How to finance Colombian cities during the COVID-19 pandemic

Did you know that by 2050, three out of four people will be living in the cities of Colombia?  That is not a small number in a country with a population of more than 50 million. This will have a major impact on urban planning in Colombia’s cities.

To satisfy the demand for utilities and public spaces such water supply and sewer systems, public lighting, parks, among others, cities must plan their growth based on current social needs.   They must also evaluate new forms of financing to obtain more resources that promote a better quality of life for their growing number of inhabitants. 

But what does this mean? It refers to the need for current planning and urban development to consider the 4.4 million households that are vulnerable today because of overcrowding, poor-quality construction materials or few or no household connections to public service networks.

This situation is exacerbated by the fact that  70% of the country's immigrant population resides in the same 15 large and medium-sized cities that have the largest number of vulnerable households in Colombia.  

Additionally, owing to the COVID-19 pandemic in the country, many people lost their jobs and businesses lost their clients, which also led to reduced tax revenue for cities, an increase in spending on services such as health, and changes in the real estate market.

For example, in the first half of 2020, the collection of municipal property taxes, which are a source of revenue for municipalities, declined by 38% nationwide. Cities commonly use these tax revenues to invest in urban development.

By the end of 2020, government revenue in large and medium-sized cities is expected to decline by 10% and 16%, respectively, given lower collection rates of taxes  such as the Industry and Commerce Tax (ICA) and the Property Tax. This will directly affect the implementation of these cities’ plans for infrastructure construction, urban development and programs to address the health emergency and the reactivation of the economy.

Urban development during the pandemic

To better understand urban development during the pandemic, it should be kept in mind  that not all municipalities and real estate products behave in the same way. For example: costs for the purchase or sale of offices, warehousing services or housing differ in each municipality. Municipalities must determine how many of the square meters built can actually be sold. This capacity varies by municipality.  Size is not always a reason for the success of a sale or purchase.

Finally, the pandemic is accelerating the response of urban planning for the city’s expansion (more green space) or consolidation (areas with increased accessibility to services and transportation) .  

During the pandemic, many Colombians have suffered an economic impact and city budgets for infrastructure investment are underfunded. Accordingly, municipal governments should evaluate new sources of financing to achieve better cities that recover quickly from the effects of the health crisis, and that are prepared to meet the demand for services and public spaces for the large number of inhabitants projected for 2050.

These challenges prompt several questions: how can cities guarantee access to infrastructure and urban development (housing; infrastructure such as health clinics and schools; drinking water networks, basic sanitation; transportation) and public spaces? How can they cover the existing deficit and the increased demand resulting from the pandemic? What programs, instruments or mechanisms can cities use to mitigate the impact of the pandemic and guarantee sustainable development?

It is not an easy task, and although the scenario is more hopeful in the medium (2022-2023) and long term (2024 onwards), there are no one-size-fits-all solutions. There are a few recommendations, however:

a.  Recommendations for urban management and city financing

• Update the cadasters linked to information from the Land Use Plans (POTs) and avoid increasing municipal taxes in the short term.
• Incentivize the use of underutilized urban management tools that can be employed in the short term for post-COVID-19 recovery and that can partly finance infrastructure.
• Encourage the use of long-term instruments that include private capital to finance urban infrastructure.
• Support the design of urban projects with a focus on financing long-term projects to ensure development during the post-pandemic recovery.

b.  Recommendations on information systems for urban development Promote the Multipurpose Cadaster, taking into account the differences among the municipalities (size, population, urban or rural), prioritizing its implementation in metropolitan areas / regions with more extensive real estate development. 

c.  Recommendations for Housing and Urban Development Programs

• Strengthen programs that promote resilience of homes and neighborhoods, increase employment in construction and encourage the growth of the sector (new housing in various segments, improvement of housing and neighborhoods, rental housing in consolidated sectors, and housing microfinance).

Municipal finances will eventually improve as municipalities increase their collection of municipal taxes and stimulate urban development. For this reason,  cities should implement long-term infrastructure projects and update land use plans, as well as apply underused instruments to obtain alternative financing to complete their development plans.

In this context, cities will not only lead their post-pandemic recovery; they will also find in urban development a source of funds to finance and guarantee a better quality of life for their inhabitants in the medium and long term.