20356 March 2000 The World Bank Infrastructure Group Urban Development t4, \, $.'; ',...'.> ,;<' '- ' ( Executive Sumrnary A Strategic View of Urban and Local Government Issues A Note to the Reader This booklet contains the executive summary of Cities in Tran- sition: A Strategic View of Urban and Local Government Issues. The full-length study has been published by the WXorld Bank. To order copies, please use the form provided at the back of this booklet. Copyright C 2000 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W Washington, D.C. 20433, USA All rights reserved Manufactured in the United States of America First printing March 2000 At the threshold of the 21st century cities and towns Form the front line in the de- velopment campaign. Within a generation the majority of the developing world's population will live in urban areas and the number of urban residents in develop- ing countries will double, increasing by over 2 billion inhabitants. The scale of this urbanization is unprecedented, and poses daunting iequirements for countries to meet the needs of their people at relatively low levels oF national income. The urban transition offers significant opportunities for countries to improve the quality of life for all their citizens, and for the Bank to realize its core mission of reducing poverty. But whether this potential is realized depends critically on the quality of urban man- agement and on the national and local policies affecting it. Cities and towns not only are growing in size and number, they also are gain- ing new influence. Political and fiscal decentralization, under way in all regions, means that municipal authorities now have greater au.thority-if insufficient capac- ity-to take charge of the local services that affect the daily lives of residents. Par- ticipatory local democracy is providing fertile grounA for innovations in the ways that people's demands are articulated and satisfied. Globalization is leading to major restructuring within countries, shifting trade and production away from 2 Cities in Transition: A Strategic View of Urban and Local Government Issues Figure 1.1 Within a generation the developing world will be predominantly urban 100 so 1960 o-t _ 1990 U2020 70 50 &40 30 20 10 0 Sub-Saharan East Asia Europe and Latin America Middle East South Total Africa and Pacific Central Asia and the and Asia Caribbean North Africa Source: United Nations data. many traditional urban centers toward cities and towns that can demonstrate mar- ket advantage. The role of national governments is being refocused to facilitate markets, promote economic and social stability, and ensure equity. But reforms of public sector management or private sector development will not do what is desired for national development until they are adapted and implemented appropriately at the municipal level. Local government remains the everyday face of the public sec- tor-the level of government where essential public services are delivered to indi- viduals and businesses, and where policy meets the people. Urbanization, when well managed, facilitates sustained economic growth and thereby promotes broad social welfare gains. The industrial and commercial activ- ities that are primarily located-and serviced, marketed, and financed-in urban areas account for half to four-fifths of GDP in most countries. The agglomeration of economic activities in the process of urbanization contributes to growth through the real sector (by raising the productivity of output and employment), through the financial sector (by mobilizing and intermediating savings and allowing the accu- mulation of real wealth in the form of real estate), and through fiscal flows (by cities providing the lion's share of tax revenues). But policy weaknesses can disrupt the benefits from urbanization. Policies af- fecting urban land use and housing investment have major ramifications for house- Executive Summary 3 holds, businesses, and the nation, as the recent crisis in East Asia demonstrated. Al- though the collapse of real estate markets there was p rovoked by weak financial sec- tor regulations, it was also rooted in flawed urban real estate policies that had cre- ated scarcities of developed land and encouraged szeculation. In many countries distortions in domestic markets and public expencliture have accelerated urban population growth. As more governments correct such imbalances and as urban consumers pay more realistic rates for the services ar[d resources they consume, ur- banization can be harnessed to promote more equitable growth of incomes in the nation as a whole. A particularly important channel through which growing urban areas contribute to national development is the synergy between rural and urban economies. "Urban" and "rural" do not signify closed systems within a country, but a seamless contin- uum of economic activities and settlements distingLuished by degrees of density, dependence on agriculture or manufacturing, and sccial organization. Interdepen- dence is particularly evident in Sub-Saharan Africa. where town and village house- holds maintain multiple ties through seasonal migra-ion and remittances, creating an informal safety net. The development of urban areas is closely tied to the rural economy through ex- changes of goods, labor, services, capital, social trans ictions, information and tech- nology, benefiting residents in both locations. A well- integrated national labor mar- 4 Cities in Transition: A Strategic View of Urban and Local Government Issues Figure 1.2 Most developing countries are in, or are entering, the high-growth phase of the urban transition : 5 - SSA 4 D EAP a MENA CD r: 3 - SAsia a LAC C~ ~ ~ ~ ~~~~~~~~~~ A 2~~~~~~~~~ ECA 1L High- 03 Income Countries C0 20 30 40 50 60 70 80 90 Percentof Urban Population, 1995 Source: WDI. ket carries growth across regions and urban areas provide alternative employment for rural households even where agriculture thrives. But rural-urban migration is not the dominant source of urban grovth. Increasingly, structural transforrnation and densification of peripheral settlements, in response to internal and external market opportunities, are bringing "urban" and "rural" closer in space as well as in eco- nomic relations. In China and Vietnam, for example., policymakers are realizing that the interdependencies between urban areas and their hinterlands provide positive synergies that can be further developed to promote national poverty reduction and growtli, by making cities anid towns efficient marketplaces for the country. Distinctions among cities, towns, and rural areas are becoming almost obsolete as economic activity spreads outward into vast semiurbanized and rural industrial- ized regions, such as the Central Valley of Mexico, the Mumbha-Pune-Nasik corri- dor in India, and the Eastern