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This document proposes a governance model for Bosnia and Herzegovina that involves municipalization rather than the current entity-based system. Key aspects of the model include transferring most competencies from the entity and cantonal levels to municipalities and the state level. Municipalities would gain powers over education, culture, healthcare and more, while the state would control policing, justice, higher education and more. Governance structures would remain largely the same at the municipal level while the state would have a strong prime minister, parliament, and indirectly elected president. The goal is to address dysfunction in the current system and meet European integration requirements.
Descrizione originale:
K-143 Municipalization Model for Popular Governance in Bosnia and Herzegovina (full document)
This document proposes a governance model for Bosnia and Herzegovina that involves municipalization rather than the current entity-based system. Key aspects of the model include transferring most competencies from the entity and cantonal levels to municipalities and the state level. Municipalities would gain powers over education, culture, healthcare and more, while the state would control policing, justice, higher education and more. Governance structures would remain largely the same at the municipal level while the state would have a strong prime minister, parliament, and indirectly elected president. The goal is to address dysfunction in the current system and meet European integration requirements.
This document proposes a governance model for Bosnia and Herzegovina that involves municipalization rather than the current entity-based system. Key aspects of the model include transferring most competencies from the entity and cantonal levels to municipalities and the state level. Municipalities would gain powers over education, culture, healthcare and more, while the state would control policing, justice, higher education and more. Governance structures would remain largely the same at the municipal level while the state would have a strong prime minister, parliament, and indirectly elected president. The goal is to address dysfunction in the current system and meet European integration requirements.
DRAFTED FEBRUARY 2010 REVISED JANUARY 2011 AND MAY 2013 PRESENTED JUNE 2014
K-143 Municipalization Model 2
TABLE OF CONTENTS
Executive Summary Page 4
Introduction and Background Page 9
I. BiHs International Obligations and Aspirations Page 12
II. Local Self-Governance in Europe Page 18
III. Brko District: A Domestic Example of Local Self-Government Page 20
IV. Why Municipalization? Page 22
V. The Municipalization Model Page 26
Guiding principles, methodological approach Page 26 1) Division of Functions Page 27 2) Governing Institutions Page 28 3) Regional Spatial and Strategic Development Councils Page 36 4) Ethnic Protection Mechanisms Page 37 5) Revenue Sources for State and Municipal Governance Page 43
VI. Financial Analysis Jasmina iki, Tony Levitas Page 44
Fiscal implications of consolidating BiHs governance structure Page 44 Methodological notes Page 70 Problems and inconsistencies Page 78
ANNEX I: Chart Showing the Distribution of Competences Page 82 between Municipalities and the State
ANNEX II: Number of Seats in K-143 Model Parliamentary Assembly Page 84
ANNEX III: European Examples of State-Local Allocations of Competences Page 89
ANNEX IV: Brko District: BiHs Most Developed Example of Local Self-Government Page 101
Bibliography Page 105 K-143 Municipalization Model 3
Brief History of Model and Co-Author Biographies Page 108
K-143 Municipalization Model 4
Executive Summary
Reform in Bosnia and Herzegovina (BiH) has hit a dead-end. Its top-heavy governance costs its citizens dearly, while senior politicians are insulated from the fate of their constituents. They have no interest in being agents of change, despite EU incentives.
The Council of Europe, the EU and NATO have all stated that constitutional reform is necessary for BiH to integrate fully in to the latter two organizations. BiH is already not compliant with the requirements of the Council of Europe and OSCE, a fact pointedly made in the December 2009 ruling by the European Court of Human Rights finding that BiHs Dayton constitution and election law are discriminatory in their provisions for election to the Presidency and House of Peoples, and must change.
Municipalization a BiH governance structure with only municipal and decentralized state government would address both the functionality and accountability failings of the current system. Unlike any other constitutional reform proposal brought up since Dayton, this state model is the first one that holds real potential for change and popular buy-in.
Dayton Bosnias dysfunctionality is rooted in the fact that it has been built bottom up from an uneven and ethnicized middle layer of government (entities, cantons). Constitutional reform proposals have addressed the problem from two directions. The first approach has been to territorially reorganize the middle layer through regionalization of Bosnia. The second has been to incrementally change state institutions and/or institutional mechanisms (the 2006 April package, the Butmir process). Both approaches had to fail. Regionalization would provoke conflict around the territorialization of ethnicity. Institutional reform does not solve the basic problem of the dominant political tradition of undermining state institutions from within based on the ethnic ticket, a process that has led to internal ethnic division of state institutions and opens space for systemic corruption.
Municipalization can solve both problems. It does not draw new borders, but builds on the existing (municipal) ones and it builds the state from the local level bottom-up, the only level at which strong ethnic affiliation and the de facto, but not formal, institutionalization of ethnicity guarantee a substantial amount of social trust and do not neutralize popular demands for citizen participation and accountability of government.
We have developed such a state model by linking this original idea with Bosnia-Herzegovinas international obligations for Euro-Atlantic integration and the countrys recent and historical K-143 Municipalization Model 5
experience and tradition of local self-governance. It made use of the experience of many other European states with decentralization, drawing special attention to Scandinavian countries and the transformation experiences of post-socialist East European states. In addition, it drew upon the unique example of Bosnias Brko District as a guidepost to the sorts of competences municipalities can handle if sufficiently empowered and resourced.
This uniquely decentralized two-layer state structure is based on several guiding principles: removal of the middle layer and transfer of as many competencies as possible to the local and as many as necessary to the state level; clear-cut division of competencies and clear mechanism of decision-making between the government layers, creating a state that is not vested in old-fashioned centralism, but functions in a modern way with a strong emphasis on harmonization, standardization and oversight leaving as many institutional forms as possible intact and only changing their substance; transforming the existing declared ethnic protection mechanisms into real functional protection mechanisms by introducing the reality principle into the state structure, which means to institutionally address the basic fears of all ethnic groups, but build the state based on todays reality and not based on national narratives tied to the past.
Such a system would serve the citizens of BiH far better than the current structure, compelling politicians to be genuinely representative at both levels, allowing for superior and more equitable public services, and enabling the rationalization of a bloated public sector. The shift would also allow for long overdue reforms of social services and veterans benefits to take place that have long been stymied in the current system.
Proposed Governance Model:
Division of functions: Municipalities would gain exclusive competences currently held at cantonal and entity levels in a number of areas like education (through the secondary level) and culture, maintaining its role in direct service provision to citizens with greater resource and staffing to fulfill these responsibilities. Municipalities would gain substantial additional competencies in a wide range of other areas (health care, civil protection, environmental protection, spatial planning, transport, tourism, trade and industry, etc) in which it would share responsibility with the state. Supervision of these competences to ensure legal compliance would be done by the relevant state ministries. Many competences would be best served by cooperation agreements with neighboring municipalities. K-143 Municipalization Model 6
The State would gain exclusive competences currently held at entity and cantonal levels, including: policing and justice (though maintaining the 16 current police and judicial units, and including a new Supreme Court), internal security, agriculture/forestry/fisheries, hospitals, higher education, finance and banking supervision. It would also gain additional revenue by assuming the middle layers income tax authority.
Governance Structures:
Municipal Level: Local governments would maintain similar structures to those in operation now, with directly-elected mayors and larger municipal councils and administrations. Sub- municipal governance would be strengthened by giving the Mjesne Zajednice more authority and certain autonomy. Where existing, city municipalities would lose their status as units of local self-government. Financial audit mechanisms would be substantially strengthened and its autonomy guaranteed.
Forms of voluntary cooperation would play a crucial role in securing the efficient management of the large number of functions that fall under local competence, especially the pooling of functions by several municipalities through the creation of collective, single-task organizations. A specific role would be played here by the Regional Spatial and Strategic Development Councils that would turn national spatial planning into a bottom-up process and provide for access to large EU structural funds.
State Level: The state would comprise a government with a strong prime minister and a strong parliament. There would also be a single President, elected indirectly in the Parliamentary Assembly, by a three-fifths majority. This office would have purely representational functions.
This model proposes a unicameral BiH Parliamentary Assembly, which is radically different from the current structure. It foresees a strong linkage of parliament to the local level and thus to the citizens and to remove the ethnic protection function from the legislative by disassociating the existing body (House/Council of Peoples) from parliament.
The unicameral parliamentary assembly would consist only of a House of Representatives directly elected from the 143 municipal districts, with additional representatives for municipalities with more than 50,000 inhabitants (in increments of 50,000). Based on the preliminary municipal population figures from the 2013 census (which will likely be revised down in 2015), this would yield a House of 169 Representatives. The citizens residing in the K-143 Municipalization Model 7
municipalities in the current Republika Srpska would seat 44% of the assembly, citizens residing in the present Federation would seat 55%, and Brko would have two seats, or roughly 1%. The House would have sole legislative authority for all state competences. We have also calculated the number of seats which would be allocated per municipality if the threshold for additional seats was set at 40,000 or 30,000 inhabitants (see Annex II). Those thresholds would create a House of Representatives composed of 184 or 213 seats, respectively.
Ethnic protection mechanisms: The proposed state model includes a number of ethnic protection mechanisms that transform the current system in order to institutionalize ethnicity into the state structure in a way that does not impede state functionality. It aims to transform the current system of territorialized ethnic protection mechanisms that enable groups and individuals to realize their private interests through the political system by declaring to act on behalf of ethnic interests without being forced to explain what these ethnic interests are and what they arent into real functional ethnic protection mechanisms.
The governance model contains crucial protection mechanisms that are strong even without being institutionalized: the decentralized state system is built upon a municipal level that is dominated by one ethnic group in most localities in post-war Bosnia. The model includes the establishment of strong institutional mechanisms that will lead to at least a substantial weakening of local and regional disparities and underdevelopment.
Besides these indirect ethnic protection mechanisms, the proposed model offers a number of direct ethnic protection mechanisms:
Council of Peoples: Councils of Peoples will be established both at the state and the municipal level. Unlike the current entity Council/Chamber they will consist of four equal caucuses of five councilors from the three constituent peoples and Others and national minorities. They will be directly elected, thus differentiated from the legislature and from political parties. They will ensure that none of the clearly and constitutionally defined Vital National Interests are violated by having the ability to veto legislation.
At the municipal level, Councils for Inter-Community Relations would take the lead role in mediating between local institutions to prevent potential ethnic conflicts. When unsuccessful, citizens will have the right of legal remedy through the Constitutional Court VNI chamber. The state Council of Peoples would perform a parallel function, negotiating with the Parliamentary K-143 Municipalization Model 8
Assembly on legislation that members determine would threaten a Vital National Interest of a recognized constituency. When harmonization proves unsuccessful, the CoP would have the right of appeal to the Constitutional Court, which will deliver a final ruling.
Proportionate ethnic representation on state level in the distribution of key political functions and public authorities would be secured, but with considerable flexibility, linked to a future census and not on the pre-war census. At the local level, proportionate representation in public authorities would include certain affirmative action mechanisms that aim to balance the effects of ethnic cleansing. This would be based on the choice of individual victims to return to their pre-war municipalities and apply for a job in local institutions, and not based on pure statistics. A system of sanctions would be applicable for active malfeasance by local authorities, not for demographic disparities alone.
Institutions to curb regional disparities and underdevelopment: Two major, modern institutional settings would guarantee to curb regional underdevelopment und the local developmental disparities. This has been a key topic and a major policy failure both in the socialist and in the post-socialist periods. These institutions would be Regional Spatial and Strategic Development Councils and mechanisms to ensure local financial equalization.
Sources of Revenue:
The simplification of BiHs governance will be reflected in governmental revenue structure. With the elimination of the middle layers of government, their revenue sources can be reallocated. The revenues from the single account (Value Added Tax and Customs) will only be split two ways, with municipalities receiving additional allocations to cover their new responsibility for primary and secondary education, as well as additional discretionary funds. The Personal Income Tax will be divided 50/50 between the state and municipalities. Municipalities will also levy charges and fees for provision of local services, and be enabled to borrow for capital expenditures. The new revenue structure is explained in detail in the financial analysis section.
K-143 Municipalization Model 9
Introduction and Background
The polarization built into the Dayton constitutional system may have been the high price of peace in 1995, but the fact that it is fatally flawed has long been apparent. The system of ethnic institutionalization and mobilization of fear (embodied de facto in the election law) rewards nationalist efforts to leverage fear and employ fiscally reckless patronage at election time (while hundreds of thousands of citizens are left with no way to demonstrate their frustration other than by refusing to exercise their voting rights or going to the streets to protest, as seen in February 2014). 1 In addition to its inherent instability 2 (only held in check by the international High Representative and his military backup, now known as EUFOR), Dayton BiH is absurdly over-governed for a country of an estimated four million inhabitants. While providing ample patronage opportunities for the ruling parties, this does little for citizens who are well aware they are overtaxed, overgoverned and underserved. 3 The failure of BiH to meet the requirements for visa liberalization in 2009 was only the latest disappointment for a population that continues to see salvation in integration with Europe, but whose politicians operate with scant concern for the common good. 4
The international community, too, increasingly recognizes that BiHs constitutional order (and its election law) hamstrings its functionality even survival as a state. The EU 5 , the Council of Europes Venice Commission 6 and European Court for Human Rights 7 , and NATO 8 have all
1 See Kurt Bassuener How Bosnias protest movement can become truly transformative, February 23, 2014 at http://www.democratizationpolicy.org/how-bosnia-s-protest-movement-can-become-truly-transformative See also Bodo Weber and Kurt Bassuener EU Policies Boomerang Bosnia and Herzegovinas Social Unrest, DPC Policy Brief, February 2014, at http://www.democratizationpolicy.org/pdf/briefs/DPC%20Policy%20Brief_Bosnia-Herzegovina's%20Social%20Unrest.pdf 2 See DPC and the Atlantic Initiatives Assessing the potential for renewed ethnic violence in Bosnia and Herzegovina: a security risk analysis, published in October 2011, at http://www.democratizationpolicy.org/uimages/pdf/DPC- AI_BiH%20Security_Study.pdf The UNDPs Annual Report 2008 aggregates the data from the four quarterly Early Warning Surveys. The 2008 Political Stability Index was at its lowest point since the surveys began in 1999. See www.undp.ba 3 Ibid. The UNDP report noted that a clear majority (of respondents) are of the view that BiH institutions cost too much money and timethey are expensive, time consuming, and of questionable efficiencythe public are not at all happy with the quality and effectiveness of domestic institutions, which inflict direct and indirect costs upon citizens and business. Pages 33 and 34. 4 Ibid, page 10. 5 This has been articulated by senior officials in both the Council and the Commission. Evolution of the constitutional framework will be essentialto ensure a functional and efficient state capable of delivering on BiHs obligations in the EU accession process and as a potential future Member States [sic]. Javier Solana and Olli Rehn, cover letter to Joint Report EUs policy in Bosnia and Herzegovina: the way ahead, letter and report to EU Foreign Ministers obtained by DPC, 31 October 2008. Both bodies participated in the failed Butmir process in late 2009. Bosnia and Herzegovina 2009 Progress Report was explicit on the problems of the current constitutional order, including entity voting. Page 7-8, Progress Report. 6 The March 11, 2005 Venice Commission Opinion on the Constitutional Situation in Bosnia and Herzegovina and the Powers of the High Representative is probably the most detailed critique of the Dayton constitutional model, and makes clear the country has no chance of entering the EU with its current governing structure in its point #26. See http://www.venice.coe.int/docs/2005/CDL-AD(2005)004-e.asp K-143 Municipalization Model 10
stated the country needs constitutional reform to move forward with its integration processes. They have yet to clarify in detail what changes will be required for BiH to meet its current obligations or enable it to integrate effectively. Constitutional reform has thus become a catchphrase both emptied of meaning and used as a political football. Elite-focused efforts to find concord among ruling parties in the Butmir process in Fall 2009 on a package including some modest constitutional reforms failed and were counterproductive. 9 Attempts to forge agreement among the same protagonists on even sub-constitutional issues (as seen with the stillborn so-called Prud Agreement) have also come to naught. Efforts to achieve agreement on how to implement the European Court of Human Rights December 2009 Sejdi-Finci ruling, which continued until February 2014, failed to deliver. 10 There is no reason to hope that yet another attempt to jump-start a constitutional reform process based on agreement among the same ethnocratic oligarchs will be any more successful. If agreement among these leaders were to be forged, it would be almost guaranteed to be dysfunctional. None will be willing to abandon their vested interests protected by the current system. These leaders know they need not fear pressure from below under the current system, and operate accordingly. In the meantime, BiH citizens see the likely date of their countrys entry into the EU receding further than that of any other regional aspirant, including Kosovo: 2022, on average. 11 They are also by far, according to all relevant polls, the most broadly pessimistic population in the region.
Bosnias dysfunction is apparently seen as so innate and intractable by both Bosnian citizens and the international community that only incremental change from the current structure is seen as possible. Attempts at a big bang change to a different system are often dismissed as a utopian lost cause, or even dangerous. But the countrys instability cannot be cured by mere scaffolding of an inherently shaky platform. It requires an entirely new operating system one that has popular legitimacy, unlike the Dayton constitution.
We believe that there is a vast potential constituency for a governance structure that can work for and is accountable to citizens. The spectrum of what might be popularly acceptable is far wider than what the senior political leaders put on the menu, according to the 2007 UNDP
7 The ECHR ruled in December 2009 that BiHs Constitution and Election Law are discriminatory in their provisions for the Presidency and House of Peoples. See Sejdi and Finci vs. Bosnia and Herzegovina at http://www.unhcr.org/refworld/category,LEGAL,,,,4b44a28a2,0.html 8 NATO Wants Bosnia to Reform Constitution Scheffer, Reuters, July 16, 2009 at http://www.javno.com/en-world/nato- wants-bosnia-to-reform-constitution-scheffer_270755 9 See Toby Vogel, Trying to appease the unappeasable, European Voice, December 18, 2009. 10 EU disappointment on lack of progress in Sejdic-Finci implementation, EU Delegation in BiH, February 17, 2014 at http://europa.ba/News.aspx?newsid=6181&lang=EN 11 Gallup Balkan Monitor Insights and Perceptions: Voices of the Balkans. 2009 Summary of Findings, page 19. www.balkan- monitor.eu K-143 Municipalization Model 11
report The Silent Majority Speaks 12 and the results of the October 2008 municipal elections. Popular dissatisfaction with established political elites, considerable even before the backsliding seen since 2006, is very pronounced. 13 As US President Barack Obamas Chief of Staff Rahm Emanuel said during the 2008 campaign, Never allow a crisis to go to waste. They are opportunities to do big things. 14 The global economic crisis, combined with the deepening political crisis, may provide the most opportune moment since Dayton to present the public with creative new solutions.
The governance model outlined on the following pages is one which K-143 members believe has great promise to gain traction with citizens throughout BiH. It is a highly decentralized structure in which municipalities would have local ownership of the day-to-day administrative and fiscal decisions, while the state-level government would be sufficiently empowered to handle the functions it can perform at a comparative advantage, and perform an oversight role. Institutions of the state could also be distributed to other urban centers, rather than being concentrated in the capital.
12 Available at http://www.undp.ba/index.aspx?PID=3&RID=43 The study found, for example, that about eight in ten BiH citizens identify with the state; only 14% profess not to. The poll also found wide aspiration for constitutional change and EU membership among the citizens, along with a lack of trust for governing authorities, or indeed socially among citizens. 13 The sense of being represented by anyone or any party in the BiH political arena was 11% for Bosniaks, 18% for Croats, and 29% for Serbs. Gallup Balkan Monitor Insights and Perceptions: Voices of the Balkans. 2009 Summary of Findings, page 24-25. www.balkan-monitor.eu 14 Jeff Zeleny, Obama Weighs Quick Undoing of Bush Policy, New York Times, November 9, 2008. http://www.nytimes.com/2008/11/10/us/politics/10obama.html K-143 Municipalization Model 12
I. BiHs International Obligations and Aspirations
Unmet Obligations
Council of Europe: Bosnia and Herzegovina undertook an obligation to bring its governance into conformity with the European Convention on Human Rights (already integral to the Annex 4 Constitution) when it joined the Council of Europe in 2002. Ever since, provisions in the Constitution and Election Law have been the target of criticism by the Council of Europes Venice Commission, the Parliamentary Assembly of the Council of Europe (PACE), and the Council itself.
The Venice Commissions Opinion on the Constitutional Situation in (BiH) and the Powers of the High Representative in 2005 15 spelled out these problems in detail: the composition of the Presidency and the House of Peoples ran counter to BiHs ratification of the Convention and Protocol 12, which guarantees the enjoyment of any right set forth by law without discrimination. 16
The European Court for Human Rights judgment in the Sejdi and Finci vs. Bosnia and Herzegovina case 17 , given on December 22, 2009, was the culmination of all previous opinions and recommendations given by the Council of Europe and its associated bodies on BiHs constitutional structures and election law provisions, making changes to remedy these problems mandatory. The Court found that the constitutional and electoral law restrictions for others regarding the Presidency and House of Peoples to be in violation of the European Convention of Human Rights (Article 1 of Protocol 12 for the applicants ineligibility for the Presidency; Article14 taken in conjunction with Article 3 of Protocol No. 1 for the applicants ineligibility for the House of Peoples).
