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close this bookFinancing Cities for Sustainable Development (HABITAT - UNDESA, 67 p.)
View the document(introduction...)
View the documentAbbreviations
View the documentForeword
View the document1. Introduction
View the document2. Main Sources of Municipal Revenue
View the document3. Property Tax
View the document4. Income Tax
View the document5. Charging for Urban Services
View the document6. Tax on Provision of Goods and Services (Business Licences and Fees)
View the document7. Income-Generating Enterprises
View the document8. Borrowing
View the document9. Central Government Allocations
View the document10. Summary of Main Findings, Conclusions and Recommendations
View the documentReferences

1. Introduction


In August 1997 the United Nations Centre for Human Settlements (UNCHS [Habitat]), with financial assistance from the Ford Foundation, embarked on a research project entitled Privatization and Financing Municipalities in a Decentralized Environment: A Governance Approach to Human Settlements Management. The objective of the project was to review the status of privatization of municipal services and of urban finance in three East African countries (Kenya, the United Republic of Tanzania and Uganda) and, based on the findings, to provide information and options to policy makers on designing effective institutional and regulatory frameworks for policy reform. Such policy reform has become imperative in East Africa, given the region's rapidly expanding urban population, on one hand, and the significant decline in the level of urban infrastructure and services, on the other.

Urbanization in the last 20 years has become one of the most important trends in human settlements development and the prospects of all developing countries continue to be deeply affected by rapid urban population growth. Policies towards urbanization appear to be changing, from a desire to control the growth of cities by curbing rural-to-urban migration, towards the acceptance of urbanization as an inevitable and even desirable process. Cities are now seen as the engines of national development, offering job opportunities and a higher quality of life to new urban dwellers. A few countries in Africa, including Uganda, have begun to encourage faster urbanization as a way of inducing faster national development.

The last few years have also witnessed a widespread acceptance of the concept of sustainable development, which was adopted in Rio de Janeiro in May 1992 at the United Nations Conference on Environment and Development. As indicated in An Urbanizing World: Global Report on Human Settlements 1996 (p. 421), sustainable development brings together two major concerns: "..meeting the needs of the present.." "..without compromising the ability of future generations to meet their own needs..". The first concern is about socio-economic development, while the second is about global ecological life-supporting systems. Within the urban context the "..needs of the present.." include: firstly, access to an adequate livelihood or productive assets, as well as economic security for the vulnerable; secondly, access to healthy and affordable shelter and related services, including water, sanitation and domestic energy, as well as access to adequate health care and to education; and thirdly, freedom to participate in national and local decision-making processes.

As a result of rapid urbanization, pressure on urban services and facilities (the "present needs" as defined in sustainable development) has become a serious problem in many urban centres and job opportunities offered by cities are too few for the large numbers of new urban dwellers. Consequently, the numbers of poor people within urban areas are rapidly increasing. In Eastern Africa, and other parts of the continent, a physical manifestation of this are the growing slums and squatter settlements, sometimes accommodating more than 50 per cent of the urban population. At the same time, rapid urbanization is also leading to serious environmental degradation, particularly within and around large cities. This is exacerbated by inappropriate consumption patterns, as well as inadequate management of natural resources. In Dar es Salaam, the United Republic of Tanzania, problems of deterioration in the level of services, combined with mismanagement of financial and other resources, culminated in the dissolution of the elected City Council and its replacement by a Government-appointed City Commission in 1997, thus repeating what Nairobi, Kenya, had gone through between 1983 and 1992.

Among the reasons accounting for the failure of many urban local authorities in developing countries to cope with the demands of their increasing populations is the inadequacy of their financing systems. In many countries, including those in East Africa, the taxing powers of local authorities are simply not wide enough and the yield from existing sources is often far inadequate to meet their expenditures. Many cities in this region, and elsewhere in Africa, are largely dependent upon income derived from property taxation and service charges, while other and more lucrative sources, such as income tax, sales tax and business tax are monopolised by central governments. Thus, many cities have to depend on central government allocations, which are themselves generally inadequate and often erratic in terms of timing. Where local authorities are able to derive revenues from property taxes and service charges, meaningful tariff increases are sometimes refused or delayed by central governments for fear of eroding political support among the urban populace. In short, many governments continue to refuse to pay the political and financial costs of decentralization, that is granting of more financial and decision-making powers to local authorities. To resolve these problems requires reconfiguration of central-local government relations, either towards more decentralized systems or more effective revenue sharing, and this can only be done if there is enough political will on the part of central governments.

