PRELIMINARY REVIEW OF EVOLUTION OF FISCAL DECENTRALISATION REFORM IN TAJIKISTAN

Report to the Ministry of Finance, Republic of Tajikistan

Janis Jankovskis, Samuel Moon

April, 2011

Disclaimer: The views presented in this paper are those of the authors and do not necessarily represent the views of the ODI

Overseas Development Institute

ContentsIntroduction........................................................................................................................................................... 4

1. Intergovernmental Fiscal relations in Tajikistan.............................................................................5

2. Achievements in the area of fiscal decentralisation to date.......................................................14

2.1 Legal and Strategic developments.......................................................................................................................14

3. Main findings.............................................................................................................................................. 18

3.1 General findings........................................................................................................................................................... 18

3.2 Revenue collection and forecasting.....................................................................................................................19

3.3 Intergovernmental transfer system....................................................................................................................21

3.4 Expenditure planning................................................................................................................................................21

3.5 Budget execution.........................................................................................................................................................21

3.6 Other findings................................................................................................................................................................22

4. Conclusions and Recommendations...................................................................................................23

Annex 1. Relevant chapters from the Public Administration Strategy of Tajikistan to the Fiscal decentralisation reform...................................................................................................................... 29

« Стратегия реформирования системыгосударственного управления »Республики Таджикистан ...............................................................................................................29

Annex 2. Overview of donor agencies’ major projects relevant to the area of Fiscal decentralisation................................................................................................................................................. 30

Annex 3. Suggested outline for the Concept paper for Fiscal decentralisation............................32

Annex 4. SNGs’ revenue autonomy (own source revenues)................................................................33

Annex 5. Distribution of the Regulated Taxes for 2006-2010 (from the report by the EC funded project MTEF: Social sectors of Tajikistan)................................................................................34

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Abbreviations

CG Central Government

EC European Commission

FD Fiscal decentralisation

GoT Government of the Republic of Tajikistan

IMF International Monetary Fund

MDG Millennium Development Goals

LB Local Budget

MoF Ministry of Finance

MTEF Medium term Expenditure Framework

OECD Organisation for Economic Development and Cooperation

ODI Overseas Development Institute

PFM Public Finance management

PCF Per Capita Financing

PFM Public Finance Management

PEFA Public expenditure and financial accountability

SNGs Sub-national Governments

RB Republican Budget

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IntroductionThe Ministry of Finance (MOF) of Tajikistan has commissioned the ODI within its wider programme “Budget Support Initiative to fragile states” to carry out a stock-take of the progress in fiscal decentralisation reform almost three years after the launching of its Public Finance Management (PFM) Strategy.

First, the concept of fiscal decentralisation should be clarified – fiscal decentralisation implies that administration of revenues and expenditures are increasingly moved from centre to the local level, classically to autonomous Self-Governments.

Fiscal decentralisation in theory might take many formats however in the case of developing countries and transition economies (DTEs) – if Central Government (CG) opts for some sort of decentralisation reform - three principal stages of fiscal decentralisation seem to be most widespread and appropriate. These are deconcentration, delegation and devolution. Deconcentration is the most limited and usually the first step and implies that the CG shifts the implementation of functions to its local branch offices in local administrative units of the country. Delegation according to the OECD definition involves transfer of responsibility for maintaining or implementing sector duties to regional or functional development authorities, parastatals and other semiautonomous government agencies that operate independently of central government control1. Devolution involves legal transfer of full discretionary authority to locally elected and fully autonomous local governments that are accountable to local electorate. The degree of fiscal decentralization can also be defined as the locally administered share of total government spending.

The PFM Strategy includes two priority reform areas for fiscal decentralisation (FD) to be achieved over the period up to 2018 the final year of the PFM reform strategy:

Beyond stating ‘in the medium term’, the PFM Strategy does not specify a timeframe for the implementation of priority 7.1. Formally, implementation of fiscal decentralisation according to the PFM Strategy should be launched only from 2014 (with preparatory activities from 2012) and finalised by 2018. However, other strategic Government documents with similar legal power propose to start fiscal decentralisation (or carry out substantial fiscal improvements in the area of local Governments) much before 2014. For instance, another major strategic document Public Administration Reform (PAR)

1 OECD, DAC Expert Group on Aid Evaluation, 1997, CeFIMS ‘Decentralisation & Local Governance’ Unit 1, p. 5.

In the medium term, the budget allocation among different levels of government is based on a stable, objective and transparent methodology (7.1)

In the long term, local government is financed in alignment with its functional responsibilities (7.2)

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Strategy for Republic of Tajikistan2 for 2005-20153 places quite a strong focus on fiscal decentralisation and plans to start some significant activities in this area from 2007/2008. This includes carrying out functional reviews of all levels of sub-national governments (SNGs) and starting implementation of the recommendations on streamlining the division of functions between various sub-national levels from 2008 (see wider overview of the Strategy in the next Chapter of the Report).

