Better Cities
Better World
A Handbook on Local Governments Self-Assessments
Catherine Farvacque-Vitkovic and Mihaly Kopanyi
Better Cities,
Better World
Better Cities,
Better World
A Handbook on Local Governments
Self-Assessments
Catherine Farvacque-Vitkovic
and Mihaly Kopanyi
© 2019 International Bank for Reconstruction and Development / The World Bank
1818 H Street NW, Washington, DC 20433
Telephone: 202-473-1000; Internet: www.worldbank.org
Some rights reserved
1 2 3 4 22 21 20 19
This work is a product of the staff of The World Bank with external contributions. The findings, interpretations,
and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of
Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the
data included in this work. The boundaries, colors, denominations, and other information shown on any map in
this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory
or the endorsement or acceptance of such boundaries.
Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immuni-
ties of The World Bank, all of which are specifically reserved.
Rights and Permissions
This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://
creativecommons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy,
distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions:
Attribution—Please cite the work as follows: Farvacque-Vitkovic, Catherine, and Mihaly Kopanyi. 2019. Better
Cities, Better World: A Handbook on Local Governments Self-Assessments. Washington, DC: World Bank.
doi:10.1596/978-1-4648-1336-8. License: Creative Commons Attribution CC BY 3.0 IGO
Translations—If you create a translation of this work, please add the following disclaimer along with the attribution:
This translation was not created by The World Bank and should not be considered an official World Bank translation.
The World Bank shall not be liable for any content or error in this translation.
Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution:
This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole
responsibility of the author or authors of the adaptation and are not endorsed by The World Bank.
Third-party content—The World Bank does not necessarily own each component of the content contained within
the work. The World Bank therefore does not warrant that the use of any third-party-owned individual component or
part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such
infringement rests solely with you. If you wish to re-use a component of the work, it is your responsibility to deter-
mine whether permission is needed for that re-use and to obtain permission from the copyright owner. Examples of
components can include, but are not limited to, tables, figures, or images.
All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H
Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org.
ISBN (paper): 978-1-4648-1336-8
ISBN (electronic): 978-1-4648-1337-5
SKU: 211336
DOI: 10.1596/978-1-4648-1336-8
Cover design: Debra Naylor, Naylor Design, Washington, DC.
Cover image: ©️ Ndoye Douts. “Lumière.” 2017. Acrylic and oil pastel on canvas. Trames Collection, Agence de
Promotion d’Art Contemporain, Dakar, Sénégal. Art on the opening pages of chapters: © Ndoye Douts. Encre de Chine
series. Used with permission. Further permission required for reuse.
Library of Congress Cataloging-in-Publication data has been requested.
CONTENTS
Foreword xiii
Acknowledgments xvii
About the Authors xix
Abbreviations xxi
Chapter 1. Genesis, Objectives and Rationale, Process and
Methodology: The Story behind Local Governments
Self-Assessments 1
Genesis 1
Objectives and Rationale for Local Governments Self-Assessments:
Connecting the Dots between Municipal Investments and Finances 7
Local Governments Self-Assessments: Process and Methodology 9
References 20
Additional Readings 21
Chapter 2. Making Sense of the City and Sorting
Out Investment Needs and Priorities: The Urban
Audit/Self-Assessment 23
Objectives and Approach 24
Block 1. City Profile 30
Block 2. City Diagnosis and Needs Assessment 40
Block 3. Priority Investment Programs: Selection, Consultation, and
Implementation 72
The “So What?” Question: Beyond Investments, A Solution
Package of Supporting Measures 85
Note 87
References 87
Additional Readings 88
Contents v
Chapter 3. Getting the Finances in Order: The Municipal
Finances Self-Assessment 89
Objectives and Rationale 89
MFSA Methodology 91
Step 1: Setting Up Core Databases 93
Step 2: Historical Analysis 124
Step 3: Ratio Analysis 143
Step 4: Financial Projections 150
Step 5: Financial Management Assessment 172
Step 6: MFSA Action Plan 189
References 192
Chapter 4. Way Forward and Perspectives for
the Future: Transformative Actions for a New Urban Agenda 197
Beyond the Nuts and Bolts of Local Governments
Self-Assessments: A World of Applications 197
Institutionalization of LGSA: Integrating LGSA into
Current Practice of Local Governments 198
LGSA Contribution to City-Based Knowledge Products:
Data with a Purpose, Data with a Voice, Deep Dive into
Storytelling 199
LGSAs: Tapping External Sources of Funding and Accessing
Multiple Windows of Financing 201
From LGSAs to Green Financing 207
From LGSAs to Municipal Programs: Partnership Agreements
and the Municipal Contract 208
Keeping an Eye on the Prize: A Bottom-Line Approach to Better
City Management 211
References 211
Additional Readings 212
Appendix A: Local Governments Self-Assessments:
Simplified Framework or Version “Light” 213
Appendix B: Detailed Methodology and Procedures
to Help Calculate Specific Results in MFSA 251
Appendix C: Municipal Finances Self-Assessment Online
Application: An Interactive Platform for Mainstreaming of Use 267
Appendix D: MFSA Action Plan: Long List of
Possible Key Actions 271
vi Better Cities, Better World
Appendix E: Self-Assessed Shadow Credit Rating 281
Glossary 293
Boxes
1.1 The Changing Geography of Urbanites 2
1.2 Senegal: Genesis of Municipal Audits 4
1.3 Improving Local Government Capacity: The Experience of Local
Governments Self-Assessments in Southeast Europe—The Case
of Belgrade, Serbia 6
1.4 Objectives of Local Governments Self-Assessments 8
1.5 Why Conduct Local Governments Self-Assessments? 8
2.1 Urban Audit/Self-Assessment Objectives and Preparation 24
2.2 A World of Maps: How Are Urban Maps Created? 27
2.3 Typology Guidance 31
2.4 Green Investment Needs for Global Infrastructure 41
2.5 Land Use Regulatory Framework: Some Definitions 56
2.6 The World Bank’s Ease of Doing Business Index 58
2.7 The Importance of Street Addressing: A Precious Ally 69
3.1 Beware of Classifications! 97
4.1 Leave No City Behind 198
4.2 Story from the Field: Belgrade’s Credit Rating 203
4.3 Paris Agreement on Climate Change 207
4.4 The Green Urban Financing and Innovation Project
Development Objective 209
E.1 Disclaimer on Standard & Poor’s Credit Assessment 282
E.2 Disclaimer on the Municipal Finances Self-Assessment 282
E.3 Moody’s Guidelines on Scorecards 283
Figures
1.1 Local Governments Self-Assessment Process 9
1.2 Sources of Municipal Finances Self-Assessment Data 14
1.3 Links between MFSA and Other Financial Performance
Assessments 16
1.4 Ladder of Citizen Engagement 17
2.1 Urban Audit/Self-Assessment Framework 29
2.2 City Profile: Key Components 30
2.3 Demographic Trends 33
2.4 Financing Mechanisms: A Simplified Matrix 35
2.5 : An Example 36
Organizational Chart of the Municipality
2.6 Key Urban Economic Indicators: Example of Belgrade, Serbia 37
Contents vii
2.7 From Diagnosis to Technical Selection 46
2.8 IPSI Method: From Inventory to Scoring—A Road Map 49
2.9 Urban Audit/Self-Assessment: Urban Services, Using IPSI as
Database 55
2.10 Criteria Selection and Validation 77
2.11 Criteria and Process for Preselection of Municipal
Investments 77
3.1 Main Steps of MFSA Analysis 91
3.2 Generic Financial Framework 92
3.3 MFSA Framework 92
3.4 MFSA Framework 93
3.5 Operating Savings/Current Revenues 145
3.6 Capital Investment Expenditure/Current Revenue 145
3.7 Maintenance Expenditure/Current Revenue 145
3.8 Debt Stock/Budget Total 147
3.9 Financial Projections Framework 151
3.10 Systems and Models for Assessing Public Financial Management
Performance 173
4.1 LGSA Byproducts: Monitoring Dashboard and Informed
Decision Making 201
A.1 Structure of Current and Capital Budget 232
B.1 Current Revenues: Three Different Trends 256
B.2 Linear Trend for Fee Revenues 260
B.3 Modified Linear Trend for Fee Revenues 260
Maps
2.1 Spatial and Urban Governance 32
2.2 Population Densities 33
2.3 Drivers of the Local Economy 38
2.4 Two Levels of City Diagnosis and Needs Assessment 40
2.5 Examples of Infrastructure and Services Maps 45
2.6 Subnational Doing Business around the World 58
2.7 Urban Audit/Self-Assessment: Land Use Map 65
2.8 Land Use Map: Sample from the Municipality of Gazi Baba,
North Macedonia 65
2.9 Location of Public Land Owned by (or under Control of) the
Municipality 70
Tables
2.1 Share of Responsibilities: Who Is Responsible for What? 35
2.2 MFSA Table: Asset Development and Maintenance 44
viii Better Cities, Better World
2.3 Inventory for the Programming of Services and
Infrastructure (IPSI): Inventory 50
2.4 Inventory for the Programming of Services and Infrastructure
(IPSI): Indicators 52
2.5 Inventory for the Programming of Services and Infrastructure
(IPSI): Scores 53
2.6 Urban/City Planning Assessment: City Planning Process 59
2.7 Land Use Regulations and Building Standards 61
2.8 Potential Correlation between City Planning and Investment
Programming 62
2.9 Effect of Existing Planning and Land Use Regulations on the
Illegal Occupation of Land 62
2.10 Basic Land-Use and Population Data 67
2.11 Land Values 67
2.12 Example: Land Development Project 71
2.13 Taking the Pulse of the City: Perception of the City by its
Citizens 73
2.14 Classification of Priority Investment Projects by Category and
Financing Source 79
2.15 Priority Investment Program 82
2.16 Project Fact Sheet 82
2.17 Priority Investment Program Implementation Schedule 84
3.1 MFSA Core Financial Database—Revenues 96
3.2 Capital Revenues 98
3.3 MFSA Core Financial Database—Expenditures 102
3.4 Capital Budget Expenditures 104
3.5 Supplementary Database Actual/Plan Analysis 107
3.6 Actual/Plan Analysis Measured by Average Absolute
Deviation 108
3.7 Expenditures by Functions 111
3.8 Summary List of Debts and Terms 113
3.9 Aging List of Debt 114
3.10 Capital Investment Plan Summary, Year 6–Year 10 117
3.11 Tax Performance Database 118
3.12 Total Financial Liabilities—City Dues, End of the Fiscal Year 120
3.13 Arrears—Overdue Financial Liabilities 121
3.14 Contingent Liabilities 122
3.15 Monthly Cash Balance 123
3.16 Municipal Assets—Investment and Maintenance 125
3.17 Financial Position Snapshot 127
3.18 Historical Tendencies in Financial Position 129
Contents ix
3.19 Main Revenue Sources 130
3.20 Main Current Expenditures 132
3.21 Capital Expenditures and Financing 133
3.22 Actual/Plan Analysis—Expenditures 135
3.23 Historical Analysis—Expenditures by Functions 136
3.24 Historical Analysis of Debt Stock and Debt Service 138
3.25 Historical Analysis of Tax Revenues and Tax Performance 139
3.26 Financial Liabilities and Arrears 140
3.27 Contingent Liabilities 141
3.28 Asset Inventory and Maintenance 142
3.29 Key Financial Ratios 144
3.30 Creditworthiness Ratios 146
3.31 Indebtedness Ratios 146
3.32 Fiscal Autonomy Ratios 147
3.33 Capital Investment Efforts Ratios 147
3.34 Level of Service Sustainability Ratios 148
3.35 Quality of Operations Ratios 148
3.36 Key Comparison Ratios 150
3.37 Capital Investment Plan—Summary 154
3.38 Debt Service Summary—Excerpt from Debt Database 155
3.39 Projection of Current Revenues, Operating Expenditures, and
Gross Operating Margin—Conservative Estimates Scenario 157
3.40 Projecting Debt Service, Capital Expenditures, and Capital
Financing—Conservative Scenario 158
3.41 Projection of Current and Capital Budgets and Balances—
Optimistic Scenario 161
3.42 Financial Ratios in Conservative Projection Scenario 165
3.43 Creditworthiness Analysis 168
3.44 Ratios for Debt and Borrowing Capacity Analysis 169
3.45 Debt Capacity of Sample City in Year 10 171
3.46 Predictability of Transfers 176
3.47 Intergovernmental Mandates 176
3.48 Debt Regulations 177
3.49 Own-Source Revenue Confidence 178
3.50 Expenditure Spending Responsibility 178
3.51 Strategic Plan and CIP 179
3.52 Budget Planning 180
3.53 Scope of the Budget 181
3.54 Budget Implementation 181
x Better Cities, Better World
3.55 Financial Management Framework 182
3.56 Revenue Management 183
3.57 Expenditure Management 183
3.58 Cash Management 184
3.59 Oversight and Internal Control 185
3.60 Financial Reporting 186
3.61 External Audit 186
3.62 Financial Disclosure 187
3.63 Public Procurement and Competitive Tendering 188
3.64 Financial Management Assessment Scoring Results 188
3.65 MFSA Action Plan: Example 191
A.1 Share of Responsibilities: Who Is Responsible for What? 214
A.2 Land Occupancy 215
A.3 Population 216
A.4 Population by Neighborhood 216
A.5 Economic Activities and Jobs 217
A.6 Infrastructure and Services Programming Inventory (ISPI)
(For complete tables, see chapter 2 tables 2.3, 2.4, and 2.5.) 217
A.7 Municipal Built Assets 218
A.8 Recent, Ongoing, and Scheduled Projects 219
A.9 Priority Investment Program (PIP) 220
A.10 PIP Implementation Schedule 220
A.11 Project Fact Sheet No. 1 221
B.1 Historical Trends in Financial Snapshot with Two Indexes 254
B.2 Projection of Current Revenues, Operating Expenditures, and
Gross Operating Margin—Conservative Estimates Scenario
(Copy of Table 3.39) 259
E.1 SASCR Scoring of Qualitative Areas and Factors from Sample
City, 2013 285
E.2 Scoring Financial Ratios 285
E.3 Scoring of Financial Ratios with Projections 286
E.4 Shadow Credit Rating Scores 288
E.5 Scoring Financial Ratios with Medium-Term Projections 289
E.6 Financial Management Scoring Summary 291
Contents xi
FOREWORD
This book is about cities and towns around the world. It is about helping
them unleash their true potentials for the pursuit of:
• Efficient and effective use of public resources
• Sustainable growth and economic prosperity
• Social inclusion
• Greater transparency and accountability in the selection of public
investments
• Making the right decisions at the right time with the right resources
• Being “smarter”
• Reducing their environmental footprint through the use of proper
regulations and appropriate technologies.
In many ways, the urbanization wave and the unprecedented urban growth
of the past 20 years have created a sense of urgency for action and an impetus
for change. In 2014, 54 percent of the world’s population, or 3.9 billion peo-
ple, lived in urban areas. That proportion is likely to rise to 68 percent by
2050, while it used to be one-third in the 1950s. More than half of city dwell-
ers live in cities of fewer than 1 million, but there are 28 megacities of more
than 10 million. In the 1950s, most of the world’s urban residents were in
Europe and the Americas. Now, Asia and Africa host the world’s largest and
fastest-growing cities. Although the planet is becoming increasingly urban,
it has become clear that “business as usual” is no longer possible.
In this new configuration, great hopes and expectations are placed on
local governments. While central governments are subject to instability and
political changes, local governments are seen as more inclined to stay the
course; because they are closer to the people, the voice of the people is more
clearly heard for a true democratic debate over the choice of neighborhood
investments and the choice of citywide policies and programs. In a context
of skewed financial resources and of incredibly complex urban challenges—
which range from the provision of basic traditional municipal services to
Foreword xiii
issues of social inclusion, economic development, city branding, emergency
response, smart technologies, and green investments—cities are searching for
more effective and more innovative ways to deal with new and old problems.
Things are indeed changing in some parts of the world. The incredible leap in
technology has enabled cities to have access to and appetite for spatially based
data and to take into account the importance of location in decision making.
New thinking has evolved on the function of city planning. No longer viewed
as a reactive function, city planning is perceived to be at the front and center
of city management and is no longer seen as the realm of stodgy planners left
in a dusty corner of City Hall. City planners have become in many places very
vocal voices for change. New planning techniques aim to (1) provide proactive
guidance and orientations for future urbanization; (2) take into account new
technologies and smart ideas to address environmental concerns; (3) embrace
social inclusion challenges; (4) foster and support city “branding”; (5) listen to
various interest groups, including citizens; and (6) play a new role of “broker”
between public and private interests. However, city planners, for the most
part, are still left out of the investment programming process and are still
very much disconnected from the financing decisions. The Urban Audit/Self-
Assessment (UA/SA) aims to fill this gap and, in many ways, can contribute
to furthering the professionalization of municipal staff by promoting a new
breed of city planners.
While the decentralization process is progressing, and the missions of local
governments are becoming ever more complex, their financial base is not keep-
ing up with the increasing pressure for competitive financing needs. Assessing
the financial position of a municipality and its capacity to sustain key capital
and recurrent investments, and connecting it to its investment needs and pri-
orities, is more essential than ever. This is where the Municipal Finances Self-
Assessment (MFSA) comes in. Collecting “data with a purpose,” budgeting
and reporting effectively and transparently, projecting future trends, and hav-
ing a holistic understanding of revenue generation potentials and expenditure
needs will help cities better manage their finances. Equally important, these
activities will facilitate municipalities’ relationships with central government
and citizens and their dealings with financial partners (access to credit and to
other financing mechanisms through banks or development partners). Again,
this calls for a new breed of municipal staff who can actively participate in the
future of their city.
This book is at the heart of this debate. It outlines a grid for analysis, a
framework for data-based policy dialogue, and a common language that, for the
first time, helps connect the dots between investment programming (Urban
Audit/Self-Assessment) and financing (Municipal Finances Self-Assessment).
• Chapter 1 provides (1) a genesis of Local Governments Self-Assessments
(LGSAs) and of the key urban challenges they aim to address; (2) a definition
and explanation of the key underlying objectives and rationales for LGSAs;
xiv Better Cities, Better World
and (3) an overview of the process and methodology of the assessments,
including answers to some fundamental questions commonly asked on the
what, why, and how.
• Chapters 2 and 3 provide a thorough and detailed roadmap for two key
functions of the municipality, which are often disconnected from each
other and typically carried out on parallel tracks. These are (1) the needs
assessment of municipal infrastructure and services and the prioritization
of key investments supported by the Urban Audit/Self-Assessment and
(2) the management of municipal finances supported by the Municipal
Finances Self-Assessment, focusing on the assessment of the financial
position of a city and the identification of the key triggers required to
strengthen its financial capacity.
• Chapter 4 focuses on how these self-assessments are turned into
transformative actions, and how they can impact the way cities conduct
their business and deliver on their promises.
The book has a bit of everything for everyone. Central governments will be
attracted by the purposefulness and clarity of these tools, their impact on local
government capacity and performance building, and the way they improve the
implementation of transformative actions for policy change. City leaders and
policy makers will find the sections on objectives and content instructive and
informative because each urban issue is placed in its context. Municipal staff
in charge of day-to-day management will find that the sections on tasks and
the detailed step-by-step walk through the process give them the pragmatic
know-how they need. Cities’ partners—such as bilateral and multilateral agen-
cies, banks and funds, utility
companies, and private operators—will find the
foundations for more effective collaborative partnerships.
Ede Jorge Ijjasz-Vasquez Sameh Wahba
Senior Director Director
Social, Urban, Rural, and Urban and Territorial
Resilience Global Development, Disaster Risk
Practice Management and Resilience
World Bank, Washington, DC World Bank, Washington, DC
Foreword xv
ACKNOWLEDGMENTS
We are thankful for the support and guidance received, over the years, from
our colleagues at the World Bank, in particular Ede Jorge Ijjasz-Vasquez
(Senior Director, Social, Urban, Rural, and Resilience Global Practice),
Sameh Wahba (Director, Urban and Territorial Development, Disaster
Risk Management and Resilience), David Sislen (Practice Manager, Europe
and Central Asia), Dean Cira (Lead Urban Specialist), and Roland White
(Global Lead for City Management, Finance and Governance). We would
like to give much appreciation and thanks to our formal reviewers for their
valuable advice and constructive comments—especially Sylvie Debomy
(Practice Manager, Urban and DRM, Africa Region, World Bank), Lourdes
Germán (Director, International and Institute-Wide Initiatives, Lincoln
Institute of Land Policy), and Rama Krishnan Venkateswaran (Lead
Financial Management Specialist, World Bank). We are also grateful to the
many other colleagues who provided, at one time or another, valuable infor-
mation and showed a general interest in this endeavor, including Christophe
Crépin (Practice Manager, Environment and Natural Resources, Asia
Region, World Bank), Sandra Kdolsky (Social Development Specialist),
Holy-Tiana Rame (Senior Public Finance Specialist, PEFA Secretariat),
Harris Selod (Senior Economist, Development Economics, World Bank),
and Asha Ayoung (Lead Procurement Specialist), as well as the respective
SD Program Leaders who cover the countries mentioned in this book.
This work has greatly benefited from the technical contribution of Anne
Sinet (Municipal Finances Consultant, AllNext) and the late Lucien Godin
(Urbanist and International Expert and Cofounder of Groupe Huit). They
provided long-term intellectual inputs into the conceptualization and
design of the tools, as well as technical support to their implementation
under several World Bank projects.
What makes the key messages and the overall content of this book pow-
erful is the fact that many cities and towns around the world have taken
part in the early design, piloting, or scaling up of these tools. There would
be no Local Governments Self-Assessments without local governments.
Acknowledgments xvii
Although there are too many mayors, city managers, and heads of techni-
cal or financial departments to mention here, we would like to acknowledge
the important contributions made by the f ollowing individuals: Chekhou
Diop, Massar Sarr, Modi Ka, Mamadou Ndiaye, Alioune Sarr, Sory Kouyate,
Dian Diallo, Abdoulaye Keita, Ljiljana Brdarevic, Marjan Nikolov, Natasa
Obradovic, Anto Bajo, Merita Toska, Anila Gjika, Dritan Shutina, Kejt Dhrami,
Brankica Lenic, Goran Rakic, and Ibrahim Gjylderen. We are also grateful
for the cooperation and support of Kelmend Zajazi (Executive Director,
Network of Associations of Local Authorities of South-East Europe) as well
as numerous national associations of local governments. We are thankful to
Türda Osmen for his professional guidance and contribution to the rating
methodology.
Last but not least, we are very grateful to Sabine Palmreuther, former
Senior Specialist at the World Bank and former task manager of the Urban
Partnership Program, and Tamara Nikolic, Operations Officer and current task
manager, World Bank. They provided the steering and the push and shared
our passion for a job well done. We would also like to acknowledge and thank
the Austrian government, which helped finance parts of this work under the
World Bank–Austria Urban Partnership program.
We also appreciate the contributions of World Bank Cartographer Bruno
Bonansea and Knowledge Management Analyst Syed Abdul Salam.
Finally, special thanks go to the World Bank Publications Department,
especially Jewel McFadden, and Mary Fisk and her team, who skillfully
guided the publication process.
This book is dedicated to our friend and colleague, Lucien Godin, who
devoted his life to the urban cause and whose legacy continues to inspire
many of us. He was at the forefront of much of the current thinking on
cities and peri-urban areas, spent his life in the trenches, and was a great
believer in tools and toolkits. More than 20 years ago, we started working
together on the development of some of these tools and writing books
about them. In that time, we notably spent endless hours conceptualizing
and designing what eventually became the local government self-
assessments. Without him, this book would not be.
xviii Better Cities, Better World
ABOUT THE AUTHORS
Catherine Farvacque-Vitkovic has more than 30 years of World Bank
experience in many regions of the world. As Lead Urban Development
Specialist at the World Bank, she has led the preparation and implementa-
tion of a large number of urban development, municipal management, and
infrastructure projects in many cities around the world. She is the author or
coauthor of several sector studies as well as several books. Among them are
the following:
• Reforming Urban Land Policies and Institutions in Developing Cities/
Politiques foncières des villes en développement (available in English and
French)
• The Future of African Cities: Challenges and Opportunities for Urban
Development/L’Avenir des villes Africaines, enjeux et priorités (available
in English and French)
• Street Addressing and the Management of Cities (available in English,
French, Portuguese, and Spanish) and companion E-Learning Program
• Municipal Finances: A Handbook for Local Governments (available in
English, French, Mandarin, and Spanish) and companion E-Learning
Program.
She has a keen interest in translating lessons from experience and
cutting-edge know-how into practical knowledge products and c
apacity-
building programs for local governments around the world. Her interests,
work experience, and extensive field practice have led her to connect the
dots between land management, city planning, investment programming,
and municipal finances.
About the Authors xix
Mihaly Kopanyi has more than 25 years of World Bank experience and has
worked in cities in 30 countries and on four continents. His key areas of
expertise include financial management, municipal finances, own- revenue
enhancements, and property taxation. He led the Municipal Finance Thematic
Group of the World Bank for over a decade until his retirement. He is a munic-
ipal finance adviser to project teams in urban lending projects and capacity-
building programs, with special focus on assessing the financial health of local
governments and seeking options for improvements.
He has written or edited numerous books and book chapters, and doz-
ens of papers for the World Bank and the London School of Economics.
Major volumes he has coauthored for the World Bank include Municipal
Finances: A Handbook for Local Governments (2014) (English, French,
Mandarin, and Spanish); “Municipal Finances E-Learning Program” (2015);
Intergovernmental Finances—A Case of Hungary (2004); and the MFSA Online
Application (a forthcoming companion document prepared by the authors).
xx Better Cities, Better World
ABBREVIATIONS
CAPEX capital expenditure
CDFs community development facilities
CIP capital investments plan
COFOG classification of functions of governments
CPI consumer price index
D/E debt-to-equity ratio
DeMPA Debt Management Performance Assessment
DSCR debt service coverage ratio
EIRR economic internal rate of return
ERR economic rate of return (synonym of EIRR)
FMA financial management assessment
FIRR financial internal rate of return
FOREX foreign exchange
FX foreign exchange
GDP gross domestic product
IFMIS integrated financial management information systems
IPIE Inventaire pour la programmation des infrastructures et
equipements
IPSAS International Public Sector Accounting Standards
IPSASB International Public Sector Accounting Standards Board
IPSI Inventory for Programming of Services and Infrastructure
GIS geographic information system
LGSA Local Governments Self-Assessment
LVC land value capture
MC municipal contract
MFSA Municipal Finances Self-Assessment
NPV net present value
OECD Organisation for Economic Co-operation and Development
O&M operation and maintenance
OPEX operating expenditures
Abbreviations xxi
PEFA Public Expenditure and Financial Accountability Assessment
PIMA Public Investment Management Assessment
PIP Priority Investment Program
PPP public–private partnership
R&M repair and maintenance
SASCR self-assessed shadow credit rating
TIF tax increment financing
TODS transit-oriented development schemes
TTIP tax on transfer of immovable property
UA/SA Urban Audit/Self-Assessment
xxii Better Cities, Better World
CHAPTER 1
Genesis, Objectives and Rationale,
Process and Methodology
The Story behind Local Governments
Self-Assessments
Genesis
Self-Assessments (LGSAs): the Urban Audit/
This book is a follow-up and companion doc- Self-Assessment (UA/SA) and the Municipal
ument to Municipal Finances: A Handbook for Finances Self-Assessment (MFSA). It (1) out-
Local Governments by the same authors and lines a genesis of the key urban problems that
published by the World Bank. The Municipal LGSAs aim to address; (2) provides an intro-
Finances Handbook set the stage for the fun- duction to what these self- assessments are and
damentals of sound local government finances why they are important; (3) offers some les-
and drilled the issues of (1) intergovernmental sons learned from implementation of UA/SAs
relations, (2) revenues management, (3) expen- and MFSAs in different contexts; (4) outlines
ditures management, (4) financial manage- a clear methodology/road map to carry out the
ment, (5) assets management, and (6) external assessments successfully and productively in a
resources management. self-paced format; and (5) discusses the trans-
Better Cities, Better World picks up where formative policy actions generated by the use of
chapter 8 of the Municipal Finances Handbook these tools. Better Cities, Better World has been
left off and focuses on Local Governments purposefully designed to help city leaders better
Genesis, Objectives and Rationale, Process and Methodology 1
manage the process of city investment planning very rough measure of the amount of intergov-
and budgeting, as well as to provide citizens, ernmental transfers needed to ensure that local
financial partners, donors, and other interest governments have sufficient revenues to meet
groups with a clear picture of the investment their expenditure responsibilities.
needs of a particular city and its matching cur- In municipalities where there is coordina-
rent and projected financial position. tion between spatial and economic develop-
ment planning and public finance, thoughtful
and strategic investments can be visible and
A Context Ripe for Local Governments
generate positive results for economic per-
Self-Assessments
formance. However, the biggest expenditure
Economists have long argued that reducing the challenge facing governments at all levels is the
gap between citizens and the level of govern- growing gap in infrastructure financing. Over
ment responsible for service provision will lead the next 15 years, an estimated US$93 trillion
to greater efficiency in the use of resources. Over of infrastructure will need to be built globally,
recent decades, many countries have devolved a 70 percent of it in cities. This new infrastruc-
growing list of expenditure responsibilities to ture will require annual investments exceed-
local governments, often without correspond- ing 5 percent of global gross domestic product
ing decentralization of resources to finance (GDP), consuming most of the tax revenues
them. As a result, in both highly developed and of subnational governments. New revenue
developing nations, one can find examples of sources will need to be found to take on this
municipal government failures to provide many challenge, and national and state/provincial
services to residents and shortfalls in infrastruc- governments will need to expand intergovern-
ture and public service investments. In many mental transfers to municipal governments,
countries, there is a large difference between enable local governments to raise new sources
the local government expenditure share and of revenues, strengthen local government
the local government revenue share. This differ- accountability to residents, and motivate local
ence, often referred to as a fiscal gap, provides a governments to exploit scale economies by
Box 1.1
The Changing Geography of Urbanites
In 2014, 54 percent of the world’s p opulation, expected to add nearly 1 billion residents in
or 3.9 billion people, lived in urban areas. coming decades, with most of the growth
That proportion is likely to rise to 66
percent occurring in cities of fewer than 1 million.
by 2050, while it used to be one-third in the By 2050, nearly 75 percent of urbanites will
1950s. More than half of city dwellers live be in Asia and Africa.
in cities of fewer than 1 million, but there A larger understanding of urban infra-
are 28 megacities of more than 10 million. structure systems is necessary to move
In the 1950s, most of the world’s city dwell- from data to information to knowledge and,
ers were in Europe and the Americas. Now, ultimately, to action for urban sustainability
Asia and Africa host the world’s largest and and human well-being.
fastest-growing cities. Cities in just three
nations—China, India, and Nigeria—are Source: Science 2016.
2 Better Cities, Better World
consolidating planning and expenditures at citizens’ confidence in their own governments
metropolitan rather than jurisdictional levels. as well as between the various levels of gov-
ernment, and (4) local governments urgently
needed support in their core mission to fill the
he Story
Genesis of LGSAs: T
gap in infrastructure and service delivery, the
behind Them
World Bank supported the development and
Early Generation of Local Governments introduction of Municipal Audits in close part-
Assessments: Municipal Audits in Africa nership with local counterparts.
The seed for the LGSAs presented in this Over the decade of the 1990s and early
book started in the 1990s as part of the World 2000s, more than 200 local governments (capi-
Bank’s engagement in Africa, where the World tal cities, cities, and towns) in West Africa alone
Bank was very actively involved in supporting completed Municipal Audits. These Municipal
urban development. Between 1993 and 2003, Audits included a two-track process:
it financed about 50 urban development proj-
• A Financial and Organizational Audit (the
ects in the cities of Sub-Saharan Africa, totaling
first generation of what we have renamed
about US$2 billion, or 20 percent of its invest-
the MFSA) aimed at shedding light on the
ments in urban projects globally. The context
financial position of the municipality and
for assessing municipal capacity was ripe on a
identifying key actions for reform.
continent fast becoming urbanized and faced
with rapid decentralization trends. Cities were • An Urban Audit (a simplified version of what
becoming more densely populated, with rising is presented in this book) aimed at assess-
demand on existing services and infrastructure. ing the level of services and infrastructure,
Their responsibilities were becoming more mapping the gaps, and facilitating the pro-
complex, with an increasing number of new gramming, financing, and implementation
devolved functions unmatched by skewed finan- of Priority Investment Programs. In the case
cial resources and limited intergovernmental of Africa, the Financial and Organizational
transfers. In addition, cities were not the key Audit led to the formulation of a Municipal
development priority of central governments. Reform/Adjustment Program (focused on
For example, in Cameroon, government’s invest- revenue and expenditure reforms, improve-
ments in 18 cities and towns represented less ment of financial practices, and adjustment
than 1 percent of national budget, and spending to staffing and skills). We even developed a
was mostly concentrated in the largest cities of Catalogue of Capacity Building Measures to
Yaounde and Douala. In Senegal, urban areas help local governments make the right deci-
contributed 60 percent of the country GDP, yet sions for their specific contexts and grasp
the municipalities collected only 1 percent of the up-front what each action required in terms
urban GDP, or US$6–8 per capita. of responsibility and costs. The Urban Audit
This kind of imbalance in budget allocations, led to the formulation of a Priority Investment
compounded with growing urban poverty and Program and a Priority Maintenance
total dysfunction of institutions and service Program, which were the results of a con-
delivery, is precisely what propelled the need sultative screening process of identification
to step up our engagement in urban Africa. and selection of infrastructure/services proj-
Grounded in the recognition that (1) reliable data ects based on social, economic, financial,
were hard to find, (2) local government capacity and environmental criteria. To support the
was patchy and needed hands-on, project-based final selection process, we also developed a
accompanying support, (3) a fracture existed in Catalogue of Urban Investments that helped
Genesis, Objectives and Rationale, Process and Methodology 3
local governments’ final decisions and pro- (especially when it came to central govern-
vided key information on unit costs, stan- ment’s actions) and to propel the concept of a
dards, and operational requirements. consultation-based municipal pro-
data-based,
gram rather than atomized p rojects. Some of
These two programs—Municipal Adjustment the major reforms on transfers, tax collection,
Programs (finances) and Priority Investment and decentralization agendas, as well as the
Programs (infrastructure)—were then outlined building of schools, clinics, roads, solid waste
in a partnership agreement called the munici- transfer zones, municipal facilities, and infra-
pal contract or the city contract. This contract structure, can be attributed to these contrac-
proved to be an effective way to hold all par- tual programs. Most of these contracts have
ties accountable for their part of the bargain led to second, third, and fourth generations
Box 1.2
Senegal: Genesis of Municipal Audits
The Senegal Urban Development and Although not legally binding, the munici-
Decentralization Program (UDDP), developed pal contract became a respected reference
in the 1990s, opened the path to many other document for all parties involved. Both the
similar projects in Africa, where the model emphasis on public consultations as an inte-
was cloned and implemented. The Senegal gral part of the municipal audits and of the
UDDP introduced for the first time the con- formulation of the municipal contracts and
cept of municipal audits and municipal con- the fact that public scrutiny and public media
tracts in Africa. The Municipal Development kept a close eye on the implementation
Agency supported 67 municipalities (includ- progress (the municipal contracts were pub-
ing Dakar) in implementing a sustainable lished in local newspapers) limited poten-
priority investment program while providing tial deviances and unwanted political gains.
them with a financing plan commensurate The first generation of municipal contracts
with their financing absorptive capacity and were signed for four- to five-year periods and
combining soft loans, grants, and savings. paved the way for the next generations of
The Urban Audit led to the identification municipal contracts up to this day. It was not
and implementation of a Priority Investment uncommon to see municipal contracts con-
Program and a Priority Maintenance tinue beyond the political mandate of may-
Program. The Financial and Organizational ors, as the municipal contract was perceived
Audit led to the identification and implemen- by local beneficiaries as a tool to “get things
tation of a Municipal Adjustment Program, done” and by donors, such as the World
to be carried out by the local government, Bank or Agence française de développe-
and a realistic set of macro reforms to be ment, to improve disbursements of painfully
conducted by the central government. All slow lending projects as well as to ensure
programs were clearly outlined and speci- quality of outputs (“getting the right things
fied in an agreement (the municipal contract) done”). An Independent Evaluation Group
between the local government and the cen- study on municipal decentralization found
tral government; the agreement typically that the municipal contract approach and its
included the ministry of finance, the ministry legacy were highly satisfactory.
of local governments, and the technical min-
istry in charge of urban infrastructure. Source: Farvacque-Vitkovic and Godin 2003.
4 Better Cities, Better World
of municipal contracts and are still ongoing At the same time, a raging civil war had caused
today. Benin, Burkina Faso, Cameroon, Chad, major fractures in the social fabric, as well as
Côte d’Ivoire, Guinea, Madagascar, Mali, a collapse of traditional forms of governance
Mauritania, Niger, Rwanda, and Senegal are and a rise of informal activities in the absence
part of this batch of municipal contract coun- of rule of law. In this context, the unlikely jour-
tries (see box 1.2). At the same time, East ney of self-evaluation started, under the Urban
African countries and South Africa simulta- Partnership Program designed and monitored
neously developed the use of performance by the World Bank, with the introduction in the
grants or performance contracts to support region of the MFSA and, later on, of the Urban
central–local government relationships and Audit/Self-Assessment.
monitor the use of public funds. Such grants As of 2019, five years into implementation,
were implemented in Ethiopia, Ghana, Kenya, the process of municipal LGSAs/audits has been
South Africa, and Tanzania. In South Africa, refined. The key achievements can be summa-
the Division of Revenue bill introduces the rized as follows: 76 municipalities have com-
conditional allocations to municipalities from pleted or are completing an MFSA, which was
the national government’s share of revenue the first self-assessment tool to be introduced
raised nationally to supplement the funding of in the program and which benefited from an
functions funded from municipal budgets. The already developed grid of analysis or analytical
program in Ethiopia provides LGs with a broad framework; and 16 municipalities have com-
investment menu from which they will prior- pleted Urban Audits/SA. The smaller number of
itize and choose investments in consultation Urban Audit/Self-Assessments reflects the fact
with citizens. that (1) urban audits were purposefully intro-
duced at a later stage in the program; (2) urban
A New Generation of Municipal Audits: audits’ analytical grid required fine-tuning and
The Local Governments Self- adjustment to the local context; and (3) unlike
Assessments and the Implementation MFSAs, which have easily identifiable coun-
Experience in Southeast Europe terparts within the financial department of the
city administration, urban audits require a skill
Fast-forward to the 2010s, when a new gen- set that spans several city departments. Many
eration of municipal audits was launched in municipalities are today into their second- or
Southeast Europe. Under Austrian financing, third-generation audits, which means both that
the World Bank was asked to design and imple- the data for the LGSAs have been updated by
ment a capacity-building program for munici- local authorities and that some of the key actions
palities in Southeast Europe. Initial discussions identified in their municipal improvement pro-
with central and local counterparts and a grams are underway (box 1.3).
quick analysis of the situation on the ground On the basis of lessons learned from the previ-
showed that key emerging priorities focused ous experiences of the first generation of munic-
on a nexus connecting the dots between land ipal audits in Africa, some adjustments were
and city planning, municipal finances, and ser- made in the design/content and implementa-
vice delivery, intertwined with issues of social tion/process of the LGSAs in Southeast Europe:
inclusion, governance, and transparency. The
countries of the region had been badly hit by • First, the first generation of municipal
the 2008 financial crisis, which showed the audits was designed and carried out in full
vulnerability of local finances and the depen- partnership with local governments, but
dency on land-based revenues and transfers. both the novelty of the tool and the varying
Genesis, Objectives and Rationale, Process and Methodology 5
Box 1.3
Improving Local Government Capacity: The Experience
of Local Governments Self-Assessments in Southeast
Europe—The Case of Belgrade, Serbia
The City of Belgrade has been a part- trends based on the analysis of its financial
ner of the World Bank–Austria Urban position and long-term projections. This way
Partnership Program (UPP) since the begin- we were ready for the first meeting held with
Moody’s credit rating agency and for complet-
ning in 2012. Belgrade is the largest city
ing the credit rating questionnaire very quickly
among UPP partners; as a result, the city
for the first time. The information we had to
has greater capacities than most in financial, provide to the agency, e.g. macroeconomic
management, and technical fields. Despite indicators, demographic profile, budget, finan-
that capacity, testing and implementing a cial debt, liquidity, off-balance sheet items and
Municipal Finances Self-Assessment (MFSA) other liabilities, had already been mostly pre-
appeared to be a very innovative change and a pared according to the MFSA methodology
cultural shift for participating city leaders. The recognized by the credit rating agency; these
most challenging first step was to restructure allowed us to complete the entire process
financial results from regular city reports into expeditiously and efficiently.
MFSA templates, which are compatible with Belgrade has updated its MFSA every
approaches of financial and capital markets year by itself and has, subsequently, com-
as well as rating agencies. Second, municipal pleted a medium-term capital improvement
staff had to analyze results. Finally, results had plan. The analysis in this plan is a logical
to be discussed with various departments next step and a derivative of the MFSA pro-
and stakeholders in order to identify correc- gram, but it also includes elements of the
tive measures and agree on key financial and Urban Audit. In short, the MFSA has helped
development targets. Belgrade analyze its own financial position
During this first phase, the city ben- from a completely new perspective, namely,
efited from the punctual assistance of a that of investors and financial institutions. The
local consultant and international experts City used the MFSA not only to demonstrate
of the World Bank. The results are palpable. its creditworthiness but also to prepare ambi-
In order to prepare market-based financ- tious infra- and superstructure development
ing, in October 2016 the city obtained a projects, many of them foreseen as public–
B1 investment grade credit rating from private partnership investments.
Moody’s, equivalent to the sovereign rating. Belgrade has also produced a short city
This rating was upgraded to B3a in March brochure, standardized under the UPP , which
2017 . The deputy mayor in charge of finance summarizes the city’s socioeconomic sit-
confirmed that—bearing in mind the com- uation, financial strength, and plans in a
plexity of financial operations in the City of very user-friendly format, easy to under-
Belgrade—the MFSA had greatly helped stand by citizens and other stakeholders,
during the credit rating analysis. He stated politicians included. In short, the UPP and
at one of the seven City to City Dialogues the LGSA tool have contributed to improve
(held in Belgrade on October 25, 2016): both Belgrade’s understanding of its own
The City of Belgrade had consolidated all of situation and its communication with finan-
its financial data for the period of five years in cial partners. Publishing results and making
one place, the MFSA, which provides a histor- information accessible on the city’s website
ical overview of Belgrade’s financial situation, have also contributed to greater transpar-
including also the City’s future prospects and ency and accountability.
6 Better Cities, Better World
capacity level of partner municipalities Objectives and Rationale
required hands-on assistance from World for Local Governments Self-
Bank staff and consultants. In the case of Assessments: Connecting
Southeast Europe, the same approach was
maintained with the exception of two dif-
the Dots between Municipal
ferences: (1) a purposeful effort to build
Investments and Finances
the capacity of local national consultants Things are changing in parts of the world, but
to help local governments and (2) a con- they are not changing equally for all—which may
tinued effort to put the local governments result in a larger gap between the haves and the
in the driver’s seat and to identify early in have-nots. The incredible leap in technology has
the process the key nominative counter- enabled cities to have access to and an appetite
parts (hence the change in label to “self-as- for spatially based data and to take into account
sessment”). These differences represent a the importance of location in decision making.
purposeful effort to improve the original New thinking has evolved on the function of city
paradigm with a strong emphasis on capac- planning. No longer seen as a reactive function,
ity building and learning by doing. city planning is perceived to be at the front and
• Second, the original/initial templates of center of city management and no longer as the
both the Urban Audit and the Financial realm of stodgy planners left in the dusty cor-
Audit have been refined, with additions on ner of City Hall. City planners have become, in
financial projections and credit shadow rat- many places, very vocal voices for change. New
ings, land, and environmental concerns. planning techniques aim to (1) p rovide proac-
tive guidance and orientations for future urban-
Better Cities, Better World presents these ization; (2) take into account new technologies
updated templates and is an additional step in and smart ideas to address environmental con-
the effort to make the philosophy, methodology, cerns; (3) embrace social inclusion challenges;
and how-to templates available to the largest (4) foster and support city “branding”; (5) listen
number of beneficiaries. As we strive to improve to the voices of various interest groups, includ-
the tools in these uncharted waters, and as more ing citizens; and (6) play a new role of “broker”
cities engage in this process, lessons from expe- between public and private interests.
rience show that the next frontier or challenges Despite this new awareness of the importance
that remain to be addressed will need to focus of city planning, city planners, for the most part,
on four key areas: are still left out of the investment programming
• Consultation and participation process and are still very much disconnected
from financing decisions. The UA/SA aims to
• Formulation and identification of the
fill this gap and, in many ways, can contribute to
Action Plans derived from both the Urban
further the professionalization of municipal staff
Audit/SA and the MFSA
by promoting a new “breed” of city planners.
• Implementation of the Action Plans (both Although the decentralization process is pro-
the Priority Investments Program and the gressing, and the missions of the local govern-
MFSA Action Plan), including searching ments are becoming ever more complex, their
for financing opportunities to support financial base has not kept up with the increas-
implementation ing pressure for competitive financing needs.
• Institutionalization of self-assessment tools Assessing the financial position of a municipality,
in day-to-day local government practice. along with its capacity to sustain key capital and
Genesis, Objectives and Rationale, Process and Methodology 7
recurrent investments, and connecting that posi- effectively and transparently, projecting future
tion to the municipality’s investment needs and trends, and having a holistic understanding of
priorities are therefore more essential than ever. revenue generation potentials and expendi-
This is where the MFSA comes in. Collecting ture needs will help cities better manage their
“data with a purpose,” budgeting and reporting finances. Equally important, these functions
Box 1.4
Objectives of Local Governments Self-Assessments
Local Governments Self-Assessments • Encourage financial and other relevant
(LGSAs) represent a radical departure municipal departments to work together
from traditional city planning and financial on capital investment programs anchored
management practices and aim to pro- in a realistic financial forecast (prioritization).
mote the following mutually reinforcing • Monitor the financial situation and the
objectives: investment programs and act on a set of
key actions (efficiency and transparency).
• Promote performance measurement. • Use a common set of concepts and
• Ensure greater accountability, and sup- internationally accepted indicators so as
port the change process in local public to improve communications and negotia-
administration (accountability). tions with banking institutions, the private
• Encourage local governments to get sector, and donors (access to external
the right data/information and to share funding).
it with other municipalities as well as • Secure cost-sharing of investment proj-
inform central government, local asso- ects.
ciations, and citizens about their current • Enhance participation of all interest
situation and program (visibility in the groups in the choice and selection of
use of public funds). municipal/city programs and projects.
Box 1.5
Why Conduct Local Governments Self-Assessments?
• The assessments came from the rec- • Help communicate with a common
ognition that data are hard to come by
language: the assessment template
and that we seem to reinvent the
provides an analytical framework (the
wheel oriented dashboard and city
action-
• Initially developed by the World Bank as management tool) with key ratios,
a project preparation tool. Evolved as a which are essential for benchmarking,
tool to help LGs improve their financial acting on key findings, and monitoring
management capacity as well as their • Connect the dots between finances,
investments programming capacity city planning, and municipal invest-
• Help flag key problems and identify key ments (reframing them as one inte-
solutions grated municipal program rather than a
series of projects)
8 Better Cities, Better World
will help cities improve their relationships with of the questions commonly asked. First, what
central government and citizens, and their deal- is the process involved in carrying out LGSAs
ings with financial partners (access to credit and (figure 1.1)? What does it take to start the
to other financing mechanisms through banks process? Can it be done anywhere—in large
or development partners). Again, this change cities or smaller cities? Should LGSAs be car-
calls for a new breed of municipal staff who can ried out simultaneously or by themselves? Do
actively participate in the future of their city. LGSAs replace existing channels of reporting
LGSAs are very much needed to bridge the skills or existing planning documents? Where can
and data gap, build the capacity of local govern- the information/data of LGSAs be found, and
ments, and induce the implementation of trans- who are the key interlocutors? How do LGSAs
formative actions for change (boxes 1.4 and 1.5). fit with other diagnostic tools? How does the
consultation process work? How do LGSAs
Local Governments move forward the agenda of green cities,
Self-Assessments: Process smart cities, compact cities, and sustainable
and resilient cities? What about social inclu-
and Methodology
sion? Beyond the nuts and bolts of LGSAs,
This section reviews the process and method- what are the key transformative outcomes
ology of LGSAs and attempts to address some derived from their application?
Figure 1.1 Local Governments Self-Assessment Process
Urban audit/self-assessment Municipal finances self-assessment
- Assess overall performance of city finances
- Making sense of the city
- Outline key bottlenecks on revenues and
- Assess and map level and quality of
expenditures + financial management practice
services, infrastructure, land
- Assess creditworthiness of local government
- Identify public investments needs
- Assess financial capacity to invest
- Priority action plan
- Priority investments program (set of short- and medium-term actions to be
- Priority maintenance program undertaken to improve financial health,
management practices and local government’s
funding capacity)
City-level investments + local finances
improvement = a municipal program
Genesis, Objectives and Rationale, Process and Methodology 9
What Does It Take to Start the Process? trust by providing a data-based platform
and a foundation for intergovernmental
Two things are of primary importance: a
negotiations. Third, many actions identi-
political will and the right people in the driver’s
fied in the MFSA Action Plan or the Urban
seat. The process must start on the right foot-
Audit Investment Program require actions
ing and obtain up-front approval and buy-in
by the central government, and the Action
from key stakeholders:
Plans will clearly identify the various tiers
of responsibilities for unlocking specific
• Town hall: Mayors and city managers
issues. It is therefore vital to bring in the
need to be on board at the very beginning
key interlocutors early on in the process so
of the process. They need to understand
that all participants understand their roles
why LGSAs are important and what these
and responsibilities.
assessments will do for them: (1) clarify
policies and, when needed, policy reforms; • Associations of local governments: Their
(2) provide a road map for action, linking role cannot be underestimated because
investment decisions to supporting capac- they are the brokers between central and
ity-building measures; (3) ensure transpar- local governments. If they do their job
ency and accountability in public spending properly, they can be the voice of the local
decisions; and (4) articulate a clear message. governments and can articulate those gov-
Without municipal leaders’ political will, ernments’ position and point of view at the
the adoption, adaptation, and operational- national level. However, many associations
ization of the LGSAs’ key findings will be around the world are plagued by a num-
short-lived. ber of issues that hinder their capacity to
properly fulfill their role. Highest on the
• Key municipal departments: Experience
list is politics. Second is a general lack of
shows that identifying the key local coun-
funding, which prevents them from hir-
terparts early in the process is essential.
ing the appropriate staff and addressing
Local government staff need to understand
the full spectrum of relevant issues. Third
that the process of LGSAs does not add to
is the temptation to get funding from
their current data collection and reporting
bilateral donors and the result of seeing
but rather facilitates it while providing a
their work program priorities hijacked by
platform for wider use and dissemination of
those donors’ agenda. They, too, need to
their work. An added bonus is the connec-
understand what LGSAs will do for them.
tion among various departments that might
Among many benefits, LGSAs will help
not typically cooperate or work together
articulate a “position” on local issues
(1)
within the city government.
and provide data-based arguments for their
• Central ministries: (finance, local govern- policy dialogue with central governments;
ments, public works, and other relevant (2) support their mission of data collection
sectoral ministries): The ministries are and curation (an LGSA may be the perfect
essential partners. First, they want and instrument to develop long-awaited urban
need to be kept informed, so accurate and observatories, including national aggre-
timely reporting is of prime importance. gated data as well as city-level data); and
Second, they want and need to trust their (3) strengthen their role as providers of
local partners; LGSAs can help build this training and
capacity-building activities.
10 Better Cities, Better World
Can LGSAs Be Done Anywhere? of the municipality and helping it to iden-
tify a Preliminary Investment Program and a
The current track record shows that LGSAs
Preliminary MFSA Action Plan. The key goal of
can be carried out anywhere. Larger cities are
this simpler version is to assess the absorptive
more prone to have staff, data, or both more
capacity of the local government and to outline
readily available. However, the size of the city
a matching program of investments ready for
and the scale of technical sectoral issues will
implementation. The objective is to help the
likely bring a level of complexity to the task.
municipality make informed investment deci-
Smaller cities may initially lack adequate staff
sions while taking steps to improve its urban,
and available data. The awareness of what is
organizational, and financial position.
missing both in terms of capacity and data is,
in itself, a useful exercise and the prelude for
addressing those gaps or shortcomings in the Should LGSAs Be Carried Out Together?
LGSAs’ Action Plans. In both cases, the first
Conducting the Urban Audit/Self-Assessment
generation of LGSAs may initially require the
and the MFSA simultaneously has many obvi-
involvement of local consultants. These local
ous benefits. First are the benefits created by
consultants can be trained in the methodology
the immediate connection and collaboration
of LGSAs and provide initial support for data
between various departments (technical and
collection and analysis. The idea with using
financial) that traditionally do not commu-
local consultants is not to substitute for munic-
nicate much among themselves: talking to
ipal staff but rather to work together and “learn
each other, sharing data, understanding the
by doing.” A great deal of capacity-building
implications of one department’s policy for
effort goes into working through LGSAs with a
the other, and understanding the trade-offs
goal to increase the skills of local governments
of one department’s decisions are all much-
to better record, analyze, present, and act on
needed ingredients in creating an integrated
key findings.
municipal/city program. Second are the level
of comprehensiveness and the greater under-
For Municipalities on the Fence: LGSA
standing of the local situation, challenges,
Version “Light”
gaps, constraints, and opportunities that arise
LGSAs require some level of capacity and a high from a simultaneous use of LGSAs. Combining
level of commitment from all parties involved. an assessment of the physical investment
The payoff and results emerging from the pro- needs concurrently with an assessment of the
cess are well worth the effort; however, some financial position will ensure a fuller under-
cities and towns may not be ready for such an standing of the city’s priorities and a better
engagement. For those local governments that picture of policy implications and required
are on the fence—ready but not quite equipped actions. Third, there is something to be said
to carry out a full-fledged Urban Audit/Self- for the power of combining both instruments
Assessment and MFSA—appendix A provides and achieving both (1) the identification and
a simplified framework (Version “Light”) for selection of a municipal investment program
a more modest self-assessment that can pro- and (2) the implementation of key supporting
vide an entry point into a full-fledged LGSA reform and policy actions.
process later. The key objective is to carry out a If the local government/city does not wish
quick assessment or diagnostic focusing on the to engage in a simultaneous Urban Audit/
urban, financial, and organizational situation MFSA process, it can adopt an incremental
Genesis, Objectives and Rationale, Process and Methodology 11
approach—starting first with the MFSA or the apps. In other cases, data will be available but
Urban Audit/SA or completing one of the two not presented in a format that can easily lead
and delaying the final decision on the way for- to policy decisions. In many cities and towns
ward. The choice will be based on a number of around the world, data may not be available
factors: (1) the political will, as discussed above; at all and must be collected, compiled, and
(2) the timing and the assessment that LGSAs analyzed.
are the right thing to do; (3) the identification of
the right municipal staff; and (4) the identifica- • The city’s planning office is the number one
tion of local experts/consultants who can help entry point. As mentioned earlier, most cities
jump-start the process and build the capacity have begun to take their planning function
of the relevant departments, if needed. In any more seriously and have come to realize that
case, step 1 of any single LGSA should be the city planning guidance, in an ever-growing
city profile, which gives an overview of (1) spa- physical environment and ever-shrinking
tial and urban governance, (2) demographics financial context, is crucial. Planning doc-
and densities, (3) stakeholders and share of uments have adapted to the local reality
functions and responsibilities, (4) urban econ- and to the need to be both more proactive
omy and city branding, and (5) main urban and more interactive. Long gone is the time
investment challenges. when dusty planning offices, supported
by an army of technical expatriate assis-
Do LGSAs Replace Existing Channels of tants, cranked out big master plans whose
Reporting or Current Planning Practices? accuracy would fail along with the pace of
urbanization and the disregard for regula-
The overarching objective is not to replace tions, permits, and the rule of law. City plan-
existing channels of reporting or current doc- ning documents today are living documents,
umentation practices. Rather, the objective documents that can adapt and guide invest-
is to facilitate the actual elaboration of these ments decisions. They typically include
documents and to improve their speed, accu- (1) citywide plans, (2) neighborhood-level
racy, quality, use, application, relevance, and plans, (3) thematic sector plans, and (4) land
implementability. development project-based plans at any
given time for specific development or rede-
Where Can the Information/Data of velopment projects.
LGSAs Be Found, and Who Are the Key
Interlocutors? • The second key entry point is the tech-
nical department of the city government,
On the urban investments side, data for the which takes the brunt of day-to-day main-
Urban Audit/Self-Assessment can be found in tenance and repairs and is on the frontline
four key locations: (1) the city planning office, and at the receiving end of both the local
(2) the city technical department, (3) utility administration’s demands and the citizens’
companies, and (4) sectoral agencies and pri- expectations.
vate operators (land, housing, economic devel-
opment, and so on). Depending on the level of • The third key entry point is utility compa-
sophistication of the city or municipality, data nies. They have their own database and geo-
will be available in varying formats and acces- graphic information systems designed to
sible on the city’s website, portal, interactive address their specific goal of billing collec-
maps, geographic information system, and tion and network maintenance.
12 Better Cities, Better World
The city planning office, technical depart- by national public financial management rules
ment, department of public works, and the and are often defined as specific output tables
various sectoral agencies typically host map- of integrated financial management informa-
based data on a vast array of topics: census tion systems (IFMIS), both of which are gener-
tract boundaries, city limits, land use plan, ally consistent with the MFSA (figure 1.2).
zoning plan, address attributes, addressing sys- Information sources for the MFSA are
tem (including map and street index), zip code
typically the following:
boundaries, street and road network, road traf-
• Financial databases are based on informa-
fic data and plan, bicycle plans and pedestrian
tion from annual closing financial reports
walkways, educational facilities (primary and
(closing budgets) prepared with varying
secondary schools), health facilities, recreation
levels of detail, ranging from very detailed
facilities (libraries, community centers, sports
programmatic budget reports to short,
centers, performance centers), parks and open
single-
summary financial statements, or
spaces, emergency facilities (fire stations and
three statements: income, cash flow, and
emergency
fire hydrants, police stations, data on
balance sheets, depending on the account-
response and evacuation), solid waste ser-
ing systems. The finance departments are
vice boundaries, solid waste service provider
also supposed to keep tax and debt ledgers
data, street sweeping routes, public works
but often have no up-to-date, detailed, and
easements, commercial facilities, business or
reliable tax or debt databases; nor do they
enterprise zones, business improvement zones,
have dedicated teams for daily debt or asset/
historic places, subdivision activities, develop-
liability management.
ment areas, building permits, inner city devel-
opment/redevelopment projects, construction • Expenditures and fee revenues are often
inspection areas, tax assessment data, maps of managed by separate service entities in var-
environmentally sensitive areas, and manage- ious forms and of varying quality, and only
ment data on flood-prone areas. key summary figures are shared with city
A key challenge is that, in many cities of the finance departments. This absence of coor-
world, these various agencies do not commu- dination hampers the strategic management
nicate their data. As a result, the mass of infor- of revenues and expenditures: integrated
mation collected by various parts of the local financial management systems too often
government administration, more often than focus on city finance department data and
not, does not add up to a coherent, funded, sus- lack tax, fee, labor/salary, goods and services,
tainable municipal program. The UA/SA is an or asset modules. In such cases, the various
opportunity to bring coherence and connectiv- service entities or functional units are the
ity in the selection of public investments while only de facto key interlocutors that maintain
integrating the prioritization process with the and record this information—information
funding capacity (current and projected) of the that is vital to the MFSA process because it
city. lists and analyzes expenditures by function,
Regarding the MFSA, the city finance separates capital and current expenditures,
departments are the key interlocutors for and measures the level and scope of the
MFSA data collection and the natural “hosts” city’s maintenance effort.
of most city-level financial information. They
generate a dozen or more monthly, quarterly, or The MFSA analysis requires filling up a
annual financial reports in formats prescribed dozen well-defined and interlinked financial
Genesis, Objectives and Rationale, Process and Methodology 13
Figure 1.2 Sources of Municipal Finances Self-Assessment Data
Finance department
Financial database
Planning and budget
department
Actual/plan variation
Road and transport
department
Debt database
Water and sanitation
department Tax potential/
performance
Education, health, and
culture departments IFMIS Fees and charges
Trade, industry, and
tourism department Liabilities and arrears
Public works
department Capital investments
Land department Expenditures by
function
Agriculture and Assets and
environment department maintenance
Note: IFMIS = integrated financial management information system.
or related tables. The task may seem daunt- accuracy of planning and budgeting docu-
ing; however, the vast majority of the ments, (3) improve forecasting with trend anal-
required information is stored in the vaults of yses and projections, and (4) open a path away
various municipal departments, albeit often from shortsighted incremental budgeting to a
disconnected and in different and inconsis- more programmatic harmonization of finances
tent structures. Preparing the MFSA analysis and investment needs. The MFSA represents
requires locating and slightly restructuring a quantum leap in data analysis and promotes
information to fit the MFSA analytical grid. a new culture of using financial reports for
Having a formatted grid such as the MFSA self-assessment of the financial situation
provides an opportunity to (1) speak with a and systematic projections of future options.
common language, (2) improve quality and By doing so, the MFSA goes far beyond the
14 Better Cities, Better World
common practices in developing countries— assessing country-level PFM systems. Although
that is, preparing financial reports with mini- initially designed to focus on central govern-
mal quality screening (if any) just because they ments’ financial management performance,
are mandated and using them only to report to the same framework has gradually and suc-
upper government bodies. The MFSA moves cessfully been used to assess the financial man-
users beyond simply recording financial data agement quality of cities or other subnational
and teaches them how to analyze, understand, governments, with the addition of one indica-
and use financial information to draw specific tor specifically highlighting intergovernmental
lessons that guide future city-level/municipal transfers. The Debt Management Performance
actions. In short, the MFSA helps cities move Assessment (DeMPA) was developed and is
from plain bookkeeping to analysis and action. being tested by the World Bank. Whereas PEFA
If municipalities lack the staffing capacity or focuses on public financial management, the
the data to complete the full MFSA grid, they DeMPA focuses on only one critical segment of
may opt for a simpler version (Version “Light”/ PEFA, namely debt management. As outlined in
appendix A) that focuses only on the following figure 1.3, the MFSA is much broader in scope,
key items: content, and intention than the other instru-
• Fill out the core financial database. ments. PEFA, for example, focuses on only one
of the five steps of the MFSA (financial man-
• Complete a historical analysis. agement), so there is very little overlap; in that
section, MFSA uses 18 of the 31 PEFA thematic
• Complete the municipal finance qualitative
areas so as to foster harmony and consistency
assessment (fill out questionnaire and score).
between the two tools.
• Draft an action plan.
The better option remains the full-fledged Quid of the Capital Improvement
MFSA; however, completing the full MFSA in Program and Its Connection with the
increments is a possible alternative if needed. Urban Audit/Self-Assessment?
A Capital Improvement Plan (CIP) is a plan-
How Do LGSAs Fit with Other
ning and fiscal management tool used to coor-
Diagnostic Tools?
dinate the location, timing, and financing of
There are a number of diagnostic tools that aim capital improvements over a multiyear period
to focus on some parts of the financial manage- (Center for Land Use Education 2008)—usually
ment process. One of them is Public Expenditure four to six years. Capital improvements refer
and Financial Accountability (PEFA), a meth- to major, nonrecurring physical expenditures
odology for assessing public financial man- such as land, buildings, public infrastructure,
agement (PFM) performance and reporting and equipment. The CIP, typically, includes a
on the strengths and weaknesses of PFM sys- description of proposed capital improvement
tems. PEFA was developed by seven develop- projects ranked by priority, a year-by-year
ment partners (European Commission, French schedule of expected project funding, and an
Ministry of Foreign Affairs, International estimate of project costs and financing sources.
Monetary Fund, Norwegian Ministry of Foreign The CIP is considered to be a working docu-
Affairs, State Secretariat of Economic Affairs of ment; it is expected to be reviewed and updated
Switzerland, U.K. Department for International annually to reflect changing community needs,
Development, and World Bank) primarily for priorities, and funding opportunities.
Genesis, Objectives and Rationale, Process and Methodology 15
Figure 1.3 Links between MFSA and Other Financial Performance Assessments
Action plan
DeMPA
Financial management
assessment
PEFA
Financial projections
scenarios
Ratios PIMA
Historical analysis
trends, indexes
Databases
Note: DeMPA = Debt Management Performance Assessment; MFSA = Municipal Finances Self-Assessment; PEFA = Public
Expenditure and Financial Accountability; PIMA = Public Investment Management Assessment.
Common categories of capital expendi- to start or how to produce a meaningful “living”
tures include (1) acquisition of land for a document. For those cities, the UA/SA process
public purpose (for example, park, landfill, will be extremely valuable. Why? Because it
industrial site); (2) construction, expansion, will (1) guide them to look for the right infor-
or major renovation of a public building or mation; (2) give them access to a standardized
facility (for example, school, library, roads, yet customized template, framework, and grid
sewage network, treatment plant, building of analysis; (3) help them make sense of the
retrofit for energy efficiency); (3) related patterns; (4) acknowl-
city’s trends and spatial
planning, engineering, design, appraisal, or edge the city’s specificities; (5) produce a
feasibility studies (for example, architectural “standardized” yet “customized” analysis of the
fees, certifications); and (4) purchase of major city’s challenges and opportunities; (6) provide
equipment (for example, playground equip- a clear definition of rules of the game, criteria,
ment, snow plows, computers). arbitration, and trade-offs in the selection of
Although the CIP process works well in cities public investments; (7) outline the key require-
with dedicated staff, a sound technical capacity, ments or prerequisites for implementation; and
and a long tradition of city planning documenta- (8) help them do a sound financial measure-
tion, it does not work as well in many other cities ment of costs with cross- checking and match-
around the world. The latter cities are man- ing of available and potential funding resources
dated to prepare CIPs but do not know where using MFSA information.
16 Better Cities, Better World
In short, the MFSA and the UA/SA are • Consult: Obtain citizen feedback on analy-
changing the way medium-term investment ses, alternatives, and decisions.
planning, budgeting, and implementation are • Collaborate: Partner with citizens in parts
done by helping cities move away from simple or all of the decision making.
ad hoc or politically driven selection of priority
investments to a more fine-tuned citywide pro- • Empower: Include citizens’ inputs in final
grammatic approach. decision making.
This emphasis on citizen engagement, in
How Does the Consultation turn, means that certain key guiding principles
Process Work? must be introduced and respected:
Consultations are a key component of LGSAs. • Transparency: The city is open and trans-
The companion book (Municipal Finances: parent in how it shares information.
A Handbook for Local Governments) devoted • Inclusiveness: The city makes its best effort
a full chapter (chapter 8, “Achieving Greater to reach, inform, and engage all people
Transparency and Accountability: Measuring impacted by the decisions being considered.
Municipal Finances Performance and Paving
a Path for Reforms”) to the importance of • Welcoming: The city creates safe, welcom-
consultation, accessibility of data, and citi- ing, and respectful engagement spaces and
zens’ voice in determining the use of public processes in which everyone feels comfort-
funds. Their voice is equally important in the able sharing feedback.
decision-making process regarding urban • Clear information: The city provides peo-
commonly accepted and rec-
investments. It is ple with the information they need to par-
ognized that effective citizen engagement is an ticipate in a meaningful way.
integral part of good governance. The “ladder
of citizen engagement” pioneered in the 1970s • Timely information: The city provides the
and 1980s still pertains today (figure 1.4): community with ample notice of opportuni-
ties to participate.
• Inform: Provide citizens with balanced
and objective information to assist them in • Commitment: The city demonstrates its
understanding the problems, alternatives, commitment to engaging the community in
opportunities, and solutions. a meaningful way, continuously improving
practices to remain relevant and effective.
Figure 1.4 Ladder of Citizen Engagement • Accessibility: The city works to remove
barriers to participation, with the goal of
ent providing all community members with an
agem
Level of interactions
ns’ eng opportunity for meaningful engagement
f citize
degr
ee o Empower (adapted from City of Victoria 2017).
ing
Increas Collaborate 4
Consult 3 As discussed in the following chapters, both
Inform 2 the UA/SA and the MFSA aim to integrate
1 these key principles. The process for each tool
is very cognizant of the need to include the
Citizen involvement in decision making
voice of key stakeholders, including citizens, in
Source: Based on City of Victoria 2017. the use of taxpayers’ money and in the selection
Genesis, Objectives and Rationale, Process and Methodology 17
of investments that will eventually affect them move the agenda forward in two different
directly and permanently. Even with the best ways:
intentions, however, experience shows that
1. The UA/SA can help local officials and deci-
this consultation and participatory approach
sion makers zoom in on issues of key relevance,
can be messy for a number of reasons: (1) there
such as the following:
is a lack of political will, (2) some of the partici-
patory tools are not effective and pay lip service • the shape of urban development and
to the cause, and (3) the increase in citizens’ compact, accessible urban forms
expectations (demand side) falls short of the • clean and efficient urban transportation
local government’s capacity to respond (sup- options
ply side). LGSAs can play a balancing act and
• efficient use of energy in buildings and
restore public confidence in municipal action
availability of local clean energy
while bringing realism in expectations.
• efficient urban waste management.
Green Cities, Smart Cities, Compact The Urban Audit/SA will support the
Cities, Sustainable and Resilient Cities: ollection of relevant data on urbanization
c
How Do LGSAs Move the Agenda patterns, shapes and trends, densities, and
Forward? existing coverage and quality of infrastructure
Cities account for about two-thirds of the and services. Its template is flexible enough to
world’s annual energy consumption and about accommodate additional indicators specifically
70 percent of global greenhouse gas emis- targeted at (1) assessing the current city-level
sions (Ostojic and others 2013). In the coming environmental situation, (2) steering policy
decades, urbanization and income growth in discussion in the right direction, (3) evaluat-
developing countries are expected to push ing the impact of projected investments on the
cities’ energy consumption and greenhouse environment, and (4) screening and promoting
gas emissions shares even higher. The num- the inclusion of such projects in the Priority
ber of people living in urban areas in devel- Investment Program. Infrastructure policies
oping countries is expected to double from are central to green growth strategies, and
2 billion to 4 billion between 2000 and 2030. inertia in infrastructure investments has great
This massive increase is expected to triple the potential for regrets.
physical footprint of urbanized areas from 2. On the financing side, the guiding principles
200,000 to 600,000 square kilometers (World that rule the funding of environmentally sound
Bank 2012). Rapid urbanization has been seen or smart projects or programs remain very sim-
as the major culprit for a heavy carbon foot- ilar at the core to the funding principles of all
print and pollution, and cities have therefore other projects. In both instances, the city needs
become a major focus for addressing climate to get its finances right, manage its expenditures,
change issues. Thousands of cities around the mobilize revenues, do proper bookkeeping, and
world are currently engaged in lessening their be or become c reditworthy to have access to
environmental impact by reducing waste, external financing or to issue sector- specific
expanding recycling, lowering emissions, bonds. All these attributes are supported by the
and increasing density while expanding open MFSA, and we would argue that filling out the
space and encouraging the development of MFSA template should be very much part of
sustainable urban lifestyles. LGSAs can help the practice of any city seeking to improve its
18 Better Cities, Better World
green or smart agenda. In addition, the MFSA effectiveness, productivity, and profitability of
can help outline the key fiscal instruments or investments, as well as their environmental and
subsidies that can help either to incentivize the social impacts. Equally important is the need to
“right” investments or policies or to discourage take into account and understand the spatial
unwanted practices and behaviors. impact of financial measures and fiscal policies
within a city. The relationship between fiscal
Moving along the Social Inclusion and policies and urban shape is poorly understood,
Poverty Reduction Agenda: Can as is the relationship between land-based rev-
LGSAs Help? enues and urbanization patterns. The UA and
MFSA help connect the dots between financial
Despite claims that the world has made tre-
and fiscal policies and the spatial pattern of city
mendous progress in reducing extreme pov-
development. The ultimate goal remains a liv-
erty—with the percentage of people living in
able city.
extreme poverty (defined as people living on
under US$1.90 a day) falling globally to a new
low of 10 percent in 2015 (World Bank 2018)— Building the Human Capital of City Hall:
rates remain stubbornly high in low-income One City at a Time with LGSAs
countries and those affected by conflict and
LGSAs are built on the concept of “learning by
political upheaval. In fact, the total number of
doing,” an old adage that is very much an actu-
poor in Sub-Saharan Africa has increased. In
ality. Indeed, building and improving local gov-
2015, more extremely poor people lived in that
ernments’ capacity are at the core of the LGSAs
region than in the rest of the world combined.
presented in this book. The premise of Better
Besides extreme poverty, we know that pov-
Cities, Better World is that many city govern-
erty exists everywhere, but data on urban pov-
ments are very keen to improve their ability to
erty remain very scarce and difficult to capture.
govern and to strengthen their management
How can LGSAs help?
capacity. Training, however, is not always avail-
First, the Urban Audit/Self-Assessment
able and, if available, may not adequately match
includes a spatially based inventory and scoring
the specific skill needs of the municipal staff.
of the level of infrastructure and services in a city.
On-the-job training has proven to be much more
This process provides an opportunity to locate
effective because it fits better with the day-to-
and map out underserviced neighborhoods,
day tasks at hand (in terms of both content and
thereby clearly identifying where the city most
timing). The LGSAs aim to fill the skill gap in
needs investments and what types of invest-
financial management, city planning, and invest-
ments are needed. Second, this analysis enables
ment programming. As mentioned, the first-
the prioritization of such investments and the
time LGSA user may need some hand-holding.
documentation of the screening p rocess used
This hand-holding can occur with the practical
to target existing pockets of poverty.
use of this handbook, which provides a detailed
step-by-step explanation of the process, and
The Importance of Space, Shape, and
of a companion online tool (appendix C). The
Form in Public Investment Decisions:
role of national local government associations
Location Matters
is worth mentioning. In the case of the Urban
Looking at citywide investment needs and Partnership Program in Southeast Europe, the
priorities spatially is at the core of the UA/ Regional Association of Local Governments had
SA. Location decisions affect the efficiency, the foresight to place great emphasis on both
Genesis, Objectives and Rationale, Process and Methodology 19
face-to-face training and online training and position, and sometimes can lead to promising
to offer a menu of courses in local languages partnerships among various stakeholders, such
based on the perceived needs of its constituents. as central and local governments and the private
Strengthening the human capital of city hall and sector.
enhancing the professionalization of municipal
leaders and staff are the only ways to truly put
local governments in charge of their present and
future.
So What Is New and Innovative References
about LGSAs?
Acuto, Michele, and Susan Parnell. 2016 “Leave No
First, the topics addressed by LGSAs as devel- City Behind.” Science 352 (6288): 873.
oped in this book are not new. Investment Center for Land Use Education. 2008. “Planning
programming and local finances are actu- Implementation Tools: Capital Improvement
ally recurrent issues; what is new is the Plan.” Center for Land Use Education, University
lens through which we look at these prob- of Wisconsin–Stevens Point. https://www .uwsp
lems. The new lens emphasizes a deep-dive .edu/cnr-ap/clue/documents/planimplementa
approach into the analysis of the problems tion/capital_improvement_plan.pdf.
and into the identification of concrete solu- City of Victoria. 2017. “Engagement Framework.”
tions and advocates for a long-overdue and Participate Victoria, City of Victoria, Canada.
missing connection between investments and Farvacque-Vitkovic, Catherine, and Lucien Godin.
finances. Second, it promotes a bottom-line, 2003. The Future of African Cities: Challenges and
Priorities for Urban Development. Directions in
no-nonsense approach to better city manage-
Development. Washington, DC: World Bank.
ment. It does not have thrills and does not get
Farvacque-Vitkovic, Catherine, and Mihaly
into the fad of the moment but, rather, focuses
Kopanyi, eds. 2014. Municipal Finances:
on bare-bones existential questions for the city.
A Handbook for Local Governments.
Finally, it provides a standardized yet custom- Washington, DC: World Bank.
ized framework of analysis, allowing for an
International Monetary Fund. 2018. “Public
in-depth dive into core issues but also allowing Investment Management Assessment (PIMA).”
some flexibility with the possibility to add on Fiscal Affairs Department, International
new layers depending on the focus of interest Monetary Fund, Washington, DC.
or the specificities of the city. Ostojic, Dejan R., Ranjan K. Bose, Holly Krambeck,
Jeanette Lim, and Yabei Zhang. 2013. Energizing
Beyond the Nuts and Bolts of LGSAs, Green Cities in Southeast Asia: Applying
What Are Some of the Key Sustainable Urban Energy and Emissions
Transformative Outcomes Derived from Planning. Directions in Development.
Their Use and Application? Washington, DC: World Bank.
PEFA Secretariat. 2016. “Supplementary Guidance
From data curation to policy changes, LGSAs for Subnational PEFA Assessments.” PEFA
support municipal action over a wide range of Secretariat, Washington, DC. https://pefa
applications. Chapter 4 will develop how the .org/sites/default/files/SNG%20PEFA%20
tools effectively lead to changes in city manage- guide%20revised%2016-03-10%20edited.pdf.
ment practices, help produce city-based knowl- Science. 2016. “Rise of the City.” Science 352 (6288):
edge products, help tell a story and articulate a 906–07.
20 Better Cities, Better World
World Bank. 2012. Inclusive Green Growth: Senegal Municipal Development Agency.
The Pathway to Sustainable Development. multiple years, 2006 onward). “Guide to
(
Washington, DC: World Bank. Cities’ Finances.” Dakar.
———. 2015. “Debt Management Performance _____. 2007. Atlas des Communes de la Region de
Assessment (DeMPA) Methodology.” Dakar. Dakar.
World Bank, Washington, DC. World Bank. 2009. “Improving Municipal
_____. 2018. Poverty and Shared Prosperity Management for Cities to Succeed: An IEG
2018: Piecing Together the Poverty Puzzle. Special Study.” World Bank, Washington, DC.
Washington, DC: World Bank. —— —. 2014. “Improving Local Governments
Capacity: The Experience of Municipal
Finances Self-Assessment in South-East
Additional Readings Europe.” UPP Program, World Bank,
Washington, DC.
Farvacque-Vitkovic, Catherine, and Lucien —— —. 2018. “Improving Local Governments
Godin. 2010. “Decentralization and Municipal Capacity: The Experience of Municipal
Development: Municipal Contracts.” Working Finances Self-Assessment in South East
Paper, World Bank, Washington, DC. Europe.” UPP Program, World Bank,
Farvacque-Vitkovic, Catherine, Lucien Godin, and Washington, DC.
Anne Sinet. 2014. “Municipal Self-Assessments: _____. Forthcoming. “Municipal Finances Self-
A Handbook for Local Governments.” Working Assessment.” Online application. World Bank,
Paper, World Bank, Washington, DC. Washington, DC.
Genesis, Objectives and Rationale, Process and Methodology 21
CHAPTER 2
Making Sense of the City and Sorting
Out Investment Needs and Priorities
The Urban Audit/Self-Assessment
The Urban Audit/Self-Assessment (UA/SA), to wider challenges may not find them here,
as presented in this book, does not pretend although the UA/SA provides a screening
to address every single urban issue. Cities are mechanism for investment projects and pro-
complex microorganisms, city situations are grams, which definitely gives priority to proj-
diverse, city functions may vary, and, conse- ects that have a positive environmental impact
quently, city priorities may not be fully cap- as well as positive social benefits. One of the
tured in the current version of the UA/SA. key objectives of the UA/SA is to promote a
What this UA/SA does provide, however, is “Do No Wrong” approach in investment deci-
(1) a “bottom line” analytical grid/framework sions. The attractiveness of this tool is that
focusing on essential municipal infrastruc- additional layers of analysis can be customized
ture and services; (2) a way of assessing the and added to the template presented below so
performance of the city in the delivery of those as to reflect the specific strategic vision or situ-
basic infrastructure and services; and (3) an ation of the city while keeping in the equation
identification of location-based priority needs the key basic, nonnegotiable, and sometimes
leading to a Municipal Investments Program unglamorous duties and functions that any
containing both capital projects and mainte- urban local government in the world has to
nance tasks. Those seeking to find solutions perform and for which funding has to be freed.
Making Sense of the City and Sorting Out Investment Needs and Priorities 23
Objectives and Approach needs, and level of services in a systematic and
comprehensive manner. The UA/SA has the
What Is an Urban Audit/Self- following key objectives:
Assessment?
• Ensure that patterns of growth and devel-
The UA/SA is an analytical framework designed opment and key urbanization challenges are
to enable local governments to (1) take stock of understood and documented by all parties
their own situation; (2) assess the level of ser- involved in public investment decisions.
vice and infrastructure delivery within their
jurisdiction; (3) locate and quantify the gaps; • Ensure that investment planning takes a
(4) outline the key components of a Priority city-level spatial programmatic approach
Investments Program (PIP), and in some cases, rather than a project-based approach.
of a Priority Maintenance Program (PMP); and • Ensure transparency and accountability
(5) provide the foundations for speedy imple- in the prioritization of key needed capital
mentation of city and n eighborhood-level investments.
investments programs, as well as supporting
policy change (box 2.1). • Ensure the timely repair and replacement of
aging infrastructure.
What Are the Key Objectives of the • Provide a level of certainty for residents,
UA/SA? businesses, and developers regarding the
location and timing of public investments.
The UA/SA is an analytical framework
designed to enable local governments to assess • Identify the most economical means of
their local socioeconomic situation, citizens’ financing capital improvements.
Box 2.1
Urban Audit/Self-Assessment Objectives and Preparation
Objectives Preparation
• To assess current urbanization trends, • The UA/SA is typically conducted in par-
existing levels of infrastructure and ser- allel with an MFSA and enables the
vices, and key challenges in the manage- municipality to match its i nvestment
ment of municipal investments needs with its capacity to finance and
• To support the identification of a maintain its existing and projected infra-
municipal program consisting of priority structure and services.
investments and accompanying city man- • The UA/SA is produced by the municipal
agement capacity-building measures services. It is prepared for a period of
• To connect the dots between the big 5 years and is annually updated.
picture (urbanization challenges, sectoral • The UA/SA is based on the available
policies) and the technical implementa- data that municipal services can collect
tion of brick-and-mortar “construction and curate.
and maintenance” of the city
24 Better Cities, Better World
• Provide an opportunity for public input in When Should a UA/SA Be Performed?
the budgeting and financing process.
Cities of all sizes can benefit from the UA/SA
• Eliminate unanticipated, poorly planned, or process. Experience shows that capital cities,
unnecessary capital expenditures. medium-size cities, and smaller towns that
have embarked on UA/SAs have done so with
• Avoid using sharp increases in tax rates, user
a great level of success. As stated in chapter 1,
fees, and debt levels to cover unexpected
the starting point will differ greatly depending
capital improvements.
on the size of the city, the level and skill mix
• Balance desired public improvements with of the municipal staff, and the availability of
the city’s financial resources. data (in particular geospatial data). As seen in
the previous chapter, the data needed to fill out
the UA/SA template are in large part already
Why Is the UA/SA Important? available but are fragmented in several city
First, it is important because, in many cases, departments that may not traditionally collab-
the local regulatory framework and the plan- orate, such as the city planning office, the city’s
ning document requirements have failed technical department, the utility companies,
local governments. Local governments are and the various sectoral agencies in charge of
often faced with the mandatory production land, housing, economic development, and
of planning documents that they do not have disaster risk management, not to mention the
the capacity to produce. UA/SAs do not aim to entity in charge of Capital Improvement Plans,
replace existing documentation requirements which commonly sits on the other side of the
but rather to facilitate their timely comple- organization chart of city hall. The UA/SA is an
tion. UA/SAs constitute an important building opportunity to bring these data together into a
block in the planning process and contribute cohesive story conducive to decision making
to a complete rethinking of the traditional and policy dialogue.
practice of investment programming because
Who Should Drive the Process?
they relink planning with finances and pro-
gramming and position investment program- Central and local governments and city
ming in the realm of the “possible” and the leaders. They are the primary users and ben-
“realistic.” eficiaries. First, it is crucial to have buy-in
Second, the UA/SA contributes to enhanced upstream from city leaders and policy makers.
transparency, participation, and accountability They need to be aware of the availability, acces-
in the decision-making process over what and sibility, and ease of use of such a tool; and they
how priorities should be financed, shedding need to understand what it can do for them,
light on the use of public funds in the municipal for their current agenda, and for their legacy.
space. In many ways, these tools are much more than
Third, the UA/SA brings together several tools: the key findings will shape policy discus-
professions and municipal departments that sions and support or drive policy reforms and
typically do not communicate. Cities that have changes. The UA/SA calls for a different set of
conducted Urban Audits/SA and Municipal skills than the ones commonly found in munic-
Finances Self-Assessments (MFSAs) have ipal departments. It requires a combination
noted this connection as a key benefit. of skills that crosses the boundaries between
Making Sense of the City and Sorting Out Investment Needs and Priorities 25
city planners, municipal engineers, budget- the UA/SA and MFSA provide the basis for a
ing, and programming and relies on a more companion set of policy actions and capacity-
integrated, more strategic, less compartmen- building tasks. Both components constitute
talized approach to city management, as well valuable foundations for lending or assistance
as a greater professionalization of municipal programs with greater prospects for results on
staff. The practice of UA/SA can help build the the ground and for fast disbursements.
capacity of municipal staff to meet that goal. Other financial partners. Private banks and
Citizens. Obviously, citizen participation other financial partners are keen to have ade-
is a key component of the Local Governments quate information for lending purposes and to
Self-Assessments (LGSAs), and no LGSA should assess the creditworthiness of a city or to iden-
be conducted without the timely inputs of civil tify “bankable” projects within the urban space.
society. Citizens are very engaged in the UA/ UA/SAs provide that easy access, in one single
SA process through a series of consultations document, to the type of quality and targeted
and are able to express their voices and con- information that lending institutions would
cerns regarding the relevance, location, and otherwise have to gather from many different
prioritization of investments that affect them sources.
directly as both users and taxpayers. By mak-
ing data readily accessible and by telling a story
What Are the Key Ingredients of
that genuinely shows the pros and cons and
Success?
trade-offs of investment decisions, the UA/SA
contributes to greater accountability and trans- Sorting out “bad” projects. There is such a
parency in the use of public funds. It goes well thing as a bad project. Examples of so-called
beyond the lip service that often prevails when white elephants that have made some towns and
it comes to citizens’ input. Clicking on an app cities famously unpopular are numerous. Many
to report potholes is great, but being actively developing cities are riddled with such proj-
engaged in a decision-making process before ects that made it to the implementation stage
decisions are made is even better. because of corruption, political struggle, and
Donor/aid community. Multi- and bilateral one-time financing for capital costs forgoing the
agencies involved in the urban space have long long-term operations and maintenance funding
struggled with a lack of data, a lack of common needs. For example, one can wonder if building
language, and a sense of “reinventing the wheel” an ice-skating rink in a tropical region is abso-
every time they engage in dialogues with cen- lutely necessary. The scrutiny of implemen-
tral or local governments on urban issues. The tation is key in order to prevent the funding of
analytical grid of the UA/SA can be used for bad projects. The UA/SA provides an evaluation
project/program preparation as well as consti- grid to help determine up-front the desirabil-
tute the key components of a lending or assis- ity and feasibility of proposed projects. Is land
tance program focusing on both investments available for new proposed projects? Does the
and capacity building. One key component of project meet the social, environmental, and eco-
the UA/SA is the i dentification/formulation nomic scores? If available, where does funding
of an Investment Plan. This Investment Plan come from and how will its use affect the finan-
is very much like a sophisticated procurement cial position of the city in the future? Assessing
plan, including project data sheets on each the level of readiness of a project is time well
selected project and a checklist of key pre- spent because it will likely prevent long delays
requisites for implementation. In addition, in implementation down the road.
26 Better Cities, Better World
Focusing on location, location, location. Taking politics out of the equation. The
Because the UA/SA is map-based, location mat- UA/SA process can most certainly minimize the
ters a great deal in the process as it should in any disruptive impact that changes in government
investment programming exercise. Looking at leadership can have on investment programs.
the world and cities spatially brings a new dimen- The UA/SA screening process is fact-based and
sion to decisions on infrastructure investments devoid of politics, and selected programs are
(box 2.2). vetted publicly through a series of consultations:
Box 2.2
A World of Maps: How Are Urban Maps Created?
Cartography, or more generically, “making Once the base map has been decided
maps” is the process of map creation and and set, specific project data will need to
map design. be added to it. The data can be found in a
To make maps, the cartographer needs variety of forms, from Excel spreadsheets
two main components: collecting poverty indicators to satellite
imagery survey results and street address-
1. A base map
ing data. All of these data will have geo-
A base map will serve as an outline of a
graphical information that will be laid down
country or area where data will be plotted.
on the base map.
It is rare that one person will create a base
map from scratch. Many tools can be used Learn your audience: General and
to start a mapping project. One of the main thematic maps
tools is the open-source OpenStreetMap One of the key components of making
(OSM) with its HOT Export Tool. Natural maps is understanding to whom the map
Earth or GADM are also among the most is addressed. Because a map will target a
prominent free data providers. specific audience, one map will totally
2. Data to be represented on the map change from one to another. This is the
Data are ultimately composed of three case with general maps, which will dis-
types: play general information for a general
audience. A simple metro map will target
• Points general metro users, such as commuters
• Lines and tourists.
• Polygons Thematic maps portray special themes
Organized together as layers, they will cre- on maps that will target specific audience.
ate the map. Points can represent cities or This could be a choropleth map show-
metro stations; lines can represent rivers, ing access to public transport in minutes,
railways, or roads; and polygons can repre- which could be used by city officials when
sent lakes, buildings, or areas. planning urban growth or to modernize a
public transport system.
continued next page
Making Sense of the City and Sorting Out Investment Needs and Priorities 27
Box 2.2 Continued
Who Is in Charge of Producing Maps, Which Software Should I Use for
and Where Can I Access Public Data? Creating Maps?
