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Policy Brief No.

1 The Local Outlook Municipal Budgeting in BiH

Municipal budgeting is a fundamental area of local governance, which provides three key purposes. Firstly, the municipal budget sets out all expenditures of the municipality during the coming year and the purpose for which they will be used, and forecasts the revenues from which such expenditures are to be financed. Secondly, the municipal budget can provide a method of controlling expenditure so that a municipality may spend within its means. Thirdly, a good budget improves the credit rating of a municipality, and therefore increase its borrowing capacity, either through the issuance of bonds or loans from commercial sources An additional purpose served by the municipal budget is to provide the citizens residing in a municipality with information about public spending for the coming years, and hence promote greater accountability of the municipal government. In the Upper Drina region the general ability of municipal staff to accurately budget and their knowledge of budgeting is poor. In order to correct this, UNDP/UDRDP has initiated a number of training sessions for municipal and civil society staff on budgeting, which this policy brief aims to supplement. Participants in the training question were set a basic test on budgeting prior to beginning the training sessions, and the average score of this test was 32%, demonstrating an extremely poor basic knowledge of budgeting. The proceeding section, will discuss some of the key weaknesses that have been identified in municipal budgeting in the Upper Drina region. Identified Weaknesses in Municipal Budgeting As a result of both the UNDP/UDRDP budgeting training sessions, and general analysis there are a number of weaknesses that hinder effective municipal budgeting in the Upper Drina region. These issues are likely to be symptomatic of the country as a whole. The problems identified will now be discussed in turn: Hand-Written Budgets: The majority of municipalities still produce hand-written annual budgets. The inevitable result of this is that budgets are of a low quality; they are difficult to understand, and generally there are many errors.

Manually Calculated Budgets: Even when budgets are electronically produced using an Excel spreadsheet, municipal staff are unable to make calculations using formulas, and instead perform calculations themselves, and simply enter the results of this onto the spreadsheet. This again leads to low quality budgets, with many inaccuracies.

Only Line Items are used: Line item budgets display expenditure and revenue related to commodities. They do not provide information of expenditure related to workloads (performance budget) or expenditure related to goals (programme budget). The line item budget displays no information regarding activities and functions of a programme, department, or municipality; hence it does not reveal how much is actually being spent on delivery of services. The budgets prepared by municipalities in the Upper Drina region consist only of line items, and therefore do not provide sufficient expenditure information. For example, how do salaries influence the delivery of specific public goods? No Measurement Units: The majority of budgets simply have a monetary value entered for expenditure in a certain area (for example, education). However, there is no indication of what exactly this money will be used for within the activity, or whether spending is for maintenance, operation, or investment. Consumption patterns of public spending need to be rationalised when choices or investments are made. For example, the construction large infrastructure will generate future annual operational and maintenance costs. Does a municipality have the financial means to cover these costs over the revenue the asset may generate? These issues can have a tremendous impact on the delivery of essential services, such as drinking water, health, and education. Inconsistency of Labelling Expenditure: Municipal budgets do no clearly explain which expenditure is for maintenance, which is for operational costs, and which is for investment. This has led to inconsistency in the classification of expenditure; certain costs which are labelled as being operational one year are then described as investment the following year. This has huge implications in terms of macroeconomic stability, as only entity and state level budgets are included in the framework. This leaves the economic impact of municipality spending behaviour unaccounted for in gearing up local economies. Inconsistency in Coding of Expenditure Accounts: The coding of the expenditure accounts in the municipal budgets often change from year to year, which means that it is very difficult to obtain information regarding the level of specific expenditures on a particular activity. Therefore, it is difficult to make expenditure comparisons over different years. Furthermore, it makes it impossible to forecast expenditure trends for the coming years. Inconsistency of Reporting: The budgets in the Republika Srspka are organized into three classifications: economic, functional, and sectoral/organizational. These difference classifications are used simply to present the budget in different forms. However, there is no consistency according to municipality in doing so. For example, Foca presents its budget in each of the three classifications; however, Cajnice and Novo Gorazde only disclose their budgets in the economic form. Even within the same entity, there are differences in the way in which the budget is reported. Budgets Inaccessible to Citizens: Only the budgets of the municipalities of Foca and Gorazde are available online for citizens to access. The budgets of the other municipalities in the region are unavailable to the general public. Even in the

cases of Foca and Gorazde, only the budget for the current year is available. Citizens are unable to observe past budgets. The overall result of these weaknesses is not only that the municipal budgets are highly inaccurate, but furthermore they are rarely consulted when public investment decisions are taken by the municipality. This means that for the purposes of ensuring that municipal expenditures do not vastly exceed revenues available, in general budgets are largely ineffective.

UNDP/UDRDP Budgeting Training Sessions UNDP/UDRDP has responded to this important local governance issue by providing budgeting training sessions for the staff of the municipalities and of civil society organizations. UNDP/UDRDP held training sessions in March 2008 for different municipality staff. A single training session was held with each group, with the overall aim being to improve basic knowledge of budgeting. The specific objective of the training session was to ensure that participants understood: The definition of budgeting The elements of good budgeting The five different types of budgeting How to assess the relevance of unit measures in measuring achievements How to judge whether an activity brought a favourable investment return How to set relevant performance indicators and implement cost saving measures. In doing so, participants were able to identify weaknesses of the budgets currently being produced, and were able to understand how to produce higher quality budgets. As has been stated previously, prior to starting these training sessions, participants were given a test on basic budgeting. The average score for this preliminary test was 32%. Having completed the training sessions, participants were given a similar test on basic budgeting, for which the average score was 82%. This demonstrates that the training sessions has a large positive impact on the budgeting knowledge of municipal and civil society organization staff. Policy Feedback At national policy level an important area to consider is whether budgeting and sources of revenues at the municipal level are receiving sufficient attention from donors and higher levels of governments. When working at the municipal level, the majority of donors deal simply with improving public services, without considering how increased expenditures will be funded within the municipal budget. An important reason for improving the budgeting capabilities of municipalities is that it will allow for more accurate information regarding expenditures and sources of revenues. This in turn will allow realistic expectations of what can be expected from municipalities in terms of public service delivery and investment. At present, many of the municipal policies that have been promoted are left unimplemented as resources required for their implementation are not available, or they are implemented at the cost of other essential public services. As most countries convert to performance budgeting in order to access cash transfers from bilateral or multilateral sources, it would be a sound decision for Bosnia and Herzegovina to prepare itself before it becomes a mandatory requirement. Introducing performance budgeting at the municipal level would be a positive decision as it is a bottom-up exercise. The benefits of this will be that this will be low-cost and low risk to the macroeconomic stability. Furthermore, it will ensure a sufficient number of

knowledgeable people to understand amalgamated higher governance budgets, as they should be cumulative. However, the horizontal imbalance of intergovernmental relations may make this process more difficult for the Federation of Bosnia and Herzegovina. Therefore, the recommendation to increase the level of decentralisation towards municipalities remains premature if budgeting and fiscal management are not improved.