Fiscal Decentralization in the Republic of Tajikistan: Progress Made, Key Considerations, and the Way Forward

Fiscal decentralization in the Republic of Tajikistan: Progress made, key considerations, and the way forward

Prepared by Paul Bernd Spahn

Dushanbe - 2014

Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Table of Content Preface ...... 4 A. Introduction ...... 4 B. The structure of the public sector in Tajikistan ...... 5 C. Political deconcentration of State powers ...... 7 1. Executive and legislative authorities at local levels ...... 7 2. The assignment of functions to lower tiers of government ...... 11 a. Expenditure functions ...... 11 b. Revenue functions ...... 13 c. Equalization ...... 18 3. Summary of section ...... 22 D. The budget process: decentralization or deconcentration? ...... 23 1. The structure of the Republican budget ...... 23 4. Public financial management (PFM) ...... 26 5. Preparing the budget ...... 27 a. Revenue forecasting ...... 27 b. Estimating expenditures ...... 29 6. Budget execution ...... 31 a. The revenue structure ...... 32 c. The expenditure structure ...... 34 d. Tax “incentives”, subventions, and borrowing ...... 39 7. Summary of section ...... 40 E. Key considerations, and the way forward ...... 42 1. Premises ...... 42 2. Ready for a change of paradigm? ...... 43 3. Intermediate steps toward reformed local governments ...... 45 4. Summary of section and proposed work program ...... 53 Appendix 1: Review of the Law on Local Self-Government of Towns and Townships ...... 58 Appendix 2: Budget data 2010 and 2011...... 68

2 Tables Table 1: The structure of realized revenues of oblasts, Dushanbe City, and the Region of Republican Subordination, 2011 ...... 32 Table 2: The structure of realized expenditures of oblasts, Dushanbe City, and the Region of Republican Subordination, 2011 ...... 34 Table 3: City/district spending by categories in the Region of Republican Subordination, somoni per inhabitant, mean, standard deviation, and variation coefficient, 2011 ...... 38 Table 4: Local expenditures on transportation and communication in percent of total local expenditures, 2011 ...... 39

Figures Figure 1: The structure of government in Tajikistan ...... 6 Figure 2: Structure of local expenditures deconcentrated by local budgets, 2011 ...... 24 Figure 3: Local budgets per capita spending (in TJS), 2011 ...... 25 Figure 4: Actual tax collections minus projected tax collections of local budgets as percentage of tax projections, 2010 and 2011 ...... 29 Figure 5: The excess of subnational taxes transferred to the Republican budget, 2011 ...... 33 Figure 6: The structure of local expenditures (except housing, utilities and other spending) by subnational entities, 2011 ...... 35 Figure 7: Local spending by categories and by local entity, somoni per inhabitant, 2011 ...... 36 Figure 8: The relationship between per capita administration costs and population for the entities of the Region of Republican Subordination, 2011 ...... 37 Figure 9: City/district spending by categories in the Region of Republican Subordination, somoni per inhabitant, 2011 ...... 38 Figure 10: Subventions as a share of total subnational income, 2010 and 2011 ...... 40

Boxes Box 1: Mahallas ...... 7 Box 2: Dual subordination of local executives ...... 10 Box 3: The assignment of functions to Polish local governments ...... 12 Box 4: Taxonomy of local tax autonomy ...... 14 Box 5: On the regional apportionment of VAT ...... 17 Box 6: The Swiss approach to equalization ...... 21

Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank

Preface Tajikistan’s National Development Strategy (NDS) for 2007-20151 puts reforms in public administration and public financial management high on the agenda. The important issue of fiscal and interbudgetary relations between levels of government is considered to be a prerequisite for an efficient and effective fiscal system for the country. The Tajik Parliament’s Committee for Economy and Finance has marked a clear interest in undertaking an assessment of the existing revenue and expenditure allocation system as well as interbudgetary relations as seen from the standpoint of the European Charter of Local Self-Government (CLSG). The mandate comprises benchmarking the effectiveness of Tajik public finance management, including the role of Parliament in the process, against experiences in other countries and the development of proposals for reforms to improve Tajik intergovernmental and interbudgetary relations in the short and longer-term. The objective of the present report is to provide (i) an analysis and assessment of the existing system for allocating responsibilities and functions between different levels of government in the area of budget resource management (revenues and expenditures) as well as an assessment of ongoing government reforms in this area; (ii) a review of inter-budgetary relations and comparisons with best practice in other countries and specific recommendations for improvement; and finally (iii) a detailed plan of reforms for improvement of interbudgetary fiscal relations, including necessary changes in legislation and recommendations for effective collaboration between executive and legislative branches increasing the role of Parliament in interbudgetary relations. This study is based on a number of interviews held in Tajikistan with several representatives of Tajik public authorities at all levels of government during the week of December 2-7, 2013, as well as on a set of documents provided by the authorities. The author is grateful for the support given to him by his interlocutors and by the Secretariat of the Parliament’s Committee for Economy and Fi- nance established under the Program “Strengthening the elements of governance in Tajikistan” of the World Bank in Dushanbe.

A. Introduction Intergovernmental fiscal relations are shaped by the existing political and administrative organization of a State, which reflects historic experiences, relative powers and functions of public entities, managerial convenience (and, alas, iner- tia), efficiency considerations, and, last not least, the role of parliaments and the closeness and efficacy of relations between citizens and their governments. Ta- jikistan as a successor State of the Soviet Union still reflects much of her former organizational features despite the various reforms that have been instigated so far. The decentralization model of Tajikistan is still significantly at variance with the “standard decentralization paradigm” (if there is such a thing) as reflected,

1 Republic of Tajikistan, National Development Strategy of the Republic of Tajikistan for the Period Up to 2015, Dushanbe 2007. 4 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank for example, in the principles established in the European Charter of Local Self- Government (CLSG) of the Council or Europe2. Given the perseverance of attitudes as regards the existing set of institutions and rules, governance structures can be changed only slowly and marginally. What is more, reforms that touch upon the basic philosophy of State organization must be futile where the mindset of politicians, administrators, and the population at large remains unaltered. Targeting and transforming peoples’ perceptions is therefore essential for successful institutional reforms. Moreover, there is no ideal governance archetype that would work effectively under all conditions. And decentralization models that have evolved in other countries in a different historic, political and cultural context, even where successful, cannot simply be transferred to Tajikistan. The present reports respects the basic constituency of the Tajik Republic as represented by its Constitution and the various laws that reign intergovernmental fiscal relations. Our objectives are hence modest: (i) In some respects politicians, parliamentarians, and administrators may want to learn from specific experiences in other countries to consider possible options for reform. The report attempts to facilitate this, in its first part, by confronting the idiosyncrasies of Tajik public governance with some important features of the “standard decentralization paradigm” and alternative versions of the model as found elsewhere. And (ii), in other respects attention is drawn to possible inconsistencies and futilities in the present Tajik legislation that could be remedied without necessarily changing the basic institutional arrangements, and/or to existing constructive legal provisions that are not always fully implemented in practice. This will form part of the third section of the report, which points to possible “ways forward”.

B. The structure of the public sector in Tajikistan As is the case in most other countries, the Tajik State exhibits a structured organization of the government sector with several layers of political and administrative entities for public service delivery. In addition to the national government vested in the powers of the President, two parliamentary chambers, and the Re- publican government, there are various intermediate and local tiers of government.3 In addition there are certain community-based organization at the local level (mahallas). The structure of government in Tajikistan is shown in Figure 1. The Tajik intermediate level of government can be divided into two layers, the higher of which consists of regional governments, three oblasts4 and the city of

2 Council of Europe, CETS No.: 122. The Charter has been signed and ratified by 47 countries, including former Soviet Union members such as Armenia, Azerbaijan, Estonia, Georgia, Latvia, Lithuania, Moldova, Russia and the Ukraine. The Central Asian Countries, including Tajikistan, have not signed this treaty, however.

3 In Tajikistan the term “local government” is often applied indiscriminately to all subnational government. Some authors distinguish between “local state governments” and “local self-government”. In this report, the distinction is mainly between “intermediate” and “local” governments.

4 One of the oblasts, the Gorno-Badakhshan Autonomous Oblast (GBAO) has autonomous status according to Article 7 of the Constitution. 5 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Dushanbe5. Each of these regional governments is subdivided into districts (ray- ons) and cities, which form a lower layer of intermediate government. A number of districts and cities do not report to a regional government for lack of a higher intermediate layer (oblast). These government entities form a “Region” whose entities are directly subordinated to the Republican government. This anomaly emanates from strong local identities suspicious against intermediate power structures that could negate or even counter local minority interests. It has led to the Republic dealing directly with districts that could comprise as little as 20,000 inhabitants (Tavildara district). The total number of entities directly subordinated to the Republican budget is 17, of which three are oblasts and the capital city along with 13 ordinary cities or districts. These entities are regulated by the Constitutional Law of the Republic of Tajikistan on Local Government.

Figure 1: The structure of government in Tajikistan

At the local government level there are towns and groups of villages, governed by a different law, the Law on Self-governance of Town and Village Governments of 2009. In addition, as a traditional feature of Tajik society, there are community-based organizations at the “grassroots” such as street associations, apartment block committees, and other community groups that function as so-called “mahallas” (see Box 1).

5 In Figure 1 the capital city of Dushanbe is placed at the oblast level. This is because of it special status (there is a Law on the Status of the Capital of the Republic of Tajikistan from 1996), the existence of four lower districts in its jurisdiction, and some overarching functions (e.g. on capital spending) comparable to that of oblasts that are assigned to the city level. 6 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank

Box 1: Mahallas

The mahalla is a traditional form of societal organization in Tajikistan. Mahalla (in Tajik guzar) could be translated by encampment, neighborhood, or community. The origins of the mahalla may date back as much as 3,500 years. Initially the mahalla was formed along kinship lines functioning as a collective provider of goods (utensils) and mutual support (often related to social events such as weddings, birthdays, cultural celebrations, funerals for the poor, etc.). The constant flow of donations among members helps to establish solidarity and loyalties beyond families; and it protects family values and serves as a means of social surveillance. For itself the mahalla—prominent in socie- ties that deemphasize individualism and contractual agreements—cannot strictly be compared with Western concepts of local self-government, but they assume many of its functions. Their assemblies are certainly not local legislatures. In modern Tajikistan the mahallas are formally recognized by the Law on the Organs of Public Initiative of 2008, and they are integrated into the administrative structure of government although they do not possess an own budget and do not form part of the State. They combine features of a familiar institution, local self-government, and public administration on behalf of governments. Officially they are classified as “public initiatives”.

In addition to targeting State welfare programs at the village level, the mahalla continues to perform its traditional role. It could take care of orphans, help raising school-age children (support of enrollment, etc.), and assist in public health and family planning. And some attempt to keep local problems such as alcoholism or drug trafficking under control. As such the mahallas may be, or become, effective instrumental for changing peoples’ mindsets. But they also organize public holidays, sporting events, wedding ceremo- nies, and other family-related social activities.

C. Political deconcentration of State powers

1. Executive and legislative authorities at local levels The organizational structure of government says little about the way the public apparatus functions in legal and political terms, or in practice. This hinges on the distribution of political powers among government tiers, the assignment of authority to each government’s institutions and representatives, the allocation of revenue and expenditure functions, the way budgets are prepared and executed, the role of intergovernmental transfers, and on citizens’ participation both directly and indirectly through parliaments and local assemblies. As said already, the Tajik approach to government, given its historic past under the Soviet regime, deviates significantly from the “standard decentralization paradigm” as reflected in the European Charter of Local Self-Government. This is true for nearly all dimensions mentioned: the distribution of powers, budgeting, revenue and expenditure allocation, and intergovernmental financial relations. In this context it is important to note that decentralization according to the standard paradigm emphasizes the so-called “subsidiarity principle” for local government, which enshrines the primacy of local over centralized rule. The CLSG formulates this principle as follows:

7 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank

“Local authorities shall, within the limits of the law, have full discretion to exercise their initiative with regard to any matter which is not excluded from their competence nor assigned to any other authority” (Article 4 (2) CLSG). And furthermore: “Powers given to local authorities shall normally be full and exclusive.” (Article 4 (4) CLSG). As shall become clear from the following, the subsidiarity principle is alien to the Tajik approach to decentralization, which still tends to consider local governments mainly as controlling or implementing agents of the Republican government, not a public sector in its own right with full and exclusive competencies in certain policy areas. Moreover, the standard paradigm typically assigns the powers of local self- government to local parliaments,6 not local executives. Article 3 (2) CLSG reads as follows:

“(Local self-government) shall be exercised by councils or assemblies composed of members freely elected by secret ballot on the basis of direct, equal, universal suffrage, and which may possess executive organs responsible to them. This provision shall in no way affect recourse to assemblies of citizens, referendums or any other form of direct citizen participation where it is permitted by statute.” The assignment of political powers to councils or assemblies implies that local executives do not possess distinctive own political powers. They act within the scope of responsibilities assigned to the local entity and its parliament. They focus on managerial and coordinative functions and are to be held fully accountable to local councils or to a local electorate for their public activities. As regards the distribution of political powers among government levels in Tajiki- stan and, within institutions, among different authorities, the arrangements deviate significantly from the guidelines of the “standard paradigm”. This finds its expression mainly, but not exclusively, in the role of local parliaments and their relationship with the role of local executives. First of all, the responsibilities of local parliaments are extremely narrow in Tajik- istan. In particular Article 8 of the Constitutional Law of the Republic of Tajikistan on Local Government avoids assigning, to local assemblies, certain functional responsibilities (e.g. for primary education or health) that would be “full and exclusive”. The terms typically used in this Article to portray the role of assemblies are to “approve”, “supervise”, “accept reports”, “establish commissions”, or “provide recommendations”, which suggests a rather passive role of the assembly.7 Moreover, Article 8 of the Constitutional Law on Local Government grants identical authorities to the assemblies of oblasts, the capital city, cities and districts without discriminating by level of government. This by itself deviates from

6 This does not preclude the assignment of functions to the local jurisdiction as such, as is found in a number of laws on local self-government in other countries.

7 Some provisions even sound paradoxical or ironic, for instance that the assembly has the right “(t)o approve the order of the President of the Republic of Tajikistan on assignment and reassignment of the chairperson”. 8 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank international conventions, which would typically assign different functional roles to different layers of government.8 Second, it appears at first sight that the real power lies in the hands of the local chairpersons, where the Constitutional Law distinguishes between oblasts and the capital city on the one hand (Article 20), and cities and districts on the other (Article 20). However, closer examination reveals that the role of the chairpersons is purely ceremonial, bureaucratic, technical, and procedural. They are not in charge of certain exclusive local policy domains. The wording of these Articles (“submits for approval” or “makes proposals” to Republican authorities) depicts the chairperson mainly as an agent of the central government, or a supervisory constituent of a reporting and command chain, rather than a politician acting autonomously on behalf of a self-governing public institution9. This impression is re-enforced by the fact that the chairpersons of oblasts, cities and districts are appointed by superior authorities, which means their allegiance is mainly bottom-up toward Republican authorities rather than to their local constituency. In the standard paradigm, subnational executives are either elected directly, or elected indirectly by local parliaments (but never appointed or nominated, as is the case in Tajikistan). This renders them fully accountable to their local constituency.10 What is more, the appointed governor of a Tajik subnational entity typically chairs the assembly11, which is by and large considered as violat- ing the principle of separation of powers.

8 Normally one would expect the higher intermediate tier to possess certain coordinative functions and to be responsible for the delivery of public services that cover a wider geographical area, e.g. specialized health clin- ics. The closer the entity is to the people, the greater the emphasis on the delivery of specific public services such as street cleaning, garbage collection, and other communal services, but often also services such as primary education and health. In Tajikistan oblasts, or the capital city of Dushanbe, do not differ from districts as far as the legal authority of their assemblies is concerned, and they do not appear to have powers over a territory.

9 An exception maybe the responsibility of oblast chairpersons to take “… decisions on increasing social stability and actions against crimes, increasing citizens’ security and securing their rights and health conditions, as well as to consolidate the actions when natural disasters and epidemics and other extraordinary situations are oc- curred.” However it is doubtful however whether this provision establishes full and independent police authority at the oblast level, which would then run into conflict with Article 69 of the Constitution that assigns the lead of the national Security Council to the President. At least the delineation of responsibilities between governments in the area of security is not clear. 10 It is not unusual however that a local authority also deals with so-called “delegated functions”, where the higher tier of government has farmed out selected own responsibilities to the lower tier. For such functions, the CLSG states in its Article 5 (5): “Where powers are delegated to (local governments) by a central or regional authority, local authorities shall, insofar as possible, be allowed discretion in adapting their exercise to local conditions.” In this case the local authority is exceptionally subject to special administrative supervision by the delegating authority “with regard to expediency” according to Article 8 (2) of the CLSG.

11 “The Chairman of the Gorno Badakhshan Autonomous Oblast, oblasts, city of Dushanbe, towns, districts, and towns of republican subordination chairs the assembly of people’s deputies.” Article 12 of the Constitu- tional Law of the Republic of Tajikistan on Local Government. For jamoyats the chairperson (head of government or management board) is elected by the local assembly from among its members, but has to be first nominated by the chairperson of the district respectively city government (Article 19 (1) and (2) of the Law on Local Self-governance in a Town or Township). 9 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Where local executive powers emanate predominantly from the center, one commonly speaks of “deconcentration” rather than “decentralization” of government. An examination of the Constitutional Law on Local Government suggests that “deconcentration” of powers better describes the organization of the Tajik public sector than the term “decentralization”. The latter usually embodies a great deal of local autonomy, not only as regards the independence of local officials from central interference, but also as regards sectoral policy discretion, local taxation, budgeting, and control. In these areas the Tajikistan fails to meet the criteria of the standard paradigm in many ways. The delegation of powers to local officials from the center conjointly with some accountability to the local assembly in Tajikistan is usually motivated by the principle of the “dual subordination of executives” (see Box 2). Dual subordination implies that executives have to serve at least two masters, the Republic and the local constituency, which must entail potential conflicts of interest that should ideally be avoided.

