Municipal Management Manual for Afghanistan, Chapters 13-19
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Municipal Management Manual for Afghanistan Afghanistan Municipal Strengthening Program Chapters 13–19 This publication was made possible through support provided by the U.S. Agency for International Development (USAID) under Contract no. 306-A-00-07-00514-00. Any opinions expressed herein are those of the authors and do not necessarily reflect the views of the Government of the Islamic Republic of Afghanistan, the Independent Directorate for Local Governance, or USAID. This publication was prepared by the Urban Management Centre, which is responsible for its contents. Contact details: Ms. Manvita Baradi Director, UMC III Floor, AUDA Building, Usmanpura Ashram Road, Ahmedabad, Gujarat, India Tel: 91-79- 27546403/ 5303 Email: [email protected] Web: www.umcasia.org Copyright © 2010 by the International City/County Management Association, 777 North Capitol Street, N.E., Washington, D.C. 20002. All rights reserved, including rights of reproduction and use in any form or by any means, including the making of copies by any photographic process, or by any electronic or mechanical device, printed, written, or oral, or for sound or visual reproduction, or for use in any knowledge or retrieval system or device, unless permission in writing is obtained from the copyright proprietor. Municipal Management Manual for Afghanistan © ICMA Introductory Material-2 Contents D Urban and Public Finance Chapter 13: Public Finance and Budgeting Chapter 14: Municipal Accounting E Local Economic Development Chapter 15: Local Economic Development Chapter 16: Heritage Management F Urban Poverty Alleviation Chapter 17: Urban Poverty Alleviation Chapter 18: Services for Informal Settlements Chapter 19: Tenure Security and Land Titling Municipal Management Manual for Afghanistan © ICMA Introductory Material-3 Chapter 13: Public Finance and Budgeting Chapter 13: Public Finance and Budgeting Summary: By definition, finance is one of the most critical components for the optimal functioning of any organization. It is a branch of economics concerned with resource allocation as well as resource management, acquisition, and investment within an organization. This chapter deals with the basic principles of public finance, specifically municipal finance. It presents budgeting techniques and principles and also highlights strategies for improvements in municipal revenues. Objectives: To present standards and procedures for sound, secure, and sustainable management of the fiscal and financial affairs of Afghan municipalities and municipal entities to ensure the following: Formation of municipal budgetary and financial processes and coordination of those processes with other levels of government. Streamlining of the process of funding for the municipalities. Guidance of the Afghan municipalities in managing their revenues, expenditures, assets, and liabilities and handling their financial dealings. Handling of the financial problems in the municipalities. Recommendation of reporting systems to ensure transparency, accountability, and appropriate lines of responsibility in the fiscal and financial affairs of municipalities and associated entities. 1.0 Introduction to Public Finance Public finance (government finance) is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. Public finance is essentially concerned with the ways governments raise money, the ways they spend that money, and the effects of these activities on the economy and on society. Public finance studies how governments at all levels provide the public with desired services and how they secure the financial resources to pay for these services. Through public finance mechanisms, governments typically provide goods and services such as roads, policing, fire protection, water and sewers, garbage collection and disposal, recreation and culture, and education. Public finance also enables governments to correct or offset undesirable side effects of a market economy. These side effects are called spillovers or externalities. Public finance provides government programs (e.g., social security, welfare, and other social programs) that moderate the incomes of the wealthy and the poor. Governments, like any other legal entity, can also take out loans, issue bonds, and invest. These are all public finance instruments. Based on the taxing authority of the entity, governments issue bonds such as tax increment bonds or revenue bonds. A bond issued by a public sector entity may give tax advantages to its owners. 2.0 Municipal Financial Management 2.1 What Is Municipal Finance? Municipal finance is essentially concerned with the management of finances related to municipalities (as opposed to public finance, which is concerned with finances of public sector entities at any level of government). Municipal finance deals with the raising and disbursement of public funds, including investment decisions, for which the municipality must consider the returns and opportunity costs of various options, and financing decisions, for Municipal Management Manual for Afghanistan © ICMA 13-1 Chapter 13: Public Finance and Budgeting which the municipality must allocate funds in the best possible manner to yield maximum returns. A municipality, like any other organization, is a business entity that needs to make profits in order to survive and, like any other public entity, is accountable to the people. Key principles of the operations of municipal finance are transparency, accountability, and equity. At its core, municipal finance deals with revenue and expenditures. In an environment of limited resources and unlimited needs, municipalities can improve revenue and control expenditures by employing three broad strategies: By seeking to raise additional revenue through a variety of means, such as increasing efficiency in billing and collection of current taxes, increasing user fees and charges, raising local taxes, introducing new taxes and charges, and selling off assets such as unused land. For example, many municipalities do not send out their property tax bills on time, and hence the collection efficiency also decreases. If the municipality sends out bills on time and undertakes a more intensive effort to collect taxes, the municipality might be able to collect more taxes. By seeking to improve the efficiency and effectiveness of their operations through productivity improvement programs; more efficient programming, planning, and budgeting; use of low-cost approaches; or achievement of cost savings through the use of private contractors or outsourcing (e.g., for repairing leaks in the water supply system). By reducing the scope of their activities through increased private participation in the provision of urban services under self-help activities and through mobilization of nongovernmental resources. For example, outsourcing door-to-door collection of solid waste to contractors might enable a municipality to reduce expenditures on hiring staff. Municipal finance deals with basic relationships between revenue generation, expenditure control, and financial balance: Revenue generation: How well the government is tapping the revenue potential and the costs of increasing revenues Expenditure control: The costs of delivering public services and the factors that cause those costs to rise Financial balance: The existing balance between revenues and expenditures and the trends projected into the future. 2.2 What Is Municipal Financial Management? Municipal financial management involves financial planning, forecasting of cash receipts and disbursements, collection and recovery of funds, allocation thereof, and use of funds in the best possible manner and with financial control. This approach also entails a decision-making process after analyzing alternative uses and sources of funds. In general, the following processes relate to financial management in municipalities: Budgeting: Working out what income the municipality will get and balancing this with planned expenditures by preparing detailed plans and forecasts Safeguarding: Putting controls in place to ensure that the municipality’s income, capital, and assets (such as money, vehicles, and computer equipment) are safeguarded against misuse, damage, loss, or theft Monitoring: Monitoring actual revenue and expenditures, comparing them to the budget through regular financial reporting, and undertaking corrective action when needed Auditing: Preparing municipal financial statements that undergo auditing by an independent auditor or by auditors from the Control and Audit Office of Afghanistan (CAO) Municipal Management Manual for Afghanistan © ICMA 13-2 Chapter 13: Public Finance and Budgeting Accountability: Reporting financial results to all stakeholders by publicizing the municipal financial statements. The municipality’s objective is to guarantee that the highest quality services are rendered at the lowest possible cost for the benefit of all – dwellers of informal settlements, squatters, business owners, and other citizens. Effective financial management assists the municipality to achieve this objective of good governance. Citizen representatives and elected members have the right to discuss, ask questions, and make recommendations to the council about the best ways to generate income, keep costs down, prevent corruption, and safeguard the municipality’s assets. 2.3 Why Is Municipal Financial Management Important? Effective financial management can help the municipality transform its local area into a better place