Tax exemptions not best way to attract private sector – expert

Last week, Kigali hosted a two-day forum on sustainable urbanisation in keeping with the spirit of the second Economic Development and Poverty Reduction Strategy (EDPRS 2). The forum brought together stakeholders in urban development and experts from various countries and international organisations who shared ideas on urbanisation. The New Times’ Collins Mwaicaught up with Richard Newfarmer, the country director for the International Growth Centre who shared insights into sustainable urbanisation that Rwanda is keen on. Briefly introduce the International Growth Centre, the organisation behind the two-day national forum on urbanisation. The International Growth Centre is a joint venture of the London School of Economics and Oxford University. We provide research and policy analysis at governments’ request. Governments point out areas where they require additional research information and we work with world renowned experts to provide expertise in those areas. What’s your take on Rwanda’s urban development and its projected impact? Rwanda has developed its own track for urbanisation. The government has in its second EDPRS placed emphasis on urbanisation which is important since it gives the country an opportunity to use cities as vehicles for economic growth as EDPRS2 aspires to have an average income growth of 11.5 per cent over the next five years. This may be difficult to achieve, but once achieved, it will help transform the lives of Rwandans. Much as we are emphasising on urbanisation, there are case studies of Sub-Saharan African countries where urbanisation has not led to increased national income. How can we ensure that Rwanda’s urbanisation contributes to income growth? Rwanda has an opportunity to use urban development to ensure growth. This can be achieved by coordinating private investments in housing and public investments in infrastructure as well as business investments in commercial activities. Ultimately, it is those commercial activities in the private sector that will drive job creation and foster increased productivity within the city. Rwanda is in a good position to maximise the benefits by not only building cities but also expanding exports and creating jobs. There are very few experiences around the world where urban development was not accompanied by income growth and often that can only occur if the government does not pay attention to issues like effective transport systems within the urban structure or partly because the type of development path was not sufficiently in line to provide a developed income generation structure. Urbanisation itself doesn’t guarantee income growth, but Rwanda is in position to have a model that will guarantee that. Urbanisation has often sparked fears of an increase in the cost of living. With the rate of development, cities become more expensive to live in. Is there a way Rwanda can avoid that? What is important is to channel public sector subsidies to the low income population and ease their plight as urbanisation occurs. This can be achieved through improving the transportation infrastructure connecting people to markets so that they can build and dwell in the city peripheral but have access to the city. Roads and streets are crucial to ensure that urban development does not leave some of the population out. Channelling subsidies and letting the middle class and the upper class help develop the mortgage fund would be another way to ensure urbanisation is not oppressive to the low income earners. Affordable housing is increasingly becoming elusive in Kigali. What is your take on this? We have seen a lot of efforts to determine what is affordable for various social strata, especially the migrants coming into the city. The government can help the process by putting in place infrastructure such as water and then letting people construct their own houses based on what they consider affordable. That will help mobilise savings and encourage investments because low income earners usually want to invest in their own housing. But that has to be aligned with an efficient construction industry so that people add to the housing naturally. They will build up, like what we have seen in Peru, for example. In Peru, housing in the 1960s and 1970s, people moved into the streets that had been laid out and started out with straw mats, and then they invested in bricks to build their own houses which have been slowly expanded and developed with time to one or two storey houses. The roads that were previously unpaved have now been paved, not through public subsidies but by the community coming together. Construction companies and real estate firms have blamed the rising cost of housing to cost of construction considering that some of the inputs are imported. How do we go about this? The City of Kigali will double or triple in size in the next 10 years or so. That will bring the rise of numerous industries one of them being construction. It is already one of the biggest industries in the Rwandan economy and we can see more firms in the industry growing. There are also other firms that facilitate the sector, for example, through production of Iron rods and brick kilns. One thing that the country should not do is to add to the cost of raw materials by raising tariffs. That would be a mistake because there is so much demand already linked with heavy transport costs and it would drive up the costs. There is, however, need to regulate the establishment and growth of the construction industry and process, part of that is a regulatory framework that the government has already put in place. This is likely to support the development of the already existing and emerging construction business. A high rate of