Box 2: Dual subordination of local executives

A particularity of state administration in Tajikistan is “dual subordination”. It relates to the fact that the local executive and the Republican government, represented by the heads of the local branches of line ministries or by appointed governors at local levels for instance, are rivaling authorities at lower tiers of government. Moreover both subnational governments and local departments of Republican ministries (education, health, labor, etc.) are financed from the localized central budget creating additional rivalries over resources.

It is possible that local officials receive instructions from local branches of Republican authorities or the Republican government directly that contradict the political preferences of the local jurisdiction. While this parallel authority at subnational levels did in fact generate substantial frictions and uncertainties under Soviet rule, such conflicts appear to have been eased in Tajikistan in principle. In doubt the authority of the local chairperson prevails over instructions received by officials from the Republican government, a dead- lock-breaking mechanism that has strengthened the position of the local executive. How- ever in practice there is a habit of seeking consensus among rivaling authorities, and ordinances, including for the appointment of staff.

There are however exceptions from dual subordination. Local branches of the Tax Com- mittee (tax inspectorate) or the security apparatus, for instance, are strictly subject to instructions from Republican ministries. Tax inspectorates are responsible for securing the timeliness and completeness of tax collection at the local level. Their officials are appointed and recalled by central authorities. However local governments, including jamoyats, play a significant role for improving tax collections through enforcement.

There is no doubt that a centrally controlled allocation of political powers to local officials risks to extend central command to lower tiers of government unduly and might, possibly, run into conflict with local political priorities. But it is wrong to suspect that a centrally controlled command chain would totally ignore local interests in Tajikistan, a country where regional power centers remain strong and have to be balanced at the national level. Nevertheless, the fact that the chairperson of a subnational entity has a dual allegiance toward the central govern- 10 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank ment and the local constituency remains a matter for discussion and possible reforms (see also the case of Poland discussed in Box 3 below).

2. The assignment of functions to lower tiers of government It is essential that local functions be defined unambiguously by the Constitution, by law, or by statute. This is to avoid paralyzing conflicts about the legality of action, and futile overlaps of competencies or functions leading to duplication and/or contradicting policies. This would simply entail a waste of public resources. Countries such as the United States or Switzerland, which are of course extreme cases, aim at a full vertical division of powers, including the power to tax, which implies vertical competition for tax bases. This radical philosophy is not widely shared, but most countries follow suit as to the allocation of expenditure functions, albeit not necessarily for local revenues. After all vertical tax competition between authorities at different levels of government may erode the tax base and typically results in unproductive spending policies. It may be difficult to draw a neat line between exclusive expenditure policies of different layers of government, and some overlap that must be tolerated in practice. However in the case of serious policy conflicts these overlaps must be addressed and mitigated by legislation, intergovernmental agreements or binding rulings by the courts. In other variants of the decentralization model, a possible vertical competition between governments is alleviated through cooperation, which may be formal (through institutions or procedural arrangements) or infor- mal. These arrangements are then often characterized as “cooperative”. Germa- ny and Austria represent such a model, for instance, but more and more countries opt for more formal intergovernmental cooperation on the basis of (often performance-based) contractual arrangements for grants (e.g. Australia, France, Spain, Switzerland, United States).

a. Expenditure functions Legislation on the assignment of responsibilities of local governments typically includes a concise enumeration of their exclusive spending powers by political function or responsibility. As said, the allocation of exclusive expenditure functions to subnational authorities is fuzzy in Tajikistan, if defined at all. For example the Constitutional Law on Local Governments grants a right to “determine the economic and social development of the area, and to approve respective projects and programs and control its implementation” to oblasts, cities and districts, which thus take part in regional planning without being in charge of executing the “respective projects and programs” (Article 8). Again, both layers – oblasts and cities/districts – compete for the same right, which must entail overlaps and frictions. In a similar vein these entities possess the right to “approve and supervise the realization of the environmental programs and effective usage of natural resources within the related administrative and territorial units, and control their implementation”. Again, this provision is conflicting and vague. The competencies are better defined when it comes to the management and the distribution of municipal property, which can be clearly assigned to oblasts, cities and districts to the extent that the ownership is undisputed. In addition to planning functions, there are certain regulatory competencies assigned to local governments, for instance on water and land issues. 11 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank When it comes to the jamoyats, the respective legislation contains – contrary to that on oblasts and cities/districts – more concise provisions for assigning functions to local governments that go beyond technical and procedural rights (as defined in Article 10 of the Law on Local Self-governance in a Town or Town- ship). Indeed, Articles 11 through 13 of this Law convey authority to the jamoyats in the areas of economics and finances, the rule of law, public order, and even defense, as well as social protection, civic beautification, municipal services (such as maintaining and improving roads, streets, squares, cultural entities, water supply sources, local markets, maintaining cemeteries, keeping neighborhoods clean and free from garbage), and the protection of the environment. Moreover Article 14 lists a number of functions that might be delegated to them by State authorities in accordance with law or on the basis of a contract between the parties concerned. Alas, these more specific policy areas assigned to jamoyats suffer from three types of shortcomings: (i) Authority is not always full and exclusive in these areas, because it could conflict with similar authorities assigned to higher levels of government, in particular to the Republic. And a pure role in planning may be irrelevant where the objectives are not in line with Republican priorities. (ii) The policy impact is hampered by the fact that jamoyats do not control their own budgets, but have to rely on designated resources provided to them, conceivably, through city or district budgets. For instance, jamoyats have the right to “support initiatives on the socio-economic development of a town or a township”, but in practice this support must be sterile without a budget. (iii) And finally, but importantly, the resources assigned to jamoyat functions are abysmally low. One important feature of the Law is, however, the right of jamoyats to establish “small enterprises, cooperatives, handicraft workshops and other kinds of organizations in accordance with law”. It allows jamoyats not only to engage in certain economic activities within their jurisdiction, but also to establish a shadow budget in the form of a public enterprise. However, for lack of an own jamoyat budget, a transfer of profits acquired by these public enterprises to the local authority itself is not possible. A contrasting model may be found in Poland, for instance, which was the first formerly communist country to adopt the standard paradigm of decentralization and where the responsibilities of local authorities are clearly marked and assigned to local governments by policy function (cf. Box 3).

Box 3: The assignment of functions to Polish local governments12

Poland is a unitary State organized in a decentralized fashion. The decentralization process started in the early 1990s and evolved rapidly thanks to various fundamental reforms. In 1989, municipalities (gmina) had been created. They correspond to jamoyats in

12 Cf. European Union, Committee of Regions, Poland – Division of Powers, at http://extranet.cor.europa.eu/divisionpowers/countries/MembersNLP/Poland/Pages/default.aspx . 12 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank

Tajikistan. Then, two other levels of self-government – at the county or powiat (district) and the provincial or vojvodship (oblast) levels – were introduced by a reform of 1998.

The principle of decentralization is enshrined in the Constitution (Art. 15). The Constitu- tion stipulates that the municipality is the basic unit of local self-government. Local self- government units possess legal personality and have property rights. They may associate themselves in order to fulfill tasks of common interest. Local government units have legislative powers for areas of local interest (Art. 94). The residual competences rest in the municipality (i.e. it performs all tasks of local interest not assigned to other units of local government, in short: the “subsidiarity principle” applies). The Prime Minister exercises the supervision over local government units (Art. 148).

The second tier of local self-government is represented by the county (powiat). The powiat self-government is responsible for local issues that cannot be ascribed to gminas. A powiat is large enough to efficiently maintain many of everyday institutions of public life such as secondary schools, general hospitals, powiat police and fire stations, sanitary inspectorates and tax offices, among other tasks of local interest. The third tiers, the province (vojvodship), represents both a deconcentrated administrative district of the central government (led by an appointed governor) and a self- governing region with an elected council and an indirectly elected executive (Marshal, Vice-Marshals and members of the Management Board).

- The deconcentrated State powers of the Governor include the supervision of the public administration in provinces and counties (police, social care, inspections of environment protection and guards) and the supervision of local self-government units with regard to compliance with the law.

- The self-governing vojvodship performs extensive tasks of certain provincial laws, in particular in public education, including higher education, the promotion and protection of health, culture and protection of heritage properties, social assistance, family policy, the modernization of the countryside, zoning, environment, water, public roads and transport, physical culture and tourism, protection of consumer rights, public safety, and the activation of the local labor market.

This vertical institutional separation of powers between the appointed governor and the assembly with the elected marshal avoids the problems related to the concept of “dual subordination”. The governor and the marshal have to find a mode of cooperation to function effectively, but, since 1999, the central administration has assumed a more passive, supervisory role, which has strengthened the role of provincial self-government.13

b. Revenue functions The standard paradigm of decentralization calls for some degree of autonomy in taxing powers for subnational governments. Article 9 of the CLSG lays down the principles of local revenue mobilization as follows:

1. “Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers.”

13 A similar role is attributed to the French préfet, representative of central powers, under the ongoing decentralization reforms. 13 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank

2. “Local authorities’ financial resources shall be commensurate with the responsibilities provided for by the constitution and the law.”

3. “Part at least of the financial resources of local authorities shall derive from local taxes and charges of which, within the limits of statute, they have the power to determine the rate.” The rights of local governments to taxation and other financial provisions are often enshrined in separate laws on local government finance.14 The law on local finances has to regulate (i) local tax policy (including for local fees etc.), (ii) local tax administration, and (iii) the apportionment of the proceeds from local taxation and local tax sharing. As to local tax policy, its scope is generally limited by horizontal competition for the tax base. If local taxation is not uniform throughout the nation (and this is desirable according to the “standard paradigm”; cf. Article 9 (3) CLSG), the tax base tends to move towards low-tax jurisdictions, which could undermine the tax base for all local entities. Therefore the ideal local tax base has a clear-cut geographical incidence and cannot be simply transferred to other local entities. It makes a strong case for a local property tax and, perhaps, residence-based taxes that cannot easily be manipulated through re-registering, for instance. Taxes that accord with the principles for local taxation, which may or may not include the right to vary tax rates, are usually assigned to local governments in full. But local governments can also piggyback on national taxes (such as the personal income tax, for instance, in Sweden). Or there may be sharing arrangements, based on fixed coefficients, for national taxes as is the case for Aus- tralia, Austria, Belgium, Germany, or some States of the USA, but also for unitary countries such as the Czech Republic, Finland, France, Greece, Hungary, the Netherlands, Sweden, or Turkey. Local tax policy can take many forms. The OECD has attempted to classify local tax autonomy and established a useful taxonomy that is reproduced in Box 4. It extends from practically unlimited local taxing powers within category a), to centrally controlled local taxes as in categories d) and e). Tajikistan’s local tax model falls into category d.4) (“There is a tax-sharing arrangement in which the revenue split is determined annually by a higher level government”), which ranks among the most centralized models of the taxonomy. Box 4: Taxonomy of local tax autonomy

The term “tax autonomy” captures various aspects of the freedom sub-central governments (SCGs) have over their own taxes. It encompasses features such as subcentral government’s right to introduce or to abolish a tax, to set tax rates, to define the tax base, or to grant tax allowances or reliefs to individuals and firms. In a number of countries taxes are not assigned to one specific government level but shared between the central and sub-central governments1. Such tax sharing arrangements deny a single SCG any control on tax rates and bases, but collectively SCGs may negotiate the sharing formula with central government.

14 Inter alia, such legislation also comprises adequate provisions for supplementary local financing through equalization payments and specific-purpose grants, including for capital spending. And they regulate local government borrowing where appropriate. 14 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank

The OECD distinguishes five main categories of autonomy (see below). Categories are ranked in decreasing order from highest to lowest taxing power. Category “a” represents full power over tax rates and bases, “b” power over tax rates (essentially representing the “piggybacking” type of tax), “c” power over the tax base, “d” tax sharing arrangements, and “e” no power on rates and bases at all. Category “f” represents non-allocable taxes. In order to better capture the more refined institutional details the five categories were further divided into subcategories: two for the “a” and “b” categories, and three for the “c” category. Special attention was paid to tax sharing arrangements, where the four “d” subcategories are thought to represent the various rules and institutions for governments to determine and change their own share. a.1 - The recipient SCG sets the tax rate and any tax reliefs without needing to consult a higher-level government. a.2 - The recipient SCG sets the rate and any reliefs after consulting a higher-level government. b.1 - The recipient SCG sets the tax rate, and a higher-level government does not set upper or lower limits on the rate chosen. b.2 - The recipient SCG sets the tax rate, and a higher-level government does sets upper and/or lower limits on the rate chosen. C.1 The recipient SCG sets tax reliefs – but it sets tax allowances only. c.2 - The recipient SCG sets tax reliefs – but it sets tax credits only. c.3 - The recipient SCG sets tax reliefs – and it sets both tax allowances and tax credits. d.1 - There is a tax-sharing arrangement in which the SCGs determine the revenue d.2 split. d.3 - There is a tax-sharing arrangement in which the revenue split can be changed only with the consent of SCGs. d.4 - There is a tax-sharing arrangement in which the revenue split is determined in legislation, and where it may be changed unilaterally by a higher-level government, but less frequently than once a year. - There is a tax-sharing arrangement in which the revenue split is determined annually by a higher-level government. E - Other cases in which the central government sets the rate and base of the SCG tax. F - None of the above categories a, b, c, d or e applies Source: OECD Fiscal Decentralization Data Base

Article 6 of the Tax Code of the Republic of Tajikistan15 distinguishes between eight national taxes16 and two local taxes. The local taxes established by the

15 This Tax Code is relatively new. In 2011 the President had called for a revision of the Tax Code, which found its expression in Resolution #307 on the setting up of a Reform Commission. With the help of international advisors, in particular from the IMF and the Worldbank, the Commission was able to present a reformed tax code, which operates only since the beginning of 2013.

16 The types of national taxes are: the income tax; the profits tax; value-added tax; excise taxes; a social tax; taxes on natural resources; a tax on road users; and a sales tax on cotton fiber and primary aluminum. 15 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Code and administered by regulatory legal acts of local public authorities in cities and regions, include a tax on vehicles, and taxes on real estate with two components: (i) a tax on land (basically a land leasing fee), and (2) a property tax. Ar- ticle 6 (8) of the Tax Code also regulates that funds from national taxes are to be distributed between the State budget and local budgets in accordance with the annual budget law of the Republic of Tajikistan, and that local tax payments received form an integral part of the respective local entity’s budget. In both cases the derivation principle applies, i.e. the proceeds from taxes are allocated according to tax collections within the boundaries of a respective local constituency.17 Indeed Tajikistan, like many other countries, allows local governments to keep, or be returned to, a share of the taxes collected on their territories. The main advantage of this principle is that local officials become interested in the shared tax base, which spurs their willingness to attract economic activities and exploit the assigned tax base. This is generally efficiency enhancing, and it fosters the political accountability of local officials. However these benefits are wrecked in Tajikistan for a number of reasons. . Contrary to other countries, local officials have no policy discretion on tax bases or rates, so they do not possess the instruments to exploit their local tax potential. Furthermore, all taxes are collected by the central tax inspectorate, which does not allow administrative “tax effort” by local officials. So the basic advantages of the derivation principle are partially lost. What remains is the regions’ interest in attracting private investments to their territory in order to create jobs and generate incomes, which strengthens the tax potential indirectly. To what extend they do have the instruments to engage in attracting private investments is doubtful however because local governments do not decide on local infrastructure, land use, administered prices, or taxes. So they lack all of the key instruments for putting an economic development policy in- to action for their constituency. . The efficiency-enhancing application of the derivation principle makes sense only where there is a clear local incidence of the tax such as the property tax, wage taxes (collected at the place of work), personal income taxes (collected at the place of residence), or retail sales taxes. In Tajikistan tax sharing comprises all taxes including those of a national character. In particular the local incidence of business taxes and corporate income taxes is fuzzy, since it is usually collected at the point of registration (mostly in Dushanbe), while business activities may extend over a larger territory. This renders the derivation principle regionally unfair for business taxes. . The regional inequities inherent in tax sharing proportions are exacerbated where local tax potentials are highly concentrated and/or assigned arbitrarily to regions. This is true in particular for resource taxes such as those tagged on natural gas exploitation, for instance.

17 Cf. Article 68 of the Tax Code. National taxes are to be paid into the budget of the Republic, local taxes into the local budget. The tax authority specifies the place of payment. Where this is not required, the residence principle applies for individual taxpayers, and for companies it is the place of business of an individual entre- preneur or place registration of a legal entity (branch or foreign legal entity), or the place of the tax agent (branch or representative office of the resident legal entity). These provisions are complicated and not easily applied. 16 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank . The sharing of VAT according to the derivation principle makes no sense at all because of an undependable incidence of input VAT credits, the zero-rating of exports, and VAT on imports (see Box 5). . Finally, the fact that sharing ratios vary across local governments (and can be changed “off the cuff” by presidential resolution or the annual budget) de- stroys any remaining incentive of local officials to care about local tax potentials.

