Creative Municipality: Raising Own-Source Revenues for Local Development Projects

The Workshop was held in the Senate of Mexico on March 14, 2012. Senator Ramon Galindo, President of the Senate Commission on Local Government, opened the workshop.

Mexico’s Senate Commission on Local Government and the Forum of Federations held a workshop on local government finance on March 14, 2012.

Held in the Senate of Mexico, the objective of the workshop was to examine financing tools that local governments can employ in order to raise own-source revenues for local development projects. International experts from Argentina, Canada and India joined over thirty Mexican practitioners to discuss how municipal governments can better use existing fiscal policies to finance local development. Recognizing that local governments in many federations are looking to expand their revenue options, particularly in the areas of taxation, this workshop focused on how local governments could work within current structures to raise much needed revenues for public works.

Senator Ramon Galindo, President of the Senate Commission on Local Government, opened the workshop by noting that local governments in Mexico raise the least amount of own-source tax revenue of any country in Latin America. There are a number of factors that have created this situation, including an overreliance on federal and state transfers, and the prohibition on re-election that creates disincentives for politically ascendant Mayors to collect property taxes. It is essential to reform the political culture in Mexico, so that citizens can feel confident that their tax contributions are being used on visible projects for the benefit of their local communities.

José Antonio Peña, Director of Research Operations, National Institute for Federalism and Municipal Development (INAFED) presented the results of a study that he coordinated which sought to determine which variables and conditions best favoured local development through municipal action. Noting an inverse relationship between high reliance on transfers and levels of local development, Peña concludes that any public policy for increased revenue collection should be part of a comprehensive strategy to spark economic development. Such a strategy should strengthen the legal framework that encourages accountability, modernize administrative tools, and professionalize municipal public servants. The latter point, while very important, poses one of the largest challenges, as the ban on re-election means that there is often a turnover of the entire municipal staff every three years, resulting in the rupture of programs and policies, as well as a loss of institutional memory.

Matías Bianchi, Executive Director of the Federalism Institute of the Catholic University of Córdoba, Argentina, said that municipal finance in Argentina has been strengthened due to the tightening of borrowing criteria following the economic crisis of 1999. The Fiscal Health Pact, passed in 2000, limits the ability of local governments to acquire new international debt by requiring the authorization of both the provincial and federal governments. As a result, local governments have had to increase own source revenues to finance their projects. In recent years, however, there has been an increase in federal transfers to local governments for strategic infrastructure projects as part of a national infrastructure renovation program. Professor Bianchi predicts that the increased capacity and political organization of local governments in Argentina will force a change in the composition of transfers, seeing greater cooperation between levels of government, and ultimately greater financial autonomy for the municipal governments.

Ash Narain Roy, Director of the Institute of Social Sciences, New Delhi, notes that in India local governments have been conceived as the third level of government but should evolve as the first level of democracy. Local government, he added, is seen by the public as the best institution to provide effective services, but up until now has not been empowered financially, neither through the transfer of sufficient resources, nor the ability to generate them. In India, the federation does not determine the available revenue sources for local governments, but rather each state government holds that power. State governments also determine the tax rates for the local governments. Demand for local government services is quickly outpacing revenue generation, and there is no clear plan on how to reconcile this gap. There have been some municipal success stories, most notably the case of the City of Ahmedabad, which became the first urban centre in India to issue bonds to finance water and sewer projects. Favorable credit ratings were secured when the city demonstrated transparent accounting and financial management, as well as a plan to generate own-source revenues.

Carlos Salazar, Director of Planning and Design, Municipality of Clarington, Ontario, Canada, identified four essential elements for a successful local government: leadership, vision, passion for the local community, and budgeting tools. Focusing on the latter, Mr. Salazar spoke of how municipalities can include public participation in budget formation, to ensure that individuals and groups feel that their tax contributions are being used wisely. This participation can come through community consultations and by canvassing local Chambers of Commerce. Finally, successful local economic development requires that projects span political administrations. In the case of his municipality, both political actors and civil servants respect that any development take place within a framework of a pre-established long-term 20 year plan that is directly integrated with a 10 year fiscal plan.

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