OECD Regional Outlook 2019

Chapter 5. Innovative multi-level governance to address future challenges

Abstract

This chapter describes the expected impacts of technological, demographic and environmental changes on subnational fiscal systems. It then discusses innovative approaches to the governance of regional policies, and focuses on public investment at the subnational level.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

Stronger multi-level governance and finance systems can help countries to seize future opportunities. Adjusting the multi-level governance and fiscal systems is all the more important when global megatrends risk deepening territorial disparities. Many trends discussed in this report will affect subnational fiscal systems. The tax base of some regions and cities might fundamentally change due to demographic shifts, changes in the labour market and business income, as well as changes in land values and housing prices. This could lead to increasing disparities in fiscal capacity among regions. Thus, vertical and horizontal equalisation mechanisms across regions will become increasingly important. These mechanisms can ensure that total per capita revenues of subnational governments within the same country do not diverge too much from each other.

Likewise, multi-level governance systems will have to be adapted to mitigate increasing disparities across regions and cities. The previous chapters have shown that considerable territorial disparities exist that will become worse unless counteracting policies are implemented. Moreover, the administrative capacity of subnational governments varies considerably in all OECD countries. The ongoing development of asymmetric multi-level governance approaches in many countries that differentiate across regions can be an effective response to this diversity and should be further pursued.

To be fit for the future, other characteristics of multi-level governance systems are equally important. Policy making has to occur at the right scale, taking into account, for example, functional urban areas and rural-urban linkages. To ensure this, appropriate co-ordination mechanisms across levels of government and across local jurisdictions should be developed. Furthermore, national governments have to pursue coherent policies for urban and rural areas, respectively, that ensure the various national policies are co-ordinated with respect to their impact on these territories.

Various stakeholders beyond the public sector should be taken into account in multi-level governance practices. Developing a strong, trusting, and co-operative relationship with the private sector, the civil society, and other communities can facilitate the alignment of objectives and incentives. Communication – such as regular dialogue and simplicity of feedback procedures – is a critical approach, as it helps clarifying what is expected from the different parties. While these procedures may imply some transaction costs in the short term, policy makers should bear in mind the long term benefits, especially as a way to be well- prepared for the potential challenges arising from the megatrends (OECD, 2018[234])

In many instances, it is not clear how to best proceed in practice. In this context, experimental governance can help to try out new governance arrangements or new policy solutions on a small scale to test whether they work. Experimental governance can thus foster public sector innovation and help to develop new solutions to future challenges.

The current level of total investment is less than half of what is required to address future needs from global megatrends.1 Subnational governments, which are in charge of 57% of public investment in OECD countries on average, will play a key role to help fill the gaps. National and subnational governments need to invest more – by better exploiting existing and potential fiscal resources for investment – and better – by improving the planning, selection, governance of investment – to ensure a balanced development of countries. However, as public sources of funding will be insufficient to cover the investment needs demanded by megatrends, cities and regions will need to seek financing for suitable projects from the private sector.

This chapter is structured as follows. First, it describes the expected impacts of technological, demographic and environmental changes on subnational fiscal systems. Second, it discusses innovative approaches to the governance of regional policies. Third, it focuses on public investment at the subnational level.

Improving the efficiency and resilience of subnational fiscal systems

Established sources of subnational tax revenues will be put under increasing pressure

In the medium term, the tax base of some regional and local governments might fundamentally change due to new technologies, demographic changes and changes in the labour market that could, for example, affect households’ and businesses’ income, land values and housing prices substantially. For example, profits in the digital economy accrue disproportionally to large companies that are based in a just a few regions. Thus, ongoing digitisation is likely to lead to a concentration of corporate income tax revenues in a few regions.

The impact of megatrends on subnational revenue depends on two factors that vary significantly among countries: 1) the weight of taxes in subnational revenues; and 2) the tax structure (Box 5.1). The tax structure includes the proportion of shared taxation and own-source taxes, the categories of taxes (on households, companies, property, etc.), subnational taxing power over rates and bases, the size of tax bases, etc. All these dimensions vary significantly among countries. As a result, tax revenues are likely to be increasingly unequally affected across regions. Table 5.1 summarises some of the main effects on taxes that can be expected from the trends discussed throughout this report.

Assuming that there will be no radical changes in tax rates or tax mix (i.e. no new major tax instruments introduced) in the short or medium term, digitalisation and demographic changes are likely to put pressure on tax revenues in many regions. For instance, in remote rural areas, population ageing and outmigration may erode income tax bases dramatically. If such development persists, less prosperous regions will become more reliant on central government transfers and other revenues.

International tax competition puts strong pressures on corporate tax rates and thereby on corporate tax revenues all over the world. Even though the economic literature usually argues that corporate tax is not an optimal source for revenue for subnational governments (Bahl, Linn and Wetzel, 2011[235]), in many countries corporate tax revenue is shared between central government and subnational governments. While business headquarters are often concentrated in large urban areas, there can still be considerable activity (such as manufacturing or mining for example) in other regions. Increasing concentration of businesses over time, particularly in large agglomerations – which may be accelerated by digitalisation – would further reduce tax revenues in less developed regions,

Property taxation is seen as the best tax for financing local public goods for several reasons. One of its main advantages is that it approximates the benefit principle, i.e. those who benefit from public services will pay the tax. It is also a geographically equitable tax and provides stable tax revenues. However, in reality, property tax makes up only one-third of all municipal tax revenues (Slack, 2018[236]). Large metropolitan areas usually have a larger per capita property tax base because of higher property values and more commercial and industrial properties, which are often taxed with higher rates than residential buildings (Slack, 2018[236]). If ongoing urbanisation and increasing economic concentration in cities drives up land and property values further, regional differences in property tax are also likely to further increase.

Table 5.1. Possible effects of global megatrends on different types of taxes at the regional level

	Environmental changes	Demographic change			Technological change
	Energy transition	Ageing	Urbanisation	Migration	Digitalisation	Automation
Personal income taxes (PIT)		Reduces PIT revenues.	May increase PIT in cities as more people move to urban areas; reduces PIT in rural areas.	In areas with positive net migration the PIT revenue can increase.		Reduces PIT in regions that see large job losses from automation.
Corporate income taxes			May increase, especially in urban areas due to agglomeration effects.		Profits in the digital economy accrue disproportionally to large companies that are based in just a few regions. Thus, ongoing digitisation is likely to lead to a concentration of corporate income tax revenues in a few regions.
Property taxes		Equity issues may arise if elderly population relying on pension income has problems to pay the property tax.	Urbanisation may push up the price of land and increase property tax revenue in urban areas. In non-urban areas, the property values and property tax revenue can diminish.		Technologies such as Geographic Information System tools can help identify properties and thus increase the efficiency of property tax collection.
Taxes on goods and services	Petrol tax base may diminish or disappear if shift to electric vehicles is successful.				Online retailers may increase the complexity of value-added tax collection and regulation; but some technologies may also help track consumption and services.

Note: Assuming a business-as-usual scenario, i.e. countries do not carry out policies to intervene/change these impacts.

In order to make the right budgetary choices, subnational governments may need more ability to raise own-revenues and enjoy more flexibility in managing them. In the area of climate change, for example, the ability to benefit from tax resources, through tax-sharing arrangements and own-sources taxes, is particularly important. All categories of taxes can potentially be used to finance climate objectives. However, taxes or user fees specifically targeting environmental protection in the areas of energy, transport, pollution, water and natural resources can also benefit subnational governments exercising functions in these sectors. Central government co-ordination is needed, however, in implementing such taxes locally to ensure that the national environmental protection targets are met. Also, to the degree that environmental taxes (such as petrol or, more generally, carbon taxes) succeed in changing behaviour towards becoming more environmentally responsible, revenues from them may gradually disappear.

At the same time, digitalisation opens an opportunity for governments to achieve a better taxation system. Blockchain, robotic process automation and Geographic Information System (GIS) in particular may enhance the transparency, efficiency and resilience of the taxation system and improve tax collection and management. These technologies can be particularly useful and of great interest for subnational governments. However, they raise specific legal, technical and capacity challenges (Box 5.2).

Box 5.1. The structure of subnational government revenues in OECD countries

In the OECD, tax revenue – which includes both shared and own-source taxes – represented around 45% of subnational revenue on average in 2016, while grants and subsidies amounted to 37%. User charges and fees and property income represented respectively 15% and 2%. Beyond these averages, national data show a very diverse situation from one country to another (OECD, 2018[50]).

Figure 5.1. Structure of subnational government revenue, 2016

Note: Tax revenues do not include here social contributions.

Source: OECD (2018[50]), “Subnational governments in OECD countries: Key data”, https://www.oecd.org/regional/regional-policy/Subnational-governments-in-OECD-Countries-Key-Data-2018.pdf.

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For example, subnational tax revenue ranges from 3.5% of subnational revenue in Estonia to 77% in Iceland. Although recurrent property taxation is the cornerstone of local own-source taxation, particularly for municipalities, its weight in subnational tax revenues differs from one country to another. It represents 35% of subnational tax revenue in the OECD (unweighted average), but accounts for 90-100% of local tax revenue in Australia, Ireland, Israel, New Zealand and the United Kingdom, and less than 10% in Estonia, Luxembourg, the Nordic countries, Switzerland and Turkey (OECD, 2018[50]).

Box 5.2. Improving subnational tax systems with new technologies

Blockchain business models change the way tax administrations operate, co‑operate and collect taxes. Blockchain creates an environment in which every transaction is public, verified and available in real time. Its application in tax has the potential to move the function from retroactive analysis and historical financial information gathering to a position where transactions, expenses, assets and liabilities can be recorded in real time and publicly scrutinised. By verifying things such as land ownership, other assets and identities, Blockchain and distributed ledger mechanisms can assist governments in mitigating the risk of mistakes and fraud as well as assessing and collecting tax payments. However, the application of Blockchain technology in taxation, especially on local taxation, may raise new technical and legal difficulties such as value determination, with a risk of the “tokenisation” of the assets and great variations of the value of existing assets across jurisdictions. Before the wide adoption of this new technology, policy makers will need to update legislation to close loopholes and potentially unfair tax treatment and to create standard guidelines regulating the “tokenisation” of the assets. The public sector might also need new competency for co-ordination among governments at different levels, as well as for generating clear guidance for citizens and businesses to apply this new technology for their assets.

