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**Local Governance Assessment**

**and**

**Policy Recommendations**

**November, 2003**

**[Executive Summary of Key Policy Recommendations]{.underline}**

There is widespread acknowledgement that structures of governance as
developed in BiH since 1995 are not efficient, do not reflect
subsidiarity and may not be sustainable in the long run. The level of
government closest to citizens, municipalities receive only 8% of all
public revenues in both entities, despite a growing list of
responsibilities and unmet citizen demands. These demands include the
need for major capital investments in infrastructure required for
economic and social development that are not being met by current
revenue distribution. Even seemingly own-source revenues such as the
property tax are regulated by higher levels, collected by entity tax
offices, and in the Federation, shared with the cantons. On the other
hand, municipalities are often held accountable by citizens for services
that are actually the responsibility of higher units of government.

This paper proposes that the introduction of the VAT, and possible other
tax reforms at the State and Entity level, be used as opportunities to
address some of the systemic problems regarding the assignment of tasks
and revenues to municipalities in both entities. (Such redesign is
taking place in Serbia as a consequence of VAT being introduced in
2004). VAT will eliminate, not replace, the sales tax in 2006 as a
significant source of municipal shared revenue in both entities,
therefore discussions surrounding VAT should be broadened to consider
the following policy changes:

a\) Move supervision and regulation of municipalities in the Federation
back to the entity level in a revised Federation local government law;

b\) Reassign functions to municipalities in both entities based upon
efficiency/accountability analysis and principles of subsidiarity, and
align local and transferred resources to reflect the true cost of
municipal mandates (both organic and delegated), guaranteeing relative
equality in access and level of services throughout BiH. Cantons should
[not]{.underline} have the power to determine revenue sharing formulae.

c\) Take measures to strengthen the rule of law and observance of the
constitutional and legal rights of municipalities already in force.

Both entities, the RS in its constitution (Article 103), and the
Federation in its current local government law (Article 14) guarantee
the availability of funds and resources to carry out mandatory and
delegated tasks on the municipal level. Both are routinely violated.

The enactment of a revised law on local government for the Federation
that calls for the direct election of mayor, moves supervision of, and
more importantly, the allocation of functions and revenues of the
municipalities up from the cantons is critical for the financial and
political sustainability of public administration and local government
services. Article 18 of the current law should be removed as it gives
cantons almost abusive powers over municipalities in municipal
legislation, annual tax sharing and budget laws. The Federation
Constitution does not mandate cantonal supervision over municipalities,
instead assigns cantons regional public service duties, as well as all
other powers that the Federation does not explicitly reserve for itself.

Policymakers should examine the use of the State-level Constitutional
Court as a final court of appeals in inter-governmental disputes that
cannot be resolved by either entity's own Constitutional Court. This
includes making explicit in the relevant Constitutions and local
government laws the right of municipalities in both entities to appeal
in first instance directly to the entity Constitutional Court.

Clarifying the rights, powers and funding sources of municipalities also
means imposing service standards, standardizing forms, making ownership
and control over property unambiguous, thus enabling municipalities to
manage public property as genuine, accountable owners.

Finally, because of widespread cynicism, passivity, and the entrenched
nature of the status quo, the international community needs to play an
active and constructive role in both advocating policy changes leading
to more accountable and efficient public administration, as well in
providing concrete assistance to municipalities in Bosnia-Herzegovina.

**[Purpose and Approach]{.underline}**

This local governance assessment advises USAID and informs other donors
and policy makers on the current situation facing municipal governments,
and recommends program and policy approaches for the next three-year
period.

Over a three week period in October, 2003, the assessment team[^1]
visited a total of seven cantons and sixteen municipalities in the
Federation, as well nine municipalities in the Republika Srpska (RS).
Interviews were conducted with mayors and their professional staff
members, such as finance and budget directors. In the case of cantons,
Finance Ministers were interviewed along with a sampling of their
professional staff. On the Entity level, interviews were conducted with
the Finance Ministries of both the RS and the Federation, as well as
with the Ministry of Justice (Federation) and the Ministry of Local
Self-Government (RS). Other stakeholders such as international donors,
USAID implementing partners and contractors, local NGOs, municipal
associations in both Entities, as well as members of the international
community also provided valuable insights to the assessment team. The
team also collected information on the unique situation in Brcko
District as well as examining the prospects for a unified City of
Mostar.

The assessment team decided it is not necessary to repeat the empirical
research done recently by The World Bank (June 2003) and other donors.
The team decided to make its policy recommendations unambiguous,
underlining that the Dayton Agreement did not mandate all features of
the structures of governance that by 2003, are in dire need of
rethinking and reform. Dramatic examples will be highlighted later in
this report.

The team collected evidence based by evaluating proposed and current
legislation, surveying current literature on the state of local
governance in BiH[^2], as well as by asking interviewees a standard set
of questions related to the following issues: the nature of
municipal-higher level relationships (canton and Federation, or RS), tax
sharing (revenue and task assignment), opinion and views on the planned
introduction of VAT, the question of municipal property ownership and
management rights, capital budgeting (investment needs and plans), and
well as views on respective municipal associations. Cantonal, Federation
or RS Ministry representatives were also asked similar questions.

**[Findings]{.underline}**

The assessment team covered a diverse set of municipalities and cantons
with widely varying levels of political and economic development. They
all face problems associated with restoring physical infrastructure,
dealing with returnees, and addressing the consequences of both
unemployment and the magnitude of the gray, untaxed economy. The team
discovered that in both entities, despite formalized political loyalties
and similarities among elites at the lower and the next higher level of
government, a surprising level of mistrust and open animosity exist
between the municipality and the canton, or municipality and the RS
government. In extreme cases, municipal leaders considered the next
level of government to be an "enemy" of local democracy, calling into
question the current practice of having an interlocutor between the
municipal level and the state or entity level. This general mistrust and
apprehension was repeated to varying degrees in all RS municipalities
covered by the team, as well as throughout the Federation, regardless of
the ethnic composition of either the canton or municipality concerned.
These attitudes appear to be unrelated to their level of development or
distance from the regional (cantonal) or entity center.

While a certain level of intergovernmental friction is to be expected in
all situations, the universality of mistrust formed through experience -
seemingly regardless of political affiliation - by the municipal level
vis-à-vis the next higher level government convinced the team that
besides acknowledging the measurable fiscal imbalances and uneven
distribution of resources, the stakeholders need to address the
[distributive and oversight legitimacy]{.underline} of the cantons, as
well as aspects of the RS government that do not follow principles of
subsidiarity and fiscal decentralization. This does [not]{.underline}
mean that the cantons, or some form of regional government in the RS,
could not have roles as service providers were they demonstratively the
most efficient and accountable unit to provide certain services.

*Specific Findings and Explanations*

**[Finding One: Disconnect between Functions and
Financing]{.underline}**

The assessment team's approach was to analyze the question of revenue
and task assignment primarily from the perspective of municipal
leaderships. Given the current structure of intergovernmental fiscal
relations in BiH, the team concluded that municipalities in both
entities lack the ability to influence neither the size nor the quality
of the tax base used for both shared taxes (income tax and sales tax)
and local taxes such as the property tax and the property transfer tax.
Municipalities are subject to annually changing arbitrary sharing of
revenues by the cantons and by the RS. The RS has a system of sharing
rates adjusted to ratings of economic development. Mayors questioned the
legitimacy of these ratings that contain arguably subjective elements,
as well as indicators that may not necessarily reveal levels of economic
development. The RS's attempt at equalization may be commendable;
however, in practice it removes incentives for increasing local tax
bases, and is relatively unpredictable.

