Financing local investments

Studies show that in developing countries, local infrastructure services account for 6.5% of annual GDP. It is also observed that this figure is quite high in developed countries as well.

There are different practices regarding whether investment budgets created by local governments are integrated into current expenditures or evaluated as a completely separate budget. Both methods have advantages and disadvantages. While an integrated budget approach provides improvements in planning, coordination, and flexibility, a separate budget prevents recurring annual expenditure items from crowding out investments. This is because when spending cuts are made in an integrated project, investment expenditures are often the first items to be eliminated. It is also necessary to recognize the problems stemming from implementation. Current expenditures and investment expenditures cannot be seen as alternatives to each other, and they must be carried out in coordination during the implementation phase.

Current data indicates that while 2/3 of countries operate with integrated budget processes, the remainder budget investment expenditures completely separately from current expenditures and present them to the central government. According to the budget preparation legislation for municipalities in Turkey, there is no regulation requiring investment expenditures to be subject to processes separate from current expenditures. For the rationality of investment budgets, it is considered beneficial to analyze and prioritize investment projects separately. Furthermore, since investment expenditures are spread over a long period, the transition to multi-year budgeting has provided an opportunity.

These services can be provided by public institutions or through partnerships with the private sector. The situation may change depending on whether the infrastructure investment generates revenue over time. If it is a service reserved for household consumption rather than revenue-generating, it does not produce income. However, if it is an investment with a return over time, its financing can be considered differently.

The financing of local investments can be provided through methods such as borrowing, public-private partnerships, privatization, tax revenues, user fees, transfers from the central government, and aid received from international organizations.

Local governments have limited access to capital markets to sell bonds directly. Therefore, borrowing is mostly done through funds created for this purpose. By creating a pool with these established funds, it becomes possible for local governments to access them. In a sense, risks are distributed among local governments, and resources are mobilized. There are regulations and oversight by the central government regarding the borrowing of local governments. Additionally, moral hazard problems can arise in this borrowing. Borrowing may be undertaken for non-economic projects, and if the debt cannot be repaid, the burden may fall on the central government.

Transfers between central and local governments are made for various reasons. They may be aimed at eliminating vertical inequality due to differences in resource availability between the central and local governments, or they may be aimed at eliminating horizontal inequality stemming from differences in financial strength among local governments. Beyond this, they may also be aimed at political reasons and establishing a balance of resources and services between different levels of the state.

Transfers from the central government to local governments can create problems in terms of accountability. While local governments elected by the votes of local constituents take credit for the services they provide, they may argue that they cannot perform services where they fail or are unable to provide because they do not receive sufficient resources from the central government. On the other hand, while citizens pay taxes to the central government, they expect services from the local government. This is because a significant portion of the services that directly affect the citizen's standard of living is provided by local governments.

Local infrastructure services can sometimes be financed through public-private partnerships due to financial inadequacies. The goal here is to mobilize private sector capital accumulation without using already insufficient financial resources. This method is possible in the provision of services that have returns, and returns are achieved through user fees once the service provision begins. However, in practice, this method does not sufficiently mobilize the private sector, and the private sector's risk concerns can increase the long-term costs of the contracts made.

Privatization is also used as a method in the provision of local services. The goal here is to ensure competition in the private sector and increase service efficiency by reducing costs. This method, which is generally used in public transportation, has not yielded the expected results. When the service area and regulations are not well thought out, it can produce the opposite results. In the example of public transportation, when the local government is completely left out, some services are disrupted, while the public sector's partial involvement in the service can increase the financial burden. Furthermore, private firms acting solely with a profit motive can lower the quality of service.

An important source of income for local governments is the revenue obtained as a result of land use and allocation. If accountability is not well defined, this is one of the most problematic areas. In places newly opened for zoning, high amounts of infrastructure financing needs arise. Although payments such as participation shares and betterment levies are legal, these resources remain limited due to political risks. On the other hand, receiving more contributions from firms brings other types of problems to the agenda. While local governments think that firms have high financial strength, firms, conversely, argue that they should not bear high costs by claiming they add economic value to the region.