1

Working Paper

Scaling up investment for sustainable urban infrastructure: A systematic approach to urban finance reform for national governments Ehtisham Ahmed, Dan Dowling, Denise Chan, Sarah Colenbrander and Nick Godfrey, with input from the Finance Working Group of the Coalition for Urban Transitions

1. Introduction

Towns and cities can be the powerhouses of economic opportunity, innovation and development. Strategic urban planning and urban infrastructure investment can help countries to generate employment, stimulate productivity and diversify economic activities. However, without urgent and coordinated action, this potential is threatened by the impacts of catastrophic climate change. Redirecting towns and cities on to a zero-carbon, climate-resilient path is essential to protect populations and economies. Currently there is over a trillion-dollar annual gap in financing available for sustainable urban infrastructure. National governments have a crucial role to play in raising these unprecedented levels of investment for low-carbon urban infrastructure and services and directing resources away from damaging and high-carbon infrastructure. This can help to achieve development priorities such as job creation and poverty reduction,1 as well as deliver national climate commitments. This paper offers a practical framework and guidance to support national economic decision-makers to plug the global financing gap and tap into the over $100 trillion in private assets currently held by banks, investment companies, pension funds, and sovereign wealth funds. The paper sets out a two-stage framework to help national governments consider how to reform national fiscal and finance systems to raise the scale of financing needed for sustainable urban infrastructure. First, it underscores the importance of getting the ‘basics right’ in terms of effective and sustainable public finance and fiscal systems, which can raise and direct resources for investment and simultaneously incentivise the deployment of private capital.

CONTENTS 1. Introduction

2. The sustainable urban infrastructure imperative 2.1 The economic and environmental importance of urban finance

2.2 The challenges of mobilising and directing low-carbon investment

3. How to reform national tax and spending systems 3.1. Taxation measures to support sustainable urban development 3.1.1 National taxes: what this means for cities 3.1.2 Local taxes: what this means for countries 3.2 Public spending and investments to support sustainable urban development

4. How to implement targeted financing instruments 4.1 The urban finance preconditions framework 4.2 The preconditions for implementing debt, PPPs, and land value capture instruments at scale 4.2.1 Debt financing 4.2.2 Public-private partnerships

4.2.3 Land value capture instruments 24

5. Key conclusions for national economic decision-makers 6. Endnotes

3

8

1

33v

5

6

8

9 10

12 13 15 15 20 24

28 31

2

Photo credit: Visty Banaji About this working paper This paper was prepared for the Coalition for Urban Transitions, a special initiative of the New Climate Economy project. The Coalition is a major international initiative to support decision makers to meet the objective of unlocking the power of cities for enhanced national economic, social, and environmental performance, including reducing the risk of climate change. Research for this paper was conducted as part of the urban finance programme which has been co-led by the London School of Economics and PwC with advisory input from a Finance Working Group of experts representing a diverse range of organisations. The opinions expressed and arguments employed here are a synthesised representation of the diverse views of the authors. Citation Ahmad, E., Dowling, D., Chan, D., Colenbrander, S., Godfrey, N. 2018. Scaling up investment for sustainable urban infrastructure: A systematic approach to urban finance reform for national governments. London and Washington, DC. Available at: http://newclimateeconomy.net/content/cities-working-papers.

This material has been funded by UK aid from the UK government; however, the views expressed do not necessarily reflect the UK government’s official policies.

Coalition for Urban Transitions c/o World Resources Institute 10 G St NE Suite 800 Washington, DC 20002, USA +1 (202) 729-7600

WRI Ross Center for Sustainable Cities 10 G St NE Suite 800 Washington, DC 20002, USA +1 (202) 729-7600

C40 Climate Leadership Group 3 Queen Victoria Street London EC4N 4TQ United Kingdom +44 (0) 20 7922 0300

3

Second, it evaluates three financing instruments with significant potential for scaling up, shifting, and blending investment with private capital once essential preconditions within an effective public finance system are in place, or are being strengthened. These instruments include debt financing through bank lending and ‘green’ bonds, public-private partnerships, and more effective land-value capture mechanisms, which leverage local assets, including land. These three instruments were previously identified as those with especially high potential in Financing the Urban Transition,3 published by the Coalition for Urban Transitions in 2017, which surveyed and short-listed over 70 financing instruments which could be deployed by national governments. This paper provides greater attention to the pre-conditions for deploying them successfully. The paper argues that scaling up specific financing instruments such as ‘green bonds,’ land value capture and PPPs is only likely to be effective or fiscally sustainable if heads of state and finance ministers put in place fair, effective and balanced taxation policy and systems, and ensure the specific technical pre-conditions for successful deployment are in place. It shows that governments can systematically build a well-designed urban finance system and sets out how this can be done - detailing the capacities needed to deploy specific fiscal and financial instruments to scale up investment and the series of strategic reforms required at the national level. In particular, it recommends that national governments serious about wanting to transform their towns and cities with major sustainable infrastructure investments should consider a comprehensive set of reforms to: Build their revenue base: Consider a judicious balance of national income tax, VAT and carbon taxation; reforms to local municipal finance, including where appropriate “piggy back” arrangements to transfer a proportion of national revenue to the local level; reform of property taxation to avoid urban sprawl and private vehicle use. Leverage private capital: Consider scaling up the use of bond / debt, PPPs, and Land Value Capture instruments whilst paying close attention to a range of ‘pre-conditions’ for success and fairness. Whilst the paper recognises that the political economy aspects of fiscal reform will require a highly country-specific approach, as previously set out in Financing the Urban Transition,4 it is our contention that many countries would benefit from having a clear set of principles to navigate the urban finance landscape. In short, although there is no single roadmap that can chart a course for all governments, there are certain principles and preconditions for building effective, fairer systems for scaling up investment in sustainable urban infrastructure that have broad relevance. The remainder of this paper is set out as follows: Section 2 restates the importance of scaling up investment in sustainable urban infrastructure; Section 3 explores how governments can reform their tax and spending choices to incentivise low-carbon urban development while raising sufficient revenues to scale investment in sustainable urban infrastructure. It emphasises the need for systemic fiscal reform to drive the low-carbon urban transition, while also delivering against other goals such as efficiency and equity. Section 4 evaluates the preconditions national governments need to consider for successfully implementing specific financing instruments to unlock private finance at scale, spanning legal and institutional arrangements, governance, capacity constraints and skills. Section 5 concludes the paper with the key recommendations for national policy makers.

2. The sustainable urban infrastructure imperative 2.1 THE ECONOMIC AND ENVIRONMENTAL IMPORTANCE OF URBAN FINANCE Cities are the powerhouses of national economies. The rapid growth of metropolitan areas in emerging and developing economies has been driven by a search for jobs and improved income opportunities. The clustering of people and firms in cities enables specialisation, reduces costs and stimulates innovation. These agglomeration economies can support long-term economic development. Central governments should therefore see the growth of sustainable urban “hubs” as an opportunity to diversify economic activities, generate employment and react to new international trading patterns. Work by New Climate Economy and the Coalition for Urban Transitions demonstrates that three pillars are crucial for supporting good economic, social, and climate outcomes: compact urban growth, connected infrastructure, and coordinated governance.5 The 3C (compact, connected, coordinated) model of urban development can help to deliver both economic and environmental goals by fostering “good density”, which can be defined as functionally and socially mixed neighbourhoods with access to green spaces, comfortable, affordable and efficient housing for all, and high-quality public transport networks.6 3C urban development can also enhance agglomeration economies while reducing carbon emissions. Clean energy generation, improved solid waste management, and expanded water networks can also prevent environmental degradation within and around cities. Meanwhile, it is becoming increasingly clear that all urban growth should be

4

directed away from areas that are exposed to significant climate hazards such as floodplains, steep slopes and low-lying coastal areas. However, many countries struggle to realise the full potential of agglomeration economies or structural transformation to deliver sustainable, inclusive, urban growth.7 While there is scope to increase productivity and improve living standards, urban sprawl, congestion, pollution and informality pose significant challenges. Countries from Chile to China have seen a concentration of activities in a few coastal hubs, which themselves face congestion, pollution, exposure to natural hazards and increasing inequality. Countries from Brazil to South Africa have failed to accommodate urban population growth, and retrospective efforts to provide sufficient housing and infrastructure to urban residents are proving complex and costly.8 Additionally, a global temperature rise above 1.5⁰C risks destroying recent development gains and is likely to undermine economic growth. Without immediate and profound system change, many major ecosystems and many national economies could risk collapse in the next 40-50 years. Cities around the world are already facing more severe and frequent storms, floods, wildfires and heatwaves, and many will be inundated as sea levels rise. 13% of the world’s urban population already lives in coastal areas less than 10 metres above sea level and almost two-thirds of urban settlements with populations greater than 5 million are located, at least partly, in these zones.9 Yet a substantial share of urban population growth and urban infrastructure investment continues to take place in areas that are particularly vulnerable to climate change impacts. Getting towns and cities right to respond to these challenges effectively will therefore be key to protecting and propelling national economic wellbeing in the face of climate crisis. Urban areas are crucial drivers of climate action. They are responsible for up to three quarters of energy-related carbon emissions,10 and consequently need to rapidly reduce emissions if the world is to stay within the global carbon budget. Delivering the Sustainable Development Goals (SDGs) and Paris Agreement will depend on rapidly creating sustainable urban hubs that can generate employment and stimulate innovation, while reducing per capita carbon footprints to net zero within this century – and ideally earlier to minimise the impacts of climate change. Many governments are still to fully recognise the opportunity that urban finance presents in fostering economic development and promoting environmental sustainability. A well-designed urban finance system can accelerate economic development in towns and cities, capture a proportion of the wealth generated, and reinvest it equitably across the country. Property tax systems, for example, can be designed to recoup the capital costs of infrastructure delivery and incentivise more efficient land use, thereby sustaining future economic growth and increasing future tax revenues. Simultaneously, a well-designed urban finance system can incentivise more sustainable economic decision-making by households and firms. Property tax systems ßcan be designed in ways that favour higher densities and reduce urban sprawl. However, the opportunity for coordinated action between national and local governments is often missed.

Figure 1

Taxation and investment linkages to support the growth of compact, connected, coordinated urban hubs (to be updated)

5

2.2 THE CHALLENGES OF MOBILISING AND DIRECTING LOW-CARBON INVESTMENT (TO BE UPDATED) Encouraging the required low-carbon, climate-resilient urban transition will require unprecedented levels of investment, strategically directed and financed in a fiscally sustainable manner. The first priority is to redirect investment flows towards sustainable urban development and away from high-carbon, business-as-usual projects. In the absence of coherent spatial and infrastructure planning, towns and cities around the world are seeing urban sprawl, growing congestion and pollution, and the proliferation of poorly serviced informal developments. The human and environmental costs of this are immense: at least one in four urban residents globally do not currently have decent housing, secure tenure or access to improved water or sanitation, while air pollution costs the global economy US$5 trillion every year.11 There is therefore an urgent need for investment in sustainable urban infrastructure so that towns and cities can effectively create wealth, attract investment and fund infrastructure and service provision across the country. This will require taxation and public spending systems that are designed to incentivise the development of economically competitive and environmentally sustainable cities. The second priority is to fill the urban infrastructure investment gap with additional resources. There is currently a global infrastructure investment deficit of around US$1 trillion per annum.12 This financing gap is projected to grow until at least the middle of the twenty-first century. Much of this shortfall is in urban areas. This is partially because an increasing proportion of the world’s population lives in urban areas, and consequently much of the needed infrastructure investment is in and around cities. In addition, innovations in energy, mobility and other sectors and the critical need to respond to the risks of climate change are creating the need for new and different urban infrastructure: in short, sustainable urban infrastructure (Box 1). The short-term investment gap for sustainable urban infrastructure is likely to be even larger given the higher upfront costs associated with some categories of investment, tempered by the potential medium- to longer-term savings from major low carbon investments in cities that has been well documented. This demand for sustainable infrastructure presents an important opportunity to transition to more sustainable patterns of urban growth. Taxation systems therefore need to efficiently raise sufficient revenues for governments to finance current spending as well as to secure access to credit for long-term infrastructure investments, which are typically more appropriately financed by borrowing and leveraging private resources, so that future generations share the costs of infrastructure that yields long term benefits. Source: Godfrey and Zhao (2016), New Climate Economy

Box 1

Definitions Urban infrastructure is defined for the purposes of this paper as infrastructure that falls within the physical boundaries of an urban area or is designed to meet the needs of city dwellers and industry, including access to water, electricity, and heat, transport, and disposal of waste (including the contributions proportionally). Sustainable infrastructure is defined for the purposes of this paper as infrastructure that is economically, socially, and environmentally sustainable:

• Economically sustainable infrastructure provides jobs and boosts GDP. • Socially sustainable infrastructure is inclusive and designed to meet the needs of the poor by increasing access to economic opportunities and supporting poverty reduction. • Environmentally sustainable infrastructure contributes to the transition to a low-carbon economy, improves resilience to climate risks, and addresses local environmental challenges, including unsustainable use of critical natural resources.

Sustainable urban infrastructure is defined as urban infrastructure that is economically, socially and environmentally sustainable, typically characterised by infrastructure that encourages more compact, connected, coordinated urban development, is consistent with a 2°C pathway or well below, and is resilient to the risks of climate change. This includes transport systems, urban utilities, buildings, and basic infrastructure that are more connected, resource-efficient, low-carbon, and climate-resilient.

