Sustainable Sustainable Decentralization in Croatia:Decentralization in Croatia: CCross Cutting Issuesross Cutting Issues

The World Bank

IntroductionIntroduction(Comparative Size of Local Governments)(Comparative Size of Local Governments)

Fig. 1.1-Local Government Expenditures as a share of General Gov. Spending

111212

1617

192020

2222

242525262727

303031

343435

3740

4244

59

0 5 10 15 20 25 30 35 40 45 50 55 60 65

Slovenia (2003)Slovak RepublikCroatia (2001)Albania (1998)

Romania (2001)France (2002p)Bulgaria (2002)

Lithuania (2003)Azerbaijan (1999)

Czech Republic (2003)Kyrgyz rep. (2001)

Estonia (2002)Hungary (2002)Moldova (2002)

United Kingdom (2002)Latvia (2003)

Italy (2000)Ukraine (2001)

Tajikistan (2001)Netherlands (2002)

Poland (2002)Georgia (2001)Finland (2001)Belarus (2002)

Kazakhstan (2002)Sweden (2001)

Denmark (2002)

IntroductionIntroduction(the administrative structure)(the administrative structure)

Central Government 20 (de-concentrated) offices of State

administration in the Counties + ministries and autonomous agencies

21 Counties*** (4.4 million inhabitants)

[Second/intermediate Level Self-Government]

124 Towns* (3 million inhabitants)***

[First Level Local Self Government]

426 Municipalities** (1.4 million inhabitants) [First Level Local Self-

Government]

* Urban communities, in general more than 10 ths. inhabitants ** Communities of less than 10 ths. inhabitants (mostly rural) *** Includes the City of Zagreb, 780 ths. inhabitants Data source: “Statistical Yearbook”, Central Bureau of Statistics, Zagreb

IntroductionIntroduction II II(fragmented local administrative units)(fragmented local administrative units)

Czech Republic: Local Self-Govt. Population Distribution

0.05.0

10.015.020.025.030.035.040.045.050.0

<.3 .3-1,5 1,5-5,0 5,0-10 10-20 20-50 50-100 100-200

Prague

Self-Govt. Unit size [in ths.]

Per

cent

age

of to

tal

% distr. Self-Gvt. Units

% distr. Population

Croatia: Local Self-Govt. Population Distribution

0.0

5.0

10.015.0

20.0

25.0

30.035.0

40.0

45.0

<1,0 1,0-3,0 3,0-5,0 5,0-10 10-15 15-50 50-100 100-200

>200

Self-Govt. Unit size [in ths.]

Per

cent

age

of to

tal %distr.Local Self-Govt. Units

% distr. Population

Albania: Distribution of Population and Sef-Gov. Units

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

< .3 .3 - .5 .5 - 1.0 1.0 -1.5

1.5 -2.0

2 - 5 5 - 10 10 - 50 50 -100

100-500

Sef-Gov. Units (in ths.)

Per

cent

of

tota

l

% distr.Self-Governing Units

% distr. Population

IntroductionIntroduction II II(fragmented local administrative units)(fragmented local administrative units)

Netherlands : Population and Local Self Government Distribution,

2004

0

5

10

15

20

25

30

35

40

45

50

<1,0 1,0-3,0 3,0-5,0 5,0-10,0 10,0-25,0 25,0-50,0 50,0-100,0 100,0-200,0

200,0+

Population Size

Per

cent

of T

otal

% distrib. of LG

% distrib.of population

France: Population and Local Self Government Distribution,

2004

0

10

20

30

40

50

60

70

80

90

<1,0 1,0-3,0 3,0-5,0 5,0-10,0 10,0-25,0 25,0-50,0 50,0-100,0 100,0+

Population Size

Perc

ent o

f Tot

al % distrib. of LG

% distrib.of population

Denmark: Local Self Government and Population Distribution

0

5

10

15

20

25

30

35

40

45

<1,0 1,0-3,0 3,0-5,0 5,0-10,0 10,0-25,0

25,0-50,0

50,0-100,0

100,0+

LGUs size (In ths)

Per

cen

t., o

f T

ota

l

% distrib. of LG

% distrib.of population

England: Local Self Government and Population Distribution

05

1015

2025

3035

4045

50

<1,0 1,0-3,0 3,0-5,0 5,0-10,0

10,0-25,0

25,0-50,0

50,0-100,0

100,0-200,0

200,0+

LGUs size (In ths)

Per

cen

t o

f T

ota

l

% distrib. of LG

% distrib.of population

IntroductionIntroduction (Change in the number of LG units in selected EU countries)