Box 5: On the regional apportionment of VAT

Applying the derivation principle for assigning the Region A Region B revenue from VAT is highly contentious. This is Domestic inputs Domestic inputs why other countries have adopted horizontal shar- $25 $25 ing formulae for this tax, if they share its proceeds Imports with lower tiers of government at all. $25 To understand the implications of VAT sharing on Value added the basis of the derivation principle, consider the Value added $75 $50 following simplified example for two regions A and B. Both regions should have the same gross production value, the same value of domestic pur- Gross production chases, but region A uses additional imports, re- value = $100 gion B does not. This leads to the following results:

If the VAT rate is 20 percent, then region A collects 0.2 * [$100 - $25 domestic inputs - $25 imports] = $10, and region B collects 0.2 * [$100 - $25 domestic inputs] = $15. So local tax collection clearly follows local value added.18

Richer entities in terms of local value added created would receive higher revenues than poorer ones, which might be considered regionally inequitable. In order to demonstrate this, consider the case of exports.

To explain the problems relating to exports, it is assumed that region B does not produce for the local market at all, but exports its total production. Since exports are zero-rated, the following calculation holds: 0.0 * $100 – 0.2 * $25 = -$5. So the VAT revenue of this high-performing region becomes negative. The region would be asked to paying a transfer rather than receiving one.

This is the reason why countries that share their VAT among regions employ allocation formulae whose allocation criteria are independent from local revenues collected. Austral- ia uses a complex machinery for determining general revenue grants on the basis of the VAT (called goods and services tax, GST) for its states; Germany employs a simple population-based model for allocating the states’ VAT share horizontally. Typically the formulae for allocating shared public revenue include criteria such as population, area, size of road or water networks, and other abstract needs criteria such as the number of stu- dents, pensioners, or refugees. Occasionally capacity criteria such as the number of schools or hospital beds, length of roads, or unit costs (e.g. for transportation) are used. See also Box 6: The Swiss approach to equalization).

18 VAT on imports is collected and retained by the central government. Moreover, VAT is not always collected at the point of production, but where the firm is registered. 17 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank On tax administration, Article 21 of the Tax Code states that the administrative regulations apply to all types of taxes, customs duties, State fees and other ob- ligatory payments to the budget, i.e. both State and local taxes are administered by the Republican government. Article 84 of the Tax Code lays out the structure of the State Tax Committee (tax inspectorate). The tax authorities consist of an authorized State body and territorial tax authorities. The latter comprise the tax department of the Gorno-Badakhshan Autonomous Oblast, of Dushanbe, tax inspectorates of cities and districts and other regional tax authorities, and the centralized tax inspectorate of large taxpayers. In addition there are authorized territorial bodies for registering legal entities and individual entrepreneurs. These State tax agencies and territorial tax authorities form a single centralized system of a national Tax Service in the Republic of Tajikistan (Article 84 (3) of the Tax Code). The picture painted on tax administration by the Tax Code would be incomplete without a word on the role of jamoyats. Although jamoyats do not have their own local budgets and benefit from taxation only indirectly through the tax shares assigned to their respective senior regional governments, the Republic, the oblasts, cities and districts, they assume an important role: they take up the delegated Republican function of “assisting in the collection of taxes and other payments” (Article 14 of the Law on Local Self-government), which includes the certification of exemptions and tax rates according to Articles 278 and 279 of the Tax Code). They can therefore grant tax expenditures in the area of national social policy.19 In rural areas, individuals may be charged the estate taxes with the assistance of officials of local government villages (Article 67 (2) Tax Code). In short: The Tajik tax system is highly centralized in spite of its deconcentrated organization. Local government do not control a tax policy of their own20, and they do not even administer the so-called local taxes, although local officials of jamoyats are relied upon for assistance.21 The fact that the proceeds from local taxes are reserved for local budgets matters little in an environment, which, in principle, assigns a share of all tax revenue collected to the local budget according to the derivation principle. This share is established by the annual budget law, and it varies, yearly, among local governments in accordance with their financial needs, although these may not be defined explicitly.

c. Equalization The vertical tax share as determined by the annual budget law is to cope with the problem of horizontal equalization among local governments. In Tajikistan cities and districts with a very narrow tax potential may receive 100 percent of

19 For real estate located in development zones, tourism and recreation areas, tax rates are twice the ordinary tax rates (Article 279 (4) of the Tax Code), which is counter-productive as it does not provide an incentive for local development in these important local policy areas.

20 Article 262 of the Tax Code assigns the right to levy local taxes to the local assemblies of cities and districts, but this has to comply with the rules laid down in the Tax Code and other publications that “официально публикуются в общедоступных периодических печатных изданиях на соответствующей территории”. It is unclear whether a local assembly has the right not to levy the taxes, which would then represent some form of policy discretion indeed.

21 Article 84 (5) Tax Code clearly states that all tax organs are under the direct control of the State Tax Service. 18 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank all taxes collected on their territory plus, perhaps, some additional subvention to cope with their financial needs (see Figure 10 below). Other cities and districts receive a share below 100 percent, where the difference is skimmed off to sus- tain the Republican budget. This is particularly relevant for the Capital City Du- shanbe, whose tax potential is still the highest in the country.22 Indeed, equalization among local governments is also prominent in the standard paradigm of decentralization. In this respect Article 9 (5) of the CLSG states:

“The protection of financially weaker local authorities calls for the institution of financial equalization procedures or equivalent measures which are designed to correct the effects of the unequal distribution of potential sources of finance and of the financial burden they must support. Such procedures or measures shall not diminish the discretion local authorities may exercise within their own sphere of responsibility.” There is a host of different equalization schemes in the world that may work both horizontally, or vertically, and the criteria used reflect political and socio- economic priorities that vary greatly among countries. No single model stands out as being universally applicable. However there are a few principles that reflect “good practices” in supporting local budgets where fiscal potentials and expenditure needs vary among governments. These principles can be summarized as follows: 1. Ideally there should be only one equalization fund, not rivaling equalization schemes. The resources distributed through the equalization fund constitute unconditional revenue of local governments, at par with their own taxes. Earmarking these funds would undermine the notion of local self-government. 2. The equalization fund is to target the compensation of varying “standard fiscal potentials” and “standard financing needs”. It does not preclude complementary funds (including earmarked funds) that go beyond achieving the financial standards, for instance by pursuing other, more specific expenditure programs (e.g. for public investments). 3. The institutional framework for equalization must address both vertical and horizontal imbalances.23

22 There are reports that Tajikistan’s Bokhtar region could hold as much as 114 trillion cubic feet of gas and 8.5 billion barrels of crude oil and/or condensate, at par with world-class discoveries off the East African coast (Gabe Collins and Bo White, “Tajikistan’s Gas Boom: Prosperity or Conflict?”, The Diplomat, June 5, 2013). If true, this would probably alter Tajik intergovernmental fiscal relations dramatically. 23 Whatever criteria are deemed to be apposite, it is necessary to translate them into an operational formula using appropriate weights. These weights must be normalized to add up to 1. The following structure is typical:

Grant i  FunctionExpenditure needsi;Fiscal capacity i;Grants Pool Where i is the i-th region and Grants Pool is the total amount of the money available for equalization. Fiscal capacity and Expenditure needs are to be defined in a simple, but appropriate way.

For instance one could base the grant on expenditure needs only: 19 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank 4. The total of the fund should provide sufficient financing of the expenditure functions assigned to recipient local governments.24 They should ideally be calculated on the basis of standard costing procedures. Where there is more than one layer of local government, this could be addressed by forming appropriate subfunds and designating them to the different layers of local governments in accordance with their respective expenditure functions. 5. The equalization fund should be well defined and “closed”, which reduces macroeconomic risks for the donor government. 6. The equalization fund could be constituted from designated national taxes (Australia designates the VAT for equalizing among States), fixed shares of a well-defined portfolio of national taxes (to dampen the volatility of single taxes), or a fixed proportion of the national budget (revenue or expenditure based). The shares and proportions should only be changed where there is a significant shift in the vertical distribution of spending functions. 7. The equalization fund should evolve steadily over time and not be subject to frequent or sudden disruptions such as those emanating from the annual budget law. The requisite of stability and durability also applies to the criteria used for allocating the fund onto beneficiary local budgets.25 8. The horizontal distribution of the resources from the fund should be based on per-capita relativities. These relativities are typically calculated on the basis of criteria that are appropriate, objective, stable, quantifiable, transparent, and non-manipulable by the recipient governments. The selection of criteria ought to be discussed with the parties concerned, but remains basically unaltered once agreement has been reached. 9. It is important to equalize only “standard” needs and “standard” fiscal capacity, not actual budget needs and revenues collected. This avoids the inefficient “gap filling” of the budget, which could create moral hazard by over-expensing and/or underperforming on own budget revenues (where this is in the hands of the local authority). In Tajikistan equalization is effected via varying shares for the assignment of taxes collected locally. And these shares are determined year by year through the budget law, trying to address not only different needs and fiscal capacities

    EN ki Granti  Grants Pool    vk , with vk 1  k EN ki  k  i  where vk are weights, and ENki are specific expenditure needs criteria to be determined. In this case fiscal capacity, is totally ignored. But usually the formula would be extended to include fiscal capacity as well. 24 Article 9 (2) CLSG demands: “Local authorities' financial resources shall be commensurate with the responsibilities provided for by the constitution and the law.” 25 In this regard Article 9 (4) CLSG states: “The financial systems on which resources available to local authorities are based shall be of a sufficiently diversified and buoyant nature to enable them to keep pace as far as practically possible with the real evolution of the cost of carrying out their tasks.” 20 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank among different types of local governments at one level, but also different responsibility layers of government simultaneously. This makes the equalization scheme highly non-transparent and unpredictable.26 The recipient local governments do not understand the mechanics that produce these coefficients, and it is particularly difficult to convey the logic of equalization to local officials at lower levels of government. A more transparent equalization system deemed to represent fair allocation criteria is likely to be accepted more easily than the opaque system that treats recipients as being “at the mercy” of the grantor government. As an example of a more modern equalization scheme that responds to the principles discussed above, the Tajik authorities may want to study the model introduced more recently in Switzerland (operating since 2008). This country has some common features with Tajikistan, for instances its mountainous topography and the challenge of defining relative fiscal needs under these conditions, but studying the Swiss equalization formula should not be misunderstood as considering Switzerland a governance model for Tajikistan more generally.27 A sketch of the Swiss equalization model is found in Box 6.

Box 6: The Swiss approach to equalization

Since 2008 the Swiss central government applies a new model of intergovernmental finance with five instruments: (i) equalization of resources; (ii) equalization of financial burdens; (iii) clear assignment of functions to levels of government; (iv) vertical cooperation between governments; and (v) stronger horizontal cooperation. Only the instruments (i) and (ii) are sketched here.

(i) Equalizing resources

Both the national government and the resource-rich cantons contribute to the equalization fund. Local resources are measured by a resource index with three components: taxable income of individuals; taxable property of individuals; and taxable profits of companies. The index is normalized so that it is 100 for the average per capita endow- ment in fiscal resources. Cantons whose index exceeds 100 are considered “resource rich”, the others as “resource poor”.

The “resource rich” cantons contribute to the equalization fund, along with the national government, according to a formula that does not, however, even out per capita differences completely. Yet the “resource poor” cantons are guaranteed to receive at least 85 percent of the national average per capita. The remainder must be financed from own resources.

(ii) Equalizing financial burdens

This subfund has two components: (i) the geographic-topographic component, and (ii) the socio-demographic component.

26 Some degree of predictability is however achieved for per-capita spending programs of the Republican government, which are based on clear and well determined, albeit variable, spending norms (see below).

27 After all, Switzerland is a well-established federation and economically more developed. Furthermore, each level of Swiss government has its own resources, unlike Tajikistan where the main taxes are appropriated by the national government. So only the general approach to equalization in Switzerland needs to be examined by Tajik officials as it exhibits some fundamental differences in approaching equalization. 21 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank

The geographic-topographic component is allocated in accordance with criteria such as the number of people living above a certain height a.s.l. (800 m), the structure of set- tlements (less than 200 inhabitants, population density), and the steepness of land (economically viable area by topographical height on average). The socio-demographic component is allocated in accordance with criteria such as poverty (e.g., recipients of social assistance), age structure (share of elderly people), the integration of foreigners (share of foreigners sojourning less than 12 years), or congestion costs (for cities, need for mass transportation, higher costs of policing etc.)

As an additional measure there is a temporary “hardship compensation” for those entities that suffer a loss of resources under the new rules compared to before.

3. Summary of section The issues discussed in this section can be summarized as in the following table: Topic Tajikistan – “Standard decentraliza- deconcentration of tion paradigm” State powers Local powers Local governments act Local functions are well de- mainly as agents of the fined, ideally there is no ver- central government. tical overlap. “Subsidiarity There are very limited principle”. Local authorities substantive local powers. have autonomy and full and Local authority is not “full exclusive local powers in and exclusive”. certain policy areas. Assignment of local Unclear. The powers of Either the local entity itself policy domains local assemblies are pre- is empowered, or local pow- dominantly procedural. er is vested in the local as- For jamoyat powers are sembly. There is the possi- narrow, vague, and over- bility of local referendums or lapping. Jamoyats do not other forms of direct citizen possess own budgets to participation. support initiatives. Local executives For oblasts, districts and Local executives are (chairpersons) cities, executives are ap- - either elected directly by pointed by the Republican the electorate of the local government. constituency, For jamoyats, executives - or elected indirectly by are nominated by dis- local parliaments (councils). trict/city authorities, and Candidates may not need to elected by local parlia- be members of the council ments (councils) “Dual subordination” Local officials are simul- “Dual subordination” is taneously accountable to avoided through parallel local assemblies and to power structures, where the State authorities. Loyalty regional representative of is mainly directed up- State authority has mainly ward. Conflict of interest. supervisory functions.

22 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Topic Tajikistan – “Standard decentraliza- deconcentration of tion paradigm” State powers Revenue functions Central tax legislation, Local governments usually administration. Local tax- possess some taxing pow- es are allocated to local ers, mainly through rate set- budgets, but they also ting. They may also benefit benefit from a share of from vertical tax sharing Republican taxes collect- usually with fixed rates. Lo- ed in their jurisdiction. cal authorities often admin- The share varies and is ister and collect their own fixed in the budget law. taxes. Equalization Is implicit in the annual Is typically based on an ex- budget allocations, which plicit equalization fund with are non-transparent for transparent and objective beneficiary governments. horizontal allocation criteria. Other Tax “incentives” are inef- Tax incentives are rare, and fectual and counterpro- only applicable where local ductive. Local borrowing governments control tax not allowed, but could be instruments. Usually bor- realized via local public rowing is possible, subject enterprises. to prudential supervision.

D. The budget process: decentralization or deconcentration?

1. The structure of the Republican budget The foregoing section maintains that it would be misleading, in the context of Tajikistan’s governance structure, to use the term “decentralization” as enshrined in the “standard paradigm” represented by the CLSG. “Deconcentration” of State power appears to be the more appropriate term. Public budgets in Tajik- istan are a pure reflection of these premises: there is one, and only one, Repub- lican budget, which is not only shared out to line ministries and other Republican budget units, but also deconcentrated by territorial organizations, the oblasts, the cities, and the district. The jamoyats of a regional government are regarded as pure spending units – like schools or hospitals. They do not control own resources and do not possess local budgets as such, but rely entirely on the higher-level regional budget.28 According to the Law on Local Self-Government, jamoyats were expected to have their own budgets from 2011 on (Article 45), but this has not yet been realized (apart from some preparatory work in the form of pilot studies). Since the jamoyats do not possess own budgets, they draw resources from budget lines of their respective district’s budgets in the same way as other local spending units such as schools, hospitals, and the like. Hence the official Tajik

28 Historically there used to be tax sharing of cities/districts with jamoyats and local budgeting, but this has been abolished with the introduction of the new Treasury Law in 1997. 23 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank “local budget” comprises only 17 territorial subsections of the Republican budget as represented in Figure 2.

Figure 2: Structure of local expenditures deconcentrated by local budgets, 2011

Source: Ministry of Finance; own calculations.

In 2011, the largest local budget share was held by the Capital City of Dushanbe (30.6 percent of total local budgets). The other local entities of the Region of Re- publican Subordination absorbed another half of Dushanbe’s budget (15.3 percent) additionally, so the total for the Region directly subordinated amounts to about 46 percent of total local budgets. The Soughd and the Kahtlon Oblasts and their sub-entities consumed roughly one quarter of the total each, while the Gorno-Badakhshan Autonomous Region drew only about 5 percent of all local spending from the Republican budget. If local budgets are broken down by spending per capita, the analysis exhibits the relativities as shown in Figure 3 below. The Soughd oblast and the Region of Republican Subordination (excepting Du- shanbe) show a similar level of spending per capita (of around 190 somoni per year). If this level of spending is considered a benchmark or standard, per capita outlays in the Khatlon oblast were about 25 percent, and per capita outlays in the GBAO about 180 percent above that standard. By far the highest level of per capita spending was found for the Capital City however, which attained almost 5 times the benchmark calculated for the Region of Republican Subordination. The standard deviation of per capita spending in the entities of the Region of Re- publican Subordination (except Dushanbe) was about 70 somoni, with a variation coefficient of 38 percent. The higher (lower) a district’s/city’s population the lower (higher) tended to be its per capita spending.

24 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Figure 3: Local budgets per capita spending (in TJS), 2011

Source: Ministry of Finance; own calculations.

