1

Municipal Service Financing

by
Prof. ATM Nurul Amin
2
Revenue and Expenditure
Determinants
Based on Bahl and Linn (1987)
3
An Analytical Framework in Fiscal
Reform of Urban Local Government
1. Expenditure Needs



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2. Actual Level of Expenditures
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provided actually service of quantity

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3. Local Government Revenues


G C T R + + =
revenues raised externally
revenues current other and charges user
revenues) tax (total taxes
revenues t governemen local
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4. Fiscal Gap


Reflects the shortage of revenue available to
provide require services.
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7
5. Actual Budgetary Deficit


Reflects the actual shortfall of revenues.
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8
6. Determinants of Tax Revenues

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9
7. Determinants of User Charges


In contrast to urban taxes, user charges for
services show a direct link between the quantity
of service provided and the revenues generated
to finance those services.
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8. External Funds G=(P, Y, Q
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Grants tend to vary directly with city population
size and amount of services provided under a
system of per capita or cost reimbursement
grants.
External resource flows may increase or
decrease in response to increase in per capita
income in the city.
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11
Municipal Service Finance
12
Introduction
The reason that UEI&S remains inadequately
built relative to the need for all parts of a city
and their residents is:
Huge initial capital requirement
Because of insurmountable initial capital
barrier
potential for gaining from scale and agglomeration
economies through UEI&S has remained only a
theoretical proposition for many years for most
countries.

13
Cost components of UEI&S
Fixed cost land, machinery, equipment
Variable cost labour, personnel, fuel,
energy, maintenance cost, repair cost,
transportation cost, equipment rental, etc.
14
Mechanism of Cost Recovery
Principles of cost recovery should
balance three critical an interrelated
aspects:
(1) quality of the service,
(2) investment costs, and
(3) tariffs that users are willing and able
to pay.
15
Users should receive an adequate
service sensitive to their ability to pay
and to their contributions to pollution:
polluter pays principles are
prerequisites for achieving
sustainability.
16
Cost Recovery Instruments
Recovery mechanisms include:
consumption based user charges,
effluent charges, and
discharge permits (charges/levies can be
incorporated in discharge permits).
17
Appropriate estimation of ATP (based
on income as well as revealed
preference method) and WTP (based on
contingent valuation method) is
considered important; application of
decentralized and privatized approach
for the improvement of collection fee.
18
Financial Planning
Financial planning involves setting
expenditure needs ()for providing the
UEI&S to a set target of HH and
accordingly determining the revenues
required (R) for meeting the capital
cost (CC) requirements and operation
and maintenance cost (O&M).

19
Major fixed cost components include
value of land for locating the UEI&S
facility, facility construction cost,
machinery and office cost, laboratory
equipment.
20
Major O&M cost items include labour,
electricity, materials (chemicals, vehicle
fuel, spare parts, office supplies),
overhead and insurance and training.
Consideration for reinvestment during
the project cycle (equipment
replacement).
21
Calculation of the economic internal
rate of returns for deciding the project
financial viability.
22
Six steps stressed for preparation of capital
and financial plan include:
Evaluation of economic factors affecting capital
and financial planning;
developing a comprehensive facility master plan;
determining and scheduling capital requirements
and evaluating alternative financing methods;
determining annual operating and capital revenue
requirements;
calculating fees and charges and
evaluating impact on customers.
23
Establishment of solid baseline data
required for financial planning can be
categorized in three major categories:
operating characteristics;
personnel characteristics and
cost characteristics.
24
Accounting
Itemizing cost (land, construction, machinery,
laboratory equipment, wages and salaries,
rent, office supplies, electricity, transport,
etc.) and revenue (user fees, revenue from
sale of bi-products) exhaustively (taking into
account all streams of costs and revenues is
central for sound financial basis of DWWM
project operations).
25
Identification of cost reducing measures ,e.g.
finding communal/ neighborhood/ philanthropic
land for locating UEI&S facility,
reducing the cost of digging cesspits and emptying
these facilities,
reducing the construction cost of buildings,
utilizing cheap or even free labour for construction
and maintenance.
26
Identifying revenue-maximizing sources
user charges,
effluent charges,
producing and marketing of all potential by-
products,
promoting use of by-products.
27
An appropriate accounting system to record
all transactions in an accessible form is a key
requirement for doing all that have been
noted above.
All work activities and corresponding costs
and revenues are to be recorded.
Payments and receipts should be recorded
(with date and description) separately under
subgroups for common expenses.
28
Financial and Cost Recovery of
DWWM
Some evidence from four case studies
in Bangladesh and Vietnam