6

The previous work in ‘Financing the Urban Transition’ by the Coalition for Urban Transitions clearly demonstrates that there is no ‘one size’ fits all approach to tackling these two priorities. Countries and cities all face different choices and can deploy different financing instruments depending on their levels of income and the maturity (or readiness) of their financial markets, and that this will change over time. High-income countries typically have well-developed capital markets, so that sophisticated debt and equity instruments can be deployed to finance new urban infrastructure. Even many city governments will have investment-grade credit ratings. High per capita incomes also mean that many infrastructure investments can generate revenue that enable cost recovery and profit. By comparison, many low-income countries have less effective revenue collection systems and do not have investment-grade credit ratings. In this case, even returns from revenue-generating assets may be too low to provide a sufficient profit margin for prospective investors, while the risks of capital investments are typically greater than in high-income countries. National and local governments therefore need to develop different strategies to enhance their ability to raise and steer low-carbon, climate-resilient urban investment depending on their current position. In summary: ensuring sustainable urbanisation requires the right combination of taxes, spending decisions, and specific financing instruments to raise and steer sufficient capital into sustainable urban infrastructure. The final set of tax instruments, spending choices and financing arrangements must be complementary to lock in the desirable structural change.13 However, it is also clear that the right specific bundles of funding, financing and spending choices need to be chosen with close attention to the domestic political economy of taxation in different countries and at different levels of government, as well as transparency and governance requirements. The next section of this report looks at how tax and spending choices can simultaneously incentivise low-carbon urban development while raising sufficient revenues to scale investment in sustainable urban infrastructure.

3. How to reform national tax and spending systems to support sustainable urban infrastructure investment National leadersip is required to establish an efficient, transparent and fair general system of taxation capable of achieving two interrelated objectives:

§ First, fiscal systems that incentivise sustainable investment decisions by firms and households in cities. Heads of State and Finance Ministers wanting to scale up investment in sustainable urban infrastructure should consider reviewing and reforming the whole suite of tax and spending choices, with the particular goal of ensuring that fiscal policy consistently favours low carbon, compact, and connected urban development. Such a review should not look solely at the fiscal instruments narrowly associated with urban areas (for example, congestion pricing) or local government taxation (for example, property taxes). It should also systematically look at how to direct investment to low-carbon urban options through a more comprehensive programme of reforms to both taxes and public spending. For example, the G7 countries currently provide at least US$100 billion annually in government support for the production and consumption of oil, gas and coal, both at home and abroad, including US$81 billion in fiscal support through direct spending and tax breaks; and US$20 billion in public finance (on average per year in 2015 and 2016).14 These subsidies distort economic decision-making and slow the energy transition that will be necessary to achieve zero-carbon cities by mid-century.

§ Second, fiscal systems that raise sufficient funding and financing to deliver sustainable urban

infrastructure at scale. The low-carbon transition will require unprecedented investment in sustainable infrastructure in urban areas to reduce the emission intensity of economic activity. Public budgets (including both domestic resources and international development assistance) are rarely sufficient to meet upfront investment needs.15 More effective taxation systems and better directed public spending have an important role to play in filling the investment gap. They are also key to unlocking additional, often blended, private finance where it is important that the costs and risks of low-carbon infrastructure investment are shared.

The scope to deploy liability-generating instruments (including debt financing and public-private partnerships), for instance, is a function of the total tax revenues collected by the government and the rate of growth of this tax base. It is therefore essential that central governments monitor the growth rate of total debts relative to the rate of growth of total revenues to ensure long-term access to credit. Governments need to ensure an adequate resource envelope over the medium-term, recognising that decisions today have implications for public revenues and access to credit in the longer-term. In short, governments’ capacity to drive the low-carbon transition in cities is contingent on maintaining a close eye on long-term fiscal sustainability.

7

A carefully designed combination of tax instruments and spending choices will be required to establish the right incentives and secure a stable revenue base for the low-carbon urban transition. This bundle of fiscal options needs to be effective and coherent across different levels of government,16 supported by effective public administration and transparent management of information. Simplicity is an advantage: the more complex the policies, the harder it is to make them work and the more scope there is for rent-seeking behaviour.17 The final set of tax instruments, spending choices and financing arrangements must be complementary to lock in the desirable structural change,18 including rapid and deep decarbonisation and ensuring towns and cities are resilient to dangerous global warming. Fiscal reform will create both winners and losers, and these trade-offs need to be addressed. Any tax reform measures will need to go hand in hand with a set of spending measures to reduce potential negative impacts, particularly on low-income and other marginalised groups. A carbon tax might meet revenue and environmental objectives, for instance, but may also have consequences for low-income households through increasing the cost of energy in the short to medium term. Adjustments to energy subsidies or the adoption of carbon pricing, may therefore create a need for targeted cash compensation for poorer households.19 In the longer-term, however, it is useful to look beyond direct cash compensation to the gamut of employment enhancing investments that might be put in place. Public investments have significant potential as part of these rebalancing efforts. In summary, a full panoply of fiscal measures needs to be deployed to incentivise low-carbon urban growth while achieving a sufficient public resource envelope to fund and finance sustainable urban infrastructure at scale. These objectives typically come together in compact, connected and coordinated towns and cities that can generate wealth and employment while reducing greenhouse gas emissions. The remainder of this section unpacks the type of fiscal reforms that can be considered looking first at the revenue raising side at the national level and at the local level (Section 2.1); and second at the public spending side (Second 2.2). The overarching framework is summarised in Figure 2.

Figure 2

Components to consider for scaling up sustainable urban infrastructure

8

3.1 TAXATION MEASURES TO SUPPORT SUSTAINABLE URBAN DEVELOPMENT 3.1.1 National taxes: what this means for cities A substantial share of the public fiscus in many countries is typically generated by wide area taxes at the national level. Personal income tax and Value Added Tax (VAT) combined with some form of carbon taxation - as a suite - can collectively go a long way towards meeting general government revenue requirements plus make an important contribution to a more efficient, fair and environmentally sustainable fiscal system. Here we focus in detail on income taxation and VAT as these are often, by far, the most significant sources of revenue in most economies. Combined, they are often 20%-30% of the tax / GDP ratio and well over half of the total tax take. [The next draft of the report will give some attention to other forms of national taxation.] The Value Added Tax (VAT) is a centrepiece of domestic financing in many countries because it generates crucial information that make taxation systems more efficient and fair. “Value added” represents the additional wages and profits at each stage of a business’ value chain, so a VAT provides useful information on key stages of a business’ production cycle. A VAT not only generates significant revenues (often upwards of 10% of GDP in many major countries), but can also be used to readjust the playing field without distorting production decisions, enabling governments to track “base shifting” by international corporations, or tax avoidance / evasion on corporate and income taxes. A VAT requires a simple rate structure, broad coverage and robust national administration in order to work well. Simplicity and breadth can minimize the cost of doing business, encourage economic integration and generate robust information to tackle tax evasion. Exemptions in the VAT for investment and distributional purposes tend not to work because they both create complexity and reduce revenue raising capabilities. Similarly, devolution of the VAT can create problems because it requires the maintenance of multiple tax administrations and creates confusion over the varying coverage and rates in different states. A number of countries have tried this, notably China, India and Mexico – all of which have recently reformed their VAT to consolidate certain functions such as information management and audit in a single agency. A VAT is notably a regressive tax as it a tax on goods and services which can disproportionately hit the poorest in society. VAT should therefore be complemented with a progressive personal income tax, which also often represents upwards of 10% of GDP in many major countries. In Mexico, the VAT, excise and income tax reforms of 2013 increased the ratio of non-oil revenues as a share of GDP from just under 11% in 2012 to over 17% by 2017,20 with the VAT effectively closing the gap vis-à-vis income taxes. Although creating complexity, exemptions for certain staple goods and services, including some food products, can be necessary to maintain basic living standards. Carbon pricing is arguably the most efficient way to incentivise clean urban development. A price on greenhouse emissions shifts the costs of climate change on to those who are responsible for it, which means that it enhances equity (at a global level). It is also a low-cost and flexible way to tackle climate change, since it provides an economic signal that allows emitters to decide how best to reduce their emissions. An emissions trading scheme is one carbon pricing approach, which provides certainty about the environmental impact but uncertainty about the cost per unit of emissions. A carbon tax guarantees a specific cost per unit of emissions, but does not guarantee emissions reductions since polluters may simply choose to incur that cost. As of 2018, 51 carbon pricing initiatives have been or are being implemented around the world, covering about 20 percent of global greenhouse gas emissions and with a total value of US$82 billion.21 Although few, if any, have a carbon price commensurate with the real cost of carbon pollution to economies. The recent work of New Climate Economy recommends a carbon price of UD$40-80 per tonne. Addressing the issue of ‘winners’ and ‘losers’ from a carbon tax is important to secure political support, as is the case with the reduction of energy subsidies. Although conditional cash transfers are often recommended for the poorest who generally live in the rural areas,22 those most affected tend to be fixed income and informal workers in cities. Improved living conditions, re-investing the proceeds of revenue raised in better public transport, and in creating new employment opportunities in revitalized and emerging cities might be the most appropriate forms of compensation for those able to participate in the labour market. In the 2013 reforms in Mexico, the potential impact of tax reform on poorer households was mitigated through a simple universal pension for all those above 65 years, as the government moved away from conditional cash transfers or Oportunidades. This protected the main group unable to participate in the labour market.

9

3.1.2 Local taxes: what this means for countries Effective and accountable local governments, especially at the city level, are critical in all societies to stimulate local economic development. They will also be equally critical to addressing climate change. Service delivery, infrastructure provision and rate-setting frequently benefit from local negotiation, coordination and administration in line with the subsidiarity principle.23 Whilst many towns and smaller cities do not have the institutional capacity to manage taxation and strategically direct large-scale spending, for those that do, a prudent fiscal approach can deliver significant benefits and efficiencies. Some local governments have sought to increase the political feasibility of local taxation through participatory budgeting, which has in some places served to optimise the use and transparency of public resources for citizens.24 Cities are also important sites for climate finance experiments that can then be scaled or replicated,25 such as the congestion price adopted in London, Milan, Singapore and Stockholm, or the emission trading schemes implemented in Beijing, Chongqing, Shanghai, Shenzhen and Tianjin. Fiscal transfers from higher levels of government are an important resource for financing subnational investment and spending, but do not constitute own-source revenues that are critical for accountability and managing liabilities and access to credit at the city level. Even if untied, grants and revenue shares do not constitute own-source revenues as recipients cannot vary tax rates at the margin if needed (for instance, for the repayment of debt). This is the essence of “hard budget constraints”. Local control over tax rates is therefore essential to anchor access to credit at the local level. Two important options available to local governments are (i) “piggy backs” (or surcharges) on certain national taxes and (ii) property taxes. These serve different and complementary functions. The municipal bond system in the USA, for instance, is substantially grounded in the capacity of cities to repay loans through revenue from property taxes, as well as the setting of the income tax piggy-back.

PIGGY BACKS FOR CITIES ON NATIONAL TAXES Subnational governments can raise revenues very efficiently through a “piggy back” on national income and carbon taxes. For a piggy back, the central government typically defines the tax base and takes responsibility for the administration, while the local administration sets a rate at the margin. This model has three key advantages. First, this generates many of the advantages of own-source revenues in terms of accountability and decision-making autonomy. Second, it counts as “own-source” revenue for the purpose of anchoring credit and liabilities at the sub-national level. Third, this approach removes capacity constraints at the local level because subnational governments can use the national tax administration. A sub-national piggy-back on the carbon tax is not widely used but could be an important driver for sustainable urban transformation. The scope to set a higher tax rate in a congested and polluted metropolitan area rather than a clean and compact new hub would send important signals to both producers and consumers. Meanwhile, the national base and rate would prevent a “competitive race to the bottom”. An important example of such a tax for emerging market and developing countries was provided in the 2013 Mexican fiscal reforms. A national tax/excise was set at a level determined by the world price in order to eliminate implicit subsidies. States were then able to impose an additional excise on top of this to raise revenue and further incentivise emissions reduction.

PROPERTY TAXES IN CITIES Property taxes are hugely important to local governments because property is immobile and the tax can be linked to local benefits—particularly public services and investments. Clearly linking property taxes to service delivery is one way to enhance accountability and offset resistance to the most visible of taxes. Property taxes can also be designed to incentivise more compact, connected and coordinated urban development – although too often these taxes are designed in ways that favour sprawl. In the United States of America (USA), for example, multifamily rental housing has an effective property tax rate that is at least 18 per cent higher than the rate on single-family owner-occupied housing.26 The USA property tax system therefore routinely promotes low-density development and disproportionately burdens lower-value properties (and therefore – likely – lower-income households). Property taxes need to be designed with both environmental and distributional objectives in mind. There are many different ways to tax land and built-up property, and the mechanisms for doing so are far from simple. These diverse options fall into two broad categories:

1. Recurrent property taxes. This model is based on ownership or occupancy of a property and depends on accurate valuation of a property (including changes in values due to public investments). The tax is paid annually, with tax levels adjusted to reflect changing market values. In addition, property owners may pay a capital gains tax on the sale of property, and betterment levies to “mop up” valuation changes due to investments, which can be a key component of land value capture. Recurrent property taxes depend on clear property rights, an accurate record of ownership titles and up-to-date-valuations. They are widely used in the

10

USA, but may not work well in much of the developing world. Recent experiments in the Chinese cities of Shanghai and Chongqing, for instance, have not to generated expected revenues.

2. Non-recurrent property taxes. This model is also based on ownership or occupancy, but uses simpler mechanisms to estimate tax owed: for example, the banding system used in the United Kingdom. The registration of properties and occupants can be potentially supplemented by modern satellite-based mapping (as being developed in Tanzania) or the use of decentralised blockchain registers (that have shown promise in some Baltic and Eastern European countries).