Robotic process automation can also be applied in the taxation system to increase efficiency and transparency. Applications such as “TaxBot’’ are already being used to transform tax function operations. By tracking business expenses and mileage, it helps users automate and simplify tedious accounting processes to save time and money, which in the end helps with such matters as provision, sales and use compliance.

Geographic Information System (GIS) tools can help enhance area-based systems, i.e. tax at a fixed rate per square metre of land area or building size. Traditionally, property taxes based on area do not capture changes in relative values over time. Revenues from this source will therefore be inelastic unless the fixed charges are frequently readjusted. Yet, with more advanced digitalisation tools, such as big data technology, one can expect that changes in relative values of assets can be easily identified or calculated, or can be forecasted in advance, which helps governments set the tax rates in a more flexible way. Cadastral maps can be updated regularly, and valuations made more consistently and in an up-to-date manner. Information flows from property registries, local building license authorities, public utilities, can be smoother. Other “land-based” subnational taxes – for example, betterment charges, levies on the sales of assets, licences to operate and even transfer taxes to a limited extent – may also benefit.

Countries may also rely on non-tax revenues, in particular to finance the maintenance and renewal of urban infrastructure. When well-exploited, tariffs and fees can help finance a number of local public services and facilities that are key to cope with megatrends, in particular in areas such as water treatment and distribution, collection and treatment of waste, public transport, and energy, among others. To reduce the environmental impacts of climate change, subnational governments could, for example, develop a fiscal strategy based on climate-friendly user fees and charges like congestion charges (OECD/The World Bank/UN Environment, 2018[237]).

Subnational governments can also better exploit land-value capture policies to bridge the financing gap. Land-value capture refers to fiscal instruments through which public authorities can capture increases in property values that are unrelated to actions of land owners. Typically it aims to capture either the windfall gain to land owners that can occur through zoning decisions or through public investments that raise the value of land and property.

Better budgeting by all levels of government

The long-term impact of global megatrends is generally hard to predict and thus difficult to incorporate into subnational expenditure frameworks. For regions with a large ageing population, the most obvious change in public expenditures may be pensions, medical care and long-term care. However, healthcare expenditure depends not only on the trend of an ageing population; the supply of medical goods and services, which is determined by technological progress, accessibility of medical services and institutional frameworks, also play a role. OECD analysis show that without reforms to contain health and long-term care costs, total expenditure in these areas is projected to increase by 7.7 percentage points of gross domestic product (GDP) between 2010 and 2060, on average, across OECD countries (3.3 percentage points of GDP in a cost-containment scenario) (de la Maisonneuve and Oliveira Martins, 2014[238]). This is a concern for national and subnational levels of government alike – health is the second highest budget item for subnational government in the OECD, accounting for 18% of subnational expenditure, the equivalent of 2.9% of GDP (OECD, 2018[50]).

A robust budgetary framework should thus be in place to meet the diversity of local needs and the potential short-, medium- and long-term challenges associated with the megatrends. This includes improved budgeting frameworks and processes, particularly in terms of time frames, stakeholder engagement and indicators used. For example, integrating multi‑year forecasting or scenario planning into budgeting processes should be a priority to establish robust budgetary frameworks in subnational governments (see Chapter 2). Multi‑year budgeting allows subnational governments to better cope with the impacts that megatrends can have on the expenditure or revenue sides. A multi-year framework needs to be complemented with mechanisms to regularly ensure reviews and updates. In Nordic countries, for example, all municipalities are legally required to have both annual budgets and four- to five-year fiscal plans, which are useful for both central government monitoring and subnational planning purposes.

In some cases, however, a full-blown multi-year budget approach may be a complex and administratively costly tool that ends up diverting attention and resources from the more fundamental task of developing adequate annual budgets. This is especially the case for small municipalities or local governments with limited resources and capacities. As such, subnational governments should bear in mind that a multi-year budgeting framework should be associated with the regional or local development strategy, including objectives pursued, development priorities identified and the approach chosen (Boex, Mcnad and Martinez-Vazquez, 1998[239]).

Participatory budgeting, a process which citizens are engaged in the decision making of spending and investment, can also help increase the robustness of the budgetary framework. When properly conducted, participatory budgeting may contribute to improving information flows between policy makers and service users, leaving the former better equipped to provide goods and services that more closely match the citizens’ needs and preferences. It also strengthens accountability, as it stimulates more frequent checks on policy makers and politicians by the citizens (Gonçalves, 2013[240]). There is a growing trend of greater citizen involvement and participation in budgeting processes, in particular at the city level. Participatory budgeting is on the rise in particular in Latin America (Brazil, Chile, Dominican Republic, Peru, etc.) as well as in Europe (Madrid with 15% of municipal budget in the hand of citizens, Reykjavik, Lisbon, Cologne, Paris, etc.). This trend is likely to continue with further increasing digitalisation.

Rethinking the governance of regional development policies

The quality of governance arrangements has a critical impact on spending effectiveness and investment outcomes. Governance that facilitates co‑ordination and integration of sectoral policies is essential for effective regional policies in general. Appropriate governance arrangements have to ensure, for example, that policies are designed and implemented at the right scale and that public actors, the business community and civil society are involved. Rethinking governance arrangements might be required to ensure that regions are prepared to make the most of current megatrends. Three areas have generated significant new insights and opportunities in the governance of regional development policies: behavioural approaches, digitalisation and experimental governance.

Regional development policies inherently involve multiple stakeholders at all levels of government and are defined by a long-term time horizon. Interactions are often difficult, as there are asymmetries in the information among stakeholders, and unconscious biases when forming objectives and their opinions (OECD, 2018_[234]). Insights derived from the behavioural and social sciences can be used as a public policy tool to address these biases.

Digitalisation opens up new ways for governments to reassess how policies are developed and services are provided. Utilising digital technologies can fundamentally alter the way governments engage with citizens. Through digital mechanisms, providing detailed information to help citizens take informed choices is just as feasible as direct feedback mechanisms that give citizens the opportunity to provide instant feedback on plans and policies that are still in development. With demographic decline raising the cost of service provision, physically or in person, relying on digital service delivery or even virtual service centres can be a solution that maintains access to public services.

The main challenge in addressing different megatrends is the uncertainty that surrounds the trends themselves, as well as their impact on different places. No single policy or governance mechanism offers the perfect response to any, let alone all, megatrends. Learning-by-doing and trial and error processes will therefore be essential to ensure that policies are sufficiently flexible to adapt as megatrends shape regions and cities and are in turn shaped by them. Experimental governance is a framework that embeds learning as an integral part of the policy design process.

Applying behavioural insights to regional policies

“Behavioural insights” are lessons derived from the behavioural and social sciences, including decision making, psychology, cognitive science, neuroscience, organisational and group behaviour (OECD, 2017[242]). Although their use in regional development policies has not been deeply explored, behavioural sciences offer a series of insights and tools worth considering when designing regional development policies. This can be done by “nudging” whole organisations via the people inside of them and via the policies and procedures defined to get results. “Nudging” people responsible for the design and implementation of regional development policies refers to the effort that can be made to modify their behaviour by influencing their decision making as opposed to doing so through compliance-oriented measures (OECD, 2018_[234]). Behavioural nudges can, for example, improve the effectiveness of tax collection. In the United Kingdom, the Behavioural Insights Team has encouraged tax payment by making reference to social norms in reminders to people with overdue tax payments. Results show that both norm‑based and public-good messages increased the likelihood of individuals paying their overdue taxes (OECD, 2018_[234]).

Understanding the behaviour of policy makers or policy implementers can make a significant difference to the quality of policy outcomes, regardless of whether one is deciding which conditions to include in a contract or which indicators should be used to evaluate performance (Box 5.3) (OECD, 2018_[234]). In the context of regional policies and investments, behavioural insights can bring useful responses by helping explain biases linked with communication problems, engagement challenges, priority misalignment, funding gaps or misallocations, among others. Behavioural insights can, for example, provide guidance on how to define conditions for transfers from national to subnational governments that can be effectively met, and how to design territorial contracts across levels of governments that better nudge the parties to collaborate (OECD, 2018_[234]). More generally, behavioural insights can help to align incentives that are provided within a public administration and outside of it more closely with policy objectives.

Digitalisation of government services in cities and regions

Across OECD countries, the use of digital government services has tripled since 2006, with around 36% of OECD citizens submitting forms via public authorities’ websites in 2016 (OECD, 2017[247]). Across the European Union, the digitalisation of services has somewhat or even substantially reduced operating costs for 85% of cities (ESPON, 2017[248]).

Digitalised services are provided by the national, regional and local governments in different services or sectors, including citizen engagement (e.g. obtaining information, administrative procedures and online voting), spatial planning and construction, social and welfare services, as well as public infrastructure. In the European Union, for example, digital services for spatial planning and construction are often available at the local level. A high proportion of cities offer online applications for planning and building permits and dedicated GIS services to explore land-use plans and proposals. A majority of cities also enable citizens to trace their council’s decision-making process on line to promote e‑inclusion of citizens in local governance (Figure 5.2). By contrast, social and welfare services are less digitalised compared to other services (ESPON, 2017[248]). In response to the megatrends, governments can make more effort to promote digitalisation in these fields.

