Decentralization and Public Administration Reform

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Decentralizationand Public Administration

Reform

P A R T I .

M A S T E R I N G D E C E N T R A L I Z AT I O NA N D P U B L I C A D M I N I S T R AT I O N R E F O R M S

I N C E N T R A L A N D E A S T E R N E U R O P E

32 L O C A L G O V E R N M E N T A N D P U B L I C S E R V I C E R E F O R M I N I T I A T I V E

M A S T E R I N G D E C E N T R A L I Z A T I O N A N D P U B L I C A D M I N I S T R AT I O N R E F O R M S I N C E N T R A L A N D E A S T E R N E U R O P E

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Decentralization in CEE Countries:Obstacles and Opportunitites

K e n n e t h D a v e y

M A S T E R I N G D E C E N T R A L I Z A T I O NA N D P U B L I C A D M I N I S T R AT I O N R E F O R M S

I N C E N T R A L A N D E A S T E R N E U R O P E

D E C E N T R A L I Z AT I O N A N D P U B L I C A D M I N I S T R AT I O N R E F O R M



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D E C E N T R A L I Z A T I O N I N C E E C O U N T R I E S : O B S TA C L E S A N D O P P O R T U N I T I E S

Decentralization in CEE Countries:Obstacles and OpportunitiesK e n n e t h D a v e y

INTRODUCTION

Decentralization is a protracted and difficult process. Somuch is clear from the experiences related in this book.Vested interests and intractable problems subject reformto long delay and prevarication. Even when a compre-hensive package is enacted, as in Hungary in 1990/91,operational problems arise which defy solution. A changeof government can bring the process to a halt, as in Polandin 1993, or move it in a false direction, as in Slovakia thefollowing year.

The polish experience also shows that persistence pays. Ifreformers have a clear program and sustained determina-tion, the opportunity to move ahead occurs sooner or later.Political momentum can be short-lived, however, and thereforms have to be ready for launching while the favorabletide lasts.

This chapter attempts to summarize a number of the issueswhich arise from the country experiences and to addressfour key questions:• What are the key components of a decentralization

program?• What are the major difficulties associated with each

of these components?• What are the main sources of resistance to reform?• What circumstances provide a favorable opportunity

for promoting decentralization?

ELEMENTS AND STAGES OF REFORM

The introduction of pluralist democratic government atnational level has led in almost all CEE countries to animmediate demand for a parallel reform in local administ-ration. One of the first acts of newly elected parliamentsin countries such as Hungary was to provide for the electionof representative municipal councils with an executivemayor selected either by the voters at large or by the council.

What varied greatly, however, was the speed with whichthese elected bodies were vested with the powers andresources that determined their real weight in local affairs.Four sets of issues typically pose challenges:• Territorial structure• Assignment of competencies• Financing• Transfer of state property

Territorial Structure: the Municipal Tier

Problem issues concerning territorial structure have typicallyarisen at both primary and upper tiers of local government.In the majority of post-Communist states, local governmentlegislation often reinforced by constitutional provisionshas allowed human settlements of any size to claim thestatus of an autonomous municipality. This has beenexploited by thousands of small villages, often reactingagainst forced amalgamations and deprivation of servicesand development under Communist regional planningpolicies. The result is that the basic level of local governmenthas a highly fragmented territorial structure as illustratedin Table 1.

This situation is not universal; in Bulgaria and Poland,for example, the basic levels of local government haveaverage population sizes well over 5,000 which have beenthe target minimum in western European reorganizationsand are viewed empirically as adequate for most municipalservices. (Council of Europe, Colloquy on the size ofmunicipalities, efficiency and citizen participation,Budapest, 1994).

However, most CEE countries have thousands of com-munities with municipal status with populations below1,000 (and a substantial proportion of these fewer than200). Reform programs are challenged by the inability ofsuch communities to provide administrative and financialcapacity and the scale economies and catchment areas



institutions at regional level that can provide a focus forplanning and partnership in economic and social develop-ment. Moreover, most post-Communist countries have alegacy of powerful state administration at a regional/county level that do not fit comfortably in a democraticsystem of government; they lack direct accountabilityeither to a local electorate or to national ministries, andare often vested with considerable authority to intervenein municipal affairs.

While most reform programs have contained a commitmentto establish an upper tier of self-government, doing so hasoften proved a tortuous and protracted process. Numbersand boundaries pose endless possibilities of argument,historical identities conflicting with ethnic loyalties,administrative rationality and the European Union’s ob-session with minimum population sizes for its regionaldevelopment funding. Cities fight to become or remainregional capitals because of the facilities to which this statusapparently entitles them.

