74920 Planning, Connecting, and Financing Cities—Now Urbanization Policy Framework Plan Connect Finance VALUE land use VALUE the city’s VALUE and through transparent external and internal develop the city’s assessment connections creditworthiness COORDINATE land use COORDINATE among COORDINATE public- with infrastructure, transport options and private finance using natural resources, and with land use clear, consistent rules hazard risk LEVERAGE competitive LEVERAGE investments LEVERAGE existing markets alongside that will generate assets to develop new regulation to expand the largest returns— ones, and link both to basic services individually and land use planning collectively Helping City Leaders Address Key Challenges Improving Managing Creating Expanding Bridging living the city’s jobs the coverage the divided conditions, physical and quality city and especially form of basic fostering in slums infrastructure inclusion services Planning, Connecting, and Financing Cities—Now Priorities for City Leaders THE WORLD BANK Washington, DC © 2013 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 16 15 14 13 This work is a product of the staff of The World Bank with external contributions. 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Cover design: Critical Stages Library of Congress Cataloging-in-Publication Data has been applied for Contents Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi About the Authors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1   Planning cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Spotlight A  Slums are not inevitable: Rules for flexible land use and coordinated connections can improve living conditions. . . . . . . . . . . . . . . . . . . . . . . . . 35 Spotlight B  The value of market rules for basic services: For expanded coverage and increased efficiency, it’s not all about the money. . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2  Connecting cities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Spotlight C  New cities should be well located, flexibly regulated, and efficiently connected: Lessons from China, the Arab Republic of Egypt, and the Republic of Korea on placement, policy, and provision of infrastructure . . . . . . . . . . . . . . . . . . . . . 63 3  Financing cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Spotlight D  Innovations in municipal finance: FINDETER and TNUDF . . . . . . . . . . . 79 v vi  CONTENTS PLANNING, CONNECTING, AND FINANCING CITIES—NOW 4  Framework in action: Lessons from Urbanization Reviews . . . . . . . . . . . . . . . . . . . . . . . . . 83   Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83   China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88   Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92   India. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96   Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101    The Republic of Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105   Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 BOXES O.1 Thinking through policy and investment choices using the World Bank’s Urbanization Reviews. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 O.2 Planning, connecting, and financing cities: How the World Bank can help city leaders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.1 Greening city growth: Coordinating land use and infrastructure planning. . . . . . . . 19 1.2 Successful policy reform in Armenia is based on a well-defined policy framework, clear service-level targets, and incentives for public private participation. . . . . . . . . 28 2.1 Identifying road connection constraints in Vietnam: The World Bank’s trucking industry survey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 2.2 The Republic of Korea’s strategic decisions to expand infrastructure networks enabled the development of new towns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 2.3 Bus rapid transit: Successful if handled with care. . . . . . . . . . . . . . . . . . . . . . . . . . . 58 3.1 Subnational debt finance: Making it sustainable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 3.2 Paying for infrastructure through ancillary services . . . . . . . . . . . . . . . . . . . . . . . . . 72 3.3 Implementing public-private partnerships—lessons from Chile and Mexico. . . . . . . 74 3.4 Leveraging land to finance infrastructure: Four lessons from international experience. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 4.1 China’s urban infrastructure financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 FIGURES BO.1.1 Urbanization Review countries, by urbanization rate (2009) and GDP per capita (2010). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 O.1 A framework of rules: Planning, connecting, and financing. . . . . . . . . . . . . . . . . . . 4 1.1  Vietnam’s dual land price system creates problems for the assembly of large plots of land needed for industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.2 Bottlenecks in accessing industrial land for private investment . . . . . . . . . . . . . . . 17 1.3  São Paulo finances infrastructure improvements by selling land development right. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1.4 Share of population with access to piped water across countries and city sizes . . . 23 1.5  Utilities in some of India’s largest cities do not recover their operating and management costs for water supply and sanitation through user fees, 2006–07. . . 27 PLANNING, CONNECTING, AND FINANCING CITIES—NOW C O N T E N T S   vii 1.6  Public transit fares do not recover operating costs in many of the world’s largest cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SB.1 Access to basic services by city size in Colombia, 1964–2005 . . . . . . . . . . . . . . . . 38 SB.2 Vietnam achieved near to universal electricity coverage in just over 15 years. . . . . 38 2.1 How do urban workers commute in Uganda?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2.2  Gaps between transport prices and costs in Africa suggest a monopolistic transport sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 2.3  The rise of private motor vehicles in Vietnam, 1997–2009 . . . . . . . . . . . . . . . . . . 51 2.4 Road fatalities in high-, middle-, and low-income countries, 2003–07 . . . . . . . . . 52 2.5  Private transportation is the largest source of vehicle emissions in Brazilian cities, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 B2.2.1 As population growth has expanded beyond Seoul and Busan, 1960–2005 . . .. . . 55 B2.2.2 . . . manufacturing jobs have deconcentrated to secondary cities, 1960–2005 . . .. 55 B2.2.3 . . . enabled by improvements in transport connectivity, 1970–2010 . . . . . . . . . . . 56 2.6 Foot and bicycle commuting as a share of all commuting, by city. . . . . . . . . . . . . 57 2.7 A city’s chosen mix of transport modes reflects its spatial structure. . . . . . . . . . . . 58 3.1 Mismatch between capital needs and budget resources of city governments . . . . . 68 4.1  Brazil’s rapid urbanization: From 30 percent urban in 1940 to 84 percent in 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 4.2 More than half of Brazil’s urban population (60 percent) is in large cities. . . . . . . 84 4.3 High specialization in smaller municipalities—greater diversity in large cities. . . . 85 4.4  Employment growth in metropolitan cores and periphery, by sector, 1998–2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 MAPS O.1  Where financing comes first, inefficiencies are likely to follow: Uncoordinated plans for housing and mass transport in Hanoi, Vietnam. . . . . . . . . . . . . . . . . . . . 5 1.1  New York’s planning is granular (and integrated with infrastructure)— Mumbai’s is coarse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1.2  Inconsistencies between new development and mass transit investments in Hanoi, Vietnam, 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.1  Measuring connections by straight-line distance and by economic distance: Two market-access maps of India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 B2.1.1 Origin cities in the Vietnam trucking industry survey. . . . . . . . . . . . . . . . . . . . . . 44 2.2  Street densities compared: The central business districts of Bangkok, Hanoi, New York, and Seoul. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.3  Connecting mountains of poverty to peaks of prosperity: A spatial tool for comparing transport investments in Sri Lanka. . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 4.1 Economic concentration of GDP, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 4.2 Economic density is dominant in Java. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 4.3 Population and GDP are highly concentrated . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 viii  CONTENTS PLANNING, CONNECTING, AND FINANCING CITIES—NOW 4.4 Ho Chi Minh City dominates economic and manufacturing output. . . . . . . . . . . . 109 4.5 Hanoi’s Master Plan for new towns contrasted with the plan of a compact city (Seoul) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 TABLES 2.1 Measuring connections along primary, secondary, and tertiary road segments in Malawi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.2 Brazil’s growth in freight transport cost per ton, 2009–11, by distance traveled . . . 43 3.1 Basic options for public-private partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Foreword C ities are where development chal- tions that are tailored to the fiscal, political, lenges and solutions meet. With the and administrative realities of cities. cities of emerging economies expected This book, Planning, Connecting, and to double from 2 billion to 4 billion people Financing Cities—Now distills the lessons between 2000 and 2030—accompanied by learned from these diagnostics into a practi- a tripling of their physical footprint from cal framework for sustainable urbanization, 200,000 to 600,000 square kilometers—the which is organized around the three policy policies and investments that get this rapid pillars of the title. The coordination among urbanization right hold the key to resilient these pillars is critical, particularly the rela- and sustainable development. The good news tionship between land use planning and haz- is that cities in the developing world can ard risk, housing, infrastructure, and urban build on the knowledge of those that have transport. This framework has already helped been successful before them and combine to reshape core urbanization policy debates these insights with homegrown solutions and and to integrate action across the urban space innovations to catalyze the engines of job cre- in countries such as Colombia, India, Uganda, ation, centers of innovation, and gateways to and Vietnam. For example, In India, the the global marketplace. ­ Urbanization Review provided considerable To help mayors and other policy makers inputs to the teams that shaped the contours identify the bottlenecks they face as urbaniza- of the 12th Five-Year Plan; in Colombia, the tion accelerates and to propose policy options Urbanization Review helped in the design of to tackle such challenges, the World Bank— a Mission for Cities—the product of a high- with support from the Swiss State Secretariat level committee for urban management. for Economic Affairs (SECO) and the Cities We encourage you to read this report, and Alliance—has carried out diagnostics called that you look at your own city and assess its “Urbanization Reviews” in 12 countries planning, connecting, and financing and how across 4 continents. This program has created they are coordinated to support sustainable a bedrock of credible facts and a set of solu- urbanization. Zoubida Allaoua Marianne Fay Director, Urban and Disaster Risk Chief Economist, Sustainable Management Department, World Bank Development Network, World Bank Beatrice Maser Mallor, Head of Economic William Cobbett Cooperation and Development, Swiss State Program Manager, Cities Alliance Secretariat for Economic Affairs (SECO) ix Acknowledgments T his report was written by a team led Boarnet, Jan Brueckner, Julia Bucknall, Dean by Somik V. Lall and composed of Cira, Uwe Deichmann, Jean Jacques Dethier, Om Prakash Agarwal, David Dowall, Michelle Gysin, Stéphane Hallegatte, Sonia Michael Klein, Nancy Lozano-Gracia, and Hammam, Vernon Henderson, Geoffrey Hyoung Gun Wang. Significant contributions Hewings, Markus Huber, Jin-Cheol Jo, Mat- were made by Isabel Chatterton, Michael thew Kahn, Steve Karam, Christine Kessides, Jacobsen, Henry Jewell, Austin Kilroy, An- ­ Andreas Kopp, David Kramer, Won-yong dreas Kopp, Dennis Linders, Lili Liu, Chris Kwon, Dag Larsson, Lili Liu, Om Prakash Rodrigo, Eugenia Suarez, Hiroaki Suzuki, Mathur, Rakesh Mohan, Stefano Negri, Jae- Nozomi Tokiwa, Sarah Elizabeth Antos, Gil Park, Sam Ock Park, Yang-Ho Park, Jose and Katie L. McWilliams. Tara Vishwanath Antonio Pinzon, Juan Mauricio Ramirez, acted as adviser to the Urbanization Review L. Nicolas Ronderos, Tony Venables, and program. The team thanks Indermit Gill for Robert D. Yaro. We appreciate the oppor- his time, advice, and guidance on sharpen- tunity to discuss the policy framework and ing the policy framework used in this report. findings at various forums including the Berenice Sanchez Suarez and Fernando Arm- Cities Alliance Consultative Group Meetings endaris provided outstanding support. (Maputo), Center for Mediterranean Inte- This report draws on Urbanization Re- gration (Marseilles), Center for Policy Re- view prototypes that seek to build a body search (New Delhi), Departamento Nacional of knowledge on urbanization challenges De Planeacion (Bogotá), Global Energy Basel and public policy implications in a variety of Summit (Basel), Swiss State Secretariat for country settings. These prototypes have been Economic Affairs workshop (Berne), Korea piloted in Brazil, China, Colombia, India, In- Research Institute for Human Settlements donesia, the Republic of Korea, Sri Lanka, (Seoul), Ministerio de Desarrollo Urbano y Tunisia, Turkey, Uganda, and Vietnam. We Vivienda (Quito), Norway Ministry of For- are grateful to Dean Cira, Peter Ellis, Steve eign Affairs (Oslo), Planning Commission Karam, Taimur Samad, Rachel Sebudde, of India (New Delhi),Toulouse School of and Tara Vishwanath for leading these coun- Economics (Toulouse), University of Illinois try pilots. (Urbana-Champaign), and the World Bank The policy framework of this report (Washington, DC). has benefited from discussions with Junaid This report was sponsored by the Sustain- Ahmed, Bianca Baerlocher, Jose Alejandro able Development Network of the World Bayona, Eric Berg, Alain Bertaud, Marlon Bank. Financial support for the Urbanization xi xii  ACKNOWLEDGMENTS PLANNING, CONNECTING, AND FINANCING CITIES—NOW Reviews was provided by the Cities Alliance Risk Management Department, and Mari- and the Swiss State Secretariat for Economic anne Fay, Chief Economist of the Sustain- Affairs (SECO). The report has been pro- able Development Network. Nick Moscho- duced under the supervision of Abha Joshi vakis and Bruce Ross-Larson, with a team Ghani, practice head for Urban Develop- included Rob Elson and Jack ­ that ­ Harlow at ment, and the overall direction of Zoubida Communications Development Inc., edited Director of the Urban and Disaster Allaoua, ­ the report. About the Authors Somik V. Lall is a Lead Economist for Urban O.P. Agarwal has been working at the World Development at the World Bank’s Disaster Bank’s Transport Anchor since 2009. He Risk and Urban Management Department. leads a World Bank team that has designed He was a core team member of the World and is delivering a Capacity Building pro- Development Report 2009: Reshaping Eco- gram for Leaders in Urban Transport Plan- nomic Geography, and recently Senior Eco- ning. He has been a member of the Indian nomic Counselor to the Indian Prime Minis- Administrative Service (IAS), the premier ter’s National Transport Development Policy civil service in India. He held several posi- Committee. He currently leads a World Bank tions, both under the national government program on the Urbanization Reviews, which and under the provincial government. He has provides diagnostic tools and a policy frame- written several papers on urban transport work for policy makers to manage rapid policy and governance issues. He has a bach- ­ urbanization and city development. His re- elor’s degree in electrical engineering from search interests span urban and spatial the Indian Institute of Technology, Chennai; economics, infrastructure development, and a master’s degree in transportation from the public finance, with more than 40 publica- Massachusetts Institute of Technology, Cam- tions featured in peer-reviewed journals, bridge, USA; and a doctorate from the Indian edited volumes, and working papers. He ­ Institute of Technology, Delhi. holds a bachelor’s degree in engineering, a master’s in city planning, and a doctorate in David Dowall has worked for the World economics and public policy. Bank for the past 27 years, designing urban development projects in more than 200 cit- Nancy Lozano-Gracia is an economist at the ies in nearly 50 countries. He was a professor World Bank who has worked extensively in of city and regional planning at the Univer- the field of economic valuation of urban ame- sity of California at Berkeley from 1976 to nities, such as water, sanitation, and sewer- 2012. His professional and research work age, as well as goods that are not traded in spans strategic and spatial planning, eco- the market (such as air quality). She is a core nomic development, infrastructure planning, team member of the Urbanization Reviews and finance. He has published more than 100 effort at the World Bank, and her work has books, academic journal articles, and profes- covered Brazil, Colombia, India, Turkey, and sional reports. He has a bachelor’s degree in Vietnam. She holds a doctorate in applied economics from the University of Maryland, economics from the University of Illinois. a master’s in urban and regional planning xiii xiv  ABOUT THE AUTHORS PLANNING, CONNECTING, AND FINANCING CITIES—NOW from the University of Colorado, and a doc- Hyoung Gun Wang is an economist in the torate in economics also from the University Disaster Risk and Urbanization Manage- of Colorado. ment Department of the World Bank. He is a core team member of the Urbanization Re- Michael Klein is Professor at the Frankfurt view flagship study of the World Bank. His School of Finance and Management in Ger- research interests are urbanization and urban many and a Senior Adjunct Professor at the development, urban and regional economics, School of Advanced International Studies of spatial economic analysis, economic impacts Johns Hopkins University. Michael worked of infrastructure investment, disaster man- at the World Bank (1982–2009), most re- agement methodology, and economic growth cently as Vice President for Financial and Pri- at the regional and local levels. His research vate Sector Development for the World Bank and work programs have spanned a range of Group as well as Chief Economist, Interna- developing countries including Brazil, China, tional Finance Corporation. He was Chief the Democratic Republic of Congo, the Rus- Economist of the Royal Dutch/Shell Group sian Federation, Turkey, and Vietnam, among (1997–2000) and headed the unit for non- others. He holds a doctorate in economics OECD economies at the OECD Economics from Brown University. Department (1991–93). Michael studied in Bonn, New Haven, and Paris and received his doctorate in economics from Bonn Uni- versity, Germany. Abbreviations BOT Build, operate, and transfer BRT Bus rapid transit FAR Floor area ratio FINDETER Financiera de Desarrollo Territorial (Colombia) FSI Floor space index GDP Gross domestic product GRDP Gross regional domestic product ICT Information and communication technology IDU Instituto de Desarrollo Urbano, Urban Development Institute (Colombia) NEN National Expressway Network (China) NWSC National Water and Sewerage Corporation (Uganda) OECD Organisation for Economic Co-operation and Development PLN Perusahaan Listrik Negara, state electricity company (Indonesia) PMIB Programa de Mejoramiento Integral de Barrios (Colombia) PPP Public-private partnership SAR Special administrative region SEZ Special economic zone TNUDF Tamil Nadu Urban Development Fund (India) VT Vale transporte, transportation vouchers (Brazil) *All monetary values are in U.S. dollars unless otherwise noted. xv Overview T he world’s first cities were in the Uruk 50 percent of world gross domestic product Cluster in Mesopotamia. The largest (GDP) is produced on just 1.5 percent of the was Ur, which appears in the Epic of world’s land, almost all of it in cities (World Gilgamesh (one of the earliest known works Bank 2008). And various estimates point out of literature, set around 3,500 BCE). Extend- that more than 80 percent of global GDP is ing over 60 hectares, Ur was home to about generated in cities, with this share increasing 24,000 people. But as an irrigation city—also rapidly. providing marketing and defense services— But today, cities are growing at an unprec- it governed and extracted surpluses from a edented and challenging speed. City leaders neighboring population of about 500,000. Its are concerned about creating jobs and mak- urban population was densely concentrated, ing their cities competitive. They also worry more than 400 people per hectare, and the about the quality of life for citizens, and how planning practices were strikingly sophisti- cities can lower their carbon trajectories.1 The cated. With four main residential areas, Ur city populations of emerging economies are offered its inhabitants basic amenities such as expected to double between 2000 and 2030, well-laid-out streets and sanitation. from 2 billion to 4 billion people. Megacities, Cities have thus been planned from the such as Tokyo, Mexico City, and São Paulo, beginning, enabling new settlements, eco- are already home to 30 million people or nomic specialization, and cultural expres- more. The built-up area of cities worldwide sion. The growth of cities is driven largely will triple in size, from 200,000 to 600,000 by the economic prosperity they help create. square kilometers. Such rapid population By enabling density—the concentration of growth accompanied by an even faster spatial people and economic activities in a small geo- expansion of cities may lead to low-density graphic space—cities have helped transform development dominated by individual-vehicle economies for many centuries. High densities transportation—a largely irreversible pattern enable social and economic interactions at (World Bank 2012b). With more than 70 per- a much higher frequency than in nonurban cent of generated energy now consumed in settings. These interactions create a vibrant cities, and as much as 80 percent of global market for ideas that translates into innova- greenhouse gas emissions attributed to urban tions by entrepreneurs and investors. Indeed, residents—and with vulnerability to natural 1 2  O V E R V I E W PLANNING, CONNECTING, AND FINANCING CITIES—NOW hazards increasingly concentrated in cities— other cities and to other neighborhoods getting this rapidly paced urbanization right in the city, as well as to outside export is the key to resilient and sustainable growth. markets. This report is written for city leaders, but • Financing —finding sources for large capi- city leaders does not just mean mayors. It tal outlays needed to provide infrastruc- means anyone whose position—local, munic- ture and services as cities grow and urban- ipal, provincial, or national—gives him or ization picks up speed. her a policy- or decision-making role and thereby a stake in urban development.2 City And for the framework of planning, con- leaders are mayors, but they are also direc- necting, and financing to work, a good gov- tors of community-based organizations; they ernance structure is a prerequisite. City lead- are subnational and national policy makers ers, at all government levels, will have to and ministers (of finance, investment, and work together. If this fails, everything else planning); and they are private sector inves- will stumble. tors, developers, and service providers. Planning, connecting, and financing— The report provides a framework to help these are terms that policy makers use on a city leaders make informed decisions for sus- daily basis, but they often place financing tainable development in their cities. What first without fully considering the other two must be done to improve living conditions, dimensions. Of the three dimensions, plan- especially in slums and hazard-prone areas? ning for land use and basic services is pri- To create jobs? To bridge the divided cit- mary. Yet because planning must allow for ies (inclusion)? To expand the coverage and people and products to be mobile, it must be quality of basic infrastructure services? To coordinated with connecting at all stages of manage the city’s physical form? In trying to a city’s growth. What follows then is financ- address these challenges, city leaders often ing: a dimension that, although as necessary pursue targeted investments—providing as the other two, should be city leaders’ last housing subsidies, increasing infrastructure concern rather than their first. spending, or creating new growth poles. Yet This point cannot be emphasized too history shows us that a more comprehensive strongly. A primary focus on financing— set of rules is needed. though understandable as an attempt to meet To think comprehensively about how pol- urgent needs—is likely to result in unplanned icy and investment choices can influence the cities if it is not coordinated with planning pace, magnitude, and impact of urbanization and connecting. And that will lock a city into and city development, the World Bank has undesirable physical forms that can set back developed a program of diagnostics called the its development for decades, even centuries. Urbanization Reviews. These diagnostics are A city’s physical structures, once established, being carried out in collaboration with city may remain in place for more than 150 years leaders in several pilot countries (box O.1). (Hallegatte 2009). At the heart of the diagnostic approach Putting financing first, without full con- used in the Urbanization Reviews are the sideration of the other dimensions, is a mis- three main dimensions of urban development take because it often neglects the overriding (figure O.1), also the focus of the three main need to coordinate infrastructure improve- chapters in this report: ments (connecting) with policies (planning). And the lack of such coordination will be • Planning —charting a course for cities by regretted by later urban generations. For setting the terms of urbanization, espe- example, in Hanoi, Vietnam, a projected cially policies for using urban land and new mass transit system will extend in sev- expanding basic infrastructure and public eral directions from today’s central business services. district—but it will not reach an emerging • Connecting —making a city’s markets second central business district, southwest of (labor, goods, and services) accessible to the city, where dense housing developments PLANNING, CONNECTING, AND FINANCING CITIES—NOW O V E R V I E W   3 BOX O.1  Thinking through policy and investment choices using the World Bank’s Urbanization Reviews Lessons from developed and urbanized countries ties. Each review starts by assessing a country’s or can help rapidly urbanizing ones. Synthesizing such region’s spatial transformation: how the urban econ- lessons was the aim of the 2009 World Develop- omy is evolving, how demand for the city is chang- ment Report: Reshaping Economic Geography ing with economic development, the pace of new (World Bank 2008). The report looked at urbaniza- arrivals, and how these new arrivals into the city are tion trends and policies worldwide, and it proposed finding places to live and commuting to their jobs. a three-part policy framework for urbanization. It then compares the city’s observed patterns with First, institutions should provide the foundations for benchmarks in other places or with past conditions. liberalizing the movement of people and goods and Such comparisons help reveal how policy distortions easing the exchange and redevelopment of land— constrain urbanization and how investment short- enabling vast economic gains. Second, investments falls restrict the benefits from it. Once the review has respond to the needs of residents and businesses, identified the possible constraints and shortfalls, it especially for basic and connective infrastructure. proposes policy options. It aims to show how a city Third, targeted interventions respond to the needs of can harness economic and social benefits not just the poor and people in marginal locations or address today, but in the future, as economies grow, tech- individual behaviors that endanger health, safety, or nologies change, and institutions are strengthened. the environment. To test the relevance of the tools and policy frame- Applying the 2009 World Development Report work in different development circumstances, the policy framework, the World Bank’s Urbanization World Bank has piloted the Urbanization Reviews in Reviews offer city leaders diagnostic tools to iden- more than 10 countries at varying stages of urban- tify policy distortions and analyze investment priori- ization (see figure BO.1.1): Uganda and Sri Lanka FIGURE BO.1.1  Urbanization Review countries, by urbanization rate (2009) and GDP per capita (2010) 100 Urbanization rate (% of urban population, 2009) 90 Brazil 80 Korea, Rep. Jordan Colombia 70 Turkey 60 Morocco Georgia Indonesia 50 China 40 30 Vietnam India 20 Uganda Sri Lanka 10 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita, 2010 Source: Urbanization Review team. (where urbanization is nascent); China, India, Indo- approach for all countries—but the policy options nesia, and Vietnam (where it is intermediate); and that are explored vary by country in their emphasis, Brazil, Colombia, the Republic of Korea, and Turkey reflecting each country’s particular stage of urban- (where it is mature). The reviews use one diagnostic ization and institutional circumstances. (box continues on next page) 4  O V E R V I E W PLANNING, CONNECTING, AND FINANCING CITIES—NOW BOX O.1  (continued) The country-specific and city-specific diagnos- benchmarking—comparing performance against the tics of the Urbanization Reviews can identify prob- situation in other places, against chosen standards, lems and help formulate policy responses. Although or against known best practices. The Urbanization the Urbanization Review is not intended to gener- Reviews also draw on the Banks’s Urban and Local ate a policy or investment blueprint, it should help Government Strategy, “System of Cities: Harnessing in identifying and resolving key policy distortions. Urbanization for Growth and Poverty Reduction” In addition, because diagnostics compare present (World Bank 2010). realities with what could be or should be, they imply FIGURE O.1  A framework of rules: Planning, connecting, and financing Plan Connect Finance Value land use Value the city’s Value and through transparent external and internal develop the city’s assessment connections creditworthiness Coordinate land use Coordinate among Coordinate public- with infrastructure, transport options and private finance using natural resources, and with land use clear, consistent rules hazard risk Leverage investments Leverage existing Leverage competitive that will generate assets to develop new markets alongside the largest returns— ones, and link both to regulation to expand individually and land use planning basic services collectively Source: Urbanization Review team. Note: This framework draws on World Bank (2012a) and the findings from various country pilots under the Urbanization Reviews. called New Urban Zones are already being connect these new homes to the job market. built (map O.1). Many workers now commute in collective Another example: the government of taxis, which are slow and expensive. The South Africa tried to save money by select- roads are not good enough to handle traffic ing isolated regions, with lower land values, efficiently, and several transfers are needed as the sites for about 2 million newly built to reach dispersed job sites (Bertaud 2009). subsidized homes. But there was no plan to Buses, too, carry workers on commutes that PLANNING, CONNECTING, AND FINANCING CITIES—NOW O V E R V I E W   5 can last nearly as long as the work day itself. MAP O.1  Where financing comes first, inefficiencies are likely to Here is how a typical day passes for one follow: Uncoordinated plans for housing and mass transport in Hanoi, Vietnam South African worker: Jones is a limousine driver in Johan- nesburg . . . he lives three hours away from his place of work. He leaves home at 5:00 every morning, takes a bus and reaches his work place at 8:00. On the return, it’s the same story. He leaves at 5:00 and reaches home at 8:00. On most days the only meal he is able to find time for—or even afford, due to the high travel cost—is his dinner. He sees his little daughter only on Sun- day, as she is not awake by the time he leaves and is asleep by the time he gets back. (Personal communication with O. P. Agarwal, report team member) Legend Similarly, Colombia’s urban development Hanoi built-up challenges arise from problems of policy and density per hectare 96 – 150 planning. One of Latin America’s most decen- 150.1 – 225 Current CBD tralized countries, Colombia has more than 225.1 – 350 Line 1: 10.56 km, 9 stations Sources: Population Census update 2009 350.1 – 388 Line 2: 11.94 km, 10 stations 1,000 municipal governments with parallel Line 3: 7.42 km, 8 stations Built-up area: land use map Google Earth 2008 Kilometers responsibilities—basic infrastructure service 0 2.5 5 10 15 20 delivery, land use and economic development, and social service provision. Urban areas Source: World Bank 2011. comprise multiple municipalities: Bogotá, for example, contains seven. These municipalities lack mechanisms to coordinate policy and planning across their boundaries. As a result, the metropolis of Kampala, Uganda urgently Colombia’s metropolitan areas are crippled needs a credible system for documenting and by inertia—unable to coordinate their land valuing land. To be sure, local urban bodies use policies, or plan for strategic investments, also need financing support—to buy land at the metropolitan or regional scale that is and pay for infrastructure. But no amount of demanded by a growing urban economy. financing alone will solve Uganda’s problems. Also similar, Uganda’s 1995 constitution The Republic of Korea can be consid- created private land ownership and abolished ered a model of success, where urban plan- land leases vested with local urban bodies. ning and land management institutions have Local governments were fiscally starved, evolved to meet challenges at each stage of unable to acquire land or protect rights-of- urbanization. Land development programs way for infrastructure improvement. And were established first, followed by a land use land transactions generally were hampered by regulation system. Then came comprehensive poor tenure security (only 18 percent of land urban planning, with guidelines for manda- is registered and titled); by the lack of a cred- tory 20-year visions, zoning decisions, and ible system for valuing land; by low incen- planning facilities. Downtown development tives for landowners to rent their land; and projects systematically adhered to phased sce- by high entry costs for land development ven- narios under the comprehensive plans. Later, tures. To remedy the situation, especially in in the 1990s and 2000s, Korea integrated 6  O V E R V I E W PLANNING, CONNECTING, AND FINANCING CITIES—NOW separate laws regulating urban and non- requires effective systems for land valua- urban areas, and in 2000 it instituted met- tion. Second, land use must be allocated in a ropolitan city–regional planning (between way that allows for infrastructure improve- the city and the county or province). Mean- ments. Third, the most basic infrastructure while, the government initiated large-scale services—water, energy, sanitation, and solid apartment construction projects that solved waste management—need to be provided for Korea’s most serious urban housing prob- all residents, urban and peri-urban alike. lems. Multiple transport modes were devel- oped. Road projects, over time, have included Value the city’s land by establishing urban highways and pavement projects as systematic and transparent assessment well as a network of expressways. And the nation’s rail network includes urban subway Urbanization generates an increase in the lines alongside traditional railroads and high- demand for land, and a problem arises when speed rail—the bullet trains that have shrunk land is scarce in places it is needed the most. Korea into a half-day travel zone. The success of tools for accommodating Planning, connecting, and financing need urban expansion and redevelopment is typi- to be integrated—as they are in this report, cally based on robust systems for assessing with chapters 1–3 drawing lessons from pre- land values. And a clear definition of property vious and ongoing Urbanization Reviews. In rights is a first requirement in this direction. addition, chapter 4 presents the plan-connect- Further, developed countries rely on various finance framework in action, distilling les- forms of data and institutions to assess land sons from pilots in seven countries (Brazil, values, including market data on transac- China, Colombia, India, Indonesia, Korea, tions and attributes of the property, as well as and Vietnam), with lessons from each. Inter- ancillary data on potential income from land leaved with the chapters are four spotlights and the cost of inputs into land development. that apply the framework to ongoing policy These data are managed to provide up-to- debates. They discuss slums and natural haz- date and reliable information for professional ards (spotlight A), infrastructure service pro- appraisers as well as the general public. Insti- vision (spotlight B), new growth poles and tutions that improve the information foun- urban regeneration (spotlight C), and innova- dations of the valuation process, including a tions in municipal finance (spotlight D). trained cadre of appraisers in property valu- City leaders can use the three-dimensional ation, contribute to ensuring transparency in urban development framework and the case the valuation process and to making informa- studies in this report to tailor the analysis tion on land values widely accessible. and identify the impediments to urbaniza- To establish appraised land values and pre- tion in their cities and countries—assessing vent land-related conflict, city leaders should “where the shoe really pinches.” Then they promote valuation processes that are sys- can identify the policy options that are most tematic, professional, and transparent. Con- politically, technically, and fiscally feasible. sider Korea, which during the 1970s encour- What are the specific tasks under planning, aged the development of a cadre of property connecting, and financing that policy makers appraisers—bringing transparency to the should focus on? Consider three more terms valuation process while making information that are also commonly used: value, coor- on land values widely accessible. In previous dinate, and leverage—terms that can help land acquisitions, market values and asset sharpen the effectiveness of planning, con- replacement costs had been assessed by local necting, and financing. government officials. In 1972, the govern- ment introduced the Basic Land Prices sys- tem, which mandated the assessment of land Planning cities and buildings by certified private appraisers. Planning is fundamental to agglomeration Estimated property values from two apprais- economies in three ways. First, land use ers were averaged for a final value; if the two PLANNING, CONNECTING, AND FINANCING CITIES—NOW O V E R V I E W   7 appraisals differed by more than 10 percent, must have strategies that are flexible. Other- a third private appraiser was selected and a wise their decisions and policies can lock cit- new average calculated (World Bank 2013). ies into physical forms that may prove subop- Although the valuation of land is essential timal. For example, density limits—though to the efficient allocation of land use, many important—should not impede economic developing countries lack institutions for growth or prevent the development of afford- valuing land effectively. In countries where able urban housing. Bangalore is an example land values are concealed to avoid high trans- of density regulations reducing economic effi- action taxes, or are distorted by laws that ciency. Research shows that if the city’s den- allow developers to acquire land at favorable sity restrictions were lifted, its radius would rates, the result is inefficiency: land may not be 8 kilometers rather than the present 12, so be allocated to the best use, high prices may the city would grow in a more compact form. lead to affordability problems, and infra- Commuting times would shrink, saving structure expansion may face delays because households about 4 percent of their income land is not easily accessible. Take India, through lower transport costs (Bertaud and where such information systems are in their Brueckner 2004). infancy and the government often acquires Similarly, land use policies need to be land for industrial and infrastructure devel- aligned with infrastructure plans (such as opment. Farmers and other landowners are plans for public transit). Singapore is a good compensated with payments benchmarked example: densities vary by location, planned on the stamp duties—a land transaction tax. use, and infrastructure availability (with But since the marginal rate for stamp duties higher densities near metro stations). New historically has been as high as 12 percent, York varies densities block by block and by land and property values have long been planned use—commercial areas in midtown underreported. Now, as India’s policy makers and downtown Manhattan have much higher amend the rules for changes in land use, the densities than do uptown residential areas. lack of independent and reliable land valua- To fund infrastructure improvements, cities tions is likely to generate public discontent can sell developers the right to build at higher and related conflicts. densities than would otherwise be allowed in But building these institutions may take a given location. Aligning land use and infra- time, and second-best solutions may help structure can also help manage the forma- countries in the interim as longer-term objec- tion and growth of slums (see spotlight A). tives are pursued. In India, for example, In Tunisia, the national upgrading program while stronger institutions governing land has dramatically reduced slum housing from use conversion, property rights definition and 23 percent in 1975 to 2 percent in 1995 of adjudication, and land valuation emerge and the overall housing stock. The program was land markets mature over time, city leaders successful as national utilities made massive may want to look at alternative options for investments in water and sewer trunk infra- the short and medium term. In India, lead- structure over the same period, making it pos- ers could explore expanding the use of land sible to upgrade existing informal settlements. readjustment3 methods for land assembly and In thinking about coordinating land use infrastructure development in urban areas. policies with infrastructure plans, it is also important to consider vulnerability to natu- ral hazard risks. While 70 percent of high- Coordinate land management with income countries integrate land use and nat- infrastructure, natural resources, and ural risk management, only about 15 percent hazard risk of low-income countries are doing so (World A city’s demand for physical structures, Bank 2012b). This is of concern as cities are infrastructure, housing, and amenities will more vulnerable to natural hazards, includ- change with time as its population grows. To ing floods that are becoming more destruc- meet new demand, city leaders and planners tive in many parts of the world. Equally 8  O V E R V I E W PLANNING, CONNECTING, AND FINANCING CITIES—NOW important is coordination between land use the development of the water supply and and natural resource management—includ- sanitation sector, checked against available ing water resources and water supply (World resources and agreed on in a multistake- Bank 2012c). Swakopmund, Namibia, a city holder policy dialogue. Efforts to improve of 42,000 surrounded by environmentally the effectiveness of service delivery and sensitive areas, has been able to limit devel- lower capital costs are needed in most cities. opment to within the zoned “townlands” These efforts may be supported by a range and has protected watersheds through inte- of planning tools including strategic financial grated environmental, sector, and land use planning, legislative and regulatory reform, planning. benchmarking, and performance tools. In addition, prices may have to be regu- lated. But to make regulatory regimes work, Leverage competitive markets cities need a mechanism to prevent after-the- alongside regulation to expand basic fact opportunism—by regulators or by ser- infrastructure vice providers. In Latin America, for exam- Water, sanitation, transportation, and elec- ple, providers have renegotiated 55 percent of tricity are basic services. How can city leaders infrastructure concessions in transport and promote their expansion and increase access? 