In January 2010, the Parliamentary Assembly of the Council of Europe (PACE) passed Resolution 1701 18 , referring to the above ruling and calling on Bosnias political leaders to fully engage in a meaningful and constructive dialogue about concrete proposals for amendments to the Constitution, in line with the 2005 recommendations of the Venice Commission, with a view to adopting a reform package in time for the 2010 parliamentary elections which should be organized in accordance with the revised Constitution. PACE also passed the related
15 http://www.venice.coe.int/docs/2005/CDL-AD(2005)004-e.asp 16 http://www.humanrights.coe.int/Prot12/Protocol%2012%20and%20Exp%20Rep.htm 17 See the judgment at http://www.unhcr.org/refworld/category,LEGAL,,,,4b44a28a2,0.html 18 http://assembly.coe.int/Main.asp?link=/Documents/AdoptedText/ta10/ERES1701.htm K-143 Municipalization Model 13
Recommendation 1894 19 to (inter alia) (consider) launching a wide discussion, with the participation of key domestic and international stakeholders, including the members of the Peace Implementation Council and, in particular, the European Union institutions and Bosnia and Herzegovinas neighbors, about the challenges Bosnia and Herzegovina currently has to face on the road to Euro-Atlantic integration and the means to overcome them.
A 2008 joint opinion by the Venice Commission and OSCEs Office for Democratic Institutions and Human Rights (ODIHR) on proposed amendments to the BiH election law 20 , repeated both organizations criticism of the discriminatory provisions of the Bosnian Constitution, adding that it contravened numerous international documents, including the International Covenant on Civil and Political Rights, the European Convention on Human Rights and other commitments to the Council of Europe, and the OSCE Copenhagen Document. It also noted that the apportionment of seats in multimember constituencies did not appear to allow for equal suffrage the equal weight of each vote. It referred to the OSCE/ODIHR Election Observation Missions report on the 2006 general elections 21 , which also raises this point in its recommendations.
In addition, BiH has signed the European Charter for Local Self-Government 22 , which stipulates the following:
That public responsibilities shall be generally exercised by those authorities closest to the citizens That the principle of local self-government be recognized in domestic legislation, in the constitution where possible That the basic powers and responsibilities of local governance be prescribed by legislation That powers given to local authorities shall normally be full and exclusive That administrative supervision of local authorities activities must be based on legislation, and be limited to ensuring compliance with law and constitutional principles (regarding tasks delegated by higher levels to be performed by local authorities), interventions must be kept in proportion to the importance of the interests to be protected That local authorities be able to determine their own internal administrative structures, limited only by general provisions
These rights should be exercised by freely elected councils/assemblies and executive organs The right and ability of local authorities to regulate and manage a substantial share of public affairs under their own responsibility, in the interest of the local population That local authorities exercise full discretion to take initiative on any matter not explicitly excluded from their competencies nor assigned to any other authority That local authorities shall be consulted in planning and decision-making processes for matters concerning them directly That municipal borders cannot be changed without consultation with local communities, ideally through a referendum Local authorities have the right of recourse to judicial remedy to secure free exercise of their powers and respect for the established principles of local self-government That local authorities have the right to co-operate and form consortia with other local authorities to carry out tasks of common interest Local authorities have the right to belong to an association for protection and promotion of common interest, and the right to belong to an international association of local authorities
The Charter stated the following about municipal financial resources:
Local authorities are entitled to freely dispose of financial resources The resources of local authorities shall be commensurate with their responsibilities These resources shall at least partly derive from local taxes and charges, the rates of which can be set at the local level Local authorities shall be appropriately consulted on how on the method of allocation of resources redistributed to them Financial equalization procedures should be established to protect financially weaker local authorities without diminishing their discretion Grants to local authorities shall not be earmarked for the financing of specific projects Local authorities should be able access national capital markets to borrow for capital investment
OSCE: BiHs obligations as a member of the OSCE, stemming from the 1990 Copenhagen Document, 23 require it to respect the right of citizens to seek political or public office, individually or as representatives of political parties or organizations, without discrimination. Persons belonging to national minorities have the right to exercise fully and effectively their human rights and fundamental freedoms without any discrimination and in full equality before the law...The participating States will respect the right of persons belonging to national
23 http://www.osce.org/documents/html/pdftohtml/13992_en.pdf.html K-143 Municipalization Model 15
minorities to effective participation in public affairs, including participation in the affairs relating to the protection and promotion of the identity of such minorities.
The term national minority carries a specific connotation in the post-Yugoslav countries, and even more specific in BiH, with its three constituent peoples. Even after the BiH Constitutional Courts constituent peoples decision in 2000 and the following impositions by the then High Representative Wolfgang Petritsch, which called for all three peoples to be constituent throughout BiH, others and national minorities remain an out group in the Dayton system. The OSCE obligation, as articulated by ODIHR in 2006 and 2008, runs parallel to the Council of Europes criticisms, through the Venice Commission and other bodies, and most recently in the Sejdi and Finci verdict by the ECHR of December 2009.
Taken together, the Council of Europe and OSCE have stated repeatedly and for years running that BiHs Dayton constitutional order is discriminatory. The December 2009 Sejdi and Finci verdict by the ECHR has made changing these provisions a legal requirement, which remains unmet as of June 2014.
Stunted Aspirations
The European Union: As noted in the introduction, the EU has called for constitutional reform in BiH to ensure functional and sustainable institutions, including clear structures for coordination between government layers (a so-called coordination mechanism).
This is critical, since as a signatory of a Stabilization and Association Agreement (SAA) and aspirant candidate for membership, BiH has entered into an enormously complicated and detailed contractual relationship with the EU, also spelled-out in phases in the Partnership Document. Substantial legislative and structural change will be required.
In brief, the EU will demand the following from BiH, listed by sector:
Economy: Ensure a single economic space, meaning the free movement of goods, capital, services and persons. Also: establishment of free trade zone between EU and Bosnia nationally harmonized regional planning (for accessing EU funds) taxes: principles of the (ECs) Code of Conduct for business taxes; permanent formula for allocation of indirect tax revenues between government layers develop fiscal surveillance mechanisms: rules-based and coordinated between layers of government, supreme audit institutions (central harmonization units for financial management and control and for internal audit systems) K-143 Municipalization Model 16
transfer of banking supervision to state level A state-level Ministry of Agriculture, Food and Rural Development and the development of a comprehensive state level agricultural strategy Anti-trust policy: adequate legislation, Competition Council (central level) WTO membership and subsequent obligations
Energy: adoption of a comprehensive energy strategy, meeting Energy Community Treaty obligations;
Transport: implementation of recommendations of Memorandum of Understanding on Development of SEE Core Regional Transport Network;
Policing: adherence to the three EU principles for police reform 24 ; maintaining established central-state agencies (SIPA; border police) and establish additional central states organs defined by the police reform law prior to the signing of the SAA;
Anti-corruption policy: adherence to relevant international conventions and GRECO recommendations (CoE Group of States against Corruption general guidelines, code of conduct for public officials, rules on party and election financing);
Health system: the development of community-based services for mental health care;
Education: resolution of the fragmentation of the educational system, prevent ethnic segregation in schools, implementation of Bologna process
Refugee return: proper funding, socio-economic integration, implementation of the Sarajevo Declaration (securing conditions for the return of remaining refugees & IDPs)
Environmental protection: passage of a state-level law and the establishment of State Environment Agency
Media and Information: strengthening the capacity and independence of the Communications Regulatory Agency and establishment of national data protection agency.
The Commissions latest Progress Report, issued in November 2010, noted minimal progress in terms of BiHs meeting most of the above conditions, and numerous others. The legislative process is not even passing the necessary legislation, much less ensuring its implementation.
24 These were prevention of political influence, state-level command and budgetary control, and policing regions based on functional criteria. They remain unimplemented. EU fudged its own conditionality to create the perception of forward movement on the European path. K-143 Municipalization Model 17
NATO: The Alliance has been the vaguest international organization on the constitutional reform issue. In Fall 2009, it weighed in at the top, with outgoing Secretary General Jaap de Hoop Scheffer stating that constitutional reform was necessary to join the Alliance. This was reiterated by his successor, the incumbent Anders Fogh Rasmussen. But there has been nothing in the way of official clarity on what this might mean. According to one NATO observer, I have the impression that this is seen as EU-led and that NATO is just lending moral support.
From a technical point of view, NATOs constitutional issues are relatively few:
Deleting from the constitution the Standing Committee on Military Matters (SCMM), which was to coordinate the (now-disbanded) entity militaries, to eliminate a potential problem in the chain of command. This would also ensure that defense is controlled by the Minister and the Parliamentary Assembly, with oversight by the Presidency as Commander in Chief. Clarity of chain of command on defense, security, and intelligence, with democratic civilian control and oversight.
The SCMM issue may be a requirement for BiH to implement the Membership Action Plan (MAP). K-143 Municipalization Model 18
II. Local Self-Governance in Europe
There are a number of examples in Europe (including EU members) of two-layer governance structures (such as Denmark, Finland and Slovenia), though the three-layer model is more prevalent. In BiH, adopting such a system would mean drawing new lines of the map not a promising prospect. An Annex compares a number of these countries in greater detail.
While the EU does not take a formal stance on the individual internal organization of its members, it does call for subsidiarity: governance functions should be assigned to the lowest level at which they can be undertaken effectively. A number of functions are commonly handled at the local level throughout the Union: development of local economy, social housing, public utilities (water, electricity and gas supply), fire protection, and local (or regional) planning.
In addition, many functions are frequently shared or divided between the state and lower levels of government, though there is wide variance among EU members at which level these are vested: police, health and social assistance, education (usually primary, often secondary), culture (libraries, museums, parks), roads and transport (public transport, sometimes ports and river transport), environmental protection, and tourism promotion.
There is also wide variance in revenue allocation between the state and local levels, with new members typically reserving more than 70% of revenues for the state level. In countries with wider distribution of authority, it comes close to 50/50 between state and sub-state levels (collectively). The source of these revenues also varies widely; from 4-70% of revenues used by local governments is derived locally, from sources like property and income taxes. Redistributive and equalization mechanisms based on objective criteria such as population size, age distribution, and socio-economic indicators are a European norm, as is increasing allocation of resources to structural and cohesion funds directed to poorer European regions, and the coordination/harmonization of national and EU policy.
Competing governance trends are at play within the EU and Europe more broadly. While decentralization allows for more responsive governance, some functions health care for instance are moving up from lower levels to take advantages of economies of scale and to ensure greater equality in service. Two competing trends are observable: One is for states with a two-layer governing system to establish a third, regional layer of government (or for some with a week mid-layer to strengthen it). The other trend is to keep the two-layer system but to increase cooperation/pooling among municipalities to provide better and more efficient public K-143 Municipalization Model 19
services. This latter approach maintains local control while ensuring maximal effectiveness and efficiency in planning and service delivery.
Denmark illustrates a balance between these. Its 98 municipalities have primary responsibility for a host of public services. An intermediate layer between local government and the state exists mainly for health care provision. These five regions of state administration have limited competence. Danish law encourages collaboration among municipalities to provide public services, though this is voluntary local governments are legally responsible for delivering these services to their citizens; how they do so is discretionary. The state has an equalization fund to ensure comparable service provision at near to average cost. Oversight for adherence to law is conducted by the state.
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III. Brko District: A Domestic Example of Local Self-Government
Brko District, in northeastern BiH, was placed under international supervision after the Dayton Accords (see Annex). It has the most expansive and well-resourced municipal government in the country, and is also the most multiethnic. It is therefore an important reference point, illustrating the extent of competences which can be handled at the local level.
Brko District (BD) is estimated to have 90,000 inhabitants, three times the BiH average. It also has significant numbers of each of the three constituent peoples. It undertakes governance functions and operates public services that are run at the entity and cantonal level elsewhere in the country. The Districts competences, as defined by the Brko District Statute, 25 include:
- BD economy - social welfare - BD finances - judiciary and legal services - Public property - policing - Public services and infrastructure - housing - Culture - urban development and zoning - Education (primary and secondary) - other competences necessary for the - Health care functioning of the District as a single - Environment administrative unit of local self-government
The main District Government institution is the Assembly, consisting of 31 members, including 2 representing national minorities, elected for a four-year term of office. Its Speaker is elected by a 60% majority. The Assembly determines general policy and oversees public administration and expenditure. Qualified majorities of 60% of members present are required for a number of defined acts, including amending the rules of procedure, passing the budget, and amending laws. 60% of total members must vote to remove the mayor. Amendment of the Statute can only be done with a 75% majority of all members. There are detailed provisions to prevent outvoting, requiring affirmative votes by at least 1/3 of members from each constituent people to pass legislation to change the Statute, rules of procedure, the budget, and concerning education, language, religion or culture. Unlike in the rest of the country, the Assembly elects the Mayor, who selects his deputy. The Coordinator represents the District to the institutions of state in Sarajevo. The Deputy Mayor, the Coordinator, and Heads of Departments are selected by the Mayor based on professional competence, also reflecting the general
25 Available in full at www.ohr.int K-143 Municipalization Model 21
composition of the population. The District also has a Finance Directorate and Office for Public Property.
Revenues: The District receives 3.55% of the VAT proceeds. It also recently introduced a property tax at the introductory rate of 0.6%. The BD Governments land reform proposal would privatize public property holdings not needed for governance purposes, which would bring in significant one-off revenues. The District may introduce an income tax in the future.
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IV. Why Municipalization?
We devised municipalization strengthened municipalities with greater decision-making powers as the foundation of popular governance, with the state also strengthened to perform the functions that can only be handled at that level, as well as to meet the requirements of Euro-Atlantic integration as the best hope of finding a modus vivendi among BiHs citizens. The political downward spiral of the past eight years has only deepened our conviction that efforts to forge consensus among BiHs political elites for incremental change to the Dayton constitutional order are approaching the basic problem from the wrong direction. BiH will only begin to function and reform itself under a system that has popular legitimacy: a majority of each self-defined group in the country needs to conclude a given system can serve and protect their interests. Coalition 143 (K-143) assembled around the municipalization model in the belief that it could deliver this popular and effective governance, and has therefore pursued development of a more detailed concept of how such a structure could work.
Local Self-Government has a long and strong tradition in Bosnia, as it does in Southeastern Europe as a whole. Local governance was the basis of the state in Ottoman Bosnia, due to its remote position in the empire and its mountainous geographical conditions.
The local level maintained an important role when society and state went through a tremendous process of late modernization in the socialist era, from the mid-20 th Century. When Socialist Yugoslavia developed its system of self-management socialism as a more democratic counter model to Stalins Soviet socialist system, decentralization was made the cornerstone of the new system and the municipal layer of government took a key position in these decentralizing efforts.
Many state functions were moved to the municipal level. The principle of local self-government was further enhanced through establishment of units of sub-municipal government, the so- called Mjesne Zajednice. It represented an additional institutional form of democratic participation and important means of modernizing society. These built the basis for collective work, of small communal activities on voluntary basis, like the building of roads in remote rural settlements.
Yet what was intended to form an important part of a democratization effort developed a number of dominating negative trends. They were the result of the structural contradiction of decentralization in an authoritarian socialist system: of decentralization as a means of democratization and the maintenance of the role of the Communist party as the ultimate K-143 Municipalization Model 23
authority. This contradiction turned decentralization into a process of authoritarian decentralization or decentralization in place of democratization. Its main features were: control over local government institutions and local economy by the party through informal and semi-formal means, undermining the normative functioning of local governing institutions making a mockery of the carefully built institutions of local democratic decision-making and direct citizen participation integration of local economies based on territorial, and not functional principles, totally inadequate to modern economies, thus leading to the territorialization of group concurrencies, aggravating a phenomenon known as localism the failure of local authorities to effectively manage transferred functions because of the lack of an adequate financing system and the failure to build a professional and skilled local administration the failure to establish efficient institutions and mechanisms of oversight and control of local authorities activities by upper layers of government, and their ultimate breakdown the failure to develop efficient mechanisms for territorial equalization, leading to the failure to deliver on one of the key promises of Yugoslav socialism to achieve regional equality and erase regional underdevelopment turning planning and decision-making processes between the different layers of government (federal, republican, local) into an informal/semi-formal bargaining process, substantially damaging the development of the economy and contributing heavily to the process of erosion of state institutions and the disintegration of the state
In the ethnic breakdown of the socialist state and in takeover of government by newly formed ethnic parties in the early 1990s the municipal level again played a crucial role. The ethnic parties gaining of power at the first multiparty elections in Bosnia in 1990 was launched from the local level. Nationalists understood the importance of the local level and paid tribute to it. They exploited the motives of the previous socialist system connected with the local level, pointing to the failure to achieve territorial equalization and highlighting the problem of regional-municipal underdevelopment. It was not coincidental that the municipalities in which conflicts between municipal authorities and Mjesne Zajednice had taken place were where ethnicization of the political and public sphere first gained ground and the culturalization of social conflicts could be observed.
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The usurpation of the state by the ethnic parties in the prewar and war period built upon their taking control over municipalities from the bottom-up. This was the precondition for physically reshaping the structure of the local population and local elites.
Yet wartime efforts to centralize the established ethnic nationalist (proto)states were only partly successful, showing the continuing tradition of strong local authorities based on their proximity to the citizens. Ethnic regimes thus had to resort to some of the ruling techniques of the previous system, such as informal bargaining with local elites.
That the traditional strength of local public authorities, based on their close geographical connection to the citizens, can be used for democratic reform of the governing system can be seen through various success stories of reform projects at the municipal level (VAT tax reform to strengthen local revenue system, improving municipal service delivery, inter-entity cooperation of municipalities). These were implemented in post-war Bosnia with the support of mayors and municipal councilors despite their membership in the leading ethnic parties that still dominate the Bosnian-Herzegovinian state and political system.
If BiH is to become a functional state, it must be built with the recognition of the importance of the local layer of government in creating a modern and democratic state. But this can only succeed if it takes into account the negative aspects of the history of decentralization and developing mechanisms that will prevent their repetition. These include:
local governance based on democratic principles and the active participation of its citizens, the financial and administrative empowerment of local authorities to handle decentralized functions, a transparent and institutionalized decision-making process between the local authorities and those of the upper layer(s) of government, an institutionalization of oversight and control by upper layer authorities over the activities of local authorities that is both efficient and respects the autonomy of local institutions, and the establishment of modern democratic institutions to fight regional disparities and underdevelopment.
A strong governance role for municipalities clearly has precedent in BiH. The underlying point of the following model for municipalization is to change the incentives in the governance system from being divisive to being integrative, and maximizing popular control.
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Municipalities are the outer limits of popular trust in BiH; beyond that outer perimeter, social trust fades altogether, even within ones own ethnic group. 26 This lack of trust, in interaction with the divisive provisions in the Dayton Accords, creates an environment ideally suited to ethnocratic political elites, allowing them to operate with little or no accountability to citizens. A municipalized governance system would be built around the present reality of limited integrative social capital, making localities the building blocks of the state governance structure. Citizens would be able to expand control of the only level of government over which they can exercise any discernable leverage, and lose nothing in the process. A two-level system would deliver accountable governance and superior (and more equitable) public services for less money, allowing space for economic development stifled by the bloated public sector.
A two-layer governance structure will also break the formal linkage between ethnic groups and territory, which has often been specified as the Dayton Constitutions main flaw by Venice Commission, and now by the ECHR in the Sejdi and Finci vs. Bosnia and Herzegovina ruling. Ethnoterritorialism would effectively continue to exist at the local level in a demographic sense; it did before the war as well in many municipalities (Drvar, Cazin and Posuje were overwhelmingly Serb, Bosniak and Croat, respectively). But under a municipalized state structure, there would be no legal reification of ethnoterritorialism, and ethnic protection mechanisms would exist for all self-defined groups, beyond the three constituent peoples.
Such a system would allow for the rise of socioeconomic issues in politics which citizens and the international community have long claimed to desire. There are common, cross-cutting interests that are regularly ignored due the easy ability of nationalist elites to homogenize populations through fear and patronage under the Dayton Constitution. There are different interests among municipalities dominated by the same group: ones interests as a resident of Oraje are quite distinct from those of someone residing in Kiseljak or Grude, for example. They cannot be effectively represented by a system that assumes their interests are identical and they are not. A state that can both reflect wide common interests where they exist and give voice to differing interests within groups must be based on the local level, where those interests are first manifested. To build-up a functioning BiH, it has to be broken down to the elemental governmental unit.
26 See UNDPs fascinating 2009 study on social capital in BiH, The Ties That Bind, available on www.undp.ba K-143 Municipalization Model 26
V. The Municipalization Model
Guiding principles, methodological approach:
Based on the rationale for a municipalized state model for Bosnia-Herzegovina, the following model is developed along several guiding principles:
Move as many governing functions as possible to the local level. Keep or move up to the state level only those functions where it is necessary for reasons of securing state integration, maintenance of public security or where the efficient functioning of a certain governing sector cannot be guaranteed when located at the local (or consensual local pooling see below) level. Share competencies in these cases as much as possible. Thus allocation of competencies to the central state level is undertaken with a strong accent on state institutions role in harmonization, standardization and overview.
Create a clear-cut division of competencies and clear mechanisms (while at the same time avoiding over-regulation) of decision-making between the two layers of government. Avoid competence-overlap and reduce discretionary authority to a minimum as both are one of the main sources of undemocratic bargaining and authoritarian tendencies and of the growth of irrational and inefficient bureaucracies as well as the flourishing of corruption in the current system.
Build the governance structure around the current reality, not competing visions of a rewind to 1991 or completely ethnically clean national territories. No ethnic groups should have to worry but at the same time, none can attain the dreams of its national leaders.