Country

Number of Municipalities in

1950

Number of Municipalities to

date Change

Lithuania 581 1996 56 -90%

Sweden 2,281 1992 289 -87%

Denmark 1,387 2002 271 -80%

Belgium 2,669 2002 589 -78%

Great Britain 2,028 1999 467 -77%

Netherlands 1,015 2004 483 -48%

Germany 25,930 1994 14,808 -43%

Austria 3,999 1992 2,301 -42%

Norway 744 1992 439 -41%

Finland 547 1993 455 -17%

Spain 9,214 2002 8,082 -12%

Latvia (1990) 570 2002 542 -4%

France (1945) 38,814 2004 36,729 -5%

Switzerland 3,097 2001 2,880 -7%

Italy 7,781 1999 8,099 +4%

Czech Republic (1990) 4104 1994 6,230 +51%

Introduction IIIIntroduction III(Structure of local revenue)(Structure of local revenue)

Composition of Subnational Government Revenues (country comparison-data 2001/3)

Own-Taxes

Tax-Sharing

General Purpose

Specific Purpose

Czech Rep. 3.9 43.8 36.3 0.0 16.0 100.0Hungary 16.3 16.8 17.0 1.7 48.2 100.0Poland 10.6 14.4 24.6 30.5 19.9 100.0Estonia 6.3 62.1 9.1 13.4 9.1 100.0Latvia 0.0 66.2 14.1 5.8 13.9 100.0Lithuania 0.0 91.0 4.8 2.3 1.9 100.0Bulgaria 0.0 47.1 13.4 32.4 7.1 100.0Romania 6.1 64.1 14.9 0.0 14.9 100.0Slovenia 10.6 49.4 17.5 15.9 6.6 100.0Slovak Rep. 22.8 39.5 19.3 0.0 18.4 100.0Average 7.7 49.4 17.1 10.2 15.6 100.0Croatia 1 3.0 53.0 29.0 0.0 15.0 100.0Sources: Ebel, R. D & S. Yilmaz, On the Measurement and Impact of FiscalDecentralization, WBI, 20021 World Bank staff estimates based on Dubravika J. Alibegovic (2004, table 8)and EIU.

Country

Composition of sub-national revenuesTax revenue

Non-tax Revenue

GrantTotal

Croatia: allocation of shared taxesCroatia: allocation of shared taxes

Percentage of collection allocated to:

State County Local Equaliza-tion Fund

Decentra-lization Fund

PIT 25.6 10.0 34.0 21.0 9.4(56.0) (10.0) (34.0) 0.0 0.0

CIT 70.0 10.0 20.0 0.0 0.0

Real estate transaction tax 40.0 0.0 60.0 0.0 0.0Numbers in parenthesis reflect the situation before the 2001 reformSee footnotes at Table III.3

National Tax

Croatia, Distribution of Shared Taxes (2001 reform)

Croatian DecentralizationCroatian Decentralization(Cross Cutting Issues)(Cross Cutting Issues)

I —Achievements since 2001

II —Main Current Challenges

III—The ways ahead: strategic directions

IV—Building Blocks for Policies and Inst. Reforms: Definition of responsibilities, and the legal and

administrative frameworks Intergovernmental fiscal relations and incentives to perform Capacity building, accountability and fiduciary management

I—Achievements Towards Decentralized I—Achievements Towards Decentralized Administrative Structure in CroatiaAdministrative Structure in Croatia

The achievements:• Major decentralization push in 2001 (education, health, social

assistance)• Legal framework broadly in line with LG European Charter • Local surtax piggybacking the national shared PIT• Allocation of shared PIT according to residence of taxpayer• Assignment of responsibilities according to delivery capacity• Establishment of a consultative “Decentralization Commission” at the

State Administration Central Office (2004)

Main message:The decentralization process in Croatia is neither complete nor sustainable yet, and important challenges on IFR have to be resolved for an efficient and effective public service delivery.

II—The Main Challenges on:II—The Main Challenges on:

1 Legal framework

2 Administrative structure

3 Functional responsibilities and competences

4 Revenue Assignment

5 Fiscal imbalances and the transfer system

6 Access to borrowing, indebtedness, and debt management

7 Autonomy, transparency and the accountability framework

Challenges on the legal Challenges on the legal frameworkframework

a. Overly complex and still incomplete

b. Inadequate implementation

Challenges on the Challenges on the Administrative StructureAdministrative Structure

a. Fragmented administrative structure and uneven capacity

b. Dual subordination of SNG executive authorities

c. Inadequate “supervisory” and “conflict resolution” mechanisms

d. Unregulated SNG civil service

e. Weak intergovernmental coordination and cooperation

Challenges on Functional Challenges on Functional Responsibilities and CompetencesResponsibilities and Competences