While this pattern of per capita spending can be explained to some extent, both for the oblasts (where the mountainous GBAO requires higher spending levels because of higher costs through topographical factors and low population density), and for the cities/districts (because smaller entities require comparably higher overhead costs per capita), it is impossible to make an assessment of Du- shanbe’s per capita spending level against the regional benchmark defined above. True, there are higher congestion costs relative to smaller entities, but these are not spelt out explicitly and the higher level of per capita spending could also result from a higher proportion of per capita revenue allocated to the Capital City. The appropriate level of per capita spending of Dushanbe can only be as- sessed by means of a thorough analysis of its spending needs based on a well- defined catalogue of city functions and their costing. Such data are not available. The mission was not able to look into the structure of local spending per capita at the jamoyat level. However there is an in-depth study of jamoyat spending to construct different types of budget models for this sector that contains valuable information for 50 jamoyats (50 model) and for 425 such entities (425 model).29 This study carried out by USAID30 found significant (and excessive) variations in per capita spending at the jamoyat level, and it makes extremely useful suggestions as to the use of various appropriate allocation criteria for establishing jamoyat budgets. The findings of this study are not reproduced here. Some of the suggestions made in this analysis are considered in the last part of this study however.

29 As of January 2001 Tajikistan’s 55 towns and 368 villages were home to 5916.5 thousand people, or 80% of the country’s total population, according to data from the Tajikistan Statistics Agency.

30 USAID, Budget Model Recommendations for Village and town Jamoyats in the Republic of Tajikistan, Local Development Initiatives Project, September 2012. 25 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank 4. Public financial management (PFM) The most recent assessment of Tajikistan’s PFM systems, processes and institu- tions31, which was financed by the World Bank, Swiss Aid and DFID, exhibits the following findings:  Budget credibility is still undermined by high fluctuations between planned and executed budgets. There are significant differences between the original plan and the actual allocation of funds to sectors. This applies in particular to local government budgets. Tax forecasting was found to be quite erratic, “due to an historical tendency in former Soviet controlled States to understate potential revenues”, but this was said to have improved in 2011 and 2012.32  Budget classifications now include administrative and program classifications, however they are not operating at full strength (in particular program budgeting is weak). Budget operations score high as to budget doc- umentation, including financial statements, and the report praises new developments in securing the „transparency and rules of the horizontal allocation of transfers among subnational governments and the timelines of reliable information to subnational governments.“33 However, whilst the monitoring of the budget execution system at subnational level was considered to be strong, there is no system for assessing aggregate risks in a consolidated fashion.  The orderliness and participation in the annual budget process appears to have improved. This stems from the Parliamentary Budget Commission being involved at a much earlier stage and also being actively following the budget process. The system of policy-based budgeting was considered to be robust.34  Multi-year perspective in fiscal planning, expenditure policy and budgeting were found to be weak however. The present analysis of local finances extends this finding of the PEFA study with regard to subnational budgets: There is in fact no multi-year perspective developed for the local sector.  There is some progress as far as the predictability and control in budget execution is concerned, but there are still shortcomings as to the effectiveness of measures for taxpayer registration and tax assessment or the reconciliation of tax assessments, collections, arrears and transfers to the Treasury.  Cash planning is not based on the real needs of the budget organizations and there is no reliable indication of actual resource availability for com- mitments. There are significant in-year budget adjustments. According to this present study, all these flaws apply in particular to the local sector.  The personnel and payroll system is decentralized and was not examined

31 The Government of Tajikistan, Public Expenditure and Financial Accountability (PEFA) Assessment: Final Report, November 2012. 32 This does, however, not correspond to the findings of the present study; see below. 33 Ibidem, page 6; the interlocutors for the present study did not confirm this finding however.

34 However this regards policy-based budgeting from a Republican perspective. Policy-based budgeting of local authorities does not exist for lack of a clear assignment of policy areas to the local sector. 26 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank by the PEFA review. Yet with policy, terms and conditions of civil servant being established at the central level and with the budget holders responsible through an authorization process subject to frequent audits, the system was said to appear robust. However, there does not seem to be a compelling improvement in personnel data and payroll reconciliations, mainly due to the fact the system is not automated.  Internal audit is being strengthened but it is not fully responding to international standards yet. The present study confirms this impression for the local sector, which suffers particularly under a shortage of qualified staff for these purposes. External audit is not yet in place more generally, however the Law on the Supreme Audit Institution adopted in 2011 might indicate some progress. Overall there is significant scope for improving public financial management not only in general terms, but also with regard to the local public sector in particular. However to improve the institutional and procedural background for effective budget management and control, a considerable effort has to be made to build up, and improve, local administrative human capital. This is especially true for the jamoyats, which fully escaped the PEFA review because of their lack of budgets and integration into a coherent framework for public decision-making and local service delivery.

5. Preparing the budget

a. Revenue forecasting Paradoxically the process of preparing local budgets is highly decentralized in Tajikistan, although local budgets are firmly entrenched in the central Republican budget framework. Local authorities are even asked to present their own revenue projections not only for local taxes, but also for the Republican taxes expected to be collected within their territory. This is unusual since there are national taxes, such as VAT or corporate income tax, that are difficult (if not impossible) to predict at the city/district level because they relate to macroeconomic indicators that cannot be broken down by small territories, cities or districts. The usual procedure would be to forecast revenues from these taxes centrally and determine their contribution to the revenue envelope of the overall budget. Only local taxes proper would be estimated by local authorities, and only where these possess, and control, their own tax administration. In Tajikistan tax forecasting by subnational entities is achieved conjointly with representatives of the tax inspectorate (Tax Committee), which is in charge of collecting all taxes in the Republic. The latter has an interest to underestimate tax revenues because forecasts are still widely understood as mandatory plan figures or “targets” to be reached or exceeded35, an attitude that reflects Soviet thinking. Missing a “target” is often considered a failure, and exceeding the target may be prone to be rewarded. In fact, local governments have even an incentive to collude with the Tax Service because they can retain 80 percent (90 percent for Dushanbe) of the excess revenue (effective minus projected) at the end of the budget year. This reward does not only encourage low tax forecasts,

35 As an example, any revenue estimate of traffic fines is typically misinterpreted as a target to be achieved, so the police would set out “speed traps” for automobilist simply to reach their revenue “target”. 27 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank but is also ineffective, if not perverse, because local governments themselves cannot influence the amount of excess taxes for which they are rewarded. Grant- ing an “incentive” to an agent who does not control the instruments to achieve a particular goal misses a fundamental point of economic theory. And finally, the Republican government itself has to gain from low tax forecasts because this holds back potential demands of local governments for higher spending budgets. In practice these local revenue forecasts are based on tax collections of a base year, which is then updated by coefficients that reflect the expected rates of increase for relevant macro data by entity as provided by the Statistical Office or the Ministry of Finance. These regionalized macro data must be considered to be rather arbitrary and impossible to justify.36 In addition local authorities receive information from the tax inspectorate on specific developments, e.g. the registration of new firms. Local governments are also in charge of projecting the revenues of jamoyats within the local constituency, which consist mainly of registration fees. Even the small fees the jamoyats have to collect, e.g. for registering official acts, have to be integrated in the Republican budget, so there is no incentive for them to mobilize local resources in their own interest. As to the projections of revenues for the Republican budget the Ministry of Fi- nance also makes its own revenue projections for the consolidated Republican budget. It is not clear why cities/districts and oblasts are then required to submit regional tax projections for their constituency. The question remains whether this was useful or just an ineffective duplication of efforts. The Ministry of Finance explained that the information generated by local authorities was valuable as such and was only changed when it did not conform with the Ministry’s own pro- jection. However the decentralized process of tax forecasting by local authorities, even if guided by the Ministry of Finance via macroeconomic indicators, is fraught with significant errors that have to be corrected during the budget year. Compared with the approved budget, the needed adjustments of revenue forecasts are massive, and realized revenues tend to outpace even the adjusted budget figures. Figure 4 exhibits the relative surpluses of tax realizations compared with tax revenues as recorded in the approved budgets for 2010 and 2011, which contradicts the findings of the PEFA study cited above. In these two years, there are only three incidents of overrating tax projections at the city/district level. The actual values for the Faysabad and the Shahrinav districts exceeded the original- ly projected amounts by some 50 percent; and Vahdat city misjudged its tax revenues by over 100 percent in 2011. The unusual and ineffective method used to estimate the financial envelope for the Republican budget in Tajikistan is probably explained by the futile attempt to technically apportion resources to oblasts, cities and districts according to the derivation principle. As said above, this principle does not make sense where the local incidence of tax revenue is arbitrary depending, inter alia, on the registration of taxpayers (firms) or the access to natural resources whose regional occur- rence is inequitable and unfair (see C.2.b above). The coefficients applied to local

36 For instance, the four districts of the Capital City received highly dissimilar figures for the rates of increase to be applied to their tax bases. For 2014, these figures are 16 percent, 34 percent, 26 percent and 9 percent, respectively. Realistically, forecasting macroeconomic developments by district of a city is virtually impossible. 28 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank tax shares may be expected to correct these inequities, not only as to tax capacity but also with regard to spending needs, but the resulting variations in vertical tax shares are impossible to be substantiated as required for a proper equalization scheme (see C.2.c on page 18).

Figure 4: Actual tax collections minus projected tax collections of local budgets as percentage of tax projections, 2010 and 2011

Source: Ministry of Finance; own calculations.

b. Estimating expenditures The main categories of the deconcentrated expenditure budget of the Republic are for education, health services, housing and culture. The responsibility for social protection is negligent, but jamoyats may play some role in identifying and targeting the poor, including for tax concessions that do not show up in public budgets since tax expenditures are not recorded. The estimation of expenditure items is also highly decentralized. Basically, the spending units (schools, health centers, etc.) are in charge of establishing the budget projections for their respective institutions, which are then consolidated at the city/district and, where applicable, at the oblast levels. The local financial officer is to include them into the local budget proposal for the coming year. The latter is then deliberated at the local level, both in terms of revenues and expenditures, and sent to the Ministry of Finance by July 15th the latest. The Minis- try of Finance looks at these proposals by functions and sectors. There are specialized sectoral departments in the Ministry of Finance such as for health and education. For public works (such as the construction of hospitals), this is taken care of by the investment unit in the Ministry of Finance. It unit tries to identify

29 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank projects that can be separated out for financing from international donors or lenders. These projects would then be integrated into the national budget. The preparation of expenditure budgets is based on relevant norms37 and budget instructions set by the Ministry of Finance conjointly with the line ministries. The breakdown of the financial envelope by institutions and budget lines is made by the Republican ministries. The Ministry of Finance organizes budget hearings where local governments may participate. The general norms used for preparing the budget are revised every year and established through the budget law. Budget proposals launched by districts are reconciled with the overall Republican budget through negotiations and compromise with local State officials. So there may be budget cuts or revisions to tax forecasts for local governments that are effected without feedback to the local constituency or assembly. As a result the main burden of consolidating the various budget proposals lies on the Ministry of Finance, but sectoral budget proposals have to be agreed upon with the line ministries, e.g. the Ministry of Education. The latter checks whether the proposals are in line with the spending norms that govern education policies. The line ministry also considers non-financial aspects such as extra-curricular activities or professional development of staff. As regards spending on education, the Ministry of Education controls only 10 percent of the national education budget directly. The largest part (80 percent) goes to general schools to be financed from local budgets. The Ministry itself takes care of some special schools (e.g. for the handicapped, or for the gifted), and for internat-type of schools. The latter serve to accommodate education needs for pupils from remote mountainous areas, for example. The Ministry also funds vocational training and universities directly from the Republican budget. And it shares the costs of medical colleges with the Ministry of Health. Moreover, for allocating resources to education and health, Tajikistan has recently introduced per capita funding schemes based on appropriate formulae. For instance the formula for education distinguishes between three categories of schools – primary (1-4), basic (1-9), and general (1-11), where the numbers in brackets indicate the range of grades offered by these institutions. These institutions receive different lump sums and a given amount of money for each pupil. The table applicable for 2013 is as follows:

Category of school Per capita amount (TJS) Lump sum (TJS)

General 497 92,118

Basic 619 37,090 Primary 775 13,353

The allocation so calculated are then leveraged by a factor that is considered a proxy for higher cost in relation to the geographical altitude of the beneficiary institution, in particular the low population density. These factors are as follows:

37 For instance, there are quantitative norms such as for student/teacher ratios, and teachers’ salaries are also given, which renders the estimation of expenditures a pure multiplication exercise. 30 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank

Oblast District/city Leverage factor Gorno-Badakhshan Autonomous Oblast Murghob district 1.9 Roshtqal’a district 1.5 Ishkoshim district 1.5 Rushon district 1.45 Chorugh city 1.45 Shughnon district 1.45 Darvoz district 1.35 Vanj district 1.35 Khatlon Oblast Norak city 1.4 Shurobod district 1.2 Soughd Oblast Ayni city 1.2 Region of Republican Subordination Rogun 1.2 Source: Ministry of Finance, Unit on Education Sector Budget Management

The resulting budget lines are calculated for each beneficiary institution, and the budget resources are strictly earmarked38 and, during execution, transferred to the district/city budget, which ought to pass them on to the respective institution (school). The district/city has no budgetary discretion on these funds whatsoev- er. However during budget execution it exercises some control function both for the Ministry of Finance and the Ministry of Education. The use of spending norms both on the supply side (teachers’ salaries) and the demand side (per capita allocations as a proxy for student fees) entails the risk of over-determining budget lines, especially as the spending units have little, if any, leeway to adjust their spending plans. The parameters conveyed to the spending units must therefore be checked for consistency at the central level, and, where needed, adjusted to the particular local circumstances during budget execution.

6. Budget execution In Tajikistan the legal budget document is executed line by line with little budgetary discretion of the administration at the local level. During budget execution some money in the form of subventions may be transferred from the Republican budget to subnational entities whose spending exceeds its revenues; and where revenues exceed expenditures, some money is transferred back to the Republi- can budget.

38 Transfers to new schools that rival existing ones are not possible, as it is impossible to shift resources from the education payroll to other education-related functions such as ICT, for instance. Direct transfer from the State budget to any chartered or accredited institutions that follows the standards set by the Ministry of Edu- cation as in the case of Armenia, for instance, or on a pilot basis in the Russian Samara Oblast, are not possible in Tajikistan. 31 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Although local budgets usually obtain the provisions approved by parliament during the course of the year, there may be some problems resulting from the failure to realize local revenue collections as planned. This is particularly trouble- some as regards the funding of schools through district budgets, for instance. It may impact on arrears in teachers’ payrolls.39 As a remedy, the government appears to be considering direct (or earmarked) subsidies for the schools where district set other priorities in spending scarce resources. However, this requires an electronic information system for school funding to cope with immediate needs. The present (paper based) system is inadequate, expensive and too slow.

a. The revenue structure As can be seen from Table 1, the structure of local revenue assignments (including both local taxes and the local share of Republican taxes) according to executed budgets varies greatly among local constituencies.

Table 1: The structure of realized revenues of oblasts, Dushanbe City, and the Region of Republican Subordination, 2011

GBAO Khatlon Soughd Dushanbe RRS Income tax 52,4% 29,0% 17,0% 22,8% 19,9% Profits tax 5,4% 9,5% 15,8% 11,1% 11,2% VAT 8,4% 15,3% 14,6% 14,0% 16,4% Resource taxes 0,1% 1,3% 7,2% 0,2% 1,1% Road tax 4,3% 5,1% 9,7% 20,5% 15,8% Sales tax 4,1% 7,3% 8,4% 9,1% 9,9% Motor vehicle tax 4,4% 4,0% 4,7% 2,1% 3,9% Land tax 3,8% 12,7% 5,7% 0,5% 5,5% Property tax 2,3% 4,9% 3,8% 4,2% 4,0% Other tax and non-tax 14,8% 10,9% 13,2% 15,5% 12,2% Total share 100,0% 100,0% 100,0% 100,0% 100,0% Share of total local taxes 1,2% 17,2% 29,3% 37,9% 14,4%

Source: Ministry of Finance; own calculations.

The most important local revenue is derived from the personal income tax, but this in varying proportions by entity. The income tax share of total taxes is highest in the GBAO (more than 50 percent), and lowest in Soughd oblast (17 percent). Roughly one fifth of total taxes are derived from personal income taxes on average. The next most important revenue derives from VAT collections. Here the share is roughly 15 percent of total taxes assigned to local governments, except for the GBAO where this share falls below 10 percent.

39 However this does not mean that districts ignore the significance of schools, which consume 60-70% of their budgets. 32 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank The share of revenue from other important taxes assigned to local governments also varies considerably. For instance, the road tax produces a share of 20 percent for Dushanbe, and 15 percent for the Region of Republican Subordination, while it is less important for the GBAO or the Khatlon oblast (5 percent or less). Similarly, the local shares of resource taxes differ, expectedly, because of variations in the local incidence of taxable resources. More generally resource taxes retained by local entities are almost negligible except for the Soughd oblast where they represented 7.2 percent of all tax revenue in 2011. As regards local taxes, the property tax contributes a relatively stable proportion of 4-5 percent of total taxes on average for all regions, while the local land tax is again very variable. It is as high as about 13 percent for the Khatlon oblast, and as low as 0.5 percent for Dushanbe.

Figure 5: The excess of subnational taxes transferred to the Republican budget, 2011

Source: Ministry of Finance; own calculations.

