State-Local Relationship and Fiscal Decentralisation in Mongolia

1. State-Local Relationship and Fiscal Decentralisation in Mongolia Financial Management and Policy TrainingNovember 11-12, 2010 Ulaanbaatar City-Mongolia 

2. Context Mongolia is set to introduce new Budget Law in place of earlier � Consolidated Budget Law Public Sector Financial Management Act Underline philosophy of proposed law seems to be giving More resources to local governments Clarifying expenditure assignments More citizens more say in preparation, implementation and monitoring of budgets of local governments Once put in place Mongolia will require massive capacity building of all stakeholders This presentation is about aspects, experiences and issues in state-local relationship

3. State Local Relations/Fiscal DecentralisationIssues faced by Mongolia Weak fiscal decentralization policy, operational mechanism Intergovernmental fiscal transfers fluctuate widely Lack of fiscal autonomy of local governments Highly centralized decision making Decisions of MUUB require approval of national government Unclear local expenditure assignment Inadequate linkage of local budget and local development policy Lack of local participation Lack of transparency Lack of accountability

4. State-local Relations/Fiscal Decentralisation Governance a evolutionary process Models of public sector management difficult to copy from one country to another Social �cloning� of governance reform a very difficult task Principles and learning about practical problems encountered or likely to encountered are more important

5. State-local Relations/Fiscal Decentralisation State-local relations is an unsettled phenomena and changes from time to time Uneven development of local governments throughout the history, most recently in transitional economies Rapid and successful development in East-Central Europe � (Poland, Hungary, Czechoslovak) LG seen as a way to both break-down the monopoly power of the communist state and to build --from the bottom up-- a new political order. Way back during 1882 � 1920 Indian Freedom struggle looked at LG as a way get independence Slow in FSU countries and disintegrated Yugoslavia

6. What viable Local Governments must have? Legal identities and the right to enter into contracts in their own name. The right to own property as well as the actual ownership of at least some of the publicly-owned land and buildings located in their jurisdictions. Administrative independence, including the right to hire and fire their own personnel and to have their decisions subject to review by higher level authorities only with respect to their legality and not their substance. Clearly defined expenditure assignments (functional domain) Clearly defined responsibilities for the management and finance of public services. Independent budgets with adequate, predictable, and transparent own revenues. (fiscal domain) Adequate, predictable and transparent intergovernmental fiscal transfer system (shared taxes/general/tide grants)

7. Issues in giving LG what they must have.. All these prerequisites can be summed up as � Functional Domain � what should LG do? Fiscal Domain � how should they get money to do what they should do? All prerequisites of viable LGs are problematic, contentious, unresolved India after 60 years of independence yet to resolve them Inevitably influenced by historical, demographic, topographical and cultural aspects Giving functions (power/autonomy) need political will & commitment as well as technical solutions Lack of capacity at local government level Many Governance functions in practice are shared and not exclusive to particular level of government � health, education

8. Issues in giving LG what they must have.. Giving revenues to the LG suffers from Shortage of resources �structural adjustment program� conditions Difficulties in determining how much money should be given to LG Equal to what national government was spending or will be required to spend if it performs the function But it is never fiscally neutral as quality of public services and institutions associated with are unevenly distributed Functions and resources to be devolved to LGs differ from country to country

9. Issues in giving LG what they must have.. Basic mechanism to give money to LG Own Revenues Shared Taxes Earmarked or Categorical Grants General Grants Countries use all above mechanisms to give money to LG but there exist huge variation in their proportion and potential Ideally maximum revenue should come from own revenue But very few high yield taxes that can reasonably be made into true local government taxes and one such tax � property tax has not been utilised by LG In transitional economies 15 to 35 % is the share of own revenue, but same is case with developing economies

10. Examples of State-Local Relationship & IGFT from transitional economies As a reaction to earlier system many countries in Europe decided to make every settlement an independent local government Mechanism of grants was avoided being both inherently political and as a distasteful form of dependency. IGFT was structured around shared taxes - % of wage tax

11. Lessons State local relationship including IGFT is not a legal exercise Must evolve from empirical efforts to model financial results of different permutations and combinations. State-local relations and fiscal decentralisation is a iteration process, one should not wait for ideal structure to evolve but should get started The functions and finance that local governments should be assigned will differ from country to country and overtime. Local government developed successfully where there was a clearly stated goal of creating politically, juridically and financially independent local governments.

12. Lessons The rules governing what local governments are responsible for, and how they should be financed should be clearly stated in framework legislation. Real challenges starts from the point new state-local relation /fiscal decentralisation is put in place as its success and further evolution depends on capacity building of all the stakeholders

13. Draft Budget Law of Mongolia

14. Draft Budget Law of Mongolia A22 � Budget Revenue A 22.6 Aimag and Capital City Budget Tax revenues � City resident�s tax Urban planning tax Land fee Immovable property tax Vehicle and self movable carriage tax and Taxes on salary remuneration, incentives and income from employment equivalent to them A 22.7 Aimag and Capital City Budget non-tax revenue Dividends from partly locally owned enterprises for the share of local property Capital charges for the usage of local property and sales revenue

15. Draft Budget Law of Mongolia A 22.8 � Soum and District Budget�s Tax Revenue Personal income taxes other than articulated by provisions 8.1.1 of the Tax Law Gun fee, state stamp fee, hunting fee License fee for exploitation of natural resources Fee on natural plants, timber fee Fee onuse of widespread mineral resources Fee on usage of water and spring water Income tax of self-employed person whose income is not predictable for a certain time period A22.9 � Soum and District Budget�s Non-tax Revenue Dividends from partly locally owned enterprises for the share of local property Capital charges for the usage of local property and sales revenue

16. Draft Budget Law of Mongolia Chapter Nine � Local Budget Relations A52 � Fiscal Relations between budget levels Three types of Transfers

17. Draft Budget Law of Mongolia A 52.3 provides for reasons for which transfers can be withhold A 53.2 � local budget should not have deficit A 53.4 � Aimag and Capital City can give temporary loans to Soum and District A 53.5 � prohibits local government to obtain or to issue or guarantee loan except to finance seasonal revenue shortage

18. Draft Budget Law of Mongolia A 54.1 � functions to be implemented with aimag and capital city budgets Aimag and Capital city management and administration Capital maintenance of locally owned assets Social care and welfare activities Programs to support employment and poverty alleviation Development of SME Improvement of pasture management and provision of livestock Fight of infectious livestock and animal diseases Generating livestock fodder reserves Pasture Management

19. Draft Budget Law of Mongolia Water supply, sewerage and drainage systems, housing and public utility services and urban planning Flood protection Public transport services Environmental protection Local road maintenance service Other functions as defined in the law

20. Draft Budget Law of Mongolia

21. Draft Budget Law of Mongolia

22. Draft Budget Law of Mongolia A 57 Ensuring community participation Bagh and Khoroo conduct open survey of people to know programs, projects to be under taken in Bagh and Khoroo from local deve fund The results of open survey to be discussed in kurals of khoroo and bagh�s citizens for prioritization and selection Soum and District Governor�s office shall prioritize proposal presented by the khoroo and Bagh�s citizens� Khurals and submit it to Soum and District�s Citizens� Representative Khural Soum and District�s Khural shall discuss and approve the proposals A 58 provides for Citizens� Representatives� Assemblies

23. State-Local Relationship Fiscal Decentralisation Thank You