Depending on the level of organization
Open-source software (free of charge)
of the government, a national statistical
agency or geographic information agency • QGIS (https://www.qgis.org)
is usually in charge of collecting, organizing, • OSM (https://www.openstreetmap.org)
and distributing data and sometimes of pro- • Hot Export Tool for OSM (https://export
ducing maps. The IBGE in Brazil, the IGN in .hotosm.org/en/v3/)
France, and the USGS in the United States • Google Earth (https://www.google.com
are examples of well-established, historical /earth/)
agencies that are responsible for their coun- • GADM (https://gadm.org)
tries’ geographical data. • World Bank datasets (https://data.world-
In cases where national data are not bank.org)
centrally organized, international develop- • Natural Earth (https://www.naturalearth
ment agencies like the Food and Agriculture data.com)
Organization of the United Nations, the • Leaflet (https://leafletjs.com)
World Bank, or the United Nations Office • Color Brewer (http://colorbrewer2.org)
for the Coordination of Humanitarian • Geoserver (https://geoserver.org)
Affairs collect, organize, and release pub- Licensed (fee-based) software
lic data through their websites, for exam-
ple, the Humanitarian Data Exchange or • ArcGIS/ArcMap (http://desktop.arcgis
Data Catalog. This helps greatly to fill the .com/en/arcmap/)
vacuum where there is a lack of organized • ArcGIS Pro (https://pro.arcgis.com/en
and maintained datasets, mainly in low- and /pro-app/)
middle-income countries. • MapInfo Pro (https://www.pitneybowes
On a smaller scale for more targeted .com/us/location-intelligence/geo
needs, nongovernmental organizations like graphic- i nformation-systems/mapin
the International Union for Conservation fo-pro.html)
of Nature or the World Resources Institute • Mapbox (https://www.mapbox.com)
also collect, organize, and publish map data. • CARTO (https://carto.com)
Protected Planet and Global Forest Watch • ArcGIS Server (https://enterprise.arcgis
are among the two most prominent GIS .com/en/)
databases freely available.
Source: Bruno Bonansea, Cartographer, the World Bank 2019.
the very public nature of this decision-making Should the UA/SA Be Performed as a
process makes it difficult for new incumbents to Single Task or Complemented with an
ignore the legacy of the past and to end or cancel MFSA?
ongoing projects. The municipal contract was
The UA/SA can be carried out by itself; how-
designed in large part to circumvent the issue of
ever, combining it with an MFSA makes it much
the dependency of municipal programs on the
more compelling because it is then possible to
cycle of political mandates.
28 Better Cities, Better World
match the PIP with the financial absorptive the Urban Audit/SA. The template of this sim
capacity of the local government. The MFSA plified version (Version “Light”) can be found
will provide a snapshot of the financial posi in appendix A.
tion of the city and of its financial projections
and will give an assessment of what makes or
What Is the Process of the UA/SA?
breaks a municipal investment program. The
MFSA will also provide an assessment of the The basic framework of the UA/SA includes
existing financial commitments of the munici three main building blocks and 13 steps
pality as well as its current borrowing capacity (figure 2.1):
and its potential to attract external funding.
• Block 1: City Profile
What If the City Is Not Ready, Prepared, ∘∘ Step 1: Spatial and Urban Governance
or Equipped for a Full-Fledged Urban
Audit/SA? ∘∘ Step 2: Demography and Densities
In such a case, the city may choose to follow a ∘∘ Step 3: Stakeholders and Share of Fun
simpler path and to use a simplified version of ctions and Responsibilities
Figure 2.1 Urban Audit/Self-Assessment Framework
Urban Audit/Self-Assessment Framework
Block 1: City Profile
Step 3
Step 1 Step 2 Step 4 Step 5
Stakeholders
Spatial and Demography Urban Economy Key Urban
and Share of
Urban and and Investment
Functions and
Governance Densities City Branding Challenges
Responsibilities
Block 2: City Diagnosis and Needs Assessment
Step 7 Step 8
Step 6 Step 9 Step 10
Infrastructure and Land
Infrastructure and Land Markets City Development
Urban Services Regulatory
Urban Services Assessment Projects: A
Diagnosis and Framework
Diagnosis and and Land Assets Snapshot of Key
Needs Diagnosis
Needs Management Urban
Assessment and Needs
Assessment Restructuring
(Neigborhood Assessment
(City Level) Programs
Level)
Block 3: Priority Investment Programs: Selection, Consultation, and Implementation
Step 11 Step 12 Step 13
Preselection, Classification of From Project
Consultation, Priority Investment Prioritization to
and Screening Projects by Program
Process Stakeholders Implementation
Making Sense of the City and Sorting Out Investment Needs and Priorities 29
∘∘ Step 4: Urban Economy and City Branding done as a first step even when the municipality
elects to carry out an MFSA alone without
∘∘ Step 5: Key Urban Investment Challenges necessarily conducting a UA/SA. Doing a City
Profile up-front enables the city to (1) brand
• Block 2: City Diagnosis and Needs itself by outlining the key features that char-
Assess ment acterize its demographic, social, and economic
∘∘ Step 6: Infrastructure and Services situation; and (2) isolate the most meaning-
Diagnosis and Needs Assessment (City ful and measurable indicators for the city in a
Level) way that makes the City Profile relevant and
informative for potential PIP partners such as
∘∘ Step 7: Infrastructure and Services banks, private partners, or development agen-
Diagnosis and Needs Assessment cies. The City Profile should almost be seen as
(Neighborhood Level) a promotional exercise.
∘∘ Step 8: Land Regulatory Framework Urban issues and challenges faced by munic-
Diagnosis and Needs Assessment ipalities around the world do have similarities;
however, they do not necessarily call for similar
∘∘ Step 9: Land Markets Assessment and solutions. The size of the city and the growth
Land Assets Management of its population, as well as its administrative
∘∘ Step 10: City Development Projects—A status (city government, district within a met-
Snapshot of Key Urban Restructuring ropolitan area, small or medium-size city, or
Programs (urban extensions, inner-city metropolitan authority) and its main urban
redevelopment, neighborhood or slum economic features, will all have an impact on its
upgrading) strategic choices and its investment policies.
Institutional framework and organizational
• Block 3: Priority Investment P
rograms— structure (functions and responsibilities both
Selection, Consultation, and Implemen-
tation
Figure 2.2 City Profile: Key Components
∘∘ Step 11: Preselection, Consultation, and
Screening Process
1: Spatial and Urban Governance
∘∘ Step 12: Classification of Priority
Investment Projects by Stakeholders
∘∘ Step 13: From Project Prioritization to 2: Demography and Densities
Program Implementation
3: Stakeholders and Share of City
Functions and Responsibilities Profile
Block 1. City Profile
Objectives and Methodology 4: Urban Economy and City
Branding
The objective of the City Profile is to provide a
brief overview of the situation of the city. It is
5: Key Urban Investment
a crucial step in the Local Governments Self-
Challenges
Assessment (LGSA) process and should be
30 Better Cities, Better World
vertically and horizontally) will also have a the municipality involved in the process. The
major influence on the content of municipal aim is to identify correctly the spatial area and
investment programs and on the efficiency the level of local government unit responsible
level of their implementation. Local develop- for infrastructure and service delivery within
ment has become increasingly complex, even those boundaries. The clear definition of the
in developing countries, and often involves unit of analysis is extremely important for the
multiple stakeholders and sophisticated cross- UA/SA as well as for the MFSA. In order to
financing mechanisms. have a viable benchmark for urban and finan-
The City Profile includes the following five cial assessments and to propose realistic and
steps: accurate recommendations for action and pol-
icy reforms, we need to have a common under-
• Step 1: Spatial and Urban Governance standing of what it is that we are looking at.
• Step 2: Demography and Densities For the sake of simplicity, the UA/SA will adopt
the commonly recognized typology shown in
• Step 3: Stakeholders and Share of Functions box 2.3.
and Responsibilities
Tasks. This section will provide a map of
• Step 4: Urban Economy and City Branding the city’s boundaries and a brief explanation
of the governance structure. It will state clearly
• Step 5: Key Urban Investment Challenges.
the various tiers of government administration
The presentation of the City Profile has and the legal framework that underlies the
been intentionally simplified because each governance structure (map 2.1).
item could clearly generate detailed explana- Step 3 will address the details on (1) the
tions and many add-ons. In other words, the distribution of functions and responsibilities
list provided in figure 2.2 is a “bottom line” list among the various jurisdictions, (2) the institu-
that can be modified, expanded, or customized tional organization, and (3) the channeling of
in order to better reflect the specific circum- public funds.
stances of the city or town.
Step 2: Demography and Densities
Step 1: Spatial and Urban Governance
Objective and content. Population trends of
Objective and content. The UA/SA’s first step the municipality are key indicators to evalu-
is to clarify the geographical boundaries of ate investment needs. It is very important to
Box 2.3
Typology Guidance
• Type 1: Municipality as a core individual funding obligations, and share of func-
unit, with no specific autonomous tions and responsibilities
subdivisions • Type 3: Metropolitan entity, including sev-
• Type 2: City district, which is a subdivi- eral situations such as intergovernmental
sion of the city according to strict legal entity and authority (Urban Community)
criteria regarding funding resources, and even larger metropolitan unit
Making Sense of the City and Sorting Out Investment Needs and Priorities 31
Map 2.1 Spatial and Urban Governance
b. Regional level c. Metropolitan level
a. Capital city level
(8 counties, 1301 LGs) (20 districts)
18
17 19
9 10
8
2
16 1 3 20
7 Paris 4 11
Paris 6
FRANCE 5
15
12
14 13
IBRD 44275 | MAY 2019
These maps were created using OSM and local data, reprojected in ArcGIS, and refined in Adobe Illustrator.
Note: LG = local government.
understand both the current structure of the might be. The basic concept is to promote an effi-
population and the projected trends in order cient use of land, making the city more compact,
to inject relevance and realism in investment limiting peri-urban sprawl, and curbing its high
programs. Similarly, the current and projected costs on infrastructure and the environment.
profile of a city’s population will determine cur- This is easier said than done, and it entails a high
rent and future potentials for tax revenues. An level of fine-tuning and sophistication in the use
aging population will require investments that of land use regulations, fiscal instruments, and
are better geared to its needs—such as neigh- incentives. Many cities struggle with underser-
borhood health clinics and community centers, viced densely populated neighborhoods. The
accessible public transportation, maintained Inventory for the Programming of Services and
sidewalks and street lighting, and accessible Infrastructure tool (explained in step 7) will
administrative services. A younger population enable an analysis of densities at the neighbor-
will have different needs—such as neighbor- hood level. Finally, the world has witnessed the
hood child care centers, schools, sports facil- ravages of wars and the displacement of millions
ities, and safe open space—and will require of refugees. Some parts of the globe have expe-
serious consideration of the economic develop- rienced this issue in dramatic and tragic pro-
ment policy of the city with the goal of provid- portions. The City Profile will look at estimated
ing job opportunities and retaining an economic numbers, the location patterns, and the impact on
vibrancy. Characteristics of an aging population infrastructure and services of these new migrants
or a younger population will have an impact on in order to customize the response in terms of
the profile of the current and future tax base. investments and funding needs.
An additional very important item for analysis
Tasks. Key items will include the following:
is density. Achieving the “right” level of density is
a difficult goal, as most experts and practitioners • Provide an overview of city-level population
do not agree on what the “right” level of density trends and show demographic projections
32 Better Cities, Better World
Figure 2.3 Demographic Trends over 5, 10, and 15 years. A distinction will be
made between natural growth and growth
Population Trends
Cens Cens
due to immigration. The population of the
Year
1
R
2
R N R N+5 R N+10 R N+15 municipality will be compared to regional
Municipality and national population.
Region
• Provide an overview of city-level popula-
30,000 tion profile and composition, including age
and gender. State any salient feature with
25,000
a long-term impact on the city’s infrastruc-
20,000 ture needs.
15,000 • Provide a neighborhood-level analysis of
Population
10,000 densities.
5,000 • In case of catastrophic conditions (condi-
0 tions related to refugee crises or climatic
incidents), explain the current situation and
–5,000
provide numbers and locations (maps) of
–10,000 new settlements.
20 0
20 1
20 2
20 3
20 4
20 5
20 6
20 7
20 8
20 9
20 0
11
These data will be presented in tables and
0
0
0
0
0
0
0
0
0
0
1
20
Years figures as follows (see below and figure 2.3).
Maps will be added to illustrate demographic
Natural increase Migrational increase
trends (see map 2.2).
Actual increase
Note: Cens = census; R = growth rate.
Map 2.2 Population Densities
Korhogo, Côte d’Ivoire
Population and Densities
Population by
Neighborhood:
Very high
High
Medium
Low
Very low
IBRD 44276 | MAY 2019
Making Sense of the City and Sorting Out Investment Needs and Priorities 33
Step 3: Stakeholders and Share of roles and responsibilities allows for a
Functions and Responsibilities greater understanding of the funding needs
and challenges. The local government
Objective and content. Because the munici-
finds itself at the crossroads of a mix of
pality does not act alone within its territory, it is
financing sources that include (1) transfers
essential to outline who is responsible for what
from the central to the local government,
at the city level and to provide a clear snapshot
(2) fiscal revenues (own revenues and
of the institutional and organizational struc-
shared taxes), (3) private sector financing,
ture of the municipality. This understanding
and (4) external funding such as donors
will help (1) assess to what extent the munic-
and banks (borrowing). Understanding
ipality is prepared to meet its key core func-
what the municipality is responsible for
tions and emerging new responsibilities and
should ideally provide a basis for the vol-
(2) identify existing needs and gaps in the cur-
ume of transfers and the importance of fis-
rent structure.
cal decentralization. Because this is not an
ideal world, however, everybody finds it
Tasks. Key items will include the following:
ultimately convenient to keep this infor-
1. A summary table indicating key stakehold- mation in a gray area.
ers in terms of public investments and who
is responsible for what. Clarification of the 3. A flow chart showing the organizational
roles and responsibilities for the delivery structure of the municipality (figure 2.5).
and maintenance of key infrastructure, util- This organizational structure might
ities, services, and land development seems change depending on the local situation
a no-brainer. In practice and in reality, or context. A constant is that every city
however, there are many local jurisdictions will have a financial department in charge
where such delineation is fuzzy or where of city finances and of keeping the books
functions overlap. Sometimes, for reasons in order and a technical services depart-
related to lack of proper governance, lack of ment in charge of running the day-to-
capacity, lack of confidence, or lack of fund- day management and maintenance of the
ing, the central or state government has had city’s infrastructure and services. The
to step in to assume delegated functions. UA/SA should aim to provide an accu-
Having clarity on the distribution of respon- rate snapshot of the structure of the city
sibilities is essential for a number of reasons: government, with the goal to (1) assess if
(1) it prevents duplication of efforts and there is a proper match between mandates
improves efficiency in delivery and mainte- and departments, skill mix and functions;
nance; (2) it provides greater accountability (2) assess if there is enough coordina-
to the citizens; and (3) it outlines the fund- tion between the various departments, in
ing responsibilities and the channeling of particular between the financial depart-
funds. Table 2.1 can be used as a model and ment and the technical department and
adjusted according to specific situations. between the municipal staff in charge of
financial projections and those in charge
2. A matrix showing the roles of stakeholders of investments programming; and (3) out-
in the financing of infrastructure, public line the key deficiencies in the existing
utilities, services, land development, and structure and the key actions required to
real estate (figure 2.4). A clear definition of improve these deficiencies.
34 Better Cities, Better World
Table 2.1 Share of Responsibilities: Who Is Responsible for What?
Responsible entities
Municipality State government Utility companies Private
New New New New
Sectors Items works Maintenance works Maintenance works Maintenance works Maintenance
1 Infrastruc- Primary roads O O
ture Secondary X X
roads
Drainage X X
Solid waste X X O O
Street lighting X X
2 Utilities Electricity X X
Water supply X X
Wastewater X X
Urban X X X X
transport
Public heating X X
Others
3 Services Education X X O O
Health X X O O
Social X X O O
Culture X X O O
Green spaces X X O O
4 Land Housing X X O O V V
develop- Industrial X X O O V V
ment Urban X X O O V V
renewal
Note: X = municipal level; O = state level; V= private.
Figure 2.4 Financing Mechanisms: A Simplified Matrix
National, provincial,
regional
government entities Private sector
Transfers, grants, Banks/lenders,
shared taxes, investors,
subsidies, regulations PPPs, buyers/
leaseholders
Donors
International Municipality
or domestic
Municipal
or state
enterprises,
Citizens private
Taxes, fees, providers
charges,
contributions
Note: PPP = public–private partnership.
Making Sense of the City and Sorting Out Investment Needs and Priorities 35
: An Example
Figure 2.5 Organizational Chart of the Municipality
Step 4: Urban Economy and City Branding this percent
figure expected to rise to over 65
by 2030. If urban economic opportunities do
Objective and content. Cities are the main
not keep pace with the influx of job seekers,
creators of economic wealth, generating over
urban poverty can have dire results for the
70 percent of the world’s gross domestic prod-
health and well-being of large shares of the
uct (GDP). Most industries and businesses are
population. Governments face a set of eco-
located in or within the immediate vicinity of
nomic and financial challenges in dealing with
urban areas, providing city residents with jobs.
growing urban populations:
Because most employment opportunities are
within urban areas, cities attract a large pro- • They must harness urban population growth
portion of a country’s job-seeking population. to generate economic prosperity.
This is especially true in developing countries,
• They must pay for infrastructure and ser-
where an increasing share of economic activ-
vices to both accommodate new residents
ities takes place in cities, and the differential
and support the existing population.
between urban and rural wages is growing.
These factors cause rapid rural-to-urban • They must facilitate economic growth
migration. Today, urban dwellers make up and job creation that are broad-based and
over 50 percent of the world’s population, with inclusive.
36 Better Cities, Better World
• They must leverage the youth dividend • Identify the “drivers” of the local economy
to create a new generation of economic and principal stakeholders involved (public
vibrancy. The youth demographics can be an and private, local and outside the region,
economic strength if youth are empowered modern” and “informal”).
“
to participate in urban life. Globally, there • Describe the features and level of urban
are more people under the age of 25 today employment: government, commerce, indus-
than ever before, and it is estimated that as try, agriculture, informal activities. Name the
many as 60 percent of all urban dwellers major “employers.”
will be under the age of 18 by 2030. Cities
of the developing world account for over • Identify “modern” businesses, such as
90 percent of the world’s urban growth,
start-ups and self-employment.
and, consequently, youth constitute a large • Estimate scale of informal activities.
percentage of those inhabitants.
• Describe the “brand” and “branding poli-
This section of the UA/SA summarizes cies” of the city.
steps to measure the key aspects of the city’s
economy: Tasks. Key items will include the following:
• Identify the key components of the local 1. Provide key current economic indicators
economy and the major factors that affect (use presentation below and see the exam-
these different components. ple in figure 2.6).
Figure 2.6 Key Urban Economic Indicators: Example of Belgrade, Serbia
Belgrade
Novi Sad Serbian “spatial banana”
Belgrade more than 50% of the GDP
on 10% of total territory
IBRD 44277 | MAY 2019
Profile of the City of Belgrade
Description 2008 2009 2010 2011
State total population 7,300,000
State GDP per capita 4,444 C 3,945 C 3,981 C 4,543 C
City total population 1,650,000
City GDP per capita 7,920 C 7,002 C 7,036 C 7,998 C
City Revenue per capita 474 C 378 C 422 C 540 C
Debt/GDP 0.8% 1.3% 2.0% 2.7%
This map was created using OSM and local data, reprojected in ArcGIS, and refined in Adobe Illustrator.
Making Sense of the City and Sorting Out Investment Needs and Priorities 37
Key Urban Economic Indicators Sector of Economic Type of Number
Economy Year activity unit activity of jobs Location
GDP per capita Industry/
manufacturing
(country level)—in
U.S. dollars or Commerce/
trade
euros
Start-up
City GDP per capita companies
(if available)—in Agriculture
U.S. dollars or Public sector
euros Administration
Median disposal Self-
annual household employment
income—in U.S. Informal
activities
dollars or euros
Other
Activity rate
Unemployment rate
3. Describe what is known about the demo-
(% active population) graphic profile (using information from
step 2 of the City Profile). What factors will
2. Describe key economic activities and affect the level of employment and the types
jobs: Who are the drivers of the economy of jobs that are most needed? One of the key
and the biggest employers? Map them issues in many cities around the world is
for better visual understanding of loca- unemployment among youth. Another
tion patterns (using the graph below and important issue will be female-headed
map 2.3). households. An important growing trend in
Map 2.3 Drivers of the Local Economy
Urban Economy: Drivers of the Local Economy
URBAN ECONOMY:
Main commercial areas
IBRD 44278 | MAY 2019
This map was created using OSM and local data, reprojected in ArcGIS, and refined in Adobe Illustrator.
38 Better Cities, Better World
the employment profile of a city is the 8. Describe the two or three key economic
increase in the number of self-employed “deals” that the city has made in the last five
people working remotely from home and years. Describe briefly what mechanisms
the impact this has on connectivity issues were put in place to attract the company,
and mobility. This part of the analysis should how long the negotiations lasted, and how
reflect the specific characteristics of the city many jobs were created. What fiscal incen-
demographics and their implications for the tives were put in place to close the deal?
jobs profile of the city. How are the costs of offsite infrastructure
shared?
4. Describe how the city brands itself. Is it
known for anything in particular? Is it
Step 5: Key Urban Investment
striving to be known for something in par-
Challenges
ticular? The branding can pertain to a sin-
gle factor or a combination of factors such Objective and content. This section of the
as the city’s history and cultural heritage, UA/SA aims to explain and illustrate the devel-
its geographical situation, its cultural opment policy of the municipality and its
scene, its social makeup, its manufacturing urbanization challenges in broad terms.
or industrial makeup, its universities and
places of higher learning, its waterways Tasks. Key items will include the following:
and waterfront, its food scene, its green
spaces or parks, its innovative governance • Determine if there is a strategic vision
system, its digital systems or smart invest- for the development of the city, and out-
ments, its social integration schemes, and line the supporting documents (strategic
its progressive transportation systems. plan? city development strategy? long-
term development plan? urbanization
5. Is a major employer present in the city? How reviews?). Indicate the date of approval
many jobs can be attributed to this major and the status of implementation.
employer? Is such a presence shaping the
way the city is growing? Is it putting pressure Strategic Vision for the City: Supporting
Documents
on housing prices and transportation?
Date of Key
Document approval and strategic Status of
6. Outline the structure currently responsible
name timeframe areas implementation
for job creation and economic development
in city hall. Is there a dedicated economic
development office in the organizational
chart of the city? Who are the key champi-
ons? What are the key strategic orientations,
and what are the key documents supporting • Describe briefly the key strategic areas for
the city’s vision? implementation of the vision, as outlined in
the supporting documents.
7. Describe the incentives or disincentives to
attract companies and create jobs. What are • If it exists, provide the Capital Improvement
the fiscal incentives, land incentives, ser- Plan (CIP), indicating the list of projects, the
vices and infrastructure delivery, public time frame for implementation, the costs,
transport, and mass transit options? and the source of financing.
Making Sense of the City and Sorting Out Investment Needs and Priorities 39
Capital Improvement Plan focuses on the assessment of services and
Time Total Source of infrastructure at two levels (map 2.4):
Project name frame costs financing
• Infrastructure and services provided at
the city level (sector level), with the
goal of capturing what is happening at
the city level sector by sector.
• Infrastructure and services provided at
Block 2. City Diagnosis and the district or neighborhood level, with
Needs Assessment the goal of capturing what is happening
within the city and assessing the level and
Objectives and Methodology quality of coverage as well as any gaps.
This section of the UA/SA constitutes a cru- 2. Land Management Diagnosis and Needs
cial milestone of the process. The framework Assessment: This section focuses on two key
focuses on three key drivers: topics that have a direct impact on urbaniza-
1. Infrastructure and Urban Services tion patterns and city shape:
Diagnosis and Needs Assessment: This • Land Development Regulatory Framework
section is very important because it Assessment
Map 2.4 Two Levels of City Diagnosis and Needs Assessment
40 Better Cities, Better World
• Land Markets Assessment and Land in the United States alone, US$2 trillion are
Assets Management needed to restore the country’s aging infrastruc-
ture (ASCE 2017). If we add the pressing need to
3. City Development Projects: This section
lower the carbon footprint of global infrastruc-
provides a snapshot of ongoing or projected
ture, a staggering US$5 trillion is required per
citywide programs of significant impact on
year in green investments (box 2.4). These num-
the economy, population, and finances of
bers account for an all-encompassing definition
the city: (1) urban extensions, (2) inner-city
of infrastructure that includes energy, bridges,
redevelopment, and (3) neighborhood or
airports, and more. In cities, we know surpris-
slum upgrading schemes.
ingly little about the gaps and investment needs.
This step of the UA/SA is therefore a crucial
Step 6: Infrastructure and Urban milestone in the process. It provides an oppor-
Services Diagnosis and Needs tunity to do the following:
Assessment (City Level)
• Clarify definitions of what urban infrastruc-
Objective and content. Although there is a ture and services are, and which ones fall under
great deal of research on assessing and quanti- the responsibility of the city government;
fying global infrastructure needs, very little is
actually known at the city level. We know, for • Map out and provide a qualitative and quan-
example, that an estimated US$93 billion a year titative assessment of existing levels of ser-
is needed to bridge the gap in Africa and that, vices and infrastructure throughout the city;
Box 2.4
Green Investment Needs for Global Infrastructure
About US$5 trillion in global infrastructure ing unprecedented heat waves, severe
investment is required per year to the year droughts, and major floods. The McKinsey
2030 in various sectors. This investment Global Growth Institute has estimated that
must be greened to secure future growth. rates of environmental degradation are
To support a future global population unsustainable for the long-term function-
of 9 billion people, an estimated US$5 ing of the global economy. Existing and
trillion per year needs to be invested in future investments, therefore, must be
global infrastructure (about US$100 trillion greened to avoid dangerous levels of cli-
over the next two decades). A business- mate change and adverse environmental
as-usual approach would maintain invest- impacts that could erode the benefits from
ment in conventional, emissions-intensive new green developments. If nongreen
technologies, endangering future growth. investments continue to grow in parallel
A 2012 World Bank report highlighted that with increased investment in green infra-
the planet is on track for a global average structure, it will not be possible to achieve
temperature rise of at least 4°C beyond green growth.
preindustrial levels, which would bring
impacts detrimental to growth, includ- Source: World Economic Forum 2013.
Making Sense of the City and Sorting Out Investment Needs and Priorities 41
• Map out and clearly identify underserviced affairs and to outline key issues pertaining to
neighborhoods and pockets of poverty; scope of coverage and quality of service.
• Outline key priority investment needs to 2. Conduct or update an inventory of munici-
bridge the gap in service delivery; and pal assets. Asset management is complex
and requires both professional and consis-
• Describe the general situation of each s ector
tent effort. If inventory records do not exist,
and discuss how sectoral entities are per-
inventorying capital assets will be the high-
forming their tasks. This diagnosis identifies
est priority. Usually, various records exist
their ability to perform the tasks assigned
that can be used as initial sources of data for
and their deficiencies. It also suggests solu-
an inventory. The legal department and the
tions to mitigate ongoing challenges.
line departments typically have some record
Tasks. The analysis focuses on the follow- of existing capital assets. Often, asset led-
ing “bottom line” items that are consid- gers are also maintained by city accoun-
ered essential deliverables in any municipal tants. If a street-addressing program has
government: been implemented, it will prove very useful
to identify and locate municipal assets.
Infrastructure: Geographic information systems (GISs) are
becoming increasingly affordable for local
• Roads and streets (mobility)
governments. They help tremendously in
• Drainage and sanitation the identification of assets as well as provide
interactive maps for strategic planning and
• Water supply daily asset management. However, for cities
• Solid waste where capacity remains an issue, it is better
to start simply: in places where inventory
• Electricity and public lighting records do not exist, it is wise to start the
• Urban heating inventory from a simple Excel spreadsheet
that can later be imported into a more
• Transport and communications advanced database linked to a GIS.
Services: 3. Provide a list of municipal assets by sector
based on the assets list typically maintained
• Education
by the line city departments. The first step
• Health starts with identifying the key components
of the networks and systems to be invento-
• Public transportation
ried. Typical municipal infrastructure will
• Social and environmental include the following:
• Recreation, sports, parks, and public space • Water systems: distribution lines, trans-
mission lines, water treatment plant,
1. Provide a general assessment of each sector water reservoir, pumping stations, fire
per the above list. This general assessment hydrants, river, wells
will focus on a few key indicators such as
service coverage, costs of service, and qual- • Wastewater systems: wastewater treat-
ity of service providers. The objective is to ment plant, distribution lines, pumping
get a general understanding of the state of stations, sludge disposal areas
42 Better Cities, Better World
• Storm drainage systems: canals, ditches, facilities such as schools, clinics, adminis-
stormwater inlets, flood control reser- trative offices, community facilities, sports
voirs, erosion protection, dikes and recreation facilities, parks and gardens,
and cemeteries. Many cities own and are
• Solid waste collection: landfill, disposal
responsible for the maintenance of commer-
facilities, collection points
cial facilities such as markets. Because the
• Streets and roads: roadways, sidewalks, city owns and is responsible for a wide range
lighting, signage, traffic control devices, of assets, it is crucial to be able to list them,
bridges, drainage systems. assess their current state and deficiencies,
and value them.
Additional assets will include munic-
ipal land as well as all public municipal
Municipal Assets by Sector: Example of Road Sector Inventory
Size/ Date
Property Current Location/ right of Unit built/ Present
Description type state Address way responsible age value
Primary/arterial roads
Secondary roads
Asphalt
Gravel
Tertiary roads/local
Asphalt
Gravel
Dirt roads
Total
Example of a Basic Building Inventory
Building
book
Total value,
Property floor Land Year of thousands, Current
current Cadastre area, area, construc- Building local occupancy,
function Address number sq. m sq. m tion condition currency % Notes
1 2 3 4 5 6 7 8 9 10 11
1 Administrative Chapichi 170,477 7,500 2,600 1985 Good 80,670 80
building St, 4
2 Kindergarten Sevani NA 580 350 1980 Satisfac- 3,500 100
government 1 St, 2 tory
3 Kindergarten River St, NA 990 690 1964 Bad NA 33 Repair
government 2 57 planned
4 Culture Center Karmin NA 6,500 4,500 1984 Bad 61,732 50
St, 39
Note: NA = not available.
Making Sense of the City and Sorting Out Investment Needs and Priorities 43
4. Reconcile the list of municipal assets with undertaken by other operators such as
the municipal assets table of the MFSA utility companies:
(table 2.2). • Project proposals in order to reduce or
(figure 2.7)
eliminate the gaps or needs
5. Provide maps showing location of exist-
ing network for each sector (map 2.5). • Project outlines, including priorities,
category of investment (new construc-
6. List recent and ongoing projects in tion, rehabilitation), operations and
the sector, including projects under- maintenance, preliminary cost estimates,
taken by the municipality and projects and schedule.
Table 2.2 MFSA Table: Asset Development and Maintenance
Year 1 Year 2 Year 3 Year 4 Year 5 Growth Growth
indexes % indexes %
Service sectors Develop- Mainte- Develop- Mainte- Develop- Mainte- Develop- Mainte- Develop- Mainte- develop- mainte-
and functions ment nance ment nance ment nance ment nance ment nance ment nance
General
administration
Office buildings
Other assets
(vehicle,
equipment)
Urban services
Roads and
drainage
Public transport
Water and
wastewater
Solid waste
Street lighting
Fire protection
Police, crime
prevention
Environmental
protection
Social services
Health
Education
Culture and
religion
Housing
Recreation and
sport
Social welfare
Commercial
services/
investments
Parking
Markets
Commercial
places
Land development
Local economic
development
TOTAL
EXPENDITURES
44 Better Cities, Better World
Recent, Ongoing, and Scheduled Projects
Description Year Location Amount Financing
Recent
Ongoing
Scheduled
Map 2.5 Examples of Infrastructure and Services Maps
a. Regional context b. Surfaced roads diagnosis
MALI
BURKINA
FASO
Korhogo
GUINEA
GHANA
YAMOUSSOUKRO
LIBERIA
SURFACED ROADS:
Degraded
Satisfactory
c. Land use d. Unsurfaced roads diagnosis
LANDUSE:
Residential
High density
Low density
Commercial
UNSURFACED ROADS:
Parks/public space
Degraded
River/areas prone
to flooding Satisfactory
IBRD 44280 | MAY 2019
These maps were created using OSM and local data, reprojected in ArcGIS, and refined in Adobe Illustrator.
Making Sense of the City and Sorting Out Investment Needs and Priorities 45
Figure 2.7 From Diagnosis to Technical Selection
1 Diagnosis and proposals by sector 3 Technical selection
t
Infrastructure
ec
oj
n
Roads/highways
io
N tor pr
& itat
Secondary roads
ha k
c d
r
se cte
o
nt
l
w
bi
Drainage 1. Sector
ou
by ele
M
ew
m
Solid waste
S
Re
overview
O
A
Street lighting 2. Recent or
Public utilities ongoing
Electricity projects
Water supply 3. Needs and
Waste water 2
gaps
Urban transport
Public heating Criteria
Others
4. Projects
Services
proposals to
Education
reduce or
Health
eliminate
Social
Culture gaps and
Green spaces needs
Land development
Housing
Industrial
Urban renewal
Step 7: Infrastructure and Urban Services neighborhood and type of facility, all in the
Diagnosis and Needs Assessment context of the city as a whole.
(Neigborhood Level)
Tasks. The document consists of, essentially,
Objective and content. Being able to track three Excel tables (inventory, indicators, and
and assess the level of services and infra- scores) and a set of maps.
structure at the neighborhood or district level
1. The inventory contains about 50 types of
is very important to understand the spatial
data, for each neighborhood or zone, on
diversity within the city. Locating and map-
population, land occupancy, and services
ping out pockets of underserviced neighbor-
provided by existing infrastructure and
hoods can help guide political choices and
facilities. For the most part, these data can
investment programs. With this goal in mind,
be collected from existing sources.
a template has been developed to do just that.
This template is called Inventory for the
Programming of Services and Infrastructure 2. The indicators (about 30) are calculated
(IPSI).1 IPSI is an aid to decision making. Its and generated automatically. They quantify
purpose is to provide a framework for plan- the characteristics of the neighborhood and
ning urban projects and to identify priorities. the level of public services provided, per
It uses a limited number of inputs to produce inhabitant, by type of existing infrastructure
indicators and “scores” that convey infor- and facilities. To some extent, they also pro-
mation about local public services and infra- vide some information on the quality of ser-
structure. Thus, it allows neighborhoods to vice coverage per neighborhood and for the
be classified, and priorities to be identified by city as a whole: for example, the number of
46 Better Cities, Better World
public standpipes per 1,000 inhabitants, The cartographic documentation is established
population densities, and total extent of (at 1:5,000 or 1:10,000 scale) on the basis of
paved roads. recent maps and existing GIS information. The
base map is supplemented by various layers of
3. The scores are automatically deducted information (the data for which are shown in
from the indicators, and the results for the the inventory table), including the following:
neighborhood are compared with numbers
for the city as a whole, which will be taken • Site constraints and urbanization trends:
as the average or mean. A neighborhood’s (1) major relief features, topographic spec-
score is defined in qualitative terms, as ificities, direction of water flow, flood-prone
“zero, poor, average, acceptable, or satisfac- areas, no-build zones; and (2) recently set-
tory,” and in quantitative terms, measured tled areas and urban sprawl trends
on a scale from 0 to 4. These results are
weighted by coefficients. The scores indi- • Land occupancy: housing, businesses, open
cate the following: spaces (avoid introducing too many types)
• Zero (rating 0): The neighborhood has no • Major facilities and principal neighborhood
facilities or infrastructure. facilities (for example, markets)
• Roads according to their condition and
• Poor (rating 1): The neighborhood indica-
classification, showing the extent of paved
tor is below the mean.
roads, unpaved roads, unimproved roads,
• Average (rating 2): Services are at the and roads with public lighting
level of the city mean. • Drainage: main outflow points and runoff
• Acceptable (rating 3): The neighborhood channels (with lengths)
indicator falls between the mean and • Sanitation and solid waste management:
1.5 times the mean. wastewater system, treatment plant, local
solid waste transfer points, city landfill
• Satisfactory (rating 4): The neighbor-
hood indicator is higher than 1.5 times • Potable water supply: water treatment
the mean. plant, reservoirs, wells, water mains (with
lengths), and public standpipes
Each scoring line is given a coefficient, for
example, 2 for a paved road, or 1.5 for a street • Breakdown by neighborhood (data collec-
with public lighting. Calculating this weight tion by neighborhoods or zones)
is done by assessing the service or infrastruc- • Planned growth corridors
ture’s importance to the local population. We
• Priority actions (to be determined by the
have given identical weights to the following
authorities on the basis of the inventory
sectors: housing, roads, energy (water, elec-
documents)
tricity), sanitation and environment, and insti-
tutional facilities (schools, health centers, and A simple tool. IPSI was designed for use by
the like). services with modest means at their disposal.
Maps/cartographic support. The results This explains why it is presented in the form
of the IPSI analysis need to be spatially rep- of simple tables and maps; the number of data
resented, using maps to locate key findings. items is low but is not intended to be limiting.
Making Sense of the City and Sorting Out Investment Needs and Priorities 47
The list of data to be collected can be modified score obtained for each neighborhood.
and expanded according to the dataset and the Thus, in the example shown below
level of GISs available. However, it would be (figure 2.8), the most poorly serviced neigh-
better to use the same list across cities so as to borhood is District C (with a score of 26),
make it easier to derive common indicators and followed by District B (score 36), and finally
make comparisons between cities. The result District A (score 109). The results make it
will be a comprehensive urban database that possible to detail the neighborhoods that are
can be updated and, if possible, enhanced over most poorly serviced, with respect to each
time. type of infrastructure or facility, and to
Implementation. This tool is designed determine priorities. Thus, District C should
to be implemented by local and central gov- have priority for public street lighting, fol-
ernments. The scheme is not the only one lowed by District B.
possible, but it is generally appropriate to
3. Ranking of priorities: Ranking priorities is
situations where implementation capaci-
easy enough with regard to defining target
ties are satisfactory at the central level but
districts: the global score can serve as the
weak at the local level. This may help the
reference point. It is more difficult to assign
sectoral ministry or line ministry to regain
a priority ranking to specific works, partic-
a degree of legitimacy that it may have lost
ularly if they fall under different headings—
over the years, by introducing and updat-
roads, energy, sanitation, facilities—since it
ing an effective urban database and helping
is hard to arrange these headings in order
municipalities develop their own expertise
of importance. However, the first cut will
in this area.
normally be made by comparing the cost of
Practical aspects. The tool can be used in
each type of work against the available fund-
a rudimentary form at first, and then progres-
ing envelope—projects that seem too costly
sively developed with more sophisticated tech-
will simply be left for further consideration.
niques. The initial stage can be handled with
The ultimate selection will have to be left to
computerized spreadsheets and maps and
the central or local authorities (and perhaps
move toward the use of GISs.
to arbitration by the funding partner).
What are the expected outputs of such an
exercise? IPSI offers cities the following three Illustrations. The sequence of tables is
benefits: shown in tables 2.3, 2.4, and 2.5. Table 2.3
provides an example of an inventory tem-
1. An urban “snapshot”: The systematic com-
plate, showing a proposed classification
pilation of data, maps, and indicators will
which can be adjusted according to each
provide an overview that can be used to
city’s specific situation. Table 2.4 provides
more clearly assess the problems in a city
a sample template of key indicators, which,
and its neighborhoods.
again, can be adjusted to specific needs and
2. Identification of priorities: Results will circumstances. They focus on level of cover-
allow classification of neighborhoods in age and quality of service. Table 2.5 proposes
terms of their levels of service delivery and a sample template for establishing scores
will indicate those neighborhoods where for each neighborhood focusing on quanti-
upgrading should be given priority. tative and qualitative results. Starting from
Classification is determined by the total the inventory table, the indicator and score
48 Better Cities, Better World
Figure 2.8 IPSI Method: From Inventory to Scoring—A Road Map
tables can be deduced. The tasks will include • Comment on the quantitative scores.
the following: Identify deficiencies and gaps by sector.
• Comment on the qualitative scores and • Synthesize deficiencies at the level of the
ranking of districts. Identify underserviced whole city and at the district/neighbor-
neighborhoods by type of public service. hood level.
Making Sense of the City and Sorting Out Investment Needs and Priorities 49
Table 2.3 Inventory for the Programming of Services and Infrastructure (IPSI): Inventory
Neighborhoods
1. Inventory Unit of measure Total 1 2 3 4 5
Population
1 Pop. serviced housing Number of inhabitants
2 Pop. underserviced housing Number of inhabitants
3 Pop. irregular housing Number of inhabitants
4 Total population Number of inhabitants
5 Residents per household
Land occupancy
Housing
6 Area with serviced housing Square meters
7 Area with underserviced housing Square meters
8 Area irregular housing Square meters
Total area housing Square meters
Other
9 Large infrastructure Square meters
10 Economic activities Square meters
11 Green space Square meters
12 Roads, open areas Square meters
Total Square meters
Access to infrastructure
Streets/Urban roads
13 Paved street (good condition) Meters
14 Paved street (poor condition) Meters
15 Unpaved street (good condition) Meters
16 Unpaved street (poor condition) Meters
17 Unimproved street (track) Meters
Total streets Meters
18 Street with lighting Meters
19 Street with an address Meters
20 Bus station Number
Water/Electricity
21 Standpipes Number
22 Water main Number
23 Water connections Number
24 Water pipes Meters
25 Water reservoir Cubic meters
26 Water treatment station Number
27 Electricity connections Number
28 Electric power station Number
29 Low-tension distribution lines Meters
continued next page
50 Better Cities, Better World
Table 2.3 Continued
Neighborhoods
1. Inventory Unit of measure Total 1 2 3 4 5
Sanitation/Environment
30 Rainwater main outflow Meters
31 Rainwater drains Meters
32 Public latrines (working) Number
33 Public latrines (not working) Number
34 Wastewater sewage Meters
35 Area not connected to networks Hectares
36 Solid waste collection points Number
37 Solid waste transfer zones Number
38 Informal dumpsites Number
39 Authorized landfill Number
40 Waste treatment center Number
Access to facilities and superstructure
Education
41 Preschool facilities Number
42 Preschool classrooms Number
43 Primary schools Number
44 Primary school classrooms Number
45 Middle schools and high schools Number
Health
46 Health centers/clinics Number
47 Hospital beds Number
48 Maternity beds Number
49 Health center (good) Number
50 Health center (not adequate) Number
51 Pharmacies (good) Number
52 Pharmacies (not adequate) Number
Revenue-earning facilities
53 Central market Number
54 Neighborhood market (good) Number
55 Neighborhood market (not adequate) Number
56 Bus stations Number
57 Commercial centers Number
58 Tourism facilities Number
59 Slaughterhouse Number
Sport/Youth
60 Stadium/Soccer field Number
61 Recreational facility Number
62 Sport center Number
continued next page
Making Sense of the City and Sorting Out Investment Needs and Priorities 51
Table 2.3 Continued
Neighborhoods
1. Inventory Unit of measure Total 1 2 3 4 5
63 Swimming pool/Aquatic center Number
Culture/Recreation
64 Community center Number
65 Library/Other Number
Administration
66 Administrative offices Number
67 Post office Number
68 Police station Number
Table 2.4 Inventory for the Programming of Services and Infrastructure (IPSI): Indicators
Neighborhoods
Average
2. Indicators Unit total 1 2 3 4 5
Density and housing
1 Underserviced housing % area
2 Irregular housing % area
3 Density serviced housing Inhabitants/hectare
4 Density underserviced housing Inhabitants/hectare
5 Density irregular housing Inhabitants/hectare
6 Density housing Inhabitants/hectare
7 Density (gross) Inhabitants/hectare
Streets and roads
8 Paved street per inhabitant Meters/inhabitant
9 Unpaved street %
10 Paved street (good condition) %
11 Paved street per hectare Meters
12 Total streets per hectare Meters
13 Street with lighting %
14 Street with address %
15 Bus station Unit/1,000 inhabitants
Water/Electricity
16 Standpipes Unit/1000 inhabitants
17 Population with water connection %
18 Water lines Meters/inhabitant
19 Population with electricity connection %
20 Low-tension distribution lines Meters/inhabitant
continued next page
52 Better Cities, Better World
Table 2.4 Continued
Neighborhoods
Average
2. Indicators Unit total 1 2 3 4 5
Sanitation/Environment
21 Storm drainage Meters/inhabitant
22 Public latrines Unit/1,000 inhabitants
23 Wastewater sewage Meters/inhabitant
24 Area housing poor sanitation % area
25 Solid waste collection points Unit/1,000 inhabitants
26 Unauthorized dumpsites Unit/1,000 inhabitants
27 Green space Square meters/inhabitant
Facilities
28 Preschools Unit/1,000 inhabitants
29 Preschool classrooms Unit/1,000 inhabitants
30 Primary schools Unit/1,000 inhabitants
31 Primary school classrooms Unit/1,000 inhabitants
32 Health clinics Unit/1,000 inhabitants
33 Hospital/Maternity beds Unit/1,000 inhabitants
34 Pharmacies Unit/1,000 inhabitants
35 Administrative offices Unit/1,000 inhabitants
36 Post office Unit/1,000 inhabitants
37 Police station Unit/1,000 inhabitants
38 Sport facilities Unit/1,000 inhabitants
39 Markets Unit/1,000 inhabitants
Table 2.5 Inventory for the Programming of Services and Infrastructure (IPSI): Scores
Neighborhood
3. Scores Unit 1 2 3 4 5
Density and housing
1 Underserviced housing % area 1.0
2 Irregular housing % area 1.5
Streets
3 Paved street Meters/inhabitant 2.0
4 Paved street (good condition) % 1.5
5 Street with lighting % 1.0
6 Street with addresses % 0.5
7 Bus station Unit/1,000 inhabitants 1.0
Water/Electricity
continued next page
Making Sense of the City and Sorting Out Investment Needs and Priorities 53
Table 2.5 Continued
Neighborhood
3. Scores Unit 1 2 3 4 5
8 Standpipes Unit/1,000 inhabitants 2.0
9 Water mains Meters/inhabitant 1.0
10 Pop. with water connections % 2.5
11 Pop. with electric connections % 1.5
Sanitation/Environment
12 Storm sewage Meters/inhabitant 2.0
13 Public latrines Unit/1,000 inhabitants 1.0
14 Wastewater sewage Meters/inhabitant 0.5
15 Area not serviced by sewage % area 1.0
16 Solid waste collection points Unit/1,000 inhabitants 2.0
17 Unauthorized dumpsites Unit/1,000 inhabitants 1.5
18 Green space Square meters/ 1.0
inhabitant
Facilities
19 Primary schools Unit/1,000 inhabitants 1.5
20 Secondary schools Unit/1,000 inhabitants 1.0
21 Health clinics Unit/1,000 inhabitants 1.0
22 Hospital beds Unit/1,000 inhabitants 1.0
23 Pharmacies Unit/1,000 inhabitants 1.0
24 Administrative office Unit/1,000 inhabitants 0.5
25 Post office Unit/1,000 inhabitants 0.5
26 Police station Unit/1,000 inhabitants 0.5
27 Sports facilities Unit/1,000 inhabitants 1.0
28 Markets Unit/1,000 inhabitants 1.0
Total Scores
Note: This table presents both qualitative and quantitative results.
• Propose projects and programs in order to (see below and figure 2.9). Using the data
reduce or eliminate the gaps. from the indicators table (see table 2.4),
scores are calculated. These scores can
facilitate the comparison between neigh-
Objective of scoring. The objective is to borhoods and the average at the city level.
determine for each type of infrastructure The score of the neighborhood is defined
or service the location of underserviced qualitatively and quantitatively and is given
neighborhoods and to outline priorities a grade (0 to 4).
54 Better Cities, Better World
Figure 2.9 Urban Audit/Self-Assessment: Urban Services, Using IPSI as Database
Neighborhood
Korhogo, Côte d’Ivoire 1. Inventory
1 2 3 Total
Urban Services and Level of Neighborhood Services • Population
• Land occupancy
• Access to infrastructure
6 9 Roads
Water and electricity
Environmental sanitation
7 • Access to superstructure facilities
5 8 Education
Health care
10 Commercial facilities
3 4 Sports and youth activities
Culture and recreation
(Government)
1 11
2 2. Indicators
• Density and housing
Level of neighborhood • Roads
12 • Environmental sanitation
services:
• Facilities
Very high 15 3. Scores
13 • Density and housing
• Roads
14 • Environmental sanitation
Very low • Facilities
IBRD 44282 | MAY 2019 FINAL SCORES
This map was created using OSM and local data, reprojected in ArcGIS, and refined in Adobe Illustrator.
nfrastructure.
Note: IPSI = Inventory for the Programming of Services and I
List (Non-Exhaustive) of Project Proposals to Reduce or Eliminate Deficiencies
Location/ New Operations and
Type Address Priority construction Rehabilitation maintenance Costs
Infrastructure
• Roads
• Drainage
• Sewage
Amenities
• Education
• Health
• Social
Step 8: Land Regulatory Framework among cities quantitatively and qualitatively;
Diagnosis and Needs Assessment and (3) to establish common ground for
actions to be taken at the national, regional,
Objective and content. The key goals of
and local levels. This section of the UA/SA
this section of the UA/SA are (1) to produce
focuses on two key pillars that have a direct,
an objective and accurate diagnosis of key
powerful, and lasting impact on future growth,
land-related issues and present them in a
trends, and investments on the city. These are
unified format; (2) to compare performance
(1) existing urban planning documentation and
Making Sense of the City and Sorting Out Investment Needs and Priorities 55
(2) key regulations pertaining to zoning/land • Traditional planning documents such as
use, building construction, and permits affect- master plans take too long to prepare and
ing the development of the city (box 2.5). are difficult to enforce. They are often dis-
Regulations, although necessary and much connected from the financing capabilities
needed, have led to a number of grievances. of the local government and cannot keep up
The most common complaints can be summa- with the rate of urbanization and the pres-
rized as follows: sure on land.
• Most regulations are based on outdated and • The urban/city planning function has been
inappropriate planning legislation or urban traditionally disconnected from the finan-
planning codes that emphasize centralized cial planning function, and traditional plan-
public interference and impose high costs. ning has too often set forth development
Existing regulations in developing countries goals that have no bearing on their cost
have been criticized for both their rigidity implications. But the reverse is also true in
and the high costs that they impose on the that budgetary exercises frequently have
builder, or developer, and ultimately the little to do with the spatial implications of
purchaser. investment decisions.
Box 2.5
Land Use Regulatory Framework: Some Definitions
The most common forms of land use reg- standards for lot sizes, layout, street
ulation and control are (1) zoning, (2) subdi- improvements, and procedures for ded-
vision regulations, (3) building regulations, icating private land for public purposes.
and (4) urban planning. They regulate such The importance lies in the fact that these
things as the shape, volume, density, and regulations enable the community to
placement of buildings; height limitations; force the developers to pay for some of
setback requirements; and requirements the infrastructure related to the project.
for open space, amenities, and utilities. • Building regulations limit or define the
way new structures are to be built and
• Zoning is the demarcation of a city by the materials to be used. Building regu-
ordinances and the establishment of lations are among the oldest and most
zones in which certain activities are pro- common methods for controlling land
hibited and others are allowed and cov- development.
ers use, location, plot ratio, and height. • Urban/City planning is the process by
Zoning is an eminently political process which decisions are made regarding the
that may be the most important munici- global configuration of a city and its pro-
pal function in many cities. jections for expansion. The plan is the
• Subdivision regulations govern the reference framework that is used for
development of raw land for residen- the application and the use of the regu-
tial or other purposes and prescribe latory instruments mentioned above.
Source: Farvacque-Vitkovic and McAuslan 1992.
56 Better Cities, Better World
• In many cities around the world, getting a have become in many places very vocal voices
building permit or any kind of development for change. In many ways, the urbanization
permit can be a challenge. Studies have been trends and unprecedented urban growth of the
done and papers have been written on the last 20 years have created a state of urgency
whole issue of lengthy procedural night- for renewal, an impetus for change. In addi-
mares involving many segments of the pub- tion, the incredible leap in technology has also
lic administration and numerous steps to get enabled cities to have access to and appetite for
a building permit approved. spatial data and to start developing, with many
shades of success, GISs. New thinking has also
• Cumbersome procedures have led, in some
occurred on the function of city planning. No
cases, to the rise of informal land use activi-
longer seen as a reactive function, city plan-
ties and the erosion of the rule of law.
ning is perceived at the front and center of city
In Malaysia, for example, a 1992 World Bank management. New planning techniques aim to
study already showed that approval procedures (1) provide proactive guidance and orientations
were time- consuming and fraught with uncer- for future urbanization; (2) take into account
tainties. Some 18 to 20 departments partici- new technologies and smart ideas to address
pated in the approval cycle of urban plans, and environmental concerns; (3) embrace social
the final approval could take between one and inclusion challenges; (4) foster and support city
seven years, depending on the particular state “branding”; (5) listen to the various stakehold-
or local authority. The Kuala Lumpur Structure ers, including citizens; and (6) play a new role of
Plan of the 1980s is a case in point. Plan prepa- “broker” between public and private interests.
ration began in 1978, the plan was released to In addition, the growing number of climate
the public in September 1982, and it was finally change–related events has shown that regula-
gazetted in June 1984, almost six years later. The tions are much needed to prevent human occu-
unofficial estimated cost was US$3 million. The pation of disaster-prone areas and that city
administrative process of receiving, reviewing, planning has a major role to play in preventing
and deciding on applications for conversion or floods, landslides, and other natural disasters.
subdivision could take between two and seven
years. Building permits were generally approved Tasks. Key tasks for this section include the
faster and were more readily understood; how- following.
ever, some 16 to 20 departments were involved
in the process. In the case of Malaysia, improve- 1. Conduct an urban/city planning assessment:
ments have been made. The 2017 Doing Business
• List major existing planning documents,
ranking showed Malaysia in 24th position for
from general urban master plan and land
overall ranking and in number 11 out of 190 in
use plan to layouts developed for spe-
ease of getting a building permit (see map 2.6
cific land development areas, by name,
and box 2.6 for more i nformation on the Doing
date of approval, scope (section 1.a and
Business Index).
section 1.b in table 2.6).
So, what does it mean? Things are chang-
ing in some parts of the world. City planning • Assess the process from preparation to
is no longer the realm of stodgy planners left approval as well as costs (section 1.c in
in the dusty corner of city hall. City planners table 2.6).
Making Sense of the City and Sorting Out Investment Needs and Priorities 57
Map 2.6 Subnational Doing Business around the World
84 locations
83 locations in OECD in Europe and Central Asia
high-income economies
30 locations
in the Middle East
and North Africa
46 locations 76 locations
in South Asia in East Asia
and the Paci c
82 locations
109 locations in Sub-Saharan Africa
in Latin America
and the Caribbean
Economies with one subnational or regional study
Economies with more than one subnational or regional study
IBRD 43044 | JANUARY 2019
Box 2.6
The World Bank’s Ease of Doing Business Index
The Ease of Doing Business Index devel- of Doing Business ranking means that the
oped by the World Bank includes “dealing regulatory environment is more condu-
with construction permits” as one of the 10 cive to the startup and operation of a local
indicators highlighted as having an impact firm. The Index is updated for 190 coun-
on business development. Economies are tries and economies, and 438 subnational
ranked on their ease of doing business on entities (cities) have been benchmarked in
a scale between 1 and 190. A high Ease 65 economies since 2005.
58 Better Cities, Better World
• Assess the process of consultation with 3. Assess the potential correlation between
all stakeholders and citizens. city planning and investment program-
ming (table 2.8).
• Highlight the key orientations of the
master plan; outline proposed invest- 4. Assess to what extent existing planning and
ments and main recommendations land use regulations affect the illegal occu-
(insert map). pation of land (table 2.9).
2. Assess the existing land use regulations and 5. Map out existing land use in the city (map 2.7
building standards (table 2.7). and map 2.8).
Table 2.6 Urban/City Planning Assessment: City Planning Process
City_________
Population: City_____________ Municipality _______
Land area: City__________ Municipality _____________
Date _______________
Section 1. City Planning Process
Section 1.a Legal framework
Type and level of plan Duration of validity of
(provide name of plan) plan
National …
Regional …
Citywide general …
Subcity detailed …
Others …
Section 1.b Preparation and approval process
Which level of government is Which level of government is
responsible for preparation of responsible for approval of
plan (Name department)? plan? Notes and
Name of plan Central/regional Local Central/regional Local comment
National …
Regional …
Citywide general …
Subcity detailed …
Other
continued next page
Making Sense of the City and Sorting Out Investment Needs and Priorities 59
Table 2.6 Continued
Section 1.c Factual progress, number of plans, and coverage
How many Who actually did the
plans of this Part of the preparation work?
type have Start and territory covered (municipal department,
been done end year of by the plan (% Approval consultants, or central
Name of plan in your city? the plans or hectares) date government)
National …
Regional …
Citywide general …
Subcity detailed …
Other
Section 1.d Implementation progress, actors, costs
Sources of Notes/
funding for remarks,
implementation including
(municipal budget, issues
Cost of central Limiting factors related to
plan government, for completing/ transfer of
prepara- private developers, updating the land
tion donors) plans, if any ownership
National …
Regional …
Citywide general …
Subcity detailed …
Other
Section 1.e Public participation in city planning
• Does the law describe the process of public participation in planning? ______ Yes or No ______
• At what time or at what stage in the procedure is the plan published or made available for public review?
____________________________________________________________________________________________
• Method of public notice and publication?
____________________________________________________________________________________________
• Procedure and time period for review and comment?
____________________________________________________________________________________________
• Requirement for public hearing, public meeting, or seminar?
____________________________________________________________________________________________
• How is the response given to the public comments?
____________________________________________________________________________________________
• Does your city provide more opportunities for public participation in addition to those required by law?
______ Yes or No ______
60 Better Cities, Better World
Table 2.7 Land Use Regulations and Building Standards
Section 2. Construction standards and land use parameters
Permitted land use or site City center Peri-urban area
characteristics Residential Commercial Industrial Residential Commercial Industrial
1. Permitted land uses
Indicator on land uses
2. Parceling
Minimum plot size
Minimum width of street/
road front
3. Construction require-
ments
Maximum floor-to-area
a.
ratio (total floor area
divided by plot area)
b.
Land coverage (area of a
building footprint divided
by the plot area), %
c. Number of floors
d. Maximum height
e. Type of buildings
f. Horizontal regulation
Min. distance from building to
plot front (street) boundary
(i.e., between construction
line and regulatory line)
Min. distance from building
to side boundaries of plot
Min. distance from building
to back boundary of plot
Min. distance from other
buildings
Min. distance between two
buildings on plot
4. Beautification of open
space on plot
Min. mandatory green area, %
dicator on land use
In
parameters: the total
number of requirements in
categories 2–4
Other requirements
Underground space – permit-
ted or not
Rainwater drainage
Making Sense of the City and Sorting Out Investment Needs and Priorities 61
Table 2.8 Potential Correlation between City Planning and Investment Programming
Section 3. Does a link exist between land development planning and estimating the cost of public
infrastructure needed for the planned development? and Does the link exist between the planning
process and the decision-making process on key investments in the city?
Title and level of
each required plan Are cost estimates for land acquisition, engineering
(those listed in studies, and onsite and offsite infrastructure
section 1.a) calculated and included? Notes
1 Yes / No
2 Yes / No
3 Yes / No
Instruction: Provide answer for each plan listed in Column 1
To what extent is the planning process influencing the decision-making process on key
infrastructure and services investments in the city?
• Greatly
• Moderately
• Not at all
Table 2.9 Effect of Existing Planning and Land Use Regulations on the Illegal Occupation of Land
Section 4. Selected indicators on informal and illegal construction
Does informal/illegal construction exist on the territory of your city/municipality?
How significant
Types of informal/illegal is this type in
construction present in your your city/ What kind of construction is
city/municipality Present? municipality? present in this type? Notes
Construction on land
1. Yes / No • Common or • Individual houses
owned by occupants, and dominating • Multiunit apartment buildings
in areas zoned for case
construction; the construc- • Commercial or industrial
• Sometimes property
tion conforms to official
land use and building • Rare • Public (government) buildings
requirements; but • Public infrastructure (roads,
occupants do not have pipelines, power lines, etc.)
proper documents and /
or did not pay required
charges (e.g., land
development fee)
continued next page
62 Better Cities, Better World
Table 2.9 Continued
Section 4. Selected Indicators on informal and illegal construction
Does informal/illegal construction exist on the territory of your city/municipality?
How significant
Types of informal/illegal is this type in
construction present in your your city/ What kind of construction is
city/municipality Present? municipality? present in this type? Notes
Construction on land
2. • Common or • Individual houses
owned by occupants, dominating • Multiunit apartment buildings
and in areas zoned for case
construction; but • Commercial or industrial
• Sometimes property
construction does not
conform to official land • Rare • Public (government) buildings
use and building • Public infrastructure (roads,
requirements and pipelines, power lines, etc.)
deviates from documen-
tation if such exists
Construction on land
3. • Common or • Individual houses
owned by occupants, but dominating • Multiunit apartment buildings
on territory not zoned for case
construction • Commercial or industrial
• Sometimes property
• Rare • Public (government) buildings
• Public infrastructure (roads,
pipelines, power lines, etc.)
Construction on public or
4. • Common or • Individual houses
private land, zoned for dominating • Multiunit apartment buildings
construction, but case
occupied/built by • Commercial or industrial
• Sometimes property
squatters/illegal tenants
• Rare • Public (government) buildings
• Public infrastructure (roads,
pipelines, power lines, etc.)
5.
Construction on public or • Common or • Individual houses
private land, not zoned dominating • Multiunit apartment buildings
for construction and case
occupied/built by • Commercial or industrial
• Sometimes property
squatters
• Rare • Public (government) buildings
• Public infrastructure (roads,
pipelines, power lines, etc.)
continued next page
Making Sense of the City and Sorting Out Investment Needs and Priorities 63
Table 2.9 Continued
Section 4. Selected Indicators on informal and illegal construction
Does informal/illegal construction exist on the territory of your city/municipality?
How significant
Types of informal/illegal is this type in
construction present in your your city/ What kind of construction is
city/municipality Present? municipality? present in this type? Notes
6. Roma settlements (slum • Common or
or low-quality durable dominating
housing) case
• Sometimes
• Rare
7. Other (specify) • Common case
• Sometimes
• Rare
” please classify according to the typology in the table below.
If the previous answer is “yes,
What is the estimated share of the area under the informal/illegal construction and settlements in the total urban
territory of the city?______%
What is the estimated share of illegally built housing units in overall housing stock on the city/municipal
territory? _________%
If informal/illegal construction is still effective, what is the estimated share of informal housing construction in
the total housing production in year 11? ______________
If the informal construction has stopped, what was the reason?_______________________________________
_______________________________________________________________________________________________
Existence of national and local regulations related to legalization (Yes / No):
a. Within the general planning regulations________
b. As a special legalization legislation________
What is the relation between the fees paid under the regular development procedure and the fees to be paid in
the legalization process:
Are the costs the same? Yes/No
Is the legalization cheaper or more expensive than the regular development? (provide a commentary,
including special incentives, discounts for lower-income households, etc.)
Is eminent domain used appropriately?______________________________________
64 Better Cities, Better World
Map 2.7 Urban Audit/Self-Assessment: Land Use Map
Korhogo, Côte d’Ivoire
Land Use Landuse:
Residential
High density
Low density
Commercial
Parks/public space
River/areas prone
to inundation
Neighborhood
Table 1-Land occupancy
1 2 3 Total
• Housing
Surface area-serviced housing hectares
Surface area-underserviced housing hectares
Surface area-irregular housing hectares
Total surface area-housing hectares
• OTHER OCCUPANCY
Major facilities hectares
Activities hectares
Green space hectares
Roads-open areas hectares
Total surface area-other occupancy hectares
IBRD 44283 | MAY 2019
This map was created using OSM and local data, reprojected in ArcGIS, and refined in Adobe Illustrator.
Map 2.8 Land Use Map: Sample from the Municipality of Gazi Baba, North Macedonia
MUNICIPALITY OF GAZI BABA
Investment Opportunities
1 Eastern Industrial Zone
Gazi Baba Block Skopje Farm (ERA City)???
2 Student Dormitories–Stiv Naumov
4
3 3 Sport and Recreational Center–Zel Ezara
2 5
4 Sport and Recreational Center
Skopje Gazi Baba–Smilkovci Lakes
1 6 7
5 Industrial Zone Highway–St. Pass
6 Hipodrom 2 Settlement
7 Sport and Recreational Center Hipodrom
LAND RE-ZONED AND PLANNED LAND WITH OFF-SITE BUILT-UP PROPERTY
AGRICULTURAL LAND
FOR DEVELOPMENT INFRASTRUCTURE (BUILDINGS AND LAND)
3 Euro/m3 25 Euro/m3 325 Euro/m3 1250 Euro/m3
Who? Government and municipalities Those who build infrastructure Developer
Who? Government and municipalities Those who build infrastructure Developer
Government and municipalities/ Tax payers, tariff payers, and/or Developer and their buyers
Who?
or developer developers
Those who can build here, Future buyers/users of real Developer, their buyers, and users
Who?
legally estate of property and space
These maps were created using OSM and local data, reprojected in ArcGIS, and refined in Adobe Illustrator.
Making Sense of the City and Sorting Out Investment Needs and Priorities 65
Step 9: Land Markets Assessment and • Are land prices increasing faster than the
Land Assets Management overall rate of inflation?
This step focuses on two crucial components of • Where are land prices the highest, and
the land management agenda. These tasks are where are land prices increasing the fastest?
hugely important for any city. Some cities may
• How much land is being provided with the
have all the systems in place and up-to-date
minimum services needed for future urban
data readily available. Others might be in the
development?
process of compiling such information in their
existing GIS systems. Some may not be there • Is there enough urban land to accommodate
yet and may require more time and support to urban growth for the next five years?
monitor land prices in their jurisdiction and
• Are the price and affordability of hous-
inventory and value their assets. Whatever the
ing and commercial and industrial space
situation might be, what follows are commonly
changing?
accepted guiding principles on best practices
for data collection and analysis. • Which segments of the population do not
have access to housing from the formal pri-
vate sector?
Land Markets Assessment
Objectives and Methodology. The land mar- • What is the impact of large infrastructure
kets assessment aims to provide data on land investments, such as public transit systems,
prices, the supply of serviced land, and current on land values?
and projected land projects (Dowall 1995). It • How can land value be captured for infra-
provides foundational knowledge for defining structure financing?
appropriate strategies to improve land mar-
ket performance and to support governmen- • What can the geography of land values tell
tal planning and decision making, evaluation us about the patterns of urbanization and
of government policies and actions, private development both for the city center and
sector investment and development decisions, peri-urban areas?
structuring of land-based taxation systems, • Is the current land market pricing out some
and shaping of various land-based infra- segments of the population?
structure financing tools. One of its primary
objectives is to answer the following questions • Is the current land market changing the face
(tables 2.10 and 2.11): of the city, and in what ways?
• Is the supply of urban serviced land expand- • Is land being used wisely, keeping in mind
ing to meet growing population and employ- the overall objectives of a livable city, a
ment needs? socially inclusive city, and a green city?
A full-fledged land market assessment
• Which land uses are growing the fastest? requires time, resources, and a multiskilled
• Where is urban land conversion taking team. Typically, LMA data are collected from
place? primary and secondary sources such as census
data, land price surveys, household surveys,
• Where is urban land conversion outstrip- and interviews with developers and real estate
ping the supply of serviced land? agents, as well as GIS data. Doing household
66 Better Cities, Better World
Table 2.10 Basic Land-Use and Population Data
For each geographic zone, data on land use and population attributes should be collected for at
least two points in time—a base year and the current year. Ideally, the two years should span a
period of 5 to 10 years
Base year Current year
1. Zone identification number
2. Size of zone, in hectares
3. Total urbanized land, in hectares
4. Total residential land area
5. Total housing units
6. Commercial land area
7. Industrial land area
8. Institutional land area
9. Vacant land area
10.Vacant land area with infrastructure
11. Change in urbanized land, in hectares
12. Change in residential land area
13. Change in total housing units
14. Change in commercial land area
15. Change in industrial land area
16. Change in institutional land area
17 . Change in vacant land area
18. Change in vacant land area with infrastructure
19. Population in base year
20. Change in population
21. Population density
22. Change in population density
Table 2.11 Land Values
Land values (based on appraisals) can be tabulated by type of land. All land values should be
expressed in constant prices.
Base year value Current year value
(per square meter) (per square meter) Median
1. Serviced residential plots in city center
2. Office space in city center
3. Commercial plots in city center
4. Land near mass transit systems
5. Industrial plots
6. Vacant plots in city center
7. Serviced plots in peri-urban areas
8. Unserviced plots in peri-urban areas
Making Sense of the City and Sorting Out Investment Needs and Priorities 67
surveys or any type of surveys is beyond the • Land Developer Multiplier: This indicator
scope of the Urban Audit/SA; however, a great measures the median price of serviced land
deal of data is available from various sources, per square meter over underserviced but
and UA/SA users just need to know where to subdivided urban land per square meter.
look. Property transactions records, local prop- • Land conversion multiplier: This indicator
erty valuation rolls, street addressing databases, measures the median price of unserviced land
and interviews with real estate professionals in urban areas per square meter over median
are all useful entry points to get access to valu- price of land in rural areas per square meter.
able data that can be collected and mapped
with less cost and effort than full-fledged sur- • Density gradient: This indicator is used to
veys. There are some key guiding principles measure the level of suburbanization or
(An Introduction to Land Market Assessment urban sprawl and to describe the population
in Complex Urban Settings OLC e-course) that density patterns of a city according to the
will help outline a roadmap for action. distance from the city center.
Market value is not an exact science and is a
Tasks: rather abstract concept. There are several ways
1. Define up front the “study zone” or location to appraise market value, among which the fol-
in order to get a balanced and representative lowing three prevail: sales comparison, income
sample. capitalization (for commercial real estate), and
2. Adhere to commonly accepted indicators, mass appraisal. It is important to keep in mind
which are as follows: why the exercise is being done: not only to
assess the performance of the land market but,
• Population density per hectare more importantly, to better understand how
• Changes in population density at 5 to 10 years the land market affects, positively or negatively,
the vibrancy, the social and economic fabric,
• Land value or mean price of land based on and the diversity and livability of the city.
the distance from the city center and in dif-
ferent zones of the study area Land Assets Management
Objective and content. Most municipalities do
• Average annual increase in urbanized land not know what they own, where their assets are
(or land converted to urban use) located, or how much those assets are worth.
• Area of vacant land inside the built-up area Land is often the most valuable asset of local
governments, which implies that the quality of
• Correlation between income and supply land assets management is especially import-
3. Compute key indices: ant. This section of the UA/SA reviews the sta-
tus of public land in the city and aims to assess
• Land affordability: This indicator measures the needs in terms of its inventory. If the city
land price per square meter over annual does not have a proper registry of land assets,
household income. It assesses the extent to the UA/SA will not be able to fill this gap, but it
which some segments of the population might will be able to guide the city in the right direc-
be affected by land values and priced out of the tion and give more visibility to this issue. If the
market. It will provide markers for the supply city does have a land assets registry, the UA/
side of the housing stock as well as for the SA can be used to update it, map it, monitor it,
types of services and infrastructure needed. and analyze it. Again, if the municipality has an
68 Better Cities, Better World
updated street addressing system, the database Main Land Assets
and maps attached to this street addressing Property Location/
will be extremely valuable (see box 2.7). type Unit Price Area Address
• Plots
Tasks. This section will assess the inventory of owned
land assets owned by the municipality or avail- by the
munici-
able on the market for urban development. The
pality
assessment will include the following tasks: • Plots
con-
• Review or jump-start an inventory of land trolled
owned by the municipality: area, location, by the
developed or not, and estimated value. munici-
pality
• Map location of land owned or controlled • Buildings
by the municipality (map 2.9). owned
• Outline methods used for the allocation by the
munici-
of municipal land. pality
• Identify developers’ complaints: number, Total
frequency, and type.
Box 2.7
The Importance of Street Addressing: A Precious Ally
The importance of street address- Why Is Street Addressing Important?
ing cannot be overlooked. Although It has multiple applications related to
many cities around the world take it for municipal management and municipal
granted, the lack of street addresses is services:
vast and problematic. It is estimated that • Civic identity
4 billion citizens worldwide do not have • Urban information systems
an address. This problem needs to be • Land and land assets management
taken seriously and tackled with care. • Service delivery: road maintenance,
What Is Street Addressing? solid waste removal, concessionary ser-
vices, and utilities
• Technique shifts emphasis from plot level
• Local taxation
demarcation and registration titling to
• Slum upgrading
occupancy units at the street level and
• Emergency response: fire and ambu-
from property rights to occupancy status.
lance services
• A system that allows the identification of
• Epidemic prevention and disaster
a building or plot of land based on the
recovery
identification of a street and an entrance
• Mail, ecommerce, and economic
number.
development
• Includes installing street signs, number-
ing doorways, mapping, street indexing,
and database management.
Making Sense of the City and Sorting Out Investment Needs and Priorities 69
Map 2.9 Location of Public Land Owned by (or under Control of) the Municipality
Step 10: City Development Projects: A located on waterways are reclaiming land on
Snapshot of Key Urban Restructuring waterfronts, transforming them into mixed-use
Programs residential and touristic destinations. Others are
doing Greenfield redevelopment, turning rural,
Objective and content. This section of the
agricultural, or vacant land into sustainable
UA/SA reviews the current urban develop-
peri-urban areas. Large former industrial tracts
ment growth patterns in the city and takes a
are also being turned into land development proj-
more holistic approach to citywide programs.
ects. City center renovation and inner city renewal
It, therefore, focuses on the following three key
programs have enabled many declining cities to
items: (1) urban extension areas for residential
revamp their images and their economies. Large
or economic activity uses (typically located in
upgrading programs have also, with more or less
the outskirts of the municipality), (2) city rede-
success, attempted to integrate large, densely
velopment/reuse/renewal projects (typically
populated, and underserviced neighborhoods
located in the inner city), and (3) slum or irreg-
into the city’s urban fabric. Last, but not least, are
ular neighborhood upgrading.
other large infrastructure p rojects, such as public
transit systems as well as large primary road net-
Tasks. This section of the UA/SA identifies and
work extensions or new construction, that have
analyzes the ongoing and contemplated urban
a tremendous impact on mobility, shape, density,
development projects (see table 2.12 for an exam-
land values, housing prices, and urban residents.
ple). Step 10 is very important because it takes
The Urban Audit/SA wants to know everything
a look at large infrastructure or development
there is to know about these large structuring
projects that will have a “structuring” or “brand-
projects, including the following:
ing” impact on the city. These projects can range
widely in terms of scope, location, partnerships, • Location
funding, and operating arrangements. They may
include waterfront redevelopment: many cities • Land ownership status
70 Better Cities, Better World
Table 2.12 Example: Land Development Project
Quantitative
Objectives indicator Definition and comments
Social o ce project 31% % of housing FVIT has 140 000 Dh (slums) and social has
200 000 Dh (others)
Resorption of slums 10 000 Number of slum households a ected
Impacts on adjoining or (1)+(2)+(3) (1) Improvement of the built environment,
adjacent areas (2) Infrastructure contribution, (3) Opening of the urbanization zone,
(4) Integration with the existing outcome, (5) Other (to be specified)
Social mobility 69% % of households expected as slum and prevention
Other Activities (including industries)
Number Unit area Total area Induced Induced
Designation
of units (in m2) (in m2) Housing Housing
1– Lots of resettlement (total)
with lots equipped in ZAP
2– Lots of prevention
3– Collective lots (R + 3 and more)
4– Other promoted lots
5– Lots of Partnership (AMI) 132 41 041 5 417 451 54 270
with social housing & FVIT 16 700 31%
6– Lots of activities including
industries
7– Socio-collective equipments 29 131 913
for Health
for Education
for Green Spaces
Total 161 41 041 5 549 364
Roads and others 2 850 636
(places, streams...)
General Total 161 41 041 8 400 000 54 270
COS–Coe cient for ground use 66%
New developed lots
Tamesna
IBRD 44286 | MAY 2019
This map was created using OSM and local data, reprojected in ArcGIS, and refined in Adobe Illustrator.
Making Sense of the City and Sorting Out Investment Needs and Priorities 71
• Planning documentation and approval The chapter ends with a note of wisdom and
process advice: it is important for cities to get ahead of
the game with sound procurement practices
• Consultation process
and procedures that will help them ultimately
• Feasibility studies speed up the physical implementation of their
municipal programs while enhancing the qual-
• Status of technical studies ity of public works and the transparency in the
• Environmental, economic, and social use of public funds.
evaluations
Step 11: Preselection, Consultation, and
• Costs and financing agreements (total and Screening Process
detailed, onsite and offsite)
Objective and content. This phase of the
• Institutional arrangements (dedicated author- process is extremely important because it pro-
ity, if any) vides an opportunity to put the pieces of the
• Population expected to be served puzzle together and to take into account the
social, technical, and highly political features
• Implementation schedule of investment programming.
• Land sales proceeds and other revenues Tasks. Key tasks in this phase include the
expected following.
Block 3. Priority Investment 1. Estimating the “demand” for projects
Programs: Selection,
Block 2 of the UA/SA provided a diagnosis
Consultation, and that helped identify gaps and needs as well
Implementation as propose investment orientations to miti-
Objective and Methodology gate or eliminate them. But other projects
are formulated in parallel coming from dif-
Block 3 is moving away from diagnosis to ferent sources, and these sources have to be
actual implementation. It outlines the vari- brought to light:
ous steps involved in reaching the final product.
In a sense, it is the most challenging phase of the • Mayor’s agenda
UA/SA, because it involves screening, validating,
• Citizens’ demands
and arbitrating to come up with a viable, realis-
tic, and desirable municipal program supported • Private sector demands
by concrete implementation requirements.
The formulation of these demands is
Block 3 includes the following three steps:
generally not homogeneous. Some are
Step 11: Preselection, Consultation, and just ideas for projects; others are well
Screening Process described, but their costs are not
assessed.
Step 12: Classification of Priority Investment
Projects by Stakeholders The tasks to perform will be the following:
Step 13: From Project Prioritization to Program • To identify and detail specific projects
Implementation included in the mayor’s agenda and
72 Better Cities, Better World
not necessarily listed in the previous of cost estimates, financial participation,
diagnosis conducted by the municipal responsibility, and impacts.
departments;
2. Setting up the consultation process
• To inform and consult citizens and the
private sector through public hearings, Cities may have their own consultation
consultation of private investors, cham- processes. Some municipalities may also
ber of commerce, and so on (table 2.13); request feedback from their citizens on a
and regular basis or on a project basis.
Table 2.13 (Taking the Pulse of the City:
• To present these projects in the same Perception of the City by its Citizens) pre
format (project fact sheet). The most sents an example of a simple questionnaire
important information is the following: designed to determine how the city is
a brief description, location, summary
Table 2.13 Taking the Pulse of the City: Perception of the City by its Citizens
Taking the Pulse of the City: Perception of the City by its Citizens
Replies Sample answer
Name of the City
1 2 3 4 5 6
—>
Bad Fair Good Bad Fair Good
1 Urban site Urban design X
2 Downtown area X
3 Image of the city X
4 Neighborhood life X
5 Risks Floods X > 25% of the city flooded < 5% of the city
flooded
6 Seismic risk X Some strong earthquake Little or no risk
7 Climate change X High vulnerability Low vulnerability
8 Other: industrial risk, X High risk Low risk
landslides...
9 Environment Natural heritage X Few natural heritage Signficant heritage
10 Green spaces X Insufficient green spaces Vast green spaces
11 Air pollution X Very polluted city No significant
pollution
12 Water pollution X Widespread water No significant
pollution pollution
13 Land tenure Land availability X Little developable land No problem urban
expansion
14 Tenure security X Informal > 25% Informal: < 5%
15 Economy Economic vibrancy X Economic stagnation Growth
16 Growth factors X Weak economic foundation Diversified base
continued next page
Making Sense of the City and Sorting Out Investment Needs and Priorities 73
Table 2.13 Continued
Taking the Pulse of the City: Perception of the City by its Citizens
Replies Sample answer
Name of the City
1 2 3 4 5 6
—>
Bad Fair Good Bad Fair Good
17 Home business X No incentive Incentives
18 Unemployment X Unemployment rate: > Unemployment rate:
40% < 10%
19 Informal employ- X Majority share of informal Almost non-existent
ment informal
20 Housing Housing provision X Insufficient Exceeds demand
21 Housing prices X Prohibitive for middle Accessible to
dasses middle class
22 Urban services Water supply X Unsatisfactory Satisfactory
23 Wastewater X Unsatisfactory Satisfactory
24 Electricity X Unsatisfactory Satisfactory
25 Street lighting X Lighting: < 50% of Lighting: in all
quarters neighborhoods
26 District heating X Unsatisfactory Satisfactory
27 Information X Uncommon internet Widespread internet
technology access access
28 Solid waste X Unsatisfactory Satisfactory
29 Security X Insecurity No security problem
30 Roads, Road network X Heavy congestion in the Low congestion in
mobility, center the city center
transport
31 Quality of road X Roads in poor condition: > Roads in poor
network 70% condition: < 10%
32 Public transportation X Poor system Efficient system
Mobility for all
- Bikes
- Pedestrians
- Challenged mobility
33 Amenities / Schools X Poor Good
Public facilities
34 Health centers X Poor Good
35 Leisure, culture, and X Poor Good
sport
Number of replies (example)
Bad 1,700 47%
Results Fair 1,000 28%
Good 900 25%
3,600 100%
Note: Information on the age group, gender, and years of residence in the city of each respondent will be useful to draw further
conclusions as to how to use the results.
74 Better Cities, Better World
doing and how it is perceived by its citi- If the UA/SA is conducted in parallel with
zens. The questionnaire covers many the MFSA, the discussion will focus on the
aspects of city life and city services and key question of availability of funding. If all
will provide a “quick and dirty” subjective the prerequisites and criteria for selection
evaluation of how citizens see their cities are met, the remaining key questions include
and their urban environment. Covering the following:
topics from housing prices to traffic con-
• Is funding available?
gestion to quality of roads and schools, this
simple questionnaire can produce valuable • What are the cost implications on the exist-
inputs on key pressure points, offer a for- ing and projected tax burden?
mal outlet for citizens’ voices, and provide
• What is the likelihood of partnering with
city leaders with food for thought.
private operators?
The consultation process for the UA/SA
• Does the inclusion of the project in the
proposes a three-step approach:
investment program preclude the financing
of other priority projects?
An “information/consultation” phase
2.1
before the UA/SA process starts. This Regardless of the type, format, scope, and
information session aims at (1) present- duration of these consultations, there are a
ing the process and explaining how it is number of principles that govern the pro-
going to be conducted and (2) gaining cess and, when applied, make it effective
early buy-in from various stakeholders. (World Bank 2013):
• Openness: The process is open. By calling a
A “reinstatement/consultation” phase
2.2 consultation, the city is prepared to be influ-
upon completion of the analysis: (1) the enced when making decisions and open to
first findings are presented along with a the input from citizens; citizens’ contribu-
list of projects whose cost is compatible tions will be taken into account.
with the initial funding envelope and
that addresses the stated deficiencies • Access to information: Citizens need access
and needs; (2) any project proposals to all relevant information in advance. This
brought up during consultation are principle applies to information on the con-
listed. sultation process as well as materials that
would help citizens to provide informed
A “consultation/validation” discussion
2.3 opinions on the subject of consultation.
stage after the costs and feasibility of Information should ideally be customized
all the projects have been assessed. and made available as needed.
This “long list” of projects is examined,
discussed, and filtered through a set of • Accountability: The input and feedback
criteria (see the next section, “Setting from each citizen are collated and assessed,
criteria for project preselection”). The shared back with citizens, and brought to
consultations are followed by discus- the attention of decision makers. In a con-
sion as needed to decide which projects sultative process, the city is accountable for
are PIP-eligible. the outcome of the consultation and for how
Making Sense of the City and Sorting Out Investment Needs and Priorities 75
citizens’ input has informed and helped • That it will favor rehabilitation of existing
decision making. assets whenever possible;
• Transparency: The consultation process is • That it will promote a balanced densifica-
transparent. Information is available to cit- tion of urban areas;
izens about relevant aspects of the process, • That it meets all the technical, financial,
citizen engagement, citizen input, consulta- economic, environmental, and social condi-
tion outcomes, and how citizen input is used. tions required for a smooth execution.
• Visibility: All those who may be impacted by a • Some of the key questions to ask are:
decision or are interested in participating in a
consultation process need to be made reason- • Is the land available and land tenure/owner-
ably aware of the process. This means making ship worked out?
an effort to reach all impacted groups, includ- • Does the proposed new facility conform
ing persons from vulnerable groups. Citizens to central government mapping (schools,
should be informed of proposed consultations health centers)?
through social media, media, press releases,
advertisements, newsletters, and so on. • Are both the equipment and staffing secured
so that the facility does not sit empty after
• Accessibility: Citizens must have reason- completion?
able access to the process. The methods
chosen for the consultation must be suitable • Is funding available?
for all citizens. Additionally, the information • Has it been cross-checked with MFSA
provided to citizens should be reasonably findings?
easy to comprehend.
• What external sources of funding have
3. Setting criteria for project preselection been secured?
Setting up criteria for preselection and • Is the private sector involved in the imple-
checking the boxes is not a futile exercise mentation and maintenance of the pro-
because it forces decision makers to (1) real- posed program?
istically assess the technical and financial
• Are the proposed financing and institu-
feasibility of a project and (2) provide some
tional arrangements acceptable?
strategic orientations on choices and priori-
ties. Some of the key criteria to consider will • Does the project make sense environ
include confirmation of the following: mentally?
• That the proposed project/program falls • How green is the proposed investment?
under the responsibility of the local gov-
ernment or follows established multi- • Does it contribute to social inclusion?
jurisdictional arrangements; criteria
Figure 2.10 and figure 2.11 illustrate the
• That it will bring a structural benefit to the and process for preselection.
city; The project fact sheet is an essential tool
that will be updated throughout the selection
• That it will have an impact on a large share process and finalized for attachment to the PIP
of the population; at the end of the process.
76 Better Cities, Better World
Figure 2.10 Criteria Selection and Validation
Urban Audit/Self-Assessment: Criteria selection and validation
Criteria for investment prioritization
Mayor’s projects, political agenda Possible selection criteria
Is the project falling under the responsibility of the municipality?
Are financial resources sufficient to fund the project?
Proposed projects in planning
Is the project "executable"/implementable?
documents
Are other similar projects underway or in preparation?
Are they competing projects?
Proposed projects from municipal
diagnosis Other possible criteria
Prioritize projects that have a direct impact on the
structure of the city (structuring projects/"Projets Structurants")
Proposed projects from citizens’ Prioritize projects that prevent degradation or loss of
demands urban heritage (upgrade before new construction).
Select projects in existing neighborhoods as opposed to
Proposed projects from projects in future sparsely populated areas.
private sector Prioritize projects which have funding opportunities
(grant or private sector involvement).
Figure 2.11 Criteria and Process for Preselection of Municipal Investments
a. Example of preselection criteria
Example of investments preselection criteria
1. To prioritize rehabilitation of existing assets rather than new assets construction
2. To prioritize projects that deliver basic services in under-equipped areas
3. To prioritize projects that impact a larger population
4. To prioritize projects whose feasibility is confirmed (land tenure, implementation schedule, complexity)
5. To prioritize projects with funding opportunities (target grants or private sector involvement)
6. To prioritize projects with strong potential environmental impact
Criteria
Proposed project 1 2 3 4 5 6 Final score
Project A X X X X 4
Project B X 1
Project C X 1
Project D X X 2
Project E X X X 3
Project F X X X X 4
Project G X 1
Project H 0
Project I X X 2
Project J 0
Making Sense of the City and Sorting Out Investment Needs and Priorities 77
Figure 2.11 Continued
b. From needs assessment to selection c. Diagnosis, preselection, and classification
Proposed projects Urban audit
3. Classification
Infrastructure 1. Diagnosis 2. Preselection by owner
and services
diagnosis
Municipal direct
Needs and gaps investments
identified by Neighborhood-
the technical level
diagnosis Project’s list Infrastructure and
departments
for selection urban services
State investments
Urban
development
areas Urban land Public utility
Project
development company
priorities
areas investments
Mayor’s
political
agenda Land development
Demands for Preliminary investments
projects fact sheets
State’s
Demands for
sector Mayor’s agenda One-off large capital
projects
programs investments
State sector programs
Citizens’ Private investors
demands Citizen demands
private sector
Step 12. Classification of Priority its own rules and financing strategy. The clas-
Investment Projects by Stakeholders sification will give an overview of the scope of
the program, the institutional arrangements
Objective and content. This step consists
to put in place, and the spread of the financing
of classifying the preselected investment
charges. Types of project ownership include
projects according to the key stakehold-
the following:
ers responsible for financing. This step
is particularly crucial because it distrib- • Municipality: Municipal direct investment
utes responsibility for implementation and projects, owned and conducted directly by
financing, and it emphasizes the need for the municipality. Their financing refers to
coordination in terms of implementation fiscal capacity of the municipality, which is
schedule, share of responsibility, and possi- assessed in parallel through the Municipal
ble cross-financing. Finances Self-Assessment.