Although the PFM Strategy does not plan major actions in the area of fiscal decentralisation before 2014, the PFM Action plan4 outlines elaborate number of preparatory measures within the framework of fiscal decentralisation to be completed by the end of 2012:

2 «Стратегия реформирования системы государственного управления Республики Таджикистан».3 Approved by the Presidential Decree No 1713 in 2006.4 Approved for a period of 2009-2012 by the PFM Council under the auspices of the PFM Strategy.

7.1.1 Further develop per capita financing for the social sectors (health and education) to all Rayons;

7.1.2 Develop a methodology to determine the allocation of resources between different levels of government

7.1.3 Introduce required changes to implement the new system for financing of local governments

7.2.1 Improve budget planning and budget capacity of local governments

7.2.2 Conduct vertical functional review of 7 ministries

7.2.3 Review current legislation versus the recommendations of the functional review to define necessary changes

7.2.4 Define lessons learnt from MTEF implementation in social sectors and piloting of programme budgeting to further reform relations at different governmental levels

7.2.5 Develop and adopt a new Law on Administrative and Territorial Division

7.2.6 Implement the PFM specific reforms of the new Law on Administrative and Territorial Division

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1. Intergovernmental Fiscal relations in Tajikistan

1.1. Sub-national Government setup in Tajikistan

Tajikistan is a presidential country with with a bicameral parliament structure5 (Madjlisi Oli) comprised of Madjlisi Namoyandagon (lower house) and Madjlisi Milli (upper house). Formally SNG structure in Tajikistan includes 3 layers: a) oblasts’ administrations as the regional level, first tier SNGs, b) rayons’ and cities’ councils as the 2nd tier and c) jamoat’s as the 3rd / lowest SNG tier. General sub-national government setup and arrangements are outlined in the Table 1.

Table 1. SNG setup and arrangements in Tajikistan

*RS – Republican subordination

(*RS – Republican subordination)

The system is complicated by the fact that most of the rayons and cities nest within oblast administrations as hierarchically higher SNGs, but some rayons / cities– so called rayons of Republican subordination – are subordinate directly to the CG. Two first tiers of SNGs (oblasts and rayons) come from the Soviet rule and this type of SNG structure could be found in many ex-USSR countries. Jamoat is a relatively new formation - and although legal framework exists - is not fully set up yet. There are 3 oblasts in Tajikistan, containing 45 rayons; 13 rayons of Republican subordination, and more than 400 jamoats.

Tajikistan SNG setup and arrangements are quite sophisticated including mechanisms of SNGs accountability to the CG, therefore SNGs are not fully self-autonomous to the traditional extent. Firstly, heads of oblasts and rayons of Republican subordination are appointed by the President – although

5 Constitution, Article 48.

PRESIDENT’s ADMINISTRATION

Gorno Badakhshan Autonomous OBLAST

Soghd / Khatlon OBLAST

GOVERNMENT MINISTRY of FINANCE/ TREASURY

1st SNG tier

Rayon Council2nd SNG tier City Council Rayon Council City Council RS* Rayon Council

RS* City Council

Town’s Jamoats

3rd SNG tier Villages’ Jamoats

Town’s Jamoats

Villages’ Jamoats

Town’s Jamoats

Villages’ Jamoats

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oblasts and rayons also have formally elected representative bodies6 - Local Majlisi - that take strategic decisions such as approval of the budget. Although by law rayons are not formally subordinated to oblasts, there is quite a strong vertical integration in budget planning and execution between the two types of entities. Moreover the Government executes another line of accountability / control via Ministry of Finance (MOF) and sector ministries (such, as MOE, MOH) – for example, heads of the financial departments7 in oblasts and rayons are directly appointed by the MOF, although they are primarily subordinated to heads of the SNGs.

1.2. Sub-national Government expenditure mandate

If looking only at the budget figures from a formal point of view, Tajikistan could already now be regarded as a country with a medium level fiscal decentralisation as the share of Local budget within the Consolidated Government spending was around 36%8 in 2009 (see Table 2).

