Local Governance and Service Delivery in Bosnia and ...documents.worldbank.org/curated/pt/609121468017420583/pdf/473200… · ABBREVIATIONS AND ACRONYMS ALDI Local Development Initiatives

Document of the World Bank

Sustainable Development Department

Europe and Central Asia Region (ECSSD)

From Stability to Performance

Local Governance and ServiceDelivery in Bosnia and Herzegovina

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From Stability to PerformanceLocal Governance and Service Delivery inBosnia and Herzegovina

Sustainable Development DepartmentEurope and Central Asia Region (ECSSD)

Document of the World Bank

January, 2009

ABBREVIATIONS AND ACRONYMS

ALDI Local Development Initiatives Agency

BFP Budget Framework Papers

BH Bosnia and Herzegovina

CDPC Community Development Planning Committee

CEPOS Center for Policy Studies

DFID UK Department for International Development

DPA Dayton Peace Agreement

EBRD European Bank for Reconstruction and Development

EDA Economic Development Administration

EIU Economist Intelligence Unit

EU RED European Union Regional Economic Development Project

EU SAA European Union Stabilization and Association Agreement

EU European Union

FBH Federation of Bosnia and Herzegovina

FBHMTC Federation of Bosnia and Herzegovina Ministry of Transport and Communications

FIAS Foreign Investment Advisory Service

GAP Governance Accountability Project

GDP Gross Domestic Product

GIB Annual Budget Report (Godisnji Izvjestaj o Budzetu)

HDZ Croatian Democratic Union

HSP Croatian Party of Rights

HSS Croat Peasant Party

IDPs Internally Displaced Persons

IMF International Monetary Fund

IMF GFS IMF Government Finance Statistics

ITA Indirect Taxation Authority

KM Konvertible Mark

LDP Local Development Project

LSMS Living Standards Measurement Study

MA Municipal Administration

MC Municipal Council

MOF Ministry of Finance

MOPE Ministry of Urban Planning and Environment

MTCs Ministries of Transport and Communication

MTDS Medium Term Development Strategy

MUCCE Ministry of Urban Housing, Communal Services, Civil Engineering and Ecology

MZ Mjesna Zajednica

NGO Non-Governmental Organization

O&M Operations and Maintenance

OBD Original Budget Data

OECD The Organization for Economic Co-operation and Development

OHR Office of High representative in Bosnia and Herzegovina

OSCE Organization for Security and Co-operation in Europe

PDP Party of Democratic Progress

PEFA Public Expenditure and Financial Accountability

PFM Public Finance Management

PIER Public Expenditure and Institutional Review

PRSP Poverty Reduction Strategy Paper

RAD Sarajevo Kanton Solid Waste Management Company

RD Road Directorate

RS Republika Srpska

RSMTC Republika Srpska Ministry of Transport and Communications

RzB Work for Improvement-Peoples Party

SBH Bosniak Party for Bosnia-Herzegovina

SDA Bosniak Party of Democratic Action

SDP Social Democratic Party

SDS Serb Democratic Party

SEED South East Europe Enterprise Development

SIGMA Support for Improvement in Governance and Management

SME Small and Medium Enterprises

SMOTC State Ministry of Transport and Communications

SNSD Union of Independent Social Democrats

SOE State Owned Enterprise

SRS Serb Radical Party

UNDP United Nations Development Programme

UNHCR United Nations High Commission for Refugees

USAID United States Agency for International Development

VAT Value Added Tax

VP Vodoprivredas

YEPP Youth Empowerment Partnership Program

ACKNOWLEDGEMENTS

The report was prepared as a background analysis to inform the ongoing policy dialogue and oper-ational program of the World Bank with Bosnia and Herzegovina on municipal governance and serv-ice delivery.

This study was developed under the guidance of Orsalia Kalantzopoulos and Jane Armitage(Country Directors), prepared under the direction of Lee Travers and Wael Zakout (SectorManagers), and has benefited from the continuous encouragement and guidance from DirkReinermann and Marco Mantovanelli.

The study was led by Aniruddha Dasgupta (Task Team Leader) and prepared by Yan Zhang, KaiKaiser, Bjorn Philipp, Paula Lytle and Vesna Francic. Research support was provided by IrinaSmirnov, Emir Dervisevic, Halko Basaric, and Zehra Kacapor. Bonita Brindley edited the report to amuch more enjoyable piece. The collaboration from Mary McNeil and Andre Herzog of the WorldBank Institute (WBI) is gratefully acknowledged. The household survey was conducted by PRISMResearch, with support from the Austrian Government through WBI. Senad Sacic helped with coor-dinated mission schedules, data requests and translation work. Delphine Hamilton formatted thereport and Tijana Medi} translated the document in local language.

The report has benefited tremendously from discussions with and comments from colleagues at dif-ferent stages of preparation, in particular: Goran Tinjic, Orhan Niksic, Irina Smirnov and JacquesBure, Richard Martin Humphreys, and Junghun Cho. The peer reviewers were Matthew D. Glasser,Larry Hannah, William Dillinger, and Barbara Nunberg.

The team is indebted to officials from the BH at all levels, to government agencies and non-govern-mental organizations, for providing key inputs, data and help with the analysis.

The team is also grateful for comments and discussions with colleagues from the IMF, OSCE, OHR,EC, EBRD, KfW, USAID, Sida, UNDP and other organizations. Special thanks go to the insightfulcomments from the Governance Accountability Program (GAP) supported by USAID, Sida, andEKN. The team is particularly grateful to Marc Ellingstad, Elisabet Tomasinec, and Erik Litver fortheir support.

An early version of the report was presented and discussed with government representatives fromBH at all levels, including mayors, at a meeting organized by the World Bank, held in Sarajevo onSeptember 17, 2008.

CONTENTS

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i

Chapter 1: Local Governance and Service Delivery in Bosnia and Herzegovina . . . . . . . . .1

1.1 Municipalities and post-conflict decentralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

1.2 Municipalities are critical for public service delivery in Bosnia and Herzegovina . . . .4

1.3 The State of Local Service Delivery Outcomes in Bosnia and Herzegovina . . . . . . .5

1.3.1 Variations across municipalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

1.3.2 Variations across sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

1.4 Key findings: What do service delivery outcomes in BH tell us? . . . . . . . . . . . . . . .20

1.5 The new challenge ahead: improvement of local service delivery performance . . . .22

Chapter 2: Bosnia and Herzegovina’s Decentralization Framework . . . . . . . . . . . . . . . . . . .25

2.1 The Evolving Decentralization Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

2.2 Dimensions of Accountability for Decentralized Service Delivery . . . . . . . . . . . . . . .28

2.2.1 Horizontal Accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

2.2.2 Vertical Accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

2.3 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

Chapter 3: Water and Roads: How Sector Structures Influence Local Service DeliveryPerformance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

3.1 Municipalities and the Roads Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

3.1.1 General state and organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

3.1.2 Road Sector Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

3.2 Municipalities and Water Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42

3.2.1 General state and organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42

3.2.2 Water Sector Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

3.3 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Chapter 4: Options to Expand the Envelope for Capital Investments in Municipalities . . .47

4.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

4.2 Municipal Public Finances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

4.3 Own-Source Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

4.4 Fiscal Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

4.4.1 Single Account Fiscal Transfer Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

4.5 Expenditure Composition and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

4.6 Municipal Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

4.7 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

Chapter 5: Public Financial Management Performance across Municipalities . . . . . . . . . . .61

5.1 The Why and What of Sub-national PFM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61

5.2 Key Findings and Summary of PFM Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . .63

5.2.1 Credibility of the Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67

5.2.2 Budget comprehensiveness and transparency . . . . . . . . . . . . . . . . . . . . . . . . . .69

5.2.3 Policy-Based Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71

5.2.4 Predictability and control in budget execution. . . . . . . . . . . . . . . . . . . . . . . . . . .71

5.2.5 Accounting, Recording, and Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73

5.2.6 External Scrutiny and Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74

5.2.7 Donor Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74

5.3 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74

Chapter 6: Conclusions and Going Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77

6.1 Strengthen the Enabling Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77

6.2 Expanding fiscal space . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77

6.3 Increasing accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78

6.3.1 Supply Side: Enhancing Horizontal Accountability . . . . . . . . . . . . . . . . . . . . . . .78

6.3.2 Demand Side: Enhancing Vertical Accountability . . . . . . . . . . . . . . . . . . . . . . . .79

Annex 1.1: Municipal Sample Survey Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83

Annex 1.2: Service Outcome Indicators and Ranking Methodology . . . . . . . . . . . . . . . . . . .86

Annex 2: BH Expenditure Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89

Annex 3.1: GIB Revenue Classifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91

Annex 3.2: GIB Expenditure Classifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93

Annex 4: Cantonal-Municipal Revenue Sharing Arrangements . . . . . . . . . . . . . . . . . . . . .95

Annex 5.1: Local Political Dynamics and Space for Change . . . . . . . . . . . . . . . . . . . . . . . . .97

Annex 5.2: Diagrams on Municipal Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103

Annex 6.1: Summary of PEFA Outcomes of BH Municipal Governments . . . . . . . . . . . . .105

Annex 6.2: PEFA Scoring Spider Diagram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107

Annex 6.3: Detailed Assessment of PFM (approximately 10 pages) . . . . . . . . . . . . . . . . . .113

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117

FIGURES

Figure 1: Overview of Political/Administrative System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Figure 2: Population and Size Distribution of Municipalities . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Figure 3: Average Population of Municipalities in Selected European Countries . . . . . . . . . . .5

Figure 4: Service outcomes vary widely across municipalities . . . . . . . . . . . . . . . . . . . . . . . . . .7

Figure 5: Service Delivery Outcome Score . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Figure 6: Income alone does not explain better outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Figure 7: Small municipalities can achieve excellent service outcomes . . . . . . . . . . . . . . . . .10

Figure 8: High population density helps, but not a condition for good service outcomes . . . .10

Figure 9: Service outcomes vary across old and new municipalities… . . . . . . . . . . . . . . . . . .11

Figure 10: but are more income-sensitive in newer municipalities . . . . . . . . . . . . . . . . . . . . . . .11

Figure 11: Access to basic services is low and people are not satisfied . . . . . . . . . . . . . . . . . .12

Figure 12: Room for improvement, particularly for water and waste . . . . . . . . . . . . . . . . . . . . .13

Figure 13: Quality ratings need balanced interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Figure 14: Citizens face harsh consequences if roads are inaccessible during winter . . . . . . .15

Figure 15: Almost half of households with water connection experience problems . . . . . . . . . .16

Figure 16: Higher-income municipalities provide better waste collection … . . . . . . . . . . . . . . .17

Figure 17: that meets household needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Figure 18: Quality and reliability decline with lower per capita municipal revenue . . . . . . . . . .18

Figure 19: Most households operate their own septic tanks . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Figure 20: Predominantly rural households face problems with their sewage system . . . . . . . .19

Figure 21: Feedback to providers would improve service quality. . . . . . . . . . . . . . . . . . . . . . . .19

Figure 22: Major Municipal Expenditure Assignments by Entity . . . . . . . . . . . . . . . . . . . . . . . . .26

Figure 23: Governance Structure for Municipal Service Delivery . . . . . . . . . . . . . . . . . . . . . . . .30

Figure 24: Participation or attendance at various local governance activities . . . . . . . . . . . . . .34

Figure 25: Unbundling Roles and Responsibilities for Decentralized Service Delivery . . . . . . .35

Figure 26: More roads than water pipes in under-funded municipalities . . . . . . . . . . . . . . . . . .35

Figure 27: Municipalities can increase satisfaction in the roads sector . . . . . . . . . . . . . . . . . . .36

Figure 28: Road Network in BH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

Figure 29: Institutional Responsibilities and Decentralization of the Road Sector in BH . . . . . .37

Figure 30: FBH Road Sector Fiscal Flows before 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

Figure 31: FBH Road Sector Fiscal Flows after 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

Figure 32: Type of community involvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

Figure 33: Sources and Uses of Financing for roads in FBH . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Figure 34: FBH Water Sector Fiscal Flows before July 2007 (status after July 2007) . . . . . . . .44

Figure 35: Municipal Expenditures in BH (2007, projected) . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

Figure 36: Aggregate Municipal Expenditures (2006, estimated) . . . . . . . . . . . . . . . . . . . . . . . .49

Figure 37 : Municipal Diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

Figure 38: Non-Tax Revenues versus Per Capita Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .50

Figure 39: Municipal Revenue Structure (RS percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51

Figure 40: Vertical Shares from the Single Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

Figure 41: Phasing in Ratios for the Single Account distribution formula (percent) in FBH . . . .53

Figure 42: Formula versus Legacy in Municipal Single Account Allocations (FBH) . . . . . . . . . .54

Figure 43: Formula versus Legacy in Municipal Single Account Allocations (RS) . . . . . . . . . . .54

Figure 44: Formula versus Legacy in Municipal Single Account Allocations (FBH) . . . . . . . . . .55

Figure 45: Wage Share against Per Capita Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

Figure 46: Selected Capital Expenditures by Municipalities (RS, 2005) . . . . . . . . . . . . . . . . . .57

Figure 47: Expenditures by Functional Classification (percent) in RS . . . . . . . . . . . . . . . . . . . .58

Figure 48: Key Regulations Concerning Municipal PFM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63

Figure 49: Service Outcome Score and PFM Scores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64

Figure 50: PFM Scores and Population Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64

Figure 51: PFM Scores, Service Outcome Score, and Per Capita Revenue . . . . . . . . . . . . . . .65

Figure 52: PFM Scores, Service Outcome Score, and Legacy . . . . . . . . . . . . . . . . . . . . . . . . .65

Figure 53: Average Absolute Deviation of Primary Budgets for 20 Municipalities . . . . . . . . . . .68

Figure 54: Sample Instances of Municipal Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73

Figure 55: Summary of Policy Recommendations, Institutions, Actions, and Instruments. . . . .80

Figure 56: Directly elected mayors are generally from the majority party in each Municipal Council .97

BOXES

Box 1: Municipalities in Bosnia and Herzegovina: Legacies of Conflict . . . . . . . . . . . . . . . . .6

Box 2: Sarajevo: Cooperation brings benefits to citizens . . . . . . . . . . . . . . . . . . . . . . . . . . .20

Box 3: The BEACON Scheme: learning from performing municipalities . . . . . . . . . . . . . . .22

Box 4: Major Political Parties in BiH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Box 5: Bugojno-moving forward together . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

Box 6: Breza-Citizens participate in building Local Infrastructure . . . . . . . . . . . . . . . . . . . .41

Box 7: Small steps to attract small business-Ljubinje deregulates local fees . . . . . . . . . . .52

Box 8: Ugljevik: Budgeting based on citizens’ needs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70

Box 9: Foca: Local Democracy at work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98

Box 10: Certifying quality public services: commitment to customer satisfaction . . . . . . . . .100

Box 11: MZS have lost their pre-war role in community development . . . . . . . . . . . . . . . . .101

From Stability to PerformanceLocal Governance and Service Deliveryin Bosnia and Herzegovina

EXECUTIVE SUMMARY

1. A decade after the conflict, Bosnia and Herzegovina municipalities have stabilized and are freefrom the fear of violence. Today, thanks to a positive external environment, the economy is stableand enjoying strong growth. The successful introduction and administration of the Value Added Tax(VAT) has boosted local-level revenues and led to a positive fiscal outcome in 2006 and 2007. Aftermonths of paralysis, the Stabilization and Association Agreement has been signed with theEuropean Commission, putting the country on track for eventual European Union membership. Thiscombination of political stability and good economic performance provides an opportunity to tacklesystemic weaknesses in local-level public service delivery that limit the country’s long-term econom-ic growth and living standards.

2. Of necessity, the Dayton Peace Agreement created post-conflict institutions that securedpeace through compromise and power-sharing. But now that peace is secured, and donor financ-ing is dwindling, these institutions are beginning to appear cumbersome, expensive, and inefficient.Policy functions are fragmented and duplicated across two entities and levels of government.Despite large public sector spending-more than 45 percent of GDP-the quality of municipal publicservice delivery is low and users are dissatisfied.

3. The research for this report revealed that the municipal level is an exceptionally promising plat-form to strengthen government responsiveness across a range of basic services that benefit bothhouseholds and businesses because municipal governments enjoy strong political legitimacyamong citizens. This report argues that local service delivery performance can be improved withoutthe delays associated with the time-consuming and politically difficult path of constitutional reform.In fact, the passage of the Local Self Governance Laws, Revenue Allocation Laws, and the ITAreforms has established the basic framework needed. Therefore, this report suggests that much canbe accomplished by introducing a range of measures to improve local service delivery performancewithout increasing overall public sector spending.

1. Methodology

4. Three sets of instruments were adopted. The enabling environment was explored through adesk review of laws and regulations affecting municipal performance; and in-depth interviews withkey informants to discover implementation status. The demand side of municipal services wasexplored by conducting a two-thousand-household user survey on local service delivery across 20municipalities. The survey covers 10 services, five of which are under municipal responsibility. Thesupply side of services was explored by collecting National Fiscal Data (across all 142 municipali-ties) from standardized (“GIB”) data to understand the fiscal positions of municipalities and to exam-ine priorities for managing fiscal space that had potential for improving service delivery. In-depth fis-cal and public financial management diagnostics were conducted for 20 municipalities, an instru-ment from the Public Expenditure and Financial Accountability (PEFA) framework adapted to themunicipal level to reflect characteristics and realities of municipal government and BH’s local con-text. In addition, in-depth interviews were conducted with mayors and local councilors to discoverthe primary drivers for reforms, and with key informants on road and water sectors to explore sec-tor-specific challenges. Lastly, brief case studies of service delivery examples illustrate precondi-tions for these successes.

i

2. Main Findings

5. This report anchors itself in service outcomes. It offers three main findings on local servicedelivery outcomes and five primary dimensions that were found to influence them.

A. Service Delivery Outcomes

6. Local service delivery outcomes are extremely uneven across municipalities and sectors,access to services is poor, and overall user satisfaction is low. More than a decade after theDayton Peace Agreement, it is evident that among the services provided at the municipal level-waterand waste have the most room for improvement. Almost 1.4 million BH citizens have no running wateror waste removal. Water coverage and quality is a problem for many households. Waste collection cov-erage is inadequate and its quality and reliability decline with lower per capita municipal revenue. Thequality of local roads is good but reliability and access need improvement.

7. Municipalities lack resources and need to increase fiscal space to expand access tobasic services. This is especially true for rural areas and among municipalities with low per capitarevenues. Furthermore, road and water sectors both have capital-intensive network infrastructures,and service outcome improvements depend heavily on the financial arrangements in both sectors.Expanding and rehabilitating roads and water pipelines requires funding that municipalities alonecannot provide.

8. Service providers lack incentives to improve their performance. Municipal serviceproviders operate in an information vacuum. The current accountability structure isolates them fromthe feedback they need to improve performance, including feedback provided by an incentive sys-tem that rewards better performers. To date, no publicly available information exists on normativeperformance benchmarks, so service users and citizens have limited ways to hold delivery providersaccountable, and without channels to receive feedback, the delivery providers have scant informa-tion on what they need to do to improve user satisfaction.

B. Factors Influencing Service Delivery Outcomes

9. The report examines service delivery outcomes along five essential dimensions: (a) enablingenvironment; (b) sector structure; (c) municipal fiscal space and resources; (d) local public financialmanagement capacity; and (e) accountability structure.

10. Enabling Environment. The basic enabling environment for BH municipalities to provide bet-ter public services has been in place since the passage of a series of laws such as the Local Self-Governance law in both entities, the law on Revenue Allocations, the introduction of VAT, and theclarifications regarding rules for municipal borrowing. The ITA reforms and the Revenue Allocationlaws in both entities have institutionalized a more stable and autonomous source of revenues formunicipalities. The recent Local Self-Governance Laws are a step toward strengthening local gov-ernment discretionary space and accountability. But many challenges remain to fully implement theLocal Self-Governance law and to harmonize sectoral legislation with the Local Self-Governancelaw. Although decentralization principles have been laid out, the degree of progress varies widelyamong sectoral ministries (including the cantonal ministries). Municipalities have been lackingnational level champions to advance municipal sector.

11. Sector Structure. The overarching framework for decentralized service delivery is in place, butwide variations in road and water sectors’ functional and financial arrangements indicate that decen-tralization manifests differently by sector. Water has been largely decentralized to the municipal level,whereas in the road sector, municipalities and higher-level governments in BH share responsibilityfor local roads provision. As a result, improving municipal performance requires different actions fordifferent sectors. In some sectors, such as roads, multi-level responsibilities create fragmentation thatexacerbates reduced capacity, leading to poor performance outcomes. Therefore, streamlining orrealigning the functional assignments is necessary to capture economies of scale and to improvecoordination across jurisdictions. Some local roads service outcome improvements are at the mercyof decisions made at higher levels of government, but municipalities can improve customer satisfac-tion by offering incentives (performance-based management contract, for instance) for local road

Local Governance and Service Delivery in Bosnia and Herzegovina

ii

maintenance companies to provide more reliable services. In contrast, in the water sector, cost andbenefit are locally determined and costs should be covered locally. Municipal performance improve-ments will benefit from further commercialization of water utility companies, and strengthening munic-ipal financial capabilities through appropriate tariff decisions made in the municipal councils. Bothsectors also have common concerns-finance and regulatory oversight of the public enterprises fromthe municipal council and upper-level government agencies to ensure public services access, quali-ty, reliability, and affordability, and to mitigate contingent liabilities.

12. Municipal fiscal space and resources. Bosnia and Herzegovina municipalities have diversefiscal positions in current and prospective transfers from higher-level governments, own-source rev-enues, borrowing levels and potential, prevailing expenditure structures, and the related scope forefficiency gains and/or improved prioritization of expenditures. Similarly, municipalities have widelydiverse revenue capacity-own-source revenues (user fees and charges) represent close to one-third of the total. The ITA/VAT transfers replaced derivation-based sales tax and reduce the dispar-ities of per capita revenue across jurisdictions. Depending on the growth of ITA pool, VAT alloca-tions could fall short of expenditure pressures for the special needs of urban or peri-urban munici-palities with large returnees. All municipalities could increase fiscal space by improving their expen-diture efficiency, for example by reducing gap-filling expenditures for unfulfilled higher-level govern-ment responsibilities and stop-gap transfers to affiliated public sector enterprises, by increasing effi-ciency in wage bills, and by better prioritizing projects. Recently, municipal borrowing has beenallowed in both entities, which increases the importance of a quality regulatory environment andenhanced monitoring of municipal fiscal well-being, therefore a cross-cutting issue is the lack of aneffective financial reporting system and process on which to base quality analysis of fiscal spaceand the potential for its expansion.

13. Local public financial management capacity. The fundamental legal framework for goodfinancial management is largely in place in BH. Recent financial management reforms haveachieved some success: Bosnia and Herzegovina has established fundamental public financialmanagement systems for managing macro-fiscal developments, some elements for enabling strate-gic allocation of resources, and a few tools for improving operational/technical efficiency. However,a systematic assessment of PFM outcomes in 20 municipalities shows that the fragmented andevolving policy and legal/regulatory environment has handicapped local-level policy design andimplementation. In general, better PFM performance is associated with better overall service out-comes across 20 municipalities. PFM performance varies greatly across municipalities, requiringintensive customized capacity building at all levels, particularly on medium-term (multi-annual)budgetary planning to ensure strategic resource allocation and prioritized sectoral spending, gener-al oversight of utilities and public enterprises, budget execution, and accounting records and prac-tices. Benchmarking municipal public financial management is a useful practice to highlight weak-nesses, allow governments to develop remedial plans, and provide the basis for reform dialogueamong development partners and governments.

14. Accountability Structure. Detailed analysis of the existing and emerging accountabilitymechanisms reveals strengths and weaknesses in the checks and balances to ensure good serv-ice outcomes. Municipalities are subjected to vertical accountability to non-state actors-citizens andservice users-via periodic elections and informal processes through which citizens demand goodperformance from officials and service providers. The introduction of jurisdiction-based direct elec-tion of Mayors provides the opportunity to build a broad-based policy platform and enhance perform-ance accountability to citizens. Elected Mayors have the desire to create well-run municipalities, andtheir peer-to-peer relationships create both the competitiveness and the collegial support thatappear to drive reforms.

15. Horizontal accountability includes state-to-state relationships either at the same level-munici-pal council and municipal administration-or across tiers of government. Horizontal accountability ischaracterized by weak oversight on the part of the Municipal Council on the service and PFM per-formance of the Municipal Administration, including the governance and financial relationshipbetween municipal companies and municipal government. Horizontal accountability is further com-plicated by a four-level split and de facto overlapping of responsibilities. Higher-governments’(Ministry of Finance and line/sectoral ministries) monitoring and oversight roles are constrained bylack of service performance standards, weak infrastructure for financial reporting, and lack of mon-itoring and evaluation capacity. Overall, the current accountability structure is weakened by lack ofadequate information on service delivery outcomes and effective channels for feedback.


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3. Recommendations Going Forward

16. In this evolving post-war period, Bosnia and Herzegovina can begin to pursue policy agendas to ori-ent its systems for higher performance without the time consuming and politically difficult path of consti-tutional change. This report points out that the achievements of the last few years-significant changes inlegislation, regulations, and financing-can now make a consolidated contribution to the transition frommunicipal stability to municipal performance.

17. To improve municipal services delivery performance the government needs to tackle threemain areas. First BH needs to keep strengthening the enabling environment. Second, municipalitiesmust expand their fiscal space to enhance local service delivery. Each municipality should examinethe four dimensions of fiscal space-transfers, own-source revenues, expenditure efficiency, and bor-rowing to maximize the dimensions with the most potential to increase local-level fiscal capacity toimprove service outcomes. Third, municipalities must be held accountable to citizens for servicedelivery. This will require implementing a performance-based system that includes publicly availableperformance benchmarks and indicators, and offers incentives to providers to improve their servicedelivery. The following key recommendations will help realize this crucial transition.

18. Strengthen enabling environment. BH must fully implement the Laws on Local Self-Governance and harmonize sectoral legislation with Laws on Local Self-Governance. Developmentpartners need to support a coherent agenda for the municipal sector, including encouraging state-and entity -level champions to effectively implement decentralization and municipal sector opera-tion. Sector ministries should work with municipalities to develop policies and strategies and set upframeworks for sectoral standards and institutional arrangements to monitor, evaluate, and enforcesector performance standards for municipal service delivery.

19. Expand fiscal space. First, the State and two entities should complete the phasing in periodof revenue sharing formula to enable a predictable and transparent revenue stream to the munici-palities. Second, affluent municipalities must increase own-source revenues by gradually raising tar-iffs to cost-recovery levels, adopting business-friendly fees and charges, and developing morebuoyant tax bases, including property taxes. Third, the Ministry of Finance at all levels shouldstrengthen its ability to monitor fiscal risks and help municipalities to be on a sounder financial foot-ing. The international community can provide technical assistance to municipalities to strengthentheir public financial management as well as capital investment planning and project appraisalcapacities, which would enable them to take advantage of borrowing. Fourth, municipalities mustincrease expenditure efficiency, which will require detailed data and clear functional classifications toalign resource allocation with policy.

20. Increase accountability. Both vertical and horizontal mechanisms require strengtheningthrough a framework for service delivery standards, monitoring and evaluation, and oversight bod-ies to ensure compliance across constituent jurisdictions. Higher-level governments should workwith municipalities to establish minimum service standards and estimate fiscal resources needed.Next Ministry of Finance and sector ministries need to strengthen their financial and technical over-sight functions and design performance-based grants to complement the existing intergovernmen-tal transfers. Municipal councils must improve oversight of service providers, monitor the decision-making of municipal executives, and municipal administrations must enhance their PFM capacity.Citizens and local officials could play a more significant role in securing benefits of efficient localgovernment, and increase civil society “voice” and participation. Development partners can promotesystematic and independent benchmarking of municipal service delivery and PFM performance-over temporal and spatial dimensions-because accurate and comprehensive data are essential toincrease both supply and demand-side accountability.


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Chapter 1: Local Governance and ServiceDelivery in Bosnia and Herzegovina

1.1. Municipalities and post-conflict decentralization

1. The current political context is a legacy of conflict. In November 1995, the Dayton PeaceAgreement (DPA) ended the war that began in April 1992, following a referendum on independencefrom Yugoslavia when Bosnian Serb leaders refused to be incorporated into the new state anddeclared a separate state of their own. In the ensuing conflict some 250,000 people in Bosnia andHerzegovina died, the scale of internal population displacement was massive, and one million peo-ple became refugees-primarily in other European countries.

2. Local fighting varied in intensity and alliances shifted during the war. Sometimes Croatand Bosniak forces fought each other and sometimes they were allied against the Serbs. On March1994, the Washington Agreement negotiated a ceasefire between Bosniak and Croat forces, whichresulted in a federation between them. The two groups were largely concentrated but still living inclose proximity along informal but well-understood demarcation lines that were determined by localconflicts. The 1995 DPA ended remaining conflict between the Serbs and the allied Croat-Bosniakforces.

3. BH’s post-conflict institutional structure sought to ensure peace. The decentralized statestructure carefully balances political/ethnic interests. The national government remains weak andmost power is vested in two entities: the Federation of Bosnia and Herzegovina (FBH) andRepublika Srpska (RS), plus the special district of Brcko (see Figure 1). The Federation is dividedinto ten cantons; Sarajevo Canton has a special status that primarily gives it greater control over itsconstituent municipalities.

4. The DPA established two entities-FBH and RS. FBH has two tiers of sub-entity govern-ments, primarily to accommodate both Bosniak and Bosnian Croats interests. FBH’s structure of tencantons and 79 underlying municipalities is more complex and decentralized than in RS, where rela-tions between the entity and municipalities are direct.


1

5. FBH cantons have their own diverse organizational structures.1 Ten highly autonomouscantons-a legacy of protecting ethnic homogeneity-have fully fledged legislative and executivestructures; the canton heads are elected by a majority of the cantonal Assembly from candidatesnominated by legislators. The main organizational units of cantons are ministries. Each canton hasits own legislation, regulation, decrees, administrative decisions that might affect the municipallevel.2

6. Cities are an additional structure in urban governance. In the FBH, municipalities withmore than 30,000 inhabitants can establish city status to amalgamate and coordinate policiesamong urban municipalities. There are three cities in FBH-Sarajevo3, Mostar, and Tuzla, and two inRS-Banja Luka and Srpsko Sarajevo. Cities have their own budgets, financed by own revenues,shared revenues, and grants from cantons (in the Federation) or Entity (in RS). There have beencases where the administrative relationship between cities and municipalities was not always clearand remained to be settled by politics or the judiciary. However, Mostar City has been reformed andunified, and Tuzla and Mostar are now being treated as other municipalities in FBH; but Sarajevohas kept a complex structure city in FBH.

7. BH Municipalities had a history of self-governance. In the former Yugoslavia, municipalgovernments had significant functional autonomy.4 The last pre-war municipal elections were heldin 1990 and during the war some internally displaced municipal council members established“municipalities-in-exile” during the war. Since the war,5 many initiatives to achieve political stabilityhave focused on municipalities, including improving public administration, participation, andaccountability.

Figure 1: Overview of Political/Administrative System


2

1. Five cantons (Una-Sana, Tuzla, Zenica-Doboj, Bosnian Podrinje, and Sarajevo) have a Bosniak majority, three (Posavina, West Herzegovina, andWest Bosnia) have Bosnian Croat majority, and two (Central Bosnia and Herzegovina-Neretva) are ethnically mixed, with special legislative proce-dures to protect constituent ethnic groups.

2. Before the Law on Local Self-Governance was passed, each canton had its own cantonal constitution governing the operations of municipalities.All cantons passed local self-government laws between 1995 and 1999, which vary to a considerable degree, particularly regarding the assignmentof functions and resources. These differences in the legal framework were reinforced by different implementation practices.

3. The City of Sarajevo encompasses 4 municipalities (Stari Grad, Centar, Novi Grad and Novo Sarajevo).4. Bogdan Denitch, “Evolution of Yugoslav Federalism.” Journal of Federalism, 1977. Municipalities in the former Yugolsavia controlled revenue sources

through taxation and revenue from local economic enterprises and exerted authority through the control of appointments of the heads of sociallyowned enterprises.

5. These “municipalities-in-exile” were abolished after the first post-war municipal elections in 1997.


3

6. A 1998 survey found that displaced people said fear for their personal security was the main obstacle to returning and most preferred to return asa group (See Bosnia Social Assessment, 1999). In early 2000, after four and half years of international reconstruction effor ts, refugee return beganto increase dramatically (See ICG, “Bosnia’s Refugee Logjam Breaks: Is the International Community Ready?” May 2000).

7. In Odzak, Jablanica, Mostar, Stolac, Berkovici, and Novo Sarajevo, less than half of respondents said their municipality is safe; but more respon-dents said, “neither safe nor unsafe,” or refused to answer.