The degree to which digital services are “localised” varies across regions. In the European Union, for example, larger cities generally tend to provide a wider range of digitalised services at the local level. While this suggests that in some parts of Europe and for some types of digitalised services a higher share of these services are provided at regional and/or national levels, it may also imply persistent differences in the use of digital government services across various population groups. Governments need to be aware of these differences in order to develop tailored public service delivery approaches and avoid creating new forms of digital exclusion as the digitisation of the public sector progresses (ESPON, 2017[248]).

Box 5.3. Applying behavioural insights to regional development policies

Behavioural insights can explain biases linked with communication problems, engagement challenges, priority misalignment, funding gaps or misallocations, among others. A step forward in regional development policy design is assessing and responding to those biases by integrating possible solutions provided by behavioural theory when deciding who to engage, which activities to fund and how to assign that funding.

Behavioural insights can be taken into account when designing regional development policies in order to:

• Better use funds and select projects: improving organisational or “group decision making” can significantly improve allocation of project funds; using behavioural insights might also help to improve effectiveness and transparency in the use of funds by using fair procedures to select projects and due processes.

• Improve co-ordination and collaboration among actors: behavioural insights can offer techniques that improve communication between parties and facilitate stakeholder engagement. Behavioural insights can also provide useful information on how to align individual and organisational goals among levels of governments. Collaboration can be enhanced through the use of behaviourally informed tools and products that aid in the process.

• Simplify procedures: behavioural insights have proven to be a successful tool in areas where the use of traditional forms of regulation is no longer effective. The use of plain language, or even visual instructions, can be more effective than lengthy instructions. Nudging principles can be applied in interventions that aim to simplify processes within an organisation, for example, in relation to public procurement or grant applications.

• Use data more effectively: behavioural science can also make sense of data by helping to answer the following questions: how can the available data be used better? How can the data be presented to different stakeholders involved in defining regional development policies with a view to increasing uptake? Which data should be used, provided to or asked of subnational governments in order to align objectives? Which data can be more effective to reward, monitor or evaluate performance?

• Improve performance and uptake: behavioural insights can contribute to a better understanding of the use of rewards or incentives in organisations, structuring rewards and measuring performance in line with the intended outcomes. They can also help build a culture of risk-taking to encourage and stimulate innovation.

Source: OECD (2018[234]), Rethinking Regional Development Policy Making, http://dx.doi.org/10.1787/9789264293014-en.

Figure 5.2. Share of digitalised services provided at local, regional and national levels in the European Union by type

Source: EPSON (2017[248]), The Territorial and Urban Dimensions of the Digital Transition of Public Services, https://www.espon.eu/sites/default/files/attachments/ESPON%20Policy%20Brief%20on%20Digital%20Transition.pdf.

GIS is a highly flexible digital tool with applications in numerous contexts, and is commonly used in urban planning, especially for construction and public transport design. Generally speaking, it allows spatially referenced data from diverse sources to be linked, thus providing a clear picture of what is going on within a given territory, such as a city. For example, when seeking to decrease the incidence of a specific disease, health departments can identify disease clusters by mapping each case. They can then layer the map with other information, including pollution levels, literacy levels, crime levels, etc. in an attempt to find correlations that either help determine causation or help guide an appropriate response to the health problem. An increasing number of cities have been using GIS to make it easier for the public to report potholes and other problems like water leaks, abandoned vehicles, potential gas leaks, graffiti, etc. (Walden University, n.d.[249]). In recent years, the application of GIS has spread to medium and small cities and regions in developed and developing countries (Box 5.4).

One significant characteristic of the digital era is the booming quantity of data – the volume of digital data is almost doubling every two years (Song et al., 2017[250]). Machine-learning techniques is a new line of research that facilitates exploiting the large amount of data increasingly available to public institutions and researchers. Machine learning tries to develop purely data-driven models that result in the best prediction for beneficial outcomes from targeted interventions (De Blasio, Lembcke and Menon, 2018[251]). In other words, it avoids identifying causality, which is often difficult in policy design, but uses empirical evidence and data to build a favourable policy model using algorithms. Software developed by the city of Los Angeles is processing big data to address traffic congestion. Using magnetic sensors, real-time updates on traffic flow are transmitted with simultaneous data analysis making second-by-second adjustments possible to avoid bottlenecks.

The increasing need for data sharing, analysis and protection in public services will challenge vertical silos in public administrations and require more co-operation among jurisdictions and levels of government. Governments should prioritise the adoption of an overall sharing strategy to co-ordinate efforts and exploit synergies (OECD, 2014[252]). This can be applied to facilitating the use of linked data and create a shared view of data and information, including open data, within and across levels of governments (OECD, 2017[253]). Open data enables public access to information and more direct involvement in decision making. For example, the Urban Open Data movement aims to foster understanding of government information by the average citizen. In Helsinki, data are released and managed through the city’s Urban Facts Agency in collaboration with neighbouring municipalities, who in turn release regional data through Helsinki Region Infoshare (Sulopuisto, 2014[254]). In the United Kingdom, the Greater London Authority has set up the London DataStore, a free and open data-sharing portal where people can access over 500 data sets for a better understanding of local issues and possible solutions. Some international initiatives offer cities support in their quest to develop and use open data for public services. For example, the World Council on City Data works on standardising city metrics and is implementing a dedicated standard in many regions (WCCD, 2018[255]).

Box 5.4. Applying Geographic Information System to public services

Geographic Information Systems (GIS) are used by subnational governments to support public service delivery. In New Jersey (United States), the New Jersey Turnpike Authority operates and maintains one of the nation’s most travelled toll roads, co-ordinating more than 800 lane closure requests a week, in order to help keep traffic flowing and to best serve the traveling public. Historically, staff would manually and meticulously review each lane closure request, combing through pages of spreadsheets to check for conflicts. Now, with the assistance of a web-based system powered by GIS, when the New Jersey Turnpike Authority receives a lane closure request, a geo-processing engine automatically checks for conflicts. In just minutes, the manager receives a recommendation from the system to accept or deny the request, depending on the results of the query.

GIS tools have become more accessible to small regions, cities and rural areas. In Santander (Spain), solid waste, parking spaces, air pollution and traffic conditions are monitored through 12 000 sensors installed around the city, providing city officials real-time information on service delivery. The Sussex County (New Jersey, United States) government developed a mobile application for citizens to find government services such as libraries, police stations and post offices. It also publishes instant information of Sussex County bridges and roads on line, including whether the bridge/road is open, whether it is single lane and so on.

Sources: Asuo-Mante, E. et al. (2016[256]), “The application of Geographic Information Systems (GIS) to improving health systems in the Upper East Region of Ghana”, https://doi.org/10.7916/D8QN678V; Siegel, J. (n.d.[257]), “Innovative GIS applications help public infrastructure agencies do more with less”, https://geographic-information-system.cioreview.com/cxoinsight/innovative-gis-applications-help-public-infrastructure-agencies-do-more-with-less-nid-15022-cid-52.html; ESRI (n.d.[258]), “Rethinking GIS for local government”, https://assets.esri.com/content/dam/esrisites/arcgis/products/arcgis-for-local-government/assets/rethinking-gis.pdf.

Subnational governments still face various obstacles to digitalisation. In a survey of 136 cities and towns across the EU, around 40% reported the absence of an overall digital strategy as a major challenge. Insufficient funding and a lack of skills are considered particularly acute for local authorities wishing to implement a digital transition, especially for medium and small regions and cities (ESPON, 2017[248]). Moreover, they may also have fewer incentives to support the development of digital tools in policy making and implementation due to a relatively small population size, further hindering progress in ensuring more efficient public service delivery and investment. There are also challenges associated with changing the public’s behaviour and improving knowledge about how to use digital services.

Experimental governance in cities and regions: An avenue to address megatrends

To address challenges associated with globalisation, climate change or disruptive technologies, governments need to become more agile, experimental and innovative, especially at the regional and local levels. Experimental governance is one way to approach this challenge by introducing experimentation and learning-by-doing into policy design and implementation processes. A willingness and capacity to experiment with policy approaches – testing, adjusting and retesting – is particularly relevant when confronted with megatrends, as these can dramatically shift, catching policy makers off-guard and requiring a rapid policy response.

Trial-and-testing: Using experimental governance for regional policies

To manage differences in terms of subnational autonomy, responsibilities or capacities, experimental governance approaches that embed learning-by-doing and trial-and-error processes into policy design, can help governments effectively respond to shifts in policy challenges and adapt approaches to specific and different local needs (Box 5.5). This is particularly true in an increasing fast-paced and changing world, where rigid and fixed policies defined by the central level can rapidly become obsolete.

A flexible and sound multi-level governance framework is fundamental to experimental governance and to empowering subnational-level policy makers to create placed-based, feasible and innovative solutions that address old and new challenges, and to facilitate mutual learning among different levels of government. Adopting more flexible policy mechanisms can help ensure that resources are more efficiently used and that service delivery and investments at the local level are effective. However, it is often unclear which governance arrangements work well and which do not in different contexts.

Implementing experimental governance means developing a culture of trial-and-testing in the public sector that allows policy makers to learn from successes and failures through pilot experiences (Morgan, 2018, forthcoming[76]). This experimentation can be conducted through top-down (state-led) or bottom-up (state-sponsored) approaches. The People’s Republic of China (hereafter “China”) and the Russian Federation, for example, have implemented the most radical top-down examples of state-led experimentalism. In 2017, China created the Xiongan New Area to explore ways to build smart and ecologically friendly cities, develop better infrastructure, and efficient transportation networks. Similarly, the Russian Federation attempted to create a Silicon Valley in Skolkovo, near Moscow, but so far with limited success (Morgan, 2018, forthcoming[76]). Other countries have implemented bottom-up approaches to experimental governance in which state, industry and universities work in concert to discover joint solutions to common problems. The Nesta innovation foundation in the United Kingdom, for example, is a public sector lab dedicated to addressing societal challenges through evidence-based local experiments. Nesta supports projects such as “rethinking parks”, which develops and applies innovative business models to the management of the public parks across the United Kingdom (Nesta, 2018[259]).