Seaboard of Thailand. Rural industrialization, sparked in some cases by external markets, can pull the rural economy along when the internal labor and land markets are sufficiently responsive. As a result of rural and small-town industrialization in the Pearl River Delta of China in the 1980s, "town and village enterprises" surpassed the state enterprise sector in output, em- ploying more than 100 million workers, most of the industrial workforce, by 1990 (Harris 1997). With improved infrastructure, rural Chinese workers also are com- muting to cities (from Guangdong Province, for example to Hong Kong) or work- ing part-time in both rural and urban occupations. Executive Summary 5 A . The growth of cities and townas expands opportunity for all citizens, and the urban built environment can enrich a nation's cultural identity. But in too many countries poorly managed urbanization results not in widely slE.ared gainis in living standards but in significant social and environmental costs. Urban poverty is growing in scale and extent, especially at the periurban rim. In the two most urbanized regions that the Bank serves, Latin America and Europe and Ceu-itral Asia, more than half the poor already, live in urban areas. By 2025 mwo-thirds oF the poor in these regions, and a third to almost half of the poor in Africa and Asia will reside in cities or towvns. Poverty has many dimnensions, wvith mnaterial deprivation (commonly measured in terms of income or consumption) being one important element. But urban poverty often has a broader meaning of cumulative deprivation, characterized by squalid living conditions; risks to life and health fromn poor sainitation, air pollution, crime and violence, traffic accidents, and natural disasters; and the breakdown of traditional family and community safety nets. Moreover, income inequality is wors- ening in many urban areas, implying further exclusibn of low-income groups from employment opportunities, basic services, political representation, legal and social protections, and amenities. Urban poverty entails a stnse of powerlessness andI bot-h individual and community vulnerability that undermine human potential and social capital. Urban populations are also hit particularly P ard by macroeconomic and fi- nancial shocks, such as the recent crises in East Asia and Russia, which have forced some households back into poverty. 6 Cities in Transition: A Strategic View of Urban and Local Government Issues Figure 1.3 The developing world's urban population is still concentrated in small cities, but large cities' share is increasing Percent 14 <~~~~~~~~~~~~~~~E |LUrban Deveiopment l 12 - Urban water & Sanitation 50 | S i | L~~~~~~~~~~ Urban Transports_ .~10 26 *~2 1993 1994 1995 1996 1997 1998 1999 FY Souirce: UN demographic data. In the fastest-growing cities in the developing world the health and nutritional status of residents has been improving more slowly than in small towns and rural areas; in some cities such indicators have actually worsened over the past two decades. Slums in many large cities are growing in size and in share of urban pop- ulation, a testament to the policy and institutional failures of land, housing, and in- frastructure systems to generate adequate supply even where people have demon- strated strong willingness to pay. The poor, especially poor children, are particularly hurt by a deteriorating urban environment. As cities modernize, environmental risks become more diverse and affect wider areas, and environmental solutions require addressing a complex urban management agenda. The importance of urban issues to national and global goals for sustainable devel- opment has long been acknowledged in the international arena, most recently at the 1996 Habitat II Conference on Human Settlements, and features prominently in the Bank's World Development Report 1999/2000. Achieving progress toward the Bank's primary mission of poverty reduction requires a closer working relationship with the level of government nearest to the people. Fostering rural-urban synergies and well-integrated city strategies to help countries realize the promise of urbaniza- Executive Summary 7 tion represents a prime opportunity for the Bank to pursue a new "comprehensive development framework," as expressed by President Wolfensohn at the 1998 An- nual Meetings of the World Bank and the International Monetary Fund. Renewing the Bank's commitment and capacity to assist effective urban development there- fore makes sense as a corporate strategy. It is also good business for the Bank, as na- tional and local government clients increasingly seek knowledge and financial sup- port to improve the economic performance of cities arad to translate national policy directions into daily realities on the ground. This review of the Bank's urban and local government strategy has been moti- vated by the external trends, by the growing demancds for Bank assistance, and by the realization that urban development activities cou ld and should have a greater impact in raising the living standards of the poor and aromoting equity. The Bank's large body of operational experience, accumulated over almost three decades of urban lending and sector work, provides a strong basis for response. Since 1972 the Bank has devoted 3 to 7 percent of its lending to urban development operations: * Municipal finance reform and capacity building * Lines of credit for multisectoral municipal investmnents e Land and shelter operations (housing finance, land registration, sites and ser- vices, reform of property ownership) * Basic improvements of social and economic services and tenure security in poor neighborhoods (urban upgrading) * Development of basic sanitation and solid waste management systems * Emergency and post-conflict reconstruction operations. During the 1970s and 1980s the Bank's urban development projects showed that living conditions for urban residents, including the poor, could be improved signif- icantly and cost-effectively. Urban work in this period tended to focus on specific as- pects of urban services or functioning, such as through multisectoral investments in low-income neighborhoods. While these efforts brought benefits, they failed to suf- ficiently recognize that sustainable urban development requires an approach that is even more integrated-across the physical environment, infrastructure, finance, institutions, and social activities. Early urban projects pioneered some of the community participation later mainstreamed in the Bank, but the initiative and ccntrol over resources often re- mained with the central government or with specially created agencies. National or cityw%ide policies were found to limit the potential retirns from investments, or their Although this document takes a broad perspectire on uirban and local governmez tissues to adoocate a common fraome of refer ence for the Bank in addressing them, the operationalfocus of/he stratego is on the urban deve/opfment lines of business (de- scrnbed in .4ttachment 1). 