8. The most recent census in Bosnia-Herzegovina was 1991. 2005 population figures are estimates.

8. Conflict legacies are reflected in current municipal structure. More than forty new munic-ipalities were created; some pre-war municipalities lost territory or were divided, many new munic-ipalities were a Mjesna Zajednica (MZ) of the parent municipality that was split off. Most new munic-ipal boundaries reflect changes in ethnic composition. Municipalities were divided between the FBHand RS, and MZs with ethnic minorities became new municipalities. Many new municipalities aresmall, rural, have minimal infrastructure, and are populated by refugees and internally displacedpersons (IDPs) from the parent municipality. Other municipalities had well-established infrastructurebefore the war but sustained significant damage. The DPA also affected municipal governance; newmunicipalities struggled with administration, and some had minimal infrastructure. The parentmunicipalities remained with fragmented territory, documentation, and history.

9. Municipalities are now a safe place to live. Recently the pace of return has slowed; itappears that many people who intended to return to their municipality of origin have done so. A 1998survey found that displaced people considered personal security as the main obstacle to returning;but during 2000-01, personal security concerns were largely supplanted by issues such as progresswith reconstruction and potential for employment. In 2007,6 most household survey respondentsconsidered their municipality a safe place to live, even in a municipality such as Mostar, almost halfof respondents considered the municipality safe, and less than one-quarter considered it unsafe.7

10. Municipalities vary widely in size, population, and resources. Population size ranges froma “micro” municipality-Istocni Stari Grad with 62 inhabitants, to Banja Luka with over 224,000.However, 18 municipalities have over 50,000 people, and six of these are over 100,000. Over halfof municipalities have more than 18,000 inhabitants and most of BH’s population lives in reasonablysized municipalities.8 Figure 2 depicts total population in each size classification. About one fifth (27)of BH municipalities had less than 5,000 inhabitants but these accounted for less than one percentof BH’s population.

Figure 2: Population and Size Distribution of Municipalities

11. Small municipalities can be viable.9 In response to the war, BH created many new munici-palities, which increased the total number by almost half and fragmented many into sizes that maybe too small for efficient service delivery. However, BH municipalities are still on the larger end ofthe European average, in line with Netherlands gemeenten (Table 1). But averages disguise sizedistributions, especially in small or rural municipalities. Citizens of smaller municipalities may bene-fit from higher levels of government accountability, but the drawback of smaller municipalities maybe their inability to attract skilled workers or achieve economies of scale.

12. Poverty is geographically concentrated in some communities. Poverty studies revealedthat combined economic dislocation and societal cleavages dramatically reduced the social capitalof some communities, and these same communities frequently have a high concentration of IDPsor refugees and returnees.10 Furthermore the rate of poverty is higher in rural areas than urban, andas of 2004, the RS had a higher poverty rate than FBH, although the gap has been narrowing.Municipalities also vary greatly in terms of physical resources. Certain areas are mountainous withlittle arable land. Others are heavily forested and rely on exploitation of timber resources, and oth-ers have considerable agricultural production.

1.2. Municipalities are critical for public service delivery inBosnia and Herzegovina

13. Municipalities are the key providers of essential public services in BH. These services includeheating, local roads, sewage, solid waste disposal and water; municipalities also deliver social serv-ices-culture and communal services, housing, pre-school, and sports; and help facilitate citizens’access to health and education services by maintaining primary and secondary school buildings,providing school bus transportation for students and teachers, and delivering physical education,ambulance services and health care supplies. Local self-governance laws empower municipalitiesin both entities to establish companies, institutions, or other organizations to manage, finance, andimprove local infrastructure and services. Municipalities may adopt rules on operational procedures,regulate fees, and take management decisions; they provide administrative services and regulatebusiness, which affects local economic development.


4

9. A range of other factors determine the optimal size of BH municipalities. Consolidating municipalities may not produce better outcomes. A recentWorld Bank review suggests that consolidating or merging local governments does not in itself bring about better results in efficiency or servicedelivery outcomes. The process and context for reforms significantly affect whether and how the reforms offset perceived costs of smaller size andjurisdictional fragmentation. Sometimes consolidation may not be politically viable, in which case cooperative arrangements across several munic-ipalities can address disadvantages of smallness. However, cooperative arrangements may not work well if municipal size disparities are too greator if there are lingering ethnic tensions. For example, the municipalities near Sarajevo are split across entity boundaries, and each has a full munic-ipal administration despite being only a few kilometers apart.

10. 2001 Poverty Assessment.

14. Municipal governments exclusivelyprovide local roads, water, sanitation, andwaste removal. The municipalities own pub-lic utility companies that provide these servic-es. The only exception is Sarajevo Canton,where those services are provided byCantonal utilities. In most municipalities, aCommunal Services Department in theadministration oversees public works, andmunicipal councils set tariff structures.Typically in larger urban areas, a single utilitysupplies water and sewerage, but in smallermunicipalities, these utilities also managewaste, maintain roads, clean streets, removesnow, maintain gardens and parks, and oper-ate funeral services and parking lots. The util-ities finance their operations through userfees, but depend heavily on local and higher-level government co-financing for capitalinvestments.

15. Municipalities help facilitate healthand education services. But responsibilityfor providing health and education rests withhigher levels of government. In the RS, forexample, compulsory and tertiary educationis vested at the entity level, with separatelaws covering all four educational branches.In the Federation, however, the cantons haveprimary responsibility. Each of the ten cantons has its own law on preschool, primary, and second-ary education, and cantons with universities have laws on higher education. There are no schoolfees, so education is financed entirely out of public funds, but ministries at various levels financeand manage education. In the RS, the Ministry of Education and Culture plans, executes, and mon-itors policy, and in the FBH, cantonal ministries of education do this. Municipalities’ main responsi-bility is to maintain school buildings, manage water and sanitation facilities, and provide communalsports facilities.

16. Municipalities are entirely responsible for district heating. Despite its importance, districtheating has been broadly neglected by the municipalities and the entity-level energy ministries, andis only available primarily to urban residents of multi-family buildings. The FBH operates 25 districtheating systems, most of which are in municipalities with populations over 25,000. In both the FBHand the RS, district heating is handled by municipal-owned independent public companies that com-pletely lack regulatory oversight.

1.3. The State of Local Service Delivery Outcomesin Bosnia and Herzegovina

17. Service delivery outcomes vary across municipalities and sectors. The following sectionwill examine municipal characteristics that contribute to these variations-urban and rural; high, medi-um, and low per capita revenues; population size; and impact from the war (newly created or splitmunicipalities). Second, it will compare sectoral outcomes in water, sanitation, waste, local roads,and education along five dimensions-access, reliability, quality, responsiveness and overall satisfac-tion, and look at health care, along two dimensions.

18. BH municipalities are quite diverse. Population size, area/density, fiscal capacity, and thelegacy of war vary widely. The average municipal population is around 27,000 but ranges from 62


5

Country Average Population per

Great Britain 126,128

Lithuania 66,300

Sweden 30,040

The Netherlands 27,559

Bosnia and Herzegovina 27,042

Denmark 18,760

Belgium 16,960

Poland 15,561

Finland 10,870

Norway 9,000

Italy 7,105

Estonia 5,713

Germany 5,575

Latvia 4,400

Spain 4,930

Austria 3,421

Hungary 3,242

Switzerland 2,468

Czech Republic 1,659

France 1,580

Figure 3: Average Population of Municipalitiesin Selected European Countries

Source: PRISM and Steiner, R (2001) “Inter-municipalCooperation and Municipal Mergers in Switzerland”; Horwath, T.(2000) Local governments in Central and Eastern Europe“Decentralization: Experiments and Reforms.”

(Istocni Drvar in the RS) to 224,647 (Banja Luka). Estimated per capita revenues range from 62 KMper capita (Ravno in FBH) to 1,466 (Novo Sarajevo in FBH). The micro municipality of Petrovac (189inhabitants) reports per capita revenues of 4,825 and Istocni Drvar (62 inhabitants) per capita rev-enues of 6,291. The smallest municipalities typically result from Dayton accords fragmentation oflarger municipalities across the entities.

19. The twenty sample municipalities reflect this diversity. Fifteen municipalities were select-ed randomly across three per capita municipal revenue strata and according to population shares.Nine municipalities were chosen in the FBH and six municipalities in the RS. All municipalities under2,500 inhabitants (12 out of 142) have been dropped. The third component selected two municipal-ities within the city of Sarajevo, which is composed of four municipalities within FBH and three with-in RS. One municipality was selected randomly for FBH and RS respectively. Finally, the study alsoselected three of the largest cities outside of Sarajevo, namely Banja Luka (RS), Mostar (FBH), andTuzla (FBH).11

20. Thirty indicators measure outcomes in six sectors. Figure 4 shows the deviation from aver-age of each indicator in eight selected municipalities. Ilidza, the best performing municipality, on theupper left, scores better than average for 27 indicators; Berkovici, on the right, can beat averageoutcome only in six. Indicators for each of the five dimensions were selected individually accordingto each sector. “Access to local roads” means an asphalted road that connects the household withother parts of the municipality. “Access to water” means running water delivered by public pipe toinside the household; “access to sewage” means connection to a septic tank. “Waste access” refersto households that have nearby garbage dumpsters or regular garbage collection. As for education,elementary school enrollment ratio serves as proxy. For health it is access to a clinic or medicaloffice. Regular services (road cleaning, more than 21 hours of water, no need for maintenance, andphysical conditions of schools) measure reliability and the level of meeting citizens’ demands orabsence of problems represent the quality of services. Responsiveness reflects citizen’s trust inpublic institutions, i.e. the capability of formal institutions (service providers, municipality or neigh-borhood council) to solve problems with service delivery. Citizen satisfaction means their level ofoverall satisfaction.


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Box 1: Municipalities in Bosnia and Herzegovina: Legacies of Conflict

Half of the 20 municipalities that comprise the research sample for this study are divided or newly estab-lished. The sample includes the range of patterns by which municipalities were reshaped. Some were par-ent municipalities, some were divided and others were MZs of parent municipalities. Stolac and Berkovicireflect both: Stolac was the multiethnic parent municipality of which Berkovici was an MZ. Stolac is nowBosnian-Croat majority with a Bosniak returnee population and Berkovici is majority Bosnian-Serb. One ofthe MZs of Ilidza became a municipality in the RS. Zvornik and [amac also lost MZs. The municipalities ofOdzak, Kalesija, and Istocni Stari Grad were divided. In Odzak, the town center became the municipality.Istocni Stari Grad was created out of Stari Grad and consists of geographically dispersed MZs. Two of thesmallest municipalities were MZs of another municipality that was not in the sample. Doboj-Jug was a MZ ofDoboj, and Ribnik of Kljuc.

Some municipalities, although not formally split by the DPA, functioned during the war or immediate post-war period as divided municipalities with separate administrations (e.g. Jablanica). Most new municipalboundaries reflect changes in ethnic composition. Municipalities were divided between the FBH and RS, andMZs with ethnic minorities became new municipalities. For example, Zvornik was majority Bosniak and isnow majority Bosnian-Serb. Pre-war Doboj was approximately 55 percent Bosniak, the Bosnian-Croat pop-ulation joined the municipality of Usora, and now the municipality is nearly all Bosniak. Some municipalitiesthat maintained pre-war boundaries changed ethnic composition.

Some municipalities that maintained pre-war boundaries changed ethnic composition. Eight municipalitieshave maintained the same borders-Banja Luka, Breza, Jablanica, Ljubinje, Novo Sarajevo, Š[iroki Brijeg,Tuzla, Visegrad. Of these, Visegrad was Bosniak and Bosnian-Serb prior to the war and is now majorityBosnian-Serb. The Bosnian-Serb majority in Banja Luka increased from approximately half the population toover 90 percent. Mostar was initially divided into six municipalities (three Bosniak and three Bosnian-Croat)after the war, but subsequently OHR cancelled this division and established Mostar as a city with six areas.The OHR statute providing for the administrative unification has not been adopted by the city council.

11. For details on the Municipal Sample Survey Selection see Annex 1.1

Figure 4: Service outcomes vary widely across municipalities


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ILIDZA (1)

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Percentage Point Deviation from

Average Sector IndicatorsBERKOVICI (20)

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30


Average Sector Indicators

TUZLA (2)

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30



STOLAC (19)

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30



BANLA LUKA (3)

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

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50%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30


Average Sector IndicatorsMOSTAR (18)

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30



NOVO SARAJEVO (4)

-70%

-60%

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-40%

-30%

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-10%

0%

10%

20%

30%

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50%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30



KALESIJA (17)

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30



1.3.1 Variations across municipalities

21. Service delivery outcomes vary significantly among municipalities. Using results from thehousehold survey, a summary outcome indicator was generated that measures service outcomesfor each municipality, comparing deviations from average sector outcomes in each of the 20 sam-ple municipalities. Municipalities can then be ranked according to their scoring for each sector;though attempts to generate an overall performance ranking of municipalities should be approachedwith caution for several reasons (see Annex 1.2). The ranking in Figure 5 is based on results for all30 indicators, the municipal values, the averages of those 20 municipalities and percentage pointsthat the municipal outcome is above or below the score. An above-average municipality is assigneda leading score, and a municipality can score up to 30 if it is above average on all scores.

Figure 5: Service Delivery Outcome Score


8

22. Higher per capita revenues alone cannot explain better performance. Municipalities withhigher incomes have consistently better service delivery outcomes, but many low and middleincome municipalities can deliver above-average services. Samac and Odzak have low-to-mediummunicipal revenues (KM 192 to KM 297) but both achieved high scores-Samac is among the topfive performers. However, none of the top three municipalities generates revenues much below KM500 per capita. All five municipalities with per capita revenues above KM 600 perform significantlybetter than average, except Mostar. Poor municipalities, on the other hand, cannot entirely over-come the effects of low income to perform well. None of the three poorest municipalities (revenuesbelow KM 160 per capita) attains above-average outcome levels for more than 12 of the 30 indica-tors. They represent half of the six municipalities on the bottom line of service outcomes. Outliers inthis subgroup are Berkovici and Mostar, which markedly underperform, given their high incomes.Mostar is still struggling with the consequences of war, which inflicted severe infrastructure damage,and Berkovici is a newly created municipality (1995), which was subdivided from the pre-war munic-ipality of Stolac. Stolac’s service outcomes are next lowest to Berkovici, but Stolac also has muchlower per capita revenues.12

12. Stolac’s and Berkovici’s size and total revenues are comparable, but Stolac has ca. 13,000 inhabitants and Berkovici has only ca. 3,000.

Figure 6: Income alone does not explain better outcomes


9

23. Smaller municipalities can perform well despite higher fixed-cost ratios. Of the six sam-ple municipalities with populations of around 50,000, four are among the top five performers.13

However, below this threshold no clear pattern emerges. Doboj-Jug, a municipality with roughly4,500 inhabitants scores very well and leads in 21 indicators. Kalesija, on the other hand, has a pop-ulation of almost 35,000, but does only slightly better than the bottom three. The same is true forpopulation density. The most densely populated municipalities achieve the highest service out-comes, but low density does not correlate with poor service outcomes. Municipal income appearsto be a stronger determinant of performance outcomes-among the top ten performers, only Samacgenerates less than KM 200 per capita, whereas among the bottom ten performers, almost halfbelongs to the lower revenue tercile.

13. Mostar and Zvornik are not among them.

Figure 7: Small municipalities can achieve excellent service outcomes

Figure 8: High population density helps, but not a condition for good service outcomes


10

24. Generally, DPA-created municipalities do not perform worse. Among the new municipali-ties, the level of per capita revenues has more significant impact on service outcomes than for theirparent municipalities. Although new municipalities are also generally smaller, it is their limited expe-rience rather than their limited size that inhibits performance outcomes compared to those of theirmore established peers. However, since each newly created municipality began with unique condi-tions, classifying and evaluating them as a group is misleading because some municipalities inher-ited functioning administrations and service providers and others started from zero. For example,Š[amac collects KM 192 per capita and achieves a high service outcome score of 22. Istocni StariGrad, on the other hand, has per capita revenues of KM 203, but has low service outcome scoresthat place it in the bottom five municipalities. The difference between [amac and Istocni Stari Gradis that [amac was newly created through the loss of several MZs, but it kept functioning as an inte-grated municipality, whereas Istocni Stari Grad consists of geographically dispersed MZs-some ofwhich are 50 kilometers apart with no direct roads connecting them.

Figure 9: Service outcomes vary across old and new municipalities…


11

Figure 10: but are more income-sensitive in newer municipalities

1.3.2 Variations across sectors

25. Almost 1.4 million BH citizens have no running water or waste removal. More than adecade after the DPA, access to services is disappointing and access to critical basic services suchas water supply and waste collection is unacceptably low. About one million citizens cannot reachother parts of their village or town via an asphalted road and half a million people lack any sanita-tion service. In a country with four million inhabitants there are some 130 municipal water compa-nies and a comparable number of community service enterprises for waste collection and otherservices. However, despite this vast number of providers and remarkable levels of investment, only65 percent of households receive their water from the public system. Almost 1.4 million people inBosnia and Herzegovina don’t have a running water connection in their household and lack regularwaste removal services. Rural households fare even worse-one-third of rural households must usewater from unsafe sources such as rivers, streams, springs, or wells because they lack municipalwater connections. The rapidly growing volume of solid waste outstrips municipal utilities’ ability tokeep pace. Every year BH citizens generate two to three million of tons of solid waste but only 36percent of households have regular waste removal services. As a result, people burn or dump theirwaste illegally, polluting land, roadsides, and rivers.

Figure 11: Access to basic services is low and people are not satisfied


12

26 Overall satisfaction rates with services are low. Even the two highest-rated sectors-waterand health-achieve service levels that satisfy only about 60 percent of the population. Less thanhalf of the sample households were satisfied with waste collection, local roads, and sewage, andonly one-third with the education system, but these results contrast sharply with ratings for relia-bility, quality, and responsiveness.

27. Health and education services perform poorly. Despite broad access, these two sectorsare a major concern for citizens. However, municipalities have only minor responsibilities in thesesectors, so their potential contributions to improvements are limited. Furthermore, from the van-tage point of this study, evaluating quality is difficult for education and nearly impossible for health.14 Two categories (physical and non-physical criteria) enable us to distinguish between municipaland higher-level government responsibilities. Education scores low on non-physical quality criteria(ca. 30 percent unsatisfied) that are mainly predetermined by cantonal (FBH) or entity-level (RS)authorities and out of reach of local influence. Nevertheless, municipalities are responsible foroperation and maintenance of school buildings, therefore they can improve their contributionbecause only 74 percent of citizens were satisfied with the condition of the buildings, 70 percentwith heating services, and only 62 percent were satisfied with sanitation facilities. Health servicesare rated higher than education, but dissatisfaction still appears widespread, results that corre-spond with the last Public Expenditure and Institutional Review (PEIR 2006), which found that thehealth sector was underperforming for the level of sectoral spending. Faced with low-quality pub-lic health care, citizens must seek private service providers, who are not covered by public healthinsurance. Nevertheless, private providers are a growing share of health provision in BH and addto citizens’ cost.

14 The survey dropped specific questions on health outcomes except for overall satisfaction, but asked about satisfaction levels with the quality ofeducation. Results must be viewed with caution but citizen perceptions offer a general idea.

Figure 12: Room for improvement, particularly for water and waste


13

28. Water and waste have vast room for improvement. Among the four services provided exclu-sively at the municipal level-waste, water, roads, and sanitation-waste scores poorly along all fiveoutcome dimensions (Figure 13) and no other service fails citizens’ quality and reliability expecta-tions to such a great extent. Water supply, although needing significant improvement, appears toachieve more balanced outcomes across the five dimensions. Local roads score average on accessand high on quality, but fall short on reliability due to poor road maintenance and inadequate winterstreet cleaning. The sewage system has surprisingly good ratings, especially compared to watersupply, but this is likely because most BH households operate their own septic tanks and are notconnected to public sewerage, so it is predominantly urban residents of multi-family buildings thatuse the public sanitation system. However rural sewerage connection rates are low-one out of fivehouseholds relies on latrines or outhouses.

Figure 13: Quality ratings need balanced interpretation


14

29. Local roads-quality is perceived by local communities as good but reliability and accessneed improvement. Three-quarters of households have a paved road to connect them to otherparts of the village or town because most roads are in good shape.15 However, when municipalproviders fall behind with winter snow removal there are serious consequences for almost half ofaffected households, particularly in rural areas where up to 40 percent have insecure access to foodsupply or medical treatment.

15. Note that the actual condition of the network is not as promising compared with the perceptions of the communities: A survey undertaken for theSecondary and Local Road Study in Albania shows that about 22% of the local network is in poor or very poor condition, 24% in fair condition,and only half the network in good condition.

Figure 14: Citizens face harsh consequences if roads are inaccessible during winter


15

30. Water coverage and quality is a problem for many households. Respondents pointed outthat water coverage rates are low, and among households connected to the public water system,most experience frequent interruptions and problems with water supply. Agricultural producers saidthat summer water shortages constrained further development (particularly in the lower water-shed).16 In the middle watershed, some residents were concerned about water safety due to pastdisease outbreaks and others noted that cisterns were not emptied regularly, risking polluted watersupplies. Reports from lower watersheds indicated that tapping into water pipes is common enoughthat water pressure is lower than levels agreed upon between municipalities.

16. Prism Research and Bosnia S., Forest and Mountain Protected Areas Project: Social Assessment, unpublished draft, Sarajevo: March 2006; GolderAssociates and Bosnia S. Integrated Ecosystem Management of the Neretva and Trebisnjic River Basin Project: Study 4 Social and RuralDevelopment Assessment, unpublished draft, Sarajevo: April 2005.

Figure 15: Almost half of households with water connection experience problems


16

26%

26%

27%

33%

13%

18%

32%

29%

40%

22%

24%

30%

25%

19%

19%

19%

15%

26%

20%

29%

12%

10%

33%

13%

21%

18%

8%

7%

8%

8%

7%

3%

15%

7%

6%

11%

7%

9%

7%

57%

59%

56%

57%

59%

62%

53%

57%

49%

56%

62%

53%

60%

ALL RESPONDENTS

Rural (429)

Urban (896)

FBiH (884)

RS (441)

2,000 - 12,500 (388)

12,501 - 25,000 (349)

25,001 and more (588)

100 - 200 KM (239)

201 - 300 KM (428)

301 KM and more (658)

Multifamily residential building (341)

Individual house (952)

Settle

ment

Type

Entit

yP

opula

tion

PC

Munic

ipal

Revenue

Type o

f

the

dw

elling

Poor quality Unexpected interruptions

Physical conditions of pipes No problems

Respondents with access to public water system in their household, n=1325

(Number of missing cases: 0)

31. Waste collection coverage is inadequate but service is good in high-income municipal-ities. Citizens’ suggested improvements to waste management services-install more bins, increasethe frequency of pick-up, and maintain a regular schedule-appear to relate more to poorer munici-palities that receive irregular services. Roughly one-third of households in poorer municipalities saythat their garbage is not picked up frequently enough. Hence, poor quality in the sector is primarilylinked to low coverage rates, which needs urgent attention from municipal authorities. On the otherhand, citizens who have access to waste collection report good service-92 percent have serviceonce a week or more, and almost 80 percent agree that collection schedules meet their needs.However, declining municipal revenues depress quality rating dramatically and the sector as awhole fails markedly because some 40 percent of citizens lack coverage, so these results appearto correlate strongly with access.

Figure 16: Higher-income municipalities provide better waste collection


17

Respondents using waste collection service, n=1191

(Number of missing cases: 153)

40%

25%

48%

45%

32%

27%

12%

64%

15%

28%

58%

52%

63%

47%

48%

61%

69%

80%

28%

65%

66%

39%

7%

12%

5%

7%

7%

4%

8%

8%

20%

6%

3%

ALL RESPONDENTS

Rural (395)

Urban (796)

FBiH (785)

RS (406)

2,000 - 12,500 (291)

12,501 - 25,000 (334)

25,001 and more (566)

100 - 200 KM (234)

201 - 300 KM (356)


Sett

lem

ent

Type

Entity

Popula

tion

PC

Munic

ipal

Revenue

More often than once a week Once a week Less often

Figure 17: that meets household needs

Figure 18: Quality and reliability decline with lower per capita municipal revenue


18

Quality of Waste Collection and Per Capita Revenue

R2 = 0.2371

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 200 400 600 800 1000 1200 1400 1600

Per capita revenue (KM 2005)

Reliability of Waste Collection and Per Capita Revenue

R2 = 0.3834

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 200 400 600 800 1000 1200 1400 1600

Per capita revenue (KM 2005)

32. Sanitation remains problematic for rural municipalities. High quality ratings for sewage aresurprising, particularly when compared to the low ratings of the water network. However, manyhouseholds in BH operate their own septic tanks and public sanitation systems predominate only inurban households and multi-family buildings. Only 19 percent of rural populations are connected topublic sewerage systems. One in five rural households relies on latrines or outhouses, and amongthose with a septic tank or connection to public sewers, some 21 percent have problems with thesewage system, most commonly obstructed pipes, stench, or complete system failure. Similar towaste collection, quality ratings diminish rapidly with declining municipal revenues and access toservices.

Figure 19: Most households operate their own septic tanks

All respondents, n=1976

Number of missing cases: 21

42%

19%

64%

50%

31%

19%

45%

58%

27%

46%

49%

93%

31%

45%

62%

29%

43%

48%

62%

43%

34%

59%

42%

39%

6%

54%

9%

17%

2%

5%

15%

13%

7%

7%

8%

8%

10%

1%

11%

4%

2%

5%

2%

6%

6%

5%

1%

6%

4%

2%

0%

4%

ALL RESPONDENTS

Rural (958)

Urban (1018)

FBiH (1191)

RS (785)

2,000 - 12,500 (588)

12,501 - 25,000 (597)

25,001 and more (791)

100 - 200 KM (498)

201 - 300 KM (591)




Settle

ment

Type

Entity

Popula

tion

PC

Munic

ipal

Revenue

Type o

f

the

dw

ellin

g

Public sewers Septic tank Latrine/outhouse only Other

Figure 20: Predominantly rural households face problems with their sewage system


19

16%

21%13%

17%15%

19%19%

13%

15%16%

18%

11%18%

0% 20%

ALL RESPONDENTS

Rural (752)

Urban (929)

FBiH (1068)

RS (613)

2,000 - 12,500 (473)

12,501 - 25,000 (495)

25,001 and more (713)

100 - 200 KM (413)

201 - 300 KM (502)




Se

ttle

me

nt

Typ

eE

ntity

Po

pu

latio

n

PC

Mu

nic

ipa

l

Re

ve

nu

e

Typ

e o

f

the

dw

ellin

g

Respondents with septic tank or connection to public sewage network, n=1681


33. Lack of responsiveness to users creates low rates of satisfaction. User ratings will con-tinue to be low unless municipalities improve responsiveness and accountability among serviceproviders. Surveyed citizens report poor problem-solving capacity among formal institutions-onlyabout six percent of client complaints ever get solved when clients report problems to the serviceprovider, municipality, or neighborhood council (MZ). This creates a downward spiral-few problemsget solved so fewer citizens report problems and therefore few providers ever get any feedbackabout their failures. Among people surveyed, about two-thirds (67 percent) claimed that if they hadproblems with a service they would contact the institutional service provider, but in reality only 20percent actually report problems (Figure 21), which means that providers lack the information theyneed to improve services.

Figure 21: Feedback to providers would improve service quality.

0

0.05

0.1

0.15

0.2

0.25

0.3

Road Waste Water Sewage

Feedback loops and problem solving capacity

Clients with problems that complained Cases where problem has been solved

1.4. Key findings: What do service delivery outcomes in BHtell us?

34. More systematic capital investment is needed. Municipalities need more capital investmentto expand access to basic services, especially in rural areas and among municipalities with low percapita revenues where coverage is low. To expand water and sewage networks, build new roads,pave existing roads, and upgrade sanitation facilities in schools, municipalities will need significantlevels of investment funding that cannot be generated at the local level alone. However, increasedinvestment must be combined with systematic sectoral approaches. For example, water has poorquality ratings even among consumers who are connected to the system-water supply shortages,frequent interruptions, and low pressure. These problems with the network are directly related tolack of investment funding. Even for high per capita municipalities, the level of investment requiredfor complete rehabilitation of the system is impossible to cover by municipalities alone. But in lesscapital-intensive services such as waste collection, improvements in quality and coverage can beachieved by a strategic sectoral approach, better performance and raising municipal per capita rev-enues. Consumer satisfaction increases significantly with increased coverage, which is within thescope of local authorities. However, other waste management activities, such as developing region-al landfills, will need coordinated investments and additional sources of finance.

35. Municipalities with a sector strategy and clear priorities do better. Conditions for betterperformance differ among municipalities, but even at given levels of income, municipalities with anestablished game plan can make a big difference. Certain levels of income are required for munic-ipalities to perform better but increased revenue alone will not lead to improved outcomes for citi-


20

Box 2: Sarajevo: Cooperation brings benefits to citizens

Although cooperation requires extra coordination among stakeholders, experience from Sarajevo Kantonproves that economies of scale in the public sector translate into better service outcomes and higher clientsatisfaction. Sarajevo Kanton, the most populous canton in the FBH, comprises nine municipalities witharound 400,000 inhabitants. It spans 1,277 sq. km and includes the capital of Bosnia and Herzegovina. Asearly as the mid eighties, municipal officials realized that serving a broader area required a higher degree ofcoordination. But the results were mixed and all too often, efforts failed.

In 1984, Sarajevo hosted the Winter Olympics, and in the same year, the eleven independent utility compa-nies could not agree on an integrated cleaning and waste collection plan.17 That motivated Sarajevo cityassembly to take a decision that would ensure efficient and reliable services throughout the capital region-they founded the public utility “RAD”, a single company for waste collection and disposal, road maintenance,public parking management, and winter services.

Today, RAD functions as an integrated service company under the Sarajevo Kanton and contracted by themunicipalities. RAD finances its operations mainly from user fees for waste collection and disposal, trafficarea reconstruction, and parking lot maintenance. Cleaning public areas, winter services, and other sharedcommunal expenditures are financed from the cantonal budget, which also funds capital investments.

Providing services for almost half a million citizens is still a challenge but RAD has adopted an organization-al structure that combines functional and spatial decentralization that enables it to handle requests from dif-ferent stakeholders. Under the umbrella of the cantonal company, regional teams in each spatial unit devel-op and implement operational plans in cooperation with each municipality, which creates smooth and effi-cient coordination since negotiations don’t take place among eleven independent companies. Integratedplans and bundled operational knowledge boost performance, and create economies of scale.

RAD’s combined resources give it the leverage to exceed regular service delivery levels in BH, and its sizeenables it to assemble investment projects with larger-scale capital expenditure that would otherwise not befeasible. For example, the Sarajevo solid waste landfill is a precedent in BH and meets international opera-tional standards. Only a few years ago, frequent incidents and contaminated soils threatened the sustain-ability of the landfill. Today, a water processing facility allows redirection of liquid filtrates into the MiljackaRiver without pollution. A self-sustaining recycling facility, the first of its kind in BH, functions at EU-level stan-dards and will eventually turn a profit. Landfill gas emissions used to cause frequent incidents, but now amethanol energy production facility generates 0.3 Mega-Watt and has the potential to produce up to 1.5 MW.

17. At the time eleven municipalities. Today, Lukavica and Kasindol are part of the RS entity City of East Sarajevo.

zens. Among the many middle-income municipalities, there is a remarkable group of strong perform-ers to follow suit. But their challenges differ from each other so that a “performance improvementblueprint” is not at hand. Ljubinje has made tremendous efforts to increase own-source revenues bypromoting local economic development. Jablanica successfully reformed its internal organizationand achieves outstanding efficiency gains from an improved municipal administration (see boxes).In the Canton Sarajevo, integrated utilities deliver better services to citizens in nine municipalitiesand the City of Sarajevo. Along with Banja Luka, they have integrated strategies for waste andwater, and perform better than big municipalities that lack strategies. Often, low outcomes resultfrom extensive fragmentation across municipalities and levels of government. As the separation ofBerkovici as new municipality from pre-war Stolac illustrates, several newer municipalities had tostart from zero to build an effective administrations and develop service providers. Many small-scaleutilities bear high units costs and cannot realize economies of scale.

36. Responsibilities overlap and accountability is weak. Horizontally and vertically overlappingresponsibilities result in unsystematic, fragmented investments, underfunded services and weakaccountability to citizens. Service providers rely mainly on municipalities to mobilize capital invest-ment funds, often from higher levels of government. Management objectives focus on operation andmaintenance, but when tariffs are below production costs and collection rates are low, revenuesbarely cover recurrent costs. Local authorities are responsible for setting the tariff structure, butmunicipal councils hesitate to pass unpopular fee increases, so assets decline and service qualitysuffers. Dissatisfied clients search in vain for someone to hold accountable for poor servicesbecause responsibilities are unclear. Some 28 percent of respondents said they have no idea whoto call when they experience problems with public services, which erodes their confidence in publicutilities and service providers. Many households haven’t had good experiences when lodging com-plaints, therefore fewer people complain because they think it is a waste of time. These accounta-bility gaps translate into higher costs since providers often lack adequate information on qualityshortcomings and quality shortcomings reduce clients’ willingness to pay.