Given the rapid growth of informal settlements around metropolitan areas in large parts of Latin America, Africa and Asia, evidence increasingly suggests that – if implemented in the right way – many of these households could welcome a simple property tax on occupancy as it provides official recognition.27 A legal address is a powerful mechanism for accessing public services: it is typically required for urban residents to get on the voter register, access entitlements and welfare payments, open a bank account or get ‘formal’ connections to water, sanitation and electricity infrastructure.28 However, if not implemented in an inclusive and equitable way, clear titling and an ownership-valuation property tax system typically excludes the informal sector. Formalisation (including through property tax systems) may actually lead to displacement, as the elites capture the most valuable land sites through either forced eviction or rising land/house prices.29 Enforced titles on communal lands can also undermine risk-sharing mechanisms that are critical in many developing countries.30 Property taxes must be designed to support inclusive urban growth, while achieving economic and environmental goals. In conclusion, a combination of national and local taxes should be used in conjunction with one another to achieve economic, social and environmental goals – including to raise and steer investment towards more sustainable and efficient forms of urban growth. Value added taxes and income taxes have a fundamental role to play in ensuring that the fiscal system is efficient and fair, while carbon taxes and property taxes can be designed to reduce carbon intensive urban development. Some degree of fiscal devolution, in-line with the capabilities of local administrations, can also be important to enhance the accountability of local governments and expand access to credit. This can be achieved through local collection of property taxes or a piggy-back on taxes administered at the national level, complemented as appropriate with other user fees and charges. 3.2 PUBLIC SPENDING AND INVESTMENTS TO SUPPORT SUSTAINABLE URBAN DEVELOPMENT The allocation of public financing for investment significantly influences the quality and direction of urban development. Like taxes, public investments generate costs and benefits that have effects on firms and households and the environment. Public investment in infrastructure, and the built environment in particular, play a crucial role in shaping the way that population and economic growth are accommodated within urban areas, and the distribution of this growth across towns and cities across a country.31 As with taxes, the interests and needs of different levels of government need to be considered since much public spending and investment is at the local level. Thus, the national frameworks that determine public investment choices (including relevant shadow prices and discount rates) need to be analysed and reformed in the same way as tax systems to ensure that they align behind encouraging low carbon, compact, and connected urban growth. Designing and managing individual public investments well is an important part of fiscal policy. International agencies have developed a range of useful guidelines that national governments can draw on for this purpose. The World Bank’s Public Investment Management Assessment (PIMA) guidelines, for example, tend to focus on the project life cycle, but also provide insights into the institutional, regulatory, and legal frameworks needed to improve the efficiency of fiscal policy frameworks. The International Monetary Fund (IMF) has developed a complementary PIMA,32 providing a ratings-like assessment of how to improve the efficiency of public investment. This covers central-local coordination, national and sectoral planning, transparent project selection processes, improved management of infrastructure assets, and enhanced oversight and control over PPPs. The Organisation for Economic Co-operation and Development (OECD) has also developed a flexible investment governance toolkit that focuses on aspects of effective public investment management across levels of government. However, economically and environmentally sustainable urban development will depend on governments taking a more strategic and coherent approach to public spending and investment.33 Public resources need to be allocated in ways that foster the growth of dynamic, interlinked urban centres to ensure the long-term generation of employment opportunities, inclusive growth and urgent reductions of greenhouse gas emissions. This is illustrated by Chile’s experience. Chilean policies and projects have been highlighted as an example of effective public investment management by the World Bank,34 OECD and IMF.35 Despite its prudent macroeconomic management over two decades, Chile’s growth pattern has increased the country’s reliance on primary exports and the economy is consequently increasingly vulnerable to fluctuations in demand for its primary products (as highlighted by the post-2008 economic crisis). Chile also shows symptoms of a middle-income trap, with concerns about employment opportunities for an increasingly vocal and educated workforce. Despite the well-constructed

11

North-South Highway, most of the employment opportunities were generated in Santiago’s metropolitan area, and private investment in smaller urban centres has been slow to materialise. Consequently, there is a buildup of informal settlements, congestion and pollution in the metropolitan area, as well as one of the highest levels of inequality in Latin America.36 Well-planned, far-sighted public investment in urban areas and connective infrastructure is therefore essential for sustainable and inclusive urban growth in the long-term. Both national and cross-border connective infrastructure play a role in changing the cost structures that govern the location of private investment and activity. Infrastructure projects should therefore be chosen to support urban hubs and trade linkages that can generate employment and stimulate innovation. This can be a challenge in federal countries such as Pakistan or the USA, where the central government does not always have the information or authority, and subnational governments do not have the resources or strategic vision for these kinds of investments. Ideally, governments should ensure that smaller urban areas are effectively linked to rural areas and large urban areas, so that they can effectively provide goods, services and non-farm employment to rural regions, as well as act as market nodes for processing agricultural products and natural resources.37 In larger urban areas, public infrastructure investment is essential to manage the local environmental costs of agglomeration, particularly the provision of core services and infrastructure, such as sewers, piped water, waste collection and drainage.38 To stay within the global carbon budget, all infrastructure investments need to both have minimal embedded greenhouse gas emissions and to support cleaner economic and social activity within cities. Whilst public investment in sustainable urban infrastructure is critical, to effectively scale up investment in a fiscally sustainable way will require national governments to be aware of four major risks and challenges:

§ First, it is critical that national governments are sufficiently cognisant that whilst public urban infrastructure investments generate assets, they also generate liabilities that need to be managed well. Public investment involves the creation of assets, which affect the government’s total resource envelope in the longer-term either by generating profits or requiring ongoing subsidies to offset losses. This is typically the case with loans, bonds and PPPs, although some of the liabilities might be hidden in Special Purpose Vehicles, and state-owned enterprises. Sub-national governments do not usually record information about the build-up of financial obligations in a consistent and transparent way. If neither markets nor central governments are aware of the full extent of liabilities, it is difficult for them to effectively price and manage risk. Long-term fiscal sustainability depends on full and consistent information on intertemporal liabilities across levels of government on the balance sheets. Without reliable recording of assets and liabilities in balance sheets, there is a danger that neither governments nor markets are aware of the full extent of the inherent risks until there is a crisis. This contributed to the depth and extent of the crises in the European Union in the late 2000s and Mexico during the 1990s.39

§ Second, national governments need to be aware that information on the build-up of liabilities

tends to be particularly poor at the city / sub-national level. This reduces local accountability, limits political constraints on non-performing jurisdictions, encourages rent-seeking and facilitates game-play vis-à-vis the central government.40 Without a clear and uniform way to record liabilities, they tend to emerge as non-performing loans in the banking system, particularly those owned by or servicing sub-national governments. Recapitalisation can transfer local debt into national liabilities overnight, as has been the case in both Mexico and Spain. There is therefore clear moral hazard: if local governments believe that the central governments will absorb their debts, they perceive no hard budget constraints and have an incentive to continue with fiscally irresponsible projects. There is a need for a complete and standardised format for public budgets to track revenues, spending and liabilities. The use of balance sheets that encompass all cash flows and future liabilities virtually removes the scope for game-play by governments at any level. There are well-developed international standards to support this, such as the GFSM2001/14.

§ Third, that effective coordination and transparency across different levels of government will

be key to designing, financing and delivering transformative urban infrastructure investments. The London Crossrail investment is a good example. At GBP15 billion, the Crossrail is one of the most important public infrastructure projects in the UK in recent years which was enacted by an Act of Parliament. It is partially funded through a betterment levy of around GBP4.1 billion, paid by a flat rate to all large businesses in London that are expected to benefit at large (rather than individually) from the new stations and improved connectivity in London. The higher business rate surcharges were a precondition for securing a central government grant of GBP4.7 billion. There were, in addition, “voluntary contributions” by selected firms—such as Heathrow Airports Authority and Canary Wharf. The Crossrail is intended to enhance connectivity across the city of London, linking workers more effectively with existing jobs and creating additional pockets of employment at new transport hubs.

§ Fourth, that natural disasters pose an increasingly important risk to effective public spending

and investment, particularly in the context of global climate change. Local governments are primarily responsible for risk reduction measures, including regulations concerning land use and building codes, as well as appropriate local preventive infrastructure—drains, dykes, shelters and the like.41 However,

12

local budgets seldom have the capacity to meet the large additional spending needs following natural disasters, so intermediate and national levels of government are primarily responsible for relief measures. This may reduce the incentives for vulnerable regions to invest in costly disaster prevention infrastructure. In these cases, it is again important for national governments to support the development of local balance sheets that anticipate potential loss of assets and to encourage the use of private insurance to share risks.42 Fiscal measures must be complemented with spatial planning and regulation to minimise exposure to more frequent and severe climate hazards, such as flooding, storm surge and sea level rise.

In summary, sound public investment choices by national governments will play a key role in complementing and reinforcing effective tax systems to achieve sustainable urban development. Government spending affects the incentives and options facing firms and households, including how they produce, transport and consume goods and services. Public spending and investment decisions need to be made with close attention to their fiscal implications (particularly the tax burden and liabilities), as well as the effects on the environment and distribution of income. Done well, a strategic programme of public investment offers major opportunities to create new and high-quality jobs, improve productivity and enhance quality of life through fostering a network of dynamic urban hubs across a country. It can also play a key role in shifting urban development towards a less carbon-intensive path through funding the infrastructure necessary for compact and connected towns and cities.

4. How to implement targeted financing instruments to mobilise private finance for sustainable urban infrastructure: Bonds, PPPs, and land value capture

Substantial investment will be required to create dynamic, sustainable urban hubs that help to deliver the Sustainable Development Goals (SDG) and Paris Climate Agreement. In most countries, much of this investment will need to come from private sources, often blended with public capital. Commercial banks and investment companies manage nearly US$70 trillion of assets, while pension funds, insurance companies and sovereign wealth funds represent a further US$44 trillion.43 Crowding in private finance can also achieve equity goals by distributing the cost of large-scale urban infrastructure more fairly over its lifetime. Involving the private sector in public urban infrastructure investment has many potential benefits beyond expanding the resource envelope. Private sector participation can secure management and technical expertise. The profit motive can incentivise greater efficiency and innovation, whether to cut costs or respond to market opportunities. Engaging private partners creates opportunities for knowledge transfer and mutual learning, generating spillovers into other plans and projects. Private finance and capabilities can therefore add substantial value, where governments are in a position to balance and manage private and social returns across all investments. Financial systems today do not provide an adequate supply of long-term, cross-border finance for sustainable urban infrastructure due to both regulatory and market failures. These have been well documented in previous work by New Climate Economy and the Coalition for Urban Transitions. Long-term finance for urban infrastructure has the potential to accelerate development by expanding productive capacity and stabilising economies (although volatility cannot be entirely prevented and must be managed with public finance anchors). Yet today there is a dearth of instruments that can mobilise longer-term, cross-border financing for major infrastructure projects. Incentive structures and portfolio restrictions (for example, pension funds may only be able to allocate a small proportion of their resources to equities) can further constrain long-term investment.45 There is therefore a need to facilitate flows of long-term capital to countries with large investment needs, particularly rapidly industrialising and urbanising economies. There are several instruments with potential to leverage long-term private capital, which could be refined, adapted and deployed at greater scale with the support of national governments. This chapter focuses on three instruments: debt financing through bonds, contracting arrangements such as public-private partnerships (PPPs) and leveraging of local assets, particularly land. However, there are many other important mechanisms such as guarantees, revolving funds and subsidies. These instruments can be designed to overcome barriers to private investment in sustainable urban infrastructure, such as institutional inertia, real or perceived risks, mixed/low return profiles and imperfect information between public and private actors. They may be used independently or together, and will be appropriate for different types of investors and projects. National and local governments should deploy a blend of financing options in ways that complement tax and spending choices in order to lock in sustainable urban development.

13

This section presents a coordinated framework for understanding the “preconditions” for the successful use of debt financing, public-private partnerships and land value capture instruments. It identifies high-level criteria or “preconditions” that governments should consider in order to utilise these mechanisms in a fiscally sustainable and economically strategic way. These preconditions are grouped into four categories: the fiscal environment, regulation and policy environment, institutional environment, and investment and credit environment. When used all together, the framework clearly highlights areas where strategic reforms or capacity building could enhance a country’s readiness to deploy these specific financing instruments. Political economy considerations are also essential to the effectiveness of leveraging private sources of finance. The efficacy and appropriateness of any particular instrument often depends on complex and sensitive politics. A typical game-play, for example, can arise in the case of single term mayors, who are can sometimes not be particularly concerned about the long-term repayment for urban infrastructure, especially if the liabilities can be largely disguised off balance sheet in the short to medium term. This has been a problem in several Latin American countries as well as during the London Underground modernisation.46 Asymmetric information on the operation of the private partner, including the effort exerted, cost and liabilities, also adds to the difficulties for the state. Furthermore, in countries with multilevel governments and/ or with different parties in power at the centre and the states, there can be a sharp incentive for subnational governments to pass the liabilities to the centre. Beyond experimenting with specific financing mechanisms in the near term, national governments have a broader role to play in two key areas:

§ First, in developing capital markets to enable the growth and diversification of long-term financing instruments. Much cross-border financing has been through bank lending, but these loans typically have short maturities (an average of 2.8 years in emerging markets) and are subject to considerable volatility, as seen during the financial crisis.47 Access to a wider range of finance sources and instruments can improve the resilience of financial systems. National governments can facilitate the development of debt and equity markets through improving legal and regulatory infrastructure, promoting transparency and strengthening financial supervision.48 On the supply side, governments can reform credit rights, investment limits, reserve requirements, the valuation of assets and liabilities, and limits on foreign investment to tackle gaps in the availability and costs of long-term, cross-border finance. On the demand side, governments can develop spatial and infrastructure plans to establish a clear pipeline of sustainable urban projects, improving feasibility assessments and bid processes to ensure that financing choices align with wider economic development strategies and long-term fiscal considerations. Both demand-side and supply-side reforms may be needed to improve the bankability and creditworthiness of prospective investments.