The experimental governance approach can be particularly challenging for subnational governments, which might lack the capacity to implement it – weak institutional environments, highly codified processes and cultures with limited room for failure can all be impediments. If implemented well, however, these models can help regional and local policy makers react to megatrends. Yet, regional and local governments should consider the experimental governance approaches and models as food for thought while they further enhance their strategic planning and co-ordination capacities to react to societal changes, thereby also improving government agility (Morgan, 2018, forthcoming[76]).

Box 5.5. Experimental governance: A definition

Experimental governance can be defined as “a recursive process of provisional goal-setting based on learning from the comparison of alternative approaches to advancing them in different contexts” (Sabel and Zeitlin, 2012, p. 169[260]). Experimental governance involves a multi-level process in which four elements are linked in an iterative cycle:

1. Broad framework goals and metrics are provisionally established by central and local authorities.

2. Local authorities are given broad discretion to pursue these goals in their own way.

3. As a condition for this autonomy, local agents must report regularly on their performance and participate in a peer review in which their results are compared to others who are using different means to the same ends.

4. The goals, metrics and decision-making procedures are revised by a widening circle of actors in response to the problems and possibilities revealed by the peer review process, and the cycle repeats.

This model is both compelling and politically challenging: compelling because it is grounded in a learning-by-monitoring evidence-based methodology; but challenging because public bodies, particularly in less developed regions, may not have the institutional capacity to manage experimental governance processes.

Source: Morgan, K. (2018, forthcoming[76]), Experimental Governance and Territorial Development.

Towards more differentiated multi-level governance

Since the 1970s, the overall trend in the OECD has been in favour of decentralisation. Decentralisation has gone hand-in-hand with an increase in subnational governance through municipal co‑operation, metropolitan governance, and “regionalisation”, i.e. the strengthening of regions (OECD, forthcoming[261]). Most importantly, the trend has been towards more differentiated governance systems at the subnational level, with different responsibilities assigned to different cities and regions – at the same level of government. This trend is likely to intensify, as it is both a consequence of, and a response to, the megatrends discussed in this report.

Inter-municipal co‑operation, metropolitan governance and regionalisation trends

Legal frameworks and policies supporting inter-municipal co‑operation have been significantly enhanced over the last 15 years. Inter‑municipal arrangements are now extremely diverse, varying in their degree of co‑operation. In the OECD, there are a variety of formats for inter‑municipal co‑operation, ranging from the softest (single or multi-purpose co‑operative agreements/contracts for shared services arrangements or shared programmes in Australia, England/United Kingdom, Ireland and New Zealand) to the strongest forms of integration, e.g. supra-municipal authorities with delegated functions in France, Portugal and Spain. Between the two, there is a spectrum of different forms of co‑operation, ranging from single purpose to multi-purpose and from co‑operation focused on technical issues to more strategic co‑operation (OECD, 2017[262]).

Metropolitan governance bodies

Metropolitan governance reforms address the issue of fragmentation at the scale of functional urban areas. In an increasingly urbanised world, cities are not only growing in size, they are also outgrowing their historic administrative boundaries. Nearly one in 4 of the 281 OECD metropolitan areas has more than 100 local governments within its functional boundaries and more than half of them have to co‑ordinate among at least 25 local governments.2 This “administrative fragmentation” can create challenges for the effectiveness of public policies and raise difficulties in the planning and delivery of public services.3

Enhancing the co-operation and co-ordination of public policies on a metropolitan‑wide basis, in particular with regard to the provision of public infrastructures and services, aims at improving the quality of life and international competitiveness of large cities. (OECD, forthcoming[261]). The number of metropolitan governance authorities of all types has increased considerably since the 1990s and there has been a renewed momentum in reforms of metropolitan governance bodies. As of 2013, around two-thirds of the metropolitan areas in the OECD had a metropolitan authority (Ahrend, Gamper and Schumann, 2014[263]). The main responsibilities given to metropolitan areas are typically in infrastructure and planning tasks such as public transport, environment, spatial planning and services targeted at local business. They help to improve information flows across local jurisdiction and encourage cross-border planning. The trends toward metropolitan governance are likely to further accelerate in the coming decades as urbanisation continues to increase and successful cities continue to expand their functional boundaries.

Regionalisation

Since the 1970s, there has not only been an increase in metropolitan governance arrangements, but countries are increasingly decentralising responsibilities from the national level to the regional level (second tier).4 Indicators that measure the authority of administrative regions, such as the Regional Authority Index, show that decentralisation to the regional level is pervasive in all parts of the world with available data (Figure 5.3). In western (mostly European) countries, the trend started in the 1960s and 1970s, with countries in Asia and the Pacific region following suit since the 1980s. To a lesser extent, regionalisation has also taken place in Latin America since 1980s. Of the 81 countries covered by the Regional Authority Index, 52 experienced a net increase in the degree of regional authority and only 9 experienced a net decline (OECD, forthcoming[261]).

Figure 5.3. Regionalisation in America, Asia and Europe

Notes: Shown are average Regional Authority Index scores for 29 American, 11 Asian and 41 European countries. America: Argentina, Bahamas, Barbados, Belize, Plurinational State of Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and Tobago, the United States, Uruguay and the Bolivarian Republic of Venezuela. Asia: Australia, Brunei, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand and Timor Leste. Europe: Albania, Austria, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Denmark, Estonia, Finland, Former Yugoslav Republic of Macedonia, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Latvia, Lithuania, Luxembourg, Malta, Montenegro, the Netherlands, Norway, Poland, Portugal, Romania, the Russian Federation, Serbia and Montenegro (until 2006), Serbia, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, and the United Kingdom.

Source: Schakel, A. et al. (2018[264]), Final Report on Updating the Regional Authority Index (RAI) for Forty-Five Countries (2010-2016), https://publications.europa.eu/en/publication-detail/-/publication/5562196f-3d3a-11e8-b5fe-01aa75ed71a1.

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Through regionalisation, countries aim at taking advantage of economies of scale in public service provision, better responding to widening functional labour markets, improving co‑ordination between municipalities and intermediary levels of government, and increasing competitiveness, among others. Relative to local governments, regions have more resources to implement effective regional development strategies and the ability to foster intra-regional co-ordination and to implement more integrated territorial planning. They may better target regional comparative advantages through access to local knowledge, compared to the national government, or to fragmented local governments (OECD, forthcoming[261]).

Asymmetric decentralisation to tailor governance to local needs and capacities

Asymmetric governance arrangements have been common since at least the 1950s and are still growing in popularity. In 1950, around half of the countries covered by the Regional Authority Index had some kind of differentiated governance at the regional level. In 2010, almost two-thirds of the countries had implemented asymmetric arrangements in some form. Asymmetric decentralisation, however, is in transition: whereas between the 1950s and the 1970s asymmetric arrangements were a tool used mostly at the regional level, the present trend seems to apply asymmetric decentralisation in major urban areas. There can be political, economic or administrative motives for asymmetric decentralisation (Bird and Ebel, 2006[265]).

Figure 5.4. Number of special autonomous regions, dependencies and asymmetric regions in 81 countries since 1950

Notes: Asymmetric and special autonomous regions and dependencies are subject to a different kind of autonomy regime than standard regions. Dependencies are directly ruled by central government and have very limited autonomy. The decline in the number of dependencies is largely based on change of dependencies into standard regions in South America.

Source: Hooghe, L. et al. (2016[266]), Measuring Regional Authority: A Postfunctionalist Theory of Governance.

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Box 5.6. What is asymmetric decentralisation?

Asymmetric decentralisation occurs if governments at the same subnational government level have different political, administrative or fiscal powers (Congleton, 2015[267]).

Political asymmetric decentralisation refers to situations where some regions or subnational governments have been given political self-rule that deviates from the norm or average assignment.

Administrative asymmetry is a “de facto” asymmetric arrangement: even if subnational governments belonging to same government tier were treated symmetrically in terms of the politico-legal system, there might be a “de facto” asymmetry in implementation. Administrative asymmetry may, for example, include sequencing a national policy so that the subnational governments that fulfil certain predetermined standards are given greater autonomy in spending and revenue.

Asymmetric fiscal arrangements consist of a wide variety of measures, including special spending responsibilities, revenue bases or taxation rights, and additional transfers.

Source: OECD (forthcoming[261]), Making Decentralisation Work: A Handbook for Policy Makers.

Asymmetric decentralisation arrangements can help regions, cities and rural areas that are particularly affected by megatrends to better respond to opportunities and challenges. These types of arrangements allow subnational governments to adopt institutional and fiscal frameworks that are better targeted to local capacities, and may allow to better respond to local needs. In general, asymmetric decentralisation favours experimentation, learning-by-doing and innovation in policy making. Ultimately, it represents an advanced form of place‑based policy (OECD, forthcoming[261]).

Differentiated subnational governance systems, such as asymmetric decentralisation, are likely to increase as they are both a consequence of, and a response to, global trends that have increasingly asymmetric regional consequences. They are no silver bullet and, crucially, they need to be put in place in a careful way, as they also entail risks (Box 5.7).

Box 5.7. Recommendations for asymmetric decentralisation

The OECD has identified a number of guidelines to make effective asymmetric decentralisation systems (OECD, forthcoming[261]):

• Asymmetric decentralisation should be part of a broader strategy to multi-level governance and territorial development.

• Asymmetric decentralisation should be supported by effective vertical and horizontal co-ordination mechanisms.

• Asymmetric decentralisation needs to go hand-in-hand with an effective equalisation system.

• The type of asymmetric decentralisation should be well-defined (political, administrative/management or/and fiscal) and have a clear rationale as the objectives and instruments will differ in each case.

