Grant Financing of Metropolitan Areas

The amounts spent for public services provided in most metropolitan areas are much larger than own-source revenues of local governments, which means that much of the job of financing local services is left to the intergovernmental transfer system and to vertical programs. Some policy analysts see this as an inevitable outcome in developing countries and stress the need to sharpen the structure of transfers and grants so they can better match the goals that have been set for them. Grants can be justified to fill the gap between expenditure assignments and revenue-raising powers, to compensate for external benefits of metropolitan government spending beyond the city boundaries, and to equalize revenues across jurisdictions. These objectives tell us that grants will play a significant role in metropolitan finances in developing countries.

In this paper Anwar M. Shah provides a synthesis on conceptual underpinnings of this literature and a brief overview of practices based on a review of 41 metropolitan areas across the world. He examines the assignment of responsibilities (or misassignments) in practice and analyzes options in grant design to facilitate better functioning of metropolitan governance. An overall theme of this paper is that grants can (and should) be properly designed in almost any institutional/organizational setting, even those that may not seem ideal.

This paper was presented at a 2011 conference at The Brookings Institution organized by the Lincoln Institute of Land Policy and is Chapter 9 of the book Financing Metropolitan Governments in Developing Countries.