Chisinau Financing Capital Governments 09.06.08

7/27/2019 Chisinau Financing Capital Governments 09.06.08

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Financing Capital Governmentsin Transitional Countries: the

case of ChisinauMihai Roscovan and Doina Melnic

1



1. Introduction

Historical Background

Chisinau is the political, economic, scientific, cultural and educational centre of the

Republic of Moldova. With its 18.3% share in the total population of the country, its

contribution to the GDP is close to 50%. Unemployment rates in the capital are

lower, while average monthly wages and pensions are higher that in the country. As

it concentrates considerable shares of country’s potential and economic

development leviers, Chisinau plays the role of a strategic urban centre of this

country. Therefore, it has a particular importance in setting up higher business

efficiency and regional economic development standards as well as regional and

global integration of the country.

Table 1 -

The Role of Chisinau in Republic of Moldova (2005)Indicator R.

MoldovaChisina

uShar

ePopulation,Thousand 3936 718 18%

Territory, Sq.km 33846 572 2%Density, Ths hab/Sq.km 116 1256 10.8GDP nominal, Mil Euro 2401 1051 44%GDP per capita, Euro 710 1464 2.1FDI, Mil Euro 163 104 64%FDI per capita, Euro 48 145 3.0SMEs, Ths 30.0 20.8 69%Budget revenues, Mil

Euro

575 83 14%

Source: Statistical Yearbook of the Republic of Moldova 2006, Statistical Yearbook: Chisinau infigures, 2006Note: The economic figures for Republic of Moldova are presented without the Transnistrian

regions

The city has developed over the last six centuries mainly due to external

geographic and political factors. Internal economic relations have had in our opinion

insignificant impacts on its evolution. The location of Chisinau between East and

West has influenced its vocation, status, goals, and spatial organization, and

architectural design, social, political, cultural and business environments.

The genesis of Chisinau as a city was determined by an external political act – theannexation of Bessarabia by Russia in 1812. The following 100 years have meant

for Chisinau a development from a 5,000 inhabitant rural and peripheral commune

to one of the largest urban centers in Eastern Europe. By the end of the XXth

century Chisinau population reached and exceeded the historical capital of Moldova

(Iasi), as well as several important European cities (Bratislava, Zagreb, Ljubljana)

and became the fifth largest city in Russia.

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After World Was II, as Bessarabia was annexed for a second time to the Soviet

Union, Chisinau became the capital of the newly formed Soviet Socialist Republic of

Moldova. Between 60ies and 80ies Chisinau has evolved a high speed and became

an important Soviet-type industrial city. It was strongly integrated in the Soviet

space and at the same time isolated from Europe, both in terms of economy and

infrastructure. Chisinau status of Soviet republican capital had a positive impact onits dynamic and scale development. However, many of these were rather unrelated,

unsynchronized and uncorrelated to the development of the Moldovan province. As

a result, the Republic of Moldova had a mega-capital polarizing in absolute terms

the national territory. Chisinau has concentrated progressively the largest share of

national resources and transition outcomes have widened the gap between the

capital and the province.

After the declaration of independence in 1991 and the adoption of the Constitution

in 1994, Chisinau city has been awarded the status of municipality. Thus 34

localities are included in the municipality now. They cover an area of 175 square km

and a population of over 60 thousand inhabitants.

Figure 1 - City and sub-city population dynamics, 1990-2005

0

100

200

300

400

500

600

700

800

900

Sub-sity 22.6 79.1 117.3 124.1

City 729 661.5 663.4 593.8

1990 1995 2000 2005

The city of Chisinau is in the beginning of the XXI century a European regional city

performing the functions of a small South-Eastern European state capital, located in

a area of maximum geo-political, financial, economic, cultural and communicationconvergence between Euro-Atlantic and Euro-Asian spaces.

Regionally, the city of Chisinau has limited international influence, a vast deficit of

metropolitan services and underdeveloped international functions. The most

important regional transportation, financial and informational flows avoid Chisinau

as they pass through Bucharest (West), Odessa (South), Lviv (North).

3



From the prospective of Republic of Moldova’s integration into the European Union,

Chisinau might become a regional centre of influence and benefit from new

cooperation opportunities with similar regional metropolis.

Demographic, economic and social processes

Demographic and migrational trends. At the beginning of 2006, the city of Chisinau had a population of 717.9 thousand people. Of these, 90.4% live in urban

areas and the rest in rural communities. The urban population of Chisinau stands for

49.2% of the total urban population in Moldova.

Before 1990 the population of Moldova has significantly increased and tripled over

30 years. Key reasons included industry boost on one side and migration processes

encouraged in the Soviet period. Between 1990 and 2005 the number of inhabitants

has not changed and increased by only 0.03%. Between 1990 and 2000 the number

of population continued to grow, although growth rhythm has decreased (0.39% peryear). After that, due to several factors and especially overseas migration1 the

increase was negative at 0.88% per year.

Figure 2 - Population dynamics, 1900-2005

0

100

200

300

400

500

600

700

800

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2005

Year

t h s

h a b i t

a n t s

However, the dynamics and the structure showed noticeable changes, in terms of

residence areas, age and gender. Thus, the dynamics of the rural population was

the highest and grew by a yearly average of approximately 11.5% while urban

1 According to the study ‘Migration and remmittances in the Republic of Moldova’, producedby CBC AxA, over 57,000 inhabitants of Chisinau have been or are currently workingabroad.

4



population of the city grew by 1.1%. The most important decrease of population

took place in the town of Chisinau with an average of approximately 0.64% per

year. As a result of the area growth and rural population increase, between 1990

and 2006 the share of urban inhabitants decreased from 97% to 90.4%.

Figure 3 - Rural and urban population, 1990-2005

600

620

640

660

680

700

720

740

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 5

Years

U r b a n

h a b i t a n t s

0

10

20

30

40

50

60

70

80

R u r a l H a b i t a n t s

Urban Rural

Gender structure could be qualified as unbalanced, with male inhabitants standing

for 46.6%. The difference between gender shares is significant at 6.9%. When

combining gender and age criteria, the difference is even more striking. The generalthe share of male population was 87.6 men per 100 women in 2005. This

disproportion grows wider with age. However the most important gap is in

economically active age groups. Most probably, men’s higher mobility is the key

reason for this.

Currently the age structure of Chisinau population is favorable, with a significant

share of economically active people and therefore the demographic burden

indicators are still low compared to the rest of the country. At the same time, the

transition period led to loss of jobs and an increase in unemployment rates. As a

result, over one quarter of Chisinau active population is believed to have migrated

abroad in search of jobs.

The reduced birth rate in the 90ies led to a considerable decrease in 10 years old

children group ages. Although an increase birth rate is expected in the immediate

future, Chisinau internal demographic resources seem exhausted. This is a threat on

the long term, as the share of economically active population would be diminishing.

5



Economic development. The municipality of Chisinau is the largest economic

centre of Moldova, contributing to more than 45% of the GDP. In absolute

terms, GDP per capita in Chisinau is twice the value in the regions. In several

main areas of economic activity, such as trade, industry, services and

investments, the share of Chisinau is over 50%.

Figure 4 - GDP per capita: Chisinau vs. Moldova

769834

9981058

1153

1346

383455 485 485

580652

0

200

400

600

800

1000

1200

1400

2000 2001 2002 2003 2004 2005

Chisinau

Moldova

Chisinau business area comprises approximately 22 thousand companies employing

over 300,000 people (Table 1). The number of profitable enterprises in 2005

reached 37.6% of the total and was slightly lower than in previous years. At the

same time, the total volume of profits has significantly increased over the last two

years, 31% and 46% respectively. Small businesses stand for 96% of all business

entities submitting statistical data and for 25% of net sales, 38% of total employees

and 14% of gross profit.

