Seven Transformations for More Equitable and Sustainable Cities

Image: WRI Ross Center for Sustainable Cities

Image: WRI Ross Center for Sustainable Cities

World Resources Report

Chapter 10

Financing and Subsidies – Increasing Investment and Targeting Funds Innovatively

Cities, countries, and investors need to substantially increase investment and target it innovatively to fill the gap in affordable urban services. National government support is essential, especially in the global South, where it can build an enabling ecosystem using its power of the purse, regulations, and control of financing institutions. Developing innovative financing instruments and engaging local communities can get money to where it is needed most.

10.1 What Must Change and Why

Financing for vast needs is inadequate in the global South

In struggling and emerging cities of the global South, investments in core services and infrastructure could pay for themselves many times over, and the costs of inaction can be staggering. But these cities face a major constraint: money. Low- and middle-income cities can rarely afford to finance such projects on their own. Big-ticket infrastructure projects cost far more than they can collect in taxes. Many of the fastest-growing cities in the world have the smallest budgets per capita to meet the growing demand for public services.345 The urban services divide will continue to grow unless cities make large, up-front capital investments in necessary infrastructure and core urban services; they also must invest differently to ensure that the money reaches those whose need is greatest. Ensuring that the poor and marginalized have equitable access to those services usually adds costs. Even investments that will be more than offset by the multiple health, economic, and environmental cobenefits they provide over the long term may prove out of reach for most cities.

Options are limited. Municipal governments in most low-income countries cannot borrow from international development banks. Private finance has generally not been forthcoming because short-term returns to investors are low or uncertain while financial risks are high. Available capital gets absorbed by safer and more immediately profitable investments that benefit more high-end customers.

Privatization is not a panacea

In recent decades, cash-strapped cities have contracted with private companies to build or repair infrastructure and manage services for a profit, sometimes through public-private partnerships (PPPs). But it is unclear whether any core urban service will become profitable for the provider (in the short and medium term) without significant public investment and subsidies to make services more affordable to customers with low incomes.

During the 1990s a number of private companies began providing piped water to cities in the global North and South. Cities privatized municipal water suppliers because they were starved of resources or because their systems were too poorly maintained to provide the quality and quantity of water needed by urban dwellers (See Box 12). But by 2005 most of these companies were losing money. They were required to connect water lines and service to low-income households that could not afford their fees.346 Private companies may have had the know-how and capital to fix leaking pipes and aging systems, but without subsidies, the water was too expensive for consumers, and privatization failed to live up to the hopes it raised. Privatization also stirred up controversy because many objected to the notion that water could be owned and commodified. Activists and scholars have argued that access to safe, reliable, affordable water is a human right.347 Some believe this also applies to sanitation, energy, and public transport. In the public transport sector, privatization of bus services without strong government oversight and regulation, and poorly structured PPPs, have sometimes led to excessive competition for passengers, poor service and maintenance, more road accidents, and gaps in coverage along less-profitable routes.348 These and other disappointments have pointed to the need for governments to oversee and regulate transit to keep it safe, reliable, and affordable. Enlisting the private sector to build housing can also yield mixed results, with private developers less inclined to target low-income groups than more affluent ones.

Box 12 | Concerned about water quality from the tap, families turn to expensive private vendors in São Paulo

São Paulo has long struggled with providing water to its residents. In 2014, when rainfall was scant, the city’s water supply system completely dried up, leaving 8.8 million city residents without access to drinking water. Even before this drought, Ivaneide, who lives in a hilltop neighborhood in northern São Paulo, distrusted the municipal water supply. She says it was “a little earth-colored, too chlorinated, [and] we did not risk drinking it because of its appearance.”

Ivaneide earns between US$251 and $378 per month as a self-employed seamstress and spends nearly $25 per month buying water from a private vendor to supplement her piped water supply due to quality concerns with the piped water (Figure B12.1). “Today, we buy the water. Previously we used the tap, which was treated and safe. But after the lack of water, we don’t use it for drinking anymore.”

Figure B12.1 | Ivaneide prepares her purchased water supply

Picture credit: Merylin Esposi, 2016.

Note: These vignettes are based on in-depth interviews with urban residents conducted in seven countries grappling with the effects of urbanization (Brazil, China, Ghana, India, Kenya, Mexico, and Nigeria).

