Basic and constant principles of Sustainable Urban Finance

The Urban Economy Forum is a Toronto-based initiative that focuses on urban economics and municipal finance. Its 4^th session, on “Sustainable Urban Finance”, was held on 3-4 October 2022. Daniel Biau made the short intervention below in one of the round-tables.

Dear Colleagues,

I believe that urban finance could be subdivided into four policy components. Under each component basic principles have been established in the 1990s (or even before) and remain valid today.

In my view, the repeated call for innovation is clearly overstated. What is needed are the political will to adapt these principles to each particular context and the capacities to implement them vigorously at a sufficient scale, for the benefit of present and future generations.

Going briefly through the four components, we will see that they all affect social, economic and environmental sustainability (including climate change).

1. Financing marketable urban services

By marketable urban services we mean services that could be “sold” to the consumers through specific fees. They include drinking water, electricity and other energy, solid waste collection, communication, private security, transportation, etc.

Fees for basic services should ensure adequate cost‑recovery but should be affordable for all users. Making services affordable for the poor requires affirmative finance policies based on grants and soft loans from national and local sources.

Accessibility may mean free services up to a certain quantity (for instance for water), cross subsidies between consumers or between various services and subsidies directed to the poorest.

Public transport could be free for certain citizens (elderly, students…), financed through a tax paid by employers. This would contribute to the reduction of GHG emissions.

2. Financing non-marketable infrastructure

By non-marketable infrastructure we mean infrastructure that need to be provided by public authorities and cannot be directly paid by the users. They include local roads, streets, public spaces, drainage, railway. Public safety, health and education could also be seen as non-marketable social services but they are mostly financed by national and provincial budgets.

Throughout the world, local governments rely of two basic sources of financing: inter- governmental transfers and own sources of revenue. Local governments can rely on land-based taxation as one of their own sources of revenue. The other main source of local revenue are the business taxes, paid by enterprises located in the municipal area.

These local sources should help finance the infrastructure required by urbanization.

Infrastructure development requires significant public investment, close coordination between government spheres, careful phasing and continuity of interventions. City adaptation to climate change is directly linked to the quality of urban infrastructure.

3. Financing from land-based revenues

I wish to go back to land-based revenues. In fact a land strategy should be a key component of any sustainable urban finance strategy because urban land could be a fantastic source of public resources.

Land-based revenues include: (a) taxes on property occupations; (b) taxes on capital gains in land transactions; (c) land value benefits derived from public investments that benefit private owners.

Two factors make it possible to adopt a progressive land strategy. The first is economic: the price of urban land is much higher than the price of rural plots and, in market economies, it increases rapidly with urban growth and densification. The second is political: public authorities can decide on the allocation and use of urban land and derive a considerable income from it.

This is somehow the miracle of urbanization, that it can feed itself by producing its own fuel and its own financing. Many new towns around the world have been profitably financed in that way: public authorities buying land at low-cost, developing it and selling it at high cost to private companies (developers, enterprises…). A determined political will to do so (often missing in developed countries) is of course required.

Let me recall that internationally agreed priorities are to limit urban sprawl and spatial inequalities, and to regulate land and property markets. This is essential to reduce CO2 emissions and urban vulnerability to climate change.

4. Financing housing for all

Housing for all refers to all types of housing options, home ownership and rental, public, private and cooperative, individual and multi-storey, newly built or upgraded, etc.As we all now, adequate housing is essential to promote social inclusion. All over the world, housing expenses represent an average of 30 per cent of household incomes and the sector is a powerful mobilizer of domestic savings.

A comprehensive housing policy must look at the needs of all groups of society. It should promote diversity in housing supply, both in terms of standards and status, as well as ensure affordability and energy-efficient housing options. A focus should be on reducing inadequate housing and upgrading and regularizing slums, without forgetting the regeneration of existing centres. Energy-efficiency in the building sector is essential to combat climate change.

A housing policy should preferably be developed at the national level (or provincial level in federal nations), the Ministry of Finance being a key stakeholder. It could be organized into supply-side interventions, demand-side interventions and institutional reforms. Supply-side interventions should aim at increasing and improving the production of housing units. Demand-side interventions should aim at improving the ability of households to access adequate housing options. They should support both home ownership and rental housing and be associated with urban and territorial planning.

To summarize, sustainable urban finance requires public investments in basic and energy-efficient services and infrastructure, essentially at the agglomeration level. This investment should rely on land-based income and business taxes, also locally mobilized.  It should be linked to national and provincial subsidies to the urban and housing sectors, and support appropriate land development programmes.