There are also strong arguments about the responsibilitiesof upper tier self- governments. While the specialized serviceinstitutions may be obvious candidates for devolution tothem, it is arguable whether they should take over manyof the tasks of regional bureaucracy which are regulatoryor very specialized (meteorology or cadastral registration,for example,) by nature, or aimed at overseeing the opera-tions of municipalities.

These contentious issues often take many years to resolvebecause forces at both national and municipal level lacksufficient positive enthusiasm for the creation of potentiallypowerful political rivals.

Table 1Average Size of (Municipal) Local Governments in Selected Countries

Country % of Municipalities Average Population Average Area

Below 1,000 Citizens [sq. km]

Bulgaria 0 35,000 432

Poland 0 16,000 130

Hungary 54 3,300 32

Slovakia 68 1,900 17

Czech Republic 80 1,700 13

SOURCE: P. Swianiewicz: Size of Local Government, Local Democracy and Efficiency in Local Services’ Delivery inCentral and Eastern Europe. Draft paper prepared for LGI, 2001.

necessary for such essential services as primary educationor waste disposal and for the employment of staff qualifiedin law, engineering, physical planning etc.

There are, a range of solutions to territorial fragmentationincluding amalgamation of smaller units, performance oftasks through inter-municipal bodies, and assignment ofselected tasks to either central town municipalities or tohigher tiers of self- government. For varying reasons, reformprograms find it extremely difficult to make a strategicchoice between these options. Architects of reform are soobsessed by the economic costs and irrationality of frag-mentation that they refuse to accept the political (and oftenconstitutional) impossibility of amalgamation. Localgovernment associations resist the compulsory frameworksthat usually accompany inter-municipal cooperation onany significant scale. Assigning tasks to central towns isunpopular with villages, and assigning them to highertiers is unpopular with the larger towns. Failure to drivea solution forward often leaves in the hands of local stateadministration functions that should be managed bylocally accountable bodies.

Territorial Structure: Higher Levels

Most CEE states have faced the challenge to establish ahigher tier of self-government. The municipal tier, whetherhighly fragmented or not, does not provide adequatecatchment areas for the more specialized services such assecondary education, hospitals, or residential care institu-tions. There has been increasing pressure, particularlyfrom the European Union, to establish representative

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Assignment of Competencies

Most local government legislation assigns responsibilityto the basic municipal level for what are often describedas “communal services.” These are elements of physicalinfrastructure including local roads and lighting, heating,water supply, sanitation, waste management, parks, andcemeteries. Management of housing is also includedthough the extent and nature of these tasks-changes withprivatization of the public housing stock. These are oftenrecognized as “own” or “original” functions of municipali-ties; difficulties attach more to finance and property rightsthan to the location of responsibility.

The most contentious item in devolution of physicalinfrastructure is water supply. Although the constructionof individual pipelines, treatment plants etc may have beenfinanced by local budgets, water supplies have customarilybeen operated in the Communist era as integrated unitscovering a range of urban and rural settlements. Decentra-lization has not been too difficult where local governmentshave agreed to the conversion of these regional entities intojoint stock companies with constituent municipalitiessharing the equity. Where, however, they have insisted onthe transfer of assets to the municipality where they arelocated, grave operational difficulties and disputes haveinevitably arisen.

Greater difficulties in the reform process surround theresponsibility for the human services (education, health,social welfare and culture) and the local regulatory tasks(for example, physical planning and construction control,civil registration, trade and occupational licensing andchild protection). Uncertainty and argument focus on twoissues. The first harks back to territorial structure—themismatch between catchment areas for schools, hospitals,social care institutions etc and the size of local governments,together with the inability of smaller municipalities toemploy qualified professional staff. These difficulties donot in themselves challenge the principle of decentralization,but pose practical difficulties that, as discussed before,often exceed the political support for decentralization orthe willingness of interest groups to compromise.

The second issue concerns the proper division of responsi-bility between national and local government; it is intrin-sically more difficult to resolve because it involves principleas well as practice. Both the human services and regulatorytasks are often defined as tasks of “state administration”rather than “local self government” which can at most bedelegated rather than devolved. In terms of the human

services, this definition implies that there are universalrights to minimum standards of provision that the Statemust guarantee. In respect of the regulatory tasks, thedefinition implies that the task involves an impartial app-lication of national laws to the circumstances of individualcitizens, in which there is no room for local variation ordiscretion; these are seen as roles for qualified bureaucrats,not elected politicians.