§ Second, through capacity building and partnerships, including with local governments. One of

the most important priorities for national government is the coordination of investment strategies and priorities. Sustainable, prosperous cities are critically dependent on national or even cross-border connectivity that can take advantage of local competitive advantages and balance growth appropriately across the country. National governments can develop integrated spatial, infrastructure and financing strategies to this end, working in partnership with local governments. National tax administrations can also provide services that are not easy to replicate in smaller towns and cities, including audit capabilities and use of satellite technology. National project preparation facilities can provide financial and technical assistance to develop bankable projects that are attractive to the private sector. This assistance may be provided at any stage of the project preparation lifecycle, most commonly to support feasibility studies and project structuring. Project preparation facilities can help governments to acquire and retain specialist expertise (rather than depending on consultants and advisors), which can in turn enable the public sector to lower the costs of project development and financing. One estimate suggests that a one to two per cent reduction in financing costs could be achieved through greater policy predictability, and could be worth up to US$100 billion per year.49

The remainder of this section outlines a framework for evaluating the preconditions for successfully deploying debt financing, public-private partnerships and land value capture instruments at scale. 4.1 THE URBAN FINANCE PRECONDITIONS FRAMEWORK This section presents a framework to evaluate the preconditions for the successful deployment of debt financing, public-private partnerships and land value capture instruments at scale. It offers a definition for each mechanism, and identifies some of the diverse instruments that can be included within this broad category. It presents a set of implementing principles for deploying that mechanism effectively. Finally, it presents a set of criteria or preconditions for governments to consider to help them unlock the full potential of that mechanism. The preconditions are specific to each instrument. However, they are always grouped into four categories:

§ Fiscal environment. The preconditions in this category focus on how the government manages and monitors its spending levels, tax rates and liabilities with respect to the relevant financing instrument. The core principles underpinning fiscal policy are outlined in further detail in Section 2.

14

§ Regulation and policy environment. The preconditions in this category focus on whether the government has established the specific legislative requirements necessary for each financial instrument to be deployed (for example, whether there is clear regulation in place to authorise and govern sub-national borrowing), and the effectiveness of the land and property system.

§ Institutional environment. The preconditions in this category focus on whether government agencies have the skills and capacity necessary to structure and implement a financing instrument (for example, whether civil servants can evaluate and design the contracts that underpin PPPs) and whether government bodies are effectively coordinated across different levels and sectors through clear assignment of responsibilities.

§ Investment and credit environment. The preconditions in this category focus on whether governments have the appropriate credit ratings necessary to attract capital markets and the capacity to plan large capital projects. It also considers currency risk, interest rate volatility and the size and sophistication of private actors (particularly investors, infrastructure providers and property developers) that are active within that country.

These preconditions collectively offer a high-level indication of whether a financing instrument is fiscally sustainable, legally acceptable, technically feasible and potentially scalable in a country or city. Taken together, this framework comprehensively assesses a country’s current readiness to deploy the three instruments and reveal areas where national governments could usefully undertake reforms and capacity building. The results for a country could be summarised in a scorecard or matrix highlighting key weaknesses in red and key strengths in green (illustrated in Figure 3).

Figure 3

Country-level Preconditions Assessment Scorecard (indicative sample country high level assessment results)

15

4.2 THE PRECONDITIONS FOR IMPLEMENTING DEBT, PPPS, AND LAND VALUE CAPTURE INSTRUMENTS AT SCALE 4.2.1 Debt financing

Box 2

Debt financing

Debt financing or borrowing for infrastructure projects involves repaying the principle and interest at specified dates. The interest rate typically depends on the opportunity cost of a project (which in turn is a function of the supply of and demand for finance), anticipated inflation and the risk to the lender. The risk to the lender is in turn a function of the credit history of the borrower, any project-specific risks, the currency in which the debt is denominated, and the loan tenor or bond maturity. The advantage of borrowing is that it offers a way to distribute the public costs of infrastructure investment equitably over time. In other words, long-term assets benefit future citizens, who should therefore help to fund it.1 Sustainable levels of borrowing are determined by current revenues and the projected increase in that revenue base, often with the presumption that infrastructure will help to deliver future growth and additional government revenues. Sources of capital for debt financing include commercial banks, infrastructure funds and institutional investors such as insurance, pension or sovereign wealth funds. Each of these investors favour different forms of debt finance: for example, commercial banks are more likely to provide project finance, while institutional investors typically favour bond finance. Multilateral development banks and bilateral development agencies often play a critical role by supporting project preparation and providing concessional (better-than-market) rates. This can reduce the cost of debt finance relative to capital markets. Loans and bonds need to be structured differently to satisfy the risk appetite and return expectations of these prospective capital providers. Two of the main instruments to borrow money are loans and bonds. A loan is taken out in exchange for future repayment of the principal amount along with interest or other finance charges. Most loans are provided by commercial banks and development banks/agencies, depending on the country and project. Project finance is short-term debt used to pay the costs associated with project development and construction. This carries higher risk for lenders, and thus generally has a higher interest rate. Repayment is usually based on a structured take-out (the debt rolls from construction to permanent finance based on terms/lending conditions met) or refinanced at the end of the term. Permanent finance is longer-term debt used to finance an asset during its operational life. Risks are more predictable during this period and therefore tend to have lower interest rates. Repayment is based on the operating revenue/income generation from the asset. A bond is a debt security: a promise by the borrower or issuer to pay the holder of the security a defined amount by a specified date, usually with interest. The market price of bonds can fluctuate. A bond is typically linked to specific sources of finance under the control of the issuer, such as property taxes or user fees. A general obligation bond is not tied to specific projects and may be repaid from government revenues; a project bond funds specific investments and is repaid from the revenue streams generated by those investments. The cost of servicing bond debt is lower than commercial bank loans, particularly for general obligation bonds as the default risk is low (since they are tied to own-source revenues). Investors may also receive favourable tax treatment for buying bonds, which can further lower the cost of capital. However, there are relatively high transaction costs associated with bond issuances, so bonds are better-suited to finance large projects or project pipelines. Debt finance also tends to favour brownfield projects (i.e., existing assets) rather than new-build greenfield projects which have higher risks – especially during the construction phase. Both loans and bonds may be used by national governments and corporations to secure finance. Subnational governments may also use these instruments if the national policy and regulatory framework permits. One of the most important but difficult tasks in managing private finance for public investments is to establish and enforce the overall debt limit across levels of government. This total then needs to be apportioned across subnational entities so as not to breach the overall limit. Each administration must account for its own debt and be capable of repayment. This requires that the lower tiers have own-source revenues that can be increased if needed to pay for liabilities, and that there is full information and transparency on the magnitudes of the liabilities over time.

16

IMPLEMENTING PRINCIPLES

1. The ability of government agencies to secure debt finance depends on the bankability of the projector or the creditworthiness of the borrower. In considering the viability of any borrowing, the borrower’s ability to repay is critical. In the case of a government agency, this means that the agency in question must have access to a revenue stream. This may be revenue from the project that the debt will finance (i.e. bankability is key) or revenue from local taxes, fees, charges and so on (i.e. creditworthiness is key). Particularly in the global South, many essential infrastructure projects are not bankable. This is due to a combination of factors, including low incomes that mean users cannot afford to pay tariffs that would allow cost recovery, and high interest rates that lead to very high financing costs for capital-intensive projects. Creditworthiness is therefore crucially important. Many subnational government agencies are unable to mobilise long-term debt finance because they are not creditworthy: they have no credit history or credit rating. Of the largest 500 cities in developing countries, only 20% are deemed creditworthy in domestic markets and 4% in international markets.50 Creditworthiness is measured through a set of specific fiscal and institutional indicators, including the revenue base, revenue-expenditure balance, autonomy and stability of revenue streams, total liabilities and the entity’s financial management.51 Government agencies can undertake a clear set of actions and reforms to address each of these issues and improve their creditworthiness: developing an efficient and effective revenue collection system, improving budgeting and forecasting, and building their credit history through small projects with diverse lenders. Kampala Capital City Authority (KCCA) in Uganda, for example, has implemented an electronic system to collect payments for business licences, hotel taxes, ground rents, property rates and market charges online. It also abolished cash payments at government offices; all payments that are not paid through the electronic system are collected at local banks. KCCA has also undertaken internal reforms, most notably reducing the number of bank accounts from 151 to 16. These efforts have dramatically improved tax administration and collection, enabling the city to triple own-source revenue in a three-year period52 and achieve an ‘A’ long-term credit rating from a South African rating agency. This improved rating is one of the elements needed to access capital markets, but – as Kampala found – is not in itself sufficient. In particular, local governments in Uganda struggle to collect property tax efficiently, so this source accounts for only 0.1% of total revenues (Sh. 20 billion out of Sh. 13,064 billion).53

2. Clear delineation of institutional responsibilities between different levels of governments can strengthen fiscal discipline and enhance coordination across infrastructure projects. A history or expectation of bailouts from higher sources of government will weaken fiscal discipline at the local level.54 In other words, local governments will not manage their resources and liabilities responsibly if they believe that higher governments will step in to support them. To manage this moral hazard, national and state governments need to establish and enforce strict rules delineating the responsibilities of different public agencies These rules are only credible when complemented with local own-source revenues and full information on liabilities over the medium term. National government has a responsibility to safeguard its own creditworthiness through managing total liabilities across the public sector. This is important for long-term debt financing at every level of government, as the credit ratings for subnational entities are benchmarked to that of sovereign bonds. Similarly, city governments will struggle to borrow in domestic capital markets if the national government is not doing so. These considerations informed the decision of the national government in Senegal to prevent the city of Dakar from issuing a municipal bond. Fragmented governance at the city scale (there are nineteen municipal agencies for a city of three million people) and inefficient property tax collection by the local authorities meant that there was a significant risk that the liabilities would eventually fall on the central government. On the other hand, higher levels of government also have a responsibility to help coordinate subnational borrowing – not only to manage total liabilities, but also to ensure that local governments can access debt finance in a sustainable way. The city of Dakar has struggled with inadequate and unreliable fiscal transfers from the central government, and had crafted a bankable project portfolio that significantly exceeded standard debt service ratios for municipalities.55 From this perspective, the constraints on local borrowing could be perceived as politically motivated. National governments can both manage fiscal risks and improve access to finance through pooling mechanisms, which bring together many individual projects or many borrowers who are smaller or whose creditworthiness is less than investment grade. Pooling helps to spread risk across many small entities and creates a larger debt offering, which has the potential to attract more investors and lower borrowing costs. Pooling can also improve coordination in infrastructure planning, although it does mean that each individual unit has less flexibility in how resources are

17

allocated and deployed.56 On the other hand, pooling can create incentives for irresponsible financial behaviour at the local level, since risks are shared with other agencies. National or regional/provincial agencies can take the lead in pooling and attracting debt on behalf of local governments, while also ensuring oversight of fiscal risk.

3. Solid legal frameworks outlining borrowing rights and conditions are necessary to instil confidence in lenders and capital markets. A transparent, robust legislative and regulatory framework can give financial institutions the security necessary to invest in long-term capital projects. Such a framework must ensure that all contracts are enforced and all financial obligations are upheld across the market. National governments can help to strengthen and deepen debt markets through a wide range of measures, including improving financial oversight, fostering greater transparency and establishing clear standards for the preparation and reporting of financial information.57 To facilitate sub-national borrowing, national frameworks additionally need to provide legal clarity about who can borrow (public entities as well as authorities/utilities and special purpose entities); for what purposes (e.g., barring borrowing to fund operations); debt limits; collateral to be pledged; and enforcement mechanisms in case of default. Limits or incentives on financial institutions and sources of institutional capital to invest in infrastructure may also be part of such a framework.58 A global study reviewing 160 countries found that 55% of national governments forbid any kind of borrowing by local governments, while at the other end of the spectrum, local governments in 22 countries are free to borrow without any restrictions.59 Local borrowing rules are typically more accommodating in Europe and Latin America, whereas subnational entities in most African countries are not permitted to issue debt at all. South Africa is the only country in sub-Saharan Africa that explicitly and constitutionally enshrines the right of municipalities to borrow. This right is grounded in one of the most effective property tax systems in emerging economies, collecting more revenues as a proportion of GDP than Germany. The national government in South Africa limits municipalities to long-term borrowing for capital expenditures (so they cannot issue bonds to cover operating expenses) and clarifies that no higher levels of government will guarantee the debt. This framework provided the legal certainty that enabled Johannesburg to issue the first green municipal bond in the global South. This has been important for diversifying the country’s sources of investment away from commercial and development banks.60 It should be kept in mind that fiscal rules become ineffective if there is incomplete information on the build-up of subnational liabilities (as was the case in Spain preceding the 2008-10 crisis) as contracts can sour quickly (even without state guarantees) and are transmitted through non-performing loans of the banking system. Another critical precondition for making fiscal rules credible, as stressed in this paper, is the concurrent existence of own-source revenues, for which the subnational jurisdiction is able to control rates at the margin. Of course, the incentives to use the tax instruments also depend on hard budget constraints and transfer design. Gap-filling deficit financing transfer systems destroy the positive incentives of full information and own-source revenues at the margin. In addition, the main political economy constraint on hard sub-national fiscal rules in developing countries is that the adjustment tends to fall on basic public services that provide for the more vulnerable groups that the central government wants to protect (the rich live in gated communities and benefit from private education and health care). Thus, an interesting game-play across levels of government ensues, especially if there are overlapping responsibilities, often making the fiscal rules meaningless.

PRECONDITIONS TO CONSIDER FOR UNLOCKING THE FULL POTENTIAL OF DEBT FINANCE

The table below highlights some key questions that can be answered by national policymakers to assess and better understand the conditions and constraints for deploying debt financing instruments within a country, linked to the overarching implementation principles above.

Table 1

Pre-conditions for public-private partnerships

Fisc

al

envi

ronm

ent Fiscal policy

Is there an accurate record of built-up liabilities across all levels of government – including those that might be hidden off balance sheets? Are there systems in place to ensure the total level of liabilities across all government levels is sustainable? How are total national resources shared with local governments? How are sustainable

18

debt limits established and apportioned across sub-national governments? Do local governments have own-source revenue handles? What are total government liabilities in both absolute terms and as a ratio of GDP? Are local debts and liabilities recorded in local and general government balance sheets?

What are average sub-national government liabilities as both a ratio to own-source revenues and a ratio of local GDP? Are there national policies and programmes in place to permit sub-national governments to set rates for own-source revenues? Are there national policies and programmes in place to support sub-national governments to take out loans or issue bonds?

Regu

latio

n an

d po

licy

envi

ronm

ent

Legislative requirements

Does national legislation currently establish standards for the preparation and reporting of financial information? Does national legislation currently permit sub-national governments to borrow from banks? Does national legislation currently permit sub-national governments to issue bonds? Does national legislation outline the terms and conditions for government borrowing, including (e.g.) what currencies the can borrow in, the type of collateral that they can pledge to secure borrowing, what types of spending that can be funded by debt and borrowing procedures? Does national legislation set out hard borrowing limits for national and subnational governments? Does national legislation enable cross-border commercial loans and bond purchases? Does national legislation stipulate the terms of recourse in the event that subnational governments default?

