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Transfers from the central government budget are revenues from the general budget, raised centrally and nation-wide, and then distributed across municipalities. The size and designs of these transfers vary considerably internationally. They can come with or without conditions, in the form of general budget support or earmarked for particular (current or investment) purposes, constitute a share of taxes or reimbursable costs, and in many other forms depending on the local conditions. In many countries central government transfers are the largest single revenue item for local authorities. Low levels of central transfers do not automatically mean that the local government sector is small as the local authorities themselves may assume the responsibility for tax collection.
3.10 In Turkey, central government transfers amount to 50% of municipal revenues or about 2% of GNP. The transfers take place through the following three mechanisms. Two of them involve the unconditional handing over of a share of the national tax revenues, and the third includes a number of smaller budget allocations via various ministries and agencies.
(i) Tax Revenues: 6% of national tax revenues are allocated to municipalities based on population size. This is the largest transfer mechanism covering about 55% of all transfers. Funds are transferred unconditionally and allocated to all municipalities.
(ii) Tax Revenues in Metropolitan Municipalities: 4.1% of taxes collected within a province are allocated to a metropolitan municipality, if present within the province. This is the second largest transfer mechanism covering about 30% of all transfers. Upon receipt, the transfer is divided into three parts. The largest, 55%, goes to the various district municipalities according to population; 35% is allocated to the metropolitan municipality; and the final 10% to the water and sewerage administration.
(iii) Other Transfers: the remaining 15% of transfers are allocated from the Central Government budget to a number of ministries and other agencies that in turn allocate the funds for activities in the municipalities. This allocation was previously done through a number of extra-budgetary funds, most of which were closed in early 2002 as part of the efforts to strengthen control and management of the central government budget 8.
Table 3.1
Municipal Size and Revenue Source
(% of municipal revenues, 2000)
|
Fund Source
|
Population Size (in 1000s)
|
All
|
> 500
|
300 to 500
|
100 to 300
|
10 to 100
|
< 10
|
Central Government
|
50
|
56
|
37
|
44
|
46
|
50
|
Locally Generated
|
39
|
22
|
59
|
54
|
50
|
48
|
Borrowed
|
11
|
22
|
4
|
2
|
4
|
2
|
Total
|
100
|
100
|
100
|
100
|
100
|
100
|
3.11 The effect of the transfer mechanism is that reliance on transfers from the central government is the highest for the very large cities and the very smallest municipalities. Reliance on locally generated revenues, on the other hand, is highest among the second-to-largest cities, then fall according to population size, but is the lowest among the very big cities. The large municipalities receive a larger share of central government funding compared to the smaller and medium sized municipalities mainly because of the additional tax revenues for metropolitan municipalities (Table 3.1). It is in these big cities that the urbanization pressure is the highest and infrastructure needs are large. At the same time the collection of local revenues in these large cities is lower compared to the medium sized and small cities, highlighting the need to ensure that adequate local revenues are collected from these large municipalities to finance infrastructure operations and investments.
Equalization
3.12 The transfer mechanism is transparent and provides an element of equalization across municipalities as most taxes are collected from areas with higher GDP and then redistributed equally according to population levels. Beneficiaries include the poorer municipalities that pay little tax but receive the per capita transfer. The special transfer to the metropolitan municipalities provides a significant boost of revenues for these municipalities. The distributive effect of this is regressive as the bigger cities also are the richest.
3.13 The equalization impact, although modest, of the overall transfer system is important for the poorest municipalities (Table 3.2). In 2000, the national tax revenues transferred corresponded to around 1.9% of GDP. Only an estimated 11% of this amount was actually transferred from the net-contributors, i.e. the 24 richest provinces in Turkey, to the municipalities in the other 57 provinces (the net-recipients). The remaining 89% was allocated to the municipalities in the provinces where the tax revenues originated. Net contributions from the 24 richest provinces amounted to about US$13 per person. Residents in the municipalities in the 17 poorest provinces received US$23 per person.
Table 3.2
Equalization of Central Government Transfer, 2000
|
|
Contributors:
24 richest provinces
|
Recipients I: the 20 second richest provinces
|
Recipients II: the 20 second poorest provinces
|
Recipients III: the 17 poorest provinces
|
Total
(Turkey)
|
Population
(million)
|
33.7
|
13.7
|
12.5
|
7.9
|
67.8
|
Paid in
(US$ million)
|
2,831
|
530
|
344
|
111
|
3,816
|
Received
(US$ million)
|
2,398
|
609
|
520
|
289
|
3,816
|
Net received
(US$ million)
|
- 433
|
+ 79
|
+176
|
+178
|
0
|
Net received
(US$/per capita)
|
- 13
|
+ 6
|
+14
|
+ 23
|
n.a.
|
Net received as percent of GDP in province
|
- 0.4%
|
+0.2%
|
+0.8%
|
+2.2%
|
n.a.
|
3.14 Given the needs of the larger municipalities, it is unlikely that transfers from the richer to the poorer municipalities will increase in the short run. However, as part of the longer term reforms, as municipalities are allowed to raise their own revenues, poorer municipalities will have better control on raising local resources to finance their needs.
