Infrastructure and services are key to driving productivity in African cities and making them liveable, sustainable spaces. They are also essential for attracting investment, which in turn helps to enhance employment opportunities – especially among rapidly growing youth populations – and underpins structural transformation.
But providing urban infrastructure and services requires significant financing and funding, which are not always easy for African cities to secure.
Financing – and particularly upfront capital investment – is needed to build new infrastructure and replace the old. Funding is required to pay for ongoing operational and maintenance costs, as well as covering repayment costs if capital investments have been made through borrowing. And as with most things, both financing and funding are context-specific; how they happen will differ between cities, dependent on the local legislative institutional and economic environment – along with other factors.
A new working paper by Astrid RN Haas and Gundula Löffler highlights trends and lessons on municipal financing in African cities, providing a valuable overview of this crosscutting issue across ten of ACRC’s focus cities: Accra, Dar es Salaam, Freetown, Harare, Lagos, Lilongwe, Maiduguri, Mogadishu and Nairobi.
It draws together research findings on city systems, as well as seven urban development domains: land and connectivity; informal settlements; youth and capability development; safety and security; housing; structural transformation; and health, wellbeing and nutrition.
Starting with a brief overview of how functional responsibilities are usually assigned in African cities, the paper then moves onto reflecting on the three key components of municipal finance – expenditures, revenues and borrowing – and how these manifest across the ten cities we looked at.
Expenditure: Who pays for what?
Based on the principle of subsidiarity, city governments should be responsible for spending on infrastructure and services that have a local remit and impact. The functional responsibilities of a city government – or of the local government entities who govern the city – are dependent on the level of decentralisation, usually codified in the country’s national legal framework. So where there are gaps or ambiguities within the legal framework, this often leads to poor coordination or struggles over competencies.
In the cities covered in this paper, expenditure assignments to city governments were fairly limited, leaving central governments to play an important role in providing key urban services. While some cities, including Nairobi, have a more substantive mandate, most city governments only have exclusive responsibility for a few services – such as streetlighting or waste management. Many other functions – including health, education, water and sanitation – are more commonly shared between central and city governments, with cities focusing on implementation. For areas like housing or transport, expenditure responsibilities tend to be predominantly assumed by central government, without involvement from the city government.
Despite these general trends, circumstances across cities and countries vary considerably, with the nature, degree and maturity of decentralisation creating a unique context for each case.
Revenues: Where does the money come from?
For most African cities, including the majority studied by ACRC, intergovernmental fiscal transfers are the most important source of revenue – although some have been making progress towards mobilising a greater share of local revenue. Intergovernmental fiscal transfers involve allocating financial resources between different levels of government, and provide vital funding and financing for cities to cover at least some of their infrastructure and service delivery responsibilities. However, certain conditions restricting the use of these resources can limit the cities’ ability to use them for the things they really need.
To reduce dependency on these transfers and to increase their overall revenues, many cities – including Freetown and Kampala – have been focusing on improving own-source revenue collection, particularly around property taxes. While some notable progress has been made, especially around leveraging digital reforms, there are still a number of political and administrative challenges that need to be overcome.
Borrowing: Where else could the money come from?
Many cities are increasingly exploring municipal borrowing as a way to finance urgently needed capital investments, but significant obstacles remain. Very few African cities have been able to overcome the legislative, political and capacity-related constraints preventing them from accessing long-term debt financing from capital markets. And many have a long way to go to become “credible” borrowers. But central governments can and should support them on this journey, by providing an enabling environment along with safeguarding against risks.
Many of these same constraints are also hindering African cities from being able to tap into much-needed climate financing, which is typically provided in the form of loans. On top of this, the overall amount of climate finance flowing into Africa is very small and unevenly distributed; only 3% of climate funding in 2019 went to Africa, with 40% concentrated in just five countries. Part of the issue relates to demand, with most African cities having insufficient projects in the pipeline to attract climate finance.
So while changes are needed to make the global climate finance architecture more compatible with the needs of African cities, considerable work is also required at the country and city levels – on both legislative and administrative fronts. Improvements in these areas would contribute significantly to enabling African cities to borrow more widely, and to access climate financing.
Investing in the future of Africa’s cities
City infrastructure and services are public goods that enhance liveability, boost the productivity of residents and firms, and contribute to the overall sustainability and resilience of urban areas. To secure these benefits and keep up with rapid rates of urbanisation, African governments need to substantially increase funding and financing for cities, ensuring they reach the local level where they are so needed.
Many city residents harbour distrust towards their governments as a result of shortfalls in the quantity, quality and distribution of urban services and infrastructure. Reforming the municipal finance system would therefore not only enhance the provision of essential services, but also strengthen the social contract with citizens. In turn, this can create a positive cycle – encouraging better tax compliance, larger revenues and improved infrastructure and services – leading to inclusive and sustainable urban growth and development.
Header photo credit: Random Institute / Unsplash. A construction site in Freetown, Sierra Leone.
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