Table 2 - Economic potential and structure of Chisinau, 2005

Nr.

Companies

Labour

(in

thousands

)

Sales

(in mil.

EURO)

Total SMEs Total SME

s

Total SMEs

Agriculture 211 196 5.3 1.5 19 8

Industry 2619 2444 73 22.6 721 133Energy 32 21 8.6 0.1 492 4Construction 1328 1264 19.6 9.8 229 102

Trade 9125 8872 62.3 37.4 2054 658 Transport and

communication

1524 1459 50 8.4 588 92

Other 6798 6554 81.1 33.5 356 118

6



TOTAL 21637 2081

0

299.

9

113.

3

445

9

1115

The tertiary sector, mainly commerce, transportation and communications, stand

for the major share in city’s economy with over 60% of gross sales and profit (Figure

3). Processing industry represents 16.2% of sales and 17.8% of profit.

Figure 5 - Share of sectors in Chisinau economy

Other

5%

Energy

11%

Industry

16%

Construction

5%

Transportation,

comunication

13%

Finance

3%

Trade

47%

Some of the main economic and social issues would include:

(i) the multitude of industrial zones with reduced activity in the city,including in central areas;

(ii) excessive concentrations of economic activities in the city centre;(iii) unbalanced labour force demand and offer, especially between urban and

rural areas.

The share of Chisinau city in foreign trade is significant at 58% of exports and 83%

of imports. In 2004 over half of all exports were for eastern markets and two-thirds

of total exports were in spirits, textiles and vegetable products. The excessive

concentration of exports in instable CIS markets and on a very narrow product

range is jeopardizing the stability of Moldova’s economic growth and makes it

vulnerable to external shocks. As a result of economic pressures, such as Russia’s

wine and vegetable products ban in 2005 and 2006, CIS countries tend to decreasetheir share in Moldova’ experts while EU and ECE increase theirs.

Between 2001 and 2005 direct investment increased 2.8 times. The main source for

investments is the private sector with approximately 83%, including 23% foreign

investments. State and local budgets share is approximately 8% and the rest is

represented by the population and bank loans. Over 60% of the investments made

were in manufacture; second and third largest were trade and infrastructure.

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Property deals stand for 23% of investments, transportation and communications

stand for 22%; processing industry for 19% and trade for 15%.

The Republic of Moldova is not yet an attractive destination for investments. FDI

was a difficult task with uneven results. In 2005 FDI per inhabitant in Chisinau

reached USD 180 or about three times the level of FDI per capita around thecountry. Taking into account the role and the functions of the capital city in this

country, as well as FDI per capita figures in other towns in the region (e.g. in

Odessa, FDI per capital in 2006 was USD 360), one can figure out that investment

opportunities are still unexplored.

Figure 6 - Foreign Direct Investment (2005) USD per capita

9200

8400

2400

360

180

150

120

0 5000 10000

Tallinn

Vilnus

Moscow

Odessa

ChisinauKiiv

Iasi

Social changes. Potential labor force in Chisinau municipality represents 529.4

thousand or approximately 74% of the total population. Economically activepopulation comprises 258.6 thousand people, of which 250.9 thousand are

employed (19% of the total per country) and 7.7 thousand registered

unemployed. The rest, 270 thousand people represent those who are

employed in the grey sector, non-registered unemployed, migrant workers

living abroad and other people temporarily incapable to work or changing

jobs.

Between 2001 and 2005 the number of employees increased by 14% while the total

labour force market per country has decreased. In 2006 unemployment in Chisinau

reached 8.3% or 0.9% above the average per country.2 Several categories directly

affected by unemployment can be identified: young people from socially vulnerablecategories, women re-joining the labour market after temporary absence for

parenting reasons, physically and mentally handicapped individuals, people lacking

permanent residences, individuals freed from penitentiaries and other social

rehabilitation institutions.

2 In 2006 National Bureau of Statistics has computed the unemployment rate for the firsttime according to ILO methodology.

8



Labour force emigration is one of the major factors influencing economic, social and

political development in Moldova. This is proven by the fact that almost 20% of the

able work force is said to be currently abroad and remittances in 2005 reached the

level of 30% of the GDP. Internal migration has one destination – Chisinau – and the

trend is dominant among young people, as the majority of young people is moving

to Chisinau if not abroad.

The sector distribution of the 250 thousand employees shows a dominance of the

processing industry, education, commerce, transportation/telecommunications

health protection and property transactions and local governments. The above

proves a relatively good distribution of work force use. These seven sectors cover

about 75.6% of total jobs.

Average monthly earnings in 2005 were EUR 113 representing a threefold increase

compared to 2001. The real increase in average earnings represented about 60%.

The lowest wages are in agriculture, education and health protection, usually twice

or three times lower than in the financial sector.

Figure 7 - Average income discrepancy in Moldova, 2000-2005, EURO/month

54

7077 79

98

113

35

4754 57

72

84

26

41 42 4044

57

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005

Average monthly salary in Chisinau Average monthly salary in Moldova

Subsistance minimum per pers on

Living standards are higher in Chisinau than in other areas of the country and still

lower than in other comparable European cities. According to the official statistics,

between 2001 and 2005, absolute poverty level incidence decreased from 30% to

5.9% and extreme poverty level from 17.2% to 2.3%. However the earning of the

majority of the population covers only 80% of the minimum subsistence. Still, the

largest share of expenses is food and housing bills, so that any increase in utilities

tariffs has significant consequences on living quality.

Figure 8 - Average monthly wage by sector, 2000-2005, Eur

9



123144

108

151

76

30

244

8181

90

0

50

100

150

200

250

300

F i n a n c e

M a n u f a c t u r i n g

i n d u s t r y

T r a n s p o r t

P u b l i c

a d m i n i s t r a t i o n

C o n s t r u c t i o n

C o m m e r c e

H o t e l a n d

r e s t a u r a n t

E d u c a t i o n

H e a l t h

P e n s i o n e r s

Average monthly salary/pension

Average m onthly salary in Chisinau

The only real prospect for rural inhabitants’ living standards is gradual increase in

personal income, on the basis of modernization and economic growth, as well as a

qualified and better paid work force.

There are factors influencing the low quality of living in Chisinau. Although there are

several recreation areas, the lack of relatively simple facilities, such as passages for

walkers and cyclists’ paths is still important.

Residential buildings in Chisinau, with approximately 270 thousand flats and 15.3

million sq. m. are relatively new compared to other towns in the region, but is not

enough to meet the requirements of all inhabitants. In average, about 90% of thefamilies in the capital city have flats, with about 19.6 sq. meters per person and the

average flat size of 56 sq. meters.

At the same time, over 60,000 families are registered to be in need of an apartment

or home improvement. The residential sector is over-populated, as statistics shows

1.6 persons per one bedroom and 15% of the flats being shared by 2 or 3 families.

Thousands of families composed of two or three generations share common

property because they cannot afford separate spaces. At the same time a

significant number of people own two, three or more flats. Over 90% of the students

are renting property.

Utilities in the housing sector needs improvement. Only 62% of the total housing

areas have access to water supply and canalization, 55% have a bathroom and 54%

have hot water /14/.