Issues
3.15 The current transfer system has many appealing features. The two mechanisms allocating a share of tax revenues (85% of all transfers) follow simple and objective criteria providing an element of stability and predictability in municipal revenues. The shares of tax revenues transferred are, however, adjusted from time to time reflecting changes in priorities and macro economic realities. In 2002, the transfer of tax revenues to the metropolitan cities was adjusted down from 5% percent of in-province tax revenues to 4.1%.
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The following four major issues should be addressed as part of improving the transfer system.
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De-couple taxation and spending: The large share of central transfers in municipalities’ revenues de-link taxation and spending and thereby weaken taxpayer accountability. Municipalities spend the money largely raised by the central government and shy away from the pains associated with raising and justifying taxes locally. There is little incentive to exploit own source revenue bases. Local taxes and duties remain at a low level and are almost exclusively set and controlled at a central level.
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De-couple transfers and service: The transfers are not used to strengthen service orientation at the local level. As mentioned above, local service delivery performance is not monitored as part of public oversight. The financial transfers are also not concerned with actual service delivery as at least 85% of transfers are handed over to municipalities whether they actually provide services or not. Linking at least part of the transfers to performance oriented criteria could both provide incentives for better performance and make it easier to provide information on actual performance levels.9
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Equalization objective not defined: The equalization element in the current transfer system lacks an explicit standard of equalization. The equalization that takes place is entirely a by-product depending on the difference between the distribution of tax collection and population. It is not clear to what extent the transfers meet any specific objective, such as allowing various municipalities to provide reasonably comparable levels of public services at comparable levels of taxation.
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Differential treatment: The 4.1% of in-province tax revenues transferred to the metropolitan municipalities creates different treatment between metropolitan cities and other large cities. As a city can only be declared a metropolitan area by an act of Parliament, there are no clear criteria that would enable other cities to qualify for this transfer.
Reforms
3.17 The Government’s approach towards municipal reform is to increase the share of national tax revenues that would be allocated to municipalities and provincial governments. These increases have to be consistent with reform efforts to reduce the overall share of the public sector in the economy. Also, the proposed increase in resource transfers to the municipalities has to be accompanied with the development of institutional and financial management capacities at the local level. In addition, the following should be taken into consideration:
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Reduce dependence on transfers: Future legislation should seek to reduce the dependence on central government tax revenue transfers, especially in the largest cities where the transfers are the largest. Instead of merely increasing transfers, a new approach could be to mobilize additional and locally controlled funding for all cities above a certain population size (i.e. 200,000) by allowing them to levy additional rates on centrally defined tax, for example the personal income tax. This could be designed to be fiscally neutral by combining the right to levy rates with the elimination of the current transfer of provincial tax revenues to metropolitan cities. This would (i) strengthen the link between taxation and spending and (ii) eliminate the different treatment between metropolitan cities and non-metropolitan cities of similar population size. Instead of an increasing dependence on central transfers, Turkey’s major cities would then be left with (i) the current 6% of national tax revenues transfer as a “life-line”, (ii) the right to increase and receive funds from the personal income taxes, and (iii) all other locally raised revenues.
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Link transfers to service: The current legislation does not provide any support for increased service orientation in the municipalities. A new approach could be to bring about fiscally neutral modifications to the transfers to provide service-oriented incentives. The mechanism to link transfers to service would have to be designed carefully with realistic sanctions and with appropriate central and local support. Incentives would have to be built into the transfer mechanisms, so that sanctions are used effectively and municipalities report their performance accurately. For example, the national tax revenue transfers could be used in the following manner:
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A large share of national tax revenues could continue to be distributed on a per capita basis to all municipalities, but could be made contingent upon the central government receiving the following: (a) a report card on services rendered to citizens during the past year; (b) annual statistics on tax bases and utilization; and (c) an independent survey of citizen satisfaction with municipal taxes and services.
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A smaller share of national tax revenues could be distributed among municipalities based upon service provision needs. For example, allocation could be proportional to the length of local road kilometers maintained by the municipality. Continuation of this grant should be dependent upon the municipality providing a report on maintenance of local roads and on actual maintenance being provided. Similarly, for water, wastewater and solid waste management services performance oriented transfers could be introduced.
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Create service incentives: The current total transfers allocated to a number of ministries and agencies could be pooled and accessed by municipalities meeting certain performance criteria linked to services. This way central funding would be conditional on financial performance or actual scope and quality of services delivered.
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Review the equalization mechanism: In the short to medium term it is unlikely that the equalization system would be amended since the current system is functional and allows a modest level of transfers from the richer to the poorer municipalities. However, in the longer run as infrastructure needs of the larger and richer municipalities are met, institutional capacity of the municipalities is increased, and as the performance benchmarking system is implemented, amendment of the equalization program should be considered.
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