a. Unclear definition of responsibilities and inadequate incentives

b. Inefficient expenditure allocation

c. Inadequate criteria for setting minimum service delivery standards

Challenges on the Revenue Challenges on the Revenue AssignmentAssignment

a. Inadequate revenue autonomy

b. Ineffective non-tax revenue and real estate taxation

c. Inequitable profit tax sharing mechanism

d. Considerable disparities in revenue capacity

Challenges on Fiscal Imbalances Challenges on Fiscal Imbalances and the Transfer Systemand the Transfer System

a. Unpredictable transfer systemb. Complex and ineffective central

“controls”c. Limited scope and perverse incentives of

the equalization transfer systemd. Lack of transparency on capital

investment transfers

Challenges on the Access to Borrowing, Challenges on the Access to Borrowing, Indebtedness, and Debt ManagementIndebtedness, and Debt Management

a. Majority of SNG hardly are creditworthy, but high indebtedness on account of contingent liabilities, arrears, and off-budget operations

b. Underdeveloped municipal capital marketc. Unsystematic and unreliable SNG debt

management

Challenges on Autonomy, Transparency Challenges on Autonomy, Transparency and the Accountability Frameworkand the Accountability Framework

a. Autonomy and transparency are lowb. Fiscal reporting system unreliablec. Lack of monitoring system for public

service deliveryd. Weak citizen participation and vulnerable

accountability framework

III—Ways AheadIII—Ways Ahead

AA - - Strategic DirectionsStrategic Directions Completion of reforms initiated in 2001, by specifying responsibilities, Completion of reforms initiated in 2001, by specifying responsibilities,

enhancing local decision-making, and improving accountabilityenhancing local decision-making, and improving accountabilityBB - - Principles underpinning the strategyPrinciples underpinning the strategy

Commensurate resource to follow functional decentralizationCommensurate resource to follow functional decentralization Local authorities empowered by incentives (and sanctions) to perform, Local authorities empowered by incentives (and sanctions) to perform,

and made accountable to citizensand made accountable to citizens IGF relations be predictable, promote hard budget constraints, and IGF relations be predictable, promote hard budget constraints, and

encourage effective and efficient service deliveryencourage effective and efficient service deliveryCC - - Fundamental Institutional ArrangementsFundamental Institutional Arrangements

““Decentralization and Local Governance Strategy”Decentralization and Local Governance Strategy” A standing “Inter-Minist. Steering Committee on Local Governance”A standing “Inter-Minist. Steering Committee on Local Governance” A permanent “Technical Secretariat” on decentralization A permanent “Technical Secretariat” on decentralization

IV—Policy & Inst. Reforms-Building Block 1:IV—Policy & Inst. Reforms-Building Block 1:(Definition of responsibilities, legal and administrative

framework)a. Assigning functional responsibilities clarifying specific responsibilities and authority to perform establishing proper incentives to increase efficiency setting up service standards based on outcome/output & measurable

perform. criteria

b. Rationalizing the legal framework streamlining and consolidating regulations drafting secondary legislation stabilizing intergovernmental fiscal relations

c. Enhancing the administrative structure fixing up supervision and conflict resolution mechanisms eliminating dual-subordination of local executive authorities regulating the status of SNG civil servants and employees addressing inefficiencies from the fragmented SNG

administrative structure

IV—Policy & Inst. Reforms-Building Block 2:IV—Policy & Inst. Reforms-Building Block 2:(Intergovernmental fiscal relations & incentives to perform)

a. Improving revenue autonomy discontinuing profit tax sharing on a derivation basis streamlining local non-tax revenue legislation adopting a well-designed property tax as a local tax

b. Mitigating fiscal imbalances eliminating bureaucratic rigidities & empower local authority increasing transparency and efficiency on capital grants broadening scope of equalization grants

c. Accessing capital markets responsibly strengthening debt management and monitoring systems developing institut. framework and strengthening prudential rules enhancing regulation for SNG to access borrowing

d. Improving conditions for absorption of EU funds encouraging municipal capital market (Laws: Bankruptcy, Fiscal

Responsibility) rationalizing the fragmented administrative units

IV—Policy & Inst. Reforms-Building Block 3IV—Policy & Inst. Reforms-Building Block 3::(Capacity building, accountability and fiduciary (Capacity building, accountability and fiduciary

management)management)

a. Promoting capacity building encouraging on-the-job training in tandem with decentralization adopting a uniform national training strategy for SNG

b. Establishing a consistent accountability framework

eliminating unfunded mandates and ensuring macroeconomic consistency (through hard budget constraints)

strengthening report and evaluation systems (incl. internal and external audit)

promoting bottom up pressure mechanisms

c. Monitoring the decentralization process enhancing Government capacity on collecting, evaluating and

disseminating SNG key performance indicators.

Thank YouThe World Bank