One of the most important issues in the transformation of the Public Sector in CEECs has been the focus on decentralisation both fiscal and organisational, following the high level of centralisation of the socialist state. Initially decentralisation was done through delegation of duties of the central government bodies to the local governments. Initially there was reluctance on behalf of the central government to delegate to the local governments. The reasons are many, ranging from a classical economic reason of providing an economy of scale to doubting the capacity of local government to carry out legally assigned original duties. There are also many cross-country differences. For instance, the former Yugoslav republics had a very decentralised system of governance, but in the 1990s they began to centralise significantly, believing that this is the way of nation-state building. So, in many of them the real decentralisation began only in the very late 1990s and has not gone too far.

However, in advanced transitional countries the issue of fiscal decentralisation per se is not important any more. It is more important to empower local communities to handle their authorities appropriately and enable them to really meet their duties with the original income that they are able to raise on its territories. It does not mean to challenge financial (or fiscal) sovereignty of the state (read the central government) but to ensure that there is governance from the bottom up, ensuring that a citizen receives the service from the government organisation that can ensure the best service, regardless of its level. The subsidiarity principle that is so widely applied in the federal states, or an emerging federal state like the EU, for instance, should be equally applied in any type of democratic organisation where citizens have their say. A citizen is more prone to communicate more openly and effectively with the local tier government, than with the central government body. As recent research has shown, in some countries the federal/central organs do not even know how to deal with the citizens directly. Through building the capacity of the local government to raise local revenues, one also supposedly promotes accountability and social responsibility. Namely, the governments have to be accountable for what they have achieved with the money locally raised. This consequently leads us to the introduction of a performance management system and wider accountability within the country. Locally taxed citizens would like to see how local money have been allocated and to what extent their living conditions have improved, for instance.

In analysing the framework for enhancing local government’s overall capacity we will focus in particular on enhancing the revenue raising capacity of the local government. The analysis will consist of a number of commissioned country studies, prepared by the members of the NISPAcee Public Sector Finance and Accounting Working/Research Group and a comparative chapter that would provide a nice theoretical introduction and a concluding chapter that will analyse different approaches employed by various transitional countries in Central and Eastern Europe. The results of this project should be presented at the NISPAcee Annual Conference to be held in Bucharest in 2003, and subsequently published by the OSI/LGI in one of their series. The application for publication in a book is to be part of this application, and will be updated on the eve of the conference when it will be known how many papers were prepared and accepted for presentation, and how many of them meet the standards to be published in a book format.

The country studies to be produced should cover the range of agreed issues. However, the issues mentioned in the framework are not by any mean exclusive. All of them should be more or less addressed, but the authors of country studies can exercise academic freedom and decide to include some other issues, or present the listed issues to a lesser extent than required by this research protocol. The country studies should provide a reader with a comprehensive overview of all the major issues facing local government in transition in a particular country, in terms of their financial position and ability to raise funds locally. Description is just the first step on which no author can remain, as it is necessary to focus on a thorough analysis of major issues. Every description must be followed by a clear answer to the question ‘why?’. It is also expected that the authors will formulate policy proposals that are suitable for implementation in a particular country.

The country study, which will be published as a chapter in an edited book, should comprise the following sections;

1. Introduction (1-2 pages)

In the introductory section, a general local government system should be described and given a general overview of the exercised decentralisation in a particular country. The system of sub-national governance should be presented in a critical manner mentioning all of the important turning points that happened in the last decade. Emphasis should be given to the current territorial organisation, with some referencing to the past or eventual impending future organisation if the local government law is in parliamentary procedure, or drafted by the Government. Basic information on a number of municipalities can be given, and if the authors deems it useful a table can be prepared detailing the movement of a number of municipalities and other forms of sub-national government in the last decade or so. If there were some major developments that influenced the path of development of local government in a particular country, the authors should cross-reference the work that explores the issue in more detail. The work should preferably be published in the English language, but if the English version is not available a version in the local language should be referred to.

