GRANT TRANSFERS AND FINANCIAL SUPERVISION IN CENTRAL AND EASTERN EUROPEAN COUNTRIES: A COMPARATIVE STUDY

Research Protocol 2003

Goals, Aims and Objectives of the Proposed Research

The grants are traditionally the centre of attention in any study of inter-governmental fiscal/financial relationship. The variation in fiscal capacities amongst the central government on one side and local governments on the other, provides a firm basis for inter-governmental assistance which is to ensure the minimum level of certain public services in all parts of the country. Government grants also have the aim of ensuring better allocation of resources and to initiate more pro-active and responsible behaviour by local governments and their bodies. In many countries government grants are the major source of finance for local government. However, in some countries in the region they can be disguised as revenue sharing, or sharing of duties for the provision of a particular public service (usually compulsory education). Although, theoretically, grants and other forms of intergovernmental fiscal assistance are perceived essentially as gifts, or subsidies from one level to another, they incur many policy repercussions. Many local governments depend on grants to finance their basic expenditure (small municipalities, for instance), and therefore the extensive use of grants can make them very dependent from central government and influence their political choices. This is one politically motivated outcome, but grants as intergovernmental transfers of purchasing power can be used for the achievement of many different social objectives. The research will focus on classifying the existent grants and restrictions on their use. Authors will analyse the categorical grants-in-aid as transfers with specified conditions attached to the expenditure of funds, and matching grants which require the activity from local governments on their part. They should also focus on all existing unconditional grants, as those to which no strings are attached as such.

The research should report on all the current practices, the problems emerged and impending policy responses, if such exist. The analysis will also include political economy issues such as to what extent grants are used to motivate local governments to subscribe to the central government programmes and policies, to initiate changes in the behaviour of local government bodies, and whether they are used in the pre-election campaign on the side of the ruling party or parties. Authors will also be required to give quantitative data on the use of grants in local/regional government financing in the last ten years or so (from 1987 onwards), in nominal terms, real terms and as a percentage of overall revenue of central governments. They should also focus on the process of raising money to match government funds in the case of conditional matching grants, that is whether local government can initiate the process of donation collections, voluntary contributions, etc. or matching money from a local level which has to come from the municipal/regional budget. Research should provide insight on the use of different types of grants in terms of their efficiency levels, effectiveness, and social impact. It is of particular importance to research initial political equilibrium in the case of both general-purpose and matching grants. Authors will analyse the shifts in the political equilibrium caused by both grants. Finally, the researchers will have to provide a platform for further research and a set of policy recommendation which can be used by policy-makers.

Format

The paper should be up to 25 pages long, in single spacing, using Times New Roman script, 12-pt size. Please, use footnotes, but try to limit the amount. A comprehensive bibliography of related material should be provided at the end. Please, refer to the existing body of literature whenever analysing country related issues. It is important to be able to demonstrate a solid knowledge of current literature both published in the country in case and abroad. Please, avoid the use of ‘general statement’ that cannot be supported by the existing sources, or where you are unable to obtain data to establish your claim. Also, avoid the statements which can be perceived by potential readers as a political activism or, in other words, try to keep your academic unbiasedness.

Structure of Country Studies

1. Introduction (1-2 pages)

In the ‘Introduction’ the authors will provide a necessary basic framework for research, explaining in general terms the role and structure of local government, when the relative importance of local government bodies has emerged, and how the local government is perceived by the public. There is no need to enter into great detail and cover the issues which will be covered anyway later in the text.

Briefly, the introduction could contain some basic information on the country concerned, current political and economic situation, on the relationship between political factors in the country (who controls the central government and what the distribution of power on local level is), what it the role of non-governmental organisations (NGOs), and to what extent are public policy processes open to public influence (an important issue in the budgeting process), etc.

2. Local Government Legal Framework (2-3 pages)

In this section the authors will introduce the main legal acts that provide a framework for the existence and activities of the local government bodies. It is necessary to start with the Local Government Law (Act), describe and analyse its major provisions and how these influence the basic position of local government. Also, if there is a middle-tier government in the country, its position should be described and properly analysed.

In this particular section contributors should outline the basic administrative structure of the country. What are the layers of government, what is their interaction, and what is the distribution of administrative power (as opposed to distribution of political power which can be assessed through the number of seats in local government which take respective political parties). It is important to define the main levels of de-concentrated central public administration. How does decentralisation takes place and what are the derived and original functions of local government? Whether decentralisation takes place based on generalist or functionalist principles. How decentralisation is followed in terms of financing (original income from or for delegated activities, or general grant transfer, etc.).