Inst

itutio

nal e

nviro

nmen

t

Institutional coordination

Is there a national regulatory body to ensure that investors and traders have enough information about securities to make decisions and to prevent fraud? Does this body have the power to conduct investigations and inspections, and to enforce its recommendations? Is there a national mechanism to collect and disseminate information on bond issuance, trading and pricing? Is the lead government agency required to consult with different sectors and levels of government throughout project planning and implementation? Is there a project preparation facility that can specifically provide support for local governments as they seek debt financing? In the case of default, is the national government able to enforce compliance on subnational debt?

Government capacity and

skills

Has the national government taken out and repaid loans in the local currency? Has it issued sovereign bonds in the local currency? Have sub-national governments taken out and repaid loans in the local currency? Have they issued bonds in the local currency? Are government agencies able to navigate the risk-return profiles of different capital sources in order to tailor projects to appropriate investors? Is there a trusted intermediary (such as an investment or development bank) that can provide advice on structuring the loan/bond, the issuing price and the maturity or tenor? Can that bank link the government agency issuing the securities to prospective investors? Does the lead government agency have the expertise to prepare the legal documentation and settlement procedures? Can it secure this expertise from national government or other partners? Is the lead government agency able to structure and prepare sustainable bankable projects that can underpin the prospectus?

Inve

stm

ent a

nd c

redi

t en

viro

nmen

t Capital investment

planning

Are government agencies able to identify potentially bankable projects?

What adjustments are made to market prices to reflect environmental and distributional concerns? Is this managed effectively and consistently across levels of government? Are government agencies able to conduct pre-feasibility assessments that effectively evaluate a range of financing/funding options? What sustainability criteria (environmental or social) applied in the preparation and evaluation of projects? Is the lead government agency able to ensure continued operation, maintenance and collection of revenues from the project?

Credit What is the national credit rating of the country?

19

environment

What is the credit rating of the entity that would access loans / issue bonds?

Does national legislation establish clear creditor rights and insolvency regimes? Is there a clear credit information system? Is this supported by external auditing systems? Has the inflation rate been stable over the past five years? Has the interest rate been stable over the past five years? Has the currency in which the bond would be issued been stable over the past five years?

Private sector capability

What is the scope for domestic commercial banks to provide loans? What is their risk appetite? What is the scope for domestic investors to purchase bonds? What portfolio restrictions do different investors have that may constrain their ability to allocate resources to debt financing? Are national governments making efforts to expand the supply of long-term finance? (for example through increasing the issuance of long-tern instruments) Are national governments making efforts to develop long-term debt markets, for example through incentives for securitization? What is the appetite of international commercial banks to provide loans in the local currency? What is the appetite of international investors to purchase bonds issued in the local currency? Are there legislative or regulatory restrictions on foreign investors?

20

4.2.2 Public-private partnerships

Box 3

Public-private partnerships

A public-private partnership (PPP) is a contract to utilise a combination of public and private sector capabilities in the design, finance, construction, operation and maintenance of public infrastructure assets. Investors participating in PPPs generally expect market-rate returns. This means that PPPs are typically well-suited to projects that will generate sufficient revenue to ensure cost recovery plus profits. Energy and road infrastructure projects have attracted the vast majority of global PPP finance1, which is not surprising given that they generate a clear income stream from energy tariffs and road tolls respectively. PPPs are intended to increase the efficiency of project management by both introducing a profit motive and bringing private sector capabilities in design, construction and operation. PPPs may also offer a means to share risk as well as returns.1 In lower-income countries, PPPs offer a way to develop local private sector capabilities through joint ventures and sub-contracting opportunities with large international firms. However, there are also challenges associated with PPPs. PPPs create liabilities that are often not fully recorded on balance sheets, so may enable government agencies to circumvent budget constraints. This has long-term fiscal consequences, as outlined in Section 2.2. If contracts are poorly or inappropriately designed, the project may face higher administrative costs or the private partners may enjoy windfall profits. This is a major risk due to incomplete and asymmetric information, with project costs generally known only to the private partner and significant incentives on both sides to renege on contracts.1 In short, PPPs can facilitate investment but have significant fiscal implications.1 The institutional and contractual arrangements underpinning PPPs are of critical importance to realise their potential benefits while minimising these risks. Contracts should be structured to incentivise cost efficiencies in construction and operations. Risks and obligations need to be explicitly identified and apportioned between private investors, private operators and public agencies. Different PPP models are suited to different projects and different stages of the project lifecycle, as well as to wider regulatory and political economy considerations. The selection and design of a contract can be complex, requiring government (or development) agencies to have experience in the operational, legal and regulatory arrangements, as well as dispute resolution. Dedicated PPP units may be established to provide these skills to different levels and sectors of government, or governments can establish procedures, guidelines, and standards to be applied during different phases of the project lifecycle (i.e., feasibility, procurement, operations and transfer/close-out). Common types of PPPs include: § Management contracts: The private partner has a contract to operate the asset, or to conduct specific operational

tasks. The asset remains in private ownership; the private partner is paid a fee for their services. § Operation and maintenance concessions: The private partner has a contract to operate the asset, or to conduct

specific operational tasks. The asset remains in private ownership; the private partner has the right to collect a fee for their services from users. This is also known as a lease or franchise model.

§ Build-operate or build-operate-finance PPPs: The private party has a contract to design, build/refurbish and finance

an asset, and then to manage and maintain it for a fixed term before transferring ownership to the public sector. There is therefore much more substantial involvement of the private partner in this model. The private party is intended to recover their costs through generating profits while managing the asset. From a public sector perspective, this model has the advantage of utilising private finance and transferring risk to the private sector. However, it can increase the cost for users. The high initial investment required from the private sector and the consequent long concession period make the distribution of risk and returns between the parties a key element of success in such schemes.

Successful PPPs are highly reliant on access to national and international capital markets, and consequently on wider macroeconomic conditions and policy frameworks. Typically, national governments establish the legislation and regulation that governs PPP projects – although state or provincial governments may have their own legal frameworks

21

IMPLEMENTING PRINCIPLES

1. Governments need to carefully determine whether PPPs are the right option to finance an infrastructure project, given the risks involved. The global evidence on the effectiveness of PPPs has been mixed. It is therefore important that governments carefully evaluate whether a PPP offers significant advantages to other financing modes. Governments should routinely compare public-private procurement to public procurement (a ‘public sector comparator’) to critically test assumptions on market appetite, risk transfer, and costs.61 The main advantage of a PPP contract lies in the risk-sharing with a private partner. But the public party is typically unable to monitor the effort put into the project by the private contractor. This information asymmetry opens up a host of problems in the design and management of PPPs. Although IPSAS rules (#32) require that the assets and liabilities of PPPs that revert to the state should be on the public balance-sheet, this has sometimes been avoided even in advanced countries like the UK. Indeed, following the collapse of Carillon in the UK at the end of 2017, with £7 billion in outstanding liabilities on account of public services, the UK government accepted that too much in the way of liabilities were kept off balance sheet. PPPs are also politically sensitive, as they outsource the financing, operation and charging systems for public infrastructure. An understanding of political implications and risks is therefore also important.62 In China, officials who are often promoted based on aggregate growth numbers, or even service delivery outcomes can have an incentive to hide liabilities in PPPs, as these will not appear until after they have gone on to higher responsibilities.63 And in India, the sharp rise in non-performing loans of state level banks and rise in discovered PPP liabilities has become a source for concern. In both countries, Ministry of Finance (MOF) approvals for PPPs has been sharply cut back. The OECD suggests that the following questions need to be satisfactorily answered before deciding to use a PPP:64

§ “Can risks be identified, measured, and transferred (i.e. are private parties willing to accept the risk)? § Is the size of risk large enough to serve as an incentive towards value for money? § How much competition is there for the market (asset class) and providers in the market? § What benefits can accrue from combining the construction phase and the operating phase of the project into a

whole-of-life contract? § Can the quality and quantity of service output from the private partner be clearly measured? § Is there rationale to trade-off cost and quality? § Is innovation required which is missing from the public sector skillset? § What public sector skills are needed to overseas asset operations? § How rapidly and significantly does the technology needed for the project change? § Is demand sufficient to render the levying of user charges if this is the income (repayment) basis? § Does the service create externalities that might give rise to a free-rider problem and hence lead to lower

demand/income? § To what extent is there a need for/desire by the government to subsidise all or part of the beneficiaries of a

service?”

2. The credibility of underlying funding sources and an accurate record of liabilities are critical to the sustainable, long-term use of PPPs. The development of bankable projects depends on having enough end users who are willing to pay at levels that cover the full costs – including sufficient profits to attract the private partner. Alternatively, a viable PPP requires a government agency that can subsidise the project by allocating other resources to it. This, in turn, is a function of their creditworthiness (see Section 3.2.1). Whether they have the fiscal space to do this depends on that agency’s total revenues and expenditures. One of the key challenges with PPPs is that they can create liabilities that are not necessarily recorded in balance sheets. For example, the costs and revenues associated with a PPP may be on the books of a special purpose vehicle, although the lead government agency may ultimately be responsible for covering any deficits. Sub-national governments have incentives to enter long-term contracts where the expenses are not seen until later – for instance, after the political term of the incumbent administration. National legislation should introduce and enforce good budgeting, accounting, and reporting standards aimed at achieving full and transparent disclosure of all future costs and risks from PPPs. Both the IPSAS 32 accounting rule and the IMF’s GFSM 2014 standards require liabilities to be recorded in the relevant balance sheets. The impact of PPPs on future government spending should be incorporated in the debt sustainability analysis and medium-term budgetary frameworks.65 The difficulty, as with the sub-national fiscal rules discussed above is that the credibility of adjustment depends on sub-national governments not being able to hide liabilities in off-budget accounts, including PPPs. With relatively weak monitoring mechanisms in most

22

developing countries (and many OECD countries, like Spain and Mexico), this is very hard to implement effectively in the short run.

3. Governments must have capacity to design and manage the complex legal, regulatory and commercial contracting arrangements. Long-term partnerships and dispute resolution processes are critical.66 It is essential to strike the right balance between risk and reward when structuring a PPP.67 Private partners will not be interested in a project where the rewards are not commensurate with the risks, so such projects will not be able to attract private capital. Simultaneously, public partners should ensure that they capture a reasonable share of the returns to enable other public spending and investment. In short, the contract needs to both manage and align the interests of both the public and private partner. It can be difficult to design contracts effectively because the set-up of PPPs often involves asymmetric information between firms and government. This can mean that each side can find it difficult to reliably estimate capital costs, operating costs and demand. It can be particularly difficult to effectively transfer risk to the private sector with very large infrastructure projects, as failures have wider macroeconomic implications. The contracts underpinning PPPs may need to have some flexibility in order to ensure that the costs and benefits are shared appropriately. Risk mitigation instruments such as guarantees and insurance can also be used to improve the risk-return profile of a prospective PPP.68 Contracts must also be drafted to protect the equity of private partners and prevent reneging.69 PPPs benefit from reliable third-party arbitration systems and separation of powers, which can ensure the sanctity of contracts. Following the London Underground Upgrade during which the contractor walked away,70 it has become standard to require that there must be a significant equity stake of the private contractor in the project.71 This is quite difficult to establish especially at the sub-national level, given the financial engineering that is involved in many cases as has been seen in the UK. Once the risks are clearly delineated in the contracts, it becomes harder to persuade the private sector to take up projects. Further, with uncertainty regarding climate change, it is hard to formulate any credible PPP contract.72 For this reason, there is increasing emphasis on “unbundling” the project life cycle into the preparation and development stage with significant risks and uncertainty, and the more “bankable” stage with stable revenue-streams.73 However, while this will be the appropriate way to develop climate change resilient technologies, as has been the case with solar energy, for more normal contracts, this loses the risk-sharing aspects that are the most attractive part of PPPs, and may also preclude the development of innovate and more efficient outcomes—and in some cases, forcing the state to take the risks and the eventual private partner to reap the profits. The contracts for PPPs are complex and costly to prepare even when the requisite public sector capacity and resources to identify investment needs and projects exist. These costs can be reduced when there are clear national (or state) procedures, guidelines, and standards to be applied during different phases of the project lifecycle, including feasibility, procurement, operations, and transfer/close-out. Many countries also have a dedicated PPP unit with specialist staff to design and implement these contracts. The PPP Center of the Philippines, for instance, provides technical assistance in contracting, implementing, monitoring and evaluating PPPs across the country, as well as serving as a repository of relevant information, skills and contracts. PPPs in the Philippines benefit from clear legislation governing the use of PPPs, specifically Republic Act No. 9 (more commonly known as the Build-Operate-Transfer Law).

PRECONDITIONS TO CONSIDER FOR UNLOCKING THE FULL POTENTIAL OF PPPs

The table below highlights some key tests that can be answered by national policymakers to assess and better understand the conditions and constraints for deploying PPPs within a country, linked to the overarching implementation principles above.

Table 2

Pre-conditions for public-private partnerships

Fisc

al

envi

ronm

ent

Fiscal policy

Is there a requirement that all PPP assets and liabilities be recorded in the relevant public balance sheets at the sub-national and general government levels? Is there an accurate record of built-up liabilities across all levels of government – including those that might be hidden off balance sheets? Are there systems in place to ensure the total level of liabilities across all government levels is sustainable? Does the national tax system favour debt financing over equity financing? How are debt limits (including PPPs) apportioned across sub-national governments? Are

23

there mechanisms in place to deal with the non-performing loans of the banking system, including those that arise from PPPs? What are total government liabilities in both absolute terms and as a ratio of GDP? What are average sub-national government liabilities as both a ratio to own-source revenues and a ratio to the relevant sub-national GDP? Are there national policies and programmes in place to permit sub-national governments to set rates for own-source revenues? Are there national policies and programmes in place to support sub-national governments to take out loans or issue bonds, or and track total debt and rates of debt repayment?

