Anthony J. Venables

As the transition to a net zero global economy takes hold, there will be new opportunities for growth across a wide range of urban industries and services. City governments in sub-Saharan Africa and South Asia need to proactively plan how they will leverage this to deliver on local productivity and job creation objectives.

Climate change has presented cities with new challenges and opportunities for improving their liveability. If well-managed, cities offer both adaptation and mitigation benefits, as well as sustainable development opportunities, that other forms of living cannot.

The case of Mzuzu illustrates how secondary cities, where revenues are often incredibly low and capacity is minimal, can innovate and lead the way on municipal finance reform. Mzuzu is Malawi’s third largest city. The focus of this case study is a simple and fit-for capacity property valuation system that increased realised revenues seven-fold between 2013 and 2018:1 The Revenue Mobilisation Programme (REMOP). Although the programme was initially seen to be a success, several serious misgivings continue to inhibit further progress. These centre on legal barriers in the current property valuation process in Malawi. More broadly, issues such as revenue pilferage, lack of capacity for financial anagement, land ownership disputes between spheres of government, and national rural bias continue to prevent Mzuzu from achieving a sustainable financial position. For development partners, the example of Mzuzu provides a stark reminder of the vital importance of widespread stakeholder engagement and caution for legal obstacles in order to achieve sustainable project success. It also illustrates the potential of using smaller cities, with more flexibility and somewhat strong incentives for reform, as a useful starting point to trial new revenue enhancement innovations. The Development Fund for Local Authorities (DFLA), a special entity set up for small and low-cost loans to local governments in Malawi, also presents an interesting model for further exploration. By helping local authorities through the process of lending, they are building local government creditworthiness and enabling them to develop systems for future debt finance. Malawi’s cities, being some of the poorest in the world and in a country with relatively low level of urbanisation, are still at the beginning of the development curve. This early stage brings numerous challenges that are yet to be faced as well as an enormous opportunity to learn from the mistakes and successes of other cities in similar contexts. The cities are still at the critical juncture where they can invest in the urban infrastructure essential for livability and productivity before mass settlement takes place.

The city of Dakar is one of the only cities in Africa to come close to taking a municipal bond to market. The US$40 million bond, set to launch in 2014, was designed to fund a new market hall for informal traders in the city. The market would relocate more than 4,000 street vendors, with the aim of moving them from side streets into a safe and central place to sell their goods, with access to credit agencies and other market services. Development partners, including the Bill and Melinda Gates Foundation, the World Bank’s Public-Private Infrastructure Advisory Facility (PPIAF), Cities Alliance, and USAID, played a crucial role in making the bond terms viable – both in shouldering the financial burden of developing internal creditworthiness, and in providing expertise and guarantees to reduce the risk. Although the bond’s launch was ultimately stopped by national government decree, the process of preparing for the bond has greatly improved the financial management capabilities and creditworthiness of the city. As a result, Dakar’s bond journey is still paying dividends to the city today, with a number of successful concessional and commercial loans. The process also deepened the city’s connection with its residents – with small bond denominations, informal traders were one of the key investors. The motivation for the bond was in part due to the city’s lack of control over its financial resources. While the most recent decentralisation law amendment, Acte III de la Décentralisation of 2013, has seen many responsibilities devolved to the local level, finances to deliver on this new mandate have not followed. In fact, all revenue and expenditure for local governments in Senegal are processed at the national level, leaving little room or incentive for financial reform. Surprisingly, despite this, the law gives local governments relative independence in taking on debt. This meant that when Mayor Sall came into office with a vision for change, the only viable financing opportunity within the city of Dakar’s control was via the latter. This legislated independence is also the reason why the halting of the bond was so heavily contested. The city of Dakar provides an example of the importance of the political landscape in effecting any innovative reforms, as well as the need for the national government to buy-in to the fact that successful cities are in their interest as well. This is particularly critical in Dakar’s case, given the city’s finances are managed at the national level. Fortuitously, the national government is now beginning to focus on improving local revenues, primarily through property taxes, as well as better coordination amongst different stakeholders through a dedicated department and the ‘Local Fiscality Commissions’ described below.

The city of Kampala in Uganda provides an illustrative example of how institutional and administrative reform, without widespread policy change, can generate substantial increases in municipal revenues. Through the implementation of more efficient digitalised systems, attracting higher capacity staff, and a focus on the ‘citizen as a client’, the city has managed to increase own-source revenues three-fold from UGX 30 billion (US$8.2 million) in 2010/11 to UGX 90 billion (US$25 million) in 2018/191, as well as crowd in more central government and donor funds. These reforms were made possible by strong leadership, a political window to act, and strong support from development partners. What was striking was the administration’s reflection that its most significant success was not in doing something new, but rather in doing its job as it is meant to be done. Furthermore, the reforms contributed to achieving an investment-grade credit rating in 2015, creating the potential for increased funding opportunities for large-scale investments in the future. This, coupled with recent regulatory change to remove the previously restrictive 10 per cent cap on borrowing, provides promising new avenues for attracting investments. However, a number of stakeholders noted concerns that, despite overcoming regulatory hurdles, the city is still not equipped with the capacity to develop bankable plans and projects. For development partners, the example of Kampala highlights the need for collaboration to build capacity, both in reforming systems and in designing implementable strategies and bankable projects worthy of external finance. However, concerns around the way development finance skews prioritisation of projects, as well as the difficulties in providing for ongoing maintenance which are often not accounted for in development partner investments, were also highlighted.

The chapter discusses regional disparities in economic performance and living standards. It first sets out some key facts and provide a conceptual framework to help analyze whether such disparities are efficient, or instead reflect market and/or policy failures. It examines whether policy attempts to reduce regional disparities necessarily involve a trade-off between equity and efficiency. The chapter then investigates whether policymakers should focus on boosting the economic performance of lagging regions—or, conversely, accept the presence of regional disparities, and instead assist households in lagging regions through transfer payments, investments in education, health, and other basic services, and by facilitating out-migration.

Towns and cities are economic and social microcosms in which large numbers of people and firms interact. These interactions largely shape how a city looks, how it functions, and how it grows. But how exactly does this many-sided relationship work? What are the specific drivers of urban economic and spatial development? Pancakes to Pyramids brings us closer to answering these questions, beginning with an idealized contrast between two patterns of urban spatial growth. Pancakes are cities that grow outward and remain relatively low-built. Pyramids are cities that grow partly outward, but also partly inward and upward, filling vacant parcels and adding height to central districts to increase economic and residential densities. Both types of density can help cities overcome the challenges that come with population growth, and most urgently, evolving from a pancake into a pyramid, creating a platform with more options for controlling greenhouse gas emissions. This report draws on new evidence, econometric analysis, and predictive modeling to relate the economic growth of cities to their past spatial evolution, and to the possibility and conditions for future pyramidal growth.