Table 2. Expenditures of SNGs in Tajikistan (2009)9

Budget functional classificationRepublican

budget (RB)*

Local Budget

(LB)

State Budget10

% of SNG spending from total

State budget

1. General public services 291,48 94,98 386,46 24,58%2. Defense 215,91 16,78 232,69 7,21%3. Public order and safety 260,02 16,73 276,75 6,05%4. Education 246,58 683,49 930,07 73,49%5. Health care 58,1 250,16 308,26 81,15%6. Social welfare 201,98 22,72 224,7 10,11%7. Housing/communal affairs, ecology, and forestry 27,35 275,52 302,87 90,97%8. Culture and sports 116 35,02 151,02 23,19%9. Fuel and energy 571,02 0 581,17 0,00%10. Agriculture, fishing, and hunting 87,37 10,15 88,64 11,45%11. Industry and construction 23,27 1,27 55,98 2,27%12. Transport and communication 67,64 32,71 100,35 32,60%13. Other economic affairs 21,42 0 21,42 0,00%14. Expenditures not classified elsewhere 358,21 16,67 374,88 4,45%Subventions from RB to LB 272,69 0 272,69 0,00%Total** 2819,04 1456,2 4275,24 36,38%*in million TJS

6 Local Majlis.7 Responsible for budget planning and execution.8 According to the Urban Institute share of sub-national expenditures was at 24% in 2002 and 19% in 2007, Local Governance and Citizen Participation Program in Tajikistan, 2009, USAID. 9 Source data: Budget Performance Report, 2009, MOF.10 State budget is composed from Republican and Local budgets.

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**except extra-budgetary funds

Usually countries are classified within the category of a medium degree of fiscal decentralisation if the sub-national share of expenditures ranges from 30-45% of total Government expenditures. Across the OECD countries the average share of SNG expenditure from the general government spending was around 32% in 200111 (with highest spending in Denmark with 57.8%, Canada with 56.5% and Japan and the USA with 40%).

As it could be seen from the table key spending functions of the SNGs lie in the area of social sectors (except social welfare where it is only 10%) and housing / communal affairs – from the point of view of expenditure powers this is quite similar to the general trends in the OECD and other developing countries. Average spending of SNGs (from the total Government spending on the sector) in the OECD countries in 2001 for education ranged from 20% for unitary countries to almost 50% in federal OECD countries and health care from - 12% for unitary countries to 25% in federal OECD countries. This also shows the recent tendency that expenditure in some sectors are increasingly centralised to address equity and efficiency problems in the decentralised system (which has even more increased in the last years).

1.3. Sub-national Government revenue mandate

Currently Tajikistan runs a decentralized tax collection system, with some important taxes (such as VAT) collected locally and then shared upwards to the CG. In this case, SNGs have no power at all to change the tax rates or tax policy locally – everything is decided again by the CG - which has been claimed by some fiscal decentralization theorists as the only way of true fiscal autonomy to achieve efficiency gains at local level (by optimal match of tax revenues and level of services provided).

As a share of the state revenues, Tajikistan also scores highly on fiscal decentralization with 30% of revenue collected at local level compared to an average of 22% in OECD countries (see Table 3).

Table 3. Revenue collection powers of SNGs in Tajikistan (2009)12

Type of revenue State Revenue**

Local Revenue

% of SNG revenue from State revenue

1. TAX REVENUE* 3693,1 1143,3 30,96%Income Tax 565,5 414,2 73,24%Social Tax 471,5 0 0,00%Real Estate and Land Tax 145,1 159,6 109,99%Sales Tax 132,6 84,6 63,80%VAT 1638 166,1 10,14%Excise Tax 153,3 17,1 11,15%Other external Taxes on Trade 217,1 0 0,00%

11 I. Joumard, P.M. Kongsrud, Fiscal relations across government levels, OECD Economic Studies 36 (2003), p. 164.12 Source data: Budget Performance Report, 2009, MOF.

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Other domestic Taxes on Goods 370 302,7 81,81%2. NON TAX REVENUE 203,6 49,1 24,12%TOTAL REVENUE*** 3896,7 1192,4 30,60%*in million TJS **State revenue implies those revenues that accrue to Republican (CG) budget **except grants and deficit funding

It has to be pointed out that revenue powers of SNGs are generally larger in the federal countries – for example, in Canada (almost 50% of revenues collected at SNG level) and US (40% of revenues collected at SNG level), however some unitary countries also have considerable level of revenue collection at the SNG level (mostly Scandinavia with more than 35% of revenues collected at SNG level, e.g. Denmark).

Although currently Tajikistan has relatively high fiscal decentralisation from the spending point of view amount of own source revenue over which the SNG has full discretionary control is relatively small. Decentralisation theory often argues that true fiscal decentralisation reflects how much of the sub-national spending is raised from the local authorities ‘own-source’ / autonomous revenues 13 over which they have full control and discretionary power.

Currently the autonomous revenue base of Local budgets in Tajikistan is limited to the following three types of Local taxes: real estate tax, retail sales tax and motor vehicle tax. There are number of non-tax revenues such as user charges and fines that could be considered as autonomous source for Local budget as well. Other revenue sources for Local budgets that tend to be much more substantial are generated essentially from two sources - from the shared taxes and intergovernmental transfers (such as subventions) from Republican budget and therefore could not be considered to be fully autonomous source of revenue (where only the SNGs have full discretion over their revenue as they largely depend on the CG position).