Residential buildings are developed relatively quickly and in high proportions, with

around 200 developers and 6.5 thousand flats with 860 thousand sq. meters built in

the last 5 years. At the same time, because of high prices, the access to property is

10



still limited. Prices have a continuously increasing trend of about 30-35% per year

since 2000. In the central part of the city prices per sq. meter reach EUR 1,000.

Specialists estimate that on the short term prices will still increase by approximately

20% per year.

Figure 9 - Residential property development in Chisinau, Ths sq.m

0

50

100

150

200

250

300

350

400

450

1990 1995 2000 2001 2002 2003 2004 2005

Apartaments Individual houses

Residential buildings are still affordable for about 2% high income earners. The

situation on the market is not improving as there is limited competition. Different

sources how that about 20% of the remittances are used for property transactions,

of which 30% are profit-making deals.

Residential property demand and supply is not balanced. Between 2001 and 2005

most of the residential buildings were private houses. Their total area was 2.5 times

larger than the one in apartment buildings. Although only ten percent of the

population require higher comfort apartments, around fifty percent of theapartments build were three-bedroom ones.

Figure 10 - Demand and Supply on Property Market in Chisinau

10%

35%

15%

40%

Confort Average Social Under average

7

16%

31

47%

1room 2 rooms 3 rooms 4 ro oms

A. Demand structure for apartments B. Supply structure of

apartments

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Roads are in a poor state. Only 15% of the repair needs are being implemented.

Streets are used very often as parking areas and this reduces by 30% the traffic

capacity. The number of cars per capita has increased over the last years and

reached 163 cars per 1,000 people, so that the burden on Chisinau streets has

doubled. The quality of transportation services is poor.

2. Legal environment: the structure of municipal

government

Laws governing capital city

Local government in Moldova is a two-tier structure, of which tier 1 includes public

local authorities in villages (communes) and towns (municipalities) and tier 2 rayon

authorities and Chisinau municipality. The legal framework includes a variety of

legal acts as indicated in Annex 1.

The legal documents listed below are the key ones:

1) Constitution of the Republic of Moldova, passed in 1994, chapter III, article109 (3), stipulating that ‘The status of the Capital City of Chisinau isdetermined by an organic law’

2) The Law on the Status of Chisinau Municipality, passed in 1995, regulatingthe organization and functioning of local public authorities in Chisinaumunicipality, functions of the municipal council, mayor and mayoralty, headsand administration of municipality sub-units, public services, municipaleconomy and finance

3) The Law on local government, passed in 2006, chapter VII article 57-59,

stipulating and regulating the organization and functioning of local publicauthorities of Chisinau municipality.

Main legal differences in relation to the general law governing

municipalities. One should note that this variety of legal acts does not fully cover

the regulation of a modern and well organized system. With some exceptions, the

legal framework for the capital is similar to general municipalities’ regulations.

There are several contradictions of legal provisions for similar competencies and

responsibilities. Treasury relationship between the state and municipalities is not

clearly defined in these legal acts. The functions of the capital as a political,

administrative, cultural and educational centre are not appropriately defined. Also,

the distribution of responsibilities between non-concentrated structures andfunctions delegation mechanism are not defined. There are cases of excessive

intervention of central public authorities in municipal activities against local

interests. Although some central government involvements, mainly financial ones,

have a positive impact on the habitat in the municipality, these initiatives are

mainly targeted at achieving political aims.

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In this context one can notice that the regulatory framework related to local

government functions needs essential changes, both in terms of clarifying the

relations with the central government and in terms of organizing a modern and

efficient municipal administration.

Municipal administrative structure The country’s administrative and territorial structure consists of rayons and

Chisinau municipality. Chisinau municipality comprises the following territorial units

(Annex 2):

- City of Chisinau with 5 sectors;- 6 towns and 2 rural localities;- 26 communes included in 12 local government units.

The 18 territorial units of the municipality, except the 5 sectors, enjoy autonomy as

per the legal acts and benefit from a separate patrimony and financial autonomy.

Several gaps in the legislation, however, cause a series of misunderstandings. Thereis no separate notion of Chisinau town. The 5 sectors subordinated to the municipal

Council, both administratively and territorially, have in their subordination other

units, that are, in their turn, autonomous structures. These misunderstandings

create impediments to a clear definition of the urban areas from the other parts of

the municipality.

The current structure is the result of the administrative and territorial reforms

started in 1998, aimed at creating a new system adjusted to current European

needs of local governance.

Municipal local administration consists of autonomous public bodies:

- municipal, town and communes councils as deliberative bodies- general mayor of Chisinau, mayors of towns, communes and subunits

administrations as executive bodies- local and municipal public services- decentralized state administration consisting of: territorial administrative control

units of the Ministry of Local Government that are now being restructured andwill take over the functions of Central Government territorial units anddecentralized services of ministries and departments.

13



Figure 11 – Chisinau Local Government Structure

Municipal council

The municipal council is the deliberative authority of municipal public administration

and functions according to the legislation and its internal regulations. It comprises

51 members of the Council, elected by the population from party lists, electoral

blocks and independent candidates on a four year term basis. The most recent

elections took place on 03 June 2007 and the structure of the Council is presentedin table below:

Table 3 - Political structure of the CMC

Elects No of

mandates

Share, %

1 Communists’ Party 16 31.42 Liberal Party 11 21.63 Our Moldova Alliance 7 13.74 People’s Christian Democratic

Party

4 7.8

5 Democratic Party 4 7.86 Social Democracy Party 3 5.97 Social Democratic Party 2 3.98 Umanitarian Party 2 3.99 National Liberal Party 1 210 Ravnopravie-Patria-Rodina 1 2

Source: www.alegeri.md

Sector

Pretor

General

Mayor

Municipal

Council

National

Government

Teritorial

Government

Office

LPA

Mayor

LPA

Council

V O T E R S

Legality control

Appointment

Direct election

14

http://www.alegeri.md/

http://www.alegeri.md/



Chisinau Municipal Council sits in ordinary meetings once in three months and in

extraordinary meetings as needed and convoked by the Chairperson or upon he

initiative of at least one-third of the Council members. The meetings of the Council

are chaired by the Chairperson elected among the members of the Council

throughout the duration of the mandate. Decisions are made by the simple majority

of the total number of Council members.

The Council seats in quarterly ordinary and other extraordinary meetings.

Extraordinary meetings may be called by the general mayor or at least one third of

the counselors. Meetings are moderated by one Chairman elected for each session.

Decisions are made with simply majority votes by all counselors.

The functions of the Council could be classified as follows:

- internal organization- local interest decisions initiation and adoption- mayor’s office structure

- local interest services, public institutions and business entities- social and economic development of the city- environment and human rights protection- cooperation with other municipalities- internal control- local finances and patrimony administration

The Council does not have its own managing body. Its activity is coordinated by the

Chairperson, its Secretary and Mayor’s Office staff 3.

The Secretary of the Council and the staff of the Mayor’s office manage the activity

of the Council. The Secretary is selected on a basis of an open competition. He/she

prepares the materials for Council’s sessions, participates in the meetings, notifies

regarding the draft decision and is responsible for their legal character and

coordinates the appropriate department in the Mayor’s office.

The Council comprises eight specialized committees, with non-remunerated

membership, formed for the entire duration of the council and subordinated to it.

Each committee has a chairperson and a secretary chosen during the meetings.

Their decisions have a recommendations character.

Municipal administration

Municipal Council creates and approves for the duration of its mandate themunicipal administration that includes several executive sub-divisions and deals

with public operations managements.