Urban infrastructure investments ignore social and environmental costs

Cities appear to make the greatest progress towards providing equitable access to core urban services when those services are provided or at least regulated by the public sector. The benefits can be denied to those who cannot or do not pay for them. But outcomes for the public good, such as cleaner air and water or improved health, are not achievable if most individuals lack access to these systems. In cities of the global South, resource constraints and deficits in the supply of water, sanitation, energy, housing, or transport may deny access to all but the privileged few. This leads to social and economic inequalities that perpetuate across generations.

The methods used to analyze and decide upon these investments often do not capture the true long-term economic and social costs and benefits for the city as a whole, tending to focus on direct monetary costs and benefits. Aspects that are more difficult to measure, such as environmental, social, and distributive costs and benefits, network impacts, and longer-term uncertainty, tend to be incorporated weakly or not at all.349 These methods also often overlook needed maintenance expenditures and their benefits over the life of the investments.

The measures residents must take to provide for themselves when core urban services are lacking illustrate another serious market failure: the tragedy of the commons. Public goods may be exploited for private benefit or used in ways that fail to consider the effects on others. Discharging untreated waste into rivers, stripping forests to burn wood for fuel, digging bore wells that drain aquifers, or driving private vehicles in congested cities, may be a cheap, expedient option for individuals. But the “negative externalities,” the price others and future generations will pay for this, are left out of the equation.

The public sector is uniquely positioned to direct capital to investments based on their true costs and benefits and their ability to best serve the public good, but in cities of the global South, they often lack the capacity and resources to do so effectively.

10.2 Priority Actions

A. Increase national government investment, directing it where the need is greatest

The public sector must take the lead when it comes to financial innovation. Since growing cities have few public resources and need substantial and sustained financial investment in core infrastructure, national governments must help.

National governments have a substantial role to play, for many reasons.350 They are uniquely positioned to finance the large up-front capital investments needed to build and connect infrastructure. They collect almost three-quarters of total public revenues worldwide, dwarfing what cities can raise. They can also tap into funding from banks, multilateral lending institutions, development agencies, and, in some cases, philanthropic organizations. Thus, it is not surprising that cities in the global South often depend on fiscal transfers from national governments. National governments typically transfer funds to regional and municipal governments in the form of grants and subsidies. In countries such as Malta, Peru, and Tanzania, grants and subsidies account for over 80 percent of these revenue transfers.351

Even projects that are popular, effective, and successful over many years can falter without sustained national government support. Pulling the rug out from under them can stall or regress transformative change. In Porto Alegre, the PB model successfully mobilized local communities, including the poor, improving access to small-scale infrastructure and services, and increasing citizens’ direct political engagement. 352 Yet the proportion of Porto Alegre’s municipal budget allocated through this mechanism remained modest, always under 10 percent, and especially modest in comparison to the share dedicated to larger investments. Fiscal transfers from the national government were necessary to support the city’s overall budget, including this innovative financing mechanism. In 2018, after national-level support and funding dried up due to national and local political changes, local authorities suspended this otherwise successful program.353

It is important that fiscal transfers not only be reliable but also adequate to enable effective budget planning and management across all tiers of government. The structure of transfers and the conditions attached to them can determine their impact as well. Requirements for tracking and transparency, as well as aligning priorities between the national program and local needs, can contribute to success. Some transfers can be ongoing for general obligations, but others can be part of larger, more specific policy goals. Examples of the latter include Mexico’s Federal Program to Support Mass Transit (Programa Federal de Apoyo al Transporte Urbano Masivo; PROTRAM) for transport, Kenya’s Water Sector Trust Fund, and India’s Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Atal Mission for Rejuvenation and Urban Transformation (AMRUT) for a range of urban services. PROTRAM finances public transit systems to reduce GHG emissions in Mexican cities, with technical assistance provided to improve operations.354 Kenya’s Water Sector Trust Fund provides grants and finances water and sanitation services in under-served areas and also includes capacity building and monitoring as key complements to its financing.355 India’s JNNURM, which ran from 2005 through 2014, city development plans were required, along with state cofinancing, to access federal or national financing of urban infrastructure.356 AMRUT followed under new political leadership in 2015, prioritizing water supply and sewer networks, with requirements for state annual action plans and use of PPPs to leverage government funding.357