8 Cities in Transition: A Strategic View of Urban and Local Government Issues scaling up to more beneficiaries-in large part because such policies often hampered the economic vitality of the city and its fiscal base. Moreover, assistance programs failed to fully capitalize on the knowvledge and capacities of informal institutions, such as community organizations and small-scale service providers, and often neglected to accommodate variations in users' demands and the need for institutional learning. There is increasing evidence that providing multiple services increases the scope of benefits, but that social or institutional failings can undercut service- oriented strategies. Urban projects since the late 1980s have therefore increasingly focused on policy reform and institutional change, extending the Bank's dialogue deeper into issues of regulation, incentive systems, and the patterns of relation- ships-among local government, the private sector, informal organizations, and households-that determine how cities perform. As democratization, decentraliza- tion, and public-private partnership strengthen the communication and collabora- tion among these stakeholders, a more holistic approach to urban development is demanded and underpins the Bank's new strategy. The Bank's pipeline of urban-related activities is growing (Attachment 2). This increase is occurring not only in urban development operations but also in other portfolio categories including urban water and sanitation and urban transport (which together represent another 6 percent of the Bank's total lending), environ- ment, public sector management, and social sectors-where urban and municipal government needs have become more apparent and counterpart agencies have been decentralized. The urban agenda is also deepening to encompass further ele- ments of sustainable urban development such as promotion of the local economy, access to private capital, reform of real estate markets, integration of cultural con- cerns, and disaster prevention and mitigation. All these trends call for a stronger re- sponse from the Bank, which remains the largest provider of urban development as- sistance with both a global and an operational perspective on urban issues. The new urban and local government strategy does more than simply retool the urban development portfolio or seek stronger performance from it, although both are required. Rather, it argues for the Bank to recognize cities and towns as a dynamic development arena where the convergence of sectoral activities, and col- laboration among communities, levels of government, and other private and public sector institutions can create a microcosm of sustainable development for the coun- try. The Bank would therefore apply to urban economies and local governments the same quality and rigor in analysis, advice, and strategizing that it applies to national economies and central governments. Ensuring well-functioning urban areas re- quires support to a spectrum of activities, both national and local, that affect urban outcomes. Skills and resources for this effort must be mobilized across sectors, the- matic groups, and professional clusters in the Bank Group. The strategy therefore calls for a commitment by a wide coalition of forces within the institution and among external partners to working together in new ways on the urban frontier, with a newly empowered set of clients. Executive Summary 9 The ultimate aim of this strategy is to pr-omote sustainable cities and towns that fulfill the promise of development for their inhabi- tants-in particular, by improving the lives of the poor and promoting equity-while contributing to the progress of'the country as a whole. Pursuing such a strategy requires: * A guiding vision of sustainable cities, in the context of a comprehensive frame- work for national development * An understanding of how the Bank's operations can support this vision * A recognition of the lessons that emerge from the strengths and shortcomings in the Bank's performance and response capability. Viewing urbanization within a comprehensive development frame- work. The new strategy is concerned with ensuring that countries extract the most benefit from urbanization. The implications of urbanization are not appreciable from demographic numbers alone. The urban transliormation affects the physical concentration of people, patterns of land use, social st-uctures and interactions, and the nature and scale of economic production. Each of these dimensions of change af- fects the lives of individuals and the requirements for resources and governance. The urban transition also translates into diverse systems of urban settlement in different countries, and cities and towns in the same countr-y often show very dissimilar out- 10 Cities in Transition: A Strategic View of Urban and Local Government Issues comes in the extent and nature of poverty, in the patterns and growth rates of in- vestment and employment, in the accessibility or spatial dispersion (e.g., "sprawl") of residential and commercial areas, and in environmental quality and cultural ameni- ties. The new strategy reflects the view that although cities and towns (like other eco- nomic entities) have different potentials and life cycles, public policies coupled with community action, private sector commitment, accountable local government, and supportive national government-can make a large difference in the character of urban areas and in their contribution to national development. To both increase well-being for all urban residents and direct urban economic growth for the benefit of all citizens, the urban transition needs to be viewed within a national comprehensive development framework. The Bank and its partners are elaborating such a perspective as an instrument for engaging local and central gov- ernments, the private sector, civil society institutions, and international donors in a shared commitment to balanced, integrated development for each country. Within the comprehensive development framework, the multiple dimensions of urban transformation (economic, institutional, social, spatial, environmental, cultural, technological) could be assessed, primarily in terms of their impact on reducing poverty. The framework would help in monitoring the actions of various stake- holders (firms, service providers, financiers, and government), to identify progress and constraints in making urbanization serve national goals of sustainable poverty reduction and broad-based growth. And it would allow a coherent view of the dy- namic rural-urban interactions and the economic roles of settlements