21

1.5. The new challenge ahead: improvement of local servicedelivery performance

37. All municipalities suffered the effects of conflict. Infrastructure destroyed during the warincluded water supply, electricity, sewerage, public buildings, and roads. The 1996 donor confer-ence estimated that more than half of municipalities had damaged infrastructure. Housing stock wasdestroyed, and waves of refugees and IDP moved through municipalities during and after the war.Nearly half of all households were split and family members emigrated, moved to other Yugoslavsuccessor states or to the other entity.18

38. Local governments had to cope directly with the consequences of the conflict.Municipalities have faced the particular challenge of reintegrating returnees and internally displacedpersons. At the end of the war, there were an estimated 2.1 million refugees and internally displacedpersons (IDP) and today, these two groups account for a high proportion of municipal populations inboth Entities-somewhere between 12 and 46 percent in the Federation and 22 to 39 percent in theRS.19 Since the war, rates of population return to the municipalities have varied. In most cases therelative numbers of returnees are proportionate to municipal population size, but some haveabsorbed greater numbers of returnees. In any event, local authorities are in the front line of over-coming ethnic divisions, facilitating cooperation between conflicting interests, and rebuilding trust.Reintegration can rarely be achieved by higher levels of government, since they lack the proximitythat local governments still have.


22

Box 3: The BEACON Scheme: learning from performing municipalities

Municipalities in BH are in a permanent cycle of incremental improvements and steady reforms to enhancelocal capacity and provide more efficient, effective, and responsive services to citizens. Innovations takeplace at many levels and within a broad range of themes but few of these initiatives were broadly recognized,scaled up, or applied elsewhere. Here is where the BEACON Scheme comes in. It was designed to raisestandards in municipal governance by recognizing and rewarding excellence and providing a platform formunicipalities to systematically seek and spread innovative practices.

After extensive consultations with municipalities, the BEACON Advisory Panel selects three themes thatreflect municipal priorities. Municipalities then can apply to the scheme, which is the first learning opportuni-ty in the process, since they have to reexamine internal practices and policies. Short-listed applicants getassessed, must give a presentation, and host a verification visit to evaluate whether they demonstrate excel-lence against the criteria developed for each theme, and the willingness to share their best practices.

This process offers municipalities insights into how their current performance compares to others. Theyreceive constructive feedback and recommendations. Excellent municipalities are awarded BEACON status.In the first round of the 2006 Beacon Scheme in Bosnia and Herzegovina, six municipalities won awards.These municipalities now receive widespread recognition and their achievements are more valued by theirown population.

Others are eager to learn from this experience. Representatives from over 40 municipalities throughoutBosnia and Herzegovina have attended the Open Days, during which the award-winning six municipalitiesshared their knowledge and provided an opportunity for exchange. All municipalities collaborated on devel-oping sustainable networks of reciprocal learning and create opportunities to enhance future cooperation.

The first two years of the BEACON competitive reward system in BH encouraged reforms, built up an arrayof approaches to change, and supported peers looking for ways to leverage their own efforts. The schemewas launched in September 2005 as a joint initiative of the OSCE Mission to Bosnia and Herzegovina, theCouncil of Europe and the FBH and RS Associations of Towns and Municipalities. In August 2007, BH hascongratulated its award-winners of the second round.

18. See Bosnia Social Assessment, 1999. UNHCR estimates that half of the population was internally displaced or refugees at some point during theconflict.

19. World Bank (2002), Bosnia and Herzegovina: From Aid Dependency to Fiscal Self-Reliance, A Public Expenditure and Institutional Review

39. Municipalities have achieved to deliver stability at the local level. Recently the pace ofreturn has slowed and it appears that many people who intended to return to their municipality oforigin have done so.20 In the early years, returnees experienced threats to personal security.21

Refugee return began to increase dramatically in 2000, after four and half years of internationalreconstruction efforts.22 During 2000-01, personal security concerns were largely supplanted byother considerations for returnees, such as progress with reconstruction and potential for employ-ment.23 In 2007, most household survey respondents considered their municipality a safe place tolive, even in a ethnically divided municipality such as Mostar, almost half of respondents (46 per-cent) considered the municipality safe and less than a quarter (23 percent) considered it unsafe.24

40. The municipal challenge of today is to deliver better services. Today, more than a decadeafter the DPA, citizens are less concerned about stability and more concerned about getting bettermunicipal services for their money and asking municipalities to promote a business environmentthat fosters economic growth and generates employment. Local governments and service providerswill have to meet this demand in the face of dwindling donor funding.

41. Better municipal performance is crucial to meet citizens’ demands. In both entities, theimportant role of municipalities has been recognized and new laws emphasize local self-governanceand independent competencies for providing basic public services. Local election held in 2004 andthe recent VAT reform have strengthened municipalities’ role in facilitating human well being andeconomic growth. Many donors, including the World Bank, have carried out extensive investmentand capacity building programs to support municipal development, ranging from utility managementreforms, budgeting, planning, social inclusion, and accountability. However, despite the substantialinternational support for municipal-level capacity building, little information exists on municipal serv-ice delivery performance.

42. Improving performance requires adequate data to understand service outcomes acrossmunicipalities and sectors. However, until this study, there has not been systematic collection anddissemination of municipal performance data. The study present results based on a survey of 2000households in 20 municipalities, and on an investigation of service delivery outcomes in ten sectors-education, electricity, health care and housing, for which responsibility is shared or under higherlevel government; and heating, local roads, sewage, waste management, transport, and water, forwhich municipalities are responsible.


23

20. A 1998 survey found that displaced people said fear for their personal security was the main obstacle to returning and most preferred to return asa group. See Bosnia Social Assessment, 1999.

21. Attacks on returnees included grenade attacks, mines planted close to returnee homes, and threatening actions such as destroying a bakerypatronized by returnees. See UNHCR, “Return Monitoring Survey: Minority Returnees to Republika Srpska,” June 2000.

22. See ICG, “Bosnia’s Refugee Logjam Breaks: Is the International Community Ready?” May 2000.23. During 2000-01, sustained effor ts to ensure personal security, to enforce rule of law, and to guarantee personal property developed a “vir tous cir-

cle.”24. In Odzak, Jablanica, Mostar, Stolac, Berkovici, and Novo Sarajevo, less than half of respondents said their municipality is safe; but more respon-

dents said “neither safe nor unsafe,” or refused to answer.

Chapter 2: Bosnia and Herzegovina’sDecentralization Framework

1. The prevailing decentralization framework, shaped by Bosnia and Herzegovina’s post-conflict legacy, shapes how individual municipalities perform in managing public resourcesand delivering public services.25 The past years have also seen significant changes to laws, reg-ulations, and ultimately, financing, that can contribute to the transition from municipal stability to sta-bility plus performance. This framework chapter first identifies some key entry points to promote in-depth municipal performance, then sets out key aspects of the enabling environment for municipalperformance for managing public resources and delivering services. The chapter identifies formaland informal responsibilities for delivering municipal services and how they are financed from high-er and local-level government sources.

2.1. The Evolving Decentralization Framework

2. Local performance depends on the intergovernmental enabling environment.Municipalities have important roles in basic service delivery, underpinned by good public financialmanagement, but concerns have been raised about the intergovernmental fiscal, administrative,and political system (see World Bank 2006, Public Expenditure Review). Sometimes these rolesand responsibilities are unclear, financing does not correspond to responsibilities (including trans-fers and own-source revenue assignments), municipal capacity is low, and the entity-cantonal-municipal relations in FBH, and the bottom-up and top-down accountability for service delivery areoverly complex.

3. Figure 22 summarizes the main sectors for which municipalities have significant rolesand responsibilities, including financing; and Annex 1 describes expenditure assignments.While many of these services are typically decentralized, some expenditure assignments merit par-ticular comment because they differ across entities. For example, no RS municipalities appear tohave responsibilities for primary education, while some FBH municipalities do. Municipalities mustfund expenditure responsibilities from their own revenues and intergovernmental transfers (e.g.,shared revenues, formula-based transfers, or other support). In some cases, if higher or lower lev-els are not providing key services demanded by local citizens, municipalities have had to step inwith their own resources for these unfunded mandates.


25

25. William Fox and Christine Wallich, Fiscal Federalism in Bosnia and Herzegovina: Subsidiarity and Solidarity in a Three Nation State, In Robert Eberland Richard Bird, (2007), Fiscal Fragmentation in Decentralized Countries: Subsidiarity, Solidarity and Asymmetry, Edward Elgar Publishers.

Figure 22: Major Municipal Expenditure Assignments by Entity

FBH RS

LocalUtility/infrastructure

Water & SewageSolid WasteLocal Roads & Public Transportation (canton regionalroads)Heating26

Water & SewageSolid WasteLocal Roads & Public Transportation (entity: regionaland trunk roads)Heating

Education

Pre-school (some Cantons took over this responsibility)Primary (municipalities in three Cantons are responsi-bility for maintenance and capital investments; allCantons are responsible for teachers)

Pre-schoolSecondary (capital improvement only)

Health Ambulance Services

AdministrativeServices

Birth & Death CertificatesBuilding Permits/cadastre servicesBusiness licensing (partially)Culture, sport, leisureCommunal InspectionsSocial welfare (jointly with Cantons)Housing

Birth & Death CertificatesBuilding PermitsBusiness licensingCulture, sport, leisureCommunal InspectionsSocial welfareHousing

Social Welfare Shared responsibility with cantons, as per cantonaland BH laws

Municipalities finance some programs


26

4. Clarity and transparency in assigning roles and responsibilities is crucial to promotingperformance. Without clear roles and responsibilities, municipal or other levels of government mayhave functional gaps, or overlaps and duplication that waste resources and effort. Ultimately,accountability is undermined if functions and the corresponding capacity and financing to deliverthem are unclear. This refers to accountability directly to citizens or to higher levels of government.Similarly, excessively complex assignments can undermine sectoral service delivery, includinginvestments, maintenance, and ongoing operations.

5. Reforms seek to strengthen the local service delivery-enabling environment. Recent legalchanges have stabilized revenues and municipal government status. First, for revenues, since 2006,municipal governments have a more stable source of revenue from Indirect Taxation Authority (ITA)-collected state-level taxes. Second, in the political arena, since 2004, mayors have been directly elect-ed by municipal citizens, which promise to increase mayoral accountability and stature with higher lev-els of government.27 Both FBH and RS have adopted Local Government laws that clarify functionalassignments to municipalities and their revenue sources, and in line with the European Charter onLocal Self Governance, strengthen the role of local communities (MZ), and provide a legal frameworkfor the Association of Cities and Municipalities to participate in legislative and policy-making process-es in FBH.28 However, many of the ten cantonal laws have yet to be aligned to these new laws.

6. Local self-governance laws are a major step forward. Two major developments in FBHlocal self-governance are that a recent federal law has laid out a set of principles to harmonize andclarify a myriad of self-governance laws in the ten cantons, and strengthens the role of Associationsof Cities and Municipalities. Although the new law expands assigned municipal competencies, mostcantonal laws regulating municipal competencies already contained these provisions. Expandedcompetencies include the explicit right to set local taxes and fees, to organize referenda, and toincur debt. The Associations of Cities and Municipalities now play a greater role in developing poli-cy and legislation by submitting proposals and amendments.29 The local community (mjesna zajed-nica-MZ) is strengthened, and now citizens must participate in local self-government through refer-enda and citizens’ meetings. In RS, the new law also contains an exhaustive list of competenciesat the local government level.

26. The big exception here is Kanto Sarajevo, where integrated Cantonal utilities provide water, sewage, solid waste and heating services.27. In April 2004, the Law on Direct Election of Mayors was adopted.28. In FBH, these include the Law on the Principle of Local Self-Government (Official Gazette 49/06), and new Law on Distribution of Public Revenues

in FBH (Official Gazette 22/06). In RS, this includes the Law on the Local Self-Government (Official Gazette 101/04) and Amendments to the Lawon Budgetary System of RS (Official Gazette 34/06).

29. Most interviewed officials stated that the role of the Association was especially positive and visible in drafting laws on local self-governance andregulations on budget transfers and relations between government levels. Smaller communities see the Association as a useful citizen advocacymechanism.

7. In FBH the local government law strengthens mechanisms for local accountability. Thelaw provides for local level mjesna zajednica (MZ), referenda, citizens’ meetings, and citizens’ ini-tiatives, but organization of the MZ is not obligatory. The laws provide for transparency and publicscrutiny of the work of local self-government units, and regulate administrative supervision of unitwork, in accordance with European Charter on Local Self-Government. Cantons must adjust theirlaws to the new Federal Law within six months and municipalities will have to adjust their localstatutes within one year. The effects of the new legislation are as yet unclear as implementation hasjust begun. Still, it appears that the new Law in FBH has improved the status of municipalities asthe authority closest to citizens, but stops short of assigning significant competencies to local self-governance.

8. In both entities, the new laws provide for cooperation, supervision, and monitoringamong higher-level authorities and local self-government. In FBH for the first time federal andcantonal authorities are obliged to consider all proposals, suggestions, and initiatives that comefrom the local authorities and respond in writing within 30 days. The process of supervision andmonitoring of local self-government units, as prescribed in the new Laws, fully respects the princi-ple from European Charter on Local Self-Government.

9. Both Laws regulate in detail local authorities’ scope of influence to develop local eco-nomic, social, and urban plans. Cities and municipalities have exclusive competencies to devel-op plans and programs for the development of local self government units, and to create conditionsfor economic development. Cities and municipalities are responsible for preparing urban and spa-tial plans, organizing the work of local administration to suit local conditions, or taking any othermeasure to improve local quality of life.

10. The new laws have institutionalized important aspects municipal government. Beginningin July 2006, the new law in FBH clarified existing municipal responsibilities but assign no addition-al functions. The new law details the scope of self-governance and relations between council andmayor. The role and financing of MZs are strengthened, including their role in the municipal affairs.Two categories of municipal and city revenues are clearly defined-own source and shared rev-enues, stipulating that no additional responsibilities can be transferred without proportional revenuetransfers to finance them. What stands out about this law is the strong role of the Association ofCities and Municipalities in FBH, and their newly established position in the intergovernmentalprocesses. Although in FBH an important challenge ahead will be harmonizing cantonal and feder-al law.

11. Constitutional reform represents ongoing political challenges in both entities. For exam-ple, the 2001-02 Constitutional Reforms in FBH demand that in municipalities with a significantmajority (over 20 percent) of either ethnicity, the mayor and speaker of council must originate froma different ethnicity. Recently, no attempts have been made to change functional assignmentsacross levels of government (including cantons) in reform efforts. The FBH Law on RevenueAllocation was subjected to constitutional challenge on the grounds that it infringed on cantonalinterests but this challenge was not sustained. Overall however, the dialogue concerning constitu-tional change has taken place at an aggregated political level, and ultimately has been difficult toreach consensus for specific changes across political parties and groupings.

12. BH state level lacks a coherent strategy to follow-up reform local self-governance. ThePartnership Group for Development of Local Governance in BH (“Partnerska grupa za razvojlokalne uprave u BH”)-a working group supported by the Associations of Cities and Municipalities ofFBH and RS-prepared a “Strategy for Development of Local Governance in BH,” which has yet tomake the agenda of relevant BH institutions. Such a strategy would need to be adopted by the twoentities; and the Public Administration Reform Unit, a state-level agency charged with strategy andoversight of public administration reform in BH, would be in a position to track its implementation.

13. Donors influenced the political process of passing recent reforms. The introduction ofITA/VAT transfers for municipalities gained momentum with significant support from USAID/Sidasupported GAP. In general, donor engagement in BH has been extensive but fragmented and hasevolved in the decade since the conflict ended and included OHR, OSCE, UNDP, USAID, and theWorld Bank. These development partners have worked on community development, the enablingenvironment, and strengthening municipal structures, particularly capacity building.


27

14. Recent reforms on municipal financing should result in more equitable levels of localservice delivery. The ITA reforms and the Laws on Revenue Allocations in both entities have pro-vided municipalities with a source of more stable and autonomous revenues. Phasing in formula-based allocations of ITA/VAT resources to municipalities in each of the entities should help estab-lish more equitable levels of service delivery across municipalities.30 (See Chapter 4). Over themedium term, ITA/VAT allocation will benefit poorer municipalities more. However, wealthier andbetter managed municipalities are more capable of borrowing to increase their capital expenditure.The significant increase in the ITA/VAT (untied) transfers raises questions about prevailing account-abilities surrounding the use of these funds by municipalities. A framework to address these issuesis introduced in the subsequent section.

2.2. Dimensions of Accountability for Decentralized ServiceDelivery

15. In BH, the prevailing legal and regulatory environment has increased local government discre-tion but there is also a need for accountability checks and balances against abuse. In the local con-text, accountability involves relationships among central governments, executive and legislativebranches of local governments, citizens, and private firms.

16. Horizontal accountability is the control that state institutions exert on the performance of otherpublic agencies. Two dimensions of horizontal accountability exist in the context of decentralizedservice delivery: (i) lower-level government entities (including government-owned enterprises/utili-ties) are accountable to government oversight agencies; (ii) the executive branch is accountable tothe legislature (state institutions must be able to check abuses by government branches within thesame level of government).

17. Vertical accountability is the means by which citizens, mass media, and civil society seek toenforce standards of good performance on officials and service providers.

18. A brief review of how accountability mechanisms are performing can indicate potential entrypoints, and instruments to address weaknesses in the existing system.

2.2.1 Horizontal Accountability

19. Horizontal accountability is complicated by a four-level split of responsibilities.Governing authority, functions, and budgets are divided among the state, the two entities, ten can-tons within FBH, and the municipalities. The DPA reinforced the cantonal structure created by theWashington Agreement. These arrangements complicate FBH municipalities’ governing context.Under the FBH constitution, cantons provide a means for both Bosnian-Croats and Bosniaks tohave governing authority. Six canton populations are essentially Bosniak, two are essentiallyBosnian-Croat, and two are mixed. Cantons have similar checks on ethnic dominance. In the twoethnically mixed cantons, the constitutions have veto structures to prevent dominance by one eth-nic group. Although Bosniaks might control a municipality, Bosnian-Croats might control the canton-al government. For example, if a municipality’s ethnic majority differs from that of the canton, themunicipality assumes certain governance functions that would otherwise have been exercised bythe canton.31

20. If higher-level government resource transfers to municipalities were accompanied by monitor-ing and accountability, it would ensure that no municipalities fall below agreed minimum standards.Monitoring, which would include standards for public financial management, could help assess thestate of the enabling environment for local performance. However, this would require higher-levelgovernment to have the capacity and motivation to promote local performance.


28

30. Law on the Principle of Local Self-Government (Official Gazette 49/06), and new Law on Distribution of Public Revenues in FBH Official Gazette22/06). A new Law on the Local Self-Government (Official Gazette 101/04) and Amendments to the Law on Budgetary System of RS (OfficialGazette 34/06) were adopted/

31. In FBH, if the dominant ethnic group in the municipality differs from the canton majority, education, culture, housing, public services, land use plan-ning, etc., must be allocated to the municipal level to protect the minority within the canton (Jokay, 2000).

21. Few structures and procedures exist to link the three governments. Intergovernmentalinteraction and cooperation is minimal and formal (e.g., through ad hoc visits and exchange of let-ters). The situation in FBH is compounded by an additional level of intermediate government, thecanton, and federal responsibilities for addressing municipal governments that are unclear.Cooperation between canton and municipality occurs primarily along party/ethnic lines32 accordingto qualitative interviews.33

22. The agency with primary responsibility for local government differs by entity. In RS, theMinistry of Administration and Self-Government performs administrative supervision of localself-government activities. The sixty-four municipalities are in direct contact with the entity’s rele-vant ministries and the entity Assembly.34 RS mayors can exercise political pressure and negotiatefor better revenue allocation through the RS Municipal Association. Even though formal responsibil-ity is with the FBH Ministry of Justice, FBH has no ministry exclusively responsible for local govern-ment. Federal and cantonal bodies within their corresponding areas of authority perform adminis-trative supervision of activities of local self-governance units. It is said that the canton governmentsare in daily contact with their respective municipalities, but the nature of canton-municipal relation-ship varies (see 3.2.2).35 The federal government’s laissez faire approach to municipalities ischanging only slowly; and means that FBH government has little contact with municipalities.

23. Higher-government line/sectoral ministries’ coordination and technical guidance rolesare constrained. As in the case of road and water (Chapter 3), sectoral laws regulate planning,financing, management, and set service standards and mechanisms for sectoral oversight. Unlikeother countries, the state government in BH does not provide coordination and technical guidancein most sectors. Instead, two entity governments, and cantonal governments in the FBH, via lineministries, are responsible for monitoring and ensuring quality compliance across constituent juris-dictions and enabling a wide variety of service providers across sectors. In reality, however, due tointrinsic sensitivity to cross-jurisdictional subsidies (often across ethnic groups), higher-level govern-ments have rarely fulfilled such functions, resulting in vastly different access to services across juris-dictions and under provision of those services that have geographic spillovers.

24. Higher-level sector regulation produces a multiple-institutional framework. For example,institutions responsible for water and sanitation include the Ministry of Agriculture, WaterManagement and Forestry (in the FBH and the RS), and the ten cantonal ministries in the FBH. Fourspecial water agencies (Vodopriviedas36, two in the FBH and RS each) monitor compliance with theLaw on Water, which covers environmental protection and water pollution. For waste managementand disposal, both entities have regulatory structures that deviate. In the Federation, the Ministry ofUrban Planning and Environment (MOPE) is responsible for policy and legislation The FBH Ministryof Health regulates clinical waste, and the FBH Ministry for Energy, Mining & Industry regulatesindustrial waste. At the cantonal level, ten ministries have a similar structure. In the RS, waste man-agement policy and legislation is under the Ministry of Urban Housing, Communal Services, CivilEngineering and Ecology (MUCCE). Finally, in the road sector, policymaking and standard settingis under the Ministry of Communication and Transport (RS and FBH respectively) and their respec-tive road directorates.

25. Financial accountability mechanisms remain weak and lack infrastructure. The Treasurysystem allows the entity and cantonal Finance Ministries to track government expenditures at theentity and canton level and ensure conformity to the adopted budget. Municipalities, on the otherhand, have begun introducing locally developed financial management information system (FMIS)37


29

32. Kalesija has a political profile reflecting the cantonal level; officials noted that the municipality was given more grant support for capital investments.In addition, five cantonal assembly representatives are from the municipality, and one was described as lobbying for a budget increase. In Stolac,another municipality with canton-municipality party alignment, most of the municipal budget came from canton authorities.

33. In interviews, some municipal officials reported that relationships with higher levels of government were determined by municipal population size.Interviewed officials from smaller municipalities felt that their voice was not heard. They noted an advantage of the Association of Cities andMunicipalities is that each municipality has an equal voice.

34. The RS Constitution stipulates that the electoral system must ensure that all municipalities are appropriately represented in the RS NationalAssembly (Art.71, al.2).

35. In reality, some cantonal officials rarely convene meetings with municipal officials, perhaps once a year, and otherwise the two levels communi-cate little. (Interviews in Tuzla)

36. In 2007 Vodoprivredas were transformed to “Agency for watershed of Adriatic Sea” and “Agency for watershed of Sava River.”37. About 50 municipalities have functioning FMIS and additional 15 municipalities are expected to implement FMIS by February 2009.

but are not fully linked with the higher-level treasury systems and the cantons are not part of FBH’sentity-level treasury system. The FBH Finance Ministry and cantons use the GIB data (brief execu-tion reports) as the sole source of information on sub-entity-level finances, chiefly for consolidation.So far, the FBH Finance Ministry and cantons do not collect the adopted budgets or analyze budg-et execution, or monitor the evolution of the intergovernmental finance system over time to informdecisions on expenditure responsibilities across levels of government, or future changes in fiscalpolicies.38 It would be worthy considering linking all three tiers financial management informationsystems to exchange information more timely and accurately while each tier of government keepsspending authorities as granted by relevant laws and maintain the current software to manage theirfinance internally.

Figure 23: Governance Structure for Municipal Service Delivery


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MUNICIPAL ADMINISTRATION

Mayor

MUNICIPAL

COUNCIL

General

Administration

Office

Line

Department

Lower

Spending

Unit

Primary

school Public library

Culture &

sports center

etc.

Public

Utility

Water

Sewerage

District

heating

etc.

Private

Enterprises

On Budget Off Budget

Approve budgets

Report expenditures

Regulate

Citizens

38. Ministries of Finance for both entities (in FBH through cantons) are collecting local government revenue and expenditure data, and theMacroeconomic Analysis Unit of the Indirect Tax Authority is collecting data for the entire BH. However, these data lack sufficient detail on localgovernments’ own revenues; in the FBH these data are only available consolidated at the cantonal level.

26. Mayors play a central executive role in municipal organization.39 Until 2004, mayors inboth entities were chosen by a directly elected Local Council or Assembly, which exerted ultimatepower within the municipal jurisdiction (following the first post-war elections in 1997, and subse-quent elections in 2000). Since 2004, mayors have been directly elected and this executive positionhas a four-year mandate in all municipalities except Mostar and Sarajevo, where the mayor is stillelected from the city council. Mayors represent the municipality, lead and manage enforcement ofmunicipal council/assembly decisions and act, propose decisions and manage the work of themunicipal administration, propose and dismiss department heads, and exercise rights and dutiesdefined by municipal statute and other regulations.

27. Municipal administration has line departments responsible for direct or indirect serviceprovision. 40 “Lower spending units” such as schools, day care, welfare, ambulance services orother healthcare, culture, and sports centers, or libraries provide direct services and directly reporttheir expenditures and revenues as part of the overall consolidated municipal budget. For indirectprovision, municipalities often have affiliated structures-a general utility company and/or specializedcompanies responsible for services such as water and sanitation; some municipalities have creat-ed their own for-profit enterprises. These public companies are off-budget. Line-departments pro-vide administrative oversight and, together with finance department, oversee financial aspects.

28. Municipal councils/assemblies supervise municipal administration. The Local Self-Governance Laws in both entities have established an oversight system for municipal councils forfinance, legal, public outreach, and citizen participation for the municipal administration. In general,the municipal council/assembly sets policy, passes local legislation, regulations and other munici-pal-level acts, coordinates and monitors the work of communal public institutions and enterprises,monitors municipal administration in general, and performs other duties stipulated by municipalstatute and law. The municipal council/assembly comprises members elected locally by secret bal-lot. According to the FBH and RS laws on Local Self-Governance, councilors cannot be dismissedfrom duty during their mandate of four years.

29. In BH during the past decade, regulatory changes and incomplete privatization processes haveled to some ambiguities in the governance and financial relationship between municipal structuresand municipal government. Local council monitors and oversees the governance and financial rela-tionship between municipal companies and municipal government, including the transfer of subsi-dies and how contingent liabilities from these entities are incorporated in municipal books. Althoughtheir governance structure and relationship with government are defined in the Laws on PublicCompanies, (see Chapter 3), in practice, it is unclear whether such governance structure andaccountability mechanisms have been implemented effectively. Not surprisingly, tariff setting is morea function of municipal councilors’ political considerations than sustainability in service delivery;councilors are reluctant to enforce revenue collection.

2.2.2 Vertical Accountability

30. Vertical accountability refers to the state being held accountable by non-state actors. Thechannels of vertical accountability are political elections, mass media, and informal processesthrough which citizens organize themselves into associations that demand good performance fromofficials and service providers.

31. In post-Dayton BH, political parties and the party system are based on ethnicity. Threemajor ethnic groups are proportionally represented in parliament according to their numbers in thecommunity as a whole. Each major nationalist party continues to maintain support almost exclusive-ly from their ethnic group. A range of reforms to the electoral system have attempted to undercutnationalist parties and promote multi-ethnic parties but progress has been moderate and the majorparties continue to form along ethnic lines by appealing to ethnic identity.41


31

39. There are two names for Council/Assembly in Bosnia and Herzegovina. In the FBH, the official name is Municipal/City Council; the RS retainedthe name used in the SFRJ-Assembly.

40. In the 20 municipalities surveyed, most municipalities have a general utility company for street cleaning, street lighting, garbage collection, publicpark maintenance, among others services. About half of municipalities have specialized companies responsible for water supply and wastewatercollection and treatment. A few municipalities have created their own for-profit enterprises.

41. The October 2006 general elections appeared to rekindle inter-ethnic tensions.

32. Most political parties are silent on the issue of municipal governance. Dayton PeaceAgreement emphasized ethnic, rather than civic, identities as the basis for representation in keyinstitutions. This approach has empowered Nationalist parties, although none of the parties hasarticulated a position on local governance, except SDP-a multi-ethnic party. Parties mention supportfor local governance reform in their programs, but in general, political programs are characterizedby appeals to ethnic or national identity.42

33. Jurisdiction-based direct election of Mayors could help to build broad-based policyplatforms and enhance performance accountability to citizenry. According to a recent BH gov-ernance structure study, “public debate about the performance and output of the public administra-tion seems to occur only during municipal elections, when politicians seek to win votes by promis-ing better service delivery.” Respondents, including mayors, noted that citizens view directly elect-ed mayors in more of a leadership role, which encouraged them to seek out mayors directly to solveproblems. Mayors expressed a sense of accountability now that citizens of all ethnic backgroundshold them responsible for municipal results. The mayor of Buzim had been elected as a member ofthe SDA; in 2004, he ran and won as an independent-a case of shifting pan-ethnic concerns in anethnically neutral way. In fact, the creation of Brcko-a multi-ethnic district, set a precedent in BHbecause ethnicity is not a factor in determining Assembly members, the police force is multi-ethnic, andthe school system is integrated.

34. Local communities (MZs) are an intermediary between municipal self-government bod-ies and citizens, although their presence and roles differ across municipalities. The Law onLocal Self Governance defines MZs as legal and political community bodies that liaise and workclosely with citizens. The MZs are constituted largely on spatial, historical, economic and culturalbases. Operating under municipality statutes and supervised under the Local Council,43 MZ repre-sentatives are not directly elected. In some municipalities, the local council nominates candidates andthe mayor makes the final decision. In some cases, MZ representatives are volunteers whose levelof involvement and activity depends on personal motivation. The MZs are not fully self-governed andlack public mandates to perform administrative and other services. Their fiscal operations are reflect-ed in municipal budgets. Large variations exist in the number of MZs set up in each municipality-rang-ing from one in Ljubinje to 72 in Zvornik, and averaging 18 per municipality. No MZs exist in Stolac,and in Mostar, MZs exist only on paper. The roles of MZs differ across municipalities; some are activein local affairs (In Breza, the municipality has channeled investment funds directly through the MZs);others are less active or marginalized. Budget hearings, for example, are held through MZs.

35. Local Self Governance Law established mechanisms for citizen participation.44

Municipalities have established public hearings, feedback lines, ombudsmen, designated openoffice hours/days for municipal council/assembly members and the mayor, and open MZ sessionsfor citizens to observe and participate. Municipal service centers have been established in 11 out ofthe 20 surveyed municipalities.45 Formal voluntary associations in post-war BH-citizens’ associa-tions and non-governmental organizations (NGOs)46 provide channels of participation.47


32

Box 4. Major Political Parties in BH*

This excludes parties represented at the entity, state, or cantonal level but inactive in the municipalities.

• Bosniak - SDA (Party of Democratic Action) and SBH (Party for Bosnia-Herzegovina)• Bosnian-Croat - HDZ (Croatian Democratic Union), HSP (Croatian Party of Rights), HDZ-1990

(reflects a split in HDZ), and HSS (Croat Peasant Party)• Bosnian-Serb- SNSD (Union of Independent Social Democrats, SDS (Serb Democratic Party), SRS

(Serbian Radical Party) and PDP (Party of Democratic Progress)• Multi-ethnic- SDP (Social Democrats), RzB (Work for Improvement- People's Party).

42. This analysis focuses on major political parties represented at state and local levels.43. In FBH, MZs are regulated by the Law on Principles of Local Self-Governance, Articles of Association, and Rules of Local Communities. In RS, MZs

are regulated by the Law on local Self Governance. Organization, operations and financing of the MZ are established in the MZ Statute.44. Local Self Governance laws in both entities require municipal governments to facilitate citizen participation in community life and decisionmaking

so that citizens can influence decisionmaking on issues such as local infrastructure.45. Mostar, Samac, Tuzla, Kalesija, Zvornik, Buzim, Banja Luka, Novo Sarajevo, Ilidza, Breza, Jablanica.46. Citizen associations are usually devoted to the interests of a specific ethnic or social group or to leisure activities and were often subsidized by

municipalities. NGOs are generally value-oriented or focus on service delivery and were funded by the international community.47. Donors see citizen participation as key to good governance. Many donor activities during the reconstruction period focused on increasing citizen

participation and ensuring transparent municipal governance (See page 85 on donor activities). In all municipalities, increased participation andtransparency are seen to be good outcomes on their own but they also improve planning, counter corruption, and help avoid state capture (ICG).After the war, increased access to formal mechanisms ensured minority ethnicities could have input to municipal government.

36. MZs, NGOs, and civil society are deemed important and municipalities and NGOs havegood relationships.48 Most NGOs representatives interviewed concurred with the municipal offi-cials’ opinion that the relationship was good, although the NGO-municipality relationship is lessclear in smaller municipalities.49


33

48. Two mayors said that initial problems with NGOs included distrust, competition for donor funding, poorly coordinated activities, and lack of com-munication with the municipal government. However, now mayors noted that some NGOs receive funding from municipalities and their roles aremore generally accepted. In Banja Luka, brochures prepared by the Helsinki Citizens’ Assembly on municipal functions were well-received by themunicipal government. In Berkovici, the mayor stated that funding for NGOs had been increased to three percent of the total budget.

