32533 East Asia and Pacific Urban Business Directions AO*A ver W f _:__ I~'A- b 0 -~~~~ I..__ ... _.f. ' -, n ' - ^ : > a ,,,.,* i \ ,~~~~~~~~~~~~~~~~~~~~~~~~~~4 .3~ ,2,';> _ ' w,'1 o _ '.- I UranDeelpmntWokig-apr * EatAi nratute Deprte ~I._ .__. East Asia and Pacific Urban Business Directions September 2004 Urban Development Working Papers East Asia Infrastructure Department Working Paper No. 5 "''I 'P Cover photos by Curt Carnemark Contents Foreword .................................................................. v Acknowledgements .................................................................. vii Part I. Urban Development Trends and Challenges .............................. ......................... 1 Current Situation .................................................................. 1 Long-term Trends and Implications .................................................................. 1 Long-term Trends .................................................................. 1 The Economic Transition .................................................................. 1 The Demographic Transition .................................................................. 2 The Governance Transition .................................................................. 4 Implications for Rural Development ................................................................. 5 Key Challenges and Policy Responses .................................................................. 6 Enhancing the Local Investment Climate to Promote Economic Growth and Increase Employment .................................................................. 6 Tackling infrastructure Challenges ................................................................. 14 Transport and Motorization .................................................................. 14 Water, Sanitation, and Solid Waste .................................. ....................... 16 Air Quality and Other Environmental Concerns ............... ........................... 16 Information Technology .................................................................. 16 Integrated Planning Approaches for Infrastructure ............ ........................ 17 Reinvigorated Urban Planning ................................................................. 17 Working with the Private Sector ............................................................... 17 Developing the Framework for Sustainable Urban Finance ........... .................... 18 Increasing Local Government Revenues and Improving Expenditure Management ................................................................. 18 Developing a Framework for Local Government Borrowing ......... ................ 18 Macroeconomic Implications of Local Borrowing ....................................... 19 Improving Urban Governance and Management .............................................. 20 National Level Actions to Support Decentralized Urban Management ....... .. 20 City-level Action to Support Administrative and Institutional Reform ....... .... 20 Increasing Accountability .................................................................. 21 Improving the Efficiency of Service Delivery ................. ............................ 21 Building Civic Awareness and Forming Partnerships to Reduce the Burden ..................... ............................................. 22 Adapting the Institutional Structure . ......................................................... 22 Engaging with Networks . .................................................................. 22 Managing Metropolitan Areas ................................................................. 22 Part II. World Bank Urban Business Priorities in EAP ................................................... 25 Regional Response to Key Challenges ................................................................. 25 The Current World Bank Urban Program in EAP ............................................... 25 Urban Environmental Management Programs ................ ........................... 25 Urban Poverty Programs . .................................................................. 25 Municipal Development Programs Supporting Small and Medium-sized Cities . .................................................................. 26 Small Country Programs . .................................................................. 26 New Approaches Needed to Respond to the Challenges of Urban Transition Facing the Region ........................... ........................... 26 Developing the Framework for Sustainable Urban Finance ......... ................ 27 Improving Metropolitan Infrastructure Provision and Periurban Development of Large and Megacities ................... ............................ 29 Improving the Business Climate in Cities for Economic Growth and Job Creation 30 Strengthening the Institutions Required for Improved Urban iii Governance and Urban Management Under Decentralization ........ ....... 31 EAP's Urban Development Objectives ......................................... ................ 33 Objectives ......................................................... 33 Key Business Lines to Support the Strategy ........................ .......................... 34 Single-sector Urban Projects ................................................................ 34 Municipal Development/integrated Urban Infrastructure Projects ............... 34 Municipal Financial Intermediaries for Lending to Multiple Cities, Especially Small and Medium-sized Cities ................ .......................... 34 Provision of Basic Services to the Poor .......................... ......................... 34 Regional/provincial Development Projects ..................... .......................... 34 Implementation Measures ................................................................ 34 Improving Internal Processes ................................................................ 35 Partnering with Others ................................................................ 36 Increasing the Urban Development Knowledge Base ............ ..................... 37 Improving Bank Presence in Small Countries ............................................ 37 Developing a Communications Strategy .......................... ..................I ...... 37 Benchmarking EAP Group's Progress in Implementing the Business Strategy .... 37 Country-specific Strategies ........................ ........................................ 38 Business Priorities for Indonesia, the Philippines, and Vietnam ......... .............. 39 Urban Governance and Institution-building Business Line .......................... 39 Sustainable Finance Business Line ................................................ ...... 39 Urban Poverty Business Line ................................................................ 42 Urban/regional Planning and Infrastructure Development Business Line .... 43 Business Priorities for China . ................................................................ 44 Greater Focus on Governance and Institutions for Improved Municipal Management 44 Increased Assistance to Secondary Cities Programs at the Provincial and Urban Subregional Scale ............................................................ 44 Support to Urban Financial Reform .......................................................... 46 Improved Urban Planning, Traffic, and Demand Management Along with New Facilities Primarily at the Periphery of Rapidly Growing Cities ....... 46 Business Priorities for Small Countries .......................................................... 47 Urban Management, Capacity Building, Land, and Finance Improving Services, Including Access to Basic Infrastructure, for the Poor ........... 49 Bibliography ................................................................ 51 Annex A. Urbanization Figures ................................ ................................ 53 Annex B. Millennium Development Goals (MDGs) ...................... ........................... 59 Figures 1. Urban Population 1960-2000 2. Population of Asian Megacities, 1950-2015 3. Decentralization of Spending 4. Slum Dwellers as a Percentage of Urban Population, 2001 5. Travel-time per work trip, 1998 Tables 1. City GDP and Population 2. Level and Rate of Urbanization 4. Urban Service Access in Southeast Asia 5. The EAP Group's Experience Across the Five Objectives 6. Interim Measures of Success for The EAP Group's Urban Business Strategy 7. Specific Business Directions for Middle-Sized Countries 8. Specific Business Directions for China 9. Specific Directions for Small Countries A.1. Total and Urban Population, East Asia and Pacific Region A.2. Historic and Recent Trends in Urbanization: East Asia and Other Countries Compared A.3. Current Level of Urbanization A.4. Largest Urban Agglomerations in East Asia Region (Ranked by Population, 1950-2015) B.1. Infant Mortality Rate B.2. Proportion of Population with Sustainable Access to an Improved Source of Drinking Water B.3. Proportion of People with Access to Improved Sanitation Foreword Cities are the engines of East Asian development. They currently contribute at least 70 per- cent of the region's economic growth. In addition, East Asia's urban population is growing at a unparalleled rate and is expected to surpass 50 percent by 2025. In order to support the East Asia and Pacific Region's client governments in creating sustainable urban policies and programs, this paper describes, the current situation, and the economic, demographic, and governance transitions now taking place in the region. It elaborates the key challenges that cities face and makes suggestions for policy responses to meet these challenges. The paper describes the World Bank's current urban program and the directions that the Bank's work will take to support its urban clients in the region. This review of business directions is an important initiative for the World Bank's urban sector, and we consider it to be a model for the sector, in the way its proposals respond effectively and strongly to client country demands. A companion report entitled "Urbanization Dynamics and Policy Frameworks in De- veloping East Asia," which examines urban systems in Cambodia, China, Indonesia, Mongolia, Philippines and Vietnam, is being published separately. Christian Delvoie Director Infrastructure Department East Asia and Pacific Region Maryvonne Plessis-Fraissar Director Transport and Urban Development Department v Acknowledgements I would like to thank Anthony Pellegrini who coordinated the inputs and drafted much of the document. I am indebted to Jeff Gutman and Christian Delvoie who made exceptional contributions to this document through their clear directions and through the tough ques- tions that they posed. Special thanks are due to each staff member of the EASUR unit. Staff gave invaluable time for individual interviews, they participated in numerous brainstorming sessions and they provided detailed comments on numerous drafts. Soraya Goga authored significant sections of the report. Important inputs also came from work done by Douglas Webster and Ken Gwilliam. Philip Gray and Milan Brahmbhatt provided valuable comments and insights. Comments from Tim Campbell, Christine Kessides, Shahid Yusuf, Mark Hildebrand, Billy Cobett, Maryvonne Plessis-Fraissard and Fitz Ford were most useful. Manisha Chaudhry and Yarissa Lyngdoh both provided invaluable assistance in orga- nizing data and conducting analysis. Jane Rea edited the document and Katrinka Ebbe provided publishing support. Finally, I would like to thank Alex McLellan of International Communications, Incorpo- rated, for his overall design and management of this paper and the East Asia and Pacific Region's Urban Development Working Paper Series. Keshav Varma Sector Director East Asia and Pacific Urban Development Sector Unit vii PART 1. URBAN DEVELOPMENT TRENDS AND CHALLENGES Current Situation East Asia's economic future depends on the continued success of its urban areas. Cities and towns are typically the most dynamic sources of productivity growth in any economy, and in East Asia they already contribute at least 70 percent of the region's economic growth.' Cities are where economies modernize. They are the main centers for production of in- ternationally traded goods and services and the chief bases for foreign investment-a fact that further enhances their importance in East Asia, a region at the forefront of integration into the world economy. East Asian cities such as Tokyo, Hong Kong, Singapore, Seoul, Beijing, Shanghai, Kuala Lumpur, Manila, and Jakarta count among the major cities of the world and are chief centers of trade and production.2 Policymakers in the region recognize urban and regional economic development as national priorities because they are crucial to national development and poverty alleviation.3 However, East Asia's urbanization is a result of a complex series of economic, demo- graphic, and governance transitions that pose an unprecedented challenge for local and na- tional governments. East Asia's urban population surged from 21 percent in 1980 to 36 per- cent in 2000 and is expected to surpass 50 percent by 2025-a growth of roughly half a billion people-primarily as a result of migration from rural areas but also from natural increase. The stakes for East Asia are high. If not properly managed, urbanization could exacer- bate environmental damage, congestion, the lack of basic services, ill health, and insecurity, especially among the poor. Sound urbanization management policies are critical, and the role of city governments in developing and implementing such policies is perhaps even more important than that of national governments. Hence, city governments, many of which have only recently been empowered by the shift toward greater East Asian decentralization, are now scrambling to meet the diverse and growing challenges of urbanization. Long-term Trends and Implications To successfully manage urbanization while minimizing its pitfalls, policymakers at local and national levels first need facts about the main features of the urbanization process, draw- ing on national, regional, and international experience. This section of the report outlines the following three key aspects of the process: * Changes in economic structure of countries in the region * Enormous demographic implications of these economic changes . Trend toward decentralization in East Asia and its implications for governance. Long-term Trends The Economic Transition Trade, industry, and services are increasinig, zvhereas agriculture is declining in inmportance. In all countries of the world, economic development is accompanied by a fall in agriculture's share of the gross domestic product (GDP) over time as industry and services grow in 1. Webster (2002). 2. Beaverstock, Smith, and Taylor (1999). 3. For example, China's 10th five-year plan recognizes that urban development holds a key to na- tional economic growth and equity. China has therefore concluded that it must promote the develop- ment of urban areas as a means of reducing persistent urban-rural disparities. East Asia and Pacific Urban Business Directions importance. In East Asia, industry and services' share of GDP rose from 72 percent in 1980 to 87 percent in 2000, while agriculture's share fell from 28 to 13 percent. Densely populated urban areas provide the most efficient locations for production of manufactured goods and services. The presence of large nearby markets for output, inputs, labor, and other services allows firms to profit from economies of scale and specialization. Physical proximity al- lows more and faster diffusion of knowledge about new techniques, products, or markets. Transaction costs fall, most notably in matching workers to job opportunities. Such effects-sometimes called agglomeration economies-explain why urbanization always accompanies sustained economic growth and why productivity and incomes tend to increase systematically with city size. For example, the per capita GDP of Ho Chi Minh City is more than three times Vietnam's national average, and the per capita GDP of Shang- hai is about five times China's national average. Incomes in Greater Jakarta, Seoul, and Bangkok are at least 80 percent higher than incomes in surrounding areas.4 Major urban areas in East Asia therefore contribute a disproportionately large share of national output (and growth) compared with their share of the national population (see table 1). Agglomeration economies often extend beyond a city itself. Cities and their surround- ing regions-including other cities and towns-are increasingly forming local networks or systems that support mutual economic growth. These new agglomeration clusters include Bangkok's eastern seaboard, China's coastal area, and the National Capital Region beyond Manila, along with the cross-border clusters of Medan (Indonesia), Penang (Malaysia), Phuket (Thailand), Yunnan Province (China), and North Laos/Vietnam. Finally, urban areas play a special role in the process of globalization, the growth in the proportion of economic transactions that take place between residents of different coun- tries-a process in which East Asia has been a leading participant. As noted above, cities are the main location for the production of internationally traded manufactured goods and services as well as of most foreign direct investment. They are centers for employment of migrants and for international communications and networking. Globalization adds to the existing advantages of urban areas for economic growth but poses new demands of its own. To meet these demands, city managers will need to provide for new types of infra- structure, particularly for communications, a sound regulatory framework, and an attrac- tive business climate. The Demographic Transition Urban poplulation and city size are rapidly increasing, zvlhile tlhe rural poputlation is stabilizing. Accompanying the rising economic might of cities during the development process is the movement of the population from rural areas to cities. Figure 1 indicates that more than 36 percent of East Asia's population now lives in urban areas, an increase from around 16 percent in 1960. The pace of urbanization became especially rapid after 1980, with the popu- lation share of urban areas increasing by 7 to 8 percentage points per decade. The current base of urbanization among developing countries of the region also varies widely, from low-income countries such as Cambodia and Vietnam, with urbanization ratios of 25 per- cent or less, to middle-income countries such as the Philippines, with an urbanization ratio near 60 percent (see table 2). East Asia is among the less urbanized of developing regions; urbanization is already around 75 percent in Latin America (about the same as in the United States) and more than 60 percent in Europe and Central Asia. However, because of the current high rate of increase in urbanization in East Asia, demographic shifts will be enor- mous, and urbanization will dominate Asia's development agenda during the next 20 years. 2 4. Yusuf and others (2001). Calculated using urban and rural income data from World Developmenit Inidicators 2001. v East Asia and Pacific Urban Business Directions Table 1. City GDP and Population City GDP as percentage Percentage of total City of national GDP population (2000) Shanghai 5 1 Beijing 3 1 Guangzhou 4 1 Bangkok 40 12 Jakarta 7 5 NCRa (Pnilippines) 31 13 Ho Chi Minh City 19 6 Hanoi 8 3 Notes: a. NCR = National Capital Region; GDP = gross domestic product. Source: World Development Indicators (2000). Table 2. Level and Rate of Urbanization (percent unless indicated) Urban Urban Forecast Urban Population Population Urbanization Population Urban Ratio Growth Growth Ratio Country 2001 (millions) 20018 1995-2000 2001-30 2030- Cambodia 2.4 17.5 6.4 3.5 36.1 China 471.9 36.7 3.5 2.2 59.5 Indonesia 90.4 42.1 4.2 2.4 63.7 Miongolia 1.5 56.6 0.9 1.4 66.5 Philippiries 45.8 59.4 3.6 2.3 75.1 Vietnam 19.4 24.5 3.1 3.0 41.3 Notes: a. Percentage of total population. Source: Webster (2002) and World Bank (various). Figure 1. Urban Population 1960-2000 (percent of total population) 80 60 - _ - - - - _ .. -- _ _ ~ ........ --- East Asia _ _ *------ Latin America 4 _ South Asia 40 . -- Europe-Central Asia Middle Easl.North Africa - u b S SubSaharan Africa 20 = 0 3 1960 1965 1970 1975 1980 1985 1990 1995 2000 Source: World Bank. East Asia and Pacific Urban Business Directions Figure 2. Population of Asian Megacities, 1950-2015 (millions) Population 30 in millions 25 20 / | Ho Chi Minh City 20 ~~~~~~~~~~~~~~~~~~Seoul Bankok 15 ------ Beijing - _ - - Shanghai Jakarta ....... ~ ~ ~- Tokvo 0 Source: World Development Report, 2003. The population living in cities with more than a million residents is expected to rise by half, from 330 million in 2000 to nearly 500 million in 2015, and the population living in "megacities," that is, cities with a population exceeding 10 million, will rise from about 80 to 120 million (see figure 2). The most rapid urban growth is taking place at the periurban periphery of East Asian cities, where manufacturers find relatively cheap production facilities. In China alone, the population of periurban areas will grow by approximately 250 million over the next 25 years.5 The conversion of rural towns to urban towns and cities as population grows ac- counts for much of this growth in urban population. The Governance Transition Decentralization is increasing the responsibility of city management and decreasing tile power of national ministries. Prospects for better city management in East Asia are being affected by a third trend- decentralization of government authority from central to local levels. The motive for de- centralization is often political, based on public demands for accountability and the recog- nition that in modem economies, govemment actions must answer local needs and be shaped by local resources and opportunities. However, sound policy reasons for decentralization arise from the increased efficiency that occurs when the people who make decisions are the ones most affected by their consequences. As cities grow in size and complexity, centralized management of city policies and development from distant capitals no longer works. This is especially true in an age of globalization, when nimble responses to market forces deter- mine competitive advantage. Hence, decentralization is an inevitable consequence of ur- ban growth. Across the region, central governments are transferring responsibility for economic de- velopment functions and core poverty reduction programs to the local level. Several East Asian countries have decentralized public spending even further than the average for Organisation for Economic Co-operation and Development (OECD) countries (see figure 3). China is among the world's most fiscally decentralized countries, with nearly 70 percent of 4 public spending decided at the subnational level, followed in the East Asia and Pacific (EAP) 5. Webster (2002). East Asia and Pacific Urban Business Directions Figure 3. Decentralization of Spending OECD I Earl- 2I, ''. C' Latin America l Earl, 1`191c' Thailand Phillipines Indonesia China _ 0 20 40 60 Subnational as percent total expenditure OECD = Organisation for Economic Cooperation and Development. Source: World Bank, East Asia Preliminary Reference Earth Model. region by the Philippines, with 43 percent (up from 25 percent in 1992). Other EAP countries are in the early stages of fiscal decentralization. Indonesia passed far-reaching decentralization laws in 2000 and is in the process of implementing regulations. Vietnam, Cambodia, and Laos are still very centralized and are just beginning to define intergovernmental policy. In China, Indonesia, and the Philippines, local governments now have a decisive influ- ence on national economic growth and competitiveness. They are responsible not only for health services, education, and housing but also for business registration, licensing and approvals, health and safety regulations, land policy, planning and building standards, infrastructure provision, environmental protection, and air quality standards as well as public safety. Decentralization clearly provides