countries

FIGURE 2.10

Possible measures applied to mitigate the short- and medium-term negative effects of COVID-19 on subnational governments in OECD countries

• CentraI government transfers/grants/subsidies: Increasing block or earmarked grants Establishing specific grants to cope with specific needs Advancing payment/acceleration/reorganization of central government transfers and distribution of subsidies (e.g., EU grants) and ability to temporarily use specific funds (e.g., liquidity associated to pension funds) • Activating rainy-day funds and equalization mechanisms • Tax arrangements: Modifying tax-sharing arrangements (increasing subnational shares of national taxes) Transferring or creating new taxes Providing more taxing powers Anticipated/early transfers of subnational shared taxes or tax collected centrally • Compensating for loss in revenues

Revenue-side measures

• Easing spending responsibilities • Temporarily transferring spending responsibilities to the central government • Temporarily reducing employer's contributions for

SNGs • Exempting SNGs from the VAT rate in the purchase of personal protection material, or other related to combating the outbreak of COVID-19 • Adapting public procurement procedures

• Adapting budgeting framework to facilitate budget management • Introduction of multi-annual budgeting practices • Setting up special COVID-19 accounts • Loosening of reporting requirements • Loosening of regulation for entering into contracts • Encouraging the use of e-government tools in financial decisions and management • Helping SNGs conduct financial analysis and develop fiscal sustainability/resilience plans • Helping SNGs fight against fraud, unpaid taxes, etc. • More flexibility in staff management • Supporting local public companies

Expenditure-side measures

• Relaxing spending rules on current and investment Fiscal rules expenditures and debt • Relaxing rules concerning budget deficit and budget balance rule • Debt: • Relaxing debt rules caps debt stock and services, authorization, etc. • Debt-relief program for highly indebted subnational governments (suspension or cancellation of loan payments) • Easier access to credit lines for short-term borrowing • Access to specific COVID-19 credit lines • Easier access to long-term borrowing • Loan guarantees from central/federal government • Assisting local government in arranging low-interest loans • Central bank intervention on financial market

Financial management

Source: OECD 2020b, 52. Note: EU = European Union; SNGs = subnational governments; VAT = value added tax.

Fiscal-side and debt-management rules appear to be more relevant measures in developed than in developing countries. Relaxing spending rules on current and investment expenditures is meant to allow temporarily using capital revenues for covering operating expenditures. The challenges in developing countries are, first, that such rules are already applied quite readily; even clear classification of current and development revenues and expenditures are blurred in practice in many developing countries (Kopanyi and Awan 2020). Second, soft budget constraints are common in developing countries, budget deficits are often avoided in budget plans, but often appear substantial in actual budgets. So, offering to soften budget balances further may help but also sends dangerous policy signals. Debt relief and soft loans look like the most promising means to help cities’ postpandemic recovery, in addition to targeted pandemic grants.

Financial management measures are vital means that can help postpandemic recovery. Most of the measures listed in figure 2.10 are applicable in developing countries. For example, improving budgeting has been a prime objective of donors with moderate success in developing countries for decades, yet it remains important as a medium-term measure. The use of e-government tools has started and shows promising results, and it should be further promoted. Setting up special COVID-19 accounts to ensure clear bookkeeping, spending, and measuring of results is a sensible tool. Helping cities to regularly conduct sound financial analysis to understand their fiscal health and plan informed actions is among the most powerful medium-term measures. Finally, enhancing financial management of municipal enterprises (like water utilities) and applying clear accounting of transactions between the municipalities and the enterprises are vital measures in the short to medium terms.

Postpandemic recovery

Experts predict a strong economic boom after the crisis ends (Buchoud et al. 2020; OECD 2020a), albeit when and how it will start and happen is still to be seen. Assets will play a special role in this process. First, delayed developments and repairs need corrections. Second and more important, assets can be used strategically to fund financial and economic recovery of municipalities. Third, well-selected investments can help cities transform the local sphere, improve resilience, and improve livability. The expectations are high. “The COVID-19 crisis entails an excellent opportunity for planners and policy makers to take transformative actions toward creating cities that are more just, resilient, and sustainable” (Sharifi and Khavarian-Garmsir 2020, 1).

Local governments are responsible for critical aspects of recovery measures in health care, social services, economic development, and public investments at the front line of crisis management in developed countries (OECD 2020b). In contrast, central governments in developing countries apparently prefer centralized measures, use units of national or regional governments, and request only logistic support by local governments. In doing so they might ignore local priorities. The recovery phase can help build prosperity and resilience by contributing to the long-term potential and sustainability of a country’s development pathway, but recovery projects should be selected strategically. OECD experts warn avoiding against atomizing the allocation of the funding in a myriad of small infrastructure projects to spend the money rapidly at the expense of longterm priorities (OECD 2020b). Hammer and Hallegatte (2020) offer a checklist for selecting recovery projects that boost the economy and support sustainability and resilience.

Quality infrastructure investment is part of the answer to the COVID-19 crisis. National and subnational governments need to invest more—by better exploiting the existing and potential fiscal resources for investment and mobilizing private investment. The IMF Fiscal Monitor estimates that a 1 percent gross domestic product (GDP) increase in public investment in advanced economies and emerging markets has the potential to push GDP up by 2.7 percent and private investment by 10.0 percent, and to create between 20 million and 33 million jobs, directly and indirectly (IMF 2020, 41).

