1 Bosnia and Herzegovina: Creating a Stable Decentralized Fiscal System The World Bank

2 Introduction I ( Comparative Size of Intermediate Governments)

3 Introduction II (Comparative Size of Local Governments)

4 Main Issues and Options on: A – Administrative Structure B – Expenditure Responsibilities C – Revenue Assignment D – Fiscal Imbalances and the Transfer System E – Access to Borrowing and Local Infrastructure Investment

5 A – Administrative Structure Main Issue: Inadequate decentralization Strategic Direction: Completing decentralization beyond the Entity and canton levels by allowing more significant degree of autonomy to municipalities, while increasing credibility and effectiveness of the State as a central coordinating authority Key Suggested Measures: Redress the design of fiscal decentralization Set up a permanent national Working Group (e.g., Technical Advisory Secretariat of Experts on Decentralization) Adopt central uniform regulation, financing, monitoring and general coordination for the post-conflict programs Consider establishing in each Entity a multilevel “Coordinating Fiscal Decentralization Implementation Body”

6 B – Expenditure Responsibilities Main Issue: Too broad and poorly defined responsibilities to each government level Strategic Direction: Specifying expenditure responsibilities where sub-Entity governments can be more effective and efficient (than the State or Entity), by empowering local authorities to perform their functions, and making them fully accountable for the results Key Suggested Measures: Consolidate all fiscal transactions (including the current off- budget operations) into the respective government budgets Decentralize adequate decision-making powers (on functions/ competencies) beyond the Cantonal and Republican levels Consider re-assigning concurrent responsibilities Restructure local utility companies, including their administration, tariff policies and service delivery systems Address the challenge of substantial and increasing disparities in per capita expenditures across Cantons and municipalities

7 C – Revenue Assignment Main Issue: Lack of revenue autonomy, and low significance of municipal own revenue sources, which have seriously undermined the accountability of local authorities Strategic Direction: Responsibly increasing revenue autonomy and predictability in order to improve allocative efficiency, governance and accountability Key Suggested Measures: Complete the implementation of the fiscal decentralization Strengthen local revenue autonomy and accountability Ensure sub-Entity governments’ revenue more predictable and reliable Review the tax assignment and tax-sharing mechanisms Decentralize local tax administration asymmetrically

8 D – Fiscal Imbalances and the Transfers System Main Issue: Fiscal imbalances in BiH are considerable, which does not help stability and nation building efforts Strategic Direction: Reconciling efficiency and equity concerns within the BiH fiscally decentralized system Key Suggested Measures: Review the current system of intergovernmental grants Consider building up a transfer resource pool to compensate for the vertical fiscal imbalances and horizontal fiscal disparities. Consider establishing general purpose equalization transfers mechanisms (a “Cantonal Participation Fund-CPF” and a “Municipal Participation Fund-MPF”)

9 E – Access to Borrowing and Local Infrastructure Investment Main Issue: The financial institutions in BiH are still weak and the capital market is highly deficient, marked by obvious market failures. Strategic Direction: Setting up incentives for sustain-able sub- Entity debt management system based on market rules, while operating sound interim measures and institutions to respond to urgent local infrastructure financing needs Key Suggested Measures: Consider setting up basic incentives to ensure development of a healthy financial system (incl. at sub-Entity) in long-term Consider developing critical institutional arrangements for responsible local infrastructure financing in the interim post- conflict era, by augmenting the LDP with a grant component Consider establishing an official monitoring agency to keep records and monitor development of subEntity capital markets and indebtedness (including contingent liabilities)

10 Bosnia and Herzegovina Thank You