Q&A: How can urbanization pay for itself? 3 questions for UN-Habitat

Let’s face it, municipal finance is not very exciting. When it comes to urbanization and smart city planning, talk of government bonds and regulatory frameworks isn’t nearly as captivating as smartphone apps that ease urban transport headaches or drone technologies to deliver goods to your doorstep.

But regardless of how mundane, public finance is a fundamental component of any city’s planning because it pays for the spaces and services that can allow private innovations to thrive. Municipal finance can itself be innovative. Perhaps the most creative component to it is the idea that cities inherently have sources of revenue that can pay for ongoing efforts in sustainable urbanization.

Much of municipal finance is actually political. Cities can create equity for local businesses and citizens by regulating the way urban areas are zoned or taking inventory of titled land. And they can unlock existing funding by working with national governments to formalize laws that mandate efficient intergovernmental transfers — a process referred to as “decentralization.”

The United Nations and other intergovernmental institutions work closely with municipal governments to better implement these practices. Devex spoke with one U.N. official who deals closely with issues at the intersection of municipal finance and local politics issues on a daily basis. Marco Kamiya heads the department of urban economy and finance at UN-Habitat. At the Habitat III summit in October 2016 — the U.N.’s seminal gathering on sustainable urbanization — he shared his thoughts with Devex on some of the simple but necessary regulatory steps that cities can do to unlock larger streams of finance and what, in his opinion, makes for smart urban planning. This interview has been edited for length and clarity.

What are the most important steps to reform public finance that cities can take to pay for ongoing urbanization?

Municipal finance is a major area of work. Municipalities demand our advice and we emphasize that small municipalities should first focus on endogenous sources of revenues by understanding what they own. It’s important that they have clear records of the inventory of their assets to be able to quantify them. It’s also important to work on registration and cadaster systems, but not force the issues since they are very expensive and not a magic bullet. However, to a certain degree, both should be at the center of our work and the work of municipalities. Not just the United Nations, but the World Bank and regional development banks need to support the technical capacities for municipalities to do this.

I also think that decentralization is necessary. Municipalities in the developing world depend on transfers. In some cases, almost 90 percent of revenues come from the central government. If that is cut then some municipalities can’t offer services. But sometimes municipalities collect taxes that go to central governments and the revenues don’t go back. So it’s important to be clear on the legal framework to make these sustainable.

Still, decentralization can sometimes still run into the issue of capacity. Governments decentralize, but sometimes local governments still don’t have enough money. They don’t receive transfers or sometimes they’re blocked by political cycles. So it’s important to try to, as much as possible, find the governance to isolate the political cycles from transfers and make revenues sustainable. At the same time it’s important to increase technical capacities in municipalities. An evolution in governance without additional capacity is difficult.

What do you consider to be “smart” urban planning?

Good urbanization pays for itself because good urbanization generates value. Just by renewing or creating neighborhoods with proper space, roads and connections, you are creating something that will attract people and business. If you incentivize new innovation that in turn creates new businesses, those businesses will pay taxes. All this will generate value. And little by little you will see a vibrant economy that is flourishing. But the output of these values have to be equally shared and it’s important to take into account social policies and basic services alongside urban planning. An integrated approach to urbanization is something coming out of the New Urban Agenda and is extremely important.

What about actual financial products and investable instruments? How can cities take advantage of those to tap into more revenue?

It’s important that we don’t create instruments and think that those instruments can be applied mechanically everywhere. First you have to assess the size and technical capacity of a city. When we work with metropolitan governments and it has all the registration systems, cadasters and teams of lawyers and financial economists in place, then we advise them to issue bonds so they can pay for local infrastructure. Sometimes they don’t even need to talk to the central government. Most often this occurs in the United States, Canada and Europe where local governments can make best use of sophisticated financial instruments.

But if you are talking to intermediary secondary cities, or a small city, the reality is different. Sometimes we go to a municipality in Africa and they don’t even have a computer. Just by installing a computer and training someone to do a proper accounting system, you are doing a lot. You can double or triple revenues for a municipality. Land value capture is at the core of UN-Habitat’s work because urban planning and urban economy are related. When you do good urbanization and good planning it creates value. This is an important source of revenue because it is an endogenous source of revenue. That’s what we mean when we say that urbanization pays for itself.

Over six weeks, Devex — along with our partners Agence Française de Développement, BearingPoint, UN-Habitat, and XII Metropolis World Congress — will explore what it takes to build a successful smart city, how climate resilient and environmentally friendly infrastructure and technologies are being implemented, and how actors in the global development community are working together toward common goals and engaging local communities in an inclusive way. Join us as we examine what it takes to create our smart cities of the future by tagging #SmartCities and @Devex.