No revolutionary approach: there should be no question of reinventing hot water as the local phrase has it. This would provoke needless resistance to the model when presented publicly, especially in connection with institutional settings that were the object of fierce (ethno-)political debate since Dayton.
Leave the form intact as much as possible, but change the substance: The model envisions maintenance of Vital National Interests and collective representation in a Council of Peoples; keeping the current unevenly sized municipalities, including the wartime-created small municipalities; maintenance of the territorial organization of police (10 cantons, Brko District, and five RS police districts); existence of city municipalities, etc. Yet in each case, the structure and context change considerably.
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The methodological approach that resulted from the application of these principles is twofold:
1. Erase the entity and canton layers of government, move their competencies mainly downwards and partly upwards.
2. Transform the current declared ethnic protection mechanisms into a system of real protection mechanisms to prevent discrimination against any ethnic group, part of an ethnic group or an individual on the basis of his/her declared ethnic affiliation.
This eliminates the potential to pursue individual/group interests under the cover of ethnic protection, thus weakening the state and its institutions, its functioning and role as a protector of and service delivery for its citizens, and thus slow down or prevent the reforming and modernizing of state, society and economy of Bosnia-Herzegovina.
1. Division of functions
Municipal competencies:
In the proposed state model, a host of government competencies would be moved down to the municipal/city level. The breadth of competencies falling under the authority of local self- government units would be great even by European standards, given both the number of exclusive and shared competencies.
Education would fall under almost exclusive municipal/city authority: pre-school, primary, secondary and vocational/technical education. Only higher education would fall outside local purview. Culture, leisure and sports would also almost completely be in the responsibility of local authorities, as well as most of public utilities (water supply, sewage, refuse collection and disposal).
Housing would be an exclusive municipal competence. In addition, local, urban and regional/spatial planning would be competencies of the local self-government units, making national spatial planning a bottom-up process in which the role of the central layer of government would basically be reduced to national harmonization.
Municipalities/cities would also exercise authority in public transport and traffic, on a local (and regional planning and coordination) level, as well as in public health and social welfare. They would have the bigger share of competence in fire protection and civil protection.
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Through shared competencies, local self-government units would play an important role in the promotion of economy (local economic development), in industry and trade and in tourism promotion.
Sharing competencies with the state level, municipalities and cities would have greater authority over agriculture/forest/fishing, as well as play a key role in consumers protection and environmental protection.
State competencies:
The two-level governance model proposed would be more decentralized than many European systems, but there are precedents (Denmark, for example). While much is to be handled at the local level, the state would gain a number of competences currently handled at the entity and cantonal level. It would also share or divide a spectrum of competences with municipalities.
New or augmented state competences would include education (exclusive authority over higher education; oversight over levels handled at municipal level), internal security/policing (current policing structures will remain, but under central command and control), justice (as with policing), health care (insurance and hospitals), social welfare, veterans affairs, energy, environmental protection, transportation (for highways, rail, river traffic and air), agriculture and forestry, and science and technology.
In the case of shared competences, the line ministries would perform oversight over municipalities (for example, Ministry of Education for primary and secondary schooling), but only to ensure compliance with legal obligations. Civil protection and firefighting, for example, is a shared competence to ensure expeditious work to combat forest fires, deal with flooding, etc.
2. Governing institutions
Municipal Level
Under the model the municipal level would be the only level of local self-government. Units of local self-government would be (rural) municipalities and cities. The principles of local self- government would be integrated in the State Constitution and spelled out in a Law on Local Self-Government, based on the principles of the European Charter of Local Self-Government (as is the case currently for the entity laws on LSG). At the same time with the strengthening of K-143 Municipalization Model 29
local self-governance the institutional role of the Mjesna zajednica as a guarantor of sub- municipal governance would be strengthened.
Governing institutions: Governing institutions as existing in both entities municipalities would remain intact.
Mayor: The mayor is the head of the executive and the chief of the municipal/city administration. He will be directly elected on majority vote. He can have one or more deputies elected by the municipal/city council.
Municipal Council: Municipal/City Councils would undergo some additions compared to their current structure. Along with the large number of (exclusive and shared) competencies moved to the municipal level additional council committees would be formed.
Given this expansion the number of councilors, currently 11 to 31 based on the number of registered voters in one municipality/city, would have to be expanded. Comparing it to councils in other European countries with a comparable amount of competencies a size ranging from 17 to 45 Council members seems most reasonable. After the upcoming census, council size should be linked to the number of inhabitants.
The current electoral system shall remain unchanged: a proportional electoral system, including a regulation for the representation of minorities 27 that guarantees at least one mandate for minorities which comprise more than 3% of population.
Ethnic protection: Certain institutions and mechanisms would be in force to secure the protection against ethnic discrimination on municipal/city level. These include a Council for Inter-Community Relations (Vijee za meunacionalne odnose/ CICR) and mechanisms for proportionate representation in public authorities as described in detail in the separate section 4 on ethnic protection mechanisms.
Sub-municipal government: Units of sub-municipal government would be Mjesne Zajednice in municipalities/cities and city municipalities.
Mjesna Zajednica: The establishment of local communities would be obligatory for all municipalities and cities. An adequate part of responsibilities and competencies should be transferred to the local communities. This would include a limited budget, the right to have
27 See Article 13.14 of the Election Law of BiH K-143 Municipalization Model 30
property and the autonomous disposal of these assets in line with principles set by the municipality/city. Competencies and authorities shall be comparable to those of Mjesni odbor in the City of Zagreb 28 , including the right to plan small communal actions (mainly in the field of infrastructure).
Cities: Cities would be exclusively defined as an urban, functional unit connected by the everyday needs of its inhabitants. They would have the same competencies as (rural) municipalities, along with exclusive competence over urban roads and public transport. City council members would be elected by the same proportional representation system, and the mayors directly elected by majority vote.
City municipalities: City municipalities with their governing institutions would remain in cities where they already exist (Sarajevo, Istono Sarajevo) but would lose current status as units of local self-government. Other cities of an adequate size (with a lower limit of inhabitants defined by the Law on Local Self-Government) would be allowed to establish city municipalities. A substantial part of responsibilities and competences should be transferred (in the case of already existing municipalities: kept) to this unit of sub-municipal government. City municipalities in the City of Belgrade and City Quarters in the City of Zagreb 29 would serve as good models for the design of city municipalities, their institutions and authorities.
Brko District: Because of its specific history, Brko District would keep its special status and retain its unique institutional setting as defined by the Districts statute (indirect election of mayor, ethnic outvoting prevention mechanisms). Its competencies would remain untouched, and the size of the district assembly unchanged.
Mostar: In 2012, the Federation Constitutional Court ruled that the Mostar Statute imposed by High Representative Paddy Ashdown was unconstitutional, running contrary to basic constitutional principles and principles of democratic representation. 30 The citys governance remains gridlocked; citizens of all identities are increasingly frustrated at the poor service. The City of Mostar would adopt the municipalization model, which would affect local government structure and representation on the state level. The mayor would be elected directly, as is the norm in the rest of BiH. Determining the districts for the citys three seats in the BiH Parliamentary Assembly may well also prove contentious. The citys specific history will make the CICR a particularly important institution. Adjustment of the distribution of councilors
28 Statut grada Zagreba, lanak 92-103 29 Statut grada Beograda, lanak 74-86 , Statut grada Zagreba, lanak 80-92 30 These violations have been confirmed by the Constitutional Court of the Federation of BiH. K-143 Municipalization Model 31
among the city electoral units may be required, given the additional competencies gained by the city authorities. The number of municipal council members would likely rise from the current 35. The modalities of applying the municipalization model to Mostars specificities will require detailed study by persons who know the city intimately.
Regional Pooling and other forms of municipal cooperation: In the proposed two-layer state model with a very high degree of decentralization of governing functions, many municipalities will structurally not be in a position to sufficiently perform all their new competences. It is therefore crucial to enable different forms of municipal cooperation. These forms of cooperation will be established on a voluntary basis, but they will be promoted by the state through a grant system. Each municipality is free to decide whether it will enter into any form of cooperation with other municipalities, as well as which municipalities it cooperates.
To ensure that municipal cooperation will not be misused for the de facto/informal re- establishment of regional sub-national units (based on ethnicity) institutions formed will exclusively be single-task service provision institutions, without governing functions.
Regional pooling: Regional pooling is probably the most promising form of cooperation. It means the establishment of joint municipal authorities, single-task organizations that are independent legal public entities governed by municipal legislation. Its council members would be delegated by municipal councils. They would be financed by the participating municipalities through user charges and separate contributions to investments. Regional pooling will be especially attractive in the field of health, education and social welfare. A special form of regional pooling would be the Regional Councils, joint authorities dealing with regional spatial planning and management of strategic regional development planning and access to EU structural funds. These will be described in a separate chapter (Chapter 3).
Other forms of municipal cooperation: Other forms allowed by the law would be: contracting other municipalities for certain functions (small, economically weak municipalities), joint municipal civil servants (small municipalities); establishing joint limited companies, co-operative societies and foundations.
State Level
BiH Parliamentary Assembly
K-143 Municipalization Model 32
There has long been recognition of the need to considerably expand the House of Representatives to allow for a more functional committee structure and member specialization. The model posited below would achieve this aim. It would have a directly elected but non- legislative Council of Peoples to serve as a watchdog for (defined) Vital National Interests, to be explained in detail later in this papers section on Ethnic Protection Mechanisms.
Unicameral Parliamentary Assembly
The House of Representatives (a.k.a. Parliamentary Assembly, a title which currently connotes both the House of Representatives and House of Peoples) would be the sole legislative body for the state of Bosnia and Herzegovina.
One Representative would be elected for each of BiHs 143 municipalities (average of 28,000 inhabitants), plus one additional Representative for those municipalities with 50,000 or more inhabitants, in step-increments of 50,000. According to the preliminary results of the BiH 2013 census, this would mean a House of Representatives of 169 members (average citizens per Representative: 22,437). 19 municipalities would elect more than one Representative, and 6 would elect more than two: Banja Luka (4), Biha (2), Bijeljina (3), Bosanska Gradika (2), Brko (2), Cazin (2), Centar Sarajevo (2), Doboj (2), Ilida (2), Istono Sarajevo (2), Mostar (3), Novi Grad Sarajevo (3), Novo Sarajevo (2), Prijedor (2), Travnik (2), Tuzla (3), Zenica (3), ivinice (2), and Zvornik (2).Election would be FPTP in single-member constituencies. In multimember constituencies, divisions among roughly equal agglomerations of mjesne zajednice would create single districts. Representatives would be required to maintain offices in their constituencies, and would receive travel and housing stipends for this purpose.
Using current territorial divisions as a frame of reference (though the entities would cease to exist), this would yield: Municipalities in present RS would elect roughly 44% of Representatives (vs. 33% now) Municipalities in present FBiH would elect roughly 55% of Representatives (vs. 66% now) Brko District would elect roughly 1% of Representatives Croat majority municipalities would elect roughly 15% of Representatives (slightly below the 17% in the 1991 census).
A qualified majority would be required (3/5, 60%) for those issues that might likely trigger VNI, as well as qualified majorities for Constitutional and Electoral Law amendments. In this way, while the electoral units are not explicitly ethnic, it would be well-nigh impossible to outvote on sensitive issues where there is intra-ethnic solidarity (at least in the case of the Serb fear of Bosniaks+Croats vs. Serbs). K-143 Municipalization Model 33
Municipal governments would represent their interests at the state level in much the same way as Brko District does now, though official offices. A unified BiH Association of Municipalities and Cities would represent the collective interests of municipalities.
Advantages over the current system:
Direct linkage of citizens to Representatives in BiH Parliament. The present party lists do not allow citizens to monitor and hold to account their representative after elections. No formal ethnic factor in electoral system OR the legislative process. Allows for issue and interest-based alliances in the House, as opposed to the rigid top- down rule of parties in the present system. This disaggregated structure would open the door to a new sort of politics. o Example: The interests of Croat-majority communities in, for example, Oraje, Kislejak, Livno, Mostar and Grude are all distinct. But under the current system their votes for HDZ get bundled to support party interests (centered in Mostar). The same differentiation applies to Bosniak-majority communities of Biha, Turbe, Zenica, Konjic, and Gorade, and Serb-majority communities in Bijeljina, Drvar, Vlasenica, Foa, and Trebinje. This model would cut into the power of the existing party machines, weakening their grip on the overall process. Candidates, whatever their party affiliation, would have to seek (and maintain) approval of a defined electoral base (unlike now, when voters cease to be a cause for concern beyond the campaign and electoral cycle). This makes it more likely that the public interest would trump party interests which usually are the personal interests of the leadership clique. No entities, so no entity voting, which effectively functions as a second ethnic vote for the RS. The larger membership (>4x as large as the current House) would allow for proper committee and staff structures, and issue specialization of Representatives. This system would come far closer to equalizing the number of citizens per representative. The current system has been a criticized by the Venice Commission and OSCE/ODIHR for its opacity and variation in representation. This system is easily adjustable to population movement/decline/growth with census data.
BiH Government
The Head of Government in this model would be embodied in the Prime Minister. The Parliamentary Assembly would elect the Prime Minister by a qualified majority of three-fifths (60%) of members present and voting. Once elected, the Prime Minister would assemble a K-143 Municipalization Model 34
Government 31 (Council of Ministers) to be confirmed by the Assembly, also by three-fifths of members present and voting. Removal of the Prime Minister or individual Ministers can be effected by three-fifths of total elected members. 32 There would also be a single President, elected indirectly in the Parliamentary Assembly, also by a three-fifths majority. This office would have purely representational functions, and be among the offices subject to the flexible distributional key explained on page 38. Changes to the Rules of Procedure, amendment of standing laws (including the Election Law), and passage of the budget shall also require three- fifths of members present and voting. In addition, qualified majority votes will be required for a certain number of issues that are of potential ethnic sensitivity. Amendment of the Constitution would require two-thirds (67%) of total members to vote in favor. The rationale for these requirements is to ensure that matters that might affect interethnic relations have substantial majorities in favor (and reducing the likelihood of a VNI intervention by the Council of Peoples).
A single President would be elected indirectly within the House of Representatives by a 3/5 majority. The President would be head of state, but the office would have only representative functions, as is common practice in many European countries.
Ministries
The State would maintain the competences it currently holds 33 , gaining additional ones from the current entity and cantonal levels. The new government would encompass the following ministries:
Ministry of Interior (Command and Control over regional police) Ministry of Justice (w/ new Human Rights portfolio) Ministry of Foreign Affairs Ministry of Defense Ministry of Finance Ministry of Economy and Trade Ministry of Health Ministry of Social Welfare, Refugee, Labor Ministry of Veterans Affairs, Ministry of Education and Culture
31 A variation of the current vetting and public hearing system for ministerial candidates, adopted in late 2006, would be maintained, amended to eliminate the role of the now nonexistent Presidency. 32 This is the same formula that applies in Brko District. 33 The Ministry of Human Rights and Refugees would be disbanded; its portfolio split between the Ministries of Justice (Human Rights) and Social Welfare (Refugees). The Ministry for Civil Affairs portfolio would be subsumed into the new Ministry of Interior. K-143 Municipalization Model 35
Ministry of Agriculture, Forestry and Fisheries/Water Management Ministry of Energy Ministry for Environmental Protection and Tourism Ministry of Science and Technology Ministry of Transport and Communications, incl. Spatial Planning
The State would also have a number of new or augmented agencies, including:
Banking and Securities Supervision Agency Anti-trust/Competition Council OSA, reporting to the Prime Minister and overseen by a select parliamentary committee State Statistics Bureau (augmented) State Auditing Office (augmented to audit municipal accounts) The BiH Civil Service Agency (augmented) National Data Protection Office Public Broadcasting System (regional studios having considerable autonomy) A new Supreme Court, with a special division to handle administrative disputes
The two-layer governance model will considerably strengthen:
Municipal Governments and Administrations The BiH Parliamentary Assembly The BiH Government The BiH Ombudsman The Court of BiH The BiH Constitutional Court
Policing and Justice
Many municipalities are unlikely to be able to support the full breadth of infrastructure (training, vetting, etc) required, so would be compelled to enter into cooperative agreements with other, neighboring municipalities. Rather than reinvent the wheel, this model would maintain the current 16 policing regions (5 Public Safety Centers in RS, 10 at Cantonal level in FBiH, and Brko District), subordinating them to state command and control through the Ministry of Interior, providing each with an individual budget based on objective criteria. (This is essentially the police reform deal that almost came into being, but was rejected by Haris Silajdi in early 2007).
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As with the policing regions, the current 16 judicial regions would be maintained. The Ministry of Justice would oversee all courts in BiH. The HJPC would maintain its role of selecting and disciplining judges and prosecutors. A new Supreme Court would be established to be the final judicial authority, and it will maintain a chamber for administrative disputes between governing authorities.
Distributing State Institutions throughout BiH
The centralization of governance functions presently generates resentment not only against Sarajevo as the State Capital, but also against entity administrations, and within ethnic groups as well as among them. Shifting to a two-layer state structure will require popular investment, so it should not result in the total concentration of state-level functions in the Capital, especially considering that the elimination of entity and cantonal administrations will free-up premises for both state and municipal use. The new Ministries and agencies as envisioned above could conceivably be located in Lukavica, Banja Luka, Mostar, and Tuzla (or elsewhere). Their location should have a functional rationale; the state property inventory and an assessment of premises currently occupied by middle-layer administrations could help identify the most suitable sites.
3. Regional Spatial and Strategic Development Councils
Regional Spatial and Strategic Development Councils would represent a special form of regional pooling of municipal authorities that has been described under municipal governing institutions in Chapter 2.
Unlike all other forms of pooling, these would be double-task authorities. The reason for this unique structure lies in the necessity for municipalities and cities to join in spatial planning on a regional scale to turn national spatial planning into a bottom-up process. It is also necessary for strategic development planning on a wider scale than the municipal/urban in order to access EU structural funds in the process of EU-integration, and even more so afterward. Given, for example, the fact that as of 2009 1.4 million inhabitants were estimated to be without access to running water, 34 the importance of the access to these funds cannot be overstated. Strategic regional development planning would be a bottom-up process too, leaving the state a role in harmonization, as the system of the EUs structural funds are based on co-financing by central grant systems.
34 This shocking statistic was drawn from the 2009 World Bank study From stability to performance. Local governance and service delivery in Bosnia and Herzegovina, pg.11 K-143 Municipalization Model 37
Participation in Regional Spatial and Strategic Development Councils would be mandatory for all municipalities and cities in the sense that all must be members of one regional council. How municipalities and cities join into regional councils would be at their discretion, yet the established planning regions would need to fulfill certain conditions.
In addition to territorial contiguity, these conditions would have to encompass the criteria set by the European Union for the definition of statistical regions the so-called NUTS.
NUTS are statistical regions used as a tool by EUROSTAT, the EUs statistical office, to systematize on a comparative basis the development of sub-national development in EU member states. They are a key element for the distribution of the EU structural funds. NUTS regions are normally defined through negotiations between EUROSTAT and the EU member states and membership candidates. In Bosnia, no such an agreement has been reached due to the politically complicated and uneven nature of sub-state units. An agreement between the different layers of government in Bosnia on defining NUTS regions could not be reached. The proposal made by the EU Regional economic development project EURED in 2004 to establish five statistical regions was rejected by RS authorities (though mayors from both entities, including in the RS, had accepted it).
One way to reconcile freedom of choice with the need to harmonize statewide and to fulfill EU conditions could be to organize a negotiating process between the Bosnian-Herzegovinian municipalities and cities and the responsible state authorities. If an agreement on the number and composition of the regional councils cannot be reached in a set timeline, the Councils will be established on the basis of the 5 statistical regions proposed by EURED and maintained until an alternate arrangement is agreed.
4. Ethnic Protection Mechanisms
Current situation and rationale for change:
Given the traumas of BiHs 3 year war, a majority of citizens see ethnic safeguards as necessary. Otherwise moderate or flexible citizens often feel compelled to vote for their nationalists (fully cognizant of their flaws) out of fear as an ethnic protection measure, as they need that perception of insurance and safety. K-143 Municipalization Model 38
The problem with the Daytons state construct does not lie with the fact that ethnicity is enshrined in the institutional setting and the political system as a whole as such, but in the way how ethnicity is enshrined.
In the current system ethnic interest to a huge extent takes the character of a blanket clause that serves group and individual interests, without the need to identify what the named ethnic interest is and what it isnt. This is achieved through of a number of institutional regulations: Through territorialization of ethnicity at the middle layer of government (entities and cantons). Through making this territorialization of ethnicity the main building principle of central state authorities: Presidency, State Legislature (entity voting) etc. Through institutionalizing Vital National Interest in entity/state legislature (House/Council of Peoples) without precisely defining it. through proportional representation in employment policy at state and middle layer state institutions, catering to patronage, mediocrity and provincialism
The underlying problem of these institutional elements is that Dayton Bosnia has institutionalized two competing narratives - the one of the (ethnically cleansed) wartime Bosnia and the one of the pre-war (multiethnic) Bosnia. These two mutually exclusive narratives lock- in the instability of the political system and prevent the reality principles entry into political life.
