*Municipal Service FinancingbyProf. ATM Nurul Amin

PartIII_Municial Service Financing

*Revenue and Expenditure DeterminantsBased on Bahl and Linn (1987)

PartIII_Municial Service Financing

*An Analytical Framework in Fiscal Reform of Urban Local Government Expenditure Needs

*2. Actual Level of Expenditures

*Local Government Revenues

*4. Fiscal Gap

Reflects the shortage of revenue available to provide require services.

*5. Actual Budgetary Deficit

Reflects the actual shortfall of revenues.

*6. Determinants of Tax Revenues

*Determinants of User Charges

In contrast to urban taxes, user charges for services show a direct link between the quantity of service provided and the revenues generated to finance those services.

*8. External Funds G=(P, Y, Qi)

Grants tend to vary directly with city population size and amount of services provided under a system of per capita or cost reimbursement grants.External resource flows may increase or decrease in response to increase in per capita income in the city.

*Municipal Service Finance

PartIII_Municial Service Financing

*IntroductionThe reason that UEI&S remains inadequately built relative to the need for all parts of a city and their residents is: Huge initial capital requirementBecause of insurmountable initial capital barrier potential for gaining from scale and agglomeration economies through UEI&S has remained only a theoretical proposition for many years for most countries.

*Cost components of UEI&SFixed cost land, machinery, equipmentVariable cost labour, personnel, fuel, energy, maintenance cost, repair cost, transportation cost, equipment rental, etc.

*Mechanism of Cost RecoveryPrinciples of cost recovery should balance three critical an interrelated aspects:(1) quality of the service,(2) investment costs, and(3) tariffs that users are willing and able to pay.

*Users should receive an adequate service sensitive to their ability to pay and to their contributions to pollution: polluter pays principles are prerequisites for achieving sustainability.

*Cost Recovery InstrumentsRecovery mechanisms include:consumption based user charges,effluent charges, and discharge permits (charges/levies can be incorporated in discharge permits).

*Appropriate estimation of ATP (based on income as well as revealed preference method) and WTP (based on contingent valuation method) is considered important; application of decentralized and privatized approach for the improvement of collection fee.

*Financial PlanningFinancial planning involves setting expenditure needs ()for providing the UEI&S to a set target of HH and accordingly determining the revenues required (R) for meeting the capital cost (CC) requirements and operation and maintenance cost (O&M).

*Major fixed cost components include value of land for locating the UEI&S facility, facility construction cost, machinery and office cost, laboratory equipment.

*Major O&M cost items include labour, electricity, materials (chemicals, vehicle fuel, spare parts, office supplies), overhead and insurance and training. Consideration for reinvestment during the project cycle (equipment replacement).

*Calculation of the economic internal rate of returns for deciding the project financial viability.

*Six steps stressed for preparation of capital and financial plan include: Evaluation of economic factors affecting capital and financial planning; developing a comprehensive facility master plan; determining and scheduling capital requirements and evaluating alternative financing methods; determining annual operating and capital revenue requirements; calculating fees and charges and evaluating impact on customers.

*Establishment of solid baseline data required for financial planning can be categorized in three major categories: operating characteristics; personnel characteristics and cost characteristics.

*AccountingItemizing cost (land, construction, machinery, laboratory equipment, wages and salaries, rent, office supplies, electricity, transport, etc.) and revenue (user fees, revenue from sale of bi-products) exhaustively (taking into account all streams of costs and revenues is central for sound financial basis of DWWM project operations).

*Identification of cost reducing measures ,e.g. finding communal/ neighborhood/ philanthropic land for locating UEI&S facility, reducing the cost of digging cesspits and emptying these facilities, reducing the construction cost of buildings, utilizing cheap or even free labour for construction and maintenance.

*Identifying revenue-maximizing sources user charges, effluent charges, producing and marketing of all potential by-products, promoting use of by-products.

