Local
Finance
Context
Municipal finance matters for the sustainability of local government provision of goods, infrastructure and services. Prior to the health crisis, cities and regions had already been facing several financial shortcomings and had been calling for the reshaping of a new financial ecosystem. The goal would be to achieve adequate funding, more fiscal autonomy and predictable intergovernmental fiscal transfers to support sustainable development projects at the local level. Efforts had also been carried out towards attracting both public and private resources for local capital investment projects.
While the lack of sufficient municipal funding is a global issue, local government expenditure varies widely between low- and high-income countries. For instance, in 2016, the average public expenditure by local and regional authorities in Africa was around 285$ Purchasing Power Parity (PPP) per capita, compared with an average of 5.890$ PPP per capita in OECD countries. Less than a quarter of African local governments’ expenditure is devoted to capital investment, compared to around 50% in OECD countries.
The COVID-19 outbreak has placed local and regional governments under additional financial pressure, as they are having to ensure the provision and financing of basic public services while incurring extraordinary expenditure on prevention and containment measures. This pressure is likely to persist and even worsen, at least in the short-mid-term. Simulations based on data from UCLG Africa’s Local Finance Observatory show that African local governments, on average, are likely to lose 30-65% of their resources, while the American National League of Cities, for instance, estimates a revenue loss for US cities of US $360 billion between 2020 and 2022.
24%
and about 24% of total public expenditure.
65%
65% of the SDGs need local and regional governments’ involvement to be achieved.
Challenges
Local governments constantly face the challenge of making very difficult choices, trying to address a variety of urgent needs – guaranteeing basic goods and services; promoting inclusive policies; establishing environmentally sustainable processes – all with finite resources. This challenge is compounded by the fact that local governments usually have little self-sufficiency and are heavily dependent on transfers from national governments, in addition to having limited access to capital markets, especially in low-income countries in Africa and Asia where the bulk of urban growth is taking place and the unmet need for infrastructure and services is massive. The COVID-19 crisis is forcing local governments to do even more with less. Local revenues are largely being impacted by emergency measures entailing deferred property tax and utility fee collection, combined with a decline in economic activity and closed-down revenue-generating infrastructure (parking lots, sports facilities, etc.). Besides urgent health measures, local governments are required to invest more in social protection measures, local economic development and local service provision to support those most affected by the crisis, including informal workers.
Learn more about the challenges being faced by cities and regions:
Needs
In order to achieve municipal financial sustainability, especially in times of crisis, increased support to local and regional governments will be needed in at least three critical focal areas:
Rebuild local governments’ fiscal space: This includes granting local governments greater flexibility to (i) collect taxes and set tax rates and tax bases and (ii) identify innovative sources of revenues (including through renewed partnership with the private sector), with a view to increasing their fiscal autonomy.
Rethink the nature of transfers: This requires securing stable and predictable transfers from national governments, to be used at the discretion of local governments to (i) finance their operating expenditure and (ii) support local economic development in strategic sectors.
Help local governments to access capital markets: This entails increasing access to long-term domestic and external finance by (i) developing subnational development banks and mechanisms for risk transfer and pooling (ii) scaling up pilot experiences in blended finance (International Municipal Investment Fund) and pool financing (Africa Territorial Agency).
As an immediate response to the COVID-19 crisis, local governments are calling for the mobilization of additional funds to partially offset exceptional expenses – be it through intergovernmental fiscal transfers, international aid, local solidarity or emergency funds.
Responses
Johannesburg is working to provide financial packages directed to local businesses most affected by the COVID-19 crisis
Mexico City is setting up a programme called “Adopt an SME” for bigger firms to provide direct financial support to smaller ones
The regional government of Antioquia allowed municipalities to defer their debt repayment for at least 2 months
Responses
Johannesburg is working to provide financial packages directed to local businesses most affected by the COVID-19 crisis.
Mexico City is setting up a programme called “Adopt an SME” for bigger firms to provide direct financial support to smaller ones.
The regional government of Antioquia allowed municipalities to defer their debt repayment for at least 2 months.
Learn more about other responses and initiatives in terms of Local Finance:
Key Takeaways
- Cities need greater agency in and control over the fiscal chain in order to be able to design local fiscal responses adapted to their context so that they are better equipped to react in case of crises or emergencies.
- Cities need to provide a diverse set of support measures that are able to address the needs of large, medium and small businesses. Special attention must be put towards engaging vulnerable actors, such as women.
- Financing solutions must be established through a multi-stakeholder and multilevel process, providing a whole-of-government and whole-of-society response to the outbreak.
- Emergency mutual support mechanisms must be promoted, allowing greater social and financial solidarity among local governments through city-to-city cooperation at global, regional and national levels.
- Financial support packages should be aligned with the rebuilding and rethinking of local finances, to secure sustainable finances for the provision of basic public services.
- Local governments should maintain a continued and enhanced policy dialogue with national governments to call for local financial autonomy and predictable, transparent and commensurate fiscal transfers.
- An international relief and recovery fund should be set up to unlock local governments’ access to funds in support of local service provision.
Download
the Press Release
Beyond
The Outbreak
Building
Back Better
The UCLG Decalogue
“Adopting financial support mechanisms that allow local and regional governments to continue to work at the frontline for the communities during the crisis and in the post COVID-19 recovery phase.”
Resources
For further information on the topic of Local Finance and its impact on cities and regions, please refer to the related resources included below.
- UCLG, Manifesto on the Future of Local Finances
- FMDV, The Potential Catalytic Role of Subnational Pooled Financing Mechanisms
- CCFLA, Localizing climate finance, mapping gaps and opportunities, designing solutions
- UNCDF, Guidance note for immediate responses to COVID-19 recommended for local governments
- UNCDF, Blog on COVID-19
- UNCDF, Operational Expenditure Block Grants
- FCM, COVID-19 resources for municipalities
- Public Services International, Lockdown pushes digitalisation through in Italian public services
- Transnational Institute, Public Finance for the Future We Want
- Public Services International, The tragedy of the private the potential of the public
- OECD and UCLG, 2019 Report of the World Observatory on Subnational Government Finance and Investment
- OECD, Cities policy responses
- OECD, The territorial impact of COVID-19: managing the crisis across levels of government
- UNDESA, Corona crisis causes turmoil in financial markets
- IMF, Policy responses to COVID-19
- Covenant of Mayors in Sub-Saharan Africa, Climate Finance Landscape forSub-Saharan African Cities
