How have the New Urban Agenda drafts dealt with municipal finance?
ANALYSIS: The Habitat III discussion has lost some vigour in that it is no longer calling for general fiscal decentralization. But it has become stronger on how local governments can take action and what they need to mobilize resources.
There has been a clear, strong focus on the social and environmental dimensions of urban development in the four primary drafts of the New Urban Agenda, the 20-year vision of sustainable urbanization currently being debated by national governments, released through August.
Nonetheless, even as government representatives from around the world continue to work toward finalizing the new strategy by October, two important questions cannot be ignored: First, who will pay to implement the New Urban Agenda? And second, how will investment in urban development be guided toward a sustainable and equitable outcome?
The main concepts to answer these questions were outlined early on, in the first version of the New Urban Agenda’s “zero draft”, released in May. Since then, three other primary drafts have been released: one in June and two in July (see here and here). Throughout that process, most of these key concepts have been changed — and some of them very significantly.
In general, the issue of finance was featured extensively in the agenda’s first draft. In that version, an entire sub-chapter addressed aspects such as domestic resource mobilization and financial management. As with many other issues, however, the extent of the language on finance was greatly reduced in subsequent revisions, to the point where the issue is currently addressed merely in a set of paragraphs, mostly in the section on means of implementation.
What has remained constant throughout, however, is the acknowledgment that finance is of the highest importance in these talks, known as the Habitat III process. Indeed, although the overall section has been streamlined, the revisions have resulted in the introduction of even stronger language on this issue. First described as one of three drivers of change to achieve transformative commitments, for instance, finance was eventually recognized as one of four fundamental drivers of change to achieve an urban paradigm shift.
Stronger functional focus
Perhaps the most important principle established in the zero draft was the notion of domestic resource mobilization. This implies that financing urban development in general and implementing the New Urban Agenda in particular will remain the responsibility of nation states, while intergovernmental transfers and external resources are regarded as secondary sources of funding.
“Some very robust proposals became part of the post-Surabaya draft. Notably, language pushing the establishment of ‘appropriate financial intermediaries for urban financing’ addresses a key issue — cities’ lack of access to financial markets.”
It is noteworthy that linking local resource mobilization to local expenditures has been mostly taken out of the document. While the zero draft included a commitment to enable local governments to collect user charges and fees to meet expenditure costs, the wording on such linkages has been softened to “promote enhancing abilities to raise revenue and manage expenditures”.
The zero draft also contained very strong language (Paragraph 131) committing member states to grant local governments greater fiscal authority and to enable shared autonomy across all levels of government. The first revision continued to include very similar language (Paragraph 114) but called on member states merely to support stronger local governments, without mentioning shared autonomy.
Even this approach was then largely dropped in the third draft published 18 July, and it was not been re-introduced in the most recent negotiations, which took place in Surabaya, Indonesia, at the end of July. Instead, the post-Surabaya version — the current iteration, as of this writing — includes more-generic language on supporting policies to enable sub-national governments to broaden their revenue base.
By contrast, several paragraphs now mention specific measures required to strengthen local financing. These include around enabling environments and coordination on all levels, as well as financial transfers to lower levels of government and technical capacity for financial management at the local level, such as debt management and expenditure-control instruments.
Thus, the discussion on finance has lost some vigour on a normative level, in that it is no longer calling for general fiscal decentralization. At the same time, it has become stronger and more explicit on the functional dimension — on how local governments can take action and what they need to mobilize resources.
Constancy of land
The zero draft defined a government’s resource base quite broadly, to include taxes, fees and borrowing. This definition is still valid, but the primary focus for local governments has changed in subsequent iterations of the New Urban Agenda. While the zero draft referred to all potential resources, the first revision called for specific attention to user charges and fees. Last month’s negotiations in Surabaya changed this language again to focus on taxes.
“It is vital to include the financial dimension in any follow-up and review mechanism of the New Urban Agenda to track progress on financial commitments and total spending. Unfortunately, the latest draft no longer includes any specific reference to funding in this section.”
Yet there is some consistency to be found throughout all draft versions: Land-based finance is consistently mentioned as a local revenue resource. Specifically, all drafts have included some reference to distributing gains in land value more equitably and to the benefit of all urban residents.
Even the expression “social function of land” has remained in all drafts, despite receiving some criticism from member states. This concept is widely applied in Latin America and can roughly be translated into “property obliges”, indicating that private land ownership brings obligations to serve society as a whole.
According to the post-Surabaya draft, several measures are required to successfully tap into land-based finance. These include sound monitoring systems to assess changes in land value and capacity-building at the local level to better manage value capture.
Elsewhere, national government transfers also have been identified as an important pillar of funding, but the concept of how to unlock this resource has changed dramatically. The first draft, for instance, called for 20 percent of the total national budget to be transferred to local governments. This target couldn’t withstand the subsequent negotiations, however, most likely because it interferes heavily with national sovereignty.
Consequently, by the first revision this paragraph had been changed to strip out the automatic 20 percent share and instead to allow officials to consider national context and local needs when determining such transfers. This changed again in subsequent drafts, wherein national context is no longer mentioned but only transfers based on local needs.
Interestingly, all drafts indicate that transfers should be used to promote integrated and balanced territorial development, to decrease inequalities across cities and between urban and rural areas by better allocating national government spending. This indicates consent among member states to earmark government transfers for specific purposes, instead of allowing them to be used as a general source of funding urban development.