75 percent in water and sanitation. For certain services—such as trucking—it is Finally, price discrimination and subsidies possible to establish wholly competitive mar- can be used to expand access to services such kets, with free entry to providers and prices as public transportation—for both social that reflect demand while covering costs. For equity and environmental sustainability. Still, other services, such as bus transportation and city leaders should look first at market struc- garbage removal, the effects of competition tures that give providers the needed incen- can be mimicked through recurrent auctions: tives and flexibility to cover costs while serv- franchises go to the provider who offers the ing as many people as possible. lowest price for a given set of performance criteria. Such franchise auctions have succeeded in Connecting cities reducing both costs and prices, so they deserve Connections—between cities and within cit- serious consideration. In many cities, such as ies—benefit producers and consumers. They Bogotá, London, and Santiago, bus routes are give producers access to input (including auctioned to operators who are then assigned labor) and output markets. They give con- to predefined itineraries. In London, since auc- sumers options and, in many cases, better tions were instituted, operating costs per bus- prices. And connections expose cities to new kilometer have declined considerably (gross of economic opportunities. But city leaders who administrative costs by an estimated 20–35 envision better transport connections for cit- percent, net of administrative costs by at least ies and neighborhoods face difficult choices. 14 percent) (Estache and Gomez-Lobo 2004). With limited resources, they cannot invest in Santiago awards five-year contracts using cri- everything. It is hard to know which new or teria that include the fare offered by the bid- improved connections will yield the highest der, along with performance standards. Before returns over time. the auctions, during a period of deregulation, Setting priorities for connective investment bus fares had risen; with the auctions, the means picking winners and losers in the short fares came back down. run—but in the long run, thinking about pri- For still other services, characterized by orities can make a vast difference for cities, natural monopolies (networks) and public even countries. To identify the most effective good characteristics, such as provision of additions and improvements to the networks water and sanitation, governments and city connecting cities and neighborhoods, city leaders have to set realistic objectives for leaders can take the following three steps. PLANNING, CONNECTING, AND FINANCING CITIES—NOW O V E R V I E W   9 Value the city’s external and Different cities demand different modal internal connections mixes, different neighborhoods demand dif- ferent modes: mass transport is generally For external connections, compare a city’s suited to compact areas, private vehicles to transport costs—and the density, quality, more sprawling ones. and capacity of roads, railways, waterways, City leaders should also seek ways to and the like—with data from similar cities. reduce the gap between transport prices In this way, determine where improvement is and costs—both between cities and within most needed. Alternatively, identify possible them—by inducing competition in trans- transport cost reductions and connectivity port markets. Not all modes and routes will gains that reflect the city’s desired mix of eco- support multiple providers. But where they nomic activities and extent of specialization. will, and where demand is high enough, pol- In Colombia, lowering transport costs along icies and regulations should foster competi- the country’s key trade corridors can enhance tion and not create artificial monopolies. At competitiveness—for cities and for the nation. the same time, city leaders should find ways For example, transporting freight by road to price the full cost of individual motor from Bogotá to the Atlantic costs about $94 vehicle use. These costs include externalities per ton while maritime transport from the from congestion where road users do not Colombian coast to the United States is less, take account of the time costs they incur on at about $75 per ton. High domestic transport other road users (Kopp 2007). Local air pol- costs undermine the competitiveness of goods lution imposes additional costs. The expan- produced in Colombia’s largest cities, espe- sion of urban areas separates jobs and resi- cially compared with other large cities around dential locations, increasing trip lengths and the world. Reducing domestic transport use of motorized transport. The associated costs by 12 percent can lead to an increase in health costs are high—in Beijing, the health exports of about 9 percent (Blyde and Martin- costs from local air pollution are estimated cus 2011). at $3.5 billion annually (Creutzig and He For internal connections, find out what 2009). the problems are: are gridlocks and lack of Finally, city leaders must balance the aim adequate public transport deterring residents of covering transport costs through market from working outside their immediate neigh- pricing with other social and environmen- borhoods (making labor markets inefficient)? tal objectives. In Brazil, the government Conversely, are long commuting times or requires formal sector employers to provide high fares forcing residents to live in crowded transit tickets to their employees through a slums so that they can walk to work? A city system called vale transporte (transporta- that faces one or both of these challenges tion vouchers, VT); the firms then deduct the needs a plan for a better transport system, VT expenditures from taxable income. The including a desired mix of transportation VT system—albeit affecting only the formal modes. The plan must balance two main sector—effectively spreads the cost of trans- objectives: increasing the supply of affordable port subsidies between employers and the transport options, and ensuring that conges- government. tion and pollution remain within acceptable If city leaders were to convey all the limits. external effects of transport to users, mon- etary costs of transport would increase. This Coordinate among transport options would gradually make households and firms and with land use rebalance their decisions on where to live and where to establish business. The result would From the beginning, city leaders must system- be a denser settlement pattern, higher land atically coordinate transport plans with land rents, and shorter transport distances—con- use policies and related infrastructure plans. tributing to the efficiency of cities. 10  O V E R V I E W PLANNING, CONNECTING, AND FINANCING CITIES—NOW Leverage investments that will yield the Value and develop the city’s highest returns for cities—collectively creditworthiness and individually Without domestic credit markets, and often Nationally, leaders must identify the most lacking the transparency needed in munici- efficient investments in connections among pal bond markets, many city governments in all the cities in a country. Where is demand developing countries cannot access long-term highest for the expansion of intercity infra- credit. Experience shows that subnational debt structure and transport services? Which cor- can work if clear regulations are in place to: ridors are identified through spatial analy- sis and simulations as most central to the • Guide the issuance of debt. network, in that improving them will yield • Manage risks from borrowing. the highest returns—for efficiency and for • Clearly set forth the conditions for subna- equity? Similarly, leaders must find ways to tional governments to issue debt (includ- make transport within cities affordable while ing the purpose, type, and amount of debt limiting congestion and pollution. Invest- that can be issued).4 ments to increase capacity should be com- bined and aligned with other policies. Tar- To make the issuance of debt to cities more geted subsidies, though not effective for all transparent, Colombia has published traffic- purposes or in all contexts, can sometimes be light ratings of local government payment used to make transport more efficient as well capacity, with red, green, and yellow signals as more equitable and safer for the environ- reflecting a combination of liquidity and ment. And other fiscal and regulatory tools solvency indicators. To rate municipalities’ can be used to manage demand for particular subnational debt, a red light identifies those transport modes. whose ratio of interest to operational savings exceeds 40 percent and whose ratio of debt stock to current revenues exceeds 80 per- Financing cities cent. Red-light municipalities cannot borrow. How do city leaders bridge the gap between Green-light municipalities can. Yellow-light readily available resources and investment municipalities can borrow only after obtain- needs? What sources should they tap? To ing the approval of the central government. start with, the government can establish its Creditworthiness is limited not only to creditworthiness by first securing cash flows local governments—it extends to their util- from user fees and taxes—and by leveraging ity companies. In Kenya, the Water Services the value of land in several ways, including Regulatory Board calculated and published taxes. Only after that can the government utility shadow credit ratings for 43 water begin to borrow money and attract private service providers in 2011 and found only 13 investment, making finance easier. Whether providers to have investment grade ratings. financing is public or private generally does Smaller cities can seek short- and medium- not make the difference between successful term loans from higher levels of government and struggling cities. But there are at least and pool their credit. Thus, governments of two situations in which private financing smaller cities can use bond banks, loan pools, may be the preferred course: when the gov- and guarantees to reduce lenders’ risks. There ernment sees public-private partnerships as are two common types of municipal bonds: a way to improve efficiency in service provi- general obligation bonds—debt instruments sion, and when the government suffers from secured by general purpose municipal rev- severe credit constraints that prevent it from enue such as property taxes—and revenue obtaining credit for improvements to publicly bonds—debt instruments secured by the rev- run systems. enue generated from specific municipal assets PLANNING, CONNECTING, AND FINANCING CITIES—NOW O V E R V I E W   11 (such as ports, toll roads, water and wastewa- private partnerships (PPPs) are no magic bullet: ter utilities), with or without recourse to gen- they require commitments to sustainable cost-­ eral revenues. Revenue bonds are particularly covering tariffs or equivalent tax revenues. useful in cases where bond markets are not They cannot stand in for good financial man- well developed. Colombia, India, Malaysia, agement or good project evaluation. Clear Romania, the Russian Federation, the Slo- rules must dictate the procedures, the require- vak Republic, Slovenia, South Africa, and ments, the approvals, the institutional respon- the República Bolivariana de Venezuela pro- sibilities of the entities involved, and the allo- vide examples of countries where cities have cation of risk. raised funds from municipal bonds. Consider Ghana, where such rules were In the absence of a well-developed bond not in place. In 2002, the government of market, financial intermediaries in diverse Ghana initiated a process to encourage PPPs forms play important roles in mobilizing in the urban water sector. However, lack of resources for urban infrastructure financ- transparency and accusations of corruption ing. In Colombia, a successful financial in the selection process led to the end of the intermediary is FINDETER (Financiera de PPP. And in Bolivia, the government priva- Desarrollo Territorial), a government com- tized the water supply system in the city of pany created to finance regional urban infra- Cochabamba, awarding a 40-year concession structure projects. More than 90 percent to the private consortium, Aguas del Tunari. owned by the national government, with the The contract was awarded without adequate remainder owned by the regions (Depart- appraisal of the financial situation of the ments), FINDETER provides resources for company. Once the concession was awarded, financial intermediaries who assign them to rate structures were modified resulting in an regional authorities. It has received funds increase of up to $20 in water bills, repre- from multilateral banks and has consistently senting as much as 20 percent of incomes for received high credit ratings (Samad, Lozano- local families. Subsequent violent protests led Gracia, and Panman 2012). Still, none of to Aguas del Tunari withdrawing from the these methods can replace a creditworthy project (Cuttaree 2008; World Bank Institute local government. and PPIAF 2012). In contrast, Chile put in place a clear and transparent procurement process, focusing Coordinate public and private finance on public awareness and a learning-by-doing using clear and consistent rules approach that allowed for adjustments along When city governments have constrained the way. This process led to the award of 21 access to credit, private investors may step in road projects on a competitive basis between to fill the gap. There are many types of part- 1993 and 2001 (Hodge 2006). The bidding nership structures, with each one transferring started with smaller projects in order to test different levels of risk to the private sector. the market while also minimizing the risk They include service contracts, management for the private sector. More than 40 Chilean contracts, leases, and privatization. Under and international companies from 10 coun- any of these structures, property rights must tries participated in the bidding through 27 first be clearly defined, so that creditors need consortia. not depend on the government’s promises. To successfully implement PPPs, city lead- Then a public-private partnership, with pri- ers will have to consider strengthening public vate sector selection mechanisms based on sector capacity, laying out the appropriate the market and on cost-benefit analyses, can legal and sector framework, promoting rig- improve project selection and ensure project orous planning and risk assessment through sustainability while adding sources of infra- feasibility studies, ensuring transparent and structure financing. Nevertheless, public- competitive procurement, building strong 12  O V E R V I E W PLANNING, CONNECTING, AND FINANCING CITIES—NOW monitoring systems, and allowing flexibility methods, and to support and oversee land for adapting to unpredictable events. management, land sales, and tax collection. Leverage existing assets to develop new Planning, connecting, and ones, linking both to land use planning financing cities—now Land sales and leaseholds can provide initial Urbanization in today’s developed countries capital for new infrastructure investments. occurred gradually, over a hundred years or Sales in Cairo, Istanbul, and Mumbai pro- more. That fairly leisurely pace allowed for vide examples of the revenue potential of trial and error in the development of rules land auctions. Yet in the long run, govern- and capabilities. In contrast, today’s devel- ments must tap own source revenues such as oping countries face sudden deluges from property taxes, or similar levies, and access the countryside. Some can expect to go from long-term credit to fund the maintenance 10–20 percent urban population to 60–85 and expansion of public facilities. Of special percent in just 30 years. interest are three revenue sources—better- Such rapid urbanization confronts devel- ment levies, special assessment taxes, and oping country governments with unprec- exactions—that link fees to increases in land edented institutional and fiscal challenges. value based on infrastructure improvements. Managing individual decisions and planning All these ways to leverage state assets require for urbanization, today’s cities struggle to the presence of many factors to succeed, and ensure the availability of shelter, transport, all have risks. Strong institutions are essen- and other basic infrastructure and services. tial to make these instruments work. Insti- All are needed by growing populations—and tutions to clearly define property rights, they are needed by businesses to start and to objectively value land using standard expand. BOX O.2  Planning, connecting, and financing cities: How the World Bank can help city leaders The World Bank has instruments to help city leaders Connecting. To support improved connections plan, connect, and finance for the future. through Development Policy Loans at the subna- tional level—with its focus on housing and slums, Planning. To support evidence-based urban plan- land and urban poverty, and urban mobility—the ning policy at the national and city levels, the World Bank can expand programmatic and policy-based Bank can build on: lending. It is also exploring options for results-based programmatic lending linked to core elements of • City Asset Management Strategies (with robust planning and connecting cities. data collection and dissemination). • Municipal Contracts (with tools to capture multi­ Financing. To partly cover debt servicing for govern- city data, as part of a wholesaling approach). ments borrowing from commercial markets (loans • Subnational Investment Climate Assessments and and bonds) and so improve debt terms, the Bank can Doing Business Surveys (with greater coverage). provide policy-based guarantees—resulting in longer maturities, lower interest rates, higher debt limits, The Bank can also use the Urbanization Knowledge and the power to tap new markets and institutional Platform and its Singapore and Marseille Urban investors. Hubs to support city leaders with just-in-time advice. PLANNING, CONNECTING, AND FINANCING CITIES—NOW O V E R V I E W   13 For the economy, for equity, and for sus- SubmittedPapers/Christian_Volpe_Martin- tainability, it is therefore of the greatest cus74.pdf. urgency that city leaders plan, connect, and Clark, Greg. Forthcoming. “Leadership and Gov- finance their cities—now. How decision mak- ernance.” In Rethinking Cities, ed. Edward ers prepare for rapid urbanization is crucial, Glaeser and Abha Joshi Ghani. Washington, not only to the future of their cities, but also DC: World Bank. Creutzig, Felix, and Dongquan He. 2009. “Cli- to global economic progress and sustainabil- mate Change Mitigation Policies and Co-­ ity. The World Bank, among others, can help benefits of Feasible Transport Demand Policies (box O.2). in Beijing.” Transportation Research Part D 14 (2): 120–31. Notes Cuttaree, Vickram. 2008. “Successes and Fail- ures of PPP Projects.” World Bank, Europe 1. These are concerns expressed by more than and Central Asia Region, Warsaw. http:// 750 city leaders in regional and national con- site resources.worldbank.org/INTECARE sultations on urbanization priorities carried GTOPTRANSPORT/Resources/Day1_Pres2_ out through the Urbanization Knowledge SuccessesandFailuresPPPprojects15JUN08.ppt. Platform—a global partnership for open- Estache, Antonio, and Andres Gomez-Lobo. source knowledge exchange among policy 2004. “The Limits to Competition in Urban makers, practitioners, and researchers. The Bus Services in Developing Countries.” Policy platform included countries ranging from low Research Working Paper 3207, World Bank, to high income, from the smallest country Washington, DC. size to the largest. Hallegatte, Stéphane. 2009. “Strategies to Adapt 2. See Clark (forthcoming) for a discussion on to an Uncertain Climate Change.” Global who constitutes city leaders and what leader- Environmental Change 19 (2): 240–7. ship implies. Hodge, Graeme A. 2006. “Public-Private Part- 3. Land readjustment is, in essence, a participa- nerships and Legitimacy.” University of New tory tool used for land assembly and infra- South Wales Law Journal 29 (3): 318–27. structure development. In India, it has been applied under the name of Town Planning Kopp, Andreas. 2007. “Summary and Discus- Schemes in the State of Gujarat. sion.” In Transport Infrastructure Charges and 4. This includes national government clearing of Capacity Choice. Self-financing Road Mainte- subnational borrowing. nance and Construction. ECMT Round Table Report 135. Paris: Organisation for Economic Co-operation and Development. References Samad, Taimur, Nancy Lozano-Gracia, and Alex- Bertaud, Alain. 2009. “Note on Spatial Issues andra Panman. 2012. Colombia Urbanization in Urban South Africa.” http://alain-bertaud Review: Amplifying the Gains from Urban .com/AB_Files/_vti_cnf/AB_Note%20on%20 Transition. Directions in Development Series. South%20Africa.pdf. Washington, DC: World Bank. Bertaud, Alain, and Jan K. Brueckner. 2004. World Bank. 2008. World Development Report: “Analyzing Building-Height Restrictions: Reshaping Economic Geography. Washing- Predicted Impacts Welfare Costs, and a Case ton, DC: World Bank. Study of Bangalore, India.” Policy Research ———. 2009a. World Development Indicators Working Paper 3290, World Bank, Washing- (CD-ROM). Washington, DC: World Bank. ton, DC. ———. 2010. “System of Cities: Harnessing Blyde, J., and C. Volpe Martincus. 2011. “Shaky Urbanization for Growth and Poverty Reduc- Roads and Trembling Exports: Assessing the tion.” Finance, Economics, and Urban Depart- Trade Effects of Domestic Transport Costs ment, Urban and Local Governments Unit, Using a Natural Experiment.” Paper presented Washington, DC. at the Forum for Research in Empirical Inter- ———. 2011. “Vietnam Urbanization Review.” national Trade, Ljubljana, Slovak Republic, Technical Assistance Report. The World Bank. June 9–11. http://www.freit.org/LETC/2011/ Washington, DC. 14  O V E R V I E W PLANNING, CONNECTING, AND FINANCING CITIES—NOW ———. 2012a. Eurasian Cities: New Realities ———. 2013. Urbanization beyond Municipal along the Silk Road. Washington, DC: World Boundaries: Nurturing Metropolitan Econo- Bank. mies and Connecting Peri-urban Areas in ———. 2012b. Inclusive Green Growth: The India. Directions in Development Series. Pathway to Sustainable Development. Wash- Washington, DC: World Bank. ington, DC: World Bank. World Bank Institute and PPIAF (Public-­Private ———. 2012c. The Future of Water in African Infrastructure Advisory Facility). 2012. Cities: Why Waste Water? Washington, DC: ­ Public-Private Partnerships Reference Guide. World Bank. Version 1.0. Washington, DC: World Bank. 1 Planning cities C ities thrive when people and firms Cities need policies for the provision of can benefit from being close together, public goods and basic infrastructure ser- creating agglomeration economies. vices (water, sanitation, and solid waste But this beneficial transformation can be management). In developing countries, thwarted by policies that stymie development access to these services tends to be espe- in urban areas. One obstacle arising from bad cially low in smaller cities and on the policy is inefficiency in the use and exchange fringes of metropolitan cities. of land. Another is a lack of coordination between land use and infrastructure plan- ning. To overcome these obstacles requires Value the city’s land by three sets of policies: establishing systematic and transparent assessment • Value the city’s land by establishing sys- The use and reuse of land is central to a tematic and transparent assessment. city’s expansion and development. For eco- Because land use shapes a city’s spatial nomic efficiency, land should be able to shift structure, cities need policies that clearly among various uses—though public inter- define property rights and determine land vention may be required to offset market values. With such policies in place, urban failures (Henderson and Wang 2007). Urban land markets help to mediate between land markets should efficiently allocate land demand and supply, increasing land utili- between urban and rural uses (with incen- zation and optimizing the development of tives to conserve farmland and green space) constructed floor area. and within urban areas (to prevent disordered • Coordinate land management with infra- land use and underserved neighborhoods). structure, natural resources, and hazard What is the key to efficient land use? The risk. Cities need policies to govern the answer is the price of land. Developed coun- intensity of land use and to manage its tries determine the price and value of land by integration with infrastructure develop- examining property attributes and market ment—especially transport. data from transactions. Developing countries • Leverage competitive markets alongside cannot do this so long as they lack certain regulation to expand basic infrastructure. basic institutions, as well as ancillary data 15 16  PLANNING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW concerning potential income from land, and often acquires land for industrial and infra- the cost of inputs into land development. structure development. Farmers and other These data are managed to provide up-to- landowners are compensated with payments date and reliable information for professional benchmarked on the stamp duties—a land appraisers as well as the general public. Con- transaction tax. But since the marginal rate sider the Republic of Korea, which during the for stamp duties historically has been as 1970s encouraged the development of a cadre high as 12 percent, land and property values of property appraisers—bringing transpar- have long been underreported (World Bank ency to the valuation process while making 2013).1 Now, as India’s policy makers amend information on land values widely acces- the rules for changes in land use, the lack of sible. In previous land acquisitions, market independent and reliable land valuations is values and asset replacement costs had been likely to result in public discontent and con- assessed by local government officials. In flicts over land. 1972, the government introduced the Basic In Vietnam, too, official land prices fail to Land Prices system, which mandated the reflect demand. The country has two kinds assessment of land and buildings by certified of prices for land transactions. First, there private appraisers. Estimated property values is the market price—the higher of the two. from two appraisers were averaged for a final Then there is the imposed land price—a value; if the two appraisals differed by more much lower value, used by the government in than 10 percent, a third private appraiser was acquiring land and allocating it to developers selected and a new average calculated (World and investors (World Bank 2011f). Such an Bank 2013). inequitable system generates resentment over Many developing countries often lack the land acquisitions: over 1996–2005, there systems to record and manage this informa- were more than 12,000 complaints. And con- tion. Transaction data, for instance, may not flicts over land, in turn, hinder the consolida- reflect the true price of land because of infor- tion of plots for industrial development. More mal market transactions to save on duties or than 85 percent of available plots in Vietnam heavy public subsidies on housing and land are smaller than 20 hectares—but industrial use. Land registries are often archaic and parks and districts typically need 150–200 lack the dynamic functionality that allows hectares of contiguous land (figure 1.1). So them to be searched or updated quickly. the country’s two-price system impedes effi- These deficient features in transaction record ciency and economic development. management translate to a dearth of data on In countries that have created success- real estate prices, preventing analysis that is ful industrial parks, these areas are much critical for land value appraisal. The impli- larger. An example is Shenzhen, China—the cations of this bear heavily on local financ- most thriving special economic zone in the ing mechanisms involving real estate and country, and among the world’s most suc- infrastructure. cessful examples of an integrated growth Land valuation is integral to local revenue center and magnet for foreign investment. generation since land values form the basis In 2005, Shenzhen comprised more than for activities such as property tax collection 70,000 hectares (Lei and Bin 2008). And in and land sales or leases. A credible system Indonesia, which has deconcentrated indus- that helps “discover” and “disseminate” the trial activities out of the cores of Jakarta and value of land makes it difficult for buyers to Surabaya, industrial districts range from defraud existing landowners. In the absence 500–800 hectares (World Bank 2011b). of such information, there is considerable City leaders in Bogotá recently pioneered scope for undervaluation of land during the the improvement of land valuation. Between acquisition process. 2008 and 2010, the city updated its cadastral Take India, where such information sys- database, revaluing the 2.1 million properties tems are in their infancy and the government it contains—generating a new revenue stream PLANNING, CONNECTING, AND FINANCING CITIES—NOW P L A N N I N G C I T I E S    17 FIGURE 1.1  Vietnam’s dual land price system FIGURE 1.2  Bottlenecks in accessing industrial land for private creates problems for the assembly of large plots of investment land needed for industry 3% OECD High-income 100 6% countries 90 9% 12% 20% Europe and 80 13% Central Asia 70 26% Middle East and 60 38% North Africa Percent 50 Sub-Saharan Africa 40 30 Latin America and 20 the Caribbean 10 East Asia and Paci c 57% 88% 62% 85% 0 Hanoi Danang Bien Hoa National South Asia average 0 20 40 60 80 100 120 Large-scale development Days (>$100 million and 200 hectares) Time to register property Mid-scale development ($10 million– $100 million and 20–200 hectares) Small-scale development Source: Data from Doing Business 2012 Survey. (<$10 million and 20 hectares) Source: World Bank 2011f. to suitable land (zoned and serviced for industry) as a major business constraint. And in India, about one in two firms reports that of $171 million annually (Ruiz and Vallejo its greatest business development challenge is 2010). To complete the cadastral update, the to obtain land in its desired industrial zone.2 government introduced information tech- In South Asia, it takes 100 days to lease pub- nology, consulted with stakeholders, and lic land for industrial purposes—the longest began estimating property values using spa- wait worldwide (figure 1.2). (In high-income tially detailed information from geographic Organisation for Economic Co-operation information systems (GIS) (Uribe 2010). and Development countries it takes just 26 Since no property transaction information days.) was available, a team of expert appraisers In accommodating industry, infrastruc- collected price data using a combination of ture, and urban development, city leaders approaches to yield an appraised value. But should first think about improving their insti- to keep property taxes progressive—and to tutions for land information and valuation. avoid resistance from property owners—the They can do so by: city imposed a cap on property tax increases. Similarly, it is generally recognized in the • Training a cadre of appraisers in property United States that tax assessors’ calculation valuation. of property value is about 33 percent lower • Ensuring transparency in the valuation than market value. process. Obstacles to valuing and assembling land • Making information on land values widely make it hard for firms to explore agglomera- accessible. tion economies and hard for governments to provide rights-of-way and basic services. So long as institutions cannot consis- About two in five firms in Algeria, Lebanon, tently and accurately discover and dissemi- and Morocco identify the difficulty of access nate land values, signals to developers and 18  PLANNING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW entre­ preneurs will be weak—and tensions Managing densities with landowners will rise. To enable the gov- ernment—as well as other interested private Land use planning does much to determine parties—to value land correctly is to lay the urban density, which in turn drives much bedrock for complementary policies and of the demand for urban infrastructure and investments. largely determines a city’s functional effi- ciency (Levy 2011). Density regulations—one of the tools used most frequently by urban Coordinate land management planners—cap the quantity of property that with infrastructure, natural can be developed on a plot of land. Such a resources, and hazard risk cap is often called the floor space index (FSI) to reflect market needs and or floor area ratio (FAR). So, for example, if societal preferences the FSI in an area of a city is 1:1, it means Linked to the functioning of a city’s land that developers can only build a building markets is its demand for physical structures, whose total floor space on the parcel is less infrastructure, housing, and amenities. That than or equal to the total plot area. While demand will change over time, requiring city in some cases it may be possible to build a leaders and planners to adapt. one-story building on a plot that entirely cov- Once the physical structures of a city have ers the plot, and therefore achieves an FSI of been built, though, they are generally fixed 1:1, developers will typically build a building for a long time. Urban structures typically with a “footprint” or “plinth” that covers survive for more than 100 years—buildings less than 100 percent of the site, but they will and housing from 20 to 150 years, transport build more than a one-story structure. For infrastructure from 30 to 200 years (Halle- example, a developer could cover 25 percent gatte 2009). Such structures will determine of a plot and build a four-story building and how the city’s land can be used and reused, still meet the FSI regulation of 1:1. dictating whether the urban economy can Other planning regulations include set- take full advantage of agglomeration and can backs (minimum distances to the front, rear, contribute to social equity and environment and sides of a plot) and maximum building sustainability (box 1.1). heights. Both are designed to protect adjacent City leaders, therefore, must make careful properties and preserve access to sun, air, decisions about their cities’ physical struc- and open space (parks and plazas). Finally, tures today—to avoid locking them into plot coverage ratio regulations limit the total physical forms that will be regretted tomor- area of a plot that can be developed (Dowall row. City leaders often are vexed with two 2012; World Bank 2013). It is very impor- different but interrelated problems. First, tant to highlight that there is no such thing they need to accommodate new demographic as an optimal FSI. The “right” FSI for a spe- and economic growth, and this may best be cific area will depend on the existing spatial located on “greenfield” areas that are not structure of the city, the street patterns and urbanized. And second, they need to revi- widths, the level of infrastructure (is there talize and reorient their cities to modernize enough capacity to accommodate higher den- them, making them more attractive to busi- sity—higher FSIs?), and cultural and social nesses and residents. Additionally, a global factors (are skyscrapers acceptable?) (Bertaud survey of cities indicates that population 2004). densities are falling and that, as the develop- Although these regulations exist for good ing country cities continue to grow, they will reasons, they often have unintended con- require much more land. Therefore, many sequences. If an area’s FSI is set far below cities are exploring how to manage their the level at which investors might otherwise densities so that they can minimize urban develop it (assuming an unregulated market), sprawl. this repression of supply can push people out PLANNING, CONNECTING, AND FINANCING CITIES—NOW P L A N N I N G C I T I E S    19 BOX 1.1  Greening city growth: Coordinating land use and infrastructure planning Urban development decisions are long-lived. As such, trips done with low-energy-consumption modes they create substantial inertia in socioeconomic sys- (Suzuki, Cervero, and Iuchi 2013). tems. Because the economic system reorganizes itself • The city of Copenhagen was designed following a around infrastructure and urban plans, and because transit-oriented and bike-friendly approach: start- so much of current growth is in cities, this inertia ing from a “finger plan”—the identification of few can extend over centuries. A delay in greening city priority development areas—then investing in five- investments may therefore prove costly if it results in axis transit radials and corridors of satellite, rail- a lock-in into technologies that turn out to no longer served new towns (Cervero 1998). be appropriate (because of their excessive carbon, land, or water intensity) or settlement patterns that But in most world cities, the decrease in the rela- prove vulnerable to changing climatic conditions. tive price of transport by individual car—due to Developing countries, which still face a huge income growth and improved car energy efficiency— transport infrastructure gap, have the opportu- has led to decreasing density, increasing sprawl, and nity to choose their urban forms and their trans- rising dependency on individual vehicles. port development path: low-emission transport or The consequence of the inertia in urban develop- car-dependent transport. Experience suggests that ment is an enormous potential for regret if decisions demand for car ownership increases dramatically at are made without adequate consideration of how annual household incomes of $6,000–$8,000. If his- conditions—socioeconomic, environmental, and tory repeats itself, an additional 2.3 billion cars will technological—will change over time. The potential be added by 2050, mostly in developing countries, for regret has always been a challenge for policies given expected economic growth and past patterns of with long-term implications, but it has been height- motorization (Chamon, Mauro, and Okawa 2008). ened by climate change and the volatility in energy Without policies to encourage high-density urban- prices. Avoiding these lock-ins—and the correspond- ization and public transport, high reliance on indi- ing regret or retrofitting costs—should be a priority vidual car transport will ensue. Consequences would for making decisions on urban planning and urban include high congestion—costly in energy expendi- infrastructure. ture and time lost—and local pollution with signifi- Of course, building better (cleaner, more resilient, cant health impacts. or both) can be more expensive. This tradeoff raises But if public transport is included as a major part the fear that countries faced with severe financing of modal structure in urban transport, there is no constraints may need to choose between “building conflict between a low-emission transport sector right” (which may make both economic and envi- and rapid growth or high income. In fact, economies ronmental sense) and “building more” (which may with some of the lowest ratios of energy consump- be what is required socially). But the additional cost tion to GDP in the world—including Hong Kong of building greener cities should not be overstated: SAR, China; Japan; and Singapore—have experi- in the urban sector, the additional cost to build with enced extraordinary development over the past few higher density and with lower energy building— decades. Curitiba and Copenhagen are two examples thanks to better insulation and more efficient heat- of where the reliance on cars is lower than average: ing systems—is limited and provides multiple cobe- nefits, making this domain a priority for immediate • The city of Curitiba shows that coordinating action (Viguie and Hallegatte 2012). urban transport with planning—to concentrate population around public transportation lines and Contributed by Stéphane Hallegatte. hubs—makes it possible to maximize the share of to other areas—and the increased demand housing prices by limiting the supply of land for those other areas can raise prices across that would otherwise be built up. It may also the city (Annez and Linn 2010). Similarly, encourage the allocation of land and build- if the FSI is a uniform limit, it may increase ings to less productive uses. Beyond slowing 20  PLANNING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW city growth in these ways, a uniform limit I n addition to densit y regulations, can also push poor households to distant enforcement of land use plans becomes a suburbs, adding to their poverty by increas- challenge when local governments do not ing their commuting costs and times. When have the administrative capacity to monitor households have no choice but to locate and facilitate growth of new settlements. In themselves near jobs, they often join hazard- Dakar, the fastest population growth in the prone informal settlements (see spotlight A). metropolitan region over the past 20 years Bangalore is an example of density regu- took place in peri-urban areas as they pro- lations reducing economic efficiency. Its FAR vide cheap and readily available land for set- is between 1.75 and 3.25, well below the tlement. However, 40 percent of the popula- typical range (most large cities around the tion growth in these areas occurred on land world have a FAR between 5 and 15). The in precarious areas—with the risk exacer- result? Research shows that if the city’s den- bated by lack of planning standards and of sity restrictions were lifted, its radius would adequate infrastructure (Pelling 2003). The be 8 kilometers rather than the present 12. physical vulnerability and risk in these peri- Commuting times would shrink, saving urban areas is compounded by their weak households about 4 percent of their income institutional capacity. through lower transport costs (Bertaud and Brueckner 2004). Coordinating land use and By contrast, developers in Bangkok’s less infrastructure planning restricted land markets were able to adapt to growing demographic and economic pres- A central problem of urban planning is that sures and climbing costs. Over 1974–88, of matching land use and infrastructure for when growth was rapid and land and housing the best possible outcome. Higher densities construction prices were on the rise, develop- generate greater need for infrastructure ser- ers responded by increasing the density of vices (electricity, water, and waste water). their housing projects. The average number But they also support environmental sustain- of units per hectare rose from 35 to 56, and ability in being better suited to public trans- multifamily housing increased from less than port. To be sure, density must not overwhelm 2 percent of new construction in 1986 to infrastructure. Yet it is equally important 43 percent in 1990. Such shifts allowed the not to underuse infrastructure, imposing low developers to build affordable housing profit- density caps where infrastructure can sup- ably (Dowall 1992). Over 1986–90, almost port higher ones. half the growth in Bangkok housing stock To see what is at stake, compare Manhat- was from private development, while infor- tan—New York City’s archetypal borough— mally produced housing composed a mere with Mumbai (map 1.1). Manhattan’s density 3 percent of the total. In other cities with zones are typically small. Its restrictions on highly constrained land markets, informally land use vary with street width and capacity, produced housing composed 20–80 percent with infrastructure capacity, and with his- of the total (Dowall 1998). torical land use patterns (commercial office To effectively shape the space, density, and districts typically have higher FSIs than resi- land use pattern of a city or metropolitan dential districts). This granularity helps to area, planners can work with a master plan make Manhattan a good example of integra- and structure plan to prepare detailed dis- tion between land use and infrastructure. trict plans. They can draft zoning ordinances In contrast, Mumbai’s density zones are to aid the plans’ implementation. And they large—uniform across much of the city—and can prepare FSI or FAR regulations to limit generally low. India’s urban planners jus- building density (Dowall 2012). Such density tify such low formal densities as necessary regulations can simultaneously be coordi- to avoid overburdening existing infrastruc- nated with infrastructure plans. ture, which is severely limited. Rather than PLANNING, CONNECTING, AND FINANCING CITIES—NOW P L A N N I N G C I T I E S    21 MAP 1.1  New York’s planning is granular (and integrated with infrastructure)—Mumbai’s is coarse a.  Manhattan, NY, United States b.  