Tasks. Table 2.14 lists stakeholders typically • Public utility company: Generally, in
involved in the selection and implementation charge of all the basic services such as
of municipal investment projects. water supply, sewage and drainage, elec-
tricity, urban heating, and others. Their
Each stakeholder involved in the urban project
financing comes from tariff proceeds and
investment selection and implementation has
78 Better Cities, Better World
Making Sense of the City and Sorting Out Investment Needs and Priorities
Table 2.14 Classification of Priority Investment Projects by Category and Financing Source
Direct Public utility Land
municipal company development One-off
investment investment investment investment
Urban roads,
street lighting Water supply, Housing
solid waste, wastewater, industrial
drainage, urban and logistics Urban
schools, transport, urban expressway,
health, culture heating... renewal subway, tramway
Key financing sources
Municipality Costs Land sales
credit- recovery and (or leases) Intergovernmental
Name of project sector Proposed by PRIORITY worthiness tariff policy PPP finance—PPP
Project A... (Culture) Mayor’s agenda
Project B... (Roads) Municipal diagnosis
Project C... (Street lighting) Municipal diagnosis
Project D... (Primary school) Mayor’s agenda
Project E... (Roads) Municipal diagnosis
Project F... (Greening) Planning documents
Project G... (Water supply) Citizens’ demand 1
Project H.... (Water supply) Citizens’ demand
Project I... (Drainage) Municipal diagnosis
Project J... (Housing) Private sector
Project K.... (Solid waste) Municipal diagnosis
Project L... (Culture) Mayor’s agenda
continued next page
79
Table 2.14 Continued
80
Direct Public utility Land
municipal company development One-off
investment investment investment investment
Urban roads,
street lighting Water supply, Housing
solid waste, wastewater, industrial
drainage, urban and logistics Urban
schools, transport, urban expressway,
health, culture heating... renewal subway, tramway
Key financing sources
Municipality Costs Land sales
credit- recovery and (or leases) Intergovernmental
Name of project sector Proposed by PRIORITY worthiness tariff policy PPP finance—PPP
Project M... (Housing) Private sector
Project N... (Trade) Private sector
Project O.... (Street lighting) Municipal diagnosis
Project P... (Elementary school) Mayor’s agenda
Project Q... (Industry) Private sector
2
Project R... (Roads) Citizens’ demand
Project S... (Sewage) Municipal diagnosis
Project T... (Water supply) Municipal diagnosis
Project U... (Water supply) Mayor’s agenda
Project V... (Transport) Planning documents
Project W... (Transport) Municipal diagnosis
Project X... (Solid waste) Mayor’s agenda
Project Y... (Trade) Private sector 3
Better Cities, Better World
Project Z... (Culture) Citizens’ demand
Note: PPP = public–private partnership.
the capacity of the company, through these After a deep dive into the analysis of the vari-
proceeds, to recover the costs (cost recov- ous components of what makes a city a city, it is
ery or full cost recovery). The level of crucial to bring some closure and to determine
performance will determine the capacity what it means in terms of next steps.
of the utility company to invest by itself
Tasks. Looking forward, the next steps will
(self-financing and debt) or to get sup-
include the following:
port from the municipality or higher level
of government through a subsidy or loan • Create a list of potential actions/reforms
guarantee. on (1) the regulatory framework on the
basis of what we have learned on city plan-
• Land developer: Land development (see ning/land development/land use regula-
the three categories defined above—hous- tions and practices; (2) capacity building
ing, industrial, and urban renewal—in the of local municipal staff to better perform
UA/SA) is generally assumed by the specific their tasks; and (3) connecting the dots
agency allowed to sell or lease the land and with the financial capacity of the munici-
to account for proceeds generated by this pality to assume a coherent financing base
activity. Consequently, investment proj- for its future investments (including main-
ects related to urban development will be tenance needs) through own revenues,
attributed to these specific stakeholders. In loans, or public– private partnerships.
the MFSA, specific financial analysis will be
conducted at the project level and as corpo- • Outline a clear, realistic Priority Investment
rate-based analysis to assess the ability of Program (PIP), which will include three
the stakeholder to carry out the project with key features: (1) maintenance, (2) rehabili-
or without support from the municipality. tation, and (3) new investments (table 2.15
and table 2.16). The temptation is always to
• One-off project with complex institu- focus on development and new investments.
tional and financial arrangements: The However, there is a great deal to say about
idea is to differentiate “exceptional” proj- “conservation,” especially in environments
ects from the other projects listed in the where one has to be mindful of financial con-
UA/SA. These exceptional projects gener- straints, physical limitations, and the envi-
ally involve the state level and the private ronmental footprint. Hence, in many cases,
sector in complex contractual arrange- taking a good look at what the municipality
ments (public–private partnerships). owns (its assets) and the great advantages
They have several owners. The objective of a central location will outweigh more
of the classification will, in this case, be costly alternatives of new development in
to list them in the municipal investment urban areas. The Project Fact Sheet
peri-
program, but also to evaluate the role of shown in table 2.14 is an additional work-
the municipality in the implementation of ing document that enables decision-makers
these projects. to concretize the justification, description,
cost, and implementation arrangement of
Step 13: From Project Prioritization to each project or program selected in the PIP.
Program Implementation
PIP: Allocation and Schedule of Invest-
Objective and content. The final step of the ments. The final step is the allocation of
UA/SA addresses the “So what?” question. investments according to priorities and the
Making Sense of the City and Sorting Out Investment Needs and Priorities 81
Table 2.15 Priority Investment Program
Order of Estimated amount
Type of investment priority Maintenance Rehabilitation New projects Total
1 Infrastructure
Primary roads
Secondary streets
2 Education and health care facilities
Subtotal education
Subtotal health care
3 Community facilities
4 Government and municipal
technical facilities
Subtotal government
Subtotal municipal technical
5 Commercial facilities
6 Environmental facilities
7 Historical assets
Total
Table 2.16 Project Fact Sheet
1 Project type and eligibility
1.1 Investment category:
1.2 • Location:
1.3 • Beneficiaries:
1.4 Special conditions and eligibility
• Eligibility:
• Agreement reached:
• Assumption of responsibility for maintenance:
2 Justification
2.1 • Priority level:
2.2 • Social impact:
2.3 • Financial/economic analysis:
2.4 • Environmental impact:
3 Description of project
3.1 Number of buildings and/or m2 to be built:
• Description:
Development of access roads:
continued next page
82 Better Cities, Better World
Table 2.16 Continued
3.2 Project preparation status
• Availability of technical documents:
• Cost basis:
• Dates of meetings with beneficiaries:
3.3 Constraints related to implementation
• Land ownership status:
• Deed of land ownership or assignment:
• Slum clearance:
• Utilities to be relocated:
• Easements:
3.4 Practical terms of startup:
3.5 Execution deadlines
• Studies:
• Work:
3.6 Site drawing
Implementation plan
3.7 Other graphics:
4 Costs
4.1 Cost of work:
4.2 Recurring expenses:
schedule of implementation over a three-year quickly progress from project identification
period. Forecasts beyond three years are not to project implementation. Identifying the
realistic because they leave too much room for right contractors, getting quality work at the
slippage and delays. right price, keeping the schedule of works
Investments in facilities and infrastructure under control, and having in place a proper
should be allocated according to priorities, the monitoring system for the supervision of pub-
nature of the work (rehabilitation, new work, lic works will enhance the ability of a city to
and so on), and the amount of the investment get things done while ensuring transparency
(table 2.17). and accountability in the use of public funds.
To be able to meet those objectives, cit-
ies and local governments should assess and
Getting Ahead of the Game: Good
strengthen the quality and effectiveness of
Procurement Matters
their procurement systems. This assessment
The topic of procurement should not be goes beyond the scope of the UA/SA. The
overlooked. The ability of the local gov topic is, however, of importance and should
ernment to procure is a key factor in the not be sidelined. Accordingly, although the
efficient, speedy, and cost-effective imple- UA does not include a specific section on
mentation of its Priority Investments Plan. procurement self-assessment, what follows
As the Urban Audit/Self-Assessment moves can provide a level of guidance to cities and
from diagnosis to program implementation, it municipalities around the world seeking to
is essential that cities and local governments improve their current procurement practices.
Making Sense of the City and Sorting Out Investment Needs and Priorities 83
Table 2.17 Priority Investment Program Implementation Schedule
Type of investment Year 1 Year 2 Year 3 Total
1 Infrastructure
2 Education and health care facilities
Subtotal education
Subtotal health care
3 Community facilities
4 Government and municipal technical facilities
Subtotal government
Subtotal municipal technical
5 Commercial facilities
6 Environmental facilities
7 Historical assets
Total
Since cities and local governments world- • Sector-Level Assessment: This assessment
wide follow national procurement regula- is intended to provide a harmonized tool for
tions, they should, in principle, be able to rely assessing the functioning and performance
on existing assessments carried out at the of the public procurement system and mar-
national level. In 2004, under the auspices of ket conditions at the sector level. It provides
a partnership between the World Bank and an overall functioning and performance of
the OECD-DAC Procurement Round Table, public procurement and understanding of
which included most multilateral and bilateral the business environment. It also assesses
donors and more than 30 partner countries, the trust and capacity of the private sector to
a Methodology for Assessing Procurement access and respond to public procurement.
Systems (MAPS) was developed to measure This assessment provides for an analyti-
the systems’ strengths and weaknesses. MAPS cal foundation for the overall planning and
has been carried out in more than 60 borrow- budgeting in the sector; it also informs cities
ing and client countries. The number of coun- of public procurement risks, including insti-
tries that use MAPS is likely to be even higher tutional shortcomings in terms of expendi-
today, but no global monitoring has taken ture, competition, environmental impact,
place since 2011. and socioeconomic issues. This, in turn, will
A revised version of MAPS was launched shape the procurement strategy, planning,
in 2017; it is a universal tool that can be used and packaging that will enable procurement
by all countries, irrespective of income level methods to be optimally designed to achieve
and development status. The revised version value for money as well as effective capacity
reflects a modern understanding of public pro- building of both public institutions and the
curement. Although MAPS II is still in a pilot private sector.
phase, two of its modules are very relevant to
• Agency-Level Assessment: This assess-
cities and towns. These modules are:
ment is intended to provide a harmonized
84 Better Cities, Better World
tool for assessing the procurement arrange- • Good Governance: Recognizing that pro-
ments and performance of individual curement is a critical part of the broader
agencies (procuring entities). It offers an governance system within which it operates
opportunity to assess the capacity of the and that poor procurement processes, bad
entity to assume procurement functions and policies, and secondary procurement goals
to take full charge of its role as a contract can have a negative impact on that system.
manager. In the case of the city, it will be
important to assess items such as (1) the pro-
curement arrangements, namely whether
there is a dedicated and qualified procure- The “So What?” Question:
ment team in line with the nature and vol- Beyond Investments,
ume of procurement to be carried out; (2) A Solution Package of
the procurement practices (for example, Supporting Measures
compliance with obligations that include
After the analysis is done, after the needs
policies, filing systems, data collection, and
assessment is completed, and after the various
performance measurement); (3) strengths
pieces of the puzzle have been put together,
and weaknesses of the procurement system;
comes the time of reckoning. So What? What
and (4) management capacity. Normally,
do we do with this information? How is it going
this assessment is heavily depended on
to impact the way a city conducts its business?
the MAPS core assessment; accordingly, a
Is it just another short-lived intellectual exer-
comprehensive MAPS at the national level
cise that will be put on the shelf once com-
is recommended before the Agency-Level
pleted? Experience shows that the last step
Assessment is carried out.
of the Local Governments Self-Assessments
The key guiding principles and require- (both the Urban Audit/SA and the MFSA) is
ments for good procurement at the city level the most difficult because it involves deci-
are very much in tune with the key objectives sion making and strategic choices. However,
of the UA/SA and are worth mentioning again: it is also the most crucial phase, and the “So
What?” question should be at the front and
• Value for Money: Reflecting the basic center of it all.
goal of any procurement system to provide Like the MFSA, the UA/SA ends with a
goods, works, and services in an economical, concrete set of actions that translate into
efficient, effective, and sustainable way. (1) a Priority Investment Plan, including
capital investments, rehabilitation, and
• Transparency: Reflecting the basic and maintenance and (2) a set of measures to
commonly agreed-upon goal of disclosure of improve the capacities of local govern-
policies and information related to decisions ments to do their jobs better. The Priority
on contract awards and complaints to the Investments Program, as discussed in this
public in a comprehensible, accessible, and chapter, is a straightforward product with
timely manner. defined steps and a process that is screened
and validated along the way. The support-
• Fairness: Reflecting the ambition that the ing and accompanying measures are more
public procurement process should be free difficult to map out and more challenging to
from bias to ensure equal treatment of bidders. implement and monitor, but they are equally
Making Sense of the City and Sorting Out Investment Needs and Priorities 85
essential, because they aim to build the major political and legislative measures
capacity of local governments and their pro- that go beyond the scope of this exercise
pensity to provide services and infrastruc- but may be an opportunity to open the pol-
ture for current and future urban residents. icy dialogue.
Among these supporting measures, the fol-
• Breaking the silos within the various
lowing list, organized in clusters of actions
departments. One key challenge to effec-
and activities, is likely to come up most
tive governance is the lack of coordination
often. This list is by no means exhaustive
among various departments within a given
and will be tailored to city-specific findings
city. Two simple ways to start address-
and situations. Some may require time and
ing this issue are to conduct regular staff
political endorsements; others may have
meetings between financial and technical
costs attached to their implementation; but
departments and to entice collaboration
most need to be on the critical path of the
across the board on specific projects.
change agenda of cities and towns.
Cluster 2: Improving Urban Investments
Cluster 1: Improving the Functioning of
Planning
Municipal Departments
The Urban Audit/SA will help the municipality
As seen previously, the Urban Audit/SA is an
shed light on its current city planning practices
opportunity to map out the existing gover-
and its land regulatory environment as well
nance structure and organizational framework
as unbundle the strengths and weaknesses of
of the local government and may lead to spe-
the existing systems. Follow-up actions may
cific follow-up actions, such as:
include the following:
• Reviewing and stabilizing the organiza-
tional framework. • Taking action on the city planning assess-
ment carried out during the UA/SA
• Clarifying city and governance structure. with regard to planning documentation,
A very important item is to clearly define approval time, key planning documents,
the tasks and decision-making procedures connectivity between planning and
within the correct spatial jurisdictional financing. It is important to assess
boundaries. whether the city is equipped in terms of
planning documentation, programming
• Reviewing skills and capacity needs. We tools, and staff skills to produce the right
talked previously about the need to pro- regulatory environment conducive to
fessionalize municipal staff and strengthen effectively addressing the urbanization
their skills so that they are better equipped challenges of the city, both current and
to address the ever-increasing set of com- future.
plex issues faced by cities around the
world. Beyond the actual capacity-building • Exploring new avenues for developing a
of individuals lies the looming and unre- preventive rather than reactive regula-
solved issue of incentives and recognition tory environment. There are several inno-
(civil servants’ status and salary matrix). vative urban planning documents that
Follow-up actions on this topic require aim at guiding the programming of urban
86 Better Cities, Better World
investments and outlining the major devel- Cluster 4: Improving City Information:
opment options. These “anticipatory” doc- The Three “Cs”
uments serve as references to guide new
Follow-up actions might include:
land development projects and housing
and business activities as well as major • Collection: Gather and organize the urban
road networks. information needed to improve the man-
agement of cities, such as databases and GIS
• Reviewing improvements to be made to the
systems.
CIP process or similar processes, such as
linking projects to budgeting. • Curation: The text-based and cartographic
• Using transportation investments and pol- data generated by the Urban Audit/SA may
icy as guiding forces. be organized to create a municipal atlas or a
city brochure with the goal of presenting and
The Urban Audit/SA also sheds light on the promoting the city’s salient features.
need for local governments to get a grasp of
• Communication: Communication and
their municipal properties (land and buildings),
awareness-raising activities are an essential
as well as these properties’ value. Land mar-
thread to any capacity-building program.
kets and land assets management are big-ticket
Cities need to do more and better to make
items and cannot be fully resolved within the
their agenda known and understood by
scope of the Urban Audit/SA. Here are a few
their many constituents.
follow-up suggestions:
• Assess the state of affairs: registry or no
registry.
Note
• Use pricing and taxation instruments.
1. IPSI was originally designed by Lucien Godin
• Connect with urban transport and public
(Groupe Huit / Allnext). The initial template
transit.
of IPSI is included in the toolkit of another
World Bank publication, The Future of African
Cluster 3: Improving the Quality and
Cities: Challenges and Priorities for Urban
Level of Urban Services
Development, by Catherine Farvacque-Vitkovic
Follow-up actions might include: and Lucien Godin.
• Review existing contracting arrangements
with service providers.
References
ASCE (American Society of Civil Engineers). 2017.
• Improve maintenance efforts and respon-
“Infrastructure Report Card and Failure to Act”
siveness, including:
Series. ASCE, Reston, VA.
∘∘ Implementing an annual maintenance Dowall, David E. 1995. “The Land Market Assessment:
plan A New Tool for Urban Management.” Urban
Management Programme Discussion Paper No 4.
∘∘ Adhering to a bottom-line maintenance
World Bank, Washington, DC.
expenditure commitment (see Service
Farvacque-Vitkovic, Catherine, and Lucien Godin.
Sustainability ratio).
2003. The Future of African Cities: Challenges
∘∘ Reviewing ongoing maintenance con- and Priorities for Urban Development. Directions
tracts. in Development. Washington, DC: World Bank.
Making Sense of the City and Sorting Out Investment Needs and Priorities 87
Farvacque-Vitkovic, Catherine, and Patrick Additional Readings
McAuslan. 1992. Reforming Urban Land Policies
and Institutions in Developing Countries. Bertaud, Alain. 2018. Order Without Design:
Washington, DC: World Bank. How Markets Shape Cities. Cambridge, MA:
MIT Press.
Glaeser, Edward, and Joshi-Ghani Abha, eds. 2015.
The Urban Imperative. Oxford, UK: Oxford de Blij, Harm. 2012. Why Geography Matters More
University Press. than Ever. New York: Oxford University Press.
Mitrić, Slobodan. 2018. “World Bank’s Engagement Center for Land Use Education. 2008. “Planning
with Transport in Cities: The Early Years.” Implementation Tools: Capital Improvement
World Bank, Washington, DC. Plan.” Center for Land Use Education, University
of Wisconsin–Stevens Point. https://www.uwsp
World Bank. 1989. “Malaysia Housing Sector
.edu/cnr-ap/clue/documents/planimplementa-
Study.” World Bank, Washington, DC.
tion/capital_improvement_plan.pdf.
———. 1992. “Housing Sector Study, 1989–1992.”
Deininger, Klaus, Harris Selod, and Anthony
World Bank, Washington, DC.
Burns. 2012. The Land Governance Assessment
———. 2012. Inclusive Green Growth: The Pathway Framework: Identifying and Monitoring Good
to Sustainable Development. Washington, DC: Practice in the Land Sector. Washington, DC:
World Bank. World Bank.
———. 2013. Planning, Connecting, and Financing Farvacque-Vitkovic, Catherine, and Lucien Godin.
Cities Now: Priorities for City Leaders. 2006. “Decentralization and Municipal
Washington, DC: World Bank. Development: Municipal Contracts.” Working
———. 2013. “Consultation Guidelines.” World Paper, World Bank, Washington, DC.
Bank, Washington, DC. https://consultations Farvacque-Vitkovic, Catherine, Lucien Godin, Leroux
.worldbank .org/Data/hub/files/d ocuments Hugues, Roberto Chavez, and Florence Verdet.
/ wo r l d _ b a n k _ c o n s u l t a t i o n _ g u i d e l i n e s 2005. Street Addressing and the Management of
_oct_2013_0.pdf. Cities. Washington, DC: World Bank.
———. 2017. “Open Learning Campus (OLC): Farvacque-Vitkovic, Catherine, Lucien Godin, and
E-course Introduction to Land Markets Anne Sinet. 2014. “Municipal Self-Assessments:
Assessment in Complex Urban Settings.” World A Handbook for Local Governments.” Working
Bank, Washington, DC. Paper, World Bank, Washington, DC.
———. “Republic of Senegal Urban Development and OECD-DAC. 2011. “Strengthening Country Procure-
Decentralization Program, Project Appraisal ment Systems: Results and Opportunities.”
Document and Implementation Completion
Report, World Bank, Washington, DC. ———. 2017. “Draft Methodology for Assessing
Procurement Systems (MAPS): Supplementary
———. “Republic of Guinea Third Urban Module Agency Level Assessments.”
Development Project, Project Appraisal
Document and Implementation Completion ———. 2018. “Draft Methodology for Assessing
Report,” World Bank, Washington, DC. Procurement Systems (MAPS): Supplementary
Module Sector Level Assessment.”
World Economic Forum. 2013. “The Green
Investment Report: The Ways and Means to Senegal (Republic of ). 2008. “Municipal Develop-
Unlock Private Finance for Green Growth.” ment Agency: Canevas de l’ Audit Urbain et Cane-
World Economic Forum, Geneva. http://www3 vas de l’ Audit Financier et Organisationnel.”
.weforum.org/docs/WEF _ GreenInvestment Universal Postal Union (UPU). 2012. “Addressing the
_Report_2013.pdf. World, An Address for Everyone.” UPU, Bern.
88 Better Cities, Better World
CHAPTER 3
Getting the Finances in Order
The Municipal Finances Self-Assessment
Objectives and Rationale
future; (2) identify the key bottlenecks in their
Cities are tasked with increasingly com- financial systems; and (3) outline a road map
plex and expensive functions as well as an for solutions and actions.
ever-growing agenda. In this fast-urbanizing The Municipal Finances Self-Assessment
world, the infrastructure gap, the delivery of (MFSA) aims to help municipal officers analyze
basic services, and maintenance needs are the financial situation of their municipalities in
key challenges for city managers and policy a systematic manner and in ways that are acces-
makers. Meanwhile, in most low- and middle- sible and compelling to their main or potential
income countries, local taxation accounts for partners (investors, banks, developers, private
a mere 3 to 5 percent of all tax revenues. As service providers, or rating agencies), includ-
stated in previous chapters, this situation has ing indicators or ratios those partners are able
induced a sense of urgency and an impetus for to understand and use to assess the financial
change. Business as usual cannot any longer be situation.
the name of the game. In this context of skewed Traditionally, local and national legislation
and centralized resources and increasing pres- and financial reporting regulations often stip-
sure on investments, it is essential that local ulate a long list of reporting tables or templates
governments (1) gain a better understanding the municipalities must fill out yearly, quarterly,
of their financial position—past, present, and or monthly. These regulations also rule that the
Getting the Finances in Order 89
municipalities should submit these financial key initiatives to improve the mobilization
reports to higher government tiers, such as of local resources, rationalize public expen-
finance, local government, or line ministries as ditures, and improve financial management
well as to the office of auditor general for com- practices.
pliance audits (Muwonge and Ebel 2014; Shah
• Access to external funding: To agree on a
2007; Venkateswaran 2014). The central gov-
common set of concepts, methodologies, and
ernment entities typically review the reports to
internationally accepted indicators, and to
verify accuracy and compliance with rules and
improve communications and negotiations
may aggregate them into national-level munic-
with banking institutions, private partners,
ipal databases. However, the regulations rarely
and donors (bilateral and international).
require municipalities to analyze their data
This is a very important point because local
and assess the financial health or project future
governments will not be able to rely solely
trends in order to uncover issues or induce cor-
on their own revenues and will, therefore,
rective measures ahead of problems.
need to seek innovative partnerships with
The MFSA, therefore, represents a dras-
the private sector as well as show their cred-
tic departure from traditional practices. It
itworthiness for accessing external funding.
provides a quantum leap in data analysis and
promotes a new culture of self-assessment Connecting the dots with urban invest-
with a purpose. In short, the MFSA helps ments: Adopting sound investments programs
municipalities move from plain bookkeeping to is key. The MFSA provides an opportunity to
analysis, diagnosis, and action. While doing so, assess the absorptive capacity of a local gov-
it promotes the following mutually reinforcing ernment. Matched with the key findings of an
objectives: Urban Audit/Self-Assessment (UA/SA), the
MFSA becomes even more relevant because
• Accountability: To promote financial
it will provide the municipality with a sense
self-assessment at the municipal level as
of “Deal or No-Deal” and a picture of where it
part of the management change process in
needs to go and what partnerships it needs to
local public administrations.
seek in order to bridge its infrastructure and
• Visibility in the use of public funds: To service delivery financing gaps.
encourage local governments to share infor- Technical notes: The MFSA analysis dis-
mation with other municipalities and to cussed in this chapter requires specific and
inform central government, local govern- detailed methodology for completing some
ment associations, and citizens about their steps. Some readers/users may need help in
current situation. completing specific calculations or using soft-
ware applications such as Excel to calculate
• Prioritization: To encourage financial and
results or establish trends. To help those users,
other relevant municipal departments—
the MFSA analysis section includes techni-
asset management, urban and strategic
cal notes (technical details, or TD) marked
planning, and the mayor’s cabinet—to work
with numbered signs—for example, TD1, TD2,
together on municipal investment programs
and so on—and presented in numeric order
securely anchored in financial feasibility
in appendix B, “Detailed Methodology and
and realism.
Procedures to Help Calculate Specific Results
• Efficiency and transparency: To monitor in MFSA.” Users who are familiar with the
the financial situation and act on a set of methodology may omit these notes and focus
90 Better Cities, Better World
rather on the analysis of the results as pre- Figure 3.1 Main Steps of MFSA Analysis
sented in this chapter.
Participation and collaboration in munic-
Step 6
ipal self-assessments: The MFSA is inher- Action plan
ently a self-assessment instrument geared
toward local financial officers and municipal Step 5
decision-making bodies, and it provides crit- Financial
ical links and opportunities for using relevant management
assessment
results to inform and involve citizens and other
stakeholders (see also Bahl, Linn, and Wetzel Step 4
2013). The connection with other city depart- Financial
ments in charge of city planning, service deliv- projections
ery, infrastructure, and maintenance is another
important opportunity facilitated by the MFSA Step 3
Ratio
process. As seen before, this connection is analysis
often missing although extremely important
for good city management.
Step 2
MFSA online application: In order to facil- Historical
itate and scale up the use of the MFSA, the analysis
authors have developed an online application.
The concepts, methodology, and steps are the Step 1 Setting up core databases
same as the ones presented in this book.
The MFSA analysis also requires follow-
MFSA Methodology ing a generic financial framework, which is a
specific structure of the municipal budgets
The MFSA builds on regular financial reports, or financial reports that segregates current
but also adds on and suggests institutionaliz- (recurrent) and capital revenues and current
ing additional reports/tables beyond regular and capital expenditures (figure 3.2 depicts
budgets to strengthen the situation analysis. the generic financial framework). This seg-
The MFSA focuses on and supplements man- regation enables defining important balances
nalysis
datory financial reports with detailed a such as current balance, capital balance, and
of the financial health of the municipality. financing balance that are often overlooked or
The municipal financial diagnosis is performed left unnoticed in regular municipal reports,
in six steps (see also figure 3.1): which more often than not include only a
• Step 1: Setting Up Core Databases balance total. One of the most important les-
sons figure 3.2 suggests is that a healthy city
• Step 2: Historical Analysis is able to generate operating surplus beyond
• Step 3: Ratio Analysis the amount of operating expenditures and
create a self-financing source for the capital
• Step 4: Financial Projections budget. A negative operating balance would
indicate that a city is not sustainable because
• Step 5: Financial Management Assessment
it uses up its capital to cover expenditures
• Step 6: MFSA Action Plan required for regular operations.
Getting the Finances in Order 91
Figure 3.2 Generic Financial Framework Transforming the local data into the MFSA
and into the generic financial framework
REVENUES EXPENDITURES
requires some level of flexibility because the
Current revenues Current expenditures level of details, and the size of the original
Current budget
Own current revenues: Payroll
financial tables may depend on the size of the
taxes, fees Operation and
Transfers from maintenance municipality, on the national financial report-
government Interest payments ing regulations, and on the local situation,
Other revenues (rents) Deficit carried forward for example, if urban services are provided
Operation surplus directly by the municipality or instead via
municipal enterprises or by private partners.
The MFSA includes two sets of tables, called
Self-financing
core databases:
Capital expenditures
Capital budget
Capital revenues Civil works 1. Standard financial data, which are generated
Sale of property, land Purchase of property, directly from the regular financial reports and
Grants land regular municipal budgets
Loans Repayment of loan
Cash reserves principal 2. Supplementary tables, which are outside
the regular budgets or financial reports,
Source: Farvacque-Vitkovic and Kopanyi 2014.
although some municipalities may record
them in different departments and different
Figure 3.3 MFSA Framework formats (figure 3.3 summarizes the frame-
work of the MFSA and shows its interac-
City tion with the UA/SA).
Figure 3.3 includes standard financial
Ratio Analysis
Financial Management
Core Financial Database
Standard financial data
tables and supplementary tables, but also
Financial Projections
Historical Analysis
Original budget or
financial reports
indicates that it is useful to distinguish
Assessment
Action Plan
“core databases” and “derivative data-
bases.” The standard financial database
and the supplementary databases con-
stitute the MFSA core databases to be
filled with external data obtained from
outside the MFSA. In contrast, several
tables and data are generated from the
Supplementary tables
core databases during MFSA analysis
and summarized in “derivative” tables,
Debt database
Tax potential/
Expenditures
maintenance
performance
investments
and arrears
by function
Assets and
Plan actual
Liabilities
such as the financial snapshot, financial
Capital
projections, and financial ratios.
The set of supplementary tables
includes items that are not recorded
within the regular budgets or financial
Urban Audit/Self-Assessment
reports (for example, list of loans, liabili-
ties, and assets); these are also known as
Note: MFSA = Municipal Finances Self-Assessment.
92 Better Cities, Better World
“under the line” or “memorandum” items. Most Figure 3.4 MFSA Framework
of these supplementary tables can be developed
with moderate workload, and many may exist • Transform
• Assess
quality of
• Calculate
in various municipal departments and various municipal
data into
financial financial
management
levels of sophistication. It is important to bring MFSA
rations
using PEFA
format • Compare
these tables into the spotlight of the MFSA • Involve
ratios
indicators
• Identify
analysis: because most national regulations other
with
benchmarks strength and
departments
exclude or do not make these tables manda- weaknesses
tory, many local governments ignore or fail to 5 Financial
record these additional data in a timely or con- 1 Core
databases
3 Ratio
analysis
manage-
ment
sistent fashion. Developing these tables under 2 Historic 4 Financial
assessment
the MFSA requires close cooperation across analysis projections
various municipal departments or entities, and Financial
database
this cross-fertilization is an added benefit of the Exp. by • Use growth
MFSA process. sectors
• Detailed
trends
The supplementary tables are particularly Captial
investment
assessment
• Identify
financing
of trends
important for the MFSA because they provide Debt and
implications
of policy
database
key clarifying information and data to the bud- Tax
balances
decisions
• Assess
gets (for example, stock and accrual items); performance level of
ahead
• Fix financing
they support financial projections, budget anal- Liabilities,
arrears
services
needs for
ysis, and planning; and they provide critical Cash
investments
links to the UA/SA (see the MFSA framework balance
Asset
in figure 3.3). These additional data also help maintenance
cities communicate with stakeholders about Step 6 MFSA action plan
the city’s services, financial issues, and under-
pinning plans. MFSA users need to approach Note: PEFA = Public Expenditure and Financial Accountability.
these tables with flexibly to fit into the local
situation. For instance, cities that are prohib- also indicates that the Action Plan should define
ited from borrowing or taking debt in any other transformative actions from the results of the
form clearly will not have the debt database, but four critical preceding steps: Historic Analysis,
the liabilities and arrears table that summarizes Ratio Analysis, Financial Projections, and
the unpaid or overdue bills remains very criti- Financial Management Assessment ( discussed
cal for them to develop and analyze. Cities may in detail later in “Step 6: MFSA Action Plan”).
develop many more supporting tables, but this
second set of tables contains the most import-
ant sources of supplementary data. Step 1: Setting Up Core
The MFSA can be performed step by step Databases
as depicted in figure 3.4. Detailed explanations
of these steps are summarized in the sections Objective: Before starting the MFSA analysis,
below. Figure 3.4 also indicates the rationale it is important to set up and populate core data-
behind each step and outlines the actions bases that include the core Financial Database
required to complete them. The figure depicts and the supplementary databases. The first
the process of MFSA analysis step by step, but and most important is the core Financial
Getting the Finances in Order 93
Database, but as previously indicated, there Core Financial Database
are many supplementary databases important
Objective: The MFSA requires transforming
for proper analysis of the city’s financial posi-
the city’s original budget or financial data into
tion and services.
a relatively short, standardized MFSA core
The MFSA core databases (core tables) are
Financial Database that reflects the logic of the
as follows:
generic financial framework explained earlier
Core Financial Database (figure 3.2). The reason for using the standard-
ized format is that accounting systems and clas-
• This is the most fundamental database in
sifications are very different across countries
the MFSA.
(Berger and Heiling 2013; Venkateswaran 2014).
Supplementary databases Local financial reports can be different in two
ways: (1) cities may follow different account-
• Actual/plan financial database
ing or budgeting systems (cash-based, partial,
• Expenditures by sectors database or full accrual accounting, line item or fund-
based budgeting, and so on); and (2) the level
• Debt database
of detail can be very different among cities. For
• Capital investments database the purpose of the MFSA analysis, which aims
• Tax performance database to be used comparably across continents and
in developed or developing countries alike, the
• Liabilities and arrears database core Financial Database is short and consistent
• Cash balance database with cash-based accounting, while the supple-
mentary tables provide additional information
• Asset maintenance database such as accruals, arrears, liabilities, or assets.
Tasks: The MFSA requires transforming the
Many of these datasets are quite simpli-
“raw” municipal reports into a standardized
fied and not at all new to municipal finance
MFSA financial database to help easy and auto-
practitioners; many may already exist in dif-
mated generation of subsequent tables, analy-
ferent forms, although some may not be rele-
sis of the results, and comparison of the results
vant in a given city. The recommended forms
across cities within countries (Kopanyi 2018).
of these templates reflect international
The first and most important step for users of the
practices, and we suggest using them in the
MFSA is therefore to review and get familiar with
MFSA in order to ensure consistency and
the standard MFSA Financial Database and build
comparability of MFSA results. Experience
a bridge between this database and their local/
shows that finance officers engaged in MFSA
municipal financial report tables. Experience
understand and appreciate the use of these
suggests that, in most cases, automated links can
supplementary tables that help provide a
be developed between the original local tables
standardized and deeper analysis and com-
and the MFSA database by simple programming
munication of the city’s situation and finan-
steps. These simple steps would not only make
cial health. Officers in many cities have
the transformation of data to the MFSA plat-
introduced or institutionalized these sup-
form easier but also substantially reduce the risk
plementary tables that have been overlooked
of numeric errors that may occur when data are
before and may use them on a regular basis
transformed manually. Thus, programmed trans-
beyond the MFSA analysis.
formation of local data is recommended.
94 Better Cities, Better World
The core MFSA Financial Database should conditional or earmarked operation trans-
include actual figures because huge differences fers. Sometimes there are no clear boundar-
often occur between the budget plans adopted ies between these three categories, but MFSA
before the beginning of a fiscal year and the users can apply the following rules:
closing budgets reported in the final accounts
• Shared taxes are municipal revenues from
at the end or soon after the closing of the fis-
specific taxes collected by the national
cal year. Municipalities often adopt a revised
government and shared in proportion of
budget during the fiscal year; these revised bud-
the volume collected in the municipality’s
gets are even ruled as mandatory if the actual
jurisdiction (for example 10 percent of per-
figures diverge substantially from the planned.
sonal income tax, 6 percent of value added
The revised budgets, therefore, are often in bet-
tax, and so on). Some finance officers may
ter harmony with the closing accounts, but the
consider the shared taxes as OSR, but we
actual figures remain the most important for
recommend not doing so unless the munic-
the MFSA analysis. We recommend establish-
ipality receives the amount collected in
ing also a supplementary financial table that
its jurisdiction (for example, 90 percent of
compares the initial plan with the actual data
some local taxes collected truly on behalf
annually, in order to draw lessons on budget
of the municipality with a 10 percent fee
realism, identify issues and areas that repeat-
retained by the collecting national agency).
edly cause variances between initial plans and
Property tax in Rwanda is OSR because
actuals, and support informed corrective mea-
the Rwanda Revenue Authority collects it,
sures to improve budget realism.
retains a 5 percent collection fee, and returns
95 percent of the proceeds to the cities on a
MFSA Core Financial Database—Revenues
monthly basis (Kopanyi 2015a).
The revenue template of the core Financial
Database structures total revenues into three • Unconditional transfers/grants are municipal
main categories: current revenues, capital reve- revenues provided by the national g overnment
nues, and financing transactions (table 3.1). For according to formulas, ad hoc, or against
illustrative purposes, we filled out all templates other allocation criteria without attaching
discussed below with numbers generated from usage conditions to them. Governments may
a city’s financial reports to help explain specific commit a portion of v arious taxes for shar-
issues and challenges based on real numbers ing with the local government sector on the
and results. We will call this city “our city” or basis of a national allocation formula. These
“sample city” in the sections below. are grants and not shared taxes, although they
Current revenues include revenues received might be called transfers from shared tax rev-
from higher government tiers, own-source rev- enues because the transferred amounts do
enue (OSR), and other revenues. We recom- not correspond to the volume collected in the
mend adding unspecified other revenues to the municipalities’ jurisdictions.
OSR because there might be revenues that do
not fit the proposed categories, but these other • Conditional transfers/grants are municipal
revenues should be small in size. revenues received from national govern-
Revenues from higher government tiers (also ments or entities and that have attached
called grants) are broken down into three specific conditions to them; therefore, they
categories for the sake of simplicity: shared can be spent exclusively for specific pur-
taxes, unconditional operation transfers, and poses, areas, or projects. These grants are
Getting the Finances in Order 95
Table 3.1 MFSA Core Financial Database—Revenues (ShS million)
Year 1 Year 2 Year 3 Year 4 Year 5
Actual Actual Actual Actual Actual
Total revenues 62,955 58,735 68,131 73,511 80,250
I Current revenues 41,999 41,214 48,636 52,743 65,821
Revenues from central/higher government 30,300 25,162 26,120 29,933 35,984
1 Shared taxes 24,053 22,255 22,747 26,915 35,631
2 Unconditional operation transfers 6,192 2,613 3,076 2,865 0
3 Conditional/earmarked operation transfers 55 294 297 153 353
Own current revenues 11,700 16,053 22,516 22,810 29,837
1 Local taxes and levies 4,235 4,818 6,212 7,548 8,037
Property tax 2,688 3,119 3,979 4,466 4,759
Business tax 1,443 1,590 2,111 2,952 3,146
Other local taxes 104 108 122 130 132
2 Fees and charges 2,496 4,389 5,571 5,397 12,347
Fees on urban services (city fee, utility 2,402 4,310 4,640 5,289 11,747
charges)
Licenses, permits, fines, other 93 79 931 108 600
3 Revenues from assets 4,969 6,847 9,778 8,723 8,989
Interests received 317 674 268 463 540
Revenues from leasing/renting assets 4,652 6,173 9,510 8,260 8,449
Other revenues 0 0 0 0 0
4 Revenue from municipal enterprises 0 0 955 1,142 464
Dividends, profit shares 0 0 955 1,142 464
Cash transfers received from enterprises 0 0 0 0 0
5 Other revenues 0 0 0 0 0
II Capital revenues without loans and 12,756 9,697 9,303 8,220 7,407
reserves
Capital grants from central/higher 0 0 0 145 324
government
Own capital revenues 12,724 9,607 8,938 7,904 7,078
Proceeds from sale of assets 887 645 546 443 1,354
Land development fee 11,668 8,893 8,333 7,413 5,604
Participation of firms and individuals 169 69 59 48 120
Donations/grants from persons or 32 90 365 171 5
nongovernment organizations
Financing proceeds from reserves
III 8,200 7,823 10,192 12,548 7,022
and debts
Cash reserves from previous years 4,978 2,867 0 0 0
Sale of financial assets 0 0 0 0 0
Proceeds from domestic loans and bonds 0 883 4,619 2,546 862
Proceeds from foreign borrowing 3,222 4,074 5,573 10,002 6,160
Planned total revenues (from initial plan) 60,000 65,000 70,000 75,000 80,000
Actual/Plan variations (%) 104.9 90.4 97 .3 98.0 100.3
Note: MFSA = Municipal Finances Self-Assessment; ShS (shillings) is a notional name of the currency of the sample city.
96 Better Cities, Better World
often called earmarked grants; they may there might be some classification issue that
finance specified functions, such as grants deserves clarification and correction.
to pay teachers’ salaries, provide welfare • Local taxes vary country by country and city
support (cash benefits), or they may sub- by city, and so the property or the business
sidize water supply in poor areas (slums). tax marked in the revenue template may not
Conditions can be more general, such as represent the two most substantial local reve-
with grants for cultural, sporting, or his- nues in some municipalities. Should a munic-
toric events or generally for capital invest- ipality collect substantial revenues from a
ment expenditures. source not specified in the template, it can be
Own current revenues include four clear cat- added either as a new subline or to replace a
egories: taxes, fees, revenues from assets, and subline that is not relevant in that municipal-
revenues from municipal enterprises (box 3.1). ity. For instance, a city may collect substan-
Some revenues may not fit well into these four tial rental income tax and tourism tax but
groups and thus can be put into the “other insignificant or no property tax. In this case,
revenues” category. Examples include small the tax revenue sublines should be renamed
donations (such as for training or for cultural to reflect the three most significant own tax
or sporting events), security deposits from revenues and all other smaller taxes should
contractors, and the like; but these “other rev- be put in the line of “other local taxes.”
enues” should represent a negligible portion • Local fees and charges should include the
of the own revenues. The vast majority of own fees and charges on services provided by
current revenues should fit into the first four municipal departments and accounted for
categories. Should a financial report include through the municipal budget. In contrast,
a substantial share (over 10 percent of total fees collected by independent entities,
revenues) as unspecified “other revenues,” whether owned by the municipality or by
Box 3.1
Beware of Classifications!
Some taxes are legislated as fees, such fee as capital revenue because (1) it is
as the “business license fee, ” “traffic con- a one-time, nonrecurrent revenue, and
gestion fee,” or “commuter fee” often col- (2) the reason for charging it is to finance
lected in fact as taxes; such taxes provide infrastructure. The Municipal Finances Self-
for substantial revenue in Kampala, Uganda Assessment (MFSA) aims for and promotes
(Kopanyi 2015b). Fees that are excessive honest self-assessment, so users need to
compared to the cost of service or admin- make personal judgments to ensure clas-
istration should be accounted for as taxes sifying the local revenue categories for the
regardless of their name. Finally, not all fees best use of the MFSA. Reclassifications
are current revenues; for example, develop- for MFSA purposes, if any, do not require
ers often need to contribute to the trunk changing the standard reports of the munic-
infrastructure and pay a “development fee. ” ipality, but they are very important for opti-
We recommend classifying a development mizing the results of the MFSA.
Getting the Finances in Order 97
others, are not part of municipal revenues Consolidated statements: The MFSA
and should be excluded from the budget core Financial Database does not capture
report. Should any of these independent the budgets or financial statements of the
entities channel some revenue back to the independent municipal entities (for exam-
municipal budget, those revenues should be ple, the water company); however, it puts
accounted for in the fourth section “revenue emphasis on money movements between
from municipal entities.” the municipality and its entities. The MFSA
also promotes and includes supplementary
• Revenues from assets (also called asset pro-
tables for each independent entity to create
ceeds) include recurrent revenues gener-
a better and more realistic picture of the ser-
ated as interest proceeds from financial assets
vices, their development, and other financial
(daily deposit of excess cash, treasury bills,
implications. Some municipalities prepare
loans to employees), renting or leasing fixed
two financial statements at the end of the
assets (residential units, shops, office spaces),
year: one is the final account of the munici-
or other petty cash received in relation to
pality, and the other is a consolidated report
assets. In contrast, revenues from selling or
that includes the results of the municipality
long-term lease of land, office buildings, or
and the municipal entities on consolidated
big structures, as well as proceeds from sell-
bases by netting out cross-transactions to
ing financial assets should be accounted for
avoid double accounting. This option is
as capital (nonrecurrent) revenues.
beyond the scope of the current MFSA.
• Revenues from municipal enterprises or enti-
ties may include dividends, ad hoc transfers, Capital revenues are presented in two
license fees, or interest paid for loans the groups: direct capital revenues and financ-
municipality has provided to them. In short, ing proceeds. These two groups of resources
it is important to clearly include all types together form the revenue side of the capital
of money transaction from the municipal budget (see table 3.2, copied from the MFSA
entities. database, table 3.1), which includes capital
Table 3.2 Capital Revenues (ShS million)
II Capital revenues without loans and reserves 12,756
Capital grants from central/higher government 0
Own capital revenues 12,724
Proceeds from sale of assets 887
Land development fee 11,668
Participation of firms and individuals 169
Donations/grants from persons or nongovernment organizations 32
III Financing proceeds from reserves and debts 8,200
Cash reserves from previous years 4,978
Sale of financial assets 0
Proceeds from domestic loans and bonds 0
Proceeds from foreign borrowing 3,222
Note: ShS (shillings) is a notional name of the currency of the sample city.
98 Better Cities, Better World
grants from government, own capital revenues, or for debt repayment) because municipali-
and financing proceeds that are composed of ties have limited numbers or volume of sell-
cash reserves from previous years and pro- able assets. In addition, the proceeds should
ceeds from domestic or foreign debt. be returned to the assets to ensure that the
Capital grants from central/higher govern- wealth of the municipality remains the same
ment are revenues provided for the municipal- or even improves eventually. There may be
ity with conditions to use them exclusively for crisis situations when the proceeds from an
capital/infrastructure development. Examples asset sale are used to cover urgent operating
include capital block grants provided as gen- costs (pay salaries), but these cases should be
eral budget support for development and ear- truly exceptional and temporary measures.
marked or project grants provided for specific In short, the proceeds from asset sale by
development projects such as building roads, default should be accounted for in the cap-
or a specific school or a water network. ital budget.
National government entities such as min-
• Land development fees are fees collected
istries or development agencies may support
from developers (under various names)
municipalities by direct financing and direct
to involve them in financing trunk infra-
management of construction of infrastructure
structure. In some countries, it is com-
facilities that are handed over after completion
mon to charge developers according to the
of construction projects. These types of projects
value of the development or as a negotiated
are also known as in-kind support to local gov-
levy without specific connection to the
ernments and are not accounted for in the local
improvement of the nearby infrastructure.
budgets because their costs are neither trans-
For instance, Nairobi charges developers
ferred nor reported to the municipality; there-
a 1.25 percent fee levied on the cost esti-
fore, this type of support should not be included
mates of the private project, a condition of
among capital revenues. The municipality does,
approval of the development application
however, need to account these items in the asset
(Kopanyi and Muwonge, forthcoming). The
inventory and should finance proper operation
supporting argument is that the municipal-
and maintenance of these assets in years ahead.
ity develops the infrastructure continuously,
Thus, in-kind projects have substantial impli-
so the developer needs to contribute regard-
cations for operating budgets in the medium to
less of whether the specific project requires
long term but are excluded from standard finan-
expansion of the trunk infrastructure in the
cial reports.
neighborhood. Some question this practice,
Own capital revenues include proceeds from
because the fee is often unregulated and
asset sales, land development fees, and partic-
some proceeds may be used for covering
ipation of firms or individuals. It is important
operations (Southeast Europe). We do rec-
to account for all of these revenues in the cap-
ommend accounting development fees in
ital budget not only because they all should
the capital budget as own capital revenue.
serve development of municipal assets and ser-
vices but also because they are nonrecurrent • Participation of firms and individuals:
revenues. Municipalities often collect contributions or
charges (such as hook-up charges or better-
• Sale of assets should be a strategic action of ment levies) from the property owners who
the municipality (for example, sale of a piece benefit from a specific infrastructure proj-
of land to finance building a school or road, ect to finance specifically a portion of the
Getting the Finances in Order 99
project cost. In this case, impacted property issues a bond and obtains cash of ShS8 billion
owners (not only the new developers) are that will be used for road development over
identified and charged, and the fee is often four years. It is wise to invest the excess cash
regulated as a portion of the well-calculated immediately into treasury bills and govern-
cost of the municipal infrastructure project. ment bonds with one- to three-year terms
For instance, in Turkey up to 50 percent of and then sell parts of this financial investment
the municipal infrastructure project cost portfolio annually according to estimated
can be collected from the beneficiary prop- need for said road construction. The annual
erty owners provided that the charge is not interest on financial assets can be accounted
greater than 2 percent of each property’s for as current revenues form assets, and the
taxable value (Kopanyi 2015c). Participation proceeds from selling financial assets should
charges should be accounted for as develop- be accounted for in the financing section of
ment budget revenues. the financial report.
Financing proceeds are part of the capital • Domestic debt includes proceeds from loans
budget, but it is important to segregate them or bonds. It is important to clarify that only
to better reflect the financing situation of the the amount disbursed altogether from var-
municipality. These proceeds include surplus ious loans during a fiscal year should be
or cash reserves accumulated over the years, accounted for here, not the total amount of
proceeds from the sale of financial assets, pro- loan contracted in the year. Should a munic-
ceeds from domestic debt, and proceeds from ipality sell a bond in a particular fiscal year,
foreign debt, if any. however, then the proceeds of the bond sale
should be accounted for in full in this line
• Cash reserves: Municipalities often generate as a one-time income for that year. Often,
cash reserves on purpose (like debt service a good portion of these bond sale proceeds
reserve fund) or just accumulate reserves may move to financial investments or cash
from annual cash balances to use on “rainy reserves for the next fiscal year because the
days,” that is, in years when expenditures municipality manages to use up only a part
appear to be greater than current year reve- of the bond proceeds in the same fiscal year.
nues for one reason or another. Accumulated Loans that are originated by foreign devel-
reserves are easy to measure by reconcilia- opment partners (such as the World Bank
tion of bank accounts at the end of the fiscal or other international or bilateral banks)
year; however, because they are apparently that lend money to the national government
not recurrent revenues, it is better not to for on-lending to municipalities should be
count them as current revenues of the fol- accounted here as domestic debt.
lowing fiscal year. Thus, we recommend
accounting them in the financing section of • Foreign debt should be accounted only if the
the capital budget, despite the fact that the municipality managed to mobilize funds
municipality may use a portion of reserves to directly from foreign markets—for example,
cover operating expenses on rainy days. if Turkish cities sold Euro-bonds in Europe
or borrowed in euros or dollars from foreign
• Sale of financial assets is a strategic option of banks. Compared to domestic debts, foreign
the municipality that may purposely invest debt liabilities behave differently because
into financial assets and divest them later as it they are exposed to foreign currency vari-
deems necessary. For instance, a municipality ations; therefore, it is important to reflect
100 Better Cities, Better World
them in separate lines in a fair financial difference. Usually, expenditures are consid-
report like the MFSA financial database. ered capital expenditure when they contribute
to expand the public assets of the municipality.
MFSA Core Financial Financing includes expenditures associ-
Database—Expenditures ated with financial transactions, namely debt
The second main section of the MFSA core principal repayment or purchasing of financial
Financial Database focuses on total expenditures assets. These are both inherent parts of the
under three subsections (table 3.3): current capital budget, because the loan proceeds are
expenditures, capital expenditures, and financ- in-advance financing of assets from external
ing items corresponding to the revenue sections sources that are internalized by the repayment
discussed above. The MFSA database follows of the principal. Municipalities may also pur-
the economic classification of expenditures, chase financial assets (bonds, treasury bills,
whereas a recommended supplementary table or shares) to set aside funds for future use
reflects functional classification of the expendi- with gains above regular bank deposits. These
tures. Both classifications are extremely import- investments should be accounted for in the
ant for analyzing and communicating the health capital budget because they are not related to
and performance of a municipality. The eco- operations and are a form of assets.
nomic classification helps create key ratios and Classification of current expenditures is
balances. The functional classification reflects self-explanatory, but the explanation below
how the municipality finances public functions. provides some quick guidance:
This classification helps plan functions and
communicate achievements with citizens or • Labor costs include not only salaries for reg-
other stakeholders (for example, how much was ular staff and wages for other paid workers
spent on schools, roads, water, or culture). but also the taxes and levies the municipal-
Current expenditures (recurrent expen- ity may be obliged to pay on labor costs. The
ditures) constitute the current budget. These classification is plain, easy, and available in
expenditures include costs of regular services most cases. One issue deserves attention
and operation of the municipality and are also though, namely that development projects
called operating expenditures. In fact, two cost also include labor costs besides the cost of
items do not come from operation: interest material, machinery, or energy. Those labor
and borrowing costs; they make the difference costs, however, should be counted under
between operating and current expenditures. the development or infrastructure item, so
Some analysis requires calculating operating this labor is part of the projects thus classi-
expenditures separately, which can be easily fied as capital expenditures and should be
completed from this basic expenditure table by accounted for as part of the capital budget
excluding line number 3 in table 3.3. expenses. The reason behind this classifica-
Capital expenditures and financing tion is that these labor costs are part of the
together represent capital budget expenditures. investments: they are one-time, nonrecurrent
Capital expenditures include expenses spent costs. Investments completed by and paid
for developing infrastructure or other capi- out to contractors are naturally accounted
tal costs, such as capital transfers to munici- for as capital expenditures regardless of the
pal entities. Current and capital expenditures fact that cost plans include labor costs. Some
should be clearly distinguished, even if the investments are completed by a unit of the
country’s accounting forms do not make such municipality like the department of public
Getting the Finances in Order 101
Table 3.3 MFSA Core Financial Database—Expenditures (ShS million)
Year 1 Year 2 Year 3 Year 4 Year 5
Actual Actual Actual Actual Actual
Total expenditures 60,088 62,546 70,872 75,848 84,702
I Current expenditures 33,818 38,286 41,883 46,060 59,105
1Labor (wages,salaries,taxes and 6,592 7,635 8,141 9,075 10,034
charges)
– Administrative staff
– Technical,service,and other staff
2 Goods and services 13,008 14,151 14,199 16,209 18,984
– Office supply 0 0 0 0 0
– Electricity 0 0 0 0 0
– Fuel and gas 0 0 0 0 0
– Repair and maintenance 2,956 3,234 2,813 3,472 3,940
– Other goods and services 10,052 10,917 11,386 12,737 15,044
3 Interest and borrowing costs 321 502 695 1,450 2,212
4 Current subsidies to service entities 7,606 6,023 9,134 8,612 11,242
5 Current grants and transfers 3,128 5,466 4,582 5,549 11,577
6 Social care/welfare support 1,946 3,274 3,827 3,774 3,492
7 Other current expenditures 1,217 1,236 1,305 1,392 1,563
II Capital expenditures 25,845 23,770 28,222 29,100 22,614
1Purchase/development of assets/ 18,901 21,005 24,040 26,903 20,584
infrastructure
2 Capital subsidies to PU/PUC 3,437 1,491 3,207 1,295 987
3Capital transfers to other level of 3,507 1,275 974 902 1,043
government
4 Investments or lending 0 0 0 0 0
III Financing 425 490 768 687 2,982
1 Debt principal repayment 425 490 768 687 2,982
2 Purchase of financial assets
IV Balance total with loan proceeds 2,867 −3,812 −2,741 −2,337 −4,452
Planned total expenditures (initial plan) 60,000 65,000 70,000 75,000 80,000
Actual/Plan variations (%) 100.1 96.2 101.2 101.1 105.9
Note: MFSA = Municipal Finances Self-Assessment; PU/PUC = public utility/public utility company; ShS (shillings) is a notional name
of the currency of the sample city.
works that may complete new roads, new investment in the capital budget. Finally, sep-
buildings, or other structures. These proj- arating the labor costs for administrative staff
ects should be and often are approached and direct staff of services provides for useful
as projects with dedicated budget, and insight about the cost of labor. A high share of
hence the total costs of material and labor administrative staff costs may signal careless
together should be accounted for as capital hiring of those staff.
102 Better Cities, Better World
• Cost of goods and services is often the sin- • Interest and borrowing costs are straight-
gle largest item among the expenditures, forward categories. Users need to make
because municipal services require procure- sure to account for all interest and
ment of a large volume of goods or services. additional charges paid for loans or
It is both useful and important to account other liabilities. Borrowing costs are not
the four main expenditure subcategories interest; instead they may occur during
clearly as follows: office supply, electricity, preparation of a new loan or other debt
fuel and gas, and repair and maintenance instrument paid to the agent who struc-
(R&M), and then account all the rest under tures the debt. These costs can be sub-
“other goods and services.” MFSA users may stantial, so it is important to account for
add more sublines to capture large expendi- them in this line item.
ture items such as telecommunications or
• Current subsidies to service entities include
travel if those appear to be substantial. This
any kinds of financial support the municipal-
classification also focuses on goods and ser-
ity may provide for entities to help operation
vices associated with municipal functions. It
by subsidizing the tariffs or service charges
is better to exclude goods and services used
in support of specific beneficiary groups or
under investment projects—for example,
more general customers. Subsidies could
material, machinery, or transport or con-
be defined as a share of tariff, as a general
struction services that are part of the invest-
annual support in lieu of tariffs, or as a trans-
ment projects’ budgets.
fer to fill the budget gap, often understood
Under goods and services, R&M is part
as a result of low tariffs. All kinds of operat-
of the operating expenditures that deserve
ing support linked to tariffs, fees, or charges
attention. There are two main challenges:
should be accounted here, regardless of the
(1) R&M activities also require procurement
fact that some of these may not be called or
of goods or services, but it is vital to account
accounted for under the line of subsidies.
these activities as independent projects and
Table 3.3 illustrates that the sample city
account the required goods and services
spends a very substantial amount as current
under the R&M rather than among general
subsidies to municipal entities or other sub-
goods or services; and (2) R&M activities
ordinated entities.
inherently overlap with investments in two
ways. First, R&M may be accounted for as • Current grants and transfers include various
investments because of unclear accounting forms of support provided without connec-
guidelines or procedures. Second, although tions to the tariffs, fees, or charges (invest-
the municipality receives development ments’ support should be in the capital
grants, R&M is assumed to be financed from budget!). The support may be formalized
the operating budget. There is even a third as a performance grant, could be ad hoc to
reason, namely that R&M is often post- support a specific action or general annual
poned/deferred for several years and even- allotment, or could be a grant to cover enti-
tually can be corrected only with a major ties’ deficit at the end of the fiscal year (bad
investment. For instance, a road may deteri- practice, but should be clearly accounted
orate so much that simple repair of potholes in the MFSA). Some transfers are provided
would be more expensive than rebuilding as payment to a third party, often to pay an
the road. electricity company, on behalf of service
Getting the Finances in Order 103
entities that have no budget to pay. MFSA Table 3.4 Capital Budget Expenditures
users should reclassify these kinds of sup- (ShS million)
port and account these as grants or transfers II Capital expenditures 25,845
to entities, instead of hiding them among 1Purchase/development of assets/ 18,901
“goods and services.” infrastructure
2 Capital subsidies to PU/PUC 3,437
• Social care/welfare support includes vari- 3Capital transfers to other level of 3,507
ous items the municipality may provide to government
specific disadvantaged groups as subsidies 4 Investments or lending 0
and social assistance programs (cash to the III Financing 425
poorest of the poor, cash or food allowance 1 Debt principal repayment 425
for school attendance, support to people 2 Purchase of financial assets 0
with disabilities or to vulnerable minori- (shillings)
Note: PU/PUC = public utility/public utility company; ShS
ties, and so on). These supports can be vol- is a notional name of the currency of the sample city.
untary actions by a municipality or funded
by the central government via earmarked
all kinds of transactions that constitute capi-
grants.
tal development or physical asset acquisition,
• Other current expenditures: There are many including but not limited to purchasing land,
small other current expenditures, and we buildings, and equipment; developing land
recommend reporting them together under (offsite and onsite land development); and
the Other category not only to simplify developing buildings. As noted earlier, there
the financial database but also to ensure is a fine line between development of infra-
accounting accuracy (that is, not to leave structure and R&M of assets. MFSA users can
out any expenses). However, should cur- generally follow the regular accounting clas-
rent expenditures appear to be a substan- sifications unless outstanding items occur.
tial amount (for example, over 10 percent A useful technical classification option to fol-
of total expenditures), the classification low is that R&M on existing assets should be
of entries deserves revision and entries the default classification option and should
reclassified or a new line opened to ensure be accounted for as current expenditure.
clarity of uses of money and to reduce the In contrast, major rehabilitation of roads,
share of “other” expenditures to a small buildings, or equipment that aims to substan-
residual amount. tially restore or even increase the value (new
Capital budget expenditures include direct engine to a truck, major rehabilitation of an
capital expenditures and financing items that office building typically with upgrading) and
together should be financed from the capital expand the useful life of the assets should be
budget (table 3.4 is an excerpt from the expen- accounted for as investment. Because major
diture budget to help close correspondence rehabilitations are often made under specific
between the budget and the issues discussed projects with a dedicated project budget,
below). they are easy to identify.
• Purchase or development of physical assets or • Capital subsidies to public utilities (PUs)
infrastructure is the most important line and or public utility companies (PUCs) are spe-
often the single most significant part of the cial forms of municipal investments justi-
capital budget. This category should include fied by legal arrangements, namely if some
104 Better Cities, Better World
municipal services are rendered by legally on one hand, this is a capital subsidy, but, on
independent entities outside the munic- the other hand, it is not a cash transaction
ipal budget. Municipalities often provide by the municipality. Thus, for consistency
these PUs/PUCs with capital subsidies to purposes, we recommend reflecting trans-
expand networks or otherwise develop the fers of already-owned physical assets only in
municipal services and reduce the burden the asset supplementary tables of MFSA, if
of customers (that is, to reduce the fees those transfers are not paired with financial
or charges the PUC would need if invest- transactions (land, building, equipment).
ment were financed from its revenues) and
support affordability. These subsidies are • Capital transfers to other levels of govern-
ment are transactions in which funds for
indirect investments made on behalf of the
capital investments are transferred to either
municipality, so they should be accounted
lower or higher government tiers from a
for in the capital budget. Accounting for
municipality. Transfers can move up to
these subsidies in capital budgets also
county or province governments to contrib-
improves comparability of MFSA financial
ute to specific joint investment projects, or
reports across municipalities or countries,
down to districts, towns, villages, or wards
because services (such as solid waste or
that operate somewhat independently
water) rendered directly under municipal
under a municipality. The downward trans-
departments are more comparable to those
fers are often parts of incentive-based sup-
(waste or water) services that are rendered
ports in which part of a project is financed
by legally independent entities. Table 3.4
by the municipality, whereas the other part
shows that the sample city uses a substan-
is financed, and the project is executed, by
tial part of the capital budget for providing
the lower governing tier. Should these kinds
PUCs with capital subsidies (also known as
of transfers be irrelevant in a municipality,
capital expenditure, or CAPEX, subsidies).
the subject line should be left empty or filled
In-kind support to PUCs could be consid-
with zeros.
ered as subsidies in cases when the munic-
ipality pays for infrastructure (for example, • Investment or lending may include actions
by extending the water network) and then when a municipality forms a joint venture
hands over the assets after project comple- with another municipality or a private
tion. Such investments are accounted for partner and invests into a joint company
under the line of purchase/development the agreed share of capital. Investment
of assets/infrastructure. This support is may be combined with lending to the same
equivalent to capital subsidies from the per- entity under conditions to turn the loan to
spective of the municipality, but it will be capital if repayment fails according to the
accounted for only in the balance sheet of the agreed time and conditions (subordinated
PUC/water entity without having effects on loan). Municipalities may lend money to
its cash flow. In contrast, a municipality may municipal companies instead of provid-
provide subsidy in the form of land that has ing them with subsidy or investments.
no effect on the municipality’s cash-based These loans should be accounted for in
budget; rather it should be accounted for in this line. Municipalities may lend money
the asset register and on the balance sheet to staff such as for housing loans. In short,
(if the latter is prepared). This is a delicate all of these forms of expenditures should
issue from the MFSA perspective because, be accounted for in the capital budget.
Getting the Finances in Order 105
This also implies that decisions in compar- assets than financial assets back into cash.
ing options between investments and lend- Nevertheless, financial investments are
ing, between lending and joint venture, or investments and should always be com-
between company A and company B should pared with physical asset investment alter-
be made using the analysis of the net pres- natives and should be accounted for in the
ent value of these investments. capital budget.
Financing that includes repayment of debt Balance total with loan proceeds: This line
principal and a financial investment is also is important to monitor and to ensure consis-
an important part of the capital budget and tency between the MFSA financial table and the
can turn out to be very substantial in specific original/official financial reports of the munici-
years. pality. Discrepancies between the two balances
suggest entry or numeric errors; users might
• Debt repayment is typically considered a have failed to upload all due original data to the
small amount; however, it can jump when MFSA or might have misclassified some entries.
various loans coincide, and repayment We strongly advise users to d ouble-check the
could become very substantial (30 percent entries and correct errors until these two bal-
or more of the capital budget in some year ances (the city’s original financial report and
in the sample city, as we discuss later in the the MFSA Financial Database in tables 3.1 and
chapter). Likewise, a bond may provide a 3.3) appear equivalent.
convenient amount of money the first year,
requiring a moderate amount of expen- Supplementary Databases
diture by paying only the annual interest
(coupon) for several years; but it may trig- The supplementary tables are particularly
ger a large balloon payment the last year important for the MFSA because they provide
when the municipality must repay the total key clarifying information and data to the cash-
volume of the principal amount by repur- based budgets (for example, stock, and accrual
chasing the bond. Monitoring debt service items); they support financial projections, bud-
expenditures, and particularly forecasting get analysis, and planning; and they provide for
with realism the potential burden in the critical links to the UA/SA (figure 3.3). These
years ahead, is a vital part of managing the additional data also help cities communicate
capital budget. with stakeholders about the city’s services,
financial issues, and underpinning plans.
• Financial investments are justified by the fact Finally, the set of supplementary tables also
that a municipality often needs reserves or serves as a sort of bridge across the various
may unintentionally generate extra income accounting, budgeting, and financial report-
when an asset sale transaction results in ing systems (for example, cash or accrual
income much greater than expected or accounting). The supplementary tables sup-
greater than the volume of money needed port clear comparability of municipal finan-
in a particular year. Prudence demands that cial situations across various municipalities
finance managers and mayors should not and systems. MFSA users need to approach
invest these resources immediately into these tables flexibly to fit into the local situ-
physical assets, which will cause them to ation. For instance, cities that are prohibited
lose flexibility in future spending because from borrowing or taking debt in any other
it is far more difficult to transfer physical form will not have the debt database, but the
106 Better Cities, Better World
liabilities and arrears table that summarizes repeatedly year by year, it is advisable to fill out
the unpaid or overdue bills remains criti- the Plan columns at the beginning of the fiscal
cal for them. Cities may develop many more year and add the Actuals only at the end of the
supportive tables, but the tables presented fiscal year (see table 3.5). Some municipalities
include the most important sources of sup- prepare similar tables but add also a column
plementary data. for “revised plans” or similar names. In this
case the table’s headings would include Plan,
Actual/Plan Analysis Revised Plan, and Actual. This is a very useful
Objective: The objective is to analyze the qual- practice that provides for more insights about
ity and reliability of the budget and the quality the budget planning and execution process.
of budget planning and execution by comparing It is advisable, however, to use the initial plans
the actual revenue and expenditure data by each from the beginning of the year for A/P analysis
budget line and identify areas that need attention if the municipality wants to use only two col-
and deserve corrective measures. These correc- umns: Plan and Actual.
tive measures will be outlined in the Action Plan, A/P analysis: It is important to monitor the
which constitutes the final step of the MFSA. actual/plan performance (A/P % in table 3.6)
This is why it is important to get it right. not only for the total budget but also for each
Actual/Plan table: It is useful to generate a line and year by year, in order to identify the
new table from the core Financial Database to specific areas that cause deviations between
monitor budget performance by comparing the plans and actuals. Improving budget reality
budget actuals reported in the closing accounts by getting the total plans and actuals closer
of the fiscal year and the initial budget plans together can only be done by corrective mea-
adopted at the beginning of a fiscal year. It is sures on the areas that cause the main differ-
further advisable to monitor the actual/plan ences between the total plans and total actuals.
(A/P) ratio year by year and measure tenden- Table 3.6 shows that the sample city has low
cies and areas of concerns. Using the MFSA predictability in planning conditional and
Table 3.5 Supplementary Database Actual/Plan Analysis (ShS million)
Year 1
Plan Actual A/P%
Total revenues 60,000 62,955 104.9
I Current revenues 42,400 41,999 99.1
Revenues from central/higher government 30,200 30,300 100.3
1 Shared taxes 23,000 24,053 104.6
2 Unconditional operation transfers 7,000 6,192 88.5
3 Conditional/earmarked operation transfers 200 55 27.4
Own current revenues 12,200 11,700 95.9
1 Local taxes and levies 4,600 4,235 92.1
Property tax 3,000 2,688 89.6
Business tax 1,500 1,443 96.2
Other local taxes 100 104 103.8
Note: A/P = actual/plan; ShS (shillings) is a notional name of the currency of the sample city.
Getting the Finances in Order 107
Table 3.6 Actual/Plan Analysis Measured by Average Absolute Deviation
Average
absolute
Year 1 Year 2 Year 3 Year 4 Year 5 deviation
A/P% A/P% A/P% A/P% A/P% from 100%
Total revenues 104.9 90.4 97.3 98.0 100.3 3.9
I Current revenues 99.1 85.6 99.7 98.1 102.0 3.9
Revenues from central/higher 100.3 83.3 91.6 101.5 104.3 6.2
government
1 Shared taxes 104.6 92.7 94.8 107.7 118.8 8.7
2 Unconditional operation 88.5 43.5 76.9 71.6 0 43.9
transfers
3 Conditonal/earmarked 27.4 147.0 59.4 30.6 70.6 51.8
operation transfers
Own current revenues 95.9 89.5 110.9 94.1 99.3 6.4
1 Local taxes and levies 92.1 86.0 88.7 100.6 95.7 7.6
Property tax 89.6 89.1 99.5 99.2 91.5 6.2
Business tax 96.2 79.5 84.4 118.1 104.9 12.6
Other local taxes 103.8 107.9 24.3 26.0 66.1 39.1
2 Fees and charges 104.0 107.0 132.6 98.1 123.6 13.8
Fees on urban services 104.5 107.7 116.0 105.8 123.8 11.6
(city fee, utility charges)
Licenses, permits, fines, other 93.3 79.1 465.4 21.6 120.0 98.3
3 Revenues from assets 101.4 85.2 132.1 85.6 84.8 15.6
Interests received 105.7 96.3 89.5 92.6 108.0 7.1
Revenues from leasing/ 103.4 85.3 135.9 86.1 84.5 16.7
renting assets
Other revenues 0 0 0 0 0 0
4 Revenue from municipal 0 0 86.8 113.1 45.9 56.1
enterprises
Dividends, profit shares 0 0 95.5 114.2 46.4 54.5
Cash transfers received from 0 0 0 0 0 0
enterprises
5 Other revenues 0 0 0 0 0 0
II Capital revenues without 114.0 86.9 83.1 73.1 87.7 16.7
loans and reserves
Capital grants from central/ 0 0 0 289.8 161.9 110.3
higher government
Own capital revenues 113.9 86.5 80.5 71.2 86.3 17.9
Proceeds from sale of assets 177.4 64.5 54.6 44.3 1353.7 293.5
Land development fee 110.4 88.9 83.3 74.1 70.1 18.8
Participation of firms and indi- 169.1 69.4 59.2 48.2 120.5 42.5
viduals
continued next page
108 Better Cities, Better World
Table 3.6 Continued
Average
absolute
Year 1 Year 2 Year 3 Year 4 Year 5 deviation
A/P% A/P% A/P% A/P% A/P% from 100%
Donations/grants from 319.8 180.1 730.3 171.0 9.6 218.3
persons or nongovernment
III
Financing proceeds from 127.9 137.3 101.9 125.5 100.3 18.6
reserves and debt
Surplus or cash reserves 100.0 106.7 0 0 0 61.3
from previous year
Sale of financial assets 0 0 0 0 0 0
Proceeds from domestic 0 176.5 92.4 127.3 86.3 45.0
loans and bonds
Proceeds from foreign 226.6 163.0 111.5 125.0 102.7 45.7
borrowing
Note: Values highlighted in yellow show extremely high deviation. A/P = actual/plan.
unconditional transfers, but also in planning Publishing of the planned figures side by
property tax collection (and because of that side with the actual and calculating the A/P
planning local taxes and levies), because the ratios are mandatory in many countries.
actual figures are beyond the ± 5 percent range Municipalities do it, although they often apply
of plans. some cosmetics, that is, they publish a revised
Absolute deviation: The deviation of budget with figures close to the actual and then
total revenues from 100 percent is very low calculate A/P ratios from the revised budget.
percent), which suggests good planning
(3.9 This practice compromises the main objective
and revenue management practices in total vol- of the A/P analysis because the real issue is
umes (TD5 in appendix B). However, table 3.6 how good the initial revenue and expenditures
shows that some revenue sources (highlighted) plans are when compared to the final closing
show extremely high deviation calculated as accounts. Differences between plans and actu-
five-year averages (for example, proceeds from als may occur for various reasons, including
sale of assets, capital grants from higher gov- inflation and natural disasters; but more often
ernment, and licenses and permits). Because bad planning, budgeting, or accounting prac-
these are five-year average deviations, the city tices are the real underlying causes.
should consider them as persistent and seri- Bad or questionable practices: Some munic-
ous planning problems that deserve attention ipalities opt to hide bad practices, such as if
and may trigger corrective measures. The table the revenue and expenditure sides of the bud-
also suggests that the city uses asset sales to fill get are prepared independently and remain
revenue gaps, which results in high volatility disconnected till the very last phase of the
of asset sales. This could be a rational behav- budgeting process. Officers then put artificial
ior, but this high deviation also suggests mul- revenue figures, like unspecified “other” reve-
tiple weaknesses in revenue and expenditure nues, land sale, or unrealistic tax or fee reve-
planning. nues (for example, inflated by plans to collect
Getting the Finances in Order 109
huge old arrears), to formally balance the bud- this table is limited to the services that are
get. They do this because the expenditure side beyond the mandatory local government func-
is more sensitive: cutting expenditures down tions and therefore can be rendered by private
to the level of conservative revenue budget entities. Some COFOG classifications name
would require cutting the budget of various all fee-based services (water, solid waste) also
entities or departments. This practice might as “commercial.” We believe the structure in
lead to another bad practice, namely to allow table 3.7 better serves municipal planning and
spending according to the initial budget plans MFSA analysis.
despite the fact that the “inflated” revenue Structuring data as in table 3.7 is a pow-
figures become apparently unrealistic during erful way to communicate results and plans
the year and the growing gap between reve- with citizens or other major stakeholders of
nues and expenditures can only be financed a municipality, because the categories are
by unpaid expenses (arrears) often rolled over self-explanatory and people easily understand
year on year. them. Current and capital expenditures should
Good practices: Several elements of good be accounted together in this classification to
practices include the following: (1) make the show the total funds the municipality has spent
A/P analysis honestly and provide the best on the functional areas. Many municipalities
information to the council, mayor, and respec- use financial reports with this functional clas-
tive departments; (2) avoid cosmetics and sification. It is a bigger challenge but doable if
include the initial plans or initial, revised, and users need to collect the respective expenditure
actual results side by side; (3) identify areas of items from various ledgers or municipal units
persistent deviation between plans and actu- to consolidate expenditures by these functions
als; and (4) propose corrective measures to and services. The results are quite useful for
improve planning reality. planning, comparison, control, and communi-
cation purposes. Finally, it is worth mentioning
Expenditures by Functions that COFOG classification makes it difficult
Objective: The objective is to measure and mon- to establish various balances or conduct ratio
itor over time the composition of the functional analysis and assess the financial health of the
classes of expenditures and use results for plan- municipality. In contrast, the economic classi-
ning, budgeting, and communicating the cover- fication used in the core Financial Database is
age and costs of municipal services and functions. more suitable for financial analysis and assess-
Expenditures by functions: This supple- ment of financial health issues.
mentary table is very important, because it Analysis of the functional classification of
helps monitor the municipality’s performance expenditures is useful for measuring the ser-
on various services and public functions. vice performance over time and across munic-
Table 3.7 is based on the Classification of ipalities within the same country with some
Functions of Governments (COFOG) initiated level of caution. Intergovernmental fiscal sys-
by the United Nations and widely used by the tems show great differences and variations
Organisation for Economic Co-operation and depending on the level of decentralization
Development, International Monetary Fund, and allocation of functions across government
and World Bank (IMF 2014; OECD 2011). The tiers. For instance, social services, especially
MFSA has introduced one remarkable differ- education and health, are central government
ence in the grouping of expenditures, namely, functions in many countries. Meanwhile,
that the category of Commercial services in within the same country, some urban services
110 Better Cities, Better World
Table 3.7 Expenditures by Functions
Year 1 Year 2 Year 3 Year 4 Year 5
Actual Actual Actual Actual Actual
General administration
Urban services
Roads and drainage
Public transport
Water and wastewater
Solid waste
Street lighting
Fire protection
Police, crime prevention
Environmental protection
Social services
Health
Education
Culture and religion
Housing
Recreation and sport
Social welfare
Commercial services
Parking
Markets
Commercial places
Land development
Local economic development
Total expenditures
Source: Based on OECD 2011.
can be rendered by independent entities or expenditures functions and mediate prioriti-
even by private providers outside the munic- zation of expenditures.
ipal budget in one city and by the municipal- Consolidated reports on services can also be
ity and inside the budget in another city. Such generated in another similar table in which
differences are often greater and more appar- the expenditures are consolidated from all
ent across countries. Analyzing the share of kinds of service providers in the munici-
expenditures spent on various functions, and pal jurisdiction. The consolidated expendi-
particularly comparing years and measuring tures report would be very useful to build a
trends with annual growth indexes, is one more realistic picture on the level, coverage,
important way to measure the municipali- and costs of public services in the munici-
ties’ performances and inform strategy deci- pality’s jurisdiction. Consolidation means
sions. Again, the UA/SA will help clarify the including all kinds of service providers but
Getting the Finances in Order 111
netting out cross- transactions, like subsi- debt forms, sources, and main conditions
dies and transfers the municipality has pro- such as loans from higher government tiers
vided to or received from any of these entities (national/central, provincial, or county);
to avoid double accounting. Consolidation loans from commercial banks; municipal
should cover direct municipal expenditures, bonds; and indications of short-term debt
expenditures by independent (off-budget) facilities if they are contracted (Freire 2014).
municipal entities (such as water, waste These tables should be filled out from the
management, or transport companies), ser- loan agreements and other important docu-
vice entities from higher government tiers ments and should capture all key terms and
(national or regional water company owned conditions until the final repayment of a par-
by the higher tiers of governments), and even ticular debt item.
private providers. The aging list of debt table summarizes each
debt instrument (loan, bond) over the years
Debt Database from the first disbursement year to the final
Objective: The objective is to draw a complete repayment. Table 3.9 provides an example of
and consistent picture of the municipal debts, an aging list of loans with detailed data on out-
and to monitor, plan ahead, and consolidate standing principal at the end of the year, loan
the annual payments on principal and inter- amortization (principal repayment install-
est and the outstanding debt liabilities. A good ments by year and interest payments by year),
debt database supports medium- to long-term actual figures between year 1 and year 5, and
planning, budget planning, and execution by forecasted figures five years ahead to year 10.
providing reliable data for policy decisions. It is advisable to expand the debt amortization
Debt database: This database may include table until the end of the last year of each loan
two related tables: the summary list of debts (table 3.9 is shortened to year 10 for simplic-
(table 3.8) and the aging list of debt (table 3.9). ity). Finally, users should reconcile the actual
These tables can be filled out from the various year figures of this table (the total debt, total
debt documents (such as loan agreements and principal amortization, and interest paid) with
any supplementary document like subsequent respective accounting or financial reports of
modification of loan terms and conditions). the municipality, and they should also ensure
Municipalities do have all these data, but they harmony with the Finance section of the core
may not maintain and update a database simi- Financial Database. The table also needs spe-
lar to the suggested tables for several reasons, cific or annual updates, because the effective
including lack of computerized financial man- repayment of debts may occur differently from
agement system and/or lack of a dedicated the original loan agreement because of either
debt management team. Therefore, these faster or delayed payment of some dues. The
supplementary tables are useful instruments table may include a line to reflect the actual
because they improve debt management by disbursement of loans yearly, for control and
clearly and consistently recording the true data consistency purposes.
on debts, regardless of whether users aim to fill Filling out the aging list of debt table: The best
them out for the purpose of an MFSA analysis rules to follow include (1) entering actual figures
or to improve and institutionalize a good debt by using data from real transactions and account-
database. ing ledgers (not from loan agreements), because
The summary list of debts (table 3.8) is actual principal or interest payments may dif-
useful for drawing a picture of the various fer from the loan agreement; (2) forecasting
112 Better Cities, Better World
Getting the Finances in Order
Table 3.8 Summary List of Debts and Terms (ShS million)
Year of the Interest
Bank or loan Initial Grace rate (fixed,
List of debts institute subscription amount Duration Currency Maturity period variable) Rate %
1 Loan/onlending from IBRD 2001 7,500 18 year local 2019 5 year Fixed 4.25
central government
ADB 2013 11,000 20 year local 2033 3 year Fixed 3.00
2 Direct loans
–– Commercial bank Credit Bank 2011 4,500 8 year local 2019 2 year Floating 13.8
–– State development
bank, municipal fund
3 Municipal bond
Short-term debt
1 Treasury facility from
state
2 Loan/overdraft from
commercial bank
Note: ADB = Asian Development Bank; IBRD = International Bank for Reconstruction and Development (World Bank); ShS (shillings) is a notional name of the currency of
the sample city.
113
114
Table 3.9 Aging List of Debt (ShS million)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Items Conditions Actual Actual Actual Actual Actual Projected
1 IBRD Water develop- Fixed 4.75%
ment 2001–2018
–– Outstanding 3,045 3,580 3,667 3,091 2,822 2,216 1,696 1,084 1,096 1,108
–– Principal repayment 425 490 537 531 591 591 622 636 643 650
–– Interest charge 151 190 157 150 159 102 72 49 37 28
2 ADB Road develop- Fixed 3.00%
ment 2013–2033
–– Outstanding 1,670 3,503 10,615 10,467 10,206 9,678
–– Principal repayment 0 0 0 367 371 350
–– Interest charge 0 45 203 318 272 268
Credit Bank (domestic)
3 Markets/Malls Floating rate
2011–2019 13.8%
–– Outstanding 3,757 4,523 3,733 2,828 1,924 1,019 115 13
–– Principal repayment 0 0 790 905 905 905 102 13
–– Interest charge 0 517 507 449 328 214 100 14
Several loan lines are ommitted from display for simplicity
Total
–– Outstanding debt 8,599 13,820 24,705 37,320 45,295 47,428 55,215 51,229 49,181 47,614
–– Principal repayment 425 490 768 687 2,982 4,084 4,423 5,039 5,309 7,198
–– Interest charge 321 502 695 1,450 2,212 2,144 2,213 2,187 1,849 1,661
Better Cities, Better World
Debt service 746 992 1,464 2,138 5,194 6,228 6,636 7,226 7,158 8,859
Borrowing disbursement 3,197 5,645 11,375 13,383 8,662 5,115 11,871 438 2,991 3,741
Note: ADB = Asian Development Bank; IBRD = International Bank for Reconstruction and Development (World Bank); ShS (shillings) is a notional name of the currency of
the sample city.
payments five years ahead based on loan agree- the municipality’s development plans into a
ment data, or covering the entire debt amorti- medium-term perspective, that is, to move
zation period, using data from loan agreements away from shortsighted annual planning
(maybe 10–15 or 20 years); (3) noticing that loans (a common practice in cities in the develop-
borrowed from foreign currency origins (such as ing world) to a systematic analysis of options
Asian Development Bank and World Bank) may and finances and setting plans for the medium
show moving interest payments despite fixed term. The objective of using CIP in MFSA is to
rates because of exchange rate fluctuation of local support medium-term planning, investment
currency; (4) being aware that loans with floating financing, and communication with stakehold-
interests (domestic bank loan in table 3.9) show ers, and to inform budgeting on capital invest-
changing rates in actual figures; (5) noting, as ments for the coming fiscal years, embedded in
signaled by table 3.9, that the volume of interest a medium-term vision or plan.
payments in the beginning years depends mutu- Capital investment plan (also known as capital
ally on the gradual disbursement of the loan and improvement plan): CIPs have become best-prac-
the repayment of the principals, and on the grace tice instruments in well-run cities. In many
period if any; and (6) including bonds in the debt cities, however, CIPs remain an unachievable
table and typically including the annual interest requirement imposed by central governments to
payments (coupon) until the last year when the local governments that do not have the capacity
total principal amount becomes due and should or tradition of interdepartmental coordination
be planned and accounted for ( sample city did to prepare a meaningful and realistic CIP. The
not issue a bond). CIP is based on strong (and often absent) coop-
Forecasting of debt service five years ahead eration and connection between the technical
should be based on loan agreements that may departments in charge of infrastructure invest-
include annuity or debt amortization infor- ments and service delivery and the planning,
mation and list of installments. This means budget, and finance departments. It is also sub-
that debt forecasting should not use trend or ject to political pressure to include the mayor’s
other simple calculations of annual growth of agenda (see Urban Audit/Self-Assessment). It is
debt stock or debt payments (as opposed to therefore recommended that cities carry out the
other forecasts in MFSA). Forecasting inter- UA/SA, which will provide an excellent building
est payments ahead with fixed rates can be block and platform to develop a CIP.
calculated using the forecasted debt stock and As described in chapter 1, the CIP includes
repayments, if they are not included in the a procedure that starts with creating an ini-
loan agreement. Forecasting interest charges tial list of possible projects received from
on floating rate loans can be done using fore- department proposals; evaluation of the pre-
casted benchmark rates from the central bank liminary salient project features (technical,
or referred international capital market infor- social, and financial); engaging in detailed
mation. Forecasting floating interest rates discussions with stakeholders; and adoption
and payments should be revised annually of a scoring and selection procedure to create
to improve accuracy and capture changing a short list of priority projects from the initial
trends on floating rates. list (Kaganova 2011). The CIP may include a
substantial amount of supporting documen-
Capital Investment Plan tation such as maps and pictures, simple
Objective: The overarching objective of devel- technical summaries, and initial financial
oping a capital investment plan (CIP) is to put estimates. A CIP is typically prepared for a
Getting the Finances in Order 115
three- to five-year time horizon on a roll- users may prepare a simpler list of projects
ing basis; this means that, every year, there structured into three categories: ongoing,
should be a final review and approval of the well prepared, and preliminary; but creating
selected projects for the upcoming year. a CIP table is preferable. Again, the UA/SA
These projects go to the budget after the due can greatly help this process (see table 2.15 in
approval process during budgeting and move chapter 2).
out from the CIP; another year is then added
to the scope of the revised CIP to cover five Tax Performance Database
years ahead again (table 3.10). Objective: The objective of this database is to
The added value of going through the monitor and forecast tax revenues and mea-
process of a UA/SA process can be summa- sure tax performance by major tax revenue
rized as follows: (1) instead of having a list of sources, and then eventually support informed
“atomized projects,” the UA/SA will lead to a decisions for corrective measures (some
citywide municipal investment program tak- will be outlined and addressed in the MFSA
ing into account the many specificities of the Action Plan).
city’s urbanization patterns; (2) the Priority The tax performance database (table 3.11) is
Investment Program (PIP) derived from the one possible supplementary table outside the
UA/SA will also include a maintenance and budget or regular mandatory financial reports.
a rehabilitation component that pays atten- Its content reflects general practices, but MFSA
tion to the financing needs of the existing users might include different taxes to reflect
stock as much as of the new investments the context of their own city. The adequate list
needs; (3) the map-based process of the UA/ should include local taxes preferably in order
SA ensures that the right investments go to of significance (volume of generated revenues),
the right location; and (4) the consultation, which depends on the intergovernmental fiscal
validation, vetting, screening, and prioritiza- relations’ revenue assignments, the national tax
tion of the PIP is such that it will ensure both legislation, and most important the quality of
that investment decisions have been widely local revenue collection systems, procedures,
and rigorously vetted and that implemen- and actions. This table is a very simplified sum-
tation problems have been anticipated. Key mary of tax performances, and MFSA users may
questions behind investment prioritization, use their own systems if they have better and
as stated in chapter 2, remain the following: more detailed tax registers and reports that pro-
Are we doing things right? Are we doing the vide a solid basis for measuring tax performance
right things? and forecasting future tax revenues.
Table 3.10 shows a possible financial sum- More detailed taxation information would
mary of a CIP report that provides for an be useful but would require substantial analy-
easy direct link to the budgeting and finan- sis and data collection, which can be done as
cial planning processes also important in self-standing actions periodically (every five
the MFSA. A CIP is good if the stakeholders years, for instance). Specific investigations may
strongly own and support it, but the quality include measuring tax potential by calculating
of the financing plans and projections deter- the potential tax revenues if all tax payers were
mines its value and usefulness. A plan with captured in the tax base; measuring the scope of
vague financing ideas is not a plan; it is a wish tax exemptions and the magnitude of revenue
list. Lacking CIP data and practices, MFSA losses they cause; analyzing the effectiveness of
116 Better Cities, Better World
Getting the Finances in Order
Table 3.10 Capital Investment Plan Summary, Year 6–Year 10 (ShS million)
Budgeted CIP Expenditure Plan Total by
No. Project name/description Status Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 projects
1 Road Ongoing 13,584 6,000 3,000 3,000 3,000 3,000 18,000
2 Water extension and connection Ongoing 4,000 5,000 4,000 4,000 3,000 16,000
3 Compactor trucks/vehicle Plan approved 5,000 5,000
and budgeted
4 Shopping arcade Plan approved 3,000 4,000 3,000 7,000
and budgeted
5 Housing development Draft plans 2,000 2,000 2,000 2,000 8,000
6 Water network development CAPEX subsidy 987 1,000 1,000 1,000 1,000 4,000
to water PUC
7 Support districts and wards Transfers for 1,043 1,000 1,000 1,000 1,000 4,000
roads
8 Fleet expansion Implemented 3,000 3,000 2,000 5,000
by the
transport PUC
9 Total expenditures 25,614 18,000 17,000 11,000 11,000 10,000 67,000
10 Source of financing
11 Budget own-source 15,268 11,500 7,000 7,500 7,500 7,500 41,000
12 Budget - Grants 324 1,500 1,000 1,500 1,500 500 6,000
13 Loan 7,022 2,000 7,000 1,000 1,000 1,000 12,000
14 PUCs fund 3,000 3,000 2,000 5,000
15 Private − 0 1,000 1,000 1,000 3,000
16 Total sources by years 25,614 18,000 17,000 11,000 11,000 10,000 67,000
17 Total budgeted expenditures Financed from 22,614 15,000 15,000 10,000 10,000 9,000 59,000
budget
Note: CAPEX = capital expenditure; CIP = Capital Investment Plan; PUC = public utility company; ShS (shillings) is a notional name of the currency of the sample city.