urbanisation can overwhelm the existing infrastructure and hinder the development of cities. What would be the best way to ensure that infrastructure is not overwhelmed? The first key ingredient has already been done (in Kigali), by putting together a master plan on how you want urban development to take place. There will be other changes to the master plan depending on infrastructure demands. I have no doubt that most of the urban areas we see were previously low income dwellings but the opportunity to channel subsidies helped build those areas to what they are now. There is need to ensure that the existing infrastructure is able to support development. Urbanisation has been linked to driving poor people away from cities because it gets harder for them to keep up with the development rates and increase in costs, is this true? Not necessarily, but it all depends on the master plan and how it is implemented and how neighbourhoods are organised. There are programmes to help upgrade those low income neighbourhoods and their living standards, especially in Kigali where you have various models of development. But it is also true that every city in the world is cheaper on its outskirts than at the centre. So it is logical that a person coming in will look for housing in the cheapest part out of the city centre. There is, however, an expectation, which is rental housing. I think this is something the government can encourage though it would not be for the lowest cost houses. It would be ideal for the middle class. In most African countries, the appreciation in the value of land and property in the city benefits a few, rich individuals at the expense of others. Some experts have advised on a model where the appreciation is taxed and the revenue ploughed back to fund the cities’ development. Is this practical? This can be termed as a low hanging fruit where the government already has in place mechanisms that would be used to tax the appreciation value and use the revenues to help build infrastructure and utilities to facilitate urbanisation. There is need to be able to capture the appreciation on the value of land to fund development and ensure that the profits are not accrued to a few, rich people. The process will be expensive and will require heavy investment. Are there fair financing options? The work in urban planning and macro-planning is important in that firms are going to be growing yearly which means that tax revenues will also grow as well. This is financeable through the revenue stream. The second source is increasing the savings of people, particularly the low income earners, as they move into the city and build their own houses. The third way would be to borrow money from organisations like World Bank, African Development Bank and other development partners who have been an important source in the developments we have made so far. New sources of funding will begin to expand beyond the sources that are available as Rwanda becomes wealthier. Cooperation between the private and public sectors has been mentioned severally as a facilitator to urbanisation. What are some of the areas that this cooperation can be effected? Communication between the two sectors is key to urban development. The government’s role is to lay out urban infrastructure because that will define where people build and develop enterprises. The private sector is going to be supplying some of the materials that go into the process and ways like architectural firms. The government focuses its efforts not on building housing to expand supply but on planning and providing infrastructure like, energy, sanitation, transport etc. Private sector has always called for incentives with the main one being tax exemptions. Would you recommend that? This has to be handled very carefully, because, virtually, every sector would like to have tax exemptions as an incentive. But the fact is that the biggest incentive the government can provide is a stable policy environment and taxes that are not excessive and the surrounding infrastructure for housing. That is what Rwanda is pretty good at. Environmental impact or urbanisation has overwhelmed some countries; especially some Asian Tigers who developing countries seek to emulate. How do we ensure that we do not fall into the same? It is important that Kigali and the upcoming secondary cities avoid this in the future through developing public transport systems that move people around efficiently. The City of Kigali has this as a work in progress in the bus system. The second is finding a way to control household emissions by gradually eliminating firewood as a source of fuel. Rwanda surely has an opportunity to make its city green by learning from the mistakes of other countries. What are some of the features of a 21st century city like the one Kigali seeks to become? They include; Pleasant architecture, efficient transport system, reliable rules and regulations, free of pollution, environmental consciousness, among others. Is there a model that you would advise Rwanda to embrace? Urbanisation is unique in every case, it is hard to copy what happened in other areas and replicate it. You can only learn from the mistakes as well as strides of other countries. There has also been an issue of too many stakeholders workingtoward the same goal differently without synergy. How should the government go about this? It has to be worked out. I have no doubt that Rwanda has a government that can solve this by virtue of the fact that they have raised the issue of ordination as a difficulty, suggesting that people will work together to iron out the issues. Rwanda has a capable government, even as this is difficult to do, it is possible.

National

Tax exemptions not best way to attract private sector – expert