Mumbai, India FSI variations in Manhattan’s zoning Parks FSI variations 0–2 2–3 3–5 5–6 6–8 8–9 9–11 11–12 12–14 14–15 –1 0 1 2 3 4 5 6 7 0 5 10 15 20 25 30 kilometers kilometers Sources: New York City Planning Department 2011 (left); Bertaud 2004 (right). Note: In some zones, the floor space index (FSI) might be increased up to two additional units because of bonuses due to plaza, arcades, and the like. In some areas, the permitted FSI might not be reached because of setbacks and plot geometry. increase formal or planned densities, they planners who seek to increase transit use and have tried to preserve urban areas by push- discourage private motor vehicles. Because ing development out to new towns and sub- a city’s transport choices can generate both urban industrial estates (World Bank 2013). positive and negative externalities as the city But this strategy ignores an opportunity: grows, transport is best addressed as part of India’s cities could instead use rising land val- an integrated urban strategy that can cater to ues to finance better, higher-capacity infra- various user groups and anticipate long-term structure, to increase office space and to add needs. In too many cities, such a strategy has affordable housing for low- and moderate- been lacking (World Bank 2002; World Bank income groups. 2012a). Central business districts, and other eco- Consider Hanoi, where mass transport nomically dynamic areas of cities, normally investments failed to anticipate rising den- have the highest FSIs. Being well connected sities. The city expects to complete the first to public transit, they can accommodate large phase of its urban mass rapid transit plan daytime populations. But outlying areas adja- by 2020, meaning that the network and 25 cent to transit stations—or at major highway stations will be built (map 1.2, with stations intersections—are also given high FSIs by marked in green). In 2009, more than one of 22  PLANNING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW MAP 1.2  Inconsistencies between new development and mass FIGURE 1.3  São Paulo finances infrastructure transit investments in Hanoi, Vietnam, 2009 improvements by selling land development right 120,000 100,000 US$ (thousands) 80,000 60,000 40,000 20,000 0 2005 2006 2007 2008 2009 2010 Source: Sandroni 2011. Note: Annual revenues are from two urban operations (development con- cessions for additional building rights) in São Paulo. Legend Hanoi built-up density per hectare subjecting land use to economic principles of 96 – 150 150.1 – 225 efficiency. Current CBD 225.1 – 350 Line 1: 10.56 km, 9 stations In two São Paulo localities, Faria Lima Sources: Population Census update 2009 350.1 – 388 Line 2: 11.94 km, 10 stations Line 3: 7.42 km, 8 stations Built-up area: land use map Google Earth 2008 and Agua Espraiada, revenues from the Kilometers sale of additional building rights have been 0 2.5 5 10 15 20 increasing (figure 1.3). The revenues are deposited in a common Urban Development Source: Bertaud 2011, Fund ­ (FUNDURB) that carries out projects defined in the master plan of 2002. So far, most of the revenues have been allocated in five residents lived within walking distance two ways: to drainage and sanitation works, of a planned transit station. Yet new devel- and to housing and support for land ten- opments are now increasing the density of ure regularization. A large share of funded the population along the Pham Hung road improvements is located in the city fringe, in southwest Hanoi—an area that the first implying a redistribution of funds through- phase of the transit network will not serve. out São Paulo: revenues collected in the As a result, in 2020 a large share of Hanoi’s most dynamic areas are invested in the most population will be disconnected from the rest deprived, peripheral areas. of the city. Cities can use their control over densities to pay for infrastructure, as São Paulo did Leverage competitive markets when it set new rules that integrated land alongside regulation to expand management with infrastructure provision. basic infrastructure To balance efficiency with equity, when the City leaders need systems for valuing land, city redefined allowable development den- and they need land use plans that are coor- sities, it imposed a charge for additional dinated with infrastructure plans. But they building rights even as it capped each area’s also need ways to promote the expansion of land supply (World Bank 2011c). The charge urban infrastructure services. The urgency for the right to build in a given area was a of this need appears in figure 1.4, showing function of its land and property prices, access to piped water for urban residents in PLANNING, CONNECTING, AND FINANCING CITIES—NOW P L A N N I N G C I T I E S    23 FIGURE 1.4  Share of population with access to piped water across countries and city sizes a. Brazil b. Colombia 100 100 80 80 60 60 Percent Percent 40 40 20 20 0 0 Largest Smallest Largest Smallest City size City size c. India d. Uganda 100 100 80 80 60 60 Percent Percent 40 40 20 20 0 0 Largest Smallest Largest Smallest City size City size e. Vietnam 100 80 60 Percent 40 20 0 Largest Smallest City size Sources: Brazil: IBGE 2000; Colombia: DANE 2005; India: Ministry of Home Affairs 2001; Uganda: Uganda Bureau of Statistics 2010; Vietnam: General Statistics Office of Vietnam 2009. Brazil, Colombia, India, Uganda, and Viet- with city size—but it does so differently. In nam. In each of these five pilot countries for Vietnam, access is high but less equitable, the World Bank’s Urbanization Reviews (see with smaller cities showing lower access. In box O.1 in the overview), water access varies Brazil and Colombia, service coverage is high 24  PLANNING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW and fairly equitable. In India and Uganda, no difference: they understand that they will access is lower and less equitable. make money only if customers are able and How to increase access to basic infrastruc- willing to pay the required price. ture services? In most infrastructure services, Can market forces indeed be harnessed— such as transport, electricity, and telecommu- to make basic infrastructure service provi- nications, a useful question for city leaders sion more efficient, to expand access to ser- is whether there is a framework of clear and vices, or both (Klein 2012)? Head-to-head consistent rules for service delivery. Three competition is feasible in principle for certain approaches merit consideration: sectors: electricity, natural gas, transport, water, and waste management, though the • Harness market forces, either by allowing sectors with large expensive networks (elec- free competition among providers or by tricity, natural gas, rail transport, and water) auctioning service franchises (mimicking require elaborate regulation to let service the effects of competitive pricing through providers share networks.3 Even where only recurrent auctions). monopolies are feasible, periodic franchise • Regulate prices, with mechanisms to insu- auctioning can mimic the effects of competi- late the regulators from political influence tive pricing. However, when large expensive by the regulated firms. network infrastructure is required, auction- • Establish subsidies, primarily to expand ing may be less efficient. access, when there is no way for prices to cover the costs of equitable service Opportunities to allow free competition provision. Telecommunications is the most prominent example of a competitive infrastructure mar- For services such as water supply and sani- ket. Others are possible, however. tation, the first order considerations are for national governments and city leaders to set • In electricity, some competition may be realistic objectives for the development of the feasible among generators, as well as water supply and sanitation sector, checked among energy traders and sellers in larger against available resources and agreed on in a systems. Hong Kong SAR, China, even multistakeholder policy dialogue; to address left residential prices unregulated until a the governance issues particularly regarding few years ago. In natural gas, there can to accountability and public participation; be effective competition from competing and to address the coordination challenges fuels such as fuel oil. Some systems, such across sectors and space. as Germany’s, have left prices unregulated and allowed entry into the pipeline busi- ness. However, typically duplication of Harnessing market forces pipelines or creation of a number of adja- In basic infrastructure, as in other mar- cent networks with different owners is not kets, prices ideally should cover costs. Why? economically optimal. Because cost-covering prices are likely to be • In transport, various forms of head-to- a city’s strongest protection against wasteful head competition are possible. Bus and investments and consumption. truck companies can compete freely. When policy makers inform potential Ports, or airports, can compete if they are providers that they will not receive any fis- not separated too widely. And freight rail cal transfers or subsidies—but that regula- firms may face effective competition from tion will allow pricing to cover costs in the road transport over large distances. In aggregate—then providers estimate demand water supply, there may be head-to-head and calibrate it against costs, just as investors competition. But in most cases, compe- in any market would do. Whether the pro- tition between household connections viders are publicly or privately owned makes and stand-posts, and alternatives such as PLANNING, CONNECTING, AND FINANCING CITIES—NOW P L A N N I N G C I T I E S    25 unprotected springs or private wells, may Yet monopolies can abuse their market in fact suggest affordability issues or cop- power, charging prices that are too high to ing strategies to overcome poor infrastruc- be socially acceptable. Such prices can also ture services. make economies less productive and less competitive. So how can policy allow prices In some urban services, free market entry is to cover costs—while ensuring that prices undesirable, because the resulting competition stay close to costs, as opposed to fattening a can undermine safety standards. The “penny monopoly with excessive profits? wars” of Bogotá are an interesting exam- ple. Before a bus rapid transit system called Auctioning service franchises TransMilenio was introduced in 2000, about Regulation can closely mimic the effects of 30,000–35,000 buses were operating in the competitive pricing even where monopolies city (Hook 2005). The government granted exist. City leaders can auction the right to nonexclusive permits to the route operators, provide a service for a certain period—mov- with whom bus owners were affiliated. The ing away from a monopolistic price, and bus owners in turn charged their drivers fixed closer to that which would arise from com- rents. The drivers’ revenue thus depended petition. Firms that lose at auction exit the directly on how many fares they collected particular market. If it is possible to put such (World Bank 2008). Cutthroat competition a monopoly franchise up for auction fairly ensued, with unsafe results: drivers had a frequently based on the lowest price, the auc- strong incentive to speed, cut people off, and tions will act like a market to set prices. carry too many passengers. The introduction Many cities auction bus routes, assigning of TransMilenio, together with a new regu- operators to predefined itineraries. Examples latory framework, eliminated these “penny include Santiago, Bogotá, and London. San- wars.” The new framework included bid- tiago awards five-year contracts using criteria ding for all parts of the service, from routes that include the fare offered by the bidder, to infrastructure. TransMilenio allocates the along with quality variables. Before the auc- market to operators according to their qual- tions, during a period of deregulation, bus ity, among other factors—and it pays them fares had risen; with the auctions, the fares by the kilometer, assuring them of a certain came back down. In London, since auctions amount regardless of their passenger load. were instituted, operating costs per bus- Head-to-head competition may also be kilometer have declined considerably (gross technically unfeasible in sectors that natu- administrative costs by an estimated 20–35 rally favor monopolies. Much of a city’s net- percent, net administrative costs by at least worked infrastructure falls in this category: 14 percent) (Estache and Gomez-Lobo 2004). its duplication tends to be inefficient. A single W here possible, franchise auctions network, fully built out, can often underbid repeated at intervals of one to three years any competitor.4 can make price regulation essentially unnec- Canada’s cities are one example of a natu- essary. Such auctions have been used, not ral monopoly superseding market competi- only in bus transport, but also in waste man- tion. Water utilities would at first compete to agement. If a company loses a franchise, supply firms and households in a given mar- its assets—buses, garbage trucks—can be ket by laying separate pipelines. Then all the deployed elsewhere. providers but one would fade away. In other cases, a monopoly provider started and was Regulating prices not challenged, either because competitors could not undercut it or because entry was Where free entry and auctions are both forbidden by law. Natural monopolies can impractical because of a natural monopoly also appear in exclusive locations, such as involving fixed assets in a service area, price airports and central metro stations. regulation is needed.5 For example, it would 26  PLANNING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW be absurd for water providers to remove and and state-owned firms will underinvest in replace pipelines after every auction. Nor can basic infrastructure provision. Moreover, such fixed assets be included in the auctions. firms that win infrastructure contracts will For an auction to determine the price of a be tempted to renegotiate them. So to make service, the bidder needs to know the price regulatory regimes work, cities need a mech- of the assets. And since assets in the ground anism to prevent after-the-fact opportun- have negligible market value outside the fran- ism—either by regulators or by the service chise area, their value depends on the price providers. Such a mechanism has three parts: that the provider can charge—which is what the auction was supposed to determine. Fix- • The design of the pricing rules. ing the asset price before the auction would • The legal framework under which rules be tantamount to direct regulation of prices. are made and administered. In regulating prices for basic infrastruc- • The organizational arrangements for ture services, the government typically administering the rules. announces a regulatory regime for private or state-owned providers.6 Only after firms The design of pricing rules invest does the actual demand become clear. For prices to cover costs while giving firms The firms then operate the system to meet an incentive to expand coverage and pro- demand. Finally, the regulator rules on the vide high-quality service, the costs must be revenue that firms can make. calculated—and the prices must allow a The problem: private providers know that rate of return. The danger of after-the-fact in the last stage of this process—revenue cap- expropriation is highest when the regula- ping—the regulator can renege on the pric- tor imposes a price cap, such as those used ing rules announced at first. Such reversals in the United Kingdom. Although price caps are likely when regulators are under pres- were meant to give firms an incentive to per- sure to lower consumer prices or to reduce form efficiently—allowing them to profit by profits deemed too large. Even in countries serving customers well at a lower cost than with strong legal systems and long regulatory expected—their profits, once made, were traditions, regulators can be strongly pres- attacked as “too high.” Furthermore, caps sured to renege on initially announced pric- decouple infrastructure prices from utiliza- ing rules. In a few parts of the United States tion. Even when demand is low, the regulated where utility regulators are publicly elected, price will reflect the cost of both used and demands to curb prices tend to undermine unused capacity. At such times, regulators service provision. may feel pressure to reduce revenues. Another problem follows: providers try to Providers have a smaller incentive for effi- renegotiate contracts shortly after the con- ciency—but may be more willing to invest— tracts are awarded. In Latin America, provid- when the rate of return is regulated, as in the ers have renegotiated 55 percent of infrastruc- United States. Profits, rather than prices, are ture concessions in transport and 75 percent capped after the fact. Regulators can vary in water and sanitation. The high incidence this cap, allowing less profit when demand is suggests that this is opportunism—not merely low and more when demand is high, to make an attempt to compensate for incomplete revenues more closely reflect utilization (an information in concession contracts. What instance of the “used and useful” doctrine7). should be decided through a competitive auc- An advantage of these typical U.S. arrange- tion is opportunistically dictated through ments is that they reduce the regulator’s a bilateral negotiation in which the govern- incentive to renege. This greater reliability ment, however, lacks power. The benefits of makes investors more likely to put their capi- competition thus vanish (Guasch 2004). tal into infrastructure expansion projects, In short, wherever the regulatory pro- even though prices may fail to cover costs cess is rife with political risk, both private during times of low demand.8 PLANNING, CONNECTING, AND FINANCING CITIES—NOW P L A N N I N G C I T I E S    27 In cities in developing countries, basic FIGURE 1.5  Utilities in some of India’s largest cities do not recover infrastructure service prices regularly fail to their operating and management costs for water supply and sanitation through user fees, 2006–07 cover the providers’ costs. In some of India’s largest cities, the cost of water provision, on average, exceeds revenues from use (fig- Indore ure 1.5). Of the 20 cities in figure 1.5, only 8 Kolkata do not recover their operating costs for water Mathura supply and sanitation through fees. As a Bhopal result, India’s urban water sector can survive Jabalpur only on large operating subsidies and capital Rajkot grants from the States. Ahmedabad In sum, excessively low price caps reduce Amritsar the incentives for infrastructure providers Chandigarh to expand coverage. They also put utilities Varanasi under financial stress—enough to harm ser- Nashik vice quality. Vijayawada Surat The legal and contractual framework Coimbatore Any pricing rule will be laid down in a legal Bangalore document. But the commitment value of legal Visakhapatnam arrangements varies across countries. Inves- Nagpur tors seeking protection from potentially arbi- Jamshedpur trary regulators may prefer contracts that are Mumbai subject to court supervision—or even regula- Chennai tions enshrined in the law, which can be hard to change.9 Generally, a regulatory regime’s 0 1 2 3 4 5 6 most prudent legal form will depend on the Operating ratio, 2006–07 quality of the institutions that safeguard and administer it. Source: World Bank. Note: The operating ratio is the ratio of operating costs, excluding depreciation and debt service, Governance challenges to operating revenues, excluding operating subsidies. A provider’s ability to cover all its operating costs (as defined above) through fees (and other nonsubsidy revenue sources) would be reflected in Usually there is a tradeoff between contrac- an operating ratio of 1. tual commitment and flexibility (since regu- lations may require adjustment to unforeseen circumstances). Managing this tradeoff is the and increased public awareness, concern, key challenge for the designers of a regulatory and involvement could all contribute to bet- institution. Typically they seek mechanisms ter planning and implementation of infra- to protect the regulatory body from undue structure service provision. In addition, for political influence by regulated firms—while private sector service provision, a transpar- giving the regulator some leeway in the appli- ent process of awards and contract provi- cation of rules. sions including, as mentioned above, barriers A lack of transparency in policy and plan- to revise contract provisions ex post are all ning and a lack of quality and integrity in key components of effective infrastructure decision making may be called the account- provision planning (box 1.2). Key gover- ability gap (OECD 2012). This is an issue nance challenges include: coordinating the for both public and private service provision, service delivery level and financing decisions, although the specific characteristics of the addressing the accountability gap, and coor- issues depend on whether it is public or pri- dinating across sectors and space. vate service provision. Improved monitoring The iterative process of setting objectives of outcomes, enhanced use of benchmarking, against available resources in multistake- 28  PLANNING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW BOX 1.2  Successful policy reform in Armenia is based on a well-defined policy framework, clear service-level targets, and incentives for public private participation In 1995 when a local self-governance system was cre- tors at the regional level, the use of Yerevan Water at ated in Armenia, the responsibility for water supply the municipal level for 80 percent of the population, and sanitation was delegated to municipalities. But public-private participation with increasing private most of them did not have the necessary organiza- sector involvement and responsibility over time, and tional and financial capacities to manage water supply the establishment of clear performance targets. and sanitation services, especially small municipalities. On the whole, the results have been very posi- Systems were in disrepair and despite an abundance of tive. For example, from 2000 to 2009, the number water in the country for almost all Armenians, water of hours of water supply in Yerevan increased from was available for only a few hours a day. 4–6 hours a day to 18–19, and electricity consump- In response to these challenges, a policy frame- tion was reduced by more than half. work has been created with the support of the World Bank. This includes a revised legal and regulatory Contributed by Michael Jacobsen, based on OECD (2011) framework, the establishment of four water opera- and World Bank (2011a). ­ older policy dialogues coined Strategic h institutional implications of planning deci- Financial Planning by the Organisation for sions. Sharing information across all levels of Economic Co-operation and Development government, as well as between sector agencies (OECD) must be carried out in the context at one level of government, is indispensable for of broader sector and urban planning that sound planning. OECD (2012) calls this the addresses the role and responsibility of public information gap. In addition, particularly for agencies, policy priorities, and related regula- water, the geographical mismatch between tory and legislative issues in order to ensure hydrologic and administrative boundaries is a that the result is a package of measures, which major obstacle to successful planning. OECD can be realistically financed (OECD 2009 and (2012) calls this the administrative gap. Met- 2011). Efforts to improve the effectiveness of ropolitan areas, with their overlapping juris- service delivery and lowering of capital costs diction and political fragmentation, can lead are needed in most cities. These efforts may be to incoherent and, at worst, mutually exclusive supported by a range of planning tools includ- water management planning and practice. ing strategic financial planning, legislative and Similarly, the city’s dependence on the catch- regulatory reform, benchmarking, and perfor- ment and competition for water may threaten mance tools and by combining both funding city-level planning. For example, the water and service provision from the public and pri- supply of Adelaide, Australia, depends cru- vate sector (World Bank 2012b). cially on water uses for irrigation and other In most countries, particularly, but not purposes higher in the Murray-Darling catch- solely, in Africa, there is a dearth of infor- ment. Singapore’s much touted “four taps” mation to guide policy makers and planners. water management strategy aims to reduce the Often there is asymmetry of information reliance on supply from Malaysia, as heavy across national and local level actors involved reliance on one upstream source is perceived in policy and planning. For example, in the to entail risks (World Bank 2012b). water sector, information about basic issues (such as the water supply and sanitation cover- Establishing subsidies age and the source, quality, and timely avail- ability of water consumed by households) is Public policy can set service prices below limited at the local level and precious little cost-recovery levels to meet social and envi- data are available about the economic and ronmental obligations. When prices are set to PLANNING, CONNECTING, AND FINANCING CITIES—NOW P L A N N I N G C I T I E S    29 cover all the costs of an infrastructure proj- access. They should target subsidies to poor ect, including the cost of capital, systems will people—whether by conducting means- likely be built out to serve all customers who testing (as in Chile’s water subsidy system), are ready to pay the service cost. But policy by targeting areas where the poor tend to makers may also want access to infrastruc- live, or by offering lifeline rates (for reduced ture to be extended to other customers— service at a reduced price). Lifeline rates both for equity and for environmental sus- raise an objection, though: they can benefit tainability. Price discrimination and subsidies people at any income level. Such objections can boost coverage and access. are a reminder that subsidies require careful design. Basing them on quantity or consump- Social equity tion does not necessarily promote equity. A The poor often pay higher prices per unit study of 26 quantity-based subsidy cases in of, for example, water or energy, than do Africa, Asia, and Latin America suggested wealthier people. Water vendors in poor that 24 were regressive, and that where cov- urban areas may charge several times the unit erage is not universal, connection subsidies cost of modern water service (Klein 2012). may be better at reaching the poor (Komives Price discrimination is a way to restore equity et al. 2005). by charging rich people more and poor peo- ple less. Environmental sustainability One method of price discrimination is Public transport can mitigate urban conges- to offer the poor a specially tailored price- tion: a bus carrying 40 or 50 people takes up quality mix. For example, poor people who no more road space than two or three private can afford to buy water at times—but not cars. And public transport pollutes less, gen- regularly—can do so by the bucket. Or the erating fewer greenhouse emissions. Yet in poor can be served by simpler pipelines. In many countries, public transport is unafford- other ways, too, the poor can be offered flex- able for the poor. ible service that is better than what they had For example, households in Kampala, before, yet not exactly what the rich receive. Uganda, pay $13 a month on fares, about 8 (Water that is not fully treated can still serve percent of their budget (World Bank 2011e). many common uses, such as flushing toilets. Although that is consistent with global esti- Poor people can make their water potable by mates of what people pay for transport, it boiling it.) Finally, the poor can be given more is unaffordable for the poor. To use public flexible payment terms—for example, through transport, the poorest 20 percent of house- the use of electronic cards. In pursuing these holds would need to spend 41 percent of their possibilities, it can help to let unconventional income on fares. Similar patterns appear in providers—from for-profit vendors to commu- other cities worldwide. nity-based organizations—enter the market The predictable result is that, in many (Baker 2009). While these are clearly not the developing countries, urban public trans- only solutions for improving access to water, port ridership is low. In cities where trans- they provide various second-best options to port fares do not cover the full cost of ser- provide services of varying quality. vice provision, transport subsidies can boost Governments can also provide subsidies ridership. But such subsidies, to succeed, for equity. However, one must recognize that require strong contractual agreements and many subsidies do not increase access to ser- regulation. vices. For example, subsidizing an existing The problem is that even after fares are utility may help the better-off people who are decoupled from full operating costs, trans- already connected—and no one else (Estache port providers still need assurance that their and de Rus 2000; Komives et al. 2005). costs will be met by revenues. Cities such as Accordingly, city leaders should focus dis- Bogotá, Curitiba (Brazil), London, and Seoul cussions of subsidies on policies to expand have solved the problem with gross cost 30  PLANNING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW FIGURE 1.6  Public transit fares do not recover operating costs in many of the world’s largest cities 140 118 120 Ratio of fares to operating costs (%) 100 97 95 100 90 80 70 67 63 61 59 60 51 51 51 42 36 40 20 0 a a re re o o on ty rk ris i i ad l in r ib ba lh iag nt ou ve Ci Yo po alo nd Pa Ch rit De ab ro um Se ou nt ico ga ng w Cu Lo To ed R, Sa Ne nc M Sin ex Ba SA m Va M Ah ng Ko ng Ho Source: Urbanization Review team. Note: The numbers in this chart relate to bus and metro systems operated by public entities or large corporate entities. A weighted average was based on ridership across modes. Small private operators were not included because data were lacking. contracts, which assure operators that their cost of mass transit is high, but the cost of revenues will be based on performance—not parking is high, as well, so that the relative on fare box collections (or not directly so). price of driving relative to using public tran- To cover costs fully, public agencies then seek sit is as high as Tokyo at 6.75 (World Bank other sources of revenue. 2011d). Transport systems around the world vary widely in the share of operating costs that Financing subsidies they recover through fares. In a sample of 15 Across sectors, subsidies can be funded by public transit systems, only 2 fully covered various taxes. Or they can be funded through their costs through fares. In Paris, 51 per- cross-subsidies. In Paris, where fares cover cent of costs were recovered through fares; less than 40 percent of public transit operat- in New York, 36 percent (figure 1.6). While ing costs, the main additional revenue source public transport systems appear to be subsi- for transport operations is an employment dized, what matters for mobility is the rela- tax levied on employers as a share of their tive price of public and private transport. It wage bill (see figure 1.6). The tax is justified turns out private transport in many cities on the grounds that public transport invest- worldwide are subsidized—as their full costs ments increase the employers’ access to labor are not recognized because road use and markets. parking are not charged efficiently. In Delhi, For services other than transport, cross- for example, the relative prices of driving to subsidies could require richer urban consum- public transit range between 1.91 and 4.13; ers to pay prices in excess of cost—allow- in Tokyo, a city with low metro fares and ing providers to charge poorer customers high gasoline prices, the relative prices range less, perhaps in rural areas or in peripheral between 5.19 and 7.20; in New York, the neighborhoods. (Spotlight B discusses this PLANNING, CONNECTING, AND FINANCING CITIES—NOW P L A N N I N G C I T I E S    31 approach.) But the viability of such cross-sub- must be physically used and useful to ratepay- sidies varies inversely with the scope for com- ers before they can be asked to pay the costs petition in the infrastructure sector. Where associated with them (Newbery 2001). head-to-head competition exists, high prices 8. Other schemes can help build credibility. The in urban areas could attract new entrants to German electricity company, RWE, initially undercut an incumbent who depends on the escaped nationalization by splitting its prof- its 50 –50 with the government. Similarly, urban market to cover rural costs through resource rents are sometimes shared in min- cross-subsidies. In such cases, a better solu- ing contracts (an example is resource rent tion is a general tax scheme on all providers. taxation). Several telecommunications regimes impose 9. Some call this “regulation by contract” (for this type of general levy, which is used to example, Gómez-Ibáñez 2003). Not funda- fund universal access. mentally different from other regulatory rules, Price discrimination and subsidies can regulation by contract merely happens to rely expand access to infrastructure services for (partly) on enforcement by the courts. equity and for environmental sustainability. 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The Right Turn: Ensuring Devel- Uribe, Maria C. 2010. “Land Information Updat- opment Through a Low-Carbon Transport ing, a De Facto Tax Reform: Bringing Up to Sector. Washington, DC: World Bank. Date the Cadastral Database of Bogota.” In ———. 2011e. “Planning for Uganda’s Urbaniza- Innovations in Land Rights Recognition, tion.” Inclusive Growth Policy Note 4. World Administration and Governance, ed. Klaus Bank, Washington, DC. Deininger. Washington, DC: World Bank. ———. 2011f. “Vietnam Urbanization Review.” Viguie, Vincent, and Stéphane Hallegatte. 2012. Technical Assistance Report. The World Bank. “Trade-Offs and Synergies in Urban Climate Washington, DC. Policies.” Nature Climate Change 2: 334–7. ———. 2012a. Inclusive Green Growth: The World Bank. 2002. World Development Report Pathway to Sustainable Development. Wash- 2003: Sustainable Development in a Dynamic ington, DC: World Bank. World. Washington, DC: World Bank. ———. 2012b. Integrating Urban Planning and ———. 2008. World Development Report 2009: Water Management in Sub-Saharan Africa. Reshaping Economic Geography. Washing- Washington, DC: World Bank. ton, DC: World Bank. ———. 2013. Urbanization beyond Municipal ———. 2011a. Europe and Central Asia Knowl- Boundaries: Nurturing Metropolitan Econo - edge Brief. December 2011, Volume 44. Wash- mies and Connecting Peri-urban Areas in ington, DC: World Bank. India. Directions in Development Series. ———. 2011b. “Indonesia: The Rise of Metropol- Washington, DC: World Bank. itan Regions: Increasing the Urban Dividend.” Washington, DC: World Bank. Spotlight A Slums are not inevitable: Rules for flexible land use and coordinated connections can improve living conditions T he United Nations projects that 2 bil- fourth of their disposable income on trans- lion people will live in slums by 2030. port (Hook 2005). How to manage slum formation and Do many people live in slums by choice, reduce the hazards faced by slum dwellers?1 simply because the tradeoffs from commut- Most policy discussions tend to focus on mov- ing would be too great? This seems at least ing people to safe environments or providing possible. What is certain is that many slum better housing elsewhere. Proposed objectives dwellers are people for whom even the cheap- include urban upgrades, such as community est public transit would be too expensive. and household infrastructure projects; reset- And it is an illustrative fact that in Mumbai tlement to new housing developments; hous- more than three in five commuters walk to ing subsidies; and land titling. their jobs. But many of these policies do not work. To foster better living conditions, city The reason is that people do not always will- leaders can coordinate land market rules ingly trade away a better location for a bet- with urban infrastructure development. ter home with modern utilities. People choose Hanoi has been able to grow without the neighborhoods for their affordable services formation of large slums because the govern- and amenities—but also for their proximity ment set prudent rules for land markets and to jobs. infrastructure. It allowed the densification of In many developing-country cities, it can former village areas. It pushed for modern- be difficult to live near one’s job, because izing road networks just outside the city, yet land markets have failed: formal housing it mostly avoided demolishing older houses. supply is low, in part because of restrictive These roads have opened new land for for- regulations. But it may also be difficult and mal developers while improving connections costly to commute to work, because trans- between existing village areas and the city. port infrastructure fails to connect urban The village areas were allowed to grow and neighborhoods. Commuting by public transit were integrated into the urban economy. in many African cities would cost more than City leaders in Bogotá similarly suc- half a poor household’s income. In Harare, ceeded by coordinating land use with infra- Zimbabwe, the poor spend more than a structure development. The Programa de 35 36  SPOTLIGHT A PLANNING, CONNECTING, AND FINANCING CITIES—NOW Mejoramiento Integral de Barrios (PMIB) efficiently, and multiple transfers are needed aimed at improving mobility and living to reach dispersed jobs (Bertaud 2009). Buses conditions in 26 of the poorest city areas, carry other workers on commutes that last called Unidades de Planificacion Zonal. The nearly as long as the work day itself. Unidades comprised 107 neighborhoods of Two main lessons emerge from these cit- informal origin, with 1,440 informal settle- ies’ experiences: ments, 300,000 plots not formally titled, and about half million structurally substandard • Efforts to alleviate slum growth and dwellings. The PMIB legalized homes and unsafe conditions with improved housing neighborhoods; it expanded infrastructure should not have the unintended effect of with roads, rainwater traps, and sanitary reducing workers’ access to labor markets. and aqueduct trunk networks; and it added • Setting rules for land and infrastructure urban facilities (stairs, parks, community coordination can connect generations of rooms). Living conditions improved for about workers to jobs—and earn city leaders the 650,000 people. right to say that their policies have trans- Other cities, such as Bangkok and Jakarta, formed urban living conditions. still do not consistently coordinate land use with infrastructure. Their undeveloped main Note roads and transit systems are extremely con- gested, even though the cities are far less 1. Slum dwellers, though not all living in hazard dense than, say, Hanoi. Their housing sup- prone areas, are more likely than others to do ply has overtaken their transport infrastruc- so. Studies show that the share of the world’s urban population subject to natural hazards ture—making housing fairly cheap, but sur- will more than double by 2050. Today, 370 rounding it with gridlock. In Jakarta, the loss million people live in cities in earthquake in productivity is severe. prone areas, 310 million in cities with high In cities such as Delhi and Mumbai, hous- probability of tropical cyclones. By 2050, these ing supply has been restricted by rules prevent- numbers are also likely to more than double ing the development of land. The outcomes (Lall and Deichmann 2009). have been very expensive housing, low hous- ing consumption—and often poor mobility, because of infrastructure’s failure to adapt. References In still other countries where the rules for Bertaud, Alain. 2009. “Note on Spatial Issues land and infrastructure were not set pru- in Urban South Africa.” http://alain-bertaud dently, households ended up disconnected .com/AB_Files/_vti_cnf/AB_Note%20on%20 from jobs. The government of South Africa South%20Africa.pdf. Hook, Walter. 2005. “Institutional and Regula- tried to manage costs for subsidized hous- tory Options for Bus Rapid Transit in Devel- ing by choosing isolated sites, with lower oping Countries: Lessons from International land values, for about two million newly Experience.” Transportation Research Record built homes. But there was no plan to con- 1939: 184–91. nect these subsidized homes to the job mar- Lall, Somik V., and Uwe Deichmann. 2009. ket. Many workers now commute in collec- “Density and Disasters: Economics of Urban tive taxis, which are slow and expensive. The Hazard Risk.” Policy Research Working Paper roads are not good enough to handle traffic 5161, World Bank, Washington, DC. Spotlight B The value of market rules for basic services: For expanded coverage and increased efficiency, it’s not all about the money W hen policy makers consider how to Even with fee increases, water remains expand infrastructure and improve fairly affordable in Colombia. The fee struc- the provision of basic services, they ture allows the government to cross-­ subsidize: have a choice. Rather than give first priority richer households and industrial users pay for to financing, as is often done, they can look at the poorest consumers. As a result, the aver- the structure of markets for basic services— age poor household spends less than 5 per- and determine what rules will work best. cent of its income on utility services. In particular, policy makers may consider In the electricity sector, Colombia’s gov- rules for competitive pricing and cost recov- ernment changed the rules to increase effi- ery. Indeed, in many cases the expectation of ciency—loosening restrictions on market cost recovery through fees will determine the entry and unbundling electricity provision availability of financing. into four categories (generation, transmis- Consider Colombia. In 1964, only half the sion, distribution, and commercialization) residents of Bogotá and other large cities had (Larsen, Pham, and Rama 2004). The policy access to water, electricity, and sanitation. change succeeded, transforming the electric- In smaller cities, coverage was even lower. ity market in Colombia and greatly increas- Today, there is nearly universal access in cit- ing its output. Indeed, the country became ies of all sizes—a convergence that took more a net exporter of electricity, exporting 1.76 than 40 years (figure SB.1). terawatt hours to Ecuador in 2005. How did Colombia expand service cover- Vietnam also increased electricity cover- age? A big part of the answer is that policy age—rapidly (figure SB.2). In the early 1990s, reforms allowed fees to nearly cover costs. For electricity reached only a small minority of example, average residential water fees more Vietnamese (about 14 percent). Today, it is than doubled over 1990–2001 (World Bank available to almost everyone (97 percent). 2004). With almost 90 percent of households Coverage is almost universally equitable: having a metered connection, household con- there is little disparity between rural and sumption was nearly halved. And that, in urban areas, and regional gaps are minor. turn, reduced the need to develop major new What policies led to Vietnam’s steep rise infrastructure. in coverage? In 1995, the government created 37 38  SPOTLIGHT B PLANNING, CONNECTING, AND FINANCING CITIES—NOW FIGURE SB.1  Access to basic services by city size in Colombia, 1964–2005 a. Electricity b. Water c. Sanitation 100 100 100 Households with access (%) households with access (%) households with access (%) 75 75 75 50 50 50 25 25 25 Largest Smallest Largest Smallest Largest Smallest (Bogotá) (Bogotá) (Bogotá) 1964 1993 2005 Sources: DANE 1964, 1993, and 2005; Urbanization Review team calculations. FIGURE SB.2  Vietnam achieved near to universal on further electricity improvements. Instead electricity coverage in just over 15 years of focusing exclusively on universal access, Vietnam’s policy makers could have tried to 100 90 ensure higher quality. It might have been bet- 80 ter for all to provide businesses with reliable Electri cation rate (%) 70 power than everyone with unreliable service. 