Local government finance is about the revenue and expenditure decisions of local governments. It covers the sources of revenue that are used by local governments such as taxes (e.g. property, income, sales), user fees, and intergovernmental transfers. It also includes ways of financing infrastructure using operating revenues and borrowing as well as charges on developers and public-private partnerships. Furthermore, local government finance also addresses issues around expenditures at the local level and the accountability for expenditure and revenue decisions, including the municipal budgetary process and capital investment planning. These issues will all be looked at within the context of the ongoing COVID-19 pandemic which has already had a significant impact on local government finances, the effects of which will continue through the current period of lockdown and beyond.
Against this background, the course presents and discusses the key principles underlying effective local government finance as well as a range of analytical approaches for the economic and financial analysis of investment projects implemented by local governments under conditions of uncertainty. By the end of this course, students should be able to:
- Understand the key principals and elements of local government finance including fiscal decentralisation, revenue management, and capital investment planning.
- Understand and apply economic and financial analysis to investment projects relevant to local governments and incorporate uncertainty and probability in decision analysis.
During the first week, the course will present the key principles underlying effective local government finance frameworks within the context of intergovernmental fiscal relations and fiscal decentralisation. It will review the main revenue sources available to local governments, the issues typically associated with such sources, and the key challenges associated with revenue management. The sources of revenue for local governments discussed include taxes, user fees, and intergovernmental transfers, as well as investment income, property sales, and licenses and permits. The course will also analyse the issues associated with the development of capital investments plans and the corresponding sources of funding. It will cover established and innovative instruments and mechanisms utilised by municipalities to leverage additional resources for financing capital investments through borrowing and accessing capital markets. It will look closely at debt management, creditworthiness, intergenerational equity and the impact of funding from development partners.
During the second week, the course will review some of the key decision analysis theories and approaches related to investment projects, with a focus on economic and financial analysis. The conceptual foundations of economic and financial Cost Benefit Analysis will be addressed by reviewing the key microeconomic concepts that can be applied to the measurement of costs and benefits. The discounted cash flow analysis principle will be applied to concrete examples of investment projects. Among others cash flow modelling, project lifetime period, net present value, discount rate, and risk will be reviewed. Excel spreadsheets will be used to build an investment decision-making framework related to a hypothetical toll road project and risk and sensitivity analysis will be carried out to incorporate uncertainty and probability in decision analysis.
Local Government Finance and Investments
Aloysius Bongwa, Dr Alberto Gianoli, Somesh Sharma
Lectures; Individual and group work; Guided discussions; Analysis of cases; Practical exercises
Individual assignment 100%