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From Stability to Performance 47320 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Delivery in Bosnia and Herzegovina Local Governance and Service Europe and Central Asia Region (ECSSD) Sustainable Development Department Document of the World Bank From Stability to Performance From Stability to Performance Local Governance and Service Delivery in Bosnia and Herzegovina Sustainable Development Department Europe and Central Asia Region (ECSSD) Document of the World Bank January, 2009 ABBREVIATIONS AND ACRONYMS ALDI Local Development Initiatives Agency BFP Budget Framework Papers BH Bosnia and Herzegovina CDPC Community Development Planning Committee CEPOS Center for Policy Studies DFID UK Department for International Development DPA Dayton Peace Agreement EBRD European Bank for Reconstruction and Development EDA Economic Development Administration EIU Economist Intelligence Unit EU RED European Union Regional Economic Development Project EU SAA European Union Stabilization and Association Agreement EU European Union FBH Federation of Bosnia and Herzegovina FBHMTC Federation of Bosnia and Herzegovina Ministry of Transport and Communications FIAS Foreign Investment Advisory Service GAP Governance Accountability Project GDP Gross Domestic Product GIB Annual Budget Report (Godisnji Izvjestaj o Budzetu) HDZ Croatian Democratic Union HSP Croatian Party of Rights HSS Croat Peasant Party IDPs Internally Displaced Persons IMF International Monetary Fund IMF GFS IMF Government Finance Statistics ITA Indirect Taxation Authority KM Konvertible Mark LDP Local Development Project LSMS Living Standards Measurement Study MA Municipal Administration MC Municipal Council MOF Ministry of Finance MOPE Ministry of Urban Planning and Environment MTCs Ministries of Transport and Communication MTDS Medium Term Development Strategy MUCCE Ministry of Urban Housing, Communal Services, Civil Engineering and Ecology MZ Mjesna Zajednica NGO Non-Governmental Organization O&M Operations and Maintenance OBD Original Budget Data OECD The Organization for Economic Co-operation and Development OHR Office of High representative in Bosnia and Herzegovina OSCE Organization for Security and Co-operation in Europe PDP Party of Democratic Progress PEFA Public Expenditure and Financial Accountability PFM Public Finance Management PIER Public Expenditure and Institutional Review PRSP Poverty Reduction Strategy Paper RAD Sarajevo Kanton Solid Waste Management Company RD Road Directorate RS Republika Srpska RSMTC Republika Srpska Ministry of Transport and Communications RzB Work for Improvement-Peoples Party SBH Bosniak Party for Bosnia-Herzegovina SDA Bosniak Party of Democratic Action SDP Social Democratic Party SDS Serb Democratic Party SEED South East Europe Enterprise Development SIGMA Support for Improvement in Governance and Management SME Small and Medium Enterprises SMOTC State Ministry of Transport and Communications SNSD Union of Independent Social Democrats SOE State Owned Enterprise SRS Serb Radical Party UNDP United Nations Development Programme UNHCR United Nations High Commission for Refugees USAID United States Agency for International Development VAT Value Added Tax VP Vodoprivredas YEPP Youth Empowerment Partnership Program ACKNOWLEDGEMENTS The report was prepared as a background analysis to inform the ongoing policy dialogue and oper- ational program of the World Bank with Bosnia and Herzegovina on municipal governance and serv- ice delivery. This study was developed under the guidance of Orsalia Kalantzopoulos and Jane Armitage (Country Directors), prepared under the direction of Lee Travers and Wael Zakout (Sector Managers), and has benefited from the continuous encouragement and guidance from Dirk Reinermann and Marco Mantovanelli. The study was led by Aniruddha Dasgupta (Task Team Leader) and prepared by Yan Zhang, Kai Kaiser, Bjorn Philipp, Paula Lytle and Vesna Francic. Research support was provided by Irina Smirnov, Emir Dervisevic, Halko Basaric, and Zehra Kacapor. Bonita Brindley edited the report to a much more enjoyable piece. The collaboration from Mary McNeil and Andre Herzog of the World Bank Institute (WBI) is gratefully acknowledged. The household survey was conducted by PRISM Research, with support from the Austrian Government through WBI. Senad Sacic helped with coor- dinated mission schedules, data requests and translation work. Delphine Hamilton formatted the report and Tijana Medi} translated the document in local language. The report has benefited tremendously from discussions with and comments from colleagues at dif- ferent stages of preparation, in particular: Goran Tinjic, Orhan Niksic, Irina