opportunities for more responsive and accountable service delivery, enhancing quality of life and local competitiveness. But to realize decentralization's full benefits, governments in East Asia must address urgent is- sues of internal reorganization, institutional change, financial management, and local ca- pacity. China, although still in the formative stages of developing market-based institu- tions and policies relevant to decentralization, is the only country in the region that has long experience with considerable provincial and local autonomy and with associated fis- cal, institutional, and administrative systems that normally must accompany decentrali- zation to leverage its benefits. Implications for Rural Development What are the consequences of these trends for rural areas? Many EAP countries now recog- nize that urbanization, far from having a negative effect on rural development, is an impor- tant part of the solution to rural poverty. China's experience is illuminating. Despite past efforts that restricted urban growth and favored rural investment, productivity in China's urban areas is double that of rural areas, and urban-based businesses have driven most national economic growth. China's 10th Five-Year Plan is the first to recognize that it must promote the positive development of its urban areas as a means of reducing persistent 5 disparities between urban and rural areas. Because of China's limited potential for agricul- tural growth, only rapid increases in the urban-based economy can reduce the income gap, East Asia and Pacific Urban Business Directions mainly by reallocating surplus rural labor but also by allowing increased capital and tech- nology input in agriculture. Analyses show that the shift of rural labor to more productive urban manufacturing and services has by itself contributed about 10 percent of China's economic growth in the past two decades. In all EAP countries, a significant percentage of rural income derives from nonfarm income, which has been an important factor in the decline of rural poverty in China and Indonesia. In rural Indonesia and China, nonfarm sources, on average, account for nearly half of rural household income.6 Rural areas are therefore beneficiaries when nearby towns are better managed and properly plan their infrastructure. Furthermore, about 40 percent of East Asia's rural population and an even higher percentage of the rural poor live on fragile lands unsuited for agriculture because they are arid, on steep slopes, or part of fragile ecosystems. Productivity growth therefore requires a shift to nonagricultural ac- tivities that do not make intense use of land.7 Strategies must consider the existing synergies between urban and rural development to reduce poverty in both areas and to balance the potential contributions of both to over- all economic growth. A national development strategy that ignores the needs of either rural or urban development would be counterproductive. Key Challenges and Policy Responses Along with the opportunities arising from economic, demographic, and governance trans- formations also come incredible challenges. Among existing urban households, millions are affected by poverty; lack of access to basic services; difficulty getting to work; or lack of adequate, sanitary living space. Without sufficient policy and investment responses, the population influx to cities could worsen environmental and health conditions and further erode the living standards of citizens, especially the poor. East Asia's urban governments not only need to manage, operate, and expand services and facilities to meet a large backlog of unmet demand but must also plan for their populations to double over the next 30 years. The following five challenges need priority attention: * Enhancing the local investment climate to promote economic growth and increase jobs * Improving the living conditions of the urban poor and their access to basic services * Managing urban population expansion through better infrastructure, planning, and land management * Developing the framework for sustainable urban finance * Strengthening the institutions required for improved urban governance and manage- ment under decentralization. Enhancing the Local Investment Climate to Promote Economic Growth and Increase Employment Improving the local investment climate can enhance the role cities play in contributing to national economic growth and employment creation. Local government decisions can have a significant effect on business productivity and thus on a city's ability to attract and retain industry and employment. With decentralization, local governments have a wide scope for shaping the investment climate in response to the needs of business. Box 1 reports on evi- dence from city-level firm surveys in China. 6 6. World Bank Reduicing Rural Poverty, 2002, East Asia and Pacific Special Focus. 7. World Development Report 2003, p. 5. East Asia and Pacific Urban Business Directions Box 1. Improving the City-Level Investment Climate in China An i nvestment; I i ma te sLi rxvev cond uc ted in tii e C hinese; ities tShanghai. GLiangzhouu Beijing. Tianjin. and Chengdu I found that firms %% ere more productive and1 achiev ed highet sales growe th and investment rates in cities w%ith better in% estment climates Ln particular. firms did better w% hen the! could hire contract %vorkers tinder flexible arrangements could dra%% on a skilled wvorkborce. and had access to efficient financial ser% ices Firms tended to perfornm less i-el in cities wzith higher lev,els ot corr-Ltion Sex eral ot the v ariable. that made a difference to firms are under the control of local gov ern- ments, they include barriers to entry and exit trom an tndustry. labor skills and tle\ibilit, corruption. and rates ot theft and loss from shipments Such findings enmphasize die potenn al local gov ernments have for enhancing regional grow%th by iniproc ing m .pecific aspects ot the investment climate. For businesses in Chengclu and Tianjin. the lo%%er-rated cite, in the China surxey, estimates suLggest that removing obstacles to in% estment could increase sales grow% th by upt to 1t) percent and o% erall producti' irt b\ a third buirL World Banl. ChLna In. estmenr Clinate A -essmenit i2002i International best practice illustrates actions that national and local governments can take to bolster the local investment climate and improve productivity and competitiveness. Many of these recommendations require cooperation across levels of government, among different local jurisdictions, and between government and the public. They include the following: * Creating national frameworks to guide local officials' economic development efforts and providing these officials with training and technical assistance. * Involving local businesses and the public in the process of crafting city-level economic development strategies, sometimes within a regional context. * Benchmarking government performance against that of comparable jurisdictions in services, regulation, licensing, land policy, environmental regulations, public safety, tax policy, local educational systems (including technical education), cultural and rec- reational opportunities, and trade logistics, ensuring that these "soft" investments are oriented to support the local development strategy. * Providing appropriate infrastructure, including competitive telecommunication and information technology (IT) services, to support the local development strategy. * Recognizing that a healthy, pleasant living environment that includes cultural, recre- ational, and social activities is an important element in attracting high-level profes- sional talent, whether foreign or domestic. * Developing strategies to market the city's products nationally and sometimes globally Singapore takes a very aggressive stance in promoting itself as a place with one of the world's best business environments for enterprise growth. It prides itself on its efforts to change rules that get in the way of business efficiency and has a website, www.cutredtape.gov.sg, that celebrates the steps it has taken and allows citizens and busi- nesses to solve problems by contacting appropriate government offices directly. Singapore, South Korea, and many Chinese cities have also invested heavily in environmental infra- structure and social facilities as part of an explicit strategy to become known as good places to live. They recognize that by improving their social, recreational, and environmental con- ditions, they enhance their ability to attract foreign direct investment and high-level work- ers, both foreign and local. The region is witnessing the emergence of a small but influential middle class of young, well-educated knowledge workers. This phenomenon may significantly increase demand for higher-quality municipal services and a clean and healthy environment. 7 Cultural assets can have a similar effect on business environments. Although cultural heritage preservation is worthwhile in its own right, cultural assets are also an important East Asia and Pacific Urban Business Directions factor in enhancing civic pride and conveying a sense of place for a city, thereby differenti- ating that city from others. Governments are beginning to understand that cultural invest- ments have economic as well as aesthetic value. A recent assessment of global experience with national plans for local and subregional economic development pointed to the following two conclusions: * "Cities and regional economies are now seen fundamentally as economic assets and building blocks rather than as problems and challenges. As a consequence, city and regional economic development is much accepted as a national priority. * In the context of an increasingly global economy, national policies have shifted to being about helping all cities and regions to do better, rather than simply helping the worse off by seeking to redistribute national economic activity and public expenditure from other cities and regions towards them."8 Local governments can tap a good deal of international experience through partner- ships, including that of more than 20,000 local development agencies in OECD countries. Local governments also have opportunities to work cooperatively with economic develop- ment entities in neighboring municipalities and regions. Where public infrastructure services are broadly inadequate, some cities have supported industrial parks to ensure that businesses have the services they need to prosper and gener- ate employment. Key requirements are to guarantee that such facilities have necessary lo- cation advantages and respond to the level, price, and type of services local businesses need. Although properly estimating the potential demand for facilities is difficult, success- ful cases of industrialization can be found in developing East Asia-for example, in coastal China, Thailand (Eastern Seaboard), and Singapore, where industrial parks were initially (and, to a large extent, still are) developed by the public sector.9 However, many govern- ments have invested in industrial parks with poor returns, which has led them to assume that private investment in and management of industrial parks is the most prudent policy. There are many cases, especially in the less developed regions or countries, where partner- ships between the public and private sectors are the only means of moving forward. It is worth noting the harm that poor land management and registration and poorly functioning land markets can inflict on city economic growth and competitiveness, push- ing up the price and reducing the utility of urban land. In the Philippines, the value of land with unclear title has been estimated at US$132 billion, seven times the savings and time deposits in commercial banks.10 Incomplete land registration also causes local gov- ernments enormous losses in forgone property taxes. With half the urban land in Indone- sia and the Philippines improperly registered and with the land records of Laos and Cam- bodia destroyed in civil conflict, the problem is large and especially affects the poor, who are the most vulnerable to exploitation without secure tenure. Land management is also affected by unaffordable planning and building standards, cumbersome dispute resolu- tion mechanisms, lengthy and costly land transfer mechanisms, limited public access to property registers, and lack of planned infrastructure. Relatively low-cost urban land management reforms, along with improved public ac- cess to land information, could reap large economic gains. Singapore, Malaysia, and Hong Kong have highly developed systems for land registration and administration, and Thai- land has recently created a strong land administration system with World Bank technical assistance. The Asian Development Bank (ADB) is also providing assistance in Mongolia, Cambodia, and other countries. Many countries have used private companies under con- tract to develop cadastres and independent property valuations. The problem deserves 8 8. Clark (2001). 9. Webster (2003). 10.De Soto (2000). East Asia and Pacific Urban Business Directions more attention from senior governmental policymakers, and a more intensive effort to solve it would have high returns. Improving Conditions of the Urban Poor and Increasing Access to Basic Services Recent decades have seen a dramatic fall in the number and proportion of East Asians living in poverty. For example, the proportion of people living on less than $1 a day fell from 26 to 15 percent between 1987 and 1998. Growth and the accompanying urbanization have driven poverty reduction in the region. Table 3 indicates that poverty rates in urban areas are typically well below those in rural areas, a finding consistent with the higher productivity and incomes generally found in urban areas. Thus, about 29 percent of the Philippines' urban population lives on less than $2 a day compared with 60 percent in rural areas. People migrate from the countryside to the city precisely because of the opportunity to escape poverty. Nevertheless, although urban income and productivity are high on average, income inequality is higher in urban than in rural areas (see Table 3). Such inequality in a geo- graphically concentrated area is not only socially problematic but also politically explosive. Table 3. Urban Poverty in East Asia (percent) Headcount Index $2/day Country/%aer Urban Rural Total China 1990 25.1 86.7 70.4 1999 11.3 68.4 50.8 Indonesia 1990 52.8 79.7 71.5 1999 49.7 74.6 64.9 Philippines 1988 35.6 70.8 57.4 2000 29.4 60.3 46.5 Thailand 1992 11.3 40.6 31.4 2000 14.7 '42.2 33.5 Share af national poverty Country/Year Urban Rural Total China 1990 9.4 90.6 100 1999 6.9 93.1 100 Indonesia 1990 22.6 77.4 100 1999 30.0 70.0 100 Pnilippines 1988 23.5 76.5 100 2000 31.0 69.0 100 Thailand 1992 11.3 88.7 100 2000 13.9 86.1 100 Source: World Bank data and staff estimates. East Asia and Pacific Urban Business Directions Furthermore, because the urban population is increasing much more quickly than the rural population, the urban share of poverty in overall national poverty will rise sharply; in the EAP Region as a whole, it is expected to rise from approximately 25 percent in 1998 to 40 percent by 2025."1 Therefore, although urbanization assists poverty reduction overall, the poverty that remains becomes concentrated in urban areas and exhibits higher levels of inequality. As a result, policies targeting the specific problems of the urban poor have become more important. Significant numbers of the urban poor live in communities that lack ac- cess to basic services such as piped water, sanitation, storm water drainage, paved foot- paths, and electricity (see table 4). In Vietnam, for example, nearly half the urban poor live in temporary housing with inadequate access to basic services compared with only 38 percent of the rural poor. In the Philippines, the proportion of households living in the poorest housing without services is five times greater in urban than in rural areas. The common assumption is that the poor lack basic services because of their poverty; however, this is not the case. Time and again, surveys of low-income housing and squatter populations indicate that these communities have the resources and the desire to pay for basic services if the government provided them. In fact, the poor often pay high prices for alternatives to these services-for example, by buying water from vendors who can charge ten times the price of water from a municipal tap. The Millennium Development Goals adopted in 2001 include among their targets to "halve, by 2015, the proportion of people without sustainable access to safe drinking wa- ter and basic sanitation" and to achieve "a significant improvement in the lives of at least 100 million slum dwellers" by 2020. Because half of the world's urban residents live in Asia, it bears a significant part of the burden of meeting these targets. Meeting urban residents' needs for access to basic services, land tenure, and environmental quality is a fundamental challenge for East Asia. The multidimensional nature of urban poverty calls for diverse approaches. Key programs for consideration by local officials include the following: Improving Basic Services anid Regularizing Lozv Income Housing. For cities with large, unserviced slum and squatter communities such as Manila, Ho Chi Minh City, or Phnom Penh, slum upgrading can directly improve the lives of the urban poor by providing water and sanitation, storm water drainage, roads or footpaths, and secure tenure (see Box 2). Such programs can have significant benefits for resi- dents' health and social welfare. Monitoring data indicate that improvement in low-income housing increases community pride, reduces crime, and significantly reduces illness and child mortality.'2 Sub-Saharan Africa has the largest percent of its urban population living in slums, followed by South and East Asia (see figure 4). Upgrading programs can also have important economic effects for the residents. Private investment has been shown to rise in low-income housing areas when basic infrastructure and land tenure improve. Surveys indicate that each dollar of public investment in physical improvements in such areas can generate seven dollars in private investment. 11. Kessides (2002). 12. For example, the infant mortality rate in El Mezquital, Guatemala, dropped by more than 90 per- 10 cent and crime rates decreased by 43 percent. In Jordan, infant mortality declined five times faster in low-income communities that were upgraded than in the population as a whole. (Elwan, unpub- lished monograph). East Asia and Pacific Urban Business Directions Table 4. Urban Service Access in Southeast Asia Lacking Piped Water Flush Toilets Electricity Three Services Poor 34 61 68 17.5 Nonpoor 55 89 97 0.6 Source: United Nations Habitat. Box 2: Examples of Urban Poverty Programs The EAP Region has pioneered programs to extend basic serx ices to low-income urban areas Hampung Improvement Program (KIP) For more than 30 vears. the KIP in Indonesia has provided low-incomne neighborhoods wvith wvater suppIv; drainage, pav-ed footpaths, some pax ed roads schools, and health clinics. Since itS inception in 1969, the Kamnpung Improvement Program has spread to 800 cities in Indonesia to benefit almost .30 million people and is among the best urban po% erh relief programs in the wvorld ' iNlassachusetts Institute of Technolog;. "KampUng Improvement Project Ill.' AXail- able at http: 'web.niit.edu urbanupgrading/ upgrading, case-examples ce-I0-iak.htmlI Philippine Community Mortgage Program (CMP) The CNIP is an inno\ati%e program to deal wvith the wvidespread problem or squatting on pri- % ate lands. Under the program, accredited nongov ernmental organizahons organize and train communities to negotiate wvith landoivners to sell the property at a mIUtually acceptable price. The CNIP Fund, established by the government, loans the comnmunit% the tunds necessary to pas the landowvner. Individual fanilies are then allocated plots and repay their share ot the cost of land acquisition to the CNIP Fund1 through individlual mortgages Because of a resource shortage. this program does not include infrastructure impro% ements The WVorld Bank', East Asia and Pacific Urban De% elopment Sector Unit is wvorking vwith the government on a pilot program to provide finding for basic wvater sUpply; drainage. sanitation. and pav ing of some roads and footpaths to familk plots associated wvith CNIP so that these communities can be better integrated into the tabric of the cih. Vietnam Household Sanitation Revolving Fund This fund has enabled 12!0.000 poor households in three cities to have access to properly de- signed in-house t1ush toilets cI.1irLt World Bank .cati Although there is no one-size-fits-all model for providing basic infrastructure ser- vices in low-income areas, experience indicates that those formulating a program should consider the following approach: 1. Adopt a program that works at scale to have an effect. Programs should sys- tematically move from one unserviced low-income area to the next. 2. Prepare a year-by-year financial model for the entire long-term program. Make sure that any national or local financial support is affordable to the govern- ment providing the support and realistic when scaled up to all the communi- ties in the program. Factor in the revenues to be obtained from the beneficia- ries, who should make a contribution toward the cost of land and neighbor- hood infrastructure. East Asia and Pacific Urban Business Directions Figure 4. Slum Dwellers as a Percentage of Urban Population, 2001 Other Developed E Europe ] Oceania - North Africa South-Eastern Asia Latin America Western Asia Eastern Asia South-Central Asia Sub-Saharan Africa 0 20 40 60 80 Percent Source: United Nations Habitat. 3. Avoid standards that are too high and costly. Predefined minimum plot sizes or service levels often raise costs excessively and hinder sustainability. Avail- able resources should dictate initial standards that can be raised over time as resources improve. 4. Minimize relocation and maximize in situ upgrading, which is less disruptive and results in lower costs. 5. Build alliances that involve the municipality, utility companies, the private sector, civic groups, affected communities, and nongovernmental organiza- tions. 6. Take a pragmatic approach to land tenure. Although some projects have been successful without land tenure, such as the Kampung Improvement Program (KIP) in Indonesia, bundling land tenure with service provision provides the basis for long-term transformation of the community and economic regenera- tion. Land tenure gives communities assets that can be leveraged and creates incentives for families to invest in home improvements. Subsidies for land should target those in greatest need. 7. Address the prevention of new unserviced low-income housing areas while dealing with existing problems. This means improving the functioning of the land market, providing the main infrastructure to open new land, and ensur- ing enforcement. 