THE BUDAPEST MODEL A liberal urban policy experiment Edited by Katalin Pallai Consultants János Atkári, László Láng, Sándor Tóth Cover photos Gábor Demszky Budapest, 2003 First edition published by Open Society Institute – Budapest / Local Government and Public Service Reform Initiative (OSI/LGI) Nádor utca 11., 1051. Budapest, Hungary; Telephone: (+36 1) 327 3104 The publication was sponsored by World Bank, World Bank Institute, DEXIA Open Society Institute – Budapest / Local Government and Public Service Reform Initiative (OSI/LGI) Copy editor Martin Tisne Translators Iván Sellei, Tibor Szendrei Individual papers © World Bank, World Bank Institute The whole book © Open Society Institute – Budapest The views expressed by the contributors to this book do not necessarily reflect the views of the publisher, sponsors or the editor of the book, but are the sole responsibility of the authors. The findings, interpretations and conclusions expressed here are those of the authors and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank cannot guarantee the accuracy of the data included in this work. All rights reserved. No part of this publication may be produced, stored in a retrieval system or translated in any form or by any means without the permis- sion of the Publisher. ISBN 963 9419 49 4 CONTENTS Introduction 5 Contributors 8 URBAN POLITICS AND POLICY 11 LIBERALISM IN PRACTICE – Gábor Demszky 13 Credo I 14 Credo II 24 Today’s Problem 31 STRATEGIC PLANNING AND MANAGEMENT REFORM – Katalin Pallai 35 Values and Goals 36 The Context 38 Strategic Planning 49 Elements of the Budapest Model In Strategic Planning 51 Urban Policy in Budapest 55 Evaluation and Further Comments 71 BUDGETARY POLICY 79 FINANCIAL MANAGEMENT REFORM – Katalin Pallai 81 Underlying Concepts 82 The Context – Intergovernmental Relations 90 Initial Conditions of Local Financial Management 104 Objectives and Strategy 106 The Architecture of the Reform Process 114 Evaluation and Lessons 137 Results 149 ELEMENTS OF THE FINANCIAL REFORM – Katalin Pallai 155 Financial Planning 155 Reforming the Operating Budget 162 Capital Investment Planning 176 Borrowing Policy 183 EXTRA-BUDGETARY UTILITIES 195 INFRASTRUCTURE POLICIES – Katalin Pallai 197 The Legacy 197 The Challenge 199 Strategy 202 The Content of the Studies in the Present Chapter 220 Evaluation and Lessons 222 USER CHARGE POLICY FOR PUBLIC UTILITIES – Pál Valentiny 235 Characteristics of Market-based Public Utilities 236 Types of Price Regulation 237 Service Obligation, Fairness 239 Price Regulation at the Municipality of Budapest 242 Price Regulation and Subsidy Systems 248 3 PUBLIC UTILITY ALLOWANCES IN BUDAPEST – Péter Gyôri 253 Background 253 Introducing the BLT 256 Lessons and Results 259 DISTRICT HEATING – A NON-PRIVATIZED UTILITY – Péter Vince 261 Peculiarities of District Heating in Budapest 261 Evolution of the Capital City’s Functions 262 The Municipal Government as an Owner 263 Changes in the Determination of the Rates 266 Economic Stability and Social Responsibility 270 Closing Remarks 271 THE TRANSFORMATION OF THE BUDAPEST PUBLIC TRANSPORT COMPANY – Éva Voszka 273 Stock Corporation – in Hybrid Markets 273 Organizational and Operational Reforms 277 Financial Status, Financing 284 New Experiments and Breakthroughs 289 Whither Now? 294 UTILITY PRIVATIZATION – Ferenc Szûcs 301 Initial Steps 301 Privatization in the Field of Water and Wastewater Management 310 Practical Experiences Concerning the Operation of the Privatization Model 322 INFRASTRUCTURE DEVELOPMENT – Katalin Pallai 327 Introductory Thoughts 327 The Heritage and the Challenge 328 The Transformation of the Infrastructure Policies 335 Concluding Thoughts 354 GENERAL CONTEXT OF THE HUNGARIAN LOCAL GOVERNMENT SYSTEM 357 GENERAL CONDITIONS OF A DECADE’S OPERATION – Tamás M. Horváth – Gábor Péteri 359 Municipal Policies of State Governments in an International Setting 360 Economic and Urbanization Conditions 371 Regulatory Changes in Budapest’s Local Government System 385 Fiscal Scope for Action 394 Conclusions 402 APPENDIX 407 SOURCES AND LITERATURE 409 TABLES 1. Revenues of the Municipality of Budapest, 1991–2002 419 Definition of revenue title items 421 2. Expenditure of the Municipality of Budapest, 1991–2002 425 3. Borrowing Transactions of the Municipality of Budapest, 1990–2002 427 4. Revenues of Utility Companies, 1991–2002 429 5. Expenditures on Utility Services, 1991–2002 431 6. Arrears of User Charges, 1991–2002 433 DETAILED TABLE OF CONTENTS 435 4 INTRODUCTION Running a city is an extremely complex affair. Day in, day out, the politician who undertakes this task has to make diffi cult choices between options that do not lend themselves to comparison. He or she has to decide whether to give priority to sewage treatment, traffi c regulation, educational development or welfare provision. The politician might consider all these tasks to be important, yet is constrained by limited resources that are not suffi cient to address them simultaneously. The city’s leader has to weigh the various goals against each other and devise strategies