While these figures result from a blend of revenues assigned according to the derivation principle and vertical tax shares that are determined annually through the budget law, and which hence may change from year to year, local governments also participate in the excess taxes (realized minus planned revenue) at a rate of 80 percent (90 percent for Dushanbe). The remainder is to be transferred 33 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank into the Republican budget (Stabilization Fund). For the year 2011, the effect of this “incentive” premium is depicted in Figure 5 above, which exhibits the excess of taxes that is transferred to the Republican budget. Figure 5 represents absolute figures, which says little about the budget relevance of these extra resources. If the revenue retained on taxes collected beyond the planned target is related to all expenditures for all 17 local budget units, about 6.5 percent of this spending was financed from the extra revenue in 2011.

c. The expenditure structure Apparently, the focus of local expenditures is on current spending. Capital spending is mainly assigned to the Republican authorities directly, with exceptions – notably the Capital City. Some important entities (such as the city of Vahdat with about 300,000 inhabitants) do not spend anything on capital projects from their budget. The local incidence of capital spending and infrastructure projects could not be examined given the limited time available. An examination of the expenditure structure of the deconcentrated budget by local governments (Table 2) also reveals significant variations.

Table 2: The structure of realized expenditures of oblasts, Dushanbe City, and the Region of Republican Subordination, 2011 GBAO Khatlon Soughd Dushanbe RRS Administration 12,5% 7,2% 5,8% 1,4% 10,0% Education 46,3% 53,6% 44,4% 14,6% 55,0% Health care 23,2% 23,4% 21,1% 9,1% 19,1% Social protection 1,2% 1,4% 1,8% 0,8% 1,3% Housing and utilities 2,8% 4,9% 6,7% 68,0% 4,9% Culture 6,9% 4,2% 12,9% 1,7% 5,1% Other spending 7,2% 5,3% 7,4% 4,4% 4,7% Total share 100,0% 100,0% 100,0% 100,0% 100,0% Share of total local spending 4,9% 24,5% 24,5% 30,8% 15,3%

Source: Ministry of Finance; own calculations.

However the Capital City blurs the interregional comparison of expenditure because of its heavy spending on infrastructure development, in particular utilities, which are improperly lumped together with housing. For this reason, the budget line “housing and utilities” and “other expenditures” were eliminated from all local budgets to obtain a less biased picture of functional spending on the remaining categories. The resulting picture is found in Figure 6. The adjusted expenditure structure of the five regional entities represented in Figure 6 appears to be much more balanced indeed. Education and health constitute the most important spending blocks with 56.1 and 25.5 percent of the revised total on average. The GBAO, the Soughd oblast, and Dushanbe fall short of the average for education; Khatlon oblast and the Region of Republican Subordi- nation exceed the average. But the variations are within  3 percentage points. For health services the Region of Republican Subordination falls short of the av-

34 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank erage by more than 4 percentage points, while the Capital City exceeds this benchmark by 7.5 points.40 The relative variations are even higher for cultural spending categories where the Soughd oblast takes the lead by spending almost twice the average share of the adjusted budget. Spending on social protection is almost negligible everywhere, except for Dushanbe where it appears to play a slightly more significant role.

Figure 6: The structure of local expenditures (except housing, utilities and other spending) by subnational entities, 2011

Source: Ministry of Finance; own calculations.

The relative budget shares do not say much about the spending needs however. For lack of appropriate demographic data, the various spending blocks were ex- pressed in per capita terms to allow at least some indicative measure of spending by population. The resulting picture represented in Figure 7 reveals a remarkable stability in per capita spending for education, excepting the GBAO, which uses up almost 2.5 times the average of the other entities. Spending on health per capita is much more variable among local constituencies even when eliminating the GBAO and Dushanbe to account for their specific needs. The largest relative variation is found for spending on cultural activities, although the average level is compara-

40 It should be noted however that public spending on health is comparably low in Tajikistan. The National De- velopment Strategy, on page 33, states: “The health care system is becoming increasingly dependent on unoffi- cial private payments for medical services and on foreign aid. In recent years private payments represented 70% of total spending, budget expenditures accounted for 16% and donor aid for 14%.” These figures may be somewhat outdated, but the order of magnitude should not have changed much. 35 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank bly low. Spending on social protection by local governments is negligible, which is unusual when compared with international practice where the lowest tier of government often plays an important role in supporting and targeting the poor. To some extent jamoyats play this role in Tajikistan as they are typically in charge of identifying individuals or families when it comes to granting tax exemptions and other State benefits. However, overall, the Tajik system of social protection is considered to be outdated needing substantial overhaul. The NDS makes extremely blunt statements about the state of the art in this important policy domain. “Due to the limited budget resources, it is not possible to support the functioning of the current system, which is unwieldy, lacks transparency, is not targeted to specific needs and is not consistent with current requirements. The impact of the existing social welfare methods on reducing poverty among vulnerable segments of the population is negligible.”41 While there could be an important role for local governments in this area, any assignment of social functions to local authorities must wait for a comprehensive sectoral reform and the mobilization of substantial resources.

Figure 7: Local spending by categories and by local entity, somoni per inhabitant, 2011

Source: Ministry of Finance; own calculations.

It is not astonishing that the share of administrative spending per capita is the higher the smaller the local constituency and the less densely it is populated. This explains both the high share of this spending category in the GBOA and the

41 National Development Strategy, op.cit., p. 37. Moreover: “Although there are laws on the books that provide for various nonmonetary concessions, in practice the beneficiaries rarely receive them.” 36 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank low share in Dushanbe (see Table 2). In per-capita terms the relationship is almost a perfect hyperbola for the cities/districts in the Region of Republican Sub- ordination (see Figure 8). Apart from some minor deviations, only Vahdat fall out of the normal pattern spending for administration per capita more than warrant- ed.

Figure 8: The relationship between per capita administration costs and population for the entities of the Region of Republican Subordination, 2011

Source: Ministry of Finance; own calculations

Moreover a glance at the city/district level in the Region of Republican Subordi- nation, which is perhaps indicative for this subnational level in the oblasts, reveals much greater variations in the distribution of per capita spending by local government (Figure 9). The standard deviations and the variation coefficients for the main categories of local per capita spending by cities and districts of the Re- gion of Republican Subordination for 2011 are shown in Table 3. Excepting administrative expenditures, which are analyzed above, the greatest variation is exhibited by per capita expenditures for culture (62.5 percent), followed by per capita spending for health services (one third) and social protection (30.8 percent).

37 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Figure 9: City/district spending by categories in the Region of Republican Subordination, somoni per inhabitant, 2011

Source: Ministry of Finance; own calculations.

Table 3: City/district spending by categories in the Region of Republican Sub- ordination, somoni per inhabitant, mean, standard deviation, and variation coefficient, 2011 Standard Variation Mean Deviation Coefficient Administration 27,79 18,74 67,4% Education 114,01 26,57 23,3% Health care 42,28 14,17 33,5% Social protection 2,41 0,74 30,8% Culture 12,27 7,67 62,5% Total 198,77 61,43 30,9%

Source: Ministry of Finance; own calculations.

Furthermore, the role of local governments in providing local infrastructure through public investments is negligible and unsystematic. The Republican budget for 2011 includes transfers to enterprises of the construction industry that go

38 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank through local budgets, but only three entities benefit from these investments whose share of total spending is around 1 percent of total spending.42 Similarly, spending on transportation and communication, which, together with housing and utilities, is virtually the only area of local fixed capital formation and maintenance, was extremely small (see Table 4). The expansion of local access to water supply, sanitation, housing and municipal services ranks high in the NDS43, but the resources assigned to these essential local services are abysmal.

Table 4: Local expenditures on transportation and communication in percent of total local expenditures, 2011 Region of Khatlon Soughd Dushanbe GBAO Republican Oblast Oblast City Subordination Transport and 0.3% 0.1% 3.2% 1.6% 1.0% communications

Source: Ministry of Finance; own calculations.

d. Tax “incentives”, subventions, and borrowing Apart from own revenue (local taxes, and a proportion of Republican taxes) the local constituency may appropriate 80 percent of the excess revenue (taxes collected minus taxes projected). This is meant to create an “incentive” to levy taxes, albeit it is ill directed and futile (see below). In addition the cities/districts may receive subventions from the Republican budget. These are deemed to bridge the gap between spending needs and own revenue (see Figure 10). Spending needs are defined in accordance with quantitative norms (for instance number of employees by population category), where the payroll determined is protected by law. In health, some flexibility is possible as savings on the payroll can be used for bonuses to encourage quality services. Surpluses from effective payroll falling below the budget norm have to be returned to the Republican budget. In other spending areas savings can be used for other forms of spending within the spending category. Figure 10 demonstrates the wide variations of subventions as a share of subnational income among local entities. It is also obvious that these share can vary significantly from one year to the other, which renders budget planning haphaz- ard without a steadier provision of funds within a clear medium-term perspective (MTEF).

42 An exception is the Shahrinav district where this share was 18 percent.

43 National Development Strategy, op.cit., p. 45. 39 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Figure 10: Subventions as a share of total subnational income, 2010 and 2011

Source: Ministry of Finance

It is obvious however that both instruments, vertical tax sharing and subventions, do not achieve their objectives to even out normalized per capita spending on education and health, for instance (see Figure 9 above). A well designed equalization system based on sound and objective criteria and a stable medium- term budget framework is likely to be crucial for the success of any decentralization strategy the country wants to engage in. Although local governments may technically borrow, albeit only from the Repub- lican government, these provisions remain idle in practice. Borrowing from financial institutions or access to capital markets is not possible. However local governments, in particular jamoyats, may establish local public enterprises whose budgets substitute the lack of own budgeting and that, potentially, have also access to credits and the capital market.

7. Summary of section Topic Tajikistan Int’l good practice Budget system Centralized Republican Each layer of government budget; deconcentrated, establishes its own budget inter alia, by local entities system. These are integrat- and, as proposed, by ed and consolidated by spending units (schools, harmonized budget rules hospitals) directly (such as classification etc.) PFM Important reforms and PFM is usually highly devel- improved PFM, but have oped, even at the local level, 40 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Topic Tajikistan Int’l good practice to be implemented. Fur- to ascertain sound budget ther reforms are needed. management Local PFM is dragging and needs special attention, including qualified human resources Revenue forecasting Is both centralized and Is usually done at the na- decentralized, with nota- tional level using macroeco- ble inconsistencies. There nomic data. Forecasts are is a built-in bias to under- then broken down in ac- state tax revenue projec- cordance with given institutions tional allocation rules. Local governments may forecast their own revenue potential independently Estimating expendi- The estimation of ex- The estimation of local ex- tures penditures is highly de- penditures is made by func- centralized, down to the tion, not necessarily by spending units. But esti- budget lines. Usually spend- mates are constrained by ing norms are not imposed, spending norms that aim but they result from external at equalizing among conditions such as the salary units. The use of spend- structure, needs indicators, ing norms both on the etc. Given a certain flexibil- supply and the demand ity of the budget, overly de- side entails the risk of tailed norms are not needed over-determining budget lines Revenue structure The derivation principle Local taxes are defined on combined with variable immobile tax sources, and vertical tax sharing pro- are allocated in full. Tax portions tends to bias the sharing of national taxes is allocation of resources. used where there is a clear- The revenue “incentive” cut local incidence of these of 80 percent of extra taxes. Other national taxes, revenue is ineffectual and in particular VAT, profit and counterproductive resource taxation are assigned to the central budget Expenditure structure Current spending in the Current spending in main main policy areas are policy areas may deviate in comparable among local per capita terms, but is con- entities, with notable ex- straint by legal mandates to ceptions. Some inconsist- provide local services. Local encies remain. Capital spending for infrastructure formation and local infra- development is significant structure development (as high as two thirds of to- are of minor significance tal capital spending of the 41 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Topic Tajikistan Int’l good practice for local governments public sector in OECD countries)

E. Key considerations, and the way forward

1. Premises With a view to establishing a platform for the country’s further development, the President of the Republic of Tajikistan has instigated and approved the National Development Strategy (NDS) through 2015, which intends to provide for an or- derly long-term development process in accordance with the Millennium Devel- opment Goals (MDGs).44 In this context, the Tajik Government considers an efficient public administration to be one of the key policy objectives for sustained economic development and poverty reduction. This is found to be crucial in view of the overarching policy goal, in the words of the President of Tajikistan,

“to bolster economic development, increase of new jobs, solution of social chal- lenges, and improvement of the people’s well-being and intensification of fruitful, strong partnership relations with foreign countries”.45 The NDS admits that “(t)he decision-making mechanism employed by government authorities remains complicated and is not transparent as far as the public is concerned”46 and, consequently, the Tajik authorities aim at a more efficient system of public administration. One of the priorities defined in the NDS emphasizes, inter alia, enhancing “administrative-territorial governance and formation of a full-fledged local self-government”.47 The chosen decentralization strategy counts on developing local governments with a view to attaining a clear distribution of functions, authority, financial resources, and property to ensure efficient and quality public service provision.48 As said in the text of the NDS:

“The distribution of functions and authorities among central and local governments and local self-government bodies is not adequately defined. This impairs the effectiveness of work done by government authorities at the local level. The absence of a clearly defined assignment of functions related to providing services to the public contributes to a dissipation of limited resources and their inefficient use. Local governments do not have sufficient authorities to address local prob-

44 Republic of Tajikistan, National Development Strategy, op.cit., p. 4. 45 The President of Tajikistan, The annual message to the Majlisi Oli of the Republic of Tajikistan, 26.04.2013, Dushanbe City.

46 National Development Strategy, op.cit., p. 5. The NDS also acknowledges that “(t)he system of public administration currently in place still retains features of the previous directive-based system. It is cumbersome and ineffective and it shows signs of redundancy and excessive administrative control” (ibidem, p. 47).

47 Ibidem, p. 12. 48 The NDS states that “(t)he centralisation of government revenues and insufficient clarity with regard to the rights, powers and accountability of local governments and local self-government authorities mean that they are not actively involved in the implementation of reforms at the local level.” Ibidem, p. 6. 42 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank

lems and as a result these problems are dealt with by central government bodies or they are not dealt with at all.

Local self-government bodies cannot ensure public access to effective and high- quality services. The operations of jamoyat administrations, the level of government closest to the population, need to be improved to fully comply with the principles of local self-governance”.49 The decentralization strategy outlined in the NDS need further elaboration and concrete policy initiatives to pave the “way forward” in this important policy domain. The Supreme Assembly (Majlisi Oli), conjointly with the President and the Cabinet, will play a decisive part in this ambitious endeavor. It is proposed that the Supreme Assembly take the initiative by organizing a high-level workshop or conference to discuss the necessary organizational transformations of the public sector, to examine the available options, to define the overall strategy for the longer and the shorter term, and to initiate further actions to lay the legislative and institutional foundations for a successful decentralization strategy. The conference could fall into two parts: Part I would be devoted to revising the Soviet heritage of public administration and the organization of public decision-making in Tajikistan. It would also lay the ground for the longer-term options including a possible conversion of the inherited paradigm. Part II would focus on feasible shorter-term options and define the more pragmatic objectives for the National Development Strategy to be fleshed out for the period after 2015. But it would also evaluate the progress made during the concurrent phase of the NDS. In particular reforms already sanctioned by the Republican legislature should be tested against the objectives and results achieved so far. This includes examining the backlog of reforms whose implementation is still pending.