8. Use the program to promote skills development and income opportunities for residents. Skills training associated with the construction can result in resi- dents becoming skilled craftsmen or small-scale contractors. Also, land regu- larization may offer greater opportunities for rental units that can provide significant income. * Targeting Credit Programs. Carefully designed microcredit or other targeted credit programs can help address market failures that otherwise exclude the poor from access to credit, thus supporting entrepreneurship and economic self-help among 12 the poor. Such programs will have the best overall effect when designed to avoid reliance on large, unsustainable subsidies or the creation of disincentives for com- mercial banks to serve the market. East Asia and Pacific Urban Business Directions * Skills Development. Efforts to teach job-related skills can be a useful element of an employment strategy that targets the poor. However, such programs are likely to have a limited impact except as part of a broader vocational training program. Recent efforts to link the design of vocational training programs to the needs of city-level business development deserve more attention. The more complex the skills, such as with technical or IT training, the more likely it is that success will require formal education or involvement of the private sector. The construction sector has traditionally been the largest entry point to the job market for unskilled laborers; it is also one of the sectors most open to newly formed small companies. In many Asian cities, the need for improvements or extensions to small-scale in- frastructure, such as drainage canals and footpaths, is very high, and such projects have high rates of return. Programs that combine training in construction skills, small-scale finance, labor-intensive work, and policies that promote small-scale construction firms can provide positive synergies that benefit low-income tar- geted groups. * Social Safety Nets. Some cities have achieved considerable success with programs that provide access to subsidized social services for the poorest citizens, includ- ing health care, education, and food. In Indonesia, Balikpapan issues identifica- tion cards to poor families who qualify for education and health care subsidies.3 * Scaling Up to Have an Effect. Scaling up urban poverty programs should be a goal of national and local governments. Accomplishing this will require national coor- dination across individual programs at the city level. Standards should be mod- est so programs will still be affordable when scaled up. Designs should be con- strained to fit within specific budget limits. Richer cities will have higher stan- dards-for example, house-to-house connections, a higher percentage of paved roads, wider streets, and even piped sewerage. Poorer cities will have fewer paved roads and perhaps pit latrines for sanitation. Affordable programs are necessary so that cities can expand them over time to all communities that lack basic infra- structure. When cities design such upgrading programs properly, community contributions can help reduce their costs. Low-income families in many countries have shown themselves willing to buy their plot and accept a large part of the costs of land acquisition and infrastructure services if given the opportunity to spread their payments over time. * Managing Migration. An important responsibility of cities must be to manage mi- gration. Although migration itself is not a negative phenomenon, it raises the incomes of migrants and relieves pressure on fragile agricultural lands. It also encourages the illegal occupation of unserviced land. Rather than preventing new migrants from entering the city, management must integrate them into the for- mal system as rapidly and smoothly as possible. Some actions that managers can take are as follows: 1. Develop realistic land-use plans supported by infrastructure development, especially in rapidly growing periurban areas, to lower the costs of planned subdivisions. 2. Avoid requirements for high minimum standards (for example, large plot sizes, waterborne sewerage) that neither the poor nor the responsible local govern- ment can afford. 3. Avoid extravagant subsidies and giving away land. Require habitants of low- income areas to pay for regularized plots. Recognize that plot sales offer a unique opportunity to recover the cost of on-site infrastructure. 13 13. World Bank (2002). East Asia and Pacific Urban Business Directions 4. Protect vacant private land; put vacant public land to use. 5. Reform land administration and property registration to facilitate a function- ing property market. 6. Encourage people to rent rooms. 7. Develop a housing and mortgage market. Because a national framework is so important to local efforts to improve the condition of the urban poor, national officials of regional countries should meet regularly and dis- cuss strategies for scaling up services to the poor in EAP. Although positive programs are under way in Indonesia and Vietnam, other countries are having difficulty developing a long-term, financially sustainable program. National agencies could benefit from a forum that allows them to share experiences and discuss their strategies among themselves and with local governments. An annual conference could be a useful vehicle for countries to discuss the elements and content of programs that lead to scalability and affordability. A conference would also provide an anchor that would support a network of practitioners. The Global Development Learning Network could also encourage government agencies to communicate and learn. Tackling Infrastructure Challenges With the exception of China, EAP countries have been unable to effectively expand their infrastructure to accommodate growth in and around cities. As a result, the price of scarce land that does have services is bid up, raising the cost of business investment as well as housing. In addition, unplanned development that takes place without infrastructure causes severe pollution and environmental damage-for example, to groundwater sources. Retro- fitting infrastructure after development is always much more expensive than planning and implementing infrastructure in line with development. Transport and Motorization Traffic congestion in East Asian cities is legendary; in many cities, travel times to work are among the worst in the world (see figure 5). 14 Traffic congestion affects efficiency and pro- ductivity. In Bangkok, the city with the region's slowest average vehicle speed, the eco- nomic cost of congestion is an estimated 2.5 percent of GDP, excluding the costs of acci- dents and environmental damage. Congestion costs will worsen as incomes rise and car ownership increases. China's national car ownership rate is forecast to increase more than tenfold in the next 20 years-from 10 cars per 1,000 population to 120-130 by 2020. Such an increase in so short a time poses an enormous urban management threat. Although major urban expressway investments can often increase primary road capac- ity (as in Bangkok, Shanghai, and other major Chinese cities), they cannot relieve urban congestion if the lower levels of the road system have inadequate capacity (as in Bangkok), or are badly designed and structured (as in Manila). In addition, in many old cities the secondary and tertiary road network cannot be significantly expanded without intolerable damage to the urban fabric. Most cities in the region have a central core with narrow streets originally built for a nonmotorized age. As they grow, cities must provide enough primary road capacity to handle essential traffic movement efficiently. But to support growth without intolerable damage to city centers or severe environmental degradation, increased road capacity must be accompanied by * Demand-restraint measures, particularly on the movements of private cars 14 * Traffic management measures to use available space efficiently and limit traffic in sensitive areas 14.Gwilliam (2003). East Asia and Pacific Urban Business Directions Figure 5. Travel-time per work trip, 1998 (Minutes) Bangkok Seoul Tokyo = Phnom Penh u Penang Singapore Buenos Aires Dhaka Bangalore Colombo 0 20 40 60 Source: UNCHS Global Urban Indicators Database. * Attractive public transportation alternatives * Adequate allowances for nonmotorized traffic, including walking, to discourage the motorization of short trips. Most large European cities have adopted such multifaceted traffic management plans, giving particular emphasis to efficient public transport. Buses, which handle most passen- gers in the EAP Region's cities, are often inadequate and poorly managed. However, no amount of bus capacity, operational subsidy, or management reform will make buses effi- cient at moving people if buses get ensnared in congested roads. In Asia, Singapore has the most comprehensive approach to traffic management, which includes an innovative con- gestion-pricing scheme that ensures that only the number of cars the roadways can handle will enter the downtown area. A rail system is an attractive mass transit option-South Korea, Hong Kong, and Singapore have well-functioning rail systems. However, because such systems have very high capital and operating costs, they are feasible only in the highest density corridors. Also, unless a dense network is created, rail systems can only carry a relatively small pro- portion of total traffic (10 percent is expected in Bangkok), primarily in the central core. Hence, road systems will continue to bear the main traffic burden. As population densities, incomes, and land values increase in Asia's large cities, and as technology and management experience with rail systems improve, rail will become both economically and financially feasible along selected routes in more cities. Rail lends itself to public-private partnerships. Risk sharing among public and private parties, including shar- ing of contingent liabilities, and competition among potential private parties are key pa- rameters in contracting. Unfortunately, in several cases recent contracting experience has not worked well, and transparency has been an issue in some countries. Involving the multilaterals to support planning and contracting may help. Because of the high capital costs of rail systems, a phased introduction may be war- ranted. Exclusive bus-ways can be built along selected rights of way, with rail intro- duced when it becomes economically and financially justified. Also, recognizing that the infrastructure and rights-of-way costs can be unbundled from rolling stock costs, with the public sector taking more responsibility for right of way and infrastructure (as with roads), can level the playing field between alternative modes. This may also stimulate 15 more interest and more competition among potential private operators of rolling stock, to the benefit of consumers. East Asia and Pacific Urban Business Directions Water, Sanitation, and Solid Waste By 2010, providing clean drinking water to existing and projected urban residents will require an estimated investment of about $20 billion, and providing sanitation will require about $28 billion. Investment in sanitation has lagged far behind that in water. For ex- ample, in the last 30 years, the Philippines has used only 3 percent of its investment for sanitation. Indonesia has sewerage in only seven cities, and even that is only rudimen- tary." Not providing water and sanitation is costly for both the environment and public health, especially among the poor, who have the least access to these services. If urban residents' needs for water are not met, they tend to tap into groundwater aqui- fers-a practice that endangers health and the viability of future water supplies. In Jakarta, residents have depleted the aquifer in the north part of the city, and salinity has risen to hazardous levels. Residents without public sewerage turn to on-site sanitation-a method that is unsuited to areas with more than 200 residents per hectare. In Jakarta, Manila, and other megacities, population density in low-income housing areas is four times this limit. Poorly constructed septic tanks leach untreated waste into the same shallow aquifers from which the self-providers extract water. Public providers of water supply in the region have proven inefficient and unable to raise the financial resources necessary to meet expanding needs. Private providers in Ma- nila and Jakarta have made some efficiency gains, but they have run into contractual is- sues with cities and have had to face the same low tariffs as public counterparts. Govern- ments and multilateral institutions need to give much more attention to institutional and regulatory arrangements, tariffs, methods of procurement, and engagement of concession- aires and financing mechanisms that reduce dependence on foreign exchange. Solid waste management and its modernization have emerged as major problems fac- ing city management. Few cities have adequate systems, causing serious environmental and logistical difficulties and consequent financial and operational burdens. Air Quality and Other Environmental Concerns Traffic congestion also contributes to air pollution and illness. East Asian cities score poorly in several categories of ambient air quality, especially in small airborne particulates caused by traffic. These particulates are the worst health threat, capable of causing widespread and severe respiratory problems. Similarly, rapid expansion of industry has increased the con- centration of industrial waste in urban areas. Information Technology The new economy also demands the presence of new types of infrastructure, particularly in communication. Although IT is not the economic magic bullet that many authorities have recently hypothesized, it is nevertheless increasingly important for modern business and industry. IT can reduce some of the disadvantages of geography and offers businesses in even small and medium-sized cities opportunities to participate in the global economy Cities that embrace and harness IT stand to gain a competitive advantage. Presently, IT infrastructure provision and use differs substantially across the EAP Re- gion, reflecting differences in basic telecommunications infrastructure and the cost of Internet connections." Hong Kong (China) leads in Internet usage, with Korea, Japan, and Singapore following closely. E-government is quickly becoming a means of improving citizens' access to services and information as well as of improving the efficiency of internal record-keeping. E-gov- ernment systems can facilitate payment of tariffs, fees, and taxes and allow easy access to, for example, citizen government accounts through disbursed kiosks. Eventually, e-gover- 16 15.World Bank (1999/2000). 16.Yusuf and others (2001). East Asia and Pacific Urban Business Directions nance will permit better citizen monitoring of service provision and improve accountabil- ity in service delivery. Seoul publishes online its budget and development programs, man- agement performance objectives for each city department, and the results of an annual independent survey of citizen perception of corruption by individual city departments. Although national telecommunications policy is crucial to developing modern systems, the responsibility for implementation, regulation, and public investment increasingly is local. Local IT and e-government policy is a new element that many of the emerging cities of the region must consider. Integrated Planning Approaches for Infrastructure Creating new integrated planning approaches for infrastructure, especially at the provin- cial/regional level, is the strongest tool for channeling growth and shaping urban form into more efficient, less costly, and more environmentally sustainable patterns. Traditional master plans in EAP are typically unrealistic and not taken seriously. They must give way to broad- based strategic plans that prioritize investments and take financial constraints into account. Jabotabek, around the city of Jakarta, and the Cavite-Laguna region south of Manila are two examples of areas where explosive population and manufacturing growth in the periurban areas surrounding a major city have led to sharply increased demands for infra- structure. Almost all countries of the EAP Region have metropolitan agglomerations that require planning across multiple independent jurisdictions. The Province of Jogjakarta is piloting such an approach with Swiss support, developing an integrated urban regional plan that covers not only Jogjakarta but also the towns surrounding the city. To make the needed infrastructure investments, rapidly growing East Asian cities will need to adopt new, more cooperative approaches to planning, including strategies for pub- lic-private partnerships in infrastructure operations. Such infrastructure cannot be planned piecemeal. An integrated approach that is more action oriented than was adopted in the past is needed, along with a coordinated mechanism for implementation. Reinvigorated Urban Planning In some countries, urban planning is officially required. For example, Indonesia mandates all cities to have planning departments (Bappeda) and prepare development plans. But such planning is either rudimentary or results in rigid, unrealistic master plans that are little more than wish lists of investment requirements. In most countries, urban planning is unconnected to the constraints of available financing and rarely involves participation with local private sector and the public. In an era of rapid population growth and resource constraints, realistic prioritization and programming of investments for infrastructure and social development are urgently needed. Decentralization suggests the need for new models of local planning. A number of cities have undertaken visioning exercises called City Development Strategies (CDS) with the help of the Cities Alliance. These are participatory processes involving the private sec- tor and the public that identify key priorities for economic development and poverty alle- viation. Although CDS is just one approach to planning, it has proven to be useful for many medium- and smaller-sized cities. A number of newly elected mayors in the Philippines, for example, have indicated that the standardized approach embedded in the Philippines CDS process helped them better understand how to meet their planning and prioritization responsibilities. This result suggests an important role for national authorities in training local officials in modern planning, programming, and budgeting possesses. Working with the Private Sector In the foreseeable future, private sources will likely provide financing for only a small part 17 of the needed urban infrastructure investments. This is true even in China, where the vol- ume of private finance is large but proportionally less than 10 percent of total infrastructure investment. However, the private sector has an important role to play in introducing inno- East Asia and Pacific Urban Business Directions vation in design and management, especially in infrastructure operation and maintenance. The Asian private sector is a vibrant force in bus transport and solid waste operations, with the public sector providing only regulatory oversight. In other urban services, local offi- cials need to continue with sector reforms, including restructuring and unbundling of ser- vices, developing transparent bidding procedures, and establishing regulatory frameworks to prepare for the time when private-sector involvement will increase. The new frame- works must improve on past practices, which involved poorly designed bidding arrange- ments, inappropriate risk sharing, and hidden contingent liabilities. These practices, exac- erbated by the Asian financial crisis, negatively affected the outcomes of many private infrastructure schemes. A positive development is the emerging ability of domestic private-sector companies to operate and manage infrastructure facilities. In Malaysia, the Philippines, Indonesia, and other countries, local companies are beginning to establish their credentials for operating water and wastewater systems and other services. Public policy that reduces the barriers to partici- pation and competition for service contracts by domestic firms could support this trend. Developing the Framework for Sustainable Urban Finance Few city administrations in East Asia have adequate recurrent revenues to cover their needs for operations and capital investment, and most still lack the incentives to increase own- source revenue. Access to institutions that can provide capital to finance investment in long-term infrastructure, education, and health is also tightly constrained, and local gov- ernment frameworks for borrowing for capital investment are poorly developed. Increasing Local Government Revenues and Improving Expenditure Management Fiscal transfer systems from central government to local governments should provide in- centives for local revenue generation and accountability for local spending. Most govern- ments have systems for transferring funds to the local level through such mechanisms as equalization grants and matching grants for certain priority programs. The amounts of central transfers and the ways in which they are provided can strongly affect the behavior of local officials. In the Philippines, for example, transfers from central government pro- vide more than 60 percent of local resources and are widely believed to be so high that they diminish local incentives to generate tax revenue. In China, central transfers amount to about 45 percent of total subnational expenditures, a figure more in line with those in ad- vanced economies. Further, when a large share of revenue comes from central government sources, the fiscal accountability of a local government to its citizens becomes tenuous. Local governments need technical assistance in revising transfer formulas and in increas- ing their own source revenues through reducing local tax rates and improving collection efficiency. Services should be priced so that they can expand according to demand, public- private responsibilities should be rationalized to increase the efficiency of service delivery, and the framework of intergovernmental expenditure assignment should be improved. Developing a Framework for Local Government Borrowing The capital investment needs of Asian cities are so great that neither government subsidies nor international aid can fill the gap. Greater reliance on borrowing from domestic capital markets will be necessary, and subnational governments need new approaches to help them access domestic savings. (Seeking access to international capital markets is an inappropri- ate step for East Asia's local governments for the foreseeable future.) In the world's advanced economies, borrowing from commercial banks and floating 18 bonds are key elements of local government financing. Most advanced economies also have specialized commercial institutions that compete with local banks for lending to local gov- ernments. Among developing countries, municipalities in the Europe and Central Asia re- gion have the broadest access to domestic bond markets. Local governments in Estonia, East Asia and Pacific Urban Business Directions Hungary, Poland, Russia, Slovakia, and the Czech Republic have all issued domestic mu- nicipal bonds. In East Asia, China's banks provide short-term loans to local governments, but in other East Asian developing countries, commercial banks are not involved and do- mestic bond financing is negligible. (The Philippines, for example, has floated only 13 rela- tively small domestic bonds since 1991.) To access domestic capital markets, local govern- ments will have to demonstrate professional management, positive revenue flows, transparent budgeting and accounting, serious project evaluation, and the ability to oper- ate and maintain investments. To obtain a formal, investment-grade domestic credit rating, they will need to meet even tougher standards. Initially, only the best-managed and best- led local governments are likely to take up this challenge. The time has arrived, however, for all EAP countries to begin formulating national strategies for market-based local gov- ernment domestic borrowing, even if full implementation is years away. It is important to encourage pilots and demonstrations by leading municipalities or local entities and to de- velop local credit-rating agencies with expertise in local government rating. A number of models from developed and developing countries offer potential ways to facilitate municipal borrowing from domestic capital markets. They include bond banks in the United States, provincial municipal financial institutions in Canada, and local govern- ment banks in the Nordic countries of Europe. In the developing world, several specialized local institutions have begun to raise domestic capital for lending to local governments. Financiera de Desarrollo Territorial in Colombia operates by rediscounting and extending the maturity of private commercial bank loans to local governments. In the Indian state of Tamil Nadu, a municipal development fund pooled the borrowing needs and risks of sev- eral local governments and successfully issued a domestic bond on their behalf. The Indian national government is now developing guidelines to support state-level financial institu- tions that will issue pooled bonds on behalf