A different set of reasons for the failure of urban local authorities to cope with increasing demands is to do with the characteristics of their existing sources of revenue and the inadequacy of the financial regulations and procedures employed. In addition to their inadequacy, many of the key sources of local revenues are generally inelastic, i.e., they do not have the capacity to yield additional revenue in proportional response to inflation, growth of personal incomes and population growth. This, for a variety of reasons, is often the case with urban property taxes, the cornerstone of the urban finances of many developing country cities, particularly those which inherited their systems from the British. A second reason which affects the acceptability of some urban taxes and their long-term sustainability is that they are often regressive, thus failing to be effective instruments for redistribution and attainment of equity. The third reason is that many cities are lacking in administrative capacity and cannot, therefore, fully benefit from the existing sources of revenue. This is quite often the case with regards to property taxes, largely as a result of the absence of proper financial cadastres and the inability to carry out accurate real estate valuation and the necessary periodic revaluations. Collection of charges for urban services rendered may also be inefficient and many cities are owed large amounts of money by consumers, including central government and parastatal consumers. Finally, some urban taxes are politically sensitive, thus affecting the willingness of local authorities to assess and collect such taxes effectively and to enforce sanctions on defaulters.

All of these problems affect cities in East Africa, in varying combinations and to different extents. Yet there are also some cities which have made progress in improving their financing systems, in terms of their revenue sources, collection systems, yield and financial management. A number of cities and towns have in recent years embarked on wide-ranging reforms of their governance systems, including the enhancement of financial mobilization and management capacity, from which useful lessons could be learnt. In Dar es Salaam, for example, the City Commission quickly realized that it had inherited from the elected City Council massive debts accumulated over many years due to poor collection levels and general financial mismanagement. To assist in raising the level of revenue collection, the Commission engaged the services of consultants to review the whole city financing system, assess the yield potential of existing sources of revenue and rationally determine new levels of rates, charges and fees.

The purpose of the research project, of which the present study is an outcome, was partly to assess the financing systems of cities in East Africa, focusing on a few selected cities, and to learn from both their strengths and weaknesses. In addition, the research aimed at pointing out directions for improving the financing systems of the selected cities in order to ensure their sustainable development. It is hoped that the findings of the research presented in this study will be of direct use to the cities examined, in addition to constituting the basis for UNCHS (Habitat)'s urban finance advisory activities within East Africa.

Aims and Methodology of the Study

The specific aims of the study are:

1. To identify and describe the case study cities' local and external revenue sources, including taxation of property, taxation of income, taxation of goods and services, charging for services rendered, income-generating enterprises, borrowing, central government allocations and any other relevant sources;

2. To assess all the sources of finance identified above against the following criteria, among others, all of which determine the sustainability of the whole financing system: yield and adequacy, elasticity, equity, administrative feasibility and political acceptability; and

3. On the basis of the study's findings, to suggest how the case study cities' financing system could be improved, focusing on the adequacy of financial resources to meet the needs of the population, as well as the sustainability of the overall financing systems.

The study is based on empirical research. It uses both secondary and primary sources of information and data. The two largest cities were selected from each of three East African countries and detailed case studies of the characteristics of each city's sources of revenue were conducted. The following cities were selected:

· Kenya: Nairobi and Mombasa
· United Republic of Tanzania: Dar es Salaam and Mwanza
· Uganda: Kampala and Jinja

The case studies were carried out by researchers based in the respective countries, while UNCHS (Habitat) synthesised the results of these case studies and prepared the present report.

From 27 to 29 April 1998, a Regional Workshop was held in Naivasha, Kenya, to review the preliminary results of the research (UNCHS, 1998). The Workshop also provided a forum for senior municipal managers from the three East African countries to react to the research findings, fill in gaps, if any, bring deeper insights to bear on the findings and discuss practical ways on how to formulate and implement more effective and realistic urban governance policies and strategies. The main results of this Workshop have also been incorporated into this study.

Chapter 2 presents the main sources of revenue for the cities studied. Chapters 3 to 9 present the results of the research by source of revenue, each chapter being devoted to one source. Finally, Chapter 10 presents the main conclusions and recommendations of the research.