LOCAL GOVERNMENT FINANCE SYSTEM IN SERBIA How to get through the crisis ? Aleksandar Bućić Strasbourg, October 11-12, 2010

LAW ON LOCAL GOVERNMENT FINANCE (LGFL) – main results before the crisis Intergovernmental transfers anchored to GDP (1.7%) Equalization component based on shared revenues PIT becoming most important shared revenue (40% for local governments) Annual Property tax as own source revenue for LGs Establishment of so called “Local Tax Administrations” Institutionalized dialogue between the National government and local governments – through the Intergovernmental Finance Commission Strasbourg, October 11-12,

LOCAL GOVERNMENT REVENUES - before and after the new law LG REVENUES BEFORE AND AFTER THE NEW LAW (in 2009 RSD, inflation adjusted) RevenuePer CapitaRevenuePer Capita % Change TOTAL REVENUE 178,366,565,75623,789194,982,628,93526,005109% REVENUE FROM THE NON-EARMARKED TRANSFER AND AS % OF TOTAL REVENUE 24,659,748,83114%41,622,462,25921%154% Strasbourg, October 11-12, Source of data: Treasury Administration, Ministry of Finance Prepared by: Anthony Levitas - Sharing the burden statistical brief, Exchange rate on October 8, 2010: 1 EUR = RSD

LOCAL GOVERNMENT REVENUES - before and after the suspension of the LGFL Strasbourg, October 11-12, Source of data: Treasury Administration, Ministry of Finance Prepared by: Anthony Levitas - Sharing the burden statistical brief, Exchange rate on October 8, 2010: 1 EUR = RSD LG REVENUES BEFORE AND AFTER THE SUSPENSION OF THE LGFL (in 2009 RSD, inflation adjusted) RevenuePer CapitaRevenuePer Capita % Change TOTAL REVENUES194,982,628,93526,005165,452,711,11022,006-15% REVENUES FROM THE NON-EARMARKED TRANSFER AND AS % OF TOTAL REVENUE 41,622,462,25921%28,157,725,90517%-20%

IS THE BURDEN OF THE CRISIS SHARED EQUALLY BETWEEN THE CENTRAL AND LOCAL LEVEL (IN BILLION RSD, nominal) / GDP2,302.22,722.52, % 2. CONSOLIDATED GENERAL GOVERNMENT REVENUES 1,002.01,143.61, % 3. CONSOLIDATED GENERAL GOVERNMENT REVENUES AS % of GDP 43.5%42.0%40.7%96.9% 4. CENTRAL GOVERNMENT REVENUES % 5. LOCAL GOVERNMENT REVENUES (current) % 6. TRANSFERS TO LOCAL GOVERNMENTS % 7. LOCAL GOVERNMENT REVENUES AS % of GDP 6.7%6.5%5.6%86.1% 8. LOCAL GOVERNMENT REVENUES AS % of CONSOLIDATED REVENUES 15.4% 13.6%88.3% 9. TRANSFERS AS % of GDP1.6%1.3%0.9%69% 10. TRANSFERS AS % of CENTRAL GOVERNMENT REVENUES 6.3%5.8%4.1%71% Strasbourg, October 11-12, Sources: Statistical Office of the Republic of Serbia Ministry of Finance, Republic of Serbia and Treasury Administration Exchange rate on October 8, 2010: 1 EUR = RSD

LOCAL GOVERNMENT REVENUES – Structure and trends during the crisis Own revenues: Importance during the crisis Property tax devolution Local tax administrations (2007 – 2009) Most important buffer for local government budgets Property tax assessment, collection, control, enforcement Poor administration in previous period Challenges regarding the collection Role of the Association of Local Governments (SCTM) Strasbourg, October 11-12,

PROPERTY TAX REVENUES, sample of local governments, period, in 000 RSD nominal BELGRADE : total (1+2) 1. Property tax – natural persons 2. Property tax – legal entities KRAGUJEVAC : total (1+2) 1. Property tax – nominal persons 2. Property tax – legal entities VRANJE : total (1+2) 1. Property tax – natural persons 2. Property tax – legal entities VRNJACKA BANJA : total (1+2) 1. Property tax – natural persons 2. Property tax – legal entities ZABARI : total (1+2) 1. Property tax – natural persons 2. Property tax – legal entities TOTAL GROWT (%) - nominal-8,13%39,99%28.08% Strasbourg, October 11-12, Source: Ministry of Finance – Treasury Administration Notes: Selected sample represents 5 local governments being the only one to take over the property tax collection in Also, these 5 local governments took over relevant databases from central tax administration in late August 2007 thus full effect is exhibited in 2008.

LOCAL GOVERNMENT REVENUES – Structure and trends during the crisis What happened during the crisis? Total own revenues declined by 10% (real terms) Specially revenues related to investments, real estate market and income from local assets (land development charge, lease income) Compensation of losses through more aggressive administration of local taxes, fees and charges Property tax revenues and revenues from land use charge increased by 15% and 18%, respectively “Notorious” business sign fee revenues declined by 1% Wage tax (local share of 40% collected) was most stable local revenue during the crisis Strasbourg, October 11-12,