*An appropriate accounting system to record all transactions in an accessible form is a key requirement for doing all that have been noted above. All work activities and corresponding costs and revenues are to be recorded. Payments and receipts should be recorded (with date and description) separately under subgroups for common expenses.

*Financial and Cost Recovery of DWWMSome evidence from four case studies in Bangladesh and Vietnam

Case study 1: Prism Duckweed production, Khulna, BangladeshCase study 2: Vacutug, DSK Dhaka, Bangladesh

*Case study 3: Community wastewater management in Hai Ba Trung district, Hanoi cityCase study 4: Wastewater management in Thanh Tri district, Hanoi city.

*Case study 1: Khulna, BDIntegrated wastewater treatment systems combined with farming using duckweed-based technology and pisciculture.Duckweed based wastewater treatment systems provide scope for income generation for the local people.

*PRISMs wastewater treatment system is comprised of three stages;Primary treatment: anaerobic waste stabilization pond;Secondary treatment: plug-flow waste stabilization which combines facultative and aerobic ponds.Duckweed grows on the surface of these ponds.It which is harvested and then sold and used as food for fish production.

*Illustration of Components of E&R for Case 1 in BangladeshExpenditure (E)Land costConstruction costOperation and maintenance costRevenue (R)Sales from by-products

*Case study 2: DSK Dhaka, BDA pilot project which aims to improve environmental conditions and the health of slum dwellers in Dhaka via the improved disposal of faecal sludge an the introduction of communal sanitation.The technology involves the Vacutug which is used for emptying pit latrines in the overcrowded slum settlements.

*Involves a 1900-litre-capacity tank system and a 200-litre Vacutug.The latter can reach areas with very narrow access and can even be lifted over obstacles.In relation to finance, initial capital investment costs are high, but over a three-month operators recovered cost and made 14% profit.Charge:Tk150 per load for slum dwellersTk200-250 for other users.

*Illustration of Components of E&R for Case 2 in BangladeshExpenditure (E)VacutugOperation and maintenance costRevenue (R)User chargeExternal payment

*Case study 3: Hai Ba Trung District, VNProjects for upgrading or construction of new sewerage lines in the local area.The budget for construction is allocated from annual government budget distributed, together with contributions from households.Running costs normally are taken from citys budget an from the local Labor Fund for Public Interest.

*When the local sewerage and drainage network connects to the urban sewerage an drainage network, a written agreement is made with the SADCO.The project owner is responsible for submitting the technical design an all other related documents to SADCO for approval.

*Case study 4: Thanh Tri district, VNCombined organization arrangement for sewerage and drainage an irrigation service.The area is not covered by service from Hanoi SADCO.The inter-commune sewerage and drainage service is provided by the agency responsible for water resources management.In case of small communal drainage and irrigation system, the management task is given to the communes PC.

*The investment and running costs are taken from citys budget and from the local fund of labor for public interest that is created by annual contributions from citizens.The Division for Planning and Rural Development of the District PC participates in co-ordination of drainage and irrigation works and takes care of planning, immediate upgrading, repairs and maintenance of the network.

*Small repairs, network upgrading and sewers and channels cleaning to address localized flooding are often carried out by local peoples labor force.All decisions are made by the local authority.Districts policies and regulations play important role in management of the system.

*Illustration of Components of E&R for Case 3 & 4 in VietnamExpenditure (E)Capital costPlanning and preparing for investmentPreparing for project implementationSurvey and detailed designProject implementationConstruction costAdministrative and PMU costMachinery and equipmentConstultation cost

*Operation and maintenance costRegular maintenancesCleaning activitiesSludge and waste transport and treatment activitiesPumping stationsOther activitiesDebt payment

*Revenue (R)User charge: will be taken up soonExternal payment (ODA)Labour fee based revenueFish sales

*Mobilization of FDI and ODA

PartIII_Municial Service Financing

*IntroductionThe foreign direct investment (FDI) flow to developing countries is steadily increasing.As the world is moving towards free trade and privatization and as official development assistance (ODA) from rich countries to poor ones is steadily declining, FDI is assuming a greater role as a source of capital and modern technology, and is imparting new skills to developing countries.

