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6.1 Proposed reforms in the local government sector cover many areas as outlined in the previous sections. A summary of the main issues and recommendations presented in a phased approach is provided below (Table 6.1). This summary information provides the broad overview of reforms that are needed and may serve as a road map for the policy makers in the country. While the reforms are spread across many sub-sectors, a comprehensive approach should be taken towards making the municipal sector sustainable which would address many issues at the same time. The political support for the reforms would have to be built around the fact that financially strong municipalities are better able to serve their citizens.
Approach Towards the Reform
6.2 Given the wide range of tasks, a strategic approach addressing issues facing the sector should be taken. The following two-pronged approach is proposed. Given that a number of agencies would be involved in the reform, it is also important to assign lead roles to particular agencies that would co-ordinate activities, as outlined below. To define the reforms in specific terms, two working groups could be formed which would be responsible for developing a detailed schedule of activities and monitoring progress.
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Public sector reform: Issues related to Central Government oversight and transfers; Municipal Revenues; and increasing Municipal Creditworthiness should be included in this category. The key agencies involved for this reform would be Ministry of Interior, Treasury, Ministry of Finance, State Planning Organization, and the Association of Municipalities. Given the nature of the work, it would be logical to assign the Ministry of Interior as the lead agency co-coordinating activities.
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Municipal borrowing reform: Issues related to strengthening the current system for municipal borrowing will involve the Treasury, Ministry of Public Works, Iller Bank, Ministry of Finance, Ministry of Interior, State Planning Organization, and the Association of Municipalities. Given that reforms under this category would involve fiscal issues and mobilization of capital, it would be logical for Treasury to take a lead in co-coordinating the activities.
6.3 As mentioned in Chapter 1, the above reforms would be effective only if the reforms related to the fiscal burden and public debt reduction, and strengthening the financial sector are in place. The central government’s share in the GNP has to decline substantially, and the size of the public debt should decrease, to allow a moderate increase in the local government share so that there is a net decrease in the public sector’s share in the GNP from the current high levels. Further, with the reforms in the banking sector, banks would not over-invest in government bonds and domestic capital would be increasingly available for the real economy. This would create a better environment for long-term municipal borrowing.
Table 6.1 Summary of Proposed Reform Program
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Public Sector Reform
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Municipal Borrowing Reform
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Phase 1: Identification and Preparation of Reforms (1-2 years)
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Actions:
- Draft Public Administration Law to provide reform support for the sector;
- Review of central government administrative procedures to streamline municipal operations;
- Expand current public sector financial management reform program to municipalities. This will include: financial accountability, audit regulations, public procurement, and budget classification;
- Review of local taxes and fees. This will include increased local control, consolidation of taxes and fees, introduction of tourism tax, implementing cost recovery tariff levels;
- Develop proposal for metropolitan municipalities to replace in-province tax transfers with locally levied taxes on income tax;
- Develop proposal to link transfers to actual levels of service;
- Review commercial activities of municipalities to ensure that that private sector is not being crowding out;
- Develop a program to enhance private sector participation in the provision of municipal services;
- Establish pilot performance monitoring system.
Benchmarks:
- Public Administration Law adopted;
- Pilot performance monitoring system established and publicly accessible;
- Government agreement on measures to enhance local control over municipal taxes and fees, including levying personal income tax in metropolitan municipalities.
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Actions:
- Review of Iller Bank operations, including an audit;
- Develop reform program for the operations of Iller Bank including identification of necessary legal/regulatory changes and technical assistance;
- Review of sanctions against municipalities that default on financial obligations;
- Develop action program to eliminate bad debts to Treasury and Iller Bank and to other state agencies;
- Develop a transparent subsidy program for municipalities that would need assistance to finance investments;
- Assess implementation of the Debt Law and develop supplementary actions as needed.
Benchmarks:
- Government approval of reform program for Iller Bank;
- Program to impose sanctions on municipalities adopted by Government;
- Program to eliminate bad debt adopted by the Government;
- Program on subsidies to municipalities in place
- Effective implementation of the Debt Law.
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Public Sector Reform
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Municipal Borrowing Reform
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Phase 2: Implementation of Reforms (2-5 years)
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Actions:
- Implement Public Administration Law;
- Implement regulations that reduce central administrative procedures;
- Implement program on increasing financial management at the local level;
- Implement reforms on local taxes and fees;
- Implement mechanisms linking transfers to performance of municipalities;
- Implement program to facilitate private sector participation in service delivery;
- Implement program to reduce municipalities’ role in commercial activities;
- Expand the coverage of the performance monitoring system;
- Review the introduction of participatory planning and budgeting.