of local governments. Few small and medium- sized governments can tap domestic markets on their own, and such bond-pooling mecha- nisms may therefore fill a market niche. The World Bank Group and other multilaterals can play an important role in supporting such efforts with partial guarantees of local currency bonds and other innovative lending instruments. The objective should be to establish a system in which local commercial banks compete on a level playing field with specialized financial intermediaries (perhaps bond-pooling intermediaries) for local government business and in which larger municipalities also have the option of issuing bonds in their own name. All East Asian countries also need to improve both their transfers from the central govern- ment to local governments and their local revenue generation. No system for local govern- ment borrowing will be scalable without continuous internal reforms in management, tax administration, collection, budgeting, accounting, procurement, and expenditure management. Macroeconomic Implications of Local Borrowing There have been cases around the world-for example, in Brazil and Argentina in South America and the Philippines and Indonesia in the EAP Region-in which local govern- ments, with the implicit support of the central government, have been allowed to borrow amounts beyond repayment capacity. This situation has led to subsequent bailouts by the central government. Sustainable borrowing requires clear rules that limit moral hazard, improve market transparency, and regulate and limit local borrowing. A basic framework is now mostly in place in the Philippines after the local government code of 1991 and is being discussed in Indonesia, but there is no internal agreement as yet on appropriate imple- menting rules in Indonesia. The following principles illustrate the types of regulations that must be put in place to ensure local borrowing is consistent with overall macro stability: * Central guarantees for local borrowing in a decentralized government framework cre- 19 ate moral hazard and should be strictly limited to exceptional cases. There should be no implicit guarantees. Lenders should know that there would be no bailouts after the East Asia and Pacific Urban Business Directions fact in cases of default. * Local governments should not borrow in foreign markets; if they do so in exceptional cases, it must be only with formal central approval. * Central approval should not be required for domestic borrowing, but central pruden- tial rules should mandate strict limits. For example, a local government's total pro- jected local debt service in any year should be restricted to 20 percent of annual rev- enues or a given percentage of property tax collections, and any local government's total stock of debt should be restricted to a certain percentage of the tax base. * Local borrowing and debt service should be subject to central monitoring and auditing and be part of annual public disclosure. * The playing field among market participants should be level so that publicly owned finan- cial institutions do not have advantages that private financial institutions cannot enjoy. Improving Urban Governance and Management Decentralization is changing the patterns of governance and presents a major challenge throughout the region. To respond adequately to this challenge, East Asian countries need an improved national framework for support to local governments as well as programs of reform within local governments themselves. National Level Actions to Support Decentralized Urban Management Many local government officials are newly elected to offices that were previously filled by appointees of the national government. They have little experience and few systems, tradi- tions, or channels of technical support to guide them. In several countries, national-level ministries have been reluctant to cede power, resulting in confusion in service delivery."7 In these circumstances, a critical first step is often for a national government to recog- nize that it plays a significant role in the success of local governments and that it can do much to support and empower them. National efforts to create an incentive structure for local officials to improve the efficiency of local service delivery carry big potential benefits. National governments should therefore develop a proactive framework for national support to local administrations that involves * Clear codification of intergovernmental responsibilities for services and investment and clear sources of finance at each level for these responsibilities * Intergovernmental transfers to promote regional equity, with incentives for local gov- ernments to increase their own-source revenues so they can maintain the link between local spending and local taxation * Regulations and models for uniform and transparent local government administrative systems, including budgeting, accounting, data collection, procurement, and public access to information about government services and activities * Performance standards and independent monitoring and ratings systems that permit benchmarking different local governments against national and international indicators * Professional training programs and technical support for implementing recommended and mandated systems. City-level Action to Support Administrative and Institutional Reform Regardless of what happens at the national level, local governments need to act indepen- dently to improve local management and increase the efficiency and responsiveness of lo- cal services. The first step in improving performance is to put in place local incentives that 20 17. For example, in Indonesia, a recently passed forestry law took back several local government pow- ers on forestry management. East Asia and Pacific Urban Business Directions motivate staff to perform and encourage creativity. Creating expectations of good perfor- mance is a characteristic of strong leadership, but changing incentives may also require changes in local systems, procedures, and structures. Increasing Accountability When decentralization works, local officials are held accountable for obtaining value for money. Accountability improves when citizens participate and are actively engaged in lo- cal government decisions such as planning, budgeting, and service delivery. In some cities of China, Vietnam, and the Philippines, local governments are involving citizens, businesses, and civil society in visioning and priority-setting exercises that subsequently become the basis of budget proposals. Citizen participation is especially important with respect to com- munity-level services. Because funds are generally not sufficient to provide desired stan- dards of services to all communities, citizen participation is essential to determine priori- ties for individual communities within budget constraints. Communities also can sometimes be involved in the execution of the works or the hiring of local contractors. When commu- nities receive training in these matters, evidence shows that they will find low-cost solu- tions and providers. Community participation also often leads communities to contribute their own resources to obtain better levels of basic facilities. Accountability requires transparency in public processes and public access to informa- tion on plans, budgets, land records, and procurement. Several local governments in Indone- sia are creating information offices that provide many forms of information on the local gov- ernment in locations easily accessible to citizens. Data about municipal performance and budgets are increasingly being made available through the Internet, although many mayors worry that making such information available will lead to misuse by political opponents. Improving the Efficiency of Service Delivery •Capacity building to improve the management and efficiency of services must be seen as an ongoing, continuous effort, not an isolated training exercise. One important goal is the em- ployment of professional, qualified staff and officials whose skills are constantly upgraded. Success in urban management ultimately depends on incentives. For example, training and technical assistance are much more effective in government units that offer strong incen- tives and expectations for good performance. Assessing the incentive structure within a local government should, in fact, be the first step in designing a capacity-building exercise. Installation of appropriate systems can leverage the available professional manpower and help create incentives for improved performance. Planning, budgeting, asset management systems, benchmarking performance, civil service reform, management by objectives, and other systems, when tied to increased citizen awareness, can all help increase the incentives for good performance, but a strong and committed leadership is essential. * Asset nmanagement systenms can be useful tools for increasing awareness of the value of municipal assets and the need for proper stewardship. Such systems can improve use of municipal resources such as infrastructure, real estate (including that with cultural significance), and significant equipment and machinery. These systems involve devel- oping asset inventories and information systems, documenting operations and mainte- nance processes for each class of assets, preparing development and use plans, creating maintenance plans, and linking training to the asset management plans. * Performnalce benchmarking against other local and foreign cities can help create stan- dards for municipal service departments to aspire to. For instance, the ADB initiated a pilot benchmarking scheme in six municipalities across East Asia in 1999. This led the ADB to conclude that benchmarking can successfully drive change."8 South Korea has 2C 18. Cities included Cebu City, Colombo, Kuantan, Shanghai, Bandung, and Surabaya. See Harmid (2000). East Asia and Pacific Urban Business Directions established independent panels to rate the quality of its public institutions and pro- duce a report card on their services. Building Civic Awareness and Forming Partnerships to Reduce the Burden Programs to build civic awareness and to educate citizens about services and their own responsibilities in improving conditions in their communities can be essential elements to improving the efficiency of services. Solid waste disposal is probably the best example in which citizen cooperation in managing household waste removal and proper disposal in designated areas can greatly reduce costs. Because of the complexity of modern towns and cities, partnerships are an essential, although neglected, mechanism for improving effectiveness. Municipal governments tend to perform in isolation of the economic and social groups active in the city. Governing rap- idly growing cities and towns in EAP and delivering services efficiently is an enormous challenge for local officials. Newly empowered city governments cannot do everything themselves; indeed, they may need to shed responsibilities to become more efficient. Rely- ing on the private sector for revenue-earning enterprises (such as markets or slaughter- houses) and on civic groups can enhance their performance and efficiency. Contracting out to neighboring municipalities or forming regional service delivery institutions is common in Europe and North America and can be an effective way to achieve improved efficiency and economies of scale. Adapting the Institutional Structure Once a government has determined its core priorities, there may be opportunities for rede- signing institutions to support these priorities. Key ingredients are typically unbundling ser- vices to allow the use of outside providers, improving the regulatory and legal framework, and modernizing management structure. In Indonesia, for example, Bandung has reduced the number of its departments from 57 to 41, and in the Philippines, Cabantuan City has halved its municipal workforce and is using the freed resources for investments in infrastructure. Engaging with Networks Today's knowledge-based economy requires cities and businesses to be open to new ideas and information. Cities can benefit from joining networks such as local and international associations that share knowledge and ideas for enhancing business, culture, and social life. An example of this is the Cities Alliance, a global partnership dedicated to eliminating urban poverty. The development community can do more to enhance local training institu- tions and local professional societies. Managing Metropolitan Areas The phenomenal growth of urban population has led to the formation of many large metro- politan agglomerations that extend over the jurisdictions of numerous local governments. Because not all services can be managed effectively within the boundaries of individual jurisdictions, the need to consider metropolitan-level governance is becoming ever more urgent. Decentralization laws that inevitably give power directly to municipal and city governments exacerbate the difficulties because typically no attention is given to the needs of the metropolitan and urban regional-level governments. As a result, a crisis in gover- nance of larger urban regional scale infrastructure networks is leading to inadequate trans- portation, land-use planning, water supplies, and drainage. New forms of institutional management are required. Other regions, including Europe and the United States, have tried different models without consensus on a single best approach. The different models 22 range from (1) creating special districts to deal with specific services across jurisdictions, (2) annexing and consolidating to form a unitary government, (3) creating a federal two-tier structure of metropolitan government over multiple local districts, and (4) encouraging voluntary cooperation among local governments. Each approach has its advocates, and East Asia and Pacific Urban Business Directions local politics and traditions play a large role. Central encouragement is inevitably neces- sary. What is important is that the national and local levels show leadership in developing a country-specific solution that will lead to joint benefits. 23 East Asia and Pacific Urban Business Directions PART II. WORLD BANK URBAN BUSINESS PRIORITIES IN EAP Regional Response to Key Challenges The Current World Bank Urban Program in EAP The World Bank's EAP urban development unit covers development themes ranging from community-driven basic service delivery and microcredit projects that address urban poverty, to water and wastewater projects, to economic sector analysis that supports economic growth, to the development of strategies for cities. Within this range, the three major lines of urban business in the larger countries have been environmental management and utility reform, urban poverty, and municipal development. In the smaller IDA countries, the focus of the Bank's work has been on water supply and achievement of the water and sanitation MDGs. Urban Environmental Management Programs Environmental management has been the largest area of activity primarily because of the program in China. Projects in China center on water resources management, sewerage, wastewater treatment, solid waste management, and air and industrial pollution control. Chinese clients have greatly appreciated the World Bank's urban work in China, and the Bank's financing of environmental infrastructure has helped China develop modern tech- nology and policies covering, for example, river basin management, user charges, and corporatization/privatization of utilities. China's cities are making large investments in sewerage and drainage, and there is a high level of demand from China for Bank support for environmental management. In most other countries, the huge financial cost of sewerage has prevented implementation of more than a few isolated systems, primarily in city centers and affluent neighborhoods. Drainage and flood control is seen to be a more immediate priority than sewerage in many countries, especially Indonesia, Vietnam, and the Philippines. In Indonesia, the Bank has financed drainage and flood control in cities through integrated urban infrastructure de- velopment programs (IUIDP). In the Philippines the Bank has used city-specific develop- ment projects to support these efforts. In Vietnam a series of important environmental sani- tation projects is under way. Urban Poverty Programs The EAP Region has extensive, positive experience with sustained, targeted programs to improve the living conditions of the urban poor. The Kampung Improvement Program (KIP) in Indonesia, for example, has received international acclaim (see box 2). More recent urban poverty programs in Indonesia respond to new country circumstances following the 1997 financial crisis. If Indonesia's central government, local governments, and communities can agree on how to finance these programs, they may be scalable to have a nationwide effect. Vietnam has made good progress recently in starting a program of upgrading low-income areas with an emphasis on sustainability and affordability. In the Philippines, the Bank helped develop important slum-improvement programs that lasted about 10 years, but in the late 1980s the government prematurely abandoned these pro- grams, and the number of squatter areas increased significantly. In many countries, a large amount of urban land is informally occupied and has no clear title or is tied up by squatters, which inhibits normal development and also diminishes municipal tax revenue. Programs to provide services and regularize tenure in those areas 25 would have strong social and economic benefits. There is high continuing demand in Indo- nesia and Vietnam for providing and improving basic services in low-income areas and East Asia and Pacific Urban Business Directions potential demand in the Philippines, Mongolia, Cambodia, and Laos. A learning and inno- vation loan (LIL) is being prepared in the Philippines to test whether the country can make a new start. However, no clear policy exists at the national level in the Philippines. Municipal Development Programs Supporting Small and Medium-sized Cities Municipal development projects aim to support a wide range of priority infrastructure in towns and cities along with various municipal management and policy reforms. The princi- pal vehicles for municipal development programs in the region have been the IUIDP projects in Indonesia and the Municipal Development Fund (MDF) series in the Philippines. * The Indonesian IUIDP projects were managed at the provincial level and were directed mostly by the national department of public works. They financed various types of infrastructure and provided significant technical assistance to local governments. The projects improved urban conditions in many Indonesian cities. However, the high de- gree of centralization of the program at the provincial government level limited the effect on improved city management. The Bank lent funds to local governments through subsidiary loan agreements, but the local governments pledged no collateral, and loan repayment rates were very poor. The need for infrastructure in cities and towns is high throughout Indonesia, but a significant Bank program will require developing new institutional and financial channels. * The MDF projects in the Philippines began in the early 1980s with the establishment of the MDF revolving fund. At the time, the MDF was seen as a simple pass-through insti- tution for retailing loans from the Bank and other donors. This limited mode worked well for the first 10 years. With strong collateral in the form of an intercept pledge of national flows to borrowing local governments, nonperforming loans are essentially zero. In the late 1990s, the MDF, renamed the Municipal Development Fund Office (MDFO), was reorganized as a department within the Department of Finance (DOF) and became caught in a budget squeeze that restricted staffing and lending. The MDFO never lent at a scale large enough to affect overall urban conditions in the Philippines. Only by giving the MDFO an adequate asset base and restructuring it to make it more commer- cial and entrepreneurial can it meet local needs for infrastructure investment. A paral- lel effort to assist local governments with project preparation is also a high priority. Local intermediaries are clearly needed to support the huge demand for local govern- ment borrowing by small and medium-sized cities in a decentralized administrative sys- tem. The models developed in the past in Indonesia and the Philippines were convenient for retailing Bank lending but were not integrated into local financial markets and did not contribute to sustainable municipal finance. New models are urgently needed. Small Country Programs The small countries of the EAP Region, Mongolia, Cambodia, and Laos, have major infra- structure deficiencies, poor land management, limited resources, and limited capacity for urban management. To date, the Bank has lent only for urban water supply and sanitation projects and has focused on helping these nations achieve the Millennium Development Goal (MDG) for clean water and sanitation. Models for moving from water issues to a broader range of urban infrastructure projects and technical assistance have yet to be developed. New Approaches Needed to Respond to the Challenges of Urban Transition Facing the Region 26 The urban group of the Bank is already engaged in significant urban environmental man- agement programs and urban poverty programs for which methodologies are reasonably well established. But the rapid economic and demographic changes in the region and the East Asia and Pacific Urban Business Directions huge increase in responsibilities thrust on local governments that were discussed above in Part I urgently require a new response from the Bank in four areas: * Developing the framework for sustainable urban finance to support lending to small and medium-sized cities * Improving metropolitan infrastructure provision and periurban development of large and mega cities * Improving the business climate in cities for economic growth and job creation * Strengthening the institutions required for improved urban governance and urban management under decentralization Developing the Framework for Sustainable Urban Finance To date, the EAP group's municipal finance work has emphasized helping local govern- ments improve their financial position through reforming property and other tax adminis- tration, raising tariffs, and improving accounting and budgeting systems. Improving accountability for expenditures and increasing internal resource mobilization are two of the most important steps to help local governments develop sustainable finance systems. Improving the planning and implementation of projects as well as the overall quality and transparency of budgeting and accounting is critical to obtaining local support for larger investments. Also, except in China, national fiscal transfers are far too high as a per- centage of total local revenues, and this dependency further decreases the accountability of local officials to citizens for expenditure decisions. Measures for revising the formulas gov- erning intergovernmental transfers must be devised. Bank operations should emphasize and reinforce project components that improve the overall quality and transparency of project planning and execution, enhance budgeting and accounting procedures, and increase local revenues. Developing a framework for borrowing in domestic currency that enables local govern- ments to carry out their investment obligations would support decentralization. Sustainable borrowing by local governments eventually requires access to domestic private banking and capital markets without central guarantees. Dependence on national subsidies or on foreign borrowing, even from multilaterals, is not a long-term solution. EAP countries are at very different developmental stages, and no country in the region is ready to move directly to full market-based finance of local investments. However, the Bank now has an opportunity to help regional governments, especially China, the Philip- pines, Indonesia, and Vietnam, develop their own country-specific strategies to increase access to domestic