National governments are key conduits in channeling funding from international aid agencies and external programs to cities that cannot directly access these funds. Tools are available to help national governments identify programs designed to achieve particular goals. For instance, since 2012, the World Bank’s municipal Program-for-Results (PforR) funding instrument has been helping national governments effectively disburse resources to regional and local governments in low- and middle-income countries.358 It offers guidance on how to direct funding based on results achieved in reaching specific goals, such as protecting the environment or improving access to services for vulnerable groups.359 Resources can be allocated to local programs that support or complement national social or community development programs. Pakistan used this instrument for urban property tax reform. India used it to scale up energy efficiency and rooftop solar programs. Tunisia used it to improve local governance and support for delivering municipal infrastructure, Kenya to establish national safety net programs for poor and vulnerable residents, and Burkina Faso to increase access to water and sanitation. This targeting instrument provides both financing and training to help recipients improve the way they administer and track progress. It can help countries design indicators and risk management procedures and implement good standards for budgeting, accounting, and reporting. The PforR makes up a rapidly growing segment of the World Bank’s lending portfolio, especially in low-income countries of Africa and South Asia.360

Finally, national government financing can scale innovations in urban service delivery. This is essential because private investors and many financing institutions cannot risk investing heavily in relatively new approaches. National governments can also work through their development finance institutions, whether national, regional, or global. Governments often establish their own development financial institutions domestically, such as national banks, investment agencies, and investment funds, and they have votes in multilateral or regional institutions, where they can set rules requiring cofinancing, set terms and conditions, and develop new products and services for different needs.361

All these pieces together display the national government’s ability to help create an enabling ecosystem to bring resources to cities. This ecosystem involves good planning that prioritizes inclusion, equity, and sustainability. National governments can align policies, policy instruments, and institutions to create mechanisms that develop quality projects, scale them, and aggregate smaller projects into larger ones of greater interest to private financiers. They also can provide “bridges” to domestic, multilateral, and international funding sources to help implement and monitor those investments.

B. Create well-structured, targeted subsidies for affordability and social returns

Financing for urban services can support transformative change if it ensures service coverage and affordability for all. To accomplish this, subsidies can be targeted to close gaps in specific under-served communities and neighborhoods, reduce the costs of services, and lift the crippling burden that self-provision often places on poor households. Measuring the cobenefits of such targeted subsidies and monetizing them would render this investment more financially viable for investors, but this kind of precise targeting poses challenges for governments across the global South. In some cases, policies designed to lower the cost of services do not reach the poorest of the poor, and they can even widen the gaping divide between those who are well served and those who are not. In all cases, targeting imposes administrative costs, which must be balanced against the benefits that targeting can provide.

Many countries in the global South have used targeting to strengthen their social safety nets and ensure that money goes where it is needed most. Examples include Brazil’s Family Allowance (Bolsa Familia) program starting in 2003 and Chile’s efforts during the 1990s to use means-targeted subsidies for conditional cash transfers. In 2005, Indonesia began an iterative process of cutting fossil fuel subsidies that flowed mostly to higher-income groups while redirecting resources towards pro-poor development, thus reducing the burden on the poor and vulnerable groups.362 Likewise, the Dominican Republic targeted direct cash transfers to the poorest 40 percent when reforming its LPG subsidy in 2008.363 More recently, poverty maps have been used by the World Bank in Luanda, Angola, to target under-served populations, and more accessible data and map processing should allow such efforts to be expanded.364

Electricity subsidies illustrate the unintended consequences when subsidies are not properly targeted. Governments subsidize electricity in myriad ways, including directly through budget allocations, indirectly through price controls on diesel to run generation plants, and through soft loans or tax breaks for investment. Governments sometimes subsidize grid extension and utility operating costs or impose price controls so that consumers pay less for electricity than the cost of providing it. But price controls can mean that utilities continuously operate at a loss. Those that cannot recover their operating costs have no incentive to add more power lines and customers, especially poor customers who cannot pay even price-controlled tariff rates. Subsidies and price controls are politically popular and are hard to abolish. But their benefits often flow not to the lowest-income groups but to better-off people already connected to the grid.