whereby noble objectives can be transformed from dreams into reality. Budapest is a multi-dimensional and exciting city rich in traditions and values, that at the same time displays serious defi ciencies and causes for concern. It is a major challenge to manage it effectively. This was especially true in the years immediately following the Socialist era when the city and its local government, discarding its old way of functioning, had to devise a strategy to meet the demands of an emerging democracy and free market economy. The city’s leaders had to replace the Socialist-type approach to local politics (which maximized central subsidies and depended heavily on the will of the central authorities) with a new approach that aimed to adapt to the new political context by optimizing the resource allocations of the autonomous local governments. Simultaneously, they had to restructure and streamline the executive organs and decision procedures on the local level. All these they had to accomplish in the wake of the change of the political system, when the public sphere still lacked a clear set of democratic principles and the economic resources of the developed market economies were not yet present in Hungary. The term ‘Budapest model’ is used to comprehensively identify the approach and the set of urban management methods and solutions which the key fi gures of the municipal leadership have devised over the past twelve years. The ‘Budapest model’ is the product of the period when the Municipality of Budapest adapted to post-Socialist conditions. In those years the transformation of the city’s fi nancial management was inevitable. It served to enable the benefi ts and potentials of the local governments’ new-found independence to arise, and ensured responsible management and balanced operation. The course of Budapest’s urban management policies was based on the careful assessment of the potential for change of the economic, fi nancial and political contexts, rather than being pronouncedly vision-driven. The adaptation process was centered around fi nancial reform, and within that, on the reform of planning. The present volume focuses on the city’s fi nancial management. The studies all refer to the fi nancial context when discussing the transformation of the general urban management policies and practices of the city. The same applies to the articles on strategic planning. We do obviously not consider fi nancial management to be a technical issue. Instead, we prefer 5 to defi ne it as an activity that enables the city’s leaders to translate their principles and objectives into practice and to implement their most important political decisions. The decision of whether Budapest has been managed effectively or poorly during the past dozen years falls beyond the competence of those who have been actively involved in the shaping of the city’s urban policies. Despite all the tensions, confl icts and grievances, since the change of the political system the citizens of Budapest have cast their votes for practically the same group of people to lead the city. It is no exaggeration to say that the majority of Budapest’s inhabitants approve of the city’s leaders’ performance. If only for this, it is worthwhile to take a closer look at their approach. The history of the past twelve years, complete with the city leaders’ actions, successes and failures, deserves a comprehensive analysis. This is what the present volume attempts to do. We introduce the reforms in their immediate context. The fi rst study focuses on the broader political environment, while the second offers a detailed analysis of the local government’s operating conditions and its comprehensive policies during the transition period. These two studies lay the foundations for the ensuing discussion of the fi nancial management reform process. The reform of the budget management processes is discussed separately from the public utility policies pursued by independent, extra-budgetary companies. The individual reforms and decisions are tackled following the logic of political decision making: fi rst we look at the starting conditions and assess the potential approaches based on the city leaders’ liberal thinking, and then we provide an analysis of the actual steps taken and results achieved. This volume assesses the reform of Budapest’s urban management policies over the past twelve years. The chapters of this study look into the individual areas and aspects of the process. In order for us to provide our readers with the appropriate contextual background, we had at certain points to reiterate the guiding values of the city’s leaders, the key elements of the broader political environment or the fundamental tools of urban management. We hope that this redundancy will enable readers to consult the chapters and studies herein independently from one other. The studies were written by experts who were directly and actively involved in the reform process. They rely on facts and evidence in their accounts, and describe the way the city’s leaders assess their own achievements and failures.