banking and credit markets and to help identify the step-by-step mea- sures to take. As local conditions improve, the Bank should increasingly use its financing to leverage private domestic capital. The long-term goal is to make progress in three ways: Developing local, market-driven institutions that issue local clurrency bonds to finance investments by local governments. As the local capital market develops, private banks will begin lending to local governments. But experience indicates that banks alone are rarely sufficient to deal with local government borrowing needs. Specialized institutions that aim to mobilize domestic currency from capital markets through domestic bond issues for on-lending to local governments can also play an im- portant role. These institutions must have capitalization and lending policies that provide the safety and security necessary to attract pension and insurance 27 companies interested in longer term investments. This will help to foster compe- tition and lead to extended tenor and reduced interest rates. Specialized interme- East Asia and Pacific Urban Business Directions diaries that can do this are particularly useful to small and medium-sized local governments that would not have access to capital markets on their own. There are many market-driven intermediaries for local government finance in the United States, Europe, and Canada that can serve as models. Multicity projects that use an intermediary for wholesaling Bank lending can be candidates for initiating a dialogue on market-driven reforms. In the Philippines, both the MDFO and the Local Water Utilities Administration (after reform) are potential intermediaries for raising money in local markets. In Indonesia, although studies have identified the outlines of a broad national framework and analyzed the criteria that an intermediary would need to fulfill, the central government is not yet ready to establish a suitable intermediary. Progress will require the in- volvement of the entire World Bank Group. The Poverty Reduction and Economic Management (PREM) unit should help develop the domestic capital market in- frastructure (with regulatory, tax, and national prudential guidelines), and the International Finance Corporation (IFC) could provide financial support to local financial intermediaries with either equity or nonsovereign loans or guarantees. The Bank may also consider using unconventional instruments such as partial guarantees or other credit enhancements of domestic bonds floated by local mu- nicipal financing institutions. Sector adjustment operations may be useful. * Supporting larger cities or grotups of cities that wish tofloat bonds in their own names. The purpose of such support is not only to raise needed funds but also to de- velop the domestic market for municipal debt by creating pilot operations. In China, the Shanghai adaptable program loan (APL) is the first Chinese project that will test the readiness of the central government to tap domestic markets for environmental infrastructure. Ho Chi Minh (HCM) City is also in this category. Project-specific bond market offerings by affluent local governments in Indone- sia could be considered pilot programs to test the market's appetite under cur- rent circumstances and identify constraints. In most cases, to introduce cities to the local market, the Bank would need to help develop credit enhancements that provide an attractive credit structure without relying on higher level govern- ment guarantees. * Leveling the playing field amongfiniancial institutionis and removing disincentives for commercial banks to enter the market. A balanced system of local government fi- nance will feature local bank lending as well as bond finance. Identifying the constraints, removing disincentives, and developing prudential regulations for banks to enter the market is currently a priority in the Philippines and will be a priority in other countries in the next several years. Using World Bank guarantees and loans in innovative ways in selected countries could help test the market. In several countries, local governments and intermediaries should use pilot operations to test innovations that involve floating domestic and pooled bonds. Such measures should be considered even when the preconditions for a long-term system are absent. Raising domestic capital for infrastructure projects is an issue that goes beyond private sector involvement. The desirability of using domestic currency financing for infrastructure does not depend on the operator being a private entity. Use of domestic capital reduces for- eign exchange risk for infrastructure projects (unless revenues are also in foreign currency). Even for a publicly managed utility, private domestic capital is more suitable than public fiscal resources because the availability of public capital is very limited and the use of private capital is more sustainable. Achieving the advantages of private capital without burdensome 28 public sector contingent liabilities is a challenge that needs to be addressed in specific cases through corporitization, special purpose companies, and public-private partnerships. East Asia and Pacific Urban Business Directions Establishing market-driven financial intermediaries will also facilitate expanding Bank support to small and medium-sized cities and towns. The Bank's EAP group does not have the staff to work directly with the many small and medium-sized towns that need support. The Bank and other institutions providing aid need an efficient local intermedi- ary that would identify, appraise, and supervise projects. Establishing such intermediaries requires a clear, longer term business development strategy that identifies the steps in a possible future transition to a market-driven institution along the lines described above. Improving Metropolitan Infrastructure Provision and Periurban Development of Large and Megacities In recent years, Bank support to large cities and megacities in the EAP Region has been lim- ited to China and aimed primarily at urban environmental improvements. Shanghai is the best example, long-term, but the Bank also has a history of support to other large cities in China. Several of China's larger cities are moving toward comprehensive development plans that include periurban districts. The Bank is supporting these efforts and is helping China develop policy on the relationships between central city and suburban districts (for example, in Shanghai and surrounding districts and Chongqing and its surrounding districts). The Bank has not tried to address these issues in other EAP countries because the prob- lem has been seen as too complicated. The issues of multiple jurisdictions, a lack of a politi- cal/institutional framework, and large financing requirements are among the concerns. However, metropolises like Greater Metropolitan Manila, Jakarta, Hanoi, and HCM City are the engines of national economic growth, and each metropolitan area is adding to its popu- lation the equivalent to a new medium-sized city every year. The built environment that corresponds with that growth will affect the economy and the population for many decades. Tackling at least one large conurbation outside of China, to help clients develop a method- ology that covers planning, finance, and implementation of integrated infrastructure and metropolitan management, should be a priorityfor the Bank. Helping clients address the infrastructure problems of a large conurbation in an inte- grated way will be a major challenge and will require long-term engagement of senior Bank staff and management from several sectors. Necessary large-scale planning exercises will involve difficult trade-offs and policy decisions about land use, institutions, tariffs, taxes, and fees. It will require a large lending program to support it, and the Bank will need to cooperate with other institutions. While there are no straightforward models to offer on metropolitan governance, the Bank and its partners could provide information on approaches used elsewhere and advice on how to customize them to local circumstances.19 If tied to a long-term lending relationship, such advice would allow investments to be planned and implemented while gradually making adjustments to long-term plans based on experience. Urban transport is the most important element of infrastructure provision because of its effects on land use and overall business efficiency. In a city's central core, where development has already taken place, demand manage- ment and improvements in traffic flow are the key urban transport requirements. Some cities with inadequate transport structure will also require mass public transit and even new urban highways. In the underdeveloped periurban areas a different approach is needed. During rapid population growth, the provision of roads and other urban transport strongly influ- ences land use and dictates where development takes place. Planning and implementing new roads and public transportation in conjunction with drainage, power, water, and sani- tation from the beginning, will result in huge savings over the cost of retrofitting such 29 19. Webster (2003). East Asia and Pacific Urban Business Directions investments after development has taken place. The start of road construction is often the catalytic event for development. An integrated planning approach therefore would have metropolitan transport as the centerpiece. A program to rationalize infrastructure provision in a large agglomeration would be too large for the Bank to manage alone. The Bank should form a partnership with bilateral institutions and with the Asian Development Bank (ADB). Although the effort required for partnering with bilateral institutions and the ADB will be substantial, the potential positive economic, social, environmental, and institutional ben- efits are huge, and partnering is a precondition for success. Providing clients with support in urban land management needs to go hand in hand with other elements of metropolitan management. The region has supported important efforts to improve transparency in property rights and to modernize land administration systems in Thailand, Cambodia, and Indonesia, but less attention has been devoted to the specific problems of urban land management. Al- though roads and other infrastructure are the most effective instrument for shaping urban land use in the EAP Region, improving the efficiency of the urban land markets through better titling, registration, adjudication of disputes, public access to records, taxation, and development fees will reduce the costs of land development for commercial, public, and residential purposes. Among the urgent matters that must be resolved are the huge back- log of land registrations and the development of a modern land titling system in Vietnam and Cambodia, and the resolution of property rights in squatter communities in the Philip- pines. Improved land management is also a precondition for alleviating the negative side- effects of migration to cities. The rural development unit of the EAP group should be con- sulted about land management components of urban projects so that they will complement dedicated land management projects. Improving the Business Climate in Cities for Economic Growth and Job Creation The PREM Department of the World Bank's EAP Region has administered several assess- ments of the business environment in EAP countries that consider the national legal frame- work, policy environment, regulatory framework, and institutional issues that support or hinder business development. However, the Bank has not yet made much progress in help- ing clients improve the business climate at the city or local level. Local laws and regula- tions, land policy, infrastructure, and supporting institutions play an important role in busi- ness efficiency. Work on this topic at the city level would require a joint effort between the Bank's urban development unit and PREM. Although considerable uncertainty persists about the most effective approaches and even about the likelihood of success, clients and staff express strong interest in improving local business environments. Pilot efforts to sup- port clients in this endeavor should be a featured element of the business strategy. China houses the most advanced program of Bank support to local government eco- nomic development. Most Chinese cities already have economic development plans. Al- though these plans are heavily oriented toward physical improvements, local officials are strongly motivated to incorporate economic growth considerations in these plans. In the Chinese administrative structure, decentralized units are expected to promote national growth, and Chinese mayors are partially evaluated by how successfully they develop their cities' economy. Although the administrative structure of other countries is different, the Bank can work with central governments to develop monitoring and incentive struc- tures aimed at increasing the local economy and increasing jobs. 30 The Bank's role in developing local economies would lie especially in making it more par- ticipative, helping identify the legal and regulatory reforms needed to promote economic growth in cities, and providing targeted infrastructure. East Asia and Pacific Urban Business Directions The Bank's EAP group has been advising Chongqing on regulatory, institutional, train- ing, and policy measures designed to improve the city's business climate and promote eco- nomic growth. The group has helped Shanghai implement its strategy, which explicitly recognizes that the city needs to cultivate a reputation for a healthy living environment if it is to attract high-end international investment. The Shanghai APL supports a set of envi- ronmental improvements that are key part of the city's economic development strategy. The EAP group has also helped selected EAP cities develop local strategies for business and employment growth through City Development Strategies (CDS). These exercises have helped local officials formulate a participatory process for working with private businesses and civic groups to assess their competitive strengths and work out a vision and action plan for economic development. More national governments should be encouraged to help their cities, especially those that are large and economically important, to develop individual strategies for economic growth and job creation. For those cities that adopt local economic development strategies, the Bank could consider a pilot project that supports regulatory policy and institutional reform, priority infra- structure development, and complementary measures such as vocational training. The policy work in Chongqing may lead to the first project with substantial support for improvements to the local business climate. In the Philippines, a CDS project is being pre- pared that would finance priority investments and local reforms agreed upon in about 40 cities through a participatory planning process. In Indonesia, the reform project for local urban governments would use a CDS-style planning exercise to identify needed institu- tional and policy reforms and targets for investment finance and capacity building. There also has been a small but interesting attempt in Indonesia to conduct a regulatory audit and stocktaking of the urban business environment. Although this stocktaking is not yet com- plete and its potential impact is unclear, this exercise should be attempted in other places to develop a broadly applicable methodology. Because there is no established model for such Bank lending products, these products will evolve over time and can be defined only by experience. Some possible elements to consider are those listed in Part I: setting up national frameworks; crafting city-level eco- nomic development strategies; benchmarking against the performance of comparable ju- risdictions; creating targeted infrastructure to support local development strategy; provid- ing outlets for cultural, recreational, and social activities to attract high-level professionals; and marketing the city's products. Although most mayors in the EAP Region have a keen interest in job creation, they have little experience to draw on, little understanding of the options and priorities (especially with respect to improving the business climate versus direct intervention), and overly opti- mistic expectations about the timeframe and scalability of programs. Often their attention is focused on small-scale, cottage-industry plans with little hope of replication. Consider- ing the success of EAP's cities as platforms for modern-sector business development, the Bank's urban development unit should shift the focus of city managers to economic growth management. This can be done partly through project preparation. Considerable capacity building and TA will be required. Strengthening the Institutions Required for Improved Urban Governance and Urban Management Under Decentralization All EAP urban development projects include some element of institutional development and policy reform aimed at improving urban governance and improved service delivery. The Bank has succeeded in specific sectors, such as environmental management, in help- 31 ing cities achieve important and sustained institutional reform. However, overall city man- agement is much more complicated, and there are few examples in which the Bank has East Asia and Pacific Urban Business Directions supported overall improvements to urban management and service delivery It would be unreasonable to expect any program by multilaterals or bilaterals to significantly improve a client city's overall management of service delivery in the short term. However, serious efforts to develop successful approaches and learn from past sector-specific efforts are im- portant. In China, the considerable improvements in the governance of water and sewer- age through measures such as corporatizing public utilities, improving tariff setting, and establishing water resources management institutions offer important lessons for other coun- tries. In the Philippines, mayors credit involvement with CDS exercises with changing the way they do their jobs. In other countries, Bank projects have improved the monitoring of environmental impacts and community-based planning. Different approaches will be necessary in programs of support to large cities versus small and medium-sized cities. The most reasonable approach by the Bank to institutional development in large cities is to expand from success in institutional performance in one sector to other sectors. Continuity and long-term, direct engagement with local municipal leaders to earn their trust and share knowledge about options and global experience will be necessary. Municipal governance is about making policy and developing institutions. Re- peated projects with the same local governments develop relationships and encourage a sophisticated dialogue. Long-term engagement in selected cities and provinces has worked well in China and Vietnam. In other countries, the Bank's work on institutional develop- ment has been more ad hoc, involving one-off projects in a city or province. In small and medium-sized cities, where direct engagement by the Bank is impractical, success requires support to local institutions that can wholesale knowledge. So far, Bank support to local intermediaries in the region has not been very successful in promoting urban management improvements. MDFO in the Philippines is the most advanced inter- mediary in the region, and although the World Bank's Operations Evaluation Department has stated that MDFO has a positive effect on local government performance, its influence in urban management and capacity building has been small. MDFO is primarily a lending institution, and lending institutions cannot bear the burden of institutional development alone. Other local centers such as universities and government training centers must play a greater role. Bank projects should include support for such local institutions. Whether directly or indirectly through local institutions, the key principles that the World Bank's urban development unit will pursue to improve governance, urban man- agement, and service delivery are as follows: * Working at the national level to develop national programs in support of decentralized manage- ment (see Part I, section III-E). * Modernizing systems that improve transparency and improve citizens' understanding of the quality and efficiency of local government services (such as public procurement systems, public disclosure policies, licensing, bill paying systems, and performance benchmarking). E-governance can be promoted as a vehicle to improve transparency and efficiency of citizen interaction with local government. This will be tried in the Indonesia Urban Sector Development Reform Project (USDRP). * Linking Bankfinancial support to incremental improvemenits in city performnnce. Bank sup- port can link to two types of city performance improvements: service delivery and economic growth management. The former will be easier to measure, but local officials will need to recognize the importance of economic growth and the levers under local control. The Bank can also support programs to improve incentives and accountability by encouraging specific performance agreements between national (or provincial) lev- els and towns and cities as well as between town or city levels and individual service departments. Having cities that receive Bank support agree to performance monitor- 32 ing would be a good first step. The proposed Indonesia USDRP is the primary testing ground for this technique. An adjustment loan for urban infrastructure and urban man- agement performance might be considered in several countries including the Philippines. East Asia and Pacific Urban Business Directions * Ensuirinzg that capacity-building support is availablefor enoughi tinme to make a difference-that is,from initial design to completed systems. * Creating local centers of excellence in support of local capacity building. Long-term support will require working with local institutions to build centers of excellence in govern- ment practice, such as local government training academies and associations to im- prove local wholesaling of support to local officials. It will be necessary to identify and support at least two candidate partner institutions in the next two years. In addition to direct support, the Bank can help link these local institutions to international institu- tions. World Bank International (WBI) will develop a partnership with the Global De- velopment Learning Network. * Using analytical and advisory activities (AAA) to support better urban governance and better urban maniagemnenit. AAA is needed to review experience in capacity-building efforts and to develop long-term strategies for specific countries. EAP's Urban Development Objectives Objectives The long-term goal of the EAP Region's urban development unit is to work closely with clients as trusted partners over an extended period to help them create a sustainable urban development path through major economic, demographic, and decentralization transitions. This goal requires the Bank to help clients in a multifaceted way in response to the chal- lenges discussed above. The key objectives are to help clients achieve the following * Develop a framework for sustainable finance of local government investments that includes local market-based financial intermediaries to support to small and medium- sized cities. * Tackle the infrastructure needs of rapidly growing metropolitan and periurban areas including both urban environment and urban transport investments. * Improve the conditions of the urban poor and their access to basic services. * Enhance the local investment climate to promote economic growth and increase employment. * Improve urban governance and management. Although the objectives will vary depending on the needs of each client, two areas will be the most important in the next five years: improving urban governance and manage- ment and developing sustainable frameworks for local government finance. The Bank's previous work in all the region's countries suggests that a sustainable development path that results in improved infrastructure, better