OSCE Mission to Skopje supports process of fiscal decentralization

Since 1 July 2005, the Government in Skopje has officially been devolving powers to the local level. The spotlight is now on fiscal decentralization, which entered its second phase on 1 July this year.

One of the main challenges of fiscal decentralization is that municipalities should become capable of generating a higher level of their own revenues, as well as building their capacity to manage funds from the state budget in order to successfully perform their tasks, as laid out in the 2002 Law on Local Self-Government.

"Municipalities need stable income and a viable tax collection system to be able to provide essential services to their citizens," said Michael Frankland, Head of the OSCE Spillover Monitor Mission to Skopje's Public Administration Reform Unit.

Two-phase fiscal reforms

In order to ensure a smooth and structurally sound process, the fiscal reforms were planned in two phases. During the first phase, all municipalities administered funds from their own sources and from the central budget in the form of grants, while starting to develop their own administrative capacity to collect and manage the municipal funds.

The main prerequisite for entering the second phase is fulfilling the criteria set by the Law on Financing of the Units of Local Self-Government (2004) among which is a requirement for the municipalities "to show positive financial results in their work for at least 24 months", and to prove that they have solid administrative and fiscal capacity to deliver quality services to their citizens.

Increasingly positive results

In order to review the achievements and shortcomings of the reform, the Mission to Skopje conducts annual surveys on its implementation. The picture painted by the results so far is increasingly positive and the 2006 report concluded that the municipalities' achievements were "generally successful".

"However, fiscal decentralization, including the administration of local taxes and fees, was considered by many respondents to be the most challenging," Andrej Petrov, President of the local Association of Local Self-Government Units (ZELS), said in an interview with newspaper Utrinski Vesnik in July this year.

"Given the fact that collecting revenues is regarded as crucial for the proper functioning of municipalities, the survey's analysis suggested that assistance in this area is vital for further success. It will help the municipalities to pass the fiscal test," he noted.

Comprehensive support package

Right from the start of the decentralization process, the Ministry of Finance and the local Association of Financial Officers (AFO) provided - with the support of the OSCE Mission - various comprehensive capacity-building activities and training for municipal officials dealing with the fiscal aspects of decentralization.

These included a special template for the 2006 and 2007 budgets, as well as software designed to handle budgets and financial reporting. Handbooks were also published dealing with the administration of taxes and fees, budget preparation and financial reporting, as well as internal audit and fraud prevention mechanisms.

"These manuals complement trainees' technical skills and I am pleased to see them on the desks of municipal officials," said Maja Subotic, the OSCE Mission's National Public Administration Reform Officer.

The training sessions organized with the Mission's help were rated highly by participants. "We benefited not only from the training on budgeting, treasury operations, administration of taxes and fees, internal control, audit and fraud prevention methods, but also from networking and exchanging our experiences during these workshops," said Dragica Todorovska, Head of Financing, Budgeting and Local Economic Development Department in the Skopje municipality of Gjorce Petrov.

Meanwhile, the AFO - in partnership with the Mission - is continuing to train budget officers, auditors and tax administration officers from all the country's 84 municipalities. So far this year, 115 tax officers have been trained on tax regulation and collection.

Sustainable tax collection

"Sustainable and efficient tax collection is a cornerstone for the proper functioning of municipalities. We realized its importance and focused our assistance in this field," said Alessandro Tedesco, Programme Officer in the Mission's Public Administration Reform Unit.

The President of the AFO, Evgenija Gramatikova, added: "With the help of the OSCE, we plan to complete training sessions for a total of 325 municipal finance officers by the end of 2007 in order to create a professional financial administration in each municipality.

"We hope that they will be able to not only efficiently execute municipal budgets, collect and manage taxes and fees, but also to establish effective systems of internal control, audit and implement proper policies and procedures for fraud prevention."

At the crossroads of decentralization

Forty two of the 84 municipalities have been assessed by the Government as now being prepared to enter the second phase of decentralization. Some, however, still have more work to do before they qualify.

"It is important to understand why some municipalities did not qualify for the second phase and to assess their current and future municipal financial capacities in order to assist them to develop their ability to effectively tackle the challenges they face," said the Mission's Frankland.

"At the same time, and in full co-operation with the relevant ministries, we will continue supporting those that did make it so they can effectively take on their new responsibilities," he noted.