To connect low-income people to electricity and other core services, cities must focus on key barriers that exclude them, such as up-front costs. A “service drop” fee for hooking up to power lines can cost what a poor household earns in a year. Typically, it has to be paid as a lump sum up front rather than in installments, and households cannot borrow money to cover the costs given their lack of access to credit. For electricity and water services, tariffs are typically lowest for low-income customers, but they are not low enough. When Bolivia needed a loan in 1997, the World Bank required it to privatize its water and sewer systems for the city of El Alto, which were in disrepair and hemorrhaging money.365 The company that took over raised water prices by 35 percent, pushing the cost of a hookup for a single house above $445. Many Bolivians earned about $2.50 a day (about $800 a year), so the connection fee would absorb a large proportion of yearly earnings.366 This may have reflected the actual costs of expanding service, but residents were incensed and protested until the contract was annulled. Governments can use subsidies to lower such fees or to pay companies directly to wire households and connect them to the grid. They can spread out the payments, offer loans, or organize bulk discounts for hooking up many homes in the same neighborhood. They can also provide subsidies to make service and hookups more affordable.

Identifying low-income urban households that need subsidies can be challenging and can impose additional administrative and monitoring costs. Some targeting efforts have been more successful than others. Bengaluru and Nairobi use “incremental block tariffs” to make water more affordable for low-income households. 367 However, the benefits flow only to those who already have running water in their homes. Multiple families or tenants sharing water taps (in other words, poorer households) miss out. Better ways to target those most in need of help might include subsidized or flexible payment arrangements for household connections, shared kiosks, or subsidized pay-per-use systems. Chile introduced direct water subsidies to offset the cost of privatized water and structured the program to funnel the largest subsidies to the lowest-income families.368 Colombia’s water subsidy is targeted to neighborhoods and is based on a six-tier classification system, representing socioeconomic status. This channels subsidies to low-income households while avoiding the costs of collecting detailed household-level economic data for means testing. Although targeting by neighborhoods may misdirect some subsidies, it can provide many of the same benefits with fewer expenses.

Voices: Jenna Davis on subsidizing and paying for water and sanitation more effectively

Providing a finite quantity of water per person at a below-market cost offers another way to reach the poorest of the poor. The city of Medellín established a “lifeline water tariff” of 2.5 cubic meters (m3) per person per month at a subsidized cost, and Bogotá allows qualifying households to receive 6 m3 per person per month of subsidized water. In Durban (eThekwini metropolitan area), a “free basic water” policy gives households a free monthly water allowance of 9 m3.369 However, tensions between free basic water and alternative water supply models continue because South Africa’s government has introduced the right to water as part of the new constitution while simultaneously trying to maintain a cost-recovery management model. One weakness of South Africa’s approach is that free water is provided only to formal homeowners; informal tenants are excluded from the program.370

In public transport, ensuring access for the lowest-income groups has led to mixed experiences. In Argentina and Brazil, transport services are supplied by private operators who receive government subsidies. But a lack of transparency and competition has resulted in both high subsidies and high fares that the poor still cannot afford.371 The high capital and operating costs in this sector make targeted subsidies for low-income groups necessary. By using smart cards and carefully screening beneficiaries, it is possible to minimize leakage of the subsidy to higher-income users who can afford to pay more.372 The city of Bogotá aims its transport subsidy squarely at social welfare beneficiaries through its National Beneficiary Selection System (Sistema Nacional de Selección de Beneficiarios). It provides up to a 60 percent discount on a maximum of 40 trips per month on its integrated public transport network.373 Early evaluations show that it is used mostly by people on the outskirts of the city with the highest fare burdens, and that the free transfer has increased overall accessibility levels in the city.374 As this shows, transfer policies, routes, and fare levels can be tailored to assist those most in need.

In all cases, the structure of subsidies matters and must be context-specific. Such subsidies are discussed in the sectoral actions under Transformation 1 and in more depth in our thematic papers.

C. Use innovative financing instruments and creative payment schemes

Cities can combine funding from diverse sources—national and local, public and private, domestic and external—to finance investments to improve access. And to ensure investments yield lasting benefits, they must set aside funds for maintenance.375 Cities can also rely on innovative combinations of traditional and less standard revenue streams and instruments. Land value capture techniques (described in Transformation 6) or green bonds can be coupled with more traditional property taxes and subsidies. Partnering with the private sector can also play a role here. Blended finance, pairing commercial and concessional funding, can tap into wider markets to raise the cash needed to build, operate, and maintain infrastructure.376 Innovative mechanisms and combinations are key to capturing value from public investments, generating potential sources of revenue, and fostering private sector involvement. Likewise, engaging local communities, both civil society and the private sector, in planning and allocating investment can allow cities to respond to true needs on the ground.