There are, of course, strong countervailing arguments fordecentralization of both human service and regulatorycompetencies. The services are of strong concern to citizens,putting pressure on local governments to devote resourcesto their development. Local councilors and parents arejust as worried as the Minister of Education if a school isfailing its pupils. To retain such services under State mana-gement is to exclude the contributions of local resourcesand local accountability which local government is understrong pressure to provide.

There is ample evidence from Western Europe that nationalminimum standards of human services can be guaranteedwithin a decentralized framework of administration. Theproblem is, however, that such guarantee depends on acombination of arrangements that are relatively sophisti-cated and unfamiliar to a post-Communist state. The firstis a normative system of financial equalization that ensuresthat national standards can realistically be achieved despitedifferences in local revenue bases. The second is nationalsystems of inspection which can provide positive guidanceas well as negative criticism, and which can be divorcedfrom administrative management and political bias. Thethird is overcoming the difficulties of inappropriate ter-ritorial structures that have been discussed in the previoussection. Time and determination are required to developsuch framework for devolution.

Until a satisfactory framework for devolving the humanservices is developed, various interim solutions apply. Insome cases service management is retained by State agencieswhich suffer from the lack of local accountability and maywell be under-resourced. In a second scenario responsibi-lities are shared as where local governments manage schoolsbut teachers are paid by the State, health service facilitiesare provided by local government, but funded principallyby health insurance agencies, or the State provides socialbenefits but local government provides welfare services.In a third case competencies are fully transferred to localgovernment, but subject to severe incidence of ‘non-fundedmandates,’ i.e. decisions made unilaterally by sectoralministries like teachers’ salaries increases or extra social




benefits which are not accompanied by changes in localrevenues.

Similarly, the argument that regulatory tasks should beexcluded from local self- government jurisdiction becauseof their judicial nature is oversimplified. Many regulatorydecisions do involve elements of subjective judgment, e.g.the capacity of a family to bring up its children, the archi-tectural consistency of a proposed new construction, thebalance between economic benefits and environmentalcosts of a new industrial estate or retail park. Moreover,decisions made within the apparently neutral frameworkof state bureaucracy may be no more protected frompolitical influence than in local government, simply lessexposed to public scrutiny. Moreover, local governmentsmay well be more concerned to see that such administrativeprocesses are discharged in a “client friendly” manner.Decentralization of regulatory tasks may well be the mostsatisfactory solution in the long term, but again it dependson the sustained development of a supportive environ-ment. A key element is professional staffing requirementsand the combination of training, qualification andprofessional association that can alone ensure adequateprotection and weight within local government.

Finance

The dependence of effective decentralization on an adequateand equitable financial base needs no explanation. Mostpost-Communist countries inherited inter-governmentalfinance systems, in which the cost of local public servicesfell initially on local budgets. These were funded partially,if not completely, by local collections of a wide basket oftaxes, fees and charges including taxes on both personaland enterprise incomes as well as land. There was a systemof redistribution, both vertical and horizontal, but lackinga normative base, subject to arbitrary variation in annualbudgets and much political bias in its application at bothnational and regional levels. Liabilities for taxes and chargesand their rates were determined nationally. There werestrong disincentives for revenue mobilization or costdiscipline. Much local budget expenditure subsidized lowcharges for utility services.

This framework was clearly incompatible with the func-tioning of a legally and politically autonomous system oflocal government system. Moreover its inherent inefficiencyis increasingly intolerable given the massive shifts frompublic to private consumption and the consequent fiscalstress experienced by post-Communist governments. In

financial terms decentralization has demanded a range offundamental reforms.

Firstly, it has been necessary to distinguish clearly betweenthe responsibilities of different levels of government,national, regional and local, for meeting the costs of specificservices. This has to be in line with the assignment ofcompetencies, and the process is, therefore, subject to theuncertainties and arguments outlined in the previoussection.

Secondly, decisions are required on which revenue sourcesshould accrue exclusively to local governments, whichshould be subjected to some intergovernmental sharing (andin what proportions), and which should be retained exclu-sively by the State Budget. This poses several difficulties.Until the assignment of responsibilities have been resolvedit is impossible to quantify the relative resource needs ofindividual tiers of government. The structure of taxationmay be concurrently subject to reform to adjust it to therequirements of a market economy. Taxes on enterprisesthat have previously accrued, at least in part, to local budgetsmay no longer be suitable for such assignment once prob-lems of origin or disparity can no longer be solved by ar-bitrary redistribution.