along a con- tinuum of sizes in the country. Addressing sources of both market and government failure. The urban and local government strategy is also grounded in sound principles about the rationales for public and private action in support of urban development. Munici- palities bear the basic responsibilities of government at its lowest tier for allocating resources and promoting social equity, within constraints set by higher levels of gov- ernment (which assign functions and fiscal authority), and for ensuring the provision of local public goods and services through partnerships with the private sector and civil society. In many rapidly growing cities in the poorest countries, weak local govern- ments have been unable to perform even minimal functions, so that households and informal institutions have become the main providers of infrastructure, housing, and social services. While this solution meets some essential needs, it has also re- sulted in fragmented urban economies. In these cities the poorest often pay most dearly for low-quality services; poorly integrated land, housing, and transport mar- kets impose high costs on firms and households; and congestion and haphazard waste disposal degrade the environment. Local governments, or designated agencies such as public utilities, have essen- tial roles to perform in providing urban public goods (streets and walkways, storm drainage, public green spaces), in facilitating efficient use of and equitable access to Executive Summary 11 urban land, in ensuring coordination through planning and policy corrections, if needed, to account for positive and negative spillover eflects of private activities (such as pollution), and in protecting public safety. These vital functions require local gov- ernment to support markets and official processes of political representation where feasible, and to promote the capacity of residents to express public choice and have their demands satisfied by other, less formal arrangements where necessary. The new urban strategy is therefore directed to correcting sources of marketfail- ure in the urban economy-such as information gaps that impede the efficient work- ings of land and real estate markets-as well as sources of governmentfailure-such as inappropriate regulations or official behaviors that create excessive transaction costs and risks for local investors. The urban strategy is also geared toward helping government at all levels, the private sector (for profit and nonprofit), community groups, and citizens function in the urban economy in ways best suited to them. This means, for example, promoting effective comperition among land developers and service providers; making local government budgets more transparent and thereby reducing the perceived risks of partnership for private financiers; increasing channels of information and collaboration among community groups, informal sec- tor operators, and local government agencies; and reiining policy tools such as tar- geted subsidies, basic land use planning, and urban xransport management to ad- dress social and environmental externalities in the uroan economy. If cities and towns are to promote the welfare of their residents and of the nation's citizens, they must be sustainable and functional in four respects. First and foremost, 12 Cities in Transition: A Strategic View of Urban and Local Government Issues they must be livable-ensuring a decent quality of life and equitable opportunity for all residents, including the poorest. To achieve that goal, they must also be competi- tive, well governed and managed, and financially sustainable, or bankable (Attachment 3) The strategy proposes an agenda for helping cities develop along these four inter- related dimensions-a comprehensive development framework for the urban arena. Each dimension implies appropriate national-level policies, including a sound macroeconomic and fiscal environment and a strong financial sector, and local policy and institutional requirements. The urban policy agenda outlines some broadly common goals for all cities and local governments. But it would be imple- mented very differently in different places, with the pace, priorities, and operational instruments depending on the political commitment and capacities of the local and central government and other key stakeholders. Livability The Bank's commitment to improving livability would be aimed at ensuring that the poor achieve a healthful and dignified living standard that permits them to share the resources of society. Providing a decent quality of life for the poor in urban areas requires much more than national policies for education, employment, and safety nets. Also necessary is to address city-level factors limiting secure land tenure and access to adequate housing, credit, transport, health care, and other services. These factors go beyond affordability and often include failure to take appropriate account of gender differences in planning services, and the political exclusion and physical isolation of poor communities. Improving the living standards of the poor also requires addressing constraints to small-scale and informal sector enterprise, tackling the unresponsiveness of local officials and poor people's sense of powerlessness, and creating support systems for working mothers, the elderly, and youth. Promoting a healthy local economy that offers broad employment opportunities and permits families to invest in housing and productive assets leads to healthier urban communities and strengthens the urban contribution to the national economy. The policy agenda for improving liv- ability also includes measures addressing the sources of environmental degradation, natural disasters, crime and violence, preserving cultural heritage, and providing amenities for all urban residents. To develop the multiple dimensions of urban livability, the Bank would help clients establish appropriate policies at both the national and the local level, involv- ing many sectors and disciplines. As an example, the Bank's urban assistance pro- gram has accumulated a strong base of experience with programs for integrated improvement in networked environmental infrastructure and services (upgrading). Numerous examples have shown that upgrading unserved neighborhoods can empower communities and raise the welfare of low-income households. National and international coalitions need to be strengthened to support the scaling up of community-based urban services, including sector-specific programs for urban Executive Summary 13 Box 1 Enhancing the quality of life for the urban poor in Indonesia through the Kampung Improvement ProgIram The classic example of slum upgrading remains the Kampung Improvement Program in Indonesia, a combined effort of the local and national governments that extended improvements