This section can refer to Leeman’s dual and fused systems, or simply put concurrent authority vs. clearly defined separated duties between the central and local government. Dual systems are defined as systems in which local government and central government act independently from each other and where there is no representation of the central government at local government level. In contrast, fused systems are defined as systems in which the central government is represented in local government bodies by means of an appointed prefect or mayor, who governs together with an elected council. Also, if there are any special territories with a special status (like the capital), these should be described and their specifics analysed.

Finally, the end of this section should provide an introduction to the next section on inter-government financial relationship. Financial relationships should be put into perspective with regard to the overall relations between the central government and local government bodies, and pave the way for a more technical analysis in the subsequent chapters.

3. Inter-Governmental Financial Relationship (2-3 pages)

In this sector the contributors should carefully describe and analyse the nature and forms of inter-governmental financial relationships in their respective country. The contributors should analyse which principle was effectively applied in their respective country, whether correspondence or subsidiarity. Correspondence offers a rule for assigning responsibilities to governments: expenditure and service responsibilities should be aligned with the benefit areas for each government service. Subsidiarity claims that the government responsibility for a function ought to be at the lowest level of government that can deliver the function efficiently.

Further, attention should be paid to the process and principles of tax collection, that is who collects the taxes and on whose behalf. Then the analysis should shift to non-tax revenue sources, and analyse how those are imposed, calculated and collected. Again, it is important to learn who the authorities are that can impose the user charges, fees and duties, and for whom they are collected. Reference to local government revenue and expenditure cost table which is to be placed in the appendix should be made. For both issues the contributors should pay attention to the issues of in-country co-ordination and inter-government assistance. It would be useful to present the principles of the national fiscal system, and to what extent local government can issue debt, or finance their budget deficit by debt of any kind. If the legislature in this field exist, it is useful to give a brief presentation of the positive legal rules that govern the overall framework of the inter-government fiscal relationship in the country.

The contributors should touch the problem of grants and their transfer in designing the fiscal relationship in their respective country. However, they are not required to do so in great depth, as the issue is central to the country study and will be analysed later in more detail. Also, it is necessary to describe how the central revenue service is organised, and whether there is any supervision by the central government over the fiscal behaviour of local government entities. If the relationship is very intense, it is necessary to present the case for fiscal independence of local government units. Financial control and supervision should be introduced, but not researched in greater detail, as a subsequent section will focus on fiscal supervision. At this point it is enough to describe the nature of the relationship and basic rights and duties of both central and local government.

In this section the contributors should include any other issues that they deem important in providing a better understanding of their country study. All country-specific issues are to be mentioned but not analysed in great detail. Also it is possible to look at the specifics of the budgeting process, especially if it affects the grant amount and their allocation. Therefore, the issues of logrolling and political dynamics in the legislative process can be touched if they are relevant to the main topic. The final paragraph in the section should prepare the way to the next section.

4. The Grant System

4.1. Roles and Purposes of Grants (2-3 pages, but can be up to 4 pages)

Grants are understood as a transfer of spending power, that is command over resources, from one government to another. In a multilevel government relationship, grants can compensate governments for benefit spillovers to non-residents, reduce the problems created by fiscal disparity, encourage programmes of special national merit, reduce special problems associated with regional economic decline, and induce the government towards management reform as a condition for receiving aid (US GAO).

Avoiding the pure theoretical analysis of the conflict between the donor and the recipient, the contributors will set out the principles of inter-government grant transfer in their respective country, explain the basic legal and institutional framework and introduce a reader to the social role of grants, their role in central government policy making and policy enforcement, the country’s overall public policy process, and how the grants are perceived by the population that benefits from them.

The contributors should provide a classification of grants according to national legislation, but also to sketch the way in which different grants serve various purposes. How they are defined in law and how they are classified. Following the classification a thorough analysis of grants’ purpose is to be analysed. It can range from economic to political targets that have to be achieved, with emphasis on the role of grants in public policy co-ordination within the country. It would be useful to analyse in general the nature of the relationship with respect to grants (their types and amounts) between central and local government which are not derived from the same political party.

4.2. General Purpose Grants (1-2-3 pages)

In this section contributors should define general-purpose grants and explain the extent of their use in intergovernmental relationships in the country. They are otherwise known as block grants or general assistance grants but none of them are programme specific related, and are given to lower level government to support their general function.

