Municipal Finance Series by Professor Jeremy Gorelick – Part 3 of 4: Resources for Municipal Finance

For a utility or municipality needing assistance with municipal finance, what resources such as reports, classes, professional organizations, can you suggest?

Bilateral and multilateral aid agencies offer  many good programs. It’s hard to pick just one, but I can easily point to one of DFID’s programs: Cities and Infrastructure for Growth (CIG), which is attractive across Africa and Asia. CIG addresses, as part of its larger programmatic goals, the question of how to help municipalities become creditworthy. It recognizes the value of having comprehensive capital investment plans that spell out the interlinkage between municipal development and economic growth. To pick another aid agency, the Germans – through GIZ and KFW – offer programs that focus on the water and sanitation sector, and they further fund intermediaries, like the C40 Cities Finance Facility, which helps cities to consider climate-smart investments through a broad technical assistance package.

Part of the challenge, though, with programs from aid agencies is that there is a significant amount of lead-time between when the program is designed and when it is implemented, during which the needs of cities can change pretty dramatically.  For that reason, it’s helpful for cities to have access to programs where they themselves can apply for support in project preparation, mostly through project preparation facilities.  Some examples of preparation facilities are shown below:

Global Focus

 

 

 

 

Asia Focus

 

  • Urban Climate Change Resilience Trust Fund/ Urban Environmental Infrastructure Fund
    • Eligibility – Cities in Asia looking to scale up investment in urban climate change resilience, especially for the urban poor in 25 secondary cities with priority on Bangladesh, India, Indonesia, Myanmar, Nepal, Pakistan, the Philippines and Vietnam

 

Africa Focus

  • Urban and Municipal Development Fund for Africa

 

 

 

Other

  • Infrastructure Project Preparation Facility. Eligibility – Public entities in Eastern Europe, CIS, and Middle East

 

 

 

The World Bank, through the Sub-National Technical Assistance program within the Public-Private Infrastructure Advisory Facility, had made tremendous strides in supporting local governments to more proactively access finance through its creditworthiness academies for municipalities, but that program’s activities have since diminished considerably.  A positive outcome, especially for the water sector, has been that the Water Team at the World Bank captured many of the lessons learned, who then offered their own creditworthiness academy for water utilities. The inaugural one was to a cohort of Kenyan water service providers in December 2016 in Naivasha, Kenya.

There are a couple of U.N. programs such as U.N. Habitat and UN Capital Development Fund (CDF) which spend considerable effort working with municipalities to either build capacity or find ways to close the financing gap through the provision of concessionary finance. The United Nations Sustainable Development Solutions Network has run information sessions for municipalities and has helped to broaden the dialogue around local governments within the UN system.

And then there are universities that teach on this topic, some through short courses. For example, New York University (NYU) did a short course for municipal leaders this past summer, in conjunction with UN Habitat. Duke University does a great one over the summer as well. And LSE Cities has put out some great reports recently. There is a jointly funded program called Coalition for Urban Transition (CUT) which has examined questions of municipal finance from a more academic perspective.

The OECD Development Centre has widened the question, looking beyond primary cities to include secondary cities as well.  This is something that is particularly important because, in the global South, the most rapid growth is occurring in secondary cities, due to a number of factors including internal migration and the physical contours of smaller cities, which allow for horizontal sprawl and expanding city limits in a way that primary cities don’t allow.

Finally, United Cities and Local Government (UCLG) has been exploring ways to capture the idea of the localization of the sustainable development goals (SDGs), with one of the critical questions being around the best way to make this a financially viable prospect.

What should I think about when considering Chinese financing vs. some of the more traditional finance options?

The Chinese are introducing innovative ways of looking at projects and how to finance them once they come to market. Having a more user-friendly project preparation facility than what is currently available creates healthy competition.

There is money sitting in many project preparation facilities that goes unused. It rolls over from year to year because nobody knows how to access the money. The Chinese have recognized that they need to be more proactive and not limited only to making cheap loans, but also how to make projects that are sustainable. They are learning from watching other development partners and are introducing themselves on an upstream basis.

As for project finance, the Chinese are coming in with cheaper money and with fewer restrictions (e.g., environmental protections). They also expect unique condition, such as involvement of Chinese labor. They want to see that Chinese money flows back to Chinese workers and to the Chinese economy. I could see that becoming increasingly problematic. Many countries see the importance of environment. They build that “cost” into their loans and grants. Also, there are examples where countries found that engagement with the Chinese came back with negative consequences – particularly if they were unable to meet even the lower finance terms. An example is the port in Sri Lanka that the Chinese have effectively repossessed. There are also examples in Africa (e.g., Kenya), particularly with transportation investments, like the Nairobi-Mombasa railway.

Over the long term, I am concerned about what the impact of Chinese money, which appears on the surface to be less expensive, can have on Africa. Many leaders fail to consider the full life-cycle cost of investments when doing a cost-benefit comparison between Chinese money and other options.

Do Development Finance Institutions consider lifecycle costs and if so, what importance do they place on them?

Some, but not all. There are limited opportunities for investment. So, there is competition even amongst the DFIs for who gets to finance projects. That’s sometimes to the detriment of both DFIs and also to the detriment of those seeking finance. An example is when municipalities, or utilities, feel like DFIs are clamoring to get their attention and there’s going to be competition for easier terms. It’s created a situation where (in the short run) the DFIs don’t worry about the borrower’s creditworthiness. They are not concerned about the more commercially minded, market-based, financial institutions – a short sighted approach.

But to answer your direct question, yes, I would say that DFIs have a greater appreciation of the lifecycle cost. I would point to what the World Bank released, along with World Resources Institute (WRI), two or three months ago, a statement on the ‘greening of grey infrastructure’. That gets to the heart of the question: how do we make sure that lifecycle costs are included? How do we also reduce lifecycle costs? For example, by thinking about ways to be more environmentally friendly, such as relying more on renewable resources, to be smarter about the associated costs.

A case in point in South Africa is being smarter with alien invasive plant species for the greater Cape Town catchment area. The city can reduce water absorption by alien species that call for more water than native flora in the Western Cape. By reducing the volume of alien species, there will be a higher flow of water available for downstream users, particularly those in urban areas, as the water would not be caught up in upstream non-native plant life. Those approaches might not be appreciated or incorporated into the thinking of every DFI. But DFIs have greater appreciation of lifecycle costs than do commercial institutions. The latter institutions focus more on the balance sheet and what can be pledged as collateral by potential borrowers.