Self governance and financing helps cities operate efficiently

In most societies, cities struggle to implement positive initiatives due to the rigid institutional structures of public organisations. There are many legitimate reasons for such structures, including ensuring accountability and transparency and preventing malpractice and corruption. Yet the rigidity seems to hamper societies that must more and more often respond to the faster pace of change – including the abrupt collapse of the housing market, unforeseen climate disasters, mass refugee migration and violent protests. In many circumstances, life simply moves more quickly than the institutions responsible for tackling these challenges.

By the same token, our financial structures seem outdated. Banks and other institutions eagerly provide cheap finance for the wealthy, yet are unwilling to do so for the poor. Many financial institutions tend to be highly compartmentalised, focusing on separate products rather than holistic places, and are guided by short-term concerns such as electoral politics and shifts in popular opinion.

Addressing the role of such structures and institutions in cementing socio-economic immobility and enhancing inequality is thus an unpopular topic and seemingly the only option this leaves for improving the livelihood of the poor is raising taxes. As a result, governments are left strapped for cash for decent healthcare, housing, education and other services. Those less fortunate must concentrate on surviving, making it harder to get out of poverty.

The arguments presented here are, of course, oversimplified. But in essence, if we do not see beyond the constraints of our public and financial institutions we are left without hope for a better future. This is the motivation behind the search for self-governing and self-financing arrangements for cities. Cities are the closest governance level to citizens, and by enabling such arrangements, we can have a direct impact on people's lives. Currently, there are three dominant ways of raising investment capital in cities: taxes, land-value capture, and tax increment financing (TIF).

However, taxes are scarce in spite of population growth because this prompts increased demand for public services and goods. First, as more people move into cities the price of housing increases, in turn meaning more people need housing subsidies and demand for affordable and social housing also rises. Both are the responsibility of the public sector. Second, as more people move into cities and housing prices rise, those on lower and middle incomes are pushed further out to access affordable housing. This increases demands on roads and public transport – also a public-sector responsibility. Third, energy distribution must respond to increased pressures.

At the same time, we know that if we do not create liveable cities with lower air pollution, more green space, good road infrastructure, investment in renewable energy and so on the challenges of urbanisation will become either extremely costly to reverse or irreversible. This is without factoring in the extra public spending needed to provide an ageing population with better medical care.

So while tax revenue per capita tends to stay more or less the same, expanding public housing, transport and energy infrastructure lead to a steeper rise in the curve of public spending. Most societies are confronted with population growth, urbanisation, infrastructure that is outdated or in short supply, and climate disruption. To provide services such as healthcare, schools, housing, sanitation and energy for these diverse, growing populations with scarce taxes is therefore impossible.

Land-value capture is a solid alternative, but it requires local governments to own and manage the land assets. It also needs to be done smartly to reap the benefits of the value thus captured. TIF, meanwhile, is available for local government that does not own and manage land assets but is able to spend future tax revenue to service and repay bonds. Yet if future taxes are spent on repaying these bonds, that revenue cannot be spent on services. In short, we need better ways of governing and financing our cities.

It will probably come as a surprise to most readers that there are many kinds of self-governance and self-financing in use. Most are, unfortunately, ignored; but a few examples are proving successful.

When landownership is fragmented, each public authority sells its land assets as it needs; but in times of recession when the public sector is strapped for cash, this may flood the market with supply. That was the case in Copenhagen during the 1970s, when the port authority had to sell land in prime locations at lower prices.

When a city does not have a dedicated, holistic strategy for optimising land assets and public entities sell land to close budgetary holes, such assets are often sold below market value. City & Port was however able to manage the market by sequencing the supply of land on sale and was also able to wait out the global recession rather than reduce the price of the land.

So that it can operate efficiently and respond effectively to the market, it is allowed ample freedom of operation from the public institutions that own and oversee it. With too much public-sector interference, it would be unable to maximise revenue that is being funnelled into the construction of a city-wide metro system.

Although the national government made huge withdrawals from the National Building Fund in 2016, leaving it with a deficit of €134m, board chair Christian Høgsbro estimates that the fund will hold €805m by 2030. Between the housing cooperatives and the fund, the industry is well consolidated, providing affordable social housing for every fifth citizen in Denmark.

KommuneInvest aims to provide cost-efficient, stable funding for all its members. It holds a triple-A credit rating due to its conservative investment tactics and loan guarantees provided by its members. The office also helps fund investments for Swedish municipalities in energy, housing and infrastructure. It will invest directly in local housing and transport corporations and, on behalf of its county members, it also invests directly in healthcare. In Sweden, municipalities allocate 70% of the public budget.

A long-term strategy for affordable social housing requires cities to maintain a vision and the ability to realise it over many election cycles. Accruing massive savings takes years: but if cities are open to new kinds of thinking and organisation, we can go a long way towards ameliorating these seemingly intractable urban problems.

Related competencies include: Development appraisals, Management and regeneration of the built environment, Project finance