60 And Vietnam cannot easily sustain its fiscal 50 support for EVN. The strain on the budget 40 gives the government a stake in seeking alter- 30 natives, such as privately financed electricity 20 generation—but those alternatives would 10 require cost recovery through higher fees. 0 Vietnam’s present government is trying to increase electricity fees and attract private 93 95 97 99 01 03 05 07 08 09 19 19 19 19 20 20 20 20 20 20 financers and generators. It is also consider- Source: Vietnam General Statistics Office 2009. ing whether to open the electricity market to competition among generators. Signs indicate a public enterprise, EVN, to manage the elec- that the market can indeed support higher tricity system. Prices were kept well below fees (World Bank 2007). cost, and service expansion was funded by In contrast to Colombia and Vietnam, fiscal transfers along with other EVN rev- Uganda still has large gaps in access to basic enues. But EVN also remained viable by services throughout the country. In 2008, diversifying into other profitable businesses, Uganda’s rate of access to improved water including telecommunications. sources was 22 percent in urban areas and Vietnam’s approach has brought benefits 5 percent in rural areas (Mugisha and Bor- to many—but those benefits have come with isova 2010)—far below the overall average costs. First, the service is spotty and ineffi- for developing countries (84 percent) and for cient, with frequent outages (World Bank the Sub-Saharan region (58 percent) (UNDP 2007). Second, low revenues from electric- 2008). ity provision led EVN to focus on its more Ugandan policy makers have started profitable ancillary businesses, rather than thinking about the rules that need to be in PLANNING, CONNECTING, AND FINANCING CITIES NOW S P O T L I G H T B    39 place to expand access to basic services. References A water reform of 1998 focused on creat- Banerjee, Sudeshna G., and Elvira Morella. 2011. ing the right incentives for more efficient Africa’s Water and Sanitation Infrastructure. service provision: attributing responsibil- Washington, DC: World Bank. ity to local service managers and increas- DANE (Departmento Administrativo Nacional de ing their accountability. Since 2000, the Estadística). 1964. “XIII National Population national government has been working with and II Housing Census.” Bogotá. the Ugandan National Water and Sewerage ———. 1993. “XVI National Population and V de Corporation (N WSC)—the autonomous Housing Census.” Bogotá. public provider of water and sanitation to ———. 2005. “General Census 2005 (XVII of the country’s large towns—to enforce per- Population and Dwelling and VI of Housing).” formance contracts. Renewed every three Bogotá. years, the contracts include specific indica- Larsen, Theo, Huong Lan Pham, and Martin tors that NWSC must meet at the end of the Rama. 2004. “Vietnam’s Public Investment Program and Its Impact on Poverty Reduc- period (Banerjee and Morella 2011). How- tion.” World Bank, Hanoi. ever, Uganda’s reform has not yet attempted Mugisha, Silver, and Tatiana Borisova. 2010. to promote cost recovery through user fees. “Development of Pro-poor Water Project in The NWSC charges a uniform fee across Uganda: A Critical Analysis.” Engineering all towns and customer categories served. Economist 55 (4): 305–27. In 2010, of 23 areas served, only 6 covered U N DP (United Nations Development Pro- production costs. gramme). 2008. Assessing Progress in Africa Policy makers hoping to improve basic toward the Millennium Development Goals. services have usually focused on financing. New York: United Nations. Sometimes they have even expressed objec- Vietnam General Statistics Office. 2009. “Results tives as investment targets (such as spending of the Survey on Household Living Standards 7 percent of GDP on infrastructure). But the 2008.” Hanoi. examples of Colombia, Vietnam, and Uganda World Bank. 2004. Colombia Recent Economic Developments in Infrastructure (REDI). show the value of rules—three in particular: Balancing Social and Productive Needs for Infrastructure. Washington, DC: World Bank, • Establish clear and consistent rules for Finance, Private Sector and Infrastructure service provision to increase effectiveness, Unit, LAC. efficiency, and equity. ———. 2007. “Vietnam Rural Energy Project, • Ensure sustainability through full cost Implementation Completion and Results recovery from tariffs and/or transfers. Report.” Report ICR485, World Bank, Wash- • Where required, subsidize access. ington, DC. 2 Connecting cities A city’s connections—external and in- resources, they cannot invest in everything. ternal, physical and economic—bear It is hard to know which new or improved heavily on its future. Where cities and connections will yield the highest returns city neighborhoods are disconnected, labor over time. As facts change, cities will need to and product markets are not integrated. The adapt. Setting priorities for investment means results are forgone productivity and higher picking winners and losers in the short run— product prices, costs felt by producers and but in the long run it can make a vast dif- consumers alike. And as weak connections ference for entire cities, even countries. Some limit the growth of cities, so feeble cites stunt decisions lock cities and countries into pat- the growth of countries. terns that last a century or more; others have The benefits of strong connections are outcomes that are simply irreversible. well understood.1 Between cities, connec- How can policy makers know which con- tions enable firms to access local, regional, nective investments are needed and will yield and global markets—both for buying inputs the highest returns? What related consid- and selling outputs. They also give consum- erations should they keep in mind? To help ers options and, in many cases, better prices. their cities grow and adapt by identifying the Within cities, connections enable people to most effective additions and improvements access employment; and they enable firms to to connective networks, city leaders can take attract workers, access other inputs, and sell the following three steps: their products in local markets. Enhanced connections can expose cities to new eco - • Value the city’s external and internal nomic opportunities, allowing them to connections. flourish. Policy makers who make markets • Coordinate among transport options and and jobs more accessible open the door to with land use, by deciding how to smartly unforeseen possibilities, facilitating economic use competition among providers and by transformation. balancing cost recovery with targeted sub- But city leaders who envision stronger sidies where needed. connections for their cities and city neigh- • Leverage investments that will yield the borhoods face difficult choices. With limited highest returns—for one city or for all. 41 42  CONNECTING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW Value the city’s external and points along a road network a good enough internal connections measure, because it ignores bad roads and rough terrain. Rather, the only way to mea- City leaders can value a city’s external and sure connections with reasonable accuracy internal connections by comparison with is to include information on the quality of other cities—cities in similar countries, cities each network segment. In Malawi, the main at similar development stages or urbanization road network does not constrain connections levels, cities with similar per capita income, very much—but feeder roads do, ratcheting or cities with similar geographic constraints. up transport costs. Malawi’s primary roads Or city leaders can take a more analytical are wide and smooth in comparison with its approach, identifying a city’s desired con- secondary and tertiary roads, which are nar- nections just as they may identify its desired rower, slower, and bumpier (table 2.1). level of economic specialization or mix of Again, consider two maps of India—both economic activities—through insights from designed to reveal nationwide variations in economics and related fields. market access, but using different measures of the distance between locations (map 2.1, Value cities’ external connections with darker shades indicating lower access). The left panel uses straight-line distance. In How should connections be valued? Physi- contrast, the right panel uses economic dis- cal connections comprise the physical quality tance: a measure designed to account for the and capacity of infrastructure, including road number of travel lanes, the roughness of the density. Where information on a road net- road, and the pavement ratio. The straight- work is available, one useful measure is the line distance measure produces much higher network’s total length. On average, network access estimates than does the economic dis- length is far lower for developing regions tance measure (with transport network con- than for high-income countries, which con- ditions considered). tain about 60 percent of the world’s paved roads. Even with population size taken into Measure transport costs account, the gap remains large. In addition to measures of distance, trans- port costs can be useful for measuring a city’s Measure distances external connections. Typically including Where information on road networks is not direct vehicle operating costs (maintenance, available, measuring intercity connections tires, fuel, labor, and capital), transport costs becomes a complex task. One cannot sim- can also incorporate indirect costs (licens- ply take the straight-line distance between ing, insurance, road tolls, and roadblock cities, because this distance fails to account payments). for actual travel conditions in developing Measurements of Brazil’s annual growth countries. Nor is the distance between two in transport costs for 2009, 2010, and 2011 show that costs have been rising, in real terms, TABLE 2.1  Measuring connections along primary, secondary, and by an average of about 5 percent a year (table tertiary road segments in Malawi 2.2) (World Bank 2011a). Brazil’s paved road network, built in the 1950s and 1970s, has International Total road Number Roughness Pavement ratio since deteriorated (World Bank 2006). Many length of lanes Index (percentage of road federal and state roads stand in urgent need Road class (kilometers) (average) (average) surface that is paved) of repaving. In 2007, more than 40 percent of Primary 1,931.6 1.7 4.4 75.7 roads were considered bad (and less than 35 Secondary 1,361.0 1.0 6.9 12.9 percent good), a sharp rise from the less than Tertiary 1,509.2 1.0 6.6 5.5 30 percent that were considered bad in 2000. Source: Lall, Wang, and Munthali 2009. Large investments in Brazilian infrastruc- Note: The International Roughness Index is a comparative measure of road bumpiness. ture are needed. But what investments, and PLANNING, CONNECTING, AND FINANCING CITIES—NOW C O N N E C T I N G C I T I E S    43 MAP 2.1  Measuring connections by straight-line distance and by economic distance: Two market-access maps of India Source: Lall, Shalizi, and Deichmann 2004. Note: The left heat map is constructed using straight-line distance to measure access, the right heat map using economic distance (incorporating numbers of lanes, International Roughness Index ratings, and pavement ratios). Darker colors indicate lower access. TABLE 2.2  Brazil’s growth in freight transport opportunities for infrastructure improvement cost per ton, 2009–11, by distance traveled to yield high dividends. When the trucking (percent) survey was administered in India, it showed Distance traveled that transport costs were highest near large (kilometers) 2009 2010 2011 cities: a pattern similar to that of Vietnam 6,000 3.73 5.20 5.27 (and also of Brazil). Freight rates for metro- 2,400 4.20 5.36 6.09 politan transport in India, defined as trips 400 4.56 5.43 7.02 shorter than 100 kilometers, averaged as high 50 4.87 5.54 7.43 as Rs 5.2 per ton-kilometer ($0.12)—twice the national average of Rs 2.6, and more Source: Data compiled from Fipe/USP/DECOPE NTC&Logistica. than five times the cost of such trips in the United States. where? The highest increases in transport Why are India’s metropolitan freight costs over the past three years have been transport costs so much higher than its long- over short distances (see table 2.2). Further haul costs? One reason is the use of smaller, decomposing the transport costs by source older trucks on metropolitan routes. Another would help explain why they are rising, and is the higher share of empty backhauls (truck- why they are rising most on certain road seg- ers returning without a load) on metropolitan ments. In Vietnam, such decomposition was routes. Finally, trucks on metropolitan routes achieved through a trucking industry survey clock about 25,000 kilometers annually— developed by the World Bank urbanization just a fourth of what they need to be econom- review team (box 2.1). ically viable. To improve coordination and Systematically disaggregating transport reduce the cost of metropolitan freight move- costs can identify bottlenecks—and reveal ments, trucking firms could adopt logistics 44  CONNECTING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW BOX 2.1  Identifying road connection constraints in Vietnam: The World Bank’s trucking industry survey To understand Vietnam’s transport infrastructure in Vietnamese truck transport. On average, truck bottlenecks and reveal the main drivers of its trans- operators rated the severity of corruption at 3.7 out port costs, the World Bank urbanization review of 5 and the severity of poor road conditions at 3.1 team commissioned a route-specific trucking survey out of 5. (map B2.1.1). It comprised structured, face-to-face Trips in the vicinity of Hanoi and Ho Chi Minh interviews with key managers and owners of truck- City appeared to have higher transport costs. About ing companies, as well with individual operators 13 percent of transport costs around Ho Chi Minh who owned or leased their trucks as independent City, and 6 percent around Hanoi, consisted of businesses. The final sample included 246 respon- informal facilitation payments (such as bribes). On dents answering questions on 852 data points average, such payments account for about 8 percent (origin-destination combinations). of all trucking operation costs. The survey suggested that corruption and poor road conditions were the main causes of bottlenecks MAP B2.1.1  Origin cities in the Vietnam trucking industry survey Source: World Bank 2011c. PLANNING, CONNECTING, AND FINANCING CITIES—NOW C O N N E C T I N G C I T I E S    45 management systems; they could collabo- FIGURE 2.1  How do urban workers commute in Uganda? rate or consolidate with competitors; or they could form trucking associations. If India’s Percentage of trips by transport mode high freight costs are not reined in, then All urban areas Kampala they—like Vietnam’s—will affect national 2.6 economic development. That is because both nations have large concentrations of eco- 9.2 nomic activity in metropolitan areas. 5.9 19.2 Transport prices depend partly on the quality and capacity of infrastructure. But 14.6 5.4 they also reflect the governance and market 64.3 70.3 8.5 structure of the transport sector, since the indivisibility of transport networks leads to natural monopolies (World Bank 2008). For example, once a rail network is built, other firms are unlikely to enter the market. Walking Taxi Boda-boda Bus/minibus Other The fixed costs of building a second network Source: Uganda Bureau of Statistics 2010. are too high—and the owner of the existing Note: A boda-boda is a bicycle taxi. one can bar other providers from it or charge them prohibitive fees for its use. The govern- ment therefore needs to promote competitive Measure street density behavior in transport service provision— Second, street density can also help to iden- but how? One way is to own the network. tify constraints on mobility among a city’s Another is to regulate prices at competitive neighborhoods. Map 2.2 shows streets wider levels (Klein 2012).2 than 15 meters in the central business dis- tricts of Bangkok, Hanoi, New York, and Seoul. They indicate that Hanoi’s street den- Value a city’s internal connections sity, though greater than Bangkok’s, is less In planning to increase access, to ensure than a third of New York’s—while Hanoi affordability, and to keep traffic and pollu- lacks the transport alternatives of a city such tion within acceptable limits, policy makers as New York or Seoul (both have extensive need to begin by assessing a city’s mobility underground metro systems). constraints. A good first step is to look at three measures: transport mode, street den- Measure population density sity, and population density. Third, information on street density can be combined with population size and density to Measure the use of transport modes predict the stress that added vehicles would First, what is the modal split of commutes to create for road networks. For example, if work? In Uganda, data from national surveys car ownership in Hanoi were to rise until it suggest that 64 percent of urban workers com- equaled the average in Malaysia (250 cars mute on foot—a figure that rises to 70 percent per 1,000 inhabitants), the result—assum- in Kampala (figure 2.1). For people who live ing no expansion of road or other transport far from a city’s economic centers, few jobs infrastructure—would be total gridlock in are available within walking distance—so the central part of Hanoi. To ensure that just the prevalence of foot commuting constrains half of Hanoi’s cars could travel at 30 kilo- labor markets. It may also exacerbate slums, meters per hour after the assumed increase as many people will trade away housing qual- in car ownership, Hanoi’s vehicular street ity to be near their jobs. And it points to the area would need to rise from 9 percent of the insufficiency of affordable transport options built up area—the present total—to 19 per- (see chapter 1) (Kumar and Barrett 2008). cent. Note that population densities are much 46  CONNECTING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW MAP 2.2  Street densities compared: The central business districts of Bangkok, Hanoi, New York, and Seoul a. Hanoi b. Bangkok c. New York d. Seoul Area of primary and secondary roads as a percentage of total area within 9 km2 around the city center Road width 0 1 KM 15m Hanoi 9.03% 20m 30m Bangkok 7.88% 40m New York 31.90% 50m Seoul 13.56% Source: World Bank 2011c. higher in Hanoi’s central districts (nearly 400 Transport prices reflect various factors: trans- persons per hectare) than across Hanoi (188 port costs, operator overhead, operator profit, persons per hectare) (World Bank 2011c). regulatory constraints, and market structure. The last of these—market structure—is a key determinant of prices in the transport indus- Measure transport prices and compare try. As noted above, some transport mar- them with transport costs—and kets are natural monopolies. Another cause consider the benefits of competition of monopolistic behavior is the emergence As discussed above, when constraints on of transport scale economies, leading to a a city’s external connections are associ - vicious circle between higher costs and lower ated with distance, the constraints can be trade and traffic. Areas with high demand measured using transport costs and physi- and large freight volumes will generate com- cal measures. But many constraints on con- petition, reducing prices—but areas with nections—internal and external alike—are lower demand will attract only a few provid- induced by policy. ers, who are likely to seek excessive profits. To measure constraints induced by pol- Connecting sparsely populated rural areas icy, city leaders can look at transport prices. can enable people and firms to move to more PLANNING, CONNECTING, AND FINANCING CITIES—NOW C O N N E C T I N G C I T I E S    47 productive areas. It can also increase resi- FIGURE 2.2  Gaps between transport prices and costs in Africa dents’ access to schools, health centers, and suggest a monopolistic transport sector local markets. However, given that lagging places do not have great market potential Lusaka-Johannesburg (and the volumes transported are likely to (Southern Africa) be small), it can be hard to attract transport Lusaka-Dar-es-Salam operators to these areas—let alone induce (Southern Africa) Mombasa-Kampala competition among them. Merely improv- (Eastern Africa) ing roads or deregulating the market will Mombasa-Nairobi not suffice. In these cases, policy makers can (Eastern Africa) Douala-N’Djamena encourage intermediate modes of transport. (Central Africa) Bicycles, hand carts, motorcycles, power til- Tema/Accra-Ouagadougou lers and trailers, and community participa- (Western Africa) Douala-Bangui tion—all can increase mobility in rural areas (Central Africa) (Lall, Wang, and Munthali 2009). Tema/Accra-Bamako (Western Africa) Ngaoundere-N’Djamena Competition in the market and for the market (Central Africa) Considerable benefits follow from inducing Ngaoundere-Moundou competition in the transport sector. One is (Central Africa) greater efficiency. Another is more affordable 0 10 20 30 40 50 60 70 80 90 100 service. In contrast, a monopolistic sector is Percent likely to be inefficient and unaffordable—and Variable cost Fixed cost Price-cost gap to encourage opportunistic behavior, inviting markups and creating incentives for bribes. Source: Teravaninthorn and Raballand 2009. Along major transport routes in Africa, considerable gaps separate transport prices from transport costs (figure 2.2). A recent study by the World Bank suggests that the vessel size and on the type of product being causes of these gaps are bribes, regulatory transported. Similarly, topographical endow- rents, and high profits (Teravaninthorn and ments and barriers are likely to affect the Raballand 2009). Inefficiencies in logistics, break points. such as large numbers of empty backhauls, High demand can have two opposed could also be driving prices up. effects on transport prices. As discussed A competitive market brings benefits, not above, it can attract competition leading to only within transport modes (competition in lower prices. But it can also lead to conges- the market), but also between them (compe- tion, and congestion—beyond what the infra- tition for the market). Competition between structure and its maintenance regimes can modes can lower prices, and it can promote readily handle—imposes economic costs. In the most efficient distribution of transport Sri Lanka, estimates suggest that traffic vol- services for various product types. Generally, umes and poor road maintenance contribute most road transport is dominated by short- costs equivalent to about 1 percent of GDP haul freight—but as distance increases, rail (World Bank 2004). And in Colombia, delays transport becomes more attractive. In India, in ports (especially the busiest ones) sig- road transport is estimated to be the least nificantly increase transport costs: for every expensive option for distances up to 400 kilo- hour that cargo remains idle, the added cost meters. Rail prices are lower for distances of per ton is 826 pesos ($0.69) (Samad, Lozano- 400–700 kilometers. Beyond 700 kilometers, Gracia, and Panman 2012). A 2007 study waterways are cheapest (McKinsey & Com- of logistics costs for trucking in Colombia’s pany 2010). These break points may vary by port terminals showed that, on average, driv- country, as they depend on truck, train, and ers reported nine hours of lag time between 48  CONNECTING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW joining the queue for entry into port facilities transport markets. Finally, they can consider and departing the facilities with a new freight how to balance the aim of covering transport load (Egis Bceom International 2007). costs through prices against other social and ecological objectives. Coordinate among transport options and with land use Establish a basis for increased mobility to improve a city’s internal within cities connections As city leaders seek to improve connections Once city leaders have identified constraints among neighborhoods, they must care- on a city’s internal connections, they can fully steer away from options that lock the determine what is needed for a good trans- city into undesirable forms. The best way to port system—one that connects the city’s avoid such wrong turns is to begin by inte- neighborhoods to each other, giving people a grating land use policies with plans for urban wider choice of places to live and work. mobility. Connections among neighborhoods are a growing problem for cities in developing Integrate land use planning and mobility countries. As incomes rise and populations planning explode, private motor vehicles strain road Plans to connect neighborhoods are insepa- capacity. In 1981–2001, for example, while rable from plans for urban land use—espe- the population of India’s six largest metro - cially density plans. For any of these policies politan cities nearly doubled, the number of to benefit the city as intended, they must be private motor vehicles increased eightfold. In integrated throughout the planning process. Delhi alone, motor vehicles shot up from 3.9 However, urban transport is often an “insti- million to 5.6 million between 2002–03 and tutional orphan,” with its responsibility 2007–08. Meanwhile the city’s total road often fragmented across agencies. Land use length merely crept up, from 30,698 kilome- planning is a core function of development ters to 30,985. Because of this disconnection authorities, with transport planning often between urban growth and urban infrastruc- limited to developing the road network. Such ture, trips in large Indian cities are barely fragmentation of responsibilities results in faster by car or truck than by bicycle.3 inefficiencies. In Bangalore, India, a new air- Although some urban congestion can be port, several miles outside the city, was close efficient, too much is the opposite. It keeps to being commissioned when city authorities people stuck in traffic for long hours, unable realized that the road connecting the city to to reach their jobs—not to mention the health the airport was inadequate. problems caused by pollution. A good trans- Land use planning is integral to trans - port system allows people to reach jobs while port planning, because land use will largely further linking them to education, health, determine transport demand. Different cities and recreation. Policy makers need ways to need different modal mixes, different neigh- boost mobility within a city while managing borhoods different modes. Mass transport congestion and pollution, and they need to generally suits compact areas, private vehicles ensure that transport is available to the poor. more sprawling ones. Mixed-use plans can To connect neighborhoods for all these reduce the need for long trips by locating purposes, city leaders can systematically housing, shops, services, and jobs all within a coordinate urban mobility plans with land short radius. Studies also suggest that higher use policies and related infrastructure plans. densities are good for efficiency and for envi- In addition, they can seek ways to reduce ronmental sustainability, reducing energy transport prices—within cities as well as consumption and emissions by reducing vehi- between them—by inducing competition in cle miles traveled (Newman and Kenworthy PLANNING, CONNECTING, AND FINANCING CITIES—NOW C O N N E C T I N G C I T I E S    49 1989; Mokhtarian, Bagley, and Salomon of income—even with subsidies covering as 1998; Schrank, Lomax, and Eisele 2011). much as 30 percent of transport costs (Crop- Transport plans, in turn, shape land use per and Bhattacharya 2007). by making specific sites more accessible. For Targeted subsidies have not always been example, a new road to undeveloped land successful. But some targeted subsidies reach can enable its development. Or a new down- the right groups and increase their access town metro connection can boost demand to jobs. For example, South Africa uses for redevelopment of the urban core. highly subsidized weekly coupons—each for 10 journeys between black townships Look for prudent ways to make transport and industrial development areas—to con- markets competitive nect low-income groups to jobs. And Brazil Not all modes and routes will support mul- requires formal sector employers to provide tiple transport providers. But where they transit tickets to their employees through a will—and where demand is high enough— system called vale transporte (transportation policies and regulations should foster com- voucher, VT); the firms then deduct the VT petition and avert monopolies. Competitive expenditures from taxable income. The VT pricing can also be encouraged by promoting system—albeit affecting only the formal sec- multiple modes of transport. tor—effectively spreads the cost of transport Although competition across modes subsidies between employers and the govern- may be desirable, free entry to some indi- ment (Gwilliam 2011). vidual modes may not be. In bus transport, for example, competition that is excessively Increase the supply of transport fierce—or not structured carefully by plan- while managing demand and harmful ners—can put passengers’ lives at risk (see externalities the discussion of Bogotá in chapter 1). Once the basis for a better transport system Balance the aim of covering transport is in place, an urban mobility plan can be costs through market pricing with the made that: complementary objectives of efficiency, equity, and environmental sustainability • Increases transport supply (capacity) Cost recovery through prices need not always through new investments and ensures ade- mean that transport users pay the whole quate maintenance. cost of transport. Urban transport subsidies • Improves existing transport systems by are sometimes desirable, not only for equity managing demand. and the environment (reducing emissions and • Controls congestion and limits pollution so forth), but also for efficiency (Gwilliam with fiscal and regulatory instruments. 1987). For example, subsidies that target lower-income groups to make urban tran- The ultimate objective is to increase the sit more affordable can boost ridership and supply of affordable transport options while reduce congestion. keeping traffic and pollution within accept- Many cities in the developing world lack able limits. affordable transport for their poorest resi- City leaders can make investments in dents. An extreme example is Mumbai, added network capacity and multiple trans- ranked as the 6th most expensive among port modes. They can manage the demand 27 cities worldwide (Carruthers, Dick, for transport through regulation, enact- and Saurkar 2005). According to a study ing policies that reduce pressure on existing published in 2007, for riders in the low- infrastructure. Finally, they can control traf- est income category in Mumbai, transport fic and limit emissions with fiscal and regula- expenditure represented at least 16 percent tory instruments such as subsidies and taxes. 50  CONNECTING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW Increase transport supply through new Even with coordination between investments investments, with attention to demand to increase supply and policies to manage Because transport infrastructure investments demand, individual actions often impose are part of a city’s mobility plan, they need social costs. In transport, these harmful to be integrated with its land use plan (as externalities arise mostly from congestion emphasized above). The next section of this and from pollution (including greenhouse gas chapter—on identifying the investments that emissions). will yield the highest returns—presents a In the developing world, rapid increases detailed discussion of ways to enhance trans- in private motor vehicle use have created port supply, between cities as well as within excessive congestion. A look at the numbers them. for Vietnam shows how quickly vehicles What needs underlining here is that devel- have multiplied in recent years (figure 2.3). oping cities cannot attain desirable forms A recent study estimates the economic costs unless investments in infrastructure are coor- of traffic congestion to be equivalent to 0.7 dinated with land use—and with efforts to percent of GDP in Manila, 0.9 percent in manage demand. Jakarta, 1.8 percent in Kuala Lumpur, and 2.1 percent in Bangkok (ESCAP 2007). Improve existing transport systems City leaders often consider building more by managing demand roads to accommodate rising numbers of pri- To have strong internal connections, a city vate vehicles—yet road expansion in the long must have a transport system that is respon- run may only attract more vehicles to the sive to demand: not just new roads or a new road, with no resulting reduction in traffic. metro line, but also regulatory and fiscal Even if congestion declines, fuel consumption instruments that will manage the demand for and emissions will not. Moreover, new infra- both new and existing infrastructure. This structure requires land and rights-of-way need to manage demand is seldom considered that can be costly and difficult to assemble by developing cities—they have traditionally in cities. focused on increasing supply (Gómez-Ibáñez Fiscal and regulatory instruments are 2011).4 another way to manage congestion and limit The management of infrastructure can pollution. Used in combination with infra- direct demand to transport modes with structure investments, such instruments unused capacity—relieving pressure on can guarantee that the benefits of increased modes that are already congested to the access exceed its social costs. To determine point of strain. It can restrain the demand the best instrument in a given case, a cost- for travel, or it can incline demand to take a benefit analysis can be conducted, with atten- certain form. For example, demand restraint tion to impacts on efficiency, equity, and measures can seek to shift commuters from affordability. private vehicles to mass transport. They can To bring congestion down to manageable motivate people to travel during off-peak levels, policies can discourage the use of per- times. They can seek to reduce trip lengths. sonal motor vehicles, making their use more And in some cases, they can be designed to difficult and costly. Measures that have been render travel unnecessary. used include restrictions on available parking In addition to managing demand, regula- space, parking fees that reflect the full eco- tions can promote competition in the market nomic cost of motorized travel, and a conges- or set prices near competitive levels (chapter tion fee for driving in core city areas at peak 1). And they can include policies to mitigate times. harmful externalities, such as congestion and Congestion fees would seem to be the pollution from vehicle emissions. most efficient instrument for their purpose, Congestion and pollution need to be man- as they attack the externality directly. In aged with fiscal and regulatory instruments. practice, their use is limited—they tend to PLANNING, CONNECTING, AND FINANCING CITIES—NOW C O N N E C T I N G C I T I E S    51 be politically costly. Examples in the devel- FIGURE 2.3  The rise of private motor vehicles in Vietnam, oped world include London, Singapore, and 1997–2009 Stockholm. The City of London raised £137 million in 30,000 2007 from its congestion fees, which by law Registered vehicles, thousands are reinvested into public transport systems in 25,000 the city. Drivers entering, leaving, or driving 20,000 in the congestion zone between 7 a.m. and 6 p.m. on weekdays must pay a fee of about 15,000 $16 by midnight of the same day. If they do 10,000 not pay the fee by the next day, it increases to $20. If still unpaid, the fee rises to $240 on 5,000 the following day and to $360 after 28 days. 0 After that the authorities can tow the car or w) 97 98 99 00 01 02 03 04 05 et 6 08 09 immobilize it with wheel boots, either action elm 200 La 19 19 19 20 20 20 20 20 20 20 20 burdening the car owner with $140–$400 (H in added costs. Residents of the congestion 07 20 zone must pay, but at a 90 percent discount. Exemptions are given for disabled drivers Auto Motorcycle and for bicycles, motorcycles, and electric or Source: Vietnam’s Ministry of Transport. alternatively fueled cars.5 London’s congestion fee has reduced the number of cars on the roads each day, and it vehicles, and it issues certificates of entitle- has raised revenue for the city. It is also asso- ment—the right to buy cars—to the highest ciated with a 6 percent increase in the number bidders. Good for 10 years, the certificates of bus passengers during charging hours. The can then be renewed at the prevailing permit policy, however, achieves less than it could in price (Menon 2002). two ways. First, drivers have no incentive to Fuel taxes can reduce both congestion and limit driving once inside the congestion zone. pollution—but they can cause unintended Second, there is no additional incentive to harm if not properly defined. For example, reduce driving during peak hours, since the increased transport costs can make products fee is constant throughout the day (Litman less competitive. One solution to this prob- 2006). lem is a discriminatory tax, imposed only on Other cities have tried to discourage the fuels used for private transport (Timilsina use of cars by making cars expensive to own. and Dulal 2010). They may charge high vehicle taxes or regis- Parking fees can help to manage conges- tration fees—or they may hold auctions for tion by shifting travelers from private cars to the legal right to buy a car. Vehicle taxes have mass transit. In Ottawa, the reduction of a been imposed in Denmark, France, Germany, parking subsidy for government employees Malaysia, the Netherlands, Philippines, Swe- from 100 percent of the cost to 30 percent den, Thailand, and the United Kingdom. led—one year later—to a 20 percent reduc- Such taxes can be based on engine model and tion in employees’ trips by private car and a capacity, fuel economy, emissions, weight, or 17 percent increase in their use of public tran- fuel type (Timilsina and Dulal 2010). Auc- sit (Timilsina and Dulal 2010). tions are used in Singapore, which since 1990 Such fiscal or regulatory instruments are has limited the annual rise in the vehicle pop- more likely to succeed in combination than ulation to 3 percent (a figure reached through alone. When they are designed to shift travel- long-term projections of land use and trans- ers from one transport mode to another, the port facility development). The government other modes must be ready for use, or the releases monthly quotas to allocate new instruments will not work as desired. 52  CONNECTING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW FIGURE 2.4  Road fatalities in high-, middle-, and low-income emissions—and in medium-size cities, those countries, 2003–07 of 100,000–250,000 people, it generates more than 70 percent. 25 To limit or reduce air pollution and green- house gas emissions, city leaders may con- sider emissions standards a useful instrument. Fatalities per 1,000 people 20 Other measures include pollution taxes, fuel 15 economy standards, and fuel quality stan- dards. Motor vehicle emissions have been reg- 10 ulated since the 1960s and 1970s in Europe and the United States. More recent, new cars 5 have been required to meet emissions stan- 0 dards in Argentina, Brazil, Chile, China, 2003 2004 2005 2006 2007 Colombia, India, and Indonesia (following U.S. and European practice). In 2009, Cali- High-income Middle-income Low-income fornia and the European Union set specific countries countries countries standards for carbon dioxide emissions. But Source: Kopits and Cropper 2003. fuel economy standards, which also control carbon dioxide, had been established much earlier (in 1975) by the U.S. federal govern- Besides congestion, another harmful ment (Gómez-Ibáñez 2011). externality associated with urban transport Adding congestion taxes or fuel taxes can is unsafe road conditions. Road accidents are further reduce pollution along with conges- one of the largest causes of death worldwide, tion. Again, a combination of instruments resulting in 1.2 million annual fatalities. can be more successful than one—if all are Each hour, about 40 people younger than 25 planned within a single framework. are estimated to die in crashes. Subsidies may be appropriate for transport The poor and vulnerable tend to be the modes that are preferable because they are most affected by road accidents. The number more ecologically sustainable. For example, of annual road fatalities per 1,000,000 peo- Mexico City’s system for bus rapid transit ple has risen in low-income countries, even (BRT) is expected to reduce carbon monox- while declining in high-income countries (fig- ide emissions by 0.28 metric tons and to gen- ure 2.4). Although low- and middle-income erate $3 million each year in health benefits countries have only 48 percent of the world’s from reduced air pollution. And the Trans- registered motor vehicles, they account for 90 Milenio BRT system in Bogotá, in its first 30 percent of road fatalities. To realize the bene- years of operation, will reduce carbon mon- fits of stronger connections within cities, reg- oxide emissions by an estimated 15 percent, ulation to control speeds—and guarantee the reduce traffic fatalities by 93 percent across safety of public transport—may be essential. the system, reduce local air pollutants by 40 Taxes, standards, and subsidies can also percent, and improve travel time by 32 per- be used to manage pollution and to make cent, compared with the transport system transport more affordable. In many cities, that would be available otherwise (Lee 2003; the transport sector is the main contribu- Gómez-Ibáñez 2011). tor to local air pollution and greenhouse gas Because the costs of air pollution are not emissions. In Brazil’s largest cities, private internalized by private agents, city leaders transportation is the main source of vehicle may choose to subsidize cleaner transport— emissions, even though it is used by just 30 such as BRT—as a way of internalizing the percent of commuters (figure 2.5). Across additional benefits from switching to cleaner all city sizes private transportation gener- modes. Where congestion costs at peak ates more than 40 percent of greenhouse gas hours are high, policy makers may consider PLANNING, CONNECTING, AND FINANCING CITIES—NOW C O N N E C T I N G C I T I E S    53 FIGURE 2.5  Private transportation is the largest source of vehicle emissions in Brazilian cities, 2009 a. Vehicle emissions b. Greenhouse gas emissions 20 100 18 90 16 80 14 70 Million tons a year 12 60 Percent 10 50 8 40 6 30 4 20 2 10 0 0 00 0 0 on on 00 0 0 on on ,00 ,00 ,00 ,00 0,0 0,0 illi illi illi illi 50 00 50 00 m 1m m 1m 10 10 –2 –5 –2 –5 –1 –1 0– 0– > > 00 00 00 00 00 00 ,00 ,00 0,0 0,0 0,0 0,0 0,0 0,0 60 60 10 25 10 25 50 50 City size City size Mass transportation Private transportation Sources: Associação Nacional de Transportes Públicos; authors’ calculations. demand-side subsidies to shift demand for transport modes. The questions that city lead- private cars toward public transit. Subsidiz- ers must answer concern the particular mix of ing cleaner vehicles and cleaner fuels can help modes, their specific design, and their integra- in reducing pollution and emissions from tion in the larger urban transport system. vehicles, though not in reducing congestion. Consider ways to induce healthy Leverage investments that will competition yield the highest returns More than building and fixing, efforts to When deciding where and how to improve improve intercity connections are also about transport networks, city leaders should iden- the economics of the transport sector. If the tify the most efficient investments in connec- market structure for transport service provi- tions throughout a country. Where is demand sion does not promote competitive pricing, highest for the expansion of infrastructure any cost reductions stemming from network and transport services? Which corridors are investments will be absorbed by monopolis- identified by spatial tools and simulations as tic providers as profit. That is because of the most central to the network, in that improv- sector’s tendency toward natural monopolies, ing them will yield the highest returns—both discussed earlier in this chapter. locally and nationally, for efficiency and for Investments in infrastructure are more suc- equity?6 cessful when bundled with regulatory reforms Within urban areas, investments to that promote competitive pricing while ensur- improve connections similarly require inte- ing compliance with safety standards. The gration with long-term planning—especially government regulates in large part to induce land use and density plans, as the preceding healthy competition—limiting monopolis- sections have emphasized. Most cities will tic behavior but also limiting the number or benefit from mass transit and from multiple behavior of competitors where required. 