49. NGO representatives cited funding made available to NGOs, and in one case, the use of municipal premises as the evidence of cooperation. Twonew mayors were singled out as having improved relationships with NGO, Zvornik and Visegrad. In two other municipalities, NGO representativesdisagreed with the perspective of municipal officials, stating that the municipality is non-transparent in its dealings with NGOs, and municipal fundallocation criteria are lacking.

50. Earning a livelihood was cited as the main constraint to civic participation. Municipal officials and NGO representatives interviewed thought mostcitizens were struggling to earn a living and had no time to participate. Many people work more` than one job to make ends meet. Other qualita-tive research in BH cited travel distance to municipal meetings as a barrier to rural respondents’ participation.

51. Exceptions are Buzim and Odzak. In Buzim, 56 percent of respondents had contacted their MZs in the past 12 months; in Odzak, 70 percent had.Both municipalities also had higher rates of contact with other local government representatives. MZ representatives in Odzak are invited to munic-ipal council meetings and meet with the mayor as well.

52. Odzak, Buzim, Samac, Banja Luka, Kalesija, Breza, Novo Sarajevo, Zvornik, and Ljubinje.53. In Buzim, 92 percent of respondents could name their MZ representatives, 72 percent in Odzak. In Kalesija and Breza, by contrast, only slightly

more than 10 percent of respondents could name the representative.

Box 5: Bugojno-moving forward together

Bugojno is in central BH in the Vrbas river valley and belongs to the Central Bosnia Canton (CBC). The pre-war population was 46,889, of which 19,697 or 42 percent were Bosniaks; 16,031 (34.2 percent) wereBosnian-Croats; 8 673 or 18.5 percent were Bosnian-Serbs; and 2,488 (5.3 percent) were other ethnicities.Today, Bugojno remains quite diverse. The population is about 39,000 of which 24,400 are Bosniaks (62.5percent), 11,000 are Bosnian-Croats (28.2 percent), 3,500 are Bosnian-Serbs (8.9 percent) and there are100others.

The Bosniak Party of Democratic Action (SDA) has 13 of 25 seats on the Municipal Council, but despite itsmajority, governs in a very constructive and inclusive way, which makes the work in the Municipality proac-tive and forward looking. In fact, Bugojno has been recognized as a best practice example of cooperationwithin the municipal administration, and externally, with citizens. The Mayor organizes briefings everyMonday morning with department heads so they can keep one another informed and improve inter-depart-mental communication.

Similarly, the Municipality has supported NGO work, especially youth groups, and recognized the importanceof civil society contributions to the community. The 2006 Municipality budget included 20,000 KM for NGOprojects and 25,000 KM in 2007. The Municipality established a Commission comprising municipal and civilsociety representatives to approve grants to NGOs, and supported establishment of a Local Advisory Group,comprising community actors and civil society representatives who provide input, develop initiatives, anddesign proposals to improve services to citizens.

The Municipality also established a Youth Empowerment Partnership Program (YEPP) group in charge oflocal development that lobbied for 25,000 KM for youth entrepreneurship for 2007.

37. Participation in formal local governance mechanisms remains relatively low. Citizensdemonstrated awareness of the various sources of information available in the municipality: a rou-tine has been established for responses to information requests, and many municipalities haveestablished procedures to handle standard transactions and publicized these procedures. However,most survey respondents have not participated in or attended any community activities in the past12 months50; most citizens interviewed had never contacted local government representatives.51 Incontrast, between 40-50 percent of respondents in ten municipalities had contacted civil servants.52

Although municipal officials interviewed say that MZs are a primary resource for information on com-munity needs and citizen inclusion, citizens do not take advantage of MZs as mechanisms for par-ticipation, and do not see them as a meaningful resource. Fewer respondents than in the past con-sider MZs a trustworthy local institution.53

38. Participants in local governance activities considered the experience useful. Of thosethat have participated local governance activities, public meetings on the municipal budget are themost well attended; municipality assembly sessions are the least popular. Respondents describeMZ council meetings as the most useful (81 percent), and consider least useful the activities relat-ed to NGOs other than meetings (70 percent).

Figure 24: Participation or attendance at various local governance activities


34

20%

13%

9%

8%

6%

5%

Public meetings on municipal budget

Local council sessions

Any unpaid communal activities

Public hearings other than on

municipal budget

NGO activities other then meetings

Municipality assembly sessions

39. Overall, client feedback loops remain weak. Part of vertical accountability is the relationshipof frontline service providers to citizens. As service provider, municipal companies should be ableto understand and evaluate citizen demand for public services and get direct feedback on perform-ance outcomes. However, this vertical accountability chain appears to be broken, as evidenced bylow responsiveness. Among people surveyed, about two-thirds (67 percent) claimed that if they hadproblems with a service they would contact the institutional service provider, but in reality only 20percent report problems, and of the problems reported, only about six percent are ever solved. Lackof feedback channels is only partly to blame, since an increasing number of municipal service com-panies have introduced citizen complaint centers or service hotlines.

2.3 Conclusions

40. The legal and regulatory framework for decentralized service delivery has been estab-lished in BH. The local government finance reforms brought by the ITA reforms and the Laws onRevenue Allocations in both entities, have institutionalized a more stable and autonomous sourceof revenues for municipalities. The recent Local Self-Governance Laws in both entities are a steptoward strengthening local government discretionary space and accountability.

41. Full implementation of legislation and reforms are key to maximizing benefits of decen-tralized service delivery. The accountability framework (vertical and horizontal) maps the actorsand their interrelationships, which can influence service delivery (and the quality of intermediateprocesses such as public financial management). Detailed analysis of the existing and emergingaccountability mechanisms reveals strengths and weaknesses in the checks and balances toensure good local governance. The next chapter examines how the decentralization framework andaccountability mechanisms manifest in two sectors-water and local roads. Following that, the reportwill identify effective entry points for strengthening accountability.

Chapter 3: Water and Roads: How SectorStructures Influence Local Service DeliveryPerformance

1. Adequate financing is only one dimension of effective local-level service delivery. Figure25 highlights seven key dimensions of managing service delivery across levels of government thatshape the performance of each municipal government. Performance can be seen as cross-cutting(i.e., How well do municipals appear to manage public funds?) or sector-specific (i.e., How respon-sive and efficient is the provision of local roads to local needs?). Effective local-level municipal serv-ice delivery depends on much more than simply assigning a service to a municipal government.54

Decentralized service delivery provision must be unbundled to understand whether capacities andaccountabilities across levels of government are assigned effectively.

Figure 25: Unbundling Roles and Responsibilities for Decentralized Service Delivery

Policymaking Who sets the main policy guidelines for a service (e.g., free primary education as a national policy)?

Standards Setting Who sets the standards (e.g., nation-wide testing, local building standards)?

Administration/contracting Which government authority administers day-to-day services?

Financing Who finances the services? Capital investments, wages, O&M? Does one level determine the allocative mix?What area of sectoral financing passes through the Sub-national budgets?

Service Delivery Who produces/delivers the service (e.g., this can often be private)?

Regulation Who regulates a service (e.g., professional accreditation in health)?

Monitoring & Evaluation Who monitors and evaluates a service (e.g., how can local citizens provide feedback)?

Source: Public Sector Group, Fiscal Decentralization Diagnostic Guidelines, Washington, DC (November 2007)


35

2. Decentralized service delivery differs by sector. To optimize functional and financialarrangements for decentralized service delivery, each sector’s different characteristics must be ana-lyzed. This chapter examines how sectoral organization and financial arrangements influence serv-ice delivery outcomes using the road and water sectors–two major service provision functions forwhich local governments are responsible.55

Figure 26: More roads than water pipes in under-funded municipalities

Roads Access and Per Capita Revenues

R2 = 0.0704

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 500 1,000 1,500 2,000

PC Revenues in KM

Ro

ad

co

nn

ects

ho

useh

old

to

villa

ge

Water Access and Per Capita Revenues

R2 = 0.3517

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 500 1,000 1,500 2,000

PC Revenues in KM

Ru

nn

ing

wate

r w

ith

in h

ou

seh

old

54. International experience provides broad guidance on the appropriate level of assigning a service delivery function. Services that are expected tohave significant externalities across local jurisdictions can be assigned to higher levels of government and/or coordinated across levels of govern-ment (e.g., inter-regional roads networks). Moreover, local jurisdictions may under-provide a service if its citizens can access the service withouttapping into their own budget. In turn, other jurisdictions may also under-provide if they feel burdened by “free-riders.” Ultimately, appropriate assign-ments depend on country context and local conditions. The subsidiarity principle argues that the lowest and presumably most responsive level ofassignment is most appropriate.

55. In fact, in no other sector than water do municipal per capita revenues correlate as strongly with access.

3. Municipalities can increase satisfaction levels in the road sector. In municipal servicedelivery outcomes, functional assignments in the sector make a difference. For example, higherclient satisfaction rates for roads correlate strongly with steady maintenance, regular cleaning, andreliable winter services directly provided by the municipality (Figure 27). By contrast, in the watersector, increasing service reliability (24/7 running water, sufficient pressure) requires capital-inten-sive rehabilitation.

Figure 27: Municipalities can increase satisfaction in the roads sector


36

Roads Reliability and Satisfaction

R2 = 0.6945

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 20% 40% 60% 80% 100%

Reliability (Regular cleaning)

Cit

izen

Sati

sfa

cti

on

Water Reliability and Satisfaction

R2 = 0.0072

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 20% 40% 60% 80% 100%

Reliability (more than 21h running water & no need for repair)

Cit

izen

Sati

sfa

cti

on

4. Sectoral organization and financial arrangements influence outcomes. Sectoral varia-tions in functional and financial arrangements for decentralized service delivery offer different entrypoints for future reforms and capacity building. The following section will discuss the two sectors interms of the following: (i) functional assignments across levels of government; (ii) financial manage-ment arrangements and characteristics of the main service providers-the Road Directorates in bothentities, and utilities in water, and relevant municipal units; and (iii) how sector organization affectsoutcomes in municipal service delivery.

3.1 Municipalities and the Roads Sector

3.1.1 General state and organization

1. Overall condition of the network remains poor. Despite substantial road reconstruction inpost-war Bosnia and Herzegovina, half of the main road network, 57 percent of the regional networkand most of the local road network are not in good condition (PEIR 2006). The road sector remainsin need of substantial capital expenditure to clear the maintenance backlog. Despite increaseddomestic revenue, recurrent needs in the sector are not being fully met.

2. Main, regional, and local road classifications are linked to functional responsibility formaintenance and development. In FBH, the entity government is responsible for trunk roads andthe cantonal government for regional roads. In RS, the entity government is responsible for bothtrunk and regional roads, and municipal governments in both entities are responsible for local roads.

Figure 28: Road Network in BH

EntityRoad infrastructure in BH (km)

Trunk roads Regional roads Local roads Total

RS 1,781 2,183

13,730 22,376FBH 1,958 2,724

Total in BH 3,739 4,907

Source: Consultant Report (in prep for PEIR 2006)

3. The transport sector institutional structure is overly complex. Multiple layers of adminis-tration exist at the state, entity, cantonal, and municipal levels. The Dayton Peace Agreement gavethe state limited power-regulatory coordination for international and inter-entity transportation,although the state has continued to assume more responsibilities.56 In 2003, BH established theState Ministry of Transport and Communications (SMOTC) as part of the process of national-levelinstitution building.57 Transportation infrastructure policymaking, development, management, andfinancing responsibilities rest largely with the entities. Both the Federation (FBHMTC) and the RS(RSMTC) have separate Ministries of Transport and Communications. Four Directorates operate inthe road sector, two in each entity, responsible for motorways and primary roads. Within theFederation, ten Cantonal Ministries of Transportation and Communications (MTCs) and fourCantonal Road Directorates are responsible for regional and local road network planning and man-agement. The Roads Directorate/Company plans and manages trunk roads, and regional roads inRS, rather than physical implementation. Road maintenance and construction is contracted out topublic/private/mixed contractors, normally through competitive bidding.

4. Municipalities are responsible for local roads. In both entities, municipalities are responsi-ble for participating in the management and financing of local roads, primarily maintenance. Similarto arrangement at higher levels, the actual service delivery-maintenance and operations-are oftencontracted out through competitive bidding.

5. Strategic sectoral planning and implementation are difficult and costly. The road sectoris plagued by a complex organizational structure that defies coherent outcomes and creates apatchwork of domestically and internationally funded programs. Ten cantonal MTCs, plus four can-tonal Road Directorates create a layer of administration that consumes disproportionate amounts ofthe sectoral budget. Network size and budget can be too small to take advantage of good planning,construction economies-of-scale, and technological progress. The fragmentation of responsibilitiesin the sector exacerbates reduced capacity in the respective bodies.

Figure 29: Institutional Responsibilities and Decentralization of the Road Sector in BH

State Federation RS

Entity Canton Municipality Entity Municipality

Policy making

State MTC oninternationalcollaboration

FBHMTCCantonal MTC (strat-egy for regional andlocal roads)

RSMTC

Standard set-

tingFBHMTC for all levels RSMTC for all levels

Regulation FBHMTC RSMTC

Administration

/contracting

(planning)

Entity RoadDirectorate

Cantonal MTC(through CantonalRoad Directorates in4 cantons) , includ-ing planning of localroads

Department ofUrbanism orequivalents

Entity RoadDirectorate

Department ofUrbanism orequivalents

Financing

Trunk road, regionalroads and localroads

Regional roads andlocal roads

Local roads (pri-marily for main-tenance)

Trunk, regional andlocal road

Local roads (pri-marily for main-tenance)

Service

Delivery

Private sectorprovider

Public and/or privatesector provider

Public and/orprivate sectorprovider

Private sectorprovider

Public and/orprivate sectorprovider

Monitoring &

Evaluation of

outputs

Entity MTC roadinspector for trunkroad

Cantonal MTC roadinspector for regionaland local road

Entity RoadInspectors fortrunk andregional roads

Authorized munici-palities for localroads

Source: Laws on Roads in FBH and RS


37

56. A BH-wide Transport Master Plan was drafted but never officially adopted by the Parliament. The World Bank is supporting the drafting of aNational Transport Strategy led by the State MOTC. The State Law on Road Safety is under discussion and effor ts are under way to develop a BHLaw on Roads.

57. The Law on Ministries and other Authorities of Bosnia and Herzegovina. As published in the Official Gazette of Bosnia and Herzegovina No.5/2003.

6. A draft Road Law aims to realign responsibilities within the Federation. The law will cen-tralize some road functions: the entity Ministry of Transport and Communications will expand itsmandate to main roads and regional roads;58 the cantonal Road Directorate and authorities’ respon-sibilities will be reduced to local roads.

3.1.2 Road Sector Financing59

7. Major revenue sources are fuel duties and motor vehicle registration fees.60 Prior to2006, 40 percent of total revenues-fuel duties61 plus full proceeds from annual motor vehicle regis-tration fees-would go to the Federal Road Directorate and 60 percent to the cantons (as revenue offour Cantonal Road Directorates or, in the other six cantons as revenue of MTC).62 The cantons hadto allocate 25 percent of total funds to municipalities in their jurisdiction.63 Today, a share of the rev-enues is coming through the single account for both entities road funds. Details on the distributionare described in the revenue allocation law, while the distribution among cantons has been speci-fied in the FBH rulebook on revenue shares.

8. Not all cantons have fulfilled their obligations: Tuzla Canton, for instance, did not transferthose revenues to the municipalities in 2005. Sarajevo Canton shares road sector revenues onlybetween municipalities and the Cantonal Road Directorate.

9. Road financing comes mainly from higher-level government. The funds municipal govern-ments receive are horizontally allocated among municipalities according to geographic area, popu-lation, and length of local roads (Pacific Consultants International 2007). Driving license fees andvarious local road fees (e.g., for permitting billboards along the local roads) are collected for theexpenditure needs of local roads-but these are of minor value and a large share of the total localroad financing comes from higher-level government transfers.

10. Dedicated revenues from motor vehicle registration remain the same, but the proportionof fuel duties that went to the Road Directorates (including the six cantons without RDs) are nowchanneled through the Single Account allocation, with shares determined by the Law on SingleAccount (3.9 percent in FBH, 3.5 percent in RS). Consequently, the amount available for the RoadDirectorates/Road Company now depends on the overall single account pool, reducing predictabil-ity and amounts received in sub-entity governments responsible for the road network at all levels64

This led some Road Directorates to lobby for extended earmarking and increases in fuel duty, or alarger share from the Single Account Allocation.65


38

58. Excluding motorways, which are under the Motorway Directorate.59. Cantons are another layer of sub-entity government so FB structure is more complex than that of RS. Therefore, this section focuses on the flow

of funds in FBH for illustration purposes, with occasional reference to the RS side when appropriate.60. In the FBH, these revenues are collected by cantonal government and then shared between the entity (upwards) and the municipalities (down-

wards). In 2005, fuel duties and motor vehicle registration fees contributed KM34 million and 60 percent for the RDs in FBH, KM36 million and 38percent for RS RD. But share was smaller in latter case, as they received KM24 million from GSM licenses that year.

61. 12 Pfenings dedicated, with remaining 3 Pfenings going to the Entity general budget.62. The actual proportions each Canton received in 2006 are detailed in Annex 4.63. Entity Road Laws define road sector revenue sources and vertical allocation to the entity, canton, and municipality levels.64. Some maintain that the fuel tax share of total revenues for roads in BH is very low (8.0 percent) compared with EU standard of 30-40 percent (even

lower than Albania). Some think that gas station profits are too high (30 percent), suggesting room to charge more fuel tax. (Interview with SarajevoCanton Road Directorate, March 28, 2007.)

65. Interview with the Entity Road Directorate in the Federation.

Figure 30: FBH Road Sector Fiscal Flows before 2006


39

60

Federation

Ministry of

Transport

3Pf/l

12Pf/l

Motor Vehicle

Registration Fee

Fuel Taxes

15 Pf/l

o Tolls

(highway,

bridges,

tunnels, etc.)

o Foreign

vehicles fee

o Other fees

applicable to

Federal levels

Driver License Fee

10 Cantonal

Ministries of

Transport

(4 Road Directorate)

Local

Communities

25 percent

total Road

Other Local Road

Fees

Entity Road

Directorate

Transfers (both capital and current)

Municipality (79)

40


Entity Road

Directorate

Municipality (79)


3.9

percent

Motor Vehicle

Registration Fee

Fuel Taxes

15 Pf/l

o Tolls (highway, bridges, tunnels, etc.)

o Foreign vehicles fee

o Other fees applicable to Federal levels

60

Federation

Ministry of

Transport

Local

Communities

25 percent

total Road

Single Account

Other Indirect

Taxes,

including VAT

10 Cantonal

Ministries of

Transport

(4 Road Directorate)

Driver License Fee

Other Local Road

Fees

40

Figure 31: FBH Road Sector Fiscal Flows after 2006

11. Most expenditures are for maintenance but existing funds are insufficient.66 The bulk offunds go to maintain existing roads and preserve existing investments, but funds are insufficienteven for trunk and regional road networks (PEIR 2006). Not surprisingly therefore, local roads (total13,730 km) are in poorer shape than main and regional roads.67 The 20 municipality survey resultsalso show that the lack of satisfaction with local roads is largely correlated with service reliability –a function requiring maintenance funds which depend on the municipalities.

12. Allocation for capital investment has been largely ad hoc. This is particularly true at sub-entity levels. Investment plans tend to ignore overall fiscal envelope, thereby offering little guidancefor investment prioritization-capital improvements versus operations and maintenance, or amongcapital projects (PEIR 2006). In fact, most capital investment for the entire sector has been provid-ed by the international community (PEIR 2006).

13. For local roads, capital investments depend on transfers from higher tiers of govern-ment. Municipalities have struggled to meet maintenance requirements with limited financing so itis common for local communities to provide capital contributions to urgently needed road upgradingand construction projects. Community involvement in local roads-capital contributions and labor-ishighest in the poorest one-third of municipalities measured by per capita revenue (Figure 32).Moreover, the availability of community contributions increasingly is a criterion for prioritizing invest-ment decisions, for example in Sarajevo and Zenica-Doboj Canton.

Figure 32: Type of community involvement


40

70%

66%

76%

85%

47%

68%

74%

67%

83%

64%

61%

55%

60%

49%

39%

79%

56%

49%

63%

46%

52%

68%

6%

7%

5%

8%

3%

2%

7%

10%

1%

12%

6%

ALL RESPONDENTS

Rural (288)

Urban (199)

FBiH (294)

RS (193)

2,000 - 12,500 (174)

12,501 - 25,000 (187)

25,001 and more (126)

100 - 200 KM (186)

201 - 300 KM (131)


Settle

ment

Type

Entit

yP

opula

tion

PC

Munic

ipal

Revenue

Finansially Manual work We provided construction material or food to workers

n.s.

P < . 01

r = . 41

P < . 01

r = . 14

P < . 01

r = . 14

Only those who reported that

there has been some

community involvement,

n=487


66. Including periodic, routine, and winter maintenance.67. Road sector expenditure needs are large: in 2005, the FBH allocated KM39 million to maintain primary and secondary networks; RS allocated

KM36 million for routine and winter maintenance (BH Ministry of Communications and Transport, Dec 2005). By contrast, over the next five years,annual maintenance needs are estimated at KM137 million on the trunk and regional road network, and KM24 million for the local road network(excluding maintenance backlog outlays).

Figure 33: Sources and Uses of Financing for roads in FBH

Construction and Upgrading Maintenance and Operation

Trunk Road Entity capital budget Designated fund for the RD + entity current transfers

Regional Road Cantonal capital budget + entity capital transferDesignated fund for 4 cantonal RDs (and 6 cantonaltransport ministries) + entity current transfers

Local RoadCantonal capital transfer + entity capital transfer (i.e.,from donors) + community contribution

Municipal budget + community contribution


41

Box 6: Breza-Citizens participate in building Local Infrastructure

In the immediate post-war recovery period, transparency and public involvement at the local level was givenlittle attention in Bosnia and Herzegovina. But now increasingly municipalities have realized the importanceof close cooperation among citizens, civil society, and the private sector for implementing infrastructure proj-ects.

The capital planning process is one of the most important functions of local governments; it must not onlyreflect local community priorities but also contribute to developing a strategic plan for the municipalities. Asuccessful capital planning process must be transparent and establish channels for communication with cit-izens.

In 2005, Breza Municipality in Northern Bosnia and Herzegovina began to implement a program for citizenparticipation on community development. Local authorities joined the Governance Accountability Project(GAP), which incorporates a method of Community Development Planning Committees (CDPC) to selectlocal priority projects and develop local community strategic goals.

Breza Municipality, led by the Mayor and Municipal Council, created administrative conditions for CDPCwork. The CDPC in Breza comprised the MZ representatives, local businesses, non-governmental sectorrepresentatives and has successfully identified priorities for developing the local community. The BrezaCPDC provides local communities with a tool to prioritize and select capital investments-each year it calls forproposals for capital projects financing. The local administration distributes forms to the MZs and other inter-ested organizations, holds public hearings, and hosts radio shows and through this transparent and openprocedure, capital investments are selected.

Breza, similar to most BH municipalities, has very little budget for capital investments. During the post-warperiod, donors and favorable loans financed most infrastructure reconstruction. But now the internationalpresence is shrinking, higher-government level funding for capital investments is insufficient, so municipali-ties are developing methods to maintain existing infrastructure and build new projects. In Breza, the munic-ipality offers to finance local road construction with matching funds of 50 percent of total investment, if localcitizens contribute the remaining 50 percent. This is a citizens’ initiative that come through their MZ, and thelocal council has passed a resolution that obligates the mayor and administration to match citizens’ fundsbudgetary funds.

This practice is now widespread throughout BH and has proven its utility in road local-level construction,sewerage and water supply projects. This process has significantly improved transparency, citizen participa-tion and oversight. Ultimately the CDPC commission continues as part of the annual budgeting process toselect priority local community projects, and in the future, this process of citizen participation will qualify localauthorities to apply for EU funds available to local governments.

3.2 Municipalities and Water Utilities

3.2.1 General state and organization

14. Water utilities are numerous but coverage remains incomplete. Rural access is low andabout one third of rural households (40 percent in rural RS) use water from unsafe sources. Waterutilities and their services are public companies, therefore independent under the law, but their legalstatus has not prevented political meddling, mainly on tariff-setting practices. Tariff levels are oftentoo low to cover operation and maintenance (O&M), let alone provide sufficient funds for capitalinvestments.

15. In both entities, water provision is assigned exclusively to the local level. Article 12 in RSLaw on Local Self-Governance assigns independent competencies in providing many services tomunicipalities, which includes regulating and securing public utility services and establishing com-panies, institutions, and other organizations to provide the services. In the Federation, Article 8 ofthe Law on Principles of Local Self-Governance assigns the management, finances, and facilitiesimprovement of local utility infrastructure to local self-government, including water supply. Article 13further empowers the municipal or city council to found enterprises and institutions for the execu-tion, to adopt Rules of operational procedures and regulations of fees, and make decisions on themanagement. Although specified in less detail, similar rights and obligations are assigned to theMunicipal Assembly in RS Law Article 14 and 30.

16. Water utilities operate mainly as public companies. Their governance structure and rela-tionship with government are defined in the Laws on Public Companies. Therefore, by law in bothentities, the following bodies are mandatory: Assembly, Supervisory Board, Management bodiesand Audit Committee. The Supervisory Board has a minimum of three members, selected accord-ing to public appointment laws68, and it supervises the Management body and appoints or dismiss-es its members. Individuals holding political positions cannot be appointed to the Management body.Management reports to the Supervisory Board upon request, normally once a year. The SupervisoryBoard reports to the Assembly (the municipal council in the case of municipal-owned enterprises),which represents company stakeholders. The Assembly decides on operating procedures, code ofconduct, and the plan of activities, which are prepared by the Supervisory Board. Both laws obligepublic companies to establish an Audit Board or Audit Committee, which appoints an external audi-tor and the director of the internal audit department69. In practice, it is unclear whether such gover-nance structure and accountability mechanisms have been implemented effectively.

17. In 2006 some water sector responsibilities transferred to the State level. This transferrarely affects regulation and policymaking in the sector, but it ushered in the Ministry for ForeignTrade and Economic Relations as a player in BH water sector, even though its role in inter-region-al matters is limited to coordination.

18. Environmental protection and water pollution regulation is defined at the Entity leveland specified in the Law on Water. Two special agencies, Vodopriviedas, (VPs) operate in FBHand the Directorate for Water in RS to monitor compliance with this law. New laws on water, effec-tive July 2007, will transform the structure of VPs in FBH from public companies to special agenciesthat report to the Ministries of Water. RS will introduce an additional directorate, matching VPs’regional responsibilities in FBH.

19. Some FBH cantons have introduced Laws on Public Services. These laws regulate ben-eficiaries’ and providers’ roles and set service standards; some laws even specify how municipali-ties should organize service provision. In Sarajevo Canton, the law specifies that tariff rates mustbe set at cost-recovery levels and if that cannot be done, the cantonal budget must make up theshort fall. In practice, however, tariffs are still well below cost-recovery and deficits are not covereddue to lack of funds.


42

68. Law on Ministerial, Governmental and Other Appointments in the Federation of Bosnia and Herzegovina (“Official Gazette of the Federation ofBosnia and Herzegovina” No. 34/03) and Law on Conflict of Interest in Government Institutions in Bosnia and Herzegovina (“Official Gazette ofBosnia and Herzegovina” No. 16/02)

69. In FBH, companies with fewer than 50 employees are exempt from having internal control departments.

20. Municipal size affects choice of service provider for water and sewerage. In bigger urbanareas a separate company usually provides both water and sewerage but in small municipalities,one general utility company is typically in charge of waste collection, local road maintenance, parkservices, among others. All municipalities operate their own (separate or integrated) water compa-nies; except Sarajevo Canton, where nine municipalities have transferred the municipal servicesprovision to the cantonal level. As a result, the water sector is fragmented, with roughly 130 munic-ipal water companies serving a population of around 4 million people. Some 67 water utility compa-nies have created the Bosnia and Herzegovina Water Works Association, to promote integratednational and regional policies in the water sector.

3.2.2 Water Sector Financing

21. Sector tariffs are too low to cover basic costs. Typically operation and maintenance costsof water utilities are financed by user charges, municipal councils set user fees and charges, andwater companies have limited influence on the tariff structure. In BH, local authorities tend to setfees well below production cost to avoid losing local political support. In addition, low collection ratesand low willingness to pay among users, particularly large public sector consumers such as militaryfacilities, hospitals and schools, add to under funding. High outstanding bills create arrears on bothsides of the equation, apparently common practice within the public sector.

22. Municipalities are responsible for capital expenditures. Since water utilities are severelyunderfunded, they rely entirely on municipalities to provide capital investment funds. Municipalitiesalso depend on funds, grants, and subsidies, which sends them to seek co-financing from higherlevels of government-entity or cantonal budgets, or both. Several international agencies, includingthe World Bank, provide investment funding for water infrastructure improvements, and municipali-ties can provide guarantees that enable water companies to borrow on the commercial market.However, borrowing is restricted and funds are limited so municipalities rarely manage to meet theirenormous water sector investment needs. Water companies interviewed for this study consistentlycited lack of investment funds as the cause of their low quality scores and their biggest constraintto rehabilitation and expansion of the networks, but low collection rates also contributed to shortageof capital funds.

23. Higher levels of government co-finance capital investments. Entity and cantonal govern-ments finance their contribution to water sector investments from the general budget and funds gen-erated by water fees that are in addition to user charges-a fee of 0.09 KM per m3 (special watermanagement and pollution fee), and all for-profit companies must pay 0.5 percent of salaries.Effective July 2007, new water laws specify that 40 percent of these fees will go to the special wateragency (former Vodoprivieda), 45 percent go to the cantonal budget, and 15 percent to the entitybudget.70 These funds are intended to co-finance municipal capital investments. Under the old law,the Vodopriviedas received 70 percent of these revenues (20 percent went to the cantonal and 10to the entity budget), but they had co-finance up to 30 percent of municipal investments. Projectswere selected by the advisory board and approved by the ministry of Agriculture, WaterManagement and Forestry.


43

70. Federation law amendments state that these fees are shared according to formulae defined by the Laws on Water.

Figure 34: FBH Water Sector Fiscal Flows before July 2007 (status after July 2007)


44

Canton

User Charges

o General

budget

o Water fees

o User charges

Special water

management and pollution fee

Water Utility

(Public

Company)

Percentage of salaries

from for-profit companies Municipality

Set Tariff

Co-finance

upto 30 percent

(no mini.

/max. limit)

Capital

investments

Donors/

Commercial

Market

Borrow for

capital

Investments

0.09

KM/m3

0.5

percent of

salaries

Vodopriviedas

(Special Agency)

70

percent (40)

t

10

percent (15)

t

Entity

20

percent (45)

t

Guarantee

3.3 Conclusions

24. Sectoral variations in decentralization affect service outcomes. Wide variations in roadand water sectors’ functional and financial arrangements indicate that decentralization manifests dif-ferently by sector. Water has been largely decentralized to the municipal level, but in the road sec-tor, municipalities and higher-level governments in BH share responsibility for local roads provision.In both cases, major service provision agencies have been corporatized to ensure professionaloperation and relative financial autonomy. However, in the road sector, RDs operate mainly at theentity and cantonal level to capture economies of scale, to allocate resources strategically, and toimprove coordination across jurisdictions. But in the water sector, cost and benefit are locally deter-mined and costs should be covered locally. The concerns common to both sectors however arefinancial and regulatory oversight of the public enterprises to ensure public services access, quali-ty, reliability, and affordability, and to mitigate contingent liabilities.

25. Allocations for capital investment need clear criteria. Road financing comes mainly fromshared revenues that are based on fuel duties and registration fees. Funds are used for both main-tenance of existing roads and investments in new roads, under regional coordination. The presentsharing formula in the road sector helps to ensure fairly equal distribution of available funds,although at a low level and generally insufficient to significantly improve local roads-especially whencompared to the regional and trunk road network. Municipalities are expected to contribute tofinancing road maintenance, but not road extension. However, in the water sector, municipalitiesmust cover the major share of capital expenditures, so that underfunded municipalities suffer dis-proportionately from lack of investment funding. They cannot afford to extend water networks or toinvest in urgently needed rehabilitation measures, and as a result, fewer citizens of poorer munici-

palities have access to safe drinking water. Although the Vodopriviedas – now Agency for watershedof Adriatic Sea and Agency for watershed of Sava River do co-finance selected investment projectsfrom revenues generated by water fees, prioritization criteria are unclear and selection of invest-ment projects appears to be ad-hoc.

