Paper/Speech Details of Conference Program for the 14th NISPAcee Annual Conference Program Overview V. Working Group on Public Sector Finance and Accounting Author(s) Krisztina Tóth University of Fribourg Fribourg Switzerland Dafflon Bernard, Title Managing local public debt in transition countries: An issue of self-control? File Paper files are available only for conference participants, please login first. Presenter Abstract An overwhelming majority of the existing literature on managing local public debt in transition countries is concerned either with the existing limitations on borrowing or with reactions to situations of excessive indebtedness. Country studies discuss at great length the development of the regulatory framework of local borrowing, the instruments of administrative control, balanced budget rules, accounting and reporting requirements, collaterals, and the role of credit rating agencies, in order to draw conclusions on the progress in public debt management policies. They are also fairly eloquent on the practice of disbursing deficit grants and conducting municipal bankruptcy or other forced administrative procedures aiming at the correction of municipal budgets that went in a wrong direction. While the channelling of local government behaviour by the centre is clearly indispensable for the development of sound debt management practices at the local level, the analyses of such disciplinary measures invariably place the role and responsibility of the central state in the forefront and examine municipal performance as a dependent variable. The present study drops "budget discipline" as an analytical perspective and focuses instead on the "budget responsibility" and self-control of local governments. Our main message is that the compliance with legal norms and a favourable rating at the bank are necessary but not sufficient conditions for a municipality to go ahead with borrowing. Success in the overall financial management necessitates a more proactive attitude. This appears to be confirmed by a few regrettable cases of municipal insolvency throughout Central and Eastern Europe in the past ten years that exhibit a number of different factors leading to fiscal crisis. While some of these factors are related to wrong incentives provided by the institutional environment (unfunded mandates driving municipalities to borrow, central government grants distorting local investment choices etc.), much of the debt problem has to do with the poor practices in planning and managing local investment programmes. Typical management errors include the non-existence or poor quality of medium and long term investment plans, oversized investment projects, resistance against co-operation with other municipalities for financing and operating the assets, the eagerness to assume new spending competences even beyond the limits of financial and administrative capacity, and the failure to take into account future operating and maintenance costs related to the investment. Our study presents an inventory of practical problems and errors that local governments in transition countries usually cope with in the context of local infrastructure investments. In a second part, we provide clear guidelines on the "mental procedure" that should precede every investment programme: the consideration of whether the local community can afford a particular investment, what funding sources are available, whether there is a good reason to borrow, and if yes, how the loan is going to be repaid. These questions are then translated into a formal assessment of the cost and benefits of borrowing and the net margin of self-financing.
