World Bank Institute

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• World Bank Institute
• Central Asia Regional Workshop on Financing Local
  Expenditures
• Istanbul, May 16-18, 2005
• Pre-requisites of a Good Intergovernmental
  Transfer System
• Oblast to rayon/local transfers

Ildar Zulkarnay, Socio-Economics Research
Institute, Ufa, Republic of Bashkortostan,
Russian Federation E-mail zulkarnay_at_bsu.bashedu.r
u
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Requirements for good intergovernmental system
(ITS)oblast-rayon (region-locality)

• 1. On the whole there are common requirements for
  ITS Center-Regions and Regions-Locality
• 2. Some requirements are more topical for ITS
  Center-Regions, the others for ITS
  Regions-Localities
• 3. It is especially difficult to implement some
  requirements on the local level
• 4. Methods of implementation of some requirements
  are different on the local level
• 5. Essential requirement need for
  decentralization

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2. Some requirements are more topical for
Center-Regions, some for Regions-Localities

• ITS Region-Localities focuses on local
  preferences,
• whereas ITS Center-Regions macroeconomic
  stability goals
• Localities need technical support from the higher
  governments
• Simplicity ITS Region-Localities should be
  more simple than ITS Center-Regions to be more
  understandable
• To ensure subnational governments accountability
  subnational units have to have assured
  constitutional defense against one-sided changes
  of game rules by the Center.

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Simplicity

• Good ITS must be simple enough to the local
  governments manage handle their arrangements.
  Possible complications
• Complicated grant allocation formulae
• A formula cannot be supported adequately by
  existing data
• Local taxes that are structured to accomplish
  other goals than revenue raising. For example,
  property tax base may depend on the space under
  the building including balconies. As a result,
  there will no balconies
• Two-channel transfer allocation system village
  benefit from transfers from rayon and from
  oblast
• Expenditure norms like the norms used in the
  USSR

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3. It is especially difficult to implement some
requirements on the local level,and they have
risks not to be implemented in post-soviet
countries

• Considerable local taxing powers
• Significant Expenditure Responsibility and
  Autonomy
• Internalization of spillovers
• One ITS is not able to fit rural and urban LGs
• One ITS cannot accomplish multiple objectives
• Hard budget constraints locality has more
  problems in balancing its expenditures with
  revenues than regions (oblast) has.

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4. Methods of implementation of some requirements
are different on the local level

• The use of conditional grants on the local level
  causes high administration (control) casts
  because of multiplicity of localities
• Tax capacity
• On Regional (oblast) level is based on GRP,
  Value Added Product
• On local level is based on tax bases weighted
  with average rates
• Index of budget expenditures
• On Regional (oblast) level ratio of current
  expenditures to the average expenditures across
  the country
• On local level an index that reflect the
  structure of consumers as well as climate,
  geographical factors, density of population
• Tax revenue assignment features

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Tax revenue assignment features

• Local taxes should be closer jointed with the
  local goods
• Local governments should have as much as more
  revenue sources to increase revenue stability
• Local taxes should not export tax burden
• Local tax should be based both tax paying
  capacity and taxpayers benefit from the
  corresponding good
• Tax administration casts should be minimal
• Local taxes should be those have immobile tax
  base.

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What is a Local Tax?

• Who imposes the tax ?
• Who determines the nature of the tax base ?
• Who determines the nature of the tax base?
• Who determines the tax rate ?
• Who collects the revenue ?
• Who receives the revenue in the end ?

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5. Essential requirement Need for
Decentralization

• European Charter of Local Self-Government
  Principles
• 12 Rules of decentralization by Roy Bahl
• In particular
• elected local council
• locally appointed chief offices
• significant amount of taxing powers
• significant local government expenditure
  responsibilities
• budget making autonomy
• The core idea of local self-government is close
  relation between the Power and population
• How to increase local governments
  accountability?

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What increases local governments accountability?

• Significant powers to mobilize revenues and
  discretion in expenditures
• Transparent participation of private business in
  delivering public services they have to compete
  to receive LGs orders
• Active participation of population in local
  self-government
• Import of advanced informal institutions of local
  self-government
• Formal institutions that encourage population for
  self-governance
• Innovations in LGs
• For instance, standard ISO-9000

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Why do LGs need Significant Budget Autonomy ?

• Efficiency better reflect local preferences
• Accountability close relationship between
  service providers and service consumers
• Manageability encourage competition and enhance
  innovation in delivering public goods

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Other issues

• Problem of buoyancy vs. stability
• Problem of LGs equity
• Implementation of reforms.

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Problem of buoyancy vs. stability

• A Grant pool must be stable enough to ensure
  predictability of LGs revenues, and buoyancy
  enough to implement equalization goals
• An ITS must be stable enough to ensure
  predictability of LGs revenues, and must be
  flexible enough to address changes of disparities
  among localities
• Expenditure responsibilities (functions)
  assignment must be stable enough to ensure
  predictability of LGs expenditure needs and
  should have a room for reassignment of functions
• in view of changes of external conditions
• in the course of negotiations
• based on consensus.

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Problem of LGs equity

• One LG does not take groundless priority of the
  other LG
• However, LGs which have different opportunities
  to mobilize revenues and to borrow should have
  different tax raising powers and expenditure
  responsibilities.

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Implementation of reforms

• There are two approaches for ITS design in large
  countries
• provincial governments design their own ITS
• the central government designs a uniform ITS
  which is obligatory for all provinces
• There must be a champion for a good ITS
• Generally, population is interested in
  participation in decision-making process, but the
  Russian mentality is different from other
  nations
• The Center concerns more with macroeconomic
  stability
• Regions (Oblasts) is interested in
  decentralization as an source for economic growth
  on the one hand, but they may afraid to weaken
  its positions if they have political tension with
  the center, on the other hand
• LGs Rich LGs arent interested in ITS , poor
  ones are interested in.