Smirnov and Jacques Bure, Richard Martin Humphreys, and Junghun Cho. The peer reviewers were Matthew D. Glasser, Larry Hannah, William Dillinger, and Barbara Nunberg. The team is indebted to officials from the BH at all levels, to government agencies and non-govern- mental organizations, for providing key inputs, data and help with the analysis. The team is also grateful for comments and discussions with colleagues from the IMF, OSCE, OHR, EC, EBRD, KfW, USAID, Sida, UNDP and other organizations. Special thanks go to the insightful comments from the Governance Accountability Program (GAP) supported by USAID, Sida, and EKN. The team is particularly grateful to Marc Ellingstad, Elisabet Tomasinec, and Erik Litver for their support. An early version of the report was presented and discussed with government representatives from BH at all levels, including mayors, at a meeting organized by the World Bank, held in Sarajevo on September 17, 2008. CONTENTS EXECUTIVE SUMMARY . .i Chapter 1: Local Governance and Service Delivery in Bosnia and Herzegovina . .1 1.1 Municipalities and post-conflict decentralization . .1 1.2 Municipalities are critical for public service delivery in Bosnia and Herzegovina . .4 1.3 The State of Local Service Delivery Outcomes in Bosnia and Herzegovina . .5 1.3.1 Variations across municipalities . .8 1.3.2 Variations across sectors . .11 1.4 Key findings: What do service delivery outcomes in BH tell us? . .20 1.5 The new challenge ahead: improvement of local service delivery performance . .22 Chapter 2: Bosnia and Herzegovina’s Decentralization Framework . .25 2.1 The Evolving Decentralization Framework . .25 2.2 Dimensions of Accountability for Decentralized Service Delivery . .28 2.2.1 Horizontal Accountability . .28 2.2.2 Vertical Accountability . .31 2.3 Conclusions . .34 Chapter 3: Water and Roads: How Sector Structures Influence Local Service Delivery Performance . .35 3.1 Municipalities and the Roads Sector . .36 3.1.1 General state and organization . .36 3.1.2 Road Sector Financing . .37 3.2 Municipalities and Water Utilities . .42 3.2.1 General state and organization . .42 3.2.2 Water Sector Financing . .43 3.3 Conclusions . .44 Chapter 4: Options to Expand the Envelope for Capital Investments in Municipalities . .47 4.1 Overview . .47 4.2 Municipal Public Finances . .48 4.3 Own-Source Revenues . .49 4.4 Fiscal Transfers . .52 4.4.1 Single Account Fiscal Transfer Allocations . .52 4.5 Expenditure Composition and Efficiency . .56 4.6 Municipal Borrowing . .58 4.7 Conclusions . .60 Chapter 5: Public Financial Management Performance across Municipalities . .61 5.1 The Why and What of Sub-national PFM . .61 5.2 Key Findings and Summary of PFM Assessment . .63 5.2.1 Credibility of the Budget . .67 5.2.2 Budget comprehensiveness and transparency . .69 5.2.3 Policy-Based Budgeting . .71 5.2.4 Predictability and control in budget execution. .71 5.2.5 Accounting, Recording, and Reporting . .73 5.2.6 External Scrutiny and Audit . .74 5.2.7 Donor Practices . .74 5.3 Conclusions . .74 Chapter 6: Conclusions and Going Forward . .77 6.1 Strengthen the Enabling Environment . .77 6.2 Expanding fiscal space . .77 6.3 Increasing accountability . .78 6.3.1 Supply Side: Enhancing Horizontal Accountability . .78 6.3.2 Demand Side: Enhancing Vertical Accountability . .79 Annex 1.1: Municipal Sample Survey Selection . .83 Annex 1.2: Service Outcome Indicators and Ranking Methodology . .86 Annex 2: BH Expenditure Assignments . .89 Annex 3.1: GIB Revenue Classifications . .91 Annex 3.2: GIB Expenditure Classifications . .93 Annex 4: Cantonal-Municipal Revenue Sharing Arrangements . .95 Annex 5.1: Local Political Dynamics and Space for Change . .97 Annex 5.2: Diagrams on Municipal Structure . .103 Annex 6.1: Summary of PEFA Outcomes of BH Municipal Governments . .105 Annex 6.2: PEFA Scoring Spider Diagram . .107 Annex 6.3: Detailed Assessment of PFM (approximately 10 pages) . .113 References . .117 FIGURES Figure 1: Overview of Political/Administrative System . .2 Figure 2: Population and Size Distribution of Municipalities . .3 Figure 3: Average Population of Municipalities in Selected European Countries . .5 Figure 4: Service outcomes vary widely across municipalities . .7 Figure 5: Service Delivery Outcome Score . .8 Figure 6: Income alone does not explain better outcomes . .9 Figure 7: Small municipalities can achieve excellent service outcomes . .10 Figure 8: High population density helps, but not a condition for good service outcomes . .10 Figure 9: Service outcomes vary across old and new municipalities… . .11 Figure 10: but are more income-sensitive in newer municipalities . ..
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