urban services, economic growth, and provi- sion of basic services to the poor depends on improving the capacity of local government management and on generating new approaches to financing priority needs. Both factors require more thinking and analysis on the part of the Bank, its partners, and its clients. The Bank's EAP urban group will make a special effort to help clients achieve these objectives over the next five years. Although its success is not assured, EAP's urban lending pro- grams, teclnical advice, and AAA will serve as platforms for this effort. Progress will re- quire that country-level strategies be agreed upon internally with country teams and with other units such as Poverty Reduction and Economic Management (PREM), World Bank Institute (WBI), Human Development (HD), and Rural Development (RD), which will play complementary roles, and externally with government counterparts. It will also require the selective use of newer instruments such as sector-adjustment loans, local currency loans, and perhaps partial guarantees. The IFC and other institutions, including bilaterals and the 33 ADB, should be partners. A sustained approach to partnering and a revitalized program of AAA is needed. East Asia and Pacific Urban Business Directions Key Business Lines to Support the Strategy In all countries, the Bank will continue to finance infrastructure and basic services that city clients urgently need. The Bank needs to help where it can while at the same time maintain- ing in each country clear, long-term goals, which it advances bit by bit through each opera- tion. The main business lines are described below. Single-sector Urban Projects These would include such projects as environmental management (with components such as sanitation and sewerage, solid waste management, drainage, urban air pollution control, industrial pollution control, and/or river basin management) and urban transport (with com- ponents such as traffic and demand management, urban mass transit, urban roads, and/or facilitation of nonmotorized traffic). Single-sector projects can support individual large cit- ies or multiple smaller cities. In the latter case, the Bank would take the opportunity to develop or improve the functioning and financial operations of a local intermediary. In both cases, the projects could be vehicles for improving the municipal finance framework, urban governance, or urban management. Municipal Development/integrated Urban Infrastructure Projects Although the EAP group has not attempted recently to use a comprehensive analysis of city priorities to support a lending operation covering a wide range of municipal infra- structure for large and important cities, this will now be part of the agenda. In particular, the EAP group will attempt to launch a pilot operation to tackle a mega-city and its periurban hinterland in partnership with others. The government of Vietnam has informally sug- gested that Greater Metropolitan Hanoi might be a candidate. Any such projects would also address urban governance and management objectives. Municipal Financial Intermediaries for Lending to Multiple Cities, Especially Small and Medium-sized Cities Local specialized financial intermediaries or municipal development funds are useful not only as vehicles for the Bank to leverage its staff in work on small and medium-sized cities but also as part of the long-term financial framework for local government finance. Provision of Basic Services to the Poor This traditional line of business will have an explicit objective of scaling up impact through citywide and national programs. Regional/provincial Development Projects Many countries have expressed an increased interest in regional- and provincial-level plan- ning and project development. In principle, such projects can be opportunities for the Bank to support the objectives of the strategy However, regional development efforts would normally require a series of projects to consolidate success in a province or region. As a practical matter, to avoid implementation complexities, any particular operation will focus on only one or two objectives. Implementation Measures As Table 5 illustrates, some of the elements of the strategy will require the development of new approaches, or will require moving forward in areas where there is a model but where there is not yet a track record. Implementing the strategy will require a departure from 34 business as usual. It will require a series of measures including: improving internal pro- cesses, developing close working relationships both within the World Bank and with other East Asia and Pacific Urban Business Directions Table 5. The EAP Group's Experience Across the Five Objectives Is there an Objective avaflable rnodel? Track record? Country programs Improving sustainable finance and Yes No China. Vietnam and access to domestic banking and credit the Philippines markets and developing market-oriented intermediaries for small and medium- sized cities. Comprehensive provision of No No Some projects in infrastructure to metropolitan and China: for example. in periurban areas of megacities. Shanghai. but emphasis is on environmental infrastructure. Improving basic services to the poor. Yes Yes Vietnam. Indonesia. Philippines. Mongolia. Improving the business climate for Some lessons learned No Just starting in China. economic growth. from experience in industrial countries Improving governance. urban Only at the sector-specific There have been some Some efforts under management. and capacity. level significant way in Indonesia and achievements in China individual sectors-for example. in water ulilities. Source: World Bank, East Asia and Pacific Urban Development Sector Unit. institutions, increasing the knowledge base, working with smaller countries, developing a communications strategy and monitoring progress. Improving Internal Processes * Location of staff. EAP has already decentralized staff to resident missions in China, Indo- nesia, Philippines and Vietnam, and has benefited from the close contact that its senior staff have with clients. This can be further reinforced with consideration given to the creation of a regional hub, possibly located in China. It may also be possible to use each existing resident mission as a minihub. Vietnam, for example, could be the hub for Cambodia and Laos, China for Mongolia, and Indonesia for the Pacific Islands. * Simplificationi of projects. It will be necessary for EAP to initiate substantial policy and country-level planning initiatives to implement the recommendations in this report. Although the planning and reform program will be complex, it is possible for indi- vidual projects to be simplified. A series of small projects, each designed to incremen- tally advance a business objective in a country, is preferred over a single large project. Program loans, sector adjustment loans, and SWAPs can be an effective way to support a country willing to undertake a program of reform. Complex projects cannot be avoided entirely but should be kept at 20 percent of the portfolio. * Skills. The new business directions require skills in urban economics, urban planning, urban environmental planning, and local government finance. The immediate priority 35 is to strengthen finance skills. East Asia and Pacific Urban Business Directions * Internal Partnierslhips. Internal partnerships are essential to delivering the highest qual- ity support to clients. The PREM unit plays a key role in intergovernmental finance issues and in efforts to develop domestic capital markets. This is complementary to the urban unit's interest in city-level financial improvements and models for borrowing for finance of subnational infrastructure. The rural development group is a natural part- ner to deal with urban rural linkages, land issues, and some issues of subnational gov- ernance. Problems of air and water pollution can be dealt with in partnership with ENV, and work on metro and periurban infrastructure need to be tackled with the Trans- port and Energy units. IFC will be an increasingly important partner as local-level private operation of services becomes more established. Partnering with Others Partnerships with others have proven hard to sustain at the operational level but are critical to the success of key elements of the Bank's strategy. Many staff members believe that part- nerships with bilaterals and with the ADB are useful and have worked hard to nurture them. To date, however, partnerships have generally been successful only when individual task managers on both sides have developed a personal relationship. As a result, long-term partnerships have not gone very far. Nevertheless, without deeper cooperation between partners, the opportunity to have an impact is severely diminished. Successfully develop- ing a new business line around periurban infrastructure planning, for example, depends directly on the ability to develop a genuine relationship, at least with the Japan Bank of International Cooperation (JBIC), Japan International Cooperation Agency (JICA), ADB, and others. The infrastructure initiative with JBIC and ADB, which focuses mostly on national in- frastructure issues, is a good start and a model for what is needed at the local government level. One way to initiate partnerships would be to reach high-level agreement among po- tential partners on a country and a topic that would be the pilot for a new partnership arrangement. The topic should be one in which all partners have a genuine interest and to which each partner can make a meaningful contribution. A good candidate for such a topic would be infrastructure development in a large megacity and its periurban hinterland. This agreement could be followed by preparing a plan of action developed jointly at the task- team level, followed in turn by joint missions. Monitoring and periodic joint high-level meetings between managers and task teams would be necessary to solve problems as they arise and to convey to all involved the importance of coordinated work. The Cities Alliance can be a valuable partner in helping to implement business priorities. The Cities Alliance has supported both city strategy work and programs targeted at the urban poor. It is also interested in helping cities improve the financing of urban priorities. To date, about 62 cities in the EAP Region have either completed CDS exercises or have them under way, and another 13 are in the pipeline. Because the program is heavily donor sup- ported, funding is limited, and in some countries there is uncertainty about how to finance more detailed follow-on planning and feasibility studies required, as well as the invest- ments themselves. A model is needed for mainstreaming city-level planning and strategy preparation. One possibility is to link city strategy work, at least informally, to loans by municipal financial intermediaries. In Indonesia, the USDRP envisions that a planning and investment prioritization exercise will precede applications for financing projects and will also be the basis for identifying management and institutional reforms. An urban lending intermediary to be set up in the future would finance priority investments. In the early stages of the program, a strategy document would be required as a condition of a loan, but 36 it probably would not be required in later stages. In the Philippines, a City Development and Investment Project (CDIP) is being prepared that will finance projects identified through the CDS process in several cities. East Asia and Pacific Urban Business Directions International experience suggests that when market lenders consider making a loan to local governments, they feel considerable comfort when the loan is part of an overall plan that reflects broad local consensus on priorities. Local intermediaries therefore have an incentive to lend for TA to cities wishing to initiate planning and strategy exercises, which can resolve the TA financing issue in some cases. Such intermediaries can also lend for the needed follow-up feasibility studies and then finance the resulting invest- ment proposals. Increasing the Urban Development Knowledge Base The EAP group's intellectual capital and knowledge base on urban development trends and policies needs renewal in light of the sweeping changes in countries and the clients' level of sophistication. Recent levels of Bank-funded AAA have been insufficient to permit an in-depth response to clients' needs. More analysis with direct involvement of the region's cities is needed. Country-specific AAA is discussed in the Country-Specific Strategies section. Some regionwide issues that require AAA are as follows: * Conducting an assessment of urban land management issues in a minimum of two countries to better document the extent of the urban land problem and its consequences and to identify practical steps forward. * Preparation of an annual High-Level EAP Urban Poverty Conference with the objec- tive of comparing, discussing, and debating the approaches being taken in national poverty strategies. * Development of country-specific strategies for improving access to domestic finance for subnational infrastructure to outline a vision and next steps and to establish dia- logue with clients. * Identification of priorities and approaches for capacity building, including identifying local institutions that can promote local skills development and assess efforts to moni- tor the performance of municipal officials. * Providing an overview of experience in local efforts to improve the business environment. Improving Bank Presence in Small Countries Small countries with which the Bank has limited lending programs often suffer from infrequent exposure to Bank staff. As noted above, the urban development unit will consider restructuring responsibilities so that regional offices serve as hubs for smaller countries. Vietnam, for example, could be the hub for Cambodia and Laos, China for Mongolia, and Indonesia for the Pacific Islands. The object is to improve the frequency and depth of contact. Developing a Communications Strategy Because there are literally thousands of local governments in the region, the Bank must develop a communications strategy about appropriate urban policy and about the Bank and its programs. This strategy should extend to cities as well as to national institutions. CDS has been a valuable mechanism for communication. Scaling up and mainstreaming CDS, as contemplated in the Philippines, can be one element of such a strategy. Another element can be working with local associations and with national planning and finance ministries on national development strategies. Financial intermediaries that lend to small cities and local governments can also play a role. Benchmarking the EAP Group's Progress in Implementing the Business Strategy Table 6 shows the objectives and the near-term targets that the EAP group must achieve to 37 have a successful outcome for its current business strategy. East Asia and Pacific Urban Business Directions Table 6. Interim Measures of Success for The EAP Group's Urban Business Strategy Objetves N , ,W-;,M t,g,t First-tier objectives Improving access to To have a framework for market-driven domestic finance of the subnalional infrasiructure domestic capital adopled in the Philippines and in one other country by fiscal year (FYI 2005. markets by local To nave support for a successful domestic bond issue by a subnational entity in three governments, countries by FY 2006. To have support for a pooled bond issue by FY 2006. To establish a market-oriented financial intermediary to tap the domestic capital markets in the Philippines by FY 2006 to help small and medium-sized cities. Improving municipal To have support committed for one local center of excellence for capacity building by FY governance and 2005 and for two by FY 2006: to have local centers of excellence connected to international management. centers by FY 2006. To have subloans to local governments in the Indonesia USDRP tied to local government success in achieving performance benchmarks by FY 2005: to have a project in another country adopt performance benchmarking by FY 2006. To have cross-country AAA on local government capacity building completed in FY 2005 and a detailed country strategy agreed upon with one country by FY 2005. Second-tier objectives Improving the city-level As a follow-up to the business and regulatory climate study in Indonesia. to have an audit of business environment the local business environment for one country other than Indonesia conducted by FY 2006. to promote economic growth and job creation To have the improvement of the city-level business climate included as a primary objective of two Project Concept Noles by FY 2005. Improving metropolitan To select one important metropolitan agglomeration outside of China and initiate a partnership and periurban to develop an integrated infrastructure and management strategy that covers the central core Infrastructure planning and periurban areas by FY 2005. and management. To establish a partnership witn JBICIJICAJADB in FY 2005 to work jointly on a selected agglomeration. Developing sustainable To have long-term programs of basic services and tenure improvements with clear coverage programs to improve largets and an affordable financing strategy adopted in Vietnam and one other country by FY conditions of the urban 2006 and in a third country by FY 2007. poor. To commence an annual High-Level Regional Conference on Basic Services to the Poor and Tenure in FY 2005. To complete a city-level Poverty Report Strategy Paper in one city of Vietnam by FY 2006. Source: World Bank, East Asia and Pacific Urban Development Sector Unit. Country-specific Strategies This section discusses specific country circumstances and priorities in the urban sector for which the EAP Region will take action. The business strategy is different from country to country but roughly clusters into three groups: (1) the middle-sized countries of Indonesia, the Philippines, and Vietnam; (2) China; and (3) the smaller countries of Cambodia, Lao People's Democratic Republic (PDR), Mongolia, and the Pacific Islands. The strategies for the middle-income countries are quite different from the strategies of the small IDA-eli- gible countries where the emphasis is on helping achieve the MDGs. Each country group is 38 discussed below. However, it must be emphasized that even within groups, unique coun- try circumstances mean that timing, policies, and institutional arrangements are necessar- ily somewhat different, even if objectives and approaches are similar. East Asia and Pacific Urban Business Directions Business Priorities for Indonesia, the Philippines, and Vietnam The following four business product lines are priorities for EAP in Indonesia, the Philip- pines, and Vietnam (see table 7): * Improving urban governance, management, and institution building * Promoting sustainable local government finance * Improving access to basic services to the urban poor * Developing new approaches to urban/regional planning, land management, and in- frastructure provision. Urban Governance and Institution-building Business Line The need to improve urban management and make service delivery more efficient is a glaring problem for cities in the Philippines, Indonesia, and Vietnam. Every project in these countries should advance this aim. Improving urban management and service efficiency means capacity building by working with domestic institutions to develop enhanced do- mestic training capability, developing local consultants, bringing in the private sector (in- cluding the local private sector), and working with nongovernmental organizations (NGOs). It also means working to develop systems that actively support local-level capabilities through national training institutes; providing guidelines for local services and local ad- ministration in such areas as budgeting and accounting; developing benchmarking sys- tems; and establishing norms for public information disclosure on procurement, loans, bud- gets, and accounts. It may mean working with local government associations, establishing communication networks among local governments, developing e-government systems, and so forth. Unfortunately, there are few resources for developing specific country-level strategies for capacity building. The USDRP project in Indonesia is the best example of a project specifically designed to support urban management. The Philippine Local Government Finance and Development Project (LOGOFIND) had a number of important TA and training components, but to date these are stalled in part by the local counterparts' budget issues. AAA is needed to develop country- specific approaches and to compare strategies across countries for capacity building. This AAA should lead to recommendations that will be supported with future lending operations. Sustainable Finance Business Line Foreign borrowing (whether from multinationals or foreign capital markets) is not a sus- tainable source of the large amounts of capital needed to support urban growth in these countries. Sustainable finance requires that local governments tap the domestic private banking and bond markets for their capital investment requirements and that local rev- enues are raised to cover recurring costs and any debt service. The following three levels of reform are needed: * An intergovernmental framework to define the rules of the game * Reform within individual local governments to improve mobilization of resources * A borrowing framework for local governments. The urban development unit's efforts in Indonesia, the Philippines, and Vietnam will focus on the two latter points. (The EAP Region's PREM unit should take the lead in devel- oping the intergovernmental framework.) Past efforts by the urban development unit have focused primarily on resource mobili- zation, with some attention to financial intermediaries. Although a great deal more needs to be done to improve resource mobilization and expenditure management, a more aggres- sive start must be made in establishing longer term borrowing frameworks, especially in the Philippines and Indonesia, using each urban and water resource lending operation to 39 move forward. This requires not only long-term strategies but also a willingness to take risks with pilot transactions in advance of a fully implemented long-term framework. In East Asia and Pacific Urban Business Directions Table 7. Specific Business Directions for Middle-Sized Countries Urban The USDRP APL attempts lo A planned lending operation CDSs are planned for two management, improve urban management and will involve the League of Cities cities with the possibility of governance governance at the local government to help implement plans drawn follow-up operations. Longer- level and covers capacity building. up through CDS studies. This term engagements with a urban finance. local economic operation aims to promote specific city (e.g.. Darang) are development, and land. It will foster municipal management and the being discussed (through a cily transparency and accountability as local government knowledge development project) well as benchmark performance. agenda (possibly including e- This will be complemented by UPP. government). It will also help which will facilitate accountability mayors address improvements and cooperation between local to the investment climate. government and communities. Promotion of The USDRP will improve local Priorities include enhancing Efforts are needed for domestic finance by (1) improving budgeting, access to market-based improving municipal finance for accounting, tax administration, and domestic finance This involves creditworthiness and local better cost recovery from tariffs and (1) removing the impedimenis developing institutions to governments fees: (2) defining policies for local to private bank lending. (2) facilitate market-oriented and local government borrowing; and (3) restructuring MDFO as an municipal borrowing in government developing a specialized financial independent institution. (3) Vietnam. There has been one corporations intermediary based on market considering the role of bond bond issue by a local principles to increase the availability pooling, and (4) improving local government (HCM City) A of domestic private capital to local government management and second HCM City bond is governments. APL 1 or 2 may resource mobilization. If under preparation. The Bank support demonstration of pilot bond government makes progress could assist specific domestic issues by carefully selected local on the policy issues, an Urban credit access initiatives to pilot governments or local institutions in Sector Adjustment Loan may test approaches that would advance of the implementation of the be possible. eventually lead to more longer-term framework. Bond market-based lending and pooling approaches are also broaden access to more cities. possible. Urban/ Three projects are being developed Metropolitan Manila is so The rapid growth of the regional to improve management of services important to the national periurban areas surrounding infrastructure that cross the boundaries of different economy that improving its Vietnam's towns and cilies planning administrative jurisdictions. These functioning and that of the requires new regional projects will promote an integrated. surrounding periurban areas approaches lo planning and regional approach to infrastructure through well-planned, regional- infrastructure development. planning and local economic scale infrastructure services The Bank should make an development and promote the needs to be a national priority. effort to join with JBIC and achievement of urban-rural This would involve working with ADB to carry out a regional synergies. The first, the East Java the Department of Public development plan for one of Development Project. will address Works and Highways and the main metropolitan centers, currently unclear institutional responsible local governments such as Hanoi A new lending relationships between provincial and to improve infrastructure product to finance the local governments. The second. the planning and develop realistic outcomes of urban/regional Yogyakarta Regional Development financing plans. Moving planning for one of the Project, supports strategic forward will require development triangles is being urban/rural linkages and regional partnerships with other official considered. integration to promote the role of development assistance cities as engines of regional institutions and clear interest economic growth. The third. the from the affected naLional and Western Java Environmental local bodies. Management Project, takes a regional approach to improving environmental quality. East Asia and Pacific Urban Business Directions Table 7. Specific Business Directions for Middle-Sized Countries continued Concept Indonesia Philippines Vietnam Scaling up The UPP series of projecis attempts A LIL is being prepared to test The VUUP will improve urban poverty to improve governance at the approaches for bettering the conditions of almost 2 million work community level and to help develop conditions of the urban poor by households living in low- representative local institutions that improving basic services and income areas across four improve collective decision-making tenure in slum and squatter cities. The project is supporting and provide level services. areas. If the LIL is successful, :he development of a National a large-scale, financially Urban Upgrading Program, sustainable program to which would systematically The third UPP in the series is under upgrade slum areas can follow. improve and regularize all preparation. which will make UPP a slums over time. national program. AAA 1. Specific delailed analyses of 1. A roadmap is needed for 1. The Bank is updating its priorities such as local taxation, urban infrastruclure io support Infrastructure Sector Strategy, resource mobilization, local urban growth in Metropolitan including the development of governmenl civil service reform, land Manila and :he surrounding policy reform agendas and policy, urban social safety nets. and periurban region that includes national investment plans with local economic development need to the institutional coordination government :hal would provide be addressed. framework for making the basis for sector lending. 2. Other topics include progress. 2. The Bank should continue its understanding the travel needs of 2. A review is needed of how support of the joint the poor and public transport reform. MDFO should operate as a government/donor Urban Mobilizing private finance for urban corporation If progress is Forum (partnership). transport infrastructure needs to be made, the Bank might consider 3. The Bank should assess the supported bv TA in the identification support through a Sector feasibility of providing lending and design of possible private Adjustment loan. - financ,al initiatives supporl to help stimulate 3. Also needed is an urban market borrowing to poverty assessment to provide subnational capital markets. a long-term vision for dealing 4. The Bank should give advice with slums and land on ne Bach e to integrated urban and regional 4. A plan is needed for infrastructure planning and mainstreaming CDS in the development. Philippines. 5. The Bank should develop 5.A strategy is needed for urban public transport capacity building and urban strategies, particularly bus managemenl support. systems and traffic management strategies. 6. With increased lending in environmental sanitation, the Bank should carry out an infrastructure study or options for wastewater management as well as sustainable financing strategies. 7. In an increasingly decentralized environment, the Bank needs to develop a strategy for municipal capacity building. Source: World Bank, East Asia and Pacific Urban Development Sector Unit. East Asia and Pacific Urban Business Directions Vietnam, support to pilot domestic bond schemes in HCM City may be a first step in initi- ating the longer term process of developing an overall borrowing framework in that coun- try. Establishing a national level financial intermediary in Vietnam for lending to local gov- ernments should be considered. The experiences of the developed world with bond banks, European local government financial agencies, and structured finance instruments for pooled bonds should be discussed in all three countries. Assistance in establishing rating agencies may be needed. The use of new World Bank instruments to promote pilot transactions, including the Bank's guarantee instrument, contingent loans, and other options, should be considered. Long-term continu- ing AAA is needed to develop and refine country-specific approaches and to establish a dialogue with clients. APLs and sector-adjustment instruments may also be needed to es- tablish the long-term framework. Developing local intermediary institutions will also help the EAP group to use its own resources more efficiently. In addition to the possible financial leveraging, the group's goal also should be to leverage staff time. In small and secondary cities, local officials do not know about the World Bank and do not understand its processes and procedures. Using an intermediary partly avoids the impractical attempt to try to have Bank staff appraise all projects in secondary towns and cities. Urban Poverty Business Line The rapid urbanization of poverty in Indonesia, the Philippines, and Vietnam calls for an urgent response and a large-scale effort. The EAP group is developing projects aimed at directly improving the living conditions and livelihoods of the poor in all three middle-sized countries. In each case the objective is to help the government develop a large-scale, long-term, financially sustainable program. Each successive Bank poverty project in a country should draw from the lessons learned in earlier projects and reflect institutional or policy adjustments as needed. A third project in the Urban Poverty Program (UPP) series is being developed in Indone- sia to deepen reform in communities already benefiting from the program and extend the program to new communities. In Vietnam, a first project is in the late stages of preparation. Of the three countries, the Philippines is farthest behind. A weak local administration at the central level of government means the Philippines has not seen a consistent national strat- egy. A LIL is being prepared to start a program in the Philippines that could be scaled up. In all three countries, providing basic services in low-income housing and informal areas is a serious national problem that needs to be managed more effectively. The Bank's role is to help develop sustainable solutions. Some of the common principles that should be followed based on past programs and on other global experience are listed below. Different country circumstances mean that the principles will be applied differently in the three countries. * A national policy and strategy should be adopted and widely publicized. * Local and national bodies should respect local government code. In practice, this means national coordination and promotion of services, but local implementation and mostly local financing. National guidelines and training for local officials in best practices are necessary parts of program promotion. * Communities and community organizations should determine priorities within fixed program budget constraints. Higher levels of services should be allowed and encour- aged if communities are willing to pay for them. * Design and planning standards for infrastructure services need to be flexible (and lim- ited by available budgets) to make a scalable solution affordable. Water and drainage network services provided in a community should be designed as parts of local net- 42 works that will connect to citywide networks. East Asia and Pacific Urban Business Directions * Cost recovery is an important target, but the ultimate goal is the long-term financial sustainability of the program. Subsidies are acceptable if they are clear, limited, tar- geted, and affordable by the level of government providing them when they are scaled up. The poorest residents may need safety nets that target individual families. National policy should specify the rules for national and local subsidies along with expected community payment. Any national financing should be consistent with broad national rules for project-level matching grants or loans. These programs should not be excuses for a national ministry to take over local government responsibilities just because the national level has the money. * Tenure is important, and a strategy for land rights that fits with overall land manage- ment policy is necessary. In the Philippines, tenure regularization should be part of any project. In Indonesia and Vietnam, a broader land management and land registration policy needs to be developed; project-level infrastructure support in these countries is not necessary. In all countries, the goal should be to integrate communities into the fabric of the city and allow them to develop normally, not to preserve them in their current state. * A parallel effort in land management and infrastructure provision in growth corridors is needed to prevent or restrain new illegal settlements from forming on unserviced land. The Cities Alliance has supported programs in each country and should be a partner in developing country poverty strategies. Urban/regional Planning and Infrastructure Development Business Line Urban/regional scale infrastructure planning that is designed to have a positive effect on accommodating urban growth around major cities is a central need in all three countries. This business line would require tackling large agglomerations such as Metropolitan Manila and the surrounding periurban provinces, Jabotabek, Greater Metropolitan HCM City, and/ or Greater Metropolitan Hanoi. Provincial-level regional development projects in East Java and Yogyakarta in Indonesia are currently being planned and fit within this framework. From a country perspective, the Greater Metropolitan Manila agglomeration is the most critical to national productivity among the various candidates and would have the greatest national impact if successful. However, tackling any of the agglomerations around large capital cities will mean dealing with political relationships between multiple provincial and local governments and national units. If the EAP group decides to move forward with Greater Metropolitan Manila, HCM City, Jabotabek, or Hanoi, a strong internal plan will be needed that overcomes concerns that the problems may be too big for the Bank to tackle. A genuine partnership with JBIC and JICA, at a minimum, will be essential for success in this business line. Involving ADB and other bilaterals would be helpful. The effort may be so intensive that only one country of the three can receive support at a given time. Dis- cussions should be held in all three countries with the aim of determining where the confluence of local interest and the likelihood of partnership suggest making a start. No good models exist in this area, and a great deal of innovation and hard work will be neces- sary for success. Land management is a serious issue in all three countries. Land management affects poverty reduction, economic development, foreign investment, urban planning, and infra- structure efficiency. The Rural Development Department has handled most land manage- ment projects in EAP to date. Considering the differences in urban and rural issues, the EAP's urban development group should undertake AAA work on land issues in at least two countries to document the extent of the problem and its consequences and to identify practical steps forward. Project components that improve urban land management should 43 be considered in future operations. East Asia and Pacific Urban Business Directions Business Priorities for China Continuity and relationships based on trust and knowledge are important to the China pro- gram. They allow the Bank to work with Chinese authorities to test reforms of national significance with repeat city and provincial borrowers with whom a partnership has already developed. One key to success is for the Bank to offer the central and provincial govern- ments and cities a strong analytical capacity to support their new urban development agenda. Environmental sanitation will continue to be the main entry point and platform for Bank support across a number of business activities. This involves continued institutional re- form to increase the efficiency of sewerage and sewerage treatment, drainage, solid waste management, air quality and river basin management. At the same time, the urban pro- gram will see several evolutionary shifts in its business activities during the next five years (see table 8). Greater Focus on Governance and Institutions for Improved Municipal Management Each project, whatever the nature of the specific investments financed, will focus on assisting with structural change and developing market institutions and policies needed for improved urban governance and service delivery. These include regulations and regulatory bodies that are part of a properly functioning market economy, tariff reform, and the development of land markets (which have key links to financial markets in China). They also include policies (1) to improve competitiveness and the local business climate and (2) to address issues of urban and regional planning, especially in the periurban districts of large cities. Controlling air pollution and solid waste will feature more prominently in the overall pro- gram, as will water supply policy. Bank projects will help local governments define urgently needed systems for management and maintenance of the existing assets built during the in- vestment wave of the past 20 years. Sometimes structural change will involve shedding func- tions. For example, the Bank can help with innovations such as maintenance concessions that may be considered along with development of a local private-service industry. There is a growing awareness among Chinese officials of the importance of historic cit- ies and cultural heritage. Chinese authorities are increasingly willing to seek the Bank's support in programs to protect its unique cultural assets and in development strategies that incorporate social and cultural opportunities, conservation and heritage protection. They are also seeking opportunities and assistance to plan city growth in a way that the built heritage is enhanced. Depending on the location of the Bank's intervention, specific projects may involve rede- velopment of old industrial bases, especially in northeast China. Chinese cities wishing to maintain the edge of entrepreneurship will require new com- munications strategies to keep abreast of customers, competitors, and new manufacturing and services technology. Especially needed are city-to-city communications, links to asso- ciations of mayors and city officials, and information and communications technology (ICT) investments. Although local officials in China are generally qualified technical profession- als, they would benefit from capacity-building efforts related to traditional city manage- ment functions of planning, including financial planning of a market economy, as well as newer functions of managing technology. The WBI Environmental and Urban Manage- ment Program has been a successful example of capacity and knowledge building. Increased Assistance to Secondary Cities Programs at the Provincial and Urban Subregional Scale The shift from single-city projects to provincial-scale, secondary-city projects and multijurisdiction periurban projects will accelerate. This will allow the Bank to spread the 44 effect of its projects and to support provincial-level policies and institutions. Two types of programs need attention: East Asia and Pacific Urban Business Directions Table 8. Specific Business Directions for China Concept Recommendation Urban Environmental The main theme of Bank support to China in the urban sector will conlinue to be urban Management environmental management. Municipal There will be continuing use of environmental investments as a platform to improve municipal management and management and build local capacity. This includes reform of municipal institutions and utilities, capacity building regulatory reform, financial management and policy reform, cultural heritage protection, city-to- city communications and networking, ICT, and e-government. Provincial-regional The shift from single-city projects to province-wide secondary city projects and regional scale planning metropolitan area projects will accelerate. The Bank will have an effect at the metropolitan regional scale and will support policies and institutions addressing urban/regional planning and management of large, multijurisdictional urban conurbations. The Bank will also support province-level secondary city projects of larger scope than in the past. The proposed Chongqing Small Cities Urbanization and Environment Project is an example of a new type of integrated regional urban development project. These trends will require developing intermediaries to help appraise and supervise larger numbers of disbursed local entities and to allow the leveraging of Bank staff time. Work in the poorer central and western provinces is expected to increase, but important policies will be tested in the more advanced eastern regions. Developing financial Work will rely on pilots in Shanghai and other advanced provinces and will emphasize improved institutions access to domestic capital markets to finance environmental infrastructure in both large and small cities. The Bank will consider intermediaries that can wholesale Bank support. Motorization and The areas of urban transport in which the Bank can be of greatest assistance are traffic demand management design and implementation, public transport reform, demand management, and management new roads at the periphery of rapidly growing cities to channel growth. The aim is to continue to leverage investment in physical facilities to secure the reform agenda. AAA An expanded AAA program needs to consider: * Small-town development strategies and the use of intermediaries I Interjurisdiction planning and management at the regional and metropolitan scale * Urban planning and management within the context of the market economy * Maximizing the fiscal and economic potential of the land and housing markets * Managing migration * Subnational infrastructure financing, including specialized institutions for lending to local entities * Moving from retail to wholesale in urban transport * Strategies for capacity building * The e-government agenda. Source: World Bank, East Asia and Pacific Urban Development Sector Unit. * The development of the smaller towns associated with a large central city that are part of a single urban-periurban agglomeration * The development of independent secondary cities and towns whose development is not associated with a large central city. 45 Both situations will require new institutional models for planning, administration, and financing. East Asia and Pacific Urban Business Directions There are numerous successful examples of secondary-city projects for which the Bank has identified and appraised subprojects. In the coming years, the Bank will need to work with Chinese authorities to develop workable provincial intermediaries that can appraise subprojects and on-lend Bank funds, because it will be increasingly difficult for the Bank to appraise in advance subprojects that the many small and medium-sized municipalities need in one province. The proposed Chongqing Small Cities Urbanization and Environment Project is an example of the type of regional small-city development project that may be typical in the future, and for which a new framework, including a framework for on-lend- ing Bank funds (wholesaling), should be developed. In the case of small towns that are influenced by large metropolises and are part of a single urban cluster, new and better integrated planning approaches are also critical. Projects in periurban agglomerations are also likely to need new Bank interventions to assist the urban poor. Support to Urban Financial Reform Sustainable funding of urban investments depends on improving access to domestic capi- tal markets. Private participation is not a solution to the financing requirements in the ab- sence of a clear legal and regulatory framework. Further, many infrastructure facilities such as secondary roads may best be bought with tax revenues rather than with tolls or user fees. State regulation and assistance would be necessary for healthy expansion of credits from the domestic capital markets as a means of financing infrastructure investments by munici- pal entities. The government should encourage * Credit pooling or credit insurance at the provincial level * Specialized funds to invest in infrastructure * Syndication practices by banks. Moreover, the government should prepare regulations for and begin allowing general ob- ligation municipal borrowing. Specialization would permit institutions to identify and evalu- ate the unique features and uncertainties of local government investments. In designing en- abling regulations for such institutions, the Bank must facilitate their main virtues: the ability to tap the domestic credit markets based on their understanding of local government and the ability to pool risks and avoid excessive contingent liability. Specialized local government financial intermediaries will likely be provincial-level insti- tutions rather than national institutions. The Shanghai APL breaks new ground in that it is the first operation to address the issue of increasing municipal environmental institutions' access to the domestic private capital markets. For domestic bank loans, a rediscount or insurance facility authorized by the center to cover the maturity risk of provincial institutions would be useful not only for the borrowers but for the health of the banking system. The state, however, should not insure against credit default risk. The state should take measures to define prudent limits for local borrowing and limit local government's contingent liabilities. Future Bank operations should continue to pi- lot test mechanisms and policies. Improved Urban Planning, Traffic, and Demand Management Along with New Facilities Primarily at the Periphery of Rapidly Growing Cities Development of improved urban