After providing a legal and/or practical definition, it is necessary to explore allocation formula and how different regions/local governments can influence the allocation formula. It would be useful to provide a short historical brief in the last ten years with regard to general-purpose grants and their use. A table with main general-purpose grants is welcomed, although information disclosed in a table should not be duplicated in the main text. In other words, there is no need to repeat the same information twice.

Contributors should explain for what activities general grants are used, and what would be the procedure to establish a general grant for a new emerging activity. It should be mentioned, briefly, how central government can supervise the spending of allocated money. It would be useful to show the common areas in which general grants are used to finance the local governments, especially since a change of political regime.

4.3. Special Purpose Grants (1-2-3 pages)

Special purpose grants (or categorical grants) are finance given for specific and narrowly defined programme purposes, usually limited to spending for certain activities, projects. These grants assist to induce the recipient government to behave in a fashion contrary to the way it would behave without aid. In other words, special purpose grants seek to encourage recipient government units to shift expenditures to particular functions or to guarantee provision of certain recipient government services in a manner consistent with national interest.

Contributors should provide national definition of special purpose grants and try to classify them in groups for easier analysis. Some of the special purpose grants can be mixed with general purpose grants. The main difference is that the recipient government cannot spend the received money according to its priorities, but for the purposes specifically attached to the grant. For instance, teachers’ salaries can be received in a form of general grant and special purpose grant. Namely, it can be earmarked for teachers’ salaries (special purpose grant) or simply a local government can receive a grant, and according to the law they have can cover the teachers’ salaries. So, in both cases the aim was achieved, but the legal and financial implications were different.

Theoretically, special purpose grants may be: 1) formula, 2) project and £ project-formula based. Formula grants: aid is distributed amongst eligible governments according to a legislatively or administratively determined formula. Contributors should analyse the formula elements thoroughly, especially those which are of a more political nature. Project type is one in which aid is distributed at the discretion of the administrator for a particular project. It is important to stress whether these grants are awarded on a competitive basis, or based purely on discretion of the administrator. Eclectic combination of project/formula should be analysed especially if it exists, as in this form the aid is distributed at the discretion of the administrator within the constraints set by a formula that limits amounts awarded to the particular sub-national government.

It is important to analyse whether specific grants are used to support activities which the recipient will undertake anyway, or those activities are regarded as important by the central government, and therefore supported. It would be useful to see what practice says about the application of a specific grants system, and whether they are used as a means to influence the behaviour of an independent local government entity.

4.4. Equalisation Grants (3-4 pages)

            - Equalisation of Revenues

            - Equalisation of Expenditures

Contributors should look at the grants which support equality between the regions and ensure equalised regional development. They are not present in all countries, but are fairly important whenever there is an agreement to share revenues between the central and local governments. It is important to state whether there are any legislative limits in levels that can be shared between different levels of government, or it is something agreed for each year separately. ‘Revenue sharing’ distributes funds according to a formula that combines population, percentage or urban population, tax efforts shown, income tax effort, and per capita income need to define the appropriate shares (at least in the US). Therefore, it is necessary to establish as to how different countries define the rules for revenue sharing. It is believed that programmes of revenue sharing can strengthen local spending power and reduce intergovernmental fiscal disparities, that is great differences in fiscal capacity that exist amongst governments at the same level across the country. Contributors should try to see whether these grants help dispriviliged parts of population to integrate and improve their living conditions.

The related issues to this is the existence of ‘mandate’ (in US fiscal terminology), that is the existence of legal provision of any kind that places an expenditure requirement on a government of the day. In other words, it is necessary to explore whether the government of the day has any pre-commitments which come from firm legal rules and regulations. These requirements must be met, without exception, and do not leave any space for adjustments and discretionary behaviour. In different legal systems the national level government can mandate spendings of local (sub-national) governments and the latter can do very little to change it. It is also important to see what the other limitations are that national governments can impose in order to limit financial independence of local governments (such as election frequency, budget and finance structures, permissible forms of government, due process definitions, etc.). However, it should be borne in mind that rules of the game can often be designed to reduce local government costs by limiting competition amongst local units, restricting direct democracy initiatives and official elections, constraining elected officials’ salaries, or defining tax processes throughout the country.

Equalisation grants are not very often present in developing and transitional countries due to a general belief that all of the country is a development area and that there are not regions which are particularly neglected. However, just a brief look will tell us that urban areas have a stronger financial base, and the capital is financially the strongest in the country. Sustainable development does not tolerate these discrepancies and there is a need for action.

