imbalance between a high level of responsibility on the part of local authorities in shaping a sustainable future and the insufficient means that they have today.
In this respect, there is no martingale and the solution to this immense challenge must, on the contrary, be to seek to extend the range of tools that can be mobilized. This will involve decisive and simultaneous action on at least four fronts in order to optimize cities’ financing mechanisms.
The 1st front involves building mechanisms that allow the public authority to make a fairer distribution of the increase in land value related to urbanization. Local authorities should consequently be able to find the financial resources to finance the city by the city through property taxes or payment mechanisms for capital gains when sales are made by private individuals.
The 2nd battle aims to improve the performance of local authorities’ recurrent revenues. This will involve both establishing or improving State transfers based on a shared taxation, but also modernizing tax collection and local taxes. On a continent like Africa, where for about fifteen years, annual growth has been in excess of 5% a year in a number of countries, the revenues devolved to local authorities should also, indeed, experience momentum, otherwise urban conditions will become unbearable.
Financial innovation to boost local authorities’ external resources is the 3rd key. Indeed, while there is abundant liquidity on capital markets, local authorities have difficulty attracting it to finance infrastructure which has a low financial rate on return. In many countries (Colombia, Brazil, Tunisia…), public financial institutions have been set up to make long-term resources available to local authorities, but their influence is still insufficient. There is a need to promote a strengthening of the effectiveness of these entities in order to help them further scale up. In addition, the initiatives that are starting to emerge to develop pooled financing mechanisms to give cities access to capital markets, or access to remittance funds from diasporas, should be supported. It is also essential to conduct advocacy towards the major private foundations, which have huge resources, to get them to make a strong commitment to this new objective.
Finally, the 4th driver would be for international donors to go beyond their traditional approaches to operations, which focus on States, in order to also allow direct financing for projects led by cities that are ambitious from an environmental, social and economic perspective. To this end, the development of direct financing for local authorities should gradually be added to their toolkits. Indeed, this type of approach has a strong impact, as the example of Dakar shows: after an initial loan of FCFA 6.5bn allocated by AFD, in the following years the city was allocated FCFA 18bn of bank, public and private financing, and a grant from the Gates Foundation. More generally, in addition to the support to major State programs, it would be necessary to ensure that cities that want to launch ecological transition projects can directly benefit from all the facilities that have recently been created, or that will be in the coming years.
Finally, to win these 4 battles, there is a pressing need to bear in mind that the support for capacity building (training, exchange of experiences, technical assistance, the sharing of expertise) is not an option, but a condition. To allow local authorities in developing countries to grasp every opportunity to scale up sources of financing for the benefit of their populations, a qualitative leap in their management is indeed necessary. To achieve this, a continued and patient commitment by donors, often through grants, will be essential.
The Addis Ababa and New York conferences have sent out the first encouraging signals in this respect, but if the international community really wants to achieve the ambitious goals that it is currently defining, while seeking real support from populations, a prerequisite will be to give cities more means to assume their responsibilities.
The opinions expressed on this blog are those of the authors and do not necessarily reflect the official position of their institutions or of AFD.