3 Municipal Council Chairperson’s responsibilities shall be presented in the new draft of theLaw on Chisinau Municipality. The draft law is not yet passed by the Parliament. A newstructure is also planned: Chisinau Municipality Bureau, a permanent body with paid staff.

15



The main attributions of the municipal administration can be classified in several

categories:

- organizing and coordinating the activities of the divisions, sections, andservices of the mayoralty;

- elaborating and coordinating economic and social development activities;- regulating land and residential property regime in the municipality;- setting the emergency regime and coordinating emergency consequences

liquidating; and- civil and social protection of the population and public order.

As of October 2007, Chisinau Municipal Council Executive Body employs over 800

people, including 500 civil servants and 300 sub-contracted staff. Staff selection is

competition based.

The General Mayor is the executive authority elected by the population through

direct vote. In exercising their functions the Mayor uses both qualities of (1)municipality representative – in exercising the function of public area

administration executive body and (2) state representative – in exercising the

functions expressly set up by local public administration law. Mayor’s attributions

can be classified in this way:

- Organizing and implementing Municipal Council’s decisions;- Initiative in setting up local regulations on public administration area;- Organizing and implementing control on the subordinated subunits;- Local public administration bodies; and- Maintaining public order.

The Mayor is supported by 4 advisers and 4 deputy mayors. Deputy Mayors areproposed by the Mayor and appointed through a decision of the Municipal Council

as civil servants. They coordinate the activity of different sub-units, e.g. the deputy

mayor responsible for economic and financial development of Chisinau municipality

is responsible for reasonable utilization of the municipal treasury, budgeting and

implementation of budget, providing services, trade and public catering as well as

city markets.

There are thirteen municipal departments responsible for public interest services4.

These departments draft and implement development programs in their areas and

consult and coordinate local councils and mayor’s offices. Municipal public services

are entitled to a certain degree of independence and execute decisions adopted by

central specialized bodies and municipal public administration authorities.

Chisinau city is divided into five sectors, where municipal government is

represented by pretors and preturas. Sector preturas are executive local

government authorities, legal entities that are part of the Mayor’s office. Unlike

4 The List of all services is included in Annex 3.

16



other similar structures of other European capitals, preturas in Chisinau do not

have elected deliberative bodies. A pretura is usually formed from a pretor, a

deputy pretor, 3-5 m embers and one secretary. Preturas have the following

functions:

-

Implementing of the relevant laws and municipal decisions in their territories;- Organizing, controlling and coordinating public sector activities in theirterritories;

- Managing the treasury as transferred from the municipality;- Managing social and economic institutions; and- Managing construction and utilities works in their territories.

Preturas’ members sit in weekly operative meetings. Also, preturas are convoked by

the pretor in working sessions, as many times as necessary and at least monthly.

The pretor is an executive municipal public administration authority and an official

with administrative functions, appointed by the General Mayor as a representative

in the sector.

Figure 12 - Relationship elective-executive bodies in Municipality of Chisinau

Sub-city local administration

Towns and communes (villages) in the suburbs of the municipality are managed by

local councils and mayor’s offices. Local councils are deliberative bodies elected by

the population. They act on the basis of the laws and their internal regulations. As of

October 2007, there are 285 members in all local councils, representing 11 political

17

Mayor

The Council

of the Municipality

of Chisinau

Sectorial Directors (5) Vicemayor (4)

CMC Committees

Secretary CMC

Sectors

Subdivisions

financed from

special sources

Subdivisions

with auto finance

Subdivisions

financed from

the budget



parties and independent candidates. Each council has 3-7 commissions in each area

of activity with recommendation-making rights.

Local councils do not have their own management body and are coordinated by

council secretaries. Council secretaries are appointed by the councils, upon

proposals from Mayors and a result of competitions. Council secretaries are alsomayor’s office secretaries.

Mayors are local council executive authorities. Their functions are regulated by legal

provisions and are similar to those of the General Mayor. Deputy Mayors are

appointed by Local Council decisions and their mandates expire together with the

mandate of the mayors. Deputy Mayor’s functions are set up in the internal

regulations of the mayor’s offices. In villages with a population under 7,000

inhabitants, deputy mayors are not remunerated.

Local public services are organized by local councils as proposed by mayors,

according to local needs and available resources. The mayor determines the needs

and submits proposals to the council. Depending on the dimensions of the locality,

public services may be organized in land regulations, construction, utilities, fiscal

relations etc. Local mayor’s offices have between five and 12 technical staff.

Central government representation

Territorial Government Office (TGO) is a representative structure of the Government

in Chisinau Municipality and is an institution that implements the principle of

territorial decentralization. The institution’s tasks include municipal interest services

administration without intervention in autonomous public administration, except for

checking the conformity and legality of the documents issued by the latter. TGO

representatives are invited and participate in all Municipal Council’s meetings. TGO

has the right to appeal local public authorities’ decisions that violate the law.

Because not all public services have been decentralized the provision of certain

services to the population has been transferred ministries and departments5. At the

same time, it is not clear which services have control functions in these areas and

that achieve the state interest in these areas.

3. Financing capital cities

The role of the city in intergovernmental structure The relationship between local government levels regarding public service provision

is regulated by the following legal acts:

a) The law on administrative de-centralizationb) The law on local government

5 V. Bulat. Evaluating legal malfunctions in Chisinau Mayoralty activity (Evaluation report),2006

18



c) The law on local public finance

The Law on administrative de-centralization sets up several types of local

government activities:

- mandatory and optional; and

- delegated and shared.

The Law on public local finance sets up ways of financing these duties and

responsibilities. Mandatory and optional services are funded from local government

own revenue streams. Delegated activities are funded from special Central

Government transfers. Shared activities are funded base don cooperation contracts

between/among local government units and/or Central Government.

In Annex 4 are present the distribution of responsibilities between local and central

government. The flowing three conclusions we could make:

1. Municipal government responsibilities cover a wide range of areas;2. The Central Government controls several activities pertaining to local

responsibility, especially urban planning, economic development, socialhousing, cadastre etc.

3. There is variety of responsibilities that are overlapping.

Central Government provides services through de-concentrated structures (Annex

5). Formally, these structures are subordinated twice but financed from Central

Government budget only and have cooperation relations with local government.

Public services that are not subordinated to the municipal authorities include, but

are not limited to: cadastre registration, district heating. The cadastre is fully

controlled by the Central Government. District heating supply services are providedby Termocom JSC, 80% owned by the municipality of Chisinau. This company is

under reorganization because of its poor financial status. This company is currently

subordinated to the council of creditors.

Companies fully or partly owned by city authorities. Chisinau municipality

has invested in 69 municipal companies. At end 2005, the value of these

investments was MDL 516.7 million. Chisinau municipality is the major shareholder

in 12 companies.

The major challenge in this area is the poor financial situation of the municipally

owned companies. For instance, due to central government involvement andpressure, Chisinau Municipal Council was not able to increase tariffs according to

the schedules established jointly with creditors (International Financial Institutions)

for Water Supply Company. Therefore Water Supply Company was not able to repay

debts in due time and was declared in default several times. On the other side, a

scheme of targeted compensation of tariffs has been adopted by the Central

Government and the Municipality has to cover those from their budget but has no

additional resources available from the Central Government.

