Paweł Swianiewicz Warsaw University Local Government Borrowing in Central and Eastern Europe: Comparative Conclusions

Local Government Policy Partnership Programme Co-financed by the Local Government and Public Service Initiative (LGI) of the Open Society Institute and the British Government’s Department for International Development (DFID) 9 policy studies in 2000-2003, each covering several countries of the region: Public perception of local governments Housing policy Educatiobn Communal services Financing local government investments Size of local governments Transparency/ Corruption in Local Governments Local Economic Development Local Government Borrowing

Local government borrowing – seven countries involved: Russia Poland Hungary Czech Republic Slovakia Estonia Romania

Local government borrowing – main issues Why to borrow? When to borrow, for what and how much? Legal regulations Limits of local indebtednes Evolution of local government borrowing policies and indebtedness level Variation between local governments within individual countries Major barriers for more efficient functioning of the borrowing market

To borrow or not to borrow? Not for current expenditures Yes, for capital purposes because: Inter-temporal equity principle Occasion to accelarate economic development Occasion to reduce operational costs Longer lasting capital projects cost more Increases access to donor / EU money

Local borrowing in CEE countries – overall conclusions 1 there are several rational arguments for wider using of borrowing to finance local government investments.And especially in countries where this method has not been popular yet, there is a case to investigate this option more thoroughly.. local borrowing should be monitored. It requires complete, precise and up-to-date information. availability of information - transparency and public access to data on local borrowing. Public finance is public, so it cannot be confidential. local borrowing a wider context – stability of public finance, predictability of local revenues, condition of the banking system etc. local governments should have considerable amount of fiscal autonomy and their borrowing policies should not be subordinated to the debt made by the central government.

Local borrowing in CEE countries – overall conclusions 2 local borrowing market depends on fiscal autonomy – namely control of local government over its revenues. Development of the local borrowing market requires liquidation of substantial arrears in payments. form of local indebtedness which plays an important role in several countries, but which we must not recommend is a system of inter-governmental loans. regulations on local borrowing need to be predictable and this requires first of all stability. the “golden rule of the balanced budget” should be applied in Central and Eastern Europe

Local borrowing in CEE countries – overall conclusions 3 effective implementation of the “golden rule” requires a clear separation of capital and operating budgets, agreed rules are really observed in practice. On a local level, there is still a demand for developing expertise of the staff. In practice, most of local governments are prudent in their borrowing policies, but there are some (discussed in national reports) exceptions to this rule and they call for an existence of clear external regulations.