to some 50,000 hectares of unserved urban communi- ties over 30 years and reached an estimated 15 million people. About a third of this coverage was achieved under four Bank-financed projects in 1975-88. The 1995 impact evaluation of the Bank-supported projects confirmed that they unleashed private investment in the settlements and that residents credited the program with enhancing the quality of their lives. Little evidence was found that the poorest residents were pushed out by gentrification, in part because the program was extended so widely to cover unserved parts of the cities. The evaluation estimated thatthe program investments yielded a minimum 12 percent rate of return even when their useful life was limited to five years because of rapid redevelopment of the areas. transport, water supply, and sanitation, to meet the emerging demands of different user groups in a sustainable manner. Pursuing flexible and practical approaches to involuntary resettlement is essential to these efforts. WVhile the greatest current de- mand for slum upgrading is felt in some of the largest cities that have major slum populations, the Bank's lending and nonlending assistance related to housing, land policies, and improved urban governance aims to help other, smaller cities address problems that could lead to slum proliferation as these cities grow. The Bank would also become more involved in iacilitating participatory urban environmental management and in helping cities assess and reduce their vulnera- bility to natural disasters. Even as the Bank helps cities cope with multiple crises and the effects of past failures to manage growth, it should encourage the adoption of participatory, market-sensitive urban planning methods. Such efforts would aim to steer future real estate and public transport investments so as to make jobs and housing more accessible for all residents in more compact, mixed-use developments friendly to both communities and the environment. These activities related to improving urban living, standards and enhancing city livability through urban development programs neecl to be complemented increas- ingly by efforts of other sectoral and thematic teams in the Bank, especially those specialized in poverty analysis, social development, environmental management, microfinance, and microenterprise development. Competitiveness Building livable cities requires buoyant, broad-based growth of employment, in- comes, and investment. And approaches to promote urban equity and social safety nets need to be consistent with incentive systems that foster productive and com- petitive firms of all sizes. The Bank's 1991 urban policy paper outlined the basic 14 Cities in Transition: A Strategic View of Urban and Local Government Issues Box 2 Increasing the efficiency and market-responsiveness of housing and real estate In Mexico, a series of four housing operations approved between 1986 and 1992, totaling over US$1 billion, spurred commercial banks to lend to home buyers and to low-income households. The projects brought about deregulation in the housing sector leading to savings in housing costs, dismantling of inefficient state housing agencies, and restructuring of housing subsidies. The operations introduced clients' participation in the design and selection of home types and locations, pre- viously unheard of in low-income housing in the country, and put commercial builders in touch with a new low-income clientele. The Second Urban Project in Mali (closed in FY94) supported the creation of a privately managed agency to auction large tracts of formerly public land for sale as individual plots with secured titles. The auctioning created an efficient and transparent process which by its large scale avoided speculation, recovered full costs, and delivered profit for the city and the central government. conditions for urban productivity, which are also necessary to make cities competi- tive and entrepreneurial in the global marketplace. The urban assistance program continues to promote these conditions by encouraging spatially integrated, efficient markets for housing, land, real estate, and public transport, since these affect work- ers' mobility and accessibility of urban employment. Urban operations also focus on problems of dysfunctional regulation or weak public administration. These create high transaction costs for firms, especially small and informal sector enterprises, a significant and undervalued source of dynamism and potential fiscal revenues. In- frastructure reform and investment projects in the infrastructure sector portfolios (water and sanitation, electricity, telecommunication, and transport), and programs that establish generally favorable trade regimes and pro-competitive environments for industry, complement this urban agenda. Helping cities define proactive strategies to enhance their prospects for eco- nomic growth and development in the global marketplace is a relatively new chal- lenge for the Bank, but one increasingly posed by local governments. The strategy proposes that the Bank facilitate citywide economic analysis and strategy develop- Box 3 Accounting for the local economy in West Africa The OECD/Club du Sahel's ECOLOC program has devised a simple economic accounting methodology for subregions in West Africa and has worked with part- ners in these local economies (governmental and nongovernmental) to analyze subregions' strengths and bottlenecks. The approach, applied initially to areas within Senegal, Mali, and C6te d'lvoire using readily available local data, permits analysis of the linkages between the main economic activities of the subregions and both domestic and international markets. Executive Summary 15 ment with urbani clients through- participatory procrsses involvinig a wide range of stakeholders. Local economic development approaches should he explored that promote diversified growth, such as by ser-ving dom-estic as well as international markets, and nourishing the potential of the small-scale and informal sector as well as larger employers. The Bank can help develop andi disseminate analytical tools to support this process, such as urhan regulatory aa,sessments and policy-relevant urban performance indicators. A strong macroeconiomic dialogue is also essential, to ensure that the basic country conditions for resilient local economies are in place. Good governance and management Improving the liv ability and competitiveness of cities places big demands on urban governance and managemenit. Good governance im-plies inclusion and represenita- tion of all groups in the urban society-and accountability, integrity, and trans- parency of local government actions-in defining and pursuing shared goals. Ca- pable urban management requires a capacity to) fulffill public responsibilities, with