117
Table 3.11 Tax Performance Database (ShS million)
Year 1 Year 2 Year 3 Year 4 Year 5
I Property tax - households (Rate 6%)
1 Tax base (amount billed) 1,526 1,650 1,800 2,000 2,200
2 Tax collected 1,075 1,248 1,592 1,786 1,903
3 Tax performance % (2/1) 70.5 75.6 88.4 89.3 86.5
4 Stock of arrears 3,000 3,200 3,300 3,250 3,120
5 Arrears collected 280 300 250 300 250
6 Tax performance % (5/4) 9.3 9.4 7.6 9.2 8.0
II Property tax - business entities (Rate 8%)
7 Tax base (amount billed) 1,650 1,900 2,400 2,700 3,000
8 Tax collected 1,613 1,872 2,388 2,680 2,855
9 Tax performance % (7/6) 97.7 98.5 99.5 99.2 95.2
10 Stock of arrears 153 170 168 140 130
11 Arrears collected 25 30 40 30 30
12 Tax performance % (10/9) 16.3 17.6 23.8 21.4 23.1
III Business tax (Rate 3%)
13 Tax base (amount billed) 1,500 1,600 2,150 3,000 3,200
14 Tax collected 1,443 1,590 2,111 2,952 3,146
15 Tax performance % (17/16) 96.2 99.4 98.2 98.4 98.3
16 Stock of arrears 40 43 33 42 30
17 Arrears collected 10 20 30 20 15
18 Total tax billed 4,676 5,150 6,350 7,700 8,400
19 Total tax collected 4,131 4,710 6,090 7,418 7,905
20 Stock of arrears total 3,193 3,413 3,501 3,432 3,280
21 Total arrears collected 315 350 320 350 295
Note: ShS (shillings) is a notional name of the currency of the sample city.
the billing and collection system; and exploring and populate this table accurately. The
the magnitude of arrears and the effectiveness table may only include three to four taxes,
of systems and procedures to collect revenues provided that they cover a very substantial
from past tax arrears. These analyses may lead share, say about 75 percent of total local tax
to the adoption of a Revenue Enhancement revenues.
Program (Kopanyi 2015b). MFSA users will • Separate property tax tables for households
include some of these actions in the MFSA and for businesses are advisable, because
Action Plan. taxes are often charged with different rates
Tax performance issues for users’ attention: for households and businesses. The col-
Table 3.11 is self-explanatory. Here are a few lection rate is often higher for businesses
highlights: because tax collection is easier to enforce.
• The scope of this table depends on the • Measure tax performance (collected/
available information, and it is advisable billed or levied) on the tax collection yields
to make substantial efforts to collect data on an annual basis in order to signal any
118 Better Cities, Better World
worsening of performance, because tax include the business license fee in the tax
collection can deteriorate unless it is kept performance table either under the title of
tight and disciplined, and unless sufficient business tax or replacing the business tax
resources are allocated to maintain or title, if there is no other form of business tax
improve performance. collected locally.
• Separate collection of taxes due in a year • Rental income tax can be significant
from collection of tax arrears that have been depending on the tax rate and the size of the
accumulated over years and some recov- local house rental market.
ered during a year. It is important not to mix • Hotel tax, also known as tourism tax, is
arrears collection with regular tax revenues becoming increasingly popular for cities
to avoid showing sharp increase of tax rev- with strong tourism markets. This tax is
enues without any improvement in collec- easy to collect from hotels or other orga-
tion of regular taxes in a specific year. nized renters, and it is often collected by
• There are several other taxes related to adding a small charge (one or two U.S. dol-
properties, some charged as proportion of lars or equivalent per day) to the guest’s bill
the property tax: stamp tax, inheritance and paid into the municipal budget daily or
tax, or transfer tax. The tax on transfer of weekly. The supporting argument is that
properties can be significant, particularly tourists burden the cities with waste, water,
if property tax collection is low, because traffic, and noise, and therefore need to con-
transfer tax is easier to collect, because, in tribute to improve the urban environment
most countries, the transfer is not registered and better urban services.
or approved until the transfer tax is paid. • A communal tax or communal fee may be
Thus, transfer tax can be reported as a single collected as a self-standing tax of one gov-
separate line item if it is substantial (it may, ernment layer or as a substitute for the
however, be a national tax). Should it be less property tax that is not collected for one
important, then it can be reported together reason or another. It has a simplified tax
with the stamp duties and taxes on gifts and base that often resembles property taxation
inheritances. (and uses a basis like proxies of property
• Many municipalities collect business tax values). Should your city levy some tax that
in various forms and under various names. has a different name but can be considered
Business tax can be levied on the basis of a variation of a communal tax or fee, then it
net turnover, business revenues, or labor is important to include it in the tax perfor-
charges, or in the form of block levies uni- mance database.
versal by size clusters of businesses (for • It is useful to attach comments to the taxes
example, ShS50,000 for small businesses, in order to help MFSA readers understand
ShS200,000 for medium-sized businesses, underlying issues and specific situations.
and turnover-based for large businesses). Such information may include changes of tax
A business license fee is one popular form rate, tax base (rules on taxable properties),
of block levies collected from businesses tax value (revaluation), and exemptions, and
annually; but, because the charge is far change of rules for collecting arrears or tax
higher than an administrative fee, this levy penalties. Tax base or policy information is
is often a massive and substantial tax, not especially important when this table is used
a fee. MFSA users are recommended to for projecting future revenues.
Getting the Finances in Order 119
Liabilities, Arrears, and Cash Reserves Financial liabilities: Table 3.12 includes a
Objective: The objective of this supplementary sample of unpaid dues to municipal entities,
table is to prepare a reliable and clear list of pay- like water bills, wages or salary bonuses, leasing
ments due by the local government and build a fees for cultural facilities, and so on. Typically,
more realistic picture of the financial health of the largest volume of financial liabilities are
the municipality at the end of the fiscal year. payments due to contractors or suppliers,
Financial liabilities and arrears: Financial because the municipality receives their bills at
liabilities include all kinds of bills or valid the very end of the fiscal year. MFSA users may
demands for payments left unpaid at the end develop a more detailed list by indicating each
of the fiscal year. A good part of these liabili- liability separately under these main catego-
ties is unpaid for technical or legal reasons; for ries. In short, it should include all bills the city
instance, because there are national regulations received from partners that were left unpaid at
that allow time to verify and question validity the end of the fiscal year.
or to complete due transactions, it is legal to It is important to supplement cash-based
pay within 45 days after receiving an invoice, financial reports with a detailed list of liabil-
bill, or demand note. Thus, liabilities that are ities (both regular and overdue) to build an
unpaid but are within the country’s legal pay- honest picture of the financial health of the
ment limits are regular liabilities and are a nat- municipality. This is also mandatory in many
ural part of business, whether municipalities developing countries; for instance, local gov-
or private firms pay, because a number of bills ernments in Kenya are supposed to maintain
are received in the last months, days, and min- debtors and creditors ledgers, although none
utes of the fiscal year. These liabilities may not of them have obeyed this rule since devolution
be paid within the same fiscal year, and thus (Kopanyi and Muwonge, forthcoming). The
remain unpaid liabilities. In contrast, liabilities table includes a line that indicates the cash
that are overdue and whose delay for payment reserves at the end of the fiscal year that can be
is beyond the legally accepted payment time filled out from bank deposit records. Table 3.12
period are considered overdue liabilities, often shows that our sample city owns much less
called arrears. in cash reserves than the volume of liabilities
Table 3.12 Total Financial Liabilities—City Dues, End of the Fiscal Year (ShS million)
Year 1 Year 2 Year 3 Year 4 Year 5
Public stakeholders (city dues to entities)
–– Water PUC 1,000 1,200 1,300 1,400 1,500
–– Solid waste PUC 500 800 900 1,000 1,100
–– Transport PUC 800 1,000 1,100 1,200 1,300
–– Schools 50 − 120 140 160
–– Kindergartens 10 10 10 10 10
–– Culture or sport entities 500 550 600 650 700
Private contractors (city dues to private) 2,700 3,000 3,400 3,800 4,000
Labor (wages, salaries) 500 400 550 600 650
Total liabilities (city dues) 6,060 6,960 7,980 8,800 9,420
Cash reserves end of fiscal year 4,300 2,980 2,500 2,400 2,300
Note: PUC = public utility company; ShS (shillings) is a notional name of the currency of the sample city.
120 Better Cities, Better World
Table 3.13 Arrears—Overdue Financial Liabilities (ShS million)
Year 5 Year 6 Year 7 Year 8 Year 9 Growth indexes (%)
Public stakeholders
–– Water PUC 200 220 260 230 210 1.2
–– Solid waste PUC 50 50 50 50 50 0
–– Transport PUC 100 110 120 130 140 8.8
–– Schools
–– Kindergartens
–– Culture or sport entities
Private contractors (city dues to 1,100 1,200 1,300 1,400 1,500 8.1
private)
Labor arrears (wages, salaries) 0
Total arrears 1,450 1,580 1,730 1,810 1,900 7.0
Note: PUC = public utility company; ShS (shillings) is a notional name of the currency of the sample city.
(ShS2,300 vs. ShS9,420 in year 5) and this gap municipalities and the MFSA core financial
is growing. This gap signals financial manage- tables follow cash-based accounting rules and
ment and financial health problems and sug- do not include liabilities. Leaving liabilities
gests that the municipality regularly uses up unnoticed or unaccounted for severely distorts
for the current year a portion of the upcoming the financial picture of the municipality. The
year’s revenues, because the bills need to be MFSA supplementary tables on liabilities are
paid in the first weeks or months of the coming therefore vital for drawing a realistic picture of
fiscal year. It is also a signal of hidden budget the financial health of a municipality, but also
deficits or imbalances. indicating liabilities for each creditor (detailed
Arrears: Arrears are parts of the total lia- list of creditors).
bilities, but it is wise to indicate them sepa- Contingent liabilities: Contingent liabili-
rately. Table 3.13 shows a case when shortage ties are liabilities that may be incurred by the
of funds results in overdue liabilities in relation municipality depending on the outcome of a
to private contractors or suppliers. Mayors or future event such as the inability of the PUC
finance officers may put some bills in drawers to repay a loan (OECD 2006). Table 3.14 shows
and wait until the partners send reminders but liabilities that do not appear in the form of bills
do not act unless the partners strongly demand or payment requests, at least not on a regular
payments or unless there is sufficient cash in basis; rather, the liabilities are included in var-
hand to pay. The appearance of arrears and ious contracts, such as loan agreements on the
their trends over time is an important signal city’s commitments to pay in case of the PUC’s
of the municipality’s self-discipline, financial default. The table shows that the transport PUC
health, and creditworthiness. Arrears of the borrowed ShS5,000 million with a guarantee
sample city have grown at a 7 percent annual by the municipality; the amount of the guaran-
pace. tee reduces year by year as the PUC repays a
Accounting liabilities: Accrual accounting portion of the loan principal. A detailed assess-
systems capture and reflect all kinds of lia- ment of the contingent liabilities is beyond the
bilities, and account costs immediately at the scope of the MFSA, but it is important to shed
time an invoice is received. In contrast, many light on a number of lessons: (1) a municipality
Getting the Finances in Order 121
Table 3.14 Contingent Liabilities (ShS million)
Year 5 Year 6 Year 7 Year 8 Year 9
Public stakeholders
–– Water PUC paying electricity bill 900 800 800 700 700
–– Solid waste PUC
–– Transport PUC loan guarantee 5,000 4,000 3,000 2,000 1,000
–– Culture or sport entities
Total contingent liabilities 5,900 4,800 3,800 2,700 1,700
Note: PUC = public utility company; ShS (shillings) is a notional name of the currency of the sample city.
may provide financial guarantee to support reality of the financial picture of the munici-
borrowing of various independent municipal pality. These contingent liabilities are not part
entities like transport PUCs; and (2) a guar- of the regular financial reports, and calculating
antee could be attached also to a supplier or their present values requires further analysis,
developer’s contract signed by the entity, but which is beyond the scope of MFSA.
countersigned by the municipality as guaran-
tor (CABRI 2017; Sirtaine 2014). Monthly Cash Balances
The guarantees are explicit contingent lia- Objective: The objective of this supplementary
bilities, but there also are often less obvious table is to prepare a reliable and clear list of
implicit liabilities. For instance, the municipal- cash movements on a monthly basis, document
ity is generally responsible for all kinds of losses liquidity, and document the payment ability of
or dues (such as unpaid electricity bills) by the the municipality.
municipal entities (PUCs, schools, and so on) Monthly cash balances (table 3.15) are results
because it is the sole owner of these entities. of various movements and actions, including
This is an implicit liability that may trigger pay- cash inflow from various revenue sources such
ments, but it is hard to quantify ahead without as taxes, fees, and asset proceeds; but they also
specific evidence and so need not be accounted include disbursements of longer-term invest-
in advance (OECD 2006). Table 3.14 includes ment loans previously contracted, and cash
payments based on historical data showing that received from short-term liquidity loans, over-
the water company has been repeatedly failing drafts, or lines of credit. The MFSA user will
to pay its electricity bills and that the munici- need to enter cash receipts and cash payments,
pality has repeatedly been stepping in on behalf then calculate cumulative inflow, outflow, and
of the water company; Turkish municipalities finally the stock of cash at the end of the month
suffer from such burdens (Kopanyi 2015c). and year.
These payments might be accounted eventually The cumulative inflow should start with
(that is, when a guarantee is called or the elec- the cash reserves carried over from the previ-
tricity bill paid) among municipal expenditures ous fiscal year and should correspond to the
as a simple purchase of goods and services, a bank reconciliations. Likewise, the stock of
transfer, a subsidy, or a loan, which obscures cash should be calculated within this table but
the real reasons behind them. It is useful to list also be reconciled with bank deposit reports,
the contingent liabilities in a supplementary especially at the end of the fiscal year. Modern
table under the MFSA to further improve the computerized financial management systems
122 Better Cities, Better World
Table 3.15 Monthly Cash Balance (ShS million)
Cash Cash Cumulative Cumulative Stock of
Fiscal year 5 receipts payments inflow outflow cash
Carried over from previous 0 0 1,234 0 1,234
fiscal year
January 3,456 2,560 4,690 2,560 2,130
February 2,800 4,600 7,490 7,160 330
March 4,300 3,800 11,790 10,960 830
April 5,120 4,330 16,910 15,290 1,620
May 4,500 4,100 21,410 19,390 2,020
June 7,230 4,500 28,640 23,890 4,750
July 3,800 4,700 32,440 28,590 3,850
August 3,300 4,500 35,740 33,090 2,650
September 4,600 4,700 40,340 37,790 2,550
October 2,500 3,900 42,840 41,690 1,150
November 3,800 3,950 46,640 45,640 1,000
December 5,300 4,000 51,940 49,640 2,300
Note: ShS (shillings) is a notional name of the currency of the sample city.
provide cash balance reports on a daily basis and lacks data, rules, and procedures. In many
to help better cash management and support cases, cities do not know what they own or
timely corrective actions. MFSA users can where. Various entities (such as transport,
use those automated reports without generat- public works, health, or housing departments)
ing this table. Short-term liquidity loans should perform some asset management functions,
be repaid during the same fiscal year; however, albeit often in silos and beyond the vision of
these loans or overdrafts may show negative the municipal finance officers who are sup-
balances at the end of the fiscal year that distort posed to oversee and consolidate asset man-
the cash balance report and should be reported agement at the municipal level. Asset registers
as a memo item under the cash balances table. are often incomplete, unreliable, or nonexis-
tent; and establishing and populating them
Asset Investment and Maintenance would require enormous work and substan-
Objective: The objective of this supplementary tial investment (Kaganova and Kopanyi 2014,
table is to prepare a reliable and clear picture of Kopanyi and Muwonge, forthcoming). Thus,
the investment and maintenance expenditures MFSA users may benefit from well- developed
by the main functional categories of assets to asset management systems if those exist; if
help planning, communication, and imple- they do not exist, one should not underes-
mentation of investments, maintenance, and timate the complexity of setting up an asset
management of assets. This table follows the register with detailed technical, financial, and
COFOG classification introduced in table 3.7. asset value data, which can obviously not be
Asset management and asset registers: Asset done as part of the MFSA process. The MFSA
management is a vital function of municipal- has a more moderate goal, namely to introduce
ities but is often poorly done, is fragmented, a consolidated report on annual investments
Getting the Finances in Order 123
and asset maintenance expenditures. Should may ask partners to revise their data and more
a municipality be also engaged in a UA/SA, precisely define expenditures on maintenance.
the UA/SA may be the first step in identify- The low level of maintenance expenditure,
ing, locating, and registering municipal assets however, may simply reflect the ground reality
and developing reliable asset registers and and poor maintenance practices.
inventories.
Asset investment and maintenance: Table 3.16
is a very simple template whose structure is Step 2: Historical Analysis
based on the functional list of current expendi-
tures (see table 3.7). Many of these data are also Step 2 focuses on the practice of historical anal-
parts of the budget plans and execution reports, ysis of data on municipal finances and services.
but they might be structured somewhat differ- Historical analysis is a very useful procedure
ently. The table includes a long list of functional and a big step in the right direction. Typically,
areas; some of these may seem irrelevant if the national regulations do not stipulate historical
respective functions are not local mandates of analyses and, instead, often instruct municipal-
an MFSA user. Even in these cases, however, ities to prepare set formats in a timely fashion
information about the investments by third par- and to submit to higher governments finan-
ties (national government, companies, or pri- cial reports of the completed fiscal year only.
vate providers), if available, is useful to draw a In some cases, some national regulations and
detailed picture of the municipal service provi- supporting documentation may include pre-
sion and to reflect the trends over time. senting results of the previous year or planned
The table helps to calculate and document figures alongside the final outcomes (“Actuals”)
the breakdown of expenditures by main of a completed fiscal year without guiding or
functional areas (urban, social, and commer- demanding an analysis beyond Actual/Plan
cial services or activities) or within each of variations.
these areas (for example, road, waste, or fire The MFSA, by contrast, puts high emphasis
protection in urban services). The table is not only on the analysis of results by looking at
also a powerful instrument to communicate the composition of revenues and expenditures
results and development plans and progress of the last year or comparing structures with
to the citizens, who are more interested in other years, but also on drawing lessons from
these issues than in specific financial ratios historic trends. For these reasons, we strongly
or balances. recommend that users collect data for at least the
There are often blurred lines between last completed five years or that they even keep
investments and R&M. MFSA users may follow expanding the data series by adding new years
one of the next two rules: (1) account every- later without dropping previous years. MFSA
thing the way it is presented in various asset helps to draw valuable lessons even from very
ledgers or financial reports, or (2) request the short two- to three-year data series, but the sta-
various departments to more precisely identify tistical power and reliability of analyses and fore-
what actions should be considered as invest- casts are better if they are based on longer data
ments and what as repair or maintenance. series. The following examples include historical
Users would then fill out table 3.16 accord- data (actual figures) for five consecutive years.
ingly. Should the table reflect an extreme sit- Objective: The overarching objective of the
uation, like very small amounts accounted as historical analysis is to systematically analyze
“maintenance” expenditures, the MFSA users municipal data uploaded into the MFSA core
124 Better Cities, Better World
Getting the Finances in Order
Table 3.16 Municipal Assets—Investment and Maintenance (ShS million)
Growth Growth
Year 1 Year 5 indexes (%) indexes (%)
Service sectors and functions Development Maintenance Development Maintenance development maintenance
General administration
Office buildings
Other assets (vehicle, equipment)
Urban services
Roads and drainage
Public transport
Water and waste water
Solid waste
Street lighting
Fire protection
Police, crime prevention
Environmental protection
Social services
Health
Education
Culture and religion
Housing
Recreation and sport
Social welfare
Commercial services/investments
Parking
Markets
Commercial places
Land development
Local economic development
Total expenditures
Note: ShS (shillings) is a notional name of the currency of the sample city.
125
financial tables and supplementary tables, financial trends of a municipality from the per-
explore trends, and quantify growth indexes or spective of financial managers and financial or
other ratios for future projections. capital market players (banks, investors, rating
Tasks: agencies, or developers). It is also important,
Main tables and results: The historical however, to present this snapshot to the city
analysis is based on the core financial tables council, to the finance committee, and (in a
and the supplementary tables generated in further simplified form like lines 1, 2, 7, 12, and
Step 1, but it also introduces some new sum- 15 of table 3.17) to the citizens.
mary tables to communicate results. Most of Task: Fill out the table and analyze the finan-
the summary tables can be easily generated cial position of your municipality in a brief sum-
or populated from the MFSA core Financial mary report that would be suitable to inform
Database, and the supplementary tables can be the council’s finance committee, the mayor, the
analyzed without changing or repeating them. council, or the key external stakeholders (inves-
Historical analysis includes 12 tables and sets tors, banks, and citizens). The numeric exam-
of tasks in two groups—core summary tables ples below aim to help the analysis, drawing
and supplementary tables—as follows: specific lessons, and drafting of a report.
Financial position: Table 3.17 is a standard
Core summary tables
summary of the financial positions that can be
• Financial Position Snapshot generated automatically from the core Financial
Database or filled out from original annual clos-
• Main Revenue Sources
ing financial reports. This is the shortest format
• Main Current Expenditures (line items) in which the municipality’s financial situation
can be summarized and communicated. The
• Capital Investment Financing first two lines compare operating revenues and
Supplementary tables expenditures that establish the gross operating
margin/balance in line 3 (otherwise known as
• Actual/Plan Analysis the operating surplus or margin), which is the
• Expenditures by Function most important health test of a municipality as
explained in the generic financial framework
• Indebtedness Situation shown in fi gure 3.2. A substantial operating
• Capital Investment Plan (CIP) margin shows financial strength; in contrast,
a low or especially a negative operating mar-
• Tax Potential and Performance gin would signal serious financial illness and
• Liabilities and Arrears unsustainable operation of a municipality.
A strong operating margin is a key creditwor-
• Cash Balances thiness ratio that will be of great interest to
• Municipal Assets Maintenance creditors or investors. The current margin is a
balance after the interest payment (interest is
current but not operating expenditure), which
Historical Analysis: Financial Position
jumped in year 5. By deducting from the current
Snapshot
margin the repayment of debt principals (which
Objective: The main objective of the Financial also jumped in year 5 presumably because of
Position Snapshot is to exhibit and help com- the expiration of grace periods of loans), we get
municate the financial position and some the net margin (line 7).
126 Better Cities, Better World
Table 3.17 Financial Position Snapshot (ShS million)
Calculation/ Year 1 Year 2 Year 3 Year 4 Year 5
Items source Actual Actual Actual Actual Actual
1 Current revenue 41,999 41,214 48,636 52,743 65,821
2 Operating expenditure 33,498 37,785 41,187 44,610 56,893
3 Gross operating margin/ (1–2) 8,501 3,430 7,449 8,132 8,927
balance
4 Interests and borrowing costs 321 502 695 1,450 2,212
5 Current margin/balance (3–4) 8,181 2,928 6,753 6,682 6,715
6 Debt principal repayment 425 490 768 687 2,982
7 Net margin - net current (5–6) 7,756 2,438 5,985 5,995 3,733
balance
8 Capital revenues (9+10+11) 17,734 12,564 9,303 8,220 7,407
9 Own capital revenues 12,724 9,607 8,938 7,904 7,078
10 Investment grants and 32 90 365 316 329
donations
11 Cash reserve from previous bank 4,978 2,867 0 0 0
years econciliation
r
12 Capital investment 25,845 23,770 28,222 29,100 22,614
expenditures
13 Investment balance before (7+8–12) –355 –8,768 –12,933 –14,886 –11,474
loan
14 Loan proceeds (disbursed) actual 3,222 4,956 10,192 12,548 7,022
15 Overall closing balance (13+14) 2,866 –3,812 –2,741 –2,337 –4,452
with loans
Note: ShS (shillings) is a notional name of the currency of the sample city.
Self-financing investments: The net margin and is presumably overly indebted, which has
plus the capital revenues provide funds for led to deficit budget. The finance subcommit-
self-financing of investments; subtracting cap- tee of a municipal council and eventually the
ital investment expenditures (line 12) of the sum council itself should discuss the financial snap-
of these revenues establishes the investment shot and may decide on further inquiries and
balance (line 13). Investment balance is often corrective measures.
negative if investments are financed partly Historical analysis of financial position: It
from debts. The third balance, however, namely is important to analyze the financial position
the overall closing balance with loans (line 15) in two ways: (1) analyzing the trends, that is,
should be zero or positive. However, it also the change of key indicators over time; and
shows a growing negative trend in the sample (2) comparing the composition of the finan-
city; this is a problem for the city because the cial position lines between the first and the last
budget is supposed to be balanced with debt years.
financing. The key lesson of this table is that the Evaluating the results: First, we need to sum-
municipality is running well in terms of financ- marize the results and draw lessons, and then
ing operations, but it has overinvested before discuss methodology and guide MFSA users
Getting the Finances in Order 127
on how to complete historical analyses, while for drawing a detailed and complete lesson
addressing different local situations and differ- from the Financial Snapshot. For example,
ent nature (behavior) of data. What are some of the creditworthiness ratio (that is, operat-
the key results in table 3.18 based on the analysis ing margin over current revenues) was 20.2
of growth indexes, comparing year 1 and year 5 percent in year 1 but fell to 13.9 percent in
results, and comparing ratios and benchmarks? year 5. This drop suggests weakening credit-
worthiness, because both of these ratios are
• The growth indexes show how the data on well below the 30 percent benchmark com-
various line items grew from year 1 to year monly accepted (Farvacque-Vitkovic and
5 and offer important lessons (the striking Sinet 2014) and the ratio shows a downward
results are highlighted). Key findings include trend. Key financial ratios will be discussed
the following: (1) operating expenditures later in Step 3, “Ratio Analysis.”
grew faster than current revenues (14.2 per-
cent vs. 11.9
percent), and as a result and not Methodologies and procedures for analyz-
surprisingly, the operating margin grew only ing tendencies: The MFSA analysis approaches
by 1.2 percent; (2) both interest and principal tendencies by using geometric average/mean
payments jumped (growing over 60 percent to calculate annual growth indexes, and linear
per year on average); (3) cash reserves dis- trends to establish trends for analysis and fore-
appeared; (4) negative investment balances casting. TD1 in appendix B summarizes the
skyrocketed (growing by 138.4 percent annu- detailed methodologies and compares options
ally); (5) loan proceeds grew faster than rev- for trend analysis. We recommend that readers
enues; and (6) the overall closing balance who feel they lack statistical knowledge visit
turned from positive to negative. These find- appendix B and read TD1 and other technical
ings underline the need for the city council and methodological explanations.
to discuss these results and seek options for
reversing some alarming trends. One obvi-
ous option to consider would be increasing Historical Analysis: Main Revenue
own revenues substantially, which, however, Sources
requires time and specific efforts. Objective: The purpose of the historical anal-
ysis of main revenue sources is to summarize
• Comparing year 1 and year 5: The last two
and comment on the main lessons learned from
columns of table 3.18 show the following
the revenue source data. Users may analyze the
most visible changes: (1) the net margin
principal sources of municipal financing by
dropped down by two-thirds (from 18.5
looking at the share of main sources in total
percent to 5.7 percent share of current rev-
revenues and then draw lessons from growth
enues); (2) the share of operating expendi-
indexes. Below we summarize some lessons
tures increased; (3) capital revenues dropped
from table 3.19.
by three quarters (from 42.2 percent to
Task: Fill out the table and analyze the
11.3 percent); and (4) cash reserves disap-
main revenue sources of your municipality in
peared. These changes suggest that the
a brief summary report that would be suitable
city has overinvested and faces heavy debt
to inform the council’s finance committee, the
burden challenges in the years ahead.
mayor, or the council. The examples below aim
• Ratio Analysis is the third analysis beyond the to help the analysis and the reporting, follow-
above two analyses, and it is very important ing the same logic and procedures.
128 Better Cities, Better World
Getting the Finances in Order
Table 3.18 Historical Tendencies in Financial Position (ShS million)
Growth Structure
Year 1 Year 2 Year 3 Year 4 Year 5 indexes (% of current revenues)
Items Actual Actual Actual Actual Actual (%) Year 5 Year 1
1 Current revenue 41,999 41,214 48,636 52,743 65,821 11.9 100.0 100.0
2 Operating expenditure 33,498 37,785 41,187 44,610 56,893 14.2 86.4 79.8
3 Gross operating margin/balance 8,501 3,430 7,449 8,132 8,927 1.2 13.6 20.2
4 Interests and borrowing costs 321 502 695 1,450 2,212 62.1 3.4 0.8
5 Current margin/balance 8,181 2,928 6,753 6,682 6,715 –4.8 10.2 19.5
6 Debt principal repayment 425 490 768 687 2,982 62.7 4.5 1.0
7 Net margin - net current balance 7,756 2,438 5,985 5,995 3,733 –16.7 5.7 18.5
8 Capital revenues 17,734 12,564 9,303 8,220 7,407 –19.6 11.3 42.2
9 Own capital revenues 12,724 9,607 8,938 7,904 7,078 –13.6 10.8 30.3
10 Investment grants and donations 32 90 365 316 329 79.0 0.5 0.1
11 Cash reserve from previous years 4,978 2,867 0 0 0 –100.0 0.0 11.9
12 Capital expenditures 25,845 23,770 28,222 29,100 22,614 –3.3 34.4 61.5
13 Investment balance before loan –355 –8,768 –12,933 –14,886 –11,474 138.4 –17.4 –0.8
14 Loan proceeds (disbursed) 3,222 4,956 10,192 12,548 7,022 21.5 10.7 7.7
15 Overall closing balance with loans 2,866 –3,812 –2,741 –2,337 –4,452 –6.8 6.8
Note: ShS (shillings) is a notional name of the currency of the sample city.
129
Table 3.19 Main Revenue Sources (ShS million)
130
Average
Year 1 Year 2 Year 3 Year 4 Year 5 annual growth % Structure
Items Actual Actual Actual Actual Actual index (%) (total revenue)
Total current revenue 41,999 41,214 48,636 52,743 65,821 11.9 82.0
1 Revenues from central/higher g
overnment 30,300 25,162 26,120 29,933 35,984 4.4 44.8
–– Shared taxes 24,053 22,255 22,747 26,915 35,631 10.3 44.4
–– Unconditional transfers 6,192 2,613 3,076 2,865 0 −100.0 0
–– Conditional transfers 55 294 297 153 353 59.4 0.4
2 Own revenue 11,700 16,053 22,516 22,810 29,837 26.4 37 .2
–– Local taxes and levies 4,235 4,818 6,212 7,548 8,037 17.4 10.0
–– Local fees, charges 2,496 4,389 5,571 5,397 12,347 49.1 15.4
–– Local asset revenues 4,969 6,847 9,778 8,723 8,989 16.0 11.2
–– Revenues from municipal enterprises 0 0 955 1,142 464 n.a. 0.6
–– Local other revenues 0 0 0 0 0 n.a. 0
Total noncurrent revenue without loan 17,734 12,564 9,303 8,220 7,407 −19.6 9.2
1 Capital grants from central/higher government 0 0 0 145 324 0.4
2 Own nonrecurrent revenues 12,724 9,607 8,938 7,904 7,078 −13.6 8.8
Asset sales’ proceeds 887 645 546 443 1,354 11.1 1.7
Land development fee 11,668 8,893 8,333 7,413 5,604 −16.8 7.0
Participation/transfers of individuals 169 69 59 48 120 −8.1 0.2
3 Donation 32 90 365 171 5 −37 .7 0
4 Financing 8,200 7,823 10,192 12,548 7,022 −3.8 8.8
Surplus or cash reserves from previous years 4,978 2,867 0 0 0 −100.0 0
Sale of financial assets 0 0 0 0 0 n.a. n.a.
Better Cities, Better World
Loans/bonds’ proceeds (disbursements) 3,222 4,956 10,192 12,548 7,022 21.5 8.8
Total revenue 62,955 55,778 67,766 73,340 80,245 6.3 100.0
1 State transfers/grants 30,300 25,162 26,120 30,078 36,308 4.6 45.2
2 Own revenues 29,434 25,660 31,454 30,714 36,915 5.8 46.0
3 External revenues 3,222 4,956 10,192 12,548 7,022 21.5 8.8
Note: n.a. = not applicable; ShS (shillings) is a notional name of the currency of the sample city.
Methodology and procedure: The main meth- be continued; (5) land development fees show
odology advice is to focus on the large items a steep decline that affects the own nonrecur-
and substantial movements and to draw a big rent revenues, which is a very worrisome trend;
picture of the revenue sources rather than to (6) surplus and cash reserves have vanished and
analyze every single line of this table. We rec- signal growing underlying budget imbalances,
ommend that users focus on those items that which need immediate attention from higher
decision makers should be aware of or would management; and (7) external revenues (loan
be interested to learn about. There are two pro- disbursement) show a strong increase over the
cedures to follow: first, illustrate the structure last five years albeit declining in year 5, which
of revenues by calculating the share of each may signal that the municipality has exhausted
revenue source as a percentage of the total rev- its borrowing capacity.
enues; second, show the revenue tendencies by
calculating the growth indexes.
Historical Analysis: Main Current
Revenue structure: First, take the total revenue
Expenditures
as the basis for calculating the revenue shares,
then pick the largest items (highlighted). Here Objective: The purpose of the historical analysis
are some lessons: (1) first, look at the section on of main current expenditures is to briefly summa-
total revenues, which shows that the sample rize and comment on the lessons learned from the
city generates largely equal share of own reve- expenditure data. Users may analyze the expen-
nues (46 percent) and transfers (45.2 percent) ditures by looking at the share of main expendi-
received from higher government, which sig- tures in total current expenditures and then draw
nals solid reliance on own revenues; (2) external lessons from growth indexes and trends that
revenues are substantial (8.8 percent); (3) reve- underscore measures for improving expenditure
nues from shared taxes (44 percent) are greater management (Morell and Kopanyi 2014).
than the own current revenues (37 percent); and Task: Fill out table 3.20 and analyze the
(4) nonrecurrent own revenues are substantial main expenditure items of your municipality in
and largely generated by land development fee, a brief summary report that would be suitable
which has been volatile because of economic to inform the council’s finance committee, the
factors beyond the control of the municipality. mayor, or the city council. The example below
Revenue tendencies: The growth indexes indi- aims to help you carry out your own analysis as
cate interesting tendencies: (1) revenues from well as draft your own report, using the same
higher government grew a mere 4.4 percent logic and methodology.
annually, far below the growth of current rev- Methodology and procedure: The main meth-
enues (11.9 percent), thus the municipality is odology advice is again to focus on the large
increasingly reliant on own revenues; (2) the items and substantial movements and draw a
shared taxes grew nicely (10.3 percent), but big picture of the current expenditures rather
failed to compensate for the lost unconditional than to analyze every single line of this table.
transfers; (3) local fees jumped in year 5, maybe Expenditure structure: What does table 3.20
because of a change in revenue base or rate (this tell us about current expenditures in the case of
requires further inquiry to see if it was a one- the sample city? Lessons are highlighted: (1) the
time movement or if it is a sign of long-term municipality spends a moderate amount on
increase of fee revenues); (4) local taxes and labor and goods and services (17.0 percent and
levies grew much faster than the total current 32.1 percent, respectively); and (2) the service
revenues, which is a good tendency and should expenditures are low because municipal entities
Getting the Finances in Order 131
Table 3.20 Main Current Expenditures (ShS million)
Average %
annual Structure
Year 1 Year 2 Year 3 Year 4 Year 5 growth (total
Items Actual Actual Actual Actual Actual index (%) revenue)
Operating expenses 33,498 37,785 41,187 44,610 56,893 14.2 96.3
1 Labor (wages, salaries, 6,592 7,635 8,141 9,075 10,034 11.1 17.0
taxes and charges)
–– Administrative staff 0
–– Technical, service, and 0
other staff
2 Goods and services 13,008 14,151 14,199 16,209 18,984 9.9 32.1
–– Office supply 0
–– Electricity 0
–– Fuel and gas 0
–– Repair and maintenance 2,956 3,234 2,813 3,472 3,940 7.4 6.7
–– Other goods and services 10,052 10,917 11,386 12,737 15,044 10.6 25.5
3 Current subsidies to service 7,606 6,023 9,134 8,612 11,242 10.3 19.0
entities
4 Current grants and transfers 3,128 5,466 4,582 5,549 11,577 38.7 19.6
5 Social care/welfare support 1,946 3,274 3,827 3,774 3,492 15.7 5.9
6 Other current expenditures 1,217 1,236 1,305 1,392 1,563 6.5 2.6
Interest and borrowing costs 321 502 695 1,450 2,212 62.1 3.7
Current expenses total 33,819 38,286 41,883 46,061 59,105 15.0 100.0
Note: ShS (shillings) is a notional name of the currency of the sample city.
seem to provide many services outside the bud- might be difficult and may constrain invest-
get, but in turn the municipality is burdened ment capacity in coming years; and, finally,
with subsidies and grants provided to munic- (3) social/welfare support shows dynamic
ipal entities (19.0 percent and 19.6 percent, 15.7 percent annual increase and creates sub-
respectively). Controlling these two line items is
stantial burden. Social/welfare supports are
vital for sustainable expenditure management. typically financed by earmarked conditional
Expenditure tendencies: The growth indexes grants in many countries, but the sample city
indicate interesting tendencies: (1) current needs to finance them from shared taxes or
grants and transfers to municipal entities not own-source tax or fee revenues because it gets
only represent a high share of revenues but also only miniscule conditional transfers/grants.
show a steep 38.7 percent annual increase over
the last five years, which is a very worrisome
Historical Analysis: Capital Investment
tendency (in part because typically these grants
Financing
are less regulated than other expenditures);
(2) interest and borrowing costs show a steep Objective: The purpose of the historical anal-
62.1 percent annual increase that needs city ysis of capital expenditures and financing is
management’s attention, because debt service to summarize and comment on the lessons
132 Better Cities, Better World
learned from the expenditure data trends. on the large items and substantial movements
Users may analyze the expenditures by looking and draw a big picture of the capital expendi-
at the share of main expenditures in total cap- tures rather than to analyze every single line of
ital expenditures and then draw lessons from this table.
growth indexes. Some lessons are shown in Structure of capital expenditures and financ-
table 3.21. ing: What is table 3.21 telling us? The main
Task: Fill out the table and analyze the main lessons are highlighted: (1) the purchase or
expenditure and financing items of your munic- development of capital assets is the single larg-
ipality in a brief summary report that would be est item among capital expenditures (91.0 per-
suitable to inform the council’s finance com- cent); (2) the debt service became a substantial
mittee, the mayor, or the council. The exam- part of capital expenses in year 5 and requires
ple below aims to help users analyze and draft attention from management; (3) development
reports, using the same logic and methodology. was financed by roughly equal shares of capital
The main methodology advice is again to focus revenues, self-financing, and loans; and (4) the
Table 3.21 Capital Expenditures and Financing (ShS million)
Average %
Year 1 Year 2 Year 3 Year 4 Year 5 annual Structure
growth (total
Items Actual Actual Actual Actual Actual index (%) revenue)
Capital investment 25,845 23,770 28,222 29,100 22,614 –3.3 100.0
expenditure
Purchase/development of 18,901 21,005 24,040 26,903 20,584 2.2 91.0
assets/infrastructure
Capital subsidies to PU/PUC 3,437 1,491 3,207 1,295 987 −26.8 4.4
Capital transfers to other level 3,507 1,275 974 902 1,043 −26.2 4.6
of government
Investments/Lending 0 0 0 0 0 0
Financing 28,711 19,958 25,480 26,763 18,162 −10.8 100.0
Capital transfers/grants from 0 0 0 145 324 n.a. 1.8
government
Capital grants (international/other) 32 90 365 171 5 −37.7 0
Capital revenue (sales of 12,724 9,607 8,938 7,904 7,078 −13.6 39.0
assets, etc.)
Self financing (Net margin) 7,756 2,438 5,985 5,995 3,733 −16.7 20.6
Cash reserve from previous 4,978 2,867 0 0 0 −100.0 0
years
Sale of financial assets 0 0 0 0 0 n.a. 0
Loan/bond proceeds 3,222 4,956 10,192 12,548 7,022 21.5 38.7
(disbursement)
Financing gap after loan −2,866 3,812 2,741 2,337 4,452 n.a. 24.5
proceeds
Note: n.a. = not applicable; PU/PUC = public utility/public utility company; ShS (shillings) is a notional name of the currency of the
sample city.
Getting the Finances in Order 133
financing gap became substantial and worri- plans by comparing planned figures with actuals.
some in year 5, which also requires immediate The lessons from A/P analysis are important to
management attention (note: in this line, posi- take into account during the forecasting of rev-
tive figures are gaps, and the negative amount enues and expenditures for the next five years.
in year 1 is surplus). It is also useful to prepare a list of A/P results in
Tendencies in capital expenditures and financ- percentage performance for the last five years
ing: The growth indexes indicate interesting and estimate from them average deviations to
tendencies: (1) capital investment expenditures measure the changes in budget planning and
show strong volatility and a slightly declining execution results over time. The average abso-
trend (–3.3 percent); (2) capital subsidies and lute deviations for five years would clearly show
capital transfers from city to entities show a the areas where persistent differences occur
sharp decline (over 26 percent per year), a between the plans and actual figures.
tendency that needs management attention in Task: Generate a historic trend table from
line with the fast-growing operating subsidies the A/P table (table 3.22) that indicates only the
to PUCs; (3) capital financing available shows A/P% figures, and calculate average absolute
a steady decline (10.8 percent per year) largely deviations from the 100 percent benchmark on
because of the declining revenues from asset A/P% over five years.
sales (13.6 percent annual decrease). These Good budget planning and execution:
findings together suggest that the municipal- Good budget planning can be witnessed if
ity should revise its capital development and the planned and actual figures are in the
financing strategy urgently because its devel- range of plus/minus 5 percent of 100 percent
opment seems nonsustainable and because (95 percent < A/P < 105 percent). The fol-
chronic budget imbalances have emerged and lowing steps need to be completed: (1) list or
are likely to remain in force in the medium term. mark the outstanding lines, especially those
that show over 20 percent differences, and
Historical Analysis: Supplementary propose analysis of the possible underlying
causes; and (2) initiate comprehensive cor-
Tables
rective actions regarding expenditures that
It is important to analyze the historical trends are persistently outstanding for several years
of the supplementary tables in the same way or if differences show a growing tendency in
we did for the core financial tables. There are some line items.
understandable differences due to the special The sample city has performed well in terms of
structure of some tables. The historical analysis budgeting and controlling expenditures in total
is not only important to see the results in the sup- volume (total expenditures in first line), exempli-
plementary tables, but some of these results also fied by the 2.4 percent absolute deviation from
provide vital information for forecasting the core 100 percent (see TD2 in a ppendix B); however,
financial tables, which thus cannot be completed there are wide variations of expenditure perfor-
without proper analysis of supplementary tables. mance behind the scene. For example, current
The same procedures, logic, and structure apply subsidies and current grants and transfers to
as those used for core financial tables. municipal entities show over 35 percent abso-
lute deviation (lines 4 and 5 in table 3.22), which
Actual/Plan Analysis—Historical Trends signals not only that the city spends a substan-
Objective: The objective of this analysis is to mea- tial amount on subsidizing entities but also that
sure the quality or predictability of the budget the subsidy system seems to be unregulated
134 Better Cities, Better World
Table 3.22 Actual/Plan Analysis—Expenditures
Average
absolute
Year 1 Year 2 Year 3 Year 4 Year 5 deviaton
Expenditures A/P% A/P% A/P% A/P% A/P% from 100%
Total expenditures 100.1 96.2 101.2 101.1 105.9 2.4
I Current expenditures 103.9 114.8 104.2 107 .7 123.2 10.8
1 Labor (wages, salaries, taxes and charges) 106.3 109.1 101.8 113.4 111.5 8.4
–– Administrative staff 0 0 0 0 0 n.a.
–– Technical, service, and other staff 0 0 0 0 0 n.a.
–– Other 3296.0 2545.1 1628.1 1814.9 2006.8 n.a.
2 Goods and services 103.6 95.6 86.1 98.2 116.5 8.0
–– Office supply 0 0 0 0 0 n.a.
–– Electricity 0 0 0 0 0 n.a.
–– Fuel and gas 0 0 0 0 0 n.a.
–– Repair and maintenance 84.5 71.9 56.3 69.4 98.5 23.9
–– Other goods and services 5026.0 2183.4 2277 .2 2547 .4 3008.8 n.a.
3 Interest and borrowing costs 106.9 100.3 99.3 96.7 100.5 2.3
4 Current subsidies to service entities 108.7 150.6 152.2 123.0 140.5 35.0
5 Current grants and transfers 104.3 136.7 131.7 138.7 165.7 35.4
6 Social care/welfare support 97 .3 128.9 85.0 82.3 77 .6 17.3
7 Other current expenditures 81.1 247 .2 130.5 116.0 156.3 53.8
II Capital expenditures 95.7 76.3 97 .3 92.4 78.0 12.1
1 Purchase/development of assets/infrastructure 94.5 83.7 96.2 96.1 79.2 10.1
2 Capital subsidies to PC/PUC 98.2 49.7 106.9 51.8 49.3 31.6
3 Capital transfers to other level of government 100.2 42.5 97 .4 90.2 104.3 14.9
4 Investments/Lending 0 0 0 0 0 n.a.
III Financing 97 .7 96.1 94.9 97 .8 99.3 2.8
1 Debt principal repayment 100.0 98.0 96.0 98.2 99.4 1.7
2 Purchase of financial assets 0 0 0 0 0 n.a.
Note: A/P = actual/plan; n.a. = not applicable; PU/PUC = public utility/public utility company; ShS (shillings) is a notional name of the
currency of the sample city.
and presumably burdened with ad hoc grants. moves in the way the municipality spends
Capital subsidies to PUs/PUCs show over 30 money to provide various core and non-
percent deviation that may signal weaknesses core services over time. The average growth
also in capital investment planning and the proj- indexes can be calculated by using the methods
ect selection process. explained in previous sections.
Should the municipality use legally inde-
Expenditures by Functions—Historical Trends pendent entities for service provision, then
Objective: The overarching objective is to ana- table 3.23 can be supplemented by a table that
lyze tendencies and highlight outstanding would include consolidated expenditures of
Getting the Finances in Order 135
Table 3.23 Historical Analysis—Expenditures by Functions
Average Structure
Year 1 Year 2 Year 3 Year 4 Year 5
annual growth (% of total
Actual Actual Actual Actual Actual index expenditures)
General administration
Urban services
Roads and drainage
Public transport
Water and wastewater
Solid waste
Street lighting
Fire protection
Police, crime prevention
Environmental protection
Social services
Health
Education
Culture and religion
Housing
Recreation and sport
Social welfare
Commercial services
Parking
Markets
Commercial places
Land development
Local economic development
Total expenditures
the municipality and of the service entities. The historical analysis of the indebtedness
Consolidation means adding line items of city level should follow a procedure completely
and entities together but netting out items that different from the growth index, trend, or
would cause double accounting such as current other historical analyses used above. The
or capital transfers that the municipality has reason is that municipalities typically bor-
provided to these entities. row (procure debt) for the medium to long
term for investment purposes. Thus, in a year
Debt Stock and Debt Service—Historical of analysis and forecasting, the key debt fig-
Analysis ures, such as due interest payments, principal
Objective: The objective of this analysis is to repayments, grace period, bond maturities,
explore underlying tendencies in the move- and so on, are largely known four to five years
ment of debt stock and debt service indicators. ahead or even longer.
136 Better Cities, Better World
Procedure: Looking ahead to the next five- tax performance and in collection of arrears in
year period requires precise knowledge of each order to support strategic decisions on tax pol-
debt, including the aging list of debts and esti- icy and administration. There is much useful
mating the future events (debt service). New literature discussing objectives, implications,
loans or bonds may emerge during the forecast- and methods of assessing and reforming local
ing period, but those cannot be derived from tax and fee revenue systems (Bird 2010, 2013;
trend analysis, rather they require information Freire and Garzon 2014; Kelly 2013; Slack and
from borrowing plans. Structuring debts often Bird 2015; Stiglitz and Rosengard 2015).
takes years, so a new investment loan or bond Tasks: Calculate the share of the main tax
cannot appear by surprise. In short, trends and revenue sources as a percentage of total tax
general growth indexes can be calculated, but revenues. It is wise to calculate these shares for
they are largely not relevant to analyze and both the first and last years of the time period
forecast debt movements by each loan item. under analysis and to highlight main changes
Analysis: It is useful to calculate and com- and outstanding items. Calculate growth
municate to higher-level bodies (city council, indexes for each line to explore underlying ten-
finance committee, mayor) the growth indexes dencies of billing, collection, collection perfor-
or tendencies of the total indebtedness figures, mance, and arrear collection.
including debt stock, principal and interest Analysis: It is important to analyze each
payments, and total debt service calculated by line of table 3.25 because the core financial
adding together the projected annual figures reports often include only one summary line
derived from actual payments or loan agree- of tax revenues and leave out the key underly-
ments. Table 3.24 shows interesting tendencies, ing changes in composition of revenues or col-
the most important among them is that the debt lections of various taxes. Small or no change
stock has grown by over 50 percent annually, in tax base, collection, or arrears signals lack
while the annual debt service and the payment of improvement and maybe lack of taxa-
of interest grew by over 60 percent annually tion strategy, policy, or procedures; so these
between year 1 and year 5. This growth indicates results should be identified and adequately
that the debt service has increased dramatically communicated to higher levels of city man-
and is likely to eat up a substantial part of funds agement. Specific attention should be paid
that would be available for investments in the to the accumulation of arrears (for example,
coming years. The growth indexes calculated if the growth indexes on stock of arrears are
over the time period of year 1 through year 10 greater than the growth indexes of tax base or
indicate that these indexes will drop radically in tax collection).
projected years unless new loans are incurred. Table 3.25 shows that property tax is the
Principal repayment burden, however, will most substantial own-source revenue (OSR)
remain high (36.9 percent annual growth over of the sample city; the revenues from house-
10 years) even without new loans. holds and businesses combined generate over
60 percent of tax revenues. The taxes billed
Tax Potential and Performance—Historical have increased in all three main taxes but most
Analysis on businesses (21 percent per year), a good
Objective: The overarching objective is to sign; but the city is rolling over a huge stock
explore the tendencies of various tax revenues, of arrears on household property tax with low
unfold shift or volume change from one to collection and stagnant total volume. This sug-
another tax revenue, and quantify the trends in gests a need for further analysis to help policy
Getting the Finances in Order 137
138
Table 3.24 Historical Analysis of Debt Stock and Debt Service (ShS million)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Items Actual Actual Actual Actual Actual Projected
1 IBRD water
development
–– Outstanding 3,045 3,580 3,667 3,091 2,822 2,216 1,696 1,084 1,096 1,108
–– Principal repayment 425 490 537 531 591 591 622 636 643 650
–– Interest charge 151 190 157 150 159 102 72 49 37 28
2 ADB road
development
–– Outstanding 1,670 3,503 10,615 10,467 10,206 9,678
–– Principal repayment 0 0 0 367 371 350
–– Interest charge 0 45 203 318 272 268
Credit bank ( domestic)
3 Markets/Malls
–– Outstanding 3,757 4,523 3,733 2,828 1,924 1,019 115 13
–– Principal repayment 0 0 790 905 905 905 102 13
–– Interest charge 0 517 507 449 328 214 100 14
Growth Growth
index index
Several loan lines are ommitted from display for simplicity year 1– year 1–
Total year 5 year 10
–– Outstanding debt 8,599 13,820 24,705 37,320 45,295 47,428 55,215 51,229 49,181 47,614 51.5% 20.9%
–– Principal repayment 425 490 768 687 2,982 4,084 4,423 5,039 5,309 7,198 62.7% 36.9%
Better Cities, Better World
–– Interest charge 321 502 695 1,450 2,212 2,144 2,213 2,187 1,849 1,661 62.1% 20.1%
Debt service 746 992 1,464 2,138 5,194 6,228 6,636 7,226 7,158 8,859 62.5% 31.6%
Borrowing disbursement 3,197 5,645 11,375 13,383 8,662 5,115 11,871 438 2,991 3,741 28.3% 1.8%
Note: ADB = Asian Development Bank; IBRD = International Bank for Reconstruction; ShS (shillings) is a notional name of the currency of the sample city.
Table 3.25 Historical Analysis of Tax Revenues and Tax Performance (ShS million)
Growth Share
indexes (%) in
Year 1 Year 2 Year 3 Year 4 Year 5 (%) year 5
Property tax - households (Rate 6%)
I
1 Tax base (amount billed) 1,526 1,650 1,800 2,000 2,200 9.6 26.2
2 Tax collected 1,075 1,248 1,592 1,786 1,903 15.3 24.1
3 Tax performance % (2/1) 70.5 75.6 88.4 89.3 86.5 5.3 n.a.
4 Stock of arrears 3,000 3,200 3,300 3,250 3,120 1.0 95.1
5 Arrears collected 280 300 250 300 250 −2.8 84.7
6 Tax performance % (5/4) 9.3 9.4 7.6 9.2 8.0 −2.8 n.a.
Property tax - business entities (Rate 8%)
II
7 Tax base (amount billed) 1,650 1,900 2,400 2,700 3,000 16.1 35.7
8 Tax collected 1,613 1,872 2,388 2,680 2,855 15.3 36.1
9 Tax performance % (7/6) 97.7 98.5 99.5 99.2 95.2 −0.7 n.a.
10 Stock of arrears 153 170 168 140 130 −4.0 4.0
11 Arrears collected 25 30 40 30 30 4.7 10.2
12 Tax performance % (10/9) 16.3 17.6 23.8 21.4 23.1 4.7 n.a.
III Business tax (Rate 3%)
13 Tax base (amount billed) 1,500 1,600 2,150 3,000 3,200 20.9 38.1
14 Tax collected 1,443 1,590 2,111 2,952 3,146 21.5 39.8
15 Tax performance % (17/16) 96.2 99.4 98.2 98.4 98.3 0.5 n.a.
16 Stock of arrears 40 43 33 42 30 −6.9 0.9
17 Arrears collected 10 20 30 20 15 10.7 5.1
18 Total tax billed 4,676 5,150 6,350 7,700 8,400 15.8 n.a.
19 Total tax collected 4,131 4,710 6,090 7,418 7,905 17 .6 n.a.
20 Stock of arrears total 3,193 3,413 3,501 3,432 3,280 0.7 n.a.
21 Total arrears collected 315 350 320 350 295 −1.6 n.a.
Note: n.a. = not applicable; ShS (shillings) is a notional name of the currency of the sample city.
setting and defining corrective measures, such specific inquiry and data collection when such
as a special program to collect and radically information is not collected on a regular basis.
reduce stock of arrears and in general improve The latter case is outside the scope of MFSA,
collection efficiency of annual taxes. but a target tax base analysis can be included in
These actions can be supplemented with the MFSA Action Plan as one priority action for
a more detailed analysis of the tax bases that the medium term.
include data about the number of tax payers,
exemptions, and the number of bills issued Liabilities and Arrears—Historical Trends
compared to number of bills paid. This infor- Objective: The objective is to develop a clear and
mation is available in advanced computerized reliable picture of liabilities by listing all finan-
tax administration systems, but it might require cial liabilities and separating the regular and
Getting the Finances in Order 139
overdue liabilities. This is particularly import- at the end of the year; instead, they are bur-
ant when the adopted accounting system is ied in financial or service contracts, but they
cash based and financial reports exclude/ignore may become very real financial obligations if
accrued liabilities. By including a clear picture the guarantees are called or minimum fees
of financial liabilities, the financial situation and are due. Write a short report for higher man-
health of a municipality can be realistically ana- agement based on the analysis that follows.
lyzed and assessed (see template table 3.26). Analysis: First, compare the cash reserves
Tasks: Fill out table 3.26 as precisely and available with the total financial liabilities.
honestly as possible, and make sure to include Should the cash reserve appear greater than
all kinds of financial obligations incurred the total financial liabilities, then the lia-
but left unserved/unpaid at the end of the bilities can be considered a technical issue
fiscal year. Complete the following analysis: because they can be fulfilled from the cash
(1) include the cash reserves from bank rec- reserves in due course. In contrast, table 3.26
onciliations; (2) calculate the ratio between shows that the financial liabilities of the sam-
the cash reserves and the financial liabilities; ple city appear two to three times greater
(3) include the overdue financial liabilities than the cash reserves, which signals finan-
(they are part of the total, but report them also cial weaknesses because the liabilities cannot
in a separate section of the table); (4) calculate be fulfilled from the available cash even if the
the growth indexes; and (5) it is wise to gener- liabilities are only technical in nature (within
ate one more table and report the contingent due payment period). Second, the tendency
liabilities such as guarantees or other finan- of the cash reserves over total liabilities ratio
cial obligations like minimum payment com- over time is an indicator of the severity of the
mitments to private service providers (landfill financial situation if the reserves are below
or water charges). These indirect financial the liabilities (index is less than 100 percent).
liabilities do not appear in the form of bills Not only were the sample city’s cash reserves
Table 3.26 Financial Liabilities and Arrears (ShS million)
Growth
Year 1 Year 2 Year 3 Year 4 Year 5 indexes (%)
Public stakeholders (city dues to entities)
–– Water PUC 1,000 1,200 1,300 1,400 1,500 10.7
–– Solid waste PUC 500 800 900 1,000 1,100 21.8
–– Transport PUC 800 1,000 1,100 1,200 1,300 12.9
–– Schools 50 − 120 140 160 33.7
–– Kindergartens 10 10 10 10 10 0
–– Culture or sport entities 500 550 600 650 700 8.8
Private contractors (city dues to private) 2,700 3,000 3,400 3,800 4,000 10.3
Labor (wages, salaries) 500 400 550 600 650 6.8
Total liabilities (city dues) 6,060 6,960 7,980 8,800 9,420 11.7
Cash reserves end of fiscal year 4,300 2,980 2,500 2,400 2,300 −14.5
Cash reserves/Total liabilities % 71 43 31 27 24 −23.4
Note: PUC = public utility company; ShS (shillings) is a notional name of the currency of the sample city.
140 Better Cities, Better World
below financial liabilities, but the gap has also suspension of water services; and (2) loan
quickly increased at an annual pace of 23.4 guarantee is an explicit contingent liability,
percent. Thus, the financial situation seems which means that the municipality has com-
unsustainable and requires attention and cor- mitted itself, by contract, to step in and honor
rective measures by higher management and debt service if the company fails to do so. The
governing bodies. Third, the growth indexes of city has a solid situation because guarantees
the various liabilities provide further insights have not been called, so contingent liabili-
on the most problematic areas and the sever- ties can be projected to decrease in line with
ity of the problems. The volume of liabilities repayment of guaranteed loans and phase out
grew faster than revenues or expenditures in entirely in year 10. In sum, taking into account
several critical areas like schools and PUCs. contingent liabilities is a wise procedure and
Needless to say, chief officers are often aware also part of the inquiry by rating agencies, so
of unpaid bills and financial distresses, but the it is advisable to include it in the MFSA as a
MFSA helps more precisely quantify the fac- supplementary table.
tors and highlight specific problem areas.
Contingent liabilities: Analysis of the contin- Municipal Assets (Investments and
gent liabilities requires a more complex finan- Maintenance)—Historical Trends
cial analysis and projections of the net present Objective: The main objective is to draw a
values of those liabilities and thus is beyond the detailed, realistic, and reliable picture of the
scope of MFSA. Users can, however, make a big asset development and maintenance expendi-
step in the right direction by merely listing the tures and their movements over time.
contingent liabilities in face value. Table 3.27 Task: Fill out table 3.28 that lists assets by
depicts the situation of a city and helps MFSA sector or function. This entails the following:
users to better understand the nature of con- (1) make sure to separate the expenditures on
tingent liabilities. development or investments and on mainte-
What can we learn from this table? Lessons nance of the various asset groups (the borders
include the following: (1) paying the elec- between development and maintenance might
tricity bill may not even appear in any con- be blurred and thus require an expert judge-
tract, but it is the legal, moral, and political ment or just follow the way they are accounted);
responsibility of the owner municipality to (2) calculate the growth indexes separately for
pay on behalf of the water company to avoid development and for maintenance by each line
interruption of the electricity service and and the total; (3) write a short note about the
Table 3.27 Contingent Liabilities (ShS million)
Growth
Year 6 Year 7 Year 8 Year 9 Year 10 indexes (%)
Public stakeholders
–– Water PUC paying electricity bill 900 800 800 700 700 −6
–– Solid waste PUC
–– Transport PUC loan guarantee 5,000 4,000 3,000 2,000 1,000 −33
–– Culture or sport entities
Total contingent liabilities 5,900 4,800 3,800 2,700 1,700 −27
Note: PUC = public utility company; ShS (shillings) is a notional name of the currency of the sample city.
Getting the Finances in Order 141
Table 3.28 Asset Inventory and Maintenance
Tentative
142
assets Year 5 Year 6 Year 7 Growth index
Inventory Development Maintenance Development Maintenance Development Maintenance Development Maintenance
in current
Items year Actual Actual Actual Actual Actual Actual Last/First yr Last/First yr
Roads, streets (km2)
Paved roads km
Unpaved roads km
Public lighting (number of
lighting posts)
Water network km
Water treatment plants (m3 total
capacity)
Sewer network km
Wastewater treatment plants
and pumping stations (number)
Solid waste management trucks
(number)
Solid waste facilities: transfer
stations (number)
Solid waste facilities: landfill
(number)
Other public infrastructure and
equipment (parks, cemeteries,
parking and garage, etc.) (m2)
Educational facilities (number of
class or m2)
Health care facilities (m2)
Administrative facilities (m2)
Cultural facilities (m2)
Sport facilities (number)
Commercial facilities (m2)
Better Cities, Better World
Environmental facilities (number)
Public housing
Number of units
Total m2 of units
Cultural heritage (number)
Vacant municipal land hectare
Urban land
Agricultural, forest, nonurban land
Note: km2 = square kilometer; m2 = square meter; m3 = cubic meter.
main lessons learned, following the analysis analysis of asset development and mainte-
below. Insert a short summary on the asset nance. Most municipalities in the developing
composition and management. Provide a short world have not yet developed asset registers;
description of how maintenance activities in such situations, the MFSA report should
are carried out: directly by municipal staff, by be very brief or silent on the stock, composi-
municipal enterprises, by private contractors, tion, or value of assets, because data collection
and by the residents themselves. would be overwhelming. However, establish-
Analysis of results: It is good to start the ing and gradually populating a reliable asset
analysis with the total expenditures and dis- register can be included among the medi-
cuss the general growth of investments and of um-term priority actions in the MFSA Action
maintenance, calculating the share of main- Plan. The first step in the right direction
tenance compared to investment expenses would be to fill out table 3.28 with prelimi-
over time. The sample city has not yet filled nary but reliable information on stock of most
out the asset and maintenance database. critical assets, to indicate the underlying stock
Should results indicate very low levels or low of assets against the annual development and
growth of maintenance expenditures, the maintenance figures. As stated earlier, the
note may propose specific inquiry to find the asset inventory can also be started as part of
real underlying causes. Underlying causes the UA/SA.
may include (1) accounting and expen-
diture classification challenges, (2) real
imbalance between development and main- Step 3: Ratio Analysis
tenance and danger of neglecting existing
assets, (3) neglecting specific areas of assets Objectives: The objectives of the ratio anal-
(roads or water networks), and (4) a general ysis are (1) to get familiar with and to adopt
policy that allocates insufficient resources municipal finance benchmarks, (2) to foster
for maintenance. Comparing the growth greater understanding of a municipality’s
indexes across service sectors and functions financial position compared with the world or
may reveal strong priorities in some areas with other cities in the region (Kopanyi 2018),
and negligence in others. Highlighting and and (3) to highlight its potentials and key gaps.
measuring by indexes the disparities across The ratios and benchmarks presented in table
sectors or service functions is very important 3.29 are based on international standards and
because, although high-level decision mak- are in harmony with ratios used by rating
ers may allocate skewed resources on what agencies (Farvacque-Vitkovic and Sinet 2014).
they perceive as priority sectors, a compre- The ratios outlined in table 3.29 are indicative
hensive picture and numeric results would and not mandatory targets.
provide solid ground for a more substan- MFSA users may feel the ratios set stan-
tial and integral policy dialogue and a more dards that are too high, and some may suggest
informed decision-making process. applying different ratios for different groups of
Stock of assets: Discussion on stock of assets countries with different levels of development.
would be a useful part of the short MFSA We tend to disagree and recommend using
note, but it is only possible if the municipality the same ratios regardless of the development
has developed a comprehensive asset register or income level of a country or of a munici-
or a reliable asset inventory from which the pality because (1) these ratios convey import-
main results can be included in the historical ant messages for immediate, medium-term,
Getting the Finances in Order 143
Table 3.29 Key Financial Ratios
Comparative
index Actual
Indicator (definition) (benchmark) Year 1 Year 2 Year 3 Year 4 Year 5
1 Creditworthiness
Operating savings before interests/Current revenue > 30% 20% 8% 15% 15% 14%
Net operating surplus (after debt service)/ > 20% 19% 7% 14% 13% 10%
Current revenue
Investment balance before loan/Total revenue > –15% −1% −16% −22% −24% −16%
Financing gap after loan proceeds/Total revenue > –5% 5% −7% −5% −4% −6%
2 Indebtedness
Debt outstanding/Operating surplus (capacity to < 10 years 1 4 3 5 5
clear its debt)
Debt service/Total current revenue < 10% 2% 2% 3% 4% 8%
Debt outstanding/Budget total < 60% 14% 24% 36% 51% 56%
Borrowing/Current revenues < 15% 8% 14% 23% 25% 13%
Operating margin/Interest payment > 15 27 7 11 6 4
Debt outstanding/Total current revenue < 100% 20% 34% 51% 71% 69%
3 Fiscal autonomy
Own (taxes + fees + unconditional grants)/Total > 80% 85% 93% 93% 94% 99%
current revenue
4 Capital investment effort
Capital investment expenditure/Current revenue > 40% 61% 56% 56% 54% 30%
Capital investment expenditure/Total expenditure > 30% 43% 38% 40% 39% 25%
Current margin/Capital investment expenditure > 25% 32% 13% 25% 24% 34%
Capital investments from earmarked grants/Total < 50% 0% 0% 1% 1% 1%
investment expenditure
5 Level of service sustainability
Maintenance works expenditure/Operating > 15% 9% 9% 7% 8% 7%
expenditures
Taxes collected/Taxes levied > 90%
Fees collected/Fees billed > 90%
6 Quality of operations
Salaries and wages/Operating actual expenditures < 40% 20% 20% 20% 20% 18%
Number of municipal employees/1,000 citizens < 25 22 22 22 22 23
Actual revenue/Planned revenue 95%1 71% 43% 31% 27% 24%
obligations (due liabilities + arrears)
or long-term recommendations; (2) should a compromise comparability and would create
municipality meet most of these benchmark space for subjective judgements.
ratios, it is proof of good financial health and The vast majority of these ratios can be
creditworthiness; and (3) setting separate calculated from the core financial tables dis-
ratios for groups of countries would therefore cussed above, although some require additional
144 Better Cities, Better World
information like the population of the municipal- Figure 3.5 Operating Savings/Current Revenues
ity for each analyzed year or national averages of
0.40
the per capita revenue and expenditure indica- 0.35
Benchmark
tors that can be obtained from finance ministries 0.30
or from websites of bureaus of statistics. The 0.25
ratio analysis tables can be generated automati-
Ratios
0.20
cally by linking respective cells of the discussed 0.15
core and supplementary tables if users generate 0.10
those in Excel (other platforms or other account- 0.05
ing instruments can be used, too). Finally, Excel 0
also makes it easy to generate charts and figures 2008 2009 2010 2011 2012 2013 2014
(see figures 3.5, 3.6, and 3.7) to showcase the
tendencies of these ratios over the time period Figure 3.6 Capital Investment Expenditure/
under analysis. Figures and charts are powerful Current Revenue
instruments for communicating the results of
0.70
the ratio analysis to key stakeholders such as city
0.60
officials, investors, or other strategic partners.
0.50
Tasks: The specific tasks include the follow- Ratios Benchmark
ing: (1) fill out or generate automatically the 0.40
key financial ratios table (table 3.29); (2) draw 0.30
lessons from the ratios, and write a short note 0.20
on ratio analysis results by covering each ratio 0.10
area and focusing on specific outstanding 0
items; and (3) generate charts on key ratios and 2008 2009 2010 2011 2012 2013 2014
use them to support findings in your ratio anal-
ysis note. In the analysis, try to relate various Figure 3.7 Maintenance Expenditure/Current
ratios and draw joint lessons across ratios. Revenue
Analysis: Table 3.29 includes real results
from the sample city and shows the following 0.20
key features: Benchmark
0.15
Ratios
Creditworthiness ratios 0.10
Creditworthiness is a complex subject that
depends on various quantitative and qualitative 0.05
factors, but in simple ratio form it is measured
by the ratio between the operating savings and 0
2008 2009 2010 2011 2012 2013 2014
the current revenues in gross and net form.
Investors are also interested in whether invest-
ment balances and financing gaps are under savings are well below the benchmarks (fig-
control. ure 3.5 and table 3.30). This suggests that
The sample city achieved positive operat- the city is on the right track but has medium
ing savings over this time period, which is a creditworthiness and needs improvement in
good sign of creditworthiness; however, the order to support borrowing on the private
Getting the Finances in Order 145
Table 3.30 Creditworthiness Ratios
Benchmarks Year 1 Year 2 Year 3 Year 4 Year 5
Operating savings before interests/Current > 30% 20% 8% 15% 15% 14%
revenue
Net operating surplus (after debt service)/ > 20% 19% 7% 14% 13% 10%
Current revenue
Investment balance before loan/Total revenue > –15% −1% −16% −22% −24% −16%
Financing gap after loan proceeds/Total revenue > –5% 5% −7% −5% −4% −6%
Table 3.31 Indebtedness Ratios
Benchmarks Year 1 Year 2 Year 3 Year 4 Year 5
Debt outstanding/Operating surplus (capacity to < 10 years 1 4 3 5 5
clear its debt)
Debt service/Total current revenue < 10% 2% 2% 3% 4% 8%
Debt outstanding/Budget total < 60% 14% 24% 36% 51% 56%
Borrowing/Current revenues < 15% 8% 14% 23% 25% 13%
Operating margin/Interest payment > 15 27 7 11 6 4
Debt outstanding/Total current revenue < 100% 20% 34% 51% 71% 69%
debt market. Is the 30 percent of current two lines of ratios are also known as regula-
revenues too high a benchmark? No. Cities tory rules applied in many countries.
that are able to finance current expenditures The sample city’s indebtedness position is
from 70 percent or less of current revenues strong (table 3.31). The city could repay all out-
(or 80 percent with debt service) show a standing debt from 5-year operating surplus
strong foundation for borrowing (that is, (against the 10-year benchmark). Likewise, the
strong creditworthiness and creditors would outstanding debt stock is low: the highest was
consider a loan to them as “investment grade 71 percent of current revenues in year 4. The
debt”). Many cities in the world invest when debt service has been increasing, however, and
savings are low, but they finance investments reached 8 percent of current revenues (vs. 10
from target grants rather than from markets. percent benchmark) in year 5. The city’s out-
The sample city gradually weakened invest- standing debt has grown quickly in the period
ment balances, which fell below the bench- and came close to the 60 percent regulatory
mark, whereas the financing gap is by and benchmark (56 percent) in year 5 ( figure 3.8);
large under control. however, the annual borrowing far exceeded
the 15 percent current revenues benchmark in
year 3 and year 4. This high borrowing is a red
Indebtedness ratios
flag in the eyes of regulators, rating agencies, or
Indebtedness ratios include six different market partners. The operating margin shrank
benchmarks: the first two lines of table 3.31 to 4 percent of interest payments, which is also
measure debt repayment capacity; the second a red flag and deserves action.
146 Better Cities, Better World
Fiscal autonomy ratio not aim to blame a city; however, it is among
indicators the market is interested in.
The fiscal autonomy ratio captures the issue of
financial sovereignty of the city by measuring
Capital investment efforts ratios
what share of local funds is dependent on local
decisions or discretions. Lenders, investors, or Financial health can also be measured by cap-
other market partners look into not only the ital investment efforts, because capital invest-
main revenue figures but also the power of the ments around the benchmarks signal not only
local decision makers. financial health but also good investment
The sample city shows strong spending sov- policies. In contrast, low capital investments
ereignty (table 3.32) with over 80–90 percent. signal that a city manages financing opera-
It is worth mentioning that fiscal autonomy is tions but fails to generate revenues sufficient
more dependent on intergovernmental finance to fund the benchmark (40 percent) level of
systems and legislation than on local decisions, capital investments. The two ratios focus on
nevertheless boosting own-source revenues two aspects: (1) total investment efforts, mea-
increases sovereignty. Finding a low ratio does sured by capital investments against current
revenues, against total expenditures, and
Figure 3.8 Debt Stock/Budget Total against current margins; and (2) investments
financed from earmarked grants, which are
60 attributed more to national government than
50 to the city.
The ratios of the sample city show strong
40
investment performance, well over 40 percent
Percent
30 in some years, and negligible reliance on ear-
marked investment grants (figure 3.6 and
20
table 3.33). This is a robust result from the
10
market players’ perspectives. The figures also
show that the extreme investment level grad-
0
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
ually went down to the normal range, which
Table 3.32 Fiscal Autonomy Ratios
Benchmarks Year 1 Year 2 Year 3 Year 4 Year 5
Own (taxes + fees + unconditional grants)/ > 80% 85% 93% 93% 94% 99%
Total current revenue
Table 3.33 Capital Investment Efforts Ratios
Benchmarks Year 1 Year 2 Year 3 Year 4 Year 5
Capital investment expenditure/Current revenue > 40% 61% 56% 56% 54% 30%
Capital investment expenditure/Total expenditure > 30% 43% 38% 40% 39% 25%
Current margin/Capital investment expenditure > 25% 32% 13% 25% 24% 34%
Capital investments from earmarked grants/ < 50% 0% 0% 1% 1% 1%
Total investment expenditure
Getting the Finances in Order 147
signals attention from and good reactions weaknesses that are likely to reduce creditwor-
by the city’s higher decision-making bodies. thiness scores regardless of the level of other
Finally, the city has not relied on earmarked ratios, despite the city’s robust and increasing
capital grants, and thus had high sovereignty own-revenue collection.
in selecting priority projects and deciding
investments.
Quality of operation ratios
Level of service sustainability ratios A set of ratios signal the quality of city man-
agement and city operation via numeric figures
This set of ratios aims at capturing the service
(table 3.35).
sustainability from both the expenditure and
the revenue sides. • Salaries and wages over operating expendi-
The sample city has stayed well below the tures is an important sign of expenditure
benchmark in maintenance expenditures composition and good management.
(table 3.34), a common practice that signals The sample city shows robust results
high emphasis on investments, low priority with ratios well below the benchmark,
on maintenance, or both in many developing which means that the city spends much less
countries. on labor costs than the benchmark. It also
The mere fact that the city has not mea- means that the city saves money this way and
sured the revenue performance in fees (direct can spend proportionately more on services
source of service costs) or all taxes (a general and development. One caveat, however, is
source) signals financial management gaps that the labor expenditures also depend on
and weaknesses, and a lack of focus on ser- the service arrangements, namely whether
vice sustainability. Potential lenders or inves- the main services are provided by indepen-
tors would consider these to be substantial dent legal entities (public utilities or private
Table 3.34 Level of Service Sustainability Ratios
Benchmarks Year 1 Year 2 Year 3 Year 4 Year 5
Maintenance works expenditure/Operating > 15% 9% 9% 7% 8% 7%
expenditures
Taxes collected/Taxes levied >90%
Fees collected/Fees billed >90%
Table 3.35 Quality of Operations Ratios
Benchmarks Year 1 Year 2 Year 3 Year 4 Year 5
Salaries and wages/Operating actual expenditures < 40% 20% 20% 20% 20% 18%
Number of municipal employees/1,000 citizens < 25 22 22 22 22 23
Actual revenue/Planned revenue 95%1 71% 43% 31% 27% 24%
obligations (due liabilities + arrears)
148 Better Cities, Better World
providers), and thus the respective employ- serious financial troubles if the ratio is
ees are not on the wage list of the munici- greater than one, meaning that the overdue
pality. Other data discussed in the historical liabilities exceed cash reserves. The sam-
analysis suggest that this is indeed the case ple city has performed well according to
for the sample city and that the city spends this ratio because the ratio remained below
less on labor cost but provides for very sub- one. The ratio has shown an alarming ten-
stantial operating subsidies and transfers to dency, however, because it has moved from
other entities. Rating agencies would take 34 percent to 83 percent over the past five
note of this issue. years. Potential lenders, investors, or rating
agencies would note this as a potential risk
• Number of employees per thousand citizens factor.
is a good comparative indicator that does
not have direct financial implications, but it • Financial resources over financial obligations:
is still one signal of good management and This ratio indicates good financial health; if
service efficiency. it is greater than one, it means that financial
The sample city performs well on this resources (cash and cash-like instruments)
ratio because it is steadily below the bench- exceed the total financial liabilities and that
mark, although the above- mentioned caveats the city can pay out all obligations from cash
should be taken into account. reserves. We should notice not only that
the sample city has cash reserves that are
• Actual revenue over planned revenue is a very too low, well below financial liabilities, but
important ratio that signals the quality of also that this ratio worsened from 71 percent
revenue management. down to 24 percent over the past five years,
The sample city performs well on this which undermines the creditworthiness
ratio despite the fact mentioned before that it regardless of possible good results on other
does not clearly measure the collection effi- ratios.
ciency of either fee or tax revenues. Another
important aspect of this ratio is that total Comparison ratios
revenue also depends on the predictability
of central government transfers, which are There are important ratios beyond the dis-
apparently stable in the case of this sam- cussed financial ratios, namely ratios that
ple city. Finally, as mentioned before, some measure the per capita financial results of a
revenue sources appeared to be volatile and city. Table 3.36 summarizes the key compari-
unpredictable and the city counterbalanced son ratios of the sample city. These ratios are
those by selling assets or increasing some useful for comparing the city’s performance
other revenues, which is a good policy and in light of the national averages or in compar-
financial management practice. ison to other cities. The comparison ratios are
easy to calculate and provide a platform for
• Arrears over net cash (end of the year): This comparing cities with their peers. Calculating
ratio signals the financial strength of a these per capita ratios in local currency is the
city if the ratio is below one, which means commonly accepted approach and useful for
arrears accumulated are less than the cash national comparisons, but these calculations
reserves available. This condition is not can easily be transformed into common cur-
a very demanding one, because overdue rencies for broader international comparison
liabilities should be small, but it signals purposes.
Getting the Finances in Order 149
Table 3.36 Key Comparison Ratios
Comparison ratios in local currency National average Year 1 Year 2 Year 3 Year 4 Year 5
Total revenue per capita 32 27.2 24.6 27.7 29.0 30.9
Total expenditure per capita 31 25.9 26.2 28.8 29.9 32.6
Current actual revenue per capita 22 18.1 17.3 19.8 20.8 25.3
Debt outstanding per capita 10 3.7 5.8 10.0 14.7 17.4
Capital investment expenditures per capita 9 11.1 10.0 11.5 11.5 8.7
Comparison ratios in Euros
Total revenue per capita 4.6 3.9 3.5 3.9 4.1 4.3
Total expenditure per capita 4.4 3.7 3.7 4.1 4.2 4.5
Current actual revenue per capita 3.1 2.6 2.4 2.8 2.9 3.5
Debt outstanding per capita 1.4 0.5 0.8 1.4 2.1 2.4
Capital investment expenditures per capita 1.3 1.6 1.4 1.6 1.6 1.2
Exchange rate 7.00 7.05 7.10 7.15 7.18
Analysis: The first and most common anal- should be improved, and revenue administra-
ysis is to compare the city’s results with the tion, capacities, and performances should be
national average ratios to assess the city’s posi- analyzed to find options for boosting own rev-
tion among municipalities in a country. The enues. Third, asset maintenance needs better
sample city is close to the national average in management and increased budget because
terms of per capita revenues and expenditures. the levels of expenditures are far below
In contrast, it has reached a much higher level benchmarks and because the recent new
of per capita outstanding debt and a remark- investments will further expand the need for
ably higher level of per capita investment maintenance. Finally, improving information
expenditures as compared to the national aver- on tax and fee arrears and increasing collec-
age. These last two ratios reinforce each other tion is a vital precondition for increasing tax
and signal that the city is trying to catch up and fee revenues.
on infrastructure investments and to use debt
financing.
Step 4: Financial Projections
Objective: The overarching objective of the
Summary of ratio analysis financial projections is to support a prelimi-
Using the results of the sample city, here is nary analysis of the future financial situation
an example of key lessons and policy recom- of a municipality, identify main driving fac-
mendations that can be also included in the tors and challenges, and identify corrective
MFSA Action Plan. First, the creditworthi- policy measures for the next five years.
ness ratios should be improved by expanding
own current revenues. This improvement is
Financial Projections: Key Principles
critical: the city’s development depends on
and Framework
savings and borrowing, because it receives no
development grants from higher government. Principles of projections: The fundamental prin-
Second, the management of fees and taxes ciples of good financial projections include the
150 Better Cities, Better World
following: (1) complete an honest analysis of summarizes the key building blocks of and
data and options; (2) account known or fore- framework for the financial projections.
seen policy decisions into assumptions; (3) Procedure: Making financial projections
use explicit assumptions and avoid implicit requires a procedure with several key steps
assumptions; (4) insert known data into built upon each other, and largely relies on
the projections first and then use trends or the results of the historical analysis and ratio
growth factors to project financials; (5) make analysis. It is advisable to follow the sequence
conservative estimates for projections; (6) of steps as explained below and summarized
screen and test for consistency after the first in figure 3.9:
complete set of projections; (7) prepare pro-
jections in separate conservative and optimis- Socioeconomic environment: It is useful to
1.
tic scenarios; (8) project the sublines first and start with collecting a few data and writ-
then calculate the main lines from the results, ing a very short note on the socioeconomic
rather than simply projecting the aggregate environment, including demographic trends
main revenue or expenditure lines; (9) use (education, age, and growth of the city’s
external data from reliable national sources population); economic trends such as
(statistical bureau, ministry of finance or gross domestic product (GDP) growth and
industry) rather than making subjective prox- inflation indexes in the country and in the
ies on national economic factors; and (10) it
specific sectors active in the city (construc-
is wise to start the projections with supple- tion, manufacturing, or agriculture) often
mentary tables, then factor in key results to available from the statistics office or minis-
the core financial tables before starting pro- tries; and change of the economic environ-
jections of core financial line items. Figure 3.9 ment in the city (such as the growth of firms
and job opportunities).
Figure 3.9 Financial Projections Framework
2.
Tax performance: List the key les-
sons learned from the tax perfor-
Policy
decisions
mance analysis, and take into
Ratio
analysis that influence account factors that may change
projections the future volume of tax or fee reve-
nues (like change of tax or fee base—
Economy, the number of payers, revaluation of
business
environment properties or other tax bases, if these
Assumptions
have been seriously planned); note
Tax and fee
Projections the change date/year if those
performance changes have been decided and are
Historic
analysis
likely to happen in the projection
period.
CIP, asset and
maintenance
Revenues 3.
Asset management (CIP and mainte-
nance): If your city has adopted a CIP
Debt or is undergoing a UA/SA for the
database Expenditures
projection period, the results should
be accounted into the respective capi-
Note: CIP = capital investment plan. tal expenditure lines on financial
Getting the Finances in Order 151
projection tables instead of using trend fore- 8. Historical analysis of core financial tables:
casts. Maintenance may not be clearly Select the key lessons learned in the histori-
accounted in CIP; thus, maintenance expendi- cal analysis of the core financial tables, and
tures may be projected by trends, unless spe- include lessons among the assumptions if
cific policy decisions are known at the time of lessons point to factors that would trigger
the projections. divergence of data from the historical trends.
4. Debt database: Include the results (dis- 9. Projections: Complete the projections by fac-
bursements, principal, interest, and debt toring in all the respective results mentioned
service total) projected for the next five above. Examples are provided using data from
years in the debt database directly to the the sample city.
respective financing or expenditure lines of
the financial projections. Do not use simple 10. Analysis of the financial projection results:
trend projections for disbursement or debt It is important to analyze the results of the
service, because the debt database and CIP financial projections and to test the consis-
should be precise in projecting future debt tency, reality, and feasibility of the results.
service commitments for the coming five MFSA users may need to revise some pro-
years. jections to improve reality or feasibility.
For example, final results may project a
5. Ratio analysis: Select key results from the ratio large and persistent financing gap or bud-
analysis, and propose or assume policy deci- get deficit that could be balanced only with
sions that will influence the financial projec- extensive borrowing that would violate bor-
tions at some specific points in the projection rowing rules or limits, or they are unlikely to
period. Include these among the critical happen. In such a case, a careful revision of
assumptions and account them in at least one both revenue and expenditure projections
of the projection scenarios. is important to achieve a feasible scenario
6. Policy decisions: Prepare a short list or bullet (less budget deficit) of the future financial
points on policy decisions that substantially situation of the municipality.
and directly influence the financial projection
in the coming five years, and include them in Task: Fill out the core financial projection
the list of assumptions. These decisions could tables. Follow the procedure recommended,
be approved plans for revaluing properties, and complete the financial projections with a
changing fees, and so on. short summary note.
7. Assumptions: Prepare a list of assumptions
Financial Projections: Conditions and
before starting the financial projections to
Assumptions
ensure using well-defined and explicit
assumptions during financial projections. The first step of the financial projection is to
Explicit assumptions are vital to convince summarize as precisely as possible the gen-
readers of financial projections and authenti- eral socioeconomic conditions that a city
cate results. In contrast, should readers real- faces and the specific assumptions derived
ize the application of multiple hidden or from the historical and ratio analysis and from
implicit assumptions, they would downgrade various known or assumed policy decisions
the presented results, maybe more deeply that are projected to have direct impact on
than would be justified. the financial situation in the next five years.
152 Better Cities, Better World
Conditions and assumptions regarding the that deserve both attention and corrective
sample city measures by higher decision-making bod-
In this section, we summarize socioeconomic ies. With the lack of specific tax perfor-
conditions and assumptions that impact the mance data, the historical trends are the
financial projections for the sample city to help only instruments to project future tax rev-
MFSA users get familiar with the details, chal- enues. The city has no reported detailed fee
lenges, and practices and to understand and revenue database, so again the historical
apply the procedure for their municipalities. trends are the only useable instruments;
We use the results from the sample city dis- however, fee revenues jumped from about
cussed in the previous sections to illustrate the ShS5,000 to ShS12,000 in year 5, and this
work and guide MFSA users through the maze fact deserves further investigation because
of financial projection. Many lessons listed the high growth rate (49 percent per year
below are usable as explicit assumptions when in the past five years) calculated using this
filling up the core financial projection tables. jump will not be realistic over the coming
• Socioeconomic environment: The sample five years. Thus, an adjusted projection is
city is among the largest of the country, recommended, using the growth rate of the
with strong economic power (exemplified first four years but starting future projec-
also by the high volume of shared taxes), tions from the level of the year 5 fee reve-
steady but moderate population growth, a nue results, unless extensive collection of
strong labor market, and a well- educated fee arrears has caused a one-time jump of
labor force; it also hosts a strong man- fee revenues. Should the latter be the case,
ufacturing industry and transport hub. a historical trend from the first four years
Inflation was 7.3 percent per year in the should project the fee revenues until year 10.
year 1 through year 5 period and projected • Capital investment plan: The city has
to fall to about 3 percent. The real GDP adopted a CIP, so estimated budget expen-
growth of the country was a moderate 0.7 ditures can be used.
percent per year (with a negative growth The data suggest a radical reduction of
in year 2) but was expected to improve to
capital expenditures as compared to the last
above 2 percent in the projected period of
five years, exemplified by the year 5 data (table
year 6 through year 10. In sum, the socio-
3.37). The planned capital expenditures are
economic trends and factors, along with
particularly low in the last three years of the
its historical growth rates, suggest steady
projection, which might signal preliminary
growth of the city, and even better in some
data and may trigger future upward revision.
areas. The city’s economic growth outper-
It is wise to use these capital investment fig-
forms the country: the core economic sec-
ures in financial projections as conservative
tors active in the city’s metropolitan area
estimates, and a more optimistic scenario can
grew by 3 percent per year as compared be tested later. We should note that the CIP
with the 0.7 percent per year national GDP
also includes investments funded by the pub-
growth in the year 1 through year 5 period.
lic utility company and by the private sector
• Tax performance and fee revenues: The fact (see table 3.10); the volume of planned capital
that the city has no detailed and reliable investments is therefore somewhat higher,
tax database is a sign of substantial weak- but only the budgeted figures can be included
nesses in the financial management system in financial projection tables.
Getting the Finances in Order 153
Table 3.37 Capital Investment Plan—Summary (ShS million)
Total
Actual CIP Expenditure Plan five-year
Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 plan
Expenditures financed from budget 22,614 15,000 15,000 10,000 10,000 9,000 59,000
Note: CIP = capital improvement plan; ShS (shillings) is a notional name of the currency of the sample city.