13 I. Joumard, P.M. Kongsrud, Fiscal relations across government levels, OECD Economic Studies 36 (2003) 155–228 / J. Darby, R. Muscatelli, G. Roy, Fiscal decentralization in Europe: A review of recent experience, in: J. Monnesland (Ed.), Regional Public Finance: European Research in Regional Science, vol. 13, Pion, London, 2003

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Table 4. SNGs’ revenue autonomy (own source revenues)14

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

200

400

600

800

1000

1200

1400

1600

1800

2007 2008 2009

Mill

. TJS

Fiscal years

SNG's autonomous and other revenue sources

SNGs' autonomous taxes (local taxes)

SNGs' total non-tax revenue

Total LB revenue

Total LB expenditure

Total SNGs' revenue from shared taxes

Total SNGs' autonomous revenue (in %)

Own source LB revenues as share of total LB expenditure (%)

As it could be seen from the Table 415 dominant part of the SNGs’ revenues generates from revenue sources that are not autonomous / discretionary for the SNGs – from the shared taxes and subventions from the Republican budget. Only around 15-19% of the Local budget expenditure on average is funded from the SNG own revenue sources (local taxes, user charges, fees) – however this level of autonomous revenues is not unusual or exceptionally low compared to OECD countries (especially for relatively small, unitary countries such as Tajikistan).

14 Source data: MOF ‘Red books’ 2007/2008, Budget performance report, 200915 See also Annex 4.

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1.4. SNGs role in budget planning

Budget planning on the SNG level is predominantly based on tax revenue sharing mechanism accross all Government levels – CG and oblasts’ administrations on the one hand and oblasts and rayons on the other hand.

Only when there is an agreement on tax sharing rates between the Republican level and oblasts and rayons of Republican subordination, then rayons and oblasts can fully proceed with their detailed budget planning – although oblasts and rayons within each oblast still need to agree on revenue sharing between themselves (which is a further complication in the system).

Key problem in the current tax sharing mechanism – that dominates budget planning in Tajikistan - is that SNGs have very little control over its revenue base for more than one year ahead16 (as it is set only in the annual Budget law). Additionally revenue sharing rates are established late in the budget process that complicates budget planning substantially.

1.5. PEFA score on intergovernmental fiscal relations

16 Medium term budget planning impossible in this case.

The tax sharing rates (between the CG and SNGs on the one hand and Oblasts and rayons on the other hand) are determined during the process of budget preparation in negotiation between the central government and SNGs and are laid down in the annual Budget Law. This is the major mechanism for intergovernmental relations - and in fact also type of equalisation instrument between jurisdictions.

Tax sharing is done mostly based on political negotiation process and is not based on transparent criteria or formula (rule-based approach). The high volume of shared taxes, coupled with substantial intergovernmental transfers, might change SNGs’ revenue base quite radically over years. Alterations in tax revenue sharing between CG and SNGs and between Oblasts-rayons have been analysed in depth by the 2010 report “Inter-governmental fiscal relations in Tajikistan: suggestions for improvement from a budgetary perspective” and the conclusion was that changes across fiscal years have been considerable and not transparent (see Annex 5).

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Tajikistan was assigned a score of B in 200917 for the PEFA Indicator PI-8: Transparency of Intergovernmental Fiscal Relations. Targets within the PFM Strategy state an intention to achieve a score of B+ in 2013 and A in 2018.

It is important to remember that formally the PEFA indicator PI-8 does not measure the level of fiscal decentralisation but rather it focuses on the transparency of budget flows and fiscal relations of the central Government in the context of sub-national authorities in the country. One of the key sub-indicators under the indicator PI-8 assumes that the Government has “clear criteria, such as formulas, for the distribution of grants18 among SNGs’ entities (i.e. horizontal allocation of funds) which are needed to ensure allocative transparency and medium-term predictability of funds available for planning and budgeting of expenditure programs by sub-national governments”19. The country may even acquire the score A under this sub-indicator if “horizontal allocation of almost all transfers (at least 90% by value) from central government is determined by transparent and rules based systems”.

For Tajikistan to move from score B to score A in this area this would not necessarily require implementation of the fully fledged agenda of fiscal decentralisation (as this is not also required by the indicator PI-8 and other PEFA indicators), but rather quite a radical revision of the current system and principles of intergovernmental transfers and revenue sharing.