kniowledge, skills, resources, and procedures that dtraw on partnerships. Fostering regular, formal interaction benween local government and residents (including through community-based and nongovernmental organizations)-in approaches such as participatory planning and badgeting, and public oversight of expenditure and service delivery--is a major focu,s of the Bank's municipal devel- opment activities. An imiportant feature of these efforts is the emphasis on stronig underlying incentives for local government accountability, and performance, wvhich are essential to combat problems of corruption. TChe urban assistance program has 16 Cities in Transition: A Strategic View of Urban and Local Government Issues Box 4 Understanding and addressing municipal corruption Two factors are required for corruption to flourish in a municipal system. The first are systems of governance which are vulnerable to corruption. A second and necessary condition is a set of perverse incentives which motivate individuals or groups of individuals to take advantage of vulnerability. Successful anti-corruption programs have at least two dimensions: The first dimension is the internal reform of both structure and process within the municipal administration. The most out- standing case of this has been the Municipality of La Paz, Bolivia in the 1980's and early 1990's during the administration of Mr. Ronald MacLean. A complete over- haul of the administration, including reduction in staff and redesign of processes, permitted the municipality to emerge from a catastrophic situation driven by cor- ruption to one of stability and good management. The second dimension is a re- form of the interactions of citizens and stakeholders with municipal government. This external reform can be exemplified by the Campo Elias, Venezuela initiative of the World Bank Institute. The reform focused principally on a series of public participatory actions, including: a participatory budget, practical mechanisms to assure flow of information to the public, and development of a standardized and integrated system of administrative procedures. also traditionally devoted attention to the intergovernmental assignment of func- tions, expenditures, and revenues that determines the system of incentives and the availability of resources for local governments. With formal fiscal decentralization in many countries, the Bank's urban staff can bring the perspective of municipalities, and an understanding of the needs and constraints facing different kinds of local governments, into the national macroeco- nomic and fiscal dialogue to promote more effective design and implementation of these reforms. Urban projects also help local governments define the scope for pri- vate sector participation and facilitate public-private partnerships, with the collab- orative support of the Private Sector Development Department and the infrastruc- ture work of the International Finance Corporation (IFC). Arrangements to involve the private sector in service delivery should be designed with careful attention to en- suring that the poor do benefit-as indeed they often have not from public or pri- vate monopolies. The need for metropolitan-level management approaches re- mains a major issue in the dialogue with many cities, especially for transport and environmental improvements whose effects cut across jurisdictions. The detailed capacity building and training of municipal staff in urban devel- opment projects would be supplemented by greater use of "wholesaling" or inter- mediary arrangements for exchanges of experience and best practice, training, and technical assistance among the local governments. These exchanges would include the municipalities' major partners, such as utilities, community-based organiza- tions, and informal service providers. The World Bank Institute can play an im- portant role in implementing this approach. Urban projects, training, and research Executive Summary 17 supported by the Bank would also do more toward refining and disseminating man- agement tools for urban practitioners. The Bank's Poverty Reduction and Economic Management network is in the process of developing a new strategy to address the challenge of reforming public institutions and strengthening governance across the public sector to improve im- pact on the lives of the poor. The urban strategy goals of improving the quality of city governance and urban management will provide the urban and local govern- ment interface with this renewed focus of the Bank on reforming the institutional "rules of the game." Bankability Cities are very poor in many countries-if not in potential resources, at least in their ability to effectively mobilize revenues and assets when large segments of the urban society operate in a shadow economy. Integrating informal and marginal commu- nities as full urban citizens, taxpayers, and public service customers is therefore an important goal. And an equitable and sustainable local -inance system is essential to income and employment growth and sound municipal management. Bankabilitv here implies financial soundness in the treatment of revenue sources and expenditures-and, for some cities, a level of creditworthiness permitting ac- cess to the capital markets. The Bank's urban development operations and related policy dialogue promote the adoption of clear and intzrnally consistent systems of local revenues and expenditures, with transparent and predictable intergovern- mental transfers, prudent conditions for municipal birrowing, and generally ac- cepted financial accounting, asset management, and procurement practices. An im- portant part of good urban financial management involves adopting a commercial approach to many of the service and administrative functions of cities, while keep- ing social concerns in view. A commercial approach is also a prerequisite for in- volvement of the private sector or eventual privatization of urban services. Box 5 Building stronger municipal financing capacity Recent impact evaluation by the Operations Evaluation Department has confirmed that in Brazil and the Philippines, municipal development fund projects train local governments (generally of small to medium-size cities) in responsible financial be- havior while helping them build a solid credit record. The study found the munici- pal development funds to have had significant effects on the financial practices and institutional capacity of the recipient local governments, as compared with nonrecipients. In both countries, the projects required municipal governments applying for a subloan to submit a financial action plan with a comprehensive re- form package. The participating municipalities in one of the Brazilian projects also credited it with helping to improve their procurement, professionalism, information technology, and community participation practices. 