19



An overview of these companies follows below:

1. District heating - SA Termocom. This joint stock company is under a

reorganization procedure and undergoes bankruptcy procedure since November

2001. It is now being managed by a special administrator. Historical debt is

periodically refinanced. In the beginning of year 2007, a Decision was passed,according to which 50 percent of the tariff is covered through targeted

compensations that have to be paid from the municipal budget.

2. Road maintenance – SA “Edilitate”. This company appears to be among the very

few profitable municipal enterprise.

3. Water supply service - SA “Apa Canal Chisinau”. This company is in a poor

financial situation, with losses being made because of the low tariffs maintained for

political reasons by the previous council and central government pressure. Current

tariff structure does cover operational costs; the municipal council increased its

capital over 2006 and in early 2007 approved a slight increase in tariffs first since

2001. Debt is repaid from refinancing.

4. Public transportation – IM “Regia Transport Electric” and IM "Parcul Urban de

Autobuze”. The poor financial situation is due to the same issue: low tariffs that do

not fully cover operational expenses. The municipality directs from time to time

some inflows for capital expenditures, such new buses and trolleybuses.

5. Solid waste management – SA “Regia Autosalubritate”. This is a profitable

company. Privatization has not been considered.

6. Utilities for apartment buildings - 23 enterprises. This is a reminiscence of state

owned buildings that have not been adjusted to private owners’ structures yet. Most

of them are basically insolvent.

7. There are a series of other companies fully or partly owned by municipality, in

areas such as fashion design, public catering, food production. Of these, some could

provide public services. For instance, Business incubator Alfa could be a good basis

for local economic development activities.

8. There are six municipal companies in culture and health protection sectors,

entirely supported by subsidies.

Overlapping and real control over local public services, In some cases centralgovernment imposes to the local government responsibilities related to nation-wide

activities. Thus, upon organizing a national event - ‘the wine festival’ – Chisinau

cleaning services are mobilized and bear additional costs that are not cover from

additional funds. Another example is in cases of international events held in the

capital city (CIS Summit or GUUAM meetings) the municipality is requested to make

additional outside design improvement works generating un-planned expenditures.

20



There were cases where the Government requested property transfer from

municipality’s balance sheet to central government subordinated bodies. Thus, in

2004 Chisinau city administration was forced to transfer the municipal emergency

service to the central government. Although this issue was discussed in several

municipal council meetings and never reported a sufficient number of votes, this

service was transferred to the balance sheet of the ministry of health protection.Other cases included land plots, non-residential buildings and unfinished

constructions.

Areas of cooperation between central government and city authorities. In

certain cases the Central Government provides funds for specific projects

implemented by Chisinau municipality. These projects are most often initiated and

targeted by the central Government and have political connotations, e.g. take place

in a pre-electoral period. Thus, in 2005-2006 the Central Government made special

transfers targeted at residential blocks design improvement, buses and trolleybuses

purchase, soviet monuments, road refurbishment, and leisure areas rehabilitation.

Because most of these projects have not been planned in the municipal budget,

several sources of funding were utilized: (1) extra-income accumulated by the

municipality; (2) special transfers from the Central Government budget; and (3)

change of budget line use. Thus, funding increase ten times compared to previous

years and it is clear that it was due to the coming 2007 local elections. As a rule,

such projects are characterized by opaque and corrupt practices.

Economic development of the city. Although the dominant role of the capital

city in country’s economy is obvious, it is not the result of the municipal

administration. The economic and financial potential of Chisinau is due, to a great

extent to the status of capital. The development of this potential is not followed byeconomic efficiency growth and is not a result of municipal administration policies.

It seems that Chisinau is making use of the centre-periphery gap inherited from the

Soviet system and widened during transition.

Municipal administration did not have or promote a clear economic development

strategy. The activity of the administration in this area is rather limiting business,

not stimulating it. In many cases, projects are launched in an ad-hoc and non-

transparent manner, under the pressure of the Central Government and

implemented by companies related to the government.

Issues in relations between central and city authorities. Key issues in therelations between city and central authorities include:

Imperfect legal framework both regarding local government and capital city status.

Although the legislation on public local government was recently improved, it did

not lead to a real local autonomy. The Law on de-centralization provides for a

general framework of responsibilities delimitation, but it does contain any provisions

regarding actual implementation. The law on public finance has not been

21



significantly changed, however previous amendments to the legislation show that

Central Government is willing to delegate as many competencies as possible to

local governments, but without sufficient funding. The law on capital city is

outdated and does not correspond to the requirements of the current local

government legislation.

Unclear delimitation of municipal and central government property Although there

is a multitude of regulations pertaining central and local government property,

central vs. local and public vs. private ownership is not yet clearly defined. This

opens up opportunities for interpretations that break local autonomy rules and

allows central authorities to pass abusive legal documents that are not in favour of

the municipality. The dispersion of local property reduces local resources efficiency

and encourages dysfunctions in capital’s development.

Limited local economic development empowerment and delegation to local

authorities. The municipality of Chisinau, as other local public authorities, has

limited leviers to stimulate economic development. Most of taxes with highcollection rates are transferred to the central government budget while local taxes

have low fiscal profitability. Local taxes and fees cap is set up by the Parliament and

thus reduces the range of economic development leviers to be used by local

administration. On the other side, exemptions and unjustified facilities granted by

the Central Government leads to fiscal basis reduction and diminish municipalities’

revenue.

Excessive intervention of the Central Government in local administration. The

involvement of central authorities in local administration current activities leads to

an inefficient utilization of financial resources. In many cases interventions such as

land plot allocation, property transfer, project funding target special interest groups.

Excessive political pressure on local authorities. Local elections on 3 June 2007

created a situation where the municipality and government are on opposite political

sides. This creates tensions and lack of confidence between the two. This in its 2008

budget, the Central Government did not provide for municipality investment

financing, nor did it provide for additional costs on projects previously launched by

the Central Government authorities.

22



City budget analysis

Municipal finances – a general overview. The budgetary and financial

processes in Chisinau are governed by the set of laws regarding public and

local public finances. The legal regulatory framework includes provisions

regarding local governments’ organization and local finances operation.6 The

legal regulatory framework governing Chisinau operations is not yet fullycompleted and includes several provisions that are determining overlapping

of Chisinau responsibilities with its subordinated LGUs ones (i.e. the laws fail

to provide enough description of Chisinau functions related to its political,

economic, cultural and its particular role as the country capital). The legal

framework does not clearly define the statute of Chisinau municipality, the

boundaries with other LGUs and the local versus municipal patrimony.

Additionally the local council has to undertake too many responsibilities and

the municipal budget is constantly under-funded.7

Currently, the Parliament is reviewing a new redaction of the law regarding the local

public finances. It is expected that Chisinau municipality activity will improve as the

draft law will be adopted as well as the whole system of local finances.

Chisinau municipality budget is part of the public finances system regulated by the

law regarding budgetary system and process. The state budget and the local

budgets are integral part of the consolidated budget. Chisinau municipality budget

is annually drafted and the fiscal year is the same as the calendar one.8

Chisinau municipal budget has a special statute and combines the features of first

and second level LGUs, consisting of 9:

a) municipal (city) budget , including the revenues and expenditures required for thecompliance with the legal functions of the municipal administration as well as the

additional responsibilities transferred from the central government; and

b) local budgets – the budgets of the communes and towns, which are part of the

Chisinau municipality.