• Debt database: The city has a debt database increase above the historical growth rates or
with an aging list of debt that provides solid trend lines to double in five years.
figures for financial projections and should
• Policy decisions: In the absence of concrete
be used instead of trend-line projections.
information and for training purposes, we
The aging list of debts clearly shows the
take into account a number of policy deci-
amount the city owes in principal repay-
sions and select them on the basis of the his-
ment, in interest payment, and in total debt
torical analyses and lessons learned during
service in year 6 through year 10. These are
the above discussions: (1) control indebted-
still projected figures, because effective debt
ness and debt benchmark ratios; (2) ensure
service might differ (for instance, if the city
timely and uninterrupted debt service;
wants early repayment, or “amortization,”
(3) improve creditworthiness by increasing
of some debts, or fails to serve some debt
own revenues; (4) put more emphasis on
because of budget shortage). In sum, these
asset maintenance; and (5) follow the con-
figures should be included in the core finan-
servative CIP in projecting capital expendi-
cial projection table. We should also note
tures, and project more ambitious plans in
that the city has experienced an extreme
an optimistic scenario.
growth of debt (51.5 percent per year!) with
the peak of debt stock in year 7; as a result, Summary of core assumptions
the city also faces extreme growth of debt • Assumptions are the following: (1) use histor-
service (over 60 percent increase per year ical trend projections in financial projection
in the first five projected years, and over 30 tables unless there are direct data or approved
percent annual increase over a 10-year time policy decisions; (2) revenues will grow along
period—see growth indexes in table 3.38). expenditures will
with historical trends; (3)
This underscores the conservative CIPs for grow along with historical trends as base
the projected time period. scenario; (4) some lines require specific
• Ratio analysis: The ratio analysis of the city assumptions that will be made explicit as
offers key lessons for policy dialogue and memo items; (5) linear trends will be used
corrective measures. In the absence of evi- as instruments for projecting the financial
dence of such policy dialogue and for train- data years ahead; and (6) historical analyses
ing purposes, we will use some assumptions of core financial tables and supplementary
from the ratio analysis summary: (1) data- tables are the bases for financial projections.
base and management of taxes will be
Financial Projections: Sample City’s Data
improved with additional growth effects in
the last three years of the projections; and Financial projections of the sample city: In
(2) expenditures on asset maintenance will this section, we will complete financial
154 Better Cities, Better World
Getting the Finances in Order
Table 3.38 Debt Service Summary—Excerpt from Debt Database (ShS million)
Growth Growth
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 index year index year
Items Actual Actual Actual Actual Actual Projected 1–year 5 (%) 1–year 10 (%)
–– Outstanding debt 8,599 13,820 24,705 37,320 45,295 47,428 55,215 51,229 49,181 47,614 51.5 20.9
–– Principal repayment 425 490 768 687 2,982 4,084 4,423 5,039 5,309 7,198 62.7 36.9
–– Interest charge 321 502 695 1,450 2,212 2,144 2,213 2,187 1,849 1,661 62.1 20.1
Debt service 746 992 1,464 2,138 5,194 6,228 6,636 7,226 7,158 8,859 62.5 31.6
Borrowing disbursement 3,197 5,645 11,375 13,383 8,662 5,115 11,871 438 2,991 3,741 28.3 1.8
Note: ShS (shillings) is a notional name of the currency of the sample city.
155
projections based on the set assumptions Projecting Debt Service, Capital
and the data of the sample city in order to Expenditures, and Capital Financing
help MFSA users get familiar with the pro- Projecting debt service, capital expenditures,
cedures, challenges, and instruments. As and capital financing will follow the same pro-
mentioned, we first need to insert into the cedures as discussed for current revenues and
projection tables the financial data borrowed expenditures, but this process should start by
from supplementary tables, and then project inserting data from supplementary tables (see
the other lines by using linear trends. We summary in table 3.40). Again, we use the data
will list the explicit assumptions as memo of the sample city to illustrate best practices
items under each projection table. We will and procedures.
complete the financial projections in two Assumptions: General assumptions remain
sections: (1) operating revenues, expendi- the same as before, and we will use specific
tures, and gross margin; and (2) debt service, assumptions and procedures in some lines
capital expenditures, capital financing, and marked again as memo items with continued
overall balance. numbering (*8) onward.
Debt service (*8): The debt service projec-
tions should be made in the supplementary
Projecting Current Revenues, tables by using the aging list of debts (loans/
Operating Expenditures, and Gross bonds). Should your municipality fail to pre-
Operating Margin pare an aging list of debts (usually a relatively
In this section, we will go through the effective small table), then the debt service might be
projection table of the sample city and high- projected with trends but should not be con-
light and explain findings and specific proce- sidered reliable. Municipal investment loans
dures in important lines. We offer one simple and loan amortizations should be well known
procedure or simple solution, but we admit and well documented five years ahead and
and emphasize that there are always other and even longer (till the end of the maturity, that
more sophisticated solutions MFSA users may is, the repayment period). New loans might
consider (see table 3.39). appear during a five-year projection period,
General assumptions: Let’s first summarize but they are under preparation often for one
some general assumptions applied all over the or two years ahead and may include a grace
financial projections: period; they are thus likely to cause only some
• Use historical linear trend projections in minor increase of interest payment in the pro-
financial projection tables unless there are jection period.
direct data (for example, debt service) or Furthermore, should the CIP indicate new
approved policy decisions. borrowing with the effective disbursement
and debt service for the projection period,
• Revenues will grow along with historical that should first be included in the debt ser-
trends. vice projections among the aging list of debts.
• Expenditures will grow along with histori- In sum, include in the debt service section the
cal trends. projected figures from the aging list of debts,
and avoid trend projections (lines 24–32 in
• Some lines require specific assumptions table 3.40). Please note that signing a loan
that will be made explicit as memo items. agreement does not immediately change the
156 Better Cities, Better World
Getting the Finances in Order
Table 3.39 Projection of Current Revenues, Operating Expenditures, and Gross Operating Margin—Conservative Estimates Scenario
(ShS million)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Actual Actual Actual Actual Actual Assumptions, formulas Projection Projection Projection Projection Projection
Items 1 2 3 4 5 serial number of years (x) 6 7 8 9 10
A Total current revenue 41,999 41,214 48,636 52,743 65,821 sum lines 1+6 69,588 75,633 83,209 93,118 97,398
1 Transfers from higher government 30,300 25,162 26,120 29,933 35,984 sum lines (7,10) 35,032 37,859 40,686 43,513 46,340
2 –– Shared taxes 24,053 22,255 22,747 26,915 35,631 y=2781.6x+17975 34,665 37,446 40,228 43,009 45,791
3 –– Unconditional transfers *4 6,192 2,613 3,076 2,865 y=6588.6–1213.2 USE zero! 0 0 0 0 0
4 –– Conditional transfers 55 294 297 153 353 y=45.565x+93.67 367 413 458 504 549
5 Own revenue 11,700 16,053 22,516 22,810 29,837 sum lines (2,5) 34,556 37,774 42,523 49,605 51,058
6 –– Local tax revenues *1 4,235 4,818 6,212 7,548 8,037 y=1033.4x+3069.6 9,270 10,303 11,337 12,370 13,404
7 –– Local fees and charges *2 2,496 4,389 5,571 5,397 12,347 y=988.63x+1991.6+5412 13,335 14,324 16,844 21,697 20,921
8 –– Local asset revenues 4,969 6,847 9,778 8,723 8,989 y=991.61x+4886.3 10,836 11,828 12,819 13,811 14,802
9 –– Local mixed revenues *3 955 1,142 464 y=204x–108.84 1,115 1,319 1,523 1,727 1,931
B Total operating expenditure 33,498 37,784 41,187 44,610 56,893 59,274 65,115 71,054 77,102 83,273
10 Labor (wages, salaries, taxes, charges) 6,592 7,635 8,141 9,075 10,034 y=832.38x+5798.2 10,792 11,625 12,457 13,290 14,122
11 –– Administrative staff
12 –– Technical, service, and other staff
13 Goods and services 10,052 10,917 11,386 12,737 15,044 y=1180.3x+8486 15,568 16,748 17,928 19,109 20,289
14 –– Office supply
15 –– Electricity
16 –– Fuel and gas
17 –– Repair and maintenance *5 2,956 3,234 2,813 3,472 3,940 y=(220.62x+2621.1)*1.1 4,339 5,040 5,838 6,745 7,774
18 –– Other goods and services
19 Current subsidies to service entities *6 7,606 6,023 9,134 8,612 11,242 y=986.19x+5564.9 11,482 12,468 13,454 14,441 15,427
20 Current grants and transfers *7 3,128 5,466 4,582 5,549 11,577 y=1698x+966.46 11,154 12,852 14,550 16,248 17,946
21 Social care/welfare support 1,946 3,274 3,827 3,774 3,492 y=359.18x+2185 4,340 4,699 5,058 5,418 5,777
22 Other current expenditures 1,217 1,236 1,305 1,392 1,563 y=84.93x+1087.8 1,597 1,682 1,767 1,852 1,937
C Gross operating saving (A – B) 8,502 3,430 7,449 8,133 8,928 10,315 10,517 12,155 16,016 14,126
Note: Empty cells in lines 11, 12, 14, 15, 16, and 18 reflect missing data (only aggregate figures were available); ShS (shillings) is a notional name of the currency of the sample city.
157
158
Table 3.40 Projecting Debt Service, Capital Expenditures, and Capital Financing—Conservative Scenario (ShS million)
Assumptions,
Year 1 Year 2 Year 3 Year 4 Year 5 formulas Year 6 Year 7 Year 8 Year 9 Year 10
D Debt service *8 746 992 1,464 2,138 5,194 All data from debt 6,228 6,636 7,226 7,158 8,859
23 − Interest charge 321 502 695 1,450 2,212 database, no plan 2,144 2,213 2,187 1,849 1,661
24 − Loan principal repayment 425 490 768 687 2,982 for new borrowing 4,084 4,423 5,039 5,309 7,198
E Net saving (C − 30) 4,799 (795) 3,172 2,523 (207) lines C-30 4,086 3,881 4,929 8,858 5,266
F Capital expenditure without debt service *9 25,845 23,770 28,222 29,100 22,614 from CIP 15,000 15,000 10,000 10,000 9,000
G Balance after capital expenditure (E − F) (21,046) (24,566) (25,049) (26,577) (22,821) (10,914) (11,119) (5,071) (1,142) (3,734)
H Investment financing (F – E) Need 21,046 24,566 25,049 26,577 22,821 10,914 11,119 5,071 1,142 3,734
I Investment financing available (capital rev) *13 17,734 12,564 9,303 8,220 7,407 10,467 15,923 19,866 19,677 26,555
25 Capital transfers 145 324 y=79.25–144.01 620 699 778 857 937
26 Investment grants/donations 32 90 365 171 5 y=2.66x+124.63 141 143 146 149 151
27 Own capital revenues 12,724 9,607 8,938 7,904 7,078 sum lines 37+38+39 5,352 4,052 2,753 1,454 1,287
28 − Proceeds from nonfinancial assets 887 645 546 443 1,354 y=73.16x+555.57 995 1068 1141 1214 1287
29 − Development fees and contributions *12 1,837 8,962 8,392 7,461 5,724 y=12593–1372.6x 4,357 2,985 1,612 240 0
(R2=0.94)
30 − Proceeds from financial assets 0 0 0 0 0 0 0 0 0 0
31 Cash reserves from previous years *11 4,978 2,867 0 0 0 Actual or projected 0 0 16,675 15,232 21,526
balance
Better Cities, Better World
32 Debt financing *10 3,222 4,956 10,192 12,548 7,022 From debt database 5,115 11,871 438 2,991 3,741
J Overall closing balance (A+I) – (B+D+F) 2,867 (3,812) (2,741) (2,337) (4,452) (A+I) – (B+D+F) 4,669 16,675 15,232 21,526 26,563
Note: ShS (shillings) is a notional name of the currency of the sample city.
debt service or the debt financing figures! fact that the amounts disbursed in years are the
Debt financing means and should reflect the historical figures and the amount that will be
amount disbursed in a specific year; like- disbursed (not the loan amount contracted!)
wise, the debt service should only include the should be included in the projection period.
amount paid on a loan in forms of either inter- Experience shows that disbursements from a
est or principal repayment in each year. new loan do not follow linear trends; they are
Memo items: See the discussions and expla- often moderate in the first year because of the
nations for table 3.40. General assumptions: preparation and slow start of the respective
infrastructure project, and then disbursement
• Use historical linear trend projections in scales up in the second and third year or so. In
financial projection tables unless there are sum, please use realistic data from disburse-
direct data (for example, debt service) or ment plans for projecting debt financing of
approved policy decisions. infrastructure in the budget, and avoid using
• Expenditures will grow along with histori- trends even if there is no aging list of debts and
cal trends. disbursement plans approved.
Surplus from previous years (*11): Surpluses
• Some lines require specific assumptions may accumulate over years and dry up quickly
that will be made explicit as memo items. on rainy days or because of increased invest-
ments or debt service. For these reasons, MFSA
Capital expenditures (*9): Capital expendi- users should use bank reconciliation figures for
tures might be listed in a CIP as in the case of the years in the historical analysis, but also for
our sample city. In such case, the capital expen- careful calculation of budget surpluses for the
diture figures should be borrowed from the CIP future years. Do not use trend projections for
if it exists or from the PIP of the UA/SA if it is the surpluses!
available, and they should only include expen- Development fees (*12): Development fees
ditures the CIP indicates as financed from or are a substantial source of revenues in the sam-
through the city budget, such as borrowing or ple city; however, experience shows that they
disbursement of a loan in a year. With the lack depend on economic cycles and thus tend to
of an adopted CIP, a list of priority projects be volatile. In the case of the sample city, there
might help in projecting capital expenditures, is a solid and predictable downward sloping
but with less reliable figures. Making trend trend in development fees (trend predictability
projections for capital expenditures can be the appears to be high: R2 = 0.94), which would end
last resort. We used CIP figures in table 3.40. with negative development fees in year 10. We
Debt financing (*10): Should your munici- therefore calculate a linear trend in projections,
pality have debt or plan borrowing, please first but obviously should project zero revenue
calculate debt financing in the aging list of debt, instead of negative in year 10. City managers
which may include the projected amount of may inform the finance department about the
debt disbursed in years ahead. Municipal loan change of a trend and suggest projecting solid
financing investments often cover 5–10 years or positive revenues for the coming years, and
longer and include gradual disbursement of the this can be taken into account. We followed the
contracted loan proceeds in 2–3 years or lon- linear trend with the lack of information that
ger, a grace period for repayment of loan prin- questions this trend. However, we calculated
cipal, and a corresponding payment of interest. an optimistic scenario discussed below where
MFSA users should understand and follow the we assumed that the development fees remain
Getting the Finances in Order 159
flat in the range of ShS5,000 million for the realistic conservative scenario that is most
entire projection period. likely to happen come rain or shine but also
Investment financing (*13): The investment an optimistic scenario in parallel. MFSA users
financing line includes funds available for should be aware, however, that this optimistic
financing investments beyond net savings: cap- scenario is a dangerous proposition because
ital transfers (line 25), investment grants (26), higher decision-making bodies may love
own capital revenues (27), surplus from previ- to hear better scenarios but projecting and
ous years (31), and debt financing (line 32). achieving more revenues also requires them
Overall closing balance: The overall clos- to approve respective decisions (for exam-
ing balance (line J) is the difference between ple, voting for increasing fee or tax rates,) and
investment financing need (H) and investment budget to improve tax administration with-
financing available (I). This amount should be out which the projected revenue increases
calculated from the sums of projected revenues remain groundless. In addition, an optimistic
and expenditures rather than projecting bal- scenario may convince higher decision-mak-
ance with trends. ing bodies that the higher revenues or lower
expenditures require approval of unpopular
policies and budgets for revenue administra-
Financial Projections: An Optimistic
tion improvements. Let’s see the results and
Scenario
draw some lessons from table 3.41. We follow
Optimistic scenario: There is ample room for the sequence of memo item numbering start-
projecting more optimistic but still reasonable ing with (*14).
scenarios (table 3.41). Options are summarized Local tax revenues (*14): We assume that
below, based on three policy assumptions: (1) the the local tax revenues will increase more sub-
tax administration improvements increase tax stantially after two years of reform preparation
revenues more substantially and double the vol- and add to trend projections ShS1,000 million,
ume of annual tax revenues from year 5 to year 2,000 million, and 3,000 million in annual rev-
10; (2) the development fee revenues will stabi- enues from year 8 onward, respectively. This
lize after year 5 and generate ShS5,000 million would result in an overall doubling of annual tax
in revenues per year; (3) the city can borrow revenues by year 10 as compared to the year 5
against the increased revenue and generated base year (see line 2 in table 3.41). International
surpluses and thus increase investments to the experience suggests that doubling tax revenues
tune of ShS20,000 million per year (table 3.41 in five years is ambitious but possible.
summarizes the results of an optimistic sce- Development fees and contributions (*15): As
nario). Some may recommend that the city plan said, the trend of development fees follows a
to cut operating subsidies to municipal entities solid downward sloping route that would end
(water or solid waste companies); this is a wise up with negative revenue in year 10. The opti-
approach, but we should note that it is only justi- mistic scenario is that these revenues will be
fied if there are reasonable plans for implement- stabilized and generate about ShS5,000 mil-
ing those expenditure cuts. We have not included lion in revenues per year between year 6 and
these possible cuts on current subsidies, despite year 10. This provides for a major improve-
the fact that we would support those measures. ment of budget balances and room for higher
The optimistic scenario is a dangerous development.
proposition: It is wise to compute and show Debt financing (*16): On the basis of the
higher decision-making bodies not only a robust increase of revenues in the optimistic
160 Better Cities, Better World
Table 3.41 Projection of Current and Capital Budgets and Balances—Optimistic Scenario (ShS million)
Getting the Finances in Order
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Assumptions,
Actual Actual Actual Actual Actual formulas serial Projection Projection Projection Projection Projection
Items 1 2 3 4 5 number of years (x) 6 7 8 9 10
A Total current 41,999 41,214 48,636 52,743 65,821 sum lines 1+6 69,588 75,633 84,209 95,118 100,398
revenue
1 Own revenue 11,700 16,053 22,516 22,810 29,837 sum lines (2,5) 34,556 37,774 43,523 51,605 54,058
2 Local tax
− 4,235 4,818 6,212 7,548 8,037 y=1033.4x+3069.6 9,270 10,303 12,337 14,370 16,404
revenues *14
3 Local fees and
− 2,496 4,389 5,571 5,397 12,347 y=988.63x+1991.6+ 13,335 14,324 16,844 21,697 20,921
charges *1 5412
4 Local asset
− 4,969 6,847 9,778 8,723 8,989 y=991.61x+4886.3 10,836 11,828 12,819 13,811 14,802
revenues
5 −
Local mixed 955 1,142 464 y=204x–108.84 1,115 1,319 1,523 1,727 1,931
revenues *3
6 Transfers from 30,300 25,162 26,120 29,933 35,984 sum lines (7,10) 35,032 37,859 40,686 43,513 46,340
higher govern-
ment
7 Shared taxes
− 24,053 22,255 22,747 26,915 35,631 y=2781.6x+17975 34,665 37,446 40,228 43,009 45,791
8 − Unconditional 6,192 2,613 3,076 2,865 y=6588.6–1213.2 USE
transfers *4 zero!
9 − Conditional 55 294 297 153 353 y=45.565x+93.67 367 413 458 504 549
transfers
B Total operating 33,498 37,784 41,187 44,610 56,893 59,274 65,115 71,054 77,102 83,273
expenditure
10 Labor (wages, 6,592 7,635 8,141 9,075 10,034 y=832.38x+5798.2 10,792 11,625 12,457 13,290 14,122
salaries, taxes,
charges)
11 − Administrative
staff
12 − Technical,
service, and
other staff
13 Goods and 10,052 10,917 11,386 12,737 15,044 y=1180.3x+8486 15,568 16,748 17,928 19,109 20,289
services
14 Office supply
−
161
15 − Electricity
continued next page
Table 3.41 Continued
162
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Assumptions,
Actual Actual Actual Actual Actual formulas serial Projection Projection Projection Projection Projection
Items 1 2 3 4 5 number of years (x) 6 7 8 9 10
16 Fuel and gas
−
17 −
Repair and 2,956 3,234 2,813 3,472 3,940 y=(220.62*x+2621.1)*1.1 4,339 5,040 5,838 6,745 7,774
maintenance *5
18 −
Other goods and
services
19 Current subsidies 7,606 6,023 9,134 8,612 11,242 y=986.19x+5564.9 11,482 12,468 13,454 14,441 15,427
to service
entities *6
20 Current grants and 3,128 5,466 4,582 5,549 11,577 y=1698x+966.46 11,154 12,852 14,550 16,248 17,946
transfers *7
21 Social care/welfare 1,946 3,274 3,827 3,774 3,492 y=359.18x+2185 4,340 4,699 5,058 5,418 5,777
support
22 Other current 1,217 1,236 1,305 1,392 1,563 y=84.93x+1087.8 1,597 1,682 1,767 1,852 1,937
expenditures
C Gross operating 8,502 3,430 7,449 8,133 8,928 10,315 10,517 13,155 18,016 17,126
saving (A – B)
Assumptions, 2014 2015 2016 2017 2018
formulas
D Debt service *8 746 992 1,464 2,138 5,194 6,228 6,636 7,226 7,158 8,859
23 Interest charge
− 321 502 695 1,450 2,212 All data from debt 2,144 2,213 2,187 1,849 1,661
database, no plan for
new borrowing
24 Loan repayment
− 425 490 768 687 2,982 4,084 4,423 5,039 5,309 7,198
E Net saving (C – D) 7,756 2,438 5,985 5,995 3,733 lines C − D 4,086 3,881 5,929 10,858 8,266
F Capital expenditure 25,845 23,770 28,222 29,100 22,614 from CIP 15,000 20,000 20,000 20,000 20,000
Better Cities, Better World
without debt
service *18
G Balance after (18,089) (21,332) (22,236) (23,105) (18,881) (10,914) (16,119) (14,071) (9,142) (11,734)
capital expenditure
(E − F)
continued next page
Table 3.41 Continued
Getting the Finances in Order
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Assumptions,
Actual Actual Actual Actual Actual formulas serial Projection Projection Projection Projection Projection
Items 1 2 3 4 5 number of years (x) 6 7 8 9 10
H Investment 18,089 21,332 22,236 23,105 18,881 10,914 16,119 14,071 9,142 11,734
financing (F – E)
Need
I Investment 17,734 12,564 9,303 8,220 7,407 11,870 18,781 14,226 11,375 13,350
financing
available (capital
rev) *17
25 Capital transfers 145 324 y=79.25–144.01 620 699 778 857 937
26 Investment 32 90 365 171 5 y=2.66x+124.63 141 143 146 149 151
grants/donations
27 Own capital 12,724 9,607 8,938 7,904 7,078 sum lines 37+38+39 5,995 6,068 6,141 6,214 6,287
revenues
28 −
Proceeds from 887 645 546 443 1,354 y=73.16x+555.57 995 1,068 1,141 1,214 1,287
nonfinancial
assets
29 − Development 11,837 8,962 8,392 7,461 5,724 y=12593–1372.6x 5,000 5,000 5,000 5,000 5,000
fees and (R2=0.94)
contributions *15
30 Proceeds from
−
financial assets
31 Cash reserves 4,978 2,867 actual or projected 2,662 155 2,233
from previous balances
years
32 Debt financing 3,222 4,956 10,192 12,548 7,022 From debt database 5,115 11,871 4,500 4,000 3,741
(actual or need in
projections) *16
J Overall closing 2,867 (3,812) (2,741) (2,337) (4,452) (A–I)–(B+D+F) 956 2,662 155 2,233 1,616
balance
(A+I) – (B+D+F)
Note: ShS (shillings) is a notional name of the currency of the sample city.
163
scenario, the city may decide to borrow or cash reserves directly or borrow against cash
disburse faster and increase the development reserves and increase capital investments sub-
funding available substantially. There is no stantially even in the conservative scenario.
need for large sums: the scenario presented
in table 3.41 includes increasing borrowing or Summary lessons from the optimistic
loan disbursement in year 8 by ShS4,000 (from financial projections
ShS438 to ShS4,500), and in year 9 increasing The optimistic scenario assumes demanding
planned disbursement by a mere ShS1,000 but possible changes in tax revenues, a more
(from ShS2,990 to ShS4,000). optimistic economic scenario that supports
Investment funding available (*17): With generating substantial revenues from land
these changes, the funding available increases development fees, and enables additional bor-
dramatically and development investments rowing to finance substantially greater devel-
can be increased substantially while maintain- opment while maintaining a balanced budget
ing overall budget balances. Projecting budgets (a key obligation for municipalities).
with negative balances should be ruled out! Gradual changes: The analysis of the two
Capital development expenditures (*18): The scenarios has also revealed that changes in total
optimistic projection scenario would enable the revenues, expenditures, and capital finances
city to maintain capital investments in the range are very gradual even when strong political
of ShS20,000 million, which would remain support is assumed (which is not always the
below the 40 percent of current revenues case), because it is difficult to change large
(between 20 and 30 percent) but at least would numbers even over a five-year time period.
enable moderate but steady development.
Important to note is that the CIPs also include Financial Ratios in Projections
investments by municipal entities and even MFSA users may calculate the main financial
moderately by the private sector, with which the ratios for the projected time period. This has
investments will exceed 30 percent of current been done for the sample city, and results are
revenues. Unfortunately, the analyzed scenarios summarized in table 3.42. This is also an import-
and the projected numbers do not support more ant communication tool to engage the city’s
ambitious investment plans, unless more radical higher decision-making bodies in substantial
improvements of the revenues or some remark- policy dialogue based on real and solid numbers
able savings in current expenditures create instead of simple revenue or development plans.
room for greater development funding. This is Creditworthiness: Operating savings over
an important lesson the higher decision- making current revenues show marginal improve-
bodies should be aware of. ments in the base scenario; numbers get
closer to the 20 percent range in the opti-
Financial Projections: Lessons Learned mistic scenario. Thus, the city presumably
faces some risk premium in case of debt
Summary lessons from the conservative financing.
financial projections Indebtedness: All indebtedness ratios remain
We should note that the overall closing balance stable even in the optimistic and higher invest-
has improved and shows robust surpluses due ment scenario with increased borrowing. This
to the increased revenues and the very conser- suggests that there is room for debt financing,
vative CIPs in the conservative scenario. This although the city should and indeed has started
suggests that the city can revise CIPs and use to approach external funding outside debt.
164 Better Cities, Better World
Getting the Finances in Order
Table 3.42 Financial Ratios in Conservative Projection Scenario
Comparative Actual Projections
index Year Year Year Year Year Year Year Year Year Year
Indicator (definition) (benchmark) 1 2 3 4 5 6 7 8 9 10
1 Creditworthiness
interests/
Operating savings before > 30% 20% 8% 15% 15% 14% 15% 14% 15% 17% 15%
Current revenue
Net operating surplus (after debt > 20% 19% 7% 14% 13% 10% 6% 5% 6% 10% 5%
service)/Current revenue
Investment balance before loan/Total > –15% −1% −16% −22% −24% −16% −14% −12% −6% −1% −4%
revenue
Financing gap after loan proceeds/Total > –5% 5% −7% −5% −4% −6% 6% 21% 18% 23% 27%
revenue
2 Indebtedness
Debt outstanding/Operating surplus < 10 years 1 4 3 5 5 5 5 4 3 3
(capacity to clear its debt)
Debt service/Total current revenue < 10% 2% 2% 3% 4% 8% 9% 9% 9% 8% 9%
Debt outstanding/Budget total < 60% 14% 24% 36% 51% 56% 63% 69% 59% 51% 48%
Borrowing/Current revenues < 15% 8% 14% 23% 25% 13% 7% 16% 1% 3% 4%
Operating margin/Interest payment > 15 27 7 11 6 4 5 5 6 9 9
Debt outstanding/Total current < 100% 20% 34% 51% 71% 69% 68% 73% 62% 53% 49%
revenue
continued next page
165
166
Table 3.42 Continued
Comparative Actual Projections
index Year Year Year Year Year Year Year Year Year Year
Indicator (definition) (benchmark) 1 2 3 4 5 6 7 8 9 10
3 Fiscal autonomy
Own (taxes + fees + unconditional > 80% 85% 93% 93% 94% 99% 99% 99% 99% 99% 99%
grants)/Total current revenue
4 Capital investment effort
Capital investment expenditure/ > 40% 61% 56% 56% 54% 30% 22% 20% 12% 11% 9%
Current revenue
Capital investment expenditure/Total > 30% 43% 38% 40% 39% 25% 19% 17% 11% 11% 9%
expenditure
Current margin/Capital investment > 25% 32% 13% 25% 24% 34% 54% 55% 100% 142% 138%
expenditure
Capital investments from earmarked < 50% 0% 0% 1% 1% 1% 3% 4% 5% 6% 6%
grants/Total investment expenditure
5 Level of service sustainability
Maintenance works expenditure/ > 15% 9% 9% 7% 8% 7% 7% 8% 8% 9% 9%
Operating expenditures
Taxes collected/Taxes levied > 90% 60% 60% 70% 80% 80%
Fees collected/Fees billed > 90% 60% 60% 70% 80% 85%
Better Cities, Better World
6 Quality of operations
Salaries and wages/Operating actual < 40% 20% 20% 20% 20% 18% 18% 18% 18% 17% 17%
expenditures
Capital investment efforts: The capital budget planning and execution. The MFSA
investment efforts ratios reflect a clear policy helps to systematically analyze and explore
goal to stabilize indebtedness and ensure solid underlying tendencies, identify feasible and
and timely debt service. As a result, the capital realistic options, and support decisions for
investments are projected to remain below the corrective measures. These are the subject of
40 percent target because of long-time effects the final step of the MFSA, namely the MFSA
of the high investments in the year 1 through Action Plan, which builds on key findings of
year 5 time period. Capital investments are the previous steps.
substantially larger in the optimistic scenario,
but still leave the city’s ratios below 30 percent. Financial Projections: Creditworthiness
These results also underscore the importance and Borrowing Capacity
of seeking external funding by both municipal
enterprises and the private sector. Creditworthiness
Repair and maintenance: The ratios on repair Creditworthiness is a well-used term, but it is
and maintenance show a marginal increase in a softer term than some people would expect.
both scenarios, despite the fact that the plans The MFSA results help us ( just like investors,
include doubling the annual repair and main- creditors, or ministries) to assess a city’s pres-
tenance expenditures by year 10 as compared ent and future creditworthiness. The financial
to year 5. This is an obvious effect that the over- ratios provide a solid basis for creditworthiness
all revenues will also increase in the projected assessment; however, it is still more a qualita-
time period. In addition, however, the dou- tive than a quantitative measurement, because
bling of an initially low level of maintenance creditworthiness is on a continuum and cannot
expenses may appear insufficient because the be captured by one single number. It is, there-
large capital investments completed and assets fore, better to assess creditworthiness in ranges,
installed/built during the year 1 through year such as weak, medium, or strong creditworthi-
5 time period will increasingly pressure repair ness, and using several years rather than one
and maintenance needs in the forecasted five particular year. Another issue to bear in mind
years ahead. is that historical figures on creditworthiness
may be used if there is no projection, but they
Takeaway lessons signal creditworthiness in the past; however,
The short summary of the projections results investors are interested more in the projected
underscores that the most important role of an future creditworthiness that signals capacity
MFSA analysis is not only to support extensive for repaying new debts. Finally, there are sev-
and substantive policy dialogue in and across eral indicators that may signal different levels
various levels of local government executives of creditworthiness, so the final assessment
and policy makers but also to promote the is a combination of various signals, explained
approach that policy dialogues should be based below with the results of the sample city.
on numbers, clear assumptions, and careful anal- The sample city has medium creditwor-
ysis of the results rather than wishful thinking. thiness (as opposed to weak or strong). The
MFSA is a policy analysis tool: Finally, it is operating savings are substantial (table 3.43),
important to emphasize that the MFSA is not but the ratios stay in the median between zero
a budget planning tool and that decisions on and the high creditworthiness level in both the
short or medium terms remain on the shoul- past and the future medium term. They show
ders of the persons and bodies responsible for some improvement in projections but remain
Getting the Finances in Order 167
Table 3.43 Creditworthiness Analysis
Comparative Actual Projections
Indicator index Year Year Year Year Year Year Year Year Year Year
(definition) (benchmark) 1 2 3 4 5 6 7 8 9 10
Operating > 30% 20% 8% 15% 15% 14% 15% 14% 15% 17% 15%
savings before
interests/
Current revenue
Net operating > 20% 19% 7% 14% 13% 10% 6% 5% 6% 10% 5%
surplus (after
debt service)/
Current revenue
Investment > –15% −1% −16% −22% −24% −16% −14% −12% −6% −1% −4%
balance before
loan/Total
revenue
Financing gap > –5% 5% −7% −5% −4% −6% 6% 21% 18% 23% 27%
after loan
proceeds/Total
revenue
far from the 30 percent investment grade ratio. revenues, and debt databases; thus, calculating
The net operating savings ratio is projected to debt capacity is inevitably more complicated
drop from above 10 percent to below 10 percent, than assessing creditworthiness. Some may use
which signals substantial weakening of credit- creditworthiness and borrowing capacity terms
worthiness in the projected period. In contrast, as synonyms, but for the MFSA analysis it is
both the investment balance and the financ- vital to distinguish these two terms. Table 3.44
ing gap ratios show strong positions and good shows six ratios, two of which are also known
improvements in projected years. Thus, it is fair as regulatory ratios: Debt outstanding / Budget
to say the city has medium creditworthiness. total [<60%] and Borrowing / Current revenues
[<15%]. The other four ratios indicate specific
Borrowing, credit, or debt capacity financial aspects of credit capacity.
Borrowing capacity means how much a city can Regulatory ratios are being used in many
borrow, that is, what amount of new debt can be developed countries (for example, in Europe)
procured at a specific point in time. Borrowing, and are increasingly popular in the developing
credit, and debt capacity therefore have the world. The advantage of these ratios is that they
same meaning in this context, so we will use are easy to measure by both the city and the
the term debt capacity for the sake of simplic- ministries because they require obtaining only
ity. It is a vital indicator for city governments, two numbers, such as debt stock and total reve-
and it should be estimated in real numbers (as nues (or total budget). They have serious short-
opposed to qualitative creditworthiness mea- comings, however, which include the following.
sures). There are several indicators, however, First, a city with low creditworthiness (operat-
that may induce different numbers in estimat- ing savings are negligible) can still be assessed
ing the debt capacity of a city. Estimating debt to have huge debt capacity if its Debt outstand-
capacity requires combining results from ratios, ing / Budget total is far below 60 percent. The
168 Better Cities, Better World
Table 3.44 Ratios for Debt and Borrowing Capacity Analysis
Comparative Actual Projections
Indicator index Year Year Year Year Year Year Year Year Year Year
(definition) (benchmark) 1 2 3 4 5 6 7 8 9 10
Debt outstanding/ < 10 years 1 4 3 5 5 5 5 4 3 3
Operating surplus
(capacity to clear
its debt)
Debt service/Total < 10% 2% 2% 3% 4% 8% 9% 9% 9% 8% 9%
current revenue
Debt outstanding/ < 60% 14% 24% 36% 51% 56% 63% 69% 59% 51% 48%
Budget total
Borrowing/Current < 15% 8% 14% 23% 25% 13% 7% 16% 1% 3% 4%
revenues
Operating margin/ > 15 27 7 11 6 4 5 5 6 9 9
Interest payment
Debt outstanding/ < 100% 20% 34% 51% 71% 69% 68% 73% 62% 53% 49%
Total current
revenue
flip-side is that a city may have robust operating may use them as signals even if there are no
savings, and good debt service capacity, but the such national rules in effect.
60 percent limit constrains its new debt. The sample city has launched a major invest-
The ratio of Borrowing / Current revenues ment program with fast-growing debts in the
again is easy to calculate, but it may be mis- past five years; as a result, it will violate the
leading. A city may become overindebted 60 percent rule in the first two projected years
(although in compliance with the indebt- and will have reasonable room for new debt
edness ratio) if it borrows about 15 percent only in the last two projected years from the
of current revenues repeatedly in each of perspective of this ratio. This suggests that
several consecutive years. In contrast, a city the city can reach debt stock of ShS74 billion,
with strong repayment capacity would be against the ShS47 billion projected debt stock
able to service a larger loan that may violate (data from table 3.9 and table 3.38), that is, its
this 15 percent rule in one particular year but capacity to procure new debts will be ShS27
plans no borrowing in the next two to three billion in year 10. In the context of the MFSA,
years, so, on average it would comply with borrowing means disbursement of debt in a
this regulation. The combination of these two particular year. The city will exceed the 15
ratios provides better control over indebted- percent of current revenue over borrowing
ness, because they control both stock and flow limit in year 7, but it will stay well below after
indebtedness ratios. Finally, there are vague that. In year 10, the city can disburse an addi-
enforcement rules attached to these ratios in tional 11 percent of current revenues beyond
many countries; as a result, cities may violate the plans (data from table 3.9 and table 3.38),
these rules without serious consequences. In that is, ShS10.8 billion beyond the planned
practice, these guiding regulatory ratios are ShS3.7 billion. We will see that some other
useful despite their said limitations, so cities ratios indicate lower borrowing capacity.
Getting the Finances in Order 169
Debt and borrowing capacity based on debt • The sample city will have a projected cur-
service capacity ratios rent revenue of ShS97.4 billion (table 3.39),
The other four ratios in table 3.44 aim to which allows ShS9.74 billion debt service
measure debt or borrowing capacity accord- according to this ratio.
ing to the city’s ability to service old and new
• The debt service capacity also depends on
debts in the future. They signal the size of debt
the debt terms, such as interest rate and
a city can procure in addition to its existing
maturity (number of years to repay). The
debt stock, using benchmarks established by
existing debt stock of the sample city indi-
creditors or rating agencies. These ratios pro-
cates various interest rates (table 3.8); let’s
vide more precise measures for debt capac-
assume a 5 percent rate for debts will be
ity; however, they require more complicated
available with a 15-year maturity investment
calculations.
loan to be procured in year 10.
Debt outstanding over operating surplus:
This ratio requires that a city should be able • The city will have high debt service of
to clear all debts from operating surplus ShS8.6 billion in year 10 (table 3.38), and thus
within 10 years. The sample city’s ratios are will have room for additional debt service up
well below 10 years; it can clear its debts in to ShS1.14 billion (9.74 billion – 8.6 billion).
5 years or fewer. This ratio suggests that in
• The annuity and present value calculation
year 10 the sample city can procure new debt
(see TD4 in appendix B) suggests that the
up to the level that its outstanding debts can
sample city will have the capacity to pro-
be cleared within 10 years as opposed to the
cure ShS11.83 billion of new debt while
projected level of 3 years. The sample city is
complying with the said debt service ratio in
projected to have ShS14.1 billion of operating
year 10; this amount is much less than the
savings (table 3.39) and ShS47.6 billion of out-
other ratios would allow, although it is still
standing debt at the end of the five-year plan
substantial.
(table 3.38). According to this ratio, the city
can raise its debt stock up to ShS141 billion Operating margin over interest payment: This
(10 times the amount of operating savings). ratio suggests that, for secure debt manage-
Thus, the capacity to procure new debt is ment, the operating margin should be 15 times
ShS93.4 billion in the year 10 planned year. We greater than the annual interest payment. The
should note, however, that this ratio does not ratios in table 3.38 indicate that the sample city
capture how much of the operating savings is is in trouble, because the combination of debt
required to service the existing debts. services (results of interest rates, maturity, and
Debt service over total current revenue: grace period) will overburden the city budget
This benchmark suggests that a city can with debt service around year 10. Thus, the
use up to 10 percent of its current revenue city has no borrowing capacity in the planned
for debt service in order to remain a sta- five years according to this measure, because
ble debtor. The sample city is projected to the operating margin will be only nine times
nearly exhaust this debt capacity, because greater than the due interest payments in year
the projected ratios will move up to the 10 (table 3.38 and table 3.39). The city may still
range of 8–9 percent in the planned period. procure debt, however, if lenders and regula-
Calculating the capacity for procuring new tors do not measure this ratio, or if it receives
debts in the projected year 10 requires a cer- credit enhancement support (the latter is
tain procedure and key data. beyond the scope of MFSA).
170 Better Cities, Better World
Table 3.45 Debt Capacity of Sample City in financial scenarios. Depending on its policy, a
Year 10 lender may remain conservative and estimate
Capacity to procure ShS11.8 billion new debt capacity in normal
new debt terms; however, it may go beyond that amount
Ratios to project debt ShS billion by attaching a higher risk premium or request-
capacity ing some credit enhancement or securitization
Debt outstanding/ 27.0 of debt. The list of estimated debt capacity
Budget total suggests, however, that lenders would likely
Debt outstanding/ 93.4 stay somewhere within the ShS11.8 billion and
Operating surplus
27.0 billion range. The city, however, may still
Debt service/Total 11.8 need to meet the regulatory rules and limit bor-
current revenue
rowing (disbursement of loans) below ShS10.8
Operating margin/ 0
billion in the last planned year.
Interest payment
Financial projections in optimistic scenarios:
Debt outstanding/ 49.8
Total current revenue
The sample city has completed financial pro-
jections also in a somewhat optimistic scenario
Note: ShS (shillings) is a notional name of the currency of the
sample city.
(table 3.41). Readers may test their knowledge
and lessons learned by estimating the debt
capacity using the optimistic scenario and fol-
Debt outstanding over current revenues: lowing the procedures explained above. Lenders
This ratio provides a good cushion for addi- and investors, however, would carefully assess
tional debt, because it is projected to be assumptions for any optimistic scenario before
percent, against the 100 percent bench-
49 starting estimation of higher debt/credit capac-
mark. The sample city is projected to have ity of the same city under such scenarios.
ShS97.4 billion of current revenues in the pro- Debt capacity based on financial reports:
jected year 10 (table 3.39), so it can reach a The above assessments of debt capacity reflect
debt stock of ShS97.4 billion. It will, however, the debt capacity of the sample city based on the
already have an ShS47.6 billion debt stock from assumption that the new debts would be paid
previous years (table 3.38). Thus, the capacity back exclusively from the city’s budgets. In prac-
for procuring new debts is estimated to be tice, however, there are more options to consider;
ShS49.8 billion in the planned year 10. the most important among these are instruments
that help substantially expand either current or
Summary of estimated debt capacity capital revenues and thus expand both debt and
The summary table 3.45 offers several lessons. development capacities. These require detailed
Estimating debt capacity is a complicated investigation, planning, and adoption of specific
business and requires clever judgments and actions in the MFSA Action Plan, such as asset/
assumptions. The various financial ratios sug- liability management or debt policy or project
gest very different levels of debt capacity, mean- financing policy reforms.
ing different amounts of possible new debt for
the sample city ranging from zero to ShS93 bil-
Expanding Credit and Borrowing
lion. Lenders or potential investors most likely
Capacity: Think Outside the Box
would calculate these or similar ratios to esti-
mate how much the sample city can borrow The MFSA not only helps users estimate
given the present and conservatively projected development funding capacities systematically
Getting the Finances in Order 171
through detailed analyses of historical results financial challenges in numeric terms; how-
and trends, but it also encourages users to seek ever, the underlying causes behind financial
options outside their regular box and gain challenges are often embedded in the finan-
additional funding. Users should test scenar- cial management framework and system, and
ios by assuming more radical improvement issues and solutions can be traced only via a
of current or capital revenues above the his- detailed qualitative assessment. A version of
torical trends and adopt medium-term CIPs this type of assessment is known as the Public
expanded with additional funding that the Expenditure and Financial Accountability
city has not used before, and that thus do not assessment (PEFA), which can be completed
show historical trends. Such revenue sources in several months by a team of external spe-
or instruments include land value capture cialists in cooperation with the municipal
(LVC). LVC, or land-based financing, refers to staff (PEFA Secretariat 2016a).
various instruments that are used to tap into Objective: The objective of the financial
the private gains of land owners, developers, management assessment (FMA) is to analyze
or the general community that resulted in the quality of the financial management system,
public infrastructure development or in smart procedures, and practices of a local government
strategic planning or zoning (Peterson 2008). and identify specific areas of concerns, weak-
The best-known instruments are detailed in nesses, and possible options for improvement.
chapter 4. Methodology: The FMA methodology is
Development capacity can be expanded also very different from the PEFA in three ways.
by advanced project financing policies or proce- First, the self-assessment modality requires
dures that are beyond the scope of the MFSA, transforming the questions into a multiple
although they are core subjects in good CIP choice test format with prefabricated alterna-
planning and clever consideration of financing tives, from which the users can select those
alternatives (Freire 2014; Freire and Kopanyi that are most relevant or that most correctly
2018). Many such alternatives aim to finance reflect the local situation. Second, the MFSA
new investments outside the budget of a financial assessment that is supposed to be
municipality (off-budget financing), including completed before the FMA provides for a solid
ring-fenced project financing or public–private ground of financial information useful for
partnership. selecting the relevant answers; thus, it saves
a lot of time in the course of the FMA. Third,
the self-assessment modality requires strong
self-discipline on the part of users to reduce
Step 5: Financial Management
the subjectivity effects.
Assessment
Subjective judgments are unavoidable during
The MFSA includes two analysis approaches the self-assessed FMA, but MFSA users should
as depicted by figure 3.4. earlier in the chap- be cautious about these challenges and should
ter: (1) detailed analysis of the financial data aim to reduce the subjectivity effects. Answering
and historical analysis of the present and the questions or selecting the most relevant
future with projections completed in the alternatives with close correspondence to the
above sections; and then (2) a qualitative financial results and ratios is the best practice
assessment of the condition of the finan- to mitigate the subjectivity. For instance, some
cial management system. The results of the may say that 60 percent tax collection efficiency
financial data analysis indicate the health and is not only realistic in developing countries but
172 Better Cities, Better World
also seems reasonable. A closer look at the FMA the quality and guide improvements in areas of
questions, however, suggests that (1) the answer public financial management for better sus-
requires revisiting the financial reports to see tainability. These assessments have grown out
the effective local ratio; and (2) 60 percent or of the standard financial analyses and audits
below is the lowest score (D) in the FMA assess- that analyze largely numeric results of national
ment. Thus, we strongly encourage that users, accounts and public sector entities (figure 3.10).
before answering the FMA questions, read and In contrast, these qualitative assessments aim
consider the financial results related to the to explore and expose the underlying legal–
financial performance. Should a user fill out this institutional framework, organizational, and
FMA without careful consideration, the results management factors and capacities that even-
would likely mislead rather than guide the local tually determine the performance of the public
government and thus will not serve the main sector because the financial results cannot be
objective of identifying issues and specific areas improved without improving financial man-
for improvement. agement. The four assessments follow the
The MFSA is a combination of quantitative same methodology, supplement, and interlink
(financial) and qualitative assessments (called each other with more emphasis on one or other
FMA) that has been developed following the particular subject area (see figure 3.10 that
models and methodology of assessments intro- shows the interlinks in callouts).
duced by multinational organizations to review
Public Expenditure and Financial
Accountability (PEFA) Assessment
Figure 3.10 Systems and Models for Assessing
The PEFA is a methodology for assessing pub-
Public Financial Management Performance
lic financial management performance and
reporting strengths and weaknesses to improve
Subset of PEFA national
Overlaps financial sustainability. Seven development part-
PEFA +subnational
PEFA
Investment ners introduced PEFA primarily for assessing
Debt qualitative
framework country-level systems (European Commission,
International Monetary Fund, World Bank,
French Ministry of Foreign Affairs, Norwegian
Same Ministry of Foreign Affairs, State Secretariat
DeMPA Methodology PIMA
national Detailed national of Economic Affairs of Switzerland, and U.K.
qualitative Questionnaires
Qualitative
qualitative
Department for International Development).
One PEFA modality applies to cities or other
subnational governments, with one additional
MFSA+FMA Investment indicator to assess the transfers from higher
Debts, Qualitative
+ quantitative
planning and
management
government tiers (PEFA Secretariat 2016d). The
liabilities,
arrears, subnational Financial PEFA assessment uses detailed questionnaires
projections
Solvency,
Debt
prefabricated and scoring methodology in 31 thematic areas, and
capacity questions
Action plan
it requires several weeks of work by a dedicated
expert team, as explained in the PEFA Handbook
Note: DeMPA = debt management performance assessment; (PEFA Secretariat 2016a). PEFA results are sum-
FMA = financial management assessment; MFSA = Municipal marized in a very detailed and long report that
Finances Self-Assessment; PEFA = Public Expenditure and
Financial Accountability; PIMA = public investment manage- helps beneficiaries adopt corrective actions
ment assessment. after PEFA. There are also similar assessments
Getting the Finances in Order 173
(AECOM 2015), but PEFA has become the main- ethodology—that is, detailed questionnaires
m
stream approach worldwide. and scoring to support aggregate results on
The FMA under the MFSA has been mod- strength and weaknesses. Many DeMPA indi-
eled after and has greatly benefitted from the cators are essentially more detailed drill-downs
PEFA methodology in the PEFA Handbook, of PEFA indicators; interlinks between the two
Volumes I, II, and III (PEFA Secretariat 2016a, assessments include areas such as audit, fiscal
2016b, 2016c,) and in Supplementary Guidance planning, and coordination with macroeco-
for Subnational PEFA Assessments (PEFA nomic policies.
Secretariat 2016d). There are substantial dif-
ferences, which include the following. First, the Public investment management assessment
PEFA requires very extensive fieldwork and (PIMA)
data gathering that takes several weeks of expert Public investment management assessment
work for data collection and analysis. Second, the (PIMA) is an International Monetary Fund tool
PEFA uses a book-size list of extended guidance for assessing infrastructure governance over the
and templates for methodology, information full investment cycle and supporting institu-
gathering, and scoring the results. The extended tion building (IMF 2018). PIMA identifies and
guidance is meant to apply in all cases no matter assesses 15 institutions in three groups: planning,
the assessment modality. It aims at guaranteeing allocating resources, and implementing invest-
the same level of objectivity. Specific guidance ments. PIMA summarizes the strengths and
has been developed for subnational entities. weaknesses of country public investment pro-
Third, the PEFA ends up with a very detailed cesses, and sets out a prioritized and sequenced
report with a series of annexes. Finally, the reform action plan. PIMA overlaps with PEFA
PEFA report is submitted to a rigorous quality in the area of public investment systems and
review process involving peers, endorsed by the frameworks, and it overlaps with DeMPA in
PEFA Check (PEFA Secretariat 2017). In con- areas of debt management in the public invest-
trast, the MFSA FMA (step 5) is designed to (1) ment context. The PIMA methodology is very
be a self-assessment by one city officer or a small similar to the PEFA and DeMPA with detailed
team of municipal officers; (2) be completed in questionnaire and scoring; however, PIMA uses
a few hours, rather than several weeks; (3) be multiple-choice questions instead of the open-
completed with the very short list of guidance ended questions used in PEFA to help quick and
presented in this section; and (4) result in a final seamless completion of questionnaires. Unlike
FMA report that is short and aims to signal key PEFA and DeMPA, PIMA also leads to and sup-
challenges and outline solutions to be included ports preparation of a detailed Action Plan with
in the MFSA Action Plan. time-bound corrective measures.
The MFSA, and within it the MFA, aims to
Debt Management Permanence Assessment improve financial sustainability and quality
(DeMPA) of local governance just like the three other
The debt management performance assessment assessment systems, but MFSA exclusively
(DeMPA) framework, tool, and methodology focuses on local governments. MFSA has ben-
introduced by the World Bank emulates and efitted from and is fully consistent with both
supplements the PEFA (World Bank 2015). the substance and the methodology of the
DeMPA is fully consistent with and focuses three other systems. FMA covers 18 of the 31
on only one critical segment of PEFA, namely PEFA thematic areas, all that are applicable at
debt management. DeMPA uses the same the local government level, and uses detailed
174 Better Cities, Better World
questionnaires and scoring similar to PEFA, right answers by using the example of the sam-
but tailored to self-assessment modality. The ple city discussed in all other sections of this
MFSA introduces procedures for data and qual- Handbook.
itative assessment of local debt management,
in harmony with DeMPA modality at the local MFSA–FMA Analysis and Scoring
level on areas such as detailed analysis of debt,
contingent liabilities, arrears, and forecasting FMA scoring is a simple and straightforward
of debt capacity, as well as quality of expendi- procedure. The questions of each thematic
ture management, audits, planning, and finan- area are listed in four separate tables. Each
cial structuring. The MFSA covers PIMA areas table includes four or five questions each
such as capital investment planning, forecast- with four prefabricated answers, developed
ing, financial management of investments, and by experts using international experience and
expenditure control, but it also uses PIMA PEFA practices.
methodology with prefabricated questions to Tasks: The user of the FMA template needs
help self-assessment modality and puts strong to read the four answers very carefully and
emphasis on forming a time-bound Action Plan select/mark the one he or she feels the most
with funding projections based on quantitative precisely reflects the local situation. It should
and qualitative results. be noted, however, that the answers often
include several conditions and each of these
conditions should be sufficiently met in the
MFSA–FMA Thematic Areas
local situation in order to support a specific
The FMA covers four thematic areas, scoring.
each with four or five sets of questions: The scores are ranked and marked with A,
(1) Intergovernmental Relations; (2) Planning, B, C, or D. This means that the B score should
Budgeting, and Budget Implementation; be granted if all but at least one condition for a
(3) Financial Management Systems and score of A are met. For instance, the A answer
Practices; and (4) Financial Reporting, to predictability of transfers reads: “There is a
Disclosure, and Transparency. These areas con- mature and robust framework for the local gov-
stitute the main underlying causes of the good ernment sector with clear definition of trans-
or weak financial performance of a local gov- fers. Any changes are made at a deliberate and
ernment. These are the thematic areas where
predictable pace. Transfers are stable and pre-
the identified weaknesses deserve attention dictable, regulated, timely transmitted, no ad hoc
and thus corrective measures can be included grants.” Only a B score should be given if said
later in the MFSA Action Plan. For instance, transfers are transmitted with delays, despite
the low level and poor collection of local tax all other conditions being met. This sort of rig-
revenues is a financial fact, but that does not orous reading and scoring requires not only
indicate how to increase revenues or improve attention but also discipline by the FMA user.
revenue collection. The FMA may point cor- The scores can be summarized by thematic
respondingly to the fact that the city does not area: should the scores include C, B, C, and D
even have a reliable tax database, without in a thematic area, then the user may give an
which improving revenues seems impossible. aggregate score of C. The short summary report
In the next section we will discuss each should also address the lowest scores in each
thematic area by the respective questions and area and may propose corrective actions to the
address some critical challenges in marking the Action Plan. Because improvements are always
Getting the Finances in Order 175
possible and justified in many areas, users need issues and run into respective challenges fre-
to select eventually the most important issues quently. Thus, it is right to ask a local officer to
that can be corrected in the short or medium fill out the intergovernmental relations section
term. Below we introduce and analyze the because he or she has or ought to have suffi-
scoring tables with information from the sam- cient knowledge on these issues.
ple city to score; we mark the score selected by Addressing the challenges identified in this
a local officer with highlighting. The complete section may go beyond the competency of a
FMA questionnaire is presented in appendix B local government officer. It is important, how-
(see TD5). ever, to list them and to be aware of these chal-
lenges because the external partners, such as
Intergovernmental Relations lender banks or potential investors, are keen
The intergovernmental relations thematic to know if the intergovernmental framework is
area includes five questions: predictability of stable and supportive of the financial capacity
transfers, intergovernmental mandate, debt and stability of the local government.
regulations, own revenue self-confidence, and Predictability of transfers: Transfers from
expenditure spending flexibility. This section higher government tiers play a very substan-
assesses how the national legal and regula- tial role in financing local governments, and
tory framework impacts the quality of local local officers are well aware of the situation
financial management. On one hand, it is a bit (table 3.46). In planning time, the issue is
of challenge for local finance officers to judge whether the amount and installments of trans-
the national framework; on the other hand, the fers are known on time, say because of a set
officers are very well aware of these framework formula or stable common practice. The other
Table 3.46 Predictability of Transfers
Predictability A There is a mature and robust framework for the LG sector with clear definition of
of transfers transfers. Any changes are made at a deliberate and predictable pace. Transfers are
stable and predictable, regulated, timely transmitted; no ad hoc grants.
B CG transfers are predictable annually and regulated, but delivery times may vary
during the year; no ad hoc grants.
C Transfers are not regulated but are, by and large, stable; ad hoc grants appear.
D Transfers are unpredictable, and/or not regulated, and/or ad hoc grants are common.
Note: CG = central government; LG = local government.
Table 3.47 Intergovernmental Mandates
Intergovernmental A Revenue and expenditure mandates are clearly stipulated by law, and are
mandate arrange- respected. Any changes are made at a deliberate and predictable pace.
ments B Revenue and expenditure mandates are stipulated, but not in harmony; rules
are respected with some exceptions. Intergovernmental finance changes are
mostly discussed with LGs.
C Revenue and expenditure mandates are not well regulated, but rarely change.
D Revenue and expenditure mandates are unclear, not fully respected, and
subject to changes without prior announcement or discussions.
Note: LG = local government.
176 Better Cities, Better World
issue is whether the transfers are conveyed in The sample city is in a relatively good sit-
a timely manner and in accordance with the uation with a B score, because the mandates
rules, formulas, or generally accepted prac- are stipulated, but there are shortcomings in
tices. This is reflected in the A answer option. harmonies between revenue and expendi-
Ad hoc grants might play an important role ture assignments and in implementation of
in an extreme situation, such as after natural rules.
disasters, but this thematic question addresses Debt regulation: Debt regulations show a
the regular, normal situation in which ad hoc wide range of approaches across the globe from
grants are considered a deviation from the very liberal market-based financing to total
formula or rules, so use of ad hoc grants down- bans of formal debt (although forced credits
grades the scoring of transfer predictability. by unpaid bills are often accepted as informal
The sample city has marked the C answer, debt rules in many countries). Prudential debt
because transfers from higher government regulation and harmony with market rules
tiers are fairly stable, but the country lacks a are vital determinants of the quality of local
legislated transfer formula. financial systems. For that reason, category
Intergovernmental mandates: Intergovern- A depicts a very robust framework typical in
mental mandates include revenue assignments developed countries, although the debt regu-
and the expenditure assignments (table 3.47). lations in South Africa also meet the score A
Law and regulations set the framework and requirement.
assign specific revenues for local government The sample city faces rules that each
that typically include transfers from higher borrowing plan should be submitted to the
government tiers, own-source revenues, and Ministry of Finance for approval, and loan
rules for incurring debt (that is, rules on if, agreements can be signed and valid only with
when, and how to borrow short-term and the formal approval of the ministry (table 3.48).
long-term loans, issue bonds, and so on). The This situation earns the sample city a score of
expenditure assignments stipulate the core C, because the ministry provides for some qual-
responsibilities of the local governments and ity assurance, but it also reduces the respon-
the corresponding authority to spend money sibility of the local government and, in some
to cover the cost of assigned services and func- cases, may open the gates for politically based
tions. A fundamental principle of the decen- approval of loans and moral hazard. In short,
tralized government systems is that revenue the involvement of a ministry is a sort of risk
and expenditure assignments should be in factor, even if it may incentivize some lenders,
harmony, in order to ensure sustainable func- because it may work as an informal guarantee
tion of the local governments. However, real by the ministry.
life is different, and the mandates may remain Own-source revenue (OSR) confidence: The
unclear or loosely followed, or tend to change basic principle of decentralized intergovern-
without discussions with key stakeholders. mental systems is that local governments not
Table 3.48 Debt Regulations
Debt A Debt financing is clearly regulated with market-based rules and insolvency framework.
regulations B Debt financing is regulated, but there is no framework for managing insolvencies.
C Ministry (of finance) approves loans with or without clear rules for debt financing.
D Debt financing is unregulated, OR no borrowing is allowed.
Getting the Finances in Order 177
Table 3.49 Own-Source Revenue Confidence
Own-source A LG has the flexibility to change taxes/fees on a significant share of operating revenues,
revenue and increases are politically acceptable at the local level. OSR is about 40% of
self- revenues or above. LG has good collection power and capacities. OSRs are predictable
confidence with clear visibility of future revenues.
B LG has the flexibility to change base or rate of some taxes/fees, but increases are
politically challenging at the local level. Collection power and capacity are reasonable
with low incentives to increase revenues. OSRs are substantial (above 20%) and
somewhat predictable.
C LG has no power to change base or rate of taxes/fees, but may propose changes to the
government/ministry. OSRs are somewhat predictable but low (below 20%).
D LG has no power to change rates or base of taxes and fees. OSRs are very low (below
10%), not predictable, or both.
Note: LG = local government; OSR = own-source revenue.
Table 3.50 Expenditure Spending Responsibility
Expenditure A Spending responsibilities are highly stable and predictable over time. LG has the
spending flexibility to change the level and nature of spending, such as by cutting public
flexibility services or changing service standards, on a significant share of operating expendi-
tures. These cuts are politically acceptable at the local level.
B LG has the legal power to change the level and nature of spending, such as by cutting
public services or changing service standards, on a significant share of operating
expenditures. These cuts are conceptually acceptable at the local level, but rarely
occur and only under extreme situations.
C LG has the legal power to change the level and nature of spending, but this occurs on
an ad hoc basis against shortages of cash and is not a common practice. Overspend-
ing occurs time and again.
D LG can change the level and nature of spending, but this happens as quick fixes
without long-term plans. Overspending in some line items is very common.
Note: LG = local government.
only have clear revenue-raising mandates but The sample city faces multiple challenges
also are empowered to set the base and the rates in revenue management, because it has no
of the main revenue sources, taxes, fees, and power to change the revenue bases or rates;
charges (table 3.49). OSR confidence measures instead, it may propose and indeed has pro-
the quality of the local financial system from this posed changes to the finance ministry and, as
perspective. Some scholars put high emphasis a result, has reached a high level of OSR (46
on whether the local government is empowered percent of total revenues). More than half
to change the revenue bases and rates; how- of this OSR, however, is from nonrecurrent
ever, the effective revenue collection is often far sources (land sale and development fees).
below the capacity that can be calculated using Thus, the sample city rightly scored OSR
centrally set rates, bases, and rules. Thus, this confidence as C.
indicator also should capture the local political Expenditure spending responsibility: The
support and capacity for raising local revenues expenditure spending responsibility indica-
as part of the revenue confidence. tor captures the issue of the local ability to
178 Better Cities, Better World
manage expenditures in changing situations good financial management system without
in order to maintain stable budget balances strategic planning and three-to-five-year per-
(table 3.50). The core “A” option reflects the spectives, reliable budgeting, and disciplined
various underlying factors of this ability or budget execution where the budget drives the
capacity, predictable and stable spending events and the spending during the year rather
responsibility, which is high if (1) OSRs and than just reflects arbitrary changes and results
unconditional transfers represent a high share at the end of the year.
of total revenues; and (2) the local govern- Strategic plan and CIP: Developing a strate-
ment has the flexibility to change, rearrange, gic plan and multiyear CIP has become a best
or specifically cut expenses in case of revenue practice, because it expands the scope of local
shortages in order to avoid overspending and financial management from the short annual to
forced deficit financing. a strategic three-to-five-year perspective. This
The sample city has a strong OSR base and a is also why the MFSA analysis takes the histor-
high share of unconditional grants, and it even ical perspective back five years to draw lessons
has the legal room for changing expenditures. from trends, and then makes financial projec-
Still, the officer points out the issue that rear- tions five years ahead. Developing and adopt-
ranging of expenditures across line items are ing strategic plans for the medium or long
ad hoc and overspending occurs. Indeed, the term, often 10–20 years ahead, has a significant
city has resulted in budget deficits four times in value, despite the fact that these plans should
the last five years, which is an apparent signal be revised against changing circumstances
of uncontrolled spending (see budget snapshot (table 3.51). Likewise, the CIP that is prefera-
in historical database, table 3.17). Thus, the city bly adopted as a rolling five-year plan sets more
wisely scored this indicator as C. concrete and specific targets for medium-term
development actions and does so in the context
Planning, Budgeting, and Budget of well-identified financing options. Again, this
Implementation is a very powerful instrument, despite the fact
This thematic area analyzes the quality of the that the CIP can be revised annually, and the
local financial management system in plan- plans of the coming year should be carefully
ning, budgeting, and budget implementation analyzed before they are moved from the CIP
by addressing four specific questions: strategic to the annual budget. Local government prac-
plan and CIP, budget planning, scope of bud- tices around the globe show wide variances
get, and budget implementation. There is no from well- established and respected systems
Table 3.51 Strategic Plan and CIP
Strategic A LG adopts, in line with a strategic plan, 3–5-year CIPs on a rolling basis, where the first
plan and year becomes the budget plan and a new year is added to the CIP every year. The CIP is
CIP developed in a participatory process and substantially implemented in the annual budgets.
B LG adopts CIPs every 3–5 years. The CIPs are substantially included in planning the
annual budgets.
C LG adopts strategic plan or CIP , some actions are considered in planning the annual
budgets, but changing circumstances reduce the scope or use of strategic planning.
D LG has no strategic plan or CIP; the planning is limited to annual budgets.
Note: CIP = capital improvement plan; LG = local government.
Getting the Finances in Order 179
Table 3.52 Budget Planning
Budget A LG budgeting is clearly regulated; budget process is mature, iterative, and participatory
planning based on predictable forecast for transfers, clear and robust national guidelines, and local
budget circulars. Budget plans are completed on time and approved. Revised budgets are
well regulated and timely planned and adopted at the midpoint of the fiscal year.
B LG budgeting is clearly regulated, budget process is timely completed based on clear
national guidelines and local budget circulars. Revised budgets are adopted at the
midpoint of the fiscal year or rarely other times as deemed necessary.
C LG budgeting is regulated by national guidelines; budgets are completed mostly on time.
Revised budgets are adopted if and when necessary.
D There are general rules for local budgets, but multiple changes occur during the fiscal year
because of unforeseen circumstances at central or local government level.
Note: LG = local government.
(score A) to nonexistent strategy, lack of CIP, or the budget process well respects the rules and
blurred medium-term vision. regulations. Revised budgets are approved at
The sample city has a well-established stra- midpoint of the fiscal year. These factors all
tegic plan and a rolling CIP procedure linked support a score of A.
to the annual capital budgeting system. The A Scope of the budget: Municipal budgets
score reflects the good framework and the ade- by default cover the revenues and expendi-
quate implementation of the CIP and budget- tures born and accounted for to reflect and
ing rules. cover the activities of narrow budgetary enti-
Budget planning: Annual budgets play a ties like municipal departments and service
major role in disciplined planning, expendi- units, or functional entities that work as part
ture control, citizen participation, and trans- of the municipality as a singular legal body.
parent communication with key stakeholders Municipalities in developed and developing
(table 3.52). That’s why the quality of budget countries alike, however, often spin off service
planning is a self-standing factor in measuring activities or functions to independent legal
the quality of the local financial management entities like public utility companies (PUCs) or
and the quality depends on several factors: independent offices or joint ventures with pri-
(1) budget rules and national and local regu- vate service providers. In these cases, the bud-
lations, (2) a budgeting process that should be gets do not inherently reflect the entire scope
iterative and participatory as a best practice, of services and functions, because they exclude
(3) budget approval, and (4) disciplined bud- the revenues and expenditures of the indepen-
get execution that requires respecting specific dent legal entities.
rules like budget appropriation as a condi- Responsibility and liabilities with respect
tion of releasing payments and the like. In to the independent legal entities: There is one
short, good-quality budget planning empow- significant connection between the munici-
ers the local government to use the budget pal budget and the legal entities, namely that
as a management tool that drives rather than entities often require support from the munic-
just follows and records service and financial ipal budget in the form of either operation or
operations. capital subsidies or both. Some municipalities
The sample city has a mature budgeting do not even account these supports as subsi-
system with good national and local rules, and dies but rather as “loans” or “regular or other
180 Better Cities, Better World
Table 3.53 Scope of the Budget
Scope A Extra-budgetary entities, PUCs, and/or funds play substantial role in local service delivery,
of the but financial transactions are regulated, are clear, and require low operating subsidies
budget (5%). LG prepares both regular and consolidated budget/financial reports.
B Extra-budgetary entities, PUCs, and/or funds play substantial role in local service delivery,
but financial transactions are regulated, are clear, and require low operating subsidies (max
10% of current revenues). LG does not prepare consolidated budget/financial reports.
C Extra-budgetary entities, PUCs, and/or funds play substantial role in local service delivery,
and require substantial operating subsidies (over 10%). Financial transactions between
municipality and entities are not regulated and not consolidated in financial reports.
D Extra-budgetary entities, PUCs, and/or funds play substantial role in local service delivery,
and require substantial operating subsidies (15%). Financial transactions to and from
entities are not regulated and not consolidated in financial reports.
Note: LG = local government; PUC = public utility company.
Table 3.54 Budget Implementation
Budget A Expenditures are adhered to budget appropriation; variations of actual and planned
implemen- total expenditures and variation of structures of main lines are within 5% of plans.
tation B Expenditures are adhered to budget appropriation; variations of actual and planned
total expenditures and variation of structures of main lines are within 10% of plans.
C LG actual expenditures and revenues and revenue and expenditure variations and main
line structures are within 15% of plans.
D LG actual expenditures and revenues and revenue and expenditure main line structures
are over 15% of plans.
Note: LG = local government.
expenditures.” Finally, municipalities often clear accounts of the financial transactions, but
commit huge contingent liabilities, because the entities require more than 15 percent of the
they are financially responsible for services current revenues as operating subsidies that
and losses as majority owners of these entities. represent a serious risk factor for the budget.
For these reasons, the scope of the budget is a This means the budget does not fairly reflect
vital factor of the financial health of the munic- the financial situation of the city, and thus the
ipalities. Two specific issues deserve close score D is justified.
scrutiny: (1) the size and form of accounting of Budget implementation: This factor captures
financial transactions between the munic-
the the budget implementation/execution prac-
ipal budget and the entities, and (2) whether tices (table 3.54) that either reinforce or under-
the municipality prepares budget and clos- mine the quality of the budget discussed above.
ing financial reports on consolidated bases, or Three issues deserve attention and answers
reports fully and consistently the financial per- here: (1) whether budget appropriations con-
formance of the independent legal entities as fine expenditures, in other words if there is a
part of the budget or financial reports, often as built-in procedure (maybe computerized) that
annex or memo items. prohibits releasing payments without budget
The sample city does not prepare a consoli- appropriation; (2) quality can be measured by
dated budget (table 3.53); the financial transac- the variation between the planned and actual
tions are well regulated by internal rules with annual total expenditures and total revenues, a
Getting the Finances in Order 181
broad signal of implementation quality (within expenditure management, cash and debt man-
5 percent, both are best-practice benchmarks); agement, and oversight and internal control
and (3) changes of the composition/share of systems and practices. Some finance officers
main line item categories, that is, whether the may find it difficult to make judgments about
amounts budgeted for solid waste services, the quality of financial management systems,
education, administration, or energy/fuel are but the specific questions are designed to
within close range of the budgeted shares. The make the responses and the selection of the
proper answer to this question requires revisit- relevant score relatively easy. Others may feel,
ing the A/P financial reports and the expendi- mistakenly, that the existence of an integrated
tures by functions. Should this information be financial management information system
left unrecorded, it is a signal of low quality of (IFMIS) automatically ensures good financial
budget implementation. management.
The sample city has good budget implemen- Financial management framework: Financial
tation records, with low variations in total bud- management is mainly driven by technologies
get within a 10 percent range between plans and and software; however, the quality and perfor-
actuals; however, it does not have clear records mance of the system largely depend on adapted
of expenditure composition by function or the and enforced procedures, clear segregation
respective A/P variations. Furthermore, the of functions, and the skills and experiences
persistent budget deficit signals weaknesses of the staff working in the various functions of
in budget execution. Thus, the score of budget the FMS. The scoring of this area aims to cap-
implementation quality is rightly C, despite the ture these factors by asking if financial man-
low budget total variations. agement is well regulated, if the computerized
system includes internationally accepted stan-
Financial Management Systems and dard templates and generates reports automat-
Practices ically, and finally if there is an adequate squad
Financial management systems and practices of qualified staff to run the systems timely and
are the cornerstones of the broad financial man- adequately. The score A requires meeting all of
agement framework of a municipality; specific these conditions.
factors include (1) the financial management The sample city has a reasonable FMS in
framework, and (2) revenue management, place (table 3.55); however, the performance
Table 3.55 Financial Management Framework
Financial A Financial management framework is well regulated and supported by FMS/IFMIS
manage- software system with standard templates and reporting forms; and sufficient number
ment of qualified staff in key positions are assigned to financial management with clear
framework segregation of functions.
B Financial management is controlled and supported by FMS/IFMIS system with clear
templates and segregation of functions; and qualified staff are assigned to many key
positions with some vacant positions.
C Financial management is supported by some software and some qualified staff are
assigned to financial management.
D Financial management is computer enhanced with various software solutions, but staff
have various levels of knowledge in financial management area.
Note: FMS = financial management system; IFMIS = integrated financial management information system.
182 Better Cities, Better World
Table 3.56 Revenue Management
Revenue A LG has effective fiscal cadaster and/or tax and fee payer registration and assessment
manage- system with up-to-date and transparent records on bases, rates, and payers’ obligations
ment and responsibilities; revenue collection efficiency is high (95%).
B LG has effective tax and fee payer registration and assessment system with up-to-date
and transparent records on payers’ obligations and responsibilities; revenue collection
efficiency is good (80%).
C LG has several tax and fee payer registration systems with records on payers’ obliga-
tions and responsibilities in various qualities; revenue collection efficiency is moderate
(60–80%).
D LG has gaps in several tax and fee payer registration systems with records on payers’
obligations and responsibilities in various qualities; revenue collection efficiency is low
(60% or below).
Note: LG = local government.
Table 3.57 Expenditure Management
Expenditure A LG has effective commitment control system, clear segregation of duties, internal
management controls for nonsalary expenditures, and public procurement procedures to ensure
value for money. Qualified staff are available.
B LG has commitment control system, expenditures are accounted mostly timely, pub-
lic procurement procedures support investments. Qualified staff are posted in most
key positions.
C LG has computerized systems for managing and recording expenditures.
D Expenditure recording and management is fragmented.
Note: LG = local government.
of the system is not fully regulated and there is weakens the credibility of the revenue collec-
shortage of staff is some important positions. tion efficiency figures, which thus deserve a
These factors justify a B score. score one notch below the suggested score.
Revenue management: Good revenue man- The sample city has no reliable revenue
agement requires several systems and pro- databases, payers’ records are in various sys-
cedures in place together. The most critical tems and in diverse quality (table 3.56). Thus,
components include reliable databases for each the score D is justified regardless of the fact
important revenue source (taxes and fees), that the city has managed to collect quite a sub-
updated records on tax and fee payers’ obli- stantial volume of OSRs. This calls for urgent
gations, easy payment systems, and powerful corrective measures that can and should be
enforcement and remedy systems and proce- included in the very next MFSA Action Plan.
dures. Needless to say, strong political support Expenditure management: Expenditure
is vital for good functioning of these systems management includes specific subsystems for
and procedures; it is not easy to assess, but col- managing operating and capital investment
lection efficiency is a good proxy for the capac- expenditures, but the quality of the system
ity and efficiency of the revenue management depends on several specific tools, instruments,
system. The lack of reliable databases, however, rules, and procedures (table 3.57). The commit-
not only undermines revenue collection; it also ment control system is vital to ensure that no
Getting the Finances in Order 183
payment is possible without prior commitment debt records (aging list of debt), competitive
in the system (budget). Controlling operat- selection of financing partners, and a strong
ing expenditures requires clear segregation of liquidity management system to ensure liquid-
functions and internal control systems and pro- ity/solvency in the short, medium and long
cedures; managing investment expenditures term. An adequate cash and debt management
requires public procurement and good contract system includes clear records, not only of loans
management, among others. Most expenditure but also of guarantees or other direct or contin-
management functions are supported today by gent liabilities, such as the likely payments the
computerized systems; however, the quality city needs to cover on behalf of some indepen-
and performance of the system depends on the dent subordinated entities like the water utility
qualified staff and the said procedures. company. The timeliness of debt service and
The sample city does have some computer- the size and nature of liabilities are indicators
ized systems for expenditure management, but of the performance and quality of the cash and
seems to lack adequate commitment control, debt management system.
internal control, and public procurement The sample city has a reasonable framework
systems and procedures. Thus, the score C is for cash and debt management (table 3.58), but
adequate. it falls short in valuation and management of
Cash and debt management: Cash manage- guarantees and other contingent liabilities.
ment is a system and process aimed at collect- These factors definitely weaken the quality and
ing and managing cash, as well as using it for the reliability of the cash and debt management
(short-term) investing. It is a key component system, thus a score B, or even C is justified (the
of ensuring the city’s financial stability and officer scored B).
solvency by making cash available as needed Oversite and control: The internal audit sys-
and investing the surplus cash into short-term tem is the cornerstone of the oversight and
instruments to earn as much as possible. These control systems; it requires qualified staff to
instruments require close interconnection with perform the internal audit and analyze the
the revenue and expenditure management financial performance and risks the city faces.
systems to ensure early warning and timely Special attention should be paid to analyz-
corrective measures. Likewise, the debt man- ing the performance of subordinated entities
agement system starts with clear consolidated and their impacts on municipal budgets and
Table 3.58 Cash Management
Cash and A LG has an effective framework for cash and debt management with reliable records on
debt cash balances, debts, guarantees, other liabilities, and payment arrears; LG debt service
manage- is stable.
ment B LG has an effective framework for cash and debt management with records on cash
balances, debts, and guarantees; but guarantees are not valuated in debt management.
LG debt service is mostly timely.
C LG has some procedure for cash and debt management with some records on cash
balances and some debts; payments delayed time and again.
D LG has no debt management framework, but cash balances are reconciled OR neither
cash nor debt management procedure is in place and/or ad hoc short-term liquidity
borrowing is common.
Note: LG = local government.
184 Better Cities, Better World
Table 3.59 Oversight and Internal Control
Oversight A LG has reliable internal audit system, effective procedures for account reconciliations,
and and for oversight and analysis of the aggregate fiscal risk born from subordinated legally
internal independent entities (PUCs) based on consolidated financial reports.
control B LG has reliable internal audit system, some procedures for account reconciliations, and
for oversight and analysis of the aggregate fiscal risk born from subordinated legally
independent entities (PUCs) without consolidation.
C LG has internal audit system, account reconciliations are intermittent, and LG receives
the annual reports from the subordinated legally independent entities (PUCs).
D LG has no formal internal audit unit or system, and there are no records about the
subordinated legally independent entities (PUCs).
Note: LG = local government; PUC = public utility company.
the risks they may induce. For these reasons, financial reporting, (2) external audit, (3) finan-
municipal budgets should be consolidated cial disclosures, and (4) public procurement.
with local entities and analyzed on the consol- Financial reporting supports the internal
idated basis. This is not the case in most devel- control and the external face of the munic-
oping countries, which substantially reduces ipality. The conditions for good financial
the credibility and power of the oversight and reporting include four key elements. First,
internal control systems. it is important to have a reliable comput-
The sample city has reliable oversite and erized financial reporting system consis-
internal control systems (table 3.59), but it tent with generally accepted accounting
fails to prepare and analyze a consolidated principles and standards. We understand
budget. Thus, the score B is justified, espe- that the computer is only a tool, but it
cially because the financial reports indicate is hardly possible to establish a reliable
that the PUCs play very substantial roles reporting system today without comput-
in local services and that the city provides a ers. Second, daily, monthly, quarterly, and
substantial volume of capital and operating annual reports that are generated timely in
subsidies. Institutionalizing development automated procedures represent another
and analysis of a consolidated budget would condition that is not a mechanical result
be among high-priority actions even if the of a computer system but is rather an attri-
national regulations do not stipulate prepara- bute of a good system. Third, ensuring that
tion of consolidated budgets. results are disseminated to respective gov-
erning bodies and discussed is good policy,
Financial Reporting, Disclosure, and because the mere preparation of reports
Transparency does not ensure good financial reporting.
Financial reporting, disclosure, and trans- Finally, good reports indicate and should
parency are critical elements of good finan- induce corrective measures. The explained
cial management systems and reflect strong standards represent the A score quality of
commitments, policies, and procedures for financial reporting systems and practices.
transparency, that is, timely sharing relevant Computerized accounting and reporting
information and receiving feedback about the systems are available everywhere today,
adequacy and results of the financial reports. so most local governments do have some
The four decisive factors are the following: (1) system; however, this set of qualifications
Getting the Finances in Order 185
Table 3.60 Financial Reporting
Financial A The LG has a reliable computerized financial reporting system consistent with generally
reporting accepted accounting principles and standards. Daily, monthly, quarterly, and annual
reports are generated timely in automated procedures (e.g., by IFMIS); results are
disseminated to respective governing bodies and discussed, and corrective measures
commenced timely.
B The LG has a reliable financial reporting system and procedures in compliance with
national legislation; reports are generated and disseminated mostly on time.
C The LG has rules and various templates for financial reporting in various LG entities,
reports are generated separately, and delays may occur because of missing information.
D LG entities generate some reports.
Note: IFMIS = integrated financial management information system; LG = local government.
Table 3.61 External Audit
External A The LG annual financial reports are audited by external auditor; audit reports are obtained
audit within 8–12 months following a fiscal year. The LG audit committee discusses the audit
results and commences corrective measures as it may deem necessary, AND the LG has
obtained unqualified audits in the last 3 years.
B The LG annual financial reports are audited by external auditor; audit reports are obtained
within 2 years following a fiscal year. The LG audit committee discusses the audit results and
commences corrective measures. The LG has obtained unqualified audits in the last year.
C The LG annual financial reports are audited by external auditor; audit reports are obtained
within 2–3 years following a fiscal year. The LG audit committee discusses the audit
results. The LG has obtained qualified audits in the last 2 years.
D The LG has no external auditor, or the LG has failed to obtain audits or obtained qualified
audits or one or more adverse external audits in the last 3 years.
Note: LG = local government.
points to the importance of the quality and external auditors are often better trained for
implementation of such systems. These are the purpose and thus are able to address key
the issues the MFSA user should address. weaknesses that might go unnoticed by the
The sample city seems to have a reliable internal auditors, support international stan-
financial reporting system (table 3.60); how- dards, and persuade corrective measures.
ever, the filing officer was not sure about the Troubles that cities in developing countries
international standards and remained silent face include (1) long-delayed external audits
about the follow-up corrective measures. (2–3 years is not uncommon); (2) central gov-
These results justify a fair B score or even a C ernment agencies performing external audits
(the officer scored B). focused on compliance with use of fund rules
External audit: An external audit performed rather than with international accounting and
by a third party provides the local govern- reporting standards; (3) simple and relaxed
ment with a valuable check on the adequacy audit reports; and (4) lack of follow-up actions.
of financial management and financial report- A score of A represents the highest standard on
ing, and eventually supports efficiency. This audits, when reports are timely audited, results
audit supplements internal audits because are discussed and followed with corrective
186 Better Cities, Better World
measures, or unqualified (good) audits are receive feedback and learn priorities and ideas
obtained persistently. from respected partners.
The sample city faces multiple challenges, Disclosure practices show a wide variety
including delays in audit reports and quali- across the globe. In some cases, very regular
fied audits discussed with an audit commit- and tailored reports, even audit reports, are dis-
tee, but no evidences of corrective measures closed in a timely manner using the best mod-
(table 3.61). These factors justify a C score. ern technology. In contrast, local governments
It is important for the users of this MFSA to in some countries consider financial results to
be very precise and disciplined in assessing be confidential and not suitable for disclosure,
the quality of external audit framework and or they simply lack the means and technology
practices, and particularly not to assume that to disclose results. MFSA users need to make
merely having external audits (by the auditors an honest judgement on the means, ways, and
general) is satisfactory for a high score, unless quality of disclosure in their own jurisdiction
the said very specific quality conditions are in order to use this assessment as a guide for
met. future improvements.
Financial disclosures: Financial disclosures The sample city presumably has financial
are essential elements of good financial man- reports, but, as a matter of policy, the reports
agement systems and policies. A city with a are made available only on demand (table 3.62).
score of A not only has an adequate finan- This policy is better than nothing, but key
cial reporting system, with quality financial stakeholders, especially citizens, are unlikely
reports that are generated and audited in a to go to local government offices and demand
timely manner and with good results (unqual- a report they may not even know exists. Thus,
ified audits), but also strongly supports trans- the score of C is a fair assessment.
parency and timely and proper disclosure of Public procurement and competitive tender-
key financial results. It means the city ensures ing: Public procurement fits into several places
that external partners—citizens, investors, in the FMS because it serves several functions,
lenders, and other government entities— from expenditure management to transparency.
understand, recognize, and respect the q uality Class A cities put high emphasis on public pro-
of the city’s financial reports and results. curement for both efficiency and transparency
The score A qualification includes two specific reasons. By default, they use the public pro-
conditions: (1) the reports are timely and made curement system and instruments in various
available in various ways (in tandem); (2) the instances and apply open, transparent compet-
city engages in dialogues about the results to itive tendering for infrastructure projects, for
Table 3.62 Financial Disclosure
Financial A The annual financial reports, the audit report, and short briefs on quarterly or monthly
disclosures reports are made available for public scrutiny (e.g., posted on the LG website, readable
at city hall, shared with key stakeholders in print or electronic forms). Town hall meeting
is held to discuss results and future plans.
B The annual financial reports are made available for public scrutiny (e.g., posted on the LG
website, readable at city hall, shared with key stakeholders in print or electronic forms).
C The annual financial reports are made available for public scrutiny on demand.
D Financial reports are not shared with public.
Note: LG = local government.
Getting the Finances in Order 187
Table 3.63 Public Procurement and Competitive Tendering
Public A LG has standard procedures that asset divestitures, all investment construction
procure- projects, and bulk purchases are procured by open competitive tendering published in
ment and various media and adhere to value for money principles.
competi- B LG has standard procedures supporting that large construction projects are procured by
tive open competitive tendering published in various media.
tendering
C Some projects are published and procured by competitive tenders.
D LG has no public procurement procedures.
Note: LG = local government.
Table 3.64 Financial Management Assessment MFSA–FMA Analysis and Scoring:
Scoring Results Summary
Financial management
assessment themes Scores The FMA needs no detailed summary, because
Intergovernmental relations C, B, C, C, C
each and every thematic area deserves close
attention and needs to be seen individually.
Planning, budgeting, and budget A, D, B, C
implementation Still, a short summary of the results might
Financial management systems B, D, C, B, B be useful to signal the overall strength of the
and practices financial management system. As noted earlier,
Financial reporting, disclosure, B, C, C, B it is also important to highlight and address
and transparency the lowest scores in each thematic area regard-
Summary C less of the general results. We use the scoring
results of the sample city to illustrate how to
bulk purchase of materials (fuel, stationary, con- summarize the results of the FMA (table 3.64).
struction material, and computers), for selecting The overall results can be scored as C,
construction supervisors, for selecting banks because C is the dominant (statistical mode)
for short-term deposits or long-term loans, score in the assessment; the lowest scores are
and for selling or leasing land or buildings via marked in each theme. This overall score is a
competitive tendering. In contrast, some cities bit worrisome, because C is a low score just
may ignore competitive tendering and public one notch above the lowest that signals a need
procurement, because the mayor or heads of for careful analysis of some areas and com-
department feel competent to find good part- mencement of corrective measures that can be
ners using their own knowledge of the city or included in the MFSA Action Plan (discussed
the specific sector. This kind of knowledge is in the next section of the Handbook).
useful, but may compromise the selection pro- Intergovernmental relations is an area where
cess without transparent public procurement possible changes are beyond the competency
and competitive tendering. of local government, except that local govern-
The sample city implements public pro- ments may join efforts or use the national asso-
curement procedures for selection of large ciation of local governments to initiate changes
investment projects (table 3.63), but it seems in national legislation or encourage the central
to ignore opportunities to use public procure- government to get rid of bad practices that may
ment and open competitive selection in many ignore or compromise national legislation. For
other possible areas mentioned above. Thus, instance, they might use these efforts to improve
the score of B is a fair assessment. the practices of biased debt approval by the
188 Better Cities, Better World
ministry of finance, or to improve predictability Plan, therefore, brings closure to the diagnos-
and stability of transfers. There is one particu- tic process and opens the pathway to a solution
lar factor—namely that the sample city has legal package along with its implementation details.
power to change the expenditures, but it has not Objective: The objective of the Action Plan
been a practice—which can be changed by local is to translate the results and lessons learned
action and may be included in the MFSA Action from the different steps of the MFSA into
Plan to achieve a higher score (B instead of C). specific actions to improve the municipality’s
Planning, budgeting, and budget implemen- financial health and financial management in
tation: The city has obtained diverse scores in the short and medium term.
this area because it has good systems in place Tasks and products: The MFSA Action Plan
and follows adequate practices—except in includes a number of components: (1) a table
controlling revenues and expenditures, which focusing on short- and medium-term actions
results in persistent budget deficit. This is a that includes specific policy targets, specific
very serious shortcoming that deserves imme- actions, timing of actions, budget estimates for
diate action and should be included in the execution, expected results in either technical
MFSA Action Plan! or financial terms or both, and the identified
Financial management systems and practices: responsible person or entity; and (2) support-
The scores are very diverse in this thematic area ing documents annexed to facilitate the imple-
and support the opinion that most financial mentation of these actions.
management systems are in place and of good
quality; however, revenue management faces
MFSA Action Plan: Guiding Principles
serious gaps and weaknesses. The score of D for
revenue management is one of the lowest scores MFSA Action Plan Time Frame
in the entire assessment and requires urgent The time frame for the MFSA Action Plan is
actions and provisions in the MFSA Action Plan. typically one to five years. Experience shows
Financial reporting, disclosure, and transpar- that it is very difficult to set an Action Plan to
ency: The city has a good financial reporting a longer time frame because many things can
system, but it has obtained qualified audits in happen during that timeframe that may ren-
recent years and follows a restricted disclosure der the Action Plan content either out of date
policy. The issue of qualified audits also signals or out of touch with the evolving reality on
weaknesses in adopting and implementing cor- the ground. The MFSA Action Plan will make
rective measures; both of these require close a clear distinction between (1) actions of high
attention and urgent improvements. priority, which need to be implemented in the
short term (short list), and (2) actions of lower
priority, which can be implemented over the
Step 6: MFSA Action Plan medium term (long list). It will also make a
distinction between actions that can be imple-
The MFSA Action Plan is the final step of the mented directly and immediately by local gov-
MFSA process and the most important one. This ernments and actions that require attention or
final step enables the city and local government decision by upper levels of government. The
to complete the loop of self-assessment by cap- latter case will have an influence on the com-
turing key solutions and actions on par with the plexity of the implementation of such actions as
key problems, bottlenecks, and issues identified well as on the realistic time frame allocated to
during the diagnosis phase. The MFSA Action them. Actions that require central government
Getting the Finances in Order 189
involvement or changes in legislation and regu- of the MFSA diagnostic and it will be achiev-
lations or sustained policy dialogue across mul- able because all implementation requirements,
tiple stakeholders will likely take longer to put in including costs and responsibilities, will have
place. Similarly, actions that affect citizens and been vetted and agreed upon.
taxpayers will require some time for “sensitiza-
tion” and communication. Experience shows MFSA Action Plan Roles and Responsibilities
that lack of clear communication between cities The MFSA Action Plan is drafted by the city
and their citizens is an important factor in the department that has carried out the MFSA
failure to implement change. analysis (typically the finance department) in
consultation with respective partner depart-
MFSA Action Plan Consultation Process ments. The Action Plan should be discussed
Just like in the UA/SA, consultation is a big part and approved by the mayor and the city coun-
of the process. Consultation needs to start at the cil and made public. Experience shows that
beginning of the MFSA process in order to ensure making it public on the city’s website, portal,
success of the reform/action agenda. Very early or social network achieves both a higher level
on, the ministry of finance, ministry of local gov- of accountability and a higher level of institu-
ernments, association of local governments, and tional commitment to its successful implemen-
other stakeholders need to be on board. They tation. In instances when a high level of central
need to understand and own the process as well government action is required or requested,
as appreciate what is in it for them. As indicated it may be advisable to enter into partnership
in chapter 1, the MFSA is a valuable analytic tool, agreements. We have previously discussed the
but it is also much more than that. It tells a story “contractual” experience in which some coun-
about the city and provides the foundational tries engage. Municipal contracts in Africa have
ground for identifying appropriate and realistic been implemented for many years with the
solutions to well-defined problems or shortcom- explicit objective of holding all parties (local
ings. The quantification of the results or findings government, central government, and others)
facilitates in turn the quantification of targets or accountable for their share of the bargain. This
goals. These targets will be the expected results approach has proved to be very successful in
of the MFSA Action Plan. reaching quantified targets on local revenue
mobilization, intergovernmental transfers,
MFSA Action Plan Expected Results shared taxation, and other reforms requiring
Expected results will focus on a number of politically charged, time sensitive action-tak-
policy objectives such as (1) improve revenue ing and moving the MFSA agenda away from
sources; (2) control and prioritize expenditures; politics and short-lived political mandates.