• The scale and scope should be clear (large part of the territory vs. restricted, regional, metropolitan, local levels; permanent vs. transitory, timing, pilot/experimental).

• The way asymmetric responsibilities are allocated should be explicit, mutually understood and clear for all actors. An asymmetric decentralisation approach should be based on dialogue, transparency and agreements between all of the main stakeholders.

• To the extent possible, participation in an asymmetric arrangement should remain voluntary. The central government or other higher level of subnational government can take responsibility for service provision in non-participant areas.

• A variety of incentives (not just financial) should be used to foster participation in voluntary schemes or pilot experiences.

• The effects of asymmetric decentralisation should be carefully monitored on a regular basis and the results of such evaluations should be used to revise the plans if needed (including the effects on equity and national cohesion).

Adopting an integrated framework for rural policies

National policies that differentiate between different types of places are an important complement to differentiated governance systems. In 2015, all 33 OECD countries surveyed had an overarching framework for rural development. Rural development policies are still driven by sectoral approaches, as agricultural production remains at the core in most countries. But there is also a trend towards more cross‑sectoral approaches and greater differentiation. In 10 out of 24 countries that responded to the OECD survey, rural‑urban linkages were already considered a high priority (OECD, 2016[268]). This linking between strategies for different types of areas is likely to become more important as places adapt to ageing, globalisation and technological progress.

The coming decades bring new opportunities for rural areas, pressing governments at all levels to respond in novel ways. From additive and distributive manufacturing to decentralised energy systems, new and emerging technologies support deconcentrated and network-based distributive production systems that have the potential to reshape the geography of economic activity, benefiting rural areas. At the same time, there are emerging threats as well. Climate change, including more frequent and unpredictable weather events and their wide-ranging effects on infrastructure, natural resources and ecologies more generally, alongside the global and enduring phenomenon of population ageing, challenge communities to adapt.

Addressing these complex issues demands an upgraded set of policy tools. Investments that offer a positive return to society should be the main instrument for rural development and community capacity building underpins the success of this approach. But, in situations where markets fail due to incomplete information, negative externalities, insufficient competition or because of a lack of provision of public goods, governments may have to be more directly involved in order to ensure that well-being in rural areas is improved. Place-based policies have always required multi-sector co-ordination and multi-level governance, and with such complex and interconnected emerging trends, this is ever so the case. Growing recognition of the strong interdependencies that are present between rural and urban regions demands the integration of rural and urban policies at various levels of government (national, regional and local). The questions are: how to deliver on these goals; how to design smart policy investments and set the right incentives to make the most of public investments and help places realise their potential.

Co‑ordinating rural policies

The evolution of rural policies towards a more multidimensional view of rural development leads to the question of how it should be organised within ministries and departments at the national and regional levels. Policies should be integrated horizontally, through management arrangements and development plans among different sectors, services and agencies within a given level of government. They should also be vertically integrated, from the national (or supranational in the case of the EU) down to the local level of government, wherein the capacity of subnational governments is critical in order for them to be meaningful partners. Interventions should be territorially integrated and consider the inter‑relationships and interdependencies between different territories. These are the general principles articulated in the OECD’s rural policy paradigm “Rural 3.0” (Box 5.8).

Box 5.8. The OECD rural policy framework: Rural Policy 3.0

In 2006, OECD member countries adopted the New Rural Paradigm as a core approach to develop better rural policy. The main principle of this approach was that rural territories can be places of opportunity, but for these places to achieve their potential, a spatially sensitive development approach is required (OECD, 2006[269]). In 2016, the New Rural Paradigm was updated with the Rural Policy 3.0, which reflects the new knowledge acquired in the intervening decade.

The core idea in Rural Policy 3.0 is that economic growth occurs in different ways in rural areas than it does in urban ones. The rural growth process takes place in a “low-density economy” where agglomeration effects do not occur and distance plays an important role in production costs and the lives of the people. Moreover, because the opportunities and constraints in different types of rural places vary, so does their economic function. Rural economies tend to have niche markets because they are small and specialised, except for those places producing natural resources, such as agricultural commodities, minerals or forest products. Table 5.2 illustrates the evolution of OECD thought on rural policy.

Table 5.2. Rural Policy 3.0

	Old paradigm	New Rural Paradigm (2006)	Rural Policy 3.0: Implementing the New Rural Paradigm
Objectives	Equalisation	Competitiveness	Well-being considering multiple dimensions of: 1) the economy; 2) society; and 3) the environment
Policy focus	Support for a single dominant resource sector	Support for multiple sectors based on their competitiveness	Low-density economies differentiated by type of rural area
Tools	Subsidies for firms	Investments in qualified firms and communities	Integrated rural development approach – spectrum of support to public sector, firms and third sector
Key actors and stakeholders	Farm organisations and national governments	All levels of government and all relevant departments plus local stakeholders	Involvement of: 1) public sector – multi-level governance; 2) private sector – for-profit firms and social enterprise; 3) third sector – non‑governmental organisations and civil society
Policy approach	Uniformly applied top-down policy	Bottom-up policy, local strategies	Integrated approach with multiple policy domains
Rural definition	Not urban	Rural as a variety of distinct types of place	Three types of rural: 1) within a functional urban area; 2) close to a functional urban area; 3) far from a functional urban area

Source: OECD (2016[270]), “Rural Policy 3.0”, http://dx.doi.org/10.1787/9789264260245-7-en.

In terms of the various dimensions of rural policy, there is an obvious need to improve co‑ordination across a wide range of ministries that each have control of specific policy domains that affect rural development. While some of these ministries, such as Health, Education or Public Safety, focus on people, irrespective of their place, others have more of a territorial focus, in that differences in geography influence the forms of policy – e.g. agriculture, mining, fisheries. How can stronger co‑ordination be achieved between these types of ministries and where should the “voice” of rural issues sit within government?

Some countries make their Ministry of Agriculture the lead agency for rural development while others assign this role to another ministry, such as a Ministry of Regional Development, Transport or Infrastructure or some other entity. Some countries have no identified lead ministry for rural development – leaving these issues to regional governments instead. Others have allocated responsibilities to different ministries over time because they were unsatisfied with the initial choice. In essence, the problem with the choice of lead ministry reduces to two different issues. The first is that a Ministry of Agriculture, by its very nature, will focus more on farming than on broader rural development issues. As farming starts to play a smaller role in rural areas, the mismatch between “interests” and “needs” becomes more evident. Second, while ministries involved in regional development have a much broader perspective on economic development, such ministries do not necessarily have a strong commitment to rural areas, especially as urban areas begin to play a larger role in terms of population share and share of economic activity. Resolving these two contradictions has been difficult for all OECD member countries.

In countries where the president or prime minister has a strong interest in rural areas, the issue is resolved by the leader directing rural policy. However, this is an increasingly rare event. Some countries have tried to establish a specific council of ministers with a rural mandate, but once again, in meetings of equals there can be no leading authority. Finland has adopted a unique approach to co-ordinating rural policy across sectors – one that combines elements of broad rural policy along with forms of vertical and networked governance. Finland’s Rural Policy Committee is a 35-member co-operation body appointed by the Finnish government that draws its membership from national ministries, regional co-operation bodies, trade unions, the Federation of Higher Education and Training Institutions, the Association of Finnish Local and Regional Authorities, the ombudsman for the LEADER programme, associations of producers of agriculture and forestry products, and the Village Action Association of Finland. The committee is presently led by a representative of the Ministry of Agriculture and Forestry. There are also seven thematic networks that support the work of the Rural Policy Committee and the realisation of Finland’s National Rural Policy Programme 2014-2020. Given that Finland’s Rural Policy Committee involves multiple levels of government from the European Union to decentralised local government and several non-governmental actors, it can be described as a form of new governance or governance network (Sørensen and Torfing, 2007[271]) (Pierre, 2009[272]).

An alternative approach to the co-ordination of national policies that impact rural areas is “rural proofing”, which was first adopted in the English context. Rural proofing entails considering the likely impact of policy decisions on rural areas, and, where necessary, adjusting the policy to take into account the particular needs of those who live in, work in or enjoy the countryside. This approach encourages the early assessments of expected, or likely, impacts in rural areas. Canada adopted a similar approach at the end of 1990s with a “rural lens” – a checklist of considerations to determine if a policy or programme addresses priorities for rural areas. More recently, Canada’s focus on rural development has been strengthened by the appointment of a Minister for Rural Economic Development in January 2019. The new Minister will oversee the creation of a rural development strategy to spur economic growth and create jobs in rural Canada. This Minister will also work with municipalities, provinces, territories, and Indigenous partners to meet the unique and diverse infrastructure needs of rural communities, including the provision of internet infrastructure in rural and remote areas of the country.

The effectiveness of “rural proofing” is a matter of debate, with some arguing that it can act as a form of tokenism that does not, in fact, adequately inform policy development at an early stage. In an assessment of rural proofing in England and Northern Ireland, Shortfall and Alston (2016[273]) find that it has had limited effectiveness due to a lack of commitment across government to the policy; that the tendency for policy makers is to argue that rural proofing is not pertinent to the policies reviewed; and that it has led to little consideration of appropriate targets, outcomes or goals. In effect, rural proofing is only as effective as underlying commitments to rural development. It is also connected to the nature of the social welfare state in the country in question and its commitment to the territorial redistribution of public resources. As such, it may have greater utility in some counties than in others (Shortall and Alston, 2016[273]).

Sweden is one of the most recent OECD countries to have devised a new approach to co‑ordination of rural and regional policy. Its new framework for rural policy has been framed in part by debates about whether rural Sweden is being left behind in the country’s growth and development. Rural policy issues have not been sufficiently represented in Sweden’s growth policy and there has been an ongoing discussion about how to develop new measures for rural development and how to better link them with the regional growth policy, and other sector policies. Recent reforms strengthening the role of regions are an important part of this. As a result of that, in 2018 Sweden’s parliament accepted the government bill on a new coherent rural policy.