The fiscal impact of the COVID-19 crisis on subnational governments depends to a large extent on the support that central or federal governments provide them to maintain or boost subnational investment through capital grants

(stimulus packages) and by building the borrowing capacity of subnational governments. Experts see both similarities and differences between the 2008 financial crisis and the COVID-19 pandemic crisis that will be vital to understand for investment recovery. “While watching the sustainability of public finances over the longer-term, it is important for countries to avoid replicating the scenario that took place after 2010, when drastic cuts in subnational public investments created a procyclical effect impeding the recovery. In some regions and cities, public investment projects are already cancelled or postponed” (OECD 2020b, 61).

Public investment recovery strategies Before the COVID-19 crisis, the levels of public and private investments in the OECD countries were still below the 2008 precrisis level; a postpandemic investment boom seems inevitable. Many governments in developed countries have announced large investment recovery packages, and these are already much larger than those adopted in 2008. “The recovery packages prioritize three areas: strengthening health systems, digitalization, and accelerating the transition to a carbon neutral economy” (OECD 2020b). It is still to be seen how far developing countries would be able and willing to adopt, finance, and implement similar strategic priorities. Identifying sustainable financing instruments and modalities tailored to the circumstances of developing countries will play a critical role in postpandemic recovery.

Adopting adequate national and local strategies and policies for postpandemic investments is among the urgent next steps. IMF experts see four specific tasks for national governments: find out (1) how investments can be accelerated, (2) how investments can foster job creation, (3) how fiscal multipliers can have high positive effects, and (4) how investments can foster the society’s resilience (IMF 2020). Lack of ready-made projects in developing countries may hinder recovery. Experts propose four critical steps to make investments effective: “focus on maintenance of existing infrastructure; review and reprioritize active projects; create and maintain a pipeline of projects that can be delivered within a couple of years; and start planning for the new development priorities stemming from the crisis” (IMF 2020, 34).

Maintaining current assets and operations. Maintenance works are underfunded and often deferred all over the world in crises, especially in developing countries; Kenyan counties spend a tiny fraction of required maintenance costs. Focusing first on maintenance in postpandemic recovery offers multiple benefits. Maintenance works are relatively small and simple and can be deployed quickly, and some create jobs for unskilled labor. Maintenance and renewal help advance technology, expand capacity, and reduce operation losses substantially in modalities cheaper than new projects.

The performance and impact of many infrastructure assets fall way behind projections because they are poorly managed. Cities invest in large-scale projects without proper calculation, planning, and budgeting for their operation phase (Lindfield and Teipelke 2019). Adequate and steady maintenance programs will be key for developing countries to achieve sustainable development goals. Adopting life-cycle AM policies and tools would also help enhancing maintenance programs. But these require reliable data on asset performance, clear accounting of capital and current expenditures, and assessing repair or replacement options in medium-term and life-cycle perspective. “For that to happen, budgets should report repair and maintenance spending exhaustively” (IMF 2020, 35).

Reviewing and reprioritizing projects. Many local governments had to cut investment spending and have suspended, delayed, or cancelled approved investment projects in 2020 (IMF 2020). Simply continuing all projects after the end of the pandemic crisis is inadequate or impossible. It is vital for governments to revisit development plans and reprioritize and restart budgeted projects that contribute the most to economic and service recovery. They may need to redo cost-benefit analyses based on new data and emerging situations (for example, changes in trade and tourism patterns), since the crises may have created uncertainties and risks resulting in the need to align or realign projects. Adopting postpandemic recovery action plans would be a powerful way to streamline investments and other interventions.

Establishing new development priorities. National and local governments alike may need to establish new development priorities in response to the global pandemic and economic crises. Correspondingly, they need to revisit project pipelines.3 The problem is, however, that such pipelines hardly exist in either national or local governments in many developing countries. Thus, in responding to the pandemic crisis cities need to establish a medium-term project pipeline, for which a capital improvement planning procedure (CIP) and life-cycle AM approach would be instrumental. Accessing grants from donors or national government, or attracting private capital, requires a solid, convincing, realistic pipeline of projects, much more then vague ideas or enthusiastic visions. Furthermore, it is “important to ensure that investments from stimulus packages do not impose large, stranded asset costs on the economy in the coming decade: for example, because they bet on declining technologies or place projects in high-risk flood zones” (Wahba et al. 2020).

Funding and financing postpandemic recovery Discussions on postpandemic recovery often ignore the challenges or assume optimistically the availability of funds and financing instruments. Instead, they focus on other aspects of recovery and let finance specialists bother with funding issues. (The other issues are equally important and include, for example, the environment, climate change, and social disparities.) Some tacitly assume that stimulus packages from donors and national governments will boost local investments but raise concerns about cities’ motivation for quickly boosting development in ways that may ignore or undermine environmental sustainability (Bassi, Pallaske, and Guzzetti 2020).

International donors and other organizations led by the G20 have adopted a landmark global action plan to support developing countries (box 2.3), since inevitably national governments or national budgets will play a major role in financing recovery.4 The main objective is to provide liquidity and enable developing countries to grow out from the crises over time with relative financial stability. However, the G20 action plan supports cities or local governments only indirectly (Blake and Wadhwa 2020). Undoubtedly international donors and national governments should provide stimulus grants eventually down to local governments too.

But a task force (T20) of the G20 pointed out that the international aids overwhelmingly target national governments, while most recovery measures can and should be implemented locally. Thus, T20 proposes including a specific Urban Platform in the G20 global action plan, revising the processes by which local priorities are incorporated into international financial institutions’ development assistance programs, and adopting a G20 sustainable and resilient urbanization