Case study 1: Prism Duckweed production,
Khulna, Bangladesh
Case study 2: Vacutug, DSK Dhaka,
Bangladesh
29
Case study 3: Community wastewater
management in Hai Ba Trung district,
Hanoi city
Case study 4: Wastewater management in
Thanh Tri district, Hanoi city.
30
Case study 1: Khulna, BD
Integrated wastewater treatment
systems combined with farming using
duckweed-based technology and
pisciculture.
Duckweed based wastewater treatment
systems provide scope for income
generation for the local people.
31
PRISMs wastewater treatment system is
comprised of three stages;
Primary treatment: anaerobic waste stabilization
pond;
Secondary treatment: plug-flow waste stabilization
which combines facultative and aerobic ponds.
Duckweed grows on the surface of these ponds.
It which is harvested and then sold and used as
food for fish production.
32
Illustration of Components of E&R
for Case 1 in Bangladesh
Expenditure (E)
Land cost
Construction cost
Operation and maintenance cost
Revenue (R)
Sales from by-products
33
Case study 2: DSK Dhaka, BD
A pilot project which aims to improve
environmental conditions and the health of
slum dwellers in Dhaka via the improved
disposal of faecal sludge an the introduction
of communal sanitation.
The technology involves the Vacutug which is
used for emptying pit latrines in the
overcrowded slum settlements.
34
Involves a 1900-litre-capacity tank system
and a 200-litre Vacutug.
The latter can reach areas with very narrow
access and can even be lifted over obstacles.
In relation to finance, initial capital
investment costs are high, but over a three-
month operators recovered cost and made
14% profit.
Charge:
Tk150 per load for slum dwellers
Tk200-250 for other users.
35
Illustration of Components of E&R
for Case 2 in Bangladesh
Expenditure (E)
Vacutug
Operation and maintenance cost
Revenue (R)
User charge
External payment
36
Case study 3: Hai Ba Trung District,
VN
Projects for upgrading or construction of new
sewerage lines in the local area.
The budget for construction is allocated from
annual government budget distributed,
together with contributions from households.
Running costs normally are taken from citys
budget an from the local Labor Fund for
Public Interest.
37
When the local sewerage and drainage
network connects to the urban sewerage an
drainage network, a written agreement is
made with the SADCO.
The project owner is responsible for
submitting the technical design an all other
related documents to SADCO for approval.
38
Case study 4: Thanh Tri district, VN
Combined organization arrangement for
sewerage and drainage an irrigation service.
The area is not covered by service from
Hanoi SADCO.
The inter-commune sewerage and drainage
service is provided by the agency responsible
for water resources management.
In case of small communal drainage and
irrigation system, the management task is
given to the communes PC.
39
The investment and running costs are taken
from citys budget and from the local fund of
labor for public interest that is created by
annual contributions from citizens.
The Division for Planning and Rural
Development of the District PC participates in
co-ordination of drainage and irrigation works
and takes care of planning, immediate
upgrading, repairs and maintenance of the
network.
40
Small repairs, network upgrading and sewers
and channels cleaning to address localized
flooding are often carried out by local
peoples labor force.
All decisions are made by the local authority.
Districts policies and regulations play
important role in management of the system.
41
Illustration of Components of E&R
for Case 3 & 4 in Vietnam
Expenditure (E)
Capital cost
Planning and preparing for investment
Preparing for project implementation
Survey and detailed design
Project implementation
Construction cost
Administrative and PMU cost
Machinery and equipment
Constultation cost
42
Operation and maintenance cost
Regular maintenances
Cleaning activities
Sludge and waste transport and treatment activities
Pumping stations
Other activities
Debt payment
43
Revenue (R)
User charge: will be taken up soon
External payment (ODA)
Labour fee based revenue
Fish sales