2. Local Government at a Glance (2-3 pages)

It is useful to present to what extentthe public sector participates in GDP (and/or GNP) and what the spending by the sub-national government is, that is local government, in particular. It may be useful to provide a figure showing all these variables and depicting the main trends. If the graph is to be produced, then it is useful to plot the movement of the inflation rate, to enable a reader to have a grasp to what extent local expenditures and inflation moved together (that is in opposite directions).

In this section the authors are to describe the nature of the relationship between the central government and sub-national level governments in fiscal issues.

In this section the authors will provide us with a graph depicting the principles of intergovernmental relationships and the supervisory powers that central government bodies have in relation to the local government bodies. It is important to delineate between original duties of the municipality (the basic local government unit whatever it may be called) and those delegated by the central government or sub-national level government (in the case where it has some original duties and responsibilities). Namely, the sub-national level government usually cannot delegate further the duties that have been delegated to it by the central government bodies.

3. Local Government Finance: An Overview (3-4 pages)

In this particular section the structure of local government finance is to be presented.

The section should depict the structure of both the revenue and expenditure side. On the revenue side, the paper should list all original local taxes, central taxes collected locally whose part is directly allocated to the municipality (becomes a revenue of local government), transfers, user charges, fees, duties, etc. In general the structure can be presented as in the LGI books on local governments in CEECs (Horvath, 2000; Kandeva, 2001).

It is useful to see what the main methods of financing of local governments are and to what extent grants are dominant in financing the local government. The structure of the grants is to be analysed, stating the pre-dominant category: general purpose or special grant and the model used in grant allocation. These are important issues, as it has been noticed by Bird (XXX) the grants are the first instrument to be used in the process of fiscal decentralisation, but they should be replaced by the original sub-national (local) government revenue sources when decentralisation is really employed. For the purposes of this research a grant is understood, mainly, as a direct money transfer from one government to another.

On the expenditure side, all major expenditures should be listed and preferably their percentage participation in the total should be given. Particular attention should be paid to operational (current) expenditures and investment allocations. Also, the most important forms of financing capital expenditures should be stated.

Attention is to be paid to deficits as well and how the deficit gaps are filled. Namely, the authors should briefly reflect on how the budget deficits are financed and whether the local governments can borrow on financial/banking markets. A European model assumes the prevalent role of the bank in local government financing, whilst the US model is more financial market based. Since most if not all CEECs are more or less trying to mimic a US model, it is to be assumed that the municipalities will seek funds on the financial markets, sooner or later.

In this section the authors should present the situation as it is stipulated by the national legislation, but they also should discuss the situation in practice. Revenue assignments and revenue allocations stricto lege vs. de facto situations should be discussed. Also, issues of current trends in local government legislation should be presented and critically discussed. A pure description of legal norms will not suffice for the purposes of this section.

4. The Political Economy of Local Budgeting Process (3-4 pages)

In this section attention should be paid to the informal mechanisms in revenue formation, using advanced methods of political log-rolling and bargaining. Although the budget is primarily a legal document, it is heavily influenced by politics and political factors. This story holds at central level and to the same or similar extent is to be applied at sub-national, primarily local level. The allocation to a particular municipality are based on the legal norm, but the political factors influence both the process of making that (revenue sharing) norm and the way in which the norm will be interpreted. We do not want to look at the situations where the norms are not applied, as this represents a dangerous and damaging anti-social behaviour. We are more interested in the way in which the norms are interpreted and applied. The legal foundations are provided, but often the exercise of discretion, based on the legally established authority, can give different outcomes, depending on the goals and objectives that the government body (which exercises discretion) wishes to achieve. Moving from the formal side of the local budgeting process, the authors should pay attention to informal mechanisms in revenue formation. The application of a full and complex (or octroyed) bargaining model should be analysed with the prevalent focus on the outcomes of the bargaining process itself. The other important issue coming from it is the definition of accountability in terms of budgetary control.