The municipal budget is elaborated and executed based on a unitary classificationsystem.10 The municipal budget is drafted according to the provisions of law onlocal finances and the methodological norms issued by the Ministry of Finances.Each year, the budgetary process is initiated by the Ministry of Finance by theissuance of the state policies regarding public revenues and expenditures

The municipal revenues and expenditures predictions are based on a set of economic indicators issued by the state government including macroeconomic

6 i.e.: chapter VII of Law on public administration.7 PUG Chisinau paper; March, 20078 Budget rectification is a current practice and takes place several times over a fiscal year .

9 Law on local public finances, article 2. 10 The law on budgetary system and the Parliament decision regarding budgetaryclassification include a detailed description of each revenue and expenditures items.

23



indicators and the normatives regarding the shared state budget revenues. Suchinformation is submitted by the Ministry of Finance local branches to themunicipality of Chisinau that is also submitting the set of indicators to itssubordinated LGUs.

Every year Chisinau Municipal Council approves the budget of the municipality,

including the city and local budgets for LGUs.

Table 5 - National and municipal finance dynamics, 2003-2005/11

2003 200

4

2005 200

6State budget revenues Eur

Mil

421 428 575 674

Total collected revenues in

municipality

Eur

Mil

134 172 189 235

City budget revenues Eur

Mil

64 65 79 104

State budget expenditures Eur

Mil

442 492 582 680

City budget expenditures Eur

Mil

59 64 77 106

Share city budget revenues in

total collected revenues in

municipality

% 48.0 37.6 41.6 44.1

Share city budget revenues in

state budget revenues

% 15.3 15.1 13.7 15.4

Share city budget expenditures

in state budget expenditures

% 13.4 13.0 13.2 15.6

Share city budget expenditures

in state budget expenditures per

capita

% 73 79 76 80

From the table above, it is clear that (a) over 50% of the taxes collected in the

municipality are transferred to the central budget (except 2006); (b) the both share

of city budget revenues and expenditures in the general state budget is decreasing;

and (c) the share of expenditures per capita have been raising but it is on 20% less

than national level.

Municipal budget revenues. Over the period 2001-2005, Chisinau budget’s

revenues calculated in the nominal terms was doubled (see diagram 1 below). At

the same time, the analysis of local income dynamics in real terms (2001 prices)shows that in 2004 and 2005 there were strong decreasing trends. As the following

analysis shall demonstrate, this revenues’ trend is mostly due to the modest level of

financial autonomy in Moldavian local governments.

Figure 13. City budget revenues dynamics, Mil Eur

11 All data presented in this chapter is based on the information provided by the municipalfinance department and NBS

24



100

65 795655

64

0

25

50

75

100

2001 2002 2003 2004 2005 2006

City budget revenues Adjusted revenues

The Law on local finances defines the Chisinau municipality’s revenues, as follows:

(1) local taxes and fees, (2) shared general government taxes, (3) transfers from

state budget, (4) special sources, and (5) special funds. Local taxes and fees, capital

revenues and special sources composed the own municipal source revenues. Theshared taxes and transfers are regulated by the state budget.

The analysis of municipal budget income for major income chapters proves thatbetween 2003 and 2006 essential changes in their structure took place.

Table 6 - City budget revenues structure 2003 – 2006 2003 2004 2005 2006

Eur Mil % Eur

Mil

% Eur Mil % Eur

Mil

%

Own

sources

40 62% 46 71% 49 63% 56 56%

Shared

taxes

21 32% 17 26% 18 23% 24 24%

Transfers 3 5% 2 4% 11 14% 20 20% Total 64 100

%

65 100

%

79 100

%

100 100

%

The own source revenues are most important revenues and represent 62 – 71% of

total budgets’ revenues. The Fiscal Code12 defines the types of local taxes and fees

that local governments may set and collect: taxes on buildings, land, fees on

release of certificates, approvals and authorizations, advertising on public buildings,

show fee, fees on hotel room occupancy, and other local taxes. For the local

property taxes and other local taxes and fees the law establishes certain ceilings

that have to be observed by local governments while adopting such taxes. For this

reason, the amount and share of these taxes and payments are low and have a

strong growth potential.

12 Law nr. 1163-XIII/24.04.97

25



Local taxes and fees are a rather stable source of revenues and represent 83-90%

of own source revenues and 50-62% of total revenues. The municipal government

has little discretion in setting local taxes and fees. The law provides maximum level

of all taxes and fees that have to be observed by municipalities adopting them;

however, it appears that the CMC is making use of all potential provided by the law

in this regard. In terms of collection the municipality has neither responsibility norlegal instrument to enforce the law over the delinquent taxpayer; all these

responsibilities are held by State Fiscal Inspectorate.

Capital revenues consist about 5-7% of own source revenues. However, there

appears to be improper asset management within the city of Chisinau; there is

neither complete inventory of municipal assets nor any re-evaluation of such assets

(most of them being registered at historical values). Until this process will be

finalized it is not advisable or desirable to continue the selling of municipal

property. The assets re-evaluation shall have a positive impact under the

circumstances the municipality decide to sell some of its privately owned assets and

if the municipality has to mortgage lease or lien assets to secure municipal debt.

The shared taxes have had a downward trend over the analyzed period and

stabilized to 25% of total revenues at the last three years. Shared taxes have a

significant contribution to the overall composition of municipal revenues. The

decreasing trend is explained by the elimination of the VAT shared taxes from the

composition of this revenue item (as of 2004). It is expected that this source of

revenues will be decreased on 30-40% as the 0% corporate income tax on

reinvested profit becomes active on 01 January 2008.

The central budget transfers include the following items: (a) State budget transfers

for current activities, (b) Allocations between local budgets at different levels, (c)State budget allocations for current expenditures, (d) State budget allocations for

capital expenditures, and (e) Transfers between various state budget chapters and

the LGUs. Transfers used to have a low contribution to the municipal revenue base

but in 2005 appear to have registered an important increase – from 5% in 2003 to

14% in 2006; this is mostly due to a sharp increase in transfers granted for the

municipality’s current activities.

These revenue items appear to be the less predictable ones. The historical trend

shows large variations from one year to another: in 2004 there was recorded a

decrease by 1/3 compared to 2003 followed by an impressive increase more the 3

times in 2005 and almost twice in 2006. This reflects the back-and-forth process of

public services decentralization taking place in Republic of Moldova. Since 2004,

responsibilities related to health have been moved to the Health Insurance House

and this implied the reduction of state allocations to Chisinau municipality - the VAT

shared amounts have been cancelled. On the other hand, year 2005 and 2006 were

a pre-electoral period and the Central Government allocated additional resources

for municipal current and capital expenses funding.

26



City expenditures. Annual expenditures may be committed only if the financial

resources are available (except if a loan is contracted); local expenditures are made

based on revenues allocation in the budget. Allocations for servicing debt

contracted with the state budget are compulsory and are determined by the

contractual provisions. Chisinau municipality has the following mandated

responsibilities:

1) Urban and territorial planning;

2) Roads, streets and bridges construction and maintenance;

3) Building public objectives of municipal interest;

4) Water and sewerage supply system, waste-water treatment plant and

municipal sanitation/solid waste management– construction, maintenance

and operating;

5) Social assistance;

6) Housing;

7) Education;

8) Libraries, museums, culture and sport ;

9) Public order, firefight units;

City budget expenditure chapters include, but are not limited to: public authorities,municipal police, education, health, social assistance, urban planning, culture, artand sports.

Expenditures are projected based on same principles as in the case of revenuesand, in addition based on normative established by the central government for thevarious expenditures chapter of municipal budget. These normative are determinedby the number of service users and the number of employees. The normatives arenot reflecting the specific feature of Chisinau as the capital city leading to an

inadequate coverage of the municipal needs. The Ministry of Finance has the rightto modify the normatives over the fiscal year.