Regu

latio

n an

d po

licy

envi

ronm

ent

Legislative requirements

Does national legislation currently establish standards for the preparation and reporting of financial information? Does national legislation currently permit sub-national governments to undertake PPPs? Does national legislation set out hard limits for total liabilities for national and subnational governments? Are these limits credible? Are PPP procurement practices codified in national regulations? Does this include the need for competitive PPP selection with clearly outlined, pre-defined criteria? Do national regulations require the publication of bidding documents and contracts in a transparent and timely manner? Are there policies and procedures in place for unsolicited PPP proposals? Are there explicit environmental, social and gender requirements in PPP guidelines? Does national legislation permit foreign investment in and ownership of urban infrastructure projects?

Inst

itutio

nal e

nviro

nmen

t

Institutional coordination

Is the lead government agency required to consult with different sectors and levels of government throughout project planning and implementation? Is there a national spatial and infrastructure plan that can underpin a pipeline of possible PPP projects? Is there a project preparation facility with adequate budget and staffing? Is there a dedicated PPP agency? Do these dedicated facilities have the engineering expertise to appraise project feasibility? The financial expertise to assess commercial viability? The legal expertise to draft contracts that incentivise cost efficiencies and appropriately apportion risk among partners?

Government capacity and skills

Has the national government undertaken PPPs? Does it have experience in management contracts, operation and maintenance concessions, and build-operate PPPs? Have sub-national governments undertaken PPPs? Do they have experience in management contracts, operation and maintenance concessions, and build-operate PPPs?

Is there a national, public registry of all PPPs? If there is no dedicated facility, is the lead government agency able to appraise project feasibility and commercial viability? If there is no dedicated facility, is the lead government agency able to structure contracts to incentivise cost efficiencies and apportion risks appropriately between the partners? Is the government able to use risk mitigation instruments to support PPP deployment, including assistance of the use of guarantees and insurance mechanisms to support PPPs when appropriate?

Inve

stm

ent a

nd c

redi

t env

ironm

ent

Capital investment planning

Are government agencies able to identify potentially bankable projects? Are government agencies able to conduct pre-feasibility assessments that effectively evaluate a range of PPP configurations? Are sustainability criteria (environmental or social) applied in the preparation and evaluation of projects? Is the lead government agency able to design bid processes that are attractive in a competitive market, incentivise low life-cycle costs and allow for physical and financial innovation? Can it secure this expertise from the national government or other trusted partners? Is the lead government agency able to assess bids in a transparent way, setting and using pre-defined criteria?

Credit environment

Is the currency in which a PPP would be issued stable?

Private sector capability

What is the number of PPPs successfully initiated within the country? How many different private sector partners have been involved in these PPPs? Are PPPs structured in ways that involves and develops local firms to strengthen domestic private sector capabilities? What portfolio restrictions do different investors have that may constrain their ability to allocate resources to equity financing? What is the appetite for the financial sector to provide substantial funding into PPPs?

24

4.2.3 Land value capture instruments

Box 4

Definition: Land value capture

The term land value capture (LVC) describes a set of instruments and mechanisms that can be deployed so that governments capture some of the increases in real estate values associated with public infrastructure projects. The resources secured by government through this process may be treated as revenue or repayment for capital investment. LVC theoretically ensures that the costs of infrastructure investment are substantially borne by those who benefit from it. LVC instruments are widely used to fund urban transport infrastructure projects. They may generate more compact urban development, thanks to interrelationships between better connectivity, more intensive use of land and rising land values. However, urban sprawl might also result—so a very careful urban planning is needed within which the LVC options might be nested, or indeed in the case of property taxation, provide the basis for both LVC and urban planning. LVC can also help to strengthen land and property markets by addressing speculation, although LVC might also result in the “capture of rents” by the well-connected. There are many types of land value capture instruments, including:

§ Tax-based LVC. These instruments are linked to an underlying property tax, with additional taxes imposed on the households or businesses that are considered beneficiaries of the new infrastructure. Two possible models are:

o Betterment levy/tax: In an ideal scenario, LVC is integrated into municipal fiscal systems through regular valuation of land and properties, and an automatic increase in taxes or levies (see Section 2.1.2). Where this is not possible, local governments can introduce a surcharge on land and property taxes to defray local infrastructure investments. This tax can be assigned to a specific subset of properties based on measurable features, such as area or frontage.1

o Tax increment financing (TIF): The lead government agency borrows money for capital expenditure, typically by issuing a bond or bonds. The increases in tax revenue from the new infrastructure are then earmarked by the government agency to repay the loan.1 The increment in taxes results from higher land values, higher property prices or new business activity.

§ Fee-based LVC o Impact fees or development charges: A governmental agency imposes a one-time charge on property

developers to cover the costs of connective infrastructure and other public facilities. Impact fees are distinguished from ad hoc contributions by the use of a consistent and transparent formula to calculate the cost of the development on the infrastructure network, so that there is no need for individual negotiations with each property development.1

o Transportation utility fees: a transportation improvement is treated as a utility (e.g. water, electricity) and is paid for by a user fee. Rather than establish a fee with respect to the value of the property, the fee is estimated on the number trips that property would generate.

§ Development-based LVC o Development rights: Government agencies can raise revenues for public infrastructure investment by

selling development rights to developers. Development rights might include the right to increase densities (notably by selling so-called “air rights” above existing developments), to convert rural to urban land or to convert residential to commercial land. The sale of development rights can therefore also be used to encourage higher density and mixed land use around new transport nodes (closely linked to transit-oriented development).

o Joint development: A public-private partnership (PPP) or other contractual arrangement to share the costs and risks of constructing and operating new developments (such as real estate) around new infrastructure. The advantage of joint developments is that it is not necessary to evaluate the impact of the infrastructure on land and property values, as there is cooperation between the public agency and private developers (see Section 3.2.2 on the preconditions for using PPPs).

When selecting LVC instruments, it is useful to consider the context. For greenfield developments, instruments that capture value within the project (such as impact fees) may be most suitable. For projects seeking to rehabilitate degraded areas of the city, instruments that capture rising values in a broader area around the project (such as betterment levies) may be more appropriate. For projects seeking to increase the density of people and economic activity in a specific area, usually around a transport hub, development rights are an effective tool.1 The LVC instruments need to be seen and used in conjunction with the tax- and fee-based instruments outlined above (particularly property taxes), public-private partnerships and asset-based transactions such as land sales. LVC tools all depend on efficient management of public assets, enabling regulatory frameworks and robust land and property markets. They also benefit from government capacity to effectively value the impact of public investments on real estate values. Accordingly, these instruments are more commonly used in higher-income countries than lower-income ones. Yet the opportunities for LVC are largest where urban population and economic growth is taking place, as this creates demand for transport infrastructure and a resulting increase in the value of land proximate to transport nodes.

25

IMPLEMENTING PRINCIPLES

1. Reliable, transparent and fair land records and valuation structures are critical for deploying LVC instruments. Land value capture (LVC) depends on a robust method for quantifying and apportioning the increase in land prices resulting from infrastructure investments, and clear land and property records so that the revenues can be collected from the appropriate source. This is a major challenge in countries at all levels of income. Ideally, governments would have access to cadastral records and detailed, digitalised real estate data to assist with administration and valuation. However, even in countries with up-to-date property data, recorded land values commonly account for two-thirds or less of the observed variation in the prices of land parcels.74 It is even harder to identify the portion of value increase due to infrastructure investments. To ensure the political feasibility of LVC, it is important to demonstrate the nexus between payments made to support the new infrastructure and benefits received from that infrastructure. If LVC instruments are not tailored to local dynamics, they can distort both financial and land markets. For instance, the loss of private returns could tip the balance of risk relative to return for private developers, causing them to abandon a project or more subtly shift development away from transport facilities to avoid particular geographic boundaries where these taxes apply.75 Alternatively, inappropriately designed LVC instruments may skew infrastructure provision towards higher-income property owners who can absorb the costs, rather than cross-subsidising development for the wider urban area.76 It is therefore important that governments effectively identify prospective beneficiaries early in the planning process, and collaborate with them to maximise local ownership of an infrastructure project.77 Participatory processes can help to ensure that land and property records are accurate, and that valuation methods are considered fair. Bogotá, Colombia has done this well, mobilising over a billion dollars to finance public works between 1993 and 2013 through betterment levies.78 The city adopted an innovative approach whereby property taxes were based on self-declaration – and threat of purchase at the declared values. Bogotá’s LVC strategy was further facilitated through comprehensive and systematic national legislation (Law 388 of 1997). However, despite the enabling national framework, such innovations are not always transferable: only two other cities in Colombia have been able to replicate Bogotá’s success.79

2. Land value capture instruments should be underpinned by an integrated approach to land use, transport and housing policies to create productive, high-density hubs around transport nodes. Land value capture opportunities are greatest where governments integrate spatial planning policies with infrastructure investment, particularly large public transport projects. This can help to create pockets or corridors of highly productive (and therefore high-value) land, fostering agglomeration economies while reducing environment impacts. Most governments historically struggle with policy siloes and specialisation, which can make a joined-up approach to spatial, infrastructure and investment planning difficult. Governance structures typically reflect historical administrative boundaries and sectoral decisions, with skills and budgets assigned accordingly. 80 This can make it difficult for governments to establish plans and policies that favour compact, connected urban growth – let alone to integrate LVC strategies into these planning and investment strategies. Poor institutional coordination has constrained effective LVC financing for many infrastructure projects, including the Sao Paolo metro in Chile and the Karnataka airport in India.81 Development rights are a feasible way of raising revenue where there is appetite to use land more intensively because it has desirable attributes such as proximity to services or transport hubs. Brazil has made effective use of the sale of development rights, either allowing property developers to increase the total floor area of a plot or to convert the use on a particular parcel of land (for example, from residential to commercial). São Paulo alone raised more than US$1 billion from selling development rights between 2006 and 2010.82 The sale of development rights has proven an important financing instrument in Brazil where municipalities often lack fiscal space or creditworthiness: the sale of development rights allows local governments to accrue revenues before the investment is made so that they do not have to increase their debt of deficit.83 An integrated approach to land use planning and infrastructure investment would increase both the viability and value of development rights, as well as other LVC options.

26

3. The design of LVC instruments should be sensitive to the design of property taxes. There are important relationships between property taxes and LVC instruments. Property taxes (particularly on business properties) serve as a base for betterment levies and many other LVC instruments. Recurrent property taxes (see Section 2.1.1) effectively capture some proportion of rising land values, since taxation levels are adjusted annually in response to changing land and property markets. General property taxes can ensure that the sale of development rights or land leasing does not just generate a one-off windfall, but rather enables a long-term increase in local revenues.84From the perspective of the tax payer, tax-increment financing and betterment levies may seem like higher property taxes rather than two separate taxes. These linkages mean that the relationship between property tax, LVC revenues and local service quality is critical. There may also be a political economy perspective—as with the reluctance of the NY Mayor to rely on LVC to finance the upgrading of the metro system—on the grounds that the costs should be shared with the state and federal governments given the externalities involved in NY, rather than being borne by the inhabitants of the respective localities that already bear some of the highest property taxes in the country. This is also in the context of the move by the Federal Government to restrict the deductibility of local taxes from the Federal income tax. The balance between property taxes and LVC will vary. While general property taxation, as well as the associated betterment levies, is often the main source of revenue in middle- to high-income countries, the land-sales component of LVC has been used in specific development locations for many low- to middle-income countries. This is particularly true where general property taxation is not effective and property rights are ill-defined (including in China and many parts of Africa where state or communal rights exist)).85 Communal property rights also provide solidarity and risk-sharing in case of natural disasters and calamities that can be lost if the individual system of rights is imposed. This is a major issue in many parts of Africa.86 Where valuation or even ownership of land is problematic, taxation of land and housing can be very simply linked to occupancy and the cost of public services. Adopting this approach can lay the political foundations for higher taxes when service delivery is improved. This model has been adapted in the UK, and provides a solution to the cases where property rights are poorly defined, as in much of Africa and in China. In all cases, it is important that total land and property taxes are perceived to be proportionate to land/property values, the quality of services and ability to pay. There are significant political and socio-economic implications to LVC instruments, particularly where rising costs lead to either displacement of existing low-income residents or the exclusion of those who might seek access to urban markets, services and spaces. Transport projects can effectively expand the supply of well-located urban land available and therefore help to manage prices.87 However, complementary policies are almost certainly needed to promote mixed-income as well as mixed-use spaces. As seen in the case of the application of the “Minha casa minha vida” program in Recife to resettle favela residents in new apartments 50 km inland was not acceptable to the potentially displaced persons.

PRECONDITIONS TO CONSIDER FOR UNLOCKING THE FULL POTENTIAL OF LAND VALUE CAPTURE INSTRUMENTS

The table below highlights some key tests that can be answered by national policymakers to assess and better understand the conditions and constraints for deploying land value capture instruments within a country, linked to the overarching implementation principles above. For LVC through tax-increment financing, please see Section 3.2.1 on the pre-conditions for using debt financing. For LVC through joint development, please see Section 3.2.2. on the pre-conditions for using PPPs.

Table 3

Pre-conditions for land value capture

Fisc

al

envi

ronm

ent Fiscal policy

Do sub-national governments have a recurrent (US-style) property tax model? Is the cadastre complete? Are there clear valuation systems in place to ensure that property taxes reflect changing market prices separately for land and built up property?

Do sub-national governments operate a non-recurrent property tax option?

27

Is there a possibility of using a simple system linked to occupancy and registration of properties linked to the cost of service delivery in localities?

What complementary fiscal measures are used to capture increases in land and property values (e.g. betterment levies, capital gains taxes)? Is there a consistent and transparent formula to calculate the increased value associated with new infrastructure investments?

If government agencies use tax increment financing or joint development approaches, is there an accurate record of built-up liabilities across all levels of government? Are there systems in place to ensure the total level of liabilities across all government levels is sustainable?