2. Ready for a change of paradigm? Given the fact that power sharing between levels of government and the structure of local government financing in Tajikistan deviates significantly from the standard paradigm of decentralization as outlined in the European Charter of Lo- cal Self-Government and good practice in non-European reference countries, the chief query must be whether the country is ready for a change in paradigm. Even though an immediate transformation of the government sector may be unrealistic, it is important to fix the longer-term goals for decentralization strategies in order to identify the “way forward”, which is to be embarked on step by step. Decentralization of government in most countries of the world evolves following the key concept of “subsidiarity”. This organizing principle presupposes that a public matter ought to be handled by the lowest, least centralized authority capable of addressing that matter effectively. Central authorities should exercise a subsidiary function, performing only those tasks, which cannot be performed ef-

49 Ibidem, p. 11. 43 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank fectively at the local or intermediate (city/district, oblast) level. In Tajikistan it would put the actual concept of State organization on its head, so it is question- able whether the country would embrace this concept even for the longer term. However discussing the concept of subsidiarity and the resulting options is crucial for any further strategy to be developed even for the short run. Tajikistan has proven that it is capable of changing paradigms in the past as ex- emplified by the following:  In the context of reorganizing the State, it is noteworthy that the Law on Local Self-government makes important leeway toward embracing not only the subsidiarity principle, but also toward propping local democracy. But it stops half way through and could become more effective by further reforms. In particular local jamoyats are in need of an own tax base and a clear definition of their exclusive functions, and they are handicapped by the lack of an own budget and conforming resources.  The adoption of a longer term Public Finance Management (PFM) Strategy complemented by realistic and feasible PFM Action Plans and Reports con- stitutes a formidable and ambitious effort to improve the effectiveness of the public sector, but it still requires scrupulous attention to enhance its effectiveness, in particular with respect to the local government sector. It appears that local governments are hampered by a dependency on ad hoc decisions of Republican authorities in the context of establishing their budgets. Volatile revenue sourcing does not allow them to do proper planning, so local budgeting should be embedded in an MTEF.  The introduction of per capita funding mechanisms in education and health services is considered to be beneficial by many observers, because it entails more active involvement of local communities and parents, encour- ages greater transparency in the sector, enhances competition among institutions and leads to better quality of service (e.g., through a better selection of teachers) and to less favoritism. But the policy may have to be evaluated and improved in the context of a new decentralization strategy because it risks to sideline local governments by implementing a centralized policy directly via local service providers, including, eventually, private institutions.  A major change in the philosophy of health care was introduced in 2008 by legislation for the setting up of a health insurance fund. Implementation of this fund was planned for 2010, but postponed, first, to 2014, and now to 2017. Obviously a health insurance system financed through contributions from the insured (e.g. by deductions from the payroll) has to be supple- mented by a public funding scheme for those that do not participate in market activities (children, the old, the handicapped). These citizens will have to be supported from the Republican budget through subsidies.50 Whatever the outcome of the new paradigm will be in practice, it is obvious that it will have a severe impact on decentralization and on local gov-

50 As the present system foresees a list of “free basic health services” that are funded from the Republican budget, and other health services for which there are fees based on a pricing list, it could lead to a dual system whereby basic health services are guaranteed and paid for from taxes, and a supplementary package to be financed from the health insurance fund. 44 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank ernment finances. Lower tiers of government could then exert greater autonomy in setting up institutions and in providing health related public services to be funded through the health insurance, which would be split from tax funding. However the greatest challenge stemming from the subsidiarity principle relates to the organization of oblasts, districts and cities governed by the actual Consti- tutional Law of the Republic of Tajikistan on Local Government. The key question is whether these entities should continue to function as deconcentrated agencies of the Republican government, or whether they should be given self-governing competencies, and in the affirmative, in which functional areas. It would also involve delving into issues of the equitable funding of local budgets (through a centralized equalization system based on objective data) and into vertical and horizontal modes of intergovernmental cooperation and funding, including jamoyats and other autonomous budget users. It is difficult to see that the Republican government would assume the risks related to a fundamental change in the paradigm without safeguards. In particular there must be an operational centralized surveillance mechanism and assurances that the decentralized functions are effectively carried out by local governments and in line with the preferences of their citizens. This could be achieved by a parallel system of State control that functions alongside with local self- governance. The successful Polish model could be helpful in this regard and the experiences made in this country would elucidate the discussions in Tajikistan. Furthermore, local authorities must possess the administrative capacity to carry out their functions. It implies the formation of adequate human capital at the local level, which is difficult to achieve under existing pay scales and norms. The need to train local officials is probably the hardest constraint in the short run due to a lack of adequate resources. While a discussion of longer-term objectives is useful for the design of a perspective for a decentralization strategy aimed at bringing citizens closer to public service delivery and at fostering the democratization process in Tajikistan, it is also necessary to flesh out decentralization policies that could be realized more immediately in the context of a subsequent National Development Strategy. Consequently, and more concretely, the proposed workshop or conference to be instigated and organized by the Supreme Assembly should produce two types of output: (i) The elaboration of a long-term vision for decentralization strategies for the National Development Strategy beyond 2015; and (ii) the setting up of various Working Parties to flesh out reform proposals that could be realized more immediately during the planning period of the next NDS. The Working Parties are supposed to evaluate the present state of the art and elaborate more details proposals for amending and complementing the present legislation.

3. Intermediate steps toward reformed local governments When it comes to reform proposal of a more immediate relevance for the Su- preme Assembly as the Republican legislator, the following areas should be looked at more closely by the proposed Working Parties.

45 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank a. Development of administrative-territorial governance and formation of full-fledged local self-government The header of this point is taken verbally from the key areas of activities of the current NDS, but the objectives remain pending so far. The strategy “calls for measures to align administrative-territorial divisions with a redistribution of functions and to define the criteria for administrative-territorial divisions and the relationship among different levels of government and local self-government”.51 It comprises “plans to reassign the functions and authorities” to subnational tiers of government, the granting of “financial autonomy” to local government bodies and “greater authority” of local self-government “to address issues of local importance”. Unfortunately the agenda is still open. In order to provide some guidance to this policy objective, the following may be helpful:  It is advisable to focus initially on the jamoyats rather than the deconcentrated subnational levels of government because disentangling Republican from local functions while maintaining central supervision requires a change in paradigm, which may be realized only over the longer term.52 In order to spur discussions on the role of jamoyats, some exploratory suggestions are made in Appendix I to this paper.  As said, the Law on Self-governance of Town and Village Governments of 2009 provides a sound basis for further reforms. The principles laid down in Article 5 of this Law are universal, sound and comprehensive. Improving the Law would revitalize the public sector closest to citizens, reactivate and promote social energies and render local self-government a daily experience, which further reforms could draw upon, for instance when revising the Constitutional Law of the Republic of Tajikistan on Local Govern- ment.  The proposed strategy is to first lay the ground for a functioning self- governing public sector “at grass roots” with little, if any, interference from Republican authorities, including those of districts and cities, but governed by legal provisions set by the Supreme Assembly that simply establish the “framework” for local self-government and its operations. It is expected that local democracy could thus evolve more freely and more rapidly, and that the lessons drawn from this experience could be used for a more comprehensive decentralization strategy that includes the intermediate sectors, oblasts, districts, and cities.  In addition the reform of the law on jamoyats could draw on activities ini- tiated by USAID53 whose work should be continued or reactivated. Some lessons to be drawn from these studies are the following:

51 National Development Strategy, op.cit., p. 15.

52 Reforming the districts and cities would interfere too much with the organization of the Republic in general and needs a change in the paradigm on decentralization, which is likely to be reached only over time, with potentially controversial discussions among the authorities concerned.

53 See in particular the Results of Functional Analysis of Local Government Powers in the Republic of Tajikistan, USAID Local Development Initiatives Project, September 2012. 46 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank o The key problem is that local government powers are very ambigu- ous in Tajikistan. It could help to restructure Articles 10-14 of the Law by distinguishing administrative functions (procedural rules concerning self-governance, monitoring and oversight, reporting, planning, approval, establishment of institutions, etc.), regulatory functions (e.g. health and sanitation regulations), coordinative functions (including interagency cooperation), service functions (e.g. kindergarten, care for the elderly, for the homeless etc.) and support functions (relative to functions under the control of higher tiers of government, but delegated to the lower tier). o In particular functional service functions, policy areas in which the jamoyats are given full and exclusive responsibility for service delivery, are not well developed in the Law and would require thorough discussing in the light of the subsidiarity principle (e.g., appropri- ateness for being carried out by jamoyats), the availability of public resources for these functions and the jamoyat budgets, as well as local administrative capacity. The focus should clearly be on local services and infrastructure development. In view of scarce local administrative capacities, supportive functions should be limited or be fully funded to avoid “unfunded mandates”. o There could be concurrent responsibilities in certain policy areas, where various levels of government act conjointly or in cooperation. However the respective shared competencies should be well defined by level of government. For instance for public order, jamoyats play an important role in registering civil acts, or ensuring public order within their territories. In social protection, where local responsibilities are particularly ill defined and underfunded, the jamoyats could assume certain functions where targeting the beneficiaries is essential (such as care for the homeless). They could also exercise payment functions for Republican social programs as long as the full coverage through the banking system is not guaranteed. Or jamoyats could assume a role in protecting the local environment (but not for clean air as appears to be the case now, at least formally). o The range of tasks and functions performed by public authorities is ill defined and spread over a large number of laws beyond the reach of the Law on Self-governance of Town and Village Governments. This renders a functional analysis unwieldy and needs some weed- ing out. For instance, jamoyats should not be involved in functions clearly assigned to the Republican government such as defense, public pensions, or even tax administration (with the possible exception of administering their own taxes). Assigning the role of a tax police to jamoyats to enforce collection without these taxes being clearly assigned to the jamoyat budget, as now, is counterproductive and could estrange local authorities from citizen-taxpayers. o There are uncertainties stemming from imprecise language in the law, from overlaps or duplication of functions (within the law), and

47 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank from conflicting competencies of local public officials through the assignment of similar or even identical legal powers. o There are discrepancies between laws, where a given function or power is described in several laws, yet assigned to different local government levels and/or jamoyats, with only slight changes in language and terminology.54 o And, most importantly, jamoyats do not control their own budgets, but have to rely on budget lines of superior levels of government. In fact the Law conveys authority to the Chairperson in Economics, Budget and Finance to formulate a draft budget of a Town or a Township (in coordination with the district or city finance departments) and to submit it to the Council, but, alas, this provision has remained sterile so far waiting to be implemented. In this regard another USAID study may provide further guidance.55 b. Development of framework for local government finance, including deconcentrated Republican local entities Another recommendation is for a Working Party of the Supreme Assembly to elaborate an organic Law on Local Government Finance, which does not exist in any preliminary form at present (except in the form of the annual Budget Law).56 This law would regulate financial and budget relations between the Republic on the one hand, and local entities (including jamoyats) on the other. It would con- tain provisions for intergovernmental fiscal relations both vertically and horizontally. The main chapters of such a law could read as follows:  General provisions – These stipulate that the funds to finance local own affairs shall be provided in the local budget, that local authorities dispose of the funds autonomously at their discretion according to the law, and that the funding of own affairs is adequate and commensurate (cf. Article 9 (1) and (2) CLSG).  The funding of local budgets – A distinction is to be made between own revenue, revenue transferred or shared by law, equalization payments, specific purpose grants, and specific payments (e.g. for delegated functions, disaster relief, etc.) o Own revenue should follow the principles of local taxation. In Tajiki- stan there are two local taxes that do in fact respect these principles. Consideration could be given to assigning all revenues from local fees, fines, service charges and the land leasing fee for jamoyat possessions to the jamoyats; revenue from the land leasing fee for city/district possessions, the property tax and the tax on vehicles to cities and districts; and revenue from the land leasing fee for oblast

54 Results of Functional Analysis…, op.cit., p. 11.

55 Budget Model Recommendations for Village and Town Jamoyats in the Republic of Tajikistan, USAID Local Development Initiatives Project, September 2012. 56 There is legislation on local government in the respective laws on oblasts, districts, and cities on the one hand, and on jamoyats at the other. Financial legislation has to be integrated into one consistent body that regulated the financial bases for all local governments. 48 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank possessions to the oblasts respectively to the City of Dushanbe. These fees, fines, taxes should also be administered and collected by the respective local authorities.57 A new local tax on property transactions (see below) could be shared between the jamoyats (perhaps conjointly for a district) and intermediate levels of government. o Republican revenue from the personal income tax could be transferred to, or shared with, local governments by the Law. Personal income tax has a clear local incidence, but care has to be taken as to where the tax is collected, at the place of work (registration of the employer), or on a residence basis. The latter is the preferable option although it might entail administrative complexities that are usually overcome easily as demonstrated by other developing or emerging countries. o Another tax with a clear local incidence (not active at present in Ta- jikistan) is a tax on the transaction of real property. Its revenue could also be transferred to, or shared with, local governments by the Law. The Capital City is likely to draw the greatest benefit from such a tax. o The allocation of resource taxes, which could also be transferred to, or shared with, local government is highly political and needs special considerations. On the one hand, public revenue from exploiting a national resource is best assigned to the Republican budget, which could then redistribute it, fully or partially, through the equalization mechanism. On the other hand, the people of a resource-rich region cannot fully be excluded from benefitting from these resources.58 o Conversely, local taxes could also be shared with the Republican budget, for instance to mitigate the volatility of a local tax. o Taxes transferred by law should not be earmarked and be at par with revenue from own resources. o Implicitly, all other Republican taxes (in particular VAT, company taxes) are assigned to the Republican budget, and no attempt is

57 It is desirable to specify all local revenue from own resources, which should also include local administrative and communal charges according to law, fees for constructions and the use of communal property, regulatory fees such as for protecting the environment, concession fees, resources from the sale of communal assets, income from capital (interest, stakes and shares), and fees for misdemeanor proceedings, including gains from confiscations resulting from the proceedings. 58 The United Nations, in its General Assembly‘s resolution 1803 (XVII) of 1962 declared, inter alia: “The right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the well-being of the people of the State concerned“. The substance of this principle has been implicitly applied to indigenous peoples by UN resolution 61/295 of 2008 on the Rights of Indigenous Peoples (Art 26): “Indigenous peoples have the right to the lands, territories and resources which they have traditionally owned, occupied or otherwise used or acquired”. This principle is however contentious with regard to newly discovered and exploited natural resources. In practice the sharing of wealth from natural resources is typically the outcome of a negotiation process between national and regional authorities. 49 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank made to allocate revenue from these taxes to local constituencies. It would end the present system of vertical tax sharing with varying and annually changing rates, which is executed without proper analysis of needs or justification. o The incentive premium for extra revenue collected leads to system- atic biases in revenue estimation and should be abolished. o Consideration could be given to allowing local governments to vary the rates of their local taxes, or to piggyback on Republican taxes at self-determined rates. o Equalization payments should also have the same rank as own resources and taxes transferred by law, i.e. they are granted without conditions. o Block grants given for specific purposes (such as education, health) should be clearly specified in terms of their allocation principles and, possibly, the specific allocation criteria employed. It is possible that these criteria be adjusted by separate legislation (e.g. a law on education), including the annual budget law. o Grants given at the discretion of the Republican government should simply be enumerated for completeness. They should be given for specific events (disaster) or for the funding of specific tasks that the Republican government delegates to a local authority. Subventions as under the present system do not form part of this category. They are abolished and replaced by horizontal equalization payments.  Equalization – The principles governing equalization laid out previously (see C.2.c above) need to be specified more clearly in the Law. They should focus on horizontal, not vertical, equalization criteria and formulae. o The resources of the equalization fund and its composition should be defined, and the funding mechanism established by the Law would automatically determine the corresponding amount of the equalization fund in the Republican budget. It can be varied only in excep- tional cases. o The allocation criteria for distributing the funds to levels of subnational entities (by group),59 and by individual entities (by unit) should also be specified in the law. It should be made clear which subnational government is entitled to participating in the equalization mechanism, and which not. o The allocation criteria by unit of subnational government should fall at least into two categories: (i) fiscal potential, and (ii) spending needs. Both categories have to be standardized and be specified in per capita terms, where objective criteria (such as topography) could serve as proxies.

59 Alternatively, it could be envisaged to allocate resources to an intermediate tier of government, which would then set up its own equalization mechanism for lower tiers of government. This is however fraught with budget risks and should only be tested at a more advanced stage of the decentralization process. 50 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank o The disbursement of the Fund’s means to local governments during the year through monthly advance payments, and the final allocation after the end of the fiscal year should be clearly regulated. The provisions could include dampening mechanisms (such as a lagged distribution of resources) to mitigate volatility of resources. o There should be a transitory “grandfathering” provision to guaran- tee a smooth transition from the present allocation of resources to the new equalization scheme. This is to protect local budgets from abrupt changes and budgetary shocks.  A Committee for Monitoring Development of the System of Fiscal Equaliza- tion of Municipalities should be establish by Law in order to monitor development of the system of fiscal equalization of local governments, and especially in order to provide the equity, efficiency and transparency of the system. The modalities for setting up this Committee, its composition, and its mandate should also be specified in the Law.  The Law should also set the stage for conditional grants, in particular for functional programs (education, primary health) and for local investment programs, where applicable. Where performance oriented grants are used, the performance criteria should also be specified as well as the sanctions to applied in the case of non-compliance.  Local budgeting – A more comprehensive section on local budgeting, the composition of the budget according to standard budget classification, budget procedures and their integration into the Republican budget cycle, and provisions regarding the preparation of the budget, including tax forecasting, and its execution, including the management of budget reserves, will also have to be regulated by the Law and harmonized between levels of government. It should comprise a framework for medium-term budgeting (MTEF). The budget section should conclude with provisions regarding internal and external audits.  Of course any Law on Local Finance, if it contains budgetary provisions, must be consistent with the overall Law on Budgets (as the annual budget laws of the Republic and all its subnational entities). And local finances must be entirely integrated into the national PFM framework, e.g. the Sin- gle Treasury Account. However in practice you may have to make concessions given the poor quality of financial administration at the local level, and not all provisions for the nation must apply to local governments.  A section of local investment policies and on local public borrowing would also be necessary.60 And the relationship between local governments and their local public enterprises, in particular in the area of municipal service provisions, could benefit from explicit regulations.  Finally, the Law should include PFM provisions that are relevant for the local government sector such as, for example, the access to the Single

60 The role of oblasts, cities and districts in capital spending is not clear in Tajikistan, let alone the role of jamoyats. Some cities/districts do invest; others have no provisions in their capital budgets. The situation appears to be clearer for the Capital City. The districts of Dushanbe do not have any role in capital spending. This is the exclusive responsibility of the City and the Republic. 51 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Treasury Account and its operation, financial planning, cash management, and supervision. c. Establishing the base budgets for local authorities It is of crucial importance to mitigate the transition from the actual allocation rules for local government budgets to the new regulations in order to avoid disruptions in funding local budgets and in the provision of local services. This requires extensive simulations of the proposed rules and their matching with actual local budgets. The methodology of such studies cannot be developed here, but a few point need to be stressed:  It is probably appropriate to start from the revenue side and tailor the expenditure functions to be attributed to local governments accordingly. A reverse methodology is likely to lead to unfunded mandates.  Once the sources of own revenue, transferred or shared Republican taxes, and the effects of the equalization scheme are simulated and hence tenta- tively known, one would examine which service functions could adequately be funded from these resources. Specific purpose programs to be funded by earmarked grants are to be examined separately and integrated con- secutively.  The service functions would have to be standardized per capita and costed according to conforming market or administrative prices.  If the financial envelope defined by the allocated resources proves to be insufficient, there are two options: either local government is relieved of the function, or the financial envelope is expanded conformingly. This starts a new round of checking and balancing local budgets.  A special treatment is required for the Capital City where most of the nation’s tax potential resides. Of course it is unrealistic to expect that the new system of local finance could reproduce the actual pattern of local budgets seamlessly. But the aim is to mini- mize discrepancies between the actual and the planned. In order to ease the transition, there is need for transitory provisions that protect local budgets tem- porarily (“grandfathering”) as specified in the Law on Local Public Finance. d. The conforming adjustment of PFM legislation and the Law on the Treasury Reforming the Law on Self-governance of Town and Village Governments and the introduction of a Law on Local Government Finance entails conforming adjustments of legislation on public sector management and the Law on the Treasury, inter alia. The present NDS has defined the relevant policy objectives as follows:

“With a view to improving spending efficiency, measures will be undertaken to increase responsibility and transparency in the management of government finances and to strengthen the potential for the development and execution of the republican and local budgets.”61

And

61 Ibidem, p. 14. 52 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank

“Special action will be taken to make budget spending more efficient, including improvement of the budget process and a clear definition of the roles of all agencies involved in the process. The MTBF will be introduced in stages, the budget commission will exercise greater authority and the budget will be linked more closely to national priorities. Coupled with the introduction of the MTBF, improve- ments will be made in macroeconomic forecasting techniques and in the methods for determining the funding package.”62 While these objectives are taken heeded by the ongoing reform process, there is need to review actual and proposed provisions in the light of public sector reform and the intended decentralization strategies. For instance there is need to examine the relationship between the local offices of the Republican Tax Service with local finance offices. And there is need to enable local governments to administer and collect their own taxes. In order to establish a level playing field for local taxation, there is need for uniform regulations on local sources of revenue such as notary fees to limit arbitrar- iness. Allegedly the actual tax provisions allow local governments, in particular jamoyats, to grant too many exemptions, so the tax revenue potential is undermined. Many businesses simply don’t register, and there is no incentive to do so (source of corruption). Much of the money is collected outside the budget, which should preferably go into socio-economic development. These failures need to be addressed by adequate PFM regulations. Moreover, everything that could be proposed to stabilize payments to local governments, for instance well established “demand norms”, i.e. the specification of particular forms of education and their funding, and other allocation rules should be examined and implemented where adequate. Finally, it is necessary to involve citizens and the civil society more strongly in establishing local budgets. This could be achieved by mechanisms of participatory budgeting, in which mahallas should be assigned a special role as far as jamoyat budgets are concerned, or through conducting public hearings in the regions.