Expenditures have been almost flat during 2003-2004 (in constant terms, 2003

prices); there has been a slight reduction in 2004 (of 4%) followed by a more

substantial increase in 2005 and 2006. This is mostly due to a significant increase in

capital expenditures for transport units acquisition and roads renovation, local

public husbandry and housing as well as the increase in public sector salaries.

Figure 14 - Total budget expenditures, Mil Eur

27



59

106

59 61

746477

57

0

25

50

75

100

2003 2004 2005 2006

Nominal budgetexpenditures

Adjusted budget

expenditures

The next table shows the budget expenditures’ structure (according the economic

classification), over the period 2003-2005, percentages of each type of

expenditures within the total expenditures.

Table 7 - Types of expenditures (%)

Local budgetexpenditures

2003 2004 2005

Personnel expenditures 30% 21% 21%Material expenditures 29% 20% 19%Capital expenditures 20% 29% 27%

Transfers and subsidies 20% 30% 32%Interest payment 0.8% 0.2% 0.5%

The analysis shows that city government has a relatively rigid structure of

expenditures. The most rigid expenditures, personnel expenditures and subsidies

represent more then 50% of total expenditures. Personnel expenditures, subsidies

and transfers and interest payments represent a significant portion of the total

expenditures as well. This level of rigidity mean that, in the event of an economic

downturn, local elected officials would feel excessive pressure from citizens to

supply essential services as well as pressure from creditors to back out of debt

service obligations. This is obviously a difficult mission.

The analysis of cities’ control over the various categories of expenditures is

following upon the functional classification of LGUs expenditures. The expenditure

of LGUs are grouped into the following main categories:

• Public authorities – local budgets undertake all material, capital and personnel

expenditures: however, local governments do not have full control over theseexpenditures as the salaries of public servants are set by national laws andregulations regarding civil servants and the number of employees is alsoestablished (as a maximum number) by the central government, depending onthe type and the size of the local authority (county, city, town or commune);

• Education – local budgets are responsible for all personnel, material

expenditures of primary and secondary state schools; also, local budgets provide

28



funding for capital expenditures. Education represents one of the most importantexpenditure items in local budgets;

• Health – Local budgets are responsible for material and capital expenditures.

• Culture – cultural institutes (excluding those that are national or regional) are

funded through local budgets (all types of expenditures). The same national laws

and regulations regarding civil servants regulate staff salaries.• Public services (material, capital and personnel expenditures; if the service is

organized as a commercial company, the local budget has no legal responsibilityto fund any type of expenditure; such companies should cover theirexpenditures by their own revenues). The exception is the public transportationcompany receiving municipal budget transfers to cover the tariff differencebetween the actual price of the ticket and individual benefiting of freetransportation (i.e. retired persons). For other local public services that are underthe municipal competency (i.e. street repairs), the local budget is funding allexpenses.

• Housing – financed by LGUs (for social housing);

The data on Table 8 shows that in the period 2003-2006 (Table 8) the dynamics on

types of expenditure was different and the expenditures structure changed

dramatically. Thus social expenses (social assistance, public safety, health,

education and culture) grew by 15%, and their share in total expenses decreased

from 66% to 42%. At the same time, economic development expenses increased

thrice, and the share of expenses on public husbandry and housing, infrastructure,

energy increased from 30% to 47%.

Financing of capital expenditure. The sources available for capital expenditures

are:

• Operating budget surpluses;• Domestic loans from banks and capital markets• Transfers• Special funds• Short term loans from state budget and banks.

Over the analyzed period, local budgets registered operating surpluses in each

year: 2004 (29% of total operating expenditures), 2005 (7% of total operating

expenditures). Such surpluses are used to finance capital expenditures and, most

importantly to cover the interest payments and other related cost of outstanding

debt.

In Chisinau, the capital expenditures are annually approved as an annex to the localbudget. Currently capital investments are not determined by a generaldevelopment strategy and are not based on economic/financial feasibility analysis.Capital investment priorities are usually selected based on political decisions; publicconsultations are absent reflecting the lack of transparency in the local governingactions.

29



Capital expenditures vary considerably from one year to another. As of end 2003,the capital expenditures represented about 20%, in 2004 – about 29% and in 2005– about 27% of total city budget.

The financing sources of the capital expenditures are derived from the statebudget. The result is that the municipal capital investment plans are often not

implemented. According to the PUG concept paper, the municipal budget haslimited resources and cannot financially support he investment need of theChisinau municipality.

Given the current development status of Chisinau, the investment needs appear to

be very high. In the March 2007 the Master Plan (PUG) of city was approved by

CMC. The PUG has determined the investment needs for the period 2007-2025 at a

level of USD 7.3 billion of which about USD 2 billion for infrastructure, USD 1.5

billion for housing and USD 2.6 billion for economic development. Over the period

2007-2010, the estimated value is USD 1.8 billion13.

The PUG also include an evaluation of the financing capacity of Chisinau

municipality to support the capital investment program until 2025 (Eur 6 billion) and

2010 (Eur 1.5 billion). Should the municipality allocate each year about 22% of the

budget for capital investment, only a portion of 3.6% would be covered until 2010

and 7.8% until 2020. Therefore the municipal budget cannot support by own

sources the needs for municipal development and additional resource need to be

mobilized.

City debt. City public debt is, according to the finance department of the

municipality, of Lei 145 million (about Eur 9.2 million) as of January 2007. The

aggregated debt service of Chisinau increased from 2.6% of total revenues in 2004

to 8.8% in 2006. It is still well below the 20% limit imposed by the law thatdemonstrates on one hand the prudent manner Chisinau understood to undertake

in tapping the credit market as well as the limitations imposed by the financial

community itself.

The municipal debt portfolio includes domestic loans contracted by Chisinau from

commercial banks (without sovereign guarantee) and very few loans from the state

budget.

By 01 January 2007 municipal receivables increased considerable to MDL 249

million as a result of poor debt collection by SA Termocom, for district heating

services provided to the population. Thus the aggregated debt reached 15% of total income and this is a constant limit to the borrowing capacity and access to

debt markets.

According to the law on local finance there are following debt limitations: (1) Loans

may only be guaranteed by the LGUs with all budget revenues; (2) Short-term loans

13 Chisnau:Planul Urbanistic General. UrbanProiect, Business Consulting Institute, Chisnau2007

30



for cash flow deficit financing shall not exceed five percent (5%) of a local’s

budgeted revenues, and (3) The annual debts representing the due installments

deriving from contracted loans including all interest expenses and other fees and

shall not exceed twenty percent (20%) of the total revenues of the local budgets.

The Law on local finances sets forth a clear and reasonable procedure forauthorizing municipal debt requiring the approval of the members of Municipal

Council. Local councils may approve short, medium and long-term internal and

external loans for public investment of local interest or for refinancing local public

debt. In case of bonds issue, there is no approval procedure in place yet. The

Securities is planning to issue a law regarding bonds and the issue procedure for

public offering. Currently, on the market there are corporate bonds issued only;

such bonds are insured and are issued under private placement.

According to the law, local public debt may consist of loans and defines this term as

interest bearing financial instruments; this means that LGUs are allowed to issue

bonds, contract bank loans and issue other securities. As mentioned above,Chisinau has contracted only loans from commercial banks.