Thirdly, there are strong arguments of accountability andefficiency (together with the provisions of the EuropeanCharter of Local Self-Government) for giving local govern-ments some power to determine liabilities for local taxes,fees and charges. Ministries of finance have been in nohurry, however, to surrender their exclusive powers in theserespects, often supported by macroeconomic argumentsconcerning the control of inflation and the encouragementof private investment. Nor have they been under pressurefrom local government lobbies, eager to obtain larger taxshares rather than taxing powers. The demands of localgovernment leaders have been generally short sighted inthis respect, ignoring the fact that a taxing power is lesshostile to political fortune than a tax share.

Fourthly, a system of redistribution may still be needed,particularly if extensive responsibilities for the humanservices have to be financed by local governments, requiringrough equality in per capita expenditure. This demandsthe creation of equalization transfers, either vertical orhorizontal based on normative assessments of the differencesbetween local needs and resources. Calculating such for-mulae poses technical challenges of measurement and datacollection, but also political judgment over the balancebetween equality and incentive.

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Fifthly, the demands of both efficiency and equity andthe increasing intervention of private sector ownership ormanagement have led to progressive decline in generalsubsidization of public utility services. This involves thechallenge to apportion responsibility between the Stateand local government for making such decisions, forimposing the consequent rises in consumer tariffs, forfunding and managing the individually targeted compen-sation for poorer consumers of essential services, and formeeting the increasingly urgent demand for investmentin repair and upgrading.

Finally, the greater the degree of fiscal decentralizationthe greater the need for improved systems of account-ability. EU accession processes, for example, highlight theneed to develop systems of external audit of localgovernment and to restrict indebtedness, measures thatare both unpopular and technically demanding.

To list this agenda (which excludes the practical issues ofrevenue assessment, budget management etc in a compe-titive mixed economy) is to indicate its complexity andthe demands it makes both on technical capability andpolitical courage.

Property Rights

It has been an obvious and generally accepted principleof decentralization that transfer of ownership of Stateproperty should accompany assignment of functionalresponsibilities to any legally autonomous tier of govern-ment associated with their performance. In practice, thishas often proved a contentious and protracted process.

Communist states obeyed the principle of the unity ofstate property. However, administration of property wasoften delegated to regional or local executive bodies, usuallyaccording to location or catchment area. Regional admi-nistration felt that an electricity supply belonged to them,so that they appointed the directors, controlled the budgets,disposed of surplus land etc, as though they were legalowners. The same applied to the attitude of city officialsto a local hospital. This was often reinforced by the factthat capital investment in a utility plant or a service insti-tution was often funded by regional or local budgets.

The restitution of property to pre-Communist ownershas added complexity to the process. In many cases, serviceinstitutions like schools, residential homes and hospitalswere originally built and managed by voluntary bodies,

usually religious. The principle of restitution has alsoencouraged municipal governments to demand return ofassets they constructed in pre-Communist times, whetheror not they now accord with their functional responsibility.

Both of these earlier patterns of ownership or managementhave complicated the process of transferring propertyrights in line with the assignment of competencies. Citygovernments claim ownership of hospitals or secondaryschools that serve a much wider area with consequentdifficulties for the allocation of running costs and controlover access. Municipalities, on the other hand, are maderesponsible for the provision of utility services that arethe monopoly of regionally owned and managed networks.Technical solutions are possible, such as joint ownershipof utility companies, but application is obstructed byarguments over the apportionment of shares and theopposition of current management who have succeededin some countries in thwarting the process by buying outthe assets or the contractual rights to manage them.

Property transfer is also subject to systemic difficulty, suchas the lack of inventories and cadastral records and over-load of the State apparatus by the processes of restitutionand privatization. Again technical difficulty combines withpolitical conflict and ambivalence to impede and delayan essential component of the decentralization program.

VESTED INTEREST

What the previous sections have tried to convey is thatbeyond the simple creation of legally autonomous, electedbodies at municipal level, decentralization is a complexand contentious process. It involves choices which areeither politically or technically difficult (or both), such asthe territorial structure of regional administration. Itrequires the reconciliation of conflicting interests, forexample between national responsibilities and localdiscretion in the management of a service like education.It demands tenacious spadework, for example to devisean appropriate equalization formula or a workableframework for inter-municipal cost sharing.