17 Before launching the PFM Strategy.18 Including transfers and subventions.19 PEFA, http://siteresources.worldbank.org/PEFA/Resources/PMFEnglishFinal.pdf

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1.6. Decentralisation in Central AsiaIf compared to other Central Asian countries (see Table 5), Tajikistan still scores considerably lower on formal fiscal decentralisation (if not accounted only for autonomous resources), especially on the expenditure side. For instance, Uzbekistan Local budget revenues are 29% of the consolidated State budget – that is comparable to Tajikistan 30% - but on the expenditure side Uzbekistan has the highest regional score with 55% from the total Government spending. This evidences that there are quite high intergovernmental transfers that try to address also horizontal imbalances across regions.

Table 5. Local Budget as percentage of State budget20

49%

55%51%

36%36%

29%

43%

30%

0%

10%

20%

30%

40%

50%

60%

Kazakhstan Uzbekistan Turkmenistan Tajikistan

LB Expenditure as share of State budget (in %)

LB Revenue as share of State budget (in %)

Although ‘on the paper’ it may seem that fiscal decentralisation in Central Asia is quite high, far above the OECD average, in practice however as argues some researchers this do not tell the true story and de facto fiscal decentralisation in Central Asia is much lower than in the OECD area21. It also has to be taken into account that generally resource rich Central Asian countries operate considerable extra-budgetary funds (such as National fund, comprising revenues from oil and other natural resources) which is the reason why their Local budgets might artificially seem larger than actually.

As mentioned, by Leschenko N. and Troschke M. all former Soviet Union countries to large extent have inherited the Soviet system (often known as ‘Russian doll’ model) that includes dependence on the center, lack of local autonomy, poor legislative basis for fiscal transactions, a high level of intended non-transparency, dual subordination and general uncertainty concerning responsibilities of different SNGs tiers22.

20 Source data: Tajikistan, Budget performance report, 2009 / other countries from Leschenko N., Troschke M. Fiscal Decentralisation in Centralised states: The case of Central Asia, April, 2006, p.6. Data used for other Central Asian countries refer to 2004.21 Leschenko N., Troschke M. Fiscal Decentralisation in Centralised states: The case of Central Asia, April, 2006, p.7.22 Leschenko N., Troschke M. Fiscal Decentralisation in Centralised states: The case of Central Asia, April, 2006, p.8.

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2. Achievements in the area of fiscal decentralisation to dateWhile the PFM Strategy plans to start the fiscal decentralisation reforms in 2014 (with preparatory activities from 2012), there have been efforts to support higher fiscal decentralisation at an earlier date, particularly with the PAR Strategy launched in 2006 and the ongoing donor agency Technical support to the reform (with legal changes and capacity building at local levels).

2.1 Legal and Strategic developments

Public Administration Reform Strategy for Republic of TajikistanThe PAR Strategy places an outspoken focus on administrative and fiscal decentralisation (see Annex 1 with relevant chapters from the Strategy for FD agenda), starting from the conclusion that the current administrative-territorial setup is not based on clear criteria and remains a barrier to the clear division of functions between the different SNG levels. According to the Action Plan23 of the PAR Strategy, functional reviews of all different levels of sub-national governments should have been carried out already by 2007, while drafting of a new classification of functions for each SNG level (including approval of the necessary legal adjustments) should have been finalised during 2008. According to the Strategy, implementation of the new system should have started in 2008 and continue until 2015. However, in practice the functional reviews that pre-empt the core implementation have not been yet undertaken - though there are plans to launch them soon with support of the funding from the UNDP.

The PAR Strategy emphasises the development of the 3 rd tier of SNGs – Jamoats24. According to the Strategy, development of effective and accessible local self governments primarily implies the legal strengthening of Jamoats’ role and their capacity. Key concerns of the PAR Strategy designers in this area was that functions of the Jamoats are highly restricted, they do not have their own budgets and thus fully dependent on funding from Rayons. This issue was formally addressed with the consecutive legal changes (see below) – additionally there is a considerable donor support for development of the Jamoats capacity.

The PFM Strategy also called for decentralisation of the State Unitary Enterprise that provides basic communal services in regions (according to the later USAID report on Sub-national government Assessment (2009) this could be located at the level of 3rd tier of sub-national authorities).

Law on Local Self-Governments in Towns and VillagesThe law was drafted (with support of the USAID) and approved in the Parliament in August, 2009. The law explicitly focuses on institutionalisation and strengthening of a Jamoat’s role as the autonomous system of local self-governments. According the Article 45, Jamoats should have separate budgets from year 2011 – however this requirement has not yet been enforced.

23 Implementation matrix.24 Due to dual subordination of Oblast and Rayon administrations (also partly to the Central Government), quite a few people claim that the only true self governments are Jamoats, as other structures quite resemble deconcentrated units of central government (which is not fully true as Oblasts and Rayons have their elected representative bodies as well).