5. Reconsidering the ‘Original’ Local Government Revenue Sources (7-8 pages)

In this section the authors should analyse thoroughly the structure and volume of the original local government revenues. Continuing from section 2, the attention is solely focused on the revenue sources that are direct revenue of the local government, regardless of who is collecting taxes on local government’s behalf. These are usually locally imposed taxes (like the British Council Tax), local user fees and charges, etc. The important issue which may not be neglected is whether the local government has the sole right to impose the tax (charge or fee), based directly on the authority invested by the law. Again attention is to be paid to the legal framework, that is to what extent the local government is independent and fully empowered to introduce taxes, fees, charges... The legal mechanisms of assigning taxes and operational aspects of implementation should be thoroughly examined. It is useful to compare original revenue sources in relation to other major forms of revenue, especially intergovernmental transfers, and assigned national taxes (taxes centrally imposed whose one part belongs to the community in which the tax was risen).

Revenue from non-fiscal activities such as, for instance, property management, has to be mentioned and analysed in the context of the last decade. This type of revenue can be used to offset some pressures from the public, especially in the situations where there is a clear conflict between the particular local government and the central government body. In this section, the authors should list all other non-standard revenues (outside of the classical public finance levies) from which the local government may benefit. What is necessary to be done to ensure that the local government behaves in an entrepreneurial manner, ensuring that all the opportunities are taken and pursued?

In this section the authors should focus on the methodology of collecting taxes and tax administration. If the local taxes are collected by the central government agency, the paper must clearly demonstrate how the central body co-operates with the local government and ensures the smooth functioning of the fiscal/tax system. The authors should give a fairly detailed presentation of local government fiscal administration (if such exists) and its relationship with the central government and its bodies. It is of particular importance to describe and analyse the relationship between local government tax administration and the central government tax inspections. The delineation of jurisdictions can be very complex, and further complicate the process of understanding.

The section will also analyse the relationship between accountability and original local taxation. Namely, local politicians and public servants should be responsive to the desires of local people, or face debacle in local elections. However, this is just one form of accountability. There is also accountability of civil servants to the citizens, and civil servants to the elected politicians. Increase accountability also implies that local taxes must be borne by local citizens. There must be an equivalent between the provision of local public goods and the tax carried by local voter-citizen. Also it is necessary to focus on the benefit-tax link, non-distortive nature of original local taxes and regional equity and long-term efficacy. It is also important to analyse the reliability and stability of the tax base itself, and of course administrative simplicity with which the system is implemented.

6. Original Revenue Sources and Local Public Borrowing (3-4 pages)

In this section the authors are required to address the problem of local borrowing in relation to the original revenue sources which form the base for the capacity of the local government body to borrow in financial markets. In this chapter the legal requirements for borrowing of local government and the legal safeguards that protect the central government (the state) as an implicit (or explicit) guarantor for the local government debts should be briefly outlined. The section will demonstrate the trends in the public sector borrowing. Some countries in the region were very conservative when it comes to local government borrowing, and although the local government bodies were empowered to borrow independently, they were very reluctant to do so. In contrast in some other countries the local government simply over-borrowed and created a problem of macroeconomic stability for the central government.

The role of implicit or explicit guarantor reserved for the central government should be looked at in more detail, and a sketch of the legal framework should be provided, together with the powers of central government to supervise the local government bodies and intervene when deemed appropriate. Moreover on local level the section should address the problem of processes and procedure when the decision on local public borrowing has to be taken. It would be very useful to provide detailed information for what the raised funds were used. Theory suggests that the money should be used for capital expenditures, but often it is not so easy to implement and ensure.

The section should also reflect on the principles used for assessing the credit-worthiness of the local government. This is an important issue, especially as the specific Eastern European methodology (or a model) has not been developed yet. Often the assessment is made by the foreign firms, and the question is whether they are able to show the full appreciation for the developments and practices in CEECs. Therefore, it is useful to reflect on those practices and say what can be done about it.

7. Enhancing Local (Fiscal) Capacity and Democratic Accountability (3-4 pages)

In this section the authors are expected to elaborate on the way sub-national government can be made more accountable through the wider introduction of original revenue sources. In the very nature of the matter, the local government will have only original revenue sources, but the central government transfers will be used to complement the original revenue sources (local taxes and fees). Or to be more precise, at the moment local taxes and fees will compliment various grants provided by the central government. It is important to examine how citizens reply to the challenges of local tax introduction, especially for instance a flat-rate surtax on a national personal income tax (so-called ‘piggybacking’). It is generally accepted that from an efficiency standpoint the central government should assess, introduce and collect taxes, but from an accountability point of view it is adamant that the local governments are empowered to set tax rates, within the limits spelled out by the law.