4. Summary of section and proposed work program The issues and recommendations discussed in this section can be summarized as follows: Proposed short-run activities (1-3 years) for the Supreme Assembly 1. Organization of a high-level conference on decentralization to elaborate a long-term vision for decentralization strategies for the National Development Strategy beyond 2015, to discuss the necessary organizational transformations of the public sector, to examine the available options, to define the overall strategy for the longer and the shorter term, and to initiate further actions to lay the legislative and institutional foundations for a successful decentralization strategy. The Conference could take place at the end of 2014 or beginning of 2015. It should lead to a) Examining the longer-term options including a possible conversion of

62 Ibidem, p. 14. 53 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Proposed short-run activities (1-3 years) for the Supreme Assembly the inherited paradigm. b) Preparing the National Development Strategy to be fleshed out for the period after 2015. 2. The setting up of Working Parties (WP) to prepare for short-run and long-run legislative initiatives. WP It reviews the organization of oblasts, districts and cities gov- “Governance” erned by the actual Constitutional Law of the Republic of Ta- (possibly with jikistan on Local Government. The key question is whether subgroups) these entities should continue to function as deconcentrated Support by the agencies of the Republican government, or whether they Office of the should be given self-governing competencies. President It studies the “subsidiarity principle” and examines the possibility to grant full and exclusive powers in functional policy areas to oblasts, cities, and districts in the longer run. It could consider sharing some competencies between the Re- public and local governments and develop well-defined cooperative intergovernmental coordination mechanisms. It considers the option to grant local governments some own taxing powers, including rate setting for local taxes. It farms out, or grants full responsibility for, the administration of local taxes to local authorities. It discusses the option of, and conditions for, local borrowing, at least for the larger local jurisdictions. It examines the relationship between local governments and local public enterprises and discusses possibly hidden budget risks stemming from uncontrolled liabilities of these companies. It discusses vesting local powers in the local assemblies of the intermediate local public sector. It discusses the possibility to elect local executives, either directly or indirectly through local assemblies. It considers assuring an operational centralized surveillance mechanism through a parallel power structure at local levels according to the approach adopted in Poland or France. It discusses the possibility of local referendums, participatory local budgeting, public budget hearings, or other forms of direct citizen participation.

54 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Proposed short-run activities (1-3 years) for the Supreme Assembly WP It deliberates on the need and the specifications of a new or- “Law on Local ganic Local Finance Law, which is to regulate, inter alia, Government Fi- (i) local tax policy (including for local fees etc.), (ii) local tax nance” administration, and (iii) the apportionment of the proceeds Support by the from local taxation and local tax sharing, (iv) equalization, Minister of Fi- (v) other grants, (vi) local budgeting. nance WP It develops a new equalization scheme based on international “Equalization” “good practices” (see page 19), probing the new scheme Support by the against the present allocation mechanism through simulations Ministers of Fi- in order to avoid disruptions in budget execution, and region- nance and of al unfairness. The scheme should aim to provide stability and Interior durability instead of the actual ad hoc allocations via the budget law. It should also develop a set of appropriate, objective, stable, quantifiable, transparent, and non- manipulable criteria for allocating equalization payments. Technical support should be given by the Ministry of Finance. WP The per-capita funding policy should be evaluated and im- “Education” proved in the context of a new decentralization strategy be- Support by the cause it risks to sideline local governments by implementing Minister of Edu- a centralized policy directly via local service providers, includ- cation ing, eventually, private institutions. WP The consequences for governance, administration, and fi- “Health” Support nancing of moving to a health insurance fund should be ex- by the Minister amined, the need for supporting vulnerable groups be de- of Health fined, and the need for assistance to local governments be identified where the new scheme could jeopardize the provision of health care in some areas. WP There could be an important role for local governments in this “Social policy” area, but any assignment of social functions to local authori- Support by the ties must wait for a comprehensive sectoral reform and the Minister of So- mobilization of substantial resources. The WP should consider cial Affairs appropriate options for activating local governments in social protection. WP The WP should consider means to enhance the local infra- “Local structure and the way local priorities are integrated into na- infrastructure” tional planning and financing. The work should include the Support by the examination of intra- and supra-regional mechanisms for co- Ministers of Fi- operation among local governments in the area of infrastruc- nance and of ture development. Interior

55 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Proposed short-run activities (1-3 years) for the Government Intermediate Involve the Parliamentary Budget Commission more strongly local authorities in actively following the budget process of intermediate local authorities. Focus local budgeting on the planning and execution of expenditures, in particular the consolidation by spending units. Centralize taxation, including tax forecasting in the Ministry of Finance, except for purely local taxes. Consider assigning Republican taxes, or tax shares, to local governments, where the local incidence is clear (e.g. wage tax; personal income tax). Consider allowing local governments to vary the rates of their local taxes, or to piggyback on Republican taxes at self- determined rates. Consider financing specific local functions, e.g. education, through specific-purpose block grants. Introduce a multi-year perspective in fiscal planning, expenditure policy and budgeting for the local public sector. Abolish the ineffectual and counterproductive tax incentives. Consider the introduction of a local tax on the transaction of real property. Consider sharing resource taxes with local jurisdictions, and prepare, in line with the UN resolutions, for a possible resource boom in the Bokhtar region. Review the financial needs of the capital city on a per citizen basis. Focus on the creation of local administrative capacity, in particular for financial office functions. Enhance the effectiveness of measures for taxpayer registration and tax assessment or the reconciliation of tax assessments, collections, arrears and transfers to the Treasury. Revise and improve cash management procedures for local governments. Automate the personnel and payroll system and related control mechanisms. Strengthen internal auditing at the local level, and implement the Law on the Supreme Audit Institution of 2011, in particular by introducing external auditing for local governments. Work out the consequences of decentralization for PFM legislation and consider the necessary adjustment of the Law on the Treasury. Jamoyats Start discussing a possible reform of the Law on Self- Government of Towns or Townships (see the suggestions made in Appendix 1). 56 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Proposed short-run activities (1-3 years) for the Government Continue to absorb technical assistance following the work of the USAID project. Further research and simulation works are needed. Introduce jamoyat budgets; experiment with “participatory budgeting” on a pilot basis; create administrative capacity and train jamoyat officials, in particular financial officers. Consider assigning all revenues from local fees, fines, service charges and the land-leasing fee for jamoyat possessions to the jamoyats. Consider introducing autonomous tax administration for jamoyat own revenue instruments. Consider mobilizing the mahallas through local participatory budgeting at the jamoyat level. Consider civil initiatives, citizens' gatherings and referendums to involve citizens more strongly in local public decision making.

Longer-run activities for both the Supreme Assembly and the Government Persistence of the work of the WP “Governance” and continuing review of longer-term options including a possible conversion of the inherited paradigm. Consider introducing a new equalization model irrespective of the more fundamental reforms concerning the administrative-territorial governance and local self-government that would respect the “subsidiarity principle”. Expand the efforts for creating local administrative capacity.

57 Appendix 1: Review of the Law on Local Self-Government of Towns and Townships As a first step, it is proposed to take immediate action on reforming the sector closest to citizens, the Jamoyat sector, despite the fact that, at that level, administrative capacities may still be weak and have to be built up or improved. Re- forming the districts and cities would interfere too much with the organization of the Republic in general and needs a change in the paradigm on decentralization, which is likely to be reached only over time, with potentially controversial discussions among the authorities concerned.

The proposed strategy is to first lay the ground for a functioning self-governing public sector “at grass roots” with little, if any, interference from Republican authorities, including those of districts and cities, but governed by legal provisions set by the Supreme Assembly that simply establish the “framework” for local self-government and its operations. It is expected that local democracy could thus evolve more freely and more rapidly, and that the lessons drawn from this experience could be used for a more comprehensive decentralization strategy that includes the intermediate sectors, oblasts, districts, and cities.

The following suggestions for a redrafting of the Law on Local Self-Government of Towns and Townships are meant to simply trigger discussions, drawing on the experiences of other countries. As such they are tentative and illustrative rather than prescriptive, and no attempt is made to preempt the sovereign rights of the Supreme Assembly to adopt some of the suggestions, or not.

The tentative suggestions are as follows:

Article 3: Self-Governance Bodies in a Town or a Township

Replace Paragraph 1: The local powers of a Town or a Township are vested in Self- Governance Bodies: the Council, and the Chairperson of the Town or Township. The Council shall be a representative organ of the citizens, which passes local laws and makes decisions within the framework of the competencies of the Town or Township.

Then change the order of Paragraphs 1 and 2.

Re-phrase Paragraph 3: The Jamoyat's activity is executed by the Chairperson in compliance with decision made by the Council and the general body of laws governing public administration. In the course of preparing actions, the Council or the Chair- person may previously organize public hearings or surveys to ask for citizens' proposals.

Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Article 4. Citizen Participation in Self-Governance of a Town or a Town- ship

Paragraph 1: Substitute “shall exercise their right to local self-government directly and through their representatives in the organs” for “have the right to take part in the establishment and activity”.

Insert between Paragraphs 1 and 2:

New 2: “Every citizen shall have the right, individually or together with others, to submit appeals and proposals regarding the work of the organs of the Town or Township and its administration. The Chairperson of the Town or Township shall be obliged to create conditions for submission of appeals and proposals; to submit the appeals and proposals to the responsible organ of the Town or Township; and to reply to the appealer or proposer within 60 days after the receipt of the appeal or proposal.

New 3: “Citizens shall directly participate in the decision-making process on issues of local importance through civil initiatives, citizens' gatherings and referendums, in a manner and procedure determined by law. The expenses for execution of the direct participation of the citizens in the decision-making process shall be covered from the budget of the Town or Township.”

New 4: The citizens shall have the right to propose to the council to enact a certain act or to decide upon a certain issue within its authority (“civil initiative”). Civil initiatives shall not be raised for personnel and financial issues.

New 5: Citizens’ gathering may be convened for the territory of the Town or Township. These gathering shall be convened by the chairperson of the Town or Township upon his/her own initiative, at the request of the council, or at the request of at least 10% of the voters in the Town or Township.

New 6: The Council shall be obliged to discuss the objectives of civil initiatives or civil gatherings if supported by at least 10% of the voters in the Town or Town- ship. The council shall be obliged to discuss a civil initiative at the latest 90 days after the lodging of the initiative, and to inform the citizens on its decision.

New 7: Through a referendum the citizens of a Town or Township may decide on issues under the competency of the Town or Township, as well as other issues of local importance. The Council may issue a notice of referendum on issues within its authority at its own initiative; and shall be obliged to issue a notice of a referendum at the request of at least 20% of the voters of the Town or Township. The decision adopted by the referendum shall be binding for the Council.

59 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank

Paragraph 2 (old) is superfluous, since it is covered by the Constitution. If considered important, start the Article with this imperative premise, or re-number 2 as paragraph 8, but delete “except in cases specified by this Law” because provisions of the Constitution cannot be changed by a simple law.

Insert New Article 5a: (It will define the functional areas of exclusive Jamoyat authority. It should also be determined which of the activities of the Jamoyat are mandatory and which not, so it would be convenient to break this list into two paragraphs. Financing through grants should be confined to mandatory functions only.)

Paragraph 1. Towns and townships, within the legal framework, shall independently regulate and perform activities of local importance, determined by this or other law and shall be responsible for their performance. They shall, within the limits of the law, have full discretion to exercise their initiatives with regard to any matter that is not excluded from their competence, nor assigned to any other authority (cf. CLSG Article 4 (2)).

Paragraph 2: The competencies referred to of this Article are by rule comprehensive and exclusive and shall not be taken away or limited, except in cases determined by law.

Insert New Article 5b:

The functional areas to be devolved to jamoyats need to be discussed, also in order to avoid overlaps with functions to be assigned to districts and cities. Ideal- ly, a consistent legislation avoids overlaps of competencies.

The following lists are taken from two countries as examples, Macedonia, which assigns significant functions such as education and health to its municipalities, and Australia, where municipal functions are relatively small (Unlike local governments in many other countries, services such as police, fire protection and schools are provided by state or territory government rather than by local councils in Australia.)

This Article could draw upon Articles 11 through 14 of the Law, which could go here (they should not interrupt the provisions relating to the Council.)

60 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Paragraph 1: Towns and townships shall be competent for the performance of the following activities63:

Local Government Law of Macedonia Local Government Act of Victoria

1. Urban and rural planning - urban (1) The functions of a Council include— planning and issuing of technical documen- (a) advocating and promoting pro- tation for construction and issuing of con- posals which are in the best inter- struction permits; regulation and mainte- ests of the local community; nance of construction land; 2. Protection of the environment, na- (b) planning for and providing ser- ture and space regulation - measures for vices and facilities for the local protection and prevention of water, at- community; mosphere and land pollution, protection of (c) providing and maintaining com- nature, protection against noise and ioniz- munity infrastructure in the munici- ing radiation; pal district; 3. Local economic development – local economic development planning; deter- (d) undertaking strategic and land mining of development and structural pri- use planning for the municipal dis- orities; running of local economic policy; trict; support of the development of small and (e) raising revenue to enable the medium size enterprises and entrepre- Council to perform its functions; neurship at local level and in that context, (f) making and enforcing local laws; participation in the establishment and development of local network of institutions (g) exercising, performing and dis- and agencies; promotion of partnership; charging the duties, functions and 4. Communal activities - potable water powers of Councils under this Act supply; technological water supply; drain- and other Acts; age and purification of waste waters; pub- (h) any other function relating to lic illumination; drainage and treatment of the peace, order and good govern- precipitation; maintenance of public hy- ment of the municipal district. giene; collection, transport and treatment of communal solid and technological (2) For the purpose of achieving its objec- waste; regulation and organization of pub- tives, a Council may perform its functions lic local transportation of passengers; sup- inside and outside its municipal district. ply with natural gas and heating energy; (3) Subject to any limitations or re- maintenance of graves, cemeteries, strictions imposed by or under this Act or crematoria and provision of burial services; any other Act, a Council has the power to construction, maintenance, reconstruction do all things necessary or convenient to be and protection of local roads, streets and done in connection with the achievement other infrastructure facilities; regulation of of its objectives and the performance of its traffic regime; construction and mainte- functions. nance of street traffic signalization; construction and maintenance of public park- ing spaces; removal of improperly parked

63 Defining the areas of competencies is crucial. The following lists are indicative, provisional and exploratory, serving as models only. They are taken from the Law on Local Governments of Macedonia (left column) and from the Local Government Act of Victoria (Australia). Similar lists for other countries should be consulted. 61 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank vehicles; removal of damaged vehicles from public spaces; construction and maintenance of markets; chimney sweep- ing; maintenance and use of parks, green spaces, park-forests and recreational spaces; regulation, maintenance and use of river beds in urbanized parts, determining of names of streets, squares, bridges and other infrastructure facilities, etc.; 5. Culture - preserving of cultural heritage; celebration of events and persons of importance for the culture and history of the municipality; 6. Sport and recreation - development of general sport and recreational activities of the citizens; organization of sport events; maintenance and construction of sport facilities of public interest for the municipality, support sport associations; 7. Social welfare and child protection – kindergartens and homes for the elderly (ownership, financing, investments and maintenance); exercising of social care for disabled persons, children without parents and parental care, children with education- al and social problems, children with special needs, children from single-parent families, deserted children, persons ex- posed to social risk, persons with drug and alcohol addiction problems; raising of citizens’ awareness, housing of persons put to social risk, sheltering and education of pre- school children;. Performance of these competencies shall be in accordance with the National Program for Development of Social Care; 8. Education – establishing, and financing, and administering of primary and secondary schools, in cooperation with the central government, in accordance with law; organizing of transportation of stu- dents and their accommodation in dormito- ries; 9. Healthcare – governance of the network of public health organizations and primary care buildings to include represen- tation of local government in all the boards of all publicly owned healthcare organizations; health improvement; preventive activities; protection of health of workers

62 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank and protection at work; health oversight over the environment; oversight over the contagious diseases; assistance to patients with special needs (mental health, child abuse, etc.); and other areas that will be determined by law; 10. Execution of preparations and undertaking of activities for protection and rescuing of citizens and goods at their territory against war destructions, natural and other disasters as well as against the consequences caused by them in the state of war; 11. Firefighting activities performed by the territorial firefighting brigades; 12. Supervision over the performance of activities from under municipal competency; 13. Other activities determined by law.