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Law on Public Finance of Republic of TajikistanAccording to the Article 5 of the newly redrafted Law on Public Finance 25 (approved by the Government in 201126), a Jamoat’s budget should be part of the Local budget – which aligns the Public Finance Law with the Law on Self-Governments in Towns and Villages. However, further presentation, sources and process of approval of Jamoat’s budget is not elaborated by the Law on Public Finance.

In an effort to stabilise revenue sources for local authority budgets and to avoid overly frequent (annual) changes of tax sharing rates, the Law on Public Finance requires the presentation of draft budgets of Oblasts and Rayons to the MOF for a three year period (Article 42) instead of the traditional annual process. Additionally, Article 49 states that appropriations for the coming fiscal year are set by the annual Budget law, but the outer year estimates presented by aggregate classifications are set by a separate decree of Majlisi Oli. However, the current approach to tax sharing is not fully abolished as Article 23 states that tax sharing rates are approved annually - within the framework of the annual Budget law and is a prerogative of the Government. It is also mentioned that in case of disagreement the MOF takes the decision and submits it for review to the Government.

2.2 Donor Projects and Technical Assistance

The Report further covers only the key donor agency Technical assistance with permanent and outstanding relevance to the reform – wider overview on TA projects in the area of fiscal decentralisation is set out in Annex 2. This section covers key findings, outputs and recommendations from these various donor Technical assistance projects.

Central Asian Republics’ Local Government Initiatives Phase II (funded by USAID)The project has generated several considerable outputs in the area of administrative and fiscal decentralisation - one of them drafting of the law “On Local Self Government in Towns and Villages” which created a structured legal framework for the Jamoats.

Report on “Sub-national Government Assessment” by the project in 2009 provides a useful overview of SNGs’ structure in Tajikistan and advocates for a strong role of Jamoats in the further decentralisation agenda. The report also concludes that the number of shared taxes has been decreased from 10 to 6 – although the Urban Institute27 recognises that the share of SNGs expenditures has been growing (primarily due to increase in education and health care expenditures). The Urban Institute also noted that “donor driven public financial management reforms are increasing the power of the central government at the expense of the sub-national governments”28. The report points out that “ongoing reforms in the budget process are shifting control over [these] expenditures from sub-national governments to the respective sector ministries. Coupled with other reforms in various facets of public

25 Approved by the Government and submitted for approval to the Parliament.26 Still needs authorisation of the Parliament.27 The contractor for the project.28 Report on Sub-national Government Assessment, Urban Institute, p. 2.

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financial management, this means that Tajikistan will be going through a process of centralisation of the government over the next three to five years”29.

Local Government Initiative Phase III (funded by USAID)The project is a continuation of the Local Government’s Initiative Phase II project and as such keeps the same focus primarily on the development of the 3rd tier of sub-national authorities – Jamoats. One of the issues currently being under the review for the project is the elaboration legal framework for more structured and transparent system of intergovernmental transfers.

Development of capacity for drafting and monitoring Local and Sub-national development programmes and budgeting (funded by UNDP)The key focus of this TA funded by the UNDP has been the drafting and institutionalisation of the Local Development Programmes (plans) at the Rayon level. The Rayon Development programmes have been initiated and drafted by the specially formed local Initiative Action Groups30 that are comprised of representatives of Rayon administration and Majlisi, Jamoats through private sector and civil society involvement. This work has been organized in a close partnership with the MEDT. Based on the results of development planning exercise at the local level, the project, together with MEDT, developed a methodology for local development planning in Tajikistan. Planning at Jamoat level is also included in the new version of the methodology at the current moment.

In the future, especially when the functions for the different levels of SNGs are clearer in the national legislation, local Development plans might be a useful addition for the medium term budget planning, investment promotion and economic development of the particular region.

MTEF Social Sectors, Tajikistan (funded by EU)

In 2010 this project released the report “Intergovernmental fiscal relations in Tajikistan: suggestions for improvement from budgetary perspective”. The report came up with the list of recommendations / options for improvement of the intergovernmental fiscal relations in Tajikistan, of which the key ones are:

Shift funding from Local to Republican budget as one of the options for improving efficiency and achieving more cost effective and coordinated policies, especially in social sectors;

Set the tax sharing rates on the three year rolling basis instead of the current annual basis.

Set the tax sharing rates earlier in the budget preparation process. In the current system the sharing rates are set late in the budget preparation process - from August to November with the FY beginning in January. As reallocated tax revenues might constitute a major part of the local budget revenues, this makes budget planning on the SNGs level difficult. The MTEF project has recommended that tax sharing rates are set soon after the macro-fiscal outlook, preferably sometime in May.