In financing access to energy and housing, cities face obstacles that include large, “lumpy” up-front costs and shared or uncertain asset ownership. Lumpy costs are fixed costs paid at the outset that do not change based on the quantity produced, such as a housing down payment or deposit and a connection to the electricity grid. Uncertain ownership of land and inadequate legal assurances or resolution processes can make capital investment risky. These raise the risk profile, making financing more expensive.

Blended and innovative financing schemes and structures can help overcome these obstacles. Along with targeted subsidies (discussed above) cities can use innovative, flexible, cost-effective technologies and payment plans to help bring services within reach. They can raise the money needed to help pay for renewable energy and energy conservation projects that require up-front investments but will end up saving money and providing environmental benefits. Thailand, for instance, levies a petroleum tax that raises around $50 million a year to finance its revolving Energy Conservation Promotion Fund. This fund finances energy efficiency programs in factories and buildings by providing capital to Thai banks at no cost. The banks then provide low-interest loans to energy services companies.377 Bangladesh has used a combination of subsidies, microfinance, and concessionary loans to encourage homeowners to invest in solar panels. This program started in 2003, and by 2014 it had led to 3 million systems being installed.378

Nonprofit financing, working together with the private sector, can also help address this challenge. PAYG models for consumer installment finance have helped households that cannot afford high initial lump-sum payments. PAYG has been successfully used to pay for solar lighting and clean cooking in Ghana, Kenya, and Zambia.379 In Uganda, PAYG approaches have made mobile phones affordable. In Ghana, PAYG has enabled customers living in informal settlements who were burning dirty fuels indoors to switch to sharing kitchens powered by cleaner fuels such as LPG.380 Digital data solutions can expand flexibility with PAYG as well, with benefits for both providers and consumers. Digital data can improve trust, transparency, and revenues as information is available to everyone, not just to those with connections. Service problems can be identified more readily, and corrupt “adjustments” become clear to all. When digital solutions were implemented for PAYG water in Niamey, Niger, the city posted improved revenues and increased trust and consumers saved time and money.381 M-KOPA, headquartered in Nairobi, is one of the most popular companies offering PAYG systems in Africa. From its commercial launch in October 2012, M-KOPA has connected more than 280,000 homes in Kenya, Tanzania, and Uganda to solar power, and it continues to connect 500 new homes each day.382 Customers acquire solar systems for a small deposit and then buy daily usage “credits” for $0.50, which is less than the price of traditional kerosene lighting.

For the finance innovations of PAYG to be fully successful, they often must be accompanied by educational efforts to promote behavioral changes along with the payment changes.383 For example, a household needs to adjust its budgeting and cash management to ensure that money is available when needed, not just for one lump-sum payment. Similar efforts often accompany microfinance as well.

Creative payment, ownership, and financing packages expand access to housing. Through land trusts, communities can collectively purchase land to build homes and meet other ongoing community needs while ensuring that, when their investments raise property values, the profits flow back to the residential community. Collective landownership in Thailand’s Baan Mankong program384 and land trusts in Bolivia, Brazil, and the United States combine innovative finance with creative ownership structures to minimize the challenges of gentrification, thus helping manage demand for finance over time.385 Land trusts are often financed by philanthropy that seeks to maximize community benefit, not financial profit. Chile’s ABC program stands for ahorro (“savings”), bono (“subsidy”), and credito (“loans”).386 The ABC program uses creative schemes for financing housing. It uses residents’ savings as a base, offering loans and providing subsidies to make housing more affordable. Any one of these approaches (savings, loans, and subsidies) alone would be insufficient; it is the combination that allows increased access to housing.

National governments can also promote innovative taxation at the local level, including municipal land value capture policies. These policies enable municipalities to recover increases in land value that result from public investment and other government actions. Cities can capture land value by selling land and building rights, or by levying additional taxes or fees when the public infrastructure spending pushes up property values. They can also finance infrastructure by selling bonds that are backed by future increases in property tax revenue that will be realized when land values appreciate. When adding infrastructure makes it possible to build denser neighborhoods and taller buildings, cities can collect revenue by selling the air rights to build higher than standards normally permit without additional fees. In Brazil, Águas Claras, near Brasília, financed its underground metro line by selling land plots as well as air rights. Between 2006 and 2010, São Paulo raised over $1 billion by selling development rights.387 Bond and air rights sales have helped cities around the world finance the infrastructure they need.

