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to find solutions. Local revenue generation and autonomy are critical to enable local governments to meet their responsibilities for expenditure on basic services in an accountable and efficient way. However, sustainable financing of basic services is not out of reach, even in the regions with the greatest backlogs in investment. As mentioned in the African chapter, the cost of full household connections in water and sanitation networks is estimated at 1% of GDP, compared with an estimated 6.5% GDP cost of the lack of adequate access to these services. Given their sustained GDP growth rate (beyond 4%-5%), most African countries can build solutions without waiting for outside resources. Other regions are confronted with the same challenge. National and local governments need to join forces to set appropriate taxes and tariffs levels, improve efficiency of budget management and experiment with innovative financing models. In many countries, structural reforms are still required to bridge the gap in basic service access and allow decentralization to fulfil its promise.
Borrowing and other alternatives for basic service financing Public financing through borrowing, local taxes and tariffs has been the backbone of most infrastructure investment in Western cities over the past two centuries. Municipalities have led the process, supported by central governments.55 In emerging countries today, many cities are borrowing to expand provision, and their traditional options are loans and, in some countries, debt obligations on the markets (bonds). Other financing models include land value capture (see Box 4) and PPPs, which have not completely fulfilled the high expectations many had for them (see below ‘partnership with private sector’).
In OECD countries, the financing system is conducive to sub-national borrowing, but elsewhere it is a mixed picture. In many middle-income countries, local government borrowing is legally constrained. In Asia, local governments in middle-income countries are permitted to access loans, but this is difficult in practice. Weak creditworthiness and administrative constraints curb access outside metropolitan areas and large cities.56 The main exception is China, where infrastructure financing involves local borrowing from domestic and international markets and the use of land as collateral. In some municipalities, land has financed up to 70% of local infrastructure investment through leases or by serving as collateral for loans. The China Development Bank provides about 50% of infrastructure funding, and the Urban Development Investment Corporation, created by municipalities, places assets as collateral for local loans under a single umbrella.57 In Eurasia, loan mobilization from commercial banks is often constrained by law or the low credit-worthiness of local governments and utilities.58 In Latin America, local governments in most countries can borrow through loans or bonds, subject to annual debt limits, and large cities are increasingly issuing bonds. Municipal banks or national funds dominate local government borrowing, but commercial banks are also active. Foreign borrowing is not allowed without authorization from higher levels.59 Longterm financing for local basic services is also difficult to obtain in non-oil producing countries of the Middle East and West Asia. What funds are available are allocated to infrastructure projects in major cities. Some municipal financial institutions have been created in the region to provide local governments with investment capital.60 Access to borrowing also remains very limited in Sub-Saharan Africa, with a few exceptions (South Africa). Municipal development funds continue to dominate local
Juuti and Katko (2005); BarraquĂŠ (2007), cited in D. Hall and E. Lobina (March 2012) 55
56
See Asia Pacific Chapter.
Peterson and Muzzini (2005) pp. 224-225. 57
58
See Eurasian Chapter.
Latin American Chapter and GOLD II Report 59
60
See MEWA Chapter.