29 Report on Sub-national Government Assessment, Urban Institute, p. 8.30 Инициативная активная группа.

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Remove the Oblasts’ role in tax sharing and budget planning on the Rayon level – it is suggested to remove Oblasts’ role in the further tax sharing process between their subordinated Rayons and the Oblast budget in question, as this complicates the system and reduces the transparency31. According to the MTEF project’s report, a possible option would be funding of Oblast’s functions from the Republican budget.

Move towards fully autonomous self-government in the long term – according to the report this might also include centralisation of tax collection leaving only a few taxes under the autonomy of local government, but having intergovernmental transfers to compensate for funding of some functions of the local governments.

31 However, this most likely would imply direct working relationship with more than 70 local administrations (Oblasts, Rayons of republican subordination, Rayons) from the MOF side which would increase the workload and transaction cost substantially.

17

3. Main findings

Main findings of this report relevant to the reform of fiscal decentralisation are set out below. These also include commenting on some key recommendations / findings from the TA projects (reviewed in the previous chapter).

3.1 General findingsAny country that has developed a good intergovernmental fiscal relations model, has addressed effectively both vertical and horizontal imbalances in an integrated approach in the design phase, taking into considerations both tax policy and intergovernmental transfer needs.

‘Vertical imbalance’ arises when there is an imbalance between the expenditure responsibilities of local governments and their revenue raising powers. Currently the intergovernmental fiscal relations system in Tajikistan puts an emphasis on correcting vertical imbalances with individual revenue sharing arrangements for each SNG (oblasts and Republican subordination rayons) and subventions from the CG to address potential deficits / revenue gaps of SNGs in the budget planning phase. However the system is not transparent, is prone to changes and does not address horizontal imbalances (inequalities between the SNGs) effectively.

Horizontal imbalance occurs when there are considerable income / revenue differences across the country and therefore equalisation among regions of the country is needed. It has also been recognised from international practice that “to the extent that sub-national governments are given more revenue raising powers, these disparities will widen”. Therefore high intensity fiscal decentralisation when basic social services are not sufficiently funded at the local levels yet is not advisable.

World Bank (WB) argues that proper sequencing of decentralisation is an important determinant of its success: “The consequences of a poorly sequenced decentralization program can range from minor delays and complications, to ineffectiveness and subsequent failing support of decentralization efforts, to macroeconomic instability, and even to chaotic situations with failed public services”32. Assessing various lessons of the reform around the world, the WB also suggests that gradual implementation of reform is less risky and more desirable than a “big bang” approach: “There are two good reasons why this might be preferred: (a) limited available information to allow good predictions on how things will eventually work out, in contrast to how they were planned, and (b) the cost of reform can be substantial, and gradual approaches allow this to be spread out over a number of years”.

32 Roy Bahl and Jorge Martinez-Vazquez “Sequencing Fiscal Decentralization”, World Bank Policy Research Working Paper 3914, May 2006.

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Key weaknesses that need to be addressed to make substantial improvements in the further decentralisation reform include: a) lack of clear division of functions between all three sub-national and national levels and b) unstable revenue / funding basis for local budgets. This creates obvious administrative waste and problems with overlapping functions.

Once the functions and funding base for each SNGs level are clarified it is also important address the issue of how to ensure minimum service standards across the country. Therefore, a revenue equalisation mechanism is the third most important element after the clarification of functional responsibilities (across all Governments’ levels) and the establishment of a stable revenue base. Currently the equalisation function is primarily delivered via a sophisticated combination of a revenue sharing mechanism and the use of intergovernmental transfers, although much of the negotiation on these transfers remains opaque (as there are almost non-existent criteria set, based on which decisions are taken).

Currently there is no coherent policy framework on the reform of fiscal decentralisation (or deconcentration which is a realistic alternative to full FD) in the country – the PFM Action plan cannot fill this role as it expires in 2012 and does not provide enough detail to drive the reform.

Although the fiscal decentralisation reform has been set to start in 2014 according to the PFM Strategy, there have been various ongoing activities (mostly supported by various donor agencies) to move the fiscal decentralisation agenda ahead. Apart from quite useful work carried out on the local level (predominantly at Rayon and Jamoat level) and quite extensive assessments in the area, existing efforts for fiscal decentralisation are focused at a very low level with little strategic focus on the full range of decentralisation reforms and the linkages from the central to Jamoat level.

Various assessments in the area of administrative and fiscal decentralisation provide a wide range of useful conclusions, but there seems to be a lack of evaluation work and a lack of recommendations on the general perspective of the decentralisation reform efforts33 – which includes how all the existing sub-national levels (Oblasts, Rayons, Jamoats) should be developed further. It is not possible and even unproductive to focus strongly at one of the SNGs levels separately and try to design the ideal system if other components of the system are not properly addressed.