To drive the process through, demand, determination andpositive enthusiasm. These two qualities are ofteninsufficient to overcome vested interest and inertia. Someinterest groups are bound to oppose decentralization. Thebureaucracies of sectoral ministries and local stateadministrations are likely centers of opposition, havingmuch power to lose or being faced with unfamiliar roles.




Ministries of finance will be nervous, their anxiety overfiscal decentralization reinforced by IMF demands forstrict control over levels of taxing and spending. Othersmay well be ambivalent. Mayors of smaller municipalitiesare often reluctant to see human service and regulatoryresponsibilities transferred to local governments, becausea narrow range of competence preserves their freedomfrom cooperation with neighbors and from state oversight.The larger towns may well see the introduction of a highertier as a threat. Local government associations may wellbe ambivalent or in conflict over particular stages of reform.

A further hurdle is coalition politics. Most CEE countrieshave proportional election systems that rarely produceoverall majorities for a single party. Governments usuallycomprise coalitions of parties that may not share a uniformview of decentralization. However much priority maynominally attached to such policy, it is difficult to persuadesectoral ministries to tow the line in terms of functionaldevolution or ministries of finance to share taxes if thereis insufficient cabinet discipline and prime ministers areconstantly afraid of parties walking out.

OPPORTUNITY

Nevertheless, opportunities for pushing through adecentralization program do arise, often unexpected. Theoverthrow of an autocratic regime may be one suchoccasion, leading to a determination to remove a regionalapparatus that may have supported the regime in power.The 1998 election provided this opportunity in Slovakiaalthough it has only been partially exploited.

The threat or occurrence of civil war may demand radicaldecentralization to give ethnic groups a sufficient degreeof local autonomy to buy off attempts at secession. Thecurrent legislative program in Macedonia is a clearexample.

Recent developments in Ukraine illustrate another pathto reform. The severity of the State’s budget crisis en-couraged Government to side with Parliament in adoptinga major program of fiscal decentralization involving a clearseparation of functional responsibilities between State,province and city budgets, accompanied by an equallyexplicit division of revenues and a formula system ofequalization. Although enacted through financial legis-lation, this reform has greatly enhanced local autonomyby severing the chain of vertical dependence.

Finally, negotiations over accession to the European Unionhave put pressure on candidate countries to completestructural reforms including the formation of regional tiersof self-government.

PREPAREDNESS

These are examples of circumstances that give decentrali-zation programs a favorable wind behind their sails. Butthe wind can lose force or change direction. The importantthing for reformers is to be able to take advantage of thewind while it is still behind them and blowing stronglyenough to overcome opposition and inertia.

This means preparation. Two examples bear this out. TheHungarian reforms in 1990/91 were far more comprehen-sive than in other CEE countries because the HungarianInstitute of Public Administration took advantage of amore liberal political climate to prepare them during thelate 1980s. The incoming Polish administration in 1997was able to push through the creation of two higher tiersof self-government with remarkable speed, again becauseso much preparatory work had been done during theprevious frustrating electoral period.

By contrast, the Slovak coalition which came to power in1998 quickly adopted a strong decentralization platform,but has taken early four years to implement it and thenonly in a diluted form. Argument over regional boundarieshas highlighted the conflicts that have delayed reform,but equally debilitating has been a failure to formulate aclear model of how to devolve state competencies on avery fragmented municipal structure. The absence of acoherent model of inter-municipal relations has allowedsectoral ministries to procrastinate over the devolution ofcompetencies, which in turn has delayed the eliminationof the local state administration and the introduction of apermanent structure of intergovernmental finance; theMinistry of Finance has been able to argue, with somejustice, that it did not know the scale of the finances whichwould have to be transferred to local government and towhich tier. Lack of technically coherent solutions has beenjust as responsible for the delays as the ambivalence ofcoalition partners and xenophobia.

Earlier sections have highlighted the technically prob-lematic areas for which blueprints have to be prepared.Particularly important are the questions of inter-municipalcooperation in the territorially fragmented states, (and its

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implications for the roles of upper tiers of self govern-ment), the precise divisions of responsibility between theState and local government in respect of education, healthcare and social welfare, and the basic elements of inter-governmental finance, namely the division of tax revenuesand the system of equalization.

Reformers can never quite know when their day will come.When it arrives, they will still have many vested intereststo surmount. Their success will depend heavily, not onlyon political support, but also on averting excuses for delay.A politically and technically coherent set of proposals willenable reformers both to catch a favorable tide and, moreimportantly, to keep up momentum.




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Decentralization and Public Administration Reform