Vivid Thoughts: Urban finance in African cities is key to delivering the 2030 Agenda

Financing urban infrastructure has long been complex and challenging. The vast majority of economic activity occurs in the world’s cities, and their fast growth requires large and rapid investments in social and economic infrastructure. Yet urban areas often struggle to secure sufficient funds in a timely and coordinated way. National governments often retain revenue generation and funding authority while planning for urban infrastructure projects sits with devolved city administrations, creating potential for a disconnected process that is slow to move forward despite increasingly urgent needs.
The need to mobilise funding for urban infrastructure continues to be urgent. The post-2015 Sustainable Development agenda commits to an ambitious set of 17 goals, including SDG 11 dedicated to sustainable human settlements. Estimates of additional finance for infrastructure required to deliver the SDGs globally range from US$3.8 – 4.1 trillion per year¹. In addition, a recent assessment of urban investments required to achieve emissions reductions targets set out in the Paris Agreement suggests that over US$50 trillion is needed in urban transport, buildings and waste sectors in the next 30 years.
The nature of urban infrastructure finance is also shifting, with the Addis Ababa Action Agenda representing a global commitment to mobilise innovative finance sources (including greater private sector involvement) at unprecedented scale to deliver the SDGs. While national governments have signed up to this agenda, cities are leading the way in implementing new models to mobilise finance for sustainable development, as drawn out in the discussions below.
Urbanisation is especially relevant in delivering sustainable development in African countries. More than half of the continent’s population will live in urban areas by 2040, doubling the urban population by mid-century. These trends, combined with continued low investment in infrastructure in African cities, are increasing pressure for change, and the ambitious targets of the SDG agenda leaving no room for continued exclusion to basic goods and services. Experience across African cities provides a snapshot of how urban areas are adapting to post-2015 finance requirements. In particular:

  • Johannesburg, South Africa – The City of Johannesburg issued Africa’s first municipal green bond in 2014, which has inspired similar efforts around the continent. More recently, in response to a significant costs from non-revenue water use (e.g. municipal water lost to leaks and theft), municipalities have been developing performance-based contracts for utilities (including eThekwini Water Services (EWS) in Durban), which shift risk from the city to public or private operators. Innovative approaches require capacity at the city level to establish credit ratings in line with the national macroeconomic landscape, engage investors and maintain fiscal integrity over the course of any bonds.
  • Addis Ababa, Ethiopia –as highlighted in Ethiopia’s SDG financing strategy, recent infrastructure developments in the capital of Africa’s second most populous country have been driven by foreign investment arranged directly through heads of state. A Chinese-funded Light Rail Transit bisects the city and expansive new housing districts are supported by UAE-based developers. While these investments help to swiftly deliver urgently required infrastructure, coordination with city and national urban planning ministries is key and the risk of leaving local authorities scrambling to incorporate new developments must be addressed.
  • Kigali, Rwanda – through a new system of property taxes, the city can capture some of the land value uplift resulting from infrastructure investments and use the resulting revenues to repay investment costs or support urban development more broadly. A tax on real estate appreciation is economically more efficient that other urban taxes, as the fixed supply of land means the tax does not negatively influence investment². It is also more equitable, as those who benefit from public investments, through increased property prices, pay. Yet they can be politically and administratively challenging to implement. Rwanda used community-based parasurveyers to minimise costs and ensure local buy-in. While getting land tax regimes right can be complicated, once a system is in place it provides a sustainable revenue source tied to the intensity of land use in urban areas.

 

As these cities and others develop strategies to finance the SDGs, important themes to consider include:

  • ensuring governance structures strike the right balance between decentralisation and coordination, enabling city-level revenue-raising that supports financial independence of local government.

The decentralisation of powers to cities enables decisions to be made closer to investments. However the balance is hard to strike. Without sufficient investment in skills and capacity, local government may be unable to effectively finance, procure, and oversee projects. Furthermore, fragmented governance may limit the scope for coordination, as unaligned incentives between local and national government may act as a break on local ambition. Kigali, Rwanda, has recently introduced a new law transferring legislative powers from the constituent districts of the city to the city itself, facilitating coordination between different areas of the city and with the national government. Kampala, Uganda, has an empowered city authority closely aligned with national government, the KCCA. Yet it only covers the city core, creating challenges in the implementation of major infrastructure projects that fall within the city but across district boundaries.

  • promoting integrated urban development planning that breaks down sector silos and encourages collaboration between spatial, social and financial planning (such as the City of Kigali’s Integrated Development Strategy that Vivid is helping to deliver).

Setting out clear long-term city plans that integrate different sectors drives a successful urban agenda. Sector silos can result in transport investments not aligning with housing plans, or educational facilities being expanded away from public transport networks or in pollution hotspots. Creating an enabling environment for integrated planning will foster coordinated spatial and social development. Credible urban plans indicate the intention of cities, reducing uncertainty for investors and national government. To finance the large infrastructure needs in African cities, local authorities need to be empowered to develop integrated urban development strategies and equipped to develop innovative funding approaches to realise them. New lenders and delivery models offer opportunities to improve service delivery and, recognising these opportunities, cities are increasingly taking charge of their own future.

  • the collection and use of, and the capacity for incorporating urban data into infrastructure development;

Traditional data sources are either infrequent (e.g. census data) or lacking within-city variation (e.g. national household surveys). New technologies, including mobile phone data and satellite imagery, can be utilised to capture more detailed and regular assessments of neighbourhoods and movement within cities. New sources of data can support planning across city departments, and can enhance the potential for cities to assess urban needs and measure impacts, creating reliable indicators to encourage investment.

While these innovative approaches to urban development offer promising lessons for cities around African and the rest of the world, they must be implemented effectively and applied to other cities to effectively deliver the promises of the SDG agenda.

We urgently need fresh new ideas to help transform the way we live in cities and ensure a better future for future generations. Innovation encompasses simple, ingenious ideas and complex frontier technology. Innovation can help us to design improved people and environment friendly cities with inclusive neighbourhoods and public spaces, to create thriving eco-systems and bio-diversity hubs and produce green energy. Imaginative ideas will allow us to be more efficient and effective in the way we manage our resources, we move people and goods, deliver our services and construct our infrastructure and buildings.”

                     – Maimunah Mohd Sharif, UN Under-Secretary-General and Executive Director, UN Habitat

 

 

¹ Compared to current trends as estimated in the G20 Global Infrastructure Outlook: https://outlook.gihub.org/

² Kopanyi and Murray, ‘An Effective Property Tax Regime for Rwanda’, IGC Working Paper 2017  https://www.theigc.org/wp-content/uploads/2017/03/Kopanyi-and-Murray-2017-working-paper.pdf

Authors

Julia Bird
Jake Wellman

Sectors:

Cities