Moscow – a successful model of urban economy

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Moscow – a successful model of urban economy
Moscow – a successful model of urban economy

A modern city is both a socio-spatial platform and a living organism. Therefore, the strategy of any successful city is based on setting up network and designing better habitat.

Moscow is a vivid example of such a successful city, perhaps one of the most remarkable in the world over the past decade. It has achieved a quantum leap in all international city ranking: from street security to investment climate. This case now serves as a guideline for most Russian cities and also is being sold to foreign markets, primarily to developing countries. In a nutshell, the economy of Moscow is bigger than all of the economies in the world except top-25 countries, whilst it’s budget ranks top-5 among other cities by its size.

It all started in 2011 when new mayor Sergei Sobyanin was elected. The new team started their work with rebooting the whole management system of the city. One of the first steps was to transfer the city planning system from highly operational and manual to program-oriented based on a clear definition of the priorities and objectives and synchronizing them with budgeting.

As a result, the reboot of the management model affected all areas of the city’s activities, and as a consequence, it had a significant impact on its budget. Thus, over seven years, budget revenues increased by 90%, and the debt burden decreased ninefold, given that at the time Russia was going through a deep-seated geopolitical crisis that led to high national currency depreciation, capital outflow, decrease in oil rents, sanctions, etc. Moscow has managed to handle the situation and developed a more sustainable and efficient budget.

What’s the secret of success?

The city has created all the opportunities for citizens and businesses for better performance. The work done was highly sophisticated, requiring constant dissolution of the outdated models and myth busting. One of the deepest myth successfully destroyed that the whole country works to the good of Moscow as the city has become self-sustaining and even started investing into other Russian regions. At the same time, a high budget diversification was achieved, where the share of the oil and gas sector decreased from 16% to 4%. Such a success than enabled budget’s sustainability can be described via four pillars of city’s economic policy.

1. Stimulus

Moscow has based its economic policy on three key objectives: attracting investment, stimulating SMEs and developing a high-tech sector. In budget terms it means higher taxes and other income streams collected and more efficient investment.

First of all, Moscow is now open to investors: the volume of direct investments in fixed assets increased by 7 times over 7 years. At the same time, there are three roubles of private investments for every budget rouble invested. There are several reasons for that: development of PPP mechanisms, the increased availability of city’s projects for investors, creation of convenient and simple infrastructure (in particular, city investment portal), as well as active promotion of the city at international conferences.

The city has focused much of its attention toward creating better environment for small and medium enterprises. In order to that the city introduced simplifies taxation system, patenting for self-employed entrepreneurs, and also redirected its procurement to SMEs. These policies combined increased the amount of enterprises by 50% and city suppliers in 10 times.

The policy for high-tech industries development has become the one key driver for budget sustainability. To this end, the city systematically creates infrastructure — industrial and science parks designed specifically for R&D and manufacturing. As a result, Moscow generates about 20% of non-primary high-tech exports of the country.

2. Attracting human capital

Human capital is the key resource on highly competitive global cities arena. Moscow has managed to reroute its strategic growth path to fulfilling city residents’ development demands and attracting talents from Russia and globally.

In order to do that, city authorities pay particular attention to investing into improving quality of life, creating high-quality urban habitat, housing, education, and healthcare. Moreover, the city secures Moscow extra allowance for some public sector employees, disabled and retired. So far, Moscow is put as one of the top cities in the world in leading international ranking for quality of life, and also it is the only city in Russia with relatively high performance according to national Urban Habitat Quality index.

3. Revenue streams enhancement

A fundamental aspect of budgeting is the way how the city works with its sources of income and with the streams itself. Moscow has managed both to increase the volume of its revenues and discover additional sources.

Tax proceeds has increased by 70% over past 8 years, primarily due to the growth of the personal income taxes base and corporate income tax – clear impact from city’s policy on corporates and human capital. In order to do that the city has reduced dramatically all administrative barriers, making all the process more efficient and transparent.

Another key solution was to redesign the methodology of land assessment, making it more flexible and closer to market conditions. After the reassessment taxation revenues increased in two times.

At the same time the city has discovered new sources of income via implementing sales taxation, chargeable parking all around the city, and new technologies that help to track all the traffic offenders. Also Moscow increases its asset management practice, making it transparent and digital which increased the value of properties by 40% even at the periphery of the city.

4. Optimization of budget expenditures

While increasing the revenues, Moscow also works comprehensively on optimizing its expenditures. The city has achieved great results on increasing procurement efficiency and the quality of social payments alongside with reducing the debt load and selling non-core assets.

For instance, in 2018 the city budget has saved over $2,5 billion by encouraging competition among suppliers during the procurement procedure. As a result, the starting prices or the contracts dropped by 20%. Another vivid example is constant monitoring of the validity of initial (maximum) prices of contracts for goods and services. This procedure has saved about $0,5 billion of Moscow’s budget.

What’s next?

Certainly, Moscow has passed the stage of formation. It’s definitely one of the leading global cities that has matured and ensured its sustainable development. However, the potential of the city is still to be unleashed. The density of economic activity in Moscow still has room to grow – GRP per km2 is $43.4 million comparing to New York’s $77.4 million.

In the next decade, Moscow should not only consolidate the established success, but also find answers to new challenges that inevitably arise due to its quick growth. How can the city harmonize its development and slow down spatial, economic and social stratification? How to minimize the negative social burden on other regions that cannot compete with the capabilities of the capital of Russia? How to respond to risks arising in the era of big data and artificial intelligence? Nevertheless, Moscow is already looking for solutions to the challenges of the future, and it’s safe to say that the answers will be found.

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