There is no single best practice solution to overcome inherent divisions between regional, rural and agricultural policies. The type of network approach that Finland has adopted is enmeshed in its culture of decentralisation and multi‑level governance; applying the same approach in different institutional and cultural settings is therefore difficult. Similarly, rural proofing does not offer a one-size-fits-all model. However, beyond governance structures, the inherent silos between these policy domains can be addressed at an organisational level as well. For example, relationships and knowledge sharing between ministries can be strengthened through opportunities for short-term secondments, and co-ordinating professional development opportunities and training for staff.

The benefits of national urban policies for managing urban transformations

In contrast to national rural policy frameworks, a dedicated and explicit national urban policy framework is (not yet) prevalent among OECD countries. Only 15 have an explicit national urban policy and in 2016, one-third of them were still in the formulation stage. However, almost 90% of OECD countries do have partial elements of a full national urban policy already in place (OECD, 2017[207]).

A coherent framework, a national urban policy, provided by the national government is an important tool to allow cities to address the challenges they face. Cities around the world face challenges such as population growth or decline, ageing, development and maintenance of urban utility services, changing land use, fluctuations in real estate and housing markets, and the introduction of new technologies.

A national urban policy is a government-led, coherent set of decisions to co‑ordinate various actors in order to promote more productive, inclusive and resilient urban development (UN-Habitat, 2014[274]). National urban policies can cover a wide range of national policies with a profound effect on urban development, including economic development, land use, housing, transport, environment, labour, health and education.

Across the globe, 150 countries have developed national urban policies, although some are not labelled as such. Many countries are currently reviewing their existing national urban policy to adapt it to the context of recent global agendas. For example, after the adoption of the New Urban Agenda of the United Nations and the Urban Agenda for the European Union in 2016, Spain is in the process of redefining its National Urban Agenda. Indonesia is in the process of incorporating the Sustainable Development Goals (SDGs) into its National Urban Policy framework, especially SDG 11 on making cities and human settlements inclusive, safe, resilient and sustainable.

The New Urban Agenda (the outcome document of Habitat III) has put explicit emphasis on national urban policies as one of its five implementation pillars and calls for measures to enhance the ability of governments to develop and implement national urban policies (UN, 2016[275]). The growing spread of national urban policies and their complex natures increase the benefits of global knowledge sharing.

Box 5.9. Co-ordinated international support for national urban policies

The complex nature of the national urban policy development and lack of capacity and resources, observed not only in rapidly urbanising countries but also in many developed countries, calls for co-ordinated and collaborative efforts by international communities. To this end, a few priority areas have been identified:

1. Regular monitoring of the development of national urban policies. A first step in monitoring has been made with the Global State of National Urban Policy (OECD/UN-Habitat, 2018[276]), launched in February 2018, but broader country participation and an extended methodology could take the knowledge base even further.

2. Enhanced knowledge-sharing. For example, the International Conferences on National Urban Policies provides a unique opportunity to learn from the latest developments across countries, take in the view of different stakeholders and experts, and exchange among peers.

3. Tailored country support. Different country support programmes, including OECD National Urban Policy Reviews, can help countries effectively identify implementation gaps, promote evidence-based policy making and enhance capacity building for national urban policy development.

The National Urban Policy Programme (NUPP), a global partnership co-led by the OECD, UN-Habitat and Cities Alliance, is an important vehicle in which all interested partners can co‑ordinate with each other in implementing these different supporting activities and create synergies.

National urban policies can help align different sectoral policies that affect urban areas so that they can coherently support cities. For instance, Switzerland has had a National Urban Policy in place since 2001 and has recently adopted a new strategy for the coming ten years, Federal Agglomeration Policy 2016+. This policy has been implemented in parallel with a policy targeting rural areas to ensure coherent spatial development. The National Urban Policy’s overarching objectives are higher quality of life, higher economic attractiveness, quality urban developments and efficient collaboration.

Implementing national urban policies

The institutional arrangements for implementing national urban policies at the national scale are highly diverse and closely tied to national historical, economic, social, political and geographical contexts. A large majority of countries do not have a specialised national urban agency in charge of implementation. Among the 35 OECD countries studied, only 3 have specialised urban agencies, whereas other countries have a general national planning authority to oversee the policy (OECD, 2017[207]). This underlines the importance of co‑ordination at the national level for successful implementation. It is not possible to generalise whether a specialised urban agency is a desirable form of governance, as such a decision has to take into account a country’s political and organisational context. In the same vein, strong national leadership on a national urban policy does not mean strengthening national control over local governments; rather, a national urban policy should empower local authorities and communities.

Engaging stakeholders in the national urban policy processes

Although occasionally characterised as a top-down approach whereby the national level dictates standards for subnational government, a national urban policy framework requires multi-level co-ordination, inclusiveness and stakeholder engagement in order to be effective (UN, 2016[275]; OECD/UN-Habitat, 2018[276]). Subnational governments not only have knowledge of local conditions and close proximity to citizens, but also the capacity to adapt policies according to context. They should be engaged at every stage of the national urban policy process and not be considered solely as agents of implementation (OECD/UN-Habitat, 2018[276]).

A national urban policy must be accompanied by an effective institutional framework and governance processes that allow for the co‑ordination and collaboration of a variety of urban stakeholders (OECD/UN-Habitat, 2018[276]). When institutional and governance frameworks only require some form of engagement, without a clear mandate on the exact form and the matter concerned, a “tick-the-box” approach to stakeholder engagement may occur (e.g. the minimum level of engagement is promoted), which will alienate stakeholders and miss key opportunities for synergies. Preliminary research indicates that the extent of stakeholder engagement tends to reflect the degree of refinement of a national urban policy, with greater stakeholder engagement generally associated with advanced national urban policies (OECD/UN-Habitat, 2018[276]).

National urban policies can also provide an interface across all levels of government and other stakeholders. Their processes can function as forums for the co‑creation of a shared vision and as a framework that enables stakeholders to move as one towards stated goals. National urban policies do not replace local urban policies, but complement them to create the necessary conditions for sustainable urban development.

Box 5.10. Explicit national urban policies are becoming more common

While a national urban policy can take a number of different forms, two broad classifications have been used to analyse the form of national urban policy. Explicit national urban policies are observed where a policy has a title of “national urban policy” or a variant such as “national urban strategy” or “national urban development strategy”. Implicit, or partial, national urban policies refer to a policy form in which many of the elements of a national urban policy exist but they are not yet brought together as a formal, or explicit, national urban policy. Approximately half of the analysed countries have adopted an explicit national urban policy, while the other half have an implicit national urban policy that incorporates some elements of an explicit national urban policy. However, explicit national urban policies are becoming more common, especially in countries that are experiencing rapid urbanisation (OECD, 2017[207]; OECD/UN-Habitat, 2018[276]).

While the differentiation between explicit and implicit national urban policies provides some indication to the effectiveness of a national urban policy, the degree of clarity with which a national urban policy is spelled out is most important. A more clearly formulated national urban policy can be more effective in ensuring policy cohesion at the national level. This is not necessarily related to whether the policy is explicit or implicit. Some well-formulated implicit national urban policies have the potential to achieve the overall outcomes as explicit national urban policies but without the deliberate framing as such (OECD, 2017[207]).

An analysis of all 150 national urban policies around the world demonstrates the variety of context-specific thematic priorities. Economic development and spatial structure receive the most attention, both in the OECD and globally. Environmental sustainability receives extensive attention in OECD countries, but is much less emphasised in national urban policies outside of OECD countries. Likewise, climate resilience receives little attention. Only 5 out of 31 national urban policies in OECD countries and 11 out of 108 national urban policies outside of OECD countries grant significant attention to this area (Figure 5.5).

Figure 5.5. Thematic areas covered by national urban policies

Source: OECD-UN-Habitat (2018[276]), Global State of National Urban Policy, http://dx.doi.org/10.1787/9789264290747-en.

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Public investment in the face of global megatrends

A significant investment gap remains

In advanced countries, public investment has steadily declined, from 5% of gross domestic product (GDP) in the 1970s to approximately 3% GDP in 2017, remaining at a lower level compared to emerging and developing countries (OECD, 2018_[50]; IMF, 2015_[78]). Behind this long-term downward trend is the fact that many OECD countries focus on maintaining existing and well-developed infrastructure rather than investing in new infrastructure. This may also be due to a shift in investment from traditional areas of physical investment to intangible and knowledge-based investments (Allain-Dupré, Hulbert and Vincent, 2017[278]) that are not always classified as investment in accounting systems.

In contrast, after years of decline, public investment as a share of GDP has started to recover in emerging and developing countries.5 Still, public investment rates in most developing countries are significantly below 6-8% of GDP, with the exception, for example, of China. Many middle-income countries, such as Brazil, India, the Russian Federation and South Africa, still have low-quality infrastructure, which constrains future economic growth (Brookings Insitution, New Climate Economy, and Grantham Research Insitute, 2015[279]).

The 2007-08 global financial crisis had a strong impact on investment, both public and private. Public investment was used as an adjustment variable in the fiscal consolidation strategies that followed the investment recovery plans in the early phase of the crisis (OECD, 2011_[3]; 2013_[281]). This drop in public investment has been particularly significant in EU countries. In the OECD, this drop has not entirely reversed, with the level of public investment in 2016 in many countries still remaining behind pre-crisis levels (OECD, 2018[50]). In OECD countries, and particularly among emerging market economies, total public and private investment remains below 2008 pre-crisis levels (IMF, 2018[282]; OECD, 2018[283]). Some studies show that for OECD countries, the current gross fixed investment spending needs to be raised by about 12% to ensure that the productive net capital stock can grow at the same pace as before the global financial crisis (OECD, 2018[283]).