In Bosnia-Herzegovina only 8% of all public revenues accrue to
municipalities in both entities. In the Federation, the cantons and the
entity keep 92% of public revenues, while in the RS, the entity keeps
92% of public revenues.[^3] A significant aspect of this situation is
that the distribution of functions, and the administrative autonomy
necessary, is not adjusted to the capabilities of the municipalities,
and does not reflect true demand for services imposed by the population.
Municipalities cannot adequately fund mandatory services from shared and
own-source revenues, cannot reject delegated tasks from the entity or
the canton, nor can they decide upon the most efficient and accountable
form of delivering their services. Entity local government laws, as well
as cantonal local government laws, were not designed taking into account
which services could be optimally performed at each level of public
administration, and the funding necessary for an optimal, or even for
the current construct, is clearly inadequate, and beyond the control of
the municipal level.

The number of delegated functions varies canton by canton, as do the
sharing formulae and the tax bases. In neither entity is there an
explicitly logical connection between the cost of mandated and delegated
tasks, the sharing formulae, and the use and availability of local taxes
and non-tax revenues. Entity tax offices do not make adequate efforts to
collect taxes from state-owned enterprises which have tax arrears, and
often engage in tax bargaining that reduces municipal revenue without
any consultation with the municipality. Tax sharing on a derivation
basis also reinforces existing differences in levels of development and
tax capacity, while assigned and delegated functions are not adjusted to
the divergent fiscal capacities of municipalities.

All taxes, even local taxes on property and transfers, are collected by
entity-level revenue offices. In the RS, the entity sets property taxes
imposed on the municipal level, collects and redistributes these taxes
back to the municipalities. In that scenario, municipal management has
no influence over tax rates, collections and enforcement. In the
Federation, the canton sets municipal property tax rates, the entity
collects the funds, and the canton keeps 20% of the municipality's local
property and transfer tax funds. Even property taxes are not genuine
own-source revenues in BiH, thus the connection between local services,
property values, and the level of taxation or tax yields is completely
broken. These revenue offices, mayors complain, do not provide adequate
information for revenue planning, nor do they release information on
local tax compliance so that municipalities could assist in collections
and enforcement. This inability to obtain information on business
taxpayers, and a general lack of instruments to improve the size and
quality of the tax base through economic development, hinders the
performance of even mandatory functions due to under funding and revenue
sharing unrelated to actual costs.

The untaxed economy imposes demand-driven costs on municipal services
that cannot be recovered through better tax compliance and collections
at the local level. The entity-controlled tax offices have little
concrete incentive to increase collections of the property tax and
transfer tax, both of which could be significant municipal own-source
revenues. An additional problem with the property and property transfer
tax is that in the Federation it is not an exclusively municipal source
of revenue as the cantons take on average 20% of these collections. The
World Bank asserted that restoring the property tax as an exclusive
local tax source is a "conditio sine qua non for restoring the fiscal
autonomy and creditworthiness of local governments."[^4] Municipalities,
in both entities, do not have the instruments to increase collections of
property tax, nor to expand the size of the tax base used by the entity
to collect sales and income taxes. In other words, local services and
economic development are not funded out of local taxes, as these by any
definition are rare.

Some mayors and municipal finance officials went as far as to assert
that they did not trust the figures generated by the treasury, and one
municipality recalled that the estimated tax sharing from the single
greatest taxpayer in their community alone was more than was returned to
that community in total shared taxes in any given year. In other words,
the largest taxpayer's revenues alone generated estimated taxes whose
shared portion was larger than what was returned in total. In
communities that do not have large taxpayers whose revenues may be known
to a municipality, it is difficult to determine the accuracy of tax
collection reports compiled by the entity treasury and revenue office.
Those tax collection reports, unverifiable by municipal officials, feed
the revenue sharing system driven by the formula set by the canton or RS
respectively.

State-owned firms were identified by municipal finance directors and
mayors in both entities as having significant arrears in taxes of all
types, including social contributions, payroll taxes, property taxes,
and other taxes that form a municipality's tax base for revenue sharing.
Obviously, a municipality cannot do much to force a state-owned
enterprise to pay taxes to the entity tax office if the two organs of
the state come to an agreement on tax compensation, tax subsidies or
other arrangements that lead to the reduction of taxes actually
collected on a municipality's territory.

Certain mandated and delegated services are not being provided or are
grossly under-funded as a consequence of the lack of information and
influence over local and shared revenues (in this case ignoring the
arbitrary nature of cantonal distribution of shared taxes). Capital
spending varied between 1-10% of cantonal budgets (direct investment by
cantons amounted to no more than 5% of budgets according to World Bank
estimates), and at the municipal level, certain mayors claimed capital
spending took up to 30% of their budgets. In addition to the dearth of
capital spending in both entities at the municipal level, the team
encountered a confused legal and regulatory environment associated with
capital borrowing by municipalities in both entities. That environment
will be largely clarified by passage of the proposed Debt Law for the
State and Entities. The lack of capital spending by cantons and
municipalities means a visible decay of the very infrastructure that is
required to deliver services mandated by entity and/or cantonal laws and
regulations.

**[Finding Two: Inadequate Definition of Responsibilities and
Intergovernmental Relations]{.underline}**

Certain public functions are unnecessarily split between municipalities
and the next higher unit of government. In many respects, municipalities
lack autonomy in organizing and delivering core services. Aspects of
permitting and urban land use are shared between cantons and
municipalities, preventing municipalities from influencing their own
development, while making permit applicants hostage to the whims of a
distant cantonal official. (Sarajevo Canton routinely issues
construction permits for projects in Sarajevo's Center Municipality
without even consulting the municipality). In both entities, social
service and education functions are divided among the municipalities and
the higher level in that teacher' salaries are paid by the higher unit,
while maintenance and material costs are assumed by the municipality.

These unclear and shared functions and responsibilities are often blamed
on the Dayton Peace Accords, yet any suggestion that the status quo be
modified raises fears that the very basis of those Accords is
threatened. The assessment team agrees with many analysts' conclusions
that fiscal decentralization was not properly addressed by the Accords,
and that the situation as it evolved is far removed from the intentions
of the framers and signatories to that Accord

For example, a routine complaint of mayors is that cantons do not
discharge their social welfare functions (examples include Zenica,
Bugojno, Jajce among others), leaving municipal staffs and budgets
unsupported in their efforts to address social issues that are not
municipal responsibilities legally, but in practical terms, the
municipality has to answer to the affected population directly. The
assessment team encountered a protest march on the municipal building by
pensioners in Zvornik who were angry about late payments and the low
amounts paid in retirement benefits. This, again, is not a municipal
responsibility, but the mayor and his staff are caught between the
obligations of a distant higher level of government, i.e. the RS
government, and the immediate accountability demanded by citizens. In
Prnjavor (RS), veterans' benefits such as housing and welfare payments
take up 8% of the local budget as a result of this entity responsibility
not being adequately funded. Similarly, the Municipality of Caplina in
the Federation complained of its obligation to house and feed veterans
and their families without an adequate transfer of resources from the
canton and entity levels. [^5]

Split responsibilities in the educational sector means that parents
complain to municipal governments about cold, dark and dilapidated
schools, and are hence forced to fund improvements and operating
expenses out of their own budgets, budgets which for many reasons are
inadequate to cover even mandatory functions. Capital expenses of
certain types are also involuntarily assumed by municipal offices facing
public pressure.