The results of this highly problematic form of ethnic institutionalization are: the distortion of all elements of the democratic political system: party system, parliamentary system, electoral system, legal system, state administration, media and civil society. systemic corruption. discrimination against the rights of national minorities and others instigation of ethnic fears remains the most promising political means for parties to gain and keep power, thus creating long-term insecurity and social instability the prevention of state functionality and of socio-economic prosperity. the prevention of Euro-Atlantic integration.
Indirect ethnic protection mechanisms: The very model of a two-layer government system, in which ethnicity is already de facto territorialized to a large extent in the municipalities (and cities) due to the results of the war, represents a form of ethnic protection in itself. Yet the municipal level is the only existing territorial level where ethnic identification does not prevent the citizens from demanding K-143 Municipalization Model 39
political participation, accountability and the separation of ethnic from other life issues (socio- economic, democratic et.al.) 35 .
Another element of ethnic protection against discrimination lies in the modern institutional mechanisms to achieve (relative) territorial equality in (socio-economic) development (financial equalization system, regional/spatial and economic development system) and equal territorial representation (state legislature) that are part of the model.
In addition to these implicit, indirect protection mechanisms the direct ethnic protection mechanisms must be designed in a way that they can provide real protection while avoiding the negative aspects of the current system (especially blockage of decision-making processes).
Direct ethnic protection mechanisms:
A. Council of Peoples (CoP)/ State level
Composition: Directly elected from the territory of BiH as a whole, allowing all members of a self-declared identity (Bosniaks, Croats, Serbs, and Others/National Minorities) to select those who would represent their group rights in state government. Council members need/must not be members of any political party; the top five vote earners in each group would be elected to the Council.
Role: The Council would not legislate (though it could forward proposals to the House); its powers would only extend to protection of Vital National Interests, as defined constitutionally.
Definition of VNIs: Amendments to constitution Culture, religion, language, national holidays and monuments Culture: only those elements subject to state-level competence; Education: only where related to questions of culture, language, tradition and religion.
Procedure: Laws, regulations or acts approved by the HoR, if they relate to a vital national interest as defined by the constitution will be sent to the Council, where a vote on the law has to be taken no later than 30 days upon receipt of the text of the law.
35 UNDPs 2009 study on social capital in BiH, The Ties That Bind, available on www.undp.ba K-143 Municipalization Model 40
If the law, regulation or act is rejected by 3/5 of one of the caucuses, a Vital Interest Panel at the Constitutional Court of BiH shall be addressed to decide whether the law concerned threatens the vital national interest of one or more constituent people; or A majority of each caucus represented in the Council can decide to return the law to the HoR for amendment and re-submission to the Council, or decide on an amendment proposal; If the HoR rejects the proposed amendment or if it does not decide on amending the law within 45 days upon receiving the Councils decision, the law is automatically addressed to the Constitutional Courts Vital National Interest Panel.
A Vital National Interest Panel would be created at the Constitutional Court of BiH. Its composition would follow that of the current Panels at the Entities Constitutional Court, adding to it judges from the group of others/national minorities (taking into account the recent ECHR ruling).
The Council could meet twice monthly during the legislative session of the Parliamentary Assembly, with provisions for rapidly convening in emergency session if need be. Councilors need not, therefore, be professional full-time politicians, but could be drawn from a far wider pool. A small secretariat (with staff from each group) could be maintained to keep tabs on proposed legislation and other government measures to facilitate the work of the Council.
Effects: In this system, citizens can effectively split the ticket vote for a progressive, citizen- oriented Representative who they believe will better cater to their interests and for a strong junkyard dog who would resist attempts to disadvantage his/her groups Vital National Interests, preventing them from being outvoted.
B. Distribution of key political functions at State level: Out of the following positions no more than two and no less than one may be filled by representatives of any one constituent people or of the group of others: 1) Prime Minister 2) President 3) Speaker of the House of Representatives HoR 4) Speaker of the House of Municipalities (bicameral state legislature concept) resp. President of the Association of Municipalities and Cities of BiH (unicameral concept) 5) Speaker of the Council of Peoples 6) President of Constitutional Court 7) President of Supreme Court 8) Chief Public Prosecutor K-143 Municipalization Model 41
C. Council for Inter-Community Relations (CICR, Vijee za meunacionalne odnose) /local level:
Composition: Directly elected from the territory of the municipality/city as a whole, allowing all members of constituent people and the group of Others/National Minorities to select those who would represent their group rights in local government. Council members shall not be members of any political party.
The Council would have five members of each constituent people which represents 5% or more of the total population according to the upcoming census and five members of the group of Others in case national minorities represent 3% or more of the total population.
For a period of 10 years/until the publication of the results of the next census (assumed 2020- 2021) a transitional provision will be in force that guarantees 5 members o a constituent people which represents less than 5% according to the last census, but that did represent 5% or more in the previous, 1991 census. It shall be replaced by a new legal arrangement, to be decided upon by a joint committee of the Municipal/City Council and the Council for Inter-Community Relations and approved by an absolute majority of both bodies (an absolute majority of the members of each Council caucus). The transitional provision shall remain in force until the new arrangement is approved.
Role: The Council would not legislate (though it could forward proposals to the House); its powers would only extend to protection of Vital National Interests, as defined by municipal/city statute.
Yet the Council would perform a strong watchdog role. It would review issues related to inter- ethnic relations and provide opinions and proposals which must be reviewed by the municipal/city assembly. It would mediate in conflicts between municipal/city authorities and between the municipality/city and its sub-municipal territorial units and its institutions that are related to ethnic relations.
Definition of VNIs: Amendments to municipal/city statute; decisions on establishing or abolishing of Mjesne Zajednice or City Quarters, decisions on the territorial reorganization of Mjesa Zjednice/City quarters; Culture, religion, language, national monuments, education: legal regulations that touch aspects of culture, language, tradition and religion; local spatial planning.
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Procedure: Legal regulations approved by the Municipal/City Council, if they relate to a vital national interest will be sent to the Council, where a vote on the law has to be taken no later than 30 days upon receipt of the text of the law.
- If the legal regulation is rejected by 3/5 of one of the caucuses, the law is sent back to the municipal/city council and an attempt must be made to resolve the objection. In the event that this proves unsuccessful, the issue will be adjudicated by the Constitutional Courts specialized VNI chamber. As with the state-level Council of Peoples, the Constitutional Courts VNI chambers ruling is final.
D. Proportional representation in public authorities:
Local level Constituent peoples and members of the group of Other/National Minorities shall be proportionately represented in public institutions on the municipal/city level across BiH.
Public institutions are the local public administration, local offices of police and judiciary, local social welfare and health institutions, local educational and cultural institutions and local public companies (because of the economic aspect of refugee return).
Such proportionate representation shall follow the most recent census, starting with the upcoming census. However, given the recent history of ethnic cleansing an element of affirmative action shall be added: - If the proportion of one constituent group of the overall population in a municipality/city in the recent census differs from (is less than in) the 1991 census by more than 10% but less than 20%, an additional 5% shall be added to its representation in public institutions. - If the proportion of one constituent group of the overall population in a municipality/city in the recent census differs from (is less than in) the 1991 census by more than 20%, an additional 10% shall be added to its representation in public institutions.
This provision shall be in force for a transitional period of 10 years until the results of the next census (2011 or thereafter) are published. It shall be replaced by a new legal arrangement, to be decided upon by a joint committee of the HoR, the CoP and the Association of municipalities and cities of BiH (the House of Municipalities) and approved by an absolute majority of all three bodies (an absolute majority of the members of each CoP caucus). The transitional provision shall remain in force until the new arrangement is approved
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Annual reports by local authorities have to be sent to the central state authorities in charge of Local Self-Government, containing statistical data and measures undertaken to achieve representation. A system of sanctions/reducing state grants will be in force to react on insufficient efforts by local authorities.
State level Employment in central state authorities (ministries and other institutions) shall be primarily based on merit. Proportionate representation of constituent peoples and members of the group of Others/National Minorities shall only apply in the sense of protection from overly underrepresentation and overrepresentation, including domination: The representation of each of the 4 groups should not deviate +/-10% or more. At the same time the representation of one group shall not be 50% or more.
5. Revenue Sources for State and Municipal Governance
One of the many advantages of a two-layer state structure would be to allow for streamlining government and administrative structures, thereby reducing aggregate public expenditure. However, the functions of governance currently performed by entities (and cantons in the Federation) would still need to be performed, and the size and competence of the state and municipal governments would correspondingly expand. Each level will need considerably greater resources to perform all the necessary governance functions.
As noted earlier, the centrally distributed resources will come from the Single Account (VAT and Customs) and the Personal Income Tax (PIT). These will be the primary source of revenue for both the state and the municipalities. However, each will also have own revenues as well. In the case of municipalities, they can levy property taxes, add on levies to the PIT, as well as charges and fees for local public services. The state will receive revenues from licensing the electromagnetic spectrum. Both layers will be able to seek financing through bond issues and borrowing on capital markets, but in the case of municipalities only for capital expenditures. The full revenue structure with before and after analysis is included in the Fiscal Implication of Consolidation section. K-143 Municipalization Model 44
VI. Financial Analysis Tony Levitas and Jasmina Djiki
The Fiscal Implications of Consolidating BiHs Governance Structure A. An Overview of the Major Components of the Analysis and the Assumptions Informing Them. This Note summarizes the fiscal implications of consolidating the governance structure of BiH in line with the Municipalization Model originally devised by the Democratization Policy Council in February 2010 and later adopted by Coalition 143. The comparison of the current structure of government spending with the structure of spending under the Model was conducted in three steps. The first step was to aggregate all public spending in BiH by level of government, and by economic and functional category as defined by COFOG norms. 36 This was a challenging task, as much of the data is poor and often incomplete, and because the notorious fragmentation of BiH makes it difficult to determine what public function each of the over 500 budgetary units in the country actually performs. The methodology we used to consolidate the budgets of all these institutions, and to group them according to level of government, is described in greater detail in the accompanying Methodological Note. The second step of the analysis was to reallocate public spending by all current levels of government in BiH in accordance with the two-level model developed by the Democratization Policy Council. Or to put the matter more plainly, to reapportion the spending that is currently made by the state, 2 entities, 1 special district, 10 cantons, 143 municipalities, and at least 27 distinct funds, across two levels of government; the State and Municipalities and three national funds for health, pensions, and unemployment benefits. 37
To reallocate existing spending in accordance with the Model we had to make two different sorts of assumptions. The first concerned to which level of government an existing function or expenditure should be assigned. The second concerned whether the institutional consolidation of expenditures associated with particular functions could be expected to yield overall savings
36 COFOG, (Classification of Functions of Government) is system for categorizing public spending that was developed by the United Nations and which has become an international standard for public accounting. For more information see http://unstats.un.org/unsd/cr/registry/regcst.asp?Cl=4 37 The 27 Funds are: FBiH Pension fund, RS Pension Fund, FBiH Unemployment Fund, 10 Cantonal Unemployment Funds, RS Unemployment Fund, BD Unemployment Fund, FBIH Health Fund, 10 Cantonal Health Funds and RS Health Fund. K-143 Municipalization Model 45
in the cost of government. Both assumptions are discussed in greater detail in the Methodological Note. But it is useful to describe their principal characteristics here. The basic assumptions for allocating functions across levels of government result from the Model itself and are straightforward: First, all expenditures related to the costs of financing and managing primary and secondary schools are assigned to municipalities. Because these costs are considerable 14% of government spending (9% of public spending including the funds) the transfer of these responsibilities to local government increases their share of government expenditure considerably. Second, most expenditures associated with land-use planning and development, firefighting, culture, sports, and for the maintenance and improvement of public utilities have also been assigned to municipalities, along with some of the costs for civil protection. Third, all remaining public services have been assigned to the (consolidated) State of BiH, or to (consolidated) health, pension and unemployment funds The assumptions governing the size of the fiscal savings that we expect consolidation to generate are more complicated. Here, we had to make individual and somewhat subjective judgments about the financial savings that the consolidation of particular institutions and functions should produce. These assumptions are listed in the Methodological Note. What must be stressed here is that we have been very conservative in our forecasts of the financial savings that consolidation would yield. We have been conservative in projecting financial savings in order to create a state with the resources and capacities necessary to meet the exigencies of EU integration on the one hand, and to monitor and enforce the quality of public services in a decentralized environment on the other. Equally importantly, we have projected little to no savings from the consolidation of a number of very large areas of government spending. Thus, we assume that the direct costs of providing public order (the judiciary and the police) and primary and secondary education (teachers wages) remain at their current levels even after the consolidation. Similarly, we have left the bulk of civil service employment intact, and only reduced wage and material costs in the budgets of the ministries and government agencies that will administer these public services after consolidation 38 . Finally, we maintain current levels of expenditure on transfer payments to
38 It is worth adding here that data on existing levels of public service employment is extremely poor, both with respect to government employees providing direct public services (teachers, police workers) and government employees working in ministries and the plethora of other administrative or regulatory institutions. As result, we have not attempted to project K-143 Municipalization Model 46
veterans and refugees, as well as for all benefit payments currently being made from the unemployment, health and pension funds. In all these areas, there is ample room for further savings. Indeed, the very consolidation of the now extremely dysfunctional state administration and the various funds associated with it, will force a comprehensive review of many issues that will undoubtedly provide opportunities for further savings. Nonetheless, by not projecting savings from either the reduction of employment in the actual delivery of public services, or in the level of benefits made through transfer payments we have left two important general questions open: How should the now very different wages and benefits of public employees be standardized in a consolidated state? And how should we standardize the different entitlement payments now made to BiH citizens for health, pensions, and unemployment support? The potential for savings in these areas is contingent on political decisions requiring research and broad social support, and are beyond the scope of this analysis. But one thing is clear from the data: Public spending on both government and funds is higher in the Federation than in the RS. This means that the standardization of wages, benefits, and entitlements payments that must come with consolidation can be achieved in one of three ways: Existing public spending can be shifted away from citizens of BiH who now reside in the Federation towards citizens of BiH who now reside in the RS (leveling down); total public spending can be increased so that all citizens of BiH can receive entitlements and (public sector) wages at levels equal to those currently obtaining in the Federation (leveling up); and total public spending at least as a share of GDP can be held constant, but through a combination of other savings, and the improved performance of the economy (and hence the budget), wages and entitlements can be leveled up. The third option is most attractive. Moreover, we think it should be achievable in a consolidated state. It is worth stressing that under all scenarios, the share of public spending currently going to citizens of BiH residing in the RS would increase substantially. Despite our conservative estimates, we find that consolidation yields a savings of about half a billion (500 million) KM. Of this half billion, 417 million comes from consolidating general government spending, and 83 million comes from the saving that will come from consolidating the Funds. Together, this is equal to 2% of GDP; 4% of all Public Spending (including the 3 Funds); and 7% of all Government Spending. This is not a huge number for pure financial savings, but it is nonetheless quite significant, especially since, again, our estimates were conservative. Equally importantly, it was not the aim of the exercise to slash public spending
the decline in public sector employment that would come with consolidation. As already indicated, we have forecast no cuts in the employment of people directly engaged in provision of public services. K-143 Municipalization Model 47
per se, but rather to expose the inefficiencies that come from the redundancy of too many levels of government, and too many government agencies and institutions in a small country. Many of these inefficiencies have less to do with the wages of government bureaucrats or to the other operating costs of the institutions that they occupy than with the fact that most government institutions try to maximize their discretionary spending. The fragmentation and redundancy of government institutions in BiH today means that there are over 500 public institutions making grants and transfer payments to other levels of government, to private firms, and to individuals. This creates a great chain of grant making and grant taking that is not only inefficient but rife with corruption, patronage and dependency. The real costs of this corruption, patronage, and dependency are of course difficult to measure, either financially or in terms of the quality of public services. Similarly, we can assume that the fragmentation and redundancy of government institutions acts as real drag on the entire economy: Overlapping and redundant government bureaucracies not only attempt to maximize their discretionary spending, but to extend their administrative domains. This means that the interface between the government and most economic agents is confused and contorted. Firms are forced to dance with a hydra of institutions and agencies, each demanding its own form of compliance for similar goods and services. Many firms collapse from the effort while more are just drained of the energy and resources necessary for expansion and creative pursuits. Needless, to say, all of this also discourages the foreign direct investment that BiH so desperately needs. We have, however, left the quantification of these losses in terms of either private sector employment or GDP growth to others more expert in these matters than ourselves. Nonetheless, we think three things should be clear: First, the real costs of administrative redundancy are not so much in the wages and operating costs of government bureaucracies, but in the overregulation and patronage that comes from having too many similar bureaucracies giving out grants, licenses, and permits, and competing to control the same regulatory space. Second, even a conservative approach to consolidation yields savings equal to 2% of GDP, a figure which sounds small but which is actually quite significant. After all, most OECD countries spend somewhere between 3-5% of GDP on primary and secondary education. And third, that both the immediate financial savings we project and the more intangible gains that will come from reducing government grant making and overregulation will improve the performance of the economy, and then again that of the state budget. In consolidating government institutions across two levels of government the state and municipalities we have also had to make assumptions about how the myriad of existing grants and transfers between should be allocated to each level, and how much of the current K-143 Municipalization Model 48
discretionary spending should be considered pure savings. Again, we have been relatively conservative in projecting pure financial savings when consolidating discretionary spending. Instead, we have either assigned this spending to the new consolidated state, or to municipalities. Here, two things should be noted. First, by leaving the new State with considerable, but nonetheless reduced discretionary spending, we have opted for a relatively strong state. By this we mean a state that has the capacity to maintain public order, make strategic interventions into the economy, create and enforce the standards necessary to ensure quality public services in a decentralized environment, and meet the exigencies of EU integration. How strong the state should be, is of course a matter of taste and it is certainly possible to adjust our assumptions to generate a more modestly sized central government. Second, when we assigned new functions to local governments, we also assigned them most of the grants and transfers that higher levels of government are spending on these functions today. Thus, the current costs of most capital and operating grants and transfers to schools; public utilities; land-use and land planning institutions; and some social welfare functions have been shifted to municipal budgets, but as general revenues coming through either unconditional transfers or other freely disposable revenues (shares in national taxes or own- revenue). What this means is that while the Model undoubtedly strengthens the state, it also makes local governments much more powerful and financial autonomous than they are presently. This brings us to the third and final step in the analysis, namely to broadly sketch out how the intergovernmental finance system would work after consolidation, with only two levels of government the state and municipalities of BiH. Here we make two fundamental assumptions. First, the vast majority of the funding local governments will need to pay for the cost of primary and secondary education will come to them through an earmarked, weighted, per-pupil grant that is expressed as a percentage of the Single Account (known popularly as the VAT Fund). 39
Designing the per-pupil financing system, developing new teaching standards and curricula, and monitoring how local governments spend their education grants to improve the life chances of children in BiH, would be the responsibility of the new Ministry of Education. At the same time, local governments would become responsible for hiring and firing school teachers including
39 The Single Account was created in 2006 when sales taxes throughout BiH were replaced by a single, state-level Value Added Tax or VAT. As a result the Single Account is often referred to as the VAT Fund or VAT Account. Technically, however this is a misnomer because all indirect taxes (e.g. excise taxes and customs duties), and not just VAT proceeds flow onto the Account. K-143 Municipalization Model 49
school directors for maintaining and improving school facilities, and for rationalizing school networks. 40
Second, money for other new functions assigned to municipalities will come primarily from a combination of new, freely disposable revenues. These will include an expanded share of the Single Account that currently goes to municipalities for general purposes, an expanded share of Personal Income Taxes; and greater own revenue powers. Moreover, we assume that the expanded share of the Single Account that will flow to municipalities for general purposes will include stronger equalization provisions to ensure that all local governments even those with weak tax bases will have the revenues necessary to provide quality public services to their citizens. B. Public Spending in BiH Today and After Consolidation
Table I below summarizes the major shifts in the composition of public expenditure for BiH as a whole that would come with implementation of the Model using the assumptions that we have outlined above. As can be seen from the Table, total public spending (including the Funds) as a percentage of GDP declines from 47.1 percent (11.63 billion KM) today to 45 percent of GDP (11.13 billion KM) after consolidation, a savings of roughly 500 million KM, or 2 percent of GDP. Government spending declines from 30.2 percent of GDP to 28.5 percent of GDP, while spending on the Funds declines from 16.9 percent to 16.5 percent of GDP. Most importantly, from our point of view, however, are the shifts in funding presented in the next to last two rows of the Table, and in the last column. Starting from the bottom, we can see that Municipal Spending increases from 7 percent to 12.3 percent of GDP, a rise of 75 percent. This is the hard evidence that the Model significantly increases the role and importance of local governments in the new government system of BiH. At the same time, spending by all other levels of government declines from 23.2 percent to 16.3 percent of GDP - a decrease of almost 30 percent. This is the hard evidence that while the Model significantly strengthens the state by consolidating the current plethora of higher levels of government, it also significantly reduces the discretionary powers of higher level government as a whole. It is this simultaneous movement of placing more responsibility for the direct provision of public services closer to the people through local governments and the reduction of the discretionary powers of the state
40 The Ministry of Education will establish common professional standards for primary and secondary-level educators. Also, under the Model, we assume that local governments will have control of a limited number of teaching hours for programs of their own design. This is theoretically the case even now, but this time has been reprogrammed for nationally-oriented curricula. K-143 Municipalization Model 50
that will produce most of the (hard to measure) gains in economic vigor, accountability, and in improved public services. Table I Comparison of Public Spending Before and After Consolidation (2008 KM) Current After Consolidation Mln KM % GDP Mln Km % GDP % Change Total Public spending as % of GDP 11,633 47.1% 11,133 45.0% -4.3% Government Spending as % of GDP 7,467 30.2% 7,050 28.5% -5.6% Spending on Funds as % of GDP 4,165 16.9% 4,083 16.5% -2.0% Government Spending without Municipalities as % of GDP 5,913 23.2% 4,020 16.3% -30.0% Municipal Spending as % of GDP 1,724 7.0% 3,030 12.3% 75.8% Savings as % of GDP na na 500 2.0% na
Table II below compares government spending by level of government before and after consolidation. As can be seen from the Table, total per capita spending by all levels of government would decline from 1,943 KM per person to 1,830 KM per person after consolidation. This reduction reflects the decline in the cost of government without the funds of 417 million KM. Table II Costs of Governance by Level of Government Today Costs of Governance by Level of Government after Consolidation Mln KM % GDP Per Capita Mln KM % GDP Per Capita BD 170 0.7% 2,246 Municipalities 3,030 12.3% 789 RS 2,173 8.8% 1,511 BiH 4,020 16.3% 1,047 FBiH 4,300 17.4% 1,847 All levels of Government 7,050 28.5% 1830 BiH 824 3.3% 214 Savings 417 1.7% 130 All Levels of Government 7,480 30.3% 1,943
After consolidation, total government spending on BiH citizens who reside in the Federation would stay about the same while government spending on those residing in the RS would increase from 1,511 KM per capita to 1,830 KM per capita, an increase of 22%. Chart I illustrates this.