18 Cities in Transition: A Strategic View of Urban and Local Government Issues For cities and countries whose municipal credit systems remain rudimentary, Bank lending will continue to support specialized financial intermediaries such as municipal development funds. Lending operations should aim increasingly to en- courage the transition to market-based municipal credit systems, which the Bank and IFC financial sector departments can support through work on the underlying market infrastructure. Sector work and other nonlending services are also needed to help countries devise appropriate national policy frameworks for financing local public expendi- ture and to help cities undertake public investment and financing plans as part of their city strategies. For potentially creditworthy cities, the Bank's urban assistance should be geared to helping them gain access to the capital market. The Bank Group (World Bank, IF, and Multilateral Investment Guarantee Agency-MIGAj would also explore participation in structured financing packages and support to risk pooling arrangements to ease the transition by local governments and local public-private infrastructure partnerships to private financial markets. Creative and flexible forms of Bank Group support will be especially important where central governments, often wisely, do not wish to continue providing sovereign guarantees to subnational governments after decentralization. The urban development portfolio has always been ambitious and wide ranging in scope. Some of its objectives-including greater subnational government capacity, cost recovery, local environmental management, community participation, and re- form of property rights-went beyond what was attempted in many other types of projects at the time. The Bank distinguished itself as the first international organi- zation to support slum upgrading as a national urban policy. Its contributions as the leading urban assistance agency and its intellectual influence in many urban re- forms were widely acknoxledged at the 1996 Habitat II Conference. The common ground with other major multilateral and bilateral agencies in urban assistance has been strengthened in consultations on the strategy exercise, and by parallel activi- ties under way by many of these agencies in which they reaffirm their own com- mitment to work on urban and local government issues. In the first two decades of urban development lending (1972-92) the portfolio was rated among the best in the Bank. But the Bank's reorganization in 1987 dis- persed the central urban projects staff and left many of their projects in the charge of managers who lacked knowledge of urban issues. The strong body of urban sec- tor work, policy studies, and research received inadequate operational follow-up and was poorly reflected in country assistance strategies. Little new analytical work was initiated after the early 1990s. The result of all these factors was a sharp dip in the performance ratings of completed projects around fiscal 1995, but recovery is well under way. Completed projects in fiscal 1997 and 1998 received ratings equal Executive Summary 19 to or better than Bankwide averages. An external client survey undertaken for the strategy exercise confirmed that clients have a high opinion of the Bank's analytical contributions and project assistance in urban development. The urban development staff and managers continue to seek ways to ensure fur- ther improvement. Experienced sector leaders have been appointed in the Bank's Re- gions, and an Urban Partnership anchored in the Infrastructure Group was created in 1997 as a cross-network arrangement to pilot new urban activities and foster new external alliances. Proactive thematic gToups ("communities of practice") have been formed to share experience, sharpen products, and train staff. The strategy exercise represents a major effort to renew and reinforce the urban development program. Sustained improvement in urban assistance will require broadening institutional com- mitment to the urban agenda, increasing resources for training and research, provid- ing more consistent and complete treatment of urban issues in country assistance strategies and sector work, and strengthening external and internal partnerships-all points of focus in the new strategy. '7 ~~~

cial safety nets available for all informal sector employment groups, desigined with attentioni to gender-based and other differences in needs c * Safety astd secturity (including low Viable communities with strong Efficienit nationsal programs fbr * Urban and city-specific poverty levels of crime, violenlce, and nlat- social capital targeted stlbsidies (bousing, food, assessments (L, P) ural disasters) tranisport), Lnemploymcnlt insur- tY atice, and welfare programs r * Full integration of all groups in * Equitable political r-epresentation Gender-sensitive employment Urbass environsmental manage- urban society, inicluding women and opporttinitics for participation policies (such as child care) mcnit strategies action plans (L) and mitioritics arid management and improve- * Preservation of cultural heritage of * Mitigation and prevention of Environnseiitally astd socially ntent prqjects (1, P) a, uirban areas, for cenjoymenit by all accideists and disastcrs balanced development of pubbic < residents transport Urban growth patterns that mini- Public justice system that is Disaster mantagemenst and rmize ncgative impact on environ- respected assd applied fairly preventioni progratms anct related ment and congestion assistance (L, P) Urban form providing accessibility Public and private commitment to Social and economic infrastructure ofjobs and housinig in relatively respectinig and preservinig public refortn and investmenit progranis compad, mixed-use developments areas, rights-of-way, and cultur-al (including public transport and that foster commurnities and have heritage, sucl as, throuigh partici- wvater anid sanitation) (P) minimal adverse environmental patory and market-friendly land impact use plainning Public green spaces, recreational HoTlseless shelters and programs * Microcredit to lIouseholds and -: amenities, and cultusral heritage as- for street childreni small firms (P) sets protected and accessible to all Policy advice on social protection policies atsd programs (P) COMPETITIVENESS Growth and increased productivity *FEfficient factor markets (land, eI gal and regulatory frameworks National urban strategies of city output, broad-based em- ltbor, capital), well isitegrated be- tlsat support appropriate business and action plans (L, P) ployment, investment, and tween rural and uirban economies incenitives atid impose Tlminimal trade its response to market tratssactions costs opporturtitics * Efficient and demand-responsive Public-private