P R W P
6002
Grant Financing of Metropolitan Areas
A Review of Principles and Worldwide Practices
Anwar Shah
e World Bank
East Asia and the Pacic Region
Poverty Reduction and Economic Management Unit
March 2012
WPS6002
Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized
Produced by the Research Support Team
Abstract
e Policy Research Working Paper Series disseminates the ndings of work in progress to encourage the exchange of ideas about development
issues. An objective of the series is to get the ndings out quickly, even if the presentations are less than fully polished. e papers carry the
names of the authors and should be cited accordingly. e ndings, interpretations, and conclusions expressed in this paper are entirely those
of the authors. ey do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and
its aliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
P R W P 6002
In the new information age in the globalized and
interconnected world, metropolitan areas hold the key
to the future prosperity and growth of nations. is
paper takes a closer look at grant-nancing regimes
faced by metropolitan areas and their role in facilitating
or hindering improvements in economic and social
outcomes of residents of metropolitan areas. A review of
42 large metropolitan areas worldwide shows that, with a
few notable exceptions, metropolitan areas in general are
hamstrung from playing their potential role in economic
advancement. Metro areas have large economic bases
and therefore little a priori needs for grant nancing, yet
they have strong dependence on central transfers. is
is because of the highly constrained scal autonomy
given to these areas, especially in developing countries,
with the singular exception of metro areas in China.
Such a strong reliance on transfers undermines local
autonomy and local accountability. General purpose
transfers are formula based , transparent and predictable
yet they discriminate against metropolitan areas as
is paper is a product of the Poverty Reduction and Economic Management Unit, East Asia and the Pacic Region. It is
part of a larger eort by the World Bank to provide open access to its research and make a contribution to development
policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.
org. e author may be contacted at shah.anwar@gmail.com.
they utilize a one size t all (common formula) for
all local governments—large or small. Such formula
typically incorporate equal per jurisdiction component
that discriminates against large metropolitan areas.
Compactness is rarely rewarded and the greater needs of
metro areas for transportation, education, health, culture
and welfare go unrecognized. Overall the emphasis in
grant nancing of metro areas deals with vertical scal
gaps or project based specic purpose grants.
To ensure that metropolitan areas can play their
dual roles in improving economic and social outcomes
for residents, it is important to strengthen their scal
autonomy while at the same time enhancing their
accountability to local residents. e paper argues that
results based grant nancing of social and transportation
services and tournament based approaches to encourage
inter-jurisdictional competition need to be given serious
consideration to ensure metropolitan autonomy while
strengthening citizen based accountability.
2
Grant Financing of Metropolitan Areas: A Review of Principles and
Worldwide Practices
Anwar Shah
1
(shah.anwar@gmail.com)
1. Introduction
The allure of metropolitan areas is irresistible for a large majority of people. Metropolitan areas
promise good jobs, good homes, a good life, a good time for the young and the young at heart
and sweet dreams of a prosperous future for all. In an information age with a borderless world
economy where economic success is more closely tied to the competitive advantage as opposed
to hackneyed notions of comparative advantage, metropolitan governments are at the core of the
future prosperity of a nation. In an age of mistrust in governments, metropolitan governments
serve as a tool to overcome a lack of trust and restore confidence in governments through their
commitment to improve social and economic outcomes.
These great expectations however are critically linked with the fiscal health of metropolitan
areas. Fiscal health is closely tied to the fiscal regimes available; in particular, the taxing powers
and other financing options such as grant and bond financing. This paper is concerned with a
critical aspect of this financing - mainly higher level fiscal transfers. While these transfers may
not be the dominant source of revenues for a large number of metropolitan areas, they have a
significant bearing on the incentives and accountabilities and associated impacts on fiscal health
of metropolitan areas. The design of these transfers requires careful thought on special features
of metropolitan areas that distinguish them from smaller local government entities.
Most metropolitan areas have large populations, typically in excess of one million. Mumbai,
India has a population of 21 million and Istanbul, Turkey has population of 13 million.
Metropolitan areas are larger and compact areas with higher population densities than the rest of
the nation. This compactness facilitates agglomeration economies as well as making
metropolitan areas centers of arts and culture and learning and sources of innovation, growth and
productivity. They also afford better transportation and communication facilities and overall a
better quality of life. This leads to a larger concentration of specialized skills and wealth, and on
1
This paper is prepared as a chapter for a forthcoming Brookings Institution book on Metropolitan Governance
and Finance in Developing Countries , edited by Roy Bahl, Johannes Linn and Deborah Wetzel. The author is
grateful to Roy Bahl, Melville McMillan, Harry Kitchen, Johannes Linn, Ernesto Revilla, and Deborah Wetzel for
helpful comments on an earlier version of this paper.
3
the downside, higher incidence of crime and poverty. Metro areas have typically much broader
responsibilities than smaller local governments. Beyond municipal services, these encompass
health, welfare, and hub functions for national and international finance, trade and economic
links. Because of this in some countries metro areas are treated as provinces/states. Examples
include Canberra in Australia, Bangkok in Thailand, Beijing and Shanghai in China, Tokyo in
Japan, Seoul and Busan in South Korea, Berlin, Bremen and Hamburg in Germany, Helsinki in
Finland and others. Metro areas typically have multiple local jurisdictions and in some cases
multiple tiers of local jurisdictions. Metropolitan areas also have a typically larger revenue base
and greater tax autonomy and therefore greater potential for self-finance.
In view of this, the grant financing needs of metro areas are very different from other local
governments. If taxing powers are adequately decentralized, there may in fact be no need for
grant financing of operating expenditures of metro areas as demonstrated by Tokyo and Seoul.
This, however, is not the case for most metropolitan areas. They lack autonomy in taxing
powers. They have limited access to dynamic productive tax bases. Existing tax bases, especially
property tax bases are overtaxed to finance municipal and education services e.g. in USA and
Canada, leaving little room to grow. In the USA, this problem is compounded by limits on local
revenues and unfunded mandates in environmental and social spending. In most developing
countries metro governments lack administrative and fiscal autonomy and act as wards of the
state and pied pipers of national and provincial governments. They are hamstring to play a
leadership role in local economic development. In these circumstances grant financing can play
an important role but grants must be tailored to specific circumstances of metro areas especially
their broader role in local, national and international governance with an expanded array of
responsibilities associated with serving as nodes of national and international connectivity and
special needs of a knowledge based local economy. Grant design also must incorporate
incentives and accountability mechanisms to ensure responsible and accountable local
governance. This paper provides a synthesis on conceptual underpinnings of this literature as
well as providing a brief overview of practices across the world based upon a review of 41
metropolitan areas. It must be noted at the outset that the assignment of responsibilities must
underpin any design of grant program (see McMillan, 2008). With appropriate assignments or
reassignments, it is possible to minimize need for higher level assistance for metropolitan areas.
However, this paper takes these assignments (or mis-assignments) in practice as given and
examines options in grant design to facilitate better functioning of metropolitan governance. An
overall theme of this paper is that grants can be (and should be) properly designed in most any
institutional/organizational setting --- even if the organizational setting may not seem to be ideal.
The rest of the paper is organized as follows. Section 2 provides a typology of grant instruments
and discusses their rationale and relevance for metro areas. Section 3 provides conceptual
guidance on grant financing metropolitan services. Section 4 outlines stylized models of
metropolitan governance and draws implications for the design of higher level transfers. It also
discusses impliations of exsting institutional arrangements for developing a grant strategy for