www.cities-localgovernments.org
UCLG POLICY PAPER ON LOCAL FINANCE SETTING THE BACKGROUND CURRENT TRENDS AND REALITIES FACING LOCAL GOVERNMENTS The world is witnessing unprecedented urban explosion. The urban population has more than quadrupled since 1950 amounting to 3.2 billion in 2005 and should reach 5 billion people in 2030 (about 60% of the World population). According to the UN, 95% of urban growth over the next 20 years will occur in Asia, Africa and to a lesser extent in South America (where the demographic urban transition has already taken place) and especially in small and medium size local governments. Fast growing urbanization is giving rise to a major and pressing need for future infrastructure projects that are expected to cost some US$200 billion per year over the next 25 years1. However, these infrastructure needs are currently being unmet. Failure to invest in infrastructure has already impacted severely upon the daily lives of millions of citizens in developing countries. If nothing is done, one human being in five will be living in a slum by 2020, especially in Africa and Asia. No longer can local governments and stakeholders afford to wait until a major crisis forces a massive uptake in local public infrastructure. Similar crises are sadly well underway in many countries - meeting the challenges they are certain to pose in the coming years means investing in the future now. Paradoxically, the current underinvestment in urban infrastructure coexists with a significant amount of liquidities at the international level, as well as relatively high cash and national savings, which tend to be invested abroad, especially in developing countries. Within this context, what are the usual solutions put forward by the international community to face these inevitable crises and invest rapidly and massively in urban infrastructure? Development banks finance few urban infrastructure projects2, and only exceptionally do they lend to local governments. Numerous international institutions tend to privilege Public Private Partnerships (PPP), despite the fact that they are marginally focusing on urban infrastructure3. The more than seventy Municipal Development Funds that were set up in the South with development banks support, to finance local infrastructure are now experiencing several difficulties, aggravated by the lack of global strategy for small and medium sized local governments. Local public borrowing is another macroeconomic solution promoted by the international community – though currently accessed only by local governments of the wealthy countries4. In many developing countries, longer 1 The World Bank has estimated that investment needs in public infrastructure in developing countries will amount to $600 billion per year over the next 25 five years. The UCLG Committee has estimated that one third of this amount, i.e. 0.4% of the World GDP, would need to be channelled to urban infrastructure. 2 Within the World Bank Group, only 8% of the total amount of loans (worth US$ 22.3 bn in 2005) was assigned to urban infrastructure and development (US$ 1.9 bn). 3 According to a World Bank study, over the 1984 2003 period, PPP focusing on urban infrastructure came to only to US$ 60 bn (i.e. 10% of the total of investments realized through PPP over this period) in just a handful of countries of South America and East Asia. 4 AFD research has shown that local public borrowing is about US$ 12 bn per year in mainly 17 countries (which include the G7 countries).
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