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p. 15 of 26 BACK | NEXT Executive Summary I. Introduction II. The Urban Sector III. The Bank's Involvement in the Urban Sector IV. Objectives and Policy Priorities A. Urban Development Objectives B. Policies for Promoting Urban Governance C. Policies for Mobilizing Financial Resources D. Policies for Improving Urban Management E. Policies for Reducing Urban Poverty F. Policies for Urban Subsectors V. The Bank's Urban Sector Strategy VI. Implications for Bank Operations VII. Conclusion

Urban Sector Strategy : IV. Objectives and Policy Priorities

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C. Policies for Mobilizing Financial Resources

87. A variety of policies are available to support the mobilization of financial resources, and to finance and maintain urban infrastructure and services, including the following:

1. Promotion of fiscal autonomy. The catalyst for improving financial management at the city level is the drive toward financial autonomy that encourages responsibility, efficiency, and increased sustainability in funding urban services. In this connection, DMCs’ central governments should allow localgovernments to retain locally collected revenue and to seek funding from a wide range of sources, including the private sector. Increased fiscal autonomy should be accompanied by regulatory mechanisms appropriate to protect the interests of producer and consumer.

2. Computerization and automation. Increased autonomy should also encourage computer-based accounting, cost control, billing and collection procedures; contracting out of services such as infrastructure maintenance; and development of management information systems and strategic financial planning.

3. Market-based and economic pricing of services. Pricing policy will become more urgent given the pressures on government resources and the increased role of the private sector. While full cost recovery is the long-term objective, in the short term efficiency, cost reduction, and revenue collection should be improved. Action needs to center on the establishment of sound pricing policies, i.e., marginal costs must reflect the costs of additional capacity together with those of O&M and the externalities associated with environmental damage. However, despite the drawbacks, some element of cross-subsidy will frequently be justified as a last resort to maintain access to services for the urban poor. More rigorous targeting of subsidies to families rather than property will need to be encouraged.

4. Direct cost recovery. At the same time, service quality will need to be kept commensurate with prices to avoid the build-up of consumer resistance. For that reason, direct cost recovery through user charges will usually be more effective than indirect cost recovery through property taxes and similar levies. However, indirect taxes will remain important elements in the local government revenue base. Property taxes in particular can be better structured to capture the economic benefits of land, as being shown by Bank-assisted projects in Dhaka.¹⁴

5. User charges and service fees. The adoption of market-based principles for pricing urban infrastructure and services will also help DMCs estimate the incremental demand for resources more accurately. Differential pricing of road usage, for instance, coupled with efficient public transport, as in Singapore, will help keep the demand for new road space at levels that are economically sustainable. Fees should also take account of maintenance costs; for example, by adding a surcharge to water bills to help fund the cleaning and repair of drainage systems. Such charges also act to develop pressure within user groups to compel local governments to maintain assets at high standards.

6. Land-related financial instruments. DMCs also need to examine different methods of capturing some of the unearned gains in land values, which result from new or upgraded road construction and other assets built at public cost; for example, through betterment charges, land readjustment techniques, and contributions in cash or kind by developers.

7. New sources of funds. New funding sources including private capital are needed for DMCs to meet the costs of infrastructure investments. However, many city economies will take time to expand to a level where they can afford to employ private capital. In the meantime, they will need to continue to rely on transfers from central governments to supplement locally raised revenues. In turn, decisions will be needed on which taxes and charges should be controlled by local governments. Other methods that can be used to supplement local revenues include municipal development funds and other financial intermediaries, community mortgage programs, loans for housing finance through local CBOs, and the funding of new infrastructure through associated property development, as in Hong Kong, China and the Philippines.

8. Capital markets and credit finance. Cities need assistance to achieve long-term access to capital markets and/or direct private investment in infrastructure. Issues include removing constraints such as the lack of credit ratings for local governments, addressing the lack of long-term debt instruments such as municipal bonds, and assisting central governments to cope with the required expansion of credit and understand the lending options for urban infrastructure projects. The many examples of private concession contracts in relation to regulatory entities need to be available to people involved in city finance.

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