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3.2 Central Government oversight relies largely on ex-ante controls and emphasizes the center’s obligation to ensure compliance with the law, rules and procedures and to employ administrative controls on inputs and processes. This is done through requirements for submission of local acts, decisions, local and regional plans, budgets and financial statements. Within MoI, the General Directorate of Local Authorities and the Presidency of Inspection Council carry out several activities linked to the control of municipalities. The ministry receives and reviews complaints from residents, and may send one of their investigators to the municipality if judged necessary. Most control measures fall into one of three areas: administrative, budget and financial.
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Administrative control: Many of the decisions made locally are subject to various forms of control, i.e. approval, postponement, or cancellations. This administrative review system is detailed and applies to all municipalities regardless of size or capacity. The control of acts and statements issued locally focuses on their compliance with the law. The MoI may reverse any decision made locally and may also remove personnel temporarily when there is an investigation or prosecution related to their duties.
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Budget control: The budgetary control focuses on legal compliance. There are no formal restrictions on revenues or expenditures as long as no laws are broken. Typically, the provincial governors approve the local budget within one week after it is approved by the municipal council. The Governor checks if any elements of the budget are incompatible with laws and regulations. In case a revenue item does not have a legal base, the Governor can remove it so that municipalities are not authorized to collect it, or the Governor may reduce the amount of revenue to a level in line with collections permitted by law. The Governor may also transfer allocations from optional expenditures to obligatory items and can also raise taxes and fees to the upper limit permitted by law if the revenues are not sufficient to cover obligatory expenditures. Central Government approval is needed for changes in the budget, transfers between sections and programs within the budget, and for decisions on local taxes. Total salaries and wages paid out cannot exceed 30% of annual revenue. Any exception to this rule has to be approved by the Governor.
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Financial control: Financial control is exercised at three levels: by the respective municipality, by the inspectors of the MoI and by the Court of Accounts. Within the respective municipality, audits can be carried out by either the municipal council or by the inspection unit of the municipality. The council may establish a committee to audit the accounts at any time, and hire outside expertise as needed. The municipal council must approve the final accounts from the previous fiscal year. The municipal inspectors investigate the accounts as instructed by the mayor. The Revenue Court is, according to the Constitution, responsible for auditing all public agencies in Turkey. Municipalities are obliged to submit the final accounts from the previous year to the court one month after the approval of the municipal council, together with the budget. Due to the heavy workload, the review of the accounts is often completed two years after the review period has ended.
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Unlike some other unitary states, in Turkey there are no formal restrictions on municipalities accessing banks and capital markets to borrow, although the current financial markets are not conducive to long-term lending. Significant parts of the decision-making in urban Turkey are de-facto decentralized as the sheer size and complexity of the sector make it impossible for central government to absorb and maintain the detailed know-how needed to exercise much of the close control that is allowed by relevant laws. Streamlining of the oversight functions is necessary to ensure effective monitoring of the municipalities by the central government but at the same time allowing flexibility in day-to-day municipal operations.
Issues
3.4 The main issue is that traditional reliance on ex-ante administrative and budget controls has become increasingly inappropriate as the urban economies have become too large and complex for the center to control directly. The system was designed for a municipal sector with few urban areas in an agrarian based economy. Today, there is little possibility for the central government to exercise meaningful ex-ante control over the 3,200 municipalities. Issues can be divided into two parts:
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Inadequate performance incentives: The oversight system is not outcome oriented and fails to provide support for, and information about, municipal performance and actual service delivery. It does not assess whether municipalities provide quality services for their residents, nor does it provide any incentives for them to do so. Focus is on compliance with laws and administrative rules but the actual performance of service delivery is not monitored. Since the outcomes of the funds spent on service provision are not assessed, taxpayers cannot hold local authorities accountable, and comparisons across municipalities to assess service levels and set benchmarks for best practice are not possible.