[In this system, those officials at the RS or cantonal levels who are
legally responsible for certain public services are not held accountable
by citizens at the]{.underline} [local]{.underline} [level, while
municipal officials, who lack the authority and wherewithal to address
the problem, are held]{.underline} [directly accountable to the
public]{.underline}. [This paradox illustrates that]{.underline} [the
inherent basic accountability that exists at the municipal level is
fundamentally more vibrant today than at higher levels of
government.]{.underline} As a generic guiding principal of modern public
administration, service provision should occur at that level which
provides the optimum balance between efficiency and democratic
accountability.

**[Finding Three: Lack of Political Weight for
Municipalities]{.underline}**

A universal complaint of mayors is that the revenue sharing formulae
used in both entities are arbitrary, do not reflect the cost of service,
and are not fair to those municipalities with weak tax bases which could
perhaps never produce sufficient revenues to be shared and returned to
cover the costs of mandated services. Revenue sharing practices appear
to result from calculations of political strength and opportunity and
have little to do with actual needs or costs. Cantonal finance ministers
claimed that the "division of responsibilities" justified the canton
taking 65-80% of the shared revenues. As to why this high share was
needed by the canton, or why the lower share was enough at the municipal
level, was never justified nor explained by cantonal representatives.
Cantons spend on average 80% of their budgets on salaries and benefits,
and certainly, at least in the seven cantonal offices the team visited,
canton governments possess office facilities, luxury vehicles and the
trappings of wealth that are seldom seen at the municipal level.
(Cantonal usage of municipal buildings without any compensation will be
covered in a later finding).

Causes of municipal weakness are many. In the Federation, the municipal
association is viewed as weak and ineffective both as a lobbying tool as
well as a mechanism for professional development. Individual
municipalities divided among ten cantonal jurisdictions have very little
collective power to question the tasks and revenues assigned to them by
the canton. Because cantonal parliaments set revenue and task
allocation, and many cantonal constitutions and local government laws
can challenge municipal ordinances, and have methods to remove mayors,
the need for effective municipal political advocacy at the Federation
level is striking.

The political structure of the Federation offers no municipal advocate
at a ministry or entity government level. If in the future were a
municipal association in the Federation ever strong enough to engage in
real interest representation, as structures currently stand it would
have no audience at the Federation level, and would instead be faced
with ten different cantonal governors, ministers, legislatures, and
bureaucracies as counterparts to any negotiation or discussion. In
effect, currently the Federation municipal association can only speak on
behalf of those several municipalities actually located in a given
canton. As demonstrated later in this assessment, the Federation has in
effect "washed its hands" of responsibility for municipalities, thus a
Federation-based municipal association literally has no counterpart in
the executive and legislative branch of the Federation government where
potential new municipal legislation could be proposed, argued for and
eventually passed and implemented.

In the RS, mayors questioned the legitimacy of the "economic
development" criteria used to determine the share of sales and income
taxes to be returned to a municipality, and considered being rated as
"more developed" catastrophic for their budgetary revenues. (This is
especially true in areas with a high level of gray market activity and
untaxed consumption, since an area may "appear" prosperous, without any
tax increment going to any level of government). This rating and
classification system was questioned by nearly all mayors interviewed by
the assessment team, with some questioning openly whether potential
changes represent just another scheme to claim more revenue for the
Entity. Those with the highest level of development receive only 20% of
the sales and income tax collected on their territories, and saw little
hope for increasing their revenues given the lack of control and
oversight over the tax base, and the disinterest of the RS tax office in
collecting municipal taxes such as the property tax. Those
municipalities with "less developed" ratings enjoyed a higher share of
taxes returned, albeit supported by a smaller tax base. Some
underdeveloped municipalities allegedly receive extra compensation
grants based upon the political affiliations of the mayors and the
minister considered. Such arbitrariness pervades the seemingly
"objective" system of revenue sharing adjusted to the general level of
economic development. RS municipalities rated as being undeveloped
earnestly feared being "upgraded" since some of the indicators used to
determine a locality's level of development were not appropriate and
gave false readings. An example: Nevesinje, one of the poorest
municipalities in the Eastern RS, reported fears about being upgraded
given the large number of mobile phones in their community. As in other
countries in transitioning Europe, mobile networks expanded rapidly
since fixed line systems were antiquated and still do not provide
adequate penetration. (Many people could buy cheap pre-paid phones even
in poor areas, instead of waiting for the privatization and
recapitalization of the old state monopoly telephone company. So the
high proportion of the population having mobile phones does not
necessarily indicate a high level of development, in some cases, it is a
proxy solution for the unavailability of modern fixed line service.)
Moving from enjoying 40% of shared taxes to 30%, for example, means a
25% drop in shared revenues on a constant nominal basis. Being upgraded
by the RS government means in a static sense losing 10-20% of the share
of revenue enjoyed a year before, without enjoying a proportionate
expansion in the tax base used to collect and share such taxes.

In general, the team detected a universal sentiment in both entities
that collective action given current circumstances is futile, that
municipalities are alone in their struggle to deliver services and to
obtain funds that they control. Some cited a level of inconsistency on
the part of the International Community regarding the role and powers of
the municipal level. Others opined that the IC has in general ignored
the concerns of the municipal level by either creating fully-empowered
cantons, removing responsibility from the Federation through
constitutional and other mechanisms, or by too fully entrusting
municipal affairs to the RS entity government. Both municipal
associations were deemed as being relatively dysfunctional and powerless
by their constituents. However, on a positive note, RS mayors did
recognize the role that their municipal association played in deflecting
certain negative aspects of the entity treasury and in commenting upon
the draft revisions to the local government law in the RS. The team's
impression was that in the Federation the association may as well not
even exist from the perspective of its potential constituency, and in
the RS, the strong leadership and personal influence of several key
mayors have made the difference, but this capacity is not institutional
in nature. Policy analysis capacity is sorely missing in both
associations, as is an awareness of the need for membership services and
feedback.

**[Finding Four: Rule of Law Concerns]{.underline}**

Mayors in the Federation complained universally of bullying behavior on
the part of cantonal officials. Examples include simply not abiding by
agreements, court decisions, cantonal laws and other commitments, or
arbitrary interference in municipal regulations and administrative
decisions. The totality of anecdotal evidence convinces the assessment
team that in many ways the readiness of cantons to rule arbitrarily
along the vertical axis of power is reminiscent of the excesses of the
communist era.

While not explicitly identified as such, mayors and other municipal
officials interviewed express serious doubts about the ability of
municipalities in either entity to seek legal redress or an independent
review of their complaint against arbitrary actions by the RS level or
by a canton. In the Federation Constitution, cantons have the right to
challenge municipal laws in the Constitutional Court, but municipalities
do not have an explicit constitutional right to challenge the laws and
decisions of the canton, or any other part of the state. In the RS, "any
citizen" may appeal to the Constitutional Court, but municipalities are
not given this right explicitly.