Benchmarks:
- Increased share of municipal revenues raised locally;
- Part of central transfers linked to local service performance;
- Tourist tax in place
- Increase in private sector participation in service delivery.
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Actions:
- Implement Iller Bank reform program;
- Implement program to eliminate bad debt of municipalities;
- Implement program to impose sanctions on municipalities.
Benchmarks:
- New lending to municipalities through Iller Bank under reformed rules;
- Municipalities bad debts shrinking, no new defaults or invoking of guarantees, sanctions for non-payments enforced uniformly.
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Phase 3: Enforcement of Reforms (5-10 years)
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Actions:
- Assessment of scope and content of future municipal responsibilities and duties;
- Review of the equalization system.
Benchmarks:
- Increased local control over locally raised revenues.
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Actions:
- Review of measures to implement financial intermediary role for Iller Bank to access private and commercial funding.
Benchmarks:
- Program to adopt financial intermediary adopted by the Government.
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6.4 A three-phased approach by the Government towards reforms in the municipal sector is suggested. The Government working groups, outlined above, would have to review the existing situation and make arrangements for necessary legislative and regulatory changes.
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Phase 1 (1-2 years): In this phase the focus would be on the identification and preparation of reforms. Activities in this phase would include review of the existing situation in detail, implementation of the pilot performance monitoring of municipal operations, adoption of the bill on Public Administration with appropriate provisions, and identification of a financially viable system for municipal borrowing. Studies, including an international audit, of Iller Bank would help establish a reform program for the institution. While local taxes are not expected to increase, fees, however, may increase to reach cost recovery levels. Local government’s share of the economy, as a percentage of the GNP, is not expected to increase in this phase. A key benchmark in this phase will be to determine the effect of the new Debt Law that was passed in 2002. Proper enforcement of the law would suggest that the incentive schemes to promote sound economic judgment are working and further reforms could be considered.
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Phase 2 (2-5 years): At this stage, the focus would be on implementing the reforms identified during Phase 1, including legislation under the Public Administration Law. At this stage, there would be a gradual reduction of central transfers matched by an increase of local taxes. In this stage, the local government’s share of the economy is also not expected to increase significantly. Sustainable municipal borrowings should start in this phase through the reformed Iller Bank.
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Phase 3 (5–10 years): In this stage, the focus would be on performance monitoring and enforcing reforms that are in place. Effective enforcement of reforms would strengthen the municipal sector and allow for its future expansion under proper macroeconomic conditions. There would be increasing reliance on local revenues compared to central transfers, especially for the large municipalities. A greater share of investment would be financed from borrowing, rather than from current revenues. In this stage, the local government sector, as a percent of GNP, would increase since a higher percentage of the population, compared to the current situation, would be living in urban areas. Further, there is a possibility that the municipalities may take on additional responsibilities, in line with EU norms. The nature of the expansion of the sector would depend on macroeconomic conditions.
6.5 Broadening the scope of the draft bill would include relaxing the current legal and administrative framework for public oversight, and broadening and strengthening the monitoring of performance in local service provision. This would also create an incentive for local authorities to deliver quality municipal services and improve the financial performance of municipalities and their enterprises. The bill could also incorporate changes in the current transfer system by linking transfers to actual service delivery performance, and by enabling big cities to access and levy flat rates on centrally defined tax bases. At the local level, legal measures could be taken to regulate the proliferation of municipal commercial activities crowding out the private sector. The scope and composition of local taxes and fees could be reviewed and streamlined. This would make local authorities focus on collection of fewer taxes and fees with the aim of increasing collection efficiency. Finally, in the area of municipal borrowing, the legal provisions should be made to reform the current operations of Iller Bank into a sustainable system for municipal borrowing. A key factor in designing the reforms would be the differences in the size, economic conditions, and institutional capacity of municipalities.
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Other relevant legislation that needs to be reviewed and possibly amended is: Law on Iller Bank (No. 4759), Law on Municipal Revenue (No. 2464), Law on Property Tax, and Law on Amendments of Tariffs and Services provided by Public Institutions (No. 4736). In addition, laws related to the provision of municipal services should be reviewed to facilitate the entry of the private sector.
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