26. The water sector needs urgent measures to become cost-effective. Municipal water com-pany operations are financially unsustainable. Quality and reliability suffer from steadily deteriorat-ing conditions of the water network, eroding consumer willingness to pay and thereby weakeningthe income base and eroding funds required to finance desperately needed network extensions.Improving water sector service delivery outcomes will require water company operations to becomemore efficient and cost-effective. Most water utilities, despite a commercially oriented organization-al structure, still have plenty of room for more efficient operation but efficiency gains alone will beinsufficient to mobilize the resources missing in the sector. The pricing schemes must be adjustedto cost-recovery levels by municipal councils because prevailing water tariffs are too low to evencover current operation and maintenance costs, which accelerates asset decline. Water tariffs fre-quently succumb to local political capture and are set well below production prices. The justificationgiven is the need to maintain affordable prices for vulnerable groups, but ironically the socially vul-nerable suffer disproportionately from current practices because they are frequently the very peo-ple who are excluded from the network, and endure bad water quality and frequent service interrup-tions. In effect, low tariffs constitute untargeted subsidies that benefit higher income groups to thedetriment of the whole water system. Instead, to protect the access of vulnerable groups to a reli-able safe water supply, a targeted subsidy with clear eligibility criteria would be preferable.Otherwise, water should be supplied on a user-pays, cost-recovery basis.

27. Improving municipal performance requires different actions for different sectors.Whereas water utilities must focus on more efficient and cost-recovery operation, local road com-panies must increase service provision reliability. In the water sector, municipal performanceimprovements will benefit from further commercialization of water utility companies, and strength-ening municipal financial capabilities through appropriate tariff decisions made in the municipalcouncils. By contrast, in the roads sector, some local roads service outcome improvements are atthe mercy of decisions made at higher levels of government, but municipalities can improve cus-tomer satisfaction by providing more reliable services.


45

Chapter 4: Options to Expand the Envelopefor Capital Investments in Municipalities

4.1 Overview

1. Bosnia and Herzegovina municipalities have diverse fiscal positions. The expenditureand revenue positions of the 106 municipalities suggest that each differs in own-source revenues,current and prospective transfers from higher-level governments, borrowing levels and potential,prevailing expenditure structures, and the related scope for efficiency gains and/or improved priori-tization of expenditures. In managing its finances to provide optimal public services to citizens, eachmunicipality must assess how much “fiscal space” it has in each of these dimensions.71 Somedimensions depend on municipal-level administration (for example, managing existing own-revenuebases to gain efficiencies in existing expenditures). But constraints and prospects, such as the evo-lution of ITA/VAT transfers, depend on entity governments. Each municipality must assess choicesand options for good intergovernmental fiscal practice.72

2. This chapter analyzes levels, structure, and trends in municipal revenues and expenditures toexamine priorities for managing fiscal space that could contribute to improved service delivery.73

The analysis, which draws on comprehensive data on public finances in FBH and RS, will identifymunicipal groups that appear to share public financial management challenges and priorities, andpay special attention to how the allocations from the Single Account, introduced in 2006, are likelyto impact municipalities. This chapter provides an overview of the evolution of aggregate revenuesin the municipal sector as a whole and comments on the available data. It provides a detailed analy-sis of differences in revenue structure across individual municipalities with a focus on own-sourcerevenues, and an overview of likely impacts from the reform of transfers. It analyzes expenditurepatterns (notably wages) relative to revenues. The final section addresses sub-entity borrowing.Annex 1 and 2 provide the revenue and expenditure categories collected in the GIB data.


47

71. Alternative perspectives have focused on facets of increasing fiscal space for priority expenditures for local governments. See Billand, Charles J.(2006), Expanding Local Government Resources for Capital Projects through Municipal Borrowing and Other Market-Based Financing,” GlobalUrban Development, Vol. 2, Issue 1, focuses on market-based borrowing and own-source revenue mobilization, rather than traditional effor ts toincrease grant-based funding from central governments or donors.

72. Most of the literature cites Sub-national governments being subject to hard-budget constraints, i.e., that they will not over-borrow and/or spend inef-ficiently, expecting higher-level government bail outs.

73. The analysis relies on standardized municipal data reported to entity level governments (“GIB data”) for 2003-06 budgets and realizations. Thesedata have limitations, especially in functional classifications (i.e., reporting by sector). At the time of writing, only partial data were available for 2006realizations, and the analysis of the effect of ITA introduction transition year is based on these.

4.2 Municipal Public Financ

Municipal budgets total over one billion KM of spending (5.7 percent of GDP). Figure 35 pres-ents current municipal expenditures compared to other components of public expenditures in BH.74

Overall expenditures are at 45.2 percent of GDP (2007). These are accounted for by levels of gov-ernment (state, entities, FBH cantons, and municipalities) and extra-budgetary funds. Municipalitiesin turn accounted for about 21.7 percent (RS) and 10.4 percent (FBH) budgets. Figure 36 summa-rizes available data for the municipal sector in 2006 by entity. While RS accounts for just over a thirdof estimated GDP in BH, total revenues for its municipalities are about half of the total. The largerrelative size of the municipal sector is in part explained by the presence of the additional cantonallevel in FBH, which is not the case in RS.

Figure 35: Municipal Expenditures in BH (2007, projected)


48

RS Budget

RS Road

Fund

RS

ExBudgetary

Fund

RS

Municipal

(est)

Brcko

State

Federation

Road Fund

Federation

Budget

Fed Catonal

& Municipal

Budgets

Fed

ExBudgetary

Funds

Source: IMF (2007)

3. Fiscal reporting by municipalities is subject to limitations. All municipalities are supposedto report their revenues (own collections or transfers) and expenditures to higher levels (through theso-called GIB forms), but consolidated data on municipal finances are problematic. Data problemsare even more pronounced in FBH, where reporting is intermediated by the cantonal level.75

Historically, the GIB process has reported expenditures by both functional classifications-education,communal affairs (see Annex 3.2), and economic classifications such as wages. However, sincemunicipalities appeared to be reporting largely by administrative units with rather imprecise map-pings to the functional classifications (see also Chapter 5), this reporting was dropped in 2006.Consequently the data pertaining to municipal expenditure prioritization by sector provide only anapproximate picture of the main sectors municipalities are spending on.76 Specific analysis in thischapter utilizes largely the RS data (given data problems for FBH) and where possible, introducescomparisons to FBH.

74. Expenditures for higher levels are net of onward transfers.75. Cantons consolidate their respective municipalities for reporting to the FBH level. Effor ts to directly collect municipal data for FBH yielded between

55-75 observations out of 80.76. Could be problematic if fourth quarter spending differed significantly from first three.

Figure 36: Aggregate Municipal Expenditures (2006, estimated)


49

GDP 2006

Proj

Municipal

Revenues

Municipal

Revenues

(Million KM) (Million KM) (% GDP)

FH 11,176 504 4.5%

RS 5,994 555 9.3%

Total 17,533 1,059 6.0%

Source: GIB Data, IMF(2006)

4. Municipalities exhibit wide diversity in fiscal/revenue capacity. Figure 37 summarizes theaverages and ranges of 2005 reported per capita revenues (budgets and realizations) and 2006budgets, plus population figures. The lowest-revenue municipalities for 2005 budgets were Kalesijaand Velika Kladusa, both FBH municipalities with under KM 77 per capita. The lowest revenuemunicipality in RS was Vukosavlje, with KM 88. Municipalities in RS reported the highest per capi-ta revenue for the 2006 budget, likely related to their status as micro-municipalities. Istocni Drvarwith 62 inhabitants had projected per capita revenues of over KM 10 and Petrovac/Drinic with 189inhabitants, 3.5 thousand. The RS municipality of Bosanski Brod with 20,424 inhabitants reportedper capita revenues of KM 5885.

Figure 37: Municipal Diversity

Mean Min Max Sd

Per Capita Revenues (2005Budget, KM)

408.9 76.3 8,629.5 965.9

Per Capita Revenues (2005Realizations, KM)

437.2 80.7 6,790.5 983.5

Per Capita Revenues (2005Budgets, KM)

403.8 78.1 10,245.2 1,080.8

Population 26,508 62 224,647 30,104

Area (km2) 140.0 3.7 475.8 109.3

5. The wide range of per capita revenues suggests that some “poor” municipalities maybe under funded in meeting minimum expenditure responsibilities, so their priority should beto enhance own-revenue collections or transfers, and to maximize expenditure efficiencies. Amongthe “fiscally poorest” 20 percent, per capita municipal incomes are below KM 150 (see Annex 3) andthe impact of the new ITA equalization component on their revenue position remains to be seen.

4.3 Own-Source Revenues

6. Municipal own-source revenues comprise fees and charges. Figure 2 summarizes aver-age municipal revenue structures. The so-called tax revenues (see Annex 1, #2-5) are taxes andentity transfers, and in FBH, cantonal transfers. Non-tax revenues (Annex 1, #17-30) are municipalown-source revenues, under municipal rate setting control, which are dominated by fees andcharges.

7. Figure 38 plots the share of non-tax revenues as overall revenues for all RS municipalitiesagainst per capita total revenues. The graph highlights how this revenue base differs in relativeimportance across municipalities.77

Figure 38: Non-Tax Revenues versus Per Capita Revenues


50

0.2

.4.6

.8S

ha

re o

f N

on

-Ta

x R

eve

nu

es (

%)

0 200 400 600 800 1000Per Capita Total Revenues (KM)

FBH RS

Fitted values Fitted values

2006 Budgets

Bosnia Municipal Own Revenue Mobilization

Figure 39 summarizes municipal revenues in RS. Almost half of RS municipality revenues derivedfrom sales/wage taxes, and since 2006, the single account transfers. Personal income tax sharingin 2005 accounted for just under 8.0 percent of realized revenues, higher-level government trans-fers, just over 70 percent, and the balance was own-source revenues such as fees and a smallamount of capital gains. Given the more variable quality of the FBH data, a more direct comparisonof differences in municipal revenues structure across the two entities was not possible, although thegeneral patterns in revenue structure were similar.

77. Some municipalities projected revenues of over 2,000 KM per capita in 2006 budgets but these were omitted from the graph. They includedPETROVAC/DRINIC (pop, 189, KM 3560.88), BOSANSKI BROD (pop. 20424, KM 5884.528, and ISTOCNI DRVAR, pop 62, KM 10245.16).

Figure 39: Municipal Revenue Structure (RS percent)


51

2003 2004 2005 2006

Type Budget Actuals Budget Actuals Budget Actuals Budget Actuals

A. "Tax Revenues" 62.0 58.5 63.0 60.1 60.9 62.1 64.3

Transfers Company income and profit taxes

(4+5+6) - 0.2 0.5 0.2 0.2 0.2 0.3 0.2

Transfers Social security contributions - 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Transfers Personal income tax - 9.2 8.4 8.5 7.6 7.5 7.8 8.4

Transfers Property tax - 4.6 4.1 4.1 3.9 4.7 3.8 3.0

Transfers Sales tax (VAT from Jan 2006)

(11+12+13) - 47.3 45.3 50.0 47.2 47.1 47.1 48.5

Transfers Taxes on international trade and

transactions - 0.2 0.0 0.0 0.0 0.0 1.0 0.9

Transfers Other taxes - 0.5 0.2 0.2 1.3 1.4 2.1 3.4

B. "Non-Tax Revenues" 27.6 29.7 27.5 29.2 28.3 27.7 26.6

Own Revenues from business activities,

property and positive exchange rate

differences (18 to 22) - 2.5 3.0 2.7 2.9 2.8 2.7 2.2

Own Fees and charges (24 to 28) - 18.4 21.4 20.0 21.1 21.3 22.0 21.5

Own Fines - 0.2 0.2 0.2 0.1 0.1 0.1 0.0

Own Other non-tax revenue - 6.4 5.1 4.6 5.0 4.2 2.8 2.9

Own C. Capital gains (32) - 0.8 0.8 0.5 1.2 1.3 1.6 1.4

C. Grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Transfers Current grants (39+40) - 9.0 9.5 8.3 8.0 8.0 6.7 5.8

Transfers Capital grants (42+43) - 0.3 1.6 0.8 1.4 1.5 1.6 1.8

Own E. Revenue from budgets of lower

tier budgetary units - 0.4 0.0 0.0 0.0 0.0 0.4 0.1

TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Recommendations

8. Short-term: Enhance own-source revenues. The sole own-source revenue base of munici-palities is user fees, but enhancing revenues from the existing consumer base will require munici-palities to upgrade service quality to improve user willingness to pay, increase revenue collectionrates and require municipal legislatures to raise existing tariff rates to cost-recovery levels. Feeincreases and better collection will be more politically palatable if the local leadership can offerexamples of where this has been successful. But municipalities should be cautioned against raisingrevenues by levying nuisance taxes (hefty permits levies, for example) because this short-term gainis a disincentive for longer-term economic growth. Awareness campaigns and higher-level supervi-sion are required to eliminate illegal taxes.

9. Medium term: develop more buoyant tax bases. All municipalities have benefited from thenew allocation system, but richer urban municipalities may benefit less. However, they are wellplaced to raise user fees for urban services, an important medium-term agenda-for example, Brckois promoting the introduction of local property tax. This requires attention to policy through legisla-tion and implementation through administration, and done skillfully, will enhance both municipal rev-enue and accountability.

4.4 Fiscal Transfers

10. The newly implemented Single Account-based transfer is the single most important revenuesource in municipalities (57 percent in FBH and 70 percent in RS in 2007).78 Distribution is basedon historical sales tax collections, and an equalization-based formula that will be phased in overseveral years (six years in FBH and nine years in RS). Prior to Single Account allocations, deriva-tion-based sales tax sharing was the main revenue transfer component for municipalities.79 For hor-izontal allocations, 2006 is a transitional year; formal ITA Single Account allocations were introducedmid-year and before that earlier versions of sales tax collection were used. In aggregate terms, RSmunicipalities enjoy a higher sharing rate of the entity ITA pool than FBH (24 versus 8.4 percent asper Figure 40). The difference is due to cantonal shares-over half of the Single Account transfersare in FBH.

4.4.1 Single Account Fiscal Transfer Allocations

11. Single Account allocations are assigned directly to municipalities. The annual SingleAccount pool dictates the amount of the vertical tranche for the municipal sector and from that eachmunicipality receives their relative share. In FBH, the cantons also receive a share but revenuesfrom the Single Account are allocated first across the state, FBH, and RS.80 In 2006, several delaysin ITA distribution arose from disputes about relative shares between entities, and the vertical dis-tribution for municipalities and cantons (see Figure 40).81


52

Box 7: Small steps to attract small business-Ljubinje deregulates local fees

Ljubinje Municipality is a small, predominantly rural municipality in Southern BH, in Republika Srpska Entity.Local administration is determined to use existing resources efficiently by creating conditions favorable tosmall- and medium-size enterprises (SMEs) and to attract investors. Last year the Municipality formed andfunded an off-budget Agency for SME development that aims to build capacity and skills among local entre-preneurs and potential entrepreneurs, who will learn how to apply for funding, run a business, and form local-level associations.

Furthermore, the municipal administration in Ljubinje has simplified and shortened internal administrativeprocedures for business registration so that the applicant need only submit the documents and civil servantscomplete the process. In less than one week, the local administration issues a registration number, contactsthe central statistical office in Banja Luka for a statistical ID number, and registers the business with the TaxAdministration.

To attract investors, the local administration lowered local communal fees that businesses have to pay, anddecided to completely exempt start-up businesses from local taxes and fees. The Mayor said: “We havedecided that we need to attract businesses and investments here. This means all Ljubinje Municipalityresources-land and everything else, should be used to attract capital and create employment.” In addition,local government earmarks funds in the annual budget to subsidize agricultural producers and small busi-nesses. As a result, the share of local tax revenues has risen to high levels in Ljubinje.

78. In 2006, municipalities appear to have received 2006 VAT and 2005 VAT back payments. (GAP)79. RS revenue sharing (income tax) is conditional on an “under-development” index.80. Law on the System of Indirect Taxation stipulates the order of payments made from the Single Account: First payments go to the State Budget (in

the amount of the adopted state budget), remaining funds are allocated to the entities and Brcko District (omitted in Figure 1). Before allocationsgo to the entities and Brcko District, foreign debt service is deducted and transferred directly to State Budget. State Budget has priority in financ-ing, which is significant and may consider potential functional transfers from entity state level (as with defense, e.g., police structures).

81. This section is based on Basaric (2006) and Levitas, Tony, Jasmina Djikic, and Brankica Lenic (2006). Figure 40 percentages are from theDecember 2006 amendments to the RS Law on the Budgetary System, which were valid as of January 2007. March 2006 amendments allocatedthe RS share from ITA in proportion 73,5-23:3 -5, which means that the December 2006 amendments increased municipal share by 1.0 percent;it also extended the transition period from six years to ten.

Figure 40: Vertical Shares from the Single Account


53

82. In FBH, the new Law on Revenue Sharing was adopted in May 2006, and came into force in January 2006. In the interim legal vacuum, FBH adopt-ed two Decisions that regulated vertical and horizontal distribution of indirect revenues and prescribed the amount to be shared was not to exceed2005 indirect taxes, and obligated cantons to allocate to their municipalities an amount that matched 2005 indirect taxes.

83. The development index captures the amount a municipalities’ average per capita sales tax and wage tax deviates from average collection of thesetaxes. The less a municipality has of the FBH average (i.e., low development index), the larger coefficients it attached.

84. These provisions were deleted in the December 2007 amendments.

Single Account

State

FBH

(64.6 %)

RS

(31.9 %)

~550

8.42

Cantons Municip

alities

Municip

alities Road

Fund

51.48

3.9

Road

Fund

24 3.5

Brcko

District

(3.6 %)

12. Allocations have two components: legacy and new formula. Basic relative allocationsacross municipalities have a legacy component based on 2005 realized collections of wage andsales taxes,82 a share that is decreasing over time, and a new formula component that follows:

FBH = 0.68*Population + 0.05*Area + 0.20*Primary Pupils + 0.07*Development IndexRS = 0.75*Population + 0.15*Area + 0.10* Secondary Pupils

13. The FBH development index measures fiscal capacity, based on historical collection ofsales and wage taxes,83 and the FBH and RS formulae modify the final allocation. For example,FBH municipalities with over 60 thousand inhabitants receive more allocations (a 20 percent addi-tional weight on their population). Previously, the RS had also imposed several “hold harmless”clauses. If a municipality were to receive less in absolute terms than before, its amount would beadjusted to ensure that it received just as much as previously in nominal terms.84 However, the RSimplementation module has changed. This clause was removed and it is now a 10 year implemen-tation period with 10 percent changes every year. Three cantons in FBH receive an additional fac-tor. Figure 41 presents the weight of the formula versus the historical sales tax collections as it isphased in over six years in FBH. The transition is slightly different for RS. In 2008 the formula andhistorical shares tax each account for half of the allocations, whereas by 2011 the allocations wouldbe fully formula based.

Figure 41: Phasing in Ratios for the Single Account distribution formula (percent) in FBH

2006 2007 2008 2009 2010 2011

Formula 10 30 50 70 90 100

Historical Sales Tax Collections 90 70 50 30 10 0

14. The new formula. The formulae are driven by population size, with a smaller relative weightgiven to geographic area and education enrollments, except for the development index in the FBHformula. This benefits larger municipalities because it assumes they need more services. However,the formula does not incorporate the notional fiscal capacity of municipalities-since most poor ruralmunicipalities have a lower fiscal capacity, richer urban municipalities have an advantage. But thisdifference may not merit changes because, in the first place, proxy data for fiscal capacity-such asregional income-may be unavailable; second, in per capita terms, rural municipalities come outahead, because they benefit from the land area factor; and third, urban municipalities’ expenditureneeds may be larger because they need more infrastructure, for example.

15. Legacy and new formula components create more equitable distribution. Figure 42 andFigure 43 plot municipal receipts based on the ratio of the legacy share of total transfers versus for-mula transfers of the overall pool. A municipality with a ratio greater than one will be receiving moretransfers from the increasing weight in the formula. Municipalities that received substantial salesand wage tax sharing will became less dependant on the transfers under the new formula, such aslarge municipalities including Mostar, Tuzla, and Banja Luka, because their relative share of histor-ical wage and sales tax allocations is greater than what they would receive based on their sharesunder revenue allocation laws. Figure 43 suggests that only 10 of 63 RS municipalities are becom-ing less dependant by this measure but these 10 accounted for over 46 percent of total SingleAccount transfers in 2006 based largely on the legacy sales allocations. Banja Luka alone account-ed for 26 percent of these transfers. However, after the full phase-in for RS over 10 years, its rela-tive share is anticipated to decline to 14 percent. Similarly, in FBH, 22 of the 71 municipalities arebecoming less dependant on the Single Account transfers (Figure 44).

Figure 42: Formula versus Legacy in Municipal Single Account Allocations (FBH)


54

Figure 43: Formula versus Legacy in Municipal Single Account Allocations (RS)

Figure 44: Formula versus Legacy in Municipal Single Account Allocations (FBH)


55

16. The growth of the Single Account pool, and the transition formula allocations. In 2006buoyant ITA collections created windfalls which exceeded even the most optimistic expectations.Similarly, revenue growth was substantial in 2007 and 2008. But this trend may not continue. Thetransition over the next five years creates dynamic annual allocations. For example, a municipalitysuch as Mostar would receive a small share of a growing overall ITA. A stagnant ITA, plus a declin-ing ITA allocation might spark a lobby for a more favorable formula, a delayed new formula phase-in, or discretionary allocations. If ITA shares fall short of expenditure pressures, for instance, for thespecial needs of urban or peri-urban municipalities with large displaced populations, or poor munic-ipal financial management such as overstaffing, municipalities may compensate with near-sighted,short-term, own-source revenue seeking to the detriment of local economic growth-for example,licenses fees for new housing, and hefty permits for business startups.

Recommendations

17. The legislative framework that determines transfers from the Single Account has beenin place and should be respected. Single Account transfers are introduced directly from entity tomunicipality in both FBH and RS, ensuring that sub-entity governments have a more predictableand transparent revenue stream. Overall, the formula design seems to promise greater equity infinancing basic municipal service delivery. The Ministries of Finance of both entities should respectwithin-entity distribution formula and monitor the dynamics during the transition period.

4.5 Expenditure Composition and Efficiency

18. Larger municipalities stand to lose from Single Account transfers. Over time, large urbanmunicipalities that enjoyed the bulk of sales/wage tax will lose out in relative terms and, given theoverall buoyancy of VAT revenues, may also lose out in absolute terms, even when adjusted forinflation. To compensate in the medium term, these municipalities will have to increase own-sourcerevenues or increase yields from other bases; and all municipalities could realize gains from assess-ing their current expenditure prioritization and efficiency.

19. Municipalities have options to enhance fiscal space on the expenditure side. This studyrevealed several options to reduce unnecessary expenditures. For example, a quarter of case studymunicipalities reported having to fill expenditure gaps left by higher levels of government, notably inhealth and education. Clarifying roles and responsibilities would yield savings but the potential mag-nitude of these savings as a share of total municipal expenditures was not quantified. Furthermore,the prevalence of stop-gap transfers to affiliated public sector enterprises such as utilities reveal thatsome municipalities subsidize inefficient service providers operations that do not cover costs. Overthe longer term this creates investment gaps for existing infrastructure, and could also signal poorcapital expenditure prioritization. Strengthened cost recovery will increase own-source revenue andopen space for alternative expenditures.

20. On average, wages consume significant portion of municipal expenditures (29% in FBHand 19% in RS). Most municipalities’ wages are under 40 percent of total annual expenditures butsome spend between 40 and 60 percent, due to staff size and wage levels. Figure 45 suggests thatthe wage share is more in poorer municipalities. Anecdotal evidence suggests that public sectorwages can differ among municipal staff, entity staff, and federal staff but the federal level appearsto be the reference point.

Figure 45: Wage Share against Per Capita Revenues


56

0.2

.4.6

Sh

are

of

Wa

ge

s in

To

tal R

eve

nu

es (

%)

0 200 400 600 800 1000Per Capita Total Revenues (KM)

FBH RS

Fitted values Fitted values

2006 Budgets

Bosnia Municipal Wage Expenditure Pressures

21. Recurrent and capital expenditures, including transfers. On average, RS municipalitiesrealized 25 percent of total expenditures on materials and service expenses (which includes travel,energy, utilities/communications, materials, fuels). In 2005, 36 percent of this category was account-ed for by contracted services, and grants and transfers accounted for an average of 22 percent oftotal realizations, of which one-third constituted transfers to individuals, suggesting that a significantpart of municipal expenditures are used for social safety nets. Municipalities reported that half oftransfers went to non-profit organizations, presumably for public facilities such as sports venues andlibraries. On average, transfers to private companies accounted for only 3.0 percent and public com-panies, 2.0 percent, although well over half of all municipalities reported transfers to public compa-nies. However, in notable outliers such as Ribnik and Srbac in RS and Vogosca, more than 50 per-cent of 2005 transfers were spent on public enterprises. Transfers to private companies were morelimited, only about one-third (20 of the 62 RS municipalities) reporting these.

22. Municipalities deployed direct capital expenditures or transfers to MZ and other enterpris-es. Figure 46 presents reported per capita capital expenditure realizations across all RS municipal-ities.85 In 2005, all municipalities reported some form of direct capital expenditures, mostly toacquire equipment and buildings (56 and 43 of 62 municipalities in RS) respectively. As expected,the largest per capita magnitude was for buildings (79 KM per capita). Just over half reported expen-ditures for reconstruction and maintenance. Imprecise data make it difficult to establish whetherother municipalities are neglecting maintenance at the expense of new capital projects. Just overhalf of municipalities reported capital transfers, albeit limited (20 KM per capita). Only one-quarterreported capital grants to lower tiers of government (i.e., MZs), while just under half reported mak-ing grants to other organizations-possibly utilities and other municipal bodies.

Figure 46: Selected Capital Expenditures by Municipalities (RS, 2005)


57

Average Highest Lowest Reporting

(KM PC) (KM PC) (KM PC) #

Fixed asset acquisition expenses 113 1652.47 0.34 62

Acquisition of land, forest and plantations 9.1 52.4 0.1 15

Acquisition of buildings 78.7 1155.1 0.1 43

Acquisition of equipment 8.5 275.3 0.2 56

Acquisition of other fixed assets 44.1 453.1 0.1 14

Acquisition of long-term assets in the form of rights 33.3 241.9 0.8 12

Reconstruction and maintenance 31.6 214.4 0.1 33

Non-material investment 2.41 7.37 0.05

Capital grants to other tiers of government 20.0 294.2 0.0 36

Capital grants to other tiers of government 13.5 85.3 0.0 15

Capital grants to individuals and non-profit organizations 18.5 294.2 0.0 28

Total Revenues 520.5 6290.6 87.0 62

23. Reporting by sectoral/functional classification is inadequate. Figure 47 summarizes RSexpenditure categories by major functional classification. The GIB data omit detailed expenditurebreakdown reporting, and no 2006 functional classifications were yet reported at the time of writ-ing; reporting problems result from prevailing administrative and accounting procedures. Abouthalf of expenditures are assigned to general services, with a slight downward trend over time;housing and communal affairs, and economic affairs appear to increase over time; and notably,about five percent of expenditures are assigned to education.

85. FBH data were incomplete, but the partial results presented generally consistent findings.

Figure 47: Expenditures by Functional Classification (percent) in RS

2003 2004 2005 2006

Budget Actuals Budget Actuals Budget Actuals Budget Actuals

General public services na 56.1 50.5 49.8 47.4 45.7 na na

Defense na 0.9 0.7 1.0 0.2 0.4 na na

Public order and safety na 1.3 0.7 0.8 0.6 0.5 na na

Economic affairs na 15.1 17.2 17.2 18.2 18.2 na na

Environment protection na 1.8 2.4 2.1 1.4 1.5 na na

Housing and communal services na 10.4 11.3 12.4 14.3 15.2 na na

Healthcare na 0.8 1.0 0.9 1.0 1.1 na na

Recreation, culture and religion na 3.7 4.5 4.8 5.2 5.3 na na

Education na 4.8 5.4 5.8 5.0 5.5 na na

Social security na 5.1 6.1 5.7 6.6 6.5 na na

Total 100.0 100.0 100.5 100.0 100.0


58

24. Effective municipal expenditure requires a well-functioning PFM process. Aggregatedata provide only the most basic sense of where municipalities could be enhancing the servicedelivery impact of their expenditures. More refined expenditure prioritization and implementationemerges from a high-quality planning and budgeting process that ensures value-for-money procure-ment (Chapter 5).

Recommendations

25. Increasing public resources available to municipalities (see above) will require consis-tent reporting on allocations and implementation of these resources-this remains a priority.Without basic efforts to strengthen this information, municipal managers and national stakeholders(e.g., Ministry of Finance, local government) will be unable to examine evolving patterns, much lesslink these to differing municipal outcome measures. Support is needed, similar to initial efforts byUSAID GAP, to introduce basic financial management information systems at the municipal level,which can facilitate consistent reporting across municipalities.

4.6 Municipal Borrowing

27. Until recently, municipal borrowing was restricted in both entities. Through 2006, borrow-ing in FBH was restricted by annual budget laws. The most recent RS law imposes limits on munic-ipalities based on debt servicing ratios. The Law on Indebtedness, Debt and Guarantees of theRepublika Srpska (passed in May 2007) allows municipalities to borrow if servicing does not exceed18 percent (increased from ten percent) of the previous year’s own-source revenues plus transfers.Furthermore, municipalities can issue guarantees (e.g., for associated public enterprises) up to 30percent of the previous year’s revenues. The FBH Law on Indebtedness, Debt and Guaranteesallows municipalities to take long term debt only under the conditions that yearly debt service of allloans, including loans incurred by their enterprises for which municipalities issued guarantees, doesnot exceed 10 % of revenues collected in previous fiscal year. However, projected Single Accounttransfers to FBH cantons will likely increase their borrowing room in aggregate volume over that ofmunicipalities.

28. Reported municipal debt stocks in RS are an estimated 2.5 percent of RS’s GDP or 27percent of RS revenues in 2006. The RS Ministry of Finance reports total municipal debt balancesjust under KM 150 million, excluding guarantees. However, only 33 million of this debt appears tohave been actually incurred. Moreover, the Ministry appears to have approved a further KM 22 mil-lion for guarantees. Detailed data of debt servicing (interest plus principal) are not available.Assuming a overall debt service ratio of 20 percent, this would allow for a debt stock of RS 2.8 bil-lion, suggesting that on aggregate, based on reported approvals, RS municipalities are well withinsanctioned limits, and hence have a potential to enhance their fiscal space within these paramaters.

The highest leveraging appeared to be Srbac (3.5 times debt stock to 2005 revenues). Eight munic-ipalities reported debt stocks exceeding 2005 revenues: Oš{tra Luka (1.6), Novigrad (1.5),Nevesinje (1.34), Kne�`evo (1.23), Petrovo (1.17), Prnjavor (1.15), Laktaši (1.05), Gradiška (1.03).

28. Long-term financing appears to dominate municipal borrowing. The GIB data distinguishbetween long- and short-term borrowings, although criteria for this distinction are unclear. The GIBdata suggest that RS municipalities borrowed KM 5.6 million in 2005, and FBH municipalities, KM4.3 million. In FBH municipalities less than 2.0 percent of this was short-term; in RS, 15 percent ofmunicipalities reported short-term borrowing. Reported long-term borrowing was derived mainlyfrom domestic sources. These data raise the question of whether FBH borrowing occurred inside oroutside the legal framework, which until recently strongly restricted borrowing.

29. FBH fiscal data quality is especially poor but has seen significant improvement. The GIBforms pass through the FBH cantons and are then sent to the entity level where all municipalities inthat canton are aggregated, but quality control for this reporting is poor. Cantons exhibit apathyabout reporting, which may set the tone at the municipal level. The introduction of the VAT, and thephasing in of the revenue allocation formula from the Single Account, is likely to affect the borrow-ing position of different types of municipalities. In some cases, several municipalities may also buildup initial surpluses given the “windfall” transfers in 2007. In relative terms, richer urban municipali-ties will increasingly have to rely on own fiscal capacity and cost-recovery. Borrowing can be effec-tive to promote much needed capital investments at the local level. However, in many cases thispresumes the ability of municipalities to adequately assess and prioritize potential projects.

Recommendations

30. Ministries of Finance at all levels should strengthen its ability to monitor fiscal risks and helpmunicipalities to be on a sounder financial footing. Until recently, borrowing has been frozen in FBHmunicipalities except through multi-laterals, e.g. World Bank, although the GIB data suggest thatsome municipalities have incurred liabilities. A priority is to clarify which FBH entity-level agency isresponsible for monitoring and approving municipal borrowing, ideally linked to enhanced monitor-ing of municipal fiscal data, as currently introduced in the FBH MoF. In FBH, the cantons will alsoneed to be monitored, given their significant fiscal space in the area of borrowing under these meas-ures. Similar efforts could be directed at strengthening the already established system of monitor-ing at RS. Better periodic monitoring should also dispel concerns that municipalities may be too rap-idly exploiting the fiscal space for borrowing as set out in the legal limits.

31. Identify capacity gaps and needs for municipal capital projects and borrowing.Particularly in FBH, the market for municipal borrowing has only recently opened. BH has a relative-ly well developed and competitive banking sector. Previous donor support (e.g., LDP) has alreadysought to strengthen this market, and several banks have already expressed more interest in thismarket (including through cross-marketing with other services). Therefore, it may be useful to bet-ter understand the project preparation needs across a range of municipalities, and how this demandcan be best supported. At the same time, borrowing tenders are subject to prevailing procurementlegislation. To achieve the best value for money, greater transparency and dissemination of thesestandards across both executive, legislative, and other municipal stakeholders could be supported.The international community can provide technical assistance to municipalities to strengthen theirpublic financial management as well as capital investment planning and project appraisal capaci-ties, which would enable them to take advantage of borrowing.