*FDI provides jobs, improves work ethics in the labour force, and encourages the local partners and suppliers to improve their standard of business.It is important to know if and how city governments can direct FDI for improving their urban environment.

*Linkages between FDI and UEMFDI has three main sets of links with the urban environment:employment, increased income, and induced charge in lifestyles,Waste discharge-pollution link, andPotential source of provision of UEI&S.These three mechanisms jointly cover the major issues of interest on FDI-UEM links.

*FDI and employmentThe needs for jobs will come from an increase in population and increasing number of migrants coming to urban area.FDI is indeed creating new jobs and many of these are of high income than the non-FDI jobs.

*FDI enterprises create jobs in the local constructing/sub-constructing companies, which construct FDI plants/workshops/infrastructure works or high-rise buildings an their supplementary work.In addition, they creates jobs in the companies that produce/supply construction materials and/or raw materials for FDI projects in the construction and/or operation phases.

*FDI also creates jobs in the trading companies/individuals selling FDI products and goods, etc.Education is the major determinant of level of income of the FDI employees.In contrast, the public sector salaries are more linked to the number of years of experience than educational attainment.

*The income gained from FDI organizations or from businesses dealing in FDI products makes significant contribution to increasing household income.

*FDI and the urban environmentIn many developing countries FDI is concentrated in and around large urban centers.As FDI is mostly located in large urban agglomerations, its effects, better or worse, is immediate to the urban environment.

*FDI and urban environmental infrastructure and servicesThe major Asian cities are cash-starved and looking for partners in the private sector for the provision of UEI&S.The international development and financial organizations have also become more active I the urban scene.The economic, financial, and political reasons behind the drive for allowing the private sector in the provision of UEI&S have been gaining strength for many years.

*Potential of attracting FDI to the UEI&S are:Imaginative and creative approach,More authority to the local government,Increased consensus among the main stakeholders,Deepening reforms,Involvement of the multilateral agencies.

*Imaginative and creative approachInstead of taking an ideological position or allowing polarization of view, forms of privatization suitable for UEI&S should be considered.

*More authority to the local governmentThe local governments need to be given enough autonomy to enter into long-term agreements with private firms.They also need access to resources to develop and maintain competent professional staff and adequately designated authority commensurate with responsibility to develop, negotiate, manage, monitor, and enforce contract instruments with private firms.

*Increased consensus among the main stakeholdersThe government must inform and educate the public to increase public consensus and awareness of the reasons for involving the private sector in the UEI&S provision, which is perceived as a natural, public sector monopoly.The government needs to educate the public for them to know and understand that the private sector is a partner in the development of their city and country.

*Deepening reformsTo attract FDI for private provision of infrastructure, a series of economic, financial, legal, and institutional reforms are necessary.

*Involvement of the multilateral agenciesInfrastructure investments are capital intensive and have long payback periods.Private financing depends on existence of long-term capital market and guarantees and rewards offered for high risks.The involvement of multilateral agencies would help to discount these risk factors an increase the confidence of the private investors.

*Options for private sector participationThe private provision of infrastructure is difficult to implement in transition countries.The government may want:First, to begin with service and management contracts and a negotiated entry;Second, it may allow a progressive move to concessions and privatizations through competitive bidding.

*They acquire experience, confidence, an credibility and build support among local constituencies for greater private sector involvement.In view of lack of adequate legal framework or hesitation in taking the political challenge of constitutional reform, the central and local governments can use alternative solutions such as BLT or BTO to attract private capital without violating the constitutional restriction on ownership.

*Issues in Cost Recovery

PartIII_Municial Service Financing

*Issues in Cost RecoveryPricing (ATP & WTP)Setting standards appropriatelyPoor cannot payPoors affordability to payPoors willingness to payPoor pays more

*Cross-subsidizationTargeting poorReducing abuses