To self-finance using own capital, or equity, is one of the most conventional ways of financing any activity. Municipal Budget Spending is a type of funding in which a city can finance its projects using resources from its own budget. To finance a municipal activity with this type of funding source, a city facilitates a needs assessment to identify steps required to meet the demands of climate neutral development. It identifies the needs of investments, processes funding requests, facilitates approvals, issues tenders, selects contractors, and implements the projects. As this type of financing requires sufficient or surplus resources, it is most suited for cash rich municipalities who can fund their own interventions. Alternatively, neighbouring municipalities can combine resources and share the costs and expertise in a joint effort. (Novikova, 2017)
Advantages: Cities that can use their own resources to finance projects, support faster processing of the project from gestation to implementation, saving on interest payments and utilisation of in-house resources. The municipality can monitor the funds use and generate accountability at the city level. Most important of all, this type of funding enjoys the advantage of full ownership of the project. (Novikova, 2017)
Disadvantages: Despite the numerous advantages, this type of funding is countered with a few drawbacks. Because of the potential long-term infrastructure investment burden, municipalities are sometimes strained by the use of their limited budget resources. The funding is typically restricted to cover all of the project's up-front expenditures. In addition, the municipalities are responsible for monitoring and handling any risks involved. Risks that may arise from mistakes in national or regional administration or decision-making, as well as any technological problems or policy impasses. Moreover, some tax payers may argue that municipal deliberation and project-related choices are not as transparent as they should be and local governments may run into trouble while trying to carry out the required initiatives due to a scarcity of the necessary knowledge, technology, and ability. (Novikova, 2017)
Projects that can be financed with this model: This type of funding can be used to finance practically all of the development projects that fall under municipal jurisdiction. In spite of the fact that the model possesses a number of advantages and may be used effectively for a variety of projects, the majority of municipalities have a tendency to favour other options to reduce the strain on their own resources. Additionally, limitations are imposed by the available human skills and resources. Municipalities are always looking for different options that will reduce the financial and technical risks that they face and make it easier for them to avoid paying the total capital expenses all at once. (Novikova, 2017)
First steps:
-
Prepare a needs assessment report
-
Review the required capital, period of investment, available own budgetary resources, available human resources and technical expertise and the urgency of the project
-
Review available grants or low interest loans
-
Review if municipal budget spending is the best option based on the above analysis
Case studies:
Further reading:
1. Municipal Finance: Self-Reliant Cities Generate their Own Revenue
2. Intermunicipal cooperation, public spending and service levels
References:
Novikova, A., Stelmakh, K., Hessling, M., Emmrich, J., and Stamo, I. 2017. Guideline on finding a suitable financing model for public lighting investment: Deliverable D.T2.3.3 Best practice guide. Report of the EU-funded project “INTERREG Central Europe CE452 Dynamic Light”, October 2017.