LGUs are authorized to issue short - restricted to financing cash deficits, medium

and long-term loans - for capital expenditures only. Currently, Chisinau domestic

debt is short-term (less than one year) and medium-term (2-3 years) only.

Although the provisions of the Law do not expressly authorize debt to bear interest

at either a fixed rate or a variable rate, the provisions imply that debt may be

issued bearing interest in either manner. During 2003-2006, loans’ interest rates

varied within a range of 20-25% and have been mostly variable interest rates.

Chisinau has contracted both short term loan for current activities financing

(basically to cover cash deficits) and for infrastructure works (i.e. water supply and

sewerage, roads rehabilitation, heating, housing); loans have also been contracted

to procure equipment (in 2005 a bank loan was contracted to procure buses).

The article 15 of the Law on local finances expressly states that there is not any

implied guaranty of the central government of municipal debt and additionally

requires language to such effect to be expressly stated in an instrument of

municipal debt in order for such instrument to be a valid, enforceable obligation.

Financial operations. A series of financial indicators is utilized to compute

municipal borrowing capacity as follows:

• Recurrent revenues – such revenues that are received by local budgets in

a cyclical way and are considered to have a certain degree of predictability; under the analysis below, this category includes local taxesand fees and the shared taxes;

• Non-recurrent revenues –such revenues that are received by local budgets

as an extraordinary revenue source and have a very low level of

31



predictability; this category includes transfers, special revenues, capitalrevenues;

• Operating expenditures include personnel and material expenditures,

subsidies and transfers, interest and fees payments.

Local taxes and fees represented, over 2003-2006, between 62-72% of totalrecurrent revenues. Shared taxes are providing the difference tough they have

registered diminishing trend as a result of the cut off of VAT shared amounts.

Non-recurrent revenues had an ascending trend over the analyzed period, from

17% in 2003 to 23% in 2006. Most non-recurrent revenues are derived from

transfers and special funds that are mostly used to fund specific current activities

and, to a certain extent capital expenditures. This shows that Chisinau is are

relatively dependent on non-recurrent revenue sources to balance its operating

budget.

Chisinau local budgets registered operating surpluses over 2003-2006. Chisinau hasnot established reserve funds.

Table 9 - Budget performance indicators14, 2003-2006

Indicator Value

Own source revenues /total revenue 62 – 64%

Local taxes and fees/recurrent revenues/recurrentrevenues

62 – 72%

Shared amounts of state budget taxes/recurrentrevenues

28 – 61%

Transfers/non-recurrent revenues 32 – 50%

Rigid expenditures/operating expenditures 71 – 73%

Capital expenditures/total expenditures 20 – 29%

Operating budget balance /operating expenditures 3-6 %

Debt level 3– 9 %

14 Caluseru G. ass. by Candu L., City Development Strategy for Municipality of Chisinau,

Municipal Finances Concept paper, UN-Habitat and World Bank project, Chisinau, 2006

32



4. Conclusions This article reviews the financing of Chisinau municipality and identifies the major

factors influencing it, such as: demography and migrational trends, economic

changes, social changes. It then explores the relationship between the capital cityand the government and reviews the laws governing the capital, the administrative

structure of the mayor’s office as well as the local sub-units organization.

As in other NIS capital, the unclear distribution of tasks and responsibilities between

different levels of government, combined with lack of experience in public finance is

a major root cause for inefficiencies at both municipal and local levels. On the other

hand, poor fiscal discipline maintenance and strong interference from the central

government consolidate the weaknesses of the municipality.

The authors then propose an overview of municipal finances, describing the first

and second tier features of Chisinau budget and providing details on the revenuesand expenditures.

Several factors common to local governments across Moldova will continue to strain

the LGUs operating and capital budgets:

• Operating surplus relies to a large degree on the shared taxes; for this

reasons the level of operating surplus has a large variation and it may

diminish over the next years; as soon as the VAT was removed from the local

budget, the operating surplus diminished dramatically; this is also a

consequence of the increase in public sector salaries; therefore it is unclear if

this positive situation is sustainable;• There is a clear uncertainty regarding the annual amount of central

government revenues to cover the increased expenditures (see the very

often change in laws);

• Lack of clear transparent regulations and allocation procedures regarding

transfers from central government (while the legal framework might provide

detailed allocation procedure, it appears that they are not consistently

applied);

• Continued operating subsidies for community services as a result of deferred

maintenance and tariff levels that do not recover operating costs; increased

capital outlays for these services for necessary network rehabilitation,

efficiency improvements and expansion.

Indeed, one of the major problems confronting the Moldovan LGUs is the relatively

rigid expenditure structure because of the high level of transfers to total operating

costs. To this one may add the very low degree of fiscal autonomy.

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Another issue confronting Chisinau municipality is the deteriorating infrastructure.

The street network, the water, sewer, and heating networks to maintain the current

services, not to mention service improvements will all require increased spending.

The large number of changes in the institutional framework has created difficulties

in drafting local budgets; while capital expenditure represent an importantexpenditure category, the municipality has not proved to have no effective control

over its infrastructure development program; capital expenditure appear to be

largely financed based on as the need may arise (first come first served); the

spread over each budgetary chapters of capital expenditures shows absence of

strategic planning with regard to city development.

In authors’ opinion, Chisinau has a relatively inelastic revenue structure and

expenditures are rigid. Overall, a better administrative leadership and especially a

better municipal finance management are strongly desirable.

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5. References

1) Bulat V., Munteanu P. Studiu privind functionarea serviciilor publice in mun.Chisinau, Business Consulting Institute, Chisinau, 2006

2) Caluseru G. ass. by Candu L., City Development Strategy for Municipality of Chisinau, Municipal Finances Concept paper, UN-Habitat and World Bankproject, Chisinau, 2006

3) Chisinau in figures: Statistical Yearbook. National Bureau of Statistics,Chisinau 2005

4) Chisinau: Planul Urbanistic General. Urban Proiect Institute, BusinessConsulting Institute. Chisinau 2007

5) Descentralizarea fiscala: provocari pentru Republica Moldova, Chisinau 2006.

6) Fast Track Municipal Fiscal Reform in Central and Eastern Europe and FSU,Edited by George Guess, OSI/LGI, 2007

7) Ionita V, Dinamica finantelor publice locale in conditiile re-centralizarii puterriide stat. IDIS Viitorul, Chisinau 2004

8) Local Government. Borowing: risks and rewards. Edited by PawelSwianiewicz, OSI/LGI, 2004

9) Grigoriev V. and others. Conteptia sotialino-economicescogo razvitia g.Kisineva, Chisinau 1989

10) Management si guvernanta urbana, Chisinau 2005

11) Planul de Amenajare Teritoriala a Municipiului Chisinau, HIS Romania,2007

12) Poverty and Policy Impact Report for 2004. Ministry of Economy and Trade of the Republic of Moldova, Chisinau 2005

13) Roscovan M. and others. Conceptia dezvoltarii urbanisticii in RepublicaMoldova, Chisnau 1992

14) Social and Economic Development Plan for Chisinau. Urban ProiectInstitute. Chisinau 2006

15) Tsenkova S., Dogotaru S. (2005). City Development Strategy for theMunicipality of Chisinau. Housing Concept Paper, UN Habitat& World BankProject, 2006.

16) United Nations Development Programe (2006) Moldova Human

Development Report. Chisinau: UNDP.IHS Romania (2007). The TerritorialDevelopment Plan for Chisinau Municipality. Chisinau 2007

Chisinau Financing Capital Governments 09.06.08

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