4.5. Payment of Grants (3-4 pages)

In this section the process of payment of grants should be carefully described and analysed. Namely, in inflationary conditions the central government can wait for a while before it releases funds to the local governments that are not friendly towards the central government policies. As the budget is planned in nominal terms, the local governments which receive grants late will be effective losers. As the central government prescribes accounting and reporting practices, it is useful to describe them here and ensure that the positive practice is critically re-examined.

It can be useful to see when the local government get their information for budgeting purposes, and how they can budget for grants coming from the central government. The payment schedule is important, especially if there are ad hoc or interim reports to be made as a prerequisite for the payment of the grant. Also, whether grants are paid in full at the beginning of the fiscal year or in instalments is also determining factor. If in instalments, are the payments automatic or do they require a request from the local government to be made, etc.

All problems that local (sub-national) government experience in the process should be pointed out, as the practice of payments of grants can in itself demonstrate the shortcomings of the current system of grants, and also whether there is a discrepancy between the legal acts and effective practice.

4.6. Grants to Needy Authorities (1-2 pages)

In this section contributors should analyse the grants to less-developed regions or small communities which cannot sustain themselves alone, so they are in need of assistance from central government. This type of grant should be seen as very specific and exceptional, but nevertheless it still exists in many countries for different political reasons. They can appear in the case of a municipality where a large number of members of national minority live, or a municipality which has strong historical roots, so that the central government hesitates to perform any rationalisation programme.

It is necessary to point out the formula (if any) by which the money is allocated to a particular local government entity in need. Or whether the allocation of resources is made solely on a discretionary basis. It would be useful to provide a table which looks at the trends, and whether the amount of money spent on these grants is falling or not. The central government should aim to enable each municipality to be able to sustain itself, and often different models of revenue sharing can resolve the problem.

4.7. Grants Mechanism Reassessed (1-2 pages)

This should be a summary and concluding part which will bring the analysis of the sole issue of grants to a close. The main types of grants should be briefly presented and the main issues raised should be mentioned with proposed policy recommendations and ideas for improvement of the current situation.

5. Financial/Fiscal Supervision: Rights and Duties (5-6 pages)

In this section it is necessary to present and analyse the supervisory and control system operating in a respective country. The section can start with the analysis of the internal audit function in the public organisation, followed by an analysis of the external audit function.

Control function is not to be looked at narrowly, but within the context of the overall practice of social responsibility and accountability. It may be useful to mention the roles and duties of the Parliamentary Budget committee if it has any power over the allocation of resources to sub-national level governments.

Supervision from the central government can be seen as a preventative action, but also as a response one. Namely, through close supervision the central government can ensure the compliance of local government bodies, but then if a mistake has been detected the central government can order an action to eliminate the problem. There is also a case for administrative control, where the central government can supervise the process of decision-making which is finalised by an administrative act, and take the necessary measures to intervene, if the law was improperly applied.

It is, however, important to establish the case for the introduction of public audit. An auditor should examine the accounts and otherwise satisfy him or herself that: the accounts are prepared in accordance with regulations and all other legal provisions applicable to the accounts; that proper practices have been observed in the compilation of the accounts; and that the body whose accounts are being audited has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources. If the external audit is prescribed by law, it is necessary to devote space to an analysis of the auditing process, rather that the organisation of the audit organisation (although it can be mentioned as well).

Finally, it is necessary to explain the logic behind the existing supervisory/audit arrangements in general, and especially if there are ministry/area specific actions that can be undertaken in the overseeing financial/fiscal activities of local government entities. It may also be useful to see how supervised public enterprises which perform functions for the local government, but are paid by the grants transfers from the central government operate. In this section contributors should promote all possible ‘good/best practices’, especially those which may be regarded as a country specific.

6. Conclusion (1-2 pages)

In this section the contributors should draw conclusions on the current state of the development of an inter-government financial/fiscal relationship in a particular country. Particular attention is to be devoted to the dynamics in the development of the current system (in what direction is it moving, more centralised or decentralised, grants as a financial instrument or an instrument of public policy, etc.). All eventual problems detected should be listed here and theoretically founded and practically sound policy proposals should be listed. Contributors should avoid making a mere summary, although this section can begin with a short summary describing the situation of inter-government financial/fiscal systems and the role of grants in it.

Appendices
- Municipal Revenue/Expenditure Structure

Pease list all the sources of revenue and expenditure for aggregate sub-national level governments. In cases where the data is not readily available, please make a representative sample of municipalities. The current book series on local government published by LGI may prove to be of help. Try to cover the period from 1989 until 2000.

- Grants Structure

List all types of grants and their participation in the central government expenditures and sub-national, local government revenues. Try to provide information from 1989 until 2000 (inclusive).