The new investments required to accommodate these additional residents will add to the amounts needed to catch up on the backlog of infrastructure, equipment and essential services that exists in most cities. The dysfunctions that result from this gap already severely handicap the productivity of African economies, in the same manner as the lack of energy or the shortcomings in transport infrastructure, for example.

Underinvestment in the urban sector is not a recent phenomenon. Since the 1980s, the response of States and the handful of donors working in this sector has been based on decentralization and good governance. The aim has been to lead cities into the virtuous circle of sustainable growth by scaling up State transfers, making them more regular and more predictable, planning local taxation and increasing own resources, in addition to achieving progress in administration and management and, finally, in donor financing.

It is clear that this approach, which is highly commendable, has finally turned out to be insufficient, despite the undeniable strides that have been made. The successful experiences and often conventional speeches on the virtues and successes of decentralization must not hide the fact that infrastructure provision, basic services and the living conditions of the majority of citizens have continued to deteriorate in relative terms in most cities, sometimes in dramatic proportions. This manifests itself in particular in the peripheral areas of Sub-Saharan cities and in cities in fragile States where urbanization over the past two decades has mainly taken place in a chaotic manner, with no supervision, no planning or network facilities and where inequalities would in fact appear to have increased.

Estimations highlight irreconcilable gaps between the amount of local investment required to cope with growth and the theoretical investment capacities of local authorities in the current circumstances. If the amounts of financing and investments continue at their current pace (the “business as usual” solution), there will be potentially unmanageable economic and sociopolitical consequences.

These observations imply massively scaling up financial volumes for local urban investment. This change of scale will not be easy because the structural instruments to achieve this are not in place. New systemic solutions able to face such considerable needs in a short space of time need to be defined. In conjunction with continued efforts to increase the solvency of local authorities and their implementation capacities, it is therefore the paradigms that govern the financing of urbanization along with the financing systems themselves that need to be overhauled.

It is highly likely that in the future local authorities will need to substantially increase their relative share in local investment financing and this for at least two reasons. First, it will be difficult for States to increase transfers towards local authorities in proportion to local investment requirements. National budgets will be mobilized for State expenditure (social sectors such as education and health, justice…), which is also experiencing sharp growth as a result of the overall demography; it will also be mobilized to finance major infrastructure, particularly in the energy and transport sectors and in productive sectors – primarily for agriculture. Second, there is a lot to suggest that official development assistance will not be in a position to pledge sufficient amounts to meet needs in terms of supporting the urban sector. Indeed, its overall amount has seen little or no increase and mainly remains focused on other topics that are also essential for Sub-Saharan Africa, such as food security, major pandemics, social sectors and major infrastructure.

It would therefore ultimately seem inevitable that local authorities will need to play an increasingly important role in financing local investments. In addition to pursuing efforts to scale up State transfers to local authorities, recourse to other methods based on endogenous financing for local investments is proving to be increasingly necessary to meet needs. These methods are not new and are used to finance local investments all over the world and sometimes have been for a very long time. They are basically centered on three principles:

• use local savings and all investment capacities – households, businesses, pension funds, investment funds – by offering secure investment vehicles;
• capture part of the value created by urban development that is well-managed as a result of property ownership mechanisms and recycle it in the following urban development operations;
• increase local authorities’ own resources by optimizing tax revenues based on property and housing.

The mobilization of local savings for local investments is a win-win solution for national economies: it avoids savings being invested abroad; it reduces the volume of foreign currency borrowing required; it encourages savers to be more involved in local affairs and therefore promotes citizenship and social cohesion. The excess liquidity of banks on its own testifies to the existence of substantial savings in Africa. Ongoing changes in African economies and societies, such as the emergence of a middle class and the arrival of popular shareholding, albeit limited and fragile, also tend to suggest that the volume of these local savings is on the rise. In addition, although they may not strictly speaking be local, migrant savings also represent a significant volume that may also be captured for local investment.

The economic effects of financing mechanisms based on land development are of the same nature as those based on savings as they are local revenues generated locally in local currency. Financing through land development on the one hand, and through taxation based on property or housing on the other hand, are ideal local solutions since they rely on assets that are not mobile. Other economic effects arise from the impact that these mechanisms can have on the building and housing sector, one of the business areas that creates the most non-public employment.

The use of such sources of financing for local investment in Africa will naturally require adapting institutional frameworks and financial systems, as well as changing the mindsets of the different operators in most countries. All in all, this paradigm shift in the vision of the city and in the way to finance it transcends technical and financial issues. It is one of the transformations of African societies.

The author

Thierry Paulais is an urban planner and economist. He started his career in engineering companies and local authority consulting firms where he worked on the economic analysis of investments and financing strategies, both in France and in over twenty countries. He subsequently joined the Caisse des dépôts et consignations as manager of a team in charge of a credit line, under the metropolitan policy, for municipalities in difficulty. In 2000, he joined Agence Française de développement (AFD) as Head of the Urban Development Division when it was set up. In 2008, he joined the Cities Alliance Secretariat (Washington, D.C.) to lead a research/publication program on financing cities in Africa. He is the author or co-author of several books on different topics related to housing sector and urban development economics and to financing city investments.

Thierry Paul released in January 2011 the book "Financing Africa's cities", a joint publication of the French Development Agency and the World Bank. Click here for more information (in French).