Figure 5.6. Annual changes in public and private investment (gross fixed capital formation) in real terms in the OECD33

Note: Private investment is obtained as gross fixed capital formation of the total economy minus general government gross fixed capital formation (appropriation account). Iceland, Lithuania and Turkey not included.

Source: Calculations based on OECD National Accounts.

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The Global Infrastructure Hub (GIH) estimated that although global infrastructure spending has gradually increased, from USD 1.8 trillion in 2007 to USD 2.3 trillion in 2015, there is a shortfall in necessary spending of USD 18 trillion between 2016 and 2040. This is 19% of the forecast spending needs, which means that spending would need to grow from 3% of GDP to 3.7% to close the gap (GIH, 2017[284]). Among the 50 countries analysed, the GIH estimates that the United States has the largest infrastructure investment gap (i.e. the difference between investment needs and current trends in investment) at USD 3.8 trillion, which is twice as high as the next largest gap – China at USD 1.9 trillion – followed by Brazil at USD 1.1 trillion and the Russian Federation at USD 0.7 trillion (GIH, 2017[284]).

More and smarter investment is needed

The OECD estimates that approximately USD 95 trillion in public and private investment will be needed in energy, transport, water and telecommunications infrastructure at a global level between 2016 and 2030 in order to sustain growth and development, without considering further climate action. This equals approximately USD 6.3 trillion per year over the next 15 years (OECD, 2017_[51]). When taking into account climate concerns, i.e. the 2°C 66% scenario,6 Paris Agreement commitments and the 2030 Agenda for Sustainable Development, there will be a need for an increase of about 10% in total infrastructure investment (USD 600 million) per year from the reference estimate (Figure 5.7) (OECD, 2017_[51]). The GIH forecasts global infrastructure investment needs to reach USD 94 trillion by 2040 in order to keep pace with profound economic and demographic changes across the globe. Adding the commitments for achieving the SDGs, the total cost rises to USD 97 trillion, i.e. an annual investment need of USD 3.7 trillion between 2016 and 2040 (GIH, 2017[284]).

Figure 5.7. Global annual infrastructure investment needs for a 66% scenario 2°C, 2016-30

Note: Reference case assumes no further action by governments to mitigate climate change.

Source: OECD (2017_[51]), Investing in Climate, Investing in Growth, https://dx.doi.org/10.1787/9789264273528-en.

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Around two-thirds of the infrastructure investment will be required in emerging and developing economies (OECD, 2017_[51]). Rapid rates of urbanisation and population growth as well as commitments to reach the SDGs entail an expansion of transport and electricity infrastructure as well as broadband access, universal access to energy, sanitation, potable water and basic public services.

For their part, developed economies also have substantial infrastructure investment needs, ranging from maintenance and operation to infrastructure upgrades. Current deficiencies in infrastructure, in terms of quality and quantity, can hamper productivity and socio‑economic opportunities for regions, as well as their resilience in the face of megatrends. In the United States, for example, almost one in ten bridges are structurally deficient and the average age of those deficient bridges is 67 years (ARTBA, 2018[289]). The US Department of Transportation (2015[290]) estimates that it could cost as much as USD 1 trillion just to bring the country’s current highways and transit systems up to date. In the European Union, 43% of municipalities surveyed in 2017 by the European Investment Bank expect their investment from 2017 to 2022 to focus on repair and maintenance instead of modernisation and capacity expansion (EIB, 2017[291]).

OECD countries also need new investments in transport (including new transportation modes such as self-driving cars), broadband, housing, energy, water supply, sanitation and waste management. Investment needs for human capital development and skills upgrading, as well as in the social sector (education, lifelong learning, healthcare, long-term care, housing, etc.) are also significant. In the EU, an investment gap of EUR 100-150 billion per year has been identified in social infrastructure alone (European Commission, 2018[292]). The European Investment Bank estimates that Europe needs to invest 3.6% of GDP, including in social infrastructure, for Europe’s economy to continue recovering and be set on a path of sustainable growth.

Key responsibilities in the policy areas that are most affected by megatrends

Subnational governments play a pivotal role in public investment. In 2016, subnational government investment accounted for approximately 57% of total public investment, on average, in OECD countries (OECD, 2018[50]) and 40% at a global level (OECD-UCLG, 2016[293]). Combining investments by states and local governments, this ratio tends to be higher in federal countries (70%) than in unitary countries (51%) (Figure 5.8).

Figure 5.8. Public investment by levels of government, 2016

Note: OECD9 and OECD26 refer to average for OECD federal countries for OECD unitary countries, respectively.

Source: OECD (2018[50]), “Subnational governments in OECD countries: Key data (brochure)”, https://www.oecd.org/regional/regional-policy/Subnational-governments-in-OECD-Countries-Key-Data-2018.pdf.

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Subnational governments have key investment responsibilities in the policy areas that are the most affected by megatrends. A recent OECD pilot study in 30 sample countries shows that subnational governments were, on average, responsible for 55% and 64% (unweighted) of environment and climate-related public spending and investment over the 2000-16 period. However, the share of environmental and climate-related investment is nonetheless very low relative to GDP, representing around 0.4% of GDP on average over 2000-16 (OECD, 2018[294]).

More public investment is needed to implement the global agenda on climate, urban policy and the SDGs in developed and developing economies (OECD, 2017_[51]). Most of the challenges are linked to public goods, such as water provision, sanitation, health, education, air quality, civil security and natural disasters management, social protection, etc., which need to be addressed jointly by governments and private actors.

Tapping into external finance: From borrowing to innovative financing

Subnational governments face multiple obstacles when it comes to external financing, limiting their potential for more and better investment. The first obstacle is linked to complex regulatory frameworks that may limit the use of borrowing by subnational governments and that can constrain public-private partnerships. A second obstacle is low credit ratings, particularly among cities. Only 4% of the 500 largest cities in developing countries are considered creditworthy in international financial markets and only 20% in local markets (World Bank Group, n.d.[296]). Creditworthiness can be affected by the inability to collect revenue, which limits a city’s capacity to borrow and enter into partnerships with the private sector.

In a tight fiscal environment, it is critical to diversify sources of financing for infrastructure investment and to use public investment to leverage private funding in an effective way. Public sources of funding, and traditional budgetary sources, are insufficient to cover the investment needs demanded by climate change, ageing and the emergence of new technologies. Therefore, subnational governments need to tap into external financing, be it through borrowing or mobilising the private sector and institutional investors. Mobilising the private sector, however, should be done for the right reasons, at the right time, in the right place and with the right incentives. Otherwise, costly failures and disappointments may occur, on both the public and the private side.

Developing borrowing, bond financing and pooled financing

Long-term borrowing to finance investment permits a better allocation of resources over time. In many countries, borrowing is also a financial necessity due to a lack of local savings and capital transfers. Borrowing frameworks should be adapted to allow borrowing on the credit and capital markets for subnational investment, at least for the most capable regions and cities. These financing tools can help subnational governments access more capital and increase their financial resilience, especially in face of multiple challenges brought on at the same time.

Bond financing is widespread in federal countries (mostly for state governments), and is common at the local level only in Canada and the United States. In a unique approach, Mexico introduced a specific tool to facilitate joint borrowing by subnational governments (OECD, forthcoming[297]). Bond financing is developing in unitary countries such as Japan, Korea, New Zealand and Norway.

Climate and social bonds could be further developed to finance investment needs generated by climate change, ageing and automation. These bonds are fundamentally the same as traditional bonds, except that they are applied to environmentally and socially related investments. Green bonds, for example, meet the eligibility criteria for the Climate Bonds Initiative’s Climate Bond Certification. Meanwhile, social bonds are intended to finance socially responsible investment. The green and social bond markets are still modest but are growing, including at the subnational level, and in 2017 issued green bonds exceeded USD 150 billion.

For their part, subnational pooled finance mechanisms (SPFMs) can facilitate subnational government access to capital markets in order to finance infrastructure. SPFMs provide joint access to private capital markets for subnational governments that have similar roles and credit characteristics, but lack the financial scope and scale, expertise and credit history to access credit markets on their own. These mechanisms can be particularly helpful for small projects as they mitigate debt service payment risk, diversify project risk and provide the technical professional management required to enable sustainability and access to private finance. SPFMs have been used in the United States; the Nordic countries where local government funding agencies are well-established; and are developing in France, New Zealand and the United Kingdom (OECD, 2017[298]).

Subnational public-private partnerships

Public-private partnerships (PPPs) represent an alternative to traditional government procurement and have the potential to improve value for money. Yet, they are complex and sometimes risky arrangements that require capacity to undertake them that is not always readily available in governments. Despite a growing proportion of infrastructure services that have been delivered through PPPs in the last decade, current levels of infrastructure investment taking place through PPPs is still moderate. Most OECD countries (83%) reported to have 0-5% of public sector infrastructure investment taking place through PPPs in the last three years (OECD, 2018[299]).

The merits of private participation lie not only in providing financial resources, but also in the potential efficiency gains that may arise from their involvement (Engel, Fischer and Galetovic, 2009[300]). For instance, by bundling the responsibility for the initial capital investment with future maintenance and operating costs, PPPs can encourage firms to minimise costs and potentially keep a check on “white elephant” projects. They may also help insulate projects from stop-and-go funding, and protect maintenance expenditures by conditioning payments on service quality and availability (ITF, 2013[301]). Additionally, the private sector may contribute to important cost savings through innovations in project design and technological and managerial efficiencies.

There have been many examples in recent years of PPP failures or misuse, and they are not well-suited for all subnational governments. They work best in larger jurisdictions that already have the general fiscal and institutional capacities required. Likewise, they should be used primarily in those infrastructure sectors where the public sector has sufficient expertise. More generally, subnational governments should strengthen their capacity to engage in PPPs, for example, by establishing dedicated PPP units at the national or subnational levels.

