The world is urbanizing fast. In less than a century more than 1 billion people have been urbanized. That translates into the fact that more than half of the world’s population is already living in cities. Experts forecast that very soon Africa will become one of the most urbanized continents. However, almost 70% of world’s urban population is living in the cities where governments are struggling to provide basic services like sanitation, schools, hospitals, and adequate clean water. The reason is that, their governments do not have enough money. This may also be true also for the city where you live or work. Poor infrastructure affects your daily life. Local governments struggle with mobilizing finances so that they can improve your quality of life but many times they are not aware of the right mechanisms. Imagine that your government wants to know how can they finance cities and they want you to advise – where will you begin with? Our finance experts are bringing their experience right at your Desk through this MOOC. This MOOC has five modules and in five weeks you will learn: • Financial decision making environment in urban systems • Mechanisms for mobilizing local revenues • Innovative mechanisms for financing infrastructure projects through partnerships, and • Financial decision making under uncertainties and risks We will provide you a carefully selected set of literature, quizzes and interactive discussion forums. So join our MOOC and find out the ways to make your city a better place to live in for yourself and for your next generations. (This MOOC was developed in collaboration with the United Cities and Local Governments of Africa (UCLG-Africa), African Local Governments Academy (ALGA), and Erasmus University Rotterdam)
Basic Concepts: The Benefit Model
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Из курса от партнера United Cities and Local Governments of Africa
Financing Infrastructure in African Cities
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Somesh SharmaExpert, Environment and Sustainable Development Planning
Institute for Housing and Urban Development Studies (IHS)
Jaap SpronkProfessor of Financial Management Science
RSM
Meine Pieter van DijkProfessor of Urban Management in Emerging Economies
IHS
Bernadette SsanyuVisiting Lecturer
Hi, and welcome to the 7th session of Module Two.
In this session, we are going to discuss the benefit model of municipal finance.
The benefit model is a framework which is used to identify mechanisms to
which enable local body can generate revenues for financing municipal services.
You can also call these mechanisms as revenue streams.
You can recognize revenue streams as our sources of current revenues,
user fees, local taxes and intergovernmental transfers.
These three sources of
municipal income far described in a previous session of this module.
In today's session, you will learn
which municipal services can be associated with which one of these revenue streams.
To learn the application of benefit model,
It is important to first learn classification of municipal services into public,
private, club, and common goods.
This we have discussed in our last session on the taxonomy of goods.
Please watch the previous video before starting to learn the benefit model.
City governments provide the services.
Did you ever think that if a city government
charging all the users for all the services that they provide,
why cannot they put a price on every service that they are providing?
I would like to link this with the consumer behavior.
In cities, city government is a provider,
municipal services are like the goods,
and citizens are the consumers.
So how do we behave as a consumer towards our city government?
Let me take a simple example from our daily life.
Imagine that your local government asks you to pay
for the electricity units consumed by your neighbor. Would you pay?
No. Or your local government asks you to
pay double the amount of electricity that you have consumed. Would you pay?
No. So when are you willing to pay?
Only when your electricity bill is equivalent
to the amount of electricity units that you have consumed.
Now electricity supply is a matrix service.
So providers can easily measure who has consumed how many units of electricity.
However, in case of many other local services,
it is not possible to measure the specific amount of benefit received by the each user.
One example, consider city parks and gardens.
Can you tell who is using the garden more than the others in your city?
Then who should pay for it?
And how much? In the other words,
how will a local government get money to provide services like gardens?
We will use this example later on to illustrate the category.
Do you recall that three main sources of revenue for an urban local body?
User fees, local, taxes and intergovernmental transfers?
Let us try to construct the benefit model by using these revenue streams.
According to the benefit model,
a user fee can be charged to the users of the services,
but only for those services that has the characteristics of private good.
If you remember that private goods are the goods which are excludable and rivalrous.
These are the services where it can be measured that
how much unit of a service is consumed by an individual.
For example, water, sewer,
garbage collection, or transit.
But there are many services in which one cannot
measure how much an individual is benefiting from the service.
However, it can be justified that a community is benefiting from the service,
such as the police,
firefighting services, public parks and streetlights.
Cost of such services can also be recovered from users to local taxes.
In simple words, local taxes can include the services which are
equally needed by everyone but are not equally consumed by everyone.
Many of the services that can be associated with
the local taxes revenue stream are of club good and common good characteristics.
This is the terminology that we have
described in the previous session, taxonomy of goods.
The third category mentioned in the benefit model is redistributive services.
Redistributive services are aimed at
bringing equality between high-income and low-income areas.
It includes services like social assistance and social housing.
A local government shall finance redistributive services through income taxes.
However, it is advised that income tax shall not be determined at the local level.
It shall be determined and administered at the national level.
Because it is likely that one of the city is richer than the other and
if income tax collected from a rich city is spent within the rich city,
then the government may lose the opportunity for redistributing income nationwide.
However, in many federal countries like Switzerland,
the income tax collection is decentralized at country level.
The fourth and the final category in the benefit model is
the intergovernmental transfers or you can call it grants.
Imagine a service like roads in your city.
Who is using it? Only the residents of your city?
Or also the visitors?
These are the public goods with spillover effect.
When users of our service are not only
the residents of the city where the service is being provided.
Then who should pay for these services?
Grants, transits a mechanism which
helps local governments in financing spillover services.
Local governments can plea to
their high-level governments for partly or fully financing spillover services.
In conclusion, these examples explain that local governments cannot
simply recover cost of all services directly from the users.
Sometimes, cost recovery is difficult because of lack of users willingness to pay.
And sometimes, it is not even possible to
determine that who the actual users of the services are.
As seen in the benefit model,
user charges and local taxes are
the two revenue streams that directly connect the local government and the users.
Other two revenue streams, income taxes,
and intergovernmental transfers are dependent on the high level of government.
It is advisable that local government shall rely more upon the first two revenue streams.
This is the end of our discussion on the benefit model.
If you carefully go through the reading that we have recommended with the session,
I am sure that you will be able to become an expert of using the benefit model.
And you can use it for helping your own city government.
In the next video,
I will summarize the content of Module Two.
And I will share with you some take-home lessons
related to the topics that we have covered in this module.
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