Regu

latio

n an

d po

licy

envi

ronm

ent

Legislative requirements

Does national legislation currently permit government agencies to use property taxes, betterment levies or development charges?

Are there integrated long-term land use, infrastructure and planning policies at the national level?

Are the land and/or property rights and ownership clearly defined? In case of traditional property rights, what arrangements can be made to replace the risk-sharing for natural disasters and calamities that the communal arrangements typically are designed to facilitate?

Does the relevant level of subnational government have the right to access or charge fees for use of the land?

Land and property system

Is the ownership of land and property clearly defined with proper titles and valuations held in the cadastre? How often is the cadastre updated?

Is there a registration system for the use/occupation of land and property?

Is there a fair, efficient, and transparent process for determining ownership and use of land and property?

Are there clear protections in place for low-income and other marginalised groups that may live on or use land, and might be in danger of eviction through LVC instruments?

Is there a timely and accurate tracking of the prices of land and property?

Is there publicly available data on the value of the stock of land and buildings (e.g. from a cadastral database)?

Inst

itutio

nal e

nviro

nmen

t

Institutional coordination

Does the appropriate level of government have authority to establish and collect property taxes, and to adjust the tax base and tax rates?

Is there a national spatial and infrastructure plan that can be used to identify areas where public investments will contribute to rising land prices?

Are national policies on land use, housing and transport aligned to create areas with high economic density and value?

Do sectoral agencies (particularly land use, housing and transport) routinely collaborate to design and deliver large urban projects? Are there systems in place to incentivise and facilitate coordination?

Is there a project preparation facility with adequate budget and staffing? Is there a dedicated LVC agency?

Government capacity and

skills

Is there a modern land information system or registry in place? Does it use satellite data to define property locations with additional verification of occupancy? Is there use of blockchain technology to track land-based transactions?

Does the land registry have operational independence? Is it accountable to appropriate stakeholders (including customers)?

Do government agencies have the information and skills necessary to estimate the impact area of a new infrastructure project (for example, using a real estate appraisal or spatial analysis)?

Are there an adequate number of specialist surveyors who have the capacity to estimate the impact of new infrastructure projects on land and property prices?

28

5. Key conclusions for national economic decision-makers The World Economic Forum estimates that every dollar spent on a sustainable urban infrastructure project such as in utilities, energy, transport, and waste management) that this generates an annual economic return of between 5 per cent and per cent.88 This paper has set out a two-step framework to help national governments consider how to reform national fiscal and finance systems to raise the scale of financing needed for sustainable urban infrastructure. It has underscored the importance of getting the ‘basics right’ in terms of effective and sustainable public finance and fiscal platforms from which governments can raise sufficient resources for investment in urban infrastructure and simultaneously incentivise the deployment of that capital into infrastructure which is sustainable. Second, it has evaluated three financing instruments with significant potential for scaling up, shifting, and blending investment with private capital once the essential elements of an effective public finance system are in place or are being strengthened. This includes debt financing through bank lending and ‘green’ bonds, public-private partnerships, and more effective Land-Value Capture mechanisms, unpacking the pre-conditions for deploying them successfully. At its simplest, this paper offers a framework for governments to think through how to strengthen the fiscal and financial underpinnings of a national urban investment strategy. Although the political economy and technical considerations will vary for each project, city and country, it is clear that scaling total investment for sustainable urban transitions will depend on:

1. Steering economic decisions by households, workers and firms through the design of tax systems and of public investment programmes that result in desirable economic, social, and environmental outcomes;

2. Raising sufficient overall public revenues for governments to invest in sustainable urban infrastructure through appropriately designed taxes at the national and subnational level

3. Responsibly mobilizing private finance, using a blend of financing instruments, for sustainable urban infrastructure.

The basic argument of this paper is that solely focusing on scaling up specific financing instruments (Point 3) such as ‘green bonds,’ Land Value Capture, and PPPs to solve the financing question in isolation of (i) encouraging Heads of State and Finance Ministers to reform tax systems and (ii) to consider more carefully the specific pre-conditions for their successful deployment is not likely to be effective or fiscally sustainable. However, it also shows that governments can systematically build a well-designed urban finance system and the capacities to deploy specific fiscal and financial instruments to scale up investment in sustainable urban infrastructure through a series of strategic reforms at the national level.

Has the government reviewed the impact of LVC approaches on low-income and marginalised groups? Are safeguards and compensation mechanisms sufficient, and how is this verified?

Inve

stm

ent a

nd c

redi

t env

ironm

ent

Capital investment

planning

Are government agencies able to identify and plan infrastructure projects that would generate significant increases in the value of surrounding land?

Are government agencies able to conduct pre-feasibility assessments that effectively evaluate a range of LVC options?

Are sustainability criteria (environmental or social) applied in the preparation and evaluation of projects?

Are government agencies able to manage and maintain the finance projects at a sufficient standard to maintain the political feasibility of LVC?

Are LVC projects structured to achieve an efficient and fair allocation of benefits and costs?

Private sector capability

Is there land and property in the city that is underutilised?

Can the level of market demand for developable land from private investors be reliably assessed?

Is the land and property market transparent, predictable and stable?

Are LVCs designed to involve local firms in planning, constructing and purchasing new developments?

29

In particular, it recommends that national government serious about wanting to transform their towns and cities with major sustainable infrastructure investments should consider a comprehensive set of national reforms to:

1. Build their revenue base through a judicious balance or bundle of national income tax, VAT, and carbon taxation and through reforms to local municipal finance, including by considering the greater use of “piggy back” arrangements to transfer a proportion of national revenue to the local level and reform of property taxation to avoid urban sprawl, private vehicle use, and underserved communities

2. Scaling up the use of bond / debt, PPPs, and Land Value Capture instruments to leverage private capital for sustainable urban infrastructure in parallel with these efforts to strengthen revenue bases and by paying closer attention to a range of (under-appreciated) ‘pre-conditions’ for success.

The paper shows that it is only through establishing a comprehensive and complementary bundle of tax instruments, spending choices and financing arrangements that the desired structural change towards more sustainable urbanisation can be locked in. No fiscal or financing mechanism stands alone: each has implications for the feasibility, efficiency and appropriateness of a range of other instruments. At the simplest level, taxation and spending policies need to be designed in conjunction to achieve their distributional goals. To create and support sustainable urban hubs, all of the fiscal and financial mechanisms deployed by governments should provide incentives for compact, connected and efficient development. The paper also highlights that own-source revenues can also be essential to enable subnational governments to take on liabilities, for example through debt financing or public-private partnerships. This can help to share the costs and risks of capital investment more appropriately with the private sector and across generations. However, the report shows that this demands a rigorous and transparent accounting of all public liabilities to avoid spiralling subnational debt. The paper highlights the possibilities of “piggy-backs” or surcharges on national taxes as straightforward options that can raise significant revenue for local governments on a personal income tax, value-added tax or carbon tax. This approach has the significant advantage of utilizing the national tax administration, effectively bypassing any capacity constraints at the local level. Few countries have enabled subnational governments to adopt a piggy back on a national carbon tax, but this mechanism could make an important contribution to a sustainable urban transition. By setting higher rates in congested and polluted metropolitan areas, local governments could address pressing social and environmental concerns while raising significant revenues. Meanwhile, the national base and rate would prevent a “competitive race to the bottom”. Many of these options do not necessarily require a separate subnational tax administration. The report also emphasizes that land and property taxes are hugely important to local governments, and can be designed in ways that favour more compact and connected urban development. Because land and property are immobile, the tax can be closely linked to local benefits such as public infrastructure investments. Property taxes should be closely linked to service delivery to strengthen accountability and assuage political resistance. Property taxes benefit from clear titling and reliable, up-to-date valuations. These preconditions are rarely in place across much of the global South, where local governments typically adopt simpler alternatives such as flat rates linked to occupancy. However, if set at a reasonable rate and implemented in a fair way, such simple property taxes may be welcomed by urban residents where they help to provide the legal recognition necessary for securing tenure and accessing public services. The paper shows that there is strong potential to deploy a range of instruments to mobilise greater private investment. Debt financing offers a way to distribute the public costs of infrastructure investment equitably over time. Public-private partnerships can secure private sector capabilities in the design, construction and management of large capital projects, and incentivise greater efficiencies and innovation. Land value capture instruments can harness the interrelationships between more productive use of land and rising land values, as well as strengthening land and property markets. These instruments need to be designed in ways that maximises their wider benefits beyond just expanding the resource envelope for capital investment. However, the paper also shows that national governments need to consider a wide range of ‘pre-conditions’ for their successful implementation. Debt financing, public-private partnerships and LVC via tax-increment financing, for example, all create public liabilities. It is therefore important that financing instruments are chosen with careful review of public revenues, assets and liabilities. Total liabilities incurred at any level of government should proportionate to its own-source revenues and fully recorded on public balance sheets. If liabilities are not tracked and hard budget constraints not enforced at subnational levels, there is a risk that they can affect the creditworthiness of the central government and therefore long-term access to affordable capital. Transparency and accountability are essential. Robust fiscal underpinnings – particularly own-source revenues and effective monitoring of liabilities – are therefore especially essential if national and subnational governments are to have access to affordable capital in the longer-term. But additionally, national governments need to oversee capital, land and property markets to ensure that they function in a fair and transparent way. National governments need to clearly establish regulatory and legislative frameworks that explicitly articulate which government agencies can use specific financing instruments can be used and under what terms. National governments need to ensure that government agencies can access the technical capacities

30

necessary to design and implement financing mechanisms, such as the legal expertise to draft suitably tight contracts or the financial expertise necessary to structure a bankable project. And governments at every level need to ensure that environmental and distributional considerations shape the choice and design of all urban infrastructure projects. [Further commentary to be added on the need for a strong and growing underlying economic growth to stimulate the fiscus] In summary, whilst governments can undertake strategic reforms and coordinated actions to build their capacity to deploy these financing instruments, urban finance ‘readiness’ is not necessarily a function of per capita incomes, but also of a country’s fiscal systems, regulatory and policy frameworks, institutional quality and investment environment. National governments can therefore scale investment for sustainable urban infrastructure by systematically addressing these conditions and constraints. Those with greater capabilities to collect, manage and spend resources responsibly not only have more public finance to invest, but also greater scope to crowd in private capital by creating an enabling environment for private investment and structuring specific projects in a way that is commercially attractive. Packaged reforms that recognise policy adjacencies and interrelationships are likely to bring the greatest and most sustainable impact. Designing a successful urban finance agenda will depend on looking beyond specific financing instruments, and fully recognising the wider economic opportunities associated with a sustainable urban transition.

31

ENDNOTES 1 Gouldson A, Sudmant A, Khreis H, Papargyropoulou E. 2018. The Economic and Social Benefits of Low-Carbon Cities: A Systematic Review of the Evidence. Coalition for Urban Transitions. London and Washington, DC. Available from: http://newclimateeconomy.net/content/cities-working-papers. 3 Floater, G., Dowling, D., Chan, D., Ulterino, M., Braunstein, J., McMinn, T., 2017. Financing the Urban Transition: Policymakers’ Summary. Coalition for Urban Transitions. London and Washington, DC. Available at: http://newclimateeconomy.net/content/cities-working-papers. 4 Ibid 5 Floater G, Rode P, Robert A, Kennedy C, Hoornweg D, Slavcheva R, Godfrey N. 2014. Cities and the New Climate Economy: the transformative role of global urban growth. Global Commission for the Economy and Climate. Available from: https://newclimateeconomy.report/workingpapers/workingpaper/cities-and-the-new-climate-economy-the-transformative-role-of-global-urban-growth/ 6 Pain, K., Black, D., Blower, G., Grimmond, S., Hunt, A., Milcheva, S., Crawford, B., Dale, N., Doolin, S., Manna, S., Shi, S., and Pugh, R. 2018. Supporting Smart Urban Development: Successful Investing in Density. Urban Land Institute (ULI) and the Coalition for Urban Transitions, London. Available at: https://newclimateeconomy.report/ workingpapers/workingpaper/supporting-smart-urbandevelopment-successful-investing-in-density/ 7 Gollin D, Jedwab R, Vollrath D. 2016. Urbanization with and without industrialization. Journal of Economic Growth. 21(1) 35-70 8 McGranahan G, Martine G. 2014. Urban Growth in Emerging Economies. Routledge. London. 9 McGranahan G, Balk D, Anderson B. 2007. The rising tide: assessing the risks of climate change and human settlements in low elevation coastal zones. Environment and Urbanization. 19(1) 17–37 10 Seto K.C., S. Dhakal, A. Bigio, H. Blanco, G.C. Delgado, D. Dewar, L. Huang, A. Inaba, A. Kansal, S. Lwasa, J.E. McMahon, D.B. Müller, J. Murakami, H. Nagendra, and A. Ramaswami, 2014: Human Settlements, Infrastructure and Spatial Planning. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlömer, C. von Stechow, T. Zwickel and J.C. Minx (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA. 11 World Bank and Institute for Health Metrics and Evaluation. 2016. The Cost of Air Pollution: Strengthening the Economic Case for Action. World Bank. Washington, DC. 12 Pulido D. 2018. Maximizing finance for safe and resilient roads. World Bank. Available from: http://blogs.worldbank.org/category/tags/infrastructure-financing-gap 13 Ahmad, E., James Rydge and Nicholas Stern “Structural change leads to tax reforms leads to structural change,” LSE Asia Research Center and China Development Forum, March 2013. 14 Whitley S, Chen H, Doukas A, Gençsü I, Gerasimchuk I, Touchette Y, Worrall L. 2018. G7 fossil fuel subsidy scorecard Tracking the phase-out of fiscal support and public finance for oil, gas and coal. Overseas Development Institute. London, UK. Available from: https://www.odi.org/sites/odi.org.uk/files/resource-documents/12222.pdf 15 Floater, G., Dowling, D., Chan, D., Ulterino, M., Braunstein, J., McMinn, T., 2017. Financing the Urban Transition: Policymakers’ Summary. Coalition for Urban Transitions. London and Washington, DC. Available at: http://newclimateeconomy.net/content/cities-working-papers. 16 Drèze, J and N. Stern, 1987, “The Theory of Cost-Benefit Analysis,” in A. Auerbach and M. Feldstein, eds., Handbook of Public Economics, North-Holland, Ahmad, E., and N. Stern, "Tax reform and shadow prices for Pakistan," Oxford Economic Papers 42, (1990), 135-159; and Ahmad, E., and N. Stern. 1991 17 Tanzi, Vito, 2018, Termites of the State, why complexity leads to inequality, Cambridge University Press. 18 Ahmad, E., James Rydge and Nicholas Stern “Structural change leads to tax reforms leads to structural change,” LSE Asia Research Center and China Development Forum, March 2013. 19 IMF, Energy Subsidy Reform: Lessons and Implications. 2013. 20 Government of Mexico, Ministry of Finance and Public Credit, Budget 2018. 21 World Bank and Ecofys. 2018. State and Trends of Carbon Pricing 2018. World Bank, Washington, DC 22 IMF, Energy Subsidy Reform: Lessons and Implications. 2013. 23 Ter-Minassian, Teresa 2007. Fiscal Rules for Subnational Governments: Can They Promote Fiscal Discipline? OECD Journal on Budgeting Volume 6 – No. 3, 2007. See also Ambrosanio, F., and M. Bordignon, (2015), “Normative and Positive Theories of Revenue Assignments”, and Ahmad, E. (2015) “Governance and Institutions”, both in Ahmad, E., and G. Brosio (eds.) Handbook of Multilevel Finance, Edward Elgar. 24 Cabannes Y, Lipietz B. 2018. Revisiting the democratic promise of participatory budgeting in light of competing political, good governance and technocratic logics. Environment and Urbanization. 30(1) 67–84 25 Bulkeley H, Broto VC. 2013. Government by experiment? Global cities and the governing of climate change. Transactions of the Institute of British Geographers. 38(3) 361-375 26 Goodman J. 2010. Houses, apartments, and the incidence of property taxes. Housing Policy Debate. 17(1) 1-29 27 Smolka M, De Cesare CM. 2012. “Property Tax and Informal Property: The Challenge of Third World Cities.” In: McCluskey WJ, Cornia GC, Walters LC. (eds) A Primer on Property Tax: Administration and Policy. Blackwell Publishing Ltd

