Municipal Finance: Self-Reliant Cities Generate their Own Revenue
Cities account for nearly 80 percent of global domestic product. A suite of municipal services exists to support urban economic growth including water and sanitation, housing, transportation, and more. Both city residents and the businesses employing them require these services to thrive. However, despite growing demands from rapidly urbanizing populations, cities have struggled to sufficiently finance these key urban services. This gap in service provision is most consequential for the livelihoods of vulnerable populations, especially the urban poor. As such, closing the gap between municipal revenues and expenditures becomes paramount in every country’s journey to self-reliance.
USAID has long recognized the importance of fiscally self-reliant cities in advancing democratic governance. In the countries where USAID is a partner, municipal finance has the potential to improve commerce and expand industry through more reliable and predictable urban service delivery and infrastructure development. Leading up to the United Nations Conference on Housing and Sustainable Urban Development (HABITAT III) in 2016, USAID supported the C40 Cities Finance Facility. USAID, led by the Office of Economic Policy, supports six current projects that focus on subnational revenue mobilization, providing a range of case examples that can inform cities in their efforts to generate own source revenue. USAID also offers a range of other mechanisms to support local fiscal reforms.
To fund necessary urban services, cities can rely on four financing mechanisms: intergovernmental transfers, own-source revenues, debt issuance and loans, and international development loans and grants. Each of these options has their opportunities and challenges. Existing studies favor efforts by local authorities to raise their own revenue to finance infrastructure and essential services. Local revenue generation has been connected to greater fiscal accountability, transparency, and democratic public engagement. Local taxes and user and service fees also represent more stable, reliable, and consistent revenue streams compared to other forms of finance. Experts have argued that across Africa, own-source revenues such as the property tax has been one of the most underutilized funding streams. For example, estimates have suggested that the property tax contributed an average of 0.38% of African countries’ GDPs between 2008 to 2013, compared to 1.80% in OECD countries. Because of this underutilization, scholars have raised the need for more intentional targeting of property taxes as a potential source of revenue in African cities.
Sustainable urban economic growth is a key priority as cities continue to expand. This growth can only be supported through providing necessary urban services to residents, however many cities remain unable to deliver these services due to capital constraints. These limitations are multifaceted in nature, ranging from internal factors such as inadequate tax collection and external factors like murky regulatory environments. USAID will continue to work with countries and municipalities to address these barriers and build adequate financing mechanisms that meet their national development objectives.