Paragraph 2: The competencies referred to in this Article shall be performed in accordance with the standards and procedures determined by law.

Insert new Article 5c:

Paragraph 1: For the purposes of performance of their competencies, the towns and townships may establish public agencies, in accordance with law. 2 The towns and townships may delegate the performance of certain activities of public interest to other legal or physical entities, including entities of higher-level government, on the basis of an agreement for the performance of activities of public interest, according to law. Paragraph 3: The towns and townships, as legal entities, shall be responsible for the performance of activities of public interest referred to in paragraphs 1 and 2 of this Article.

Article 6: Relationship of a Self-Governance Body of a Town or a Township and the Republic (This Article needs further reflections and elaboration.) Perhaps insert before Paragraph 1:

Paragraph 0a): If there is any inconsistency between a local law and a law made by the Republic, the law made by the Republic prevails to the extent of the inconsistency.

63 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank

Paragraph 0b): Local legislation cannot … (list the limits to local legislation).

Paragraph 0c): A Town or Township must not make a local law that contains an anti- competitive provision unless the local government has complied with the procedures prescribed under a regulation for the review of anti-competitive provisions.

Paragraph 0d): A local law, to the extent that it is contrary to the previous paragraphs, has no effect.

Paragraph 1: Replace “create” by “secure”.

New Article 6a: Self-Organization, and Regulation by Statute

(The purpose of this Article is to render overly detailed regulations in the law superfluous.)

New 1: The Town or Township shall regulate the performance of its competencies by its own statute and other regulations. The relevant Republican authority as- sures that statutes and other regulations conform to the law, and it provides guidance in order to achieving homogeneous national standards.

New 2: The statute of the Town or Township shall regulate the following: the organization and operation of the Town or Township organs, organization and operation of the Council committees; performance of the functions referred to in Article 5b of this Law; the way of informing the citizens; the cases of excluding the public from the sessions of the Council; the way and procedure for filing appeals and proposals regarding the work of the organs of the Town or Township and acting upon them; the way of organizing public hearings, public gathering, referendums, and carrying out of surveys and collecting citizens’ proposals and other forms of securing citizens’ participation; as well as other issues of importance for the local self-government.

New 5: The regulations of the Town or Township shall be submitted to the relevant Republican authority, and published before coming into force. The way of publishing the regulations shall be regulated by the statute.

Article 6: 1. Substitute “lend support to creating” for “create”. Attach new sentence: “This support shall in no way interfere with the town’s or township’s ability to regulate its own affairs (‘exclusive authority’).” Any amendment of Article 5a of this law, which introduces new exclusive Jamoyat competencies, shall also determine the financial means for the performance of those competencies.

64 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank 2. Attach: “(‘delegated authority’)” after “on the basis of agreement”, and delete the rest of the sentence. Instead add: “Jamoyat authorities shall, insofar as possible, be allowed discretion in adapting their exercise to local conditions. (cf. CLSG Article 5 (4)). New 3: “Administrative supervision may be exercised with regard to expediency (over the way in which the task is carried out ) by intermediate local authorities (oblasts, districts, and cities) in respect of tasks the execution of which is delegated to Jamoyats.” (cf. CLSG Article 8 (2)). This should not, however, result in preventing the Jamoyat authority from exercising certain discretion in executing the task.” (cf. CLSG Article 8 (2)). New 4: “Where Jamoyats exercise delegated authority, or provide certain public services on behalf of delegating authorities, the relevant expenses shall be funded from the budget of the delegating authority.” (cf. Council of Europe, Appendix to Rec(2000)14, 3b, last bullet; compare also Article 14 (2) of the Jamoyat Law.)

Rename Article 7: Relationship of Self-Governance Bodies with Commu- nity Self-Governing Bodies, and Inter-Jamoyat and International Coop- eration

Leave the provision on mahallas as Paragraph 1, and add the following:

New Paragraph 2: In the performance of their competencies, Towns or Town- ships may cooperate among themselves. For the purpose of accomplishing common interests and performing common tasks that fall within their competency, they may join funds and establish shared public agencies, in accordance with the law.

New Paragraph 3: For the purpose of performing certain competencies, Towns or Townships may also establish shared administrative bodies in certain areas, in accordance with law.

New Paragraph 4: Towns or Townships may create, and cooperate with, a national Jamoyat Association in support of their common interests.

New Paragraph 5: Towns or Townships may cooperate with units of local self- government of other states, as well as international organizations of local communities, and may be members of international organizations of local governments. The Ministry responsible for the performance of functions related to local self-government shall keep records on the realized international cooperation of Jamoyats, in accordance with law.

Chapter II: (Perhaps change heading): The Jamoyat Council

65 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Bring Articles 11 through 14 of the Law forward to Article 5b.

Insert a new Chapter before Article 16.

Chapter IIa: The Jamoyat Management Board

Article 17: Authorities of the Jamoyat Management Board

Please revise. There are a number of important responsibilities of the Executive that should be subject to Council approval!

The following text on page 4 has no Article number or header (here presented as Article 15a). It should be brought forward into Chapter II, perhaps after Article 15:

Article 15a: Council Commissions

1. Jamoyat Management Board A Jamoyat Council may set up committees from among Jamoyat Councilors to provide preliminary consideration, preparation of issues and organization of oversight on implementation of the resolutions of a Jamoyat Council, a Jamoyat Management Board and lawful directions of national government authorities; 2. A Jamoyat Council decides the appointment procedures and the scope of activity of the committees.

Article 19: Procedures for Electing and Removing Jamoyat Chairper- son, Deputy Chairperson(s) and Secretary

Paragraph 2: It is important to substitute “may propose” for “will nominate”. The election of the Chairperson (if not elected directly by the electorate) is an essential and unrestricted prerogative of the Council.

Paragraph 4: Replace “nominations” by “qualifications”.

Article 21. Authorities of Jamoyat Chairperson in Economics, Budget and Finance

“Organizes timely payment of taxes, insurance and other payments from the citizens.” This ought to be specific to local taxes and other payments. Jamoyats should not be involved in administering Republican taxes etc.

Article 26. Financial Resources of a Town or Township

66 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank The first sentence stresses the Jamoyat budget. There are no such budgets at present, so there is a problem with implementing the law!

The second part of this provision mentions “funds allocated for specific purposes”. There are no own revenues. It is important to establish own local taxes for jamoyats, or tax shares, and equalization entitlements. These should be regulated in a separate Law on Local Government Finance, which includes the financing of oblasts, districts, and cities. The following considerations may be useful:

Some local finance laws go into details of budgeting that are better enshrined in a national Law on Budgets. This solution should always be pre- ferred. And the assignment of taxes could be in the Tax Code. However these Laws are often extremely onerous for local administrations. In particular, local taxes in Tajikistan as in the Tax Code are in practice administered and treated like national taxes, so local governments will not take "ownership" of its own resources under these conditions. It would also be inconvenient if provisions regarding equalization or the local grants arrangements would be appropriately regulated by the national Law on Budgets. So it makes sense to put these into a separate legislation, because it emphasizes the financial situation of local governments which would otherwise be buried in a large body of national legislation. This is why a separate law is preferable (and many countries make that division). It would even be preferable to take local taxes out of the national Tax Code, especially if the jamoyats were given powers to legislate in this area. In the end it is desirable that local governments set their own rates for their local taxes in their annual budget legislation, but of course Tajikistan has some way to go to reach that goal.

Of course the Law on Local Finance, if it contains budgetary provisions, must be consistent with the overall Law on Budgets (as the annual budget laws of the Republic and all its subnational entities). And local finances must be entirely integrated into the national PFM framework, e.g. the Sin- gle Treasury Account. However in practice you may have to make concessions given the poor quality of financial administration at the local level, and not all provisions for the nation must apply to local governments.

67 Appendix 2: Budget data 2010 and 2011 Table A1: Executed Regional Budgets of Tajik Oblasts, the City of Dushanbe, and the Region of Republican Subordination, Revenues, 2010

Region of Revenue (in somoni) GBAO Khatlon Oblast Soughd Oblast Dushanbe City Republican Subordination 1.1.1. Income tax from individuals 9.626.929 73.147.015 97.361.194 96.232.113 49.220.323 1.1.2. Tax on profits of legal entities 381.298 11.342.209 46.800.715 50.664.668 5.009.016 1.1.3. Minimal income tax (from legal entities) 728.092 17.491.853 33.458.749 33.885.802 21.222.374 3.1.1. Real estate property tax 499.248 14.200.351 17.211.526 22.565.231 8.031.057 3.1.2. Land tax from legal entities 71.672 2.290.092 2.257.087 1.328.039 1.276.862 3.1.3. Land tax on individuals 74.937 7.105.962 4.419.836 1.850.548 2.810.704 3.1.4. Uniform tax for agricultural producers 655.111 27.037.868 26.884.078 0 11.004.393 4.1.3. Retailers tax 817.143 17.066.488 34.856.038 46.156.806 21.704.693 4.2.1. VAT 2.046.268 47.124.378 49.292.299 108.442.214 17.471.174 4.2.3. Road user’s tax 943.270 16.761.779 32.073.726 107.958.255 29.323.071 4.3.1 Tax under the simplified system 773.397 7.379.976 26.299.885 35.058.087 12.340.911 5.1. Inward excise 2.070 702.749 8.549.882 2.778.912 870.806 7.1.2. Tax from vehicle owners 907.322 10.616.393 24.385.499 14.454.015 9.585.951 7.1.3. Taxes on natural resources 13.574 5.576.005 23.645.443 1.498.923 2.197.909 7.1.5. State duty 619.983 9.018.280 15.753.250 24.410.903 6.792.339 V. Other non-tax revenues 1.567.177 9.323.105 20.677.259 44.718.396 7.252.535 All revenues 19.727.491 276.184.503 463.926.466 592.002.912 206.114.118 Available funds (balances) from the budget of last year 2.666.210 24.525.908 16.453.345 31.429.454 11.135.729 Subvention – from Republican budget 65.812.400 147.648.800 0 0 73.692.109 Funds received from Republican budget by mutual settlement 4.203.982 15.470.566 429.306 82.802 3.395.232 Lending (budget loans) 0 0 0 0 50.000 Function of the capital (Dushanbe city) 0 0 0 7.000.000 0 Total revenues 92.410.083 463.829.777 480.809.117 630.515.168 294.387.188

Source: Ministry of Finance Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Table A2: Executed Regional Budgets of Tajik Oblasts, the City of Dushanbe, and the Region of Republican Subordination, Expenditures, 2010

Expenditures (in somoni) Region of GBAO Khatlon Oblast Soughd Oblast Dushanbe City Republican by functional budget classification Subordination

1. Sector of the state power and administration 12.344.456 31.904.990 26.874.999 6.441.124 29.519.948 2. Defense 4.145.528 5.242.713 6.886.828 715.768 89.314 3. Law enforcement agencies 1.137.492 4.291.258 4.690.784 2.594.449 2.533.954 4. Education 42.633.050 249.158.636 208.356.843 81.256.058 157.670.232 5. Health care 19.024.289 91.541.707 89.089.074 46.732.202 47.436.710 6. Social Insurance and Social Security 1.093.916 6.910.131 9.751.246 4.707.755 3.721.028 7. Housing and utilities sector 3.077.000 24.092.428 23.093.838 281.457.152 15.511.197 8. Culture 5.355.471 15.975.194 57.452.350 3.168.760 8.544.748 10.1.4. Expenditure on Land Reclamation 0 4.099.613 1.539.184 0 687.459 10.1.5. Veterinary sector 1.118.591 1.625.252 1.031.590 107.063 1.362.022 11.3.1. Enterprises of the construction sector 0 0 1.945.266 0 536.541 12. Transport and communications 298.999 542.236 7.432.225 8.933.948 3.398.535 14.3. Others 295.875 14.678.145 9.028.163 12.160.679 6.937.554 All expenditures 90.524.667 450.062.303 447.172.390 448.274.958 277.949.242 Funds transferred to the republican budget 0 0 0 596.003 1.732.640 Funds of Stabilization Fund 461.692 357.882 15.994.326 21.317.536 3.113.279 Total expenditures 90.986.359 450.420.185 463.166.716 470.188.497 282.795.161

Source: Ministry of Finance

69 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Table A3: Executed Regional Budgets of Tajik Oblasts, the City of Dushanbe, and the Region of Republican Subordination, Revenues, 2011

Region of Revenue (in somoni) GBAO Khatlon Oblast Soughd Oblast Dushanbe City Republican Subordination 1.1.1. Income tax from individuals 11.552.990 93.656.935 93.269.453 162.399.883 53.864.014 1.1.2. Tax on profits of legal entities 505.613 10.919.155 40.860.851 42.634.403 5.900.230 1.1.3. Minimal income tax (from legal entities) 695.160 19.660.244 45.890.297 36.358.292 24.415.468 3.1.1. Real estate property tax 498.668 15.909.714 20.711.578 29.656.563 10.917.967 3.1.2. Land tax from legal entities 35.938 2.171.678 2.129.413 1.868.766 1.203.043 3.1.3. Land tax on individuals 115.158 7.731.223 4.731.707 1.921.525 3.159.866

3.1.4. Uniform tax for agricultural producers 681.411 31.103.478 24.237.194 0 10.425.819 4.1.3. Retailers tax 913.316 23.463.736 46.115.983 64.924.808 26.884.100 4.2.1. VAT 1.858.425 49.555.101 80.229.273 99.393.638 44.381.123 4.2.3. Road user's tax 940.908 16.544.549 53.021.979 146.062.589 42.812.606 4.3.1 Tax under the simplified system 940.623 13.202.425 29.913.767 55.561.584 17.547.172 5.1. Inward excise 4.625 963.192 8.954.248 3.013.161 972.840 7.1.2. Tax from vehicle owners 964.806 12.776.360 25.626.300 15.221.843 10.647.381 7.1.3. Taxes on natural resources 25.549 4.352.000 39.577.336 1.381.395 3.095.024 7.1.5. State duty 748.875 12.134.307 17.809.224 26.915.673 8.081.789 V. Other non-tax revenues 1.566.146 8.737.759 15.878.497 24.508.858 6.537.427 All revenues 22.048.211 322.881.856 548.957.100 711.822.981 270.845.869

Available funds (balances) from the budget of last year 1.301.305 18.570.421 17.170.607 121.184.081 10.615.752 Subvention - from Republican budget 78.743.481 187.110.693 0 0 72.640.129

Funds received from Republican budget by mutual settlement 9.017.343 29.228.194 284.293 86.040 6.704.995 Lending (budget loans) 0 0 0 0 0 Function of the capital (Dushanbe city) 0 0 0 10.000.000 0 Total revenues 111.110.340 557.791.164 566.412.000 833.093.102 360.806.745

Source: Ministry of Finance

70 Fiscal Fiscal decentralization in the Republic of Tajikistan T The World Bank Table A4: Executed Regional Budgets of Tajik Oblasts, the City of Dushanbe, and the Region of Republican Subordination, Expenditures, 2011

Expenditures (in somoni) Region of GBAO Khatlon Oblast Soughd Oblast Dushanbe City Republican by functional budget classification Subordination

1. Sector of the state power and administration 13.702.813 39.063.920 31.281.504 9.851.444 33.845.651 2. Defense 4.875.541 6.342.676 9.200.855 1.560.913 39.666 3. Law enforcement agencies 1.455.300 5.416.923 6.616.184 4.372.809 3.090.299 4. Education 50.759.936 291.133.718 240.544.406 99.587.449 186.377.884 5. Health care 25.426.367 127.369.597 114.598.168 62.183.659 64.638.674 6. Social Insurance and Social Security 1.333.637 7.794.244 9.597.110 5.149.485 4.344.507 7. Housing and utilities sector 3.026.209 26.375.982 36.368.766 464.652.536 16.600.863 8. Culture 7.537.873 22.915.672 69.936.743 11.442.843 17.179.189 10.1.4. Expenditure on Land Reclamation 0 4.538.277 1.140.447 0 916.353 10.1.5. Veterinary sector 1.219.660 2.027.652 1.399.780 257.656 1.821.009

11.3.1. Enterprises of the construction sector 0 0 4.111.179 0 4.295.871 12. Transport and communications 297.810 697.128 17.156.970 11.171.803 3.328.533 14.3. Others 17.228 9.530.478 289.942 12.836.000 2.315.063 All expenditures 109.652.374 543.206.267 542.242.054 683.066.597 338.793.562

Funds transferred to the republican budget 78.030 2.019.547 244.220 132.467 2.511.012 Funds of Stabilization Fund 610.522 1.972.680 13.075.056 7.222.872 8.211.083 Total expenditures 110.340.926 547.198.494 555.561.330 690.421.936 349.515.657

Source: Ministry of Finance