Significant inconsistencies were identified between cantons regarding
revenue sharing, and among municipalities in the RS. For example, in
April, 2002, Tomislavgrad municipality discovered that the property tax
and transfer tax revenue that the canton shared with 80% to the
municipality had been rearranged by a new cantonal regulation which kept
75% of property tax revenues for the canton, leaving the remainder for
the municipality. That canton seems to be upsetting the convention that
property tax revenue is organic to the municipality, as it is entirely
in the RS, and elsewhere in the world where property taxes are imposed.
In this case as in many others, those municipalities have no legal
recourse. Categorization in the RS seemed in many instances to be
arbitrary, as well as the revenue allocation formula in any canton What
is common in these complaints is that there is no higher forum to
address grievances against the canton or against the RS government.

For example, some cantons and RS agencies use municipal property without
paying any rent or compensation for utility and maintenance expenses.
Despite court orders in some cases, the higher level of government is
seemingly free in BiH to abuse its power over the municipal sector.
Examples of arbitrary actions on the part of higher units of government
abound. There are problems related to the extraction of natural
resources such as wood and minerals, where municipalities are entitled
to "usage of natural resources" fees, but these fees are not shared by
the canton, if they are imposed and collected at all.

One of the most egregious examples of arbitrary and arguably illegal
action on the part of a higher unit of government was discovered in the
RS, in the Municipality of Modrica. According to the mayor, the town's
water system was privatized without consultation, consent, let alone
compensation. A mandatory municipal function, water service, was sold,
including the pipes in the ground that were in part constructed with
local taxes and self-contributions. Modrica municipality is accountable
and responsible for clean water, and for setting water prices, yet it
cannot influence the new private owner's actions. Who will be at fault
if service is unreliable or unhealthy is unclear. To the best of the
Mayor's knowledge, the RS government did not sign any performance
agreement with the new owner, nor did it extract any commitment to
expand and improve service. The RS Law on the Privatization of State
Capital[^6] deems water and other environmental services as being
"strategic," hence their privatization is under the direct control of
the privatization agency at the RS level. The law refers to a special
decree on strategic assets that has not yet been formulated. It is
questionable whether such a privatization is legal at all. Certainly the
procedure and the result question the very role of municipalities in
delivering services mandated by the Local Self-Government Law. In a
similar situation, communal services such as water provision, street
cleaning and waste removal were partially privatized in Zvornik, again
without municipal consent. The mayor questioned the legality of the move
by the RS government, and expressed grave concern over how the
municipality is to deliver a mandatory service if the assets needed to
deliver the service were taken away, and with the municipality lacking a
legal instrument to hold the new owners accountable. Neither mayor could
identify a court or other forum where he could seek redress or at least
file a protest.

Though most mayors felt that they had legal control, i.e., full
ownership (including the right to sell and reshuffle real estate) of
their core assets such as streets, public buildings, parks, schools
etc., many ambiguities remain regarding the separation of municipal,
cantonal and entity property, since ownership claims are justified with
references to pre-1990 Yugoslavia, as well as with claims of ownership
based upon current possession. The latter is especially common in cases
where canton offices simply occupied municipal buildings as the cantons
never existed before, and needed the space traditionally used and owned
by the municipalities. Clear-cut definitions of state, entity, cantonal
and municipal property are still missing in BiH, and property ownership
does not follow function based upon the principle of subsidiarity.

**[Finding Five: Wide Disparities in Skills and Knowledge at the
Municipal Level]{.underline}**

This finding, based upon gained knowledge and impressions of the
physical and human resource capacities of the municipalities encountered
by the team is not unique to BiH, as any transformation country has
similar characteristics. However, given the intensity of the problems
defined in the first four findings, the variation of skills, and on
average, the stunted ability to deal with the problems described, the
municipal skill question has deeper implications for political
stability, and the viability of democratically-elected local government
in BiH.

Mayors in both entities complained about "inheriting" large numbers of
staff from the previous regime or during the war period. These staff
members often do not have the skills, professionalism and willingness to
work in a modern public administration system. Yet mayors fear firing
such staff for political and economic reasons, i.e., it is difficult to
fire a public servant, and expensive in terms of severance costs.
Furthermore, the cost of bloated and unqualified staff includes the
inability to hire appropriate people, especially in the IT and finance
areas, both of which are critical to any reform process.

With no on-going BiH-wide education of municipal officials, elected and
professional, as well as a dearth of professional information channels,
this situation needs immediate attention. From training of local
legislators to professional certification of finance officers and
others, major human capital deficits were detected in all parts of the
country. At the same time, the team was able to identify many
municipalities with dedicated, professional mayors and staff who seemed
to well understand both their jobs and the environment they work in..

**General Characteristics of Findings:**

The status quo described above provides incentives for systemic under-
and unfunded mandates, virtual mandates, as well as burden shifting from
higher levels of government to the local level.

*Unfunded, underfunded and virtual mandates:*

By *underfunded and unfunded* mandates we mean legislation from the
canton or RS level that defines municipal responsibilities without
proper financing. For example, municipalities are responsible for
transporting students to schools, yet there is no separate funding for
the full costs of these tasks. In the case of veterans' housing, in both
entities municipalities were made responsible without any additional
funds. In the case of social safety net questions, additional
unemployment caused by privatization and/or restructuring of state-owned
firms increases the municipalities' burdens to care for the newly
unemployed, yet no line item exists for this new task. In both entities,
municipalities are responsible for the maintenance and material costs of
elementary schools. Yet if the electric or heating costs exceed the
resources the municipality has available from various local and shared
taxes, it has no choice but to cover the additional costs, or else the
parents will protest to the mayor, not at the appropriate higher level
of government.

As in all transition countries, in theory at least, laws "guarantee"
sufficient resources to carry out mandated and delegated duties. In the
Federation, Article 14 of the Federation Law on Local Self-Government,
states that municipalities are "entitled to\...appropriate sources of
financing" over which they can "freely dispose of", as well as funds to
perform tasks delegated by the cantons.[^7] Neither guarantee is
enforceable nor adhered to, nor does the Federation's local government
law identify any forum for redress. (The Federation Constitution does
not give municipalities the explicit right to appeal to the
Constitutional Court against cantonal or federation laws and rules).
This legal right of the municipal sector to adequate funding is clearly
denied in cantonal legislation and practice, but municipalities also
lack the accounting and technical skills to effectively demonstrate the
true cost of services they are mandated to deliver, and what types of
additional resources Article 14 of the Federation Local Government Law
entitles them to have.

*Virtual mandates* are those that are not legally or explicitly required
of a municipality. If the public function is to be carried out to the
satisfaction of the local population, despite a lack of direct funding
and responsibility for tasks to be financed by a higher level,
municipalities must often step in.. Examples abound in the fields of
education, social welfare, and public housing. Municipalities, not faced
with any legal or explicit mandate, are often forced into the role of
bandaging a broken welfare state, usually on an ad hoc basis. While
demonstrating that municipal leaders can be both responsive and
entrepreneurial, the failings of higher levels of government cause
particular pressure on municipal budgets.

*Burden shifting: hiding the true cost of the public sector*

*Burden shifting* in short can be defined as forgone incomes and
incurred opportunity costs at the municipal level, combined with
increased operational, maintenance and utilities outlays, combined with
a crumbling physical infrastructure, that is, depreciation expense.