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Obsolete and costly control: The municipalities are so many, large and complex that the center cannot exercise uniform control. Especially in the larger cities, some rules are de-facto ignored or circumvented and fail to affect local behavior and performance. For example, ceilings on staffing levels are avoided by hiring staff under consultancy contracts or by establishing municipal companies, although a monitoring system provides quarterly headcounts of municipal staff in the metropolitan municipalities. Municipalities that try to comply with the rules face delays and costs. The most commonly quoted outcomes of excessive central government oversight are: (a) staffing decisions are delayed resulting in prolonged vacancies for key staff positions that deal with the delivery of services; (b) key decisions on increases in municipal taxes and fees are delayed which make it difficult to raise adequate local revenues and enforce cost-recovery. The excessive budget and financial control issues at the local level are similar to the issues faced in the central government (Box 2).
Box 2: Internal Control of the Central Budget Execution
The local government oversight issues described above are very similar to those related to the internal control of the central government budget execution. The August 2001 World Bank “Turkey Public Expenditure and Institutional Review” concluded that the “…many layers of ex-ante control and seemingly little scope for discretion in the use of funds by line agencies…..create a rigid financial system that hampers budget execution while providing little assurance of effective control or efficiency in resource use.” The review further states that “… most OECD countries have recognized that flexibility in the budgetary system within an appropriate framework of accountability for results is important to better public sector performance”. It further concludes that “Turkey’s budget system has remained untouched by these modern approaches to budget management. Reforms to the system of internal control are critical to overall improvement in budget management in Turkey”. Actions to reduce the ex-ante controls and strengthen performance monitoring and accountability7 were implemented in the first PFPSAL as part of a broader program to strengthen public sector management. Results to date include preparation of new accounting standards, a new public procurement law, and the launch of an audit reform program. For the municipal sector, the Government has also initiated a pilot on performance monitoring.
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Reforms
3.5 This review suggests that future reform efforts should seek to provide equal access to sustainable municipal services for all. This objective should be met through:
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Creating incentives to maintain fiscal prudence for municipal operations including no centrally funded bail-outs and no new lending to municipalities in default.
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Linking fiscal transfers to service and financial performance of municipalities.
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Reducing the scope of ex-ante administrative controls and replacing this with regulations rewarding responsive and responsible local governance.
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Providing technical assistance to municipalities so that they are able to manage resources effectively.
Short Run
3.6 In the short run, three sets of actions are proposed.
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Increase performance monitoring: The Central Government should expand the part of public oversight that focuses on support and performance monitoring. Today, there is no systematic monitoring of municipal performance and actual service delivery and no analysis of “value for money” or efficiency. Performance based audits could be used to set benchmarks and make comparisons across municipalities. There are two initiatives in Government that merit support.
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the MoI is establishing a performance monitoring system that is supported by a World Bank IDF Grant and that would enable cross-municipal comparisons and assessments of best practices (Box 3). The performance monitoring will strengthen public oversight, increase accountability at the local level, and ensure better financial management; and
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the Court of Accounts has established a unit that is developing guidelines on performance audits of local authorities and other public agencies.
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Reduce administrative control: A review of municipal regulations should identify modifications to existing rules that could be easily implemented and have quick and tangible results. Areas of particular focus could include (i) making it easier for municipalities to increase taxes and fees related to the investments and services they manage, (ii) relaxing the administrative controls that lead to significant service delays or cost increases and; (iii) replacing case-by-case approvals of staffing by norms and standards under which municipalities are automatically entitled to certain staff numbers based on population size or other criteria.
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Expand financial accountability to local level: New laws and regulations for financial accountability, public procurement, accounting standards and budget classification are being implemented in the central government agencies. As they apply to the whole public sector, efforts are needed to implement them at the local level as well.
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Support for a shift away from reliance on ex-ante controls in favor of performance monitoring linked to ex-post interventions and incentives should be provided in the draft bill on Public Administration. Legal and regulatory support should be provided in the development and the implementation of the monitoring program. Currently, the bill does provide room for replacing case-by-case staff approvals with automatic endorsements up to pre-set ceilings, and this should be developed. However, the current bill updates the nominal or percentage tax rates for a number of local taxes and fees, thereby not allowing flexibility for the local government to set its own tax rates.
Box 3: Performance Monitoring
Since the February 2001 economic crisis, the Government’s macroeconomic reform efforts have focused on improved public sector management. Attempts to improve the public oversight, accountability and expenditure management in the local government sector have, however, been hampered by the lack of adequate information. Data on local government performance is limited. Aggregated nationwide budget data exists but little is known about the administrative or financial performance at the local level or about the scope and quality of services actually provided and how they relate to costs and staffing levels.
