Cities need good credit scores too. Here’s why

Businesses or individuals applying for a loan need to demonstrate a sound financial standing – and cities are no different.

Cities need creditworthiness to finance costly infrastructure projects, but it’s often a steep challenge for governments in the developing world.

More than half the world’s population now lives in cities, a number the UN estimates will grow to two-thirds by 2050. Trillions of dollars of investment is required to ensure these cities are livable and resilient places, with clean water and sanitation, good transit systems and schools, and economic opportunities for residents.

Few banks and investors, though, are ready to gamble on cities with weak economies; they are considered too financially risky. Unlike cities in here in the US and in Europe, which have a long history of borrowing money and obtaining loans and investment, most of the fast-growing urban areas in developing regions don’t even have a credit rating. As a result, city services suffer.

Arusha, in northern Tanzania, for instance, is typical. Out of a population of just over 400,000, as many as seven out of 10 residents live in informal or unplanned settlements with limited or no access to clean water and electricity. Without a credit history, Arusha’s authorities could not secure the commercial-based financing necessary for vital infrastructure projects.

Through the City Creditworthiness Initiative – a program launched by the World Bank, the Public-Private Infrastructure Advisory Facility and The Rockefeller Foundation help the world’s poorest cities achieve creditworthiness and resilient growth – Arusha has adopted an innovative strategy to strengthen municipal finances and, in turn, to bolster the city’s ability to attract financing.

One of the most important criteria for good credit is to make sure city revenues predictably exceed costs. So as a first step, the municipal authorities had to know where all the city’s money comes from and how fast it might grow, as well as how tax rates are set and taxes collected.

Using the initiative’s City Creditworthiness Toolkit, a self-assessment toolkit designed to help cities develop action-plans to strengthen their creditworthiness, municipal authorities analyzed the data and found serious problems with Arusha’s tax collection system. More than 70% of city residents never paid any taxes, and a majority of small businesses failed to keep accurate records.

As a second step, in support of the World Bank’s Tanzania Strategic Cities Project, the Creditworthiness Initiative worked with Arusha to employ a geographic information system – a mapping program that can visualize and interpret trends and patterns – which allowed city officials to identify all properties and potential revenue within the sprawling urban area, and devise a plan to improve tax collection.

While finding tax dodgers is one thing, getting them to pay is another. All too often, cities with poor public services encounter resistance to tax collection from residents who say they see little improvement for their money. To make a strong case for paying taxes, the city began a public awareness campaign that illustrated how paying taxes leads to tangible benefits such as new roads, schools and hospitals.

These efforts have paid off. Revenues to the city’s coffers grew by 140% between 2011 and 2016, the latest figures available, and 2017 will see the trend continue. With this additional revenue, Arusha is freed from over-reliance on central government funding and officials can seek other sources of investment as the city moves toward creditworthiness.

An estimated $10 million-worth of projects is already on the drawing board, including bus stations, marketplaces and bridges. With its proximity to Mt. Kilimanjaro and the Serengeti National Park, Arusha also envisions becoming an eco-friendly tourist hub.

Anyone seeking a loan will understand how important it is to undertake some financial housekeeping to ensure economic stability and steady revenues. And while a city’s budget is obviously more complex than an individual’s, both strive for the same thing: finances that are transparent, orderly and healthy. In other words, every city needs a good credit rating to help secure a better future for its residents.

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