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4.7 Conclusions

32. Municipal priorities will differ. When BH municipalities’ fiscal positions are analyzed usingavailable data on municipal budget levels, structures, and trends, there are wide differences infinances and expenditures, which will affect priorities.

33. The impact of state/entity level reforms on municipalities will differ. For underfundedmunicipalities, the phasing in and targeting of the ITA transfers are crucial. Property tax reforms area medium-term proposition but will have the largest impact on richer municipalities. For most munic-ipalities, formal borrowing limits are acceptable. Given the recent relaxation on borrowing in FBH,significant effort will be needed to enhance monitoring of borrowing patterns for those municipali-ties.

34. Aggregate budget GIB data provide a limited view of fiscal space and options. In thefunctional area, GIB data reveal whether municipalities were spending on unassigned functions.The original budget data (OBD) for individual municipalities differ on reporting structures, and evenby year, which prevents a systematic integration of the data. A more systematic analysis of the fis-cal space of BH municipalities is significantly constrained by the absence of effective reporting sys-tems and processes. Special efforts are needed to convince key stakeholders of the value ofimproving these reporting systems. First, municipalities themselves must accept the value of goodfiscal reporting not only to their own executive and legislative, but also their ability to compare them-selves to other municipalities. Second, international development partners will need better informa-tion on the fiscal capacity, and linked therewith performance, of individual municipalities to better tar-get and monitor their assistance over time. Finally, entity and state level agencies, notably Ministriesof Finance, must better appreciate the value of this type of reporting, given the increasing resourcesbeing channeled to the municipal sector and their oversight responsibilities with respect to theseresources.


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Chapter 5: Public Financial ManagementPerformance across Municipalities

5.1 The Why and What of Sub-national PFM

1. Sub-national public financial management (PFM) practices-from budgeting, planning, execu-tion, to external scrutiny and monitoring-expose a set of cross-cutting issues that contribute to vari-ations of service delivery outcomes. Since service delivery is increasingly decentralized, weak PFMfunctions and local government institutions are likely to undermine benefits inherent in bringing pub-lic services closer to local communities, including broad-based accountability. This section summa-rizes a systematic assessment of PFM outcomes in 20 municipalities-the first attempt in BH, anddiscusses reforms that could improve the situation.86

2. The enabling environment and local policymaker actions shape municipal PFM out-comes. Examining the main drivers for PFM outcomes in a Sub-national context is the best methodof discovering where potential exists for improvements. For example, some outcomes are primarilydriven by the overall intergovernmental enabling context-crucial budget transfers might becomeempty promises, or the entity government may fail to conduct external audits. Other outcomes aredriven primarily by municipal behavior or capacity. For example, despite timely announcements ontransfers from higher levels of government, significant delays in the annual budget approval occurdue to gridlock among political parties that prevents timely passage of the municipal budget. In thiscontext, the Municipal Administration (MA) and Municipal Council (MC) must be differentiated.


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86. The Public Expenditure and Financial Management (PEFA) performance indicator framework guided the assessment of individual municipal PublicFinancial Management (PFM) outcomes; the framework covers 28 indicators, plus three for donor behavior (See Annex 6.1 for a summary of PEFAframework). Typically, the indicators have been applied to national contexts, but are increasingly used at the Sub-national level. The report adoptsa streamlined assessment framework to assess PFM performance in 20 case municipalities. While the PEFA indicators are typically graded on anA-D scale (PEFA 2005), for this pilot phase, the team used some indicators on a yes/no basis, and where possible collected quantitative data (e.g.,deviations from planned to realized budgets), and noted qualitative dynamics in each area (including factors/ issues that may not have been con-sidered in advance of the field work). The objective of the PEFA indicators is to better assess why outcomes are occurring, not simply to scorethem.


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Summary of PEFA

The Public Expenditure and Financial Accountability (PEFA) Framework is intended to: (i) provideintegrated assessment of performance of national PFM systems; (ii)demonstrate progress in PFMperformance over time; (iii) enable regular, rigorous, evidence-based monitoring by domestic andinternational stakeholders; and (iv) facilitate harmonization through wide international acceptance.

This framework identifies six critical dimensions of performance of an open and orderly PFM sys-tem as follows:

1. Credibility of the budget - The budget is realistic and is implemented as intended2. Comprehensiveness and transparency - The budget and the fiscal risk oversight are

comprehensive, and fiscal and budget information is accessible to the public.3. Policy-based budgeting - The budget is prepared with due regard to government policy.4. Predictability and control in budget execution - The budget is implemented in an orderly and

predictable manner and there are arrangements for the exercise of control and stewardshipin the use of public funds.

5. Accounting, recording and reporting - Adequate records and information are produced,maintained and disseminated to meet decision-making control, management and reportingpurposes.

6. External scrutiny and audit - Arrangements for scrutiny of public finances and follow upby executive are operating.

Against the six core dimensions of PFM performance, 28 high-level indicators of country PFM per-formance are structured into three categories:

A. PFM system out-turns: the immediate results of the PFM system in terms of actual expen-ditures and revenues by comparing them to the original approved budget, as well as levelof and changes in expenditure arrears.

B. Cross-cutting features of the PFM system: the comprehensiveness and transparency ofthe PFM system across the whole of the budget cycle.

C. Budget cycle: the performance of the key systems, processes and institutions within thebudget cycle of the central government. In addition, this framework also includes 3 donor indicators

D. Donor practices: elements of donor practices which impact the performance of countryPFM system.

Budget credibility

A. PFM Out-turns

External scrutiny and

audit

Accounting, Recording, Reporting

Predictability and control in Budget Execution

Policy Based

budgeting

C. Budget Cycle

D. Donor Practices

Comprehensiveness and Transparency

B. Cross-cutting features

3. The enabling environment consists of legislation, regulations, guidance, and instructions atState, entity, and cantonal (in FBH) and municipal levels. Recent legislative and regulatory reformshave improved public financial management performance, and some areas, for example, Sub-national borrowing, internal audit, have pending legislation or policy in development. Table 2 sum-marizes key legislation that governs BH public financial management for municipalities, and high-lights circumstances where PFM arrangements differ between the Federation and RS.87

Figure 48: Key Regulations Concerning Municipal PFM

State FBH RS

Credibility of the budgetComprehensiveness and trans-parencyPolicy-based budgetingPredictability and control in budgetexecution

BH Law on Payments into a SingleAccount and Revenues (Dec 2004)Law on Public Procurement

FBH Organic Budget Law 2006FBH Law on TreasuryFBH Law on Principles of LocalSelf-GovernanceFBH Laws on Revenue AllocationCantonal Laws on RevenueAllocationLaw on Debt, Indebtedness, andGuarantees of the Federation ofBosnia and Herzegovina

RS Budget System LawLaw on Treasury System in RSThe RS Law on Local Self-GovernanceRelevant bylaws, rulebooks andinstructions by MoFsLaw on Indebtedness, Debt andGuarantees of Republika Srpska,2007.

Accounting, recording and report-ing

FBH Laws on Accounting andAuditingLaw on Internal Audit in PubulicSector in FBH )(Official Gazette48/08)

RS Laws on Accounting andAuditingLaw on Internal Audit in PublicSector in RS (Official Gazette17/08)

External scrutiny and auditLaw on Audit of institutions of FBH(Official Gazette 22/06)

Law on Audit in Public Sector in RS(Official Gazette 98/05)

Donor practices

Source: See Annex 3.3 for details.


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5.2 Key Findings and Summary of PFM Assessment

4. Recent reforms on financial management have achieved some success. Bosnia andHerzegovina has established fundamental PFM systems for managing macro-fiscal developments,some elements for enabling strategic allocation of resources, and a few tools for improving opera-tional/technical efficiency.88 However, the fragmented and evolving policy and legal/regulatory envi-ronment has handicapped policy design and implementation at the local level, which requiresstrengthening the link between legislation/regulation and implementation, and intensive but cus-tomized capacity building at all levels.

5. Better PFM performance is associated with better overall service outcomes across 20municipalities (Figure 49). Exceptions are Odzak and Ljubinje, ranking 6 and 8 in service out-comes but only 16 and 18 on PFM scores. Similarly, Buzim is 2 in PFM measures but only 15 onservice outcomes. PFM performance does not appear to correlate strongly with per capital revenuesor population size (Figure 50 and Figure 51). In general, older municipalities have better PFMscores than newly established municipalities (Figure 52).

87. Full references to laws and background documents are found in the report bibliography.88. See World Bank, 2006, A Fiduciary Update on Public Financial Management Bosnia and Herzegovina.

Figure 49: Service Outcome Score and PFM Scores


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Figure 51: PFM Scores, Service Outcome Score, and Per Capita Revenue


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Figure 52: PFM Scores, Service Outcome Score, and Legacy

6. PFM performance varies greatly across municipalities (see Annex 6.3 for spider dia-grams), indicating the need for a tailored PFM capacity-building strategy grounded in municipal-level analysis.


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Breza PFM Results

-80%

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Budget Credibility

Comprehensiveness &

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Execution

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Donor Practices

Ilidza PFM Results

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ExecutionAccounting, Recording & Reporting


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5.2.1 Credibility of the Budget

7. Further reforms are urgent to enhance budget credibility so that the budget can be trust-ed by users who will implement it and deliver services, and by citizens and businesses. Reformsneed a two-pronged approach: first, improve municipal technical capacity to carry out revenue fore-casting (in particular for own-source revenues), and second, ensure predictability of shared rev-enues and transfers from higher level government.

8. For most municipalities, municipal budget credibility-measured as the difference betweenapproved budgets and realizations-was weak and has not changed appreciably over the past threeyears. In at least one of the past three years (2004-06), three quarters of municipalities had eitheroverspent, or failed to spend, their original budget-a variation of larger than five percent in absoluteterms.89 Admittedly, by more lenient standards, which sets the reference threshold at ten and fifteenpercent respectively (or B-D grades under the full PEFA framework), the number of below-par per-formers is more limited. Some 12 of the 20 municipalities exceeded a 15 percent deviation no morethan one year over the three year period.


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Mostar PFM Results

-80%

-40%

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Comprehensiveness &

Transparency





Donor Practices

Berkovici PFM Results

-80%

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Comprehensiveness &

Transparency





Donor Practices

89. The average absolute deviations were 10.3 percent in 2004, 10.7 in 2005, and 18.5 in 2006.

9. Internal and external factors contribute to weak budget predictability.90 The overall inter-governmental enabling context and weak municipal capacity in budget forecasting, execution, andscrutiny contribute to weak budget predictability. Since transfers and grants comprise two thirds oftotal municipal revenue, municipal budget credibility to a large degree depends on higher-level gov-ernments providing municipal governments with reliable and timely forward estimates of annualtransfers and grants, and most importantly, to accept accountability for amounts promised.However, the transfers and grants have become the biggest source of unpredictability, with an aver-age 54 percent absolute deviation during 2004-06.91 In 2006, the government envisioned the VATwould provide municipalities with more predicable transfers directly from the state level. However,the first year of implementing Single Account transfers eroded budget predictability. First, distribu-tion coefficients were published too late, which meant that municipalities prepared their 2006 budg-et based on past revenue proceeds, and entity governments’ conservative guidelines suggestingexpected revenue outturns for 2006.92 Later, disputes over the single account revenue share acrossthe two entities and the Brcko district frequently delayed transfers from indirect taxation in 2006,resulting in a revenue windfall in the first quarter of the year, with revenues being transferred in bulkat the end of March. Actual municipal expenditures significantly exceeded budgeted expenditures,since by then municipalities had already significant arrears to be covered, such as wages for example.

Figure 53: Average Absolute Deviation of Primary Budgets for 20 Municipalities

%2004

%2005

%2006

Total Expenditure 10 11 24

Operating Expenditure 8 20 23

Capital Expenditure 27 65 71

Total Revenue 9 9 21

Tax-revenue 14 7 26

Non-tax-revenue 23 16 25

Transfers and Grants 34 63 71


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10. Compounding the problem, most municipalities exhibit weak capacity for revenue fore-casting, as demonstrated by aggregate revenue out-turns compared to original budgets. Mostmunicipalities base their revenue forecasts on the previous year’s revenue, often using nine monthfigures to meet requirements of the budget calendar. Few municipalities had forward-looking per-spectives that considered fiscal capacity or local revenue mobilization potential. Compared to taxrevenue forecasting, municipalities tend to be optimistic about non-tax revenues collection,93 lead-ing to large deviations in non-tax revenue outturns averaging 21 percent absolute deviation. Delaysor poor information on higher-level transfers,94 especially capital transfers, and unclear and ever-changing revenue-sharing arrangements made municipal revenue protection problematic.95

Community contributions to capital investment are by nature less predicable, thus adding to poorbudget projection.

11. Many factors contribute to expenditure deviations. Capital expenditure deviations resultedfrom (i) unclear entity-and cantonal-level rules of capital project selection; (ii) failure to transfermatching funds; (iii) unexpected/unplanned transfers to capital projects; (iv) donor programs; and(v) loan refinancing. Operating expenditure deviations resulted from (i) reductions to operational out-lays to meet national and international standards; (ii) financing deficit and capital expenditure; (iii)increased salary base by higher-level government (from 86KM to 102KM in RS); and (iv) difficultyshedding employees during unsuccessful/unfinished local administration reforms, or politicalchanges in government.

90. Please note that this analysis was based on 2004-2006 data collected as part of the PFM assessment. Some experts suggest that in general therevenue projections by OMS are filtered down to municipalities in a timely manner. However, in FBH, as the communication from the Ministry ofFinance to municipalities goes through the cantons, which are not quick enough with information sharing. In fact, the projections provided by OMAare often too conservative every year, hence loosing credibility.

91. Compared to average deviation of 16 percent on tax-revenue and 21 on non-tax revenue during the same period.92. For example, the RS Entity Government suggested revenue increases of about 5.0 percent to its municipalities.93. Non-tax revenues include fees from flooded land, utilities, construction land, business premises, compensations, and other fees and charges.94. Such as Doboj jug and Ilidza.95. For instance, Una-Sana Canton and Herzegovina Neretva Canton.

12. New responsibilities pressure municipalities to switch expenditure priorities. A fractionof municipalities received explicit new expenditure responsibilities in the past three years. For exam-ple, Mostar, Jablanica of Herzegovina-Neretva Stolac Canton and Buzim of Canton Una-Sana, andLjubinje in the RS, adopted a Law on Social Protection in 2005, which delegates some social assis-tance functions to municipalities, but no additional resources were transferred. A quarter of munici-palities reported having to fill the funding gap left by higher-level governments, primarily in educa-tion, health care, social protection, welfare, and in one case, arrears for the sport and cultural cen-ter operated by the cantonal government.

13. One-third of municipalities have accumulated expenditure payment arrears.96 Threemunicipalities have incurred salary arrears. Of seven municipalities, most have records, but onlythree of them know the stock of their arrears (2.0, 3.0, and 21 percent) with an average of 8.7 per-cent of total expenditure. This diminishes municipal ability to invest locally and remain financiallyindependent, which may reveal a need to expand the budget envelope for some.

14. Lawsuits against local governments are potentially large liabilities. Legal liabilities threat-en budget credibility and disrupt municipal operations. About three-quarters of municipalities havebeen sued.97,98 Some municipal accounts have been blocked; some revenues have been redirect-ed to creditors or plaintiffs (e.g., Stolac). In 2006, the FBH government amended the Law onExecutive Procedure, ruling that municipalities and cantons that are under court rulings must paytheir debt/arrears and must set aside a minimum of five percent of revenues for this purpose. Thisamendment assures creditors and plaintiffs of recouping their money, and protects municipalitiesand cantons from potential bankruptcy or operational disruptions.

15. Case studies suggest some positive trends since the 2004 election. Qualitative interviewssuggest that mayors in municipalities such as Ribnik, Stolac, Zvornik made budget credibility animportant platform for their new governments after the 2004 elections. Before 2004, Ribnik, forexample, had large accumulated arrears and no budget approved by the local council. The newmayor cleaned up the books and restored budget credibility by paying off arrears and working withlocal council on a realistic budget.

5.2.2 Budget comprehensiveness and transparency

16. Improved functional classification is essential. Budget classification lacks comprehensive-ness and functional classification is particularly weak. As a result, local governments have beenunable to assess the strategic allocation of budget resources among economic sectors.Municipalities and higher level governments cannot track spending efficiency and effectiveness ofservices. In the short run, the Ministries of Finance in both entities must clarify functional classifica-tion and provide further technical assistance to improve the policy focus in resource allocation. Inthe long run, budget classification and accounting systems should be structured and aligned toenable performance orientation, which will also require service outcomes to be monitored andmeasured.

17. Budget classification in BH, as defined in Budget Laws in both entities,99 allows spend-ing to be tracked at all levels by administrative and, economic classification but functional classi-fication is yet to be introduced at the municipal level. Despite the introduction of the automatedtreasury system at all levels of government, there is no unified Chart of account and those used bythree tiers of government are not fully compliant with international public sector accounting stan-dard. This would raise a concern regarding compatibility of financial information and overall trans-parency of public spending.100


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96. Budget Laws in both entities regulate expenditure payment arrears. In the FBH, budget users shall not incur arrears without Ministry of Financeapproval. In RS, legislation forbids arrears at all levels, although Berkovici has accumulated some arrears.

97. Some municipalities star ted to levy local taxes in an effor t to raise local revenues. These taxes were later ruled illegal by constitutional court(e.g., Siroki Brijeg’s turnover tax on a meat packing factory).

98. Most keep a record of all court suits, half of municipalities plan to repay the arrears and lost cases.99. In the Federation, FBH Law on Accounting and Auditing legislation and government Decree (and subsequent Rulebook) also provide framework

for Chart of Accounts.100. OSCE has partnered with USAID and Sida funded Governance Accountability Project (GAP) and developed a Budget and Finance Guide as a

reference document for Mayors, Heads of Finance, councilors and citizens in all BH municipalities.

18. Significant deviations from the Charts of Accounts exist in actual budget reporting atthe municipal level in both entities. Economic classification is common practice but functionalclassification and administrative classification are less popular. Increasing numbers of municipalitiesuse all three classifications (from 5 in 2004 to 11 in 2006). Weak local government compliance onfunctional classification in part reflects a lack of clear instruction and clarification from higher-levelgovernment. Both entities require GIB reporting, however some municipalities object to the narrow-ness of GIB forms, which has led to a reduction of reported items (about half of those reported tothe municipal council).

19. Budget documentation information is increasingly comprehensive. Although the amountof budget information submitted to the local legislature is rising, the level of unreported extra-budg-etary government operations is unclear. Half of the 20 sample municipalities have included five orsix of the requested six elements of key information-prior year’s budget outturn, budget proposal,fiscal deficit, deficit financing, and debt stock (when applicable, see Annex 3.2, PI 6). However,about half of municipalities failed to explain the budget implications of new policy initiatives, andabout half have unreported government operations for which no data were available on compositionor magnitude.


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Box 8: Ugljevik: Budgeting based on citizens’ needs.

Ugljevik is situated in the Semberija region, North-East Republika Srpska. It has an estimated 17,000 citi-zens, down from the 1991 census, which recorded 25,645 citizens. The RS government categorizesUgjevik as a developed municipality thanks to a coal mine and an electric plant that is the largest source ofmunicipal revenue. Per a RS Government decree, these revenues from concessions must be used forcapital investments and development projects.

The local government understands that sustainable municipal development is enhanced through participa-tory planning. This philosophy, combined with the revenues for capital investments and development proj-ects created favorable conditions in Ugljevik, where Municipal authorities have established a model ofdrafting the budget with citizen inputs. The first step in drawing up the budget is to consult MZ representa-tives and conduct a survey of citizen opinions.

The Commission for Development within the Municipal administration evaluates the survey results and theMZ inputs using criteria set by MZ Councils and citizens to ensure all projects have equal status and prioritiesare selected democratically. This participatory approach to budget setting was recognized as a model for BH.

20. Over three-quarters of municipalities provide support to their MZs, but how this supportis managed varies. MZs have been established in almost all municipalities in the sample.101 Therole of local communities (MZs), as subdivisions of municipalities, have recently been clarified andinstitutionalized through the Law on Principles of Local Self-Government in FBH and the RS Law onLocal Self-Governance.102 In practice, over half of municipalities have passed local legislation toregulate MZs activities. Although financing is largely secured for MZs’ operating costs, most trans-fers are ad hoc; only two municipalities transfer the funds according to objective formulae (Zvornikand Visegrad). Only half of MZs account for their spending, less than half have a system of auditing.

21. Municipal government subsidies and guarantees to their public enterprises may createfiscal risk. Only three municipalities have legislation that covers aspects of financial managementand reporting for locally owned public enterprises.103 Municipalities subsidize capital expendituresfor their utility and for-profit-companies (SOEs), and the enterprises self-finance for recurrent expen-ditures through user tariff collection or sale of goods and services. All municipalities reported thatenterprise subsidies are recorded but the detailed municipal budget is unclear about how much cap-ital expenditure municipalities allocated to their enterprises and it is impossible to track.Municipalities have also issued guarantees to their public enterprises, creating potential fiscal risk.

22. Weak oversight of public enterprises poses fiscal risks to local governments. Few enterpris-es have internal audits but most municipalities have external audits on the annual financial statements oflocal enterprises/institutions. However, Municipal Finance Directors interviewed were often unaware ofexternal audit results. Most local legislation on financial management excludes local enterprise reporting.

101. Except Stolac and Mostar.102. Local Self-Governance Laws do not specify MZs’ revenue composition. In the FBH, some revenues include self-financing, service-provision fees,

“gifts,” and other resources—intended for use in MZ plans and programs. 103. Although three-quarters of municipalities have legislation on locally owned public enterprises.

23. Municipalities do not understand relevant entity-level laws. The Laws on PublicEnterprises (2006) newly introduced in both entities regulate the ownership, governance, andfinancing of public sector companies. However, considerable confusion/ambiguity surrounds thefinancial relationship between the utilities and municipalities, which creates potential municipal lia-bilities and threatens to erode service delivery outcomes. Furthermore, legislation and practice aredisconnected, in part due to a failure to disseminate and clarify the new laws104. In RS, the 2007update on the Law on Indebtedness, Debt and Guarantees provides the framework to overseeaggregate fiscal risk. In FBH, a similar law was adopted by the parliament in December 2007.However, considerable confusion still exists about municipal mandates to issue guarantees and bor-row from the credit market.

24. BH municipalities provide reasonable public access to fiscal information. All municipali-ties hold public hearings, often in MZs, on the draft budget before it is submitted to the local coun-cil, and sometimes hearings are broadcast by local radio or television. All municipalities publish thefinalized budget in official Gazettes; 19 out of 20 do so using their notice boards. A quarter of themunicipalities published their annual budget on-line, although the level of detail varies widely. All 20municipal Finance Directors prepare quarterly in-year reports for local councils on budget executionand these are made available to citizens by request.

5.2.3 Policy-Based Budgeting

25. Little potential for multi-year budgeting and strategic sectoral planning at the local level.Although the basic enabling environment and tools for policy-based budgeting are in place and thebudget process is orderly, multi-year perspective and strategic sectoral planning are hampered, par-ticularly at the municipal level, by unpredictability of transfers from upper-level governments, andlack of local capacity.105 Capacity needs to be built at all levels to translate government policy pri-orities into annual budget preparation, which requires a longer-term perspective.

26. Both entities have clear annual budget calendars. Timelines for the budget preparationactivities of local governments are defined in the FBH Organic Budget Law and RS Budget SystemLaw. Over the past three years, most municipalities passed their budgets before the start of the fis-cal year, although slippage has occurred. Qualitative interviews suggest that it is often difficult to setstrategic objectives and get annual budget passed easily if the mayor belongs to a political party dif-ferent from the majority party/coalition in the council.106

27. Enabling elements exist for strategic allocation of resources but practice lags. In bothentities the budget framework papers (BFPs)107 cover a three-year period, set out key revenue pro-jections, expenditure policies and strategies to guide budget preparation for the entity, cantons, andmunicipalities. Legislation requires municipalities to prepare their own BFPs. Close to three-quar-ters of municipalities claimed to have done so but only about half of them have documentation ofmedium-term priorities. Moreover, in only half of municipalities do final sector plans reflect develop-ment priorities from the medium-term development plan, despite participation of local councils to setsector priorities and programs in most municipalities.

5.2.4 Predictability and control in budget execution.

28. The cantonal and municipal governments lack capacity to bring discipline to the budg-et execution system. As a result, government policies and programs are not carried out efficient-ly or effectively and underdeveloped cash and debt management constrain municipal ability to carryout large-scale infrastructure projects and ensure their successful operation.


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04. For example, municipalities interviewed in RS thought entity government still owned the utilities. In FBH, a privatization scheme is being pilot-ed in Tuzla, where the municipality holds 51 percent of all communal enterprises, but the municipal council regulates and sets tariffs at socialprices. A board of directors is established for each enterprise. In Tuzla, the deputy department head of utilities sits on the water company’sboard.

105. In 2004, a country-wide Medium Term Development Strategy (MTDS), also known as Poverty Reduction Strategy Paper (PRSP), was preparedjointly by the three governments. However, even at the national level, the link between policy and budget remains very weak.

106. Law on Principles of Local Self-Governance introduces checks and balances to prevent the council from blocking budget passage. The mayorcan declare the budget effective if the council fails to adopt it within 90 days.

107. The BFPs contain economic and social development forecasts, main macroeconomic indicators, and revenue and expenditure forecasts cov-ering the period for which the BFP is prepared.

29. Revenue administration is ineffective. Municipalities in both entities lack significant policyand administrative autonomy over taxation.108 Under local legislation, municipalities regulate onlymunicipal administrative fees, court fees, rent, and tariffs/user charges. Only half of municipalitiesproduced accurate and punctual account notices for tax payers and service users, and few imposelate fees. In 2005, three-quarters of municipalities had revenue arrears but only one-quarter hadplans to collect them. Collection costs for each type of revenue have rarely been analyzed.

Debt and guarantee management in municipalities remain controversial. This is particularlytrue in the FBH; although the adoption of the FBH Law on Indebtedness, Debt and Guarantees hasreduced ambiguities in the legal framework.109 In RS, municipalities are allowed to borrow up to 10percent of total revenues to cover debt service payments, without approval from the Ministry ofFinance. The Ministry of Finance has a debt unit that approves all loans exceeding this 10 percentthreshold; and local councils must sign off on borrowing. In March 2007 the RS National Assemblypassed a new Law on Indebtedness, Debt and Guarantees of Republika Srpska, which permittedlong-term debt for the municipalities to finance capital investments, refinance long-term debt, andfinance past liabilities, upon approval from the Finance Ministry. Total debt-proposed and outstand-ing-due for payment in any following year should not exceed 18 percent of the previous year’s reg-ular revenue. Municipalities can issue guarantees to public municipal companies and others accord-ing to the decision of the Municipal Assembly. Total exposure of municipal guarantees must notexceed 30 percent of total regular revenues of the previous fiscal year. However, guarantees arenot subject to municipal debt limits.

30. From 2002 to 2007, the FBH Law on Annual Budget Law banned municipalities and can-tons from borrowing, except during 2002, but this provision is absent from the 2007 AnnualBudget Law.110 The 2007 Annual Budget Law stipulated that cantons and municipalities could bor-row domestically if municipal/cantonal assemblies approve. Debt repayment was the sole obligationof these tiers of government. Cantons and municipalities could borrow to bridge short-term cashdeficits,111 finance capital investments; refinance FBH public debt; and to issue and pay guaran-tees. Cantons and municipalities could issue guarantees for capital investments only to companiesin which they are majority shareholders; cantons only for capital investments if they had CantonalFinance Ministry approval. The FBH Government and cantons must set upper limits for overall fis-cal year borrowing. Cantons and municipalities must report regularly to the FBH Government ontheir indebtedness and guarantees. The FBH Government reserved the right to ban cantonal andmunicipal borrowing through provisions in annual Budget Law. In December 2007, FBH Law onIndebtedness, Debt and Guarantees was passed. It stipulates that cities and municipalities can gen-erate long term debt only under the condition that debt service for each consecutive year, includingservicing of the new loan and all loans for which they issued guarantees, does not exceed 10 % ofrevenues collected in previous fiscal year. Unlike in RS, guarantees count toward the debt limit infull in FBH. All foreign debt to be incurred by cities and municipalities must obtain prior approval bythe FBH Parliament as well as the BH Parliament.


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108 In the BH, the State legislates only customs, excise, and VAT. Entities (and cantons in the FBH) legislate most direct and indirect taxes, definetax base, rate, and exemptions. In RS, the entity government regualtes all taxes.

109 Debt stock limits are impossible due to lack of information on total debt assumed at Sub-national level (entities, cantons, and municipalities).110. Stipulated under Article 43 of the FBH Law on Annual Budget for 2006.111. Borrowing cannot exceed 5.0 percent of annual recurring revenues.

Figure 54: Sample Instances of Municipal Borrowing


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Municipality Purpose SourceLoan Amount

(in KM)

Breza Water supply network Investment Bank of FBH 700.000

Stolac Arrears commercial bank 70.000

Zvornik Water supply network commercial bank 500.000

SamacDeficit financing and capital invest-

mentcommercial Bank

(Razvojna banka, Nova banka)

2x200.0001x300.000

700.000 in total

LjubinjeMunicipal building

reconstructionWorld Bank and commercial bank

(Hypo-Alpe-Adria)

1x300.0001x200.000

500.000 in total

Berkovici

Deficit financing andinfrastructural projects.

Infrastructure

commercial bank (Nova BanjaluckaBanka)

commercial bank (Nova BanjaluckaBanka)

200,000

50,000

Visegrad Water supply network commercial bank 70.000

Istocni Stari GradMunicipal building

reconstructioncommercial bank(Raiffeisen bank)

190.000

Buzim Water supply system Investment bank of FBH 700.000

OdzakLocal roads and

water supply networkcommercial bank (Unicredit

Zagrebacka banka)

1x140.0001x260.000

400.000 in total

TuzlaWater supply network, road infra-

structureWorld Bank 3.000.000

Siroki Brijeg Water supply network World Bank 1.700.000

Mostar

Water Supply, Bridge, Roads

Old Bridge ReconstructionWater Supply

Kuwait development foundation,on-lending through Federal

Investment Bank.World Bank (grace period until 2009)

World Bank

16,000,000US$ 4,000,000

US$ 12,000,000

112. The Law defines competitive and compulsory international bidding thresholds for goods and services.113. An Internal Audit Law is being drafted.114. Law on Internal Audit in Public Sector in FBH (Official Gazette 48/08); and Law on Internal Audit in Public Sector in RS (Official Gazette 17/08)

31. Quantitative procurement indicators show good practices across municipalities.Municipalities are bound by the legal framework for procurement stipulated in a single state-levelLaw on Public Procurement, as stipulated by the European Commission.112 Tendering is requiredfor procuring banking services on municipal accounts management and loans, and these must bere-tendered every three years. Actual tendering practices vary-some commercial banks reportedwidespread irregularities during tendering, but almost all municipalities reported that at least 75 per-cent of all contracts awarded were carried out through open competition. Contracts were signedonly after proposed expenditures were included in the most recent approved budget. Contractors’performance is monitored and reported to the procurement committee for future reference.Guidance was provided to officials to minimize conflicts of interest. However, smaller municipalitiesinterviewed tend to negotiate directly with suppliers, which is justified by the small amount involved.

32. Internal audit quality remains weak across municipalities.113 Both entities have adoptedInternal Audit Laws that introduce the obligation to undertake Internal Audits at all levels of govern-ment.114 7 However, implementation is lagging behind the tight deadlines. Only one-quarter ofmunicipalities have adopted local legislation that defines internal audit roles and responsibilities.Internal audit mechanisms, where they exist, tend to function well.

5.2.5 Accounting, Recording, and Reporting

33. Municipal-level accounting, recording, and reporting remain poor. This underminesincentives for effective budget implementation and weakens transparency and accountability. Mostmunicipalities report having basic accounting competencies in place, but about one-quarter lack suf-ficient staff. The FBH municipalities and several others in RS say this is due to weak finance depart-ment guidelines. Most municipalities have a procedure manual but it is unclear whether it is munic-ipal- or entity-specific. About seven of the twenty municipalities report that cash management legis-lation is inconsistent with national guidelines.

5.2.6 External Scrutiny and Audit

34. External scrutiny and audit at sub-national level is scant and constrained by capacity.This has weakened administrative accountability to fulfill mandates and fiscal accountability for useof public resources. The FBH external audit office is auditing only federal and cantonal institutions.Despite their legal obligation to audit all FBH governments, external auditors are constrained byweak capacity to extend this function down to municipal level. External audit of municipalities by theentity-level Supreme Audit Institution remains limited. The legislative council plays an important rolein external oversight.115

35. Effective expenditure-tracking mechanisms are essential. Consistent budget classifica-tion, adequate accounting, recording, reporting, and auditing are vital to move toward performance-based budgeting at the Sub-national level. Extending the treasury system to local-level govern-ments to track and monitor financial flows and public spending, and good information systems tomonitor physical targets and spending outcomes are crucial preconditions for a performance-orient-ed PFM system. Further efforts are needed for both vertical and horizontal administrative and finan-cial accountability-higher-level governments and users/citizens, using good performance-outcomeinformation.

