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									      State-Local Relationship and
Fiscal Decentralisation in Mongolia

                                Dr. Ravikant Joshi

               Financial Management and Policy Training
                                 November 11-12, 2010
                              Ulaanbaatar City-Mongolia
l   Mongolia is set to introduce new Budget Law in place of
    earlier –
    ¡   Consolidated Budget Law
    ¡   Public Sector Financial Management Act
l   Underline philosophy of proposed law seems to be
    ¡   More resources to local governments
    ¡   Clarifying expenditure assignments
    ¡   More citizens more say in preparation, implementation and
        monitoring of budgets of local governments
l   Once put in place Mongolia will require massive capacity
    building of all stakeholders
l   This presentation is about aspects, experiences and
    issues in state-local relationship
State Local Relations/Fiscal Decentralisation
Issues faced by Mongolia
l   Weak fiscal decentralization policy, operational
    ¡   Intergovernmental fiscal transfers fluctuate widely
l   Lack of fiscal autonomy of local governments
    ¡   Highly centralized decision making
    ¡   Decisions of MUUB require approval of national
        government                                               Proposed
l   Unclear local expenditure assignment                       Budget Law
                                                               of Mongolia
l   Inadequate linkage of local budget and local              is an attempt
    development policy                                          to address
l   Lack of local participation                               these issues

l   Lack of transparency
l   Lack of accountability
State-local Relations/Fiscal Decentralisation

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

 l   State-local relations is an unsettled phenomena
     and changes from time to time
 l   Uneven development of local governments
     throughout the history, most recently in
     transitional economies
     ¡   Rapid and successful development in East-Central
         Europe – (Poland, Hungary, Czechoslovak)
          l   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.
          l   Way back during 1882 – 1920 Indian Freedom struggle
              looked at LG as a way get independence
     ¡   Slow in FSU countries and disintegrated Yugoslavia
    What viable Local Governments must
l   Legal identities and the right to enter into contracts in their
    own name.
l   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.
l   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.
l   Clearly defined expenditure assignments (functional domain)
l   Clearly defined responsibilities for the management and
    finance of public services.
l   Independent budgets with adequate, predictable, and
    transparent own revenues. (fiscal domain)
l   Adequate, predictable and transparent intergovernmental
    fiscal transfer system (shared taxes/general/tide grants)
Issues in giving LG what they must have..

l   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?
l   All prerequisites of viable LGs are problematic,
    contentious, unresolved
    ¡   India after 60 years of independence yet to resolve them
l   Inevitably influenced by historical, demographic,
    topographical and cultural aspects
l   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
Issues in giving LG what they must have..

l   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
         l   Equal to what national government was spending or will
             be required to spend if it performs the function
         l   But it is never fiscally neutral as quality of public services
             and institutions associated with are unevenly distributed
l   Functions and resources to be devolved to LGs
    differ from country to country
Issues in giving LG what they must have..
l   Basic mechanism to give money to LG
    ¡   Own Revenues
    ¡   Shared Taxes
    ¡   Earmarked or Categorical Grants
    ¡   General Grants
l   Countries use all above mechanisms to give money to
    LG but there exist huge variation in their proportion and
l   Ideally maximum revenue should come from own
l   But very few high yield taxes that can reasonably be
    made into true local government taxes and
l   one such tax – property tax has not been utilised by LG
l   In transitional economies 15 to 35 % is the share of own
    revenue, but same is case with developing economies
Examples of State-Local Relationship &
IGFT from transitional economies
l As  a reaction to earlier system many
  countries in Europe decided to make every
  settlement an independent local
l Mechanism of grants was avoided being
  both inherently political and as a
  distasteful form of dependency.
l IGFT was structured around shared taxes
  - % of wage tax
l   State local relationship including IGFT is not a legal
l   Must evolve from empirical efforts to model financial
    results of different permutations and combinations.
l   State-local relations and fiscal decentralisation is a
    iteration process, one should not wait for ideal structure
    to evolve but should get started
l   The functions and finance that local governments should
    be assigned will differ from country to country and
l   Local government developed successfully where there
    was a clearly stated goal of creating politically, juridically
    and financially independent local governments.

