Examining the paradox of revenue-rich but infrastructure-poor urbanization in Ethiopia’s medium-sized cities, focusing on how institutional factors determine compliance with land-based financing mechanisms
This study reveals that despite Ethiopia's legal mandate to allocate 90% of land lease revenues to infrastructure, Injibara City's compliance rate averages only 44.3% due to institutional weaknesses like poor budget utilization and systematic fund diversion to salaries, demonstrating that fiscal rules alone are insufficient without robust institutional mechanisms to ensure revenue translates into infrastructure outcomes.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
Cities are growing faster than almost anywhere else in the world, and this rapid expansion creates a massive demand for roads, water systems, and public buildings. In many developing nations, local governments struggle to find the money to build these essential services. One strategy that has gained popularity is to sell or lease city land to developers and then use that money to pay for infrastructure. The logic is straightforward: as a city grows and becomes more valuable, the land within it becomes more valuable, and the government can capture that increase to fund the very projects that make the growth possible. This approach relies on a simple promise: the money collected from land sales must be spent on building the city, not on other expenses.
However, having a law on the books is different from following it. In Ethiopia, a national rule requires that ninety percent of all money collected from land leases be spent on infrastructure. This creates a clear test for how well a city manages its finances. A new study looks at a medium-sized city called Injibara to see if this promise is being kept. The researchers wanted to understand why some cities collect plenty of money but still fail to build the roads and facilities they need. They examined whether the problem was a lack of money coming in, or if the money was simply being used for something else entirely.
The study focused on Injibara, a bustling urban center in northern Ethiopia that has seen its population and land values rise sharply over the last decade. The researchers gathered ten years of financial records, from 2014 to 2023, to track exactly how much money the city collected from land leases and how that money was actually spent. They also spoke with hundreds of residents and city officials to understand the pressures and decisions behind the numbers. The goal was to measure the gap between what the law required and what actually happened on the ground.
The findings reveal a stark reality. While the city was quite good at collecting money, it was failing to spend it where it was supposed to. Over the ten-year period, the city collected more than 425 million Ethiopian birr from land leases. The law dictated that 90 percent of this sum, roughly 383 million birr, should have been used for infrastructure. Instead, the city only spent about 170 million birr on infrastructure projects. This means that for every dollar collected from land, less than half was used to build the city's future. The total shortfall, or the money that was collected but not spent on its intended purpose, amounted to over 213 million birr.
The researchers discovered that the problem was not a failure to collect revenue. In fact, the city was highly efficient at gathering funds, often collecting nearly all the money it planned to. The issue lay in how the budget was managed after the money arrived. The study found that the city was systematically diverting the land lease funds to cover its daily operating costs. Nearly 42 percent of the money that should have gone to infrastructure was instead used to pay salaries, allowances, and travel expenses for government staff. Another large portion went to compensating people whose land had been taken for development, and the rest covered office administration and vehicle maintenance. In essence, the city was using money meant for building new roads and schools to keep the lights on and pay the bills of the current year.
To understand why this was happening, the researchers looked at the internal workings of the city administration. They found that the ability to follow the law depended heavily on how well the city was organized, not on how much money it had. Three specific factors determined whether the city spent the money correctly: how well it executed its capital budget, the quality of its record-keeping, and the overall efficiency of its institutions. When the city had strong documentation and efficient processes, it was more likely to follow the rules. Surprisingly, the speed or success of collecting the money had no effect on whether it was spent correctly. A city could be excellent at gathering funds but still fail to build infrastructure if its internal systems were weak.
The study also highlighted a second layer of failure. Even when the city did plan to spend money on infrastructure, it often failed to actually spend it. The data showed that the city only utilized about 57 percent of the capital budget it had set aside for construction. This meant that even the money that was not diverted was often left sitting in the bank because of delays in hiring contractors, slow procurement processes, or a lack of technical staff to manage the projects. The combination of diverting funds to pay salaries and failing to spend the remaining budget meant that only about a quarter of the potential land revenue actually resulted in completed infrastructure.
Residents of Injibara are acutely aware of this disconnect. In surveys, more than 70 percent of people expressed dissatisfaction with the state of the city's infrastructure. They cited poor road conditions, limited access to services, and a lack of community involvement as major concerns. Perhaps most telling was the finding that nearly 80 percent of residents were unwilling to pay more for services or contribute financially to improvements. This reluctance stems from a deep lack of trust; when people see that the government cannot follow its own rules or deliver on its promises, they stop believing that their contributions will be used wisely.
The researchers conclude that simply passing a law is not enough to solve the problem. The existence of a rule requiring 90 percent of land revenue to be spent on infrastructure did not guarantee that it would happen. Without strong institutional mechanisms to enforce the rule, such as ring-fenced budgets that physically separate infrastructure funds from operating funds, and rigorous auditing to track every dollar, the money will continue to be diverted. The study suggests that the path forward requires building the capacity of local governments to manage their finances, rather than just focusing on collecting more revenue. Until the systems that manage the money are fixed, the promise of land-based financing will remain unfulfilled, leaving cities with full bank accounts but empty construction sites.
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