New financing instruments connected to carbon-related emissions and credit instruments provide additional nontraditional financing sources. One example is green bonds. Mexico City issued its first green bond in 2016, with proceeds used for energy-efficient lighting, BRT improvements, and water infrastructure modernization.388 Bogotá’s BRT, Transmilenio, and Delhi’s metro system both have tapped the Clean Development Mechanism’s carbon emissions reduction credits traded on the carbon market.389 Such financing requires that the recipient accurately measure emissions reductions, limiting possibilities because of challenges in measurement, but improvements in sensors should offer new opportunities in the future.

Cities can pay to extend services and infrastructure to marginalized communities by tapping into fees paid by the rich. Ouagadougou uses fees paid by high-income households for sewer service to support safe on-site sanitation for low-income households, create a training program for safe emptying practices, and construct school latrines.390 When money collected from customers, national and local revenue streams, and overseas development is insufficient, cities can consider PPPs. South Africa now has standard criteria and methodologies for overseeing PPPs, reducing risks and clarifying dispute-resolution procedures. These kinds of laws and regulations are important to unleash capital flows and increase investment.

D. Regulate private entities and strengthen oversight capacity

There are times when it is appropriate for the government to contract private entities to build physical infrastructure and deliver services. The high cost and large scale of many infrastructure projects, and the length of time it takes to recoup what is spent, means the cost of some of these systems can dwarf what the public sector has on hand. Governments turn to the private sector for long-term financing, which can include loans, equity investment, and sometimes innovative contracts. These arrangements often give a private company a say in operations, tariff setting, and fee structures. So, to protect the public interest, the government will need to set and enforce regulations to ensure quality and public safety and also monitor the price charged to consumers for the service. Most regulatory authority lies with national authorities, but local officials can engage communities to ensure they are getting services of acceptable quality at prices they can afford.

The issue of the cost to consumers is particularly crucial where the market and service structure favors a single supplier. Piped water and sewers are such natural monopolies. Having multiple providers extending physical lines in an infrastructure network would be inefficient and negate economies of scale.391 But single providers can use their market dominance to charge exorbitant prices or deliver poor service. To guard against this, regulators need credible information about the service quality and prices charged.392 Competitive tendering, well administered, can help address this challenge, yet the capacity constraints are significant. Another way to learn what is happening on the ground, especially in low-income communities, is for public regulators to engage with civil society organizations. Negotiating with utility managers and financiers to improve services requires regulators to have sophistication, skill, and experience, along with authority and political will to apply and enforce their decisions. They often require training and capacity building to develop these skills.

For government officials to meet higher technical demands and build more participatory processes, they will need training in both the “hard” technical skills of setting and enforcing regulations and in the “softer” skills of more inclusive planning and consultation processes. Building both technical393 and process-oriented skills 394 will allow government officials to ensure that finance helps catalyze transformation rather than obstructing it.

E. Incorporate wider social costs and benefits into financial analysis and involve the community

Cities must adopt a longer and wider financial planning horizon that looks beyond short-term financial concerns and factors in broader benefits as well as costs. When calculating the pros and cons of public investments, planners and funders should weigh not just the financing requirements for individual projects but also the cobenefits for urban residents in terms of health and productivity.395 For example, cities can get social benefits worth between 4 and 12 times the cost of improving water and sanitation,396 and cities such as Beijing and São Paulo could save up to 10 percent of GDP by investing in public transit and reducing congestion, road accidents, and dangerous levels of air pollution.397

Better analysis requires new tools, concepts, and ways to measure both explicit and implicit costs and benefits, including externalities.398 Models used need to factor in social and environmental outcomes—such as the costs of environmental degradation, the value of ecosystem services, the health impacts on specific populations, and so on—but often these are left out.399 There are many tools that can help governments estimate the costs and benefits of services over time.400 Governments should use them, and make sure that they include social and environmental outcomes. Social and equity impacts can be gauged through distributive cost-benefit analysis. This methodology revealed, for instance, that in Bogotá; Istanbul, Turkey; Johannesburg; and Mexico City, BRT systems benefited the under-served more than the richest strata of society over time.401 Challenges, however, in accurately monetizing both costs and benefits, even with proxy variables, complicate this type of analysis. Survey data from users can complement these quantitative analyses.