*Burden shifting* by higher levels of government underreports and hides
the true cost of the public sector in BiH in several ways. Firstly, when
a higher level unit of government uses municipal facilities without
paying rent or other forms of compensation, no unpaid accounts payable
accumulates in the public sector accounting system. A higher unit of
government uses public assets for "free," while the municipality also
does not record its uncollected accounts receivable. There is no direct
measure of the rents unpaid, or incomes forgone in the public sector. In
either case, refusal by the users of municipal property to pay rent and
the inability to collect or record such foregone income shifts the
burden of running the public sector down to the municipal level. At a
macro level, contingent liabilities and incomes accumulate, while the
municipalities take losses in one unrecorded, and two very visible ways.
Firstly they forgo significant rental income. Secondly, they assume the
utility, maintenance and other overhead costs of buildings used by other
units of government and these uncompensated expenses show up in their
budgets. Thirdly, these buildings used by other units of government
depreciate in a physical manner, and the municipality is not capable of
preserving the value of these buildings for future use, and thus takes a
significant loss on a theoretical balance sheet.

Burden shifting, though hard to measure, deserves serious consideration
by all stakeholders as the full cost of running the state, entities,
cantons, and municipalities should be made explicit. Examples of burden
shifting abound. Canton, Federation and RS units of government and
public administration, cantonal courts, cantonal police forces, etc. use
municipal buildings throughout BiH without paying any rent or
compensation. In the RS, the tax office uses municipal office space in
many situations where the office space could earn significant rental
income from commercial users, but the tax office does not pay rent to
municipalities. In the cantons where the formerly municipal functions
like the police were moved up, or new functions such as cantonal courts
and administration were added, municipal buildings were simply
appropriated or occupied. Instead of assuming full responsibility for
maintenance and utility costs as "new" owners should, the cantons simply
use municipal facilities free of charge, and occasionally at full cost
to the municipality, which again has no legal recourse to collect rents
and utility charges. Municipalities use the modest share of taxes
collected on their territory to essentially subsidize the cantons that
in extreme cases take 80% of the shared taxes generated within a given
municipality.

The true cost of public administration and governance in Bosnia is not
fully recorded or measured. Those aspects of burden shifting that are
observable, however, are borne fully by the municipal sector.

[This situation is not a direct result of the Dayton Accords but rather
the cumulative effect of improper and inefficient intergovernmental
relations allowed to become precedent and therefore define the status
quo]{.underline}. The IC does bear some degree of responsibility for not
recognizing and challenging in a timely enough manner what has grown
into an abusive and inefficient system of intergovernmental relations in
Bosnia and Herzegovina.

*Brcko District and Mostar City*

The assessment team spent a significant amount of time interviewing
stakeholders, both local and international, involved in Brcko District
and Mostar. Brcko District seems to attract the envy of mayors
throughout BiH, who see it as an example of what can be done at the
municipal level if both autonomy and adequate financing are present. On
the other hand, these same mayors in both entities report that Brcko is
home to rampant smuggling and tax evasion, as well as completely legal
tax shifting. In other words, residents of jurisdictions close to Brcko
suffer losses of both sales and income taxes as consumers and businesses
route transactions through the District that has lower tax rates than
surrounding areas.

Brcko District demonstrates that a relatively small municipality,
formerly consisting of ethnically-based municipalities, can be
consolidated and reformed based upon service delivery criteria. The
unpopular consolidation of public institutions and offices did cause
unemployment in the District, yet these reforms demonstrated that
municipalities can be reorganized with independent tax and finance
authorities and other functions not available outside of Brcko.
Unfortunately, the ability of Brcko reforms to serve as a model for
other BiH municipalities is limited by a widespread feeling that "Brcko
is different".

On the future of Brcko District, the assessment team believes it
important to point out that a number of important policy questions
remain open. These questions have implications not just for Brcko
District, but also impact neighboring regions, future VAT
implementation, and the overall structure of public administration in
BiH.

The case of Mostar's potential consolidation into one city with one
municipal government requires first of all political will on the part of
all existing municipalities and stakeholders. However, beyond the
considerable political obstacles to unification, the assessment team
believes it important not to neglect technical aspects to implementation
should a political accord be reached. The Brcko experience demonstrates
that with sufficient political will, international pressure and support,
as well as with appropriate technical skills, a unified, efficient
multi-ethnic city can be created out of divided and subdivided
municipalities. At the same time political will, in and of itself, may
not be enough. The assessment team believes that the technical aspects
to the Brcko experience can be mined for insights and implementation
strategies should Mostar embark upon a unification course.

**[Policy Recommendations]{.underline}**

In light of the findings above, the assessment team proposes that the
impending imposition of the value added tax (VAT) in BiH be used as an
opportunity to reconsider the roles and resources of local government. A
consensus is developing among stakeholders at nearly all levels that the
current public administration system is not efficient, does not reflect
subsidiarity, and is not sustainable in the long run. The introduction
of VAT will necessarily require a substantial restructuring of the
current system of intergovernmental finance. The assessment team
strongly recommends that both sides of the equation -- revenue
collection and expenditure assignments -- be reshaped as
Bosnia-Herzegovina prepares for VAT implementation.

The Dayton Accords did not call for the current status quo of municipal
functions and revenues in the entities and cantons. The Accords included
as an annex the proposed and eventually adopted Constitution of Bosnia
and Herzegovina. That State Constitution does not mention
municipalities, and delegates all powers not specifically assigned to
the State to the two entities.

The Federation Constitution offers very few specifics on the rights,
obligations and roles of municipalities, and in fact, in Section I,
Article 2, mentions only cantons as the units that constitute the
Federation. While cantonal functions are specifically identified, all
powers not specifically allocated to the Federation by law or in the
Constitution (III, Article 4) belong exclusively to the cantons. These
are the clauses that seem to enable cantons to do as they will vis-à-vis
municipalities. The Federation Constitution identifies the differences
between Federation and cantonal duties, and specifically authorizes
cantons to both "confer" and to "delegate" (V, 1, Article 2) its own
responsibilities to the municipality. Cantons may even "confer"
responsibilities to the Federation (!) but no municipality may reject
tasks either delegated or conferred by the canton, or confer
responsibilities it cannot discharge back to the canton. There are no
requirements that the canton also transfer resources to fund those
conferred and delegated responsibilities. The Federation Constitution's
section on municipalities (VI, Article 2) states specifically that
municipalities may exercise self-rule, but at the same time must have
local statutes that are consistent with Federation and cantonal
constitutions and laws. This seems reasonable and prudent and this does
not authorize cantons to write independent laws governing
municipalities. Unfortunately, in the Federation Constitution there is
no explicit mention of the responsibilities and rights of
municipalities, nor does the Federation Constitution define a
municipality's right to own property.

Despite these features, the Federation Constitution does not
*specifically* empower cantons to write their own local government laws,
nor to essentially rule over the municipalities without any form of
judicial or constitutional redress. While the assessment team did not
have specialized legal expertise, the team concluded that instead of
Dayton or the Federation Constitution, the Federation Local Government
Law, also passed in late 1995, is the legal instrument that simply
requires and empowers cantons in Article 18 ("cantons shall regulate")
to write their local government laws regulating a long list of issues.
That Federation law, written and passed under duress in late 1995 as the
Dayton Accords were approved, should be changed given eight years of
clear policy failure. The Federation should take back its power to set
the legal framework for municipalities, and hence this power will be
explicitly the competence of the Federation, still leaving other
"unregulated matters" in the hands of the cantons. As Dayton, the State
and Federation Constitutions give essentially sovereign powers to the
entities, the Federation may chose to regulate municipalities directly,
in other words that power by the current Federation Constitution will
not de facto belong to the cantons, and the Federation still has the
right to revise its current Local Government Law that unfortunately
gives unchecked power over municipalities to the cantons.