(3) improve financial management practices The sections below summarize the results of
including budget realism; (4) increase service the MFSA analysis in a formal Action Plan for
sustainability; and (5) increase creditworthiness. priority actions derived from the MFSA analy-
This list is indicative and can be expanded or sis. They provide a template for the user’s own
narrowed down according to the MFSA findings. purpose. Appendix D provides detailed guid-
Whatever the focus of action might be (increase ance for identifying and outlining a long list of
tax revenues, increase transfers, improve assets possible actions based on systematic reading of
management), an expected quantified target the results of the MFSA steps from historical
will be attached to it. This quantified target will analysis all the way to financial management
be realistic because it is calculated on the basis qualitative assessment.
190 Better Cities, Better World
Table 3.65 MFSA Action Plan: Example
Getting the Finances in Order
Objective Specific action Expected results Time frame Cost estimate Responsible entity
Increase Reorganize tax administration Tax revenues start increasing Years 1–5 ShS20,000 Council to approve
creditworthi- with computerized databases, third year and reach 25%, million plans; revenue
ness easy payment systems, and 60%, and 100% increase, department to
collection, billing, and enforce- respectively, on 2013 results implement
ment procedures. by 2018.
Lobby with municipal associations Increase transfers from Years 1–5 No cost Mayor to lobby
to increase central government 4.4% per year to 7 .3%. continues
transfers at least to the level of
inflation (7.3% in last 5 years).
Increase Increase expenditures for repair Better services, more Years 1–5 Increase R&M Council to approve;
service and maintenance (R&M) to reliable assets. continues expenditures service departments
sustainability double gradually by 2018. from ShS3,900 to implement
Additional 10% increase year on million to
year above the trend. ShS7 ,800 million
Maintain revenues from land Maintain revenue in the Years 1–5 ShS5,000 Planning and revenue
development fee by charging range of ShS5,000 million continues million departments
developers for off-site infrastruc- per year or even above if
ture; improve monitoring and possible.
enforcement.
Increase investments. Infrastructure investment Years 1–5 ShS10,000 Planning and finance
on-budget increased to continues million addition- departments to plan;
20,000 (from 10,000 plan) al budgeted council to approve
and additional 3,000–5,000 expenditures
off-budget investments per with ShS5,000
year. million loan
disbursement
Control Revise the system and proce- Reduce amount spent on Years 1–5 No cost Finance department
expenditure dures for subsidizing current subsidizing service and and service entities
expenditures of service entities, subordinated entities, while
measure performance, and improving performance.
introduce rules for perfor-
mance-based subsidization.
Improve Increase budget reality by good Balanced budget maintained Years 1–5 Planning and finance
budget reality analyses, conservative forecast- in planning and implementa- continues departments to plan;
ing, and disciplined planning. tion, actual/plan ratios within council to approve
191
(+/–) 5% of plans.
MFSA Action Plan: A Solution Package (ShS20 million) is comparable to the total local
Detailed analysis of the MFSA results has helped tax revenues collected in year 5 (table 3.19);
us define 50 specific possible actions (see appen- however, that investment will be recovered by
dix D). This list is indicative of what an Action the fifth year from the incremental revenues
Plan can entail but is not restricted to those (table 3.41) and will generate double annual tax
actions. Local governments may identify other revenues in subsequent years. We can also see
potential actions that would be specific to the that several actions need no financial invest-
local context and particular circumstances. It ments; instead they require only improving the
would be very difficult, if not impossible, how- internal control or management system or net-
ever, for the sample city (or any city) to start working and lobbying for national changes.
implementing all of these actions immediately Some cities may find that the Action Plan
or even to aim at completing all of them in the stated as an example is too modest and does not
medium term. However, it is very valuable to see do justice to the multitude of possible actions.
all of these actions together, consider and discuss First, this table is used mostly to illustrate the
the implications, and then select a strategic short format and to provide an indicative template.
list of priority actions manageable in the medium Second, it can be expanded during initial discus-
term. There are critical interlinks across some sions, final prioritization, and approval by the
actions that trigger sequencing. The cost of some city council. Finally, new actions can be added
items may appear to be large, representing a siz- after the initial implementation in subsequent
able financial commitment. Thus, sequencing years.
will be necessary in order to be in harmony with
the technical, human, organizational, and finan-
cial absorptive capacity of a municipality and to
make such institutional modernization realistic
and doable. It is therefore pragmatic to select a
short list of specific actions considered as doable References
in the medium term.
AECOM. 2015. “Public Expenditure and Financial
Preliminary Action Plan: Table 3.65 summa- Accountability Assessment for the City of
rizes the preliminary Action Plan of the sam- Tshwane, South Africa.” AECOM Technology
ple city with a small number of time-bound Corporation, Los Angeles, and South African
priority actions. A good action plan includes at Cities Network.
least six headings: objectives, specific actions, Bahl, Roy. 2009. “Property Tax Reform in Developing
expected results, time frame, cost estimate, and Transition Countries.” Paper for the Fiscal
and responsible entity. The table indicates, for Reform and Economic Governance Project,
instance, that reforming the tax administra- U.S. Agency for International Development.
tion includes many sub-actions and may need Bahl, Roy, Johannes Linn, and Deborah Wetzel.
two or more years to complete. For example, 2013. “Governing and Financing Metropolitan
increasing own tax revenues requires estab- Areas in the Developing World.” In Financing
lishing a reliable revenue management sys- Metropolitan Governments in Developing
tem, establishing a reliable computerized tax Countries, edited by Roy Bahl, Johannes Linn,
database, revising and expanding the tax base, and Deborah Wetzel. Cambridge, MA: Lincoln
improving tax collection procedures, collection Institute of Land Policy.
and management of tax arrears, and eventu- Berger, Thomas Müller-Marqués, and Jens Heiling.
ally property revaluation. The investment need 2013. “European Accounting Standards for the
192 Better Cities, Better World
Public Sectors.” European Union Commission Fitch Ratings. 2015. “International Local and
Report, Brussels. Regional Governments Rating Criteria—
Bird, Richard. 2010. “Smart Tax Administration.” Outside the United States.” Fitch Ratings,
Economic Premise No. 36, Poverty Reduction www.fitchratings.com.
and Economic Management Network, World Fourie, Erika, Tanja Verster, and Gary Wayne
Bank, Washington, DC. van Vuuren. 2016. “A Proposed Quantitative
———. 2013. “Foreign Advice and Tax Policy in Credit-Rating Methodology for South African
Developing Countries.” International Center Provincial Departments.” South African Journal
for Public Policy Working Paper 13-07, Andrew of Economics and Managements Sciences 19 (2):
Young School of Policy Studies, Georgia State 192–214.
University, Atlanta. Freire, Maria Emilia. 2014. “Managing External
Bird, Richard, and Naomi Enid Slack. 2015. Is Your Resources.” Chapter 7 in Municipal Finances:
City Healthy? Measuring Urban Fiscal Health. A Handbook for Local Governments, edited
University of Toronto Press. by Catherine Farvacque-Vitkovic and Mihaly
Cabaleiro, Roberto, Enrique Buch, and Antonio Kopanyi, 325–78. Washington, DC: World Bank.
Vaamonde. 2013. “Developing a Method to Freire, Maria Emilia, and Hernando Garzón.
Assessing the Municipal Financial Health.” The 2014. “Managing Local Revenues.” Chapter 3
American Review of Public Administration 43 in Municipal Finances: A Handbook for Local
(6): 729–51. Governments, edited by Catherine Farvacque-
CABRI (Collaborative Africa Budget Reform Vitkovic and Mihaly Kopanyi, 147–214.
Initiative). 2017. “Management of Explicit Washington, DC: World Bank.
Contingent Liabilities—Credit Guarantees for Freire, Maria E., and Mihaly Kopanyi. 2018. “Asset
State-Owned Entities’ Debt.” CABRI Policy and Debt Management for Cities.” Cities that
Dialogue Paper, CABRI South Africa. Work, International Growth Centre Working
Colorado General Assembly. 2013. “Fiscal Paper, London School of Economics and
Health Analysis for Colorado Counties and University of Oxford.
Municipalities.” Report No. 2129-13, Colorado German, Lourdes. 2015. “Creating a Digital
General Assembly, Denver. Bridge for Municipal Fiscal Health.” Meeting
Farvacque-Vitkovic, Catherine and Lucien Godin. of the Minds (blog), December 10. https://
2006. “Decentralization and Municipal meetingoftheminds.org/creating-a-digital
Development: Municipal Contracts.” Working -bridge-for-municipal-fiscal-health-14597.
Paper, World Bank, Washington, DC. Groves, Sanford, and Maureen Godsey Valente. 2003.
Farvacque-Vitkovic, Catherine, Lucien Godin, and Evaluating Financial Condition: A Handbook for
Anne Sinet. 2014. Municipal Self-Assessments: Local Governments. Washington, DC: ICMA.
A Handbook for Local Governments. HM Treasury. 2017. “Contingent Liability Approval
Washington, DC: World Bank. Framework: Guidance.” Government of the
Farvacque-Vitkovic, Catherine, and Mihaly Kopanyi, United Kingdom. https://assets.publishing
eds. 2014. Municipal Finances: A Handbook for .service.gov.uk/government/uploads/system
Local Governments. Washington, DC: World Bank. /uploads/a ttachment_data/file/635939
/contingent_liability_approval_framework
Farvacque -Vitkovic, Catherine, and Anne Sinet.
_guidance.pdf.
2014. “Achieving Greater Transparency and
Accountability: Measuring Municipal Financial IMF (International Monetary Fund). 2014. General
Performance and Paving the Path for Reforms.” Finance Statistics Manual. International
Chapter 8 in Municipal Finances: A Handbook Monetary Fund, Washington, DC.
for Local Governments, edited by Catherine ———. 2018. “Public Investment Management
Farvacque-Vitkovic and Mihaly Kopanyi, 379– Assessment (PIMA).” Fiscal Affairs Department,
445. Washington, DC: World Bank. International Monetary Fund, Washington, DC.
Getting the Finances in Order 193
Kaganova, Olga. 2011. “Guidebook on Capital Liu, Lily, and Kim Song Tan. 2009. “Subnational
Investment Planning for Local Governments.” Credit Ratings.” Policy Research Working
Urban Development Series Knowledge Papers, Paper 5013, World Bank, Washington, DC.
World Bank, Washington, DC. Logan, Sarah. 2016. “Local Revenue Reform
Kaganova, Olga, and Mihaly Kopanyi. 2014. with the Kampala Capital City Authority.”
“Managing Local Assets.” Chapter 6 in International Growth Centre (blog). http://
Municipal Finances: A Handbook for Local www.theigc.org/ blog/local-revenue-reform
Governments, edited by Catherine Farvacque- -with-the-kampala-capital-city-authority.
Vitkovic and Mihaly Kopanyi, 275–324. Moody’s. 2013. “Rating Scales and Definitions.”
Washington, DC: World Bank. Moody’s Asia Pacific. https://www.moodys
Kelly, Roy. 2013. “Making the Property Tax Work.” .com/sites/products/ProductAttachments
International Center for Public Policy Working /AP075378_1_1408_KI.pdf.
Paper 13-11, Andrew Young School of Policy ———. 2017. “Rating Methodology: Regional and
Studies, Georgia State University, Atlanta. Local Governments.” Report Number 1072625.
Kim, Julie. 2018. “CePACs and Their Value Capture Moody’s Investor Service.
Viability in the U.S. for Infrastructure Funding.” Morell, Lance, and Mihaly Kopanyi. 2014.
Working Paper 18Jk1, Lincoln Institute of Land “Managing Local Expenditures.” Chapter 5
Policy, Cambridge, MA. in Municipal Finances: A Handbook for Local
Governments, edited by Catherine Farvacque-
Kopanyi, Mihaly. 2015a. “Local Revenue Reform
Vitkovic and Mihaly Kopanyi, 215–74.
in Rwanda.” International Growth Centre
Washington, DC: World Bank.
Working Paper, London School of Economics
and University of Oxford. Muwonge, Abdu, and Robert Ebel. 2014.
“Intergovernmental Finances in a Decentralized
———. 2015b. “Local Revenue Reform of Kampala
World.” Chapter 1 in Municipal Finances: A
Capital City Authority.” International Growth
Handbook for Local Governments, edited by
Centre Working Paper, London School of
Catherine Farvacque-Vitkovic and Mihaly
Economics and University of Oxford.
Kopanyi, 1–39. Washington, DC: World Bank.
———. 2015c. “Financing Cities in Turkey.” OECD (Organisation for Economic Co-operation
Chapter 5 in The Rise of the Anatolian Tigers: and Development). 2006. “Explicit Contingent
Turkey Urbanization Review. Report No. 87180- Liabilities in Debt Management.” Chapter 6 in
TR. Washington, DC: World Bank. Advances in Risk Management of Government
———. 2016. “Improving Revenue Mobilization in Debt. Paris: OECD Publishing. https://dx.doi
Cities.” Conference paper for the East and .org/10.1787/9789264104433-7-en.
Central African Cities Development Forum, ———. 2011. “Classification of the Functions of
Kampala, International Growth Centre, Government (COFOG).” Annex B in Government
London School of Economics and University of at a Glance 2011, 194–95. Paris, OECD Publishing.
Oxford, May 24–26. Ösmen, Türda. 2016. “Principles of Municipal
———. 2018. "Municipal Finances Self-Assessment Creditworthiness and Shadow Credit Rating.”
(MFSA) Experiences in South-East Europe: City Creditworthiness Initiative Workshop,
Synthesis and Country Reports." Working World Bank, Ankara.
Paper, World Bank-Austria Urban Partnership PEFA Secretariat. 2016a. PEFA Handbook Volume
Program (UPP), World Bank, Washington, DC. I: The PEFA Assessment Process—Planning,
Kopanyi, Mihaly, and A. Muwonge. Forthcoming. Managing and Using PEFA. PEFA Secretariat,
Managing Municipal Assets in Kenya— Washington, DC. https://www.pefa.org
Post Devolution Challenges and Responses. /sites/default/files/PEFA%20Handbook%20
Washington, DC: World Bank. Volume%201%20-%20second%20edition_1.pdf.
194 Better Cities, Better World
———. 2016b. PEFA Handbook, Volume II: PEFA the World.” IMFG Papers on Municipal Finance
Assessment Fieldguide. PEFA Secretariat, and Governance, Institute of Municipal Finance
Washington, DC. https://www.pefa.org/sites and Governance, University of Toronto.
/de f aul t / f i l e s / P E FA % 2 0 Ha n d b o o k %2 0 Standard & Poor’s. 2016. “S&P Global Ratings
Volume%202%20-%20second%20edition%20 Definitions 2016.” Standard & Poor’s.
publication.pdf. Stiglitz, Joseph E., and Jay K. Rosengard. 2015.
———. 2016c. PEFA Handbook Volume III: “The Five Desirable Characteristics of Any
Preparing the PEFA Report. PEFA Secretariat, Tax System.” In Economics of the Public Sector,
Washington, DC. https://www.pefa.org/sites Fourth Edition, edited by Joseph Stiglitz, J. and
/de f aul t / f i l e s / P E FA % 2 0 Ha n d b o o k %2 0 J. K. Rosengard. London and New York: W.W.
Volume%203%20Second%20edition_2.pdf. Norton and Company.
———. 2016d. “Supplementary Guidance for Suzuki, Hiraoke, Jin Murakame, Yu-Hung Hong, and
Subnational PEFA Assessments.” PEFA Beth Tamayose. 2015. Financing Transit-Oriented
Secretariat, Washington, DC. https://pefa. Development with Land Values: Adapting Land
org/sites/default/files/SNG%20PEFA%20 Value Capture in Developing Countries. Urban
guide%20revised%2016-03-10%20edited.pdf. Development Series. Washington, DC: World
———. 2017. “PEFA Check: Quality endorsement of Bank.
PEFA assessments from January 1, 2018.” PEFA UN-Habitat. 2009. Guide to Municipal Finance.
Secretariat, Washington, DC. https://pefa.org sites
/ Nairobi: United Nations Human Settlements
/default/files/20180111-PEFA%20Check%20 Programme.
from%20January%201%202018-Final_0.pdf. Venkateswaran, Rama Krishnan. 2014. “Municipal
PEFINDO. 2016. “Municipal Rating Methodology— Financial Management.” Chapter 3 in Municipal
Subnational Entity (Province/Regency/City).” Finances: A Handbook for Local Governments,
PEFINDO Credit Rating Agency. https://www edited by Catherine Farvacque-Vitkovic and
.pefindo.com/index.php/fileman/file?file=91. Mihaly Kopanyi, 93–145. Washington, DC:
Peterson, George. 1998. “Measuring Local Government World Bank.
Credit Risk and Improving Creditworthiness.” World Bank. 2014 “Improving Local Government
Working Paper, World Bank, Washington, DC. Capacity—The Experience of Municipal Finances
———. 2008. Unlocking Land Values to Finance Urban Self-Assessment (MFSA) in South-East Europe.”
Infrastructure. Washington, DC: World Bank. World Bank–Austria Urban Partnership Program,
Shah, Anwar. 2007. Local Budgeting: Public Sector World Bank, Washington, DC.
Governance and Accountability. Washington, ———. 2015. “Debt Management Performance
DC: World Bank. Assessment (DeMPA) Methodology.”
Sirtaine, Sophie. 2014. “Contingent Liability World Bank, Washington, DC.
Management.” Presentation at the PPPs in ———. 2017. Public–Private Partnerships: Reference
Infrastructure Conference, World Bank. Guide Version 3. Washington, DC: World Bank.
http://siteresources.worldbank.org/ECAEXT https://ppp.worldbank.org/public-private-part-
/Resources/Day2Session8.pdf. nership/library/ppp-reference-guide-3-0.
Slack, Enid. 2014. “The Fiscal Health of Ontario ———. 2018 “Improving Local Government
Municipalities.” Presentation to OMTRA Capacity—The Experience of Municipal
Annual Conference, Kingston, Ontario, Finances Self-Assessment (MFSA) in
December 9. https://munkschool.utoronto South-East Europe.” World Bank–Austria
.ca/imfg/uploads/291/slack_presentation_to Urban Partnership Program, World Bank,
_omtra_september_9_2014.pdf. Washington, DC.
Slack, Enid, and Richard Bird. 2015. “How to ———. (Forthcoming). “Municipal Finances Self-
Reform the Property Tax: Lessons from around Assessment Online Application.”
Getting the Finances in Order 195
CHAPTER 4
Way Forward and Perspectives for
the Future
Transformative Actions for a New Urban Agenda
Beyond the Nuts and Bolts • Support to leveraging financing opportuni-
of Local Governments Self- ties for public urban investments
Assessments: A World of • Support to access to credit
Applications
• Support to municipal program/project design
Local Governments Self-Assessments (LGSAs)
have many current and potential applications. • Support to capacity building of local
Among the multiple applications, the following governments
are worth mentioning again:
• Support to professionalization of municipal
• Data collection and curation staff
• Data sharing and dissemination • Support to city leaders’ decision making and
• Support to planning documents (both city policy change
planning documents and budgeting and
• Support to central government ministries
financial reporting)
of finance, public works and infrastructure,
• Support to investment programming and local governments.
Way Forward and Perspectives for the Future 197
Box 4.1
Leave No City Behind
“Data gathering capacity is underdevel- monitoring mechanism for cities acknowl-
oped, weak, or dysfunctional in many edges that there are transnational drivers
parts of the world. Africa, Asia, and Latin of urban change and embraces the idea
America are especially data (infrastruc- that the way all cities are run will deter-
ture) poor. There is no consensus on mine our common future. If the post-2030
who should set the metrics, who might agenda logic of ‘Leave no one behind’ is
generate and monitor data, or what the to incorporate the logic of ‘Leave no city
architecture of the science–policy inter- behind,’ then fundamental attention to
face underpinning global urban gover- fair, accessible, and effective monitoring
nance should be. Implementing a global mechanisms is imperative. ”
Source: Acuto and Parnell 2016, 873.
Institutionalization of or identify needed corrective measures. On the
LGSA: Integrating LGSA investment side, we have already discussed the
into Current Practice of lack of meaningful data, the sporadic nature of
data collection and curation, and the discon-
Local Governments nect between the various bodies in charge of
As we have seen, national legislation, coun- planning and programming, all of which make
try regulations, and management rules and the prioritization of municipal investments
requirements typically stipulate the way data programs difficult (box 4.1).
collection and reporting are done. On the The LGSAs outlined in this book represent
financial side, there is a list of reporting doc- a radical departure from this culture and pro-
uments that municipalities are mandated to mote the use of data and data reporting for a
fill out monthly, quarterly, or yearly; munici- greater good of analysis and policy change.
palities must also submit financial reports to LGSAs indeed have the potential to change
higher-level government entities, such as the the deep-rooted culture of local governments
ministry of finance, the ministry of local gov- as they move away from simple reporting to
ernments, or sectoral ministries. The central storytelling and analysis. Municipalities work
government entities review the reports to verify more and more like business entities (Bird
accuracy and compliance with rules, and may, 2013), and LGSAs support the move toward
sometimes, aggregate them into national-level unified and integrated data reporting and ana-
municipal databases. Very rarely, however, do lytical practices, one step closer to more effec-
the regulations require municipalities to ana- tive and accountable city management. The
lyze data with the aim of assessing their finan- LGSA methodology and results have been well
cial health, nor do regulations require them to tested and underscore a great potential toward
project future trends in order to uncover issues becoming a new integrated practice of local
198 Better Cities, Better World
governments. Supporting arguments include leaders in the decision-making process of
the following: reforms or actions.
• Present city analysis and financial results • Institutionalizing the formulation and adop-
in both format and content that are under- tion of a Priority Investment Plan (PIP) and
stood and valued by key partners such as an MFSA Action Plan with specific mea-
citizens, central governments, banks, capital sures will help improve the financial health
markets, rating agencies, private partners, and the quality of investments of the city.
and potential donors. This should become part of the new cul-
ture and mainstream practice, because sub-
• Institutionalizing benchmarks to enable
stantive corrective measures and reforms
consistent comparison of city analysis and
require careful planning, calibration, time,
financial results with national and interna-
and investments that can only be completed
tional benchmarks is very valuable, regard-
over several years. This new culture is a
less of how far the city’s indicators are from
departure from the common practice of ad
international best practices. The bench-
hoc, shortsighted, and short-lived improve-
marks serve as signals on where the city
ment actions.
stands and where it needs to go.
With the goal of facilitating access to LGSA
• Standardizing basic financial reporting and
templates and scaling up its use, a companion
analyses helps make comparison across cit-
Internet-based, online application has been
ies and across countries clear and reliable,
developed. Details can be found in appendix C.
regardless of their diverse accounting and
financial reporting practices.
• Speak a common language across the vari-
ous accounting practices ranging from cash-
LGSA Contribution to City-
based or modified cash to modified accrual Based Knowledge Products:
and full accrual accounting practices. Data with a Purpose, Data
The Municipal Finances Self-Assessment with a Voice, Deep Dive
(MFSA) helps this unification without into Storytelling
requiring or demanding major changes in There are many ways of presenting or curat-
the various national legislations and rules ing data. Following are some examples of city-
that govern accounting and financial report- based knowledge products to which LGSAs
ing in various countries. can contribute.
• Institutionalizing greater collaboration
among various departments that typically National and Regional Observatories
do not communicate or work together
National or regional observatories are a com-
breaks the cycle of poor management prac-
mon product line. There have been many
tices, disconnected services, and disjointed
attempts, and many failures, at creating large-
service delivery.
scale observatories. One common shortcoming
• Institutionalizing fact-based information and is trying to get too many data and losing sight
financial forecasting, planning, and budget- of what we want to track. LGSAs can help in
ing supports policy dialogues and helps city many ways with city-based results as well as
Way Forward and Perspectives for the Future 199
with national aggregate results combined with These guides, produced on an annual basis,
international benchmarking indicators. were based on the findings of the early “finan-
Municipal associations can benefit from cial audits” and included city-level as well as
LGSAs results. These associations often engage aggregated data covering the key financial
in policy dialogue with national governments ratios and providing thereby a quick snapshot of
aiming at corrective measures in the intergov- the cities. They were linked to an Urban Atlas,
ernmental finance system. Associations often a by-product of Urban Audits, that served the
lack sufficient data to support such a dialogue, same purpose on urban issues. In Senegal, the
however, and they often rely on anecdotal Municipal Development Agency has been pro-
evidence, some of which may be misleading, ducing and updating such reports since 1998.
incorrect, or biased. The systematic set of City websites and apps. There are many
LGSA data provides a powerful source of uni- ways of presenting city data, and cities around
fied and reliable information to support fact- the world have proved to be very ingenious
based dialogue. when it comes to presenting and branding
Ministries of finance can also benefit from themselves (see figure 4.1). Our intention is
LGSAs results. These ministries often have not to confine this creativity but to highlight
good aggregate data on intergovernmental some fundamentals that will help make city
finances but often face difficulties in disaggre- websites more accessible and user friendly. As
gating such data. The MFSA provides several mentioned previously, map-based data rep-
supporting options, including (1) templates resentation supported by a geographic infor-
and an analytic tool for unified data collec- mation system as well as interactive apps are
tion; (2)
systematic samples for policy anal- incredible assets that cities should tap into.
ysis to support reform decisions and policy The packaging, however, should not overlook
dialogue; (3) unified data and templates for the quality, relevance, or accuracy of data. The
international benchmarking and compari- overarching principles should be found in the
son; and (4) templates and methodology for concept of “data with a purpose, data with a
developing a disaggregated national municipal voice:”
finance database. For instance, inspired by the
MFSA, the Ministry of Finance of Croatia has “The raw material for this work is data
developed such a national database in cooper- and therefore providing data with a voice
is an intrinsic part of this process. Data
ation with the Association of Municipalities.
need to be crafted into a story in order
This database has greatly improved not only
to be heard. If you visualize data as what
policy dialogue and analysis but also transpar- it is—material, basically—you often end
ency, because the database and the rich set of up with confusing results or you fail to
graphic exhibits on cities, groups of munici- communicate the content and the story.”
palities, or sectors are accessible to local gov- (Scherabon 2016).
ernments, development partners, and financial
market entities. As we have tried to show throughout this
book, data are useful only as long as you make
them compelling. The art of storytelling is,
Urban Atlas, Financial Ratios Guide, and
generally speaking, not the forte of most
City Profiles
government entities. It is becoming clear, how-
Earlier generations of MFSAs have been instru- ever, that a little capacity building around this
mental in developing Financial Ratios Guides. topic is in order.
200 Better Cities, Better World
Figure 4.1 LGSA Byproducts: Monitoring Dashboard and Informed Decision Making
LGSAs: Tapping External agencies. LGSAs are helping local governments
Sources of Funding and to do so through the following:
Accessing Multiple • Improved creditworthiness and access to
Windows of Financing borrowing;
The Urban Audit/Self-Assessment (UA/SA) • Tapping into specific instruments (land-
and the MFSA can be instrumental in expand- value capture and public–private partner-
ing funding capacity beyond local government ships); and
budgets and current revenues. There are three • Access to donor funding made easier.
ways that local governments can expand their
funding capacity: (1) through access to credit
Tapping External Sources of Funding:
from lending institutions and banks; (2) by
Creditworthiness and Access to
tapping into innovative instruments through
Borrowing
deals with private partners; and (3) through
access to grants from central government The primary objective of the MFSA analysis is
and multilateral and bilateral development to assess the financial health of a municipality
Way Forward and Perspectives for the Future 201
and identify issues and corrective measures also strongly influences the cost of borrowing or
that can be included in the MFSA Action Plan bond issuance. Lenders highly value the rating
in order to improve financial health substan- scores published by internationally renowned
tially in the medium term (see box 4.2 for the rating agencies such as Fitch Ratings, Moody’s,
example of Belgrade, Serbia). One inherent and Standard and Poor’s. In contrast, cities
component of the MFSA is the assessment of (mostly in the developing world) lack such
the borrowing capacity of the municipality, its published rating results and, thus, borrow with
so-called creditworthiness. MFSA users can high risk premium.
also complete a simple self-assessed shadow Is it better for them to obtain published credit
credit rating. Details are explained in various ratings from the rating agencies and access
sections of this handbook (see chapter 1 and debt in more favorable terms? The answer is:
appendix E). it depends. The fact that they may pay a sub-
Creditworthiness is a well-used term, but it stantial amount for a rating does not ensure
is a softer term than some people would expect. obtaining a rating favorable enough to obtain
The MFSA financial ratios provide a solid basis good terms for debt. The reason is that not
for creditworthiness assessment because cred- only do they miss published credit ratings, but
itworthiness is on a continuum and it is better also, and more importantly, most of them have
to assess it in ranges, such as weak, medium, or weak creditworthiness and substandard finan-
strong creditworthiness. Historical data signal cial management systems; thus, a rating could
creditworthiness in the past; however, inves- show unfavorable scores that cities would not
tors are more interested in projected future be willing to make public. To address this issue,
creditworthiness in order to see the capac- rating agencies have introduced an interim
ity for repaying new debts. That is why it is solution; namely a shadow credit rating to help
important to measure creditworthiness at both municipalities identify and correct areas of
current and future times on the basis of finan- weaknesses and initiate a formal credit rating
cial projections. process later on when likely good results are
Borrowing capacity refers to how much a expected. The challenge is, however, that even
city can borrow, that is, what amount of new a shadow credit rating remains an expensive
debt can be procured at a specific point in exercise.
time. It is a vital indicator for city governments, The MFSA offers a solution one notch
and it should be estimated in real numbers (as below this, namely, to complete a self-assessed
opposed to qualitative creditworthiness mea- shadow credit rating (SASCR) based on MFSA
sures). Estimating debt capacity requires com- results at no or very little cost. This SASCR
bining results from ratios, revenues, and debt would inform the municipality about its sta-
databases; but borrowing capacity depends tus, weaknesses, and likely rating score, sig-
also on the debt terms, such as interest rate naling whether or not it would be wise to
and maturity. Thus, calculating debt capacity contract for a formal rating that would pro-
is inevitably more complicated than assessing vide them with favorable scores. Experiences
creditworthiness. show that, in most cases, it is better for even
Credit rating is becoming increasingly pop- the progressive cities in the developing world
ular among municipalities in the developed to first get the results from the SASCR, engage
world, because it not only signals the financial in specific corrective measures, and aim for
and management quality of a municipality but formal rating at a later stage.
202 Better Cities, Better World
Box 4.2
Story from the Field: Belgrade’s Credit Rating
The city of Belgrade was among the first liquidity position in a periodic review of the
municipalities to join the World Bank– Ba3 credit rating of Serbia’s capital, dep-
Austria Urban Partnership Program (UPP); uty mayor Goran Vesic said. “The rating
still takes into account the relatively high
the city started using the Municipal
level of indebtedness of the city due to the
Finances Self-Assessment (MFSA) among
debt of 1.2 billion euros left by the previous
various capacity-building instruments in mayor, but Moody’s states that the level
2011. It took city officials a year to restruc- of indebtedness of Belgrade is decreasing
ture their original financial reports, fill out and concludes that our city is the centre of
MFSA templates using the methodology the Serbian national economy, ” Vesic said,
outlined in this handbook, and then ana- according to a press release issued by the
lyze key findings and results. The initial city government.
results signaled good creditworthiness, In a periodic review of Belgrade’s credit
sound financial management, and overall rating Moody’s said earlier this month
good medium-term outlook. In 2013, the that the credit profile challenges include
city government decided to embark on a the city’s high investment requirements,
formal credit rating in order to obtain loans associated with pressure stemming from
with more favorable terms, and finally the transport company and limited finan-
contracted with Moody’s Rating Agency. cial flexibility under the current legislative
Rating discussions and analysis went framework.
more smoothly and faster than expected, “Moody’s also considers the City of Belgrade
because the city shared with Moody’s not to have a strong likelihood of extraordinary
only all original financial reports but also the support from the Government of Serbia
MFSA reports, which Moody’s found fully (Ba3) in the event that the issuer was to face
compatible with the rating requirements acute liquidity stress, ” the ratings agency
said on April 10, 2019.
(see details in chapter 1).
The MFSA has helped the city of Belgrade In March 2017 , Moody’s upgraded Belgrade’s
to obtain and sustain a sound financial posi- long-term issuer rating to Ba3 from B1 and
tion. The most recent rating review was com- changed its rating’s outlook to stable from
pleted with a score of Ba3 and announced by positive following similar actions on Serbia’s
Moody’s Investor Services on April 22, 2019. government bond rating. The creditworthi-
A press statement published in SeeNews, ness of Belgrade is closely linked to that of
an Internet-based news portal, reported: the sovereign, as Serbian local governments
BELGRADE (Serbia): Moody’s Investors depend on revenues that are linked to the
Service has praised Belgrade city govern- sovereign’s macroeconomic and fiscal per-
ment’s self-financing capacity and improved formance (Ralev 2019).
The SASCR involves a procedure that (Fitch Ratings 2015; Moody’s 2017; Standard
adopts the principles and key methodol- and Poor’s 2016). The scores could be aaa,
ogy practices of rating agencies in complet- aa, a, bbb, bb, b, ccc, cc, c, or d. The SASCR,
ing credit ratings or shadow credit ratings however, applies rating instruments in a
Way Forward and Perspectives for the Future 203
self-assessment modality. SASCR analysis and capture increases in land values. Cities such
scoring are built on three pillars: (1) the MFSA as New York; Washington, DC; London; and
qualitative municipal finance assessment Paris, and, more recently, Chinese cities,
(MFA), (2) the MFSA ratio analysis, and (3) made it a major component of financing their
MFSA financial projections. All of these are urban infrastructure. Land value capture has
assumed to be completed during the MFSA also been used to finance large infrastructure
before the SASCR. Therefore, the SASCR does in Latin America. The most famous exam-
not require new data collection. ples are the bus rapid transit (BRT) systems
SASCR analysis and scoring include the of Bogotá, Colombia, and São Paolo, Brazil.
following simple steps: (1) scoring the quali- Land value capture (LVC) is a method of
tative results from the MFA; (2) scoring the funding infrastructure improvements based
quantitative results from the ratio analysis; on the recovery of all or some of the increase
calculating the final score; and (4) estab-
(3) in property values generated by public infra-
lishing a shadow credit rating score based on structure investments (Peterson 2008). LVC
the final score and a rating table. It is also use- can help mitigate the challenges cities face
ful to summarize the results in a short SASCR in obtaining public funding, while also pro-
report. The steps of the SASCR are explained viding benefits to private sector partners.
in appendix E by using again the data of the Below are some of the LVC instruments that
sample city analyzed and explained in the pre- local governments can tap into (Freire and
ceding MFSA sections. Kopanyi 2018; Kim 2018):
• Tax increment financing (TIF): TIF is a
Tapping External Sources of Funding:
funding strategy used by cities to promote
Land Value Capture and Public–Private
economic development within a designated
Partnerships
area that is deemed “blighted” or “underde-
Land Value Capture veloped.” TIF is used to divert anticipated
The combination of the UA/SA and MFSA is a property tax increases to a dedicated fund,
powerful instrument for estimating both the which is then reinvested into public infra-
projected development funding needs and structure within the TIF district. It is used
the existing funding capacity while encour- to promote economic development by ear-
aging users to seek options “outside the box.” marking future property tax revenues from
The UA/SA, through its Land Assessment increases in assessed values within a zone
and its identification of major land develop- and issue bonds against these earmarked
ment projects in the city, is uniquely posi- revenues.
tioned to provide a current and accurate
picture of the local situation on existing zon- • Transit development impact fee (TDIF):
ing and regulations, population trends, and The TDIF is a one-time charge on new
development pressures. Many cities are very development designed to cover costs asso-
dependent on land-based revenues; there- ciated with its impact on public transit sys-
fore, any additional revenues tied to specific tems. TDIF reflects a shift in policy where
land development projects are bound to have local governments increasingly look to
a measurable impact on revenue generation. developers to contribute to the impacts of
In recent years, cities have explored ways to development.
204 Better Cities, Better World
• Special assessment district (SAD)/ developers, forcing them to contribute
Betterment levy: In districts in which land to development of trunk infrastructure.
value has increased as a result of public Issuance of building permits will be made
infrastructure improvements, like upgraded upon payment of development fees.
transit systems, an additional tax is assessed
• Development agreements: They capture
on parcels to recover the costs of the public
land value via voluntary contracts negotiated
improvement project. SADs are most use-
between cities and developers where devel-
ful to fund localized improvements, such
opers promise to make large up-front invest-
as new transit stations on existing lines
ments on infrastructure if the city commits
or district-specific improvements like bus
not to change land use and zoning regula-
or light rail. Betterment levies or special
tions during the term of the agreement.
assessments are instruments that charge
property owners a substantial share of the • Community benefit agreements: These are
cost for infrastructure improvements that voluntary contracts between developers and
benefit their properties within a designated the community in a defined zone.
area of improvement. One modality of these
is known as transit-oriented development LVC’s success as a funding tool requires an
(TOD), commonly used to support met- environment with a smart mix of uses, density,
ro-rail development (Suzuki et al. 2015). accessibility, and market demand:
Community development facilities (CDFs) • Regulatory framework: Local zoning
represent another modality when cities ordinances that allow for a mix of uses—
issue special levies, outside of property tax, ecreational—
residential, commercial, and r
based on land (size, not value) without link- must be in place for LVC to be effective,
ing them to specific development; cities in because mixed-use development near
California often issue bonds backed by CDFs. transit stations tends to generate more
• Transfer of development rights: This value than single-use development. If
areas near transit are zoned only for a sin-
refers to a set of instruments introduced
gle use, cities may need to rewrite z oning
initially to induce voluntary private trans-
ordinances to include mixed-use zoning,
actions to trade development rights (for
or develop a TOD overlay district.
example, some defined area in square
meters) between owners in “selling” and • Density: Development near transit should
“receiving” zones defined for better urban be sufficiently dense in order to capture the
development by master plans or zoning reg- greatest value possible through LVC strat-
ulations. Cities have emulated this practice egies. Because LVC funds transit projects
by selling building rights in defined zones through a proportional relationship with
directly to developers or to any investors property values, dense development that
via open auctions (Certificate of Potential creates more value per built square foot is
Additional Construction, or CePAC in more desirable than comparably less valu-
Brazil) in order to collect revenues while able sprawling, suburban style development.
promoting higher- density urbanization.
• Reforming property taxes: In addition
• Developer exactions/Development fees: to zoning, reforming general property tax
These are charges that a city collects from formulas to include a land value tax (LVT)
Way Forward and Perspectives for the Future 205
component can be an effective method to longer period, in line with the expected benefits
promote TOD and raise revenue to finance (such as savings on vehicle operating cost, on
public transit. LVT as a reform measure travel time, and on accidents). Public funds are,
results in placing a higher tax rate on land thus, freed up for investments in sectors where
than on buildings, which provides incen- private investments are impossible or inappro-
tives to develop property by making it more priate. Experience suggests, however, that PPP
costly to hold on to vacant or underused is not a panacea, and structuring and managing
sites. Additionally, placing a lower tax rate a PPP is a very demanding task. Typical mis-
on improvement assessments could encour- takes cities may make include contracting out
age owners to upgrade or replace obsolete services that have failed both in technical and
buildings. financial terms and expecting private partners
to fix all the deficiencies. Another mistake is
Public-Private Partnerships when the municipality lacks capacity to mon-
Municipalities can substantially expand invest- itor and control the private service provider,
ment capacities by selecting projects to be and, as a result, services deteriorate and even-
funded and managed by public–private part- tually the contract may be canceled. Finally, the
nerships (PPPs). Applying PPP arrangements PPP makes the different interests very visible,
for the right project and with the right condi- because the private partner wants fair recov-
tions can produce a win-win situation for both ery of costs and return on equity; as a result,
the private and public partners. PPPs include PPP partners often demand various guarantees
a wide range of modalities. One modality is a such as off-take warrantees, which means that
very simple management contract that aims the municipality must commit to pay a portion
to improve management efficiency by pri- of fees to ensure that the private partner gener-
vate experiences and procedures. A second ates sufficient revenues in case of low volume
modality is joint ventures, when the munici- of initial customers’ demand (for example, due
pality provides some assets and forms a joint to gradual increase of water use, bus travelers,
venture company with a private partner who or volume of waste disposed of in a landfill). In
also contributes with substantial funds (for summary, a city needs to get the proper tech-
example, working capital or equipment) and nical and financial advice before engaging in
when parties share the risk of operation. One such partnerships in order to make sure that
of the highest-level modalities is concession, the endeavor is profitable and beneficial for all
in which the municipality tenders out a license parties involved.
to provide particular services (for example,
solid waste collection and disposal, water and
Tapping External Sources of Funding:
wastewater services, or public transport). The
Access to Donor Funding Made Easier
private partner signs a concession agreement
in exchange for a concession fee; the munici- There is nothing that donors love better than
pality becomes a regulator of the contracted having a trusted line of communication with
service, while the private partner provides for key country stakeholders at the central and
all required investments and working capital local levels, knowing that key agreements are
and builds and operates the facilities until the based on sound and reliable data, and know-
end of the concession agreement. ing that due diligence and proper homework
From the municipality’s perspective, PPPs have been carried out. Multilateral agencies,
financed by the private sector allow the spread- bilateral agencies, and foundations are ready
ing of the project cost for the public over a to jump in but, more often than not, are
206 Better Cities, Better World
concerned about the lack of preparedness of implementation (box 4.3). A key principle of
potential investment projects. The European green financing is to better manage environ-
Union in Southeast Europe is a case in point: mental and social risks and take opportuni-
large funding opportunities have not been ties that bring both a decent rate of return
fully “captured” by potential beneficiaries. The and environmental benefit and that deliver
donor complains about the lack of “bankable” greater accountability. Green financing can be
projects or programs, whereas the potential promoted through changes in countries’ reg-
recipient laments the administrative hurdles ulatory frameworks, such as harmonization of
put in place to access funding. The first group public financial incentives, increases in green
is concerned about not disbursing fast enough financing from different sectors, alignment of
whereas the second does not know how to public sector financial decision making with
present its agenda and its credentials. Such the environmental dimension of the invest-
a situation is hard to fathom in view of the ment projects, increases in investments in
state of urgency and the incredible financing clean and green technologies, and increased
gap outlined in this book. LGSAs can provide use of green bonds.
a solution to all parties because their use and Cities have a major role to play in this
application will clear the way for the screening agenda, and LGSAs can help push it forward.
and identification of priority actions as well as Today’s capital markets do not provide cities
companion measures. with adequate access to affordable financ-
ing suited to low-emission, climate-resilient
From LGSAs to Green infrastructure. The challenge is not simply
to increase the amount of money in the pipe-
Financing
line; it is also to create an enabling envi-
Green financing refers to actions aimed at ronment that encourages existing and new
increasing the level of financial flows to sus- financing to flow from a broad spectrum of
tainable development priorities and project sources. Specific recommendations include
Box 4.3
Paris Agreement on Climate Change
This agreement is a global treaty under Funding climate change has always been
international law to combat climate change. a contentious issue between rich and poor
It was adopted by 195 nations in Paris during countries. Under the convention, developed
the 21st Conference of Parties (COP21) of countries are bound to provide support in
the United Nations Framework Convention the amount of US$100 billion per year to
on Climate Change (UNFCCC) on December developing countries, every year, until 2025
12, 2015. The core objective of the Paris through the Green Climate Fund. For the
Agreement on Climate Change is to limit post-2025 period, a new, higher financial
the global temperature rise to below 2° goal will be set. With regard to financial sup-
Celsius as compared to the preindustrial era port, for the first time in any international
in the present century. The agreement also agreement, developing countries are also
emphasizes the need to drive efforts so that encouraged to come forward voluntarily to
the temperature rise can be limited to 1.5 °C. contribute financially.
Way Forward and Perspectives for the Future 207
the following: develop a financial policy envi- projects funded by the bond perform. If a green
ronment that encourages cities to invest in infrastructure intervention is more effective than
low-emission, climate-resilient infrastruc- expected, investors get a greater return; if the
ture; support cities in developing frameworks intervention is less successful, the return is lower.
to price climate externalities; develop and The financing is particularly useful for innova-
encourage project preparation and maxi- tive projects that might be difficult to fund with
mize support for mitigation and adaptation traditional bonds. Examples of environmental
projects; and collaborate with local financial impact bonds include US$12 million, Atlanta,
institutions to develop climate finance infra- Georgia (2019); US$25 million, Washington, DC,
structure solutions for cities. Water Company (2017); and the Massachusetts
Bay Transportation Authority’s tax-exempt sus-
• National government supporting public sec-
tainability bonds as part of a US$574 million
tors on creating enabling environments for
competitive sale (2017).
green investments (Global Green Growth
Interestingly, India and China have been
Institute, GGGI)
making progress in green financing. China has
• Selecting local public investments with green issued guidelines for establishing a green finan-
technology modalities and environmental cial system. The city of Shanghai has estab-
sustainability (for example, public transport lished a special-purpose vehicle, the Shanghai
with electric vehicles, energy-saving build- Green Urban Financing and Services Co., Ltd
ings, energy-efficient street lighting (iLEF (FSC), and is borrowing from the World Bank
2015), solar electricity applications, water in order to finance a very comprehensive green
conservation, and solid-waste treatment financing program, the Green Urban Financing
with methane capture) and Innovation Project, for a total amount of
• Selecting municipal project financing US$520 million (World Bank 2019) (box 4.4).
modalities to tap into available international
funds set aside to support green develop-
ment, for example, the Green Climate Fund From LGSAs to Municipal
GCF—the world’s largest climate fund—or Programs: Partnership
the Global Environment Facility GEF— Agreements and the
managed under the World Bank Municipal Contract
• Promoting public-private partnerships on
One possible and powerful outcome of the
financing mechanisms, such as green bonds.
LGSA process lies in the fact that the UA/SA
Carbon emission trade is a well-tested PIP and the MFSA Action Plan can become the
instrument that works well in developing coun- key components of a partnership agreement
tries. As of September 2015, 39 countries and between the local government and the central
23 cities, states, and provinces have employed government. There is a long legacy of such part-
carbon-pricing instruments, mostly in the form nerships. Below is a summary of experience
of carbon taxes or emissions-trading systems and a reminder of what municipal contracts
(Habitat 2016). are and what they can do to support both the
Environmental impact bonds (EIBs) are a decentralization process and greater account-
type of financing that provides different levels central–local
ability in municipal affairs and in
of return for investors based on how well the relationships.
208 Better Cities, Better World
Box 4.4
The Green Urban Financing and Innovation Project Development
Objective
The Green Urban Financing and Innovation will help cities enhance resilience against
Project development objective is to climate change threats. Building on experi-
increase access to sustainable, long-term ences with green financing, the proposed
financing for selected green urban invest- financial intermediary (Shanghai Green
ments benefitting local governments in the Urban Financing and Services Co., Ltd, or
Yangtze River Delta (YRD) Region. The YRD FSC) is expected to raise medium- to long-
Region is very vulnerable to the impact of term funds in the capital markets and on-lend
climate change. Direct economic losses to specific subprojects based on project
from extreme weather events account for appraisal and fiduciary oversight capacity.
up to 3 percent of China’s annual GDP . Of The FSC will be the first subnational
the top 20 cities worldwide affected by ris- financing facility of its kind in China. The
ing sea levels, seven are from China; four of FSC would be open to public utilities and
the seven are in the YRD Region. revenue-earning entities that are service
According to a Climate Change Special providers for districts and towns in the
Assessment Report on the YRD Region, Shanghai metropolitan area and other cit-
water resources shortages, water environ- ies and towns in adjacent provinces in the
mental degradation, and urban flooding are YRD Region. They would be responsible for
the top three climate-change-related chal- raising the initial financing and would repay
lenges facing cities in the region. Investments loans from operating revenues or govern-
in water supply, wastewater, and solid waste ment subsidies (World Bank 2019).
Legacy from Europe
of contractualization—public action contracts of
In Europe, the rapid development of such the 1970s and social action contracts (focused
contractual arrangements is directly linked to on underserviced neighborhoods) of the 1980s.
ambitious public policies aimed at addressing They represented a new form of selectivity in
social, economic, and environmental problems awarding capital grants to urban areas. During
in urban areas in the 1980s. All these policies the 2000–06 period, 247 municipal contracts
feature the same objectives aimed at promoting involving 2,000 municipalities were signed, pro-
social cohesion, enhancing public safety, and viding over 2 billion euros in financing.
improving living conditions. In this context, con- Comparable arrangements emerged in
tractualization means a concerted partnership Europe to best suit the increasingly integrated
policy that advocates the cofinancing of costly nature of urban development programs. The
investments and involves several ministries and Netherlands adopted the contract formula in
levels of local governments as well as citizens as its “big city” policy, which was implemented
partners. In France, municipal contracts were by way of a comprehensive agreement between
initially introduced on an experimental basis in the central government and 25 cities in 1994
1989–94. They were the legacy of a dual history and a city-by-city agreement in 1999–2003.
Way Forward and Perspectives for the Future 209
In Sweden, “local development contracts” were several generations of municipal contracts,
implemented in the 2000s with seven munic- thereby introducing some level of accountabil-
ipalities that provided cofinancing. The con- ity in public spending.
tracts targeted 24 poor neighborhoods that were
home to a large concentration of immigrants. Connecting LGSAs and Municipal
In Belgium, federal authorities used the law of Contracts
July 17, 2000, to develop a municipal contracts
policy, whereby contracts would specify the If financing through own revenues, grants, or
conditions under which local authorities may donor funding is available, converting the con-
receive financial aid from the state. Beginning tent of the UA/SA PIP and MFSA Action Plan
in 2000, the first municipal contracts were into components of a municipal contract is an
executed and targeted initially to larger cities, effective way to ensure their actual implemen-
gradually including other municipalities. The tation. It provides the following:
United Kingdom adopted an original form of • An accountable binding agreement:
partnership policy that brought together local Although this agreement has no legal value, it
stakeholders (civil society, private sector, local is a signed public document that stipulates the
governments) for the purpose of identify- content of the program both in terms of infra-
ing and outlining local development projects, structure investments and in terms of specific
which gave them access to grants from the measures pertaining to revenue mobilization,
central government’s Neighborhood Renewal expenditures management, local taxation,
Fund. The United Kingdom is currently asset management, bookkeeping, and finan-
expanding the use of city contracts beyond the cial management with specific annual targets
initial urban renewal objective. Germany also and assignment of responsibilities between
introduced partnership policies between vari- the central and local governments.
ous tiers of governments in which the regions
(Landers) played an important role. Its “Social • Some measure of stability and visibility on
City” program drew 25 percent of its financing short- and medium-term public spending:
from the federal government, and 75 percent It, in effect, introduces a multiyear planning
came from the Landers and communities. perspective and “culture” as well as a pro-
In Europe, the concept of municipal con- grammatic approach to city management
tracts has been used and scaled up in a very and investments. To some extent, it takes the
pragmatic and determined way. It has not politics out of the equation because the dura-
often been used to seal an all-encompassing tion of the municipal contract (which is typi-
agreement or a full-scale municipal program; cally three to five years) does not necessarily
instead, it has been used to target specific pub- match the duration of the political mandate
lic policy objectives, such as social inclusion, or of the elected leadership, and its content is
to help bridge a financing gap for large multi- not likely to be subject to political volatility.
jurisdiction investment projects. Experiences • Some measure of efficiency in channeling
in Europe, and particularly in France, with funding for the city: Because the compo-
regard to central–local government partner- nents of the municipal contract are based
ships provided some inspiration for the munic- on the UA/SA and the MFSA and because
ipal contracts that emerged in the Maghreb the data and key findings are reliable, trust-
(Morocco and Tunisia) and in Sub-Saharan worthy, and packaged in a way that inspires
Africa. There, the model has been very effec- confidence, central governments, private
tive: over 200 municipalities have implemented partners, and the donor community are
210 Better Cities, Better World
likely to use the municipal contract as a who has power to unlock a situation? What trig-
platform for investments, giving the munici- gers or key prerequisites need to be unleashed
pality an opportunity to harmonize its many to get the best results? What trade-offs must not
windows of financing and cut down on be overlooked? What is the proper timing and
transaction costs. sequencing of tasks and activities? What mun-
dane or less mundane implementation issues
• Some measure of progress on structural
need to be overcome? Ultimately, what matters
reforms and on the decentralization pro-
is not so much how we get there, but what we get
cess: Because it brings together the key
in the end. Keeping an eye on the prize comes
proponents of the decentralization pro-
down to better cities and a better world.
cess, typically the ministry of finance and
the city, the municipal contract process
provides a greater chance to put on the
table and work through some fundamen-
tal reforms such as local taxation, shared
taxes, grant allocation formulas, and inter-
governmental transfers. References
Acuto, Michele, and Susan Parnell. 2016. “Leave No
Again, if funding is available, if the political City Behind.” Science 352 (6288): 873. Urban
will is there, and if the partners are commit- Planet Special Issue.
ted to change and progress and serious about ADM (Agence de Développement Municipal). 2008.
implementation, then the municipal contract Guide de Ratios 2008–2011. Senegal: ADM.
may be the final step of the LGSA process—the
ADM (Agence de Developpement Municipal).
icing on the cake. Atlas Urbain des Villes du Senegal 2008-2011.
Senegal: ADM.
Keeping an Eye on the Bird, Richard. 2013. “Foreign Advice and Tax Policy
in Developing Countries.” International Center
Prize: A Bottom-Line for Public Policy Working Paper 13-07, Andrew
Approach to Better City Young School of Policy Studies, Georgia State
Management University, Atlanta.
Freire, Maria E., and Mihaly Kopanyi. 2018. “Asset
When all is said and done, the LGSA’s ultimate
and Debt Management for Cities.” Cities that
goal can be summarized in two words: action
Work, International Growth Centre Working
and reform. This is why the UA/SA PIPs and Paper, London School of Economics and
the MFSA Action Plans, which are derived from University of Oxford.
both the urban and the financial analysis, are so Kim, Julie. 2018. “CePACs and Their Value Capture
very important. Users of LGSAs should always Viability in the U.S. for Infrastructure Funding.”
keep in mind the “solution” side of the equa- Working Paper 18Jk1, Lincoln Institute of Land
tion. For every issue, challenge, and weakness Policy, Cambridge, MA.
the LGSAs uncover, there should be a solution, Peterson, George. 2008. Unlocking Land Values
a way forward, and, if needed, the outline of a to Finance Urban Infrastructure. Washington,
reform. Each solution should come with its mode DC: World Bank.
d’emploi, or “how-to,” in order to bring realism Ralev, Radomir. 2019. “Moody’s Praises Belgrade
and accountability to its implementation. Among City’s Self-Financing Capacity, Liquidity—
the questions that should be properly addressed Deputy Mayor.” SeeNews, April 22. https://
are the following: Who are the gatekeepers, and seenews.com/news/moodys-praises
Way Forward and Perspectives for the Future 211
-belgrade- citys- self-financing- capacity Governments, edited by Catherine Farvacque-
-liquidity-deputy-mayor-651449. Vitkovic and Mihaly Kopanyi. Washington, DC:
Scherabon, Herwig. 2016. “The Art of World Bank.
Gentrification: City Data Made Beautiful.” Goudriaan, Mirco. 2010. “Effective Aid through
The Guardian Cities in Numbers gallery. Municipal Contracts.” Working Paper,
https://www.theguardian.com/cities/gallery World Bank, Washington, DC.
/2016 /nov/30/art-gentrification-patterns-data Habitat. 2016. “Municipal Finance and Local Fiscal
-visualisation-herwig-scherabon-. Systems.” HABITAT III Policy Paper 5, Quito III.
Suzuki, Hiraoke, Jin Murakame, Yu-Hung Hong, ILEF (International Lighting Efficiency Financing).
and Beth Tamayose. 2015. Financing Transit 2015. “International Lighting Efficiency
Oriented Development with Land Values: Financing–Facility Financial Model Capital
Adapting Land Value Capture in Developing Estimate and Financial Viability.”
Countries. Urban Development Series. NALAS (Network of Associations of Local
Washington, DC: World Bank. Authorities of South-East Europe). 2011.
World Bank. 2019. “People’s Republic of China: “Report on Fiscal Decentralization Indicators
Green Urban Financing and Innovation in South-East Europe.” NALAS, Skopje.
Project.” Project Appraisal Document, World Partenariat pour le Developpement Municipal
Bank, Washington, DC, April. (PDM), Banque du Developpement Local au
Maroc, and Institut de la Gestion Deleguee
(IGD). 2007. “Guide pour l’Autoevaluation
Additional Readings financiere des autorites locales.”
Agence Française de Notation. 2010. Rapport de Paulais, Thierry. 2012. Financing Africa’s Cities:
l’Observatoire des Finances Locales. Paris: The Imperative of Local Investments. Africa
Agence Française de Notation. Development Forum series. Washington, DC:
Ammons, D. N. 2001. Municipal Benchmarks: World Bank.
Assessing Local Performances and Establishing Poister, H. T., and C. Streib. 1999. “Performance
Community Standards. Thousand Oaks, CA: Measurement in Municipal Government:
Sage Publications Inc. Assessing the State of the Practice.” Public
Cities Alliance. 2006. Guide to City Development Administration Review 59: 325–35.
Strategies: Improving Urban Performance. Smolka, Martin O. 2013. “Implementing Value Capture
Brussels: The Cities Alliance, Cities without in Latin America.” Policy Focus Report Series,
Slums. Lincoln Institute of Land Policy, Washington, DC.
Farvacque-Vitkovic, Catherine, and Lucien Godin. World Bank. 2013. Planning, Connecting and
2006. “Decentralization and Municipal Financing Cities—Now: Priorities for City
Development: Municipal Contracts.” Working Leaders. Washington, DC: World Bank.
Paper, World Bank, Washington, DC. ———. 2014. “Improving Local Governments
Farvacque-Vitkovic, Catherine, Lucien Godin, and Capacity—The Experience of Municipal Finances
Anne Sinet. 2014. “Municipal Self-Assessments: Self-Assessment (MFSA) in South-East Europe.”
A Handbook for Local Governments.” Working World Bank–Austria Urban Partnership Program,
Paper, World Bank, Washington, DC. World Bank, Washington, DC.
Farvacque-Vitkovic, Catherine, and Anne Sinet. ———. 2018. “Improving Local Governments
2014. “Achieving Greater Transparency and Capacity—The Experience of Municipal Finances
Accountability: Measuring Municipal Finances Self-Assessment (MFSA) in South-East Europe.”
Performance and Paving a Path for Reforms.” World Bank–Austria Urban Partnership Program,
In Municipal Finances: A Handbook for Local World Bank, Washington, DC.
212 Better Cities, Better World
APPENDIX A
Local Governments Self-Assessments:
Simplified Framework or Version
“Light”
LGSAs as described in this book require some of the municipality and help it to identify a
level of capacity and a high level of commit- Priority Investment Program and a MFSA
ment from all parties involved. The payoff and Action Plan. The key goal of this simpler ver-
results emerging from the process are well sion is to assess the absorptive capacity of the
worth the effort; however, some cities and local government and to outline a matching
towns may not be ready for such an engage- program of investments ready for implemen-
ment. For those local governments that are tation. The objective is to help the municipal-
on the fence—ready but not quite equipped ity take informed investments decisions while
to carry out a full-fledged Urban Audit/Self- taking steps on improving its urban, organi-
Assessment and a Municipal Finances Self- zational, and financial position. This process
Assessment/MFSA—this appendix provides can easily be carried out by any technical and
a simplified framework for a more modest financial department and would not require, as
self-assessment that can provide an entry may be the case with the LGSAs presented in
point into a full-fledged LGSA process later. the main core of this book, the initial reliance
The key objective is to carry out a quick on local experts. This template/framework has
assessment or diagnostic focusing on the been developed, tested, and implemented on
urban, financial, and organizational situation the ground in many cities.
Local Governments Self-Assessments: Simplified Framework or Version “Light” 213
Urban Audit/Self- projections for 5, 10, and 15 years from now,
Assessment: Simplified as well as the corresponding growth rates.
Framework Map: The city in its regional context
Step 1: Regional context
Step 2: Urban setting and organization
The city in its regional context of the city
• Give a brief description of the region (major Urban setting
geographical features), distances to other
major cities, and major access routes. • Describe the city’s physical context: (a) prin-
cipal terrain relief, hydrography, undevelop-
able areas (such as steep slopes, erosion, and
Regional economy and boundaries of the city’s
flood-prone areas), conservation areas (for-
hinterland
ests, water tables), open areas, and potential
• Describe the region’s principal activities expansion areas; (b) principal connections
and products, as well its connectivity with to other cities; (c) climate (seasonal precip-
the rest of the country (key transportation itation table); and (d) assets and constraints
nodes and mobility patterns of goods and hinder urban expansion.
that favor or
people). Indicate the principal regional
administrative boundaries and population Organization of the city
clusters. Define the boundaries of the city’s
hinterland (area of influence). • Clarify administrative boundaries of the city
and internal organization in districts.
Demography • Identify levels of local government units
• Provide figures for the regional population responsible for infrastructure and service
according to the most recent censuses and delivery.
Table A.1 Share of Responsibilities: Who Is Responsible for What?
Responsible entities
Municipality State government Utility companies Private
New New New New
Sectors Items works Maintenance works Maintenance works Maintenance works Maintenance
1 Infrastruc- Primary roads O O
ture Secondary X X
roads
Drainage X X
Solid waste X X O O
Street lighting X X
2 Utilities Electricity X X
Water supply X X
Wastewater X X
Urban X X X X
transport
continued next page
214 Better Cities, Better World
Table A.1 Share of Responsibilities: Who Is Responsible for What? (continued)
Responsible entities
Municipality State government Utility companies Private
New New New New
Sectors Items works Maintenance works Maintenance works Maintenance works Maintenance
Public heating X X
Others
3 Services Education X X O O
Health X X O O
Social X X O O
Culture X X O O
Green spaces X X O O
4 Land Housing X X O O V V
develop- Industrial X X O O V V
ment
Urban X X O O V V
renewal
Note: Responsibility for infrastructure or public utilities denoted by X = municipal level; O = state level; V= private.
Land occupancy Major
• Review and outline the pros and cons of facilities
existing city planning documents and land Activities
use regulations and their impact on the city Green
space
fabric and configuration.
Roads, open
• Map existing land occupancy, highlight- areas
ing current and future urbanization pat- Total - other
terns and trends and locating key pressure occupancy
points.
Land Markets
Table A.2 Land Occupancy • Do a quick review of existing sources (real
Surface area, Neighborhood estate, transaction records) to assess current
hectares 1 2 3 … … Total land prices by neighborhood.
Housing • Map out land value information.
Serviced
housing Land Assets
Underserviced
housing • Do a quick assessment of the city’s land
Irregular assets information.
housing
• Update or jumpstart a quick Land Assets
Total housing
Inventory.
Other
occupancy • Map existing locations of public lands.
Local Governments Self-Assessments: Simplified Framework or Version “Light” 215
Main Land Assets Table A.4 Population by Neighborhood
Property Location/ Neighborhood
type Unit Price Area Address 1 2 3 Total
Plots owned Population in serviced housing
by the
Population in underserviced
municipality
housing
Plots Population in irregular housing
controlled by
the munici- Total population
pality Housing
Buildings
owned by Step 4: Urban Economy and City
the munici-
Branding
pality
Total The city is the focal point for shaping the local
economy and developing relations with hinter-
land areas:
Step 3: Demography and Densities
• Identify the “drivers” of the local economy:
Urban population and population by principal stakeholders involved (public and
neighborhood private, local and outside the region, “mod-
• Provide figures for the city’s population ern” and “informal”).
according to the most recent censuses and • Describe the exchanges of agricultural
projections for 5, 10, and 15 years from now, goods and services and transfers between
as well as the corresponding growth rates. rural areas and the city, and analyze the
• Break down the city’s population by interdependencies between these two areas.
neighborhood.
• Identify the decision-making centers that
• Provide an overview of the city-level popu- influence the various components of the
lation profile and composition, including by local economy, and the major external fac-
age and gender. tors that affect these different components.
• State any salient feature with a long- • Describe the features and level of urban
term impact on the city’s infrastructure employment: government, commerce,
needs. industry, agriculture, “informal” activities.
• Map. Population and density by Name the major “employers.” List features of
neighborhood. large local retailers, the transportation sector,
and the public buildings and works sector.
Table A.3 Population • Identify “modern” businesses and informal
Census Census activities.
Year 1 2 N N+5 N+10 N+15
• Describe the “brand” and “branding poli-
Population
cies” of the city.
216 Better Cities, Better World
Table A.5 Economic Activities and Jobs in the “inventory” section (1) of the table.
Economic Section 2, “indicators,” compares the most sig-
Sector of units / Type of Number nificant service data to the populations of each
activity services activity of jobs Location neighborhood (calculated automatically). And
Industry finally, the scores determined from these indi-
Crafts cators serve as the basis for comparing neigh-
Commerce borhood service data to the average for the
Public city. The neighborhood score is defined quali-
enterprise tatively (poor, mediocre, average, fair, or good)
Public by way of a quantitative rating of 0 to 4, with
administra- a 4 equal to the city’s average. A coefficient is
tion assigned to each score according to its weight.
Other Maps: (a) Facilities; (b) Roads (by
Informal
classification, kind, condition); (c) Drainage;
activities (d) Potable water supply (reservoirs, princi-
Other pal network, treatment plant, water towers);
(e) Electricity (high voltage lines, medium volt-
Step 5: Urban Services and Infrastructure age lines, power plant); (f ) Sanitation (sewage,
waste disposal, transfer stations).
Urban Services and Infrastructure Needs
Assessment Table A.6 Infrastructure and Services
Programming Inventory (ISPI) (For complete
• Prepare an inventory of neighborhood tables, see chapter 2 tables 2.3, 2.4, and 2.5.)
access to services, by infrastructure and Neighborhood
superstructure facilities. Enter the informa- 1 2 3 Total
tion in the ISPI table.
1. Inventory
• Comment on the results of indicators and Population
Land occupancy
scores: (a) brief description of each neigh-
Access to infrastructure
borhood; (b) classification of neighborhoods Roads
according to scores received. Water and electricity
Environmental
• Identify the most underserviced neighbor-
sanitation
hoods, where access to infrastructure and Access to superstruc-
facilities is the most deficient. ture facilities
Education
This analysis should help reveal the city’s
Health care
principal needs and serve as a guide for pro- Commercial facilities
posals under the Priority Investment Program Sports and youth
(PIP). The goal is to determine, for each type activities
of infrastructure or facility, which neighbor- Culture and recreation
hood(s) are the most inadequate, and thereby Public administration
decide on priorities. The data are entered continued next page
Local Governments Self-Assessments: Simplified Framework or Version “Light” 217
Table A.6 Infrastructure and Services • Reconcile the list of municipal assets with
Programming Inventory (ISPI; continued) the municipal assets list of the MFSA.
Neighborhood
• Map information.
1 2 3 Total
2. Indicators If street addresses exist, the street addressing
Population database and map will be the first key entry
Land occupancy points for this inventory exercise.
Access to infrastructure
Table A.7 Municipal Built Assets
Roads
Water and electricity Date
Environmental purchased Present
sanitation Description Size /built value
Access to superstructure Developed land m2
facilities Undeveloped land m2
Education Infrastructure km
Health care Asphalt roads
Commercial facilities Dirt roads
Sports and youth Rolling stock
activities
Culture and recreation Total
Public administration
3. Scores
Public works maintenance
Population
Land occupancy • Identify the maintenance work performed
Access to infrastructure annually by the municipality: type of work,
Roads location, method of execution, resources
Water and electricity allocated to maintenance.
Environmental • State if a Capital Improvement Plan is avail-
sanitation able, and indicate its date of approval, con-
Access to superstructure tent, costs, level of implementation, and key
facilities
pending issues with either its preparation or
Education
its implementation.
Health care
Commercial facilities
Sports and youth Step 6: Deficiencies and needs
activities
Based on the infrastructure and services needs
Culture and recreation
assessment,
Public administration
Final score • Summarize the main deficiencies and needs
identified during the analysis and imple-
Municipal assets mentation of the ISPI.
• List all municipally owned built assets, indi- • Indicate feasible intervention types and sec-
cating their location (a street address), dates tors to help focus the process of identifying
of building, and present values. projects for the PIP.
218 Better Cities, Better World
Step 7: Urban development projects, • An information/sensibilization session at
recent and future projects the beginning of the UA/SA process. This is
a crucial time when all stakeholders should
Urban development trends and urban planning
be on board with both the process and the
projects
expected results.
• Outline urbanization trends both in the city • A “reinstatement/consultation” phase upon
center and in the peri-urban areas. completion of the analysis. This is an equally
• Give an overview of current urban planning important stage because it is an opportunity
documents, assess implementation status. for city officials, funding partners, and civil
society to come together to review and
• Give an overview of the content and imple- discuss the key findings of the UA/SA and
mentation status of the Capital Improvement to start decanting what it means in terms
Plan, if it exists. of (1) needed supporting-capacity-building
• Identify key large infrastructure projects/ measures, (2) new investment priorities,
structuring or restructuring projects in and (3) key maintenance/rehabilitation pro-
the city, specifically mentioning the loca- grams. It is also an opportunity to ensure
tion, costs, implementing agency/agencies, that the selection criteria are agreed upon
involvement of private partners, sources of and that proper attention is placed on green
funding, and timeline for implementation. investments, social inclusion, and programs
that contribute to the economic and cultural
• Summarize all projects completed or ongo- vibrancy of the city.
ing during the past three years in the munic-
ipality or its immediate surroundings, and • A “consultation/cooperative discussion”
work projected for the immediate future. stage after the costs and feasibility of all the
projects have been assessed. This “long list” of
• Map: Urban development trends, recent and projects1 is examined, discussed, and fi ltered
future projects, and projects. through the criteria listed. The consulta-
tions are followed by discussion as needed to
Table A.8 Recent, Ongoing, and Scheduled decide which projects are PIP-eligible.
Projects
Descrip- Financ- Project eligibility and priority criteria
tion Year Location Amount ing
If the UA/SA is conducted in parallel with the
Recent
MFSA, one of the first criteria will be the key
Ongoing question of availability of funding. Is funding
Projected available, and through what source? What
Scheduled are the cost implications on the existing and
projected tax burden? What is the like-
lihood of partnering with private oper-
Step 8: Priority Investments Program:
ators? Does the inclusion of a specific
Consultation and Selection
project preclude the financing of other
Overview of the consultation process priority projects? Is the project expected to
The consultation process is a key compo- raise revenues for the city and increase land
nent of the Urban Audit/SA. It includes the values? What impact will it have on existing
following: residents? Besides the funding issue, there are
Local Governments Self-Assessments: Simplified Framework or Version “Light” 219
other equally important criteria which need to 9. PIP: Allocation and schedule of
example, the project should:
be checked. For investments
• Be executable within the expected time- • Allocate investments in facilities and infra-
frame come under municipal authority. structure according to priorities, the nature of
the work (for example, rehabilitation or new
• Not be redundant with other projects work), and the amount of the investment.
planned under other programs.
Table A.9 Priority Investment Program (PIP)
• Respond to the needs identified in the urban Estimated amount
Order
analysis and/or the demands articulated Type of of New
during consultation. investment priority work Rehabilitation Total
1 Infrastructure
• Meet the requirement for immediate
2 Educational and
start-up upon completion of the work
health care facilities
(for example, availability of staff to run -
Subtotal education
the facility, and connection to utility Subtotal health
-
networks). care
3 Community facilities
• Give priority consideration to underserviced 4 Government and
neighborhoods with high population density. municipal technical
facilities
• Be free of land ownership concerns.
Subtotal govern-
-
• Not cause any major displacement of popu- ment
lation or users; but in the event of displace- Subtotal municipal
-
ment, a solution should be found within the technical
parameters of the project. 5 Commercial facilities
6 Environmental
• Correspond to long-term goals for the facilities
greening of the city. 7 Historical assets
Total
• Contribute to the social inclusion vision of
the city.
• Do no harm. Table A.10 PIP Implementation Schedule
Year Year Year
• Favor rehabilitation of existing infra- Type of investment 1 2 3 Total
structure and built assets rather than new
1 Infrastructure
construction.
2 Educational and health
• Contribute to the livability of the city. care facilities
Subtotal education
• Contribute to the branding of the city.
Subtotal health care
• Contribute to the medium- and long-term 3 Community facilities
urbanization strategy of the city. continued next page
220 Better Cities, Better World
Table A.10 PIP Implementation Schedule 3.3 Constraints related to implementation
(continued)
• Land ownership status:
Year Year Year
• Deed of land ownership or assignment:
Type of investment 1 2 3 Total
• Slum clearance:
4 Government and
• Utilities to be relocated:
municipal technical
facilities • Easements:
Subtotal government 3.4 Practical terms of start-up:
Subtotal municipal 3.5 Execution deadlines
technical • Studies:
5 Commercial facilities • Work:
6 Environmental facilities 3.6 Site drawing
7 Historical assets
Implementation plan
Total
3.7 Other graphics:
IV Costs
Table A.11 Project Fact Sheet No. 1
4.1 Cost of work:
Title of project:
4.2 ….
No. Name Recurring expenses:
I Project type and eligibility
1.1 Investment category:
1.2 • Location: Municipal Finances Self-
1.3 • Beneficiaries: Assessment: Simplified
1.4 Special conditions and eligibility
Framework
• Eligibility: Step 1: City profile
• Agreement reached:
The city profile is an introductory section
• Assumption of responsibility for mainte-
nance:
with three components: (a) institutional and
II Justification
territorial organization/demography/econ-
2.1 • Priority level: omy of the city, (b) municipal organization,
and (c) main urban issues and challenges
2.2 • Social impact:
that face the city for the next three to five
2.3 • Financial/economic analysis:
years (for example, presentation of the main
2.4 • Environmental impact: content of the Local Economic Development
III Description of project
Plan).
3.1 Number of buildings and/or m2 to be built:
• Description: 1. Institutional organization/city map/
• …. demography/economy
Construction of fences:
Objective: Give a general overview of the
Development of access roads: situation of the municipality through few
3.2 Project preparation status indicators. Regarding the complexity of the
• Availability of technical documents: territorial organization, clarify the consis-
• Cost basis: tency of the entity (city, subcity, metropolitan
• Dates of meetings with beneficiaries: area).
Local Governments Self-Assessments: Simplified Framework or Version “Light” 221
City with
City with inter-
One city sub- communal
level municipalities upper level
I Territorial organization
Number/name of subnational/metropolitan entities
Submunicipalities or metropolitan financed by the city Yes/No Yes/No
level
City level financed by submunicipality level and/or the Yes/No Yes/No
metropolitan level
Area of the municipality and agglomeration in square
kilometers
II Demography Year 1 Year 2 Year 3 Year 4
Country population
Total resident population
Annual growth
Rank in the country (in population)
III Economy
GDP per head (country level) in US$ or euros
City GDP per head (if available) in US$ or euros
Median disposable annual household income in US$
or euros
Activity rate
Unemployment rate (% active population)
Insert a map of the city (A4) 2. Local finance and management
Insert a short summary on the three items
Objective: Provide with preliminary sum-
(territorial organization, demography, and
marized information and data on volume of
economy) with focus on consideration directly
local finance, utilities, management, munici-
linked with financial situation (for example,
pal staff, etc.
how territorial organization has direct impact
on distribution of the functions and bud- Insert a short summary on the different
get; how population increases or specificities items.
impact the budget; how the local taxation takes
advantage of the local economy).
Year 1 Year 2 Year 3 Year 4
IV Total municipal budget revenue
Total revenue
Revenue per capita
Annual city capital investment
Debt outstanding
continued next page
222 Better Cities, Better World
Continued
Year 1 Year 2 Year 3 Year 4
V Utilities management Denomination Annex to Tariff (current)
municipal
budget (Yes/No)
Water supply
Wastewater
Electricity
Urban heating
Other
VI Tax policy Rate Last increase Fixed locally
Property tax
Local business tax
Tax 3
Tax 4
VII Municipal staff (regular staff) Number %
Total 100%
General administration
Education
Social services
Technical service units
Environment (including solid waste)
Contractual workers total
VIII Financial reporting (Yes/No) Year 1 Year 2 Year 3 Year 4
Long-term investment program
Annual budget
Annual financial statement
Audited accounts
Taxes: Fill property and local business tax development plan) and mention the level
lines and name the two most important other of approval (for example, city assembly or
local taxes. central government).
• What are the key areas for implementation
3. Urban issues and challenges
of the vision? Present the main components
Objective and content: Explain and illustrate of the “Local Economic Development Plan,”
the development policy of the municipality. including capital investment, institutional
development, and others.
• Is there a strategic vision for the develop-
ment of the city? If yes, provide main con- • If existing, provide with the Capital
tent (city development strategy, long-term Investment Plan.
Local Governments Self-Assessments: Simplified Framework or Version “Light” 223
IX Capital Investment Plan
Project name Timeframe Total costs Source of financing
Insert a short summary of the multiyear classification, classification per category,
development program approved by the coun- etc.), the consistency of the budget data-
cil. List all priority projects; add more lines if base will have to be adjusted consequently
needed. by the user; expenditures and revenues will
be listed on a strategic basis, for example
Step 2: Basic accounting and financial (taxation revenue, grants, fees, loans), using
database a commonly accepted typology as well as
the destination they have (for example, pay-
Objective and content: This step consists of roll, O&M, debts service), rather than a long
organizing data not in a usual accounting pre- list of revenues and expenditures without
sentation (always different from one country classification.
to another or even among municipalities of
the same country), but in a financial one (more • Actual data, compared to planned budget,
generic). will be favored. It can be cash accounting
This step includes filling out the following transaction (payment and receipt) or com-
five key tables: mitment accounting transaction (contract
signed and receipt validated through an
• Municipal/city budget + annex public utility invoice or equivalent).
company (PUC) budget
• Current and capital expenditures will have to
• Cash balance and arrears be clearly distinguished, even if the account-
ing format does not make a difference.
• Indebtedness Usually, expenditures are considered as cap-
• Capital investment ital expenditures when they contribute to
expand the public assets of the municipality.
• Tax potential and performance
• The mandatory expenditures dedicated or
These five tables will mention three years of implemented on behalf of the central gov-
historical (actual data) and one year of planned ernment level will be separated from the
data. own expenditures of the municipality; the
The sources will be clearly mentioned (doc- same for the revenues coming from the state
ument title and source); for example, budget and earmarked to specific expenditures.
department, taxation department, economic These revenues will have to be outlined.
department, other entity than the municipality, • The different types of subsidies or intergov-
Ministry of Finance). ernmental transfers will be included and will
differentiate between transfers for which
General budget database
the municipality does not have any flexi-
• Because the accounting systems and clas- bility in the allocation and transfers free of
sifications are all different (functional allocation.
224 Better Cities, Better World
• General budget will be analyzed sepa- will have to be accounted as expenditure
rately from the independent PUC bud- in city budget and revenue in PUC budget;
get. Only consider financial transactions the same for dividend or any cash coming
between city budget and budgets accounted from PUC budget to city budget). A consol-
in the city budget (for example, subsidy idated budget will be set up subsequently,
from the general budget to PUC budget if possible.
Step 2: Financial self-evaluation basic database
A actual
P projection
1. GENERAL BUDGET (simplified table)
In millions Year 1 Year 2 Year 3 Year 4
A A A P
TOTAL REVENUES
I STATE REVENUES (INTERGOVERNMENTAL)
1 Shared taxes City share
- VAT and sales taxes …%
- Personal income tax …%
- Corporate income tax (tax on company profit) …%
- Tax on the transfer of property rights …%
- Motor vehicle tax …%
- Others …%
2 Unconditional transfers
- Operating transfer
- Investment grant
- Road rehabilitation
- Education
…
3 Conditional transfers
- For wages from
Ministry
…
- For social policy (social welfare) from
Ministry
…
- …. from
Ministry
…
continued next page
Local Governments Self-Assessments: Simplified Framework or Version “Light” 225
Step 2: Financial self-evaluation basic database (continued)
II LOCAL REVENUES
1 Local taxes and levies
- Property tax (regardless if centrally collected)
- Business taxes
2 Local fees
- Licenses
- Permits
- Local development fee
- Authorizations and issuance
- Others (fines, etc.)
3 Local asset proceeds
- Rents
- Sales
- Charges
- Levies on exploitation of natural resources (forest,
mineral, water, etc.)
- Other
4 Dividends, funds, or assets from PUCs
- Utility 1
- Utility 2
- Utility 3
5 Donations
6 Loan proceeds
7 Municipal bond proceeds
In filling up dividends, funds, or assets municipality’s property, whether cash, land,
from PUCs, please add the combined value or equipment, if any occurred in the given
of all wealth transferred from PUCs to the year.
In millions, local currency Year 1 Year 2 Year 3 Year 4
A A A P
TOTAL EXPENDITURES
I EXPENSES ON DELEGATED FUNCTIONS
1 Preschool education
Wages
Operating costs
Maintenance
Capital investments (new construction)
2 Primary and secondary school
Wages
Operating
continued next page
226 Better Cities, Better World
Continued
In millions, local currency Year 1 Year 2 Year 3 Year 4
A A A P
TOTAL EXPENDITURES
Capital investment
3 Health care
4 Social assistance and poverty alleviation
5 Public order and civil protection
Wages
Operating costs
Maintenance
Capital investment
6 Environmental protection
Wastewater
Solid waste
7 Other
II OWN EXPENDITURES
1 Infrastructure and public services
- Current expenditures
Direct expenditures
Subcontracts
- Capital expenditures
Direct expenditures
Subcontracts
2 Social, cultural, recreational expenditures
3 Local economic development
4 Social housing
5 Urban development
6 Civil security
7 Transfer to local government entities
8 Support to PUC (subsidies, grants, or in-kind)
Utility 1
Utility 2
Utility 3
9 Loan repayment
10 Interest charges
11 Guarantees called (paid by the municipality)
Supports to PUC (subsidies, grants, or Cash balance and arrears
in-kind): please enter the total combined
value of all support provided to PUCs (by • The objective is to complete budgetary
sectors/services) regardless if cash (grant, and accounting data with information
subsidy), equity, or in-kind asset (land, struc- on cash; provide a monthly general situation.
ture, or equipment) was transferred by the • Identify the volume of the arrears (expenses
municipality. incurred but not paid), with the difference
between public and private providers.
Local Governments Self-Assessments: Simplified Framework or Version “Light” 227
2. CASH BALANCE, ARREARS
I Cash Balance
Cash receipts Cash Cumulative Cumulative Net change
payments inflow outflow in the stock
of cash
January
February
March
April
May
June
July
August
September
October
November
December
II Arrears (overdue liabilities by the city or by its entities)
Year 1 Year 2 Year 3 Year 4
31.12 31.12 31.12 30.09
Public stakeholders
- Water supply
- Electricity
- Social welfare
- Transport
City dues to private
contractors
Labor arrears (wages,
salaries)
Indebtedness database • Differentiate between medium long-term
(MLT) debt and short-term (overdraft
• List all ongoing loans and bonds (subscribed
credit facility) debt.
and not fully reimbursed).
• Complete the table with amortization
figures for each loan, for further analysis
and financial projections.
228 Better Cities, Better World
3. INDEBTEDNESS DATABASE
Bank or Year of the Initial Duration Currency Maturity Grace Interest Rate
institution loan amount period Rate (%)
subscription (fixed,
variable)
I MLT DEBT
1 On-lending
loan (from
central
government)
2 Direct loan
-Commercial
bank
State
-
development
bank
3 Municipal
bond
II SHORT-TERM
DEBT
1 Treasury
facility from
state
2 Facility from
commercial
bank
Note: Give amortization figure for each MLT loan.
Capital investment database projections) and per sector (sectors can be
adjusted regarding specific policy).
• Provide a figure with capital investment
expenditure per year (historical and • Provide simplified tentative financing plan.
4. CAPITAL INVESTMENT DATABASE
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
A A A P P P P P
Population
Inflation rate (annual)
I TOTAL INVESTMENT 100%
% growth
continued next page
Local Governments Self-Assessments: Simplified Framework or Version “Light” 229
4. CAPITAL INVESTMENT DATABASE (continued)
Delegated investments …%
(from earmarked
grants)
- Education
- Health care
- Housing
-…
Municipal investment …%
- Roads rehabilitation
- Street lighting
- Solid waste equipment
purchase
- Urban renewal
-…
Investment into PUC …%
(assets, grants, or
equity provided for
PUC in cash or in-kind)
- Water supply
- Wastewater
- Transport
- Urban heating
- Other
II TOTAL FINANCING
- Earmarked grants …%
- Own budgetary …%
revenue
- Loans or municipal …%
bond
- Equity from PUC …%
Tax potential and tax performance • It is important to obtain information on the
number of taxpayers and to differentiate
• The objective is to put together relevant
households from businesses, especially for
information coming from tax administra-
property tax.
tion about the tax potential of the city.
• The items (property tax, business tax, etc.)
have to be adjusted according to the local
situation.
230 Better Cities, Better World
Tax potential and Year 1 Year 2 Year 3 Year 4
performance
No. of Amount No. of Amount No. of Amount No. of Amount
taxpay- tax tax tax
ers payers payers payers
I PROPERTY TAX
Tax base
(taxable)
Households
Business
Others
Tax rate
Households
Business
Others
Exemption
Households
Business
Others
Tax collected
Households
Business
Others
II BUSINESS TAX
Tax basis
Rate
Exemption
Tax proceed
collected
III Development
fees
Step 3: Generic financial framework budget: evaluate operating margin or sur-
plus and see how it contributes to the self-
Objective and content: If the database is
financing of capital investment budget. This
necessarily different from one municipality
will show the financial ability of the munic-
to another, the generic financial framework
ipality, at the end of the year, to self-finance
should be the same. The objective is to evaluate
part of its capital investment budget, directly
at a glance the financial position of the munici-
or through additional debt (borrowing).
pality and to assess the following:
• Ability to generate growth savings and oper- • Creditworthiness: level of the debt service
ating surplus to finance capital investment and adequacy with financial position.
Local Governments Self-Assessments: Simplified Framework or Version “Light” 231
• Level of capital investment effort compared • General surplus at the end of the year: to
with operating budget. account for the general surplus or deficit
coming from year N-1 in the actual budget
• Degree of dependency from grants coming
of the year N.
from the state government.
Figure A.1 Structure of Current and Capital Budget
Revenues Expenditure
1. Taxation revenue 1. Payroll
Current budget
2. Grants 2. Operating and
3. Other (income from maintenance
services and assets) 3. Debt service
4. Year N-1 margin 4. Year N-1 loss (only
(only current) current)
Operating surplus
Capital investment budget
Self-financing
1. Civil works
2. Land and
1. Property sales equipement
2. Subsidies purchase
3. Loans 3. Loan repayment
The figure will be completed by a graph comparison with the current revenue and the
showing the operating surplus or margin in capital investment expenditures.
Main definitions
Current or operating budget should include overnment, and resources recovered by
g
the expenses and receipts used to provide the local authority in the form of rates, fees,
for daily operation. They are often consid- tariffs, etc. generated by the local assets
ered as mandatory and repeat themselves owned by the municipality (for example,
relatively predictably. land lease, public utilities, and facilities).
• Current revenues include tax receipts, • Current expenditures mainly include sal-
grants from the state or other levels of aries (payroll including social insurance
232 Better Cities, Better World
Main definitions (continued)
and other charges connected to staff (12 months) and have to be split on sev-
management), operating costs, O&M eral fiscal years. Their amount can be
(often difficult to identify because of variable from one year to another.
subsidies paid by the local authority to
• Debt service should be split between
assist other structures such as associa-
the current budget, for loan interest, and
tions or related budgets), and debt ser-
the capital budget, for loan repayment.
vice incumbent on the local authority.
All the debt service (including loan prin-
Capital revenues and expenditures are
cipal repayment) should be covered by
operations that increase or reduce the
the operating surplus as a proof of debt
assets of the local authority (acquisitions
service ability.
or sales, civil works). Most of the local
• Total budget or annual account can be
public accounting systems are cash-based
balanced, positive, or in deficit (nega-
and thus do not include depreciation or
tive): net position.
physical amortization of the assets owned
• More precise budget analysis requires
by the municipality; they are administra-
taking into account (including in or
tive accounting. Consequently, the capital
annexing to the budget report) expen-
revenues and expenditures will be yearly
ditures that are not paid and that affect
operations.
apparent surplus at the end of the year;
• Usually, capital expenditures are
such as revenues billed/levied but not
implemented on more than one year
recovered during the year.
