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7.10.2017. 2

Challenges and the Need for a New Approach

Gary O’Callaghan, Senior Advisor to the EUSR

1. Common challenges 2. A networked approach 3. Political challenges and opportunities 4. Issues specific to the FBiH I. Competences, coordination & financing II. Horizontal allocation of resources III. Oversight, grants and public administration

• IV. Fragmentation in Health and Public Order

5. Issues specific to the RS I. Moving to a multi-type concept of government II. Financing, sustainability and local autonomy

06.06.2018 3

• 1. Common Challenges
• Common challenges / systemic problems.
• Local government is fragmented and often

costly and, as a result, there are insufficient resources available for local economic development and, especially, social care.

• The population is falling and aging and this

is putting an increasing strain on resources.

• Secondary cities are in decline and there is

a growing divide between the capacities

• f smaller municipalities and larger cities.

06.06.2018. 4

• 1. Common Challenges

Source: World Bank. 5

• 5

5 10 15 20 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Population ages 65 and above (% of total) Population growth (annual %) 10 20 30 40 50 60 70 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Young as percent of working-age population Old as percent of working-age population

• 1. Common Challenges

Source: World Bank and BiH Statistics. 6

15 25 35 45 55 65 75 85 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Rural population (% of total) Urban population (% of total) Croatia urban (% of total) Serbia urban (% of total)

R² = 0.50

50 100 150 200 250 300 350 400 450 500

• 2.50
• 2.00
• 1.50
• 1.00
• 0.50

0.00 0.50 1.00 1.50 Population in 2013 ( ,000) Population Growth, 2013-16

• 1. Common Challenges
• The vertical allocation of resources (and

external debt payment) is viewed as unsatisfactory by almost all municipalities.

• Management/sharing of natural resources

is often inefficient and undermines the sustainable development of resources.

• The horizontal allocation of resources is

controversial—especially for cantons—and there is no FBiH consensus on a balance between keeping/sharing local resources.

06.06.2018. 7

• 1. Common Challenges—Horizontal Allocation

06.06.2018. 8

R² = 0.85 60 80 100 120 140 160 180 40 60 80 100 120 140 160 VAT Revenues per capita Index Employment Index

Allocation of VAT Revenues to Cantons (per capita index, average = 100), 2016

06.06.2018. 9

Allocation of VAT Revenues to FBiH Municipalities by Canton (per capita index, average = 100), 2015

y = 0.53x + 51.58 R² = 0.14 80 85 90 95 100 105 110 115 120 125 130 80 85 90 95 100 105 110 115 VAT Revenues per Capita Index Gross Wage Index

• 1. Common Challenges—Horizontal Allocation

06.06.2018. 10

Municipal Revenues per Capita in RS (Total and Tax Revenues), 2017

y = 0.3x + 293.6 y = 0.0x + 302.0 100 200 300 400 500 600 700 800 900 1,000 400 600 800 1,000 1,200 Revenues per Capita (in KM) Average Net Wage in 2016 Total Revenue Tax Revenue

• 1. Common Challenges—Horizontal Allocation

• 2. A Networked Approach
• No scope for aggregate tax increases—but

sharing of resources could be re-examined.

• Need to significantly improve cooperation

and collaboration to save resources.

• Cooperative actions need to be formalised

in joint networks (institutions) that would:

• Range across areas/regions that are large

enough to deliver economies of scale.

• Have the necessary organisational features

to preserve local autonomy.

06.06.2018. 11

• 2. A Networked Approach
• Same approach—different structures:
• In FBiH, canton is the logical unit to anchor

a networked approach (that needs to be agreed with municipalities). Reforms need to be tailored (locally) to specific cantons (that vary in size by a factor of 20/1).

• Cantons could make significant savings

through improved cooperation—especially in health care and public order and safety.

• The RS proposes multi-type municipalities (to

replace mono-type). This could lead to net- worked service delivery around larger cities.

06.06.2018. 12

• 2. A Networked Approach
• Same approach—different institutions:
• A hub-and-spoke system for single-access

services (health): consumer goes to the provider & institutions are part of a system;

• A collaborative system for pure-networked

services (water): a common product is provided on demand and institutions share infrastructure;

• An associated approach to the provision of

grouped-network services (economic development): agencies/institutions are jointly owned and pursue a common goal.

06.06.2018. 13

• 3. Political Challenges and Opportunities
• Reforms hampered by associated problems
• f political division and corruption. Static

affiliations reduce public scrutiny and induce a lack of transparency and corruption.

• Grant schemes complicated and political—

combine into a few block grants targeted to broad areas & allow full discretion to spend.

• Reform Agenda, renewed growth, EU path

and new infrastructure offer opportunity.

• New approach has to facilitate and provide

incentives for collaboration & cooperation.