Therefore, it is [not]{.underline} the Dayton Peace Accords, nor the
Constitution of the Federation that is responsible for this untenable
power grab by the cantons, rather it is the Federation Local Government
Law that simply absolves the Federation of any responsibility, oversight
and power over the municipalities.

The status quo developed in a power vacuum with canton legislatures
using loopholes and ambiguities in Federation law, as described above,
to do as they pleased with municipalities. The status quo was created
neither by external pressure nor by logic, but rather by the simple
calculus of political weight. This problem was aggravated and indeed
cemented since the International Community largely ignored the plight of
the municipal sector, or conveniently advocated "decentralizing"
responsibility to the (entity) cantonal or RS level without adequately
taking into account revenue and task assignment, the issue of property,
efficiency and accountability. To be fair to the IC, public
administration efficiency and accountability were understandably not the
number one priority immediately following the war.

**[Recommendation One: Examine the Current Assignment of Functions and
Responsibilities with the Intention of Maximizing the Principle of
Subsidiarity]{.underline}**

The implementation of VAT needs to go forward in 2006 in conjunction
with a systemic review and realignment of functions and corresponding
revenues, and property where appropriate. The fast track implementation
of VAT must take into account the effect of the removal of the sales tax
as a source of shared revenue for the municipalities and cantons in
2005. According to our information, the VAT will go into effect across
BiH in 2006, and will be distributed to the two entities in line with
the collections of sales tax established in 2005. The VAT, paid into a
state-level account, will be partially used to fund the international
debt obligations of both entities, to finance the state budget, and
finally, the entities and Brcko are to receive the balance based upon
final consumption as determined by VAT returns. This is a potential
danger to the viability of local governments in that though VAT is
expected to be a more robust tax than the sales tax, the entities and
Brcko, as well as the state, have priority in access to these funds.
What is left for redistribution, if any, is entirely at the discretion
of the entities, and given the municipalities' extremely limited
bargaining power and the lack of municipal knowledge and awareness of
municipal problems at the Federation level, the assessment team is not
convinced that what remains after initial VAT distributions will *at a
minimum* replace the amounts that sales taxes represent as a source of
municipal financing.

Implementing legislation proposed for the State and Entity levels, to
our best knowledge, will simply empower the two entities to consider
further uses and potential distribution of the VAT. Both entities, the
RS in its Constitution (Article 103), and the Federation in its local
government law (Article 14) guarantee the availability of funds and
resources to carry out both mandatory and delegated (by the RS or the
cantons) tasks on the municipal level. The VAT discussion should include
options for finally complying with the RS Constitution and with the
current local government law in the Federation by undergoing a thorough
examination of the costs of mandated and delegated services.

In our view to only focus on the revenue-collection side of VAT would be
missing a significant opportunity to encourage a necessary review
(including reconsideration of the distributive role of cantons in the
Federation) of revenue and task assignments. The cantons should
[not]{.underline} serve any distributive function in VAT revenue
sharing. Revenue should be passed from the entity directly to the
municipality by formula if it were to form a shared tax. The cantons
were not empowered nor intended by the Dayton accords to be distributors
of resources to the municipal sector and their potential as regional
service providers in functions requiring scale economies is certainly
ignored. Cantons created on primarily ethnic criteria should not be
obstacles to the creation of inter-cantonal, inter-entity and
inter-municipal service provision areas in health, education and
environmental infrastructure that follow economic, technical,
hydrological and other objective factors in delineation, rather than
boundaries hammered out during ceasefire and peace negotiations.[^8]

Functions should be assigned on an exclusive basis, removing overlapping
and divided responsibilities (salaries from above, maintenance and
utilities from below).

The assessment team is concerned that when the sales tax is removed as a
source of shared revenue for the municipalities, the entities (cantons)
will not, of their own accord and volition, voluntarily develop a
fairer, more uniform and more efficient source of funding for
municipalities. The pattern may be repeated with other direct (such as a
potential unitary income tax) and indirect taxes as those too are
modernized without a functional examination of the role of
municipalities in delivering services. Given the inability of the
municipal sector to lobby for its own interests in either entity, it is
simply not fair, wise, nor realistic on the part of VAT advocates (both
domestic and international) to assume that the entity governments will
"work out" the VAT distribution issue on their own without further
damaging legitimate municipal interests and violating principles of
subsidiarity.

Under international pressure from the IMF and the EU, Serbia is also
planning to introduce VAT sometime in 2004. The Ministry of Finance,
partly due to municipal association lobbying, was forced to consider the
consequences of removing sales tax as a major source of municipal
revenue and revenue equalization. The experiences of Croatia with
several years of VAT implementation, and Serbia preparing for VAT should
be considered by stakeholders in BiH as the budget systems laws in all
three were influenced by the same donor, the US Treasury, and the local
government laws, based in part on Yugoslav tradition, show striking
similarities as well.

The World Bank report on fiscal decentralization (June, 2003) supports
the idea of redesigning the task and revenue allocation system[^9], but
explains the problems and solutions in technical language only. We
suggest that the World Bank report be circulated more widely among
experts and perhaps in a shorter and simpler form for the local and
international stakeholders. Both versions deserve broader consideration
and debate among policymakers at all levels in BiH.

**[Recommendation Two: Standardize Legislation and Provide More Autonomy
for Municipalities to Provide Efficient Public Services]{.underline}**

The team's recommendations in this area include the following specific
steps:

A.  [Enactment of a revised law on Local Self-government for the
    Federation that moves supervision of, and more importantly, the
    allocation of functions and revenues of the municipalities up from
    the cantons]{.underline}.

In other words, the Federation needs one local government law, not ten
separate cantonal local government laws. Article 18 of the current
Federation law must be removed since it gives cantons almost abusive
powers over municipalities in cantonal municipal laws and annual tax
sharing and budget laws.

Article 18 of the Federation Local Government Law states: "A cantonal
law on local self-government shall regulate in greater detail...the
..work of the municipality, direct participation in decision-making by
citizens, organs of a unit of self-government, territorial
self-government, property and financing of local self-government and
**other issues** (sic!) relevant for the exercise of local
self-government." [^10] The Constitution, in contrast, does not grant
direct supervisory powers to the cantons over the municipalities, rather
it assigns all functions not otherwise granted to the Federation as
being the competence of the cantons. The assessment team argues that the
cantons have used this Federation law provision rather liberally,
essentially exceeding the spirit of this law, Dayton, and all principles
of subsidiarity.

There are documented contradictions between cantonal and Federation laws
and constitutions that have not been addressed since 1995, and many of
these contradictions stem from the arbitrariness of cantonal legislation
governing municipalities. A new Federation LSG law is needed to
eliminate the current ten systems of local government in the Federation,
with varying revenue and task assignments, and no recourse to higher
authorities. There is no justification for cantons to each have their
own systems of municipal governance, when in the smallest cantons there
may just over 30,000 citizens living in several municipal jurisdictions.