Step 4: Historical analysis After self-financing, the analysis turns to the
characteristics of debt already incurred by the
Objective and content: To review previous
local authority, for example:
year budget and identify trends and perfor-
mances in level of services provided to popula- • Is the level of debt acceptable?
tion, taxation efficiency, etc. • Who are the lenders?
The objective is to understand how the
• What is the cost of the debt?
budget is structured and to identify the
major trends and how they occur. The anal- • How much time will be needed to pay it
ysis is mainly based on gross self-financ- back?
ing (or savings) calculated as the positive The capacity of the local authority to develop
difference between operating receipts and a summary table, such as the one recommended
expenses. Self-financing makes it possible here, based on a transparent and easy-to-
to pay for a portion of investments; it is a control methodology, reinforces the credibility
crucial indicator of quality management of the municipal financial management.
on the part of the local authority, and is a
strong component in dialogues with finan- Main outputs: Ten tables have to be produced:
cial partners: no financial partner wants to
• Table 1: Financial position
see its resources used to finance an operat-
ing deficit. • Table 2: Main revenue sources
Local Governments Self-Assessments: Simplified Framework or Version “Light” 233
• Table 3: Tax potential and tax performance • Table 8: Capital investment budget financing
• Table 4: Grants and transfers • Table 9: Cash balance
• Table 5: Main operating expenses line items • Table 10: Arrears
by category
These tables and figures have to be set up
• Table 6: Municipal assets and maintenance from the database ( five tables) prepared in
step 2.
• Table 7: Indebtedness situation
Table 1 Financial position
Year 1 Year 2 Year 3 Year 4 Average
annual %
Items Calculation actual actual actual plan growth structure
1 Total current revenues
2 Balance N-1 (if surplus)
3 Current revenues year N (1 − 2)
4 Operating expenditures
5 Operating margin (1 − 4)
6 Debt repayment
7 Net margin (5 − 6)
8 Capital expenditures
9 Financing requirements (8 − 7)
10 - Own capital revenues
11 - Investment grants
12 - Loan (9 − (10 + 11))
13 Investment balance (8 − (7 + 10 + 11
+ 12))
14 Overall closing balance (1 + 10 + 11 +
12) − (4 + 8)
Insert a short summary and comment financial position data on the basis of ratio
on the main lessons learned from the structure.
234 Better Cities, Better World
Table 2 Main revenue sources
Year 1 Year 2 Year 3 Year 4 Average %
annual structure
Items Calculation actual actual actual plan growth (total)
TOTAL CURRENT REVENUES
1 State transfers
- Shared taxes
- Unconditional transfers/grants
Refer to database
- Conditional operating transfers
2 Own revenues
- Local taxes and levies
- Local fees
- Local asset proceeds
3 Other revenues
- Surplus Y-1
- Revenues received from PUC
TOTAL NONRECURRENT
REVENUES
1 State transfers and grants
-Unconditional development
transfers
Refer to database
- Conditional development grants
2 Own revenues
- Property sales
- Long-term leases
3 External revenues
- Loans proceeds
- Municipal bonds
- Donations
TOTAL REVENUES
database
Refer to
1 State transfers
2 Own revenues
3 External revenues
Insert a short summary and comment grants, local taxes, etc.); evaluate revenues
on the main lessons drawn from the main and potentials from the local taxation sys-
revenue source data: analyze the principal tem; and estimate revenues from commer-
sources of municipal financing (taxation, cial facilities.
Local Governments Self-Assessments: Simplified Framework or Version “Light” 235
Table 3 Tax potential and performance analysis
Year 1 Year 2 Year 3 Year 4 2009–08 2010–09
Items Source actual actual actual plan growth growth
1 Property tax (residential)
- Number of items
- Number of taxpayers
- Amount taxable
- Amount collected
- Collection rate
2 Property tax (commercial
and business)
- Number of items
- Number of taxpayers
- Amount taxable
- Amount collected
- Collection rate
3 Business tax
- Number of items
- Number of taxpayers
- Amount taxable
- Amount collected
- Collection rate
Main taxpayers
List of the 10 to 50 major
taxpayers
Insert a short summary and comment on fabric and tax potential of the modern and
the main lessons learned from the above data: informal sectors; (b) assessment rate; (c) col-
analyze the tax potential and pressure for land, lection rate overall and by category of tax paid
property, and business taxes: (a) economic (concentration).
Table 4 Transfer predictability and city dependence
%
Year 1 Year 2 Year 3 Year 4
Average structure
Allocation annual (total
Items criteria actual actual actual plan growth revenue)
1 Unconditional
transfers
- Transfer 1
- Transfer 2
-…
continued next page
236 Better Cities, Better World
Table 4 Transfer predictability and city dependence (continued)
Year 1 Year 2 Year 3 Year 4 %
Average structure
Allocation annual (total
Items criteria actual actual actual plan growth revenue)
2 Conditional
transfers
- Transfer 1
- Transfer 2
-…
Insert a short summary and comments on Provide information on allocation crite-
the main lessons learned from the above data ria for grants and assess the degree to which
on predictability of transfers and level of city local governments can affect the volume
dependence: % of transfers compared to total allocated to them (performance criteria, if
revenues. any).
Table 5 Main operating expenditures line items by category
Year Average
Year 1 Year 2 Year 3 4 annual % structure
Items actual actual actual plan growth (total rev.)
CURRENT EXPENDITURES
1 Payroll (including employees benefits & misc.)
- Administrative staff
- Technical department staff
- Other staff (contractual workers)
2 Operating costs
- Office supplies
- Electricity
- Communication (telephone, etc.)
- Fuel and gas
-…
3 Maintenance costs
…
4 Costs to maintain state assets
Total
Insert a short summary of the main operat- expenditures (for example, maintenance of
ing expenditures line items. Evaluate specific infrastructure and facilities).
Local Governments Self-Assessments: Simplified Framework or Version “Light” 237
Table 6 Municipal assets and maintenance expenditures
Tentative Year 1 Year 2 Year 3 Year 4 Average Dominant
assets annual implementation
Items inventory actual actual actual plan growth arrangement (1)
Roads, streets (m2)
o.w. Artery roads km
Residential streets km
Paved roads total km
Public lighting (number of
lighting posts)
Water, networks km
Water treatment plants (number)
Sewer network (km)
Wastewater treatment plants
(number)
Solid waste management facilities
trucks
Solid waste (transfer stations, landfill
total capacity ton per day)
Other public infrastructure and
equipment (parks, cemeteries,
parking and garage, etc.) (m2)
Educational facilities (number of
class or m2)
Health care facilities (m2)
Administrative facilities (m2)
Cultural facilities (m2)
Sport facilities (m2)
Commercial facilities (m2)
Environmental facilities
Public housing (number of
apartments and other units, m2)
Cultural heritage
Vacant municipal land (hectare)
directed by the city, by contractors and private partners, by residents …
(1)
Insert a short summary on the asset com- calculation. If the municipality has already
position and management, more specifically conducted an evaluation of its assets, provide
if there is public housing and land property. the main results and analysis. If an Urban
Provide a short description of the maintenance Audit/SA is being conducted, it is important to
implementation: directed by municipal staff, by include consolidated data on location and map-
municipal enterprise, by private contractors, or ping of municipal assets. Similarly, if a street
by residents themselves. addressing program is in place, it would be very
No information is requested on valuation useful to connect with the existing data from
of the assets because of the complexity of the the street addressing database and map.
238 Better Cities, Better World
Table 7 Indebtedness situation
Donor/bank Year 1 Year 2 Year 3 Year 4
terms and
Items Conditions actual actual actual plan
Loan 1
- Outstanding
- K repayment
- Interest charge
Loan 2
- Outstanding
- K repayment
- Interest charge
Loan 3
- Outstanding
- K repayment
- Interest charge
Municipal bond
- Outstanding
- K repayment
- Interest charge
Cash facility (short term)
Loan
Overdraft
Suppliers’ credit
Insert a short summary on existing debt of the of these loans, (c) contribution to annual debt
municipality: (a) number of loans or other exist- service. The amortization tables will be useful
ing external financing, (b) terms and conditions to make projections on the next 5 to 10 years.
Table 8 Capital investment financing
Year 1 Year 2 Year 3 Year 4 Average %
annual structure
Items actual actual actual plan growth (total rev.)
Total capital investment costs
- Civil works
- Equipment purchase
- Others
Financing
- Grants from state
-Investment revenues (sales of
assets, etc.)
- Self-financing (Y1 or -1)
- Loan
Local Governments Self-Assessments: Simplified Framework or Version “Light” 239
Insert a short summary about the structure during the year with fluctuation between
of the municipality’s capital budget and its inflows (for example, grants payment rate
financing. or tax collection rate) and outflows rate
Insert a short summary on the cash bal- every month. Mention any specific arrange-
ance at the end of the year but also about the ments with the Treasury or the banks (cash
monthly cash flow: possible difficulties faced facility).
Table 9 Cash balance
Inflows Cumulative Outflows Cumulative Balance
January
February
March
April
May
June
July
August
September
October
November
December
Table 10 Arrears
%
Year 1 Year 2 Year 3 Year 4 outflows
current
Average and
annual capital
Items Calculation actual actual actual plan growth inv.
CURRENT BUDGET
Energy -
Material -
Salaries or other labor costs -
Social security dues
CAPITAL BUDGET
Public institutions -
Private entities -
TOTAL
240 Better Cities, Better World
Insert a short summary about evaluation of and will also be able to highlight its potentials
unpaid invoices and commitments amount by and key gaps. The ratio analysis tables can be
the municipality, differentiating between cur- filled out by linking the respective cells of the
rent and capital expenditures. Analysis can historical analysis tables.
also distinguish between institutional debt or It is important to work closely with the
arrears and private contractors arrears. Ministry of Finance in order to publish annu-
ally these ratios at the national level for all the
municipalities as a tool for self-comparison
Step 5: Ratio analysis
and self-improvement.
The objective of the ratio analysis is to get Reference to ratios already used by the
familiar with and to adopt municipal finances Ministry of Finance or the Ministry of
benchmarks, for internal purpose (financial Interior, or even to ratios calculated by
management dashboard) and regional compar- regional associations of local governments, is
ative purpose. The following ratios and bench- recommended.
marks are based on international standards Finally, ratios comparing local finance per-
used in Western European countries and in formance and GDP are not suggested at this
the United States. stage but could be usefully added if local GDP
Through the MFSA, each municipality will data are available. This comparison is common
get a better understanding of its position com- at the national level: weight of local expendi-
pared to others in the region and in the world tures and local taxation/GDP.
Step 5. Ratio analysis (municipal finance dashboard)
Comparative Graph with mention
Indicator index City index of the benchmark if
Criteria (definition) Objective (benchmark) Year 1 Year 2 Year 3 possible
STOCK RATIO
Creditworthiness
Operating The local > 0.3 Graph with mention
savings before government of the benchmark if
interests/current has the possible
actual revenues capacity to
borrow and to
invest
Net operating The local > 0.2 Graph with mention
surplus (after government of the benchmark if
debt service has the possible
including capital capacity to
repayment)/ borrow more
current actual
revenues
continued next page
Local Governments Self-Assessments: Simplified Framework or Version “Light” 241
Continued
Comparative City index Graph with mention
Indicator index of the benchmark if
Criteria (definition) Objective (benchmark) Year 1 Year 2 Year 3 possible
Cash (end of the The local 90 days Graph with mention
year)/current government of the benchmark if
liabilities has the ability possible
(divided by 365 to meet its
days) short-term
obligations
Indebtedness
Debt outstand- The local < 10 years Graph with mention
ing/operating government of the benchmark if
surplus has the possible
(capacity to capacity to
clear its debt) clear its debt
with operating
surplus
Debt service/ The annual < 10% Graph with mention
total current debt burden is of the benchmark if
revenues correct possible
regarding
current
revenue
Fiscal autonomy
Own tax The local > 80% Graph with mention
receipts + government of the benchmark if
unconditional has the ability possible
grants/current to increase its
actual revenues revenue
Tax pressure < 70%
(tax receipts/
tax potential)
Capital investment effort
Capital invest- The local > 40% Graph with mention
ment expendi- government of the benchmark if
tures/current favors possible
actual revenues development
expenditures
continued next page
242 Better Cities, Better World
Continued
Comparative City index Graph with mention
Indicator index of the benchmark if
Criteria (definition) Objective (benchmark) Year 1 Year 2 Year 3 possible
Capital invest- The local > 50% Graph with mention
ment expendi- government of the benchmark if
tures delegated functions are possible
by state/total still weak
investment
expenditures
Level of service
Maintenance The local > 30% Graph with mention
works expendi- government of the benchmark if
tures/operating has important possible
expenditures noncurrent
assets to
maintain and
make it a
priority
Others
Total number of The local > 25 employ- Graph with mention
municipal government ees for 1,000 of the benchmark if
employees/ has limited inhabitants possible
population room for
financing
maintenance
Salaries and > 40%
and capital
wages/
investment
operating actual
expenses
Actual revenues/ The local > 95% Graph with mention
estimated government of the benchmark if
revenues has a good possible
visibility and
Budget is
reliable
Arrears amount/ The local >1 Graph with mention of
net cash (end of government the benchmark if
the year) accumulates possible
short-term debt
and reduces its
credibility
toward
contractors
Local Governments Self-Assessments: Simplified Framework or Version “Light” 243
Continued
Graph with
Comparative mention of the
Indicator index City index benchmark if
Criteria (definition) Objective (benchmark) Year 1 Year 2 Year 3 possible
FLOW RATIO
1 Margin ratio: The city is living 1.02 Graph with
Total financial (or not) within mention of the
resources its financial benchmark if
(cash)/total means possible
financial
obligations
(payment +
arrears)
COMPARISON RATIO
Total revenues Comparison Graph with
per capita with local mention of the
Total governments of benchmark if
expenditures the same size in possible
per capita the country or
Current actual abroad
revenues per
capita
Debt
outstanding per
capita
Capital
investment
expenditures per
capita
Insert a short summary about the key find- financial position of the municipality. Usually,
ings and lessons learned from the ratio analysis. several assumptions and scenarios are tested:
past trends projections and projections on
the basis of significant changes. The method
Step 6: Financial projections
will be adjusted depending on the size of the
The five-year financial projections are per- municipality and the issues it currently faces
formed with the objective to confirm and (for example, specific investment program for
complete ratio analysis main results. It pro- the future years, specific indebtedness situa-
vides a review of the financial position of the tion to solve).
municipality with focus on creditworthiness. The following figures provide a prelim-
The main objective is to formalize through inary and simplified framework for projec-
assumptions the impact of policy decisions tions. Insert a short summary about the lessons
(expenses, borrowing, tax pressure) on the learned from the preliminary results obtained.
244 Better Cities, Better World
Step 6. Five-year financial projections
In current currency
Last 3 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
actual Main Specific Pro- Pro- Pro- Pro- Pro-
years assump- calcula- Esti- jec- jec- jec- jec- jec-
Items trends tions Index tion Actual mated tion tion tion tion tion
A TOTAL CURRENT REVENUES
Own tax
revenues
-
Property
tax
Business
-
tax
Others (develop-
-
ment fee)
State transfers
- Shared tax
-Unconditional
grants
- Conditional grants
Other revenues
- Asset rent, interest
B TOTAL OPERATING EXPENDITURES
Payroll (including
employees’ benefits
and misc.)
- Administrative staff
-Technical depart-
ment staff
-Other staff
(specific …)
Operating costs
- Office supplies
- Electricity
-Communication
(telephone, etc.)
- Fuel and gas
- Maintenance costs
-…
continued next page
Local Governments Self-Assessments: Simplified Framework or Version “Light” 245
Continued
Last 3 Main Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
actual as- Specific Pro- Pro- Pro- Pro- Pro-
years sump- calcula- Esti- jec- jec- jec- jec- jec-
Items trends tions Index tion Actual mated tion tion tion tion tion
C GROSS OPERATING SAVINGS (A − B)
D DEBT SERVICE
Existing debt
- Interest charge
- Loan repayment
New debt
- Interest charge
- Loan repayment
Total debt service
- Interest charge
- Loan repayment
E NET SAVINGS
(C − D)
F CAPITAL EXPENDI-
TURES
G INVESTMENT
FINANCING (F − E)
Investment grants
Own capital
revenues excl.
operation surplus
Loans
H OVERALL CLOSING
BALANCE (CASH-
FLOW) (A + G) −
(B + D + F)
Step 7: Financial management
A municipality may have a good financial
assessment
situation but weak financial management;
Objective and content: The objective is likewise, a municipality may have poor finan-
to assess the financial management of the cial capacity but a fair financial management
municipality. system.
246 Better Cities, Better World
This section capitalizes on the PEFA meth- Insert comments on the different items and
odology, also developed by the World Bank and propose specific actions for improvement.
its partners, and provides a checklist of six key
indicators of financial management.
Aggregate fiscal Strategic allocation of
discipline resources Efficient service delivery
1. Credibility of Overoptimistic revenue Revenues shortfalls/ Efficiency of resources used
the budget forecasts/underbudgeting underestimation of the costs at the service delivery level;
of nondiscretionary of the policy priorities/ a shift across expenditure
spending/noncompliance noncompliance in the use of categories, reflecting person-
in budget. resources. al preferences rather than
efficiency of service delivery.
2. Comprehen- Activities not managed Extrabudgetary funds/ Lack of comprehensiveness/
siveness and and reported through earmarking of some increase waste of resources/
transparency adequate budget revenues to certain pro- decrease the provision of
processes are unlikely to grams/limits the capacity of services/limit competition in
be subject to the same the legislature, civil society, the review of the efficiency
kind of scrutiny and and media to assess the and effectiveness of the
controls (included from extent to which the govern- different programs and their
financial markets) as are ment is implementing its inputs/may facilitate the
operations included in the policy priorities. development of patronage or
budget. corrupt practices.
3. Policy-based Weak planning process/ Process of allocation of the The lack of multiyear
budgeting no respect for the fiscal global resource envelope in perspective may contribute
and macroeconomic line with LG priorities/annual to inadequate planning of
framework/lead to budget too short to introduce the recurrent costs of
unsustainable policies. significant changes in investment decisions and of
expenditure/ costs of new the funding for multiyear
policy systematically procurement.
underestimated.
4. Predictability Impact on fiscal manage- Planned reallocations/ Plan and use resources in a
and control in ment/inadequate debt authorized expenditures/ timely and efficient manner/
budget execution policy/excess of expendi- fraudulent payments. competitive tendering
tures. process practices/control of
payrolls.
5. Accounting, To allow management for Regular information on Inadequate information and
recording and long-term fiscal sustain- budget execution allows records would reduce the
reporting ability and affordability of monitoring on the use of availability of evidence that is
policies: timely and resources, but also facili- required for effective audit
adequate information on tates identification of and oversight of the use of
revenue forecasting and bottlenecks and problems funds and could provide the
collection/existing liquidity that may lead to significant opportunity for leakages,
levels and expenditures changes in the executed corrupt procurement
flows/debt levels, budget. practices, or use of
guarantees/contingent resources in a unintended
liability and forward costs manner.
of investment programs.
continued next page
Local Governments Self-Assessments: Simplified Framework or Version “Light” 247
Continued
Aggregate fiscal Strategic allocation of
discipline resources Efficient Service Delivery
6. External Consider long-term fiscal Pressure on LG to allocate LG is held accountable for
scrutiny and audit sustainability issues and and execute the budget in efficient and rule-based
respect its targets. line with its stated policies. management of resources,
without which the value of
services is likely to be
diminished. The accounting
and use of funds is subject
to detailed review and
verification.
Step 7. Financial management assessment
Criteria Indicator
A. Credibility of the budget
Aggregate expenditure compared to original approved
budget
Composition of expenditure compared to original approved
budget
Aggregate revenue compared to original approved budget
Stock and monitoring of expenditure payment arrears
B. Comprehensiveness and transparency
Classification of the budget
Comprehensiveness of information included in budget documen-
tation
Extent of unreported government operations
Transparency of intergovernmental fiscal relations
Oversight of aggregate fiscal risk from other public sector entities
Public access to key fiscal information
C. Budget cycle
Policy-based budgeting
Orderliness and participation in the annual budget process
Multiyear perspective in fiscal planning, expenditure policy, and
budgeting
Predictability and control in budget execution
Transparency of taxpayer obligations and liabilities
Effectiveness of measures for taxpayer registration and tax
assessment
Effectiveness in collection of tax payments
Predictability in the availability of funds for commitment of
expenditures
continued next page
248 Better Cities, Better World
Step 7. Financial management assessment (continued)
Criteria Indicator
Recording and management of cash balances, debt, and
guarantees
Effectiveness of payroll controls
Competition, value for money, and controls in procurement
Effectiveness of internal controls for nonsalary expenditures
Effectiveness of internal audit
Accounting, recording, and reporting
Timeliness and regularity of accounts reconciliation
Availability of information on resources received by service
delivery units
Quality and timeliness of in-year budget reports
Quality and timeliness of annual financial statements
External scrutiny and audit
Scope, nature, and follow-up of external audit
Scrutiny of the annual budget law by the city council
Scrutiny of external audit reports by the city council
D. Donor practices
Predictability of direct budget support
Financial information provided by donors for budgeting and
reporting on project and program aid
Proportion of aid that is managed by use of national procedures
Predictability of transfers from higher level of government
Step 8: MFSA Action Plan of Local Governments (that is, they need to
have some traction for actual implementation
Objective and content: The goal is to translate
and should include precisely what is expected
lessons learned from the different steps of the
from central government).
MFSA into a few actions to be implemented by
The MFSA Action Plan can be divided into:
the municipality to improve its financial situ-
ation and its financial management. The tem- • Short-term actions: 1 year
plate below is indicative and should be further
• Medium-term actions: (1 to 3 years)
developed based on the findings of the MFSA.
The municipality is free to list any action it All of them need to include a specific
considers as a priority. The actions that are not description of what needs to be done and why,
under the full control of the municipality can be with quantified targets in some cases, and
mentioned if they are part of state reforms cur- explain when (timeline), how, and by whom
rently under discussion or if they are included these actions will be implemented. It should
in the current agenda of National Associations also indicate if there is a cost attached to them.
Local Governments Self-Assessments: Simplified Framework or Version “Light” 249
MFSA Action Plan (nonexhaustive sample)
Schedule: Cost Responsible
Specific Expected Short term/ estimate, if entity/
objective Items Priority action result long term any person
Objective 1: Improve financial situation of the municipality
Leverage under the control of state
Increase Replace conditional
fiscal grants with
autonomy unconditional
grants or shared
taxes
Give more flexibility
on the local tax
policy
…
Action to plan and to implement at the LG level
Increase Increase local tax
fiscal collection
autonomy Reconsider the rate
of property tax for
households
…
Objective 2: Improve financial management of the municipality
Specific Items Priority action Expected Schedule Cost Responsible
objective result short- term/ estimate, entity/person
long-term if any
Credibility Improve forecast
of the reliability
budget
Policy- Improve cost
based analysis of main
budgeting expenditure
Improve Improve expendi- E.g., competi-
budget ture control tive bidding,
execution performance
contacts
250 Better Cities, Better World
APPENDIX B
Detailed Methodology and
Procedures to Help Calculate
Specific Results in MFSA
This appendix provides specific and detailed TD1: Analyzing Historical
methodology and procedures for completing Trends
some MFSA analytical steps. The technical
notes might be useful for those who lack experi- Historical trends can be approached in v arious
ence with technical proficiency on various sta- ways, but we limit our discussion to the fol-
tistical, econometric, or other data-processing lowing three options: (1) estimating the annual
procedures, such as means, mode, and median, growth indexes; (2) estimating the average
or the use of respective software, such as vari- changes over the given time period; and (3)
ous Microsoft Excel applications on trends or developing trend equations and graph trend
forecasting steps. Users who are familiar with lines. There is no one single best method for
these methodologies and software applications historical analysis, because each procedure
will omit this section and will focus instead on includes benefits and shortcomings. We will
the analysis of the results explained in chap- explain these three analysis options by using
ter 3. The technical notes (also called techni- the data from table 3.18 of chapter 3. We also
cal details or TD) are numbered for reference recommend that, in parallel with reading the
purposes in the text from TD1 to TD5 and dis- technical notes, users open an Excel table and
cussed in numeric order in this section. enter the data from table 3.18 in order to test
Detailed Methodology and Procedures to Help Calculate Specific Results in MFSA 251
the procedures and increase their own knowl- where N is the number of years, x is the total
edge with real data processed. change ratio over the given time period, g is the
growth ratio, and 1/(N–1) is the root factor.
TD1.1: Estimating Annual Growth Rate
Growth index: In communicating financial
and Growth Indexes with Geometric
results, we often talk about “growth index” ( gi),
Averages
which refers to the percentages by which the rev-
Total changes. We can calculate annual enues grow annually over the period of analysis
growth rate for each financial line in table 3.18. [Growth index: gi = ( g–1) * 100]. This means that
The first step is to calculate the total changes we use g–1 instead of g in communicating results;
in five years (meaning four years added on top for example, [ gi = (1.11887–1) * 100 = 0.11887 * 100
of the beginning year). The total changes can = 11.887%] or 11.9 percent after rounding. Thus,
be calculated by the following formula: [x = Y2 / the key finding is that the municipal revenues
Y1 * Y3 /Y2 * Y4 /Y3 * Y5 /Y4 = Y5 /Y1 after simpli- have grown on average by 11.9 percent annually
fication]. Please note that there are four steps between Year 1 and Year 5 (first line in table 3.18).
between Year 1 (Y1) and Year 5 (Y5), but also That is one easy, clear, and common way to ana-
that the total change can be simply calculated lyze and communicate the growth indexes in the
by dividing the last year data with the first year. historical position tables.
Average growth (the growth index) is a geo- Using root formulas: Root formulas can be
metric average of the growth ratios, which downloaded via Google or other search engines,
means that the first year actual revenue but MFSA users can also use Microsoft Excel
could grow steadily with this rate four times more conveniently.
to reach the actual revenues of the fifth year.
Let’s take current revenue data (the first line Methods to calculate roots in Excel: We show
of table 3.18): two possible methods:
Total change: x =
41,214/41,999 * 1. Click on a cell for which you need to com-
48,636/41,214 * pute the result (for example, the index) =>
52,743/48,636 * enter the equal sign “=” => type POWER
65,821/52,743 = (YN /Y1,1 /(N–1)) or => in our case =POWER
65,821/41,999 = 1.567 (Y5 /Y1,1 /4)
2. Click on a cell for which you need to compute
The x shows the total change over the five the result (the index) => enter the equal sign
years. The geometric average is the fourth root “=” => enter the total growth (x in above for-
of the total change. The fourth root of x is a mula) between brackets “( )” in the follow-
number g = 1.11887 with which we can multi- ing way (Y5/Y1) by clicking on the respective
ply the first year revenue (41,999) four times to cells in the table => enter the sign “^” (upper
reach the last year results with negligible error: case the number 6 on the keyboard) => enter
41,999 * g * g * g * g = 65,820. For calculation of the root factor “(1/(N–1)” in brackets => click
the root, we use the following formula: “Enter”
Geometric average = Root formula: The Excel formula to calculate g will appear
growth ratio = g = 4 x = x1/4 or more generally; like the following in the cell window:
(N − 1 )
• In our case: = (I9/E9)^(1/4) = POWER
Root formula: g = x = x 1/( N −1 ) (Y5 /Y1,1 /4)
252 Better Cities, Better World
• In general form: = (YN /Y1)^(1/(N–1)) data are volatile over the years. This is the case
with interest, debt repayment, or overall bal-
This formula should appear in your cell and
ance in table 3.18. The index is still good in these
gives the g growth ratio after your click “Enter,”
lines to shed light on alarming movements
where Y1 and Y5 are the revenue in Year 1 and
(without being precise in measuring growth).
Year 5, ^ is a sign above the number 6 on the
There is, however, no one good method to rep-
keyboard, and N is the number of total years in
resent a data series in a much better way; if the
your data series (N = 5 and N–1 = 4 and 1/(N–1)
data are volatile or a year sticks out, that also
is ¼ in our case).
means that the data series is less predictable.
The Excel formula to calculate gi growth
index in table 3.18 is
TD1.2: Measuring Growth by Arithmetic
gi = ((I9/E9)^(1/4))–1 Averages
This may seem complicated but is, in fact, sim- Estimating the arithmetic average of annual
ple because you need to enter this formula only changes is another simple method for comput-
once in a top cell of a respective column of an ing growth indexes, and some users may find
analyzed table and roll it down to the bottom of it easier to handle. Using again the usual signs
the table/column to generate dozens of growth such as Y1, Y2, Y3, Y4, and Y5 representing the
indexes. annual figures of the time series (for example,
revenues), g = growth ratio (Y2/Y1), and growth
Benefits: One major benefit to using this formula
index = gi = ( g–1).
is its simplicity to calculate: you enter the for-
Procedure: The calculation procedure is to
mula in one cell once to create dozens of growth
compute gi for each pair of years, and take the
indexes very quickly. The other benefit is that
arithmetic average as the gi for the time period
this is the way economists or finance officers
(for example, for a line of revenues). Notice that
commonly talk about the results, the growth, or
there are four pairs in a five-year time series of
achievements. Finally, these indexes are easily
financial data.
comparable across lines or tables: 11.9 percent
is far greater than 1.2 percent regardless of the Growth average formula: gi = {[(Y2/Y1)–1] +
nature of the subject. In contrast, most other [(Y3/Y2)–1] + [(Y4/Y3)–1] + [(Y5/Y1)–1]} / 4
indicators that reflect trends may be more pre-
or, more generally,
cise, but either they provide for absolute num-
bers that are hard to compare across lines or gi = {[(Y2/Y1)–1] + [(Y3/Y2)–1] + …
their results are buried in complex formulas that + [(YN/YN–1)–1]} / (N–1)
are difficult to translate into simple and well-
Benefits: The first benefit of this formula is
known percentages. For instance, it is difficult
simplicity. This formula provides users with
to compare a current revenue change of 24,000
the same kinds of benefits that the geometric
with an operating margin change of 400, but it is
average formula provides.
easier to understand that current revenues grew
Caveats and shortcomings: This growth
by 11.9 percent while operating margin grew by
average formula (unlike the gi growth index
only 1.2 percent in the same time period.
above) captures the volatility of the time series
Caveats and shortcomings: Calculating growth in every year and adds them into the average
index this way provides a rough estimate, not a ratio, which means that it can distort the aver-
very precise one; it measures growth in smooth age with any extreme movement (drop or raise
data series, but the results are less reliable if the in revenues) during years that might not be
Detailed Methodology and Procedures to Help Calculate Specific Results in MFSA 253
representative of the time period. The index variations between arithmetic and geometric
is useful for signaling issues, but less effective averages in a few critical areas that are high-
for computing or projecting growth in volatile lighted. First, the arithmetic average formula
time series. For projecting future growth, this indicates a 19.1 percent growth of the operat-
index can be used only with great caution. Let’s ing margin annually (line 3), which is appar-
compare the results of the indexes computed ently wrong because the margin is greater
by the two formulas in table B.1, which is a copy than the first year only once (that is, in the
of table 3.18. last year); and, except for a drop in Year 2, the
The results of the two growth indexes movement is moderate. Thus, the geometric
are often similar, but table B.1 shows great average index (1.2 percent) is far more realistic.
Table B.1 Historical Trends in Financial Snapshot with Two Indexes
Year 1 Year 2 Year 3 Year 4 Year 5 Growth indexes
Geometric Arithmetic
Items actual actual actual actual actual average average
1 Current revenue 41,999 41,214 48,636 52,743 65,821 11.9% 12.3%
2 Operating 33,498 37,785 41,187 44,610 56,893 14.2% 14.4%
expenditure
3 Gross operating 8,501 3,430 7,449 8,132 8,927 1.2% 19.1%
margin/balance
4 Interests and 321 502 695 1,450 2,212 62.1% 64.0%
borrowing costs
5 Current margin/ 8,181 2,928 6,753 6,682 6,715 −4.8% 16.5%
balance
6 Debt principal 425 490 768 687 2,982 62.7% 98.8%
repayment
7 Net margin - net 7,756 2,438 5,985 5,995 3,733 −16.7% 9.8%
current balance
8 Capital revenues 17,734 12,564 9,303 8,220 7,407 −19.6% −19.2%
9 Own capital 12,724 9,607 8,938 7,904 7,078 −13.6% −13.4%
revenues
10 Investment grants 32 90 365 316 329 79.0% 119.4%
and donations
11 Cash reserve from 4,978 2,867 0 0 0 −100.0%
previous years
12 Capital expendi- 25,845 23,770 28,222 29,100 22,614 −3.3% −2.1%
tures
13 Investment −355 −8,768 −12,933 −14,886 −11,474 138.4% 601.8%
balance before
loan
14 Loan proceeds 3,222 4,956 10,192 12,548 7,022 21.5% 34.6%
(disbursed)
15 Overall closing 2,866 −3,812 −2,741 −2,337 −4,452 −46.3%
balance with loans
254 Better Cities, Better World
Second, the net margin data show an appar- they may project unrealistically high figures, as
ent decreasing trend, a sharp contrast to the will be shown later.
arithmetic average index that measures a
Procedures: MFSA users who are unfamiliar
percent annual increase. Again, the geo-
16.5
with Excel chart applications may read and
metric index (–4.8 percent) is more realis-
use the following guidance; others may skip
tic. Finally, the trend in investment balance
it. Excel offers easy procedures for drawing
(601.8 percent increase by year) is exaggerated
charts/figures with trends and including trend
by the arithmetic average formula. Thus, the
equations, which are important for projecting
geometric average formula is preferable and
revenues/expenditures years ahead. We inten-
recommended for MFSA users.
tionally ignore the statistical details needed
to establish a trend equation from raw data
TD 1.3: Trend Analysis because Excel does everything “behind the
Trend analysis requires more effort, but it screen” for users.
provides some benefits and is, for example, Excel procedure: Choose and select a
better for projecting financial figures in the data series like current revenues (line 1
future. Users can generate charts with trend in table B.1) => click on “Insert” => select
lines, trend equations, and future projections, “scatter” graph and a graph will appear
or even test the predicting quality (R2) of the in a box beside the table => click on the
trend equation. There are easy applications in graph line depicting the actual data, and
Excel. => select “Add trend line,” and a box
appears with options on trend forms
Benefits: The major benefit of the trend analy- => select a trend form (Linear trend is
sis is that it conceptually positions a trend line a default and also advisable as a first
somewhere between the dots of actual finan- choice), but also mark “Display equation
cial figures, and so somewhat counterbalances on chart,” which you will see in the box
the volatility of the annual figures. Trend lines of trend options. You are done, and your
and equations are less sensitive to the first and graph shows a line chart of actual data,
a crossing trend line, and an equation.
last year figures regardless of whether those
Let’s look at three charts side by side in
are in harmony with the other years or stand Figure B.1.
out either as extremely low or extremely high
compared to the other years. For this reason,
Results: Reading the results that appear in
the trend equations are the best instruments
figure B.1 depends on the trend line you have
for conservatively projecting future financial
selected. Look at the first box in figure B.1; the
figures.
linear trend line is the simplest: the equation
Shortcomings: Trend analyses have one major y = 5917.1x + 32,331 appears. The coefficient
shortcoming, namely that most of the coeffi- before the x is the most important result and
cients and constants that appear in trend equa- measures the amount of money by which cur-
tions are hard to interpret in economic terms, rent revenues grow annually according to this
unlike the simple percentage from growth trend. The x is the serial number of the years
indexes used in the other two methods above. (1, 2, 3, 4, 5). By putting the serial number of
Another, less substantial shortcoming is that the year into the formula, you can compute
very precise trends are not necessarily better the trend estimate of the revenue for any year
for projecting future financial results because within this five-year period or beyond (for year
Detailed Methodology and Procedures to Help Calculate Specific Results in MFSA 255
5 it is: 5,917.1 * 5 + 32,331 = 61,916.5), somewhat provide for factors or coefficients that are dif-
lower than the actual figure in the table as the ficult to interpret in the course of financial
trend line also suggests. But you can also put analyses. Please notice also that the polynomial
10 into the equation to see the estimated rev- trend seems to fit best with the actual data in
enue five years ahead, such as y = 5,917.1 * 10 + this financial line; however, its coefficients can-
32,331 = 91,502. not be transformed into financial categories,
and by nature this equation would provide for
Benefits and shortcomings: The major benefits
extremely high (overly optimistic) revenue
of linear trend include (1) its simplicity and
projection for year 10 (ShS173,450 as opposed
ease for projecting future revenues; (2) that it
to ShS91,502 projected by the linear tend). We
provides for a conservative estimate in projec-
can make an interesting test, namely, to esti-
tions ahead, because it counterbalances data
mate the average annual growth indexes over
volatility; and (3) that some results are easy to
10 years by using the geometric average index
explain when comparing trend results of var-
formula with the year 10 revenues of the three
ious revenue or expenditure lines. By estab-
trend projections. The Y10/Y1 growth indexes
lishing trend equations for current revenues,
computed back from these projected reve-
current expenditures, and capital expenditures
nues with ninth roots suggest that the linear
in table B.1, we find that current revenues grew
percent annual growth
trend projects about 9.1
by ShS5,917 per year, current expenditures
whereas the polynomial projects 15.3 percent
grew by ShS5,361 per year, and capital expendi-
annual growth, which is an overly optimis-
tures grew by only ShS418 per year. One short-
tic projection compared to the conservative
coming of the trend analysis is that it indicates
9 percent.
the growth factor only in absolute number (for
example, volume in shillings), which is hard
to translate into general TD 1.4: Lessons from the Three Different
percentage growth
Growth Analyses
typically used in various comparisons and
benchmarks. We can draw the following lessons by compar-
Two other trends in Figure B.1: The other ing results of the three methods:
two trends (panels b and c in figure B.1) pro- • The geometric average seems to provide
duce apparently more complex equations and for an easy procedure to estimate annual
Figure B.1 Current Revenues: Three Different Trends
a. Current revenues, b. Current revenues, c. Current revenues,
linear trend power trend polynomial trend
70,000 70,000 70,000
y = 5917.1x + 32331 y = 38548x0.2577 y = 1743.6x2 – 4544.7x
60,000 60,000 60,000
+ 44537
50,000 50,000 50,000
40,000 40,000 40,000
30,000 30,000 30,000
20,000 20,000 20,000
10,000 10,000 10,000
0 2 4 6 0 2 4 6 0 2 4 6
256 Better Cities, Better World
growth and seems more reliable than the exceed the plans in a year (collection of busi-
arithmetic average formula to compute ness tax appears to be 34 percent above the
growth indexes. plan) is good for revenue collection but still
signals poor revenue planning.
• Growth indexes are useful for highlighting
A good plan and disciplined execu-
warning trends, but it is better to use them
tion of budget result in small deviations,
with caution for projections of future rev-
meaning that the actual figures are close
enues or expenditures. It is better to use
to the planned figures (ideally within the
trends instead for projections.
percent range). Deviations can be either
±5
• The linear trend is often the best instru- positive or negative; thus, a simple sum of
ment for projecting future financial num- deviations may underestimate the actual/
bers years ahead, particularly when we have plan (A/P) variations because pluses and
short time series (five years or fewer). minuses eliminate each other even if they
are big. For example, a positive 20 percent
• There are more trend formulas and other deviation (A/P = 120 percent) and a negative
estimating procedures that the MFSA users percent deviation (A/P = 80
20 percent) next
may try testing. Experience shows, how- year would show a zero deviation on aver-
ever, that these formulas and procedures are age. Therefore, estimating the budget reality
more complex and more difficult to use or and true variations should sum the absolute
interpret without providing visibly better value of deviations—that is, SUM of |+20%| +
results. |–20%| = 20% + 20% = 40%, and the average
• Short time series (fewer than five years) pro- absolute deviation is 20
percent as opposed
vide very preliminary estimates in growth to zero (average deviation).
indexes and are not suitable for trend analy-
ses. Thus, users are strongly advised to col- Methodology: Measuring planning efficiency
lect historical data for at least five years or requires calculating the average absolute
longer, or to use the results from short time deviation from 100 percent rather than using
series with extreme caution. simply the average deviation. For example, in
table 3.6 in main text, the line Participation
of firms and individuals shows the following
TD2: Average Absolute A/P budget performances between Year 1 and
Year 5: 169.1 percent, 69.4 percent, 59.2 percent
Deviation from 100 Percent
48.2 percent, and 120.5 percent; these numbers
Deviation issues: Deviation from 100 percent signal very unpredictable and volatile budget
is an important measure of efficiency of execution. The deviations from 100 percent
planning and execution of budgets, because are: +69 percent, –31 percent, –41 percent,
percent. The
an ideal plan is fulfilled to 100 –52 percent, and +20 percent. The average
problem with negative deviation is obvious; deviation would be 6.7 percent, because pluses
for instance, if property tax collection is, say, and minuses eliminate each other. In contrast,
78 percent of the planned collection, the city the absolute deviations show the real and very
faces both a revenue shortage and a case of substantial variations: |+69%|, |–31%|, |–41%|,
ill-predicted revenue that needs attention |–52%|, |+20%| = +69%, +31%, +41%, +52%,
and corrective measures. Interestingly, how- +20%; and the average absolute deviation is
ever, a case where actual revenues greatly 213%/5 = 42.5%.
Detailed Methodology and Procedures to Help Calculate Specific Results in MFSA 257
TD3: Projecting Local Tax items and indicate the respective memo ref-
Revenues by Using Trend erences with (*) star marks like (*1) for tax
Functions in Excel revenues.
4. Projection challenge—unusual data flow
For illustrating the technical details in using
(*2): Line 7, Local fees and charges, shows
trend functions of Excel, we copy into table B.2
an unusual flow, namely that the Year 5 rev-
and follow table 3.39 from chapter 3 and pro-
enues stand out from the previous trend
vide explanations step by step from 1 to 4.
(flow) because they more than doubled com-
1. Let’s take line 6, Local tax revenues, in pared to Year 4. Let’s address the projection
table B.2. Generate linear trend line equa- challenges. First, the high revenue of Year 5
tion with Excel by following the next steps: would steepen the slope of the trend and
highlight/mark the respective cells in line 6 may result in unrealistic revenue projections
(4,235, 4,818, 6,212, 7,584, and 8,037) => click (figure B.2). In contrast, using the trend of
on “Insert” icon => select “Scatter” charts => the four years and excluding the outstanding
click on a graph icon => click on the graph that year would result in unrealistic low projec-
appears in a chart => click on “Linear trend” tions. One way to mitigate the above chal-
option with “Display Equation on Chart” lenges is to estimate the trend on the basis
.. =>.. click on “Close,” and you will see the of the first four years and then elevate the
trend equation beside the trend line => type trend line to the last year by changing the
the equation to the respective cell (Taxes y = base in the trend formula with the same slope
1,033.4x + 3,069.6) of the Assumption column (see the trend line in figure B.3). This is what
of the financial projection table B.2. we recommend for MFSA users.
2. Create a technical line above line A that Figures B.2 and B.3 show the impact of an out-
includes the serial numbers of the years, standing fee volume (12,347) in Year 5: (1) a com-
which should be used as the values of the x bined linear trend would project over 20,000 in
variable in the equations (see the cells high- revenues in Year 10; (2) a trend that ignores the
lighted in table B.2). outstanding volume in Year 5 would project
only about 12,000 in fee revenues, the amount
3. Compute the projected local tax revenues by that has been reached already in Year 5; and (3)
using the equations for the taxes in Year 6: the adjusted trend would start from the level of
=> click in the cell => insert [=1,033.4 * 6 + Year 5 (12,347 in revenues) but follow the slope
3,069.6], and you see the projected tax reve- of the previous years. This is realistic in a sense
nues as 9,270. (Please note that we assume that the expansion of the fee base and increase
the cell is y in the equation, but do not write of fee rates increased the revenues one time sub-
the “y” or the “x” letters: we use them only stantially and created a new basis for the future,
to show clearly the inserted equation.) =>.. but it is unrealistic to assume that it has also
Scroll the cell to Year 10, and now you have changed the slope of the fee trend. This means it
computed the first line of financial projec- is not realistic to expect an additional ShS2,000
tions. We will apply this procedure to all the in fee revenues year on year (see x coefficient)
lines of financial projections unless we note after this large increase; rather the revenues
reasons for not doing so, but we will not are likely to increase the same way as before, by
explain them again. Below we focus on only about ShS1,000 annually from the elevated level
the lines that require special attention or of Year 5, and thus would reach about ShS16,000
procedures; we also highlight them in memo in Year 10. Note that this projection would still
258 Better Cities, Better World
Table B.2 Projection of Current Revenues, Operating Expenditures, and Gross Operating Margin—Conservative Estimates Scenario
Detailed Methodology and Procedures to Help Calculate Specific Results in MFSA
(Copy of Table 3.39)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Actual Actual Actual Actual Actual Assumptions, formulas Projection Projection Projection Projection Projection
Items 1 2 3 4 5 serial number of years (x) 6 7 8 9 10
A Total current revenue 41,999 41,214 48,636 52,743 65,821 sum lines 1+6 69,588 75,633 83,209 93,118 97,398
1 Transfers from higher government 30,300 25,162 26,120 29,933 35,984 sum lines (7,10) 35,032 37,859 40,686 43,513 46,340
2 –– Shared taxes 24,053 22,255 22,747 26,915 35,631 y=2781.6x+17975 34,665 37,446 40,228 43,009 45,791
3 –– Unconditional transfers *4 6,192 2,613 3,076 2,865 y=6588.6–1213.2 USE zero! 0 0 0 0 0
4 –– Conditional transfers 55 294 297 153 353 y=45.565x+93.67 367 413 458 504 549
5 Own revenue 11,700 16,053 22,516 22,810 29,837 sum lines (2,5) 34,556 37,774 42,523 49,605 51,058
6 –– Local tax revenues *1 4,235 4,818 6,212 7,548 8,037 y=1033.4x+3069.6 9,270 10,303 11,337 12,370 13,404
7 –– Local fees and charges *2 2,496 4,389 5,571 5,397 12,347 y=988.63x+1991.6+5412 13,335 14,324 16,844 21,697 20,921
8 –– Local asset revenues 4,969 6,847 9,778 8,723 8,989 y=991.61x+4886.3 10,836 11,828 12,819 13,811 14,802
9 –– Local mixed revenues *3 955 1,142 464 y=204x–108.84 1,115 1,319 1,523 1,727 1,931
B Total operating expenditure 33,498 37,784 41,187 44,610 56,893 59,274 65,115 71,054 77,102 83,273
10 Labor (wages, salaries, taxes, charges) 6,592 7,635 8,141 9,075 10,034 y=832.38x+5798.2 10,792 11,625 12,457 13,290 14,122
11 –– Administrative staff
12 –– Technical, service, and other staff
13 Goods and services 10,052 10,917 11,386 12,737 15,044 y=1180.3x+8486 15,568 16,748 17,928 19,109 20,289
14 –– Office supply
15 –– Electricity
16 –– Fuel and gas
17 –– Repair and maintenance *5 2,956 3,234 2,813 3,472 3,940 y=(220.62x+2621.1)*1.1 4,339 5,040 5,838 6,745 7,774
18 –– Other goods and services
19 Current subsidies to service entities *6 7,606 6,023 9,134 8,612 11,242 y=986.19x+5564.9 11,482 12,468 13,454 14,441 15,427
20 Current grants and transfers *7 3,128 5,466 4,582 5,549 11,577 y=1698x+966.46 11,154 12,852 14,550 16,248 17,946
21 Social care/welfare support 1,946 3,274 3,827 3,774 3,492 y=359.18x+2185 4,340 4,699 5,058 5,418 5,777
22 Other current expenditures 1,217 1,236 1,305 1,392 1,563 y=84.93x+1087.8 1,597 1,682 1,767 1,852 1,937
C Gross operating saving (A – B) 8,502 3,430 7,449 8,133 8,928 10,315 10,517 12,155 16,016 14,126
Note: Empty cells in lines 11, 12, 14, 15, 16, and 18 reflect missing data (only aggregate figures were available); ShS (shillings) is a notional name of the currency of the sample city.
259
Figure B.2 Linear Trend for Fee Revenues 1. The sample city will have a projected cur-
rent revenue of ShS97.4billion (bn) in the
25,000
planned Year 10 (table B.2) that allows
20,000 ShS9.74bn debt service according to the
y = 2071.1x – 4E+06 ratio Debt service ≤ 10% of Current revenues.
15,000
2. The debt capacity, however, also depends
10,000
on the debt terms, such as interest rate and
5,000 maturity (that is, the number of years to
repay). The existing debt stock of the sam-
0
ple city indicates various interest rates
(table 3.8 in chapter 3), so for the matter of
1
2
3
4
5
6
7
8
9
10
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
Ye
Ye
Ye
Ye
Ye
Ye
Ye
Ye
Ye
simplicity let’s assume that a 5 percent rate
Ye
for debts will be available with a 15-year
Figure B.3 Modified Linear Trend for Fee maturity investment loan to be procured
Revenues in Year 10.
16,000
3. The city will have high debt service of
16,404 ShS8.6bn in Year 10 (table 3.38), so it will
14,000
have room for additional debt service only
12,000
up to ShS1.14.bn (9.74bn – 8.6bn).
10,000
8,000 4. The present value calculation below sug-
6,000 y = 988.63x – 2E+06 gests that the sample city will have capacity
4,000
to procure ShS11.83bn in new debt in the
planned Year 10, much less than the other
2,000
0
ratios would allow.
The calculation of debt capacity follows the
1
2
3
4
5
6
7
8
9
10
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
logic of a standard annuity calculation, that is
Ye
Ye
Ye
Ye
Ye
Ye
Ye
Ye
Ye
Ye
to find the present value of a loan that can be
show a sixfold increase over 10 years, a quite repaid in 15 years and 15 equal Shs1.14bn install-
remarkable increase. In sum, we recommend ments, with a 5 percent interest rate. According
that MFSA users follow this logic and careful to this ratio and the data above, the city has a
procedure to mitigate the outstanding end-year capacity to pay an additional ShS1.14bn install-
figures by changing either the slope or the base ment (debt service) above and beyond the
of the historical trend for projecting future reve- already committed and due debt service of
nues or expenditures. ShS8.6bn and comply with the rule that debt
service is not more than 10 percent of the
current revenues (projected to be ShS97.4bn
TD4: Calculating Debt in Year 10.
Capacity by Using the Excel has a function to calculate the present
value of a loan with a 5 percent interest rate,
Annuity Function in Excel 15 installments, and amount of ShS1.14bn per
Calculating the capacity for procuring new installment. Formula in Excel: [=PV(interest
debts in the projected Year 10 requires the fol- rate in decimals, maturity years or num-
lowing procedure. ber of installments, installment amount)] =>
260 Better Cities, Better World
[=PV(0.05,15,1.14)] = 11.83. With these numbers the amount of new debt capacity, appears as
the estimated present value of a loan, that is, ShS11.83bn.
TD5: Financial Management Scoring Templates
1. Intergovernmental Relations
Predictability A There is a mature and robust framework for the LG sector with clear definition of
of transfers transfers. Any changes are made at a deliberate and predictable pace. Transfers are
stable and predictable, regulated, timely transmitted; no ad hoc grants.
B CG transfers are predictable annually, regulated, but delivery times may vary during
the year; no ad hoc grants.
C Transfers are not regulated but are by and large stable; ad hoc grants appear.
D Transfers are unpredictable, and/or not regulated, and/or ad hoc grants are
common.
Intergovern- A Revenue and expenditure mandates are clearly stipulated by law, and are respected.
mental Any changes are made at a deliberate and predictable pace.
mandate B Revenue and expenditure mandates are stipulated, but not in harmony, rules are
arrangements respected with some exceptions. Intergovernmental finance changes are mostly
discussed with LGs.
C Revenue and expenditure mandates are not well regulated, but rarely change.
D Revenue and expenditure mandates are unclear, not fully respected, and subject to
changes without prior announcement or discussions.
Debt regula- A Debt financing is clearly regulated with market-based rules and insolvency
tions framework; LG debt service is stable.
B Debt financing is regulated; LG debt service is mostly timely.
C Ministry (of finance) approves loans with no clear rules for debt financing.
Payments may be delayed.
D Debt financing is unregulated, loans may rolled over, ad hoc short-term liquidity
borrowing is common OR no borrowing is allowed.
Own revenue A LG has the flexibility to change taxes/fees on a significant share of operating
self-confidence revenues, and increases are politically acceptable at the local level. LG has good
collection power and capacities. Own revenues are predictable with clear visibility
of future revenues.
B LG has the flexibility to change base or rate of some taxes/fees, but increases are
politically challenging at the local level. Collection power and capacity are reason-
able with low incentives to increase revenues. Own revenues are substantial and
somewhat predictable.
C LG has no power to change base or rate of taxes/fees, may propose changes to
the government/ministry. Own revenues are somewhat predictable.
D LG has no power to change rates or base of taxes and fees. Own revenues are not
predictable or are very low.
Detailed Methodology and Procedures to Help Calculate Specific Results in MFSA 261
Expenditure A Spending responsibilities are highly stable and predictable over time. LG has the
spending flexibility to change the level and nature of spending, such as by cutting public
flexibility services or changing service standards, on a significant share of operating
expenditures. These cuts are politically acceptable at the local level.
B LG has the legal power to change the level and nature of spending, such as by
cutting public services or changing service standards, on a significant share of
operating expenditures. These cuts are conceptually acceptable at the local level,
but rarely occur and only under extreme situations.
C LG has the legal power to change the level and nature of spending, but this occurs
on an ad hoc basis against shortages of cash, and it is not a common practice.
Overspending occurs time and again.
D LG can change the level and nature of spending, but this happens as quick fixes
without long-term plans. Overspending is very common.
2. Planning, Budgeting, and Budget Implementation
Strategic plan A LG adopts, in line with a strategic plan, 3–5-year capital improvement plans (CIPs)
and CIP on a rolling basis, whereas the first year becomes the budget plan and a new year
is added to the CIP every year. The CIP is developed in participatory process and
substantially implemented in the annual budgets.
B LG adopts CIPs every 3–5 years. The CIPs are substantially included in planning
the annual budgets.
C LG adopts strategic plan or CIP , some actions are considered in planning the annual
budgets, but changing circumstances reduce the scope or use of strategic
planning.
D LG has no strategic plan or CIP; the planning is limited to annual budgets.
Budget A LG budgeting is clearly regulated, budget process is mature, iterative, and
planning participatory based on predictable forecast for transfers, clear and robust national
guidelines, and local budget circulars. Budget plans are completed on time and
approved. Revised budgets are well regulated and timely planned and adopted at
the midpoint of the fiscal year.
B LG budgeting is clearly regulated; budget process is timely completed based on
clear national guidelines and local budget circulars. Revised budgets are adopted
as deemed necessary.
C LG budgeting is regulated by national guidelines; budgets are completed mostly on
time. Revised budgets are adopted several times a year if and when necessary.
D There are general rules for local budgets; multiple changes occur because of
unforeseen circumstances at central or local government level.
Scope of A Extrabudgetary entities, PUCs, and/or funds play substantial role in local service
budget delivery; but financial transactions are regulated, clear, and require low operating
subsidies (5%). LG prepares both regular and consolidated budget/financial reports.
B Extrabudgetary entities, PUCs, and/or funds play substantial role in local service
delivery; but financial transactions are regulated, clear, and require low operating
subsidies (max 10% of current revenues). LG does not prepare consolidated
budget/financial reports.
262 Better Cities, Better World
C Extrabudgetary entities, PUCs, and/or funds play substantial role in local service
delivery, and require substantial operating subsidies (over 10%). Financial transac-
tions are accounted but not regulated and not consolidated in financial reports.
D Extrabudgetary entities, PUCs, and/or funds play substantial role in local service
delivery, and require substantial operating subsidies (15%). Financial transactions
to and from entities are not regulated, accounted in various forms, but not
consolidated in financial reports.
Budget A Expenditures adhere to budget appropriations; variations of actual and planned
implementa- total expenditures and variation of structures of main lines are within 5% of plans.
tion B Expenditures adhere to budget appropriation; variations of actual and planned total
expenditures and variation of structures of main lines are within 10% of plans.
C LG actual expenditures and revenues and revenue and expenditure variations and
main line structures are within 15% of plans.
D LG actual expenditures and revenues and revenue and expenditure main line
structures are over 15% of plans.
3. Financial Management
Financial A Financial management framework is well regulated and supported by IFMS/FMS
management software system with standard templates and reporting forms, and sufficient
framework number of qualified staff in key positions are assigned to financial management
with clear segregation of functions.
B Financial management is controlled and supported by IFMS/FMS system with
clear templates and segregation of functions, and qualified staff are assigned to
many key positions with some vacant positions.
C Financial management is supported by some software, and some qualified staff
are assigned to financial management.
D Financial management is computer enhanced with various software solutions, but
staff have varying levels of knowledge in financial management area.
Revenue A LG has effective fiscal cadaster and/or tax and fee payer registration and assess-
management ment system with up-to-date and transparent records on bases, rates, and payers’
obligations and responsibilities; revenue collection efficiency is high (95%).
B LG has effective tax and fee payer registration and assessment system with
up-to-date and transparent records on payers’ obligations and responsibilities;
revenue collection efficiency is good (80%).
C LG has several tax and fee payer registration systems with records on payers’
obligations and responsibilities in various qualities; revenue collection efficiency is
moderate (60–80%).
D LG has no or has several tax and fee payer registration systems with records on
payers’ obligations and responsibilities in varying qualities; revenue collection
efficiency is low (60% or below).
Detailed Methodology and Procedures to Help Calculate Specific Results in MFSA 263
Expenditure A LG has effective commitment control system, clear segregation of duties, internal
management controls for nonsalary expenditures, and public procurement procedures to ensure
value for money.
B LG has commitment control system, expenditures are accounted mostly on time,
public procurement procedures support investments.
C LG has computerized systems for managing and recording e xpenditures.
D Expenditure recording and management are fragmented.
Cash and debt A LG has an effective framework for cash and debt management with reliable
management records on cash balances, debts, guarantees, other liabilities, and payment arrears.
B LG has an effective framework for cash and debt management with records on
cash balances, debts, and guarantees; but guarantees are not valuated in debt
management.
C LG has some procedure for cash and debt management with some records on
cash balances and some debts.
D LG has no debt management framework but cash balances are reconciled or
neither cash nor debt management procedure is in place.
Oversight and A LG has reliable internal audit system, effective procedures for account reconcilia-
internal tions, and for oversight and analysis of the aggregate fiscal risk born from subordi-
control nated legally independent entities (PUCs) based on consolidated financial reports.
B LG has reliable internal audit system, some procedures for accounts’ reconcilia-
tions, and for oversight and analysis of the aggregate fiscal risk born from subordi-
nated legally independent entities (PUCs) without consolidation.
C LG has internal audit system, accounts reconciliations are intermittent, and LG
receives the annual reports from the subordinated legally independent entities
(PUCs).
D LG has no formal internal audit unit or system, and there are no records about the
subordinated legally independent entities (PUCs).
4. Financial Reporting, Disclosure, and Transparency
Financial A The LG has a reliable computerized financial reporting system consistent with
reporting generally accepted accounting principles and standards. Daily, monthly, quarterly,
and annual reports are generated timely in automated procedures (e.g., by IFMS);
results are disseminated to respective governing bodies, discussed, and corrective
measures commenced timely.
B The LG has a reliable financial reporting system and procedures in compliance with
national legislation; reports are generated and disseminated mostly on due
courses.
C The LG has rules and various templates for financial reporting in various LG
entities, reports are generated separately and delays may occur because of
missing information.
D LG entities do generate some reports.
264 Better Cities, Better World
External audit A The LG annual financial reports are audited by external auditor; audit reports are
obtained within 8-12 month following a fiscal year. The LG audit committee
discusses the audit results and commences corrective measures as may deem
necessary AND the LG has obtained unqualified audits in the last 3 years.
B The LG annual financial reports are audited by external auditor; audit reports are
obtained within 2 years following a fiscal year. The LG audit committee discusses
the audit results and commences corrective measures AND the LG has obtained
unqualified audits in the last year.
C The LG annual financial reports are audited by external auditor; audit reports are
obtained within 2–3 years following a fiscal year. The LG audit committee discuss-
es the audit results. The LG has obtained qualified audits in the last 2 years.
D The LG has no external auditor or the LG has failed to obtain audits or has obtained
qualified audits or one or more adverse external audits in the last 3 years.
Financial A The annual financial reports, the audit report, and short briefs on quarterly or
disclosures monthly reports are made available for public scrutiny (e.g., posted on the LG
website, readable at city hall, shared with key stakeholders in print or electronic
forms). Town hall meeting is held to discuss results and future plans.
B The annual financial reports are made available for public scrutiny (e.g., posted on
the LG website, readable at city hall, shared with key stakeholders in print or
electronic forms).
C The annual financial reports are made available for public scrutiny on demand.
D Financial reports are not shared with the public.
Public procure- A LG has standard procedures that asset divestitures, all investment construction
ment projects, and bulk purchases are procured by open competitive tendering pub-
lished in various media and adhere to value-for-money principles.
B LG has standard procedures supporting that large construction projects are
procured by open competitive tendering published in various media.
C Some projects are published and procured by competitive tenders.
D LG has no public procurement procedures.
Note: CG = central government; FMS = financial management system; IFMS = integrated financial management system; LG = local
government; PUC = public utility company.
Detailed Methodology and Procedures to Help Calculate Specific Results in MFSA 265
APPENDIX C
Municipal Finances Self-Assessment
Online Application: An Interactive
Platform for Mainstreaming of Use
The authors of Better Cities, Better World: process, and methodology. The online appli-
A Handbook on Local Governments Self- cation enables quick results because calcula-
Assessments have also developed a Municipal tions are done automatically on the basis of
Finances Self-Assessment Online Application the city data entered by the user; however,
(World Bank 2019). The platform will be it does not contain the detailed step-by-step
accessible by application via the World guidance and data interpretation that the
Bank website: www.worldbank.org. It is a book provides. The readers of Better Cities,
follow-up companion document to Municipal Better World are encouraged to sign up and
Finances: A Handbook for Local Governments use the online application to save time on
(Farvacque-Vitkovic and Kopanyi 2014), data entry and focus instead on analyzing
which also included a weblink to the MFSA results, drawing lessons, and seeking options
Version “Light” and, more specifically, to this for future improvements. A combined use of
current publication. The MFSA online appli- the LGSA Handbook and the MFSA online
cation is identical to the MFSA described in application is the most effective way to
chapter 3 of this book in substance, content, proceed.
Municipal Finances Self-Assessment Online Application: An Interactive Platform for Mainstreaming of Use 267
Salient Features derivative or output tables. Users will need to
analyze the results of both the standard and
The MFSA Online Application includes the the supplementary tables and perform the
following: prescribed actions.
• A built-in, easy-to-access Users Guide to aid Tables that users are advised to fill out
users in learning and operating the platform. include the following:
• A detailed built-in Glossary that explains the • Financial Database, which is the most fun-
meanings and relations of over 300 terms, in damental database in the MFSA
order to ensure consistency of the financial • Expenditures by sector
terminology and analyses across cities and
countries. • Capital investments
• Minimized data entry requirements with a • Debt database
single-entry method, whereby specific data • Tax performance database
are entered only once, and then the sys-
tem populates all the relevant tables and • Liabilities and arrears
cells automatically. Users can focus more • Cash balance
on analyses and on forming and testing
assumptions to project future scenarios. • Asset maintenance database
• Performance of all routine calculations • Actual/Plan variations financial database
in the tables and automatic population of
derivative and output tables, such as sub- Should a user be missing some of the infor-
totals and totals, growth indexes, trends, mation needed to fill out supplementary
and financial ratios. All the tables are tables, the system will still perform most of
interlinked following standard finance the MFSA analysis. Should tables or lines be
and accounting principles. There are still left unfilled, the system will still work; but it
numerous actions users need to perform will show gaps in some output tables, such as
besides entering data, such as selecting financial projections or ratio analysis. It also
options, defining assumptions and enter- may provide a low score on the shadow credit
ing variations accordingly, and analyzing rating, which assumes that missing informa-
and summarizing results in short reports. tion signals financial weaknesses and risks of
The system includes icons to help users low creditworthiness. Such gaps actually do
to either export to local databases or print point to weaknesses, and they signal areas that
tables from the system. need special attention and corrective mea-
sures. In short, systematically pointing out
gaps is already one valuable result of an MFSA
How to Use the Online analysis, because users who are not aware of
Application such gaps have little chance to address them
or to improve the respective areas of financial
The users of this MFSA online application will management.
need to populate only the Financial Database The standard tables can be generated
and the supplementary tables, and the sys- from the regular budgets or financial reports
tem will automatically populate the standard of a municipality. The template tables that
268 Better Cities, Better World
appear on the screen in each step are self-ex- all the main entries, subtotals, and totals are
planatory, but users may visit the Glossary identical with the numbers found in the orig-
and Users Guide for help, clarification, and inal local reports, such as operating revenues;
ensuring quality of entries for the respective operating expenditures; capital revenue; cap-
cells. ital expenditures; and loans, borrowing, and
The supplementary tables include items that savings.
are not recorded within regular budgets. Most Local own-source revenues may need
of these supplementary tables, though, can
careful adjustment and may even require
be developed with a moderate workload, and changing the built-in categories (lines are
many may already exist in various municipal
editable in the platform); for example, prop-
departments, with various levels of sophistica- erty tax might be the most significant revenue
tion. It is important to bring these tables into source in one city, but negligible in another
the spotlight with MFSA analysis, because one where business tax and communal tax are
most national regulations exclude or do not the most important. Thus, users are enabled
make these tables mandatory; hence, many and encouraged to change the name of the
local governments ignore or fail to record own taxes or fees to reflect the local reality.
these additional data in a timely or consistent However, the subtotal lines such as Local taxes
fashion. Developing these tables under the or Local fees should remain unchanged, and the
MFSA requires close cooperation across var- sum figures should be identical to the original
ious municipal departments and entities, and local financial reports.
this cross-fertilization is an added bonus of the
MFSA process.
Populating the initial Financial Database
from the raw municipal data is the most crit-
ical task that users should complete first.
Challenges include, first, reducing the details References
of the original local reports from hundreds
Farvacque-Vitkovic, Catherine, and Mihaly
of lines to a short 60-line report called the
Kopanyi, eds. 2014. Municipal Finances:
Financial Database and, second, identifying A Handbook for Local Governments.
and streamlining the categories to the inter- Washington, DC: World Bank.
national standard structure of the Financial Farvacque-Vitkovic, Catherine, and Anne Sinet.
Database. Entering new lines and categories 2014. “Achieving Greater Transparency
is not possible, yet leaving out financial data and Accountability: Measuring Municipal
because of an unspecified category is not advis- Finances Performance.” In Municipal Finances:
able. A third challenge is making adjustments A Handbook for Local Governments, edited by
to fit the cash accounting principles from the Catherine Farvacque-Vitkovic and Mihaly
various local practices (for example, accrual Kopanyi. Washington, DC: World Bank.
reports, performance-based budgeting, or World Bank. 2019. “Municipal Finances Self-
other local peculiarities). A final challenge is to Assessment Online Application.” World Bank,
screen and compare the entries to ensure that Washington, DC.
Municipal Finances Self-Assessment Online Application: An Interactive Platform for Mainstreaming of Use 269
APPENDIX D
MFSA Action Plan: Long List of
Possible Key Actions
The MFSA Action Plan is the most important and timing in order to exemplify the process
final product of the MFSA process. It is also of costing and based on our limited knowledge
the step that proves to be the most difficult of the sample city. Users may further structure
for MFSA users. MFSA users find it some- the action plan into specific clusters of actions
times difficult to translate key issues into key and they may follow a different logic than the
actions, and they also need support for the MFSA steps (see table 3.4 in chapter 3).
implementation phase of the Action Plan. This MFSA Action Plans should include a sum-
section provides guidance for identifying spe- mary table of key actions. This summary table
cific actions based on the MFSA analysis and will include the following information, which
results. It follows the sequence of MFSA steps is essential for implementation and monitoring
and identifies potential actions for each step. It costs, timelines, and responsibilities. In addi-
is based on the key findings of our Sample City tion, the summary table will make a distinc-
(chapter 3). It is advisable in a real-life situa- tion between (1) short-term actions that can
tion to revisit such a long list and to select a be carried out by local government with little
shorter list for the city council’s consideration involvement from other stakeholders and (2)
against the available funding after simple esti- medium-term actions that may require inter-
mates of timing and costs. We have included a vention from higher levels of government.
short list with a few specific actions with cost The latter case will make any implementation
MFSA Action Plan: Long List of Possible Key Actions 271
schedule more difficult to predict, but mapping transfers, insufficient local tax revenues, and
the path and highlighting the requirements on shrinking own capital revenues.
the way (regulatory or legislative changes) will
a) The transfers from central government
make implementation easier and more feasible.
grew by a mere 4.4 percent per year,
which is slightly higher than half of annual
Historical Analysis national inflation. This is because the
(Sample City) government phased out unconditional
transfers, which the growing shared taxes
The financial snapshot signals three major failed to counterbalance, thus apparently
weaknesses (table 3.18 in chapter 3), all of reducing transfers to the local government
which can be corrected by internal actions. sector. Specific action could include:
Main findings include that the overall closing
4. The mayor and finance officer initiate or
balance became steadily negative in the last
join policy dialogue together with munic-
years, the debt service skyrocketed, and the
ipal association and other cities on the
gross margin grew a mere 1.2 percent per year,
issue of government’s hidden modifica-
well below the 7.3 percent national inflation.
tion of the transfer system and silent
Corrective actions may include the following:
reduction of share of transfers, and then
1. Improve budgeting practices to ensure request that it reestablish the uncondi-
balance in both planned and actual tional grants and ensure increasing trans-
budgets. This action requires no cost,
fers at least in proportion to inflation or
but revising and improving both bud- increase the local shares of designated
geting and budget execution control taxes to counterbalance the lost grants.
procedure by the budget and finance b) Local own tax revenues are stable and
departments, as well as tightening the growing but seem to be far below the tax
council’s budget approval. potential; they are hard to measure because
of nonexistent tax databases. Specific
2. High debt service requires establishment
actions may include the following, but
of a debt management system with pro-
technical issues and cost estimates require
cedures and an appointed debt manage-
further analyses:
ment team in the finance department.
The action needs moderate costs to 5. Establish a reliable revenue manage-
improve respective information technol- ment system with standard procedures
ogy if any, because there is already a sim- and solid professional capacities
ple debt database in place, suitable for that may require insourcing trained
managing a small number of debt items. specialists.
3. The decreasing gross margin should be 6. Establish a reliable computerized tax
addressed in the course of revenue and database for all or the five largest own tax
expenditure actions aiming to boost own- revenue sources.
source revenue and expand gross margin.
7. Revise and expand the tax bases and tax
The revenue trends signal three major chal- nets and aim to reach over 95 percent
lenges (table 3.19): shrinking government coverage rate.
272 Better Cities, Better World
8. Improve tax collection procedures to entire municipal sector with new reve-
ensure over 95 percent collection rate nue sources based on international
and aim to double annual collection in practices.
the next five years.
f ) Own capital revenues include two major
9. Initiate a program for collection and items: (1) asset proceeds that are basically
workout of tax arrears; measure and then from lease or sale of land or buildings,
adopt program to reduce the stock of his- and (2) land development fee; both items
torical arrears to 5 percent of total tax shrank in the last period. Corrective actions
revenues. may include the following:
10. Address issue of property valuation and 15. Establish an asset management system
plan a revaluation or updating program with reliable registers, strategy, and pol-
by the end of this medium-term period icy; there is currently no formal asset
and after completion of the first five register.
actions above (actions 5 through 9)—
16. Revise land-lease contracts to explore
doable by the end of this medium term.
hidden losses and initiate corrective
c)
Fee revenues have just increased measures.
substantially, but a specific plan should be
17. Institutionalize competitive tendering
adopted:
procedures for sale or lease of land, build-
11. Adopt a program to collect historical fee ings, or other assets.
arrears; measure and reduce the volume
of stock of fee arrears to 5 percent of total 18. Commence analysis of underlying rea-
fee revenues. sons behind decreasing land development
fee revenues and initiate corrective
d) Improve cash management: measures. Institutionalize regular annual
analysis of the private land and real estate
12. Introduce a cash and liquidity manage-
market to explore tendencies and make
ment system with a dedicated team to
solid projections for land development
ensure strong liquidity; in the mean-
fee revenues five years ahead on a rolling
time, invest free cash into short-term
basis.
instruments that gain revenues with
low risk. 19. Establish or revise procedures for sys-
tematic and rule-based collection of
e) Introduce new revenue sources:
participation fee (hook-up charge) from
Analyze revenue options and perfor-
13. new users of service networks to ensure
mances and adopt program to boost some collecting a fair but substantial participa-
revenues or introduce new revenue tion from beneficiaries for expanding the
sources within the current legal limits. service infrastructure.
Seek specifically options for using vari-
ous land-value-capture instruments. Revise methodology for analyzing
20.
options for investment financing to
14. Initiate or join policy dialogue to change expand private financing in public infra-
the local revenue assignments for the structure based on careful risk analyses.
MFSA Action Plan: Long List of Possible Key Actions 273
Expenditures: The current expenditures Revise the system and procedures for
24.
seem to be under good control exemplified subsidizing current expenditures of ser-
by the low share of labor costs and cost of vice entities, measure performance, and
goods and services (tables 3.20 and 3.21 in introduce rules for performance-based
chapter 3). Nevertheless, operating expenses subsidization.
have grown much faster than current revenues
Introduce control procedure for rule-
25.
(14.4 percent and 12.3 percent, respectively).
based provision of current grants and
Weaknesses explored include missing reliable
transfers to subordinated entities (dis-
expenditure data; low control on current sub-
tricts, wards, communities).
sidies to service entities and current grants
and transfers to subordinated entities, both of c) Improve service sustainability by enhanced
which represent substantial shares of expen- procedures for asset development planning
ditures; and expenditures signaling low asset and maintenance. Actions may include the
sustainability, because the share of repair and following:
maintenance expenses are low and the money
spent for repair of assets grew 7 percent annu- Increase expenditures for asset repair
26.
ally, a pace about equal to annual inflation. and maintenance, at least double real vol-
Corrective actions may include the following: ume in the medium term.
a) Expenditure databases should be established 27. Increase expansion of assets by revision
or enhanced on several fronts: of current capital improvement plans
in line with the forecasted revenue
21. Establish databases on functional classi- increases against the expected reform
fication of expenditures in compliance actions and enhanced financing strate-
with the classification of the functions of gies, but in parallel maintain budget bal-
government (COFOG) classification, ances and comply with indebtedness
which would not only improve planning regulations.
but also enhance communication of plans
and results with citizens and other
stakeholders. Ratio Analysis (Sample City)
Improve databases and enhance con-
22. The ratio analysis results underscore sev-
trol cost of labor (administrative and eral findings and actions listed before and
technical staff ), cost of goods and ser- point to some further weaknesses and actions
vices such as office supply, fuel and gas, for improvement (table 3.29 in chapter 3). It
and electricity. is unnecessary to repeat here the 27 actions
23. Develop database on repair and mainte- already mentioned, so we focus discussions
nance prior to and later as part of asset on new aspects or actions to be considered.
management system (action 15). One general observation is clear, namely that
the initial financial projections do not indicate
b) Control subsidies and grants, because they substantial changes in the systems or results
represent a substantial share of current measured by financial ratios in the medium
expenditures (nearly 40 percent in Year 5). term. Thus, the ratio analysis also supports
Actions may include the following: the idea that the city may seek more ambitious
274 Better Cities, Better World
improvements and more visible enhancements a) The ratio of [Debt service/Total current
and gradual reduction of gaps between a few revenue] has grown fast and has nearly
selected city ratios and the international bench- reached the set regulatory limit (8 percent
marks in the medium term. In the interim, the against the 10 percent limit in Year 5); it is
city should also maintain or improve compli- likely to grow further in the planned period.
ance with regulations. Increasing own revenues or receiving
Creditworthiness: Creditworthiness ratios substantially larger transfers would solve
signal two warning lessons: namely that the this issue.
operating savings are low in both the gross and
The ratio of [Debt outstanding/Budget
b)
the net term.
total] has nearly reached the regulatory
a) The ratio of [Operating savings before limit, it was 56 percent in Year 5; however, it
interests/Current revenue] is not bad will go far above 60 percent in the beginning
in comparison to similar developing of the projected period. The trouble is
countries, but it is far below the benchmark. that it is hard if not impossible and really
This ratio largely depends on the current not advisable to reduce the stock of
revenues, which further depend on outstanding debt on short notice, on the
transfers and own revenues because the one hand. However, increasing revenues
explored actions do not signal substantial by adopting and implementing revenue
savings on operating expenditures. Thus, enhancement actions takes time and is
increasing revenues is the only way to unlikely to generate substantial additional
improve this ratio and creditworthiness. own revenues in the first one to two years
We have identified specific corresponding of the planned period. Thus, increased
actions for both local and national level government transfers seem to be the
(see actions 4 through 14). only simple solution. This underlines the
importance of national actions mentioned
b)
The ratio of [Net Operating Surplus/ before, namely to improve transfer
Current revenue ratio] depends on the revenues (action 4); meanwhile the city
revenues just like the gross ratio, but it should establish effective cash and debt
further depends on the volume and share of management system, procedures, and
debt service expenditures. Because the debt capacities (action 12).
service has been largely predetermined by
Service sustainability includes two direct
loans contracted and disbursed before, the
service and two financial ratios, namely
improvement of the net ratio practically
capital investment expenditures and repair
depends on the revenue actions mentioned
and maintenance work expenditures. These
above.
two could move against each other, so offer
Indebtedness: There are two warning sig- no solution when both are lower than the
nals of indebtedness, both of which come benchmarks. The collection efficiency of
from regulations; they got close to the regula- taxes and fees provides the vital underlying
tory limits by the end of the analyzed period ratios that could support or rather further
and may even breach the limits in the planned undermine the two direct service sustain-
period. ability ratios.
MFSA Action Plan: Long List of Possible Key Actions 275
The ratio of [Capital investment
a) 29. Carry out a specific risk-based analysis of
expenditure/Current revenue] was far assets to measure the current quality of
above the benchmarks in the beginning assets and to calculate more precise tech-
and for much of the analyzed period, but nical and financial requirements for sys-
it dropped down to a reasonable level by tematic preventive repair and maintenance
the end of the period. However, financial of the most critical assets. Without such
projections and investment plans signal analysis, nobody knows what would be
a radical drop of this ratio to the range the adequate expenditure plan for repair
below or about half of the benchmark in and maintenance, or what would be a
the optimistic scenario. This is good, on the realistic repair and maintenance over
one hand, from the financial control point operating expenditures ratios in the
of view and signals city leaders’ intention medium term.
to comply with various rules and especially
to avoid unmanageable debt burden. On the c) Tax efficiency measured by the ratio of
other hand, such a radical reduction for an [Taxes collected/Taxes levied] is vital for
entire medium-term period may undermine service sustainability because tax revenues
the scope, coverage, or quality of local provide an important part of own-source
services. Actions identified before include revenues and operating savings. The fact
substantial increase of revenues and are that the sample city (like many users of
promising options that can improve capital MFSA) does not have reliable tax databases
investments in the medium term. Introduce can be seen as a red flag from the perspective
new revenue sources (actions 13 and 14). of lenders, investors, or other possible
partners. (See actions 6 through 10.)
28. Enhance and diversify investment financ-
ing. This is a bold option that offers room d) The fee efficiency ratio measured by [Fees
for expansion of investments outside the collected/Fees billed] is vital for service
budget, thus without violating the regu- sustainability; they may not generate
latory or solvency rules. The city may revenue surplus, but fee revenues are vital
establish a team or hire an expert to for cost recovery of key urban services.
explore technically and legally possible Lack of reliable fee databases and/or low
options for enhanced financing of collection efficiency gravely undermine
investments. services, but it also induces using up other
revenues like general taxes or transfers,
The ratio of [Maintenance works
b) which would otherwise be usable for
expenditure / Operating expenditures] is far development financing. Furthermore,
below the benchmark, but more important reliable fee databases are vital to help
it signals inadequate maintenance and measure and improve cost recovery of
raises risk of deteriorating local assets services. The actions mentioned before—
and services in the medium term. Even in namely to establish reliable databases—are
the optimistic scenario where the amount good signals toward customers (who pay
of money for maintenance is planned to better if they know a good database exists)
double, it would only help to marginally and partners, but they also help stringent
increase the maintenance ratio. A possible expenditure control, cost recovery and
specific action beyond those already stated: tariff management, and performance
276 Better Cities, Better World
measurement of respective staff and b) The ratio of [Financial resources (cash
entities (actions 11 and 14). A possible + cash-like)/Financial obligations (due
additional specific action not mentioned liabilities + arrears)] reflects a broader
before: scope of resources and dues, a sort of gross
account of the ratio on arrears discussed
Carry out a detailed revenue analysis
30.
above. The sample city was unable to
covering all main tax revenues, each of
manage a balance between liabilities and
which generates a substantial volume
cash-like financial resources, which remain
of money.
far below liabilities, but this ratio also shows
Quality of operations includes several worsening tendency. This is a very bad
ratios. The sample city is doing well in con- signal that undermines creditworthiness
trolling employment and labor costs (unlike and encourages lenders and investors to
many cities in the developing world that
follow calculate a higher entity risk when working
a tradition of reckless employment and esca- with such city.
lated labor costs to the detriment of services).
Weaknesses appear in the area of budget 32. Establish an asset-liability management
predictability, managing liabilities, and cash unit within the finance department to
management. systematically monitor and control regu-
lar and overdue liabilities in connection
a) Budget reality: The ratio of [Actual revenue/ with current assets.
Planned revenue] indicates the reality of
the budget plan (ideally by comparing the
very first/initial rather than the revised Financial Projections
plan) against the actual final account/ (Sample City)
budget at the end of the fiscal year. The
sample city shows a relatively stable and Financial projections were made initially on
well-controlled overall management the basis of the historical trends and by fac-
of current revenues and expenditures toring in a few imminent specific actions to
(despite said shortcomings). However, the enhance revenues and funding (tables 3.39 and
budget fluctuates far beyond the 5 percent 3.41 in chapter 3). The plans indicate moder-
range of 100 percent, and it does so largely ate changes, however, even in the optimistic
because of movements in development scenario. Possible specific actions include the
expenditures. One possible action to following:
improve budget reality:
33. Initiate an iterative forecasting and pro-
31. Initiate a detailed analysis of actual/plan jection process that includes preliminary
variation by checking each line of the selection and analysis of a longer list from
main revenue and expenditure figures in the revenue-improvement and expendi-
the course of the last five years and iden- ture-enhancement actions listed. Beware
tify areas where large variations are per- of the fact that some actions are inter-
sistent. Then, commence dialogue with linked, reinforce, or supplement each
respective departments or units to find other, whereas many other actions can
out the underlying reasons and to explore be postponed without major short-term
options for corrective measures. impacts.
MFSA Action Plan: Long List of Possible Key Actions 277
34. Recalculate a third scenario that factors although are by and large stable and ad hoc
in the projected results of the said new grants appear. Indeed, as we have seen,
preliminary actions. the government gradually decreased the
unconditional grants/block grants and
Perform a reality check against the
35. limited the growth of transfers far below
selected actions, and then analyze the the inflation rate (table 3.19). Corrective
effects on general revenue and expendi- action could be the following:
ture trends, balances, and impacts on
asset development and maintenance. 37. Initiate or join a national policy dialogue
on setting clear rules for transfers, make
36. Perform revised projections based on les-
them more predictable, and avoid or
sons learned from the third forecasting
make ad hoc grants exceptional.
model and analyze a fourth forecasting
scenario. b) Debt regulation got a C score because the
ministry of finance approves municipal
Financial Management loans with or without clear rules for
Assessment (Sample City) debt financing. This distorts lenders’
risk management, allows subjectivity for
The financial management assessment cov- borrowing approvals, and opens room for
ers four thematic areas, each with four or five political interference. Corrective action
sets of questions: (1) intergovernmental rela- could be the following:
tions; (2) planning, budgeting, and budget
38. Initiate or join a national policy dialogue
implementation; (3) financial management;
to set national regulations for municipal
and (4) financial reporting, disclosure, and
borrowing, debt management, and insol-
transparency. These areas constitute the main
vency resolution; and then reduce or
underlying causes of the good or weak finan-
terminate the ministry’s loan approval
cial performance of a local government; many
mandate.
of the respective issues have already been men-
tioned and actions defined. We focus on the c) Own revenue self-confidence got a C score
specific public financial management aspects because municipalities have no power to
of the financial management system in this change the base or rate of taxes and most
section and identify specific actions to improve fees; instead, they may propose changes to
areas of low performance exemplified by low the government/ministry. Own revenues
C or D scores in each of the said four thematic are somewhat predictable but low.
areas discussed in chapter 3 (Step 5 and sum- Corrective actions include increasing own
marized in table 3.64). revenues (actions 4 through 14) and the
Intergovernmental relations include five following:
specific questions: predictability of transfers,
39. Initiate or join a national policy dialogue
intergovernmental mandate, debt regulations,
to empower municipalities to change
own revenue self-confidence, and expenditure
the base or rate of local taxes and fees,
spending flexibility.
possibly within a set minimum and max-
a) Predictability of transfers got a C score imum range—a common international
because transfers are not regulated practice.
278 Better Cities, Better World
d) Expenditure spending flexibility got a C plan contingencies in some specific criti-
score because municipalities have legal cal areas (such as fuel).
power to control and change spending;
however, this is not a common practice, and The financial management systems and
overspending occurs. Corrective actions practices area includes five specific factors:
could be the following: financial management framework, revenue
management, expenditure management,
40. Review internal control systems and ini-
cash and debt management, and oversight
tiate adequate operating procedures to
and internal control systems and practices.
improve budget appropriation control,
Of these factors, revenue management and
local expenditure policy, and expendi-
expenditure management appear to be the
ture management practices.
problematic areas. Revenue management got
41. Initiate procedure to tighten budget control a lowest D score, but all critical actions have
and rules for identifying and enforcing bud- been mentioned earlier (actions 4 through 14).
get cuts as deemed necessary, especially
during preparation of revised budgets. Financial reporting, disclosure, and
transparency includes four decisive factors:
Planning, budgeting, and budget imple- financial reporting, external audit, financial
mentation includes four specific questions: disclosures, and public procurement. Of these
strategic plan and CIP, budget planning, scope factors, external audit and financial disclosures
of budget, and budget implementation. The appear to be problematic and need corrective
first three of these areas are under good con- measures.
trol and performing well. The issues appear in
the fourth area. a) External audit got a C score because the
annual financial reports are audited by an
a) Budget implementation got a C score external auditor; however, audit reports
because the city experiences high plan/ are obtained within two to three years
actual variations (over 15 percent) in both following a fiscal year. The city has obtained
revenue and expenditures. This score qualified audits in the last two years. The
signals weaknesses in both planning local audit committee discussed the audit
and implementation practices. These results, but there is no evidence of adopting
issues are interrelated with several corrective measures. Specific actions could
challenges mentioned before, such as include the following:
low predictability of some transfers, or
reliance on revenues that reflect market 43. Initiate or join a national policy dialogue
volatility such as land development fees. to legalize private external audits and
Corrective actions have already been aim to provide municipalities with audit
mentioned, for example, detailed analysis reports within six months after submis-
of actual/plan variations to identify the sion of financial reports for audits.
most persistent and critical areas. One
Carry out investigation and consultancy
44.
more can be added:
analysis to unfold the reasons behind
42. Improve revenue and expenditure analy- qualified audits obtained in the last two
sis and forecasting practices (for exam- years and define specific, time-bound
ple, use MFSA), set realistic targets, and corrective measures.
MFSA Action Plan: Long List of Possible Key Actions 279
45. Adopt a rule that the local audit commit- communication, and collection and anal-
tee should commence detailed discus- ysis of feedback information.
sion with auditor for clarifications, define
48. Adopt a communication and citizen out-
specific time-bound corrective measures,
reach strategy based on analyses and
and then discuss them with respective
national or international best practices,
stakeholders.
and include a list of standard short bud-
46. Mandate and encourage the mayor and/or get and other reports designed for easy
town clerk to oversee and enforce imple- understanding by citizens.
mentation of the corrective measures
Develop specific communication tools
49.
about audit reports in a timely fashion.
such as leaflets, media news, and web-
b) Financial disclosures got a C score because based communication, public hearings,
the annual financial reports are made and town hall meetings to timely commu-
available for public scrutiny on demand, nicate the city’s plans and financial
but this is a passive form of communication results.
and results in low levels of citizen outreach.
50. Publish financial results on a recurrent
Specific actions could include the following:
basis; in parallel make them permanently
Establish a cell/team responsible for
47. accessible via various media tools, and
policy analysis, customer education, enable citizens’ easy feedback.
280 Better Cities, Better World
APPENDIX E
Self-Assessed Shadow Credit Rating
Self-assessed shadow credit rating (SASCR) The SASCR resembles more an entity’s idio-
is a procedure that adopts the principles and syncratic risk assessment than a credit rating of
key methodology practices of rating agen- a debt instrument, that is, it aims to indicate
cies in completing credit ratings or shadow the general financial health or creditworthi-
credit ratings (Fitch Ratings 2015; Moody’s ness of a municipality similar to such general
2017; Standard and Poor’s 2016). The SASCR, assessments by rating agencies (Ösmen 2016).
however, applies rating instruments in a self- Compared to professional and published
assessment modality. We use the SASCR third-party credit ratings, the SASCR leans
acronym in order to clearly distinguish this more toward a self-assessment with messages
procedure and its results from other shadow geared to the finance department, finance sub-
credit ratings and in particular from pub- committee of the city council, city council, and
lished credit ratings set by rating committees city mayor instead of investors; therefore, by no
and professional rating agencies, including the means can it serve or can it be understood as a
Fitch, Moody’s, Standard and Poor’s Global publishable rating result (box E.2).
