27
|
administrative |
modifying building codes and zoning |
Source: (own draft) Hamlin, R. E.; Lyons, T. S. ,1996:37-76; CUED, 1978:197-199
One can distinguish primarily financial, not-primarily financial, and administrative incentives.
Especially financial incentives are to use in order to induce investment and focus investment
in targeted areas. Administrative incentives including land use control incentives such as
relaxing regulations and controls may be used by local governments when a project promotes
public goals. In another approach local government provides development assistance through
land acquisition, assemblage, and readjustment. This is a key role of the public sector since it
can use its ‘taking power’. The public sector can also assist technically and financially in
feasibility studies.
City governments have used a wide range of innovative techniques to finance urban and
economic development activities. Especially complex public financial incentives and
investments have increasingly been tailored to the needs of private developers and investors.
Innovative public sector leverage has encouraged a growing cooperative public/private
investment trend in urban development. The public sector has also began to assume the role of
an investment partner in joint development ventures. The increasingly complex nature of
public/private financial transactions contributed to the formalization of public/private
development planning and implementation.
A fundamental change of local government’s role in urban development took place with the
public sector’s engagement in direct debt and equity financing. It is used by the public sector
to direct credit to development projects. Traditionally, equity financing “represents an
investment of an owner or partial owner of an enterprise”, whereas debt financing “refers to
the loan being made by a bank to provide further capital to an entrepreneur” (CED,
1978:236). Under debt-financing programs, a public entity makes or guarantees loans. Equity
investments, in contrast, are riskier for local governments as the municipality becomes a
partial owner in an enterprise or development project. Thus, the recovery of the investment by
the municipality depends on the success of the corporation or project. The public sector has
become deeply involved in debt and equity financing mostly through loans, guarantees, and
subsidies. Loan Guarantees are a means of risk-reducing to leverage investment from private
lenders. Debt financing is more widespread than equity arrangements and is a traditional
public sector incentive to the private sector. Three major kinds of debt-financing are: direct
loans, loan guarantees, and revenue bond financing. A loan guarantee is a means of lowering
the cost of credit. In that case, the local government guarantees to a private lender that a
specific portion of the loan will be paid back in case of default. Thus, the risk to the private
lender will be reduced. According to Eisinger, “the most important economic development
tool for generating low-cost capital [...] has been tax -exempt bond financing” (Eisinger,
1988:157). Bonds sold by municipalities are tax-exempt from federal taxation. Because of the
tax-exempt status of the bond interest rates paid by the municipality are low. As follows, the
costs of borrowing through tax-exempt bonds are lower for the municipality than it is through
private lenders. Cities become entrepreneurial also through limited or general partnership in
development projects and development corporations. Thus, the city has an equity position in