54  CONNECTING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW In Uganda, as in many other African coun- Transport markets display network exter- tries, a large gap between transport costs and nalities, meaning that improvements to prices attests to monopolistic behavior (see one segment can affect the whole network. figure 2.2). Along the Kampala–Mombasa Spatial tools can help identify the network corridor, home to most of Uganda’s indus- improvements that will bring the highest pos- trial production, transport prices are $2.22 itive externalities. And that, in turn, can help per kilometer—double the average price in city leaders identify and understand the com- the United States—even though transport plex tradeoffs between efficiency and equity costs per kilometer are about $0.35 per kilo- in decisions about transport infrastructure. meter. According to trucker surveys, 86 per- Take Sri Lanka, where transport costs cent of the corridor is in good condition. So are high by international standards. It costs the fact that providers are making more than $2.90 per kilometer to move products there, 85 percent profit suggests a need for competi- more than twice the U.S. cost of $1.25. The tion, competition that can be most effectively quality of the road network seems to be a induced through policy measures and regula- main driver of transport costs: more than tion (World Bank 2012b). half reportedly is in bad condition (World Bank 2010). In deciding which segments to improve, policy makers must weigh two con- Use spatial analysis to set priorities for flicting objectives: intercity connections Once the basis for competitive pricing is in • Efficiency. Resources can be allocated place, spatial or geographic analysis can to investments that make the most of reveal the emerging demand for particular national income (connecting regions with cities and help city leaders identify the invest- the highest rate of return), or to those that ments that will most reduce transport costs. would reduce transport costs by the great- Some spatial tools examine the growth of est amount (compared with investments in cities by looking at their demographic and other network segments). economic footprints. Others point to areas • Equity. Resources can be distributed of urban expansion, those where investments equally throughout the country, with no can yield the highest returns. Combining this eye to efficiency. information with data on households and on industry location can suggest where demand Recent research used a simulation model is highest for expanded infrastructure or to measure transport cost savings from related services (box 2.2). alternative infrastructure investments in Sri BOX 2.2  The Republic of Korea’s strategic decisions to expand infrastructure networks enabled the development of new towns City leaders in the Republic of Korea integrated their was concentrated in and near them, the government transport infrastructure investments to enable the made efforts to connect them—to each other and spatial evolution of the economy. Figures B2.2.1– to domestic and international markets. Finally, the B2.2.3 depict changes in the spatial distribution of right panel in each figure shows how urbanization city sizes, in the share of manufacturing employ- advanced and large urban centers arose outside Seoul ment, and in proximity to intercity highways. As and Busan. Korean manufacturing now remains the left panel in each figure illustrates, in the 1960s highly concentrated in and around these two cities— the population was concentrated in the cities of yet government efforts have ensured that the entire Seoul and Busan. The middle panels show how in national network of cities is well connected. the 1980s, as these cities grew and manufacturing (box continues on next page) PLANNING, CONNECTING, AND FINANCING CITIES—NOW C O N N E C T I N G C I T I E S    55 BOX 2.2  The Republic of Korea’s strategic decisions to expand infrastructure networks enabled the development of new towns FIGURE B2.2.1  As population growth has expanded beyond Seoul and Busan, 1960–2005 . . . Legend < 20,000 20,000 – 50,000 50,000 – 200,000 200,000 – 500,000 500,000 – 1,000,000 > 1,000,000 Source: World Bank 2011b. FIGURE B2.2.2  . . . manufacturing jobs have deconcentrated to secondary cities, 1960–2005 . . . Legend ~10% ~20% ~30% ~40% More than 40% Source: World Bank 2011b. FIGURE B2.2.3  . . . enabled by improvements in transport connectivity, 1970–2010 Service area Service area Service area Within 10 min Within 10 min Within 10 min Within 20 min Within 20 min Within 20 min Within 30 min Within 30 min Within 30 min Source: World Bank 2011b. Note: Journey time to the closest expressway interchange (within 10, 20, and 30 minutes). 56  CONNECTING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW MAP 2.3  Connecting mountains of poverty to peaks of prosperity: A spatial tool for comparing transport investments in Sri Lanka Source: World Bank 2010. Lanka (World Bank 2010). The main finding: was upgraded to high-quality gravel, 9 of 10 connections in poor and remote areas can people would reside within five hours of a be most enhanced by improving roads and city with at least 50,000 inhabitants (Dorosh transport in areas of intermediate wealth— and Schmidt 2008). not in the poorest and most remote areas themselves, where traffic is thin. Improving Increase urban transport capacity— corridors with the highest potential, such as but how? that from Kandy to Colombo, will connect the most poor people to large markets (map Discussions of urban transport have tradi- 2.3). Since these investments will promote tionally focused on supply. Enhancement both efficiency and equity, it makes sense to was long taken to mean increasing the sys- give them priority. tem’s carrying capacity to meet growing Similarly, a recent study identified key demand. Making roads wider, enabling them infrastructure investments for Mozambique to hold more traffic, was considered the best using population distribution data and infor- approach. But now that rising incomes are mation about the road network (including making private vehicles more common, add- quality characteristics). The study showed ing road space only attracts more cars onto that investments in the five major interna- the roads. In place of wider roads, affordable tional transport corridors (in the north of mass transit—either public or private—has the country), and in the Maputo–Pemba come to be seen as a central need for cities. corridor, would greatly reduce travel times between major cities—but would scarcely Why affordable mass transit is essential for improve most people’s access to markets. urban development in many cities Instead, large investments in feeder roads When urban transport is available and were revealed as the best way to improve con- affordable, people are freer to settle in areas nections for people in remote northern areas. across the city. When it is not, people are less If the corridors were paved and kept in good free in their choice of housing, locations, and condition while the entire rural road network amenities because they are constrained by PLANNING, CONNECTING, AND FINANCING CITIES—NOW C O N N E C T I N G C I T I E S    57 the need to stay near their jobs. A symptom FIGURE 2.6  Foot and bicycle commuting as a share of all of this constraint is a large informal market commuting, by city for land and housing—often located precari- ously on hilltops, floodplains, and the like. In 90 India, data from the 2001 census suggested 80 that slum dwellers were more likely than oth- 70 ers to walk or bicycle to work (figure 2.6). 60 Slum dwellers may thus be internalizing the Percent 50 transport constraint as a constraint on loca- 40 tion and housing, trading off decent living 30 conditions for the ability to commute and 20 participate in labor markets. 10 0 Density and mass transit options i re i ta ur al ne ad a r rh ba lh Mass transit can take many forms, including wa tn op lka alo ip ga De ab Pu um Pa es Ja Bh di Ko ed ng an M public buses, rail, and BRT. As this chapter an m Ba ub Ch Ah Bh has repeatedly indicated, linking transport modes to urban density plans is a critical part Slum dwellers Nonslum dwellers of planning infrastructure investments. A scatter chart of some 30 cities, plot- Source: Ministry of Home Affairs 2001. ting each city according to its density and its physical concentration around an urban form a group that relies on private motor center, shows a consistent pattern: dense and vehicles (figure 2.7). Between these two compact cities form a group that emphasizes groups is a third, larger group that benefits mass transit, while sparse and sprawling ones most by combining the two—indeed, by FIGURE 2.7  A city’s chosen mix of transport modes reflects its spatial structure Source: Bertaud and Malpezzi 2003. 58  CONNECTING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW integrating several transport modes within a unrecovered financial cost can be matched or single framework. exceeded by its social benefits. Second, and more important: An essential Two pivotal choices for transit part of integrating land use and infrastruc- Should mass transit use rail or buses? How ture planning is the integration of various should various transport modes be integrated transport infrastructures within the larger within the urban transport system? These urban mobility plan. Research has suggested are two of the main questions that confront that two kinds of integration are needed: urban mass transit planners. physical integration for transfers between First: In weighing rail against buses, policy modes, and fare integration for avoiding makers should consider that rail transit sys- excessive price competition among modes tems rarely cover operating costs with fares.7 (NEA Transport Research and Training By comparison, BRT generally requires a 2003). Further, different modes have also dif- lower capital investment—it often uses exist- ferent energy needs, and therefore much can ing infrastructure, and it runs at ground level be gained from planning a transport system (box 2.3). And BRT can operate without that integrates the different infrastructures subsidies while charging affordable fares, and considers all costs (World Bank 2012a). imposing less financial stress on cities (Gwil- See spotlight C for country lessons on city liam 2011). Note, however, that rail transit’s placement, policy, and infrastructure. BOX 2.3  Bus rapid transit: Successful if handled with care Bus rapid transit (BRT) systems have been praised— toward project completion were hastened so that including by the World Bank—for their performance elected officials could claim credit before the end capability, their low build cost compared with rail of their terms in office. As a result, crucial insti- and metro systems, and their ability to operate with tutional, legal, and financial issues were some- small subsidies or no subsidies. Famous projects in times neglected—though BRT planners gave long Bogotá and Brazil’s Curitiba are often touted as BRT thought to busway designs (median or curbside), successes. platform types (high or low), fuel technologies Less often noticed have been the pitfalls and (diesel or compressed natural gas), and fare collec- shortcomings of these and other BRT projects. A tion mechanisms (on board or prepaid). World Bank review reveals key determinants of suc- • Fares were defined by political authorities— some- cess along with certain challenges: times without a complete calculation of costs and revenues. • Bureaucracy was circumvented. In all 11 cities • The public was not adequately educated about studied, planning and implementation teams were route changes. Communication failures occurred formed outside existing public structures to avoid in Bogotá, Santiago, Mexico City, and Mexico’s bureaucratic obstructions. León during the expansion of its system—leading • Political leadership was on board. Projects went to chaotic conditions and, in some cases, dramatic forward rapidly in cities where the mayor or other public protests. political leaders had a clear vision for BRT, such as • Existing transport operators protested when their in Bogotá, Curitiba, Jakarta, and Ecuador’s Guay- interests were sidelined. For example, they were aquil. Projects were stalled, sometimes for years, not involved in the BRT process through direct in cities where no such political commitment was negotiations—or the bidding process failed to sat- present. isfy them. • Lead times were reduced to match political time- • Fare collection systems were not integrated tables—but this produced gaps in planning. Steps everywhere with public transit systems. Such PLANNING, CONNECTING, AND FINANCING CITIES—NOW C O N N E C T I N G C I T I E S    59 BOX 2.3  (continued) disconnections occurred in Beijing, Bogotá, and Guayaquil, Jakarta, León, Mexico City, and Mexico City. Even BRT corridors were not always Quito. integrated with each other: examples include Jakarta and Quito. In short, BRT projects indeed have great poten- • Bus scheduling has sometimes led to overuse at tial—but they must be carefully planned and carried peak hours and underuse at off-peak hours. Peak out. hour crowding and off-peak inactivity are perhaps the most visible weakness in BRT operation. One Sources: Hidalgo, Custodio, and Graftieaux 2007; ITDP or both can be seen in Beijing, Bogotá, Curitiba, 2007. Notes (Economides 1996). That is because a private agent whose interests span only two points in 1. A vast literature shows positive links between the network might not realize the wider ben- market access and the growth of cities (see, efits of connecting them. Say that a new road among others, Beeson, DeJong, and Troesken connects Hanoi and Guangzhou. With this 2001; Henderson and Thisse 2004; and Tao, link, a firm in Hanoi has expanded its output Hewings, and Donaghy 2010). For exam - market by the total number of additional cit- ple, research on Brazil shows that a 1 per- ies that can be reached through Guangzhou. cent increase in market potential leads to an Furthermore, because Ho Chi Minh City is increase in city size of 2.7 percent, while a already connected to Hanoi and Guangzhou reduction in transport costs of 10 percent leads to Beijing, the new road lets firms in Ho Chi to a 1 percent increase in city growth over a Minh City sell in Beijing. Ignoring such net- decade (Da Mata and others 2007). work effects can lead to underinvestment in 2. Research on the effects of transport deregula- infrastructure connections. tion is a major area in recent transport eco- 7. Few cities can bring the cost of rail transit close nomics. Much of the impetus for this devel- to the revenues from rail transit. Those few cit- opment has come from outside traditional ies share three important characteristics: they transport economics, being intellectually stim- are large in absolute terms, they have highly ulated by work in such areas as regulatory cap- concentrated corridor flows, and they have ture (Stigler 1971), market structures (Baumol, medium to high incomes that warrant fairly Panzar, and Willig 1982), and new regulatory high revenues per passenger (Gwilliam 2011). instruments (Laffont 1994). 3. Bicycles are typically ridden at around 15 kilo- meters per hour. References 4. For example, the Ho Chi Minh City plan for 2025 contains a proposal to build a 161-­ Baumol, William J., John C. Panzar, and Robert kilometer rail system and highway investments D. Willig. 1982. Contestable Markets and the of more than $9.8 billion. Theory of Industry Structure. San Diego, CA: 5. Transport for London/Congestion Charging. Harcourt Brace Jovanovich. www.tfl.gov.uk/roadusers/congestioncharging, Beeson, Patricia E., David N. DeJong, and Werner accessed September 28, 2010. Troesken. 2001. “Population Growth in U.S. 6. In the transport sector, network economies— Counties, 1840–1990.” Regional Science and where the benefits from connecting two points Urban Economics 31: 669–99. extend to all related connections in the net- Bertaud, Alain, and Stephen Malpezzi. 2003. work—can often benefit from policy measures “The Spatial Distribution of Population in 60  CONNECTING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW 48 World Cities: Implications for Economies Case Studies of Hitches, Hic-Ups and Areas for in Transition.” http://alain-bertaud.com/AB_ Improvement; Synthesis of Lessons Learned.” Files/Spatia_%20Distribution_of_Pop_%20 Summary presentation, World Bank, Washing- 50_%20Cities.pdf. ton, DC, April 4. Carruthers, Robin, Malise Dick, and Anuja ITDP (Institute for Transportation and Develop- Saurkar. 2005. Affordability of Public Trans- ment Policy). 2007. Bus Rapid Transit Planning port in Developing Countries . Transport Guide. New York: ITDP. http://www.itdp.org/ Papers 3. Washington, DC: World Bank. microsites/bus-rapid-transit-planning-guide/ Cropper, Maureen, and Soma Bhattacharya. Klein, Michael. 2012. “Infrastructure Policy: 2007. “Public Transport Subsidies and Afford- Basic Design Options.” Background paper for ability in Mumbai, India.” Policy Research this report. Working Paper 4395, World Bank, Washing- Kopits, Elizabeth, and Maureen Cropper. 2003. ton, DC. “Traffic Fatalities and Economic Growth.” Da Mata, Daniel, Uwe Deichmann, J. Vernon Policy Research Working Paper 3035, World Henderson, Somik Lall, and H. G. Wang. Bank, Washington, DC. 2007. “Determinant of City Growth in Bra- Kumar, Ajay, and Fanny Barrett. 2008. Stuck in zil.” Journal of Urban Economics 62: 252–72. Traffic: Urban Transport in Africa. Washing- Dorosh, Paul, and Emily M. Schmidt. 2008. ton, DC: World Bank. “Mozambique Corridors: Implications of Laffont, Jean-Jacques. 1994. “The New Econom- Investments in Feeder Roads.” World Bank, ics of Regulation Ten Years After.” Economet- Spatial and Local Development Team, Wash- rica 62 (3): 507–37. ington, DC. Lall, Somik V., Zmarak Shalizi, and Uwe Deich- Economides, Nicholas. 1996. “The Economics of mann. 2004. “Agglomeration Economies and Networks.” International Journal of Indus - Productivity in Indian Industry.” Journal of trial Organization 14 (6): 673–99 Development Economics 73 (2): 643–73. Egis Bceom International. 2007. “Study of the Lall, Somik V., Hyoung Gun Wang, and Thomas Feasibility of Logistics Platforms at Bogotá Munthali. 2009. “Explaining High Transport and the Region of the Savannah of Bogotá.” Costs within Malawi—Bad Roads or Lack Guyancourt, France. of Trucking Competition?” Policy Research ESCAP (United Nations Economic and Social Working Paper 5133, World Bank, Washing- Commission for Asia and the Pacific). 2007. ton, DC. “Sustainable Infrastructure in Asia: Over- Lee, Myung-Kyoon. 2003. “TransMilenio Bus view and Proceedings.” Seoul Initiative Policy Rapid Transit System of Bogota, Colombia.” Forum on Sustainable Infrastructure, Seoul, UN EP Collaborating Centre on Energy and September 6–8, 2006. Environment, Roskilde, Denmark. Gómez-Ibáñez, Jose A. 2011. “Urban Transporta- Litman, Todd. 2006. “London Congestion Pric- tion and Green Growth.” Harvard University, ing.” Victoria Transport Policy Institute, Vic- Cambridge, MA. toria, Canada. Gwilliam Ken. 1987. “Market Failures, Subsidy McKinsey & Company. 2010. Building India: and Welfare Maximisation.” In Transport Transforming the Nation’s Logistics Infra - Subsidy, ed. Stephen Glaister. Newbury, U.K.: structure. Washington, DC. Policy Journals. Menon, A. P. Gopinath. 2002. “Travel Demand ———. 2011. Africa’s Transport Infrastructure: Management in Singapore —Why Did It Mainstreaming Maintenance and Manage - Work?” MSI Global Pte Ltd, Singapore. ment. Washington DC: World Bank. Mokhtarian, Patricia L., Michael N. Bagley, and Henderson, J. Vernon, and Jacques François Ilan Salomon. 1998 “The Impact of Gender, Thisse, eds. 2004. Handbook of Regional Occupation, and Presence of Children on Tele- and Urban Economics, vol. 4. Amsterdam: commuting Motivations and Constraints.” Elsevier. Journal of American Society for Information Hidalgo, Dario, Paulo Custodio, and Pierre Graft- Science 49 (12): 1115–34. ieaux. 2007. “A Critical Look at Major Bus NEA Transport Research and Training. 2003. Improvements in Latin America and Asia: “Final Report: Integration and Regulatory PLANNING, CONNECTING, AND FINANCING CITIES—NOW C O N N E C T I N G C I T I E S    61 Structures in Public Transport.” Euro- World Bank. 2004. Sri Lanka Development Pol- pean Commission GD T R EN , Rijswijk, icy Review. Report No. 29396-LK. Washing- Netherlands. ton, DC: South Asia Region, Poverty Reduc- Newman, Peter, and Jeffrey R. Kenworthy. 1989. tion and Economic Management Sector Unit, Cities and Automobile Dependence: An World Bank. International Sourcebook. Aldershot, U.K.: ———. 2006. Brazil—Inputs for a Strategy for Avebury. Cities: A Contribution with a Focus on Cit- Samad, Taimur, Nancy Lozano-Gracia, and Alex- ies and Municipalities. Report No. 35749- andra Panman, eds. 2012. Colombia Urban - BR. Washington, DC: Latin America and the ization Review: Amplifying the Gains from Caribbean Region, Finance, Private Sector and the Urban Transition. Directions in Develop- Infrastructure Management Unit, World Bank. ment series. Washington, DC: World Bank. ———. 2008. World Development Report 2009: Schrank, David, Tim Lomax, and Bill Eisele. Reshaping Economic Geography. Washing- 2011. “2011 Urban Mobility Report.” Texas ton, DC: World Bank. A&M University, Texas Transportation Insti- ———. 2010. Sri Lanka: Reshaping Economic tute, College Station, TX. Geography. Connecting People to Prosperity. Stigler, George J. 1971. “The Theory of Economic Washington, DC: World Bank. Regulation.” The Bell Journal of Economics ———. 2011a. “Urbanization Review—Brazil.” and Management Science 2 (1): 3–21. Washington, DC: Finance, Economics, and Tao, Zhining, Geoffrey J. D. Hewings, and Kieran Urban Department, Urban and Local Govern- P. Donaghy. 2010. “An Economic Analysis of ments Unit, World Bank. Trends of Mid-Western US Pollutant Emissions ———. 2011b. “Urbanization Review—South from 1970 to 2000.” Ecological Economics 69 Korea.” Washington, DC: Korea Research (8): 1666–74. Institute for Human Settlements. Teravaninthorn, Supee, and Gaël Raballand. ———. 2011c. “Vietnam Urbanization Review.” 2009. Transport Prices and Costs in Africa: A Technical Assistance Report. The World Bank. Review of the Main International Corridors. Washington, D.C. Washington, DC: World Bank. ———. 2012a. Inclusive Green Growth: The Timilsina, Govinda R., and Hari B. Dulal. 2010. Pathway to Sustainable Development. Wash- “Urban Road Transportation Externalities: ington, DC: World Bank. Costs and Choice of Policy Instruments.” ———. 2012b. Planning for Uganda’s Urbaniza- World Bank Research Observer 26 (1): 162–91. tion. Inclusive Growth Policy Note 4. World Uganda Bureau of Statistics. 2010. Uganda Bank, Washington, DC. National Household Survey 2009/2010. Kampala. Spotlight C New cities should be well located, flexibly regulated, and efficiently connected: Lessons from China, the Arab Republic of Egypt, and the Republic of Korea on placement, policy, and provision of infrastructure C ities in the developing world increas- economic zones (SEZs).1 The Shenzhen SEZ ingly must accommodate urban was deliberately located just north of Hong ex-pansion. During rapid urbaniza- ­ Kong SAR, China, on a greenfield site in tion, existing cities struggle to cope with southern China. Although basically rural, infrastructure backlogs and increased densi- the area had two urban settlements. One was ties. Policy makers have two main options: Luohu, the main customs checkpoint with they can expand existing cities—increas- Hong Kong SAR, China and a major point of ing urban areas and densities—or they can cross-border traffic on the Kowloon-Canton ­ create new ones. Railway. The other was Shenzhen Old Town, New cities have been planned, with mixed a stopover for cross-border travelers (Wong success, in countries including China, the and Yeh 1985). Arab Republic of Egypt, and the Republic of China’s government enabled land use Korea. A look at their history suggests two transformation in the Shenzhen SEZ by main lessons: assembling large lots of land and by adjust- ing land prices to attract industry. The • New cities are more economically viable if introduction of land auctions in 1987 led they are located near existing metropoli- to a boom in property development, while tan areas. giving the local government more extrabud- • Given a good location, a new city can yield getary capital to improve basic and connec- higher returns if it benefits from coordi- tive infrastructure—ports and roads, water nated policies for land use and for infra- and sewerage, electricity and gas, telephone structure—with fluid land markets and communications—and to carry out develop- strong connections to existing cities. ment plans (Zeng 2011). Shenzhen’s success revolves around its spatial proximity to Hong These two principles—a good location, Kong SAR, China, but this advantage was institutionally supported land use transfor- supported by strong state actions to nurture mation coordinated with connective infra- land and labor markets. China’s government structure—do much to explain the early invested in the initial basic and connective success of China’s Jing Ji Te Qu or special infrastructure for SEZs, even as it offered 63 64  SPOTLIGHT C PLANNING, CONNECTING, AND FINANCING CITIES—NOW private investors the opportunity to col- viable? By basing its regional development laborate in infrastructure development. The plans on the principles of convenient loca- government also helped entrepreneurs take tion, flexible regulation, and efficient connec- risks and experiment with new products, tion. During the 1980s, as the demand for in part through subsidized financing (Zeng urban land increased, the government assem- 2011). And the SEZ was granted considerable bled land in Seoul’s periphery for five new autonomy in deciding how to attract indus- cities strategically positioned within 20–25 try, including legislative authority: it could kilometers of the city’s central business dis- develop municipal laws and regulations along trict (Kim 1999; Korea Land Company n.d.). the basic lines of national laws and regula- The land, acquired through public purchase, tions (Zheng 2009). Finally, labor markets was fully paid for at market prices. Densifica- were created. Shenzhen was the first zone in tion was encouraged by fluid urban develop- China to adopt wage reforms, including a ment guidelines on issues such as floor area minimum wage and a social insurance pack- ratio and land conversion. And the new cities age (Sklair 1991). were connected to Seoul’s core with metro What happens to new cities planned with- links and with bridges across the Han River out regard for the principles of convenient (World Bank 2008b). location, flexible regulations, and efficient Rigid policies on land use and urban connections? They fail. Egypt planned and expansion, with underinvestment in urban developed 20 towns over the past 20 years infrastructure, will limit the growth of new to reduce population growth in Cairo and cities and existing metropolitan areas alike. the Nile valley. Meant for 5 million people, New cities are likely to do well near exist- the new towns have barely drawn 800,000. ing metropolitan areas, but underlying land In the Greater Cairo Area, eight new towns market distortions must also be corrected were created to deconcentrate the city—but and rights-of-way set aside for infrastructure by 2006 they still accounted for less than in greenfield locations (just as infrastructure 14 percent of Greater Cairo’s population must be developed in areas already show- increase over a decade (World Bank 2008a). ing economic promise). The suburbs of large The reason for these failures is that Egypt’s metropolitan areas are well suited to the cre- new towns are hobbled by their distant loca- ation of thriving new cities. Developing new tions, overly rigid land use plans, and lack cities far from large metropolitan areas is of connective infrastructure. Their planning more risky—so before a government plans norms, considered restrictive by international to develop such locations, it should first care- standards, have elevated property prices and fully assess why they have not already taken limited affordable housing. And the need off. Is it because of regulatory constraints, for infrastructure to connect the new towns high transport costs, or low market accessi- with existing metropolitan markets has bility (limiting yields on private investment)? been neglected, deterring firms from relocat- If public investments are made to offset some ing. Finally, taxes on new trucks are high in of these costs, will they succeed in counter- Egypt, and important roads are of low qual- ing the tendency of firms to cluster in sectors ity, so road transport costs are prohibitive that value agglomeration economies? Finally, (Nathan Associates 1999). since agglomeration economics asserts that In contrast to Egypt’s failed towns, Korea’s some metropolitan concentration of eco- new cities were a success. Developed mostly nomic activity is best for productivity, what over a single five-year period in the mid- is the tradeoff in industrial location between 1990s, they quickly attracted 2.7 million new national efficiency and spatial equity? residents (Lee and Ahn 2005). During their Around the world, new cities have been rise, Seoul was spatially deconcentrated, and seen as solutions to metropolitan problems. its population began a gradual decline. How But city leaders could more prudently address did Korea ensure that its new cities would be the problems by encouraging fluid urban land PLANNING, CONNECTING, AND FINANCING CITIES—NOW S P O T L I G H T C    65 and labor markets—regardless of whether Lee, Chang-Moo, and Kun-Hyuck Ahn. 2005. the solutions include new cities or redevel- “Five New Towns in the Seoul Metropolitan oping old ones. The main question is not Area and Their Attractions in Non-working whether the government should or should Trips: Implications on Self-containment of New Towns.” Habitat International 29: 647–66. not initiate the development of new cities. Nathan Associates. 1999. “Reducing Transport It is whether the government has taken the Costs of Egypt’s Exports.” U.S. Agency for needed measures to correct underlying land International Development, Cairo. market failures and has created institutions Sklair, Leslie. 1991. “Problems of Socialist Devel- to set aside rights-of-way for infrastructure opment—the Significance of Shenzhen Special expansion. With these policies in place, a Economic Zone for China Open-Door Devel- city can develop organically. In their absence, opment Strategy.” International Journal of urban development will falter. Urban and Regional Research 15 (2): 197–215. Wong, Aline K., and Stephen Yeh. 1985. Housing a Nation: 25 Years of Public Housing in Singa- Note pore. Singapore: Maruzen Asia. 1.  G iven the strong hand of the government in World Bank. 2008a. “The Dynamics of Peri- SEZ development, it may be difficult to replicate urban Areas around Greater Cairo Region.” China’s experience in every detail. But the Urban Sector Update, Urban Note, March underlying principles still apply. 2008, Cairo. ———. 2008b. World Development Report 2009: Reshaping Economic Geography. Washing- References ton, DC: World Bank. Zeng, Douglas Z. 2011. “How Do Special Eco - Kim, Jeong-Ho. 1999. “Public Policies for New nomic Zones and Industrial Clusters Drive Towns in Korea: An Appraisal.” Korea China’s Rapid Development?” Policy Research Research Institute for Human Settlements, Working Paper 5583, World Bank, Washing- Gyeonggi-do, Korea. ton, DC. Korea Land Company. n.d. “Overall Assessment Zheng, Yu. 2009. “Incentives and Commitment: of New Towns in the Seoul Metropolitan The Political Economy of Special Zones in Area.” Seongnam, Korea. China.” University of Connecticut, Storrs, CT. 3 Financing cities H aving identified priorities for invest- the government sees public-private partner- ments, city leaders confront the prob- ships (PPPs) as a way toward greater long- lem of financing those investments. term efficiency in service provision, and The main difficulty is the need for money up when the government suffers from severe front. Large capital outlays are needed to pro- credit constraints that prevent it from obtain- vide infrastructure and services that are not ing credit for improvements to a publicly run fully in demand now, but will become so as system. urbanization picks up speed (Mohan 2009). Infrastructure service providers, whether The large capital investments that are needed public or private, will usually benefit from in the construction phase—whether for trans- clear government policies that ensure cost port, water provision, solid waste manage- recovery through competitive pricing. The ment, or sewage removal and treatment—are value of covering costs through user fees has likely to far exceed the budget of any city gov- been emphasized throughout this report.1 ernment (figure 3.1). If costs can be covered through prices, then How do city leaders bridge the gap whether ownership is public or private need between readily available resources and not make a large difference to city leaders— investment needs? What sources should they or to the urban residents who are best served tap? To start with, the government can estab- when provision is reliable, affordable, and lish its creditworthiness by first securing efficient. cash flows from user fees and taxes—and by Thus, the primary question for city leaders leveraging the value of land in various ways, is not likely to be the question of ownership. including taxes. Only with future cash flows (To be sure, policy debates have too often secured can the government begin to borrow focused on this question—and on details of money and attract private investment. financial engineering that similarly do not Whether financing is public or private gen- deserve first consideration.) Instead, policy erally does not make the difference between makers are wise to think first about how to successful and struggling cities. But there secure cash flows for service provision, how are at least two situations in which private to finance improvements by turning a city’s financing may be the preferred course: when existing assets into new ones, and how to 67 68  FINANCING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW FIGURE 3.1  Mismatch between capital needs and budget value capture taxes); and tax increment resources of city governments financing. The rest of this chapter presents key con- $ siderations for city leaders, as they scrutinize these choices and seek the best way to finance their cities’ infrastructure needs. Land-based financing instruments and PPPs have both Capital costs of advantages and disadvantages. Neither can Tentative budget Cash out ow Capital replacement and expenditure allocation to city turn a project based on bad economics into government for refurbishment a good project. Nor is either likely to impose urban infrastructure excessive costs. Any decision by city leaders to pursue one financing option rather than another should be made for the sake of effi- ciency, not finance—except perhaps in times Operating and maintenance of fiscal crisis, when severe credit constraints expenses may compel government to tap land-based Construction phase Operation phase instruments and private finance for addi- T tional resources. Source: Recreated from KPMG 2010. Value and develop the city’s creditworthiness create an inviting economic environment for City leaders can also consider borrowing to private firms. finance infrastructure investments—but bor- To finance investments in infrastructure, rowing might not be easy. Municipal govern- city leaders have three main tasks (CDIA ments in most developing countries have little 2010; World Bank Institute and PPIAF access to credit markets, partly because there 2012). They need to: are no local government credit markets. Despite this lack of local credit in devel- • Value and develop the city’s creditwor- oping countries, experience in developed thiness. Creditworthiness can be demon- countries suggests that local credit can work strated by securing cash flows through for long-term municipal financing—if regu- user fees and taxes—and, where neces- lations are in place to guide the issuance of sary, by raising revenue through leveraged debt and manage the risks. Such regulations assets. It is also possible to tap capital should clearly set forth procedures for sub- markets, either by issuing bonds or by bor- national governments to follow when lending rowing from specialized financial institu- money, including the purposes, types, and tions and intermediaries. amounts of allowable loans. They also should • Coordinate public and private finance clearly define institutional mechanisms for using clear and consistent rules. With approving loans and monitoring debt (Liu enough assurance that commitments are 2010). firm, PPPs can reduce the fiscal burden of Only a strong regulatory framework can infrastructure improvement projects. enable cities to manage debt and reduce the • Leverage existing assets to develop new risk of insolvency. The 1990s saw a wide- ones, linking both to land use planning. spread subnational debt crisis affecting many Leveraging can include land and prop- countries: Argentina, Brazil, Colombia, erty taxes; land sales and leases; charges Hungary, Mexico, the Russian Federation, for impact and for development (devel- South Africa, and others. What those coun- oper extractions); betterment levies (land tries needed, but lacked, was a regulatory PLANNING, CONNECTING, AND FINANCING CITIES—NOW F I N A N C I N G C I T I E S    69 framework to strengthen subnational fiscal credit ratings for 43 urban water supply pro- discipline (Liu and Waibel 2008). viders. In the process, they found that 13 would be likely to be rated A or BBB credit- worthy and 16 BB; these high credits scores Valuing creditworthiness may open the door for private commercial Even where subnational credit markets exist, finance on the local bond market for these it is hard to find useful and reliable informa- local water suppliers. tion on the creditworthiness of local govern- ments in developing countries—one reason Giving smaller cities access to capital being a lack of transparency in municipal markets: bond banks and resource pools government operations (Kaganova 2011). Developed countries make information on Smaller cities may be unable to gain direct creditworthiness available in the form of access to long-term credit because they lack bond ratings. the required financial infrastructure and Colombia has promoted transparency by local capacity. In such cases, city leaders can publishing traffic-light ratings of local pay- instead seek short- or medium-term loans ment capacity, with red, green, and yellow from higher levels of government through signals reflecting a combination of liquidity specialized donor-funded entities, such as and solvency indicators. To rate municipali- municipal development funds. Or finan- ties’ subnational debt, a red light identifies cial institutions can pool capacities to set up those whose ratio of interest to operational municipal local government financial inter- savings exceeds 40 percent and whose ratio mediaries, or bond banks (Samad, Lozano- of debt stock to current revenues exceeds 80 Gracia, and Panman 2012). percent. Red-light municipalities cannot bor- Developed countries with bond banks row. Green-light municipalities can. Yellow- include Belgium, Finland, France, Spain, and light municipalities can borrow only after Sweden, as well as Canada with its munici- obtaining the approval of the central govern- pal finance corporations (mostly provincial ment (Liu and Waibel 2008). agencies operating at the provincial level) and In 2010, the Municipality of Lima, Peru, the United States with its municipal bond obtained a loan to finance urban infrastruc- banks (state instrumentalities operating at ture. As a first step, the city received donor- the state level). Funds may not be available supported technical assistance to apply for for all projects through bond banks, but they a credit rating from an international rating are an important source of funding for cities agency. The outcome was a $70 million com- (Kaganova 2011). mercial bank loan from BBVA Banco Con- In Colombia, a successful bond bank is tinental to the municipality. This loan took FINDETER (Financiera de Desarrollo Ter- Lima a large step forward to securing long- ritorial), a government company created term financing—its maturity was double that to finance regional urban infrastructure of the city’s previous debts, making debt ser- projects. More than 90 percent nation- vice payments more affordable and freeing ally owned, with the remainder owned by municipal revenues to cover critical operating the Departamentos, FINDETER provides expenses. The loan was partially backed by resources to financial intermediaries who a $32 million guarantee from the Interna- assign them to regional authorities. It has tional Finance Corporation (Samad, Lozano- received funds from multilateral banks and Gracia, and Panman 2012; IFC 2012). has consistently received very high credit An example involving the water sector is ratings (see spotlight D) (Samad, Lozano- found in Kenya. The Water and Sanitation Gracia, and Panman 2012). Program, together with the Water Services Another way to give smaller cities access Regulatory Board in Kenya, recently com- to capital markets is through resource pools. pleted an effort to establish utility shadow India has pooled smaller municipalities’ 70  FINANCING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW resources for this purpose. The first step Is resource pooling the best way for was to rate municipal credit using a national smaller cities to obtain credit? The jury is still methodology. In 1995, this methodology was out. Pooling can be difficult, as a highly rated applied to the Ahmedabad Municipal Corpo- government may be reluctant to lend weaker ration by Credit Rating Information Services governments the benefit of its credit rating. In of India Limited. And in 1996, Ahmedabad such cases, a more realistic alternative is par- received a rating for bond offering. In 1998, allel financing: each municipality borrows on Ahmedabad issued India’s first municipal its own terms—based on its creditworthiness bond without a state guarantee—a Rs 1 bil- and ability to pay—to finance a common lion bond to finance a water supply and sew- project (Isabel Chatterton, personal commu- erage project. Used in combination with fis- nications, May 2012). cal and management reforms (to computerize Bond banks and resource pooling—with accounting, improve tax collection, and the guarantees—can be used to reduce the risk like), the bond issue helped Ahmedabad turn of smaller government debt. Yet neither is a a fiscal deficit into a surplus. substitute for establishing the foundations of I n 20 01, the govern ment of I ndia creditworthiness in local governments (box announced guidelines for tax-free munici- 3.1). City leaders can help cities establish pal bonds. Its aim was to create incentives their creditworthiness by (Pethe and Ghodke for local governments to improve their fiscal 2005): management and meet the demands of capi- tal markets. Again, Ahmedabad was first to • Creating credible accounting mechanisms. issue the bonds: in 2002, it borrowed Rs 1 • Creating sound financial management billion through a 10-year tax-free bond with systems. 