Comparative financing of megacities in multi-level BRICS states

• DOI: https://doi.org/10.1108/IJPSM-10-2016-0166
• Date: 14 May 2018
• Published date: 14 May 2018
• Pages: 507-524
• Author: Marco Salm
• Subject Matter: Public policy & environmental management,Politics,Public adminstration & management

Comparative financing of

megacities in multi-level

BRICS states

Marco Salm

Department of Public Finance,

German University of Administrative Sciences, Speyer, Germany

Abstract

Purpose –The BRICS states are based on multi-level government’s architecture whose megacities have an

outstanding role in their respective states –not only in terms of population and in terms of economic power,

but also in terms of local own-tax revenue collection, which, in turn, implies a very strong administration.

At the same time, megacities are facing increasing public expenditures because of infrastructure needs,

housing shortage, growth of social inequality, and environmental degradation. In order to outweigh the urban

advantages associated with urbanization, reconsidering the fiscal framework is of urgent need. The paper

aims to discuss these issues.

Design/methodology/approach –Most similar case design is applied.

Findings –Megacities are at the forefront of national economic growth, that they have an above average tax

base, an excellent administration, and therefore, face above average yields of property tax revenues.

Rethinking the fiscal framework could considerably improve local finances.

Research limitations/implications –Due to limitations on public finance statistics, the sample draws on

four megacities in BRICS, in reference to all megacities, only.

Practical implications –In context of Habitat III, New Urban Agenda, the practical implications are manyfold:

the paper focuses on megacities, its finances ( financing for development), and social implications involved.

Social implications –Localpublic finance,especially propertytaxation, hasmany implicationson social level.

Originality/value –The paper is one in a kind.

Keywords China, Brazil, India, South Africa, Decentralization, Finance

Paper type Research paper

1. Background

The world has moved into the urban millennium[1]. This process was heavily shaped in the

past and will be shaped by the BRICS states in future: within the period 2015 to 2030 the

number of megacities, urban agglomerations with more than 10 million inhabitants,

increases from 13 to 18 within BRICS (out of 29 and 41 worldwide) (see footnote 1). The

urbanization process is accompanied by many urban advantages, such as economies of

scale, social benefits (better access to health and education services, trade and cultural

activities), and economic growth. Cities are the key for (individual, municipal, and national)

prosperity, as urbanization and economic growth are positively correlated (UN-HABITAT,

2008, p. 28), which, in turn, leads to above average individual and corporate incomes and

rapidly increasing property values. At the same time, increasing numbers of urban residents

lead to increasing needs for urban infrastructure, housing provision, poverty reduction,

crime prevention, reduction of social inequality, and environmental degradation. Ideally, the

fiscal framework provides megacities with access to revenue sources that are corresponding

with the powers and functions that they are responsible for. However, finances often lag

behind and have negative impact on the financial sustainability of municipalities, on the

reliability and quality of municipal services, and municipalities’contribution to supporting

economic growth. The question therefore is if megacities have the “right”functions assigned

and taxing powers devolved to address the urban challenges?

International Journal of Public

Sector Management

Vol. 31 No. 4, 2018

pp. 507-524

© Emerald PublishingLimited

0951-3558

DOI 10.1108/IJPSM-10-2016-0166

Received 6 October 2016

Revised 10 February 2017

28 April 2017

6 May 2017

Accepted 2 June 2017

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/0951-3558.htm

JEL Classification —H710, R51

507

Comparative

financing of

megacities

In an urbanizing world, public finance is more important than ever before, if social and

economic benefits should outplay the costs of urbanization. Herewith, the megacities are

simultaneously experiencing both the costs and benefits of urbanization. They face above

average per capita expenditure needs, but at the same time, above average tax bases. To put

megacities on a sound public finance framework, property taxes are an indispensable

instrument, because property tax can be seen as a benefit tax, where local citizens

experience (collectively) the cost and benefits of local public services rendered.

In this context, megacities themselves must make an effort to tap local own-tax revenue

sources, especially property taxes, to guarantee high levels of municipal services and to

achieve higher levels of self-governance. Therefore, the property tax constitutes an ideal

indicator with regard to megacities effort to collect own-tax revenues. However, as this

paper will illustrate, revenue effort is much more dependent on other aspects, such as the

financial integration of the megacities within the multi-level government structure of their

respective states.

This paper follows a mix of methods in order to identify functional and fiscal

responsibilities assigned to the megacities and in order to draw comparative lessons: first, a

structured case-by-case assessment is conducted; second, the most similar case design

(MSCD) for a comparative evaluation of the property tax regimes is applied. “Similar”

megacities making use of “different”property tax performances constitute a fruitful basis

for comparison. Therefore, the sample matches megacities with similar socio-economic

conditions (i.e. they are the most populous cities with above average economic power) in

order to identify the variance in local own-tax revenue collection –especially with regard to

property taxes. Hence, the property tax performance (dependent variable) displays the

needed variance, while the explanatory or independent variables indicate a comparably low

level of variance; thus, they satisfy the basic idea of MSCD (Salm, 2017).

Against this backdrop, the paper will review the megacities Bangalore (India), São Paulo

(Brazil), Shanghai (China), and Johannesburg (South Africa) within the multi-state

governance structure of their respective BRICS states. The selected megacities are

deliberately non-capital cities as they often have special status within their states (Watts,

2008, p. 79ff). For this reason, and due to data limitations, Moscow (Russia) is not part

of the sample. Overall, this explorative approach has its strengths by analyzing similar

(non-capital) megacities; however, it has also its weakness by making use of a limited

sample, thereby, limiting generalizability and results interpretation.

This paper will provide an overview on the megacities within the multi-level government

structure of their respective state. Furthermore, the taxing and expenditure powers assigned

to the megacities will be illustrated and discussed case-by-case in context of their economic,

administrative and social importance. The property tax is selected as indicator to illustrate

megacities own-tax collection effort and their capability to offset the costs associated with

urbanization. Finally, BRICS megacities will be discussed in a comparative perspective and

conclusions will be drawn within the summary.

2. Megacities in multi-level states

2.1 Multi-level BRICS states and the place of megacities

The BRICS states are –with the exception of China –following the concept of federalism,

which refers according to Watts (2008, p. 8) to “the advocacy of multi-tiered government

combining elements of shared-rule and regional self-rule. It is based on the presumed value

and validity of combining unity and diversity […]. The essence of federalism as a normative

principle is the value of perpetuating both union and non-centralization at the same time.”

While there has been large attention given to the role of central and state governments

within federations, the role of local governments and megacities is of less comparative

research concern so far[2]. Within federations, the scope and powers of local governments

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