06.06.2018. 14

• 4. Issues Specific to the FBiH:

I Competences, Coordination & Financing

06.06.2018. 15

• Cantons think they have a coordinated

approach with municipalities but there is significant confusion and frustration due to:

• Joint and overlapping competences

between the two layers of government (e.g. in local economic development and spatial planning);

• A municipal perception that unfunded

mandates are handed down to them (e.g. in social welfare and mental health); and

• A failure to overcome latent inefficiencies in

assignment of responsibilities (e.g. waste).

06.06.2018. 16

• Cantons should lead local service delivery:
• Agree (3-5 year) Public Service Development

Agreements (PSDAs) that would clarify local responsibilities (e.g. social welfare, waste) and need to be co-signed by municipalities.

• Draft cantonal network plans (e.g. health)

that would adhere to a single entity methodology to link them with plans from

• ther cantons.
• Establish functional agencies—with joint

municipal ownership—to oversee specialised functions (e.g. economic development).

• 4. Issues Specific to the FBiH:

I Competences, Coordination & Financing

• Cantons should have incentives to improve

local coordination and collaboration.

• PSDAs would include agreement on vertical

allocation in cantons—including PIT and CIT.

• Clearer canton-specific identification of

local responsibilities and roles.

• Servicing of external debt could be sole

responsibility of entity—with corresponding reduction in VAT allocations at local level.

06.06.2018. 17

• 4. Issues Specific to the FBiH:

I Competences, Coordination & Financing

• 4. Issues Specific to the FBiH:

II Horizontal Allocation of Resources

• Horizontal allocation of revenues suffers

from a hybrid system that achieves none of its goals and is subject to near-universal resentment—especially from cantons.

• System should be reformed and simplified

according to clearly-agreed principles.

• Report endorses a two-pillar approach

proposed by the IMF to replace coefficients.

• Professor Brosio will elaborate on options.

06.06.2018. 18

• 4. Issues Specific to the FBiH:

III Oversight, Grants and Public Administration

06.06.2018. 19

• New system of horizontal allocation would

include block grants to promote better coordination—to be approved by a combination of ministries.

• Ministry of Local Government could
• versee reforms, coordination and grants.
• Need PFM Reform for vertical coordination.
• PAR needs to address overstaffing, lack of

qualification and “rigid” Civil Service Laws.

• PAR needs to address “unsuitable” Public

Procurement Laws & lack of PPP structure.

• 4. Issues Specific to the FBiH:

III Oversight, Grants and Public Administration

06.06.2018. 20

Government Payroll in BiH

10 20 30 40 50 60 70 80 90 100 RS Total FBiH

State+Brcko Entities Local

• 4. Issues Specific to the FBiH:

IV Fragmentation in Health and Public Order

• Health financed by 10 cantonal insurance

funds and a Federation Solidarity Fund (SF).

• Fragmented systems range in size from

443,000 to 23,500 people and per capita expenditures vary by a factor of 2.

• SF only used to purchase high-cost drugs.
• Wide variety of health-delivery systems

undermines development of network plans.

• Hospitals accumulating significant arrears

and stop-gap measures lead to strikes.

• Equalisation, portability & joint purchasing.

06.06.2018. 21

• 4. Issues Specific to the FBiH:

IV Fragmentation in Health and Public Order

• 11 law-enforcement agencies & 11 MOIs—
• ften leads to different readings of laws.
• All financed independently with little co-
• peration, leading to duplication of service

& inefficiencies—policing very expensive.

• Recent floods and fires demonstrated an

urgent need for improved cooperation.

• More coordination & communication

between boards to reduce political interference and strengthen integrity.

• Joint purchasing & share special services.

06.06.2018. 22

• 5. Issues Specific to the RS:

I Moving to a Multi-Type System of Government

• Strategy envisages a networked approach.
• Multi-type system would address the fact

that smaller units cannot provide full range.

• Financing needs to adjust to broader

perspective that promotes cooperation.

• Legal framework already established to

facilitate municipal cooperation—both within the entity and across entities.

• Municipalities need to be more efficient

and targets set to reduce overstaffing.

• PFM reforms will improve budget controls.

06.06.2018. 23

• 5. Issues Specific to the RS:

II Financing, Sustainability and Local Autonomy

• Stage is set for a meaningful debate:
• Vertical financing system could be reformed

by allocating external debt to entity level.

• Multi-type system could be enhanced by the

introduction of a municipal surcharge on PIT.

• Property tax system could be improved as its

administration is devolved to municipalities.

• There is general support for existing system of

horizontal financing and giving assistance to less-developed and undeveloped areas.

• Municipalities will need joint regional plans

and new institutional vehicles (as proposed and described in the Report).

06.06.2018. 24