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Chart I
Table III below presents the same information for the Funds. The Table must be treated with some caution because it does not capture the full value of unemployment and pensions funds in Brko District, and because it may underrepresent fund spending on unemployment in the RS. 41 Moreover, it must be remembered, that the payroll taxes used to finance the funds are higher in the Federation than in the RS. As can be seen from the Table we are forecasting that the consolidation of the funds will generate 83 million KM in savings from administrative costs (not benefits). More importantly, what the Table shows is that spending by the Funds is more than 60 percent higher per capita (c. 500 KM) in the Federation, than it is in the RS 42 . After consolidation, and as we have already discussed, these differences will have to be equalized, either by leveling-up or leveling down. In the right hand side of the Table, we have assumed for the purposes of illustration that benefits will be leveled down, meaning that after consolidation spending on health, pension and unemployment benefits for citizens of BiH who currently reside in the Federation would decrease 20 percent from 1,200 KM per capita to 1,062, while they would increase 30 percent for those who reside in the RS, rising from 721 KM per capita to 1,062 KM. Benefits, however, could also be leveled-up by putting new money into the Funds. The cost of bringing the benefit levels of all citizens of BiH up to those currently obtaining in the FBiH would be approximately 700 million KM, or about 200 million KM more than the Model anticipates generating in
41 In the Model, we have included the RS Fund for Child Support (50 mln KM) in the costs of governance, and not as part of the Funds. This may be misleading, in as much as the bulk of these payments probably go to underemployed households and may rightfully be considered unemployment benefits. Similarly, we have included Veterans Benefits not in the funds, but in the costs of governance. Because veteran spending is higher in the Federation than in the RS in per capita terms, this inflates the difference in current per capita spending on governance by the entities in favor of the Federation. 42 See the Appendix for a discussion of the origins of the savings. K-143 Municipalization Model 52
immediate financial savings. We are confident that this difference can be extracted from potential savings, contingent on policymakers decisions.
Table III (Assuming Leveling-Down) Cost of Funds by Level of Government Costs of Funds in a Consolidated BiH
Mln KM % GDP Per Capita Mln KM % GDP Per Capita BD 16 0.0% 211 All Funds 4,083 16.5% 1,062 RS 1,346 5.4% 721 Savings 83 .03% 13 FBiH 2,804 11.3% 1,204 All Funds 4,165 16.8% 1,081
Charts II and III on the next two pages present graphically the composition of public spending before and after consolidation. Chart II significantly under-represents the degree of fragmentation in BiH today because each Canton actually has its own Health, Pension and Unemployment funds. Chart III slightly under-represents the degree of consolidation that is achieved, since the financial savings produced by consolidation are included in the picture. K-143 Municipalization Model 53
Chart II BiH 824 7% FBIH 1,496 13% RS 1,431 12% Cantons 1,992 17% FBIH municipalities 812 7% RS municipalities 742 7% Brcko District 170 2% FBiH Pension 1,544 13% FBiH Health 1,003 9% FBiH Unemployment 257 2% RS Pension 821 7% RS Health 494 4% RS Unemployment 31 0% BD Health 13 0% Other 4,165 35% Composition of Public Spending in BiH in 2008 (in mln KM) (7.4 bln Government, 4.2 bln Funds)
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Chart III Municipalities 3,030 26% BiH 4,020 35% Savings 500 4% Health Fund 1,489 13% Pension Fund 2,345 20% Unemployment Fund 249 2% Other 4,083 35% Compostion of Public Spending in BiH after Consolidation (in mln KM) (7.05 bln Government, 4.08 bln Funds, 0.5 bln Savings) K-143 Municipalization Model
Table IV below shows the composition of government spending by level of government without the Funds and by economic expenditure type in 2008. As can be seen from the Table, the combined spending of the cantons and the Federation government on both wages and material costs is more than twice that of the RS, despite the fact that the Federation has a population that is only 60 percent larger than its smaller counterpart. Moreover, the vast majority of expenditures on wages and material costs are being made by the cantons, which are clearly the source of much of the redundancy of government institutions in BiH as a whole. Even more striking is the fact that total investment spending (Capital Grants and Capital investments) undertaken by the cantons and the Federation Government is 4.3 times higher (350 million KM vs. 80 million KM) than in the RS. Similarly, the cantons and the Federation government spend almost 2.7 times as much on current grants than the RS (1,310 million KM vs. 485 million KM). This is partly because of the high level of transfer payments that are made to veterans and refugees in the Federation, spending that we have left untouched in the Model, but which would need to be equalized across the former entities after consolidation. In part, however, both the higher capital spending and the higher spending on current grants reflect the increase in discretionary spending that accompanies redundant institutions. So once again, the reallocation of spending that will come with consolidation will shift what is currently discretionary spending by the Federation and the cantons towards citizens of BiH who currently reside in the RS. Table IV Composition of Government Expenditure in BiH by Level of Government in 2008 (mln KM) BD Cantons FBiH RS RS Local Govs FBIH Local Govs BiH Total Wages 62 1,044 242 596 160 196 550 2,849 Material costs 35 214 73 157 135 131 176 922 Current grants 44 521 789 485 131 176 31 2,177 Capital grants 0 79 69 1 11 160 0 321 Capital investment 21 115 82 78 267 141 66 770 Lending 8 7 5 25 14 1 0 59 Debt repayment 0 15 236 89 24 6 1 373 Total 170 1,995 1,496 1,431 742 812 824 7,470 % of Total Government Expenditure 2.3% 26.7% 20.0% 19.2% 9.9% 10.9% 11.0% 100.0%
But if spending by middle level governments is skewed strongly in favor of the Federation, spending by local governments is skewed though much less strongly in favor of the RS. K-143 Municipalization Model
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Spending by RS municipalities on wages and current grants are respectively 20 and 25 percent less than in the Federation, despite the fact that the population of the RS is an estimate 40 percent smaller. Even more striking, given the different population of the two entities, is the fact that RS municipalities spend roughly the same amount of money on total investments (capital grants plus capital investments) and material costs. As such, it should be clear that municipalities in the RS are relatively better off financially than their counterparts in the Federation. Chart IV below presents the same data contained in the last two lines of Table IV in pictorial form, while Chart V presents the composition of government spending by level of government after consolidation. As can be seen from the Charts the share of municipal spending in total government spending increases from 23% today (FBiH municipalities, RS municipalities, and Brko District) to 43% after consolidation. Or put another way, these Charts show the increased importance of municipalities in the governance structure of BiH as reflected in their share of government spending, as opposed to their share of spending as a percentage of GDP (Table I above). Chart IV
Chart V K-143 Municipalization Model
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BiH 4,020 57% Municipalities 3,030 43% Composition of Government Spending in BiH After Consolidation (mln KM)
Chart VI below shows the shift in the basic composition of municipal revenues produced by consolidation. But the Chart is really based on expenditures, meaning it shows the existing municipal expenditures in terms of revenues, plus the new revenues municipalities will receive for assuming expenditure assignments that are currently being performed by other levels of government. As can be seen from the Chart, the lions share of the increase in municipal revenues (expenditures) comes from their new responsibilities for the financing and managing primary and secondary schools. Indeed, the assumption of new responsibilities in the education sector will require 960 million KM in new revenues, and will account for 32% of all municipal government expenditures of after consolidation (three-quarters of new municipal revenue). Meanwhile, municipalities will receive another 347 million KM in revenues for other expenditure responsibilities that have been assigned to them. As we have noted earlier, these other new responsibilities fall primarily in the areas of urban land management and planning; civil protection; and the operation, maintenance and improvement of local public utilities, sports and culture.
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Chart VI
Table V below, explains in somewhat greater detail what is actually going on. The first column shows the existing composition municipal expenditures. This column is interesting because it shows that 35 percent of all municipal spending is on Capital Investments and Capital Grants, with the latter going mainly to public utilities. Another 20 percent is spent as Current Grants, in the form of (operating) transfers to public utilities, NGOs and individuals. Only 24 percent of municipal expenditures are currently spent on wages, and 17 percent on material costs.
Table V
Composition of Municipal Revenues and Expenditures Today and after Consolidation (mln KM)
Municipal Expenditure Today % New Education Funds % New Disposable Income % Post Consolid. % Wage bill 417 24% 788 82% 54 16% 1,259 42% Material costs 301 17% 82 9% 36 10% 419 14% Current Grants 352 20% 40 4% 99 29% 491 16% Capital Grants 172 10% 18 2% 23 7% 212 7% Capital Investment 429 25% 32 3% 135 39% 596 20% Lending 14 1% 0 0% 0 0% 14 0% Debt repayment 38 2% 0 0% 0 0% 38 1% Total 1,724 100% 959 100% 347 100% 3,030 100% percent of total 57% 32% 11% 100% K-143 Municipalization Model
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The second column shows the total amount of spending on wages and material costs that higher level governments (cantons and entities) are currently spending on primary and secondary schools, as well as almost all of the grants and capital spending that higher level governments are currently devoting to pre-tertiary education. All the wage and material costs for primary and secondary schools have been assigned to municipalities, but a small fraction of the grants and capital expenditures that higher levels of government are currently spending on education have been assigned to the state. This has been done to provide the state with a limited amount of discretionary funding to pursue strategic objectives in the sector.
More than 90 percent of the expenditure responsibilities being asigned to municipalities for primary and secondary education is for wages (788 million KM, 82%) and material costs (82 million KM, 8.6%). This means that realitively little of what is currently spent on the function by higher level governments is spent as grants or capital invesments. In the Model, virtually all of the grants and capital investments that higher level governments are currently spending on primary eduction will now be transferred to municipalities (90 million, 10% of total education funding) as part of an education transfer from the Single Account.
Municipalities will be required to spend their education transfers on education. But within the educational sphere, they will be free to spend this transfer as they see fit, as well as to contribute other municipal revenues towards the improvement of their school systems. As a result, if a municipality spends less of its Education Transfer on wages because it has consolidated classrooms and/or schools, it will have more to spend on improving facilities and teaching conditions. Conversely, if a municipality chooses to maintain its current school network and classroom sizes, it may find itself under pressure to contribute other revenues to the support of its schools in order to maintain reasonable standards, or to keep up with the standards being created by its neighbors.
The column in the Table labeled New Disposable Income is a composite of all the other functions that under the Model have been assigned to municipalities. As can be seen from the Table, 74 percent of the 347 million KM in new money being given to local governments is currently being spent by higher levels of governments on grants and investments in functions that will become entirely municipal, such as urban and land use planning, maintaining and improving public utilities, and supporting local cultural institutions. Conversely, only 16 percent of these new disposable funds are currently being spent on wages and only 10 percent on material costs, mostly in the areas of civil protection and firefighting.
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The last column in the Table shows that total municipal revenues will increase from 1.7 billion to over 3 billion after consolidation. After consolidation, the combined share of municipal expenditures on Current Grants, Capital Grants and Investments will decrease from 55 percent of total spending (column 1) to 43 percent (column 4). Meanwhile spending on wages and material costs will rise from 41 percent of municipal expenditures to 66 percent. The reason for this increase is again the overwhelming financial significance of making local governments responsible for teachers wages after consolidation.
Chart VI below compares the composition of government spending by level of government before and after consolidation. As can be seen from the Chart, all categories of municipal expenditure increase after consolidation, while all categories of spending by higher levels of government in this instance the new consolidated state decrease. The most dramatic shift is in expenditures on employment, due principally to the already discussed shifting of responsibility for teachers wages from higher levels of government to municipalities. But a similar and very important trend can be seen in discretionary spending. Before consolidation, higher level governments controlled 2.2 billion KM of spending on investments and capital and operating grants; after consolidation this figure drops by 400 million to 1.8 billion KM, a decline of 18 percent. Conversely, before consolidation municipalities controlled 950 million KM of spending on investments and capital and operating grants, while after consolidation this figure increases by 350 million KM to 1.3 billion.
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Chart VII
What this means is that consolidation has at once made the higher level of government leaner, meaner and less discretionary, while putting more freely disposable money in the hands of municipal governments to meet the needs of their citizens. The Model generates pure financial savings equal to two percent of the GDP, radically reduces costly administrative fragmentation and redundancy, limits the discretionary powers of higher level governments, and expands the fiscal autonomy of municipalities.
C. An Outline of the Revenue Structure of a Municipalities in a Consolidated BiH Table V below presents the revenues of municipalities in the RS and the Federation in 2008, as well as the revenues of Brko District. The data for the RS and the Federation are from the annual budget execution statements that all levels of government are obliged to prepare (the so-called GIB forms) while the data for Brko District, are imputed because we did not have revenue data for the District. 43 The total revenues of the municipal sector (including Brko District) are about 136 million KM less than the total expenditures that were used as the basis for the Model in the previous section of the report. While it is rare that revenues and
43 To derive imputed types of revenues for Brcko we have multiplied the total expenditures of the District less spending on the Health Fundby the share of each revenue type in the total revenues of FBiH and RS municipalities.
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expenditures completely balance this difference equal to 8.5% of total revenues is on the high side and not easily explained. 44
Table VI Structure of Municipal Revenues in 2008 (mln Km) Revenue Type RS 2008 % of Total FBiH 2008 % of Total Brko 2008 (imputed) Total Muni Revenues in 2008 with Brko % of Total Shared Wage Tax 45.9 7% 74.1 10% 14.4 134.4 8% Property & Other Taxes 31.5 5% 94.2 12% 12.7 138.5 9% Single Account Revenues 317.0 50% 201.4 26% 62.2 580.7 37% Asset Revenues 34.3 5% 95.1 12% 15.5 145.0 9% Fees and Charges 147.1 23% 154.4 20% 34.7 336.2 21% Operating grants 14.9 2% 123.2 16% 16.6 154.7 10% Asset Sales 19.4 3% 14.8 2% 4.1 38.2 2% Capital Grants 30.1 5% 19.3 2% 5.9 55.3 3% Total 640.2 100% 776.6 100% 170.0 1,586.8 100%
The most significant differences in the composition of municipal revenues between the RS and the Federation lie in the much higher share of (general) revenues RS municipalities derive from the Single Account, and the much lower share of (earmarked) revenues they derive from Operating Grants from higher levels of government. At least according to law (if not practice), local governments in the RS currently have more financial autonomy than their counterparts in the Federation. As described earlier, the Model assumes that following consolidation municipalities will be fully responsible financing and managing primary and secondary schools. It also assumes that in order to finance this new responsibility, municipalities must be provided with the same amount of funding that higher levels of government are currently spending on pre-tertiary education. In 2008, this amounted to about 960 million KM. Similarly, we assume in the Model that education will remain as it is in most countries a shared function: The state government will set standards and provide local governments with the vast majority of the funds they need to run schools, but local governments will be free to contribute additional revenues to the sector and to manage schools as they see fit, so long as they meet those standards.
44 It is probably explained in part by the notoriously poor reporting of some local government revenues including income carried over from the previous year and in part by expenditures that have been incurred but not paid for (payment arrears)
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In line with these assumptions, local governments would receive an earmarked transfer from the Single Account for Primary and Secondary Education. The total value of the transfer pool would be set by law as a percentage of the Single Account, ensuring that funding for education would increase with the economy as a whole. At the same time, the allocation of the transfer pool created from the Single Account would be allocated to municipalities in accordance with a formula. The basic driver of the formula would be the number of pupils attending school in a given jurisdiction. But the formula would be weighted to take into account the different costs of educating different types of pupils (e.g. the handicapped), in different types of schools (e.g. primary, secondary, vocational) as well as in different types of demographic environments (e.g. rural and urban). It is obviously, beyond the scope of this exercise to design this formula now, but certain basic effects of the new system can be examined. Table VI below presents current spending on primary and secondary by all higher levels of government in the RS and the Federation today. The Table does not include spending on education by local governments. 45 As can be seen from the Table, higher level governments in the Federation spends about 250 KM more per pupil on primary and secondary education than the RS government does. Table VII Current Spending On Primary and Secondary Education
Expenditures on Primary and Secondary Schools Primary and Secondary School Pupils Per pupil Expenditures RS 257,601,922 162,928 1,581 FBiH 634,940,023 346,402 1,833 BiH 892,541,945 509,330 1,752
Table VIII below presents the basic dimensions of the new Education Transfer. The Transfer would be set equal to 19.5 percent of the Single Account in order to yield not just the 892 million currently spent by higher level governments, but an additional 66 million of grants that are currently spent on education by various education Ministries (together 959 million). Most importantly, and has can be seen from the Table the basic per pupil norm (without weighting) for education throughout BiH would increase from 1,752 (Table VII above) to 1,883 KM, an increase of 50 KM over current levels in the Federation and of over more than 300 KM in the RS.
45 In the RS, local governments are legally responsible for maintaining the facilitates of secondary schools but not primary schools; in the Federation, local governments in Cantons 7 and 8 pay for the maintenance of both primary and secondary schools, while in all other cantons, it is at least in theory the cantons who cover these costs. K-143 Municipalization Model
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Table VIII Value of the Education Transfer as % of the Single Account & in Per Pupil Terms % of Single Account Value in KM Number of Pupils Per Pupil Norm BiH 19.5% 959,314,875 509,330 1,883
The Model also anticipates an increase of municipal revenues by an additional 347 million KM in order to cover the costs of functions now being paid for by higher levels of government and which will be transferred to local governments. It also assumes that many of the current grants that local governments receive primarily in the Federation should be transformed from earmarked grants into general revenues. This however, raises the question of how these general revenues should be provided to local governments. Our basic answer is that these additional general revenues should be assigned to local governments in two ways: Through an increase in the municipal share of the statewide yield of the Personal Income Tax (PIT); and through an expanded share of the general purpose monies that they currently receive through the Single Account. For the purposes of the Model we have assumed that all local governments will receive 50 percent of the PIT revenues generated in their jurisdictions (up from 25 percent in the RS and 34.4 percent in the Federation) and that half the amount of funds that local governments currently receive in operating grants would be converted into general revenues. Table IX below shows the effects of the changes in KM. Table IX Comparison of Municipal Revenues Before and After Consolidation (mln KM) Revenue Type Total Muni Revenues in 2008 (with Brko) Municipal Revenue After Consolidation Consolidated Municipalities (differential with 2008) Shared Wage Tax 134 202 +68 Property Taxes 119 119 0 Other Taxes 22 22 0 Single Account Revenues 581 937 +356 Asset Revenues 145 145 0 Fees and Charges 324 324 0 Other Non-Tax Revenue 14 14 0 Operating grants 155 77 -77 Asset Sales 38 38 0 Capital Grants 55 55 0 Transfer for Education 0 959 +959 Total 1,587 2,893 +1,306 K-143 Municipalization Model
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Total local government revenues increase by 1.3 billion KM, of which 959 million comes from the new Education Transfer, 347 million from the combined increase in the PIT and Single Account share minus the operational grants that we have converted into general revenues to reduce the discretionary powers of the state. We have however, left the current level of Capital Grants untouched on the grounds that there will still be investments in the municipal sector that local governments will need some support to realize. It is also worth noting that the own revenues of local governments should also increase after consolidation, particularly in the Federation, where land use and issuance of construction permits is often controlled by cantonal authorities. Table IX below compares the percentages of the Single Account municipalities including Brko District received in 2008 (5.80 billion KM) with the share they would receive after consolidation and in line with the assumptions presented below. As can be seen from the Table, the share of the Single Account that all municipalities would receive including Brko District would increase from 11.8 percent to 19 percent. This increase would raise the average per capita general grant for local governments from its current level of 151 KM per person to 244 KM per person. For RS municipalities the average per capita increase would be about 24 KM per person or 10% more than current levels. In the Federation, where local governments currently get much more of their revenues from earmarked grants and much less of them from the Single Account, the shift would be much more dramatic: per capita municipal revenues from the general grant component of the Single Account will almost triple, rising from 87 KM to 244 KM per capita. Table IX General Grant as a % of the Single Account
KM % of SA Per Capita KM RS 317,022,597 6.4% 220 FBiH 201,435,894 4.1% 87 Brko (imputed*) 62,209,647 1.3% 16 Total Today (with Brko) 580,668,138 11.8% 151 Total After Consolidation 937,120,244 19.0% 244 *Because we could not obtain the revenue numbers for Brko District, its share of the Single Account has been imputed here. The amount in the Table understates the real value of Brkos share.