While domestic resources remain the strategy’s main focus, external sources of finance feature very prominently, as well. First and foremost, the issue of debt finance and municipal borrowing is covered extensively. Again, the zero draft contained an entire section dedicated to borrowing, covering related topics such as the expansion of municipal debt markets, the establishment of financial intermediaries and capacities for managing risk associated with borrowing.
This stand-alone section on borrowing no longer exists in the post-Surabaya draft. Nonetheless, these elements have not disappeared: Rather, all aspects originally covered can now be found sprinkled throughout the document.
There appears to be a strong consensus on the importance of debt financing and how to unlock its potential — for example, local debt-control mechanisms, transparent accounting, and better access to financial markets are mentioned as requirements.
Other external means of funding include official development assistance (ODA) and better access to global funds. While ODA was described extensively in the zero draft, it appears in just a single paragraph in all subsequent versions. Meanwhile, better accessibility of global funds for local governments has been extended and now includes specific references to four different funds from the field of climate finance.
Indeed, to anchor financing as a key means of implementation in the New Urban Agenda, explicit, clear and strong linkages to other fields and agreements are required. In particular, mention will need to be made of two new frameworks agreed upon last year. First, the 2030 Agenda for Sustainable Development will guide the United Nations’ anti-poverty and sustainability efforts over the next decade and a half. And second, the Addis Ababa Action Agenda offers details on how governments plan to pay for the 2030 Agenda.
Currently, links to these other agreements are mentioned only in general terms — for instance, in the New Urban Agenda’s preamble. Specific reference was introduced in the revision of mid-June, and it has been kept in the most recent draft, but even this merely invites member states to “reaffirm the means of implementation” included in these other agreements.
Surprisingly, the New Urban Agenda drafters have thus far missed an obvious opportunity to establish a more direct link to the Addis Ababa talks, by including reference to the new Global Infrastructure Forum. Those talks mandated the creation of this new body, which was inaugurated in April. Set to bridge the infrastructure gap by bringing together all infrastructure actors, multilateral institutions as well as the private sector, the forum addresses a key challenge for sustainable urban development. After all, funding urban infrastructure alone accounts for 80 percent of global investment, according to the World Economic Forum.
Further, it is vital to include the financial dimension in any follow-up and review mechanism of the New Urban Agenda to track progress on financial commitments and total spending. Unfortunately, the latest draft no longer includes any specific reference to funding in this section.
This is even more regrettable given that very strong paragraphs were part of previous drafts. For instance, earlier iterations included a suggestion to include municipal finance systems in the official review process and a call for multilateral and regional organizations and financial institutions to better coordinate their strategies and mainstream the New Urban Agenda outcomes into their urban development activities.
While none of these suggestions became part of the follow-up section in the latest draft, a previous version at least included a phrase that suggested incorporating “to the extent possible, inputs of […] international financial institutions”. But ultimately, not even this very general reference survived the Surabaya negotiations.
Besides addressing funding questions in the political follow-up process, establishing finance initiatives is another way to ensure continuous attention to the issue at the global issue.
“An important remaining proposal is the establishment of a trust fund by UN-Habitat for capacity development in support of sustainable urban development. A similar development can be observed regarding the establishment of urban transport infrastructure funds.”
Indeed, some very robust proposals became part of the post-Surabaya draft. Notably, language pushing the establishment of “appropriate financial intermediaries for urban financing” addresses a key issue — cities’ lack of access to financial markets.
Another important remaining proposal is the establishment of a trust fund by UN-Habitat for capacity development in support of sustainable urban development. This idea was introduced in the mid-June revision, and it remains almost unchanged in the current draft.
Initially conceptualized as a fund open to all member states, the New Urban Agenda now calls for support of such a fund accessible to developing and middle-income countries, according to their challenges. This last point was an important twist: to ensure demand-driven funding for countries that need it most.
A similar development can be observed regarding the establishment of urban transport infrastructure funds. First introduced in the zero draft, the concept was kept and even extended to transport infrastructure and services. These funds are intended to provide a new basis to finance sustainable transport solutions by compiling various funding sources, from both the public and private sector.
While these important initiatives were kept, some smaller-scale proposals did not make it through the various revision rounds. Establishing public-private partnerships and project-preparation facilities at the national level were two proposals introduced in the zero draft that have since been dropped.
The New Urban Agenda in its current draft provides good groundwork to establish better policies and practices to finance urban development. But the actual availability of money will make all the difference when it comes to implementation. So can the existing proposals prevail and deliver the much-needed impact to unlock financial resources?
To establish a trust fund for capacity-building is a vital step, especially for developing countries. However, due to the complexity of urban finance, such a fund would need access to substantial resources, would have to cover a wide range of issues and should be designed with a mid-to long-term perspective. A suitable host for such a fund still would need to be found, as the current controversial debate around the future of UN-Habitat makes the proposal a bargaining chip, vulnerable to political chaffering.
But availability of funding alone is not enough. An integrated and coordinated approach is required and should be included in the New Urban Agenda. A sectoral approach such as the establishment of national transport infrastructure funds could prove counterproductive, as this could foster “siloed” thinking. Instead, capacity-building, the activities of financial intermediaries and the definition of an appropriate mix of local, domestic and international resources should all be based on common working principles, incorporating the shared ideas of sustainable urban development.