Broken financing

An inconsistent disbursement system leaves cities perpetually cash-strapped

When cities do get money they can only afford beautification projects like fountains (Photo: Greg Demarque | Executive)
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From wellness to cherries, at hospitality clusters and beach resorts, Lebanon’s event organizers and business owners outside the capital agree on one thing: municipalities should do more to bolster their economies. While article 49 of law 118/1977 on municipalities says they can plan roads and other public works – projects like playgrounds, hospitals, sewage and water networks – in practice many are too cash strapped to build or upgrade infrastructure that could support local economic growth. Local business leaders running entertainment venues, restaurants, hotels and other ventures that benefit from an influx of event-goers complain of poor roadways connecting to Beirut and of inadequate public utilities linking businesses to the local grid. Why, asked one business owner before answering their own question, do some people, as anecdotal as it is seemingly commonplace, commute two hours each way to jobs in coastal urban centers? Because residents find few opportunities in rural villages.

What the complaints ultimately boil down to is a criticism of infrastructure investments at the municipal level: more is needed. The hospitality sector is not the only segment of the economy that might benefit from such infrastructure investments, including sanitation, health care and education facilities – public works projects could improve quality of life, boosting access to public services and driving new business growth and job creation in underdeveloped areas of Lebanon. But the municipalities are challenged to do so: they lack money, and a mechanism meant to distribute funding equitably amongst Lebanon’s more than 1,000 cities and villages is broken.

Closing the funding gap

Municipalities are caught in a vicious cycle says Sami Atallah, executive director of the Lebanese Center for Policy Studies, a think tank that has extensively studied the issue of local governance and its financing, lobbying for reform. “The idea is to get poorer and rural areas closer to the average in terms of infrastructure and level of development,” Atallah tells Executive. Cities simply do not have the financial means to implement development projects and maintain or upgrade existing infrastructure he says, pointing out that the problem is more nuanced than just not having cash. A system to distribute money to municipalities, the Independent Municipal Fund (IMF), was set up in 1979 but the mechanism has been plagued by irregular transfers from the pot to the cities.

A portion of the fees on mobile phone and internet service collected by the Ministry of Telecommunications are a large source of revenue meant for the fund, as are taxes collected by the Ministry of Finance. How much money should make its way into the IMF, in terms of assessing whether new taxes and fees are necessary, and whether money meant for municipalities actually goes to them, are entirely separate questions from that of disbursement. On the latter question, a 2011 study by the International City/County Management Association (ICMA), an association of local government administrators advancing professional local governance, in which Atallah was a lead researcher, found a number of unlawful diversions from the IMF to pay for government services at the national level. Between 1993 and 2007 the study found $72 million was transferred out of the municipalities’ trust fund to pay for civil defense. For the same period the ICMA study calculated all unauthorized deductions totaled some $246 million from the trust fund, an amount that, by law, should have gone to municipalities.

Distributing cash to the municipalities from the fund’s account at the central bank has its own challenges. For one, unpredictable timing of transfers makes it all but impossible for cities to think in the long term. Planning infrastructure development, investing, building, even a city’s branding as a place-to-visit or as business-friendly (for example a rural municipality that, because of a new or upgraded road, is now easier to reach) all require outlooks measured in decades rather than years. Compounding the problem of unpredictable transfers are, Atallah says, distribution rules that illogically favor wealthy cities over poorer ones. Just as citizens vote not in the town of their residence but where their family is registered so too do municipalities calculate a part of their share of IMF payments, counting the size of their tax base as registered citizens rather than residents. Municipalities’ share of IMF payments are also calculated based on a two-year average of the revenues they collect from their tax, instead of a municipality’s efficiency to collect taxes and fees.

This further exacerbates inequality between richer and poorer areas, Atallah says, giving more urbanized cities an underlying advantage. Taxes collected at the municipal level are made up mostly of real estate-related revenues like property taxes and fees on transactions, rentals and building permits, so cities with more built-up surface area have an edge in their two-year average of collected revenues. “The more urbanized [a municipality] the more likely it will be able to collect these taxes. So the rural areas where there is unbuilt areas – they don’t have rentals, building permits – that’s where you see the discrepancy taking place between rural and urban,” Atallah says.

Getting the money where it’s needed

Businesses in the hospitality industry wouldn’t be the only beneficiaries of municipal investments into infrastructure. “Infrastructure development is a critical enabler of economic activity,” wrote the for-profit consulting firm The Boston Consulting Group in a 2015 report focused on African infrastructure investment for the World Economic Forum. A crucial question that municipalities must ask when planning infrastructure projects is what economic returns can they expect to “buy” from the investment. Studies of rural economies show that job creation, expanding and attracting new businesses are typical returns from infrastructure investments. And studies on the installation of high-speed broadband internet connections to rural towns in Kentucky, and to other out-of-the-way cities in the United States, found positive growth in employment, property values and the number of businesses.

Atallah says there are intangible benefits of infrastructure development beyond returns to economic growth. Investments into roads and public utilities, as well as health and education infrastructures in rural Lebanon is a must because “there is a huge discrepancy between the poor and the rich,” he says. In terms of connecting the country and closing the gap Atallah adds that “you want the feeling that this discrepancy is closing, and the IMF can play the role by saying that poorer regions get more money, up to a certain percentage.”

But after years of studying municipal financing and lobbying for fixes to the law Atallah says Lebanon’s decision-makers have little appetite to pursue any reform. Without a change to the funding mechanism, and with no other structured frameworks, like issuing municipal bonds or entering public-private partnerships, as a way to raise money to build infrastructure, rural and poor cities have little prospect of bolstering their economies and improving the livelihoods of their residents.

Jeremy Arbid

Jeremy is Executive's former economics and policy editor.