Furthermore, given expected declines in donor funding, and great needs
for infrastructure at the municipal level, a unified credit market
cannot emerge without great inefficiencies if lenders and bondholders
have to become familiar with 10 different municipal systems. The lending
market with such inefficiencies will add interest and transaction costs
to potential borrowing by municipalities who are least in a position to
avoid paying a systemic premium through no fault of their own. Interest
articulation, training and education of elected and professional
officials, as well as equal access to quality services by the local
population are not possible in a system with ten different legal and
financial frameworks for local governance.

The existing Federation Local Self-Government Law could, in our view, be
amended, to offer unitary and equitable services to all citizens,
regardless of where they live. The revised draft versions of the new RS
Local Self-Government Law could serve as a basic model of a revised
Federation-level law that removes all aspects of revenue and task
assignment from the cantons. Cantons could continue as elected regional
units of self-government, performing those tasks that regional units of
government are usually assigned in other European countries, such as:
(for illustrative purposes) secondary education, regional environmental
infrastructure, regional roads, and perhaps police and justice. The role
of the cantons would need to be explicitly addressed in relevant
Federation legislation, perhaps with a law on cantons that derives their
powers from what is contained in the Constitution, not from the powers
the cantons asserted when the Federation Local Government Law took a
"hands off" approach to municipal rights and duties.

B.  [Rapid passage and implementation of a new law on public debt in
    both entities to establish a framework for municipal infrastructure
    borrowing]{.underline}.

The assessment team fully supports the public debt law being developed
by the US Department of Treasury, and is convinced that such legislation
would serve a vital role in promoting a viable municipal credit market.
As donor resources decrease and the accumulated effects of deferred
capital spending increase, a viable private-sector led municipal credit
market is of utmost importance.

C.  [Reexamine the RS Law on the Privatization of State Capital in
    Enterprises in regards to communal enterprises and local
    utilities.]{.underline} This includes reviewing any regulations or
    decrees that were issued regarding water sector utilities.

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D.  [Require increased sharing of, and access to, information between
    cantons/municipalities and the entity tax authorities to provide
    data for multiyear budget preparation, oversight of actual transfers
    and collections, and improvement of tax bases and
    collections.]{.underline}

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E.  [Examine the use of the State-level Constitutional Court as a final
    court of appeals in inter-governmental disputes that cannot be
    resolved by either entity's own Constitutional Court.]{.underline}
    This step could include making explicit the right of municipalities
    in both entities to appeal first directly to the entity
    Constitutional Court in the relevant Constitutions and local
    government laws of both entities, then to the State-Level
    Constitutional Court.

The current RS Law on Self-Government does not contain dispute
resolution language as article 32 clearly states that conflicts between
municipalities and the state will be settled by "the Government." The RS
Constitution allows "anyone" to appeal to the RS Constitutional Court;
however there is no explicit court of redress for municipalities.
Fortunately, a draft revision of the RS Local Self-Government Law
contains a provision enabling municipalities to appeal directly to the
RS Supreme Court in cases where the municipality seeks to challenge the
legality of a law, directive, and decision, etc., of a higher unit of
government. Such a provision, with clear rules, could be a part of a
proposed revision of the Federation Local Self-Government Law.[^11]

The Federation Local Government Law does not identify any redress
procedure or court available to municipalities. The Federation
Constitution identifies the Constitutional Court as the forum to resolve
conflicts between and among levels of government, including between
cantons and municipalities. Unfortunately, the Constitution declares
that Federation laws, cantonal laws, Federation regulations, and
municipal regulations may be submitted to the Constitutional Court by
every level of elected authority except the municipal level. Cantonal
Ministers and Presidents may submit cantonal or municipal laws to the
Court. Mayors and elected bodies of municipalities are not listed as
being authorized to submit questions regarding cantonal decisions. In
other words, the canton may request judicial oversight over a municipal
law or regulation, but a municipality cannot request judicial review of
a cantonal decision that it feels violates its rights.[^12]

**[Recommendation Three: Strengthen Municipal Internal]{.underline}**
**[Capacities]{.underline}**

Given the weaknesses in local professional capacity, as well as systemic
factors identified as hindering municipal government, the team has the
following simple policy suggestions:

A.  [Support direct election of mayors in the Federation, with
    appropriate changes to the Federation Constitution.]{.underline}

Direct election of mayors has been in place in the RS for several years,
although other supporting laws were not explicitly defined. The
Federation Parliament received and approved the initiative on the direct
election of mayors five years ago, but it ended up in the drawers of
Constitutional Commission of the Parliament that was to prepare
appropriate amendments to the Constitution of FBiH. The adoption of
these amendments would help lay the groundwork for more accountability
at the local government level in the Federation and diminish the ability
of political parties to put their own interests above all. The mayor
would be elected directly by citizens and not by the municipal council,
replacing the practice of political parties to be more concerned with
party representation at the mayoral and departmental level, rather than
taking only professional qualities into account.

B.  [Municipal utilities, their ownership, oversight and management
    structures require urgent reforms and clarification of roles and
    responsibilities.]{.underline}

The situation in this field is complex as most utilities are
semi-autonomous in FBiH and in the RS the entity government can manage
its own and municipal assets. Municipalities are serve as founders,
appoint management boards and approve rates based upon utility company
proposals, but also subsidize their operations and their budget in case
of low collection rates or other infrastructure improvements. No
significant efforts have been made in the privatization of public
utility and infrastructure enterprises. In the RS, the assessment team
was told about certain cases when entity government conducted the
privatization of a communal utility company unilaterally without
consulting the municipality. Privatization of public utilities should
follow a strategic approach which takes community input into account,
and should not be undertaken on an ad hoc basis to merely generate
one-off revenues.

C.  [Local government documents and permits, as well as forms, etc.,
    used for standard functions should ideally be universal throughout
    BiH, taking into account linguistic differences and the use of
    minority languages.]{.underline}

The situation in the Federation in this respect is much more complex
than in the RS. Standardization efforts would bring more order into the
current system, facilitate and simplify procedures, improve
inter-governmental information sharing and communication, and help
prevent forgery.

D.  [Develop concrete service standards for municipalities and their
    agencies.]{.underline}

Many municipalities in both the Republika Srpska and the Federation have
undertaken substantial revisions of administrative regulations and
procedures. While great gains have been made already in Brcko,
municipalities in the two entities continue to face considerable
challenges in amending regulations and policies while conforming to
existing local governance laws. There are an increasing number of
municipalities working to achieve ISO 9001/2000 certification or
undertake other steps to achieve system quality management.
Municipalities should be encouraged to strive to further improve
concrete services to citizens.

USAID has financed the creation of 22 one-stop shops, essentially
information and service centers where citizens can complete most of the
paperwork and processes needed to obtain the routine municipal services,
such as birth and death certificates, permits, payment of local taxes
and fees, etc. These service centers operate more efficiently if
combined with process reengineering workflow not just at the customer
interface level, but within the municipal administration. These efforts
have significantly cut waiting times for routine municipal services, and
also enable citizens and municipal workers to track where exactly the
paperwork is at any moment in time, greatly increasing accountability.
More work is needed in this area, including identifying bottlenecks at
the cantonal or entity level that essentially limit the extent of these
reforms. Furthermore, while news of one-stop shops and other concrete
administrative reforms is spreading, more formalized documentation and
dissemination of methodologies and success stories needs to take place.