Giving communities a voice in planning infrastructure investment and allocating public spending can build confidence and trust in government and improve service delivery to traditionally under-served areas and populations. In Porto Alegre, PB was an integral part of transformative change in the city. The PB model successfully mobilized local communities, including the poor, helping them choose the investments that would most improve their lives, and building the small-scale infrastructure they needed. It helped pave streets, add sewer and water lines, improve local parks, and build and renovate schools, medical clinics and community centers. It also nurtured citizens’ direct political engagement. Instead of being simply clients, recipients, or beneficiaries of the government, they became part of the process. The PB program built on the strength of civil society, encouraging all communities, including the poor, to set their own priorities, and allocated the money specifically for them to help them achieve their goals.

Newer techniques used either in person or online can also tap community opinion and enthusiasm about budget allocations. Simulation and role-playing games, especially those concerning budgets, can be helpful in getting input from different stakeholders. However, care must be taken to ensure that they do not merely confirm the government position, as was the case recently in India.402

Increased and better-targeted investment to address long-ignored needs is essential for a more equal city. This will not be possible without strong national government involvement, well-structured and targeted subsidies, and innovative financing instruments. It will also require financial analysis and regulatory approaches that consider broader social and environmental costs and benefits. Governments will need to build the capacity to perform these calculations, negotiate with service providers, catalyze additional resources, and use them well. Table 6 lists the actions and roles required of different actors to move Transformation 5 forward.

Table 6 | Roles of specific actors in advancing Transformation 5: Financing and Subsidies

Financing and Subsidies—Increasing Investment and Targeting Funds Innovatively

City Government and Urban Sector Specialists

  • Prioritize ways to reduce the cost of urban services for the lowest-income consumers, considering the local context
  • Increase investment in urban services to ensure service coverage and affordability for all by targeting investments to close gaps in services in specific under-served communities and neighborhoods
  • Adopt a longer, wider financial planning horizon factoring in broader social benefits and costs and engaging the community
  • Regulate the private sector’s role in financing, building, and delivering core infrastructure and services
  • Give communities a voice in the allocation of public spending to build confidence and trust in government and result in more effective service delivery
  • Consider innovative and diverse ways to increase the affordability of all urban services through the use of cost-effective technologies, targeted subsidies, and flexible payment mechanisms that allow people with irregular incomes to pay for them

National Government

  • Support the financing of large capital investments in urban areas by enabling fiscal transfers with conditions for performance outcomes related to equity and sustainability
  • Ensure adequate funding to urban authorities to support bottom-up processes, such as participatory budgeting
  • Channel funding from international aid agencies and external programs to cities that are unable to directly access these funds
  • Enable alternate, innovative financing techniques by creating the right regulatory and policy frameworks, such as public-private partnerships and land value capture; ensure financial regulators are not working at cross-purposes with other policies; incorporate social costs and benefits into financial analysis and oversight
  • Authorize local and state governments to increase own-source revenues and collect land-based revenues and taxes
  • Create and fund well-structured, targeted subsidies for affordability and social returns
  • Regulate private entities and strengthen oversight capacity

Civil Society, including Nongovernmental Organizations, Experts, and Researchers

  • Support the design and implementation of appropriate targeting mechanisms and processes to identify vulnerable populations in cities and get money where it is needed most
  • Advocate for embedding equity criteria in investment programs (national, local, private, and international) and monitoring their impact on vulnerable groups
  • Participate in and push for inclusive, participatory budget allocation processes at national, state, and local levels
  • Gather data on public sector expenditures and ensure accountability for equitable allocation; consider using community groups and universities to help gather and maintain these data

Private Sector

  • Support up-front investments to address the urban services divide in urban areas by developing new models and partnerships with government and financial institutions
  • Develop innovative financing structures, collaborating with the public sector to ensure laws and regulations keep up with innovations
  • Explore creative payment schemes and blends of financing to invest in urban services and keep them affordable for low-income people

International Community, including Development Finance Institutions

  • Disburse resources to subnational levels of government through new tools and financial instruments
  • Direct resources into locally implemented development programs with the condition that investment be targeted to achieve equitable access goals
  • Ensure resources and capacity for adequate monitoring, evaluation, and learning, and share knowledge of international good practices and performance standards
  • Mandate well-designed and well-structured processes for public participation in decision-making for recipients of financial resources
  • Incorporate social costs and benefits into financial analysis for project approval and allocation of financial resources

Source: Authors.