Ratings, or their national or regional affiliates The SASCR is structured in a way to encour-
(PEFINDO 2016). Thus, it is important to clar- age honest scoring and factors applied are in
ify the nature and position of the SASCR in harmony with the regular rating principles,
relation to the published formal credit ratings but the SASCR inevitably includes some level
or the shadow credit ratings or credit assess- of subjectivity that emerges from the self-
ment conducted by third-party expert teams or assessment modality. Therefore, compari-
rating agencies (see box E.1 for a discussion of son of the SASCR rating scores, if any, may be
Standard and Poor’s credit assessment). adequate for a domestic shadow credit rating;
Self-Assessed Shadow Credit Rating 281
Box E.1
Disclaimer on Standard & Poor’s Credit Assessment
“Standard and Poor’s (S&P)] credit assess- assessment usually represents a point-in-
ment is an indicator of S&P Global Ratings’ time evaluation and S&P Global A credit
opinion of creditworthiness that may be assessment is generally confidential.
expressed in descriptive terms, a broad Credit assessments are expressed using
rating category or with the addition of a S&P Global Ratings’ traditional credit
plus (+) or minus (–) sign to indicate rela- rating symbols, but in lower case (e.g.,
tive strength within the category. A credit ”
‘bbb’).
Source: Standard and Poor’s 2016.
Box E.2
Disclaimer on the Municipal Finances Self-Assessment
The self-assessed shadow credit rat- ing to or suggesting any automatic
ing (SASCR) is a self-testing instru- actions. Neither the authors nor the
ment with its merits and strong limita- publisher can be made responsible for
tions; therefore, users should take full any effects that may occur because of
responsibility for interpreting and using actions taken by SASCR users based on
the results. SASCR aims at generat- their own inputs and own understand-
ing dialogues in city management on ings of scores of their own SASCR
critical financial issues without point- assessments.
it is presumably fair even to downgrade some simplicity is a major objective of the SASCR.
SASCR results. For example, a “ccc” score in A more sophisticated SASCR would require sig-
SASCR may be comparable to a “c” score in a nificantly greater efforts while providing mar-
domestic shadow credit rating, but it is better ginally improved precision; however, it would
not to compare it to external ratings at all. still not be considered a formal credit rating.
The SASCR also differs from the third-party The SASCR relies more on scorecards, but
shadow or internationally recognized profes- we do encourage the users to identify and
sional credit ratings in terms of the scope of write a short summary report, pointing out
rating drivers considered and assessed. The strengths and weaknesses of their financial
main reason is that the SASCR aims to use the system as well as specific factors that play a
results of the MFSA quantitative and qualita- major role in credit scores (qualitative and
tive assessments without requiring substantial quantitative modifiers). The SASCR final sum-
additional data gathering and analysis. In short, mary scores and rating are set by the user of the
282 Better Cities, Better World
scoring templates. These templates also incor- in case of financial distress or disability of a
porate experiences from various creditwor- municipality to service a debt. They do so
thiness assessments and analysis completed regardless of whether there is a formal com-
under international donors such as the World mitment of the government in the form of
Bank, academia, and subnational assessments either a sovereign guarantee behind a debt
(Bird and Slack 2015; Cabaleiro, Buch, and (loan or bond) or a general legislation that
Vaamonde 2013; Colorado General Assembly suggests such intervention, or even whether
2013; Fourie, Verster, and van Vuuren 2016; there is just a general practice for providing
German 2015; Groves and Valente 2003; Liu ad hoc grants if a municipality needs them.
and Tan 2009: Peterson 1998). In contrast, This is understandable from the investor or
rating agencies assign rating committees to lender perspective, because the assurance or
establish the final rating on the basis of “base- likelihood of government support is a credit
line credit assessments” by scorecard tables, enhancement for them; however, many ques-
but also taking additional national, market, tion those assurances because they are often
policy, or political information into account the source of moral hazard on both the lend-
(box E.3). This is one important reason why er’s and borrower’s side. They could induce
the SASCR should only be considered as a lim- perverse incentives for lenders who may com-
ited shadow rating. promise due diligence and ignore business
The SASCR is based on historical results risks, because they assume protection from a
with an opportunity to score the results of higher government tier regardless of the bor-
financial projections five years ahead, but it is rower’s performance.
still not comparable to a formal rating that is In contrast, the MFSA and the SASCR score
strongly focused on predicting the future cred- a government’s extra financial support or evi-
itworthiness and likelihood of risks that ham- dence of ad hoc grants outside the formula-
per debt service during the repayment period based transfers as negative characteristics of
of a loan or bond. the intergovernmental framework. In short,
Finally, formal credit ratings are geared to SASCR intends to assess the financial health of
investors and lenders, so they value positively a city without the extra support and protection
the likelihood of extra government support by the central government.
Box E.3
Moody’s Guidelines on Scorecards
The scorecards are not meant to be a sub- looking opinions of credit strength. The
stitute for rating committee judgments limited number of variables included in
on individual baseline credit assessment. the scorecard cannot fully capture all
Scorecard results have limitations in idiosyncratic risks nor the breadth and
that they generally use historical data, depth of the analysis considered by rating
while credit assessments are forward- committees.
Source: Moody’s 2017 (page 2).
Self-Assessed Shadow Credit Rating 283
SASCR Analysis and 2. Calculate the average score in each qualitative
Scoring area as a simple arithmetic average of the fac-
tor scores; compared to the MFA score, A = 5,
SASCR analysis and scoring are built on three B = 4, C = 3, and D = 2. Table E.1 summarizes
pillars: (1) the MFSA qualitative municipal the scoring of the sample city on the basis of
finance assessment (MFA), which is a deriv- the MFA tables in “Step 5 Financial
ative of the Public Expenditure and Financial Management Assessment FMA” and the
Accountability (PEFA) Assessments, (2) the MFSA–MFA Analysis and Scoring (see table
MFSA ratio analysis, and (3) MFSA financial 3.64). In this case, however, the lowest score,
projections. All of these are assumed to be com- not the average, should be attached to the
pleted during the MFSA before the SASCR. financial reporting, disclosure, and transpar-
Therefore, the SASCR does not require new ency qualitative area to capture the weakest
data collection. link in the chain of creditworthiness factors.
SASCR analysis and scoring include the Users may use table E.1 as a template for their
following simple steps: (1) scoring the qual- own scoring.
itative results from the MFA; (2) scoring the
quantitative results from the ratio analysis; 3. Calculate the final score of the qualitative
(3) calculating the final score; (4) estab- assessment as a weighted average of the
lishing a shadow credit rating based on scores of the qualitative areas by applying
the final score and a rating table. It is also the following formula (using the acronyms
useful to summarize the results in a short identified in the first step for the four quali-
SASCR report. The steps of the SASCR are tative areas):
explained in this section by using again
the data of the sample city analyzed and MFA score = (0.4*IR + 0.2PB + 0.2FM +
explained in chapter 3. 0.2RDT)/4
The formula applies higher weight for
intergovernmental relations (IR), because that
Scoring Qualitative Results factor plays a particularly important role in
The SASCR analysis and scoring include the financial stability and eventually creditworthi-
following simple steps users are advised to ness of a city.
follow:
1. Read and score the municipal finance (qual- Scoring Quantitative
itative) assessment (MFA) line by line and
score each factor. Users who have filled out
Results
the MFA assessment can borrow the results, Scoring the quantitative results uses the
and then attach SASCR scores to the factors results of the ratio analysis (Step 3 of the
in each of the four qualitative areas: MFSA Analysis). The scoring scales are sum-
a. Intergovernmental relations (IR) marized in table E.2. Users just need to look
b. Planning, budgeting, and budget into the ratio analysis results and set the
implementation (PB) scores accordingly. One specific rule is to use
c. Financial management (FM) the score 2 (the lowest score) if there are no
d. Financial reporting, disclosure, and data, and no ratio established in a specific
transparency (RDT). line. The reason is that missing data represent
284 Better Cities, Better World
Table E.1 SASCR Scoring of Qualitative Areas and Factors from Sample City, 2013
Factor Factor
Scores Scores
Intergovernmental relations scoring Financial management (FM)
summary (IR)
Predictability of transfers C=3 Financial management framework B=4
Intergovernmental mandate arrangements B=4 Revenue management C=3
Debt regulations C=3 Expenditure management C=3
Own revenue self-confidence C=3 Cash and debt management B=4
Expenditure spending flexibility D=2 Oversite and internal control B=4
Average score 3.00 Average score 3.60
Planning, budgeting, and budget Financial reporting, disclosure, and
implementation (PB) transparency (RDT)
Strategic plan and CIP A=5 Financial reporting B=4
Budget planning A=5 External audit C=3
Scope of budget B=4 Financial disclosures C=3
Budget implementation B=4 Public procurement B=4
Average score 4.50 Lowest score! 3.00
Qualitative assessment final scores = 0.4*IR+0.2*PB+0.2*FM+0.2*RDT = 3.42
Note: CIP = capital investment plan; SASCR = self-assessed shadow credit rating.
Table E.2 Scoring Financial Ratios regardless of the fact that the city indeed
Creditworthiness (CW) 3.75 collects substantial own-source revenue.
Indebtedness (ID) 4.67 Without measurement, it remains unclear if
Fiscal autonomy (FA) 5.00 the collection could have substantial growth
Capital investment 4.50 potential or has exhausted capacities under
effort (CE) the current revenue management system.
Service sustainability (SS) 2.33 The ratio analysis measures six clusters of
Quality of operations(QO) 3.80 ratios: creditworthiness, indebtedness, fiscal
Financial ratios final score 4.06 autonomy, capital investment efforts, service
sustainability, and quality of operations. Each
of these measurements includes several spe-
risks, downscale financial health measure-
cific ratios that signal factors that influence
ment, and may reduce creditworthiness. The
financial health and creditworthiness. The
fact that a city has no data for an area that
scoring of the financial ratios includes the
is supposed to be measured and for which
following steps:
a financial ratio should be established is an
apparent risk factor and a shortcoming that 1. Calculate the average score for each factor by
may hide financial health issues. For instance, using a qualified weighted average of scores
the sample city does not have reliable fee for five years (Y1 through Y5) = (1*Y5+0.9*
databases and does not measure collection Y4+0.8*Y3+0.7*Y2+0.6*Y1)/4 to put higher
efficiency, which are financial health issues emphasis on more recent scores.
Self-Assessed Shadow Credit Rating 285
2. Score each ratio/factor from table 3.29 using creditworthiness of the city. It is also important,
the set scales presented in table E.3. however, to account the other measurements
because financial sustainability depends not only
3. Establish average scores for each measure-
on the direct creditworthiness ratios but also
ment area by calculating the arithmetic
on the sustainability of services, capital invest-
average of the factor scores. Table E.3 shows
ments, and quality of operations. For instance,
the results of the sample city and can be
many municipalities cut expenditures on repair
used as a template for summary of the scor-
and maintenance, which may improve operating
ing of ratio analyses.
savings and creditworthiness ratios in the short
term but will induce higher costs of operation
4. Calculate the final score for the financial
and future repair and may undermine creditwor-
ratios by applying the following formula:
thiness in the medium to long term. Likewise, a
high level of spending on administration and
0.25*CW+0.25*ID+
Final Score for Ratios =
labor indicates a substantial imbalance between
0.125*FA+0.125 CE +
the city’s main functions (that is, services and the
0.125*SS+0.125*QO =
bureaucracy). Therefore, the low scores on the
quality of operations have negative impacts on
0.25*3.75+0.25*
Ratios for Sample City:
financial health and eventually on creditwor-
4.67+0.125*5+0.
thiness. The results of the sample city show low
125*4.50+0.125*
scores in service sustainability and quality of
2.33+0.125*3.25=4.06
operation, moderate results in creditworthiness
The creditworthiness and the indebtedness and indebtedness, and higher scores in capital
measurement ratios are given double the weight investments and fiscal autonomy. The overall
of the other four measurements, because they result of the financial scores is 4.06 (tables E.2
strongly influence the financial health and the and E.3).
Table E.3 Scoring of Financial Ratios with Projections
Scoring 5, 4, 3, 2 Scores 5-year average
Creditworthiness 3.75
Operating savings before interests/ >30%, >15%, >0%, <0% 3 14%
Current revenue
Net operating surplus/Current revenue > 20%, >10%, >0%, <0% 4 12%
Investment balance before loan/Total > –15%, > –20%, > –25 %, > –30% 4 –17%
revenue
Financing gap after loan proceeds/Total >0%, > –3%, > –6%, < –6% 4 –4%
revenue
Indebtedness 4.7
Debt outstanding/operating surplus < 10y, <15y, <20y, <25y 5 4
(years)
continued next page
286 Better Cities, Better World
Table E.3 Continued
Scoring 5, 4, 3, 2 Scores 5-year average
Debt outstanding/Budget total <60%, <80%, <100%, <120% 5 39%
Debt service/Total current revenue <10%, <15%, <20%, <25% 5 4%
Operating margin/Interest payment (x) >15x, >10x, >5x, <5x 4 10
Borrowing/Current revenues <15%, <20%, <25%, <30% 4 17%
Debt outstanding/Total current revenue <100%, <120%, <140%, 160% 5 52%
Fiscal autonomy 5
Own (taxes + fees + unconditional >80%, >65%, >50%, <50% 5 0.94
grants)/Total Current revenue
Capital investment effort 4.5
Capital investment expenditure/Total >40%, >30%, >20%, <20% 5 50%
Current revenue
Capital investment expenditure/Total >30%, >2 5%, >20%, <20% 5 36%
Expenditure
Current margin/Capital investment >30%, >25%, >20%, <20% 3 26%
expenditure
Capital investments from earmarked <50%, <70%, <90%, >90% 5 1%
grants/Total investment expenditures
Service sustainability 2.3
Maintenance works expenditure/ >15 %, >10%, >5%, <5% 3 8%
Operating expenditures
Taxes collected/Taxes levied* >95 %, >80%, >70%, <70% 2
Fees Collected/Fees billed* >95 %, >80%, >70%, <70% 2
Quality of operations 3.8
Salaries & wages/Operating expendi- <40%, <50%, <60%, >60% 5 19%
tures
Number of municipal employees/1000 <25, <40,<60, <80, <100 5 22
citizens
Actual revenue/Planned revenue ± 5%, ±10%, ±15%, ±20% or 5 98%
more
Arrears due/net cash (end of the year). <100%, <1 20%, <140%, >140% 2 0%
Financial resources (cash + cash-like)/ >100%, >90%, >80%, <80% 2
Financial obligations (due liabilities +
arrears)*
Average of total financial ratio scores 4.06 n.a.
Average of total qualitative scores 3.42
Shadow credit rating score 3.23
Note: *The city has no data on these two ratios; thus, a score of “2” should be added. n.a. = not applicable.
Self-Assessed Shadow Credit Rating 287
Calculating the Total Score The other rating brackets have been estab-
and the SASCR lished in adjusting the total range. It is clear,
however, that any SASCR rating score below “b”
Calculating the final results of the SASCR should be considered low and should encour-
requires two steps: (1) calculating the total age plans for improvements. It also means that
score of qualitative and quantitative assess- a city with an SASCR rate in the “ccc” to “c”
ments and (2) applying a rating scale. range should focus on medium-term improve-
The total score of the SASCR is a simple ment plans to increase scores and strengthen
(arithmetic average) of the qualitative and financial health and creditworthiness; it
quantitative summary scores. The rating scale should not plan to spend money immediately
presented in table E.4 has been established for obtaining a pro forma external credit rating.
on the basis of international experiences and A good credit rating is beneficial, but a bad for-
taking into account all the caveats of self- mal credit rating would be counterproductive,
assessment mentioned before. We repeat that a waste of money, or even harmful if published
this is just one possible rating approach and or leaked.
there might be many similar or different, but Should your SASCR scores conclude with
still adequate, rating options. a “d” rating, it is recommended that you con-
The possible range of scores is between 5 sider that the SASCR is incomplete because
and 2. The 5 has been retained as a single score of a severe shortage of data and information
for the “aaa” rate, which is extremely diffi- entered. Rather than naming the results as an
cult if not impossible for a city to reach. The SASCR at all, it is better to repeat the entire
SASCR discourages scoring too liberally and SASCR exercise right away or in the next fis-
presenting ratings to please city management cal year. Even in such a situation, however, the
and politicians. An “aaa” rating in the SASCR MFSA results, the SASCR results of the qual-
would not be a fair or accurate reflection of itative assessments, and especially the weak-
the financial health of a city in the develop- nesses explored may convey useful messages
ing world and would presumably be above the and valuable issues to be discussed, first in the
national sovereign rating, which rating agen- finance department and then shared with the
cies consider as an upper limit for subnational higher-level administration of your city.
entities. A rating of “b” or better would signal On the basis of the financial projections, the
good financial health and that the city could financial ratios can be calculated for five years
consider commencing a pro forma external ahead to show the medium-term outlook of a
credit rating. city (table E.5).
The sample city’s financial projections show
remarkable but still moderate improvements in
Table E.4 Shadow Credit Rating Scores financial ratios (table 3.42) The financial ratios,
aaa 5
however, are projected to remain in the range
of the historical results, and do not support
a ≥4.5
increase of the financial scores of the SASCR.
bbb ≥4.0
The medium-term forecasts summarized in
b ≥3.5
table E.5 show that the sample city is likely to
ccc ≥3.0
remain in the “b” rating level during the pro-
c ≥2.5
jected five-year time period (See summary in
d ≥2.0
table E.6). It may improve, however, provided
288 Better Cities, Better World
Table E.5 Scoring Financial Ratios with Medium-Term Projections
Scores based on
5-year weighted Past Future
Ratio scoring Scoring 5, 4, 3, 2 averages average average
Creditworthiness 3.75 4.25 5 year 5 year
89 Operating savings >30%, >15%, >0%, <0% 3 4 14% 15%
before interests/
Current revenue
90 Net operating surplus/ >20%, >10%, >0%, <0% 4 3 12% 6%
Current revenue
91 Investment balance > –15%, > –20%, > –25%, 4 5 –17% –8%
before loan/Total > –30%
revenue
92 Financing gap after loan >0%, > –3%, > –6%, < –6% 4 5 –4% 18%
proceeds/Total revenue
4.7 4.7
Indebtedness
93 Debt outstanding/ <10y, <15y, <20y, <25y 5 5 4 4
operating surplus
(years).
94 Debt outstanding/ <60%, <80%, <100%, <120% 5 5 39% 59%
Budget total
95 Debt service/Total <10%, <15%, <20%, <25% 5 5 4% 9%
current revenue
96 Operating margin/ >15x, >10x, >5x, <5x 4 3 10 6
Interest payment (x)
97 Borrowing/Current <15%, <20%, <25%, <30% 4 5 17% 7%
revenues
98 Debt outstanding/ Total <100%, <120%, <140%, 5 5 52% 62%
current revenue 160%
5 5
Fiscal autonomy
99 Own (taxes + fees + >80%, >65%, >50%, <50% 5 5 0.94 0.99
unconditional grants)/
Total Current revenue
4.5 3.5
Capital investment
effort
100 Capital investment >40%, >30%, >20%, <20% 5 2 50% 16%
expenditure/ Total
Current revenue
101 Capital investment >30%, >25%, >20%, <20% 5 2 36% 14%
expenditure/ Total
Expenditure
102 Current margin/Capital >30%, >25%, >20%, <20% 3 5 26% 92%
investment expenditure
continued next page
Self-Assessed Shadow Credit Rating 289
Table E.5 Continued
Scores based on
5-year weighted Past Future
Ratio scoring Scoring 5, 4, 3, 2 averages average average
103 Capital investments <50%, <70%, <90%, >90% 5 5 1% 5%
from earmarked grants/
Total investment
expenditures
2.3 2.3
Service sustainability
104 Maintenance works >15%, >10%, >5%, <5% 3 3 8% 8%
expenditure/Operating
expenditures
105 Taxes collected/Taxes >95%, >80%, >70%, <70% 2 2 69%
levied
106 Fees collected/Fees >95%, >80%, >70%, <70% 2 2 69%
billed
Quality of operations 3.8 3.6
107 Salaries & wages/ <40%, <50%, < 60%, >60% 5 5 19% 18%
Operating expenditures
108 Number of municipal >25, >40, >60, >80, >100 5 5 22 24
employees/1,000 citizens
109 Actual revenue/Planned ±5%, ±10%, ±15%, ±20% or 5 4 98% 109%
revenue more
110 Arrears due/Net cash <100%, <120%, <140%, 2 2 0% 0%
(end of the year). >140%
111 Financial resources >100%, >90%, >80%, <80% 2 2
(cash + cash-like)/
Financial obligations
(due liabilities + arrears)
Average of total financial 4.06 4.03 n.a. n.a.
ratio scores
Note: n.a. = not applicable.
that it successfully completes the actions listed and several SASCR factors. For instance, the
in the action plan and accounted in the finan- planned establishment of reliable tax and fee
cial projections. A revision of the action plan databases would improve service sustainabil-
and inclusion of measures particularly import- ity, increase revenues, and elevate the scores
ant for improving the results of the quantita- on service sustainability factors. Some of these
tive ratios are well justified and would further results are accounted for in the medium-term
improve the SASCR results in the medium future scores.
term. In sum, the medium-term outlook of the
The optimistic scenario of the financial pro- sample city is stable and shows improve-
jections plan indicates additional measures ments in both the qualitative and quantita-
that could improve revenues, creditworthiness, tive scores. Data in the city profile further
290 Better Cities, Better World
Table E.6 Financial Management Scoring Summary
Scores 5 years
Scores past 5 years ahead
Scoring items average average
Intergovernmental relations 3.00 3.20
Planning, budgeting, and budget implementation 4.50 4.50
Financial management 3.60 4.00
Financial reporting and disclosure 3.00 4.00
Qualitative scores total 3.42 3.78
Creditworthiness 3.75 4.25
Indebtedness 4.67 4.67
Fiscal autonomy 5.00 5.00
Capital investment effort 4.50 3.50
Service sustainability 2.33 2.33
Quality of operations 3.80 3.60
Financial ratios total 4.06 4.03
Shadow credit rating total scores 3.74 3.91
Shadow credit rating sample city b b
reconfirm a good medium-term outlook, improvements, which are the most signif-
because growth of key industries in the city icant results of this SASCR shadow credit
has been higher than national gross domes- rating.
tic product growth. Overall the projections Finally, it is worth mentioning that the sam-
suggest (table E.6) that the city may improve ple city, in this case, is a well-managed city in
credit scores from 3.74 to 3.91, reaching a Eastern Europe, and its results may not repre-
rating score of “bb” and moving closer to sent most cities in the developing world. Thus,
the “bbb” score that is ≥4.0. It is worth men- users in less-developed countries should not be
tioning that this credit score is not an over- surprised if the SASCR results of their own city
arching objective of the SASCR. Instead the fall below the “b” range. As said, identifying the
credit score just provides a sort of metric factors and inducing corrective measures are
to improve understanding of the underly- the most important results of a self-assessed
ing factors and the signals toward potential shadow credit rating.
Self-Assessed Shadow Credit Rating 291
Glossary
This glossary summarizes the terms used in the statements accurately reflect its true financial
MFSA modules. Many of these terms are used status because of misstatements found to be
in various contexts such as banking, financial pervasive.
material and
or capital markets, corporate finance, or gen-
eral
economics. This glossary, however, defines Aging list of debt: A detailed list of various
the terms only in the context of the municipal- debt instruments that reflects the date of debt
ities and MFSA modules without explaining procured, terms, and the amount of projected
the broader context or broader meaning of the payments of interest and principal based on the
terms. loan agreement or bond contracts till maturity
repayment). The payments of principal
(final
Accrual accounting: Accounting method that and interest for actual years may be somewhat
records revenues and expenses when they are different from projections because of subse-
incurred (that is, bill received), regardless of quent changes or delayed or early repayments.
when the corresponding cash is exchanged The list indicates the stock of outstanding debt
paid). Under this method, the
(that is, bill principals at a particular date, and the total
municipality accounts for expenses as bills debt service, as a sum of due or repaid princi-
are received and records revenues when taxes year). See
pal and/or interest at a given period (
or services are billed (see also cash-based maturity.
debt stock, debt service, debt
accounting, modified cash-based accounting,
modified accrual accounting). Amortization: Accounting for the depreci-
ation in value of fixed assets (due to usage or
Action plan: A list of specific time-bound obsolescence) as operational costs; also used to
actions aimed at improving the performance of refer to gradual repayment of debt (for exam-
a municipality. principal).
ple, amortization of loan
Adverse audit opinion: An auditor issues a Annuity: Repayment of debt in equal install-
disclaimer with adverse opinion if he or she has ments, that is, when the sum of principal and
no confidence that a municipality’s financial year).
interest is equal in each payment period (
Glossary 293
Appropriation: Assignment of money for capital revenues ought to be used for funding
spending on specific purposes or budget lines capital investments or debt service in order to
with authorization of respective entities (for maintain the net wealth of the municipality.
example, municipal departments) to spend the Asset sale revenues may be used to cover cost
ear. Appropriation
assigned money in a fiscal y situations.
of operations only in emergency
is the term for the expenditure section of the
annual budget (see budget). Asset transfers: Assets (whether fixed/phys-
ical or financial) transferred from the munici-
Area-based property tax: Tax based on pality to municipal entities or from the entities
measured area (for example, square meter or to the municipality (see subsidies and in-kind
square feet) of properties such as land or build- donations).
ings (see also property tax, value-based prop-
erty tax, market value–based property tax). Audit: An independent examination of the
financial statements, project studies, or finan-
Arrears: Overdue debts, liabilities, or cial projections from the perspective of com-
collectibles. The municipality’s overdue compliance.
pleteness, correctness, and/or
debts, fees, charges, or bills to suppliers, cred-
itors, taxes, or employees are arrears of the Audited financial reports: A status given to a
municipality. Arrears may refer to overdue
municipality’s financial reports once they are
collectibles, that is, arrears by citizens or legal audited, and accompanied by an audit letter
entities with respect to the municipality such with an audit statement issued by the auditor.
as overdue uncollected taxes, fees, charges, or The audit letter may include an audit state-
debts (see also liabilities, overdue liabilities, tax ment with an unqualified, qualified, or adverse
arrears). opinion.
Assets: All tangible and intangible properties Average rate of return (ARR): The ratio of
of a municipality including real property such investment.
average net earnings to average
as land, buildings, structures, equipment, cash,
or receivables; also includes intangibles such as Balanced budget: A municipal budget or final
on.
intellectual properties, rights of way, and so account where all revenues are equal to all
expenditures; more generally this refers to a
Asset-based financing: Borrowing in the form budget that has no deficit but may show a pos-
of loans or selling debt by securing it with ded- balance. Good planning principles require
itive
icated assets of a municipality (for example, a budget plan (planned budget) to be balanced;
fixed assets and revenue fl ows). It offers a debt in contrast an actual (closing) budget ought to
financing option when a municipality is not be balanced, too, but may show a positive or
otherwise creditworthy (see also land-based negative balance because of unforeseen move-
enhancements).
financing, credit ments in revenues and expenditures during the
fiscal year (see also overall balance, closing bal-
Asset proceeds: Revenues or gains obtained ance, and budget reality ratio).
from municipal assets, which include operat-
ing revenues like rents, charges, and levies on Balance sheet: A financial statement that sum-
natural resource exploitation. Also includes marizes the municipality’s assets and liabilities
capital revenues from divestiture of assets; year).
at a point in time (typically end of fiscal
294 Better Cities, Better World
Municipalities that follow accrual accounting annually or at maturity). The issuer receives
prepare balance sheets (some of which are lim- the principal amount from the buyers who
ited to financial assets and liabilities), income onds. Bond financing is an alter-
invest in the b
statements, and cash-flow statements. native to loans (that is, borrowing from banks
creditors). See also securities, general
or other
Bailout: Action by an owner or higher-level gov- obligation bonds, revenue bonds.
ernment entity to pay the obligations of a munic-
ipality or municipal entity in order to avoid Bond proceeds: The total amount of money
formal bankruptcy or disruption of services. collected by selling the bonds issued by a
municipality. As opposed to loan proceeds,
Base year: A selected specific year for compar- which may disburse over a period of years,
ison of results in a series of years, for example, bond proceeds are transferred to the municipal
period.
the first year of a five-year budget by selling the bonds over a short time
period, and they may be deposited into a spe-
Benchmark: A figure or ratio that serves as cial account from which the investment will
a reference point against which to measure be financed gradually in subsequent months or
financial or service performance on the basis years.
ratios.
of internationally accepted practices or
Bridge financing or bridge loan: Short-term
Betterment levies: Forms of taxes levied loan that provides interim financing before
on land or property that has gained value place.
long-term financing is put in
investments.
because of public infrastructure
Betterment levies are calculated on the basis Budget plan, or opening budget: A financial
of investment cost of a specific public infra- plan that serves as an estimate of future expen-
structure (for example, Tokyo metro-rail) and ditures and revenues adopted for one fiscal
allocated across beneficiaries according to year (see also revised budget, closing budget,
estimated impacts, albeit sometimes collected accounts).
and final
somewhat arbitrarily (see development fee).
Business license fee: A fee collected from busi-
Betterment tax: See betterment
levies. ness owners when a business license is granted
or renewed; it can be a small administrative fee
Billing efficiency: The ratio of number of tax- or a substantial charge collected annually. It is a
payers billed to the number of taxpayers in the tax).
form of tax if it is substantial (see business
tax net.
Business tax: A tax levied on business owner-
Block grants: Grants from higher government ship according to the size or value of the busi-
tiers with some general provisions, for exam- ness (as measured by net turnover or balance
ple, for development or for human services, but sheet), often levied under the designation of
without specific rules and limits attached to fee.”
“business license
ways and amounts of spending.
CAPEX: See capital
expenditure.
Bond: A security that represents the debt of
the issuing municipality and a commitment Capital appreciation: The increase in value of
to repay at a defined date (with interest paid financial).
an asset over time (land, building,
Glossary 295
Capital budget: List and sum total of revenues Capital investment costs: All costs required
generated and available for financing capital to make a project, asset, or service fully
expenditures, including net savings, asset sales,
operational. These may include acquisition
debts. The expenditure side
capital grants, and costs for land, building, or equipment; con-
of the capital budget includes costs of capital struction costs; and the costs of designing,
investments (acquisition of land or buildings, managing, and/or monitoring the construction
construction of buildings, structures, infra- cost).
(see capital
structure networks, and so on), capital grants
to municipal entities, and repayment of debt Capital investment plan: Capital improve-
principal (see also current budget, develop- ment plan.
ment budget, operating budget).
Capital market: Segment of the financial
Capital cost: The cost of financing construc- system; a market of tradeable debts, securi-
tion or equipment; the total one-off expenses of ties, and equities distinct from other segments
a project that may include cost of equipment, such as banking or private exchange of debts.
transactions.
land, labor, material, energy and
Capitalized interest: Accrued interest that is
Capital expenditure: Long-term expendi- not paid but is instead added to the principal
tures spent for acquiring or developing fixed amount of debt at the end of each interest pay-
assets such as land, buildings, plants, and ment period or by a specific action (see debt
equipment that have substantial value and rollover).
whose benefits will last over a period of more
than one year (antonym: current or operating Capital subsidies: Financial support to pre-
expenditures). ferred entities often earmarked to specific
investment projects without repayment
Capital gains tax: Tax levied on the basis
obligation. Capital subsidies reduce the cost
of the value gained on capital or properties of services because the beneficiaries need
between acquisition and divestiture, assumed only cover the cost of operation to remain
to be a result of improvements to nearby public financially sustainable and are therefore able
period.
infrastructure during this to keep the service charges low; thus the end
users/customers are the final beneficiaries
Capital Improvement Plan: A medium-term of the capital subsidies. Municipalities often
(three-to-five-year) plan or program that provide capital subsidies by fully financing
incorporates capital investment priority proj- and managing the construction of (expansion
ects and implementation timing; it identifies of ) local service infrastructure and handing it
funding sources, including the municipal bud- over to public utility companies as an in-kind
get, specific grants or donations from public or asset transfer.
private donors, and equity transfers from third
parties (public utility companies, private inves- Carryovers: Appropriations, encumbrances,
tor partners). or unspent grants and capital funds carried
over from the current to the next fiscal year in
Capital investment: The amount invested to final accounts and budget plans at the end of
assets.
develop or acquire fixed year.
one fiscal
296 Better Cities, Better World
Cash balance: The stock of cash the munic- accounts affect cash and cash-equivalents in
ipality owns that is accessible in various bank the fields of operating, investing, and financing
accounts at a point of time; or the difference activities.
between the total cash inflows and outflows
during a certain time period (such as a month Cash-like securities: Bank accounts, market-
year).
or a able securities, commercial papers, treasury
bills, and short-term government bonds with
Cash-based accounting: A method of record- maturities of three months or less that can be
ing accounting transactions for revenues and them.
easily transformed into cash by selling
expenses only when the corresponding cash is
received or payments are made. A bill a munic- Cash transfers received from municipal
ipality has received but not yet paid is not enterprises: Although municipal enterprises
accounted for in the budget or financial state- (MEs) or public utility companies (PUCs) are
ments; likewise, taxes or fees levied but not yet legally independent entities, the municipality
collected are not recorded. The vast majority as sole owner of MEs or PUCs may request and
of municipalities follow some version of cash- receive cash transfers from MEs or PUCs to
based accounting (see also accrual accounting, fill a liquidity gap
temporarily. Such cases may
modified cash-based accounting, or modified occur as formal loans or transfers from enter-
accrual accounting). prise fund to general fund of the municipal-
ity, or may be obscured when the MEs/PUCs
Cash flow: Incoming and outgoing cash during simply pay invoices for an event or services on
a fiscal year or project cycle that eventually behalf of the municipality.
shows the difference between cash available at
the beginning of a period and cash available at CIP: Capital improvement plan or capital
flow).
the end (see revenue investment plan.
Cash flow analysis: A procedure to segregate City unemployed population: People who
from various financial statements of a munic- are registered citizens of a city’s jurisdiction
ipality the items that induce and represent and registered as unemployed on the basis of
cash in- or outflows and to include these in a national employment registration systems
dedicated cash flow statement. For instance, and statistics, measured and published by the
collection of taxes or payments for energy, entity.
bureau of statistics or similar national
machinery, or salaries are cash flow items;
but amortization costs of assets do not repre- City unemployment rate: The ratio of regis-
sent cash outflow and therefore would not be tered unemployed citizens to the city’s active
part of the cash flow statements (see cash flow population based on the national population
statement, cash-based accounting, balance and employment registration system and sta-
sheet, income statement). tistics, measured and published by the bureau
entity.
of statistics or similar national
Cash flow statement: A financial statement
that summarizes financial transactions that Closing budget: A municipal budget that
involved cash movement and thus shows reflects the actual volume of revenues and
how changes in the balance sheet and income expenditures as of the end of the fiscal year;
Glossary 297
this is why it is also known as an “actual budget: Community development facility (CDF):
accounts).
(see also actual budget, final A modality of betterment levies when cities
issue special levies based on land (size not
Co-financing: Joint financing by different value), not linked to specific development,
entities such as municipalities, other govern- and levied outside the property tax; cities in
sector.
ment entities, and/or the private California often issue bonds backed by CDFs
levies).
(see betterment
COFOG (classification of functions of gov-
ernments): A widely accepted and used list Comparison ratios: Ratios that compare
with definitions of expenditures by function; municipal performance to the national average,
adopted by the Organisation for Economic to international averages, or to other munic-
Co-operation and Development (OECD) and ipalities, comparing measures such as per
Nations.
also published by the United capita revenues, per capita expenditures, per
investments.
capita debts, or per capita
Collateral: An asset pledged as security to sup-
port a loan and secure creditors’
recovery. Compound interest: Interest calculated on
the initial principal plus on the accumulated
Commercial bank: A common bank that col- interest of previous periods of a deposit or loan.
lects deposits and lends money that pays inter-
est to a wide range of customers such as private Concession: Right (of service or development)
persons or entities (antonyms: specialized granted by a central or local government to a
banks, investment banks). private entity for a period of time in exchange
for a one-time or annual payment of conces-
Commercial risk, or business risk: Risk sion fee.
born from uncertain and unpredictable mar-
ket events during financing, construction, Conditional grants: Grants provided to local
or operation of assets or while performing governments with specific conditions on
services. attached.
obtaining or spending
Commission: A fee paid to an agent that Contingent liability: A liability that is uncer-
performs some management functions; the tain either in amount or in timing until it occurs
commission is based on a percentage of the or crystallizes (for example, the guarantee the
collected revenues (for example, taxes, fees) or municipality issued to support its public util-
price.
the sales ity company in repaying a l oan). It becomes a
direct financial liability if the company defaults
Communal tax: Tax levied to cover the cost of and the municipality must step in and pay the
communal services, often based on or attached interest or the unpaid principal. Thus, the
to some characteristic (for example, size, value) value of this contingent liability decreases over
bills.
of the properties, or electricity time as the company repays the installments of
the loan principal and interests.
Community benefit agreements are volun-
tary contracts between developers and the Corporatized utility: A utility company
zone.
community in a defined owned by a municipality but structured and
298 Better Cities, Better World
operating like a private or public corporate Credit rating agency: A company that analyzes
status.
entity with independent legal creditworthiness and assigns credit ratings,
which rate a debtor’s ability to pay back debt by
Cost-benefit analysis, benefit-cost analysis, making timely interest payments and the esti-
or cost-effectiveness analysis: An analyt- mated likelihood of default. The most notable
ical technique to support policy/business rating agencies include Moody’s, Standard &
decisions by comparing the total financial agency).
Poor’s, and Fitch Ratings (see rating
and nonfinancial costs and total financial and
nonfinancial benefits of proposed programs Credit risk: A risk that a counterpart in a
or policy actions based on the estimated financial transaction (debtor) fails to perform
net present value of alternatives (see also according to the terms and agreed conditions
net present value, NPV, and internal rate of risk).
(also known as default
return).
Creditworthiness: An entity’s current and
Cost of capital: The rate of return that could future ability and inclination to honor debt
have been earned by putting the same money obligations as agreed upon. It is usually mea-
into a different investment with equal r isk. The sured according to the credit history, credit rat-
yields of long-term bonds are often used as a entity.
ing, and character of the
reference rate to reflect the cost of capital, but
a company or a municipality may use a higher Creditworthiness ratio: A municipality’s
rate if it is relevant on the basis of the assumed creditworthiness is measured as a ratio of
risks (see hurdle rate). operating savings to current actual revenues,
but also using the debt service coverage ratio;
Cost of debt: The total cost of interest until it reflects the municipality’s capacity to borrow
maturity/repayment plus the cost of financial or service debts.
debt.
structuring required to obtain the
Current assets: Cash, cash-like securities, and
Cost of financing: The cost of
debt. other financial assets (for example, receivables,
uncollected fees, taxes, and so on) that are
Coupon: The interest amount or annual rate of expected to be converted to cash within a year.
a bond attached physically or electronically to
a bond
certificate. Current budget: Budget that includes recur-
rent revenues (operating revenues and financial
CPI (consumer price index): An index that gains) and recurrent expenditures (labor, goods
measures changes in the level of prices of and services, administrative costs, and interest
goods; it is calculated and published by the year. The
and financial costs paid) in a fiscal
bureau of statistics using a selected list of prod- term current budget is also used to refer to the
ucts (consumer basket). budget of the current year that includes both
lan).
operating and capital budgets (see budget p
Creditor: Person or entity providing debt for
a project or another entity (municipality) on Current expenditures, or recurrent expendi-
purpose or in form of issuers of unpaid bills/ tures: Expenditures on goods and services con-
claims (see lenders, forced creditor). sumed within the current year, which need to be
Glossary 299
made recurrently to sustain administrative func- Debt rescheduling: Modifying the tenor/
tions and deliver services; in contrast, spend- maturity, interest rate, or other conditions of an
ing money for investments is a nonrecurrent existing debt agreement (see also loan rollover,
expenditure that can be postponed, reduced, or debt restructuring).
canceled if the finances appear to be insufficient
(see also capital
expenditures). Debt restructuring: An arrangement to
replace an existing debt with a new one, typ-
Current liabilities: Amounts due within ically one with longer maturity and/or that is
12 months to creditors, suppliers, contractors, of a different type (see also refinancing, debt
workers, or other government entities. rescheduling).
Current margin/balance: The difference Debt service: The total amount of interest
between the total current (or recurrent) reve- and principal payment, often measured and
nues and total current e xpenditures. Current accounted as one year or one installment (see
balance is also equal to the operating balance/ amortization).
also debt
margin minus nonoperating current expen-
ditures, such as interest payments, financing Debt service coverage ratio (DSCR): The
costs, or insurance premiums, because these ratio of cash available for debt servicing to
are due and paid regardless of operation (see interest, principal, and lease payments (the
current revenues, current expenditures, oper- service).
ratio of net operating income to debt
ating margin/balance).
Debt service reserve fund (DSRF): An
Current revenues, or recurrent revenues: amount set aside or accumulated to ensure
Revenues a municipality receives on a recur- future.
uninterrupted service of a debt in the
ring basis from higher government tiers and Lenders may require municipalities or munic-
from collection of own taxes, fees, and charges ipal entities to enhance loan security by
(see also operating revenues, nonrecurrent establishing a debt service reserve fund (for
revenues). example, set aside three installments of debt
service in a special account accessible by the
Debt: An obligation to pay cash to another lender).
entity under agreed terms and on an agreed
schedule (see also
liability). Debt stock (outstanding debt total): The
total value of the principal of various debt
Debt capacity: The total volume of debt a instruments a municipality owes at a point in
municipality can prudently acquire at a point time (for example, end or beginning of a fiscal
in time given the net current revenues or assets year); the stock includes the principal of short-
service.
available for debt and long-term loans a municipality borrowed
and the face value of bonds a municipality
Debt maturity: The time period in which the
issued/sold. The debt stock changes monthly/
debt is expected to be fully repaid (5 years, yearly because of repayment of principal in
10 years, and so on) based on the initial or installments, maturity (final payment) of some
actual (amended) debt agreements, terms, and debts, or procurement of new debts (see aging
conditions. debts).
list of
300 Better Cities, Better World
Debt-to-equity ratio, or D/E ratio: The pro- Developer exaction (or development fee):
sheet.
portion of debt to equities in a balance A charge cities collect from developers forcing
them to contribute development of trunk infra-
Default: Inability of a debtor municipality to structure, because the city issues building per-
service a debt’s interest or principal or both, mits only against these payments.
or failure to fulfill other agreed-upon legal
and contractual obligations (for example pay- Development agreements: A tool to capture
contractors). In some countries a default
ing land value via voluntary contracts negotiated
triggers formal declaration of default or bank- between cities and developers where develop-
ruptcy (Hungary, South Africa, and the United ers promise to make large up-front investments
States). In most of the developing world,
on infrastructure if the city commits not to
municipal defaults remain hidden, undeclared, change land use and zoning regulations during
and settled without formal rules; and overdue agreement.
the term of the
payment obligations keep accumulating (see
also overdue liabilities, arrears,
insolvency). Development bank: A lending agency that is
focused on financing development projects and
Default risk: The risk that reflects the like- assisting development by mobilizing financing
lihood that a borrower may default, that is, for development.
be unable or unwilling to serve the debt (see
credit risk). Development fee (or land development
fee): A tax collected from developers often
Deficit credit: An amount of money by which during the permitting procedure to enforce
the total sum of expenditures and/or liabilities contribution by the developer to the expan-
is greater than the available income and/or sion of respective infrastructure (for example,
budget).
revenues in a fiscal year (see balanced water and sanitation, roads, and so on). It can
Municipalities should not adopt a budget plan be charged as a percent of investment costs or
with deficit (except in extreme circumstances be somewhat arbitrarily negotiated. Revenues
such as financial restructuring), but the final from development fees should be accounted for
account or closing budget may end with deficit as development revenues and used for devel-
because of unforeseen changes during the fis- opment and not for covering costs of operation.
cal year or poor management of expenditures
or revenues. Development fund/municipal fund: Special-
ized financial intermediary that exclusively
Delegated functions: Local service functions supports municipalities or other local govern-
that the law assigns to higher government tiers, ments and entities and that, besides investment
but that are provided by local government as financing, often provides technical assistance
agent and financed by conditional funding in structuring financing and development
received from the higher government tier (see projects.
earmarked grants).
Direct liability: An obligation to pay an amount
Depreciation: Reduction of an asset’s value of money under agreed/contracted conditions,
over time; the corresponding amortization for for example, repayment of debt principal and
accounting, tax, or income
calculation. interest or payment of a bill against delivered
Glossary 301
products or services such as electricity bill or Earmarked grants: Grants provided to local
liability).
contractors’ bills (see also contingent governments with conditions that they can be
used only for a set specific purpose (for exam-
Disclaimer: A formal statement that the issuer ple, paying teachers’ salaries, building a hospi-
is not (legally) responsible for something; for tal ward, and so on) and with the exact amount
example, an auditor is not responsible legally set aside (unused amounts should be returned
for the reliability of the municipality’s finan- to the grantor). Earmarked grants are often
cial reports because of limited obtainable provided to fund delegated functions (see dele-
information (see also auditor, qualified audit, gated functions, conditional grants).
unqualified audit).
Earnings: Excess of revenue over all respec-
Disbursement: Payout (by a bank) of funds/ tive expenses for a given time (typically a year)
cash from the principal of an approved loan; venture.
in a project or
for example, a municipality may withdraw
million from a 10 million loan in the first year
4 Economic rate of return (ERR) (or eco-
of a project and 6 million in the second year. nomic internal rate of return [EIRR]): A
Or disbursement of funds from one to another project’s rate of return after combining the
government entity within the intergovernmen- direct financial returns and the monetized
system.
tal financial nonfinancial economic, environmental, and
social costs and benefits; the maximum rate
Dividends: Distribution of cash to hold-
at which the project’s net present value
ers of stock or equity ownership stake based
equals to zero (see also financial rate of
year.
on the financial results of a financial
return, FIR).
Municipalities may receive dividends from
public companies or joint ventures as cash
EIRR: Economic internal rate of
return.
transfers to the municipal
budget.
Donations: Gifts provided to municipalities Encumbrance: An accounting commitment
by natural or legal persons in the form of cash, that reserves appropriated funds for a future
services, or
assets. Financial donations should expenditure related to unperformed contracts
be accounted for as external revenues, because ervices. The total of all expendi-
for goods or s
they are obtained from entities outside the tures and encumbrances for a department or
intergovernmental finance system. agency in a fiscal year, or for a capital project,
may not exceed its total appropriation.
DSCR: Debt service coverage
ratio.
Equity: The total value of municipal proper-
DSRF: Debt service reserve fund. ties minus the current liabilities. In account-
ing terms equity is the difference between the
Due date: Date on which a payment of interest assets and liabilities on a municipality’s bal-
or principal, or a supplier bill, becomes payable. prepared).
ance sheet (if one is
Due diligence: A detailed and reasonable Equity-based financing: Sale of an owner-
review of a borrower’s overall position, man- ship interest to raise funds (see asset-based
abilities.
agement, and financial financing).
302 Better Cities, Better World
Escrow account: A special financial account External revenues: Revenues or funds a
for the temporary deposit of funds (inflow of municipality may incur from resources out-
money) before they are paid out according to side the fiscal intergovernmental finance
agreed conditions (deed). Lenders to munic- stream (transfers or own revenues). These
ipalities may demand an escrow account and can be loans, bond proceeds, or private
that the fee revenues of a project or tax rev- external donations and inflow of foreign
enues are directly deposited to this account investments.
from which the debt service is performed
monthly, after which only the excess amount Fiscal autonomy ratio: A ratio that reflects
is transferred to the regular accounts of the the sovereignty of a municipality in finan-
municipality. cial decisions on increasing revenues or
saving costs, measured as a ratio of own rev-
Expenditures on delegated functions: enues plus unconditional grants to current
Expenditures spent on functions that are revenues.
assigned to higher government tiers, but pro-
vision is delegated to the municipality (such Fiscal year (FY): A 12-month period desig-
as primary education, primary health, or nated as the operating year for accounting and
social protection). Delegated expenditures budgeting purposes in a country. A fiscal year
are typically financed from earmarked grants can start on different dates, such as January 1,
provided by the higher government with spe- March 20, or July 1, depending upon the
cific amounts and rules governing spending. country.
Municipalities are allowed (or sometimes
forced) to co-finance the delegated functions Final account: Financial statement (budget
from their general revenues (like add a new report) prepared to summarize the actual rev-
classroom to a school or top up labor, elec- enues and actual expenditures at the end of a
tricity, or water expenditures, and so on if fiscal year (see also closing budget or actual
the earmarked grants received appear to be budget).
insufficient).
Financial internal rate of return (FIRR): See
Explicit contingent liabilities: Liabilities that return.
internal rate of
are contingent upon the occurrence of some
events, stipulated by law, or committed explic- Financial management assessment (FMA):
itly in contracts with clear measurable timing Assessment of the factors and quality of the
and volume (which may also depend on the financial management system and perfor-
timing) that may become directly payable; also mance of a municipality using specific qual-
known as direct liability when some agreed itative indicators and s cores. It is a module
foreseen event occurs. A municipality’s guar- of the Municipal Finances Self-Assessment
antee issued/committed to support a debt of that includes assessment of intergovernmen-
a municipal entity (water company) is a com- tal relations; planning, budgeting, and budget
mon example that becomes directly payable if implementation; the financial management
the company fails to service a debt guaranteed framework and practices; and the financial
by the municipality (see implicit contingent reporting, disclosure, and transparency assess-
liability). ment (see also MFSA, MFA, PEFA).
Glossary 303
Financial projection: Medium-term projec- FIRR: Financial internal rate of
return.
tion of revenues, expenditures, or balances,
projected with statistical tools using histori- Fixed rate: An interest rate fixed for a defined
cal figures and trends, while also taking into maturity.
time period of a loan typically till
account specific assumptions or expected
future events that divert results from the his- Fixed rate loan: A loan with a fixed interest
torical trends. repayment.
rate for the life of the loan till
Financial ratios: Ratios calculated from the Floating interest rate: An interest rate that
financial reports of the municipality such as fluctuates during the loan term in accordance
creditworthiness ratios (ratio of operating sav- with an agreed-upon benchmark index and/
ings / current revenues, net savings / current or formula (for example, central bank rate or
revenues, cash in hand / liabilities); indebted- rates).
Treasury bill
ness ratios (ratio of outstanding debt / operat-
ing balance, debt service / current revenues); FMA (financial management assess-
and fiscal autonomy (own revenues plus ment): A module in the Municipal Finances
unconditional grants / current revenues). Self-Assessment.
Financial statements: Statements a munici- FMIS: Financial management information sys-
pality prepares to reflect and declare its finan- tem is a methodology and tools a municipality
cial position periodically and at the end of the uses to fulfill financial management functions.
fiscal year; they depend on the accounting sys- The FMIS term may be used to reflect that the
tem applied, but may include a balance sheet, various tools or functions (payroll, revenues,
income statement, and cash flow statement, or expenditures and so on) are not organized into
just a final account or closing budget (see also one integrated system. In short, all kinds of
balance sheet, income statement, cash flow information systems municipalities use can be
statement, final account). named as FMIS (see IFMIS, IFMS).
Financing gap before loan proceeds: The Forced creditors: Entities or persons who
amount of money required to cover the planned issued bills or other forms of claims and forced
development expenditures from loan proceeds by the municipality or its entity to become
or other forms of external financing; this gap is unwilling creditor by postponing due and
the difference between the amount of planned undisputed payments. (see creditors)
development expenditures and the available
financing from net savings, own capital reve- Foreign exchange rate (FX rate): A price at
nues, and cash reserves from previous years, which the currency of a country can be bought
and investment grants received. with or exchanged for the currency of another
country.
Financing requirement: The amount of
money required to cover the cost of planned Foreign exchange risk: A risk that the move-
capital expenditures after covering all cur- ment of the FX rate substantially affects a proj-
rent expenditures; financing sources include service.
ect’s costs, revenues, or debt
net margin, own capital revenues, investment
grants received, and loan
proceeds. Forex (FX): Foreign
exchange.
304 Better Cities, Better World
Full-fledged guarantee: A guarantee whereby Geographic information system (GIS): A
a guarantor commits to pay the full amount of computer system for capturing, storing, check-
principal and interest if the supported debtor ing, and displaying data related to positions on
defaults and the guarantee is called (see guar- urface. GIS is also used to display
the Earth’s s
antee called, partial risk guarantee, partial and identify properties in a municipal jurisdic-
credit guarantee). tion, municipal service networks, and struc-
tures for planning, development, or taxation
Fund: A sum of money set aside for a specific purposes.
purpose with specific rules regulated by law or
by the donor entity. For example, an education General obligation bonds: Bonds issued with
fund, road fund, social welfare fund in a munic- the obligation to repay from the general budget
ipality, or private trust fund to support disabled of the municipality; thus, they are backed by
students (see trust fund). the taxing and other revenue-collecting power
of the municipality without pledging any spe-
Fund accounting: An accounting system in cific project or revenue source for repayment
which the revenues and expenditures are (see also GO bonds and revenue bonds).
structured by specific activities or functions
into funds with special regulations and lim- GIS: Geographic information
system.
itations (health fund, education fund, road
fund, and general fund in a m
unicipality). Fund GO bonds: See general obligation
bonds.
accounting is a common practice by U.S. local
governments that supports accountability. Grants: Grants are transfers for which no
repayment is required; often used interchange-
Future value: The value of a specific invest- ably with the term “transfers,” and in this
ment after a specified period at a certain inter- broad sense all transfers from higher to local
est rate. governments are grants. In the narrower sense
grants are parts of the transfers from higher to
FX rate: See foreign exchange
rate. local governments that are provided in addi-
tion to shared taxes, which are considered
FX risk: See foreign exchange
risk. joint revenues or some as own revenues of the
local governments (see also transfers, condi-
General contractor: A contractor who takes tional grants, earmarked grants, unconditional
full responsibility for completion of a project grants).
with full management competency; he/she
remains the key contact of the municipality Gross (operating) margin: The difference
even if subcontracts are part of the construc- between recurrent revenues from operation
tion or procurement activities. and direct cost of operation (see also operating
margin).
General fund: In fund accounting, municipali-
ties use the general fund to cover expenditures Guarantee: Commitment to fulfill the obli-
of general administration or general functions, gations of a third party in the event of default
as opposed to special-purpose funds that are (a municipality may issue a guarantee to sup-
dedicated to special functions (for example, port a debt of a municipal company); it could
health or education fund). See fund accounting. be a full-fledged financial guarantee or a partial
Glossary 305
one with limited provisions either in time, liabilities are born from political, moral, or
amount, or instrument (for example, to support social obligations or from environmental
only).
interest payment
events. Examples include the municipality’s
obligation to support citizens after environ-
Guarantees called: Guarantees that become a mental disasters, flood, and fire; to support the
payment obligation of a municipality because poorest of the poor; or to build a bridge a win-
of the default of the supported project or ning politician had promised. Unlike explicit
entity. Guarantees remain contingent liabilities contingent liabilities, implicit contingent liabil-
until or unless they are called and crystallized, ities cannot be estimated in advance, and thus
because contracts assume that the debtor will they are not accounted in a balance sheet (see
serve the debt in a timely manner, but there is explicit contingent liabilities).
a risk of default in terms of timing and/or pay-
ment amount (see also full-fledged guarantee, Income statement: A report of a municipali-
partial risk guarantee, partial credit guarantee, ty’s revenues and expenditures and the result-
contingent liabilities). ing net income for a period such as a fiscal
year (see profit and loss account for municipal
Guarantor: A party that guarantees repayment companies).
covenants.
or performance of
Indebtedness ratios: Ratios that reflect the
Hurdle rate: Minimum acceptable rate of ability of a municipality to clear its debts from
return on an investment defined by an entity or operating surplus, such as outstanding debt/
an evaluator; often used to calculate net pres- operating balance, outstanding debt/total bud-
project.
ent value of a get, and debt service/current revenues.
Idiosyncratic credit risk assessment: Inflows: All kinds of revenues, incomes, or
Assessment of credit risks for an entity or financial proceeds that are accounted for in the
cluster of entities (such as municipalities) to budget of a municipality, such as taxes, fees,
explore specific risks and risk profiles uniquely charges, transfers from other government enti-
and particularly relevant to such entities (see ties, interests received, proceeds from sale or
rating).
credit risk, risk assessment, credit lease of assets, legal gains, loan proceeds, secu-
rity deposits, and so o n. In contrast, inflows do
IFMIS: Integrated financial management not include the value of fixed assets received as
information system is a methodology and inte- in-kind contributions from other government
grated software a municipality uses for fulfill- entities or donors (land, buildings, networks,
ing the financial management f unctions. (see structures, equipment) if those do not imply
FMS, IFMS). financial transactions. In-kind transfers affect
the balance sheet, but not the budget, cash
IFMS: Financial management information sys- flow, or income statements of municipalities
IFMIS.
tem; synonym of (see financial transfers, in-kind donations).
Implicit contingent liabilities: Liabilities that Inheritance tax: A tax levied on the property
are contingent upon the occurrence of some of a person who has died and that is due to be
events but are measurable neither by volume/ paid by the persons who inherit the property
timing. Implicit contingent
size nor in terms of or assets.
306 Better Cities, Better World
Initial budget plan: A budget plan adopted Interest: Cash amount paid by borrowers to
before or at the beginning of a fiscal year as lenders for the use of money, expressed in per-
a first official and approved budget of the centage terms.
respective year; it is binding and can only be
changed by formal approval of a revised bud- Interest rate: A percentage of the principal
get (see also revised budget, closing budget, rate.
amount expressed as an annual
final accounts).
Intergovernmental revenues: Funds/money/
In-kind donations: Donations of assets (land, transfers municipalities receive from federal,
structures, or buildings) to municipal entities, state, or other government entities in the form
including cases when a municipality finances of grants, shared taxes, reimbursements, or
from the budget expansion of service infra- payments instead of taxes.
structure (for example, water, road, or school
building) and transfers the constructed assets Intergovernmental system: A network and
to the entities (for example, public utility com- hierarchic system of governing entities (tiers)
panies, schools, and health centers) in the form at the national, provincial, regional, and local
of an asset transfer without repayment obliga- level.
tions (see also asset transfer, capital s
ubsidies).
A municipality may receive in-kind donations Intergovernmental finance system: A
from private or legal persons who may donate a system of financial arrangements across
building, land, park, sculpture, or vehicle. various tiers of government entities that
enables and supports ability at each level to
Insolvency: A situation when a municipality finance the mandated responsibilities and
(or other municipal entity) is unable to service services.
its debts or other liabilities (for example, it is
unable to pay contractors’ or suppliers’ bills on Internal rate of return (IRR): The interest
time). Solutions of insolvencies may include
rate at which the net present value of all the
legal procedures or grants from higher gov- cash flows (both positive and negative) from a
ernment (see also municipal bankruptcy, debt project or investment equals to z ero. Internal
restructuring, bailout, ad hoc grants). rate of return is used to evaluate the attractive-
ness of a project or investment or to compare
Insolvency status: A legal status of an entity various alternatives.
(for example, municipality or municipal
company) that is declared or recognized as Investment balance: The difference between
insolvent. Insolvency status aims to help the
the capital expenditures and the available
debtor in restructuring operations and debts in financing sources (net balance plus own cap-
order to stabilize finances and maintain opera- ital revenues, plus investment grants and
tions or services under controlled and agreed donations) without loan proceeds taken into
terms. account.
Intangible assets: Assets that have no tangi- Investment bank: Specialized bank that
ble forms, such as good will, patents, rights of mobilizes funding and financial services for
way, permissions, and ownership share/bond projects and investments (see also develop-
premiums. ment bank).
Glossary 307
Investment grants: Grants to local govern- Lenders: Persons or entities providing debt for
ment provided for capital investments with or a project or another entity (municipality). See
without specific conditions for use (see uncon- creditors.
grants).
ditional grants, conditional
Lending arrangement: A legal document that
IRR: Internal rate of
return. includes the terms and conditions for lending
and financing.
Joint venture: Jointly owned corporation and
arrangement between two or more parties for Lessee: User who obtains rights to use specific
joint operation of a company or other entity, assets for a set time and under agreed condi-
which shares the net income according to an tions and pays rentals or lease fees to the owner
agreed-upon formula which is often the own- (lessor).
ership shares.
Lessor: An owner of assets who hands over
Jurisdiction: A geographic area defined by law their use to a lessee for an agreed time period
within which the appointed administration or rrangement.
and under an agreed use and price a
elected local government is the ruling local
authority with administrative and legislative Liability: An obligation to pay an amount of
power (see intergovernmental systems, local money or perform a service under agreed or
administration). assumed conditions set by law or defined and
contracts.
agreed in
Labor cost: Wages or salaries paid to employ-
ees and contractual workers, plus the cost of Liabilities with respect to national gov-
other employee benefits and payroll taxes paid ernment entities: Liabilities a municipality/
municipality.
by the city is obliged to pay by law (for example, to
national social or health insurance author-
Land development fee: A fee local govern- ities) also known as statutory deductions,
ments charge developers in order to finance taxes due to national government, or fees
a portion of the services required for proper and charges against services received from
functioning of the planned development; the national government entities or state corpo-
fee is often regulated, published, and calcu- rations (for example, electricity bills to the
lated as a percentage of development cost, or supplier).
national electricity
set ad hoc by negotiations in some developing
countries. Lien: A legal security interest registered on an
cadasters.
asset in national
Land value capture (LVC): also known as
land-based financing, refers to a group of Life cycle: Time period and stages of an asset
instruments that are used to tap into the pri- from procurement/construction through
vate gains of land owners, developers, or the repair, maintenance, refurbishment during
general community that resulted in public disposal.
useful life, and then final
infrastructure development or in smart strate-
gic planning or zoning of a city (see betterment Life cycle asset management: A core process
contributions).
levies, development fees, of asset management whereby all management
308 Better Cities, Better World
decisions are evaluated and alternatives Loan repayment: The amount of principal
compared in the context of the entire life cycle; and interest due or repaid in a certain period
these include systematic scheduled mainte- of time like a fiscal year; repayment of princi-
nance as well as timely repair and refurbish- pal is often accounted for as a capital expen-
ment, which are performed in order to reduce diture, whereas interest costs are accounted
the total life cycle costs and maintain the for as current expenditures (see also debt
economic value of the
asset. service).
Life cycle costing: Accounting for the present Local administration: Single administrative
value of the costs of an asset—actual and pro- entity granted with ruling administrative pow-
cycle.
jected—for the entire life ers of self-government by appointment or by
popular votes.
Line-item budget: A budget or financial
statement where the individual financial lines Local currency: The official currency of a
are grouped by departments or cost centers c
ountry.
(see also program budgeting, performance
budgeting). Local fees and charges: Fees and charges
assigned to be levied, managed, and collected
Line of credit: A bank’s commitment to a by local governments, including licenses, per-
borrower to extend a series of credits up to mits, user charges for urban services, stamp
a specific maximum amount under agreed fees.
duties, and local development
terms and conditions; thus, the borrower can
withdraw portions of the credit as a unilateral Local service tax: A tax levied on some
action, without seeking permits or approval of self-employed professionals or persons who
the lender. hold jobs.
Liquidity: The ability to serve a debt or pay any Local taxes: Taxes assigned to be levied, man-
financial obligation due; beyond cash on hand, aged, and collected by local governments,
it may include the ability to exchange assets for which may delegate or contract out some of
cash or reschedule liabilities (see also current these functions (like collection). The most
assets, solvency). common local taxes include property tax, busi-
ness tax, hotel tax, local service tax, communal
Loan proceeds: The amount disbursed to a tax, or betterment levies.
municipality from a loan (under a loan agree-
ment) in a particular time period such as a Long-term debt: Debt (bank loan) with matu-
year. Development loans are often dis-
fiscal more.
rity of five years or
bursed gradually as the construction of assets
progresses; for example, a municipality may Maintenance: Routine or periodic repair and
withdraw 7 million from a 20 million loan in maintenance of assets in order to ensure sus-
year. In cash accounting the line item
the first tainable use until the end of its regular operat-
“Loans” should indicate the disbursed volume ing time period without changing the capacity
(proceeds) in a year rather than the contracted or quality of the asset; that is, without major
proceeds).
total principal of a loan (see bond refurbishment or replacement of main parts
Glossary 309
that would increase value or extend useful life In fact, most municipalities follow modified
R&M).
(see O&M, accrual accounting rather than full accrual
accounting (see also accrual accounting,
Maintenance cost: Operating costs spent for cash-based accounting, modified cash-based
routine maintenance of assets (as opposed accounting).
to major refurbishment or expansion, which
would constitute investment or development Modified cash-based accounting: See modi-
expenditures). fied accrual accounting, although there might
be minor differences in the detailed rules like
Maintenance expenditures: See maintenance accounting for large cash outflows for invested
cost. assets.
Management contract: When a munic- Mortgage: A pledge or assignment of security
ipality hands over assets and services to a of a particular property for payment of debt or
private company or other entity for full man- for performance of other obligations.
agement of operations following agreed per-
formance benchmarks and for a fee paid by the Municipal bankruptcy: A legal status of a
municipality. municipality, recognized in only a few coun-
tries, including Hungary, South Africa, and
Market risks: Risks emerging from market the United States (chapter 9 procedure);
factors and movements beyond the control of it aims to help the debtor in restructuring
the municipality or contractual parties that operations and debts in order to stabilize
revenues.
may impact costs, sales, or finances while maintaining operation or
services under controlled and agreed-upon
Market value: The price an asset or property terms (see insolvency, municipal insolvency,
could be sold for on the market by a willing debt restructuring).
seller to a willing buyer under free market
conditions. Municipal enterprises (MEs), or public
utility companies (PUCs): Legally indepen-
Maturity: The date or time period upon or by dent often incorporated entities owned fully or
due.
which full repayment of a debt becomes governments.
in majority by the local
Medium term: Generally denotes two to five Municipal financial improvement plan:
y
ears. A list of specific time-bound actions aimed
at improving the financial performance of a
MFSA: Municipal Finances Self-Assessment. plan).
municipality (see action
Modified accrual accounting: An accounting Municipal Finances Self-Assessment (MFSA):
method that is midway between and mixes cash A methodology and procedure to assess the finan-
and accrual principles. In modified accrual cial health of municipalities using a self-paced
accounting revenues are accounted for in the approach that includes six modules: historical
period when they are collected, but expendi- analysis, financial projections, ratio analysis,
tures are accounted for in the period the cor- financial management qualitative assessment,
received).
responding liability is incurred (bill action plan, and self-assessed shadow credit
310 Better Cities, Better World
rating (SASCR) with qualitative and quantitative sources of revenue or other municipal assets in
assessments. default.
the case of a
Municipal insolvency: A situation and/or sta- NPV: Net present
value.
tus when a municipality is unable to service
its debts or other financial liabilities such as O&M: Operation and
maintenance.
paying suppliers or contractors (see municipal
bankruptcy, insolvency). Off-balance sheet liabilities: Obligations that
do not need to be accounted for in municipal
Negative pledge: The borrower’s commitment budgets or balance sheets such as costs and
not to pledge any of its assets as security and/ financing.
revenues of a ring-fenced project
or not to incur further debts until the end of an
agreed-upon time period (usually maturity of a Off-budget entities: Legally independent
debt supported by this negative pledge). entities with management, operations, bal-
ance sheet, and finances fully separated from
Net income: Operating cash flow minus (over- the municipal budget, although often owned
depreciation).
head + fully or dominantly by the municipality; these
may include public utility companies as well
Net margin: Gross margin minus debt payment as sport, culture, or commercial entities under
expenditures, that is, current revenues minus municipal ownership. Municipalities often
operating expenditures minus debt payment. support their entities by means of cash trans-
fers or in-kind subsidies (see transfers to
Net operating surplus, or net margin: The transfers).
municipal entities, in-kind asset
amount of revenue net of operating expen-
ditures, debt service, and other recurrent Operation and maintenance (O&M) cost:
nonoperating expenses (legal fees, insurance The cost of operating an asset such as a plant or
premiums paid, cost of financial
structuring). service system and covering ongoing expenses
such as labor, energy, repairs, and routine
Net present value (NPV): The difference maintenance.
between the discounted cash inflows and out-
flows of a project at a set discount rate in a set O&M expenditures: Incurred costs for oper-
time period; a profitable project should show ystem.
ating an asset such as a plant or service s
positive NPV (see also hurdle rate, cost of This is also a name of an accounting line used
capital). to account such expenditures from all kinds of
assets.
Net saving: See net operating
surplus.
Operating budget: List and total sum of reve-
Net wealth, or net worth: A municipality’s nues gained from operations and expenditures
net wealth is estimated as the value of total (planned or spent) on operating and mainte-
liabilities.
assets minus total nance in a year (see also current budget, capital
budget).
Nonrecourse debt: A loan secured exclu-
sively by a project’s cash flow as pledged collat- Operating cash flow: A financial statement
eral; thus, the lender has no recourse to other that summarizes a project’s net cash revenues
Glossary 311
generated by a project’s operation (see also waste collection, public transport, construc-
cash inflow). assets.
tion, or repair of
Operating margin: The difference between Outstanding loan: Unpaid portion of a debt at
the current revenues and the operating expen- a point in time that may include accrued inter-
margin).
ditures (see also gross margin, net debt).
est (see also stock of
Operating risks: Risks related to market fac- Overall closing balance, or budget balance:
tors and management components of the proj- Difference between the total revenues (current
ect that have an impact on project’s output, and capital revenues, grants, savings from
profitability.
revenues, or previous years, and loan proceeds disbursed
in a year) and the total current and capital
Operating surplus: Operating revenues minus
expenditures. In budget plans the balance
operating expenditures (see also gross margin). should be zero or positive; in real life deficit
may occur because of unexpected changes in
Operating transfers: Transfers from higher revenues and/or expenditures (for example,
government tiers provided for general oper- increased energy prices, disasters, or misman-
ating expenditures, which may come with agement of revenues and/or expenditures).
or without conditions for spending (see also
unconditional grants or transfers, conditional Overdraft: Deficit on an account caused by
grants).
transfers, earmarked drawing more money than the account holds; it
is often based on an agreement between a bank
Operator: A person or entity that undertakes and a municipality.
the operation and maintenance of a plant, sys-
tem, or equipment for a fee or
salary. Overdraft agreement: Arrangement that
allows account holders (a municipality)
OPEX: Operating expenditures costs and to withdraw money up to a certain agreed
expenses incurred to cover municipal admin- amount that is beyond and above the zero
istration, ensure services, and maintain assets balance of its account, and thus to temporar-
(antonym: CAPEX). ily maintain a negative balance and obtain a
short-term loan.
Outflow: The amount of money spent/flow-
ing out of the municipal budget for all kinds Overdue: A term that means “behind sched-
of forms and all kinds of reasons—for exam- ule”; a bill, charge, tax, or other liability that
ple, costs of goods or services, purchase of remains unpaid beyond the legally defined
assets, fees, charges, penalties, taxes, grants, or regulated due date (for example, 45, 60, or
and donations or transfers to public utility 90 days after receiving a bill).
companies or other government tiers like city
districts or wards (see expenditures, inflow, Own expenditures: Expenditures spent to
transfers). cover administrative and service functions or
activities assigned to a municipality by law;
Outsourcing: Assigning services or operations these expenditures include operational and
to an external person or entity (usually pri- recurrent as well as development and capital
vate), such as simple janitorial services, solid investment expenditures (see also expenditure
312 Better Cities, Better World
assignment, delegated expenditures, ear- budget execution performance (see also
marked expenditures). program budgeting).
Own tax revenues: Tax revenues levied and Performance ratios: Financial or other ratios
collected by local governments or third par- that reflect the performance of a municipality
ties under collection agreements (signed with such as the service sustainability ratio (ratio of
national entities or even private collectors); capital investments to current expenditures;
the shared taxes can be considered as own rev- ratio of maintenance expenditures to oper-
enues if the shared amount is returned to the ating expenditures), labor efficiency (ratio of
source jurisdiction according to the collection; salaries to total operating expenditures; ratio
in contrast, the shared tax is a grant if any allo- of number of municipal employees to popula-
cation formula is used. tion), budget reliability (ratio of the actual to
planned revenues or expenditures), collection
Partnership: An arrangement when two or efficiency (ratio of billed to collected taxes/
more parties agree to jointly undertake pro- fees; ratio of arrears [uncollected taxes, fees] to
duction or services through joint investment total budget).
financing and sharing of both risks and net
revenues. Political risk: Risk emerging from political
disturbances such as war, terrorism, currency
Payback period: A period (in years) during inconvertibility, expropriation, nongovern-
recovers.
which a loan or initial investment mental activities, and so on (see also country
risk).
Payroll expenditures: Salaries and wages,
employment benefits, and taxes (see labor Present value: The present value of a future
expenditures). payment or income calculated by discounting
the projected amount with a set discount rate
PEFA: Public Expenditure and Financial rate).
(cost of capital or hurdle
Accountability Assessment.
Principal, or loan principal: The original
PEFA guidelines: Guidelines for commenc- total amount loaned, upon which interest pay-
ing and completing PEFA, issued by the PEFA ccrues.
ments are based and on which interest a
Secretariat. A principal may refer to the total amount
loan.
remaining on a
PEFA Secretariat: A multidonor agency
supported by the European Commission, Principal repayment: The amount of money
International Monetary Fund, World Bank, the borrower repays to amortize the principal
and several bilateral agencies; it issues guide- amount.
lines for commencing and implementing
PEFA. Priority Investment Program (PIP): Detailed
explanation of priority investment plans or
Performance-based budgeting: A budget- projects with supporting arguments, data, and
ing practice that links the inputs and outputs figures published in the form of a small book
of municipal entities or services to set per- or brochure. Some municipalities may adopt
formance indicators in order to help measure such a PIP formally and publish it after public
Glossary 313
scrutiny; others draft and name the program as PPP: Public–private partnership.
a PIP without formal approval or p ublication.
Latter PIPs could be as simple as a very short Project: A package of actions required to
list of projects drafted without a detailed selec- expand municipal assets or services or refur-
tion process and approval (see CIP). bish assets, including planning, designing,
assets.
financing, constructing, or procuring
Priority maintenance program: A list of
major maintenance actions planned in the Project financing: A financing arrangement
medium term, with or without detailed analy- where the repayment of the debt/loan is
explanation.
sis and secured primarily by the project’s cash flow
and the project’s assets, rights, and interests
Proceeds from domestic loans and bonds: (see also recourse financing, nonrecourse
Inflow of cash or cash equivalents to the city financing).
budget as a form of earning or income from dis-
bursing portions of a domestic loan or selling Property tax: A tax levied on the basis of
bonds. immovable properties (houses, land) to cover
general expenditures of the local government;
Proceeds from foreign borrowing: Inflow the base on which the tax is calculated can be
of cash or cash equivalents to the city budget the market value, rental value, or area of the
as a form of earning or income from disburs- rate.
property, or an estimated flat
ing portions of foreign loan or selling bonds
abroad. Proceeds from foreign loans borrowed Property transfer tax: See
TTIP.
by national government and on-lent to local
governments are domestic loans if the national Public Expenditure and Financial
government/treasury takes up the foreign Accountability Assessment (PEFA):
exchange risk. Methodology to assess the quality of the pub-
lic financial management framework and
Proceeds from sale of assets: Revenues, practices of a country or a municipality (see
income, or all kinds of money inflow to the also PEFA, financial management assessment,
budget in exchange for sale or lease of assets FMA, PEFA guidelines).
(for example, selling land; leasing out office
spaces; selling vehicles, plants, or
equipment). Public–private partnership (PPP): An
arrangement whereby public entities (munic-
Procurement: A process by which a munic- ipalities) engage in partnership with private
ipality procures assets, debt, or inventories; it entities to develop and/or operate assets, aiming
could be an adopted principle and procedure to pass through the corresponding commercial
aiming to obtain the best available quality at and management risks to the private partner
cost.
the least in exchange for a fee or shared income. In con-
trast, outsourcing such as hiring a firm to supply
Program budgeting: Budgeting practices material, to refurbish an office building, or to
where the financial items are grouped first by repair a truck is not a PPP (see also outsourcing).
program and then by subject with or without
performance measurements (see also perfor- Public utility companies (PUCs), or munic-
mance budgeting, line-item
budgeting). ipal enterprises (MEs): Legally independent,
314 Better Cities, Better World
often incorporated entities owned fully or in insurance companies or municipalities them-
governments.
majority by local selves to measure municipal performance.
They can be clustered into stock, flow, or com-
Qualified audit opinion: The auditor issues a parison ratios, or financial, performance, or
disclaimer with qualified opinion if the munic- comparison ratios.
ipality provided a limited scope of informa-
tion and/or deviated from generally accepted Real estate tax: See property
tax.
accounting principles.
Reallocation of appropriation: Transfer
Qualitative scores: The scoring of the of unencumbered appropriations from one
qualitative assessment of the financial and municipal entity, budget line, or fund to another
accountability framework and practices of a fund.
entity, budget line, or
municipality in the self-assessed shadow credit
rating (SASCR), based on the current situation Recourse: Financing arrangement when the
and projected improvements five years out (see lender has power to access cash or securities
also SASCR, PEFA, quantitative scores). from other sponsors in case the project in ques-
tion does not generate sufficient revenues to
Quantitative scores: The scoring of the finan- debt.
service the
cial and performance abilities of a municipal-
ity based on weighted averages of the relevant Refinancing: Repaying existing debt with
ratios, using aggregated data from the past five a new loan to obtain better terms, lengthen
years as well as five-year financial projections maturity, or capitalize overdue accrued
of future ratios, calculated in line with rating interests (see also debt rollover and debt
agencies’ practices; quantitative scores are rescheduling).
established from ratios on creditworthiness,
indebtedness, fiscal autonomy, capital invest- Rental value: One possible value base upon
ment efforts, service sustainability, and qual- which to levy property taxes; calculated using
ity of operations (see also SASCR, qualitative market evidence that indicates the amount of
scores). money a willing renter/lessee would pay for
renting/leasing the property to a willing lessor/
Rating agency: See credit rating
agency. owner under free market conditions.
Ratio analysis: A procedure to calculate ratios Reserve account: A special account to hold
from the municipal financial or other reports cash or letters of credit to secure uninterrupted
and analyze the status or financial health of a debt service in support of a loan/debt.
municipality by comparing the ratios to gener-
ally accepted benchmark r atios. Ratio analysis Repair and maintenance (R&M): The
is a powerful tool to interpret and analyze the costs or expenditures planned or spent for
status of a municipality in a quick and simple repairing or maintaining an asset (such
format (see also ratios, financial ratios, perfor- as plant, service system, school building).
mance ratios, comparison ratios, credit rating). R&M is part of operation and maintenance,
but excludes expenditures spent for opera-
Ratios: The generally accepted ratios are used tion such as labor, energy, water and sanita-
by rating agencies, financial institutions, and on.
tion and so
Glossary 315
Revenues: Municipal revenues include trans- it can be done at any time of the fiscal year in
fers from higher levels of government (federal, response to substantial unforeseen changes
state, or provincial); own-source revenues in planned revenues or expenditures (see also
from taxes, service fees, and charges, and asset plan).
budget plan, initial budget
proceeds; and external funds like loans (see
also current revenues, capital revenues, exter- Ring-fenced project financing: Financing
nal revenues). arrangement whereby a municipal project
is separated from the general assets of the
Revenue bonds: Municipal bonds issued with municipality and financed as a closed inde-
repayment commitment from revenues of a pendent entity, regardless of whether it is
specific (revenue generating) project or service a legally independent company or just a
and without backing repayment from the gen- unicipality.
selected regular asset of the m
eral budget of the municipality—that is, with- Ring-fenced project financing carves out
out general obligation (see also ring-fenced both the respective assets, revenues, and
bonds).
project financing, GO the finances from the municipal budget for
risk management purposes and provides
Revenue expenditures, or operating and higher security for the creditors, which
maintenance expenditures: Expenditures in turn lowers the interest rate for the
incurred on fixed assets that are aimed at municipality.
maintaining (rather than enhancing) the use-
ful life or earning capacity; but also, this is an Risk premium: An additional (higher) amount
amount that is spent for an expense that will of interest rate that lenders or investors require
be matched immediately with the revenues from municipalities because of identified or
reported on the current period’s income state- assumed risks above and beyond the generally
ment of the assets such as costs of repair, main- assumed market risks; the main incremental
tenance, repainting, or renewal expenses. This risks assumed could include political, regula-
term is used to make distinction between cap- tory, or
financial.
ital and revenue expenses incurred on assets,
and to classify and account repair and mainte- Royalty: A share of revenue or fee paid to the
nance expenses as revenue expenses (see also central and/or local government by a conces-
repair and maintenance, R&M, operation and sionaire under a concession or license agree-
maintenance, O&M expenditures). ment on mining, service provision, land use,
and so on (see concession).
Revenue-generating projects: Investment
projects whereby municipalities may invest in SASCR: Self-assessed shadow credit
rating.
commercial activities that are beyond munic-
ipal mandated services or functions; they do Secondary market: A market of bonds or
these projects purely in order to generate reve- other securities traded among investors after
nue for the budget (albeit they may incur losses issuer.
the initial sale of the security by the
revenues).
instead of
Secured creditor: A creditor who has a
Revised budget, or amended budget: A bud- secured debt, meaning a debt backed by a
get plan that has been revised and approved pledge of assets or cash that is secured by the
by the council, typically at mid-fiscal year, but party.
debtor or a third
316 Better Cities, Better World
Secured debt: Debt secured by assets or spe- Social assistance expenditures: Money spent
cific rights that are unconditionally acces- on providing financial or in-kind assistance to
sible to the lender in the event of debtor’s defined disadvantaged groups of citizens in
default. the municipal jurisdiction. Social assistance is
often a delegated service where the municipal-
Securities: Tradable financial papers (bonds, ity acts as an agent of the higher government
stocks, bank notes, debentures) that repre- and finances these expenditures from ear-
sent asset ownership without possession marked grants.
and are freely tradeable (see bonds, stocks,
shares). Solvency, or liquidity: Debtor’s ability to pay
the debt or installment on time; also measured
Self-assessed shadow credit rating as liquidity of assets that can be sold for paying
(SASCR): A methodology and procedure for due debts or liabilities.
municipalities to complete a shadow credit
rating in a self-paced manner; it combines Stamp duty: A tax paid to validate a legal doc-
scoring of a qualitative assessment based on ument (historically in the form of buying and
PEFA indicators and quantitative scoring sticking to the document a duty stamp), such as
based on historical and projected financial and a land transaction contract or land registry form.
performance ratios following the rating agen- The amount of stamp duty aims to cover the
cies’ practices. cost of administration; however, in many coun-
tries the stamp duty has elevated to a substantial
Self-financing: The portion of financing an tax; it is easier to enforce than many other taxes
investment funded from the municipality’s because the seller and buyer of land properties
own resources, or in a narrow sense from the are motivated to be registered (see also TTIP).
net balance. In project finance terms, a project
is self-financing if it has the capacity to finance Standby credit: Lending arrangement that
itself without subsidies, grants, and loans. enables a borrower to withdraw money if
needed; banks provide these against a commit-
Shared taxes: Taxes levied and collected by ment fee; it becomes a debt upon withdrawal
national government, but a part of them are (see also line of credit, overdraft).
shared with local government entities with no
restrictions on the use of the funds (for exam- Subsovereign entities: Public entities that are
ple, personal income tax, value added tax, or below the highest national entities (federal or
concessions). The sharing can be general and state governments), such as provinces, coun-
formula based, or can return to source the exact entities.
ties, municipalities, or municipal
jurisdiction.
share of the amount collected in a
Sunk cost: Costs or capital already spent that
Short-term debt: Debt with less than one- recovered.
thus cannot be
year maturity.
Surtax: An additional tax on something already
Sinking fund: A fund reserve set aside to surcharge).
taxed (see tax
secure paying out a liability that is expected
to become due at a later date (see also DSRF, Tax: A mandatory levy or financial charge
reserve funds). imposed upon a taxpayer by a governmental
Glossary 317
organization without directly enumerating Tax surcharge: An additional tax that is lev-
exchange. Taxes levied
any specific services in ied together with the national tax but collected
in order to finance general administration or by or for the local authorities—for example, a
various general public expenditures that are 2.3 percent tax local surcharge attached to a 16
provided without charge, such as street lights, percent national personal income tax.
roads, and so on (see direct taxes, indirect
taxes, own taxes, shared taxes, tax
surcharge). Taxes on properties: Various taxes levied on
properties, including the property tax, prop-
Tax arrears: Overdue uncollected taxes and erty transfer tax, inheritance tax, capital gain
penalties. tax, stamp duties, and communal tax.
Tax capacity: See tax
potential. Tenor, or tenure: A period of time for holding
a particular status, like the number of years a
Tax efficiency: The ratio between the collected loan is outstanding (see also maturity, term).
amounts.
actual amount of taxes and the billed
Term: Conditions in the lending or other legal
Tax effort: A ratio between the actual collected agreements, including the interest rate and
capacity.
taxes and the tax potential or tax time period in number of years for a debt or
loan (see maturity, tenor).
Tax enforcement: Legal and/or regulatory
measures to collect the billed tax from nonpay- Transfer of development rights: A set of
arrears).
ers (see also tax instruments introduced initially to induce vol-
untary private transactions to trade develop-
Tax increment financing (TIF): A financing ment rights between owners in “selling” and
instrument cities use to promote economic in “receiving” zones defined for better urban
development by earmarking future property development by master plans and/or zoning
tax revenues from increases in assessed values
regulations. Cities have emulated this by sell-
within a zone and issue bonds against these ing building rights in defined zones direct to
earmarked incremental revenues (not the total developers or even to any investor via open
property tax). auctions (Certificate of Potential Additional
Construction, or CePAC, in Brazil) in order to
Tax on transfer of immovable properties collect revenues while promoting higher-den-
(TTIP): A tax levied at the transfer of owner- sity urbanization.
ship of immovable properties (houses, land);
this could be a small amount to cover adminis- Transfers: A general term that refers to all
trative costs, or rather a substantial revenue, for types of money channeled from higher gov-
example, 3 percent of property value. ernment tiers to local governments; these may
include shared taxes, formula-based transfers,
Tax potential: The amount of revenue a ad hoc transfers, and conditional or uncondi-
municipality could reasonably raise from a tax tional or block grants; some countries use the
source if all tax payers were well identified and term grant interchangeably with transfer (see
collected.
all tax levies were billed and fully grants).
318 Better Cities, Better World
Transfers to local government entities: or use conditions attached; these include
Financial support a municipality provides shared taxes, operational grants, equalization
without repayment obligations to its legally grants, and development or ad hoc grants (see
independent (off-budget) entities in order to unconditional grants).
subsidize capital investments and operations, or
to cover deficits of the entity (see also CAPEX, Underwriting: A bank’s commitment to buy a
OPEX subsidies, bailout, off-budget entities). certain amount of a newly issued debt (munic-
ipal bond) if it is not sold in the market within
Trust fund: A portfolio of assets established an agreed time period.
by a grantor in the form of a fund to support
specific activities or specific beneficiaries (for Unsecured loan: A loan granted on the general
example, food for children) often managed by a credit of a borrower without pledging assets
dedicated trustee. or other securities; the lender assumes it will
recover debt from the budget or balance sheet
TTIP, or property transfer tax: Tax on trans- of the debtor (for example, a short-term liquid-
fer of immovable property (see also stamp duty). unicipality). (See also overdraft,
ity loan for a m
liquidity loan.)
Unconditional grants: Central government
grants provided to beneficiaries without any Useful life: Time period within which an
conditions attached concerning either obtain- asset has positive economic value and remains
money.
ing or spending the usable with routine maintenance (see life cycle
costing).
Unconditional transfers: Transfers provided
to local governments without any repayment Yield: Rate of return on an
investment.
Glossary 319
ECO-AUDIT
Environmental Benefits Statement
The World Bank Group is committed to reducing its environmental footprint. In
support of this commitment, we leverage electronic publishing options and print-
on-demand technology, which is located in regional hubs worldwide. Together,
these initiatives enable print runs to be lowered and shipping distances decreased,
resulting in reduced paper consumption, chemical use, greenhouse gas emissions,
and waste.
We follow the recommended standards for paper use set by the Green Press
Initiative. The majority of our books are printed on Forest Stewardship Council
(FSC)–certified paper, with nearly all containing 50–100 percent recycled con-
tent. The recycled fiber in our book paper is either unbleached or bleached using
totally chlorine-free (TCF), processed chlorine–free (PCF), or enhanced elemental
chlorine–free (EECF) processes.
More information about the Bank’s environmental philosophy can be found at
http://www.worldbank.org/corporateresponsibility.
T
he planet is becoming increasingly urban. action; a common language that, for the first
In many ways, the urbanization wave and time, helps connect the dots between pub-
the unprecedented urban growth of the lic investments programming (Urban Audit/
past 20 years have created a sense of urgency Self-Assessment) and financing (Municipal
and an impetus for change. Some 54 percent of Finances Self-Assessment). It helps address
the world’s population—3.9 billion people—lives two key questions, too often bypassed when it
in urban areas today; thus, it has become clear comes to municipal infrastructure and services
that “business as usual” is no longer possible. financing: Are we doing the right things? Are
we doing things right?
This new configuration places great expec-
tations on local governments. While central Better Cities, Better World: A Handbook on
governments are subject to instability and Local Governments Self-Assessments offers a
political changes, local governments are seen bit of everything for everyone.
as more inclined to stay the course. Because
• Central governments will be attracted by
they are closer to the people, the voice of the
the purposefulness and clarity of these tools,
people is more clearly heard for a truly dem-
their impact on local government capacity
ocratic debate over the choice of neighbor-
and performance building, and how they
hood investments and city-wide policies and
improve the implementation of transforma-
programs, as well as the decision process on
tive actions for policy change.
the use of public funds and taxpayers’ money.
In a context of skewed financial resources • City leaders and policy makers will find the
and complex urban challenges—that range sections on objectives and content instruc-
from the provision of basic traditional munic- tive and informative, with each issue placed
ipal services to the “newer” agenda of social in its context, and strong connections
inclusion, economic development, city brand- between data and municipal action.
ing, emergency response, smart technolo-
• Municipal staff in charge of day-to-day man-
gies, and green investment—more cities are
agement will find that the sections on tasks
searching for more effective and innovative
and the detailed step-by-step walk through
ways to deal with new and old problems.
the process give them the pragmatic know-
how that they need.
Better Cities, Better World: A Handbook on
Local Governments Self-Assessments is at the • Cities’ partners—such as bilateral and mul-
heart of this debate. It recognizes the complex tilateral agencies, banks and funds, utility
past, current, and future challenges that cities companies, civil society, and private oper-
face and outlines a bottom-line, no-nonsense ators—will find the foundations for more
framework for data-based policy dialogue and effective collaborative partnerships.
ISBN 978-1-4648-1336-8
SKU 211336