l The   rules governing what local
  governments are responsible for, and how
  they should be financed should be clearly
  stated in framework legislation.
l 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
Draft Budget Law of Mongolia
Draft Budget Law of Mongolia
l   A22 – Budget Revenue
    ¡   A 22.6 Aimag and Capital City Budget Tax revenues –
         l   City resident’s tax
         l   Urban planning tax
         l   Land fee
         l   Immovable property tax
         l   Vehicle and self movable carriage tax and
         l   Taxes on salary remuneration, incentives and income
             from employment equivalent to them
    ¡   A 22.7 Aimag and Capital City Budget non-tax revenue
         l   Dividends from partly locally owned enterprises for the
             share of local property
         l   Capital charges for the usage of local property and sales
Draft Budget Law of Mongolia
  ¡   A 22.8 – Soum and District Budget’s Tax Revenue
       l   Personal income taxes other than articulated by
           provisions 8.1.1 of the Tax Law
       l   Gun fee, state stamp fee, hunting fee
       l   License fee for exploitation of natural resources
       l   Fee on natural plants, timber fee
       l   Fee onuse of widespread mineral resources
       l   Fee on usage of water and spring water
       l   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
       l   Dividends from partly locally owned enterprises for the
           share of local property
       l   Capital charges for the usage of local property and sales
Draft Budget Law of Mongolia

l Chapter Nine – Local Budget Relations
l A52 – Fiscal Relations between budget
     ¡ Three      types of Transfers

   Financial Support         Revenue Transfers       Special Purpose Subsidy
Financing basic budget      Implementation of its    For development needs
  Deficit of lower level   Investment, programs,      of capital city & towns
 Budget (local budget)     Projects and Activities

                            Lower Level Budget
                               Local Budget
Draft Budget Law of Mongolia

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

l   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
    ¡   Fight of infectious livestock and animal diseases
    ¡   Generating livestock fodder reserves
    ¡   Pasture Management
Draft Budget Law of Mongolia
  ¡ Water  supply, sewerage and drainage systems,
    housing and public utility services and urban
  ¡ Flood protection

  ¡ Public transport services

  ¡ Environmental protection

  ¡ Local road maintenance service

  ¡ Other functions as defined in the law
  Draft Budget Law of Mongolia
      Article 55 provides for constitution of General Local Development Fund

  30% of VAT of       Grants, Donations by      Basic Budget Surplus
 goods & services       Non-government          of lower level budget
 Imports excluded     Organisation & foreign     transferred to upper
                       Aids for local develo         Level budget

                       General Local Development Fund        Four Indicators for defining
                                                             Transfer from fund
                                                             1. Development Index
Methodology of transfer to be
                                                             2. Population
 Finalised by Government                                     3. Population Density,
                                                             remoteness & size
                            Aimag and Capital City           4. Tax Initiative

   Soum and District to get 60% of funds received by their Aimag or Capital City
   Draft Budget Law of Mongolia
Article 56 provides for constitution of Local Development Fund by Local Governments
                           For supporting local development.

  Transfers from      Grants, Donations by     Basic Budget Surplus    Additional Sources
  General Local         Non-government         of lower level budget   Generated by Tax
 Development Fund     Organisation & foreign    transferred to upper   Increase & saving
                       Aids for local develo        Level budget          expenditure

                             Local Development Fund

A 56.3.1 to 56.3.6 - Funds from local fund can not be spent on
Programs & activities not articulated in the law
Local self governing and administrative body, political parties and NGOs
Holidays, festivals, anniversary celebration and religious events except national festival
Activities that are not in common interest of public
Issue loans, guarantees with financial consequences for covering of loss or damages
Expenditure not reflect local community opinions, not supported by Majority
Draft Budget Law of Mongolia
l   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
    ¡   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
l   A 58 provides for Citizens’ Representatives’
State-Local Relationship
 Fiscal Decentralisation
               Thank You

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