design and appropriate urban planning regulations is a pri- ority for many cities in China. There is increasing understanding of the importance of improv- ing the built heritage of historic cities. The Bank will continue to help by providing technical assistance and financing. There are cross-sector synergies between urban transport and urban planning, land-use 46 management, air quality, and metropolitan-level management that can be exploited in Bank operations. Including urban transport in urban development projects makes sense and may East Asia and Pacific Urban Business Directions help in wholesaling these approaches as the urban program moves to multicity approaches. Areas of urban transport in which the Bank can be of greatest assistance would appear to be those of traffic management design and implementation, public transportation reform, and the more difficult area of demand management, in which little progress has been made to date. The aim should be to continue attempting to leverage investment in physical facilities to secure the reform agenda. Even with four projects per year, China's large size means that the Bank must make difficult choices about the location of its urban projects in China. One possibility is for the Bank to focus its efforts on the poorer interior provinces to maximize the poverty impact of its support. Poverty impact should be an overriding criterion, and the largest part of the program should therefore address the special needs of poorer provinces. However, in China it will be possible to test many significant urban policies and reforms in the advanced prov- inces that are most likely to be able to handle them before spreading them nationwide. Rather than focusing attention exclusively on the poorer interior regions, where innova- tion, especially in urban finance and institutional restructuring, is less likely, the Bank should balance its program geographically when opportunities for influencing national policy arise. Of course, models developed in one province may not be suitable for another. The Bank needs to help China develop approaches specifically adapted for the socioeconomic condi- tions in the western and interior provinces. The Bank's role in different provinces is shifting. In coastal cities it must increasingly provide more knowledge than money. In interior cities, where most of the poor live, the Bank should scale up its urban lending program. The Shanghai APL is a good example of the type of knowledge and policy-based program appropriate for Bank support in the east- ern provinces. Bank budget support for urban analytic work on China has been sorely limited in the recent past, with most work undertaken as part of project and investment program formu- lation. A Bank-supported AAA program needs to be developed. Among the important is- sues that require continuous attention are the following: * What institutional frameworks and financial intermediaries are most suitable for sup- porting the infrastructure investment needs of small and medium-sized cities? * What is the strategy for wholesaling Bank assistance to large numbers of medium- sized and small towns? * What mechanism can be used to move from retail to wholesale in urban transport? * How is urban poverty changing, and what kind of policy response is necessary? * How should future migration to cities be managed? * What steps can be taken at the local level to improve the business climate and promote job creation? * How can the Bank help improve interjurisdiction urban planning and infrastructure management at the urban regional and metropolitan scale? What changes are needed to make urban planning and management effective within the context of the market economy? * How should the Bank develop the land and housing markets to maximize their poten- tial fiscal and economic benefits? * What strategy should the Bank adopt for capacity building? What domestic organiza- tions can be partners? How can the Bank best work with local associations of mayors? * What is the e-government agenda, and what is the Bank's role in it? Business Priorities for Small Countries In the smaller countries of Cambodia, Lao PDR, Mongolia, and the Pacific Islands, the pri- 47 orities include the nexus of urban management, capacity building, land management, and East Asia and Pacific Urban Business Directions Table 9. Specific Directions for Small Countries Concept Cambodia Lao PDR Mongolia Pacific Islands Capacity The focus on establishing The proposed Mongolia has limited Key needs are building andi instilutional and financial AAA to help the capacily to prepare and strengthening improved arrangements will make government implement urban responsiveness to local management improvements to dhe evelop development programs, so communities in planning and revenue water sector sustainable develop a training needs to precede and dtecision-making. mobilization Output-based aid and poverty and change. The priority Appropriate land-use design-build-lease service delivery oblectives for training are planning is also central. contracts are being tried strategy for in the area of participatory However, institutional to involve the private Vientiane and and transparent urban arrangements for land-use sector in provincial and provincial towns governance. The Bank will management are weak periurban areas. Priorities hoId def assist in enhancing throughout the Pacific in all projects would be su ilunicipality of Ulaanbaatar Island region new capacity building for capacity-building finances (including local officials. developing action plan. intergovernmental belter planning syslems transfers, property and through a CDS exercise, other taxes, and user and developing charges and fees) as a transparent systems of means of improving procurement and financial sustainability of budgeting. municipal services. Scaling up The objective of the Any future urban The second Ulaanbaatar Customary land ownership urban poverty program in Cambodia is work in Laos will Services Improvement traditions restrict access by work to help the government focus on Project is part of a series utility agencies to low- achieve the urban, water, improving basic whose objective is to income communities where and sanitation MDGs. service delivery, improve the quality of life tenure is not secure This means moving from especially in low- of the urban poor in the ger Policies and innovative 35 percent coverage to income areas of Ulaanbaatar. The institutional arrangements 70 percent coverage in communities. program provides basic are needed to integrate water by 2015 and The first step is urban services, such as these communities into the improving land tenure in to initiate a water supply, sanitation. urban social and economic slum areas. If the review of drainage, laundry and bath mainsiream. The Bank's institutional and financial services and the houses, and access roads considerable experience in targets are successful, needs of the and pathways, in a community-based, low- the country can develop a urban poor in sustainable way. income community 15-year program. Vientiane and upgrading could be provincial instrumental in helping capitals. The next in the series Pacific Island countries should deepen address this large and achievements in Urban growing problem. where Poverty (UP) and begin to the political will exists. extend improved services to provincial capitals. AAA An urban poverty It is necessary to Mongolia must further There is a need for mapping exercise and develop a develop approaches to preparalion of clear strategy is needed to lay poverty and municipal management, stralegies on a broad the groundwork for the service-delivery capacity building. financial range of urban following series of urban strategy focused management, land management issues. poverty projects. This on Vientiane and management, and Options are also needed survey should consider provincial engagement of the private on programs to improve land and services issues capitals. sector .n managing land tenure and service in squatter communities services. Also necessary is provision to low-income and should be done a review of needs in communities. jointly with government, provincial capitals. Consideration should also NGOs, and other donors. be given to mobilizing support for an appropriate CDS-type activity in selected towns. Source: World Bank, East Asia and Pacific Urban Development Sector Unit. East Asia and Pacific Urban Business Directions urban finance; the secondary priority is improving services to the urban poor (see table 9). Initiatives to deal with these issues will have to be bundled together in Bank operations, considering the limited size of the lending program in the small countries. The Bank does not have an urban program in Laos, a heavily rural country. Given rapid urbanization rates, however, it would be wise to carry out AAA to help the government develop a poverty and service-delivery strategy for Vientiane and provincial towns. Urban Management, Capacity Building, Land, and Finance The Cambodia program is testing some innovative attempts to use output-based aid and design-build-operate contracts for water in provincial and periurban towns. Involving the private sector in operations has the potential to improve service delivery significantly. A CDS for Phnom Penh is being planned that will identify municipal, institutional, and policy constraints to improve urban management. This will be the entry point for further support to the municipality in future operations. Mongolia has limited capacity to prepare and implement urban development programs. Thus, training needs to be an important part of these programs. The priority objectives for training are developing more participatory and transparent urban governance and teach- ing project preparation. The Bank will help enhance Municipality of Ulaanbaatar (MUB) finances (including intergovernmental transfers, property and other taxes, and user charges and fees) as a means of improving financial sustainability of municipal services. In Pacific Island countries, strengthening urban governance and management involves strengthening the responsiveness of government to local needs and the role of communities in planning and decision-making. Indeed, the community-based approach to managing coastal erosion under the Bank-financed Asset Management Project in Samoa is a successful example of this approach. Appropriate land-use planning is central to effective environmen- tal management, which is a prerequisite for successful long-term economic development. However, institutional arrangements for land-use management are weak throughout the region. Many Pacific Island countries are vulnerable to natural disasters and, while much attention and assistance is being provided, much clearly remain to be done. Improving Services, Including Access to Basic Infrastructure, for the Poor In Cambodia and Mongolia, water and sanitation needs have been the entry point for im- proved urban services. The objective in Cambodia has been to help meet the Urban and the Water and Sanita- tion MDG targets. Institutional reforms are being tried that, if successful, would make a long-term national program feasible. The next projects in the series for Cambodia should aim to (1) consolidate the reforms in the water sector, (2) actively involve the municipality of Phnom Penh in the work in low-income areas, and (3) deal with issues of land regular- ization and access roads. In Mongolia, both the municipality and the water company are involved in efforts to improve conditions in ger areas. Financing service expansion, modest standards, cost re- covery, land management, and charging for land occupation are key issues being tackled to develop a sustainable ger-upgrading program. Bank-financed infrastructure operations in the Pacific Islands presently involve a highly effective asset management project for road works in Samoa, which has generated interest for similar assistance in Fiji, and emergency reconstruction activities in Tonga and Samoa. Preparation of an adaptation program related to sea-level rise under way in Kiribati also has clear relevance for urban communities throughout the Pacific. In many Pacific coun- tries, the most dramatic population growth has been in informal periurban settlements. The lack of secure tenure heightens the vulnerability of these communities. Policies and 49 innovative institutional arrangements are needed to integrate these communities into the urban social and economic mainstream. The Bank's considerable experience in commu- East Asia and Pacific Urban Business Directions nity-based, low-income community upgrading could be instrumental in helping Pacific Island countries with the political will to address this large and growing problem. In all of the small countries, the Bank needs to work with political leaders, first to iden- tify opportunities for economic gain and improve urban efficiency and, second, to develop clear, policy-based investment programs. Financial sustainability and local resource mobi- lization will be part of any program design and will require constant attention during imple- mentation of the programs. 50 East Asia and Pacific Urban Business Directions Bibliography Beaverstock, Jonathan V., R. G. Smith, and P. J. Taylor. 1999. "A Roster of World Cities" Cities, 16 (6):455-58. Brockerhoff, Martin and Ellen Brennan. 1998. "The Poverty of Cities in Developing Regions," Poputlationi and Development Revieut, 24(I): (March), 1-40. Clark, Greg. 2001. The Impact of Globalization on Local Economic Development: A Practitioner's Overviewo. Economic development background paper, South African Cities Network. Lon- don, United Kingdom. De Soto, Hernando. 2000. The Mystery of Capital. New York: Basic Books. Gwilliam, Ken. 2003. East Asia Urban Transport Strategy Review, Unpublished draft. Hamid, Naved. 2000. "Benchmarking as a Means of Improving Municipal Service Delivery." Paper presented at the East Asia Urban and City Management Course, May 1-14, 2000, Singapore. Available at http: / /www.worldbank.org/wbi/urbancitymgt/singapore/assets/ s-hamid-modO5.pdf. (Accessed April 3, 2004.) Hanoi: 2002 figures, from various sources on the Internet. Available at http: / /www.worldbank.org.vn/data/e_indicator.htm; http: / /www.cia.gov/cia/publica- tions/factbook/geos/vm.html; http://www.economist.co.uk/countries/Vietnam/ EconomicData.cfm (Accessed September 2003). Ho Clhi Minh Cityl: 2000 figures. Available at http:/ /www.hcminvest.gov.vn/html/ecol.html#2 (Accessed April 3, 2004). Jakarta: 1996 figures, in "Mega-Cities: Innovations for Urban Life." Available at http:// www.megacitiesproject.org/network/jakarta.asp. (Accessed April 3, 2004.) Kessides, Christine. 2002. Urban Poverty in the East Asia Regioni. Washington, D.C.: World Bank. Kittiprapas, Sauwalak. 1999. "Role of Bangkok and Its Periphery in the Asia-Pacific Region: Toward Globalization Economy and Sustainable Development," TDRI Quarterly Reviewv, 14(3): 18-24. National Bureau of Statistics of China. 2001. China Statistical Yearbook 2001. Beijing. China Sta- tistics Press. - 2002. Chiina Statistical Yearbook 2002. Beijing. China Statistics Press. - 2003. Chiina Statistical Yearbook 2003. Beijing. China Statistics Press. National Capital Region, Philippines: 1998 figures. Available at http://www.nscb.gov.ph/ factsheet/pdf02/fs2_03.asp (Accessed April 3, 2004). Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat. (2000, 2001). World Urbanization Prospects: 1999 Revision. Part 1: Urban and Rural Areas (POP/DB/WUP/Rev. 1999/1), data set in digital form. Washington, D.C.: World De- velopment Indicators. New York: United Nations (Department of Economic and Social Affairs, Population Division). Ulaanbaatar: 2000 figures, from presentation by Mr. Ch Bat, Director, Economy and Strategy Policy Department, Office of the Mayor, to World Bank/Singapore Urban Poverty Seminar, June 2000. United Nations.World Urbanizationi Prospects: The 2001 Revision, Vol. I: Comprehensive Tables . 51 New York:Population Division, Department of Economic and Social Affairs. East Asia and Pacific Urban Business Directions Webster, Douglas. 2002. Urban Dynamics and Public Policies in Developing East Asia Washington, D.C.: World Bank. . 2003. Unpublished aide memoir following mission to Chongqing. World Bank. 2000. Water and Sanitation Program: 1999- 2000 Annual Report. Washington, D.C.: World Bank. - 2002. Reducing Rural Poverty, East Asia and Pacific Special Focus. Washington, D.C.: World Bank. - 2002. Urban Sector Reviewfor Indoniesia. Washington, D.C.: World Bank. . 2003. World Development Report 2003: Sustainable Development in a Dynamic World. Wash- ington, D.C.: World Bank, 5. World Health Organization. 2002. Global Water Supply and Sanitation Assessment 2000 Report. WHO/UNICEF Joint Monitoring Programme for Water Supply and Sanitation. Geneva. WHO/UNICEF/Water Supply and Sanitation Collaborative Council. Yusuf, Shahid and others. 2001. East Asia's Urban Regions: A Strategyfor the Upcoming Decade. Washington, D.C.: World Bank. 52 East Asia and Pacific Urban Business Directions Annex A. Urbanization Figures 53 East Asia and Pacific Urban Business Directions Table A.I1. Total and Urban Population, East Asia and Pacific Region EAP Region 200Q 2030 Increase Percentage POpUI8tkn r(Irnfins) (rnhllons) (millions) increase Total 1.877.0 2,301.9 424.9 22.6 Urban 664.8 1230.1 565.3 85.0 Rural 1,212.5 1,071.8 -140.7 -11.6 Urban as 35.4% 53.4% percentage of total Note: East Asia and Pacific (EAP) Region combines Southeastern Asia and Eastern Asia less Japan. Data exclude Melanesia, Micronesia, and Polynesia. Source: World Urbanization Prospects: 2001 Revision. 54 East Asia and Pacific Urban Business Directions Table A.2. Historic and Recent Trends in Urbanization: East Asia and Other Countries Compared Developed East Asia and Pacific Trend Countries All Developing Countries Region Year 1900-25 1975-2000 2000-25 1975-2000 2000-25 Share urban, 26-40 27-40 40-53 20-35 35-51 beginning-end of period (percent) Urban population 90 140 82 151 75 growth over 25- year period (percent I Annual growth rate (percent) Urban 2.57 3.56 2.43 3.75 2.25 Rural 0.05 1.12 0.20 0.60 -0.32 Total 0.87 1.92 1.23 1.45 0 74 Urban as 96 62 92 71 130 percentage of total population growtn Source: Developed country data: Brockerhoff and Brennon (1998); other data: World Urbanization Prospects: 2001 Revision. All averages weighted by population. 55 East Asia and Pacific Urban Business Directions Table A.3. Current Level of Urbanization Gross National Income* Per Capita Growth Average Rate of Annual Urban Percentage of Growth Percentage Urban Population Population Population in Rate Current Level of Urban (miUlions) (percent) Largest City $ (percent) Urbanization 2000 2030 2000 2030 2000-05 2000 1999 1997-98 High Republic of Korea 81.9 90.5 38.4 47.9 2.67 26 8,490 -7.5 Medium Mongolia 63.5 76.0 1.7 2.9 2.28 NA 390 1.9 Philippines 58.6 73.8 44.5 84.1 3.14 25 1,050 -2.1 Malaysia 57.4 72.7 12.8 23.7 2.83 10 3.390 -8 0 Lower Medium Indonesia 40.9 63.5 86.8 179.9 3.57 13 600 -18.0 China 32.1 50.3 410.0 752.1 2.34 3 780 6.4 Myanmar 27.7 46.6 12.6 28.0 2.86 33 NA NA Low Laos 23.5 42.6 1.3 4.5 4.87 NA 290 1.4 Vietnam 19.7 33.7 15.7 38.0 2.86 30 370 4.3 Thailand 21.6 39.1 13.3 29.0 2.19 56 2.010 -8.6 Cambodia 15.9 31.9 1.8 5.5 4.16 51 260 -2.3 Papua New 17.4 33.0 0.8 2.6 4.01 NA 810 0.0 Guinea Regional averages Eastem Asia 38.5 54.6 571.7 933.0 1.90 Southeastern Asia 37.2 55.9 192.7 397.4 3.17 Total, EAP Region 10 1.010 -2 6 * Formerly gross national product. World Development Indicators 2001. NA = not available. Source: World Urbanization Prospects: 2001 Revision. 56 East Asia and Pacific Urban Business Directions Table A.4. Largest Urban Agglomerations in East Asia Region (Ranked by Population, 1950-2015) Rank, by Year Urban Agglomefation and Country Population (miftions) 1950 1 Shanghai, China 5.333 2 Beijing, China 3.913 3 Tianjin, China 2.374 2000 1 Shanghai, China 12.887 2 Jakarta, Indonesia 11.018 3 Beijing, China 10.839 4 Mietropolilan Manila. Philippines 9.950 5 Seoul, Republic of Korea 9.888 6 Tianjin, China 9.156 7 Bangkok, Thailand 7.372 2015 1 Jakarta, Indonesia 17.268 2 Shanghai, China 13 598 3 Metropolitan Manila, Philippines 12.579 4 Beijing. China 11.671 5 Tianjin, China 10 319 6 Seoul, Republic of Korea 9 918 7 Bangkok, Thailand 9 816 Source: World Urbanization Prospects: The 2001 Revision. 57 - - - East Asia and Pacific Urban Business Directions Annex B. Millennium Development Goals (MDGs) 59 East Asia and Pacific Urban Business Directions Table B.1. Infant Mortality Rate MDG Goal 4. Reduce child mortality Target 5. Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate. Annu"a Annual Percent Country/ 2015 Percent On Change to region 1990 1995 1996 1997 1996 1999 2000 Target Change Track? Achieve Taget World 61 57 NA 55 NA 54 NA High 8 6 6 6 6 6 NA 3 -3.8 No income Low and 66 62 NA 60 NA 58 NA 22 -1.3 No middle income East Asia 40 38 NA 37 NA 35 NA 13 -1.5 No -1.3 and Pacific Cambodia 122 108 NA 103 NA 100 NA 41 -2.1 No -3.7 China 33 34 NA 32 NA 30 NA 11 -1.0 No -1 2 Indonesia 60 46 NA 44 NA 42 NA 20 -4.0 Yes -1.4 Korea. 45 61 NA 64 NA 58 NA 15 2.8 No -2.7 Dem. Rep. Korea Rep. 12 10 NA 9 NA 8 NA 4 -4.1 Yes -0 3 Lao PDR 108 104 NA 98 NA 93 NA 36 -1.6 No -3.6 Malaysia 16 12 NA 10 8 8 7.9 5 -7.7 Yes -0.2 Mongolia 73 65 NA 62 NA 58 NA 24 -2.6 No -2.1 Myanmar 94 83 NA 79 NA 77 NA 31 -2.1 No -2.9 Papua New 83 67 NA 61 NA 58 NA 28 -4.1 Yes -1.9 Guinea Philippines 37 35 NA 33 NA 31 NA 12 -1.8 No -1 2 Thailand 37 31 NA 29 NA 28 NA 12 -3 0 No -1.0 Vietnam 40 37 NA 37 NA 37 NA 13 -1.0 No -1 5 NA = Not available. Sources: World Bank staff estimates and United Nations Children's Fund. 60 East Asia and Pacific Urban Business Directions Table B.2. Proportion of Population with Sustainable Access to an Improved Source of Drinking Water MDG Goal 7. Ensure environmental sustainability. Target 10. Halve by 2015 the proportion of people without sustainable access to safe drinking water. Annual Percen Year Change -_- _ _ -_ - Annual to Target Percent AohIe Country/ region 1990 1995 1996 1997 1998 1999 2000 2015 Change Tarwgt World 76 NA NA NA NA NA 81 88 0.6 High income NA NA NA NA NA NA NA NA NA Low and Middle income 73 NA NA NA NA NA 79 86 0.8 East Asia and Pacific 70 NA NA NA NA NA 75 85 0.6 0.7 Cambodia NA NA NA NA NA NA 30 NA NA China 71 NA NA NA NA NA 75 86 0.5 0.7 Indonesia 69 NA NA NA NA NA 76 85 1.0 0.6 Korea. Dem. Rep. NA NA NA NA NA NA NA NA NA Korea. Rep. NA NA NA NA NA NA 92 NA NA LaoPDR NA NA NA NA NA NA 90 NA NA Malaysia NA NA NA NA NA NA NA NA NA Mongolia NA NA NA NA NA NA 60 NA NA Myanmar 64 NA NA NA NA NA 68 82 0.6 0.9 Papua New Guinea 42 NA NA NA NA NA 42 71 0.0 1.9 Philippines 87 NA NA NA NA NA 87 94 0.0 0.4 Thailand 71 NA NA NA NA NA 80 86 1.2 0.4 Vietnam 48 NA NA NA NA NA 56 74 1.5 1.2 NA = Not applicable. 61 East Asia and Pacific Urban Business Directions Table B.3. Proportion of People with Access to Improved Sanitation Goal 7. Ensure environmental sustainability. Target 11. By 2020 to have achieved a significant improvement in the lives of at least 100 million slum dwellers. Annual Percent Year Change Annual to Country/ Target Percent On Achieve region 1990 1995 1996 1997 1998 1999 2000 2020 Change Track? Target World 49 NA NA NA NA NA 56 High Income NA NA NA NA NA NA NA NA NA Low and Middle Income 44 NA NA NA NA NA 52 72 1.8 Yes East Asia and Pacific 38 NA NA NA NA NA 47 69 2.2 Yes 1.1 Cambodia NA NA NA NA NA NA 18 NA NA China 29 NA NA NA NA NA 38 65 2.7 Yes 1.3 Indonesia 54 NA NA NA NA NA 66 77 2.0 Yes 0.6 Korea, Dem. Rep. NA NA NA NA NA NA NA NA NA Korea, Rep. NA NA NA NA NA NA 63 NA NA Lao PDR NA NA NA NA NA NA 46 NA NA Malaysia NA NA NA NA NA NA NA NA Mongolia NA NA NA NA NA NA 30 NA Myanmar 45 NA NA NA NA NA 46 73 0.2 No 1.3 Papua New Guinea 82 NA NA NA NA NA 82 91 0.0 Yes 0 5 Philippines 74 NA NA NA NA NA 83 87 1.1 Yes 0.2 Thailand 86 NA NA NA NA NA 96 93 1.1 Yes -0 2 Vietnam 73 NA NA NA NA NA 73 87 0.0 No 0.7 NA = Not available. Source: World Health Organization. 62 - East Asia and Pacific Region Infrastructure Department Urban Development Sector Unit The World Bank 1818 H Street, N.W. Washington, D.C. 20433 USA Telephone: 202-473-1000 World Bank East Asia and Pacific Website: http://worldbank.org/eap