As a first step to develop better information to guide the reforms in the sector, the Ministry of Interior (MoI) started a project to establish a system to monitor and evaluate the performance of the local authorities, and this is supported by a US$350,000 IDF grant from the World Bank. An inventory of the various existing databases with relevant information has been developed, and a steering committee and advisory board have been formed. The initiative is supported by Treasury/Ministry of Finance as better information would guide actions to improve the overall fiscal performance for the sector. The State Planning Organization will also be able to use the system as improved information would lead to better planning for municipal investments in line with the service levels and financial performance. In addition, there is a growing public demand for information on municipal affairs and a credible information system would enable residents to take a greater interest and participate more actively in the municipal affairs.
The grant also finances training and dissemination seminars for officials, the public and the business community. This includes a series of training sessions for municipal officials in municipalities and dissemination seminars for the public, media, business community and officials in participating municipalities. The aim is to enable participants to better understand the good and weak points of individual municipal operations as shown by the information system. The public benchmarking of municipal performance will also create an incentive for local authorities to improve operations.
Upon completion of the project, a performance monitoring system for municipalities will be in place which will include established routines for reporting, data entry, and analysis. Data and the associated analysis and results will be publicly available on the web, and thus available to consumers and citizens wishing to exercise oversight and assess their municipalities, private service providers and financial institutions to assess business opportunities, municipalities to compare themselves to others, and central government as an aid to formulate policies and regulations for improved local government sector.
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Long Run
3.8 In the long run, the Government may wish to incorporate other international practices in the areas of increased public participation and responsible financial behavior as part of public oversight. These measures would include:
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Participatory planning, budgeting and monitoring: International experience has shown that accountability of municipalities increases if citizens are involved in the planning and the budgeting processes. Increased accountability leads to better governance at the local level.
Examples of participatory planning are: the establishment of citizen’s committees to monitor performance of municipalities and to publicize the financial performance of municipalities (New Zealand, Bolivia, Colombia, and South Africa); mandatory participation of the citizens in the budgeting process (Porto Alegre, Brazil); referendum for major capital projects (Switzerland); higher implementation priority provided to those municipal investments that are co-financed with contributions from citizens and the private sector (Pakistan).
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Technical assistance: If municipalities are expected to implement mandated reforms, better manage their finances and also improve the level of service delivered, they would need technical assistance in a number of areas, including financial management, asset management, and other technical areas related to the delivery of services such as water and transportation. In addition, due to the discussions related to EU Accession, the responsibilities of the municipalities may increase and they may be required to implement some of the social programs which would further increase the need for technical assistance.
It should be kept in mind that there are 3,200 municipalities in the country and a streamlined approach should be taken towards the development of the technical assistance program. The need for technical assistance for the larger municipalities is much less compared to the numerous smaller municipalities. Special emphasis should be put towards developing the smaller and typically the poorer municipalities. For the small municipalities, it is possible to develop regional or multi-municipal utilities in a localized area that would bring about economies of scale to promote the level of services.
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Encouraging responsible fiscal behavior: A continuous effort must be made towards encouraging responsible fiscal behavior. As a first step, the performance monitoring system that is currently being developed with the Bank’s IDF grant will help to benchmark performance of municipalities and help in objective decisions of sanctions and rewards. Thereafter, Turkey should consider adopting other practices that would encourage better fiscal performance. Absence of central bailouts will encourage responsible fiscal behavior. Other important elements for imposing a market discipline on public sector borrowing include the use of the performance monitoring system to rate municipalities, which may be used by banks for lending decisions.
Examples include: The EU’s golden rule where the current budget must balance, borrowing is permitted for capital projects only, and limits are set on debts and deficits; establishment of institutions for intergovernmental coordination such as the Loan Council in Australia, Council of the State Finance Ministers (CONFAZ) in Brazil, Bundesrat (regional government representation in the Upper House) in Germany, and the Council of the Provinces in South Africa; or limiting public wages to a certain percentage of local budgets – for instance in Poland, where salary expenditure cannot exceed 30% of municipal budget, the same role adopted by Turkey.
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