When designing an intergovernmental fiscal arrangement one should take into consideration a number of criteria, such as autonomy, revenue adequacy, equity, efficiency, simplicity, incentive, etc. However, for the purpose of the section it is necessary to look at the predictability, which should ensure a relatively steady revenue for a local government which should guarantee certain revenues. If there is high volatility in revenue, establishing any kind or original revenue sources for the particular local government will not give results. Namely, in bad years the local government will be forced either to ask for a special purpose (or need) grant, or to go into the financial market to borrow. But, in the latter version the local government is under serious strain, and often the conditions in the market are not so favourable for the local governments for which lenders know that they have to deliver and therefore do not have a very long period of time to negotiate conditions of a loan.

The increase in fiscal capacity certainly is closely linked to (political) accountability. Namely, the local government has to have some original revenue sources as a ‘collateral’ for outside borrowing, and when the money is raised in the financial markets, they (theoretically) can signal unsatisfactory performance of sub-national government through the increase in interest rates or blocking the access of the particular local government to the revenue source. However, the accountability should not be understood too narrowly. Namely, besides political accountability there is a need to develop financial accountability. Financial accountability requires regular collection and the presentation of collected information to the public, in order to ensure two-way communication. The public is the major stakeholder, and the opinions of the public are to be seriously regarded in the process of defining the public policy.

Local capacity has many forms. We have been primarily interested in fiscal capacity, that is de jure and de facto abilities of the local government to raise locally taxes and other fiscal revenues for itself. However, this may be too narrow a perception of local capacity. Local capacity can be seen also as a technical and managerial capacity. Capacity can be perceived, amongst other things, to be the ability of the local government to meet the needs of local people in a satisfactory manner. In the process of assessing local government capacity, one should take into consideration four general skill areas: identifying and analysing local problems in order to plan appropriate responses, mobilising and managing resources, communicating and co-ordinating policy implementation, and resolving local conflict. Often some talent is wasted because the system failed to notice extraordinary results and potential. In the process of assessing local capacity one should try to set up liaison committees with the locals and assess their perceptions and values. Also, it is necessary to construct indicators that will demonstrate the inclusiveness of the community into the local project.

Building local capacity was not initially seen as a part of the decentralisation process (project) and consequently was fairly neglected. In a modern economy it is of the utmost importance that the citizens are listened to. So demand-driven capacity-building programmes believe that they will improve the living conditions and strengthen the local community. Also, an advisory and/or participatory role in CEECs is a must.

8. Summary and Conclusion (2-3 pages)

In this section the authors will provide a brief overview of their respective paper/chapter. They have to summarise all the most important conclusions and policy recommendation. In this chapter a clear link between ‘open’ public policy, social responsibility and accountability on one side and the overall local government capacity on the other (administrative, technical, political, fiscal, economic, etc.). Finally, as this is intended to be both academic and policy-oriented research the authors should provide a list of policy actions that may be taken by the central and local governments in order to increase local government capacity, and therefore provide better service for the citizens.

General Timeframe

This project is intended to be completed from October 2002 until November 2003. Initially, members of the group and others interested in the NISPAcee-member institutions and the academic and professional public in CEECs will be invited to prepare draft papers/chapter and submit to the convenor of the Group by mid-December. The paper will be sent for refereeing and the authors will be provided with a list of the extensive comments which they should seek to address and prepare another version by early-mid February 2003. The approved papers will be presented at the NISPAcee 2003 Annual Conference in Bucharest, and comments given at the conference will be incorporated in the next version of the text. Finally, over the summer 2003, the final comments will be made, so that the final manuscript can be prepared by late October early/November 2003, and preferably published either by LGI or independently with LGI support. The book synopsis will be prepared following the Bucharest conference.

This project is intended to be alive and therefore changes on the way are not only permitted, but also probable.

The Working Group on Public Sector Finance and Accounting is supported by a grant from The Local Government and Public Service Reform Initiative Open Society Institute, Budapest, Hungary http://lgi.osi.hu/