partnerships to City development strategies markets for infrastructuire identify miiarket opportunities and and action plans (L, P) remove bottlenecks ili dcvelopirsg land, infrastructure, amsd cultural heritage assets * Efficieiit local public admitmistra- Land, real estate, and transport liousimng anld -ia cestatc dcvclop tion that is business-friendly planning that supports spatially ef- ment programs and housing fi- licient land suse and adequate sup- nance reforms (L, P) ply of developed land for business and residential uses * lealtliy industr-y structures (with Rule of law artcs pr operty rights * Urbams r egulator-y audits (laind, fluid erntry and exit for firms of all protected housing, buisiness, labor) (L, P) sizes) that integrate informal sector firms * Investmnent and industrial develop- * Infrastructure subsector invest- ment corresponding to tlse com- mertt and reform progr-ams, in- parative advaistagc of the city cluding public-private in irastruc- .0 economiy ture franmework analysis (P) ATTACHMENT 3 MATRIX OF STRATEGIC VISION AND ACTIONS TO SUPPORT SUSTAINABLE CITIES (continued) Goals and objectives for Enabling policy andcl inistitutionial Bank instrumcnits and supporting sustainable cities Components and preccoiditions framework actiotna Modern communication and Macroeconomic dialogue and technology services S(ructural Adjustmenit Lending frameworks for stabilization aisd economic liberalization (P) GOOD GOVERNANCE AND MANAGEMENT Accountability, transparency, and Broad participation of all groups Clear franseworks for intra- and National urban strategies integrity of local government in urban goveirnance, through iiitergoverirmental assignment and and action plans (L,P) boti formal and informal chaisnels delegation of filnctions, responsi- and instittitions bilities, revenities, and expenditures > Local governmernt institutions senl- * Clear inicerntives for performance Mecianisms Ibr objective, indc- Self-standing advisory C/) sitive to the needs of poor ancd dis- by all levels of governmenit affect- peisdent review of local govern- services advantaged residents and to genider ing usrban development ment perobrmance (L, P) differences in service requirements Good collaboratiort amonig local < government agenicies and informal institutions such as community- o based organizations o Cost-effective fulfillmenit of local * Stronig capacity to ensuire the de- * Developmeist and applicatioms of * City development strategies government service obligationis livery of services through a variety tnanagetnient tools and best anid actioni plan (L, P) of msechanisniis practices * Strong public trist atid tsiist of Professionalization anid training of * Urban muanagenrment projects (L) high levels of government in local local governiment staif goverulnllent o * Public access to information about in local governmsent decision making B and actions i * Appropriate public-private part- Support to associations of x nership frameworks implemented municipalities for sharing C best practices, technical assistance, training, and city CD twinning (L, P) _ * RegtLlar public conisultation and Identification and dissernination of 3 oversight in budget and local gov- best practices in uirban maniage- ermnient decisioni usiakiTug ment (I, P) processes * Incentive structures lor public rep- resentatives arid employees that encourage istegrity aind Irrinimize corruptioni * City awards fur managerial excellenice (L, P) * Municipal management and pub- lic integTity training (World Bank Ilnstitute) (P) * Institutionial reviews anid anti- corruption surveys including local goverinmenit (P) flAtlflfl* *-', UnIIMODILI I I * Sound fitiancial managersenit * Intergovernmental finance system * Firiancial management capacity * Municipal development fitiid permitting fitlfillotient of service tiat is predictable anid promotes and iniforosation systems its projects (L) obligationts appropriate incentives isrunicipal goverinmenits * Social compact with users for * Sustained tax effort relative to * Viable finanicial institutionis willing * Muniicipal finance (expenditure, fee-for-sen-ices revenste base arid able to bear municipal credit revenue, aisd inivestment) reviews risk (I1) * Creditworthy local governmients * Transparenit and efficient manage- * Regulatory and institutional in*fa- * Self-standing municipal able to access market-based credit merit of expenditures, reveniues, structure for developing capital finance advisory services (L) and muniiicipal assets, publicly dis- niarket instruments for municipali- closed and audited ties (bonds) 36 Cities in Transition: A Strategic View of Urban and Local Government Issues % - e - elE * - ~ ~~~~~' C Cd C 3 DJ. , k t* Q~~~~E -aC O _ O CCX -z C2 u a t k co m) : Ci a g < ~ ~ ~ t o C,g= -tc - C v id C'Q5C OCA C n cC C5 U U a 4 C C £4 C0~~~~~~~~~~~~~~~~t . o £4 ci O R D E R C O U P O N Cities in Transition: A Strategic View of Urban and Local Government Issues CUSTOMERS IN THE UNITED STATES CUSTOMERS OUTSIDE THE UNITED STATES Mail order to: Contact your local Bank publications distributor World Bank Publications for information on prices in local currency and PO. 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Please include purchase order. * World Bank Publications Visit our website at IwV. worldlaitk. orgopublicationts The World Bank's new strategy for an urbanizing world, Cities in Transition: A Strategic View of ULrban and Local Government Issues, rec- ognizes that cities and towns form the front line in a global cam- paign to address issues of poverty and development opportunitv. Guided by a vision of sustainable cities that are livable, competi- tive, well governed and managed, and bankable, this study argues that the WVorld Bank needs to View the city holistically while inter- vening selectively; facilitate city-led development processes as well as support sound national urban policy framewArorks; invrest widely in urban knowledge generation, dissemination, and capacity build- ing; and work through strengthened public and private partner- ships at local, national, and international levels. Cities in Transition proposes four strategic building blocks to supplement and enhance the Bank's continuing activities in urban development. These are I) support to national urban strategies, 2) support to city-led development strategies, 3) scaling up pro- grams of services for the poor, and 4) enhanced assistance for knowledge sharing and capacity building. The study is an invalu- able resource that builds upon the World Bank's experience in and commitment to urban development. The World Bank 1818 H Street N.W. Washington, D.C. 20433 USA Telephone: 202-477-1234 Facsimile: 202-477-6391 Telex: MCI 64145 WORLDBANK MCI 248423 WORLDBANK Internet: www.worldbank.org E-mail: books@worldbank.org A FREE PUBLIC-ATION