I ntergovernmental Fiscal Relations in Macedonia and Kosovo: Comparisons Marjan Nikolov, MSc OSCE Forum in Kosovo November, 2007
Presentation Plan • Why fiscal decentralization • Implementation • Responsibilities • Revenues • Transfers • Borrowing • Monitoring and evaluation • Main issues and challenges with the current system • Outline a preliminary brief agenda for reform 2
Why fiscal decentralization • Macedonia – Three periods can be identified in the process of decentralization. The period of centralization from 1991-1995 left municipalities with no competencies and nor a system of financing. – During the period between 1995 and 2001 a new law on LSG was adopted in 1995, for the first time after the independence, and the new law on territorial organization was adopted in 1996. Both laws were a product of highly ethnically and politically motivated process. – Macedonia signed the European Charter in 1996, which was ratified in 1997. – The process of decentralization was backed up by two important documents: the Government Program of 1999 and the Government Strategy for Reforming the Public Administration also of 1999. – In 2001 the crises in Macedonia ended with the signing of the Ohrid framework agreement (OFA). The OFA called for constitutional changes as well as adoption of a new law on Local Self-Government (adopted in 2002) and thus decentralization initiatives of 1999 gained a new momentum. – The EU is a good driving mechanism – Expectations for more accountability from the local self governments – Expectations for enhanced revenue mobilization (own source revenues possible PIT) – Expectations for solution for ethnic disputes while facilitating nation building. 3
Why fiscal decentralization • Kosovo – Abolition of Kosovo’s provincial autonomy in 1989 – Start of parallel institutions – War activities in 1998 – NATO bombing in 1999 – In the UNMIK/REG 2007/30 it is stated that the municipality assembly subscribe to a solemn oath of declaration so that it will “…ensure conditions for a peaceful life for all”. – Better services to citizens is required to be formalized in legislation – ECLSG should be a reference of the future legislation related to LSG in Kosovo 4
Implementation • Macedonia – Phased approach First phase: 1. Transferring own revenues from tax sources (the PIT sharing) to municipalities (GOV) 2. Developing a methodology for transferring the capital and earmarked transfers (GOV) 3. The LSG will start with the plan implementation of solving the liabilities up to 31st of January 2001 (LSG) Conditional on: In 90 % of the total municipalities comprising 90 % of the total population will provide: 1. At least 2 financial officers 2. At least 3 tax experts – 5
Implementation Macedonia • – Phased approach Second phase: 1. Culture 2. Social welfare and child protection (kindergartens and homes for elderly) 3. Education (primary and secondary school) 4. Healthcare (public health organizations and primary care) Conditional on: 1. All the conditions from phase 1 are satisfied 2. A proper capacity of the financial officers 3. Viable results of 24 months for on time and regular reporting confirmed by the ministry of finance 4. There are no accounts payable than usual ones 5. The commission will evaluate if all the conditions are satisfied 6. There is a written request from the municipalities to the proper ministry and the ministry of finance for block transfers transferring after all the conditions are satisfied. 6
Implementation Kosovo • – Goals? – Phased approach? – Ahtisaari’s proposal. Not detailed, not clear and just a framework. – Subsidiarity principle important – Please, do not mix the Status with the Decentralization process? – Kosovo’s demographics and economy – Legislation package in need – Still: AP for the implementation developed, budget process is advancing but unstable as it changes each year – Yet: capacity to absorb at local level is low, LSGs are more as a spending agency of the central government 7
Responsibility • Macedonia – List of responsibilities in the Law on local self government with rather detailed explanation on what exactly the LSG is in charge off – Additionally, the Law on financing LSG defines transfers for O&M, Block grants, unconditional and capital grants • Kosovo – Not clear list of responsibilities but details in the budget circulars and the grant system of Kosovo. Left to the sectoral laws – Problem in both countries – uniform system . For example, Romania recognizes 1 st and 2 nd level of LSG in accordance of being able to assume responsibility. Gradual approach can help but at least urban/rural asymmetry could be introduced. At the end of the day, if not taken in the beginning it will need solution later (as it is now in Macedonia). 8
Revenues • Macedonia – Property taxes. Recently business are not any more exempt. Difficulties with delivery of invoices but increasing collection rates. Still, collection less than peer ratios in developing countries by a scale of 10 (now it is 0,06% of GDP) and thus, still potential for widening tax base. • Kosovo – Not clear list of responsibilities but details in the budget circulars and the grant system of Kosovo. Left to the sectoral laws – Kosovo should think more on taxing consumption rather than income 9
Transfers • Macedonia – Earmarked grants – Block grants – Unconditional VAT grant – Sharing PIT grant – Capital grants • Kosovo – General – Specific – Fair share financing – Tax incentive scheme 10
Borrowing • Macedonia starting July this year. • Borrowing from – Foreign and domestic entities is allowed • Borrowing limits – Short Term borrowing (20% of the annual revenues) – Long Term borrowing (up to annual budget revenues) • Kosovo? 11
Monitoring and implementation • Macedonia • Decentralization working group • Working group for monitoring the process (led by the MLGA) • Subgroups by functions (as per the assignments for municipalities) to assess: – The progress of legislation adoption especially secondary legislation and by-laws – The implementation of the new competencies by the municipalities – The possible transfer of equipment, human resources, property from central to local level – The needs for training and capacity building – The identification and management of possible risks to the process • Commissions • Kosovo? 12
Main issues and challenges with the current system • Macedonia – Disparities among LSG – More than quarter of LSG don’t have financial management capacity – Subsidiarity should be reconsidered especially for environmental assignments – Lost time in division of assets and personnel than delineation of decision-making authority – Communal enterprises continue to be a drain in local finances – Input oriented financing (organizations instead function) – Local own taxes can be improved in registering tax base and improved collection – More revenues in need for local discretion – Weak statistical information system – Overhang historic arrears hurts creditworthiness – Under-use of long term borrowing to finance infrastructures • Kosovo? – Fair share financing – Awareness for paying local taxes – Statistics – Grants commission – Disparities and equalization 13
Outline a preliminary brief agenda for reform • Macedonia – Strategy and Goals for decentralization – Need for an explicit and fair strategy to deal with municipalities lacking administrative capacity – Clarify expenditure responsibilities – Asymmetric decentralization versus individualized approach of dealing with LSG without capacity – City of Skopje problems – Improve statistics – Calculate the expenditure needs – Calculate the fiscal capacity – Introduce reforms in transfer system – Central government should encourage further and facilitate borrowing or other instruments like PPP • Kosovo? – Package of legislation – Reform of transfer system – Strong monitoring system from the government. Who will be the CHAMPION? 14
15 THANK YOU
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