STRUCTURE OF LG OWN REVENUES (in 2009 RSD, inflation adjusted), in % Change Self-Contribution Fee 1,8952,0478% PROPERTY TAX* 7,9899,14815% of which Physical Persons3,5764,38723% Legal Entities4,4144,7618% Communal Fees and Charges and other local income 11,17812,36911% Business Sign Fee 3,2803,261-1% LAND USE CHARGE 9,73311,43918% Land Lease Fee and Lease Income 9,4377,099-25% Land Development Charge 24,69815,124-39% Fines, Penalties, Interest and Dividends 2,2132,56516% Total own revenues 70,42563,052-10% OWN REVENUES as a % of total 37%40% Strasbourg, October 11-12, Source of data: Treasury Administration, Ministry of Finance Prepared by: Anthony Levitas - Sharing the burden statistical brief, Exchange rate on October 8, 2010: 1 EUR = RSD

STRUCTURE OF LG REVENUES Strasbourg, October 11-12,

STRUCTURE OF LG EXPENDITURES BY FUNCTION: 2007 and 2009 (in 000, 2009 RSD) Strasbourg, October 11-12, % of Total 2009 % of Total % Change 2,3,7 Defense, Safety, Health2,094,5941%1,452,2541%-31% 5 Environment3,651,9182%4,242,1112%16% 0 Social Protection6,583,7033%8,174,9375%24% 8 Sport5,161,0653%6,117,1183%19% 9 Secondary Education5,611,1343%3,854,5932%-31% 6 Housing8,502,1264%7,339,7564%-14% 9 Primary Education10,390,5105%8,716,9295%-16% 8 Culture12,375,4796%11,221,5166%-9% 9 Preschools12,673,9656%16,177,7599%28% 4 Economic Activity14,051,4647%10,261,5126%-27% 4 Transport and Road31,880,67716%22,769,87713%-29% 1 General Services40,949,00320%36,787,81121%-10% 6 Community development48,164,29024%38,045,74322%-21% TOTAL 202,089,935100%175,161,921100%-13% Source of data: Treasury Administration, Ministry of Finance Prepared by: Anthony Levitas, Sharing the burden statistical brief, Exchange rate on October 8, 2010: 1 EUR = RSD Note: numbers in front of the functions represent coding of functional classification

LOCAL GOVERNMENT EXPENDITURES What happened during the crisis? Significant fall of investment spending by 16% Reduced capital and operating subsidies to PUC and local communities (MZ) PUCs running large amounts of payment arrears Functions: steep decline in community development (-21%), transport and roads (-29%) and general economic activity (-29%) Functions: preschools increase (28%), social protection (24%) Share of investments in overall expenditures fell from 39% in 2007 to 29% in 2009 Rapid growth of payment arrears on the local level Strasbourg, October 11-12,

Outstanding payment arrears of LGs, public utility companies (PUCs) established by LGs and institutions and organizations founded by LGs on December 31, 2008, in 000 RSD To State Public Company (EPS) – electric power To Oil Industry of Serbia (NIS) – fuels, petroleum To State Public Company “Srbijagas” – supplier of natural gas for heating To other suppliers and service providers (construction companies) Other (to employees, etc) Total 1. City / Municipal administration PUCs Institutions and organizations (including schools) TOTAL ( ) Strasbourg, October 11-12, Source: Standing Conference of Towns and Municipalities, survey, 2010 Exchange rate on October 8, 2010: 1 EUR = RSD

Outstanding payment arrears of lGS, public utility companies (PUCs) established by LGs and institutions and organizations founded by LGs, on April 30, 2010, in 000 RSD To State Public Company (EPS) – electric power To Oil Industry of Serbia (NIS) – fuels, petroleum To State Public Company “Srbijagas” – supplier of natural gas for heating To other suppliers and service providers (construction companies) Other (to employees, etc) Total 1. City / Municipal administration PUCs Institutions and organizations (including schools) TOTAL ( ) 16,925,233 Strasbourg, October 11-12, Source: Standing Conference of Towns and Municipalities, survey, 2010 Exchange rate on October 8, 2010: 1 EUR = RSD

LONG TERM LGs BORROWING (in 000 RSD) Source: Public Debt Administration, Ministry of Finance TOTAL AMOUNT27,016,11136,136,90646,720,706 AMOUNT PAID OFF1,293,9364,689,7815,507,318 OUTSTANDING DEBT25,718,82331,447,12541,213,388 OUTSTANDING DEBT GROWTH (%, nominal) 22%31% Strasbourg, October 11-12,

WHAT HAS TO BE DONE ON THE POLICY LEVEL? Need to intensify the dialogue between the National Government and local governments Strengthening the role of Intergovernmental Finance Commission Restoring transfers up to the amount existing before the crises If not restoring, then redefining allocation formula Reconsidering formula for equalization transfer Revenue capacity and standards for expenditures? Strasbourg, October 11-12,

WHAT HAS TO BE DONE ON THE POLICY LEVEL? Improvement of legal framework and administrative procedures for property tax Lifting caps (ceilings) on utility prices and bringing them to full cost recovery level Regulatory regime for efficient and better quality service provision of local utilities Benchmarking the public services of local governments (Ministry of finance & Standing Conference of Towns and Municipalities) Strasbourg, October 11-12,

WHAT HAS TO BE DONE BY LGs THEMSELVES? Improvement of administration and collection of own revenues Reduction of operating costs Improvement of asset management Prudent use of debt and to maintain investment efforts Considering alternative ways for capital finance (PPP, municipal bonds) Strasbourg, October 11-12,

MAYORS MARCHING ON THE NATIONAL GOVERNMENT IN BELGRADE: RESTORE THE LAW! October 8, 2010 Strasbourg, October 11-12,

MAYORS MARCHING ON THE NATIONAL GOVERNMENT IN BELGRADE: RESTORE THE LAW! October 8, 2010 Strasbourg, October 11-12,