As with the per pupil education transfer, however, modeling the allocation of the general transfer to individual local governments is beyond the scope of this exercise. This problem is analogous to the problem of designing the specific coefficients used to weight the per pupil K-143 Municipalization Model
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formula we have discussed above. But here, the formula should take into consideration not just the relative costs of providing different services in different jurisdictions, but above all the relative wealth of the jurisdictions themselves. In other words and as is done today in both the Federation and the RS the share of the Single Account that any particular jurisdiction would receive would be adjusted by coefficients designed to ensure that poorer jurisdictions got additional funding. The key consideration in designing this formula would be to ensure the horizontal equalization of local government revenues so that poor jurisdictions and underdeveloped regions have sufficient funds to provide adequate public services and develop themselves. Moreover, if the overall level of equalization achievable through the direct application of the formula was deemed insufficient, some of the half billion KM in savings generated by the Model could be set aside as distinct Infrastructure Development Fund for Underdeveloped Municipalities. The purpose of this Fund would be to provide capital grants to municipalities whose existing infrastructure endowments lagged considerably behind those of other jurisdictions. K-143 Municipalization Model
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Appendix I A Note on the Origin of the Savings Generated by the Model As described in the Report and the accompanying methodological note, the Model generates financial savings equal to 500 million KM. Of this amount, 83 million comes from the savings that we project will come from the administrative consolidation of the funds. These savings will come from consolidating the administrative costs of 27 distinct funds into 3 funds; a state health fund, a state pension fund, and a state unemployment fund. Or put another way, none of the savings we anticipate coming from the consolidation of the Funds, comes from reducing money currently being spent on the actual delivery of health, pension, and unemployment benefits. The remain 417 million in savings represent the amount of money we think can be saved after all existing government spending is allocated to either the state government or to municipalities with consolidation. The Chart below presents this total amount of savings (with the Funds) in relation to total government spending (without the funds) after consolidation.
The Table below presents the origin of the savings by economic expenditure type. This Table, like Table V in the body of the report must be read with caution, particularly with respect to the municipal columns. This is because the Table presents the amount of money we have taken from different economic expenditures categories and given to the state and municipalities as revenues, and to savings as savings. As such, the line items for the state and municipalities should not be understood as revenue types. Indeed, under the Model, and as we have explained in the text, the vast majority of the current grants, capital grants, and investment monies that municipalities will receive will no longer be in the form of grants, but as part of either formula-based transfers from the Single Account, or new revenues from a higher personal income tax (PIT) share. K-143 Municipalization Model
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What the Table does clearly show is that 58 percent of all savings will come from reducing the wage and material costs associated with redundant government institutions (34 percent wages, 24 percent material costs), and 42 percent of it will come from reducing the discretionary spending associated with this redundandcy (current grants 22 percent, capital grants and investments 20 percent) The Origin of Savings by Economic Classification of Expenditures (mln KM) State Munis Total Savings % of Savings Wage bill 1,458 1,259 2,717 172 34% Material costs 404 419 823 120 24% Current grants 1,443 491 1,934 111 22% Capital grants & Investment 338 808 1,147 99 20% Lending 34 22 56 0% Debt repayment 342 30 373 0 0% Total 4,020 3,030 7,050 501 100% Percent of Total 57% 43% 100% 7%
Appendix II Where to spend the savings? The movement toward the model has yielded a certain amount of savings across different sectors. The big question is how to best use the potential savings and what goals can be strived toward using the opportunity this reform is offering. Here we list a few ideas that encourage most efficient and productive use of the savings. A drive for the decrease of the government sector this approach implies going back to the model and deciding which public revenues to decrease in order to lower the tax burden on citizens and business and what goals would be achieved. For example introducing a VAT with several rates could allow for lower tax burden on basic goods in theory leading to poorest society members staying with more disposable income. Deciding to cut contributions, on the other hand would lower the burden on employers and encourage more employment as the labor force would thus become cheaper, possibly even making BiH more competitive when attracting potential investors (both domestic and foreign). K-143 Municipalization Model
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Reform of the pension sector - BiHs pension systems are still very much dependent on Pay as you go model that with aging population and low employment led to a pension system that is currently groaning under the weight of the number of pensioners that have to be supported by the currently employed work force. Use of the savings to develop a program of support for the transformation of the current system to a different one (whichever is selected) would enable a transition period that would within a space of at least a decade move away from the solely Pay as you go system. Accelerated repayment of public debt - the public debt in BiH has dramatically increased during the last year due to the effects of the international crisis and it has taken a substantial debt from the IMF in order to cover the public expenditure needs in that period. The savings can be used to lower the countrys debt burden and open space for debt for public investment projects instead. Reform of the Health care system the system of public health care provision is widely deemed a nightmare for any patient incautious enough to actually get sick and need those services. The savings could be allocated to the endeavor of reforming the public health care systems and to improve the quality of service that the citizens receive. Severance programs for the laid off public workers the savings are partially made through laying off a number of public sector employees, and beyond the severance payments that they are eligible for by the law, part of the savings could be used to fund short term programs to help the newly laid off either start their own ventures or get them new skill sets for finding work in different places. As well, a ploy similar to what was done during the decrease of the Defense Ministries in Entities could be undertaken a cash one off payment to everyone that willingly leaves the public employment, coupled with programs that will provide some guidance about how to use the funds to their best effect (IOM was heavily involved at that time and provided expertise and assistance). Public Investment programs finally, the savings could be used to move faster on agreed priorities in area of public investment, which demand significant funds. One of those examples is the Corridor V-C, others can include such investments as the green technology use in public sector, waste disposal and water supply investments across BiH. K-143 Municipalization Model
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Methodological notes
Gathering and organizing the information to develop the model was a lengthy process consisting of several steps. Each had its own challenges and issues that needed to be resolved.
The countrys complicated structure made such issues inevitable. There are two official charts of accounts being applied in the entities (the Federation of BIH FBiH and the Republika Srpska RS) and two unofficial (in Brko District BD and for the state of BiH) leading to differences in accounting and presentation of information. This made data consolidation difficult. One of the largest problems is a lack of transparency, which forced us to turn to third party sources to obtain information about budget execution of different governments and funds. While not our target in this exercise, we have documented these difficulties and described them in greater detail in a separate annex.
Step 1 data gathering The sources of information were: the budget execution documents of individual governments analyzed, adopted FBiH budget, the annual budget execution reports for municipalities made by entities Ministries of Finance, the Indirect Tax Authoritys Macroeconomic Analysis Units consolidated reports for 2008, Central Bank reports on government finance and the reports published on websites of entities health, pension and unemployment funds.
For statistical information (e.g., GDP estimates, numbers of pupils and citizens) we relied on the BiH Statistics Agency and the entities statistical institutes.
The lack of information about expenditures for the off-budget funds (health, pensions, veterans benefits, and unemployment) was among the most daunting problems we encountered. While the Federation Health Fund published on its website detailed information about its expenditures, and expenditures of the cantonal funds, the same cannot be said of any other off-budget fund in the country. Their publicly available information was extremely poor. In some cases, such as pension funds, these sources provided information about the pension payouts, but nothing about the actual financial situation of the fund itself. For instance, the RS Health Fund only provided information about expenditures, such as primary and secondary health care. No higher level of detail about the fund itself, or specific allocation according to economic codes, was made available. K-143 Municipalization Model
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In addition to going to the funds, we tried also through contacts with other international organizations working in those fields (such as the World Bank) to obtain more detailed information. We found out that the funds were no more forthcoming with information to them.
In the end, we relied on the information gathered by the Central Bank (obtained from the World Bank) to discern the finances of the off-budget funds. Due to the poor quality (and quantity) of data available, a more detailed analysis of their expenditures was impossible. The use of BiH Central Bank data to plug the holes, while necessary, has a drawback. Capital investment, debt and acquisition of non-financial assets (investment in companies shares, or lending) are shown as a net value; it is not certain what the actual expenditure in these categories is for the funds. For the purpose of data consistency, the Central Bank information was used for all off-budget funds (pension, unemployment, health and the RS Childrens fund).
Besides this outright unavailability of data on the various funds, we were unable to find sufficient information in certain areas in budget execution documents. Therefore, these data gaps had to be leaped with a series of assumptions.
Information was completely lacking on the number of public employees in the RS (both budget- funded institutions and RS Funds), Canton 1, Canton 3 and individual municipalities in both entities.
To overcome this lack of data, we averaged out the number of employees (where we had them), and picked an average for those governments that did not provide the information to try and assess the number of employees.
While average wage is a way to determine the number of employees, this method is far from ideal. Some functions within a government are better paid than others. Thus, we can assume our numbers probably influence the number of teachers negatively (they are bound to have lower wages) and positively the employees within ministries (who are usually better paid). This will act as a distorting factor on any analysis done that takes as input the number of employees. However, the distortion should not be too severe on average.
Step 2 data organization and sorting
After gathering all the available data, a set of decisions was made the municipal sector was left untouched. All their current expenditures were simply carried over in the model and taken in as part of the municipal sector expenditure. The BD budget was only affected in the very few K-143 Municipalization Model
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areas where the functions according to the model have to be centralized to be more efficient and equal (e.g. health and pensions). All the other parts of the BD budget were treated the same as the other municipalities (i.e., left untouched).
Reallocation was made from the state budget, entities, cantons and bits and pieces of the BD budget into the two layers foreseen by the model the municipalities and the state.
Each budget under analysis was first organized in the same manner with the wage bill being compressed to include net wages, contributions and all the benefits, to have a more accurate wage bill per employee. Public administration frequently pays low wages, but often increases employees take-home pay through benefits and compensation for committee work. The contributions systems in entities differ. The way the entities presented the information about the wage bill with all its components was not sufficient to distinguish actual wages from contributions and benefits. The effect of this information gap is that we could not create a single wage scale for the new institutions. Some areas may end up getting trimmed, while others will need to be augmented to ensure proper delivery of public services.
The area of grants required several adjustments. First, the other grants code is actually used to denote repayment of internal debt, including foreign currency savings and some other material costs. The expenditures in that code were moved to debt repayment and / or material costs. Secondly, the FBiH Budget execution report did not break down grant information by code; it gave only totals. Thus the adopted budget was used to create estimates for grants expenditures in the sense of breakdowns between different grant categories, as totals were provided in the execution document. Finally, as we were aiming to consolidate all the public expenditure information in one place, it was necessary to exclude grants to other levels of government and funds in an effort to avoid double accounting. Below is a table with the amounts of grants to other levels of government that were excluded in consolidation.
Government Current grants Capital grants Republika Srpska 230,259,946 145,491 Federation 167,583,874 14,129,809.95 Canton 1 606,249 5,162,226 Canton 2 2,696,767 Canton 3 4,886,025 4,774,412 K-143 Municipalization Model
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Canton 4 6,269,098 609,936 Canton 5 5,225,495 285,000 Canton 6 9,673,673.25 Canton 7 6,673,639 120.720 Canton 8 5,516,872 466,000 Canton 9 45,596,651 9,547,382 Canton 10 2,679,289 194,063 Brcko District 200,000 Total 487,867,578 35,314,441
Note: Some of the intergovernmental transfers were tracked as transfers to individuals or NGOs. The codes did not match the descriptions (e.g., transfer to pension fund being coded as transfer to individuals). In cases where we could identify through description a grant to other level of government (as in the example), it was treated as such.
Step 3 division of expenditures by function
Following such clean-up and consolidation of information within individual budgets, it was necessary to try and divide the expenditures by function to have a clear picture of the amount of public funds being spent on each particular function and institution. The division by function was done following the COFOG (Classification of the Functions of Government), as published by the United Nations Statistics Division in its Classifications Registry. The institutional set-up followed the state budget institutions as a baseline within the division by function.
The division by function was challenging, in that every government lumped together functions in different institutions. A judgment call was made about how to split them up, since there was no information available regarding the actual work division within an institution. For example, in situations where education was tied together with culture and sports, it was assumed a higher proportion of the institution was devoting its time to education, and smaller shares were allocated to culture and sports. The full list of how the institutions where divided is presented in the Annex.
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Step 4 reshaping of functional expenditures to follow the model
After making that allocation across functions and institutions, the next step in the process was to take a look at all the institutions that exist currently at different levels of government to see how, within a certain function they can be merged to follow the two-layer governance model. Once completed, we began merging and sorting out functions in institutions following the model.
The institutions that were previously created at the central state level to deal with tasks for which there was no ministry were merged in the new ministries for appropriate function or deleted, and a certain number of institutions existing at lower levels previously were removed as it was deemed their tasks will be done inside the new ministries. Finally, reorganization within the functional setup was done following the model as some functions were merged within one ministry.
When a function was to be moved up to or merged at at the state level, assessment of the workload and potential savings was made based on the work load and the existence of current structures in future. For example, the police function was shifted in full to the state level, and no savings were assumed as this function would need to be carried in the same volume and the regional infrastructure would be kept. In some cases, we refrained from making savings, given the insufficient provision in that sector. For example, the Ministry of Health is keeping all the current expenditures for its future work.
A number of institutions, such as the new Education and Culture Ministry, were dealt with in three parts. A part was merged to perform the function at the state level in this case coming from the education part of the current expenditures. Reduced administrative capacity allowed some of these funds to be allocated to savings., Finally, municipalities will receive funding for their performance in the targeted area. In this case, a large proportion of the current culture allocations will be allocated to municipalities.
However, when a function or institution was being moved up to the state-level to perform a task that was considered to not require the aggregate volume of support (as with the Ministry of Finance and Treasury), a certain amount of savings through efficiency gains was assumed. In addition to simple efficiency gains, we also assessed whether a function in government was sufficiently resourced. This implied that the task carried out by current institutions is similar enough that there would be significant surplus administrative capacities when the function is K-143 Municipalization Model
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carried out in a more efficient manner. These institutions were the ones where we assumed more significant savings.
If a certain function (or elements thereof) were to be fulfilled in the future by municipal government, we assumed that no savings would be made in the proportion going down to municipal level (for example, elementary and secondary education).
Grants and capital investments were assessed separately from administrative capacity. This was again done function by function and institution by institution, bearing in mind the importance of the function. In some cases, even when we knew there might be potential savings we did not take those decisions. We are convinced that significant economies can be made within these figures, contingent upon public policy decisions. But it is best left to publicly accountable policy makers to decide how to address the numerous issues within certain functions.
The no-savings approach was taken in several areas. First and the biggest expense of public budgets today is the area of social protection. Grants are provided to the veteran population and for social protection purposes (protection of poor, pensioners, and families with children, invalids etc.). The bulk of expenditures in grants in this area (about 1.3 billion KM annually) were allocated for future grants without any savings at the state level. This sector demands rationalization, so it can provide sufficient assistance to those in need, while weeding out patronage exploitation.
In the area of environment no savings were made. However, grants and capital investment made within this function were divided, with the greater share allocated to municipalities (as the future more involved investors in this area), and the lesser share for overarching goals and investment at the state level.
Small savings were made across different areas and functions, based on assessment of probable duplication of grants. In some cases, the institutional reshuffle resulted in some institutions being phased-out.
The most significant savings in the area of grants and capital investment were made within the function of general public services. This includes institutions such as the Parliament, government administration, common services, the Ministry of Finance, etc. The savings made here amounted to 112 million KM annually. Each government has a pool of funds for discretionary grants, which with administrative streamlining would not be required in same K-143 Municipalization Model
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amount. The simple reduction in the number of buildings to maintain would lead to significant savings in capital investment.
Finally, in some areas we looked at capital investments and grants together, as it made sense to combine them as discretionary funds within a particular function.
The Health, Pension and Unemployment Funds were not analyzed, as there was a severe lack of information about their operations and expenditures that would enable analysis. We assumed very minor savings due to efficiency gains in consolidation, but went no further than that. As noted earlier, these functions require urgent and thorough reform to meet public need at affordable cost. Adoption of the models governance system would make these hard decisions easier or at least possible.
This assessment surely leaves space to generate additional savings in the reshaping of the public sector and reallocate from one sector to another in cases where the policy makers feel there is underfunding to reach more efficient redistribution of public resources.
Step 5 outlining the future revenue structure
The revenues presented a problem in the sense that there is a severe gap between 2008 revenues and expenditures, forcing deficits throughout BiH. Based on available information, it appears that expenditures exceed revenues by 130 million KM.
Several different sources of information had to be used to construct a composite picture of revenues, leading to disparities in the totals. The main sources used were the annual budget execution reports made by entity governments for local level governments (GIB), and the information provided by the Indirect Tax Authority Macroeconomic Analysis Unit (OMA).
As the information about Brko District revenues was not available, the information was determined from the expenditure side, and using the average shares in revenues of municipalities in FBIH to determine the overall structure of revenues. GIB data was used to determine the existing revenues for municipalities. Local governments continue to receive all the funding they were previously allocated. In addition, several new revenues are allocated to the municipal level to perform its new responsibilities. Largest among these is the per-pupil weighted allocation for primary and secondary education, but additional discretionary resources are also provided.
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The first source of revenues adjusted was the share the municipalities receive from Personal Income Tax (PIT), with the new share assumed at 50%. That share would amount to 202 million KM, and presents an increase of some 68 million over the current PIT revenue.
New revenue for BiH municipalities based on the reshuffle of functions (without education) should amount to 347 million KM. The amount of converted grants (money previously received as grants, but now core revenue) to be added is 77 million KM, and finally from the total the funds that will be received from increased share of PIT amounting to 68 million KM were deducted. This amounted to 356 million KM of fresh revenue that needed to be added to municipal revenue.
The current funds municipalities receive from the Single Account revenue (VAT, excise and customs) amount to 581 million KM. We added to that the new 356 million KM and the total of 937 million KM was then expressed as a share of Single Account revenue, which amounted to 19%.
The funding of primary and secondary education, amounting to 959 million KM that is to be shifted to local governments was as well expressed as a share of Single Account revenue, and this amounts to 19.5% of the Single Account revenue. However, the reason for keeping this as a separate stream is to first insure that these funds will only be used for education funding, and no other purpose. Secondly, this also enables the revenue to be shared among local governments based on criteria that will be more strongly tied to education sector in particular.
In total, the Single Account share that will belong to local governments will increase to 38.5% and the new PIT share will amount to 50%. This is a radical shift in revenue streams in BiH, allocating a significant portion of government revenue to local governments. K-143 Municipalization Model
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Problems and Inconsistencies Encountered in Financial Analysis
This is a short list of major inconsistencies, lacks of publicly available information and accounting problems that we encountered while gathering and organizing data for our financial analysis of the K-143governance model.
Lack of information The first obstacle was a lack of information. Even after gathering information from different sources, some gaps in information could not be closed and had to be extrapolated or assumed, based on other information. In some cases, such as the health sector, the lack of information was severe enough to impede any substantial analysis. The main information black holes were: The RS budget execution does not list data by school, but only aggregates for elementary and secondary education. The RS does not list the number of employees within its budget execution, nor is this available in any adopted budgets. The number of employees was also missing for two cantons and the Federation. For the cantons, we extrapolated. For FBIH, we used the adopted budget numbers for employees. It was impossible to get numbers for employees in the health sector. The actual cost of the health care provision is buried within the costs of the health funds. Furthermore, there is no presentation of the revenues the health sector makes from the citizens paying for services (when uninsured), or participation for some services, and from donations. Number of employees we had available for the health funds only reflected the funds own employment, without the number of health care providers. FBIH Ministry of Finance only tracks revenues in the annual execution reports from the funds. Expenditures are not required. The BD unemployment fund data was unavailable. The funds website could not be located. It does indeed exist, according to news references. The source of information for this fund was Central Bank data. K-143 Municipalization Model
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There is no debt stock data available for all levels of government. Sarajevo Canton budget did not have information about where the high schools are located, we used Google to find where the schools are located and allocated accordingly.
Chart of Accounts issues FBiH budget and budgets of cantons do not have the breakdown between salaries and compensation, and while RS does have that information, for the sake of consistency, it is merged for RS as well. The code 614800, other grants in the FBIH Chart of Accounts is actually used to denote repayment of internal debt, including arrears and foreign currency savings and material costs tied to that debt. This is an accepted deviance in FBIH CoA, but it can be misleading for the uninformed. In FBIH, the transfer to pension fund was tracked as transfer to individuals, due to it being classified that way in CoA. This is generally considered transfer to other levels of governments / funds, as the fund reports on grants given to individuals. RS has a 681000 category that was used for transfer of funds to other institutions within the budget before treasury. They seem to be channeling a part of current grants from here, even though those codes should not be used after treasury introduction.