9 percent annual interest. • Requiring the independent auditing of Because only larger municipalities such as local government finances. Ahmedabad were able to obtain the credit • Requiring performance evaluations for ratings needed for municipal bond issues, local government services. the government of India took a further step: it created special mechanisms to help Finally, it should be recalled that capital smaller municipalities pool their resources markets—in assessing the risks of municipal and jointly access credit. The government’s government debt—will strongly prefer invest- Pooled Finance Development Fund Guide- ment projects designed to cover costs through lines are meant to encourage small munici- pricing mechanisms (World Bank Institute palities in undertaking the fiscal, financial, and PPIAF 2012). and institutional reforms that will give them Besides bond banks and resource pools, access to market funds (Vaidya and Vaidya another option for accessing credit is private 2008; World Bank 2011a). financing through PPPs. Such partnerships Another example in India is the Tamil are likely to favor cost recovery through user Nadu Urban Development Fund, which fees in service provision. And they can work converted from a state-owned municipal well—if they follow rules that are clearly development fund into India’s first financial established in advance. intermediary, with private sector capital and management participation. It has successfully mobilized financial resources from the capital Coordinate public and market, through various innovative financ- private finance using clear ing schemes and helped small municipali- and consistent rules ties develop PPP projects such as the Build, Traditionally, urban infrastructure financing Operate, and Transfer (BOT) project—for has come from higher government levels— example, the Karur Bridge BOT and Alandur which raise the funds through taxes—and wastewater BOT (see spotlight D). from government-owned or government- PLANNING, CONNECTING, AND FINANCING CITIES—NOW F I N A N C I N G C I T I E S    71 BOX 3.1  Subnational debt finance: Making it sustainable State and local government debt, and debt of quasi- tant role in developing infrastructure networks that public agencies have been growing in importance. cut across the boundaries of subnational adminis- Rapid urbanization, with unprecedented rural-to- trations. But the special-purpose vehicle operations urban migration, will continue to demand massive must be within a transparent governance and finan- urban infrastructure investments—investments that cial structure to ensure that they do not become a largely have been decentralized to subnational gov- means of circumventing borrowing limits or contin- ernments in many countries. Developing countries gent liabilities of their creators. invest an annual average of 3–4 percent of GDP in Land asset–based financing is an additional and infrastructure, well short of what is considered to important source of subnational finance for urban be required (7–8 percent). The scale and the sus- infrastructure in many countries, as land is often tainability of infrastructure financing will criti- the most valuable asset on the asset side of subna- cally depend on the subnational government’s fiscal tional balance sheets. It can also create significant sustainability. fiscal risks, including diverting proceeds for current The sovereign’s macroeconomic fundamentals expenditure and using land and other hard assets as will continue to be vital to the fiscal sustainability of collateral for debt instruments such as bank loans. subnational governments. Major international rating The upswing in the value of hard assets in economic agencies generally cap subsovereign credit ratings by booms can lead to excessive borrowing; and the vol- the sovereign credit ratings. A country’s macroeco- atility of land and real estate markets creates risks nomic management and countrywide risks affect not for nonperforming loans, which can create macro- only the broader economic, fiscal, and financial con- economic risks. ditions under which a subnational government oper- The global financial crisis has brought home the ates, but they also place restrictions on its ability to importance of developing domestic financial mar- raise funds. kets, including subnational credit markets. Sub- Subnational debt sustainability will also require national governments or their entities in various strong regulatory frameworks for borrowing, countries have already issued bond instruments including the management of implicit and contin- (for example, in China, Colombia, India, Mexico, gent liabilities. Significant progress has been made Poland, the Russian Federation, and South Africa). in establishing ex ante fiscal rules for subnationals in More countries are considering policy frameworks various developing countries to reduce default risks. for facilitating subnational debt market development Newly decentralizing countries will need to develop (Indonesia), whereas others are allowing selected regulatory frameworks for subnational debt instru- subnational entities to pilot-test transaction and ments before opening up subnational government capacity-building activities (Peru). A competitive and access to financial markets. More also needs to be diversified subnational credit market can help ensure done in developing a robust ex post insolvency sys- the lowest cost and the sustainable availability of tem for debt restructuring in the case of subnational credit. This means opening access on equal terms defaults. A sound insolvency system reduces the to bank lending and bond issuance and prohibiting moral hazard of free-riding on common resources by monopolies of “municipal or development banks.” individual subnationals and sends signals to finan- Securities laws and market infrastructure are part of cial markets about pricing risks and returns. developing subnational credit markets. Many subnational governments have created special-purpose vehicles to undertake infrastructure Contributed by Lili Liu, based on Canuto and Liu (2010), investments, often in partnership with private finan- Liu (2010), Liu and Pradelli (2012), and Liu and Tan ciers and operators. Such vehicles can play an impor- (2009). sponsored banks and financial institutions. incentives to manage risks wisely, to spend But because the political costs for these expen- money efficiently, or to do what is needed for ditures have been borne at the national level, continued creditworthiness. Cities are more towns and cities have not always had strong accountable for their own development when 72  FINANCING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW BOX 3.2  Paying for infrastructure through ancillary services When infrastructure services cannot easily cover airport franchise is the right to operate or lease out their full cost through user fees, ancillary services concession services—shops, restaurants, and the can sometimes fill the gap. like—at the airport. Such add-ons to basic infra- For example, a toll road operator may not be structure service can make funding possible with- able to set fees high enough to cover costs. But there out recourse to regular government budgets. And is money to be made in roadside businesses. So city when infrastructure service is independent of fiscal leaders can combine the toll road franchise with the processes, the government is better insulated from right to lease out service concessions for hotels, res- undue political influence. taurants, or gas stations at highway rest stops. Indeed, Still, there is a danger that subsidies may become a toll road company might lease out the rights to real excessive and foster economically inefficient proj- estate development along part, or all, of a highway. ects. So city leaders should routinely use cost-benefit In granting a highway concession, governments analyses to measure the welfare increases that infra- can thus auction off the full package of rights and structure services are likely to produce. obligations to obtain the best price for the whole. Similarly, one of the main revenue sources for an Sources: Klein 2012. the funds for that development are raised provision. When services are to be publicly locally. provided (or provided through state-owned One way for cities to raise funds locally enterprises), lenders do not always accept a and demonstrate accountability is through government’s assurances about cost recov- PPPs. City leaders in developing countries— ery through user fees. Why? One reason is where financial markets do not readily allow that lenders lack confidence in the govern- municipalities to access long-term credit—are ment’s commitment to fee collection (fees especially likely to think about private partic- actually collected might differ from those ipation in urban infrastructure projects. initially announced). Another is that lend- Done well, PPPs can not only attract ers fear a diversion of fee revenues from cost additional infrastructure financing but also recovery—their original purpose—to other improve project selection—ensuring that uses. Uncertainty of demand may also be selected projects are sustainable by subject- a concern. Finally, lenders can be wary of ing them to private sector market selection unpredictable leadership, wondering whether mechanisms. In addition, PPPs can improve a state-owned service provider will have its asset utilization and favor cost recovery revenues arbitrarily taxed or withheld by the through user fees. User fees are not exclusive government. to PPPs, since governments also can charge When lenders remain reluctant to extend users to cover costs. Yet governments may credit even after user fees are announced, find it politically difficult to achieve full cost the government may have no choice. The recovery through user fees. Using ancillary only way for city leaders to restore credit and benefits to recover costs may also be a politi- finance urban infrastructure projects may cally viable alternative (box 3.2). then be through the sale of public assets to In addition, it may be difficult or impos- private firms.2 sible for the government— even af ter Private participation is not a magic bullet announcing that it will cover costs through against all challenges to infrastructure financ- a regime of user fees—to obtain financing for ing. Further, the contractual arrangements improvements in public infrastructure service for PPPs can vary considerably depending PLANNING, CONNECTING, AND FINANCING CITIES—NOW F I N A N C I N G C I T I E S    73 on the risk allocated to the private sector TABLE 3.1  Basic options for public-private partnerships (table 3.1). Like any other financing source, Allocation of risk to private sector Type of ownership arrangement PPPs require commitments from sustainable None State-owned enterprise cost-covering tariffs or equivalent tax rev- enues. Because long-term fiscal commitments Service delivery for state-owned firm Service contract depend on risky variables—such as costs, Management service for a franchise Management contract demand, or exchange rates—their cost can Commercial operations of a franchise Lease, affermage be difficult to assess. They may prompt over- (including risk of nonpayment) commitment from the government and exces- Commercial operations and investment Concession, privatization sive fiscal risk, because the cost of guarantees Source: Klein 2012. offered may be hard to estimate (World Bank Note: There is no significant difference between a full concession and privatization of a monopoly franchise. Compare the French water concessions with English water privatization. Institute and PPIAF 2012). An English private owner cannot decide to turn off taps nor can she dig up the pipelines In 1990, the government of Colombia and take them elsewhere. Both concessions and privatizations can be terminated for fault or even without fault. While the details of these two types of contracts may vary, the basics are provided guarantees on toll road revenues, no different. airport revenues, and payments to utility (power) companies under long-term purchase agreements. The government underestimated the risks of these guarantees—among other In short, PPPs are not a substitute for problems, demand was lower than expected. good financial management and good project By 2005, the government had paid out $2 evaluation. Examples around the world sug- million on the guarantees. Another example gest that when the risks are underestimated, of underestimated risks is Korea. In 1990, feasibility studies overlooked, and financial Korea’s government guaranteed 90 percent of sustainability ignored, failure is the result. forecast revenue for 20 years on a privately Policy makers can benefit from PPPs, while financed road linking Seoul to a new air- avoiding their pitfalls, by following proven port at Incheon. Again, the government paid rules (box 3.3). tens of millions of dollars every year because In South Africa, which has a long history demand was lower than expected (World of successful infrastructure financing through Bank Institute and PPIAF 2012). PPPs, the law that governs them was enacted In Bolivia, the government privatized the in 1999. The regulation defines the process water supply system in the city of Cocha- for creating a PPP, with the necessary require- bamba, awarding a 40-year concession to ments and approvals, and it spells out the insti- the private consortium, Aguas del Tunari. tutional responsibilities of all entities involved. The contract was awarded without ade- Each step in the process is clearly defined in quate appraisal of the financial situation an independent module, which can be updated of the company. Once the concession was separately as conditions change—making the awarded, rate structures were modified regulation flexible and adaptable. The trea- resulting in increases of up to $20 in water sury conducts approvals and reviews, evaluat- bills, representing as much as 20 percent of ing projects with a focus on their affordability incomes for local families. Subsequent vio- and value for money. And the auditor general lent protests led to Aguas del Tunari with- oversees the entire process, auditing contract- drawing from the project. And in Poland, ing authorities annually to ensure that they the government awarded a concession to follow the rules for PPP implementation. the Gdansk Transport Company in 1997 In many jurisdictions, finally, a clear defi- for building and operating a section of the nition of property rights can provide stronger highway between Gdansk and Torun. How- protection for investors than any promises ever, a key piece of PPP legislation was miss- by the state or its enterprises can. This form ing, delaying the signing of the contract of collateralization can make finance flow by seven years (World Bank Institute and to infrastructure ventures and help expand PPIAF 2012). systems. 74  FINANCING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW BOX 3.3  Implementing public-private partnerships—lessons from Chile and Mexico Experience worldwide suggests that successful imple- public awareness of the process, and a learning-by- mentation of public-private partnerships (PPPs) hinges doing approach that allowed for adjustments during on several key rules. Among these is the need for the process contributed to the success of these PPPs. strong public sector capacity, appropriate legal and In contrast, Mexico’s road concessions were not sector framework, rigorous planning and risk assess- as successful. Between 1987 and 1995, 52 PPPs for ment through feasibility studies, transparent and toll roads were awarded by the government of Mex- competitive procurement, strong monitoring systems, ico. Average actual revenues for most projects were and flexibility for adapting to unpredictable events. about 30 percent below forecasts while construction Chile’s road concession PPPs reflected these rules. cost overruns averaged 25 percent. A short conces- Between 1993 and 2001, the government of Chile sion period (with a 15-year maximum) led to high awarded contracts for 21 roads on a competitive tolls, which increased on average by $0.15 per kilo- basis. The bidding started with smaller projects in meter after the concessions were granted. This led to order to test the market while also minimizing the the government finally taking over 23 projects and risk for the private sector. More than 40 Chilean and paying outstanding debt to Mexican banks and con- international companies from 10 countries partici- struction companies, representing about $7.6 billion. pated in the bidding through 27 consortia. A clear and transparent procurement process, a focus on Source: Hodge 2006. Leverage existing assets to • In Mumbai, in 2006–07, the auction of 13 develop new assets hectares of land in the new financial cen- ter—Bandra-Kurla Complex—generated Cities can leverage the value of their assets— $1.2 billion. That was more than 10 times mainly land—to finance public infrastruc- the total 2005 fiscal spending of the Mum- ture. An advantage of land-based financing bai Metropolitan Regional Development over other sources is that it usually generates Authority, and 6 times the total value of more cash up front (CDIA 2010). municipal bonds issued by all urban local Auction mechanisms are often used to sell bodies and local utilities in India in more land in developing countries, which lack sys- than a decade. 3 The proceeds were to be tematic land valuations. Some countries use used primarily in financing projects iden- land parcel auctions as a standard element tified by the Metropolitan Transportation in land management. Land auction data are Plan. not widely available—but three recent large • In Istanbul, in 2007, the auction of an old transactions illustrate the revenue potential bus station and government building gen- of land auctions (Peterson 2007; Peterson erated $1.5 billion—more than the city’s and Kaganova 2010): total 2005 fiscal expenditures and infra- structure investments.4 • In Cairo, in 2007, the auction of 3,100 hectares of desert land for a new town gen- Clearly, land sales can help to finance erated $3.12 billion—an amount 117 times urban infrastructure and other investments. greater than the country’s total urban prop- Yet city leaders should recognize that all erty tax collections, and about a tenth the successful land-based financing instruments size of national government revenue. The require at least three kinds of rules to be in proceeds were to be used to reimburse costs place (see chapter 1 on planning). First are of internal infrastructure and build a con- rules to assign and protect property rights. necting highway to Cairo’s ring road. Second are institutions for the valuation and PLANNING, CONNECTING, AND FINANCING CITIES—NOW F I N A N C I N G C I T I E S    75 public dissemination of land values across increases driven by infrastructure improve- various uses. Third is a strong legal frame- ment. The funds generated are used to work, with a healthy judicial system to finance the infrastructure projects. To be handle disputes and oversee the land-based sure, such projects do not pay their own way. financing process. Furthermore, a single Yet they mesh with local revenue generation planning strategy should integrate land-based and accounting efforts. financing with urban land use planning. A more advanced type of land-based Where governments want to continue financing, seen in the United States, is tax owning land, leaseholds have emerged as increment financing. It uses property tax another way of leveraging land’s value. They increases from improvements to finance have been used extensively in China, where infrastructure investments. Like betterment the government owns all land. 5 Until 1994, levies, tax increment financing requires a the central government was allowed to col- well-established, functioning property tax lect up to 60 percent of all land leasing rev- regime. enue. After financial reforms, it went down Considered as financing sources for infra- to 5 percent, enabling local governments structure investment, land sales may appear to capture a local revenue source (Peterson simpler than levies, taxes, and exactions. Yet 2007). China acquires leasable land through for land sales to immediately raise revenue, several sources. Often it moves administra- they also require strong institutions—partic- tive buildings or state-owned enterprises to ularly institutions of two types: new sites—freeing up desirable spots to be leased—or it acquires rural land from col- • Institutions that manage land assets using lectives on a city’s fringes (Peterson 2007). transparent, robust municipal accounting However, relying extensively on land leases methods. as a revenue source risks creating inefficien- • Institutions that determine leasing and cies (at least in the short term) by producing sales prices (or floor prices in land sale empty or underused new cities in the middle auctions) by defining objective land valu- of nowhere. The essential principle is to lever- ation techniques. age land to generate new assets, at the same time systematically linking this new revenue Furthermore, land sales are a one-time source to a city’s land use plans. income flow—not a long-term flow to meet a Land sales and leaseholds can generate city’s ongoing need for financing. initial capital to defray the first-time costs of infrastructure investments. But in the long Betterment levies in Colombia and Peru run, other instruments, such as property Betterment levies are payments made by taxes and similar levies, must pay for the affected property owners who help fund maintenance and expansion of public facili- infrastructure improvements based on the ties. In the United States, property taxes are increased value of their property. Special the main source of revenue for local govern- assessment taxes similarly collect payments ments. By contrast, in developing countries, from property owners within a designated such taxes are still only a small percentage area of improvement. The best-known sys- of local revenues—except in the largest cities, tem of municipal financing through bet- where they are becoming more important. terment levy collection is Colombia’s. Its One problem is that these taxes are often betterment levies, or contribución de valo- hard to collect in developing countries, where rización, established in 1921, are now regu- property values are not systematically defined lated under a law passed in 1970. They have and tax collection rates are low. substantially helped to finance local proj- Betterment levies, special assessment ects, comprising 16 percent of Bogotá’s total taxes, and exactions respond to these chal- income in the 1960s (rising to 24 percent in lenges by linking fee payments to value 1993) and 45 percent of Medellín’s (Uribe 76  FINANCING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW 2010; Borrero 2011).6 In Bogotá, as much as pay for them—so they end up benefiting half of the city’s arterial road network was the city’s more affluent areas. funded by betterment levies (Uribe 2010). • Poor coordination among various admin- However, a recent study has found three istrations. Although the IDU works with internal challenges to Bogotá’s betterment the planning department on betterment levy system (Uribe 2010). They are: projects, the projects are not always con- sistent with the city’s master plan. • Institutional limitations. At present man- aged by the Instituto de Desarrollo Urbano Peru’s experience with betterment levies (Urban Development Institute, IDU), the offers an instructive contrast with Colom- levies were marred until recently by incon- bia’s. Concentrated in metropolitan Lima, sistent property value estimates arising betterment projects in Peru have yet to gain from a lack of communication between the traction. Why? Because Lima presents them IDU and the cadastre office. Now, updates with unique challenges. Although Peru’s to the cadastral database enable the IDU methodology for betterment levies is nearly to use the property values recorded in the identical to Colombia’s, a lack of training and cadastre. Efforts are under way to central- of technical knowledge for implementation in ize data collection in the cadastre for the Lima means that missteps are common. Over benefit of other institutions. 1990–93, of more than 500 public works • Regressive effects. Most betterment proj- projects begun in Lima, only 31 used better- ects are carried out wherever residents can ment levy financing (Huayapa 2001). BOX 3.4  Leveraging land to finance infrastructure: Four lessons from international experience Strong institutions are needed to make land-based fee. The success of this system is attributable partly financing instruments work. Institutions are essen- to major efforts at updating and maintaining a com- tial to clearly define property rights; to objectively prehensive cadastral database—but also to growing value land using standard methods; and to support citizen participation and oversight. and oversee land management, land sales, and tax collection. Development and impact fees, and tax increment financing, are seen mostly in developed countries— Land sales are most successful when coupled with because their success requires strong institutions other financing sources, such as a system of prop- that many developing counties do not yet have. erty taxes. Although useful as an initial source of These instruments need a strong regulatory author- revenue for infrastructure investments, land sales ity to enforce fee collection and to ensure that fees are not a reliable source of long-term financing; for are used only for their defined purpose. Clearly that, a tax revenue system is needed. defined property rights are essential. Other prereq- uisites for success include updated information on Betterment levies and special assessment taxes property values and a clearly defined methodol- bring revenue to municipalities based on the ogy for estimating a project’s impact on land and increase in land value from public improvements. property values. And for tax increment financing, a The main challenge to betterment levies, in prac- well-developed property tax regime is also required. tice, is determining how to calculate the increases in Unless a strong property tax system is in place, property value due to improvements. Such determi- imposing development and impact fees and estab- nations require institutions for valuation and for the lishing tax increment financing may be unrealistic collection and publication of price data. A simplified ambitions. solution has worked well in Bogotá: levies are not estimated for each parcel but linked to a citywide Source: Urbanization Review Team. PLANNING, CONNECTING, AND FINANCING CITIES—NOW F I N A N C I N G C I T I E S    77 To succeed, betterment levies require the privatization during its heyday in the 1990s, presence of several factors. One is strong the main benefit from privatization was the institutions—to collect the taxes and to build relaxation of constraints on investment—lead- project capacity. Another is a clear under- ing to system expansion and greater over- all benefits, as well as to the liquidity that standing among taxpayers of how the levy’s can be critical for governments with credit distribution is defined and how its benefits constraints. are calculated. Finally, a positive attitude 3. Of course, comparing a one-time sale of land among taxpayers is essential: encouraging with annual fiscal spending should not prompt citizen participation and working toward generalizations about the revenue potential a strong tax payment culture are key steps of land sales compared with other financing toward the successful use of betterment levies sources. Without time-series data, it is not (box 3.4). clear whether such land sales are fiscally sus- Land-based infrastructure financing has tainable in the long run. the biggest payoff where there is rapid urban 4. This property in Turkey was purchased by growth. Rapid growth causes land prices to Sama Dubai with grand plans to build the Dubai Towers in Istanbul—to be the tallest rise rapidly, creating an opportunity to gener- skyscrapers in Turkey. However, the munici- ate significant revenue. Yet rapid growth also pality and developer could not come to terms magnifies infrastructure investment needs, on the impact of the buildings to the sur- requiring significant sources of development rounding area so the project has been halted finance. France, Japan, and the United States indefinitely. Meanwhile, the land remains used land-based financing techniques most undeveloped. heavily during periods of rapid urban growth 5. The United Kingdom and Commonwealth when there were large leaps in the scale of countries are other examples. urban investment. 6. Medellín discontinued the use of better- As city leaders consider financing infra- ment levies in 2001 because of administrative structure with land-based instruments, they challenges. should also appreciate the risks (Peterson 2007). Real estate markets are highly cycli- References cal. So if land financing is used to finance infrastructure broadly (rather than being Borrero, Oscar. 2011. “Betterment Levy in dedicated to new development), it will add Colombia: Relevance, Procedures, and Social Acceptability.” Land Lines April: 14–19. Lin- uncertainty to local government budgets. coln Institute of Land Policy, Cambridge, MA. Furthermore, the large revenues associated Canuto, Otaviano, and Lili Liu. 2010. “Subna- with land transactions and urban infrastruc- tional Debt Finance: Make it Sustainable.” In ture investment create incentives for abuse The Day After Tomorrow: A Handbook on by intermediaries. Finally, there is a risk that the Future of Economic Policy in the Devel - high potential profits from land transactions oping World, ed. Otaviano Canuto and Mar- will transform local authorities into real celo Giugale, 219–38. Washington, DC: World estate developers, seeking their own profit Bank.  over the citizens’ common welfare. CDIA (Cities Development Initiative for Asia). 2010. “PPP Guide for Municipalities.” Metro Manila, Philippines, June. http://cdia.asia/wp- Notes content/uploads/PPP-Guide-for-Municipalities- 1. Prices should cover costs wherever possible FINAL-100609.pdf. and should emerge through competition, or by Galal, Ahmed, and Bharat Nauriyal. 1995. “Reg- regulations that mimic competition (discussed ulation of Telecom in Developing Countries: in chapters 1 and 2). Outcomes, Incentives and Commitment.” 2. This position is consistent with the strongest Revista de Análisis Económico 10: 41–62. evidence on the superiority of private solu- Hodge, Graeme A. 2006. “Public-Private Part- tions over public ones (Galal and Nauriyal nerships and Legitimacy.” University of New 1995). According to analyses of infrastructure South Wales Law Journal 29 (3): 318–27. 78  FINANCING CITIES PLANNING, CONNECTING, AND FINANCING CITIES—NOW Huayapa, Margarita. 2001. “Experience with the Responsibility and Urban Infrastructure in Betterment Levy in Peru.” Working Paper, Lin- Brazil, China, India, Poland and South Africa, coln Institute of Land Policy, Cambridge, MA. ed. George E. Peterson and Patricia Clarke IFC (International Finance Corporation). 2012. Annez, 284–306. Washington, DC: World “Cities and PPPs.” Handshake 4 (January). Bank. Kaganova, Olga. 2011. Guidebook on Capital Peterson, George E., and Olga Kaganova 2010. Investing Planning for Local Governments. “Integrating Land Financing into Subnational Washington, DC: World Bank. Fiscal Management.” Policy Research Working Klein, Michael. 2012. “Infrastructure Policy: Paper 5409, World Bank, Washington, DC. Basic Design Options.” Background paper for Pethe, Abhay, and Manju Ghodke. 20 05. this report. “Towards Bank Financing of Urban Infra- KPMG. 2010. Linking Cities to Finance: Over- structure.” Working Paper 2, University of coming Bottlenecks to Financing Strategic Mumbai, Department of Economics. Urban Infrastructure Investments . Back- Samad, Taimur, Nancy Lozano-Gracia, and Alex- ground paper, Shanghai, China, September andra Panman. 2012. Colombia Urbanization 27–28. Review: Amplifying the Gains from Urban Liu, Lili. 2010. “Strengthening Subnational Debt Transition. Directions in Development Series. Financing and Managing Risks.” Review of Washington, DC: World Bank. Economic Research; Ministry of Finance, Bei- Uribe, Maria C. 2010. “Land Information Updat- jing; August 16, 2010, 46 F-9. ing, a De Facto Tax Reform: Bringing Up to Liu, Lili, and Juan Pradelli. 2012. “Financing Date the Cadastral Database of Bogota.” In Infrastructure and Monitoring Fiscal Risks.” Innovations in Land Rights Recognition, Policy Research Working Paper 6069, World Administration and Governance, ed. Klaus Bank, Washington, DC. Deininger, Clarissa Augustinas, Stig Enemark, Liu, Lili, and Kim S. Tan. 2009. “Subnational and Paul Munro-Faure, 180–207. Washington, Credit Ratings: A Comparative Review.” DC: World Bank. Policy Research Working Paper 5013, World Vaidya, Chetan, and Hitesh Vaidya. 2008. Bank, Washington, DC. “Creative Financing of Urban Infrastructure Liu, Lili, and Michael Waibel. 2008. “Managing in India through Market-based Financing and Subnational Credit and Default Risks.” Policy Public-Private Partnership Options.” Presented Research Working Paper 5362, World Bank, at the 9th Metropolitan Congress, Sydney, Washington, DC. October 22–26. http://niua.org/present_series/ Mohan, Rakesh. 2009. “Global Financial Cri- syndey/sydney_paper.pdf. sis—Causes, Impact, Policy Responses and World Bank. 2011a. “Developing a Regula- Lessons.” 7th Annual India Business Forum tory Framework for Municipal Borrowing in Conference, London Business School, London, India.” Washington, DC: World Bank. April 23. World Bank Institute and PPI A F (Public- Peterson, George E. 2007. “Land Leasing and Private Infrastructure Advisory Facility). 2012. Land Sale as an Infrastructure Financ- Public-Private Partnerships Reference Guide. ing Option.” In Financing Cities: Fiscal Version 1.0. Washington, DC: World Bank. Spotlight D Innovations in municipal finance: FINDETER and TNUDF Territorial the commercial bank. The commercial bank remains responsible for servicing its redis- In Colombia, commercial banks had no expe- counted loan by FINDETER regardless of rience with lending to municipal governments its own collection of debt services from the until the early 1990s. However, the subsov- municipal government, thus absorbing all the ereign debt market has rapidly developed credit risk. The municipal government also since, and has been stimulated by the finan- has to set up a special account into which cial intermediation of Financiera de Desar- intergovernmental payments flow. The com- rollo Territorial (FINDETER). FINDETER, mercial bank has a senior right to intercept established in 1999 as a legally independent revenue if loan payments are due. The com- and quasi-public financial institution, acts as a second-tier lender encouraging commercial mercial bank, in turn, endorses these liens to lenders (first-tier lenders) to directly finance FINDETER. Thus, if a participating bank municipal governments. By lowering the cost becomes insolvent, ­ FINDETER can still col- of loans, FINDETER increased commer- lect its dues (figure SD.1). cial banks’ willingness to lend to municipal FINDETER has encouraged commer- governments. cial banks to offer municipal governments FINDETER rediscounts loans that com- long-term loans at attractive rates. In addi- mercial banks make to subnational borrow- tion, it provides long-term financing up to ers; this process makes it more financially 15 years, whereas typical maximum loan attractive for commercial banks to lend to maturities are 3–5 years. From 1990 to 2003, subnational borrowers. In practice, this ­ FINDETER has financed about $2 billion in means that a municipal government applies loans in more than 700 municipalities, and for a loan to a commercial bank. The com- from 2006 to 2010, it disbursed about $4 bil- mercial bank and FINDETER then appraise lion. In addition, FINDETER has maintained the proposal and, if approved, the com- low levels of bad debt to under 2 percent. mercial bank lends to the municipal gov- FINDETER has succeeded in establish- ernment. FINDETER, in turn, lends an ing itself as a viable financial institution. agreed-upon amount at a discounted rate to And although FINDETER initially relied 79 80  SPOTLIGHT D PLANNING, CONNECTING, AND FINANCING CITIES—NOW FIGURE SD.1  FINDETER operational process Debt and Discount Public equity Loan sources Loan Flow of funds FINDETER Loan Commercial Subnational Repayments banks borrowers Donors Debt Resource Private Intergovernmental sources revenue transfer Source: Contributed by Nozomi Tokiwa and Hiroaki Suzuki. on donor support, primarily from the Inter- local bodies’ access to capital markets (figure American Development Bank and the World SD.2). Bank, revenue from existing loans has TNUDF has an efficient institutional and financed more than 78 percent of its activi- managerial framework. They are an autono- ties since 2006. In addition, FINDETER has mous legal entity, outside the government, achieved an AAA local credit rating (from and also involve equity contributions from Duff & Phelps), which has helped accessing three Indian private financial institutions. less expensive financing. This structure has facilitated a positive rela- tionship with the private sector, and it has facilitated efficient investment decisions. Tamil Nadu Urban Development TNUDF has mobilized private capital by Fund issuing bonds and by facilitating innovative In the late 1990s, the government of Tamil financing schemes such as credit pooling, Nadu in India faced the challenge of reduc- securitization, and public-private financing. ing the huge backlog of needed infrastruc- ture investments and of meeting the under- • Bond issuance. In 2000, TNUDF suc- supply of basic urban services. The situation ceeded in issuing domestic bonds ($59.3 was caused by urban local bodies’ limited million equivalent) with an LAA rating, financial and technical capacity and lack of indicating high safety and moderate risk long-term financing. To solve these prob- due to TNUDF’s strong financial posi- lems, the government established the Tamil tion. This was the first nonguaranteed and Nadu Urban Development Fund (TNUDF) unsecured bond issuance by a financial in 1996 as the first public-private financial intermediary in India. intermediary in India, which aims to provide • Pool financing. TNUDF facilitated a credit long-term financing for urban infrastructure pooling facility for financing smaller urban in Tamil Nadu. Further, TNUDF’s broad local bodies, who face limited financing scope includes attracting private capital into capacity. In this scheme, small water and urban infrastructure and facilitating urban sanitation projects were pooled together PLANNING, CONNECTING, AND FINANCING CITIES—NOW S P O T L I G H T D    81 FIGURE SD.2  Tamil Nadu Urban Development Fund institutional framework Loan Loan Loan Equity Private Donors Government GoTN nancial TNUDF of India institutions Bond purchase Loan/TA Flow of funds ULBs/private Bond investors Repayments investors Source: Contributed by Nozomi Tokiwa and Hiroaki Suzuki. Note: GTN = government of Tamil Nadu; ULBs = urban local governments; TA = technical assistance. in a single bond issuance, to be repaid increase the toll by 8 percent a year. The through project revenue. The issuance project included a substantial equity con- received a rating of AA by Fitch Ratings. tribution by the builder/owner. • Securitization. TNUDF structured refi- nancing of the Madurai Bypass, the first A high loan recovery rate at around 98 toll road project based on user charge. After percent has allowed TNUDF to finance and the facility began generating revenue, the support extended urban infrastructure proj- urban local body issued bonds to refinance ects (181 loans to 732 urban local bodies with the loan made by TNUDF at lower interest a cumulative approved loan amount of $95 rates. The bonds were fully subscribed by million as of February 2002). Additionally, banks and other investors. the success of TNUDF has been supported • Public-private partnership (PPP) financing: from various donors such as the World Bank, TNUDF assisted refinancing of Karur the Asian Development Bank, the Japanese Bridge, the first Build, Operate, and International Cooperation Agency, and the Transfer toll bridge in India, through PPP KfW banking group in Germany. financing. The bond issue was backed by a contract that allows the builder/owner to Contributed by Nozomi Tokiwa and Hiroaki Suzuki. 4 Framework in action: Lessons from Urbanization Reviews This chapter presents case studies of seven Urbanization Review pilot countries—Brazil, China, Colombia, India, Indonesia, the Republic of Korea, and Vietnam—with lessons from each. BRAZIL have populations greater than 100,000 (fig- ure 4.2). These cities are more prevalent in Eighty-four percent of Brazil’s population the southeast, where 70 percent of the urban lives in urban areas, and urban population population lives in large urban centers and 23 growth is expected to drive future population percent in metropolises (with an urban popu- growth. Over 1970–2000, the urban share lation of more than 4 million). But Brazil’s 12 of Brazil’s population climbed from 56 to 82 metropolitan areas have been losing ground percent (figure 4.1). Brazil’s cities generate as smaller cities attract more people—the about 90 percent of GDP. With this burgeon- percentage of urban population living in ing urban population, Brazil must success- the 12 metropolitan areas rose between the fully manage planning and connecting across 1940s and 1970 but has fallen since. the system of cities. Home to the vast majority of the coun- try’s population, Brazil’s cities are the center of economic activity. Today, Brazil mirrors How Brazil is urbanizing the behavior of developed countries, where Large urban centers (populations greater income starts to disperse as the country than 100,000) dominate Brazil’s system of approaches high-income levels. The share in cities. While this system varies considerably GDP of the 12 largest metropolitan areas has by region, 60 percent of all municipalities been declining slowly, from about 46 per- cent in 2000 to about 43 percent in 2008. São Paolo and Rio de Janeiro led the decline, The Brazil Urbanization Review has been prepared by a moving from about 33 to 30 percent in these team led by Nancy Lozano-Gracia comprising Hyoung eight years. Dispersion of GDP may also be Gun Wang, Henry Jewell, Somik V. Lall, and Eugenia Suarez. Consultants involved in this work were Geof- related to the decline in productivity growth frey J. D. Hewings, Andre M. Maghalaes, Roberta de in the past years in larger cities, as well as Moraes Rocha, and Marcelo E. Alves da Silva. to increased congestion, bad management, 83 84  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW FIGURE 4.1  Brazil’s rapid urbanization: From 30 percent urban in percentage points. Access to piped water was 1940 to 84 percent in 2010 already above 85 percent across cities at that time. While for other basic services such as 100 sewerage the gap in access between city sizes 90 is still large (more than 40 percentage points), Share of total population (%) 80 it declined by 10 percentage points in those 70 10 years. Considerable regulatory reforms in 60 water and electricity in the second half of the 50 1990s contributed to this success. And tariffs 40 have helped extend the networks and expand 30 access. 20 10 Brazil’s system of cities follows the pat- 0 terns suggested by international experience, 1940 1950 1960 1970 1980 1990 2000 2010 indicating that the system is well integrated and that different cities are performing dif- Urban Rural ferent activities (figure 4.3). As one would expect in an integrated urban system, large Source: IBGE demographic census, several years. cities are diversified and small and medium cities are more specialized. Between 1995 and 20 08, the Herfindahl-Hirschman FIGURE 4.2  More than half of Brazil’s urban population (60 percent) is in large cities Index1 for production activity increased in medium cities, small cities, and mostly rural municipalities, suggesting more con- 100 centrated production activities. 90 Location quotients 2 for the 123 largest Share of urban population (%) 80 urban agglomerations confirm the national 70 pattern. The largest cities have a strong con- 60 50 centration of high and medium-high tech- 40 nology industries like publishing; chemi- 30 cal products; and electrical, electronic, and 20 transportation equipment. Computer-related 10 industries and financial services are also clus- 0 tered in the largest cities. Medium cities host 1940 1950 1960 1970 1980 1990 2000 2010 industries of medium technological levels, ≥ 4 million 1 million–4 million 500,000–1 million such as textiles and pulp and paper products. 100,000–500,000 50,000–100,000 20,000–50,000 Low technology industries are most com- ≤ 20,000 monly in the smallest cities (Da Mata and others 2006; 2007). Different cities in Brazil Source: IBGE demographic census, several years. seem to be performing different functions, as expected in a well-connected system. and poor metropolitan coordination, among Urban challenges other problems (World Bank 2006). Despite great population inflows into cit- Access to basic services ies, Brazil has been closing the gap in access Regional and within-city disparities in to basic services across city sizes. In 1990, the access to basic services persist. While Brazil gap in access to piped water between small has improved access to water and electric- and large cities was about 30 percentage ity, there are still considerable differences points; by 2000, this gap closed to about 13 in access to basic services across the urban PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    85 system. The gap in access to piped water FIGURE 4.3  High specialization in smaller municipalities—greater is closing. But the north region seems to diversity in large cities be lagging. Average access to piped water in medium cities was below 60 percent in 0.45 2000. Disparities are also wide within cit- 0.40 ies: while on average only 8 percent of total 0.35 households do not have a bathroom within Herfindahl Index 0.30 their house, the percentage in slum house- 0.25 holds is 12 percent. 0.20 These regional differences may lead to 0.15 migrants moving for the wrong reasons. 0.10 When people migrate in search of better 0.05 access to basic services, location decisions 0.00 may lead to inefficient outcomes. These indi- 0 0 00 0 on on on viduals may end up contributing more to ,00 ,00 ,00 0,0 illi illi illi 20 50 00 m m 4m 10 congestion in large cities than to increases in 0– –5 ≤ –1 –4 0– ,00 00 ≥ 00 on ,00 0,0 agglomeration benefits. A study of Brazilian 20 0,0 illi 50 10 1m 50 migration finds that higher wages in leading City size regions is a strong determinant of the deci- sion to migrate. But it also finds that many 1995 2008 individuals migrate in search of better access Sources: Employment data at 2–4 digit industrial classification; Relação Anual de Informações Sociais/ to basic services (Lall, Timmons, and Yu Ministerio do Trabalho e Emprego data for 1995 and 2008; authors’ calculations. 2009). Connective infrastructure and transport costs Housing deficits in urban areas vary between Connective infrastructure is deteriorating 7 percent in the south and 32 percent in the due to lack of maintenance. Large invest- north. In rural areas, the deficits for these ments in connective infrastructure in the two regions are 9 and 44 percent, respec- 1950s and 1970s paid off. But the paved road tively. While the housing deficit is larger in network has deteriorated, and overall road relative terms in urban areas, the number of conditions are similar to those in the 1970s units is much larger given the high urbaniza- (World Bank 2006). Large portions of federal tion rate of the country. and state networks have paved roads that are old, without proper maintenance for many Urban density years. While less than 30 percent of the roads With density increasing in Brazil’s largest were considered of bad quality in 2000, by cities, congestion will worsen, making an 2007 that percentage rose to more than 40. efficient transport system even more impor- Less than 35 percent of the roads were con- tant. A city that wants to grow denser must sidered of good quality in 2007. Transport recognize that a dense city is feasible only costs have risen steadily by around 5 percent when workers can commute efficiently to per year. More important, in the past three their workplaces. Between 2001 and 2009, years the highest increases appear to be for commutes up to 30 minutes appear to have short-distance trips. remained relatively stable or declined in most cities. But a combination of relocation Housing deficits of some major economic activities, changes In both rural and urban areas, housing in residential locations, and increased con- deficits are large. The urban housing defi- gestion generated by dramatic growth in cit represents between 60 and 90 percent of car ownership have stretched commuting the total deficit, depending on the region. times in places like São Paulo and Salvador. 