32

28 Satterthwaite D, Archer D, Colenbrander S, Dodman D, Hardoy J, Patel S. 2018. Responding to climate change in cities and in their informal settlements and economies. IPCC Cities and Climate Change Conference. 5-7 March 2018. Edmonton, Canada. Available from: https://citiesipcc.org/wp-content/uploads/2018/03/Informality-background-paper-for-IPCC-Cities.pdf 29 Platteau, J-P, 2009, “Information distortion, elite capture and task complexity in decentralized development,” in E. Ahmad and G. Brosio, eds., 2009, Does decentralization enhance service delivery and poverty reduction? Edward Elgar. 30 Platteau, J-P, 1995, Reforming Land Rights in Sub-Saharan Africa, United Nations Research Institute for Social Development. See also Platteau, J-P and Z. Wahhaj 2012, “Strategic Interactions between Modern Law and Custom,” in V. Ginsburg and D. Throsby, Handbook of the Economics of Art and Culture, Chapter 22, North-Holland. 31 Turok I, McGranahan G. 2013. Urbanization and economic growth: the arguments and evidence for Africa and Asia. Environment and Urbanization. 25(2) 465–482 32 IMF 2015, Making Public Investment More Efficient, June, Washington, DC. 33 See the criticism of mechanical applications of the IMF-World Bank Debt-Sustainability Framework by authors such as the former Chief Economist of the World Bank, Justin Lin (Lin and Wang, 2016). 34 World Bank, 2006, Chile Public Investment Management Review. 35 IMF, Chile: Staff Report, 2016, Washington DC. 36 Fernández IC, Manuel-Navarrete D, Torres-Salinas R. 2016. Breaking Resilient Patterns of Inequality in Santiago de Chile: Challenges to Navigate towards a More Sustainable City. Sustainability. 8(8), 820 37 Tacoli C. 2017. Why small towns matter: urbanisation, rural transformations and food security. International Institute for Environment and Development. London. Available from; http://pubs.iied.org/pdfs/10815IIED.pdf 38 Turok I, McGranahan G. 2013. Urbanization and economic growth: the arguments and evidence for Africa and Asia. Environment and Urbanization. 25(2) 465–482 39 Ahmad, E, M. Bordignon, and G Brosio 2016 (eds), Multilevel Finance and the Eurocrisis, Edward Elgar. 40 Ahmad, E., 2015, “Governance and Institutions,” in Ahmad, E. and G. Brosio, 2015, Handbook of Multilevel Finance, Edward Elgar. 41 Revi A, Satterthwaite D, Aragón-Durand F, Corfee-Morlot J, Kiunsi RBR, Pelling M, Roberts D, Solecki W, Gajjar SP, Sverdlik A. 2014. Towards transformative adaptation in cities: the IPCC’s Fifth Assessment. Environment and Urbanization. 26(1) 11–28 42 Goodspeed, T., 2015, “Decentralization and Natural Disasters,” in E. Ahmad and G. Brosio (eds.), Handbook of Multilevel Finance, Edward Elgar. 43 Revi A, Satterthwaite D, Aragón-Durand F, Corfee-Morlot J, Kiunsi RBR, Pelling M, Roberts D, Solecki W, Gajjar SP, Sverdlik A. 2014. Towards transformative adaptation in cities: the IPCC’s Fifth Assessment. Environment and Urbanization. 26(1) 11–28 45 G30, (2013) Long term finance and economic growth, Working Group on Long Term Finance, Washington DC. 46 House of Lords (2010), Private Finance Projects and Off-Balance Sheet Debt, Report of Sessions, Vols I and II, Report HL, Papers 63-1 and 63-2. 47 Rajan, R., (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton University Press. 48 G30, (2013) Long term finance and economic growth, Working Group on Long Term Finance, Washington DC. 49 Bhattacharya, A, Meltzer, JP, Oppenheim, J, Qureshi, Z and Stern, N (2016) Delivering on Sustainable Infrastructure for Better Development and Better Climate. Brookings Institute, New Climate Economy and the Grantham Institute for Climate Change and the Environment. London and Washington DC. 50 The World Bank 2013. Financing Sustainable Cities: How We’re Helping Africa’s Cities Raise Their Credit Ratings. Available from: http://www.worldbank.org/en/news/feature/2013/10/24/financing-sustainable-cities-africa-creditworthy 51 Liu, Zhi 2015. Towards Sustainable Urban Transport Finance Mechanisms, from Traffic in Towns: The Next Fifty Years. 52 Fallon A. 2016. How Kampala is building a culture of taxpaying. Citiscope. Published 23 September 2016. Available from: http://archive.citiscope.org/story/2016/how-kampala-building-culture-taxpaying 53 IMF’s Government Finance Statistics Yearbook 2017 54 Ter-Minassian, Teresa, 2007. Fiscal Rules for Subnational Governments: Can They Promote Fiscal Discipline? OECD Journal on Budgeting Volume 6 – No. 3, 2007. 55 Paice E. 2016. Dakar’s municipal bond issue: A tale of two cities. Africa Research Institute. Available from: https://www.africaresearchinstitute.org/newsite/wp-content/uploads/2016/05/ARI_Dakar_BN_final-final.pdf 56 Yusuf, S 2016. Developing a Common Narrative on Urban Accessibility: A Fiscal/Finance Perspective Brookings Institute, Washington DC, December 2016. 57 G30, (2013) Long term finance and economic growth, Working Group on Long Term Finance, Washington DC. 58 OECD, 2006. Environmental Finance Local Capital Markets for Environmental Infrastructure: Prospects in selected transition economies. ISBN-92-64-035966 59 Ivanyna, M. and Shah, A., 2012. How Close Is Your Government to Its People? Worldwide Indicators on Localization and Decentralization World Bank Policy Research Working Paper 6138 60 Gorelick J. 2018. Supporting the future of municipal bonds in sub-Saharan Africa: the centrality of enabling environments and regulatory frameworks. Environment and Urbanization. 30(1) 103–122 61 OECD (2010). Dedicated Public-Private Partnership Units: A Survey of Institutional and Governance Structures.

33

62 Maier, T. (2015, September 15). Toward an effective PPP business model: An eight-point plan for closing the infrastructure gap. Retrieved from http://blogs.worldbank.org/ppps/toward-effective-ppp-business-model-eight-point-plan-closing-infrastructure-gap 63 Ahmad, E., (2018) “Governance models and policy framework: some Chinese perspectives,” Journal of Chinese Governance, April, https:/doi.org/10.1080/23812346.2018.1455414. 64 Burger, P. and Hawkesworth, I. (2011) How to attain value for money. OECD Journal on Budgeting, No. 1, 2011. 65 Rial, Isabel. “One Question, Eight Experts, Part One: Isabel Rial.” Jobs and Development, World Bank, 6 Aug. 2015, blogs.worldbank.org/ppps/one-question-eight-experts-part-one-isabel-rial. 66 OECD (2010). Dedicated Public-Private Partnership Units: A Survey of Institutional and Governance Structures. 67 Maier, T. (2015, September 15). Toward an effective PPP business model: An eight-point plan for closing the infrastructure gap. Retrieved from http://blogs.worldbank.org/ppps/toward-effective-ppp-business-model-eight-point-plan-closing-infrastructure-gap 68 Matsukawa, T., Habeck, O., 2007. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments. Available at: http://documents.worldbank.org/curated/en/708161468135957570/pdf/405300Risk0mit101OFFICIAL0USE0ONLY1.pdf 69 Ahmad, Vinella and Xiao (2017). G24 Background Paper: Contracting Arrangements and PPPs for Sustainable Development. 70 House of Lords (2010), Private Finance Projects and Off-Balance Sheet Debt, Report of Sessions, Vols I and II, Report HL, Papers 63-1 and 63-2. 71 See Ahmad, Bhattacharya, Vinella and Xiao (2015), op cit. 72 Martimort, D and S. Straub, 2016, “How to Design Infrastructure Contracts in a Warming World: a critical appraisal of PPPs,” International Economic Review, 57(1), 61-87. 73 Bhattacharya, A., J. Meltzer, J. Oppenheim, Z. Qureshi and N. Stern, 2016, Delivering on Sustainable Infrastructure for Better Development and Climate Change, Brookings. 74 Peterson, G (2009). Unlocking land values to finance urban infrastructure. World Bank - Trends and policy options; no. 7. Washington, DC. 75 Bowditch, G (2016). Is value capture infrastructure’s new funding panacea? Available at https://sydney.edu.au/john-grill-centre/news-and-insights/insights/is-value-capture-infrastructures-new-funding-panacea.html. 76 DFID (2015). Mobilising Finance for Infrastructure: As Study for the UK Department for International Development (DFID). UKaid and CEPA. Retrieved on 19 September 2016 from https://assets.publishing.service.gov.uk/media/57a08979ed915d622c00022b/61319-DfID_3_Three_page_summary.pdf

77 Commonwealth of Australia (2016). Using value capture to help deliver major land transport infrastructure: roles for the Australian Government (Discussion Paper). Department of Infrastructure and Regional Development. 78 Smolka MO. 2013. Implementing Value Capture in Latin America: Policies and Tools for Urban Development. Lincoln Institute of Land Policy. Cambridge. Available from: https://www.lincolninst.edu/sites/default/files/pubfiles/implementing-value-capture-in-latin-america-full_1.pdf 79 Ahmad, E., G. Brosio and J-P. Jimenéz, 2018, “An expanded role for property taxation in Latin America: adopting a simplified tax structure and digital technology,” Jornadas of CEPAL and IADB, Cartagena de Indias, September 7, 2018 80 Rode P, Heeckt C, Ahrend R, Huerta Melchor O, Robert A, Badstuber N, Hoolachan A, Kwami C. 2017. Integrating national policies to deliver compact, connected cities: an overview of transport and housing. Coalition for Urban Transitions, London and Washington, DC. Available at: http://newclimateeconomy.net/content/cities-working-papers 81 Peterson, G (2009). Unlocking land values to finance urban infrastructure. World Bank - Trends and policy options; no. 7. Washington, DC. Suzuki, H. Murakami, J., Hong, Y. and Tamayose, B. (2015). Financing Transit-Oriented Development with Land Values: Adapting Land Value Capture in Developing Countries. The World Bank, Washington DC. 82 Sandroni, P. H. 2011. Recent experience with land value capture in São Paulo, Brazil. Land Lines 23(3): 14–19. 83 Vetter DM, Vetter M. 2011. Land-Based Financing for Brazil’s Municipalities. Lincoln Institute of Land Policy. Available from: https://www.lincolninst.edu/sites/default/files/pubfiles/1953_1274_LLA111004.pdf 84 DFID (2015). Mobilising Finance for Infrastructure: As Study for the UK Department for International Development (DFID). UKaid and CEPA. Retrieved on 19 September 2016 from https://assets.publishing.service.gov.uk/media/57a08979ed915d622c00022b/61319-DfID_3_Three_page_summary.pdf. 85 Suzuki, H. Murakami, J., Hong, Y. and Tamayose, B. (2015). Financing Transit-Oriented Development with Land Values: Adapting Land Value Capture in Developing Countries. The World Bank, Washington DC. See also Wang, Wu and Ye (2018) op cit., and Platteau and Wahhaj (2012), op cit. 86 Platteau, J-P and Z. Wahhaj 2012, “Strategic Interactions between Modern Law and Custom,” in V. Ginsburg and D. Throsby, Handbook of the Economics of Art and Culture, Chapter 22, North-Holland. 87 Patel SB, Saluja J, Kapadia O. 2018. Affordable housing needs affordable transit. Environment and Urbanization. 30(1) 123–140 88 The World Economic Forum and PwC. 2012. Strategic Infrastructure Steps to Prioritize and Deliver Infrastructure Effectively and Efficiently