Inconsistencies RS has an interesting category other budgetary expenditure containing material costs and debt. This should be identified by organizational code to clarify what institution was responsible for those expenditures. It looks as if the RS budget gives grants to its own budget users from the execution documents. RS was listing the costs of work of parliamentary committees as grants to non-profit organizations. It's not a grant. However, due to such accounting, there is no breakdown of costs (materials, phones, support staff time, etc.). The FBIH is actually spending more per employee than the State, even though State has nominally higher salaries. It can be presumed the difference is to be found in the amount of benefits and payments for participation in committee work. K-143 Municipalization Model
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The use of Central Bank data to plug the holes, while beneficial, has a drawback. They show capital investment, debt and acquisition of non-financial assets (investment in companies shares, or lending) as a net value. The actual expenditure in these categories for the users of public monies (especially funds) remains opaque. From the numbers on revenues and the execution of expenditures from the budgets, it seems that most governments either went into debt, or finished 2008 with a deficit. The current reserve was often reported as a line item expenditure, while it should be reallocated based on which economic category it was spent on in the reports. The Chart of Accounts missed a category for public institutions created and largely funded by government; there are not specific groups in CoA. One example of the results of such structure can be found in Canton 7, where the grants for higher education and the pedagogic institute are listed under grants to other levels of government. What this means is that in case of consolidation, these funds would be omitted from the total, making it actually lower than it is, as there is no other public budget where these funds are recorded as received and thus accounted for. The budget execution documents for FBiH do not allow the segregation of grants, they are reported on in consolidated manner without making clear the allocation by type, affecting consolidation efforts (cannot make segregation between grants to other levels of government and other types of grants). In the BiH budget, a part of expenditures is kept apart from any institution, like the obligations on court cases, or investment in a new building. Such allocations make it a bit more difficult to see who has responsibility for implementation of related activities. Brko District has a more specific budget structure, in which sub-departments are listed. However, capital expenditures are allocated based on departments, and it cannot be easily deduced which capital expenditures were related to work of which particular sub- department. BD was actually recording the debt repayment as material expenses, however they included the information about reserve spending in the report, and thus we were able to deduce from descriptions that it is debt, and not material expenses. Some parliamentary expenses seem to have the parliament members included in number of employees, while some do not. This makes the costs per employee a disputable number to use in such cases. K-143 Municipalization Model
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It is unclear where from the Central Bank draws the information for BD health fund the Department of Health of the BD government has a bigger budget. The way the budget execution report reads the health body is part of the BD budget and is not a separate organization thus the double accounting that the Central Bank seems to be doing appears hard to explain.
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ANNEX I: Chart showing the distribution of competences between Municipalities and State
Function Competent authority Type of competence State Regional pooling Municipality Exclusive Shared General administration
Security, police 46 x x Fire protection x x x Civil protection x x x Justice x x Civil status register x x Statistical office x x Electoral register x x Education 47
Pre-school education x x Primary education x x Secondary education x x Vocational and technical x x Higher education x x Public health Hospitals x x Health protection 48 x x x Social welfare 49
Family welfare services x x Welfare homes x x Social security x x Housing and town planning Housing x x Town planning x x Spatial/ regional planning x (x) x x
46 The current areas of operation of police (5 RS public safety centers, cantonal in FBiH, Brko District) would remain (as would the congruent judicial institutions). These would receive budget allocations from the state and be under ultimate state command and control, but local management. 47 Primary and secondary education will receive support through earmarked state grants, and be overseen (but not run) by a BiH Ministry of Education in terms of curriculum. 48 Municipal restaurant inspection, water testing, etc. 49 A BiH Ministry of Social Welfare will take over and raise pension payments to an inflation-pegged, sufficient, and equitable level statewide. K-143 Municipalization Model
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Function Competent authority Type of competence State Regional pooling Municipality Exclusive Shared Environment, public sanitation
Water & sewage x x Refuse collection & disposal x x Environmental protection (including state parks and reserves) x x x Consumer protection x x x Culture, leisure & sports 50
Preservation of cultural heritage sites x x Theatres & concerts x x Museums & libraries x x x Parks & open spaces x x Sports & leisure x x Religious facilities 51 x x x Traffic, transport Roads x x x Transport 52 x x x Urban road transport x x Urban public transport x x Airports x x Economic services Electricity x x Gas x x District heating x x Water supply x Agriculture (and veterinary inspection), forest, fishing x x x Economic promotion x x x Trade & industry x x x Tourism x x x
50 State support for cultural activities at the municipal level will be delivered in block grants, allowing local discretion on spending. 51 Current public expenditures are not systematic. Common in Europe for pensions and health care contributions to be made by the state. Municipalities often contribute on a project basis. Facilities may be deemed cultural heritage sites deserving of public maintenance. 52 Municipalities will participate in the BiH-wide spatial and transport planning process. K-143 Municipalization Model
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ANNEX II: Number of Seats in K-143 Model Parliamentary Assembly Municipal Population (rounded to nearest hundred)
Average population per representative 46.500 31.000 23.250
% of seats in the PA BiH
1,18% 1,63% 1,88%
FBiH 2.372.000 94 105 122
Average population per representative 25.234 22.590 19.443
% of seats in the PA BiH
55,62% 57,07% 57,28% C a n t o n
1
Biha 61.200 2 2 3 Bosanska Krupa 29.700 1 1 1 Bosanski Petrovac 7.900 1 1 1 Buim 20.300 1 1 1 Cazin 69.400 2 2 3 Klju 18.700 1 1 1 Sanski Most 47.400 1 2 2 Velika Kladua 44.700 1 2 2 C a n t o n
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Domaljevac-amac 5.200 1 1 1 Odak 21.300 1 1 1 Oraje 21.600 1 1 1 C a n t o n
Centar Sarajevo 59.200 2 2 2 Hadii 25.000 1 1 1 Ilida 71.900 2 2 3 Ilija 20.500 1 1 1 Novi Grad Sarajevo 124.500 3 4 5 Novo Sarajevo 68.800 2 2 3 Stari Grad Sarajevo 38.900 1 1 2 Trnovo-FBiH 1.800 1 1 1 Vogoa 27.800 1 1 1 C a n t o n
Number of seats per Croat-majority municipalities (Assume majority in Mostar, not total. Split Bugojno, Travnik and Jajce when multimember; none in RS) 50.000 threshold 40.000 threshold 30.000 threshold 27 seats (16%) 27 seats (15%) 31 seats (15%)
Number of seats per Serb-majority municipalities (RS less Srebrenica and Osmaci + Majority in Prijedor + 4 munis in FBiH) 50.000 threshold 40.000 threshold 30.000 threshold 74 seats (44%) 77 seats (42%) 87 seats (41%) K-143 Municipalization Model
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ANNEX III: European Examples of State-Local Allocations of Competences
I. general trends concerning decentralization in EU member states, EU principles and structures affecting local government:
Principle of subsidiarity: every state function should be assigned to the lowest level at which it can be undertaken effectively. This is a powerful device to counter a natural tendency towards centralization.
EU has no formal legal authority in relation to the organization and management of public administration in member states
State functions which are normally decentralized:
A. functions fully under control of sub-national level (local and/or regional) - development of local economy - social housing - public utilities: water, electricity and gas supply - fire protection - local planning (regional)
B. Functions frequently shared between the state and sub-national level - local functions: - police: wide variance, local/regional function in many Latin + Germanic countries - health and social assistance: wide variance in organization/division of responsibilities - education: primary education, sometimes secondary - culture: libraries, museums, parks - roads: local/regional national - transport: public transport, sometimes ports and river transport - environmental protection - tourism promotion
Proportion of public expenditure for local/regional level: depending on degree of decentralization, but in most cases over 70 % central level (new member states 70- 90%!), even Germany over 50%, in countries with active local/regional sector about equal between central state and sub-national level(s) K-143 Municipalization Model
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Revenues for local government: local taxes (income tax, property taxes etc.) very wide range (4 70%) Remainder from national funds, service charges
Redistribution mechanisms: increasing allocation of resources to structural and cohesion funds directed to poorer European regions, coordination/harmonization of national and EU policy
Decentralization trends: more efficiency and effectiveness in administration, development of sub-national administrative structures contributes to improving democratic control and responsiveness to citizens, EU-integration important for developing greater local autonomy without endangering state integration; growing interest and participation of regional authorities in policy-making at European level; Devolution of power and competencies from national to sub-national level(s) transfer of some functions from local to higher sub-national level (regional), because of increasingly sophisticated demands of modern society, like in case of health systems, that question the economic and efficiency capacities of local administration, 2 alternative trends: 1. establishment (or strengthening of existing) regional tier of local government 2. pooling resources and expertise through voluntary associations of local authorities
II. lessons from transformation in other post-socialist countries: timing of financial regulation is crucial to the extent of transformation/devolution of power to the local level transformation of public administration crucial: a civil service system based on professional criteria, ensure clear division between political and administrative influence, regulate with great precision politico-administrative relations among higher offices (mayor, chief administrative officer, staff), political neutrality of staff/ defense from political pressure establishment of strictly regulated instruments to control legality of local government activities, including financial auditing K-143 Municipalization Model
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III. Local self-government country comparisons:
1. Latvia
Tiers: two-tier local self-government: with 26 districts (regions) and 530 local governments (rural and town municipalities, amalgamated municipalities); 7 republican towns are represented at both levels, with town districts having municipal status; districts no directly elected representatives (council consisting of local council chairpersons)
Principles: subsidiary and correlation between responsibilities and financial resources
Size: extraordinary high number of small municipalities, with 90% only up to 5,000 inhabitants!
Fields of cooperation between central government and local governments: drafting laws and regulations affecting local governments; determining grants allocated to local governments each year; identifying financial sources for transfer of additional functions to local level
Municipal institutions: councils: 7-15 members. 7-9 members for municipalities with up to 5,000 inhabitants; 11 members for municipalities with up to 50.000 inhabitants, Riga city council 60 deputies, council meetings public; council chairperson appointed by council, political head, executive director head of administration, appointed by council on proposal by chairperson
Electoral system: only council members directly elected, every 4 years, proportional representation, voters associations play dominating role in local councils, with national party only a marginal role (!)
Training administration staff: Project management and self-government Training center at University of Latvia, Local Government Training Center and regional training centers
Division of functions:
State: legislation and state administration, economic policy and employment; spatial planning foreign affairs, defense and public order and law enforcement, social security, higher education and scientific research, vocational and technical education; energy resources (electricity and K-143 Municipalization Model
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gas), long-distance communication and transport (incl. ports and airports); consumer protection;
Municipalities: water supply and sewage, heating, waste collection and disposal; local communication, cemeteries, regulation of public forest and water use; local economic development, local planning; education: primary and secondary education; social welfare: social housing, nurseries, kindergartens, services for elderly and handicapped, welfare homes; civil status register; local police (public order);
Districts: public transport; regional planning; teacher training; representation of local government in regional public health insurance fund; civil defense (shared with central state);
Forms of local government cooperation: Union of Local and Regional Governments of Latvia (ULRLG): interest representation towards central state institutions and intl. institutions, annual state budget negotiations with central government, promotion of local authority cooperation, training of local staff, social protection of local employees; voluntary establishment of common institutions by several municipalities, main fields: health and social care, education water supply and waste, local/regional planning; contracting other municipalities for certain functions (small, economically weak municipalities);
Financing: main revenues taxes, then grants and non-tax revenues; no local taxes, but shares of state taxes, mainly personal income tax (72%), real estate tax (100%);
Local Government Financial Equalization Fund: system based on CoE recommendations and Danish example, aimed at certain equalization effect to reduce difference between wealthy and structurally underdeveloped municipalities, financed by central state contribution (15%) and wealthier municipalities whose annual revenues are more then 10% above a calculated national average;
Control mechanisms: control of legality by ministry of regional development and local authorities; financial control by State Audit Office, annual financial audits by auditor company, authorizing annual financial report;
2. Slovenia K-143 Municipalization Model
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Tiers: one tier, 210 municipalities (regions constitutionally foreseen, but not yet introduced), organizational forms on sub-municipal level can be established;
Size: defined by size, at least 5.000 inhabitants (exceptionally 2.000), towns at least 20.000; yet still half of municipalities below 5.000 inhabitants
Municipal institutions: council: 7-45 members according to size, mayor: political head and executive body, directly elected, municipal secretary/director: heads of administration, a civil servant, appointed by the mayor
Electoral system: system dependant on council size, up to 12 members majority vote, with individual candidates running for office, each voter having as many votes as council seats; above proportional system with candidate lists/party list, with mixed list-preferential voting; in both systems facultative division of municipality into constituencies;
Division of functions: municipal functions: limited exclusive functions, education: only pre-school, primary and adult as shared responsibility; health not exclusive; social welfare: kindergarten, family welfare (with social security shared); housing, town and regional/spatial planning (except where of national interest); waste disposal and cemeteries; heating and water supply; additional functions performed by urban municipalities in urban public transport, urban environment protection and housing;
Financing: principle of financing through own revenues, therefore local taxes whose tax rates are assigned by the state, real estate tax, inheritance and gift taxes, tax on water vehicles, taxes on profits from lotteries and games of chance; other revenues fees, fines, concession rates and administrative revenues; municipalities allowed to take loans, but not from abroad, not exceeding 20% if annual revenues;
Financial equalization system: system of additional financial aid to underdeveloped municipalities for covering expenses, based on calculation of appropriate expenditure as average amount of resources by inhabitant defined by the National Assembly for each fiscal year, 90% of municipalities receive financial assistance, municipalities above this average freely dispose of their surplus resources;
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Control: financial control exerted by supervisory committees elected by municipal councils, Court of Auditors at national level;
3. Finland
Tiers: one tier, 348 municipalities, called either municipalities or cities;
Size: one third 1.000-5.000 inhabitants, with the Helsinki Metropolitan Area 20% of population; (5.3m population)
Municipal institutions: councils, 17-85 members, municipal executive board, responsible for administration and financial management, municipal manager, civil servant, head of local administration;
Electoral system: council members are elected by proportional representation on the principle of one person, one vote
Division of functions: extraordinary number of functions completely decentralized to local level: education all but higher education in municipal responsibility; public health exclusive municipal function; public utilities exclusively; culture leisure and sport; electricity, gas, water and heating; Policing is an exclusively state function.
Advisory Board on Municipal Economy and Administration: joint institution by State ministries and the Association of Finnish local and regional authorities, negotiates in budget draft concerning transfer payment to municipalities and cost distribution between central government and municipalities;
Financing: taxes, fees and sales incomes and state grants; taxes are all local taxes, main source municipal income tax (86%), rate set independently by municipal councils, share of corporate income tax determined by state parliament, and real estate tax, independently determined by municipal councils;
Loans: municipal independence, both domestic and foreign borrowing;
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Control: no regular control of municipal decisions and finances by state(!), annual municipal reports to Statistics Finland, state administration control limited to legality check, and only upon complaint;
Forms of local cooperation: stimulated by central government through grants
Pooling of functions: joint municipal authorities, single-task organizations, independent legal public entities governed by municipal legislation, compulsory for special health care (20), care of disabled (14), regional planning: regional spatial planning and management of strategic regional development planning/EU structural funds projects (19 regional councils), for other functions voluntary, overall 228 joint authorities, mainly in fields of health, education and social service, its council members delegated by municipal councils, financed by municipalities through user charges and separate contributions to investments;
Other forms: joint municipal civil servants (small municipalities); limited companies, co- operative societies, foundations, contractual co-operation;
4. Denmark
Tiers: two 98 localities (kommuner) with primary responsibility for a host of competences, and five regional state administration offices with limited responsibility.
Size: Average size 55,000 inhabitants, some under 20,000 which didnt wish to amalgamate into to larger municipalities, but must cooperate with neighboring municipalities to meet responsibility to deliver services.
Municipal Institutions: Municipal Councils of 25-31 members, keyed to population and elected for 4-year terms on a proportional representation open list basis. Mayors elected by Councils. Councils determine structure of local government, division of functions.
Regional Councils of 41 members, directly elected in 4-year terms, coincident with municipal elections. Free to set-up structure at will to fulfill mandates responsibilities. Note: The local and regional council and the councils Finance Committees are responsible for the staff of the authorities. Staff are not appointed politically and are not replaced after an election.
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Division of Functions: Most citizen-related tasks handled at the municipal level. Exclusive competences include local utilities (water, sanitation, electricity, heating, gas), pre-school and primary education, family welfare, social security, fire protection, local spatial planning, sports and leisure. Municipalities also share competence with the state and regions on a host of sectors (transport, health care, planning, environment, agriculture, employment, culture).
The state maintains exclusive control over policing, security and justice. It also operates secondary and higher education.
The five regions exist to pool resources for regional issues, particularly health care (hospitals), special education, and regional spatial and economic planning. To ensure coordination with the municipalities, twice-annual sessions of the Contact Committee, including the chair of the regional administration and the mayors of all the regions municipalities, must be held. Health care, for example, is financed 80% from state revenue, 20% from municipal revenue. The state portion is based on both age distribution (77.5%) and socio-economic indicators (22.5%).
Financing: Municipalities are finances through a combination of own revenues both local taxes and fees - (approximately >70% of total) and grants from the state (26%). Local taxes include income tax (collected by the state) and land taxes (collected locally). Municipalities also collect fees for services. State grants are both earmarked for specific purposes (full reimbursement of old age pensions, partial reimbursement of early pensions, partial social security reimbursement) and general purposes.
Financial Equalization System: Partial (up to 90%) equalization to ensure that municipalities can deliver average quality services and close to average cost.
Supervision/Control: The Ministry of Social Welfare monitors the five state regions from a legal point of view (e.g., cannot second-guess expediency of a decision), and can initiate supervision in case of a serious breach or as a matter of principle. Sanctions can be applied to municipal council members who have acted unlawfully or neglected their legal duties. Decisions can be appealed through ordinary courts.
The Ombudsman oversees all public sector except courts of law, especially regarding questions of good administrative practice. The Ombudsman determines whether a complaint gives sufficient cause for investigation and can bring actions against authorities in question.
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5. Iceland
Tiers: One municipal level. There were 101 municipalities as of 2006, down from 229 in 1950. There has been a long-term trend for mergers of municipalities to form larger units, better capable of providing services. There is a detailed legal procedure for doing so it is usually voluntary, but can be compelled for municipalities having fewer than 50 inhabitants for three years running.
Size: Varies widely, from 38 to ~114,000 inhabitants (Reykjavik). 68% of municipalities have under 1,000 inhabitants; a further 23% fall between 1,000 and 5,000. Only 5% have above 10,000. Hence the increasing commonality of joint service provision.
Municipal Institutions: Local Councils, elected by PR every 4 years. The size varies within parameters in law: 3-5 for municipalities of fewer than 200 inhabitants, up to 15-27.
The Councils can elect an executive board (if more than 200 residents) from among Council members for a term of one year. The Council also selects a chair for a one-year term. The Council may also decide to appoint a municipal administrator or mayor, whose duties are determined by the Council. These persons usually serve for the Councils first term. Unless this person is a Council member, he/she can introduce topics but cannot vote.
Division of Functions: Principal local competences include pre-schools and primary schools, water, sewage, waste collection, district heating, fire protection, spatial planning, local environmental protection.
The Association of Iceland Municipal Authorities is the interlocutor with the state for local interests.
Financing: The local share of public expenditure in 2001 was 33.3%. This is growing. Own resources include real estate taxes (with rates set in bands by the state, determined locally) and local income taxes (ranging from 11.24-13.03%). The former provide 11% or the total local revenue base, the latter 61%. Fees for services and licensing provide approximately 18.5%. Municipalities also receive grants from the Local Authorities Equalization Fund and grants (both earmarked and block) from the state government.
Financial Equalization: This comes from the Local Authorities Equalization Fund, and four types of funds are granted: fixed contributions, special contributions, equalization contributions, and K-143 Municipalization Model
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equalization contributions for primary schools. For municipalities with fewer than 2,000 residents, there are special contributions toward public utilities and primary education.
Supervision/Control: The Ministry of Social Affairs oversees local government matters (for breaches of law and duty, not expediency). Auditing of accounts is legally required. Newly elected councils must select two auditors (non-members).
Consortia to institutionalize cooperation to perform tasks of common interest also have legal foundation, but are initiated voluntarily. There are also 8 federations of local authorities these are simply collectives for service delivery, and receive funding from the Local Authorities Equalization Fund.
6. Macedonia
Tiers: one - 84 municipalities + city of Skopje.