86  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW Congestion also leads to considerable envi- and the Republic of Korea, which are con- ronmental impacts such as pollution. sidered to have restrictive land regulations (Lall, Timmons, and Yu 2009). Using data High poverty and income disparities for slum formation across Brazilian cities Between 1991 and 2000, the number of peo- between 1980 and 2000, Da Mata (2006) ple living on less than half minimum wage shows that pro-poor land use regulations like declined only slightly.3 The northeast and the minimum lot size encourage immigration of north have a considerably larger percentage the poor and increase slum formation. But in poverty than the leading region of south- urban zoning regulations are found to have a east. And the pattern across city sizes didn’t positive effect on the growth of formal hous- vary between 1991 and 2000: the largest ing markets and city population. Urban zon- metropolitan areas have less poverty than ing regulations are likely to improve land use smaller cities and mostly rural municipalities. efficiency by facilitating timely infrastructure In all regions, the percentage of poor in small investments both in urban expansion and and medium cities is growing over time. The redevelopment. It is key to identify policies total number of poor is also higher in munici- that increase the housing supply relative to palities with smaller urban populations. population growth and improve the elastic- More important, the number of poor in large ity of housing supply (Lall, Timmons, and Yu cities has remained fairly constant. 2009). Land regulations are just one of many Other challenges exclusionary policies in the hands of local Brazil’s cities face metropolitan management authorities that could lead to growing slums. issues and safety and crime control. Brazil’s There is evidence that during the dictator- metropolitan regions and other large agglom- ship localities appeared to withhold ser- erations in many cases still lack metropolitan vices, measured as water connections, to management, and planning is done at the deter in-migration of low-education house- municipality level. holds (Feler and Henderson 2011). These early strategic interactions—where localities respond to increases in service in other local- Looking ahead ities by withholding their own service—led Planning to the growth of many unserviced informal Stringent land regulations led to dramatic housing sectors. The implications of these growth in slums in the last 60 years, and policies are costly, as catch-up investments today about 60 percent of urban land is are required, and building infrastructure under some kind of informality (World Bank on developed neighborhoods is considerably 2006). The annual growth of slum dwellers more costly than greenfield development. in cities in the 1980s and 1990s were 5.5 and 3.9 percent, respectively—much higher than Connecting city population growth (2.4 and 2.0 percent, Connective investments maintain and respectively) as a whole. The four largest cit- enhance cities’ competitiveness. Previous con- ies (with populations more than 4.2 million) necting efforts seem to have paid off, leading collectively have 3.6 million slum dwellers, to a well-functioning system of cities. But as accounting for 9.1 percent of the total popu- Brazil moves toward higher incomes, it will lation (Lall, Timmons, and Yu 2009). be important to become more competitive. Elasticity of housing supply in the formal Considerable investments in infrastructure market appears to be very low, limiting the may be necessary. Investments in short dis- degree to which the supply can respond to tance trips are particularly important. demand increases. The estimated housing Coordination across jurisdictions will be supply elasticity is similar to that of Malaysia key to tackle the challenges in large cities. PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    87 Efforts to improve governance of metropoli- References tan areas will also be important to reduce Da Mata, Daniel, Uwe Deichmann, J. Vernon disparities within the largest cities; coordina- Henderson, Somik V. Lall, and Hyoung Gun tion across jurisdictions would improve effi- Wang. 2006. “Um Exame dos Padrões de ciency in land use planning as well as provi- Crescimento das Cidades Brasileiras.” Dis- sion of basic services. cussion Papers 1155, Instituto de Pesquisa Econômica Aplicada, Brasilia. ———. 2007. “Determinant of City Growth in Notes Brazil.” Journal of Urban Economics 62: 1. The Herfindahl- Hirschman Index (HHI) 252–72. provides a quantitative measure of the impor- Feler, Leo, and J. Vernon Henderson. 2011. tance of a particular sector in a region. When “Exclusionary Policies in Urban Development: the region is completely specialized, the index Under-Servicing Migrant Households in Bra- approaches one, while if no single sector domi- zilian Cities.” Journal of Urban Economics 69 nates the region, the index approaches zero. (3): 253–72. 2. The location quotient, a measure of geographic Lall, Somik V., Christopher Timmins, and concentration of an industry, is defined as the Shouyue Yu. 2009. “Connecting Lagging and ratio of a location’s share of the industry’s Leading Regions: The Role of Labor Mobil- employment to its share of national employ- ity.” Policy Research Working Paper 4843, ment. Values above/less than 1 indicate that World Bank, Washington, DC. the location is relatively more/less specialized PNUD (Programa das Nações Unidas para o in the industry than the national average. Desenvolvimento). 2003. “Atlas do Desen- 3. Half minimum wage has been used in Brazil to volvimento Humano no Brasil.” Brasilia. define a poverty line. Households living with World Bank. 2006. Brazil—Inputs for a Strategy less than half minimum wage are considered for Cities: A Contribution with a Focus on poor and those living with less than a fourth Cities and Municipalities. Report No. 35749- are considered indigents (PNUD 2003). BR. Washington, DC: Latin America and the Caribbean Region, Finance, Private Sector and Infrastructure Management Unit. 88  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW CHINA group, likely due to economic geography con- ditions and other local factors. China embraced the urbanization that While overall poverty reduction has been accompanied its dramatic economic transfor- impressive, the coastal-inland development mation. Roughly 1 of 10 people in the world gap and the rural-urban divide are the two is a resident of a Chinese city. The United major components of spatial inequality in Nations projects that Chinese urban dwell- China. Spatial transformations have stimu- ers will increase from more than 622 million lated progress in large coastal cities, but today to more than 1 billion by about 2030. many poor people in rural areas and small How China manages its urban transforma- hinterland cities still need to be connected tion will have considerable bearing not only with prosperity. The rural poor account for for the Chinese economy and society, but for 91 percent of the total poor; and western the world at large. provinces (north and south) account for more than 50 percent, though the western region represents only around 20 percent of the How China is urbanizing national population (World Bank 2008). China’s urbanization has been characterized In addition to rural-urban and broad by spatial expansion—particularly in large regional divisions, the urban underclass is cities. With monopoly powers on urban land concentrated in second-tier cities (nonpro- supply, municipal governments have had con- vincial capitals). The four largest provincial siderable influence on land conversion and megacities (Beijing, Shanghai, Chongqing, use to accommodate people and economic and Tianjin) have the lowest urban disadvan- activities. Cities such as Beijing, Shanghai, taged rate of around 1 percent. More than 80 and Guangzhou have rapidly suburbanized. percent of the urban underclass lives in pre- While population densities are greatest in the fectural or lower-level cities. city core, population growth or urban expan- sion is much higher in the fringe areas 30–40 kilometers from the city center. Urban challenges Spatial expansion has been accompanied Rural-urban land use conversion by higher land consumption per capita in Rural land can be transformed for urban these big cities, where higher incomes have land use only when the municipal govern- bid up the demand for land and housing. ment purchases the land from rural com- Economic prosperity is concentrated in munes. This effectively makes municipal large cities with good access to international governments the monopoly supplier of urban markets (map 4.1). Urbanization—particularly land in the primary land market. urban concentration in the largest cities—has Since 2001, the focus has shifted from a amplified economic progress. Cities with 2.5 centrally planned system to a more market- million or more people generate 76 percent of oriented system. Conveyance transactions urban exports;1 and 62 percent of overall for- have started to account for a larger share eign capital is used in these cities. Proximity in the primary market. The government to international markets has been the main sets principles and procedures to increase driver of urbanization and urban success. transparency. The urban economic structure is more The rapid outward spread of cities has complex when looked at closely. For example, led to greater concern from the central gov- big cities tend to generate higher incomes, but ernment over the loss of China’s farmlands. there are large variations within each city size The relatively small percentage of arable land (around 14 percent) has amplified this con- The China Urbanization Review has been prepared by cern, as has the government’s longstanding a team led by Hyoung Gun Wang and comprising commitment to sustaining food self-suffi- Somik V. Lall and Yuanyuan Jiang. ciency for security reasons. Although China PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    89 is committed to a strict policy of farmland MAP 4.1  Economic concentration of GDP, 2007 protection, many local governments rely heavily on off-budget revenues from land lease transactions to fund economic and infrastructure programs. Labor mobility Under the hukou system, or regulations on household registration, every Chinese is assigned a hukou location with either agri- cultural (rural) or nonagricultural (urban) hukou classifications. An agricultural hukou provides access to farmland, and a nonagri- cultural hukou provides access to jobs, hous- ing, food, and state-sponsored benefits. With- out an urban hukou, unregistered migrants cannot have access to basic needs of urban life, including jobs, housing, and public and social services. Source: Authors’ calculation using Statistical Yearbooks by the National Bureau of Statistics of China. As local governments implemented various hukou reforms after the 1980s, local hukou Connecting cities regulations vary greatly from city to city. In Massive infrastructure construction, par- general, it is more difficult to obtain a local ticularly the national transport network, has hukou in a larger city than a smaller one. The largely driven China’s economic growth. The hukou system is the main barrier limiting national transport network expanded rap- rural-urban migration, especially for large cit- idly. From 1990 to 2005, China completed ies such as Beijing, Shanghai, and Guangzhou. nearly 41,000 kilometers of high-grade tolled expressways comprising the National Trunk Basic services Highway System, or the National Expressway Recent policy initiatives indicate an increas- Network (NEN). During this period, about ing government commitment to broader pov- 400,000 kilometers of local and township erty reduction, social protection, and human roads were also improved. This expansion development. The quality of life in urban and was funded by investments upward of $40 rural areas has improved greatly in the past billion a year, with about a third allocated decade, measured by net income and Engel’s to the NEN. The current NEN plan includes coefficient. 2 And the rural-urban difference 7 corridors radiating from Beijing, 9 north- in the expenditure share on social services south corridors, and 18 east-west corridors. (education and health) diminished signifi- The strategy for defining the 7–9–18 plan cantly over 1990–2008. But the income dis- combined radial and grid patterns to maxi- parity between the urban and rural residents mize coverage and transport connections. has widened over time. Despite China’s recent efforts to update the The overall quality of health services is transport infrastructure, the logistics industry a cause for concern. There is hardly any still needs to improve its efficiency to reduce improvement, and in some instances it is associated costs. China’s expense on logistics deteriorating. Local governments’ limited accounted for 20 percent of the GDP—much capacity to generate fiscal revenues contrib- higher than the United States (10 percent), utes to poor basic services in small cities. Japan (14 percent), and the European Union More important, urban water infrastructure (10–13 percent). A logistics performance study fails to provide sufficient water and meet ranked China’s domestic logistics costs 72 of ever-increasing urban demand. 150 countries (World Bank 2007). 90  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW Connecting neighborhoods within cities proportion that the low-income group spends Chinese cities are moving toward motor- on transport has grown much faster in Bei- ized transport with rapid growth in the use jing, while Shanghai succeeded in making of private cars and public transport. This is urban transport inclusive for low-income city coupled with fast growth in inner suburb and residents. Without targeted interventions and outer suburb trips in large cities, where resi- investments, low-income urban residents will dential development has been concentrated face greater pressure to manage travel expen- recently. ditures as cities expand and motorize. Nonmotorized travel, including walking and biking, continues to decline in favor of Financing motorized trips on both public and private With the introduction of fiscal contracts modes. Private motorized vehicles are gain- in 1988, the central government is no lon- ing a larger share of travel (Darido, Torres-­ ger responsible for financing local expendi- Montoya, and Mehndiratta 2009). Similar tures. Instead, the local government’s role trends can be seen for public transportation expanded from providing public services to and taxis. Nonmotorized travel in big cities— financing them as well. Local governments including Beijing, Shanghai, Guangzhou, and are responsible for a wide spectrum of gov- Xi’an—has declined well below 50 percent, ernment functions (box 4.1).3 whereas the majority of residents in small As transfers from the central government cities travel to work by foot or bicycle. This are allocated through a revenue-sharing indicates that each local urban transport pol- mechanism, rich and big cities receive larger icy should be differentiated according to its transfers than small cities (Mountfield and own city size and development rather than a Wong 2005). Thus local governments’ ability one-size-fits-all approach. to raise revenues either on- or off-budget is The average portion of the transporta- crucial for high-quality public services. tion expenditure to discretionary income in Local governments in larger cities generate Beijing, Shanghai, and the nation as a whole disproportionately higher revenues per capita has risen steadily over the past few years. The than smaller cities. Residents in large cities BOX 4.1  China’s urban infrastructure financing Debt financing. To fill the gap created by the decline urban infrastructure. The national planning agency in direct budget spending, local governments have is increasingly calling for this mode of financing to primarily turned to borrowing. In 2001, commercial replace the declining share of direct budget financ- bank loans accounted for more than 30 percent of ing. There are two key elements to the marketization infrastructure investment by local governments. The financing. central government strongly encouraged this policy, First, marketization financing earns proceeds identifying urban infrastructure investment as a from land leasing—that is, the sale of leasing rights top priority for banks. And this lending was seen owned by the local government to private develop- as implicitly guaranteed by the central government. ers. Leasing rights, typically for 40–70 years, are The central government also issued infrastructure sold up-front as a cash transaction. bonds and passed the proceeds to provincial and Second, the local governments are increasingly local governments as a mix of on-lending and grants. moving toward “privatizing” existing infrastruc- ture assets. This can be viewed as a way of attract- Marketization. “Marketization” describes the mobi- ing private capital to help finance new infrastructure lization of capital from the private sector to invest in projects. PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    91 enjoy better access to high-quality public ser- and disposal, urban gas supply, mass transit); vices, as their local governments can generate maintenance, repair, and operation of urban more revenues in both absolute and relative infrastructure; management of local state terms. owned enterprises; expenditure for agriculture production; primary and secondary schooling and a large portion of higher education; health Looking ahead clinics and hospitals; price subsides; poverty reduction; protection of laid-off workers from China’s urbanization should amplify the pace state owned enterprises; cultural and heritage of economic prosperity and enhance living protection; local and regional economic devel- conditions across the country’s vast land- opment; and physical planning. scape. Public policy and investment need to generate win-wins for urban efficiency and References social inclusion. As other parts of the urban system start benefiting from more prosperity, Darido, Georges, Mariana Torres-Montoya, and Shomik Mehndiratta. 2009. “Urban Trans- the management of urbanization and urban port and CO2 Emissions: Some Evidence from land consumption is likely to have consider- Chinese Cities.” Working Paper, World Bank, able bearing on urban productivity, mobility, Washington, DC. and sustainability. Mountfield, Edward, and Christine P. Wong. 2005. “Public Expenditure on the Frontline: Toward Effective Management by Subnational Notes Governments.” In East Asia Decentralizes: 1. As of 2007 (Statistical Yearbook). Making Local Government Work. Washing- 2. The Engel’s coefficient serves as a measure of ton, DC: World Bank. the standard of living in a country. It measures National Bureau of Statistics of China. Statistical the percentage of a household’s expenditure on Yearbooks. Several years. Beijing. food relative to its total spending. A low coef- World Bank. 2007. Connecting to Compete 2007: ficient indicates a high standard of living. Trade Logistics in the Global Economy. Wash- 3. Subnational government administration; ington, DC: World Bank. local capital construction; basic local ser- ———. 2008. World Development Report 2009: vices (water supply and distribution, local Reshaping Economic Geography. Washing- and regional roads and highways, wastewater ton, DC: World Bank. collection and treatment, garbage collection 92  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW COLOMBIA from a commodity-driven economic system to a stronger resource-based manufactur- Seventy-five percent of Colombians live in cit- ing structure and then toward knowledge-­ ies. Bogotá, home to 7 million, is Colombia’s intensive industries (Sinnott, Nash, and de la largest city, with 18,000 people per square Torre 2010). High-income countries such as kilometer—the densest in the western hemi- Australia, Canada, the Scandinavian coun- sphere. Together with Cali, Medellín, and tries, and the United States have evolved simi- Barranquilla, the largest cities account for larly (Blomström and Meller 1991; De Fer- 30 percent of the country’s population and a ranti and others 2002). Almost 80 percent of high proportion of its jobs. At the other end Colombians live in urban areas, where unem- of the spectrum lie 927 municipalities with ployment rates are above 12 percent—among fewer than 20,000 people, dispersed across the highest in the region. the national landscape. How city leaders manage the urban system will impact Colom- bia’s chances of transitioning from a middle- Urban challenges income to a high-income country. What key drivers will enable Colombia’s urban system to cash in on its growth divi- How Colombia is urbanizing dend? The Colombia Urbanization Review focuses on three priorities: enhancing Colombia, as much of Latin America, has planning coordination at a regional and enjoyed positive economic growth in the metropolitan scale, deepening economic past few years, mitigating the potential connections across cities, and fostering effi- adverse consequences of the global financial ciency and innovation in how cities finance crisis. These gains came on the back of high themselves. commodity prices, improvements in macro- economic and financial management, diver- Enhancing coordination for better planning sification of trading partners—particularly Colombia is one of the most decentral- through stronger links with China—and ized countries in Latin America. More than safer integration into international financial 1,000 municipal governments have identical markets (World Bank 2011). While Colom- responsibilities for basic infrastructure ser- bia is still highly dependent on commodities, vice delivery, land use and economic devel- urban activities are central to its growth. opment planning, and provision of social Urban activities have contributed to more services. But the footprint of urbanization is than 50 percent of GDP growth over the frequently greater than municipal boundar- past four decades.1 ies. The metropolitan area of Bogotá covers Strengthening cities’ contribution can help seven municipal jurisdictions (Bogotá, La mitigate the risks inherent to commodity- Calera, Chía, Cota, Funza, Mosquera, and intensive economies and support the move Soacha) and has a population of about 8.1 million. This occupation pattern is not pri- The Colombia Urbanization Review has been prepared marily sprawl—Bogotá is one of the most by a team led by Taimur Samad (task team leader) and densely populated cities in the world. And Nancy Lozano-Gracia (co–task team leader), compris- this spatial pattern is not unique to Bogotá. ing Bernadette Baird-Zars, Henry Jewell, Yoonhee Kim, Somik V. Lall, Alexandra Panman, Alejandro Firms and households in other large and Rodriguez, and Hyoung Gun Wang. Consultants whose medium cities are increasingly spilling across reports served as inputs for this work include: Fran- the boundaries of core municipalities, driven cisco Perdomo and Pablo Roda; Francisco Rodriquez; by natural economic forces including access Oscar Arboleda, Juan Benavides, Mauricio Olivera, and to affordable land. Claudia Patricia Quintero; and Nicolas Ronderos and Robert Yaro. The main counterpart for this report in Metropolitan areas in Colombia face the government of Colombia was the National Planning crippling inertia and bottlenecks in plan- Department. ning land use and strategic investment. The PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    93 benefits of coordinated land use include for the Atlantic and slightly higher for the the development of productive and logistics Pacific. Logistic costs are also high. infrastructure and of structural drainage and flood protection infrastructure and the effi- Fostering efficiency and innovation in financing cient spatial organization of economic activi- Smaller municipalities are highly dependent ties. Despite the benefits that may arise from on transfers from the national government. interjurisdictional coordination, many politi- About 70 percent of the revenues of small cal economy challenges discourage coordi- municipalities come from national transfers, nated services and planning across adminis- compared with about 30 percent for the larg- trative boundaries. est municipalities. Heavy reliance on transfers In decentralized systems like Colombia, may weaken accountability, as the politi- local administrators and politicians face cal costs of raising funds are borne at the strong disincentives to coordinate regional national level and not directly where they are actions. Resistance often emerges to aggrega- spent. This is important because service qual- tion or “clawing back” of power and respon- ity remains a major challenge in Colombia. sibility from the municipal level. Earmarking transfers for spending in par- ticular sectors may not be sufficient to ensure Deepening economic connections quality improvements without mechanisms Colombia’s geography poses serious chal- to measure the investments’ effectiveness. lenges for interregional transport. As early Excessive reliance on earmarking could also as 1927, studies have noted that the natural encourage fiscal laziness, as municipalities and economic geography poses a particular lack the incentive to raise revenue and direct challenge for transport in Colombia (Renner it to specific local needs. And evidence sug- 1927; Stokes 1967). Many cities are dispersed gests that heavy reliance on transfers can lead across mountainous terrain and far from to inefficient spending. coastal ports. Bogotá, the country’s primary While municipal tax collection has risen production center, is more than a day’s drive with decentralization and administrative from the Atlantic or Pacific coasts, where reforms across all categories of cities, small agricultural products for export, fossil fuels, and medium cities have not kept pace with and raw materials are concentrated. Because larger cities in their ability to increase local many imports and exports are processed in revenues. Municipal capacity to raise prop- maritime ports, freight travels long distances erty taxes is closely connected to the effi- in Colombia. A 2006 study showed that ciency of the cadastral system: there is a posi- freight distances in Colombia were almost tive correlation between property tax revenue three times those in Brazil and Chile, five and the cadastral system’s accuracy. Only times those in Malaysia, and six times those Bogotá, Medellín, and Cali have independent in Argentina, China, and the Republic of cadastre offices, and all others are handled Korea. at the national level. Large cities have more In Colombia, physical distances are exac- comprehensive land cadastres. Bogotá has erbated by economic distances. Costs for attained 100 percent registration of land. freight transport on domestic roads from By contrast, only 43 percent of rural areas Bogotá to the Atlantic are about $94 per ton, are included within the national registration while international maritime transport to the system. United States is about $75 per ton. Moving products from Bogotá to Barranquilla costs Looking ahead $88 per ton, and Bogotá to Buenaventura $54 per ton. Shipping goods from Cartagena Coordinating or Buenaventura to Rotterdam or Shanghai The government has an important role in is about $60 per ton—that is, less than the aligning incentives and fostering coordina- transport costs from Bogotá to the ports tion among local governments. International 94  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW experience demonstrates that national gov- trucking is the most cost-effective mode ernments and urban areas have success- for distances less than 300 kilometers. For fully responded to changing conditions by medium distances, rail is the most cost-effec- reforming interjurisdictional coordination tive, and for distances beyond 700 kilometers arrangements. The role of national govern- river transport is the most cost-effective. Dis- ment is to build a framework and create tances from Bogotá to the Atlantic coast are the right incentives for coordination. This roughly 1,000 kilometers, suggesting a large may include strengthening metropolitan benefit from greater modal diversity. governance structures through building And from a demand-side perspective, the capacity, expanding metropolitan competen- two main corridors identified as medium- cies, regulating and promoting cooperation term priorities are the route along the eastern structures, and developing coordinated proj- mountain chain, connecting Bogotá to the ects between the national and regional gov- Atlantic Coast ports, and the route connect- ernments. Financial incentives can also pro- ing the highlands to the Pacific ports (from mote horizontal coordination. Bogotá to Buenaventura). Note that the Efforts to increase coordination across demand models used in this assessment factor jurisdictions are particularly timely in light in today’s ongoing pipeline investments (such of new legal reforms. The new law regu- as Ruta del Sol, along the Bogotá-Atlantic lating spatial planning—Ley Orgánica de Coast Corridor). Even with these investments Ordenamiento Territorial—responds to factored in, projected growth in demand will the need to develop a clear institutional cause substantial congestion on these routes framework to support the aggregation as early as 2020. of municipal functions and coordination Reduced transport costs resulting from between territorial entities. The law opens connective investments and competition spaces for voluntary collaboration in insti- across modes will likely alter the distribu- tutional interjurisdictional arrangements tion of trade across the system of cities. It will and enables the formation of organizational also open new opportunities for places and entities (commissions) to collaborate on ter- products that were constrained by high costs. ritorial planning issues. But it does establish Rather than focusing on picking winners and clearly defined coordination responsibilities. losers, national policy should aim to reduce Its pending regulation will present a critical market and government failures—here the opportunity for the government to ensure market failures, related to infrastructure pro- the new legal framework has the ability to vision, that impede trade among Colombian claw back excessive decentralization. cities and between them and the rest of the world. Connecting Lowering transport costs will catalyze Financing growth and improve overall efficiency across A strong push is required to strengthen the the system of cities in Colombia. The Colom- fiscal fundamentals for small and medium bia Urbanization Review identified two pos- cities. This might be done through increased sible ways to reduce costs: improvements to capacity building in municipal fiscal manage- intermodality and investments in specific cor- ment, strengthened local cadastral systems, ridors that will face high congestion as soon and the structuring of fiscal and performance as 2020. incentives within the national transfer sys- A preliminary simulation analyzing the tem. In the face of considerable infrastruc- competitiveness of three modes (truck, rail, ture finance gaps, medium and large cities and waterways) suggests that more competi- must find new ways to finance urban infra- tion across modes would bring considerable structure. Cities will require diversified strat- cost savings. The simulation suggests that, egies, including increasing access to munici- given limited access to marine terminals, pal bonds and credit markets, elaborating PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    95 existing land-based financing instruments, would merely reproduce past errors in the roy- and accessing municipal development funds alties system. The royalties fund for regional and specialized financial intermediaries. development should be designed with strong Colombia is a leader in land-based financ- performance-based criteria, filter investment ing instruments in Latin America. But these priorities through a “system of cities” techni- innovative land-based financing instru- cal framework, and create incentives for effec- ments have had limited penetration beyond tive cooperation across municipalities and Colombia’s large cities, where they have also between departments. run into capacity and technical constraints. Medium and large cities should also create Note new instruments for infrastructure financ- 1. Urban activities include commerce, restau- ing such as tradable development rights, land rants, hotels, manufacture, financing, and sales and leases, tax increment financing, and other services. Urbanization Review calcu- private-public partnerships for urban redevel- lations are based on a moving average of the opment and renovation. component of the economy’s growth rate con- The national government has a broader tributed by purely urban activities. role in supporting the financial efforts of cit- ies. More systematic data on expenditures as well as close monitoring and evaluation References would clarify the impact of specific condi- Blomström, Magnus, and Patricio Meller. 1991. tions, such as earmarking, on efficiency of “Issues for Development: Lessons from Scan- investment. The government may also con- dinavia and Latin American Development.” In Diverging Paths: Comparing a Century of sider developing and deepening efforts to Scandinavian and Latin American Develop- support fiscal capacity at the municipal level, ment , ed. Magnus Blomström and Patricio targeting assistance strategically within the Meller. Washington, DC: Inter-American “system of cities” approach. Efforts may Development Bank. include creating programs to develop munici- de Ferranti, David, Guillermo E. Perry, Daniel pal cadastres in medium cities, targeting Lederman, and William F. Maloney. 2002. technical assistance across the system of cit- From Natural Resources to the Knowledge ies in investment planning and fiscal manage- Economy: Trade and Job Quality. Latin ment, and working with medium cities on American and Caribbean Studies. Washing- ton, DC: World Bank. municipal creditworthiness. Renner, G.T., Jr. 1927. “Colombia’s Internal The government may also analyze and Development.” Economic Geography 3 (2): develop greater performance-based incentives 259–64. within the Sistema General de Participaciones Sinnott, Emily, John Nash, and Augusto de la framework to improve the efficiency and effec- Torre. 2010. Natural Resources in Latin tiveness of the transfers and overall munici- America and the Caribbean beyond Booms pal investment. And the government has a and Busts? Washington, DC: World Bank. unique opportunity to structure the regional Stokes, Charles J. 1967. “The Freight Transport development fund within the context of the System of Colombia, 1959.” Economic Geog- raphy 43 (1): 71–90. Royalties Law (Ley de Regalias) to create the World Bank. 2011. “LAC Success Put to the Test.” right incentives for strategic investment plan- Office of the Chief Economist, Latin America ning and development. Allowing this fund to and the Caribbean, World Bank, Washington, be a formula-driven transfer to departments DC. 96  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW INDIA How India is urbanizing Identifying options for accommodating An assessment of India’s urbanization high- urban expansion is gaining importance in lights considerable stability in the spatial India’s policy discourse. Since 2001, another distribution of people and jobs. One would 90 million people have joined the urban expect rapid economic concentration in large ranks, and 250 million more are projected by metropolitan areas with good market access 2030. The challenge—as well as the opportu- following economic liberalization, as in China nity—is extremely high population densities during the 1980s and in other Asian countries in and around the largest metropolitan areas. following economic integration. But India’s Population densities in the 50-kilometer metropolitan areas have not gained discern- vicinity of the largest metropolises average ibly in economic activity. True, the seven 2,450 people per square kilometer. And a largest such areas have the highest concentra- third of India’s new towns were “born” in a tion of economic activities that benefit from 50-kilometer neighborhood of existing cities urbanization economies—information and with more than one million people.1 communication technology (ICT), machine If these trends are any indication of the tools, rapidly growing export manufactur- future, much of India’s urbanization chal- ing, and supporting services. But these met- lenge will be to transform land use and ropolitan areas have been stagnant in recent expand infrastructure in its largest cities and years (figure 4.4). Over 1993–2006, they did neighboring suburbs—places that are not not increase their overall shares in national pristine or greenfield but already support 9 employment—not even in industries that typi- percent of the country’s population and pro- cally benefit from agglomeration economies, vide 18 percent of employment on 1 percent such as ICT and high-tech manufacturing. of its land area. So far, high population densi- The cross-country experience, that met- ties have not been accompanied by commen- ropolitan concentration increases until per surate substitution between scarce land and capita income levels of $7,000–$10,000 are durable capital or built-up area. reached, suggests that the liberalization of How urbanization is managed has impli- industrial investment in the 1990s should cations for economic efficiency and spatial have led to greater economic concentration equity. For economic efficiency, it is impor- in India’s metropolitan areas. The stagnancy tant to learn where the transformation is of these metropolitan areas in recent years occurring and whether productivity gains points to three overlapping scenarios. through agglomeration economies are being First, industry in India has not grown adequately tapped. Are policy distortions sty- rapidly, thus reducing the demand for urban mying such benefits, and can specific reforms agglomerations that can provide localization reduce the inefficiencies? For spatial equity, it and urbanization economies. But this is not is important to learn whether the benefits of entirely convincing as India has developed the transformation are spreading geographi- niche markets in ICT services and specialized cally and whether policies can help spread manufacturing that it trades with the rest of economic activities. the world. And there has been considerable growth in low-end manufacturing that is The India Urbanization Review was prepared by a consumed and traded internally. By looking core team led by Tara Vishwanath, consisting of David at differences between Karnataka and Tamil Dowall, Somik V. Lall, Nancy Lozano- Gracia, Nadu—India’s high-growth states—it is Siddharth Sharma, Eugenia Suarez, Hyoung Gun becoming clear that economic geography has Wang, and Cheryl Young. The policy discussion in a role to play in influencing specializations this report was framed following extensive discussions with the Planning Commission and the Ministries of across urban areas. Urban Development and Housing and Urban Poverty Second, India’s cities have some of the Alleviation. most restrictive rules on conversion of land PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    97 FIGURE 4.4  Employment growth in metropolitan cores and periphery, by sector, 1998–2005 a. Manufacturing b. Information and communication technology 200 1,200 150 1,000 Employment growth (%) Employment growth (%) 100 800 50 600 0 400 –50 200 –100 0 Metropolitan Suburban Suburban Metropolitan Suburban Suburban core towns villages core towns villages High-tech Fast-growing export manufacturing manufacturing Sources: Ministry of Statistics and Programme Implementation 1998 and 2005. Note: The metropolitan core is an area with a 10 kilometer radius, centered on the main metropolis. Suburban towns include urban areas 10–50 kilometers from the metropolitan core. Suburban villages include rural areas in the same vicinity. These figures are averages for the seven largest metropolitan areas (Mumbai, Delhi, Bangalore, Kolkata, Chennai, Hyderabad, and Ahmedabad). for urban use and on the intensity with which worldwide phenomenon, it usually happens land can be used to accommodate industry at middle to advanced stages of develop- and commerce. For example, even though the ment.2 India’s early suburbanization suggests standard practice in cities with limited land that the overall stagnancy of metropolitan is to raise the permitted floor space index areas is partly due to firms being pushed out (FSI) over time to accommodate growth, the of the cores. The growth of metropolitan Municipal Corporation of Greater Mumbai suburbs is possibly a reaction to these draco- lowered the permitted FSI to 1.33 in 1991 nian land policy regulations. But the journey (World Bank 2008). In this otherwise liber- to the suburbs is costly for firms and work- alized policy environment, stringent regu- ers. Transport costs for freight are among the lation on development densities is pushing highest between the metropolitan core and businesses and people out of urban centers. its periphery, and infrastructure access and The constraints on land use are also mak- quality of water, electricity, and sanitation is ing housing expensive, pricing out poor and much worse at the urban periphery relative middle-class households from urban centers. to the core. Third, all metropolitan suburbs—whether officially classified as rural or urban—are Urban challenges experiencing an industrial boom. At 41 per- cent, the pace of manufacturing employment Rigid land use policies growth is fastest in the rural areas adjacent to Urbanization brings higher demand for land, the largest metropolitan areas. Even though and a problem arises when land is scarce high-tech and other emerging manufactur- where it is needed most. India lacks many of ing industries are moving away from the cen- the institutions—such as a transparent sys- ters of metropolitan areas, they are relocat- tem to convert land use, a clear definition ing to the suburbs and peripheries of these of property rights, a robust system of land same cities, rather than to smaller cities. And and property valuation, and a strong judicial although metropolitan suburbanization is a system to address public concerns—that are 98  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW needed to facilitate land markets and make though several initiatives increase the supply it easier to accommodate land transactions of public transport, limited integration with and land use changes. While stronger insti- other modes of transport and land use plan- tutions governing land use conversion, land ning reduces its use. valuation, and property rights definition Just as urban transport is key to connect- and adjudication emerge, and land markets ing people with jobs, an adequate logistics mature over time, India may want to look at infrastructure is needed for city businesses alternative options for the short and medium to reach local and regional markets. Mar- term. Land readjustment is gaining accep- ket access provides incentives for firms to tance as an alternative to land acquisition as increase production scale and specialize. But it has many advantages for land assembly. as businesses suburbanize, they face higher Essentially a participatory tool, land read- costs to connect with urban markets. Freight justment to a great extent avoids the public costs between metropolitan cores and their discontent and protests that land acquisition peripheries are as high as Rs 5.2 ton per kilo- may generate. meter ($0.12)—twice the national average of Rs 2.6 and more than five times the cost to Sprawl and escalating property prices move products in countries such as the United Managing densities within cities is another States. Much of the high transport costs are challenge in accommodating urban expan- due to use of smaller and older trucks as well sion, as is financing urban expansion and as a higher share of empty backhauls without city renewal. Urban regulations such as FSIs a return load. Trucks on these routes clock limit densification in Indian cities, capping about 25,000 kilometers a year, a fourth of densities at levels much below international what they need to be economically viable. good practice. And India’s cities have blan- Logistics management systems and collabo- ket FSIs that cover large areas, thus missing ration and consolidation with competing opportunities to strategically increase density truckers and trucking associations can help around infrastructure networks. Granularity internalize the network externalities and in FSI design and coordination of land use to reduce metropolitan freight costs. exploit infrastructure placement is the bed- rock of good urban planning (as in Seoul and Spatial disparities in access to basic services Singapore). Access to and quality of basic services both matter for living standards of households Commuting and freight transport and performance of firms. India has a long While urban land and building regulations way to go to provide universal access to basic limit densities in metropolitan cores and services. Access to services such as sewerage push people and firms to the outskirts, defi- and drainage facilities worsen as city size cient connections are exacerbating these con- decreases, with small towns and rural areas straints. If a good transport system is in place, suffering from the lowest access levels. Two people can make efficient tradeoffs between factors drive these differences: fragmented how much they consume and its quality, and institutional responsibilities between state the distance they travel to work. But conges- and central governments, and regulations tion presents a major challenge for Indian that keep tariffs low and do not allow utili- cities. Narrow roads, combined with perva- ties to be financially sustainable, making sive growth of private car ownership, lead them unable to expand services. to motorized journey speeds in all cities that are barely faster than riding a bicycle. While Looking ahead motorization is on the rise, public transport has not been able to serve the expanding Planning mass of urban commuters. Discussions with To accommodate urban expansion, India urban transport experts suggest that even needs to change its urban planning “License PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    99 Raj.” Getting urban planning right is essen- governance structures, including efficiency tial for economic prosperity. Urban planning in exploiting economies of scale and ability systems across the country limit urban expan- to reduce negative spillovers across munici- sion, redevelopment, modernization, and the pal boundaries, equity in sharing costs and repurposing of older, inefficient areas. In set- benefits of services across the metropolitan ting out to relax these constraints, Indian area, accountability for decision making, policy makers could embark on “big bang” and local responsiveness. Agencies such as reforms such as those in Hong Kong SAR, the Bangalore Metropolitan Region Devel- China; the Republic of Korea, and Singa- opment Authority and the Mumbai Metro- pore—which followed a big push model of politan Region Development Authority have “managed urbanization” led by a strong and been instituted to facilitate metropolitan- often intrusive state. But this approach could wide functional and investment coordina- face high political and social risks. Another tion. But the jury is still out on the effective- option—which may be more conducive to ness of these institutions in performing their India’s democratic and federal system—is to intended roles and of their ability to manage pursue an incremental model of experimenta- efficiency, equity, and accountability across tion focusing on a few areas (such as infra- metropolitan areas. structure corridors and neighborhoods) and then scaling up based on community-level consensus building. This will also allow for Notes learning from alternative approaches and 1. Of the 1,108 new towns “born” between 1991 lead to capacity building at the local level. and 2001, 35 percent were in urban fringe areas within 50 kilometers of medium and Responsibility for urban reforms large cities of more than 1 million people. Who is responsible for implementing urban 2. For Brazil, see Townroe (1981) and Hansen reforms in a federal country where national, (1983). For the Republic of Korea, see Chun and Lee (1985) and Henderson, Lee, and Lee state, and municipal jurisdictions overlap? (1999). Gregory Ingram (1998) highlights Some very local- or neighborhood-level deci- that the general trend of urban development sions on densification and infrastructure included dispersal from the center to the planning are often decided at the state level; periphery of both population and employment, and the guidelines on land valuation are con- with the largest metropolitan areas converg- currently handled by national and state gov- ing to decentralized and multiple subcentered ernments with some inputs from the districts areas. (not the municipalities). Similarly, urban basic services such as water supply are often provided by state-level public health and References engineering departments, often missing out Chun, Dong Hoon, and Kyu Sik Lee. 1985. on economies of scale and scope that could “Changing Location Patterns of Population come from differentiating service options and Employment in the Seoul Region.” Discus- across settlements with varying densities. sion paper UDD65, World Bank, Washington, DC. Metropolitan-wide horizontal coordination Hansen, Eric R. 1983. “Why Do Firms Locate Beyond the implementation challenges of ver- Where They Do?” Discussion paper UDD25, World Bank, Washington, DC. tical coordination, the rapidly increasing spa- Henderson, J. Vernon, T. Lee, and J-Y Lee. 1999. tial footprint or suburbanization of India’s “Externalities and Industrial Deconcentra- urban areas is creating a disconnect between tion under Rapid Growth.” Brown University, what is “urban” and what is “municipal,” Providence, RI. calling for metropolitanwide horizontal Ingram, Gregory K. 1998. “Patterns of Metropol- coordination. International experience points itan Development: What Have We Learned?” to several criteria for designing metropolitan Urban Studies 35 (7): 1019–35. 