External Assistance for Urban Finance Development

In this paper, Homi Kharas and Johannes F. Linn address two sets of questions. First, what is known about the amount of aid that supports urban development in developing countries relative to financing needs, and what should be done to assure accurate data is available to properly assess the amounts and trends of these flows? Second, what is known about the strategic objectives and operational approaches followed by aid donors, especially regarding urban finance improvements, and about the effectiveness of the aid flows to urban areas in terms of their impacts in improving urban service provision and raising the capacity to improve urban finance mobilization and management. Their analysis reviews external assistance for urban development by assessing the need for urban assistance and by documenting trends in aid going into urban projects and programs. Unfortunately, this analysis is constrained by the limited information available on the amount of support donors give specifically for urban or metropolitan city development.

Based on their assessment of the available information on financing needs and aid flows for urban development the authors reach the following conclusions:

• Donors’ urban strategies generally focus on the right issues and approaches to urban finance policy, but there is a glaring disconnect between the strategies and their implementation on the ground.
• Current aid flows to urban areas are undersized relative to needs, and they have been stagnant over time, despite updated strategies of select donors who seek to give greater prominence to urban development issues.
• Urban aid suffers from the same micro-macro paradox as other forms of aid.
• The ability and willingness of municipal governments to raise own-source revenue has been weak, and donor support for targeted improvements in local revenue capacity has been limited or has had limited impact; similarly, other forms of finance, such as intergovernmental transfers and local borrowing, have not received adequate attention.
• Evaluations of urban programs are a potentially useful but apparently underutilized source of information for donors.

Given these trends, it appears unlikely that urban development assistance will receive the kind of attention from donors that would seem to be justified by need and by successful past experiences with shelter, slum upgrading, and low-income housing. The design and implementation of the financing aspects of urban development projects and programs are key success factors for the impact, sustainability, and scalability of urban development programs funded by external donors. If donors neglect the urban finance dimension in design, implementation, and evaluation, they will likely be less successful in assisting countries to respond effectively to the great opportunities and challenges of rapid urbanization.

This paper was presented at a 2011 conference at The Brookings Institution organized by the Lincoln Institute of Land Policy and is Chapter 15 of the book Financing Metropolitan Governments in Developing Countries.