Decentralization process based mainly on Ohrid Framework agreement and subsequent laws (on local self-government, financing of LSG, City of Skopje, on inter-municipal cooperation), process underway, began in 2005; represents a break in political culture of post-socialist era, moving from the most highly centralized European state with only 1,6% of state budget goin to the local level to a modern decentralized state;
Size: 2 million inhabitants, of which 500.000 in capital Skopje, 20% of municipalities below 5.000 inhabitants; 18% 5-10.000 inhabitants;
Municipal institutions: council 9-33 members (Skopje 45), mayor, directly elected,
Self-Government Units (Mjesne Zajednice): weakly developed sub-municipal institutions of citizens participation, neighborhood self-government units/village councils (NSGU councils), succeeding institution to socialist Mjesne zajednice, though have lost both their infrastructure (staff) and competencies. Consultative in nature, mainly instrument for citizen interest expression and communication with local authorities, in rural areas function of maintaining and improving infrastructure through voluntary contribution;
Division of functions: municipal functions (when decentralizing reforms finished): local economic development; urban/rural planning; public utilities: water and sewage, waste collection; local roads and transport; cemeteries; education: primary and secondary; social K-143 Municipalization Model
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services: centers for pre-school children, orphans, and socially vulnerable people, homes for the elderly and the disabled, child care; health care: primary health care and public health; environmental protection; culture and sports; police: head of local police selected by council (from Interior Ministry list); civil defense and firefighting;
Financing: decentralization of state functions not adequately accompanied by financial resources; local revenue structure in flux because of ongoing decentralization process accompanied by state financial aid: 2005 59% taxes, 3% non-tax revenues and 38% grants and transfers, 2008 29% taxes, 6% non-tax revenues and 65% grants and transfers; extremely low share of GDP by local government expenditures in comparison to EU-countries, 4,7% in 2008 (Latvia 10%, Slovenia 5%); revenue-structure: taxes both local and shares, non-tax revenues and grants and transfers, taxes: local taxes, property taxes and taxes on specific services, rate set locally within a centrally-determined range, local shares of national taxes, VAT is currently 3,4%, Personal income tax (PIT) share of 3%; borrowing from both domestic and foreign sources allowed;
Local cooperation: widespread and growing, main forms of cooperation joint planning for LED, contractual buying of service provision from other municipality, joint administration; Establishment of centers for balanced regional development planned to manage application for EU funds;
Administration: human resource management units established at all state institutions, including municipal administrations, manage human resources along with state administration civil servants agency;
Annual training programs developed by municipalities, coordinated with Civil Servants Agency;
Ethnicity: in municipal councils like in national parliament principle of double majority voting, means in defined fields (culture, use of language, education, use of symbols and personal documentation[concerning use of different official languages on documents]) decisions on the basis of majority of council members and of majority of votes of representatives of ethnic groups which are not the majority ethnic group in the municipality, OSCE states that that principle encourages consensus-building among community representatives; Equitable representation of ethnic groups in administration, problem: no enforcement mechanisms;
Committees for Inter Community Relations (CICS): advisory board to mayor and council, composed of equal number of representatives for all ethnic groups, 2-9 members, membership K-143 Municipalization Model
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voluntarily/ an honorary duty, committee discusses issues concerning inter-ethnic relations (culture and language) and gives opinions and proposals to be reviewed by the municipal council, decision-making by consensus; performance since establishment in 2005 is low, not really active, majority of population not aware of existence;
Main problems in decentralization process: overall problem is the speed of the introduction of a threefold decentralization process (territorial reorganization, new legislation and transfer of competencies),
Main individual problems: lack of financial resources, low administrative capacity of municipal staff/level o of professionalization, lack of central government assistance;
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ANNEX IV: Brko District: BiHs Most Developed Example of Local Self-Government
Background: The municipality of Brko, on the Sava River in northeastern Bosnia, was among the first to be ethnically cleansed by Bosnian Serb forces in 1992, driving out its large Bosnian Muslim (Bosniak) and Croat populations. It was a focal point during the conflict, as its position in the Posavina Corridor linked the two halves of Republika Srpska, making it vital for the Bosnian Serbs to control and crucial for the Army of BiH and HVO to cut. Reflecting Brkos strategic position, the negotiations in Dayton failed to arrive at an agreement on its disposition. It was put up for binding arbitration for a tribunal chaired by American State Department lawyer Roberts Owen, and placed under a US-run supervisory regime. The prewar municipality, which has Serb, Croat and Bosniak-held areas, was not awarded to either entity, but rather kept a territory apart under supervision. Brko District (BD) was able to develop a wide range of multiethnic institutions under the supervisory regime, which continues to this day, though it rarely engages in the local political arena. The District is by far the most self-governing of any of BiHs 143 municipalities, with a direct proportion (3.55%) of VAT revenue through the Indirect Taxation Authority (ITA), its own multiethnic police and justice system, a separate education system, and other elements of governance that are handled at higher levels in the two entities. All these are enumerated in the Brko District Statute, 53 which states that BD is a single administrative unit of local self-government existing under the sovereignty of Bosnia and Herzegovina. It is therefore a useful guidepost for a municipalized two-layer state structure. Size: Brko District is about three times the average sized BiH municipality, at roughly 90,000 inhabitants. 54
Government Competences are listed in Article 8 of the Statute: - BD economy - social welfare - BD finances - judiciary and legal services - Public property - policing - Public services and infrastructure - housing - Culture - urban development and zoning - Education - other competences necessary for the - Health care functioning of the District as a single - Environment administrative unit of local self-govt Government:
53 Available in full at www.ohr.int 54 Estimates of the resident population run between 80,000 and 100,000. Prior to BiH defense reform and an end to conscription, BD held the attraction of being exempt from conscription into the entity militaries, drawing a number of young men wishing to dodge the draft. This makes it more difficult to estimate the actual residents. K-143 Municipalization Model
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a) The Brko District Assembly, which is defined in detail in Section B of the Statute, is elected for four years and consists of 31 members, 2 of which represent the national minorities resident in BD. The Assembly elects its Speaker by a 3/5 majority (the second-place finisher becomes the Deputy Speaker). The Assembly, and determines the general policy for BD, monitoring the Government and Public Administration, especially management of revenue and expenditure. The Assembly also has the authority to petition the BiH Constitutional Court under Article VI.4 of the Constitution (Annex 4 of the Dayton Peace Agreement). Article 33 of the Statute defines those decisions for which there must be a qualified majority of 3/5 of Councilors present: o Rules of procedure o District budget o Adoption and amendment of District laws o Election and dismissal of people elected by the Assembly, except Speaker/Deputy Speaker and Mayor (special provisions apply for these) o Assembly consent to appoint or remove official in accordance with the Statute/law o Vetoes of appointments or removals of officials o Decisions to dismiss members of Steering Boards of public companies
3/5 of the total number of Councilors is required to: o Remove the Speaker or Deputy Speaker o Remove the Mayor o Veto the appointment of the Mayor or Deputy Mayor
To amend the Brko District Statute, of all the elected Councilors must vote in favor. Article 33a of the Statute is titled Prevention of Outvoting o The affirmative votes of at least 1/3 of Councilors from each constituent people present and voting is required for Assembly decisions related to: Adoption of amendments to the Statute Adoption of amendments to the Assemblys Rules of Procedure The annual budget, spatial planning, education, religion, language and culture (Art. 53 (1)) National holidays and monuments
b) The Brko District Government and Public Administration is defined by Section C of the Statute. The Government consists of the Mayor, Deputy Mayor, Government Chief Coordinator, and the Heads of Departments. The Public Administration consists of the Government Departments, K-143 Municipalization Model
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the Mayors Office, the District Finance Directorate, the Office of Public Property, and the Office for the Coordinator of Brko District in the BiH Council of Ministers. The Mayor is elected by the Assembly. The Mayor selects the Deputy Mayor, the Government Chief Coordinator, and the Heads of Departments based on professional criteria, and these appointments should reflect the composition of the population. The District Finance Directorate (Art. 49) includes a separate Tax Administration and Treasury. The Office for Public Property (Art. 49) administers public property in BD and conducts the procedures of disposal of public property. Article 8 (5) of the Statute clearly defines what is to be done with unneeded public property: All public property in the territory of the District on March 5, 1999 belonged to the District on that date, and all legal rights in public property vested in the District with effect from that date. The District shall privatize all public property not necessary for the performance of public functions. The Office of the Coordinator for Brko District in the Council of Ministers of BiH represents the interests of the District before the institutions of BiH. The Coordinator reports to the Mayor. Public Companies (to provide services to BD residents, or manage public funds or assets). Steering Boards are accountable to the Assembly, but independent of Public Administration. Brko District has its own Police and Courts, Public Attorneys Office, and Prosecutors Office, defines in Chapters IV and V of the Statute. The BiH High Judicial and Prosecutorial Council appoints the judges and prosecutors in the District. Revenue: Brko District presently receives a fixed 3.55% of the VAT intake from the ITA. This revenue has leveled-off after a spike in revenue after introduction, and has taken a hit from the global economic downturn as well. The District also recently introduced an annual land (property) tax at an initial rate of 0.6%. The BD Government has a land reform proposal that would privatize the public property holdings not needed for governance purposes, which would bring in significant one-off revenues. The Districts public companies charge for their services. The District may introduce an income tax in the future. Other Noteworthy Features: - Unlike any other municipality in BiH, Brko District operates its own primary and secondary school system. - Chapter III, Article 20 of the Statute reads Public Employment with the District shall be based on professional merit and shall reflect the composition of the population. This is based on the 1991 census. K-143 Municipalization Model
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- Articles 21 and 28 contained detailed and thorough financial disclosure and conflict of interest provisions for public officials.
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ANNEX V: Bibliography
Documents - Bosnia and Herzegovina 2007 European Partnership, EU Commission, Brussels 2007 - Constitution of BiH - Constitution of the Federation of BiH - Constitution of the RS - Copenhagen Document, OSCE (then-CSCE), 1990 - Draft Joint Opinion on Amendments to the Election Law of BiH by Venice Commission and OSCE/ODIHR, 2008 - Election Law of BiH - Law on Local Self-Government of the RS - Law on the Principles of Local Self-Government of the Federation BiH Constitutional Court. 2000. Constituent people Decision. Case U/98, July 1, 2000, published on Slubeni glasnik BiH, No. 23/00, 14 September 2000 - Statute of the Brko District - Statut grada Zagreba - Statut grada Beograda - European Charter of Local Self-Government, Council of Europe 1985 - European Court of Human Rights, Case of Sejdi and Finci v. Bosnia and Herzegovina, (Applications nos. 27996/06 and 34836/06) Judgement (22.December 2009) - Parliamentary Assembly of the Council of Europe (PACE) Resolution 1701, The functioning of democratic institutions in Bosnia and Herzegovina, 2010 - Parliamentary Assembly of the Council of Europe (PACE), Recommendation 1894, The functioning of democratic institutions in Bosnia and Herzegovina, 2010 - Report on 2006 General Elections in Bosnia and Herzegovina, OSCE/ODIHR, Warsaw, 2007 - Structure and Operation of Local and Regional Democracy, country reports: Denmark, Finland, Iceland, Latvia, Slovenia - Stabilisation and Association Agreement between the European Communities and their member states and Bosnia-Herzegovina, Brussels 2007 - Venice Commission (of Council of Europe), Opinion on the Constitutional Situation in (BiH) and the Powers of the High Representative, 2005 - Visa liberalisation with Bosnia and Herzegovina. Roadmap, EU Comission, Brussels 2008 - Bosnia and Herzegovina 2009 progress report, EU Comission, Brussels 2009 Enlargement strategy and main challenges 2009-2010, EU Comission, Brussels 2009 Ohrid Agreement
Literature
- Analytica Brief, Conceptualzing decentralizaion trends in Macedonia, Skopje, 2006 K-143 Municipalization Model
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- Centri Civilnih Inicijativa (CCI), Naelnik i lokalna samouprava: liderstvo, demokratija, razvoj, Sarajevo December 2009 - CCI, Odnos nacelnika i skuptina u BiH, Sarajevo October 2009 - Kenneth Davey (Ed.), Making Government Accountable. Local Government Audit in Postcommunist Europe, Budapest 2009 - Decentralization and local democracy in the world. First global report by United Cities and Local Governments, Barcelona 2009 - Decentralization: conditions for success. Lessons from Central and Eastern Europe and the Commonwealth of Independent States, United Nations, New York 2000 - Decentralization Survey 2009, OSCE Spillover Monitor Mission to Skopje, Skopje 2009 - EDA Razvojna Agencija, Popravke ili prepravka? Analiza opcija razvoja lokalne samouprave u BiH, Banja Luka May 2008 - EDA, Strateki plan razvoja lokalne samouprave u BiH, Banja Luka 2006 - Ekonomski institute B. Luka, Kreiranje i uvoenje modela raspolaganja i vlasnitva nad lokalnim resursima, B. Luka November 2007 - Foreign Policy initiative BiH (FPI BiH) The Role of civil society in BiH constitutional reform, Policy Analysis 1/09, Sarajevo, July 2009 - FPI BiH, Monitoring of the BiH European integration processes, 2008 preliminary report, Sarajevo 2009 - FPI BiH, Monitoring of the BiH European integration processes, 2009 first semi-annual report, Sarajevo 2009 - FPI BiH, Strukture upravljanja dravom u BiH, Sarajevo 2008 - Friedrich Ebert Stiftung Zagreb Office, Local Self Government and Decentralization in South - East Europe, Zagreb 2001 - Friedrich Ebert Stiftung Zagreb Office, Decentralizing Government, Problems and Reform Prospects in South-East Europe, Zagreb 2002 - Friedrich Ebert Stiftung Zagreb Office, Executive and Legislature at Local Level, Zagreb 2002 - Friedrich Ebert Stiftung Zagreb Office, Economic Development on the Local and Regional Level, Zagreb 2003 - Friedrich Ebert Stiftung Zagreb Office, Reforming Local Public Administration, Zagreb 2003 - From Stability to Performance. Local Governance and Service Delivery in Bosnia and Herzegovina, World Bank, Washington, January 2009 - Horvath, Tamas M. (ed), decentralization: experiments and reforms, Local governments in Central and Eastern Europe Vol. 1, Budapest 2000 - Kandeva, Emilia (ed), Stabilization of local governments, Local governments in Central and Eastern Europe Vol. 2, Budapest 2001 - Kapitanova, Guinka, Inter-municipal cooperation and decentralization in the Former Yugoslav Republic of Macedonia, LSE and UNDP Development and Transition, Issue Nr. 12/2009 K-143 Municipalization Model
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- Birgit Kunrath, The Role of Ethnic Voting in Bosnia and Herzegovina An Evaluation of Decision-Making between June 2008 and June 2009, Council of Europe, Field Office Sarajevo, July 2009 - Levitas, Tony, A Tale of Two Entities: How Finance Reform Builds Democracy in Bosnia and Herzegovina, DAIdeas democracy briefs, No.1, Washington, February 2007 - Bosnia and Herzegovina: Republika Srpska: Local self-government training needs assessment report, SIDA/UNDP July 2009 - Bosnia and Herzegovina: Federation of BiH: Local self-government training needs assessment report, SIDA/UNDP July 2009 - Mnch, Claudia, Emanzipation der lokalen Ebene? Kommunen auf dem Weg nach Europa, Wiesbaden 2006 - Ostoji, Rajko, Zdravstveni system u Hrvatskoj, FES Zagreb 2009 - Paali-Kreso, Adila, Then constitution and education in BiH, Open Society Fund BiH, Sarajevo, September 2004 - Pearson, Brenda Lee, An external review of training delivered to local government staff 2004-2007, OSCE Spillover Monitor Mission to Skopje, Skopje October 2008 - Pejanovi, Mirko, Politiki razvitak BiH u postdejtonskom periodu, Sarajevo 2005 - Ebd./Zlokapa/Zoli/Arnautovi, Optine/opine u BiH. Demografske, socijalne, ekonomske I politike injenice, Sarajevo 2006 - Ebd./Osmankovic, Jasmina, Euroregije i BiH, Sarajevo 2009 - Pension reform and social protection systems in BiH, UNDP in BiH, Sarajevo 2007 - Perry, Valery, Democratic ends and democratic means: Peace implementation stratgies and international intervention options in Bosnia and Herzegovina, George Mason University 2006 (unpublished dissertation) - Pteri, Gbor (Ed.), Mind Your Own Business! Community Governance in Rural Municipalities, Budapest 2008 - Reents/Krger/Libbe, Dezentralisierung und Umweltverwaltungsstrukturen in Mittel- und Osteuropa, Deutsches Institut fr Urbanistik 2002 - arevi, Edin Dejtonski Ustav: Karakteristike i karakteristini problemi, Konrad- Adenauer-Foundation in BiH, Sarajevo May 2009 - Sebastin Aparicio, Sofia, State building in deeply divided societies. Beyond Dayton in Bosnia, London School of economics October 2009 (unpublished dissertation) - Shakarishvili, George (Ed.), Decentralization in health care, Budapest 2008 - Soos, Gabor/Zentai, Violetta (Ed.), Faces of Local Democracy, Budapest 2005 - Summary report on the findings of the survey on the implementation of the process of decentralization, OSCE Spillover monitor mission to Skopje, Skopje 2006 - Tausz, Katalin (ed.), The Impact of Decentralization on Social Policy, Budapest 2002 - The Ties That Bind - Social Capital in BiH, UNDP in BiH, Sarajevo 2009 - Wollmann, Hellmut, Reformen in Kommunalpolitik und verwaltung, Wiesbaden 2008 K-143 Municipalization Model
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ANNEX VI: BRIEF HISTORY OF MODEL AND CO-AUTHORS SHORT BIOGRAPHIES
The muncipalization model emerged following consultations with a host of BiH civil society figures. Based on popular frustrations with the Dayton constitutional system and its lack of representation, DPC Kurt Bassuener and Bodo Weber, with expertise in grass-roots democratization efforts began a research and development process aimed at creating a governance structure built around citizens needs and interests. Only with the direct election of mayors beginning in 2004 was this need even partially met in postwar BiH. Tony Levitas and Jasmina Djiki were sought out for their specialized knowledge on public expenditure and fiscal decentralization to model the economic impact of adopting this model of local self-governance. Coalition 143 assembled by BiH civil society actors following a long series of consultations and modifications of the original model. It was adopted in its current form by K-143 members the Center for Civic Cooperation (CGS-Livno), the Center for Governance and Constitutional Studies (CUUS), the European Research Center (EIC), and the Public Interest Advocacy Center (CPI) in 2014. K-143 began grassroots advocacy efforts in late 2013.
The model presented in this document was originally developed with the support of the Royal Norwegian Embassy in BiH, the Heinrich Bll Stiftung BiH, and the Open Society Foundation BiH. The model was supported by the Norwegian Embassy in 2009-2010, with Blls in-kind support. OSF BiH sponsored the financial analysis in 2010. All three supported the coalition-building effort which began in early 2011.
Kurt Bassuener is an independent policy analyst in Sarajevo, Bosnia-Herzegovina. He is co- founder and Senior Associate of the Democratization Policy Council (http://www.democratizationpolicy.org), a global initiative for accountability on democracy promotion. He has worked on Bosnia policy since 1997 (Balkan Institute, Balkan Action Council, US Institute of Peace, and Democratization Policy Institute) and resided in Sarajevo since 2005. He served as Strategy Analyst at the Office of the High Representative in 2005-6. He also co- authored (with Amb. Jeremy Kinsman) the Diplomats Handbook for Democracy and Development Support, a project of the Community of Democracies, the third edition of which was published in September 2013 (see http://www.diplomatshandbook.org). In his role as the projects Research Director, he authored, co-authored, or oversaw the research and writing of the Handbooks case studies. He has also contributed various analyses and opinion pieces to The Washington Post, The Christian Science Monitor, The International Herald Tribune, and other newspapers. He received his MA in European Studies at the Central European University K-143 Municipalization Model
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in Prague in 1994, having previously earned his BA in International Relations at America Universitys School of International Service in 1991.
kbassuener@democratizationpolicy.org
Bodo Weber is a Senior Associate of the Democratization Policy Council (DPC). He is a longtime analyst of international policy, Western Balkans policy and society and German foreign policy.
He also works as a political consultant for political foundations and international organizations in Germany and the Balkans. In the 1990s, he worked as an editor with Perspektiven (Frankfurt/Main), a journal, and served as a board member of the Bosnien- Bro Frankfurt. He has published numerous articles and analytical papers on politics and societies in the Balkans, on post-conflict peacebuilding, democratization and German foreign policy. He has published articles and OpEds in various journals and papers such as Die Zeit, Internationale Politik, Democracy and Security in Southeast Europe et. al. and regularly appears as a commentator in Southeast European media such as Blic, Koha Ditore, BH Oslobodjenje, Al Jazeera Balkan. He is the author of The crises of the Bosnian-Herzegovinian universities and the perspectives of junior scholars, Friedrich-Ebert-Stiftung, Sarajevo 2007 and a co-author of the Bosnia security study Assessing the potential for renewed ethnic violence in Bosnia-Herzegovina (Sarajevo 2011). Weber has an MA in political science from the Johann- Wolfgang-Goethe-University in Frankfurt/Main. He lives in Berlin.
bweber@democratizationpolicy.org
For the last twenty years, Tony Levitas has been providing analytical and political advice on local government reform to elected officials and civil servants in post-communist Europe. In general, he helps policy makers decide what responsibilities sub-national governments should have and where they should get the money to pay for them. In particular, he provides support in designing predictable, adequate, and equitable transfer systems; in developing sound rules for local government taxation, budgeting, investment planning, and financial reporting; and in creating and regulating municipal debt markets. He has also worked extensively on school management and finance. Tony has been instrumental in developing and implementing local government reform programs in Poland, Macedonia, Serbia, Bosnia and Herzegovina, and Albania. He has also worked in Ukraine, Turkey, Mongolia, Georgia and Armenia. In Poland, where has lived for most of the past two decades, he has been deeply involved with the decentralization of primary and secondary education and until recently served as Research Director of the Ministry of Education's Local Government School Management unit.
tony.levitas@gmail.com K-143 Municipalization Model
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Jasmina Djiki is a public finance expert with 15 years experience on public finance in BiH. She currently is the Municipal Finance Advisor at the Growth-Oriented Local Development (GOLD) project, funded by USAID. Her previous positions include being Long-Term Public Finance Expert with Human Dynamics, Public Finance Expert for the Public Interest Advocacy Center (CPI), Fiscal Policy Advisor with the USAID-SIDA-Netherlands-funded Government Accountability Project (GAP) from 2005-2012, and Public Finance Consultant with SIGMA. She received her Bachelor of Science in Economics from Moscow State University in 1996 and a Masters of International Management from Thunderbird in 1998.