100  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW Ministry of Statistics and Programme Implemen- Metropolitan São Paulo.” Staff working paper tation. 1988. “Economic Census 1988: All 517, World Bank, Washington, DC. India Report.” Central Statistical Organisa- World Bank. 2008. World Development Report tion, New Delhi. 20 09: Reshaping Economic Geography. ———. 2005. “Provisional Results of Economic Washington, DC: World Bank. Census 2005: All India Report.” Central Sta- tistical Organisation, New Delhi. Townroe, Peter. 1981. “Location Factors in the Decentralization of Industry: A Survey of PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    101 INDONESIA Urbanization in Indonesia will continue to be rapid. In absolute terms, the country The spatial structure of urban growth and is expected to add 56 million people to its development in Indonesia will shape eco- urban areas over the next four decades. While nomic growth over the next 15 years, deter- demographic and economic concentrations mine the quality of life for urban dwellers, around the Jakarta metropolitan region, and and define the competitiveness of Indonesia’s more generally across Java and on Bali, will cities. To foster productive clusters of eco- continue to dominate the country’s economy, nomic activity, the government of Indonesia urbanization is also accelerating in the coun- needs to encourage efficient urban spatial try’s medium-size cities (map 4.2). structures, appropriate and timely invest- ments in critical large-scale infrastructure in How Indonesia is urbanizing cities, spatially comprehensive basic services, effective urban management, stronger institu- Over the past 20 years, Jakarta has done tional capacity, and proactive horizontal and well despite an influx of residents and serious vertical coordination of local government infrastructure challenges. Surabaya’s per cap- actions. ita growth in gross regional domestic product Urbanization is a path-dependent pro- (GRDP) has been slightly weaker, as it did cess. Once a city is built, the constructed not fully recover from the 1997 crisis, but its areas, along with the institutional relations growth has been steady since 2003. Medium- that now manage the city, become increas- size cities have experienced the strongest per ingly locked-in. The most important task is capita growth in GRDP, along with strong to engage in proactive planning and man- to moderate population growth. Small cities agement of the city in order to leverage the have performed the weakest, with declines in opportunities generated by agglomeration population and per capita GRDPs. Trends in economies. land, population, infrastructure, investment By 2025, more than two-thirds of the climate, and economic sector data indicate country’s population will be urban. This pres- that the medium-size cities have managed to ents a major opportunity: urbanization can leverage urbanization for economic growth boost regional economic growth and create very well. vibrant cities and metropolitan areas. Urban- Population growth is most rapid in the ization and the agglomeration economies suburban ring of the metropolitan areas. that it generates will be central to Indonesia’s development as a middle-income country. If managed properly, urbanization can generate MAP 4.2  Economic density is dominant in Java the productivity gains, rising incomes, and economic opportunities needed to support the growing middle-income population. The Indonesia Urbanization Review was prepared by a team led by Peter Ellis, and included Rumayya Batubara, Arish Dastur, Jennifer Day, David Dowall, Blane Lewis, Harun al-Rasyid Lubis, Edy Priyono, Arlan Rahman, Arief Ramadhian, Wilmar Salim, Rulli Setiawan, Renata Simatupang, Thalyta E. Yuwono, and the Urban and Regional Development Institute. Ira Marina provided excellent logistical support to the team and formatted the report. Country counterparts included Bappenas, the Ministry of Transportation, and representatives of the governments of Jakarta, Sura- Source: GIS processing World Bank DECRG, Washington, DC, extrapolation UNEP/GRID-Geneva and baya, Medan, and Makassar. team elaborations. 102  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW More than 70 percent of all urban popula- Infrastructure and service delivery tion growth between 1996 and 2007 took Growth in the larger metropolitan areas place in the suburban areas of multidistrict is also constrained by a lack of large-scale metropolitan regions. This fact points to two investments and within-city challenges in phenomena: first, many metropolitan regions infrastructure delivery. Access to basic ser- are gradually deconcentrating their centers as vices— clean water, sanitation, electric- they grow into their peripheries; and second, ity, and roads—are generally limited and this expansion cuts across multiple jurisdic- unequally distributed across regions. About tions, often with conflicting interests. This 55 percent of households in Indonesia have requires mechanisms that optimize and coor- access to safe drinking water, but only 15 dinate development at a scale more complex percent comes from piped water. Access to and much larger than the city core. safe drinking water is higher in urban areas (78 percent) than rural (49 percent). Per- pamsi (Association for Local Water Utilities Urban challenges Providers) recorded that 403 local govern- Land markets ments (kota/kabupaten) out of almost 500 Land markets are constraining the economic local governments have piped water facili- development of cities. Local and provincial ties, but the outreach of the service is still governments need to enable and manage very limited.1 dynamic land markets. This is possibly one of While access to clean water and sanita- tion is limited, access to electricity is rela- the biggest bottlenecks Indonesia faces as it tively higher. Almost 98 percent of urban urbanizes. Land acquisition processes based households used electricity from Perusahaan on government valuations of land are lengthy Listrik Negara (PLN, the state electricity and cumbersome, causing long delays and company), while the national rate reached 89 relaying costs to projects and infrastructure percent. However, this rate varies across the construction. region, as there are provinces with less than Except for Medan, metropolitan regions 50 percent access to electricity.2 are sprawling as real estate developers and businesses find it easier, cheaper, and faster Coordination to develop projects in outlying areas. This Lack of coordination greatly affects metro- also follows the international patterns of politan regions that need coordinated land decentralization of manufacturing. These use and spatial planning to foster economic trends indicate that metropolitan areas are efficiency. With most new urbanization tak- rapidly expanding into outlying areas, and ing place outside central cities—DKI Jakarta, as a consequence, driving population den- Surabaya, Makassar, Bandung, and oth- sity downward (Firman 2000). Currently, ers—metropolitan areas cannot effectively three phenomena are apparent in Indonesia’s plan for future growth or develop budgeting metropolitan areas: many metro regions are mechanisms to finance needed infrastruc- gradually deconcentrating their centers as ture. In some cases, infrastructure invest- they grow into their peripheries; periphery ments are not coordinated and road projects areas need to be prepared to receive indus- stop at district or provincial boundaries. In try—and this expansion spans across mul- others, independently developed urban land tiple jurisdictions, often with conflicting use plans do not consider the economic trans- interests. The data on urban land use and formations in a region, and land use is not population, when combined with GRDP, structured to foster economic development clearly illustrate the strong and positive cor- and boost economic development. This may relation between economic density (GRDP be one of the most significant factors holding per urban land area) and productivity back the development of some of the largest (GRDP per capita). secondary cities. PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    103 Transportation Complex land rights systems hinder eco- Because of its uniquely archipelagic geogra- nomic development. In the public sector, phy, Indonesia requires an extensive system the costly and time-consuming processes of maritime ports that are efficiently man- to acquire rights-of-way for infrastructure aged and well connected with urban and projects impede construction. Private sector rural regions. It is important to invest in entities are more efficient in land acquisition water-based transport systems and reduce because they are more flexible and realistic shipping costs to foster interregional trade. with compensation, but the complexity of Looking at the split between transporta- the acquisition process drives them to subur- tion modes, however, it is clear that Indo- ban areas were land parcels are larger and, nesia has not begun to make greater use of therefore, fewer transactions are typically water-based transport systems. Improving needed. This promotes fragmented urban both terrestrial and maritime transporta- development and undermines agglomeration tion by lowering costs and improving the economies and urban revitalization. Systems quality and timeliness of goods and people of guided urbanization, such as land pool- movement will generate manifold benefits: ing and readjustment, might be part of the increased economic integration between broader solution. regions as well as opportunities to develop The government needs a multifaceted supply chains between small, medium, and strategy for managing urbanization to fur- large cities. Highway construction and main- ther leverage regional growth. Indonesia’s tenance has not kept pace with the country’s urban development strategy needs to be need to develop strong links with regions. focused along two dimensions. First, it must make spatial planning and investment priori- Looking ahead ties between tiers of government—national, provincial, and local—more consistent. Sec- Planning ond, it must stratify local governments along The government needs to fully implement its size characteristics: the two largest metro- laws and regulations regarding intergovern- mental coordination and metropolitan-scale politan regions, second-tier metropolitan management of spatial planning, as the lack areas, rapidly agglomerating medium-size of intergovernmental coordination is ham- cities, and small cities. Urban trends need to pering effective spatial planning. District be linked with the Economic Transformation plans are not well aligned with those of con- Master Plan. tiguous districts, and they are not consistent Consistency between spatial plans and with the plans of their provinces. investments needs to improve. This requires National laws and regulations for the coordinating spatial planning between levels preparation of local (district and provincial) of government and among districts compris- plans should be amended to incorporate ing metropolitan areas, so that plans and infrastructure capital investment programs investment priorities are more closely aligned needed for spatial plan implementation. In with investment priorities. Investment plans the case studies done for this project, we for large-scale infrastructure also need to encountered numerous cases where planning take into account the impact on urban land was not integrated with infrastructure and markets. Greater investment is needed in financing programs. Part of this limitation is critical infrastructure (electrical power, due to unclear legislation, lack of compliance, transit, surface and maritime transportation and limited local capacity to link spatial and networks, and basic services). For example, infrastructure planning with financial pro- industrial and business and consumer ser- gramming. Spatial plans do not appear to vices districts need to be developed and pro- fully inform the financial budgeting process vided with better transportation accessibility of local government agencies. to residential zones. 104  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW Connecting district economic growth. Local govern- The government needs to connect rapidly ments that are relatively more urbanized agglomerating metropolitan and medium- or have relatively larger urban populations size cities. These cities have adequate infra- (or both) spend less on capital projects than structure and do not suffer from poor spa- other local governments. Capital expenditure tial structure, but they need more and better needs to be increased in more urbanized local infrastructure and connections with major governments. centers and ports. As these cities continue to agglomerate, they should maintain their capi- Notes tal investment programs. Sound spatial plan- ning and land management can help these 1. Among them, 383 providers are PDAM (Peru- cities enhance productivity, and regional sahaan Daerah Air Minum, local water utili- ties provider), 10 are private companies, and transportation investments can provide an another 10 are institutions under the Public additional boost. Works Office. For Java and Sumatra, the government 2. The electrification rate according to BPS (the should consider constructing trans-Java and Central Statistics Agency) is higher than the trans-Sumatra highways to improve the effi- rate published by PLN (62.4 percent), but the ciency of surface transportation. A trans-Java director of PLN had confirmed the validity of corridor would create a strong link between BPS’ data ( Jurnas 2010). Jakarta and Surabaya, as well as links in sec- ondary cities such as Bandung, Semarang, References and Yogyakarta. Firman, Tom. 2000. “Rural to Urban Land Con- version in Indonesia during Boom and Bust Financing Periods.” Land Use Policy 17 (1): 13–20. Local governments that are urbanizing need Jurnas. 2010. “Dirut PLN: Angka Elektrifikasi to increase both the level and effectiveness Versi BPS Jangan Jadikan PLN Berpuas Diri.” of their capital expenditures, or else risk December 8. www.jurnas.com/news/15014/ severely constraining economic growth. The Dirut_PLN:_Angka_Elektrifikasi_Versi_BPS_ capital expenditures of local governments Jangan_ Jadikan_ PLN_Berpuas_Diri/193/ have a significant and positive influence on Ekonomi. PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    105 THE REPUBLIC OF KOREA 1950s, social and political chaos frequently broke out, leading to a high concentration of Already at an advanced stage of urbaniza- population in urban areas. As a result urban- tion, the Republic of Korea differs from the ization increased to 36.8 percent by 1960. other case studies in this report. Through coordinated planning and connecting poli- Intermediate urbanization cies, Korea successfully managed its journey Rapid urbanization took place between from incipient to advanced urbanization. 1960 and 1990. From 35.8 percent in 1960, Korea has had rapid economic growth urbanization reached 82.6 percent by 1990, since the 1960s, attracting considerable inter- a 46.8 percentage point increase. Thus after est from the rest of the world. Through the 1960, urbanization increased an average 15.6 1950s, Korea was so poor that people had percent every 10 years. In this urbanization trouble securing even one meal a day. In phase, about 60 percent of the urban popula- 1962, its per capita gross national income tion lived in large cities (populations of more was only $76, and total national exports than 1 million). And concentration of urban were $55 million. population in satellite cities around the capi- To address economic development and tal grew. The proportion of urban population urbanization, Korea’s government imple- living in the capital region rose from 21 per- mented the Five-Year National Economic cent in 1960 to 43 percent in 1990. Development Plans and the National Ter- ritory Comprehensive Plans. Due to these Advanced urbanization plans, Korea began a journey of economic Urbanization reached a plateau in the late progress with an average economic growth 1990s at about 90 percent. Between 1990 of 22.6 percent in the late 1960s. High eco- and 2000, it increased from 83 percent to 94 nomic growth continued until the 2000s, percent, and remained almost unchanged at when Korea had the 15th largest GDP. Korea 96 percent as of 2005. Concentration of the joined the Organization for Economic Coop- urban population in the capital region contin- eration and Development in 1996 and hosted ued (48 percent in 2005). Some residents liv- the G-20 Summit in 2010. How did Korea ing in the core of metropolitan cities started do it? to relocate to neighboring cities and satellite towns with populations between 200,000 and 1 million. How Korea urbanized Korea’s urbanization can be divided into three stages: incipient (1920s to 1960), inter- The evolution of urbanization policies mediate (1960 to 1990), and advanced (1990s in Korea and on). Korea’s progress from incipient to advanced urbanization involved four policy areas: Incipient urbanization urban planning and land management, hous- The rate of urbanization in 1920 was 4.86 ing supply policies, connecting policies, and percent, but it rapidly increased to 23.8 per- slum and low-income housing policies. cent by 1944. After the Korean War in the Before the introduction of a comprehen- sive urban planning system, land develop- The Korea Urbanization Review is based on the report Urbanization and Urban Policies in Korea, which was ment programs were established, followed by produced by Korea Research Institute for Human Set- a land use regulation system. Korea suffered tlements (KRIHS). The authors of this report include greatly from its housing shortage, with no Jaegil Park (lead author), Daejong Kim, Eunnan Kim, apparent housing polices during the incipi- Keuntae Kim Yongseok Ko, and Keunhyun Park at ent and intermediate urbanization periods. KRIHS. The Korea Urbanization Review was pre- pared in close collaboration between Somik V. Lall and Housing shortages were solved to some Hyoung Gun Wang from the World Bank and KRIHS extent by the massive housing construction in 2010. plans in the early 1990s. 106  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW The transportation system was completed legal basis to purchase lands within the area in the following order: first, the railroad sys- designated as industrial districts, including tem at the incipient stage, followed by the compulsory acquisition. express highway system in the intermediate During this intermediate stage of urban- urbanization period, and then the metropoli- ization, several complementary measures tan highway and high speed railroad system were required for a number of reasons. For in the advanced period. instance, zoning decisions and urban plan- In the intermediate period, policies that ning facility projects were amended too fre- cleared and relocated slums were imple- quently by the mayors and county leaders. To mented in response to spatial division in solve this problem, the Urban Comprehensive urban areas, but with no success. In the early Plan—which provides guidelines for 20-year advanced period, the decline of slums was urban planning visions, zoning decisions, driven mainly by the strong market forces in and urban planning facilities—became man- the residential redevelopment projects. datory. And downtown development projects Throughout the urbanization process, were implemented according to phased devel- urban planning and land management have opment scenarios in the Urban Comprehen- been considered the most important policy sive Plan. areas. As urbanization was under way at full speed, urban development projects greatly Urban planning and land management increased, and goals, subjects, and types of In the incipient urbanization stage, mod- development projects became diverse. But ern land ownership and land management too many acts and measures were estab- institutions were established. The Land Sur- lished, leading to confusion within the urban vey Act (1912) and the Urban Planning Act development system. In the late 1990s, a (1934) defined the rights of land ownership movement to integrate and reorganize urban and land use. planning acts emerged. For example, the Established in 1962, the Land Acquisi- National Land Use and Management Act, tion Act provided an institutional means for established in 2002, integrated the Urban appropriate compensation in purchasing land. Planning Act and the National Land Use Public works projects greatly increased dur- Management Act, which had separately con- ing this period, and the Exemption Act for trolled urban and nonurban areas. It played Public Land Acquisition and Compensation a major role in spreading urban planning was introduced in 1975 to facilitate public throughout the country. land acquisition with proper compensation. In the 1990s, the number of registered It provided uniform evaluation criteria, meth- vehicles greatly increased, and transportation ods, and processes to acquire lands for public infrastructure rapidly expanded. Coopera- works. tion between the city and the national gov- Residential development projects for the ernment was emphasized to accommodate sale and rent of affordable housing were first urban infrastructure. As a response to these adopted through the Public Housing Act in regional planning issues, metropolitan city– 1963, but land development was still carried regional planning, which requires coopera- out through land readjustment projects. In tion between the city and the county or the 1966, the Korean government established the city and the province, was institutionalized in Land Readjustment Act and separated it from 2000. the existing Urban Planning Act. The Urban Redevelopment Act was newly established Housing supply policies and separated from the Urban Planning Act Although providing sufficient housing units in in 1971. In 1973, the government instituted response to rapid urban population growth is the Promotion Act of Industrial Base Devel- necessary to meet basic infrastructure needs, opment to develop industrial sites and pro- housing supply policies were not a major con- mote industrialization. The act provided a cern during the incipient urbanization stage. PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    107 In the intermediate urbanization stage, how- capacities. The sixth (1987–91) emphasized ever, housing shortages became serious social pavement projects, increasing the pavement issues and gradually worsened due to rapid ratio from 54 to 76 percent. urban growth. Recognizing this problem, the government Slums and low-income housing policies built a large number of housing units. Because In the incipient urbanization stage, land of the scarcity of urban land and high popu- ownership by a few landlords or the ruling lation density, it encouraged the construction class forced farmers to lose their land and of apartments rather than houses. Its hous- move to urban areas. In the intermediate ing construction policies, such as the Hous- stage, industrialization provided incentives ing Construction Promotion Act (1973) and for rural people to move to cities for job the Two Million Housing Construction Plan opportunities. While this concentration of (1988–92), led to large-scale residential devel- rural population in urban areas was in prog- opment focused on apartment construction. ress, many deteriorated low-income neigh- Due to these policy efforts, the most serious borhoods (slums)—such as shanty towns and housing problems were largely solved in the poor hillside settlements—formed within advanced urbanization stage. urban areas. Later in the intermediate urbanization Connecting policies stage, these neighborhoods were removed for Because the Kyoungbu (Seoul-Busan) rail- more efficient land use, and many apartments road was built in 1904, and a railroad net- replaced these poor-quality houses. Dense work had already been established in the slums were greatly reduced in the advanced early Japanese colonial period, Korea was urbanization stage. But the residents from prepared for a more modern urban struc- these slums were scattered over outer metro- ture in the incipient urbanization stage. In politan areas or satellite cities, living in sub- the intermediate urbanization stage, road standard places such as in building attics or networks based on expressways were built, basements. contributing to the development of nation- wide transportation systems. In the latter Looking ahead half of the intermediate urbanization stage, urban highways and subway lines were built Urban planning and land management insti- to meet rapidly rising demand in large met- tutions were adopted to respond to chal- ropolitan areas. In the advanced urbaniza- lenges in each urbanization stage and proved tion stage, the Korea Train Express (KTX, their effectiveness. Investments in connective the bullet train) was constructed, shrinking infrastructure contributed to the successful the entire nation into a half-day travel zone. urbanization process by improving the eco- In the 2000s, regional highways such as nomic efficiency of the national urban system the Seoul Outer Beltway were constructed as well as that of individual cities. Construc- in major metropolitan cities to meet metro- tion of the KTE line helped reduce travel time regional transport demand. dramatically, forming a spatial structure suit- The government considered trunk trans- able for the advanced urbanization stage. port infrastructure a core component of the But the absence of housing supply policies national economic development planning. from incipient to intermediate urbanization The first Five-Year Economic Development stages continuously raised housing and land Plan (1962–66) devoted 64 percent of the prices. As a solution, increased housing sup- total investment in transportation to rail- ply, through direct and indirect government roads. The second Five-Year Plan focused interventions, helped stabilize housing prices, on metropolitan roads and a “public road– but demand for high-quality residential envi- centric” structure. The third to fifth Five- ronments still poses heavy financial burdens Year Plans focused on expanding expressway on the national and household economy. 108  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW VIETNAM is a central element of Vietnam’s economic growth strategy. No country has achieved Vietnam will have only one chance to get high-income status and strong economic urbanization right. If we fail at urbaniza- growth without urbanizing, and nearly all tion, we will fail at industrialization and countries become at least 50 percent urban- modernization. ized before reaching middle-income status. —Deputy P. M. Nguyen Sinh Hung, speak- Vietnam is on this path. Urbanization will be ing at the Vietnam National Urban Confer- rapid for the next 10–15 years, and 50 per- ence, November 6–7, 2009 cent of the country’s population will be living in urban areas by 2025. Vietnam is now widely considered a devel- opmental success story. Driven by the Doi Moi reforms that began in 1986, Vietnam How Vietnam is urbanizing has rapidly evolved from one of the poor- Vietnam has a complex system for classify- est countries in the world to an emerging ing cities, including two cities with Special m iddle-income country. In about 25 years, ­ status due to their significant and unique living standards have tripled, poverty has economic and political contributions to the fallen by 80 percent, and gross national country: Ho Chi Minh City and Hanoi. income per capita has risen from less than Then cities are classified from Class I to $100 to more than $1,000. With its accession Class V in descending order of size, with to the World Trade Organization in 2007, Class V marking the limit between rural and Vietnam emerged as a global and regional urban areas.1 Besides these two, Vietnam has powerhouse: international trade represents at least two others with populations of more 160 percent of GDP, exports have risen by than 1 million (Can Tho and Hai Phong) 14 percent annually over 2006–10, and many and several medium cities (such as Da Nang, industrial exports have grown much faster. with a population of about 700,000). But As of 2011, Vietnam attracted more net for- most of Vietnam’s economic and population eign direct investment commitments than growth is driven by two independent, domi- Indonesia, the Philippines, and Thailand nant, core-periphery urban systems: Ho Chi combined (World Bank 2011b). Minh City and Hanoi (map 4.3). The country’s long-term development At this stage of Vietnam’s development, prospects are solid, but the sustainability of as gains from agglomeration economies are its growth will necessitate a shift from reli- consolidated, the dominance of the major ance on low-cost labor and natural resources economic regions of the southeast (Ho Chi exploitation to a greater focus on produc- Minh City) and the Red River Delta (Hanoi), tivity growth and technological advances together with the emerging Mekong Delta while also ensuring greater macroeconomic economic region, are to be expected. But stability (World Bank 2011a). Urbanization these regions appear to be developing in dif- ferent ways, with some evidence that Hanoi The World Bank’s Vietnam Urbanization Review was is moving more rapidly into heavy and higher led by Dean Cira, and prepared by a core team con- technology manufacturing, while Ho Chi sisting of Arish Dastur, Henry Jewell, Austin Kilroy, Minh City and the southeast region still Nancy Lozano-Garcia, Huyen Thi Phuong Phan, and Hyoung Gun Wang. The team benefited from the stra- dominate economic and manufacturing out- tegic guidance provided by Stephen Karam and Somik put (map 4.4). V. Lall. The consultants and firms that helped prepare Vietnam’s economic growth and competi- background reports for this work are Alain Bertaud, tiveness will depend largely on these regions, Etude Economique Conseil, Quang Minh Consulting, and sustaining strategic investments in these Mekong Economics, and Urban Solutions. The Vietnam Urbanization Review was informed and enriched by areas is important for economic develop- extensive and valuable discussions with the government ment. Notwithstanding the rise of urban of Vietnam. economic centers, rural areas are still the PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    109 MAP 4.3  Population and GDP are highly infrastructure, and universal access to basic concentrated services will level the playing field and facili- tate the fluidity of factor markets, enabling a. Population b. GDP per capita firms and households to choose the best loca- tions for economic activity, thus maximizing Vietnam’s economic development. Urban challenges Valuing and pricing urban land Land markets in Vietnam reflect deeper issues with land management and gover- nance. Vietnamese cities have largely enabled a pluralistic supply of housing to meet the needs of different market segments—through small contractors producing town houses, incremental upgrading of housing stock, and infrastructure extension to increase the den- sity of peri-urban areas. But land prices are by most indications high, partly due to Viet- Source: Authors’ calculations, based on data from the Vietnam General nam’s two-tiered land pricing system and a Statistics Office. lack of good market information. In Hanoi and Ho Chi Minh City, land and housing prices produced by formal developers are MAP 4.4  Ho Chi Minh City dominates economic perhaps affordable to only 5 percent of the and manufacturing output population. a. Total economic output b. Manufacturing output Planning Planning and urban management in Vietnam still focus on static urban design principles— not on the fluid functioning of land and hous- ing markets. Strict adherence to static Master Plans, combined with a city classification sys- tem that induces cities to annex rural areas and land lease for infrastructure financing, are leading to urban sprawl and new towns where there is little market demand (map 4.5). Basic urban services Vietnam has done a remarkable job attain- ing nearly universal access to electricity (96 Source: Authors’ calculation, based on data from the Vietnam General percent). Access to other basic services such Statistics Office. as water and sanitation remains at lower levels despite remarkable improvement (70 percent of urban households had access to major source of livelihood for a large part of piped water by 2007). In contrast, waste Vietnam’s population and 93 percent of its water collection and treatment levels are still poor. For areas currently without strong eco- very low. And it appears that access to and nomic potential comparable with large cities, quality of urban services diminishes with investing in people (education and health), city size. 110  FRAMEWORK IN ACTION PLANNING, CONNECTING, AND FINANCING CITIES—NOW MAP 4.5  Hanoi’s Master Plan for new towns contrasted with the car ownership. As motorists shift to indi- plan of a compact city (Seoul) vidual cars for just a fraction of the current trips made by motorcycles, the current road networks in Hanoi and Ho Chi Minh City (to a slightly less extent) will be incompati- ble with the demand for road space. A prior- ity will be road networks and transit systems that are compatible with rising urban densi- ties and land use trends (such as the emerg- ing policy-centric development of the major cities) and that reflect consumer demand for location of housing and commercial facili- ties. This will require integrating land use planning and development with transit and urban transport development. Minimizing the transition from motorbike to car while Vietnam’s major cities develop their transit networks will be a major challenge, yet it is a priority to ensure greater mobility in Viet- nam’s cities. Source: Bertaud 2011. Connections between metropolitan cores and peripheries The connectivity of the urban system under- As Vietnam moves to higher income levels scores the importance of investing in regional and as universal access is achieved in other economic growth drivers. Ho Chi Minh City services, the next goal will be to focus on and the southeast together with the Mekong the quality and sustainability of urban ser- Delta Region account for 62 percent of Viet- vices. Tariffs for urban water supply gener- nam’s industrial activity, and Ho Chi Minh ally cover only operations and maintenance City and the southeast Region account for costs, and nonrevenue water (losses) is as 71 percent of the country’s seaport through- high as 40 percent in major cities. A major put. From 1999–2009, the bulk of manufac- challenge for local governments will be turing employment and its highest growth financing infrastructure services. As service were in Hanoi and Ho Chi Minh City and quality improves, tariffs will need to rise to their neighboring suburban areas (within 70 cover investment costs as well (to the extent kilometers from the city center). Even at this possible). Local governments have limited early stage of urbanization, manufacturing options to raise own-source revenues for activities are not confined to the adminis- investment and rely increasingly on land sales trative boundaries and, in many cases, there (leases); for example, such sales made up 20 is strong manufacturing activity within a percent of Ho Chi Minh City’s 2008 budget. 50-kilometer radius of the two major cities. Continuing strong investment in cities will Investing in logistics infrastructure will be depend on more sustainable financing. critical to developing the country’s strongest economic regions. An intercity trucking sur- Connections among neighborhoods within vey conducted for the Urbanization Review cities indicates that transport costs are highest in Vietnam’s cities (including its largest) have the two main economic regions. Truckers relatively good mobility, due in part to the identify poor road conditions and informal predominant use of motorcycles. But this is payments as the major bottlenecks. This sug- changing rapidly. As incomes rise, so will gests that connections can be improved not PLANNING, CONNECTING, AND FINANCING CITIES—NOW F R A M E W O R K I N A C T I O N    111 only through strategic transport and logis- will be necessary to coordinate land use plan- tics improvements, but also through regula- ning and development with transit and urban tory reforms to improve service quality in transport development. Minimizing the tran- trucking and logistics services. Analysis sug- sition from motorbike to car while Vietnam’s gests that freight costs in the Ho Chi Minh major cities develop their transit networks City and Hanoi economic regions could be will be a major challenge and priority to reduced 57 percent and 67 percent, respec- ensure greater mobility in Vietnam’s cities. tively, by reducing these bottlenecks. Connections can be improved not only through strategic transport and logistics Financing improvements, but also through regulatory Provinces and their subsidiary units are reforms to improve service quality in truck- financing themselves through a range of ing and logistics services. sources: equalization transfers from the cen- tral government, taxes, land sales, short-term Financing debt, local development investment funds, Because local governments have limited and sometimes cross-subsidies from profit- options to raise own-source revenues for able subsidiary entities of provincial public investment, sustaining strong investment utility companies. The merits and risks of in cities will depend on more sustainable these approaches need to be further exam- sources of financing. ined as alternatives are considered. For the poorer provinces, equalization has been a Note cornerstone in enabling access to basic ser- vices and should be maintained. 1. Classification is not only based on population. It also takes into account density, percentages of nonagricultural labor, and socioeconomic Looking ahead infrastructure available. Planning Monitoring land and housing markets will be References important to help urban economies function Bertaud, Alain. 2011. “Comments on Hanoi efficiently and equitably. Moving from static Capital Construction Master Plan to 2030 to dynamic plans, better integrating planning and Vision to 2050 (3rd report—comprehen- functions, and using sharper tools to moni- sive text report).” Commissioned for Vietnam tor real changes in land and housing markets Urbanization Review, World Bank, Washing- could improve the planning process consider- ton, DC. World Bank. 2011a. “Country Partnership Strat- ably and lead to a more efficient allocation of egy for Vietnam.” Working Draft, World land uses. Bank, Washington, DC. September 9. ———. 2011b. Securing the Present, Shaping the Connecting Future. East Asia and Pacific Economic Update To ensure that transit systems are compatible 2011, Volume 1. Washington, DC: World with urban density and land use trends, it Bank. ECO-AUDIT Environmental Benefits Statement The World Bank is committed to preserving Saved: endangered forests and natural resources. • 5 trees The Office of the Publisher has chosen to • 2 million BTU of print Planning, Connecting, and Financing total energy Cities—Now on recycled paper with 30 per- •416 pounds of CO2 cent postconsumer fiber in accordance with equivalent of  the recommended standards for paper usage greenhouse gases set by the Green Press Initiative, a nonprofit • 2,260 gallons of program supporting publishers in using wastewater fiber that is not sourced from endangered • 151 pounds of forests. For more in­ formation, visit www solid waste .greenpressinitiative.org.