**[Program Recommendations]{.underline}**

[The assessment team offers the following recommendations to USAID as
rough parameters around which to design future local government
assistance projects.]{.underline}

[Geographic scope]{.underline}: Some spread-effect of ongoing municipal
projects in Northern and Central Bosnia was observed, with non-target
municipalities demonstrating awareness of ongoing reform efforts.
Because of the lack of previous large-scale municipal programming, the
team recommends that the area south of Sarajevo, including both Eastern
and Western Herzegovina be considered for direct municipal-level
interventions. Policy work would largely have to be accomplished in both
Sarajevo and Banja Luka.

[Direct]{.underline} [municipal]{.underline}
[interventions:]{.underline} USAID should continue to work directly with
municipalities in improving service standards (through one-stop shops,
process engineering, human resource management training, etc.), in
promoting local economic development through increased cooperation with
and awareness of the business community, in utility management/handover,
and in budgeting and financial management. USAID should use experience
already present in BiH (Brcko, previous target municipalities), or
experiences from other countries in the former Yugoslavia.

[Policy component]{.underline}: Given the critical importance of
replacing the sales tax with a different source of municipal revenue, as
well as the opportunity to truly reform revenue and task assignment, the
new program should have a policy research and support component that
addresses needs at the Federation Ministry of Finance (where there is
little or no experience in working with municipalities), at the RS
Ministry of Finance and Local Self Government Ministries, as well with
appropriate municipal associations. The policy component should consider
regional experiences, with an emphasis on the former Yugoslavia as well
as other transition countries. The policy effort should also assist the
efforts of the IC in this area, and could include a "public
involvement/professional debate" component in conjunction with nascent
local policy organizations.

[Small-scale, community infrastructure grant component]{.underline}: If
funding permits, this should be closely tied with other municipal-level
interventions. This would be a modest component providing visible
outputs to citizens in the very short-term, and creating a context for
deeper municipality-community interaction in providing solutions for
local needs.

[Municipal association strengthening:]{.underline} This is a fundamental
and largely unmet need in both entities. However, given the complex
realities, including the absolute necessity for political will and the
legacy of ongoing efforts, this component should be structured to allow
enough flexibility so that contractor efforts would be conditioned on
concrete progress in certain areas, with built-in periodic reviews to
allow for a "go/no go" decision. Ideally, work with municipal
associations would also include providing associations with the capacity
to provide policy analysis and to fulfill an information/skills
dissemination function.

[Municipal loan packaging]{.underline}: A small, discrete component
should be included which would provide demand-driven assistance in
packaging potential municipal capital projects to be presented to banks
active in the municipal credit market. Municipalities in BiH have little
concrete experience in interacting with private banks in longer-term
projects and are likely to require assistance in many cases for
otherwise bankable projects to be approved.

tem

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Remarks on the Table:

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**[List of Interviewees]{.underline}**

[International Community]{.underline}

The World Bank, Sarajevo Office

OHR Sarajevo

VNG Project Office, Sarajevo

OSCE Sarajevo Office

US Treasury---Public Sector Accounting Project

UNDP Sarajevo Office

UK Civil Service College Project Office, Banja Luka

OHR North, Brcko

EU Delegation, Sarajevo

OHR South, Mostar

US Treasury, Office of Technical Assistance, Sarajevo

Swiss Agency for International Development

[Brcko District]{.underline}

Municipal officials (mayor, finance director, other professional staff)

[Federation BiH]{.underline}

Ministry of Finance

Ministry of Justice

*Municipal officials (mayor, finance director, other professional
staff):*

Mostar (City, Stari Grad, Jug)

Capljina

Ljubuski

Orasje

Tuzla

Sanski Most

Jajce

Bugojno

Livno

Tomislavgrad

Siroki Brijeg

Citluk

Jablanica

Maglaj

Zenica

Sarajevo Centar

*Cantonal officials (Ministers of Finance, other professional staff):*

Mostar Canton

Canton 8

Posavina Canton

Tuzla Canton

Central Bosnia Canton

Canton 10

Zenica Canton

[Republika Srpska]{.underline}

Ministry of Finance

Ministry of Local Self-Government

*Municipal officials (mayor, finance director, other professional
staff):*

Banja Luka

Prnjavor

Derventa

Modrica

Trebinje

Nevesinje

Zvornik

Bijeljina

Doboj

[^1]: Consisting of Marc Ellingstad and Marinko Sakic, Democracy Office,
    USAID Sarajevo, Ted Priftis, USAID Washington, and Charles Jokay,
    consultant.

[^2]: This assessment will not provide a general description of the
    local government system in BiH. See the following for more
    information:

    Bosnia Herzegovina, From Aid Dependence to Fiscal Self Reliance, A
    Public Expenditure and Institutional Review, The World Bank, 2002

    Bosnia and Herzegovina: Creating an Efficient Decentralized Fiscal
    System, The World Bank, June 2003 (World Bank, 2003)

    Bosnia and Herzegovina Local Development Project -- Legal and
    Regulatory Framework, Michael DeAngelis and George Peterson, The
    Urban Institute, 2001

    Advisory Note on Regulatory Framework and Institutional Issues:
    Municipal Borrowing in Bosnia and Herzegovina, Glasser and Jokay,
    RTI International, 2000.
    <http://www.rti.org/pubs/mun-borr-bh-mdg.pdf>

    Brief Analysis of Local Government Jurisdiction and Practice in
    Bosnia and Herzegovina, USAID, 2000
    <http://206.118.253.100/usaid-bih/information/sheets/analysis.doc>

[^3]: For more data see World Bank (2003).

[^4]: ibid, p. 52

[^5]: For more data see World Bank (2003).

[^6]: Article 7 of the RS Law on the Privatization of State Capital in
    Enterprises ("Official Gazette" of Republika Srpska, 24/98, 62/02)
    states the following: "*In enterprises of strategic importance
    within the area of production and distribution of electricity,
    railway traffic, telecommunications, water supply, mining and
    forestry, public media, games of chances, production of arms,
    military equipment and other enterprises defined by the Government
    Republica Srpska, state capital will be privatized based on this law
    according to Special privatization programs of the Government, and
    in exceptional cases even according special decisions of the
    Government." (OHR translation).*

[^7]: See Law on the Bases of Local Self-Government (Official Journal of
    the Federation BH, November 8, 1995).

[^8]: Interjurisdictional cooperation in service delivery is supported
    by the World Bank (2003) study, p. 14. Several mayors indicated that
    it was inevitable that they would need to cooperate with neighboring
    municipalities, crossing both entity and cantonal lines given the
    nature of watersheds and population centers.

[^9]: We fully support some of the Bank's recommendations concerning:
    "establishing the parameters of local revenue at the level of
    organic law," eliminating tax compensation, reassigning the property
    tax exclusively to the municipalities, allocating the sales tax and
    future VAT proportionately on a per capita basis, decentralize tax
    administration etc. See World Bank (2003) pp. 54-57.

[^10]: (Official Journal Federation BH, 8 November, 1995)

[^11]: Several cantonal local government laws enable "any citizen" to
    appeal to the Constitutional Court if the "citizens'" right to
    self-government were denied. This language is not strong enough, and
    does not specifically give the municipality the right to directly
    appeal to the Constitutional Court.

[^12]: See Federation Constitution, IV-C-3, Article 10 on the functions
    of the Constitutional Court.