44
Mobilization of FDI and
ODA
45
Introduction
The foreign direct investment (FDI) flow to
developing countries is steadily increasing.
As the world is moving towards free trade
and privatization and as official development
assistance (ODA) from rich countries to poor
ones is steadily declining, FDI is assuming a
greater role as a source of capital and
modern technology, and is imparting new
skills to developing countries.
46
FDI provides jobs, improves work ethics
in the labour force, and encourages the
local partners and suppliers to improve
their standard of business.
It is important to know if and how city
governments can direct FDI for
improving their urban environment.
47
Linkages between FDI and UEM
FDI has three main sets of links with the
urban environment:
(a) employment, increased income, and induced
charge in lifestyles,
(b) Waste discharge-pollution link, and
(c) Potential source of provision of UEI&S.
These three mechanisms jointly cover the
major issues of interest on FDI-UEM links.
48
FDI and employment
The needs for jobs will come from an
increase in population and increasing number
of migrants coming to urban area.
FDI is indeed creating new jobs and many of
these are of high income than the non-FDI
jobs.
49
FDI enterprises create jobs in the local
constructing/sub-constructing companies,
which construct FDI
plants/workshops/infrastructure works or
high-rise buildings an their supplementary
work.
In addition, they creates jobs in the
companies that produce/supply construction
materials and/or raw materials for FDI
projects in the construction and/or operation
phases.
50
FDI also creates jobs in the trading
companies/individuals selling FDI products
and goods, etc.
Education is the major determinant of level of
income of the FDI employees.
In contrast, the public sector salaries are
more linked to the number of years of
experience than educational attainment.
51
The income gained from FDI
organizations or from businesses
dealing in FDI products makes
significant contribution to increasing
household income.
52
FDI and the urban environment
In many developing countries FDI is
concentrated in and around large urban
centers.
As FDI is mostly located in large urban
agglomerations, its effects, better or
worse, is immediate to the urban
environment.
53
FDI and urban environmental
infrastructure and services
The major Asian cities are cash-starved and
looking for partners in the private sector for
the provision of UEI&S.
The international development and financial
organizations have also become more active I
the urban scene.
The economic, financial, and political reasons
behind the drive for allowing the private
sector in the provision of UEI&S have been
gaining strength for many years.
54
Potential of attracting FDI to the UEI&S
are:
Imaginative and creative approach,
More authority to the local government,
Increased consensus among the main
stakeholders,
Deepening reforms,
Involvement of the multilateral agencies.
55
Imaginative and creative approach
Instead of taking an ideological position
or allowing polarization of view, forms
of privatization suitable for UEI&S
should be considered.
56
More authority to the local
government
The local governments need to be given
enough autonomy to enter into long-term
agreements with private firms.
They also need access to resources to
develop and maintain competent professional
staff and adequately designated authority
commensurate with responsibility to develop,
negotiate, manage, monitor, and enforce
contract instruments with private firms.
57
Increased consensus among the
main stakeholders
The government must inform and educate
the public to increase public consensus and
awareness of the reasons for involving the
private sector in the UEI&S provision, which
is perceived as a natural, public sector
monopoly.
The government needs to educate the public
for them to know and understand that the
private sector is a partner in the development
of their city and country.
58
Deepening reforms
To attract FDI for private provision of
infrastructure, a series of economic,
financial, legal, and institutional reforms
are necessary.
59
Involvement of the multilateral
agencies
Infrastructure investments are capital
intensive and have long payback periods.
Private financing depends on existence of
long-term capital market and guarantees and
rewards offered for high risks.
The involvement of multilateral agencies
would help to discount these risk factors an
increase the confidence of the private
investors.
60
Options for private sector
participation
The private provision of infrastructure is
difficult to implement in transition countries.
The government may want:
First, to begin with service and management
contracts and a negotiated entry;
Second, it may allow a progressive move to
concessions and privatizations through competitive
bidding.
61
They acquire experience, confidence, an
credibility and build support among local
constituencies for greater private sector
involvement.
In view of lack of adequate legal framework
or hesitation in taking the political challenge
of constitutional reform, the central and local
governments can use alternative solutions
such as BLT or BTO to attract private capital
without violating the constitutional restriction
on ownership.
62
Issues in Cost Recovery
63
Issues in Cost Recovery
Pricing (ATP & WTP)
Setting standards appropriately
Poor cannot pay
Poors affordability to pay
Poors willingness to pay
Poor pays more
64
Cross-subsidization
Targeting poor
Reducing abuses