LAND JOURNAL

Self governance and financing helps cities operate efficiently

Rigid public organisations and outdated financial structures are holding back the development of modern cities. Self-governing and financing arrangements could be the answer, as examples from Scandinavia show

Author: Luise Noring

13 January 2019

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By the same token, our financial structures seem outdated.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).

"Cities are the closest governance level to citizens, and by enabling such arrangements, we can have a direct impact on people's lives"

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.

"Most societies are confronted with population growth, urbanisation, infrastructure that is outdated or in short supply, and climate disruption"

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.

Copenhagen

The Copenhagen City & Port Development Corporation is a vehicle for leveraging the value of public assets such as land and buildings. It is important to note that this needs a unified approach, because if several public entities are trying to leverage their assets simultaneously then the price is lowered and it does not work.

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.

Affordable housing

The Danish model for affordable social housing is another example of self-governance and financing. The industry consists of private, non-profit housing cooperatives that are owned, governed and financed by their members. The tenants select and prepare leaders from among their own number and also pay their rent back into the savings scheme. One-third of it goes towards the improvement and maintenance of their housing estate, while another third goes towards the savings of the housing cooperative, which owns and oversees multiple estates; the final third is put into the National Building Fund to finance the construction of new affordable and social housing. This arrangement prompted the CEO of housing cooperative KAB Jens Elmelund to say: "If you think about it, it is quite remarkable that this segment of society is making such enormous savings for collective use."

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.

Local Government Denmark

Local Government Denmark (KL) is a private membership organisation that represents all Danish municipalities. The founding principle is that by bringing them together, KL is able to gain political and fiscal competencies that each municipality would not have by itself. KL is the permanent partner in the annual negotiations with the finance ministry that settle the municipal budgets. Danish municipalities allocate 50% of the entire public budget, compared with the 30% that are allocated by national government and 20% by the regions. Every three years, KL meets with trade unions, regional authorities and the national government to determine the salaries, terms and conditions for the half a million municipal employees.

KommuneInvest

The Swedish Local Debt Office KommuneInvest is another private membership organisation, which represents 272 of the 290 Swedish municipalities in the financial markets. With a lending portfolio of around €30bn, it is a powerful player in the domestic and international financial markets. In the global market, scale is essential and by bundling all municipal loans KommuneInvest is able to negotiate these on similar terms to its peers.

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.

What's stopping us?

We may ask ourselves: why not all implement these and other self-governing and self-financing measures? What are the barriers? The short answer is an unimaginative reliance on existing institutions and financial tools. Cities are unable to see beyond limited, short-term ambitions and capabilities. Bundling assets or competencies under the management of one entity, municipalities in KL and KommuneInvest relinquish individual political power to join collective negotiations instead. In the process, each must accept the opinion of the majority of member municipalities.

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.

Luise Noring is assistant professor at the Copenhagen Business School's Department of Management, Society and Communication  lno.msc@cbs.dk

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

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