Effective public investment requires investing in governance

A growing body of work points to the positive effects of public investment on growth. Recent OECD research shows that countries with higher levels of public investment increase their productivity faster than those with lower levels of public investment (Fournier, 2016[302]): in the long-run, increasing the share of public investment in primary government spending by 1 percentage point could increase the long-term GDP level by about 5% (Fournier, 2016[302]; OECD, 2013[281]).

Better governance of public investment helps achieve higher returns on investment and improve its effectiveness. The impact of public investment on regional development policy depends, to a significant extent, on how governments manage investment. Some studies show that improving the management of public investment could lead to substantial savings and enhanced productivity (OECD, 2013[281]; 2014[252]) (IMF, 2015[78]) (MGI, 2016[303]). The International Monetary Fund, for example, has estimated that, on average, about 30% of the potential value of public investment is lost due to inefficiencies in the investment process (IMF, 2015[78]).

Addressing the capacity issue to invest more efficiently

Capacity limitations – be they in investment financing, policy design and implementation, or governance more broadly – can inhibit the ability to introduce new polices, adapt existing ones or finance the initiatives that will help address the demands and pressures of megatrends. The financing dimension can be particularly problematic for cities and local governments that often have limited capacity to use funding tools and to combine different streams of financing and funding (OECD, 2018_[234]).

When considering regional development policy, given differences in the capacity levels among regions, there is a risk of primarily benefiting those regions where governments have sufficient implementation capacity. This can result in excluding regions with less capacity, which are often also those with the lowest level of development and which stand the most to gain from supportive regional development policies (OECD, 2018_[234]). Improving governance capacities should be a priority for all countries, for all levels of government and for all types of regions (OECD, 2013[281]).

Capacity building is a “learning-by-doing” process in which all levels of government learn by repeated interactions. It is crucial to limit excessive administrative procedures and constant changes in the rules. For this learning-by-doing process to be in place, it is important to gradually provide more autonomy to subnational governments in the accomplishment of their tasks by decreasing rules and procedures, increasing monitoring and ex post evaluations. However, this “learning-by-doing process” needs to go hand-in-hand with differentiated and targeted capacity-building activities and technical assistance. This process might need a differentiated approach to specifically target different needs in different types of regions (OECD, 2018_[234]).

Focusing on performance

A results-oriented public investment strategy – one that focuses on the performance of investments through the entire investment cycle – can help countries be more agile in their response to the risk and impact of megatrends and future developments. Setting evaluation processes for regional development policies and investments is necessary to increase their efficiency, learn from experiences and adapt policies to better fit specific subnational needs. Evaluating policy implementation not only refers to ex post programme evaluation, it also refers to technically sound project appraisals and effective investment-monitoring systems that monitor policy performance during the entire investment cycle, from its design to its execution (OECD, 2018_[234]).

Ex ante appraisals are essential for minimising sustainable investment decisions, and for minimising investment risk. Such appraisals need to integrate an assessment of all the different types of risks associated with public investment: not only fiscal risks, but also financial, political, social and environmental risks in the short and long terms (OECD, forthcoming[297]). Despite its relevance, ex ante assessment is one of the weakest aspects of government capacity to take proper public investment decisions.

Overall, evaluation and monitoring criteria and mechanisms need to be defined in the early stages of the policy design process and should not be limited to budget execution. Integrating evaluation early in the planning process allows countries to allocate the resources needed to define the evaluation methodology and produce the appropriate data for this purpose (OECD, 2018_[234]).

A focus on EU Cohesion Policy

Evidence from the European Union shows that the quality of government can be a determining factor in economic growth and the efficiency of Structural and Cohesion Funds expenditure. Estimates show that investments that simultaneously target regions and quality of government make a difference for regional economic growth. The evidence also shows that beyond a certain threshold of investment in cohesion and regional development, the quality of the regional government becomes a vital factor in determining the extent to which a region grows. In this sense, the most efficient way to achieve greater economic and social cohesion is by improving the quality of government; otherwise, improvements in economic growth would require massive amounts of additional investment (Rodríguez-Pose and Garcilazo, 2015[310]).

As the EU’s main investment policy – providing funding equivalent to 8.5% of government capital investment in the EU – Cohesion Policy has successfully boosted investments and regional convergence. However, the global financial crisis of 2007‑08 and the subsequent Eurozone crisis significantly affected Cohesion Policy results by putting a break on the progress in regional convergence (OECD, 2018[8]). This suggests that there is scope to make cohesion spending more effective in the next programming period.

Cohesion Policy plays a key role in addressing megatrend challenges, strongly supported EU member country investments to protect the environment, reduce emissions and adapt to climate change, for example. For the post-2020 period, Cohesion Policy investments need to be more effective at delivering on the EU’s environmental and climate goals – for example by shifting towards more energy efficient and cleaner transport and making existing transport infrastructure more efficient (European Commission, 2017[311]).

Strengthening the results-oriented governance framework of EU Cohesion Policy

Performance monitoring and evaluation mechanisms allow bridging the gaps and diminishing information asymmetries between the EU level, that negotiates and monitors programmes, and the level of government where operations take place and where the beneficiaries (e.g. firms, municipalities) are located (OECD, 2018_[234]). Cohesion Policy requires monitoring progress with respect to defined targets in terms of financial/input, output and, in certain cases, result/outcome indicators. This monitoring seeks to ensure that project beneficiaries and programme managers are likely to achieve their targets. It requires indicators that are relatively unaffected by outside factors. This tight link forms the basis for the allocation of a performance reserve (6%), which aims to reward good performance in the implementation of programmes if they have achieved their milestones ahead of schedule (Downes, Moretti and Nicol, 2017[313]).

However, the focus on performance in the 2014-20 period has not been without challenges. Countries have encountered difficulties in formulating well-defined specific goals and setting programme targets (OECD, 2018_[234]). A large number of indicators which are not always consistent across the different funds has also been a barrier to performance monitoring. For these reasons, the OECD has recommended focusing on high-quality indicators and streamlining both ex ante and ex post budget reporting (OECD, 2018[315]).

For the 2021-27 programming period, the European Commission plans to strengthen the focus on performance monitoring through the Cohesion Open Data Platform and mid-term reviews. The Cohesion Open Data Platform allows following the evolution of project selection and payment rates, as well as the progress of EU investments against pre‑established targets. In 2021-27, EU member states will have to report implementation data every two months, allowing citizens to follow the progress almost in real time. In addition, a mid-term review of the programmes will take into account each programme’s progress in achieving the objectives set at the beginning of the period. Based on performance, the mid-term review will determine the need to change programmes and the need to transfer resources within programmes. For these initiatives to be successfully implemented in the next programming period, it will be crucial that reporting requirements do not result in additional administrative costs.

Making rules simpler and ensuring flexibility

It has been widely acknowledged that reducing the administrative burden is necessary to make Cohesion Policy more effective. Too much legislation and guidance and/or the proliferation of multiple conditions coupled with weak capacities may lead to a low or inefficient use of Cohesion funds by subnational governments. If the administrative burden exceeds the expected benefits of regional policy outcomes, project beneficiaries might not even bother applying for European grants to fund their initiatives. Administrative burden affects particularly small beneficiaries (e.g. small or weak subnational governments, SMEs, start-ups), and could potentially increase regional disparities instead of sustaining convergence. It is thus crucial to compare the administrative burden with the expected policy benefits to avoid an excessive amount of guidance and legislation (OECD, 2018_[234]).

The excessive administrative burden partly stems from the need to align priorities and compliance requirements in an environment with low levels of trust and confidence (Eurocities, 2017[317]). This is particularly challenging when diverse actors from different levels of government need to co-ordinate and collaborate or when regional policies are operating in areas with low governance capacity or risks of corruption. Simplifying administrative procedures requires, among other things, trust among the various actors involved (OECD, 2018_[234]).

The European Commission has made simplicity a fundamental priority. For example, in the 2014-20 period, countries draft just one document to apply for funding (previously it was one per fund) and can use pre-defined accounting methods to simplify cost options (OECD, 2018[315]). A high-level group to advise on the simplification of rules and of the architecture of funds in preparation of the post-2020 framework has also been established. For the 2021-27 programming period, the European Commission aims to strike the right balance between accountability, simplification and performance, while still maintaining strict rules for the sound management of EU funds.

In the context of megatrends, simplicity goes hand-in-hand with the need for greater flexibility in Cohesion rules in order to better adapt programmes to local circumstances and development needs. Flexibility represents the capacity of the budget to react rapidly without major legislative changes to emerging challenges and unexpected priorities. A good level of flexibility allows reprogramming when necessary, while maintaining a long‑term approach and avoiding the burden and uncertainty of continuous change (OECD, 2018_[234]).

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Notes

← 1. The OECD estimates that approximately USD 95 trillion in public and private investments will be needed in energy, transport, water and telecommunications infrastructure at global level between 2016 and 2030 in order to support growth and sustainable development. This is equivalent to approximately USD 6.3 trillion per year over the next 15 years (OECD, 2017[51]). Different sources estimate the current global infrastructure spending around USD 2.5 trillion per year (GIH, 2017[284]) (MGI, 2016[303]). This level of investment is less than half of what is required to address the megatrends.

← 2. Calculations based on OECD (2019), OECD Regional Statistics (database), https://doi.org/10.1787/region-data-en (accessed 20 December 2018).

← 3. Empirical evidence highlights the adverse effect of administrative fragmentation on economic outcomes and suggests local growth policies, transport and land‑use policies, among others as channels that lead to adverse outcomes (e.g. Cheshire and Magrini (2009[359]) and Ahrend et al. (2017[360])).

← 4. See Ahrend, Gamper and Schumann (2014_[263]) for dates of creation of OECD metropolitan governance bodies.

← 5. This rise has been driven by China, whose public investment accounted for 60% of public investment in developing and emerging countries in 2014 (OECD, 2018[142]).

← 6. A scenario with 66% probability of holding global warming below 2°C suggested by the International Energy Agency.