5.2.7 Donor Practices

36. Most donor financial management practices have used parallel processes with limitedreporting in line with budget formulation or execution cycles. Most municipalities receive donorfinancial support, but no municipality reported this as “direct budget support” because most donorssupport projects and project funds are managed through designated bank accounts. Although mostmunicipalities document externally financed projects in their budget,116 donor support is not inte-grated in the annual budget as revenue, with estimated loan receipts, or as expenditure, with esti-mated project expenditures. The annual budget reflects only counterpart funds made available forproject implementation. These practices make it difficult to track and monitor public investments invarious sectors.

37. Donors should clarify funding allocation guidelines and timing. Only about one-third ofmunicipalities receiving externally financed support said that donor support and guidelines wereclear. Successful projects implemented by local governments (including cantons in the FBH requiredonors to develop a common understanding of local-level PFM capacity and a careful assessmentof the potential to use country systems.

5.3 Conclusions

38. Public financial management capacity varies substantially across municipalities. ThePFM results vary according to the individual municipal enabling environment and characteristics.Achieving a paradigm shift from stability to stability plus performance in local public service deliverywill require the following actions for PFM.

39. Inter-governmental enabling environment. The fundamental legal framework for good finan-cial management has been largely in place in BH. However, legal acts and regulations must be fullyimplemented to give practical direction for policymaking and service delivery at the local level. Somelegislation must be adapted to the municipal level (e.g., Budget Laws on multi-year BudgetFramework Papers), and some legislation needs guidance and technical assistance to implement(e.g., Budget Laws and Chart of Accounts on budget classification system; Law on Indebtedness,Debt and Guarantees of Republika Srpska and FBH, et al).


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115. Local council must approve all borrowing and long-term investment plans.116. Notable exceptions are Banja Luka and Zvornick in RS.

40. Crucial fine-tuning of municipal-cantonal and municipal-entity relations must be com-pleted to reap the benefits of decentralization. The transfers from the single account haveimproved budget predictability and fine-tuning will clarify and enforce “rules of the game” for trans-fers and shared revenues by shifting the role of cantons and entities from excessive control to over-sight. Expenditure responsibilities should rest with higher-level government, and municipalities andcantons should focus on oversight processes to ensure that municipalities meet performance stan-dards and spend their resources in line with legislation and their mandates. This shift will requirecomprehensive and uniform budget classification and an integrated monitoring and evaluation sys-tem for municipal government performance.

41. Strengthen municipal FM capacity. Efficient and effective municipal service delivery, andimproved self-governance and accountability will require municipalities to strengthen their financialmanagement capacity, particularly on medium-term (multi-annual) budgetary planning to ensurestrategic resource allocation and prioritized sectoral spending, general oversight of utilities and pub-lic enterprises, budget execution, and accounting records and practices. In general, local councilsmust strengthen and institutionalize their oversight function.

42. Benchmarking municipal PFM provides crucial information. Benchmarking PFM providesinformation for policymakers at all levels, development partners, and taxpayers and can highlightweakness, allow governments to develop remedial plans, and set the agenda for reform dialoguebetween development partners and governments. Benchmarking could be conducted by an inde-pendent body, begin with a few volunteer municipalities, and scaled up. The scope of informationcan be selected jointly by the independent body and participating municipalities. The PEFA assess-ment adapted for this report could serve as a comprehensive example.


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Chapter 6: Conclusions and Going Forward

1. To improve municipal services delivery performance, Bosnia and Herzegovina need totackle three main areas. First, it must rationalize and then strengthen the enabling environment byensuring full implementation of laws and policies. Second, it must increase fiscal space by targetingdimensions with the greatest potential to enhance municipal resources for service delivery. And final-ly, it must strengthen horizontal and vertical accountability by implementing a performance manage-ment system for municipal public service delivery, including offering incentives for better performers.

2. This chapter maps out key policy instruments that should be considered, institutions and theactions they might take to implement policy recommendations, and suggests potential areas for theinternational community to provide support.

6.1 Strengthen the Enabling Environment

3. Of necessity, the Dayton Peace Agreement created post-conflict institutions that secured peacethrough compromise and power-sharing but also resulted in a complicated multi-level government struc-ture. The international community has been heavily engaged in the state-building agenda and BH lead-ers have taken the first steps toward making necessary amendments to the Dayton constitution.117

4. The basic enabling environment is in place. Local Self-Governance law in both entities, theintroduction of a stable source of income for municipalities, and efforts to clarify the rules for municipalborrowing have now laid the groundwork for BH municipalities to provide decentralized public services.Several primary challenges remain. First, the Local Self-Governance laws must be fully implemented.Second, the phasing-in of the transfer formula should be completed. Third, sectoral ministries’ (includ-ing the cantonal ministries’) uneven progress on decentralization needs to be corrected. The Ministriesof Finance should work with line ministries (and the Ministry of Local Self-Governance in the RS) tocomplete sector-specific harmonization of sector legislation with the new Local Self-Governance laws.

5. Sector ministries should lead on deepening sectoral reforms. Sector policies and strate-gies need to be developed and sector ministries need to work with municipalities to set up frame-works at the sub-national level that include sectoral standards and institutional arrangements tomonitor and evaluate, and enforce sector performance standards for municipal service delivery.

6. As post-war conditions change, expectations on local service delivery rise. Much can bedone at the local level without waiting for constitutional change. Therefore, the international communi-ty needs to support a coherent agenda that supports the implementation of the enabling legislation,and identification of potential champions to implement decentralization and municipal sector operation.

6.2 Expanding fiscal space

7. The sustainable expansion of fiscal revenue space for municipalities will require sever-al actions. First, the Ministry of Finance should enhance monitoring of the Revenue Allocation for-mula phase-in to evaluate municipal fiscal outcomes. The Single Account transfers are an impres-sive start to provide municipalities with predicable and more equitably distributed resources theyneed to help finance basic municipal service delivery.

8. Second, the Municipal Council of more affluent municipalities must increase own-source revenues by gradually raising tariffs to cost-recovery levels. However, this must be car-ried out in conjunction with the Municipal Administration to provide oversight of service quality andcommunication links between users and service providers to remedy any deficiencies, therebyimproving users’ willingness to pay. In the longer term, affluent urban municipalities need to devel-op more buoyant tax bases, including property taxes.


77

117. Under Article III.5 of the Dayton constitution, the international community and BH authorities have gradually taken steps to cede some author-ity to central state institutions, such as a state border service; a unified intelligence service; security, defense, and justice ministries; a state-levelIndirect Taxation Authority; a state court and prosecutor; criminal and criminal procedure codes; and a civil service commission.

9. Third, the Ministry of Finance at all levels should support responsible municipal borrow-ing and this will require finance ministries to strengthen monitoring municipal liabilities(including contingent liabilities) and give municipalities clear messages and guidance on borrowing.The international community can provide municipalities with technical assistance to become credit-worthy and to prepare quality projects that will attract financing.

10. Fourth, to increase expenditure efficiency, governments need detailed data to evaluatecurrent municipal sector spending against outcome indicators. In the short-to medium-term,the Ministries of Finance in both entities must clarify functional classification and provide sufficienttechnical assistance to align resource allocation with policy. In the longer term, budget classificationand accounting systems should be structured and aligned with a performance orientation; therefore,service outcomes must be monitored and measured.

6.3 Increasing accountability

11. Municipalities must be held accountable for the performance of services that they pro-vide to citizens, particularly now that more resources are being channeled to the municipal sector.But until both vertical and horizontal mechanisms are strengthened, there are few incentives formunicipalities to improve service performance. Both supply side (horizontal accountability) anddemand side (vertical accountability) should be deployed. Vertical accountability to citizens is begin-ning to be strengthened by the direct election of mayors. Horizontal accountability among stateactors such as Municipal Councils, Municipal Administrations, higher-level government, serviceproviders, and the municipality peer group, will require setting up a framework for service deliverystandards and for monitoring and evaluation, to ensure compliance across constituent jurisdictions.

6.3.1 Supply Side: Enhancing Horizontal Accountability

12. Municipal councils (MCs) do not demand enough from municipal administrations (MAs),which undermines service delivery performance. Now that the municipal executive is directly elect-ed, the local council should strengthen its legislative and oversight capacity to challenge the admin-istration, demand information, debate strategies with the executive branch, monitor administrationdecision making regarding service delivery, and take a long-term view on tariff setting.

13. Higher-level government-Ministry of Finance and sector ministries-need to overseemunicipal performance in service delivery and fiscal outcomes, and provide strategic and tech-nical guidance to strengthen compliance. In terms of service delivery, line ministries need to devel-op overall sector strategies to guide the technical and quality aspects of performance. Most impor-tantly, line ministries should work closely with the Ministry of Finance to establish minimum servicestandards, and estimate the resources required to deliver all obligatory local functions and a priori-tized subset of mandated functions for immediate action. Meanwhile, sectoral ministries must buildcapacity, provide guidance, and coordinate monitoring and oversight bodies to enforce minimumservice standards among municipalities.

14. In terms of fiscal outcomes, Ministries of Finance in both entities should strengthentheir financial oversight functions, train and support local officials, and monitor and analyzedevelopments in sub-national finance. Ministries of Finance need to develop PFM guidelines andprovide technical assistance and training on financial accounting and reporting functions.

15. Municipal bodies must strengthen their public financial management capacity if munici-palities are to fulfill minimum standards for service delivery. Municipal councils and administrationsneed to improve PFM capacity to ensure that public funds yield value and that budgets reflect poli-cy objectives. Local parliamentarians need substantial capacity building in public financial manage-ment to improve their financial oversight function. The international community has an important roleto play in PFM capacity building among local administration and parliamentarians, as proven inOSCE and GAP’s on-going efforts on this aspect.

16. Fostering performance orientation will require incentives for better performers. Toencourage municipal service providers to exceed the minimum standard, Ministries of Finance and


78

sector ministries should work with municipalities to design performance-based grants that will com-plement the revenue allocation system, encourage better service delivery, and ease the difficulty ofreform measures.

17. Benchmarking municipal services and PFM over spatial and temporal dimensions canshowcase better service delivery performers and reform front runners, and shed light on weakness-es so that governments can develop remedial plans, and create a platform for reform dialogueamong development partners and governments. To pursue reforms effectively, and strengthenmunicipal governance, institutions and individuals need data that show how well municipalities areperforming over time and in relation to other municipalities. Therefore, Associations of Cities andMunicipalities or independent bodies, need to set up a benchmarking system and widely dissemi-nate performance outcomes on key dimensions of municipal performance, including mandatedservices and PFM.

6.3.2 Demand Side: Enhancing Vertical Accountability

18. Jurisdiction-based direct election of mayors promises to provide a broad-based policyplatform and enhance performance accountability to citizens. Political parties help promotebroader reforms in the BH decentralization framework but they could play a more significant role insecuring the benefits of efficient local government and improved municipal service provision. BothNGOs and civil society are well positioned to advocate for raising municipal performance as a pri-ority issue in political party platforms. Ethnicity-based politics and party identification remain perva-sive, and there is an ongoing role for international development partners to remain engaged instrengthening the dialogue with entity-and state-level political parties. In the longer term, politicalparties need a greater appreciation of municipal performance in their overall platform.

19. MZs should clarify and fulfill their role of providing bottom-up community “voice.” In theabsence of functioning government, international and domestic actors and organizations have pro-moted social accountability (demand-side). Although participation mechanisms have been in placebut now that the government structure is gradually taking shape, it is essential to improve the effec-tiveness of existing channels to strengthen accountability from within. The MZs, as the nexusbetween the two approaches (public/supply and social/demand), should be strengthened to providea stronger bottom-up voice.

20. Municipal performance benchmarking, monitoring, and widespread dissemination ofperformance outcomes should be key to the BH municipal development agenda. To be effec-tive in pursuing reforms and changes in municipal governance, civil society and NGOs need to knowhow well municipalities are performing over time and in relation to other municipalities. Informationon public finance (i.e., budgeting and expenditure reporting) is essential at municipal level to informlocal constituents and to encourage public participation in the political process. Information on per-formance standards and service outcomes is critical for service user citizens to pressure govern-ment to enforce policy implementation, to hold service providers accountable; and to allow officialsand citizens to evaluate the extent to which a municipality is “well-run,” since this is the main objec-tive of many mayors surveyed for this report. Better benchmarking information on key dimensionsof municipal performance can strengthen local voice, not only at election time but also in the longerterm across election periods.

21. Today in BH, no systematic collection and dissemination of municipal performance dataexists at any level. International development partners can help fill the gap by facilitating system-atic and independent benchmarking of municipal service delivery and PFM performance for themunicipal reform agenda to gather needed momentum.


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Figure 55: Summary of Policy Recommendations, Institutions, Actions, and Instruments.

Policy Recommendations Key Institutions and Actions Instruments

Strengthen Enabling Environment

Strengthen sectoral alignment with decentraliza-tion framework

Ministry of Finance to coordinate with line min-istries (and the Ministry of Local Self-Governance in the RS) to harmonize sector legis-lation with Local Self-Governance laws

Sector ministries to deepen sector reforms bydeveloping sector policies and strategies thatset up framework for service provision at theSub-national level, including sectoral standardsand institutional arrangements for monitoringand evaluation

Carry out policy dialogue and provide technicalassistance (TA) on sector strategies to Ministryof Finance and line ministries

Provide TA to sector ministries and municipali-ties in sector reforms

Identify and sustain central government champi-ons and support policy analysis capacity toeffectively implement decentralization and oper-ation of the municipal sector

Technical assistance to Ministry of Finance andMinistry of Local Government (RS) on policyanalysis and monitoring

Increase Fiscal Space

Promote sustainable expansion of fiscal spacefor municipalities

To ensure implementation of enabling legislation

• transfers

Ministry of Finance of two entities to systemati-cally monitor the effect of the new fiscalarrangements (revenue sharing from the SingleAccount) on municipal fiscal outcomes and localborrowing on national fiscal stability

Ministry of Finance of entity and cantonal levelsto further clarification of roles and responsibili-ties to reduce “gap filling” by municipalities tofinance functions of higher level of government

Provide TA to municipalities and cantons toenhance consistent reporting on allocation andimplementation

• own source revenues

Municipal councilors (especially in affluentmunicipalities) to gradually increase tariffs tocost-recovery level, while collaborating withmunicipal administration on community outreach

Support continued efforts (such as GAP) tointroduce basic financial management informa-tion systems at the municipal level

Affluent municipalities to explore options forbroadening tax base, such as introducing prop-erty taxation

Provide TA to municipal finance and to introduceproperty taxation

expenditure efficiencyMunicipalities to enhance capital investmentplanning, project prioritization, and procurementto ensure value for money

Provide TA to enhance planning and budgetingprocess that ensure value-for-money

borrowing

Ministry of Finance at all levels to supportresponsible municipal borrowing and monitormunicipal liabilities (including contingent liabili-ties) and give municipalities clear messages andguidance on borrowing

Provide TA to municipalities to prepare qualityprojects and to become creditworthy

Strengthen Vertical and Horizontal Accountability

Enhance supply-side (horizontal)accountability

Line ministries to develop minimum standardsfor service delivery and work with the Ministryof Finance to estimate fiscal resources needed

Line ministries to coordinate monitoring andoversight bodies to ensure compliance at thelocal level

Advise Ministry of Finance and line ministries onanalyzing fiscal implications

Provide capacity building for monitoring andevaluation at the central level

Municipal councils to strengthen oversight func-tion on service producers, monitoring adminis-tration decision making regarding service deliv-ery


80


81

Policy Recommendations Key Institutions and Actions Instruments

Ministry of Finance to strengthen financial over-sight function, train and support local officials,and monitor and analyze developments in sub-national finance

Ministry of Finance to develop guidelines andprovide TA on PFM to municipalities

Provide TA to Ministries of Finance on financialoversight and PFM guideline development

Provide capacity building to local parliamentari-ans and administrations on PFM to strengthenPFM outcomes

Ministry of Finance and Line Ministries to initi-ate dialogue with municipalities to reviewoptions for and design performance-basedgrants to complement the existing intergovern-mental transfer arrangements

Provide TA and pilot program in selected sectors

Associations of Cities and Municipalities in bothentities and/or independent bodies to dissemi-nate best practices and leverage peer pressureamong municipalities

Promote systematic and independent bench-marking of municipal service delivery and PFMperformance

Support pilot program and scaling up

Enhancing demand side (vertical) accountabilityMZs to clarify and strengthen their role in pro-viding better bottom-up voice and improveclient-power feedback loops

NGOs and civil society to educate citizens onthe benefits of improved municipal performanceto elevate to a central issue in political partyplatforms

Promote systematic and independent bench-marking of municipal service delivery and PFMperformance

Support pilot program and scaling up

Annex 1.1: Municipal Sample SurveySelection

1. Bosnia and Herzegovina’s administration is divided into two entities, the Republika Srpska(RS) and the Federation of Bosnia and Herzegovina (FBH), plus the special district of Brcko. TheRS is sub-divided into 62 municipalities. The FBH is divided into ten cantons, which in turn are sub-divided into 79 municipal districts. Bosnia has a total of 141 municipalities, and Brcko is treated asspecial district. The FBH is estimated to have 60.5 percent of the population, RS 38.3 percent, andBrcko 1.1 percent.

2. Due to resource and time constraints, this study selected 20 municipalities throughout thecountry to represent as broad as possible variation in likely differentials in service delivery and localgovernance measures-not only across the FBH and RS, but also urban and rural. Municipalities inBosnia and Herzegovina are quite diverse in population size, area/density, and fiscal capacity. Theaverage municipal population is 27,043, but sizes range from 62 in Istocni Drvar in the RS, to224,647 in the municipality of Banja Luka. Estimated per capita revenues range from 62 KM percapita in Ravno in the Federation to 1,466 in Novo Sarajevo in the Federation. The micro munici-palities of Petrovac (189 inhabitants) report per capita revenue of 4,825 KM, and Istocni Drvar (62inhabitants) 6,291 KM. The smallest municipalities are typically the result of the fragmentation oflarger municipalities across the entities that occurred with the Dayton accords.

3. Municipal selection proceeded in four components. In the first component, fifteen municipali-ties were selected randomly across three per capita municipal revenue strata and according to pop-ulation shares. The 2005 income strata served as a proxy for fiscal capacity/expenditure levels.Nine municipalities were chosen in the FBH and six municipalities in the RS.118 Second, the sam-pling dropped all municipalities under 2,500 inhabitants (12 out of 142). The third component select-ed two municipalities within the city of Sarajevo. Sarajevo city comprises four municipalities withinFBH and three within RS. One municipality was selected randomly for FBH and RS respectively.Finally, the study also selected municipalities associated with three of the largest cities outside ofSarajevo, namely Banja Luka (RS), Mostar (FBH), and Tuzla (FBH).

4. The approach considered and rejected several alternatives for stratification based on assump-tions that these would influence diversity in service delivery and local governance across municipal-ities. These included size (population size) and population density (as a proxy for urbanization).Indicators pertaining to the degree of urbanization of municipalities were not available. Given thelimited overall sample, only one stratum criterion was selected under the entity category.

Figure A1: Municipal Survey Sample


83

118. In RS, the study drew upon all per capita revenues for 2005 as reported to the Ministry of Finance. The income stratum within FBH excludedown-source/non-tax revenues, as these data were not available at the entity level Ministry of Finance.

5. Intra-municipality sampling is based on settlement clusters. The most recent census was 1991.The National Statistical Agency has adopted a special sampling frame used in the LSMS (LivingStandards Measurement Study), pending the new population census (estimated to be in 2010).However, this sample frame was neither available to the study nor did it have appropriate samplingclusters. Sample cluster size sought to trade off spreading with the municipality, and capturinghouseholds experiencing a more similar environment.

6. In each municipality, about 6 settlements with 15 interviews in each were conducted.

The selected sample does overlap with some of the municipal engagement of major projects.Eleven municipalities under the World Bank Community Development Projects (CDP) are in thesample of twenty. Six of these are in the FBH. Six municipalities in the World Bank LocalDevelopment Project (LDP) are included (of which three are in the FBH). Some of these municipal-ities/cities are included in the Urban Infrastructure Services Project, i.e. Sarajevo, Mostar, BanjaLuka, Tuzla. Nine of USAID/SIDA Governance and Accountability Project (GAP) municipalities (ofwhich nine are in the FBH) are covered by this sample. Overall estimated project coverage is 88 forCDP, 42 for GAP, and 24 for LDP.


84


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Annex 1.2: Service Outcome Indicators and RankingMethodology

Sector Access/Usage Reliability Quality Responsiveness Overall Satisfaction

Local roads

An asphalted roadconnects householdwith other parts ofthe village/town(roads1)

Regular cleaning ofroads in winter time,‘always when need-ed’ and ‘less regularthan needed’ (roads2)

Percent of all respon-dents whose house-hold is connectedwith asphalted roadstated that the roadwas entirely asphalt-ed (roads3)

Citizens who had aproblem with theservice and lodged acomplaint and saidthey would relay on aformal institution(service provider,municipality, MZ) atfirst place (roads4)

Level of overall satis-faction (roads5)

Waste removal

Garbage dumpsternear home or a cartthat picks up garbage(waste1)

Garbage collection isscheduled once aweek or more often(waste2)

Garbage collectionmeets householdneeds (waste3)

Citizens who had aproblem with theservice and lodged acomplaint and saidthey would relay on aformal institution(service provider,municipality, MZ) atfirst place (waste4)

Level of overall satis-faction (waste5)

Water supply

Running water frompublic water pipewithin house/apart-ment (water1)

Household receivewater more than 21hours per day duringthe last month(water2a); No needfor maintenance andrepair of the watersupply system in thehouse/apartment(water2b)

No problems withwater supply in thehousehold (water3)

Citizens who had aproblem with theservice and lodged acomplaint and saidthey would relay on aformal institution(service provider,municipality, MZ) atfirst place (water4)

Level of overall satis-faction (water5)

Sewerage

Household connectedto public sewage net-work or septic tank(sewage1)

The sewerage systemin the household doesnot need maintenance(sewage2)

No problems with thesewerage system inthe household(sewage3)

Citizens who had aproblem with theservice and lodged acomplaint and saidthey would relay on aformal institution(service provider,municipality, MZ) atfirst place (sewage4)

Level of overall satis-faction (sewage5)

Healthcare facilities

Medical office/ ambu-lance services(health1a); or Healthcentre/clinic(health1b) invillage/town

- - -Level of overall satis-faction (health5)

Elementary school

Percent of children inhousehold in schoolage that are enrolledin elementary school(educ1)

Percentage of house-holds who evaluatedphysical conditions ofeducation as ‘verygood’ and ‘fair’:Building in general(educ2a); Heating(educ2b); Sanitationfacilities (educ2c)

Percentage of house-holds who are ‘satis-fied’ and ‘very satis-fied’ with non-physi-cal conditions of ele-mentary education(educ3)

-Level of overall satis-faction (educ5)


86

Service outcome ranking:

The summary outcome indicator measures service outcomes for each municipality. It uses theresults from the household survey and was generated by comparing the deviations from averagesector outcomes for each of the 30 indicators as defined above. First, municipal values for each indi-cator were calculated. Second, we averaged the value for each indicator across the 20 municipali-ties. We then get the percentage points that that the municipal outcome for each indicator is aboveor below that average score. Finally, municipalities can then be ranked according to their scoring foreach sector. If a municipality is above average, it gets assigned a leading score. A municipality canscore up to 30, if it is better than average on all indicators.

With this methodology we are ranking municipalities based on the number of indicators where theyscore about the indicator average across all municipalities. However, we don’t weight the extent ofthis deviation. For a number of reasons, attempts to generate an overall ranking of municipalitiesshould be approached with significant caution.

Data Quality: Owing to the limited sample sizes in each district, ranks even across a single indica-tor should be treated with caution. Statistically measures of satisfaction rates (e.g. households hav-ing access to water) will be subject to measurement error. Given the likely confidence intervals foreach measure (i.e. the range of uncertainty around each measure), two municipalities with a simi-lar average are actually statistically indistinguishable by rank.

Sectoral Differences. Our approach has been to select key indicators across all basic areas ofservice delivery, totaling 30. Given that not all these indicators are fully correlated, simply averag-ing these indicators out would be inappropriate. We examined correlations across all measures(both within sectors and across sectors). Within sectors, individual measures were typically positive-ly correlated, although certainly did not move in unison.

Especially in infrastructure sectors such as water, roads and sewerage, the measures of accesswhere typically independent or even negatively correlated to those for reliability and access. This isto be expected, since the measures speak to the have-nots (i.e. access rates) and the experiencesof the haves (i.e. quality and reliability for those enjoying the service).

To avert simple aggregation, our method simply sought to score each district based on its positionrelative to the respective benchmark, i.e. did it underperform or over perform with respect to thisaverage. While more sophisticated statistical techniques could have been selected, the method pro-vides initiative insight into the behavior of individual measures.


87

Annex 2: BH Expenditure AssignmentsBosnia and Herzegovina – Expenditure Assignment

source: Joao 2003, p18.

ExpenditureAssignments

State

Entities

Federation Republika Srpska

Federation Cantons Municipalities Republic Municipalities

Immigration,Refugees andAsylum Policies

Immigration,Refugees andAsylum Policies

Refugees anddisplaced persons

Refugees anddisplaced persons

Justice Internat. & Inter-Entity CriminalLaw Enforcement

Internalaffairs/justice andpolice

PoliceInternal affairs/justice and police

Local policeInternal Securityand Police

CommunicationsRegul. Inter-EntityTelecom. System

Intra-Entityregulation

Reg. Radio TVintra-Canton

Intra-Entityregulation

PublicTransportation

Regulates

Intra-Entity Reg. intra-Canton Intra-Entity-Nat. transp.system

-Inter-Ent. traff.cntl

Social Safety Netand Welfare

Soc .Ass.-jointFBH Pension

System (beingconsolidated)Categorical S.Ass.

Soc. Ass.-joint Soc. Ass.-jointRS Pension

SystemSocial assistance

(Refugeeprograms)

EnergyElectricitytransmission lines

Electricitytransmission lines

RoadsHighways

Local roadsHighways

Local roadsRailways Railways

Defense (Army) 100 percent 100 percent

Economic andSocial Policies

100 percent 100 percent

ReconstructionPrograms


Education

-Universities andresearch institutes

-Pre-school-Universities andresearch institutes

-Pre-school

-Teachers’salaries

-Primary schoolpart maintenance

-Teachers’salaries

-Primary schoolpart. maintan.

-School bldg.Subs.

-School buses- School .bldg.Subs

-School buses

-All levels educ. -Second.schools1

Health Care

Primary healthcare Hospitals

Ambulance servic-es

Primary healthcare Hospitals

Ambulance servic-es

Medical researchinstitutes – FBH

HIF (fragmented)

Healthcare sup-plies

Medical researchinstitutes

Health care sup-plies

– RS HIF

Sanitation100 percent 100 percent(Garbage

Collection)

SewageTreatment


Water and PublicUtilities


Housing andSpatial/CityPlanning

Housing policy City planning Housing policy City planning

Culture, Sports,Recreation, Parks,Street Lighting

Museums Culture, sports,parks, street light-ing

Museums Culture, sports,parks, street light-ingTheaters Theaters

Fire Protection 100 percent 100 percent

Libraries 100 percent 100 percent

Environment andUse of NaturalResources

Concurrentresponsibility

Concurrentresponsibility


89

Annex 3.1: GIB Revenue Classificationsno code Item

1 I REVENUES (2+16+31+37+44+52)

2 710000 A. Tax revenue (3+7+8+9+10+14+15)

3 711000 Company income and profit taxes (4+5+6)

4 711100 Income tax

5 711200 Company profit tax

6 711300 Capital gains tax

7 712000 Social security contributions

8 713000 Personal income tax

9 714000 Property tax

10 715000 Sales tax (VAT from Jan 2006) (11+12+13)

11 715100 Goods transaction tax

12 715200 Service transaction tax

13 715300 Excise

14 716000 Taxes on international trade and transactions

15 719000 Other taxes

16 720000 B. Non-tax revenue (17+23+29+30)

17 721000 Revenues from business activities, property and positive exchange rate differences (18 to 22)

18 721100 Revenues from non-financial public companies and financial public institutions

19 721200 Other revenues from property

20 721300 Interest received from loans and capital investment

21 721400 Revenues received from loans and capital investment

22 721500 Revenues from positive exchange rate differences

23 722000 Fees and charges (24 to 28)

24 722100 Administrative fees

25 722200 Judicial fees

26 722300 Communal fees

27 722400 Other fees

28 722500 Revenues from public services delivery

29 723000 Fines

30 729000 Other non-tax revenue

31 C. Capital gains (32)

32 811000 Capital gains (33 to 36)

33 811100 Asset sale revenue

34 811200 Revenue from sale of government reserves

35 811300 Capital grants from non-government sources

36 811900 Other capital gains

37 D. Grants and transfers (38+41)

38 731000 Current grants (39+40)

39 731100 Grants from abroad

40 731200 Transfers from other tiers of government

41 812000 Capital grants (42+43)

42 812100 Capital grants from abroad

43 812200 Capital grants from other tiers of government

44 813000 D. Loan repayment receipts and capital investment return (45 to 51)

45 813100 Loan repayment receipts from loans to other tears of government

46 813200 Loan repayment receipts from loans to individuals and non-profit organizations

47 813300 Loan repayment receipts from loans to public enterprises

48 813400 Return on investment in public enterprise shares

49 813500 Return on investment in shares of private enterprises and mutual funds

50 813600 Loan repayment receipts from other domestic loans

51 813700 Loan repayment receipts from foreign loans

52 780000 E. Revenue from budgets of lower tier budgetary units

104 680000 D. Transfers from budgets of lower tier budgetary units

105 Surplus

106 Deficit

107 Deficit is covered by:

108 A) loans


91


92

no code Item

109 B) excess revenues from past years

110 C) other sources

111 III FINANCING (112+121)

112 A. Loans and credits (113+117)

113 814000 Long-term loans and credits (114 to 116)

114 814100 Loans received through the government

115 814200 Revenue from foreign loans

116 814300 Revenue from domestic loans

117 815000 Short-term loans and credits (118 to 120)




121 B. Repayment of loans and credits received (122)

122 823000 Debt servicing (123 to 125)

123 823100 Repayment of loans received through the government

124 823200 Repayment of foreign loans

125 823300 Repayment of domestic loans

Annex 3.2: GIB Expenditure Classifications53 II EXPENDITURE (ACCORDING TO ECONOMIC CLASSIFICATION) (54+82+95+104)

54 610000 A. Current expenditure (55+58+59+69+77)

55 611000 Wages and salaries (general administration employees and councilors)

56 611100 Brutto salaries and contributions

57 611200 Expense reimbursement of employees and councilors

58 612000 Taxes and contributions on other personal income

59 613000 Material and service expenses (60 to 68)

60 613100 Travel expenses

61 613200 Energy expenses

62 613300 Utilities and communications expenses

63 613400 Procurement of materials

64 613500 Transport and fuel expenses

65 613600 Rental of property and equipment

66 613700 Current maintenance expenses

67 613800 Insurance, bank services and transaction expenses

68 613900 Contracted services

69 614000 Current grants (70 to 76)

70 614100 Transfers to other tears of government

71 614200 Grants to individuals

72 614300 Grants to non-profit organizations

73 614400 Subsidies to public companies

74 614500 Subsidies to private companies

75 614600 Subsidies to financial institutions

76 614700 Foreign assistance

77 616000 Interest and other charges expense (78 to 81)

78 616100 Interest on government loans

79 616200 Interest on foreign loans

80 616300 Interest on domestic loans

81 616400 Other loan expenses

82 B. Capital expenditure (83+91)

83 821000 Fixed asset acquisition expenses (84 to 90)

84 821100 Acquisition of land, forest and plantations

85 821200 Acquisition of buildings

86 821300 Acquisition of equipment

87 821400 Acquisition of other fixed assets

88 821500 Acquisition of long-term assets in the form of rights

89 821600 Reconstruction and maintenance

90 821700 Non-material investment

91 615000 Capital grants (92 to 94)

92 615100 Capital grants to other tiers of government

93 615200 Capital grants to individuals and non-profit organizations

94 615300 Foreign capital grants

95 C. Other expenditure (96)

96 822000 Loans and investment in shares (97 to 103)

97 822100 Loans to other levels of government

98 822200 Loans to individuals and non-profit organizations

99 822300 Loans to public enterprises

100 822400 Investment in shares of public enterprises

101 822500 Investment in shares of private enterprises and mutual funds

102 822600 Other domestic loans

103 822700 Foreign loans

104 680000 D. Transfers (from/TO?) budgets of lower tier budgetary units

105 Surplus

106 Deficit

107 Deficit is covered by:

108 a) loans

109 b) excess revenues from past years

110 c) other sources


93


94

111 III FINANCING (112+121)

112 A. Loans and credits (113+117)

113 814000 Long-term loans and credits (114 to 116)




117 815000 Short-term loans and credits (118 to 120)




121 B. Repayment of loans and credits received (122)

122 823000 Debt servicing (123 to 125)

123 823100 Repayment of loans received through the government

124 823200 Repayment of foreign loans

125 823300 Repayment of domestic loans

126 IV EXPENDITURE (ACCORDING TO ORGANIZATIONAL CLASSIFICATION) (127 to 136)

127 0100 General public services

128 0200 Defence

129 0300 Public order and safety

130 0400 Economic affairs

131 0500 Environment protection

132 0600 Housing and communal services

133 0700 Healthcare

134 0800 Recreation, culture and religion

135 0900 Education

136 1000 Social security

An

nex

4:

Can

ton

al-M

un

icip

al R

even

ue

Sh

arin

g A

rran

gem

ents


95

Tax

Can

ton

1C

an

ton

2

Can

ton

3C

an

ton

4C

an

ton

5C

an

ton

6C

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7C

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Wages t

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28.5

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5247

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50

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100

30

100

100

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100

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100

100

50

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Pro

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100

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100

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100

100

100

50

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40

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100

50

--

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100

40

-25

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,

innovati

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advances

100

50

--

--

--

100

50

80

50

100

--

100

Tax o

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100

50

100

100

100

100

100

100

100

50

80

50

100

--

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Tax o

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gam

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100

50

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--

--

100

50

80

50

100

--

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Tax o

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100

--

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100

70-

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100

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industr

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100

--

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--

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80

50

100

--

100

Tax o

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te

transacti

on

100

50

100

100

100

100

100

100

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0

Annex 5.1: Local Political Dynamics and Space for Change

1. This chapter examines the potential for local politics and leadership to shape local servicedelivery outcomes, to increase efficient use of public resources, and improve overall service deliv-ery outcomes. The chapter also discusses how to improve local accountability from the supply side(horizontal accountability) and demand side (vertical accountability).

