Urban infrastructure in Sub-Saharan Africa

Harnessing land values, housing and transport

Matt Glasser

July 2015

Financing Infrastructure for the urban poor

• “Urban poor”

• “Infrastructure”

• “Financing”

Words can refer to different concepts

Who are the poor?

Dar es Salaam

Thinking about poverty and wealth

1. Low vs. high income demographics

• And many points in between

• And corporate entities

2. Few assets with little value vs. many assets with high value

• Ditto

3. Spending and economic activity

• Ditto

(Re) distribution?

• Income redistribution income taxes (national tool usually)

• Asset redistribution land-based financing? (LG tool)

• Social burden of land

• Henry George (1879): the location value of land is created by society, so tax/rent on land is the most logical source of public revenue

What is infrastructure?

• Services?

• Serviced sites?

• Complete housing units?

• Transit systems?

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• Residential?

• Commercial?

Urban infrastructure needs

Three categories: 1. existing service delivery gaps (mostly poor?) 2. population and economic growth (some poor) 3. replace and rehabilitate aging infrastructure (some poor)

What do we mean by financing? 1. Sources of revenue

• Taxes

• Grants

• Fees and charges

2. Ways of leveraging revenue • Borrowing

• PPPs

3. Ways of providing subsidies • Supply side

• Demand side

• Incentives and distortions

It matters how infrastructure is financed

Financing tools shift financing burden

• local taxes:

• cost borne by local taxpayers

• national grants:

• cost borne by national taxpayers

• land-based financing, cost is borne by:

• Those who use / benefit from infrastructure, or

• Those who create the need.

Questions for discussion

1. Should the rich help pay for infrastructure for the poor?

1. How can this be done with fairness (equity) and efficiency (avoid perverse incentives)?

1. Role of national and local governments?

Infrastructure costs

• cost of planned investments includes: • construction costs

• design and supervision costs (engineering consultants),

• compliance costs (e.g. EIS and mitigation)

• financing costs (transaction and debt service)

Closing the gap

• Lower costs? • The more you do, the more it costs (cobblestone vs.

paved roads, houses vs. sites, public goods vs. private goods)

• Limit waste and improve efficiency

• Delay capital expenditure? • Add infrastructure in smaller steps

• Increase revenues? • Fees and charges for water, electric • Wealth, income, and economic activity taxes for

public goods (most roads, health, education) • Housing? • Keep subsidies separate from charges

• Accelerate revenues? • Development charges • Impact fees

Local Government Revenue

1. Transfers from national government

2. Own source revenues

• taxes

• fees and charges

• capital revenues

With a good legal framework, cities can raise all the revenue they need. They dominate in terms of:

• wealth (property taxes)

• transactions (sales tax, VAT, etc.)

• income (personal and corporate income tax)

General Taxes v. User Charges

• Property taxes

• Sales taxes

• Income taxes

• Business taxes

• Tariffs, service charges, tolls, etc.

• Cover cost of production

• Targeted Subsidies

No good excuse for sloppy billing and collection!

Questions for discussion

1. Should the rich help pay for infrastructure for the poor?

• Consequences of inequality

2. How can this be done with fairness (equity) and efficiency (avoid perverse incentives)?

• Minimize cost

• Capital contributions as early as possible

• Capital subsidies transparent and up front

• Portable subsidies

3. Role of national and local governments?

• Regulatory role

• Fiscal (tax and spend role)

• Delivery role (housing is an issue)

Land-based financing - General • Property taxes are the archetype

• As value goes up, tax base increases, even if tax rate is steady.

• Value reflects location and amenities: • if a highway intersection or metro line is built,

value increases • If a rural property becomes part of the city,

value increases

• Keys to success: • Keep tax rolls up to date, so all properties are

included • Regular re-valuation to capture changes in

value

Land-based financing - TIF

• Tax increment financing • Can be used with property tax

(and other local taxes which grow with urbanization)

• Base year collections established

• Increment over base year can pay for infrastructure

Development charges

Capital cost recovery fees

• pro rata share of capital costs city has incurred to provide services,

• e.g. water / sanitary sewage treatment plants, mains, etc.

• imposed when user connects to networks

Impact fees

• compensate for off-site impacts, e.g.

• new shopping mall attracts traffic, clogging streets off-site.

• paving increases drainage downstream. Ditches, culverts, are needed.

• impacts are cumulative.

• Aggregate impacts have real financial and economic consequences.

Other land-based financing

• Betterment levies

• A special tax on a parcel benefitted by infrastructure

• Meant to captures appreciation in value

• Compare to property taxes with regular valuations

• One time charge, may be paid over time

• Special improvement / downtown development districts

• Not limited to infrastructure

• Usually at least majority of property owners consent

• Can have one time or recurrent charges

• Special / Quasi municipal districts

• A separate juridical entity

• Can have taxing powers like municipality

• Can be inside or outside municipal boundaries

• Can be special purpose or general

Leverage

• Borrowing

• Loans

• Bonds

• Leases

• PPPs

Pros and cons of leveraging

Advantages:

• More infrastructure more quickly

• Future users contribute

• Supports decentralization and local priorities

Disadvantages:

• Limits flexibility of future councils

• Borrowing can make a bad financial situation worse

• Investments cost even more, so if used unwisely, future generations are left with unnecessary burden

End

Urban infrastructure in Sub-Saharan Africa – harnessing land

values, housing and transport