Harnessing the potential of urbanisation in Africa: Raising capacity of local governments

The success of urban policies depends on municipal and state capacity. Government in Africa, especially at the local level, suffers from low fiscal capacity, but there are signs of improvement.

We have seen through this series that government policy has a role to play in ensuring that cities develop productively. However, without public funds and a well-functioning public sector, there is little hope that good urban policy can be implemented. This can be particularly problematic for municipal governments in Africa, where capacity can often be low; both in a productive sense and in an extractive sense.

The need to tax

To be effective, governments need to be well funded. However, local African governments often struggle to raise revenues. In general, low-income countries raise about a quarter to a half of the tax revenue as a share of GDP that is raised in high-income countries.[1] Low-income countries also tend to rely on tariffs and face higher levels of non-compliance. Property taxes, often an important revenue source for municipal governments, are collected at only one tenth of the rate of OECD countries.[2] In addition, informality limits rents from business licenses and sales taxes, which are also important for municipal governments.

The City of Kampala, Uganda by Alex Proimos

Raising the tax base

One big effort here is to modernise and digitise property records in order to expand the property tax base. There are many examples of cities in sub-Saharan Africa expanding their property tax base in the past decade: in 2017 Hargeisa, Somaliland expanded its property tax registry from 59,000 to over 200,000 properties;[3] in 2014 expansion of the property tax base in Kampala, Uganda raised potential revenue from the two central districts by almost threefold;[4] in Dakar, Senegal only an estimated 20% of plots are on the current tax roll, which has motivated the implementation of a modernised property tax management system;[5] in Freetown, Sierra Leone the city council recently increased the number of properties on the tax register from 57,000 to about 110,000;[6] and Rwanda recently completed a nationwide programme that registered 11.6 million parcels of land for the first time.[7]

Improving compliance

Bringing more people into the tax base is not enough on its own; low tax compliance can also be problematic. Efforts are being made to improve the capacity of the state to enforce and encourage tax compliance. One interesting focus is to use traditional local leaders to support the modern formal state. These local leaders, who are common across many cities in Africa, have been shown to be better tax collectors than state employees in the DRC.[8] The main channel that this seems to work through is improved local knowledge, rather than better ability in terms of coercion or persuasion. Related work in Tanzania shows that local leaders can be complementary to the state in terms of setting local prices for publicly provided goods.[9] Local leaders have information on the demand for government-provided title deeds that can be used by the government to set prices in a way that improves uptake and revenue from the government provision of title deeds.

A virtuous cycle of state capacity

The need for improved state capacity in order to raise revenues can seem to create a trap, wherebygovernment capacity is limited by the revenues they raise, which are in turn limited by the capacity of the state to extract taxes and fees. However, recent work has shown evidence of a virtuous cycle of tax compliance and state legitimacy.[10] If governments can make a first push to improve their tax capacity, this can strengthen democratic participation and public attitudes toward the state, which in turn can improve government capacity and intrinsic motivation to pay taxes.

There is potential for urbanisation in Africa to raise the productivity and quality of life for hundreds of millions of people. Government has an important role to play in ensuring that cities flourish and develop efficiently. To do so, strong and well-functioning urban authorities will be needed that can enact and implement the policies necessary to guide these cities into the future.

Background reading

  1. Taxation and Development. Besley and Persson, in Handbook of Public Economics vol. 5, 2013.
  2. How Can Governments of Low-Income Countries Collect More Tax Revenue? Moore and Wilson, ICTD Working Paper #70, 2017.
  3. Property taxes: Exploring the untapped potential for the city of Hargeisa. Astrid Haas, IGC Cities that work, 2017.
  4. Enhancing property tax in Kampala: Successes, challenges, and next steps for increasing municipal revenue. Manwaring and Regan, IGC policy brief 43448, 2020.
  5. Taxing property owners in Dakar. Knebelmann, IGC Policy brief 50415, 2019.
  6. Freetown just implemented a new tax system that could quintuple revenue. Prichard, Kamara, and Meriggi, African Arguments, 2020.
  7. Using Satellite Imagery to Revolutionize Creation of Tax Maps and Local Revenue Collection. Ali, Deininger, and Wild, World Bank Policy Research Working Paper 8437, 2018.
  8. Local Elites as State Capacity. Balan, Bergeron, Tourek, and Weigel, American Economic Review, 2022.
  9. Ask a local: Improving the public pricing of title deeds in urban Tanzania. Manara and Regan, CEP Discussion Paper # 1848, 2022.
  10. The Taxman Cometh: Pathways out of a low capacity trap in DR Congo. Kabue and Weigel, Working Paper, 2021.

Harnessing the potential of urbanisation in Africa is a short series exploring the exponential growth of African cities and the challenges and opportunities this presents for the housing market and its impact on productivity and quality of life. Over the past few months, we have released several articles covering (1) the existing issues facing the efficient development of African cities, (2) policy options to mitigate these issues, and (3) how we can improve state capacity to allow African governments to implement new policies. This series aims to inspire further research and interest from practitioners in this increasingly important area of real estate and urban economics.

Tanner Regan is a Research Fellow in Economics at London Business School, focusing on the economics of housing, land tenure, urban planning and property tax in developing-country cities. He holds a PhD from the London School of Economics and MA and BSc degrees from the University of Toronto. He is affiliated with the Centre for Economic Performance and the International Growth Centre at the LSE.

Featured image credit: The City of Kampala, Uganda by Alex Proimos, CC license via flickr

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