Municipal Finance of Urban Infrastructure: Knowns and Unknowns

James Alm


Various trends, including an increasing emphasis on fiscal decentralization; political democratization in many areas; globalization and the financial liberalization that often accompanies it; growing demands for urban services as urbanization continues in major cities around the world; all argue compellingly for finding ways to help municipalities finance largescale infrastructure. Improved urban infrastructure, for water supply, sanitation, urban transportation and solid waste management is widely believed essential in encouraging and facilitating economic growth. Evidence indicates that those countries most successful in sustaining high growth supported their cities with transformative investments to improve urban infrastructure that could accommodate rapid population growth in major economic centers. This evidence suggests that infrastructure has a strong “supplyside” orientation and in practice, it is the effects of infrastructure on “supply” that are most often emphasized. There is also a strong “demand-side” aspect: individuals and businesses value the services that flow from the stock of infrastructure facilities and these demands should be (but are often not) considered in determining the appropriate level of infrastructure investment. In addition to the potential supply-and-demand-side impacts on economic growth, the services of infrastructure also play a significant role in the distribution of income.

Although data are often limited, the extent of the infrastructure “gap”—or the amount of additional infrastructure spending that is needed to provide basic services—is enormous. See Box 1 for a discussion of the quality of infrastructure in Kenya. The experience there is not an isolated one.

Urban infrastructure finance has multiple dimensions. This paper focuses on a limited number of these dimensions:

  • Finance for major infrastructure improvements in major economic centers;
  • Finance for expansion of basic municipal services in secondary cities and towns; and
  • Intergovernmental systems for financing investments with impacts beyond jurisdictional limits.