Africa's future is urban, but someone has to pay for it - where will the money come from?

About $90 billion per year is required in order to meet the needs of swelling urban populations, says recent data from the Mo Ibrahim Foundation

MASTER CARD’S recently released African cities index examined African cities’ economic outlook according to their potential for inclusive urbanization.

Two cities in Mozambique emerged as the continent’s centers for highest growth potential, and African cities with medium to high growth potential are all located in Eastern and Western Africa. The index noted that one of the greatest barriers to African cities’ economic expansion is the low level of internal trade within the continent.

But it is just one of the many headaches the continent’s cities have to contend with.

In Yaonde, Cameroon, city authorities were going through a familiar challenge for African cities – greater responsibility thrust on them, as the emphasis on governance shifts towards decantralisation, but the central government retaining a tight grip on finances.

It makes it difficult to achieve anything meaningful – in fact, with greater expectations in the decentralised model, disappointment is almost certain.

So Yaounde V, one of the Cameroonian capital’s municipalities decided to try something different. The municipality had a budget amounting to just $2.6 per resident, so they asked residents to directly participate in the planning and execution of public projects.

It’s called participatory budgeting, and an important principle is that communities must themselves contribute in some way – in cash, labour, materials or land. This bridges the financing shortfall but also builds trust and promotes a sense of genuine local ownership in the new assets.

The response was dramatic. In Yaoundé II, only 351 residents took part in the first participatory budgeting cycle in 2009 but more than over 11,000 were involved by 2011.

Majority urban

It’s one of the innovative ways African city governments are looking to close the financing gap. The continent is expected to be majority urban by 2037, and by 2050, the continent will host nearly a quarter of the global urban population.

It means that finding money to run cities is an increasingly important issue in public policy. An estimated $90 billion per year is required in order to meet the needs of burgeoning urban populations, according to recent data from the Mo Ibrahim Foundation.

Speaking at the recent 7th Africities Summit in Johannesburg, South Africa’s Cooperative Governance and Traditional Affairs Minister (now Finance minister), Pravin Gordhan said for local governments to be effective, they need to be empowered with “constitutional” powers so that they can be empowered to respond to their mandate to deliver basic services.

“Too much centralisation constrains capable municipalities and their ability to plan and deliver in an integrated and sustainable manner. We need to give local governments original institutional powers,” he said.

At present, about $45billion is earmarked annually for city development in Africa by national treasuries, and a further $10billion mobilised from donors and $1 billion from local authorities.

In effect, local authorities in Africa are only able to mobilise a little more than 1% of what is needed to run cities on the continent.

In many countries, cities are legally barred from incurring long-term debt, or dealing directly with donors, which means financing must be chanelled through central governments.

Larger municipalities are able to mobilise more funds on their own. In Mozambique, transfers from the national government account for 70% of rural local government incomes, but less than 40% of large cities.

More often than not, dependency on transfers from the national government means that cities often can’t control, let alone predict, their own revenues from year to year.

Municipal bonds

But there are some cities that are resorting to some innovative financing instruments, such as municipal bonds, that allow the mobilisation of finance from capital markets.

In order to issue a bond, cities must be credit rated and have sufficient borrowing capacity to issue bonds of high enough value to be worthwhile; solvent and well-rated cities can get funding at better rates.

Since 2004, Johannesburg has launched four municipal bonds, channeling the money into clearing its capital expenditure backlog, estimated at $600 million. The city plans to raise another $500 million in the next three years.

Lagos sold $533 million worth of 7-year debt in 2013, and Dakar, Dar es Salaam, Kampala and Windhoek are looking to enter the bond market in the near future.

Land and property can also serve as important ways of mobilising domestic revenue.

Also speaking at the Africities Summit, Mayor of Johannesburg Parks Tau said that one of the successes of local government lies in the decentralisation of financial management systems.

“The ability to recognise tenure of property is an important mechanism in raising local revenue through property tax,” said the mayor.

The challenge is that most African cities run on informality, limiting resource collection from land and property.

But property-related taxes constitute as much as 4% of national GDP in the developed world, by contrast, in a country like Rwanda, they amounted to 0.02% of GDP in the 2013/14 financial year.

Article from our “Insida Urban Africa” ebook, a comprehensive look at Africa’s urbanisation story

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