Local Political Dynamics in BH

2. Political competition and dynamics influence local administrative performance. Forexample, more competitive and pluralistic local politics could motivate officials to perform better; onthe other hand, competition could produce political fragmentation, which would undermine local con-sensus building and the provision of public goods. Local political conditions might also encourageofficials to provide narrow, clientelistic services, and civil society to engage in activism and politicalpressure to secure a narrow range of services or projects for their own interest groups. Politicalcomplexities combined with local dependence on higher-level government resources can createpowerful countervailing forces to reforms. Ultimately therefore, it is the motivation and ability of localleaders that can overcome these forces to drive and sustain reforms at the local level.119

3. The political composition of municipal councils varies greatly. More than twenty-five polit-ical parties are represented at the municipal council level among the sample municipalities, whichalso results in a wide diversity of coalitions (see Figure 56Figure 56).120 For example, Mostar hastwo coalitions, one comprising six parties and the other, two. Three of the same parties present inMostar also form a coalition in Stolac. Parties representing pensioners hold one or two seats in fivemunicipalities. To maintain an ethnically balanced municipal leadership, the mayor and the chair-man of the municipal council must represent “constituent people” (i.e., political party, which is inher-ently ethically based), except for municipalities with more than 80 percent of residents from thesame ethic group.

4. Municipalities with a one-party majority in the municipal council generally elected amayor from the same party. Direct election of mayors is the only election in BH that is district/epi-graphically-based rather than party–based. Direct elections would change municipal politicaldynamics, for example, mayors or executives could be from a different party or could change partyaffiliation, or mayors and municipal councils could be from different parties. In most municipalitiesthis has not yet happened. The charts for each entity (Figure 56) demonstrate this pattern in mostof the 20 municipalities. The dotted bar denote the mayor’s political party.121

Figure 56: Directly elected mayors are generally from the majority party in each Municipal Council


97

Municipal Assembly- Party Composition- RS

0 5 10 15 20 25

Ribnik

Banja Luka

Samac

Ljubinje

Berkovici

Visegrad

I Stari GradSDP BiH

SDA

DNS

Independent

Others

SRS- RS

PDP-RS

SPRS

SNSD

SDS

119. See for example Grindle, Merillee S., (2007), Going Local: Decentralization, Democratization, and the Promise of Good Governance, PrincetonUniversity Press, which provides a detailed examination of municipal performance in 30 districts in Mexico.

120. Greatly reduced from the first post-war election results.121. The charts for the FBH do not reflect the strength of the Croat parties. In three municipalities (Mostar, Stolac, Siroki Brijeg), coalitions of Croat

parties hold seats in the municipal council. Coalitions differ slightly by composition.


98

Municipal Council composition- FBiH

0 2 4 6 8 10 12 14 16

Mostar

Jablanica

Buzim

Odzak

Breza

Doboj Jug

Kalesija

Tuzla

Siroki brijeg

Stolac

N Sarajevo

Ilidza

Ccltn 1 SDA SDP

SBiH HDZ- BiH RzB

Ccltn 2 Independent SDU- BiH

SPU-BiH Ccltn3 Ccltn4

BCltn1 Others

Box 9: Foca: Local Democracy at work

Until the elections in 2004, Foca had a reputation for war crimes and obstructing returnees and reconcilia-tion. But in 2004, a Socialist Party of Republika Srpska (SPRS) candidate, Mr Zdravko Krsmanovic, won thelocal elections. As Mayor of Foca, Krsmanovic has opened the town to returnees, assistance, and invest-ments, and gained political and economic support from local and international development partners.

However, in 2007, the assembly majority composed of SNSD, SDS, PDP, DNS, SRS RS, SDA and one inde-pendent candidate, accused Krsmanovic of overspending the 2005 municipal budget and failing to respectthe Assembly. The majority coalition began a legal process and established a Commission to organize a ref-erendum on recalling the mayor.

The 2007 referendum attracted 8375 voters and the Commission stated that 4,217 citizens or 50.9 percenthad voted for recall. However, the Central Election Commission monitoring the referendum overruled thedecision based on several process irregularities, for example, the ballots were not distributed according toElection Law, which stipulates a minimum of 20 days for voters abroad to cast absentee ballots. Hence, thereferendum was overturned and Krsmanovic stayed. Similar referenda occurred in other Republika Srpskamunicipalities, Cajnice and Vlasenica, but both were overturned by the Central Election Commission.

5. Party misalignment between MAs and MCs could undermine efficient municipal admin-istration. The power structure of local self-governments such as the Municipal Administration (MA)and Municipal Council (MC) has not become apparent in the first few years since 2004 local elec-tions. However, party misalignment between MAs and MCs, though not yet common after the firstdirect election of mayors, is reportedly undermining efficient operation of municipal administra-tion.122 Most officials and civil society representatives contend that direct election improved may-oral accountability and transparency, increased focus on citizen needs, and decreased the power ofpolitical lobbies and elites. Opinions were divided on the extent of mayoral autonomy-some thoughtit limited and others emphasized that mayors have discretionary power to implement projects with-out approval from municipal councils/assemblies or public consultations.

6. Party fragmentation within council may contribute to gridlock or delay in administrationdecision-making. Doboj Jug, with a split municipal council, demonstrates these effects: the munic-ipality has difficulty passing the budget and must endure multiple revisions before council approval.On the other side, one-party control and little party fragmentation in the municipal council does notguarantee efficient decision-making. One-third of FBH municipalities in the sample reported a budg-et struggle; three of those had clear party majority and below-average fragmentation. This may indi-cate political tension surrounding budgeting,123 perhaps due to weak municipal-level discretionarypower, weak municipal council oversight power, or both.

7. Individual leadership emerges as the strongest factor accounting for good practices, inthe constantly evolving democratic environment. Mayors want well-run municipalities, and severalsaid that a well-run municipality provided their main job satisfaction and they hoped that voters rec-ognized the improvements. Most mayors interviewed (a) have no desire for higher political office,(b) noted that local-level work is most visible and has the most tangible results, (c) consider theirpolitical career important, (d) intend to run in the next local elections. By contrast, data analysisrevealed no single trend among political drivers to improve local service delivery.

8. Horizontal peer-to-peer relationships appear to be a strong driver for reform. Mayors andother interviewed officials see peer pressure and collaboration among municipalities as important totheir personal development and the development of their municipalities. They expressed stronginterest in sharing knowledge and pride in their accomplishments. Municipal officials expressed thevalue of cooperating with peers, even across entity lines.124 Examples of cooperation ranged fromconsulting and exchange of experiences, coordination of development plans to harmonization ofcertain activities, such as regional waste collection or water supply.125 Various municipal stakehold-ers also mentioned international cooperation.126

9. Further research is needed on the nature of local politics and accountability. Enhancingmunicipal performance, especially in public financial management, and ultimately in service deliv-ery requires an improved understanding of municipal-level political dynamics in BH, including howthe behavior of local authorities is shaped by institutions such as electoral arrangements, charac-teristics of political parties, and prevailing local conditions such as ethnic diversity and the interestsof local constituencies.127

Potential Space for Reform to Enhance Accountability for Service Delivery

10. Weak accountability mechanisms provide entry points to strengthen both supply-side (horizon-tal) public sector accountability and demand-side (vertical) civil society accountability.


99

122. Only Buzim municipality elected an independent as mayor and it experienced budget approval difficulties. 123. Issues such as spatial planning and the treatment of illegally constructed building are reported to have the potential to trigger contentious eth-

nically based debate that threatens existing municipal political dynamics. Most municipalities lack urban/regulatory plans, or they are just begin-ning to draft and adopt them, which will require housing registration.

124. The European Charter on Local Self Government sets out the right of municipalities to cooperate, encouraging municipal networking within thecountry and internationally. Municipalities within a state may exchange and exercise their roles, without limits or approval of the State. FBH andRS laws mention local government rights to network and cooperate with municipalities in the entity, state, and abroad and mention theAssociation of Cities and Municipalities and its importance for networking and cooperation among municipalities (see text box).

125. These include a joint regional waste collection facility project for the municipalities of Zvornik, Srebrenica, Kalesija, Osmaci, Kalinovik and Milici,and a water supply system servicing Istocni Stari Grad (RS) and Stari Grad (FBH).

126. Historically, BH cities and municipalities have had twin cities and municipalities abroad, and cooperation intensified after the war and todaycooperation is seen as a good tool to develop joint projects and support.

127. The literature reflects a growing concern about whether politicians, even under democratic settings, are likely to provide public goods versusprivate goods (i.e., more clientelistic/patronage-based services and transfers). Phil Keefer in “Democracy, Public Expenditures, and the Poor:Understanding Political Incentives for Providing Public Services” the World Bank Research Observer 2005 20(1):1-27, argues that voters lackinformation and politicians tend to be unable to provide credible commitments (e.g., for sustained service delivery), which weakens service deliv-ery outcomes, particularly for the poor.

Supply Side: Enhancing Horizontal Accountability

11. Municipal councils are crucial to strengthen horizontal accountability. Given the recentreforms, this will take time. Efforts to clarify the roles and responsibilities of both the legislative andexecutive will be important in this regard. Municipal Councils should strengthen their oversightfunction on MA and its service producers, monitor decision making of the MA regarding servicedelivery, and take a long-term view on tariff setting. With direct election introducing municipal exec-utive head into the political competition, it is crucial to improve local council legislative and over-sight capacity to challenge, demand information and debate strategies with the executive branch.

12. Municipal administrations and councils both need to improve PFM capacity to betterlink policy to the budgeting process and ensure efficient use of public funds. Local parliamentari-ans need substantial capacity building in public financial management to improve their financialoversight function. as proven critical in GAP’s on-going efforts on this aspect.


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Box 10: Certifying quality public services: commitment to customer satisfaction

Consumers expect high-quality products and services, so suppliers compete on customer satisfaction asthey do on price. However, consumers often lack sufficient knowledge about quality characteristics to eval-uate products and services in advance, which is why many manufacturers and suppliers use certification toindicate highest standards of quality.

Increasingly, public sector institutions and utility companies are also adopting quality management and bet-ter process designs to ensure consumer satisfaction so they can compete with the private sector, avoidadverse publicity, and ensure funding.

In RS, the number of municipalities and their utilities eager to comply with international quality standards isgrowing. Many undertake far-reaching reforms, seek external auditing, advice, and official recognition, suchas that offered by the International Organization for Standardization (ISO), which issues ISO 9001 certifi-cates that have been a reliable indicator for almost twenty years, of a commitment to quality and customersatisfaction.

To obtain ISO 9001 certification, entities seek independent audits by authorized fee-for-service certificationbodies that evaluate the degree to which they apply and implement eight quality management principlesincluding customer focus, leadership, continual improvements, and fact-based decision making. Entities thatfail certification can use their detailed feedback to improve performance and reapply.

Maintaining ongoing quality means that certifications must be renewed regularly. These reassessments areintegral to ISO certification and provide an opportunity for learning and incremental improvements.Reassessments also ensure that entities continue to apply, monitor, and improve management systems andprocesses to enhances performance, and improve staff motivation, commitment, and understanding of rolesand responsibilities.

Citizens benefit from certified quality standards and the following provide examples throughout BH-the citi-zen satisfaction center at the Sarajevo Water company (Vodovod i Kanalizacija - VIK) or the municipality ofJablanica; the online bill payer introduced by RAD, the Cantonal Multi-utility in Sarajevo; or the quality con-trol system launched in Lakta{i.

13. In BH, the Association of Cities and Municipalities in both entities, albeit weak, should createa coherent municipal voice to influence future local governance reforms. Under the enabling institu-tional and legal framework in FBH, Associations can participate in preparing legislation by offeringtheir amendments and opinions, although sectoral ministries or legislative bodies are not obliged toaccept them. In both entities, Associations could help disseminate best practices among municipal-ities and cities; and the Associations should help implement the new Law on Principle on Local Self-Governance, which will require coordination among entity and cantonal ministries and other actors.

14. Shift role of cantons and entities gradually from excessive control to oversight: Ratherthan retaining expenditure responsibilities, higher level governments should turned their focus intooversight processes which ensure that municipalities meet performance standards and spend theirresources in accordance with law and their mandates, as well as technical assistance to municipal-ities to ensure a transparent management of public finances in line with policy decisions. This roleshift will require comprehensive and uniform budget classification and an integrated system to mon-itor and evaluate municipal government performance.

15. Overall sector strategies are needed to guide performance. Upper-level governmentsneed to develop overall sector strategies to guide the technical and quality aspects of performance,including setting and enforcing standards for service delivery. Sectoral ministries must establishnational-level regulation and build capacity to enforce minimum service standards among munici-palities.

16. Monitoring and assessing Sub-national finances can be strengthened considerablythrough improvements in financial accounting and reporting, and the establishment of analyticalcapabilities for monitoring and evaluation. The development and implementation of financial report-ing and information systems often requires substantial technical assistance, training, time andresources. Implementation of these systems may also require that central institutions be establishedto develop and maintain the reporting systems, to train and support local officials, and to monitorand analyze developments in Sub-national finance.

17. Line ministries should tailor approaches to monitoring service delivery performance.Depending on the service delivery objective, the need for monitoring will differ. For example, differ-ent aspects of decentralization may have different effects on the construction and maintenance ofvarious types of infrastructure (see Chapter 3 for discussion on water and local road), or health andeducation programs.

18. It is vital to understand flow of information between the executive and legislativebranches of the municipal government to verify compliance with policy goals. Financial flows(i.e., budgeting and expenditure reporting) is essential at municipal level to inform local constituentsand to encourage public participation in the political process –information on service outcomes andperformance standards, will be critical for clients/citizens to pressure government to enforce policyimplementation (tariff collection, for instance), to hold service providers accountable; and to allowofficials and citizens to determine the extent to which a municipality is “well-run,” as aspired by manymayors as their main objective.


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Box 11: MZs have lost their pre-war role in community development.

In pre-war Bosnia-Herzegovina and throughout the former Yugoslavia, MZs were responsible for some localinfrastructure (roads, parks, water, and sewerage systems) and some public services. They played a signif-icant role in mobilizing collective works-a feature of Yugoslavia in which municipalities and MZs organizedresidents of a specific area to construct or repair local infrastructure, other public "volunteer" work such asclean-ups, flood control, etc. However, during the war many MZs split along ethnic lines and their rights havebeen curtailed in the post-war period-MZs can no longer own buildings, initiate infrastructure projects, orfinance projects through compulsory contributions. They became a "transmission belt" to municipal authori-ties, primarily on priorities and infrastructure requests. In the past, MZ representatives were paid but now thisis not always the case.

As a result, MZs still take a role in initiating collective works, but their responsibilities are unclear even thoughcitizen participation in collective works persists. Survey results in 2001 found that about a third of respon-dents had contributed financially to local infrastructure and 20 percent had taken part in collective work relat-ed to infrastructure. One-third of rural residents expressed willingness to help repair roads or clean up theircommunity, and over 40 percent of urban residents expressed willingness to participate in clean-up actions(Local Level Institutions, p. 49).

Fewer respondents consider MZs as a local institution to be trusted than in the past. In a 2006 survey, only10 percent trusted MZs to make decisions about the community. In Buzim, 92 percent of respondents couldname their MZ representatives, 72 percent in Odzak. In Kalesija and Breza, by contrast, only slightly morethan 10 percent of respondents could name the representative.

Demand Side: Enhancing Vertical Accountability

19. As post-war conditions change, expectations on service delivery rise. Results from 1999focus groups found that respondent main expectations from municipalities related to documentationand forms.128 Two years later, respondents’ priorities had shifted to those that required capitalinvestments such as roads, water supply, sewerage, and waste collection. Less than 5 percent ofrespondents in the 2006 household survey considered themselves as very satisfied with any of thefollowing aspects of municipal governance: local development plans, municipal budgets, issuing oflicensing and other documents, and the collection of local taxes, fees and charges.

20. Political parties play an important role in setting the tone of discourse at the municipallevel, as well as promoting broader reforms in BH decentralization framework that promises to deliv-ery more effective municipal outcomes. Institutional reforms such as directly elected mayors havechanged local politics. However, there are significant areas where voice can be improved, e.g., bet-ter benchmarking information on key dimensions of municipal performance can help strengthenlocal voice, not just prior to elections, but in a more sustained manner across election periods.

21. Although the initial effects of the direct election of the mayors have been relatively minimal, theindications are that the reform will have a wider impact in successive elections.129 The reality is thatethnicity continues to be a strong if not dominant element of local political platforms. Over time, how-ever, efforts to encourage a great appreciation of municipal performance in the platform of politicalparties will need to be a critical part of overall efforts.

22. Better “voice” from bottom up through clarifying and fulfilling role of MZs. To date, par-ticipation mechanisms have been in place. In light of the absence of functioning government, inter-national and domestic actors/organizations have promoted social accountability approach.130 Withgovernment structure gradually taking shape, it is essential to improve the effectiveness of existingchannels to strengthen accountability from within. MZs, as nexus between the two (supply/public vs.social), can be strengthened to provide stronger voice from bottom up. Given the fact that MZs arenot viewed as a valuable channel for participation, a closer look at ways in which MZs can functionmore effectively is warranted.

23. Municipal performance benchmarking, monitoring and widespread dissemination of perform-ance outcomes needs to be a key part of BH’s municipal development agenda. For ordinary citi-zens, NGOs, and civil society in general to be effective in pursuing reform and bringing change inmunicipal governance, they need to know how well municipalities are performing over time and inrelation to other municipalities. Today in BH, there is no systematic collection and dissemination ofmunicipal performance data at any level. This gap needs to be addressed immediately for themunicipal reform agenda to gather needed momentum. The municipal associations and a legitimateperformance rating mechanism might be good places to start.


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128. Bosnia and Herzegovina: Consultations with the Poor, Prepared for the Global Synthesis Workshop, September 1999.129. In Novo Sarajevo, political leadership was SDP and the current mayor is SDA; in Zvornik, leadership was DNS and is now SNSD. Interviewed

officials and NGO representatives in Zvornik expect a major change with arrival of the new mayor. The HDZ split that led to creation of a newparty HDZ 1990 has not yet had much local-level impact; however, it is expected to influence changes in the local division of power in the 2008elections.

130. As defined in pressures exerted outside the government channel.

Annex 5.2: Diagrams on Municipal Structure

1. Administrative structures differ widely across municipalities. Great variations in population sizeleads to a wide range of municipal government organizational types. Smaller municipalities tend tohave a simple structure of two departments. Typically this includes a Department of GeneralAdministration and Department of Economy, Finance, and Social Affairs. Istocni Stari Grad, with apopulation of 3,815 has only a Department of General Administration. In medium-sized municipali-ties, functions are organized in four to seven departments, with Economy, Finances, Social Affairs,Urbanism/Urban Planning, and Department of Refugees and Displaced Persons being the majorfunctions, although each with slightly different combination of these functions. Larger municipalitiestend to have more complicated structure (more than eight departments), with further division of func-tions, such as housing and communal services, land surveying, property and cadastre, environmentprotection, culture and sports, etc.

Organizational Structure of a Typical Small Municipality


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Mayor

Department of General

Administration

Department of Public

Works and Public

Economy

Elementary School

Secondary School

Welfare Center

General Utility

Company

Municipal Council

Appointments Committee

Mandate-immunity

Award Committee

Religious Affairs

Rules and Regulations

Verifications

Annex 6.1: Summary of PEFA Outcomes of BH MunicipalGovernments


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A. PFM-OUT-TURNS:Credibility of the budget

Highlights from Enabling Environment (3.3) and Municipal Cases Studies

PI-1Aggregate expenditure out-turncompared to original approvedbudget

A significant number of municipalities did not manage to have annual budget outcomes within ten per-cent of what was planned. Lack of predictability surrounding transfers was one major driver of thesepoor outcomes, as we other municipal factors such as poor ability to plan and implement expenditures,as well as adequately predict and realized own source revenues.

PI-2Composition of expenditure out-turn compared to originalapproved budget

Reporting along administrative and functional lines remains quite diverse and limited for BH municipali-ties. In the first order this is due to the diverse structure of municipalities themselves, with many of thesmaller ones having only one or two departments. This in turn shapes reporting. Reporting along func-tional lines is often a creative exercise, and the underlying accounting and reporting systems to not pro-duce standardized reports (e.g., along functional reporting lines that can be mapped to IMF GFS report-ing). The exercise therefore focused on out-turns along major economic type classifications of operatingexpenditures (including wages), as well as investments and social transfers. Across these classifica-tions, the magnitudes of lack of credibility were similar to those found in aggregate expenditures,although with notable differences across municipalities. Poor planning and political pressures aroundsocial expenditures seem to be one driver undermining compositional credibility, as was the case ofmunicipal governments stepping in for unclear expenditure mandates (e.g., vis-à-vis FBH cantons orentity levels).

PI-3Aggregate revenue out-turn com-pared to original approved budget

The analysis of budget credibility in this area sought to distinguish between revenue sources that aremainly under the control of local governments versus those where municipalities are dependent on high-er levels of government. In BH, “non-tax: revenues can best be interpreted as own source revenues(OSR), which tax revenues refer to shared taxes and transfers. The analysis suggested that municipali-ties performed badly in both areas, but especially non-tax revenues. Between 2004 and 2005 thereseemed to be a major improvement in the predictability of tax (i.e., revenues derived from higher levels).However in 2006, the introduction of the ITA saw most municipalities underestimate these revenues.

PI-4Stock and monitoring of expendi-ture payment arrears

Just over a third (7) of the municipalities reported having arrears. Just under half of these includedsalary arrears (3).

B. KEY CROSS-CUTTINGISSUES: Comprehensiveness

and Transparency

PI-5 Classification of the budget

The quality of budget documentation various significantly across municipalities, in part according to thesize of the municipalities. Some large urban municipalities like Tuzla present budgets in significantdetail for a large number of entities. In general, however, the presentation of the budgets in their currentform to no allow for a consistent mapping of budgets and realizations into GFS consistent economic andfunctional classifications to be able to compare local government finances.

PI-6Comprehensiveness ofinformation included inbudget documentation

Varies significantly across municipalities

PI-7Extent of unreported govern-ment operations

8 of nine reporting say included in budget. Not clear what the other twelve are doing, in the sense ofhaving none?

PI-8Transparency of inter-govern-mental fiscal relations

Most municipalities have some instituted fiscal relations with MZ, although practices vary significantlyacross municipalities.

PI-9Oversight of aggregate fiscal riskfrom other public sector entities.

Almost half give guarantees to SOEs outside budget.

PI-10Public access to key fiscal infor-mation

Municipalities claim this is high, and almost two thirds say budgets are published on the web. Not clearwhether this is supported by qualitative evidence.

C. BUDGET CYCLE

C(i) Policy-Based Budgeting

PI-11Orderliness and participation inthe annual budget process

PI-12Multi-year perspective in fiscalplanning, expenditure policy andbudgeting

Municipalities are to follow 3 year planning cycles, but have poor forward estimates of transfers fromhigher levels

C(ii) Predictability and Control

in Budget Execution

PI-13Transparency of taxpayer obliga-tions and liabilities

Municipalities rely primarily on fees.

PI-14Effectiveness of measures fortaxpayer registration and taxassessment

N/A


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PI-15Effectiveness in collection of taxpayments

Some problems with full collection of user fees, but primary problems in low rate setting (e.g., of utilityrates).

PI-16Predictability in the availabilityof funds for commitment ofexpenditures

Some significant delays in higher level transfers (e.g., due to entity disputes concerning FBH/RS sharesof ITA pool in 2006).

PI-17Recording and management ofcash balances, debt and guaran-tees

Differences in regulations concerning debt in FBH/RS, with FBH imposing a ban until recently.Municipalities extend guarantees to utilities.

PI-18 Effectiveness of payroll controls Municipalities set wages with some reference to entity levels

PI-19Competition, value for moneyand controls in procurement

Municipalities follow national regulations.

PI-20Effectiveness of internal controlsfor non-salary expenditure

PI-21 Effectiveness of internal audit

C(iii) Accounting, Recording

and Reporting

PI-22Timeliness and regularity ofaccounts reconciliation

PI-23Availability of information onresources received by servicedelivery units

PI-24Quality and timeliness of in-yearbudget reports

PI-25Quality and timeliness of annualfinancial statements

C(iv) External Scrutiny and

Audit

PI-26Scope, nature and follow-up ofexternal audit

External audit remains limited to a minority of municipal governments.

PI-27Legislative scrutiny of the annu-al budget law

PI-28Legislative scrutiny of externalaudit reports

D. DONOR PRACTICES

D-1Predictability of Direct BudgetSupport

Most municipalities seem to get some donor support, some concerns about predictability.

D-2

Financial information providedby donors for budgeting andreporting on project and pro-gram aid

D-3Proportion of aid that is man-aged by use of national proce-dures

Annex 6.2: PEFA Scoring Spider Diagram

The summary outcome indicator measures PFM outcomes for each municipality. It uses the resultsfrom the PFM survey, using the FEFA Framework. It was generated by comparing the deviationsfrom average outcomes for each of the 6 key dimensions – budget credibility, comprehensivenessand transparency, predictability and control in budget execution, accounting, recording and report-ing, external scrutiny and audit. The PFM indicators, however, were not measured by the full fledgedscoring methodology. Instead scoring with A-D scale, a simplified methodology was applied where-by some of the questions were answered with Yes or No, with Yes always as the good practicehence scoring 1 and No as the bad one hence scoring 0. This simplification is necessary due to thedata availability at subnational level, as well as the capacity constrains at the local level.

The summary performance outcomes are produced as the following: First, municipal values foreach indicator were calculated (by summing up all Yes answers within each area). Second, we aver-aged the value for each indicator across the 20 municipalities. We then get the percentage pointsthat that the municipal outcome for each indicator is above or below that average score.

With this methodology we are ranking municipalities based on how much (in % term) they performabove or below the indicator average across all municipalities. For a number of reasons, attemptsto generate an overall ranking of municipalities should be approached with significant caution.


107


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80%

Budget C

redib

ility

Com

pre

hensiv

eness &

Tra

nspare

ncy

Polic

y-B

ased B

udgetin

g

Pre

dic

tability

& C

ontr

ol i

n

Budget Executio

n

Accountin

g, R

ecord

ing &

Report

ing

Exte

rnal S

cru

tiny &

Audit

Donor

Pra

ctic

es


112

Sir

ok

i B

rije

g P

FM

Re

su

lts

-80

%

-40

%

0%

40

%

80

%B

udget C

redib

ility

Com

pre

hensiv

eness &

Tra

nspare

ncy

Polic

y-B

ased B

udgetin

g

Pre

dic

tability

& C

ontr

ol i

n B

udget

Executio

nA

ccountin

g, R

ecord

ing &

Report

ing

Exte

rnal S

cru

tiny &

Audit

Donor

Pra

ctic

es

Sto

lac

PF

M R

es

ult

s

-80

%

-40

%

0%

40

%

80

%B

udget C

redib

ility

Com

pre

hensiv

eness &

Tra

nspare

ncy

Polic

y-B

ased B

udgetin

g

Pre

dic

tability

& C

ontr

ol i

n B

udget

Executio

nA

ccountin

g, R

ecord

ing &

Report

ing

Exte

rnal S

cru

tiny &

Audit

Donor

Pra

ctic

es

Ja

bla

nic

a P

FM

Re

su

lts

-80

%

-40

%

0%

40

%

80

%B

udget C

redib

ility

Com

pre

hensiv

eness &

Tra

nspare

ncy

Polic

y-B

ased B

udgetin

g

Pre

dic

tability

& C

ontr

ol i

n B

udget

Executio

nA

ccountin

g, R

ecord

ing &

Report

ing

Exte

rnal S

cru

tiny &

Audit

Donor

Pra

ctic

es

Ilid

za

PF

M R

es

ult

s

-80

%

-40

%

0%

40

%

80

%B

udget C

redib

ility

Com

pre

hensiv

eness &

Tra

nspare

ncy

Polic

y-B

ased B

udgetin

g

Pre

dic

tability

& C

ontr

ol i

n B

udget

Executio

nA

ccountin

g, R

ecord

ing &

Report

ing

Exte

rnal S

cru

tiny &

Audit

Donor

Pra

ctic

es

Annex 6.3: Detailed Assessment of PFM (approximately 10pages)


113

Budget Credibility

-60%

-40%

-20%

0%

20%

40%

60%Rib

nik

Banja

Luka

Sam

ac

Zvorn

ik

Lju

bin

je

Berk

ovic

i

Vis

egra

d

I Sta

ri G

rad

Mosta

r

Jabla

nic

a

Buzim

Odzak

Bre

za

Doboj Jug

Kale

sija

Tuzla

Siroki brije

g

Sto

lac

N S

ara

jevo

Ilid

za

Comprehensiveness and Transparency

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Rib

nik

Banja

Luka

Sam

ac

Zvorn

ik

Lju

bin

je

Berk

ovic

i

Vis

egra

d

I S

tari G

rad

Mosta

r

Jabla

nic

a

Buzim

Odzak

Bre

za

Doboj Jug

Kale

sija

Tuzla

Siroki brije

g

Sto

lac

N S

ara

jevo

Ilid

za

Policy Based Budgeting

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Rib

nik

Banja

Luka

Sam

ac

Zvorn

ik

Lju

bin

je

Berk

ovic

i

Vis

egra

d

I S

tari G

rad

Mosta

r

Jabla

nic

a

Buzim

Odzak

Bre

za

Doboj Jug

Kale

sija

Tuzla

Siroki brije

g

Sto

lac

N S

ara

jevo

Ilid

za

Predictability and Control in Budget Execution

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Rib

nik

Ba

nja

Lu

ka

Sa

ma

c

Zv

orn

ik

Lju

bin

je

Be

rko

vic

i

Vis

eg

rad

I S

tari

Gra

d

Mo

sta

r

Ja

bla

nic

a

Buz

im

Odz

ak

Bre

za

Do

bo

j J

ug

Ka

les

ija

Tu

zla

Sir

ok

i b

rije

g

Sto

lac

N S

ara

jev

o

Ilid

za

Accounting, Reporting

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Rib

nik

Banja

Luka

Sam

ac

Zvorn

ik

Lju

bin

je

Berk

ovic

i

Vis

egra

d

I S

tari G

rad

Mosta

r

Jabla

nic

a

Buzim

Odzak

Bre

za

Doboj Jug

Kale

sija

Tuzla

Siroki brije

g

Sto

lac

N S

ara

jevo

Ilid

za

External Scrutiny and Audit

-60%

-40%

-20%

0%

20%

40%

60%

80%

Rib

nik

Ba

nja

Lu

ka

Sa

ma

c

Zv

orn

ik

Lju

bin

je

Be

rko

vic

i

Vis

eg

rad

I S

tari

Gra

d

Mo

sta

r

Ja

bla

nic

a

Bu

zim

Odz

ak

Bre

za

Dob

oj

Jug

Kale

sija

Tu

zla

Siro

ki

brije

g

Sto

lac

N S

ara

jev

o

Ilid

za


115

Donor Practices

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Rib

nik

Banja

Luka

Sam

ac

Zvorn

ik

Lju

bin

je

Berk

ovic

i

Vis

egra

d

I S

tari G

rad

Mosta

r

Jabla

nic

a

Buzim

Odzak

Bre

za

Doboj Jug

Kale

sija

Tuzla

Siroki brije

g

Sto

lac

N S

ara

jevo

Ilid

za

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