3.2 Revenue collection and forecastingAs mentioned, a key obstacle to improvements in budget planning is the introduction of mid-term budget planning and the achievement of more efficient administration at local levels is the unstable sub-national authorities’ funding / revenue base. Revenue sharing is not based on any explicit and transparent methodology, it is solely based on political negotiations each year. The

33 Maybe except the report “Intergovernmental fiscal relations in Tajikistan: suggestions for improvement from budgetary perspective” which looks at all SN levels and provides vision for the future as well (however the emphasis here again is just on the social sectors due to specifics of the project).

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high volume of shared taxes, coupled with substantial intergovernmental transfers, might change the sub-national authority revenue base quite radically over years34.

The MTEF project in report on Intergovernmental fiscal relations has suggested setting the tax sharing rates on a three year rolling basis. However the newly drafted Law on Public finance is not fully consistent with this position. According to Article 42 of the 2011 law, Oblasts and Rayons have to present the draft budgets to the MOF and Government for a three year period. In addition, Article 7 requires that planning of the budget is done for the coming fiscal year and two consecutive years. Article 49 states that appropriations for the coming fiscal year are set by the annual Budget law, but the outer year estimates by aggregate classification - by a separate decree of Majlisi Oli. However, Article 23 of the Public finance law still requires that tax sharing is done annually by the Budget law – therefore there are no solid grounds in the new law to have a stable and rolling tax sharing decision for the medium term.

Only when there is an agreement on tax sharing rates between the Republican level and Oblasts and Rayons of Republican subordination can Rayons and Oblasts fully proceed with their detailed budget planning – although Rayons need to agree at Oblast level on revenue sharing between themselves (which is further complication in the system). This is why the MTEF project has recommended setting the tax sharing rates earlier in the budget preparation process. This approach would help to rectify deep systemic problems within the PFM system, but may prove not to be sustainable in the longer term. Furthermore, it requires robust local revenue forecasting well in advance of the following fiscal year which also has proved problematic.

Underestimating the revenues in the budget planning process seems to be a systemic part of the budget planning and execution system (as it is practised quite widely over the number of years). Revenue surpluses up to 10% of the total budget does not require a budget amendments procedure through Parliament and might be spent more easily, however from the budget transparency and efficiency point of view this is not a sound finance management practice. Also, the current authorisation process is not an optimal one. Currently the decisions on specific expenditures from the surplus revenues are taken by the head of the sub-national authority and post-factum mandated in the local Majlisi. If the system remains operational for some time the MOF could set more specific rules about which priority areas should be funded from the surplus revenues, ask for a local budget strategy, and require that spending from the surplus revenues are mandated also by local Majlisi before release. Additionally to restrict the systematic underestimation of revenues, the Government could consider requesting sub-national authorities to pay a higher proportion of their surplus revenues to the Stabilisation Fund35.

34 According to the report “Intergovernmental fiscal relations in Tajikistan: suggestions for improvement from budgetary perspective” tax sharing rates for the same local authority have varied quite a lot over the years.35 With the Budget Law 2010, local governments have to pay 20 % of their surplus to the newly created ‘Stabilization fund for the development of the economy’, before it was 10%.

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3.3 Intergovernmental transfer systemA key problem with the current intergovernmental transfer system is that is not based on transparent and systemic rules – the best practice would be to base the transfers on clear rules and formulae.

Theoretically from the international PFM perspective, intergovernmental transfers might be of three types:

a) unconditional grants to fund the decentralised services of local governments (usually based on the costs of those services) but with no conditions attached to the transfer;

b) equalisation grants, to support the least developed local administrations, based on minimum service delivery standards and formulae;

c) conditional grants, to help local governments finance programmes agreed between central government and the local government in line with an agreed set of conditions and sanctions if conditions are not met. This type of transfer enables central government to track resources for service delivery better and provides for greater accountability from local governments.

Another shortcoming of the current system in Tajikistan is that dominant part of transfers practised could be viewed in fact as unconditional grants - to compensate the revenue shortfall / fiscal gap for any particular local budget (usually in the budget planning stage). Very rarely intergovernmental transfers could be seen as earmarked conditional transfers – although in most cases intergovernmental transfers are recorded as subventions (which according to the existing budget legislation should be for a specific expenditure purpose).

3.4 Expenditure planning As mentioned before a key weakness in achieving improvements – independent of whether Tajikistan decides to go for a higher or lower fiscal decentralisation – is the lack of a clear division of functions between each level of sub-national governments.

Another complication for the system is that on the one hand social spending forms the largest part of the local budgets, while on the other hand line ministries for health, education and social protection have the roles of setting general sector policy, but have very little role in budget preparation, execution or oversight. Currently, there are major institutional and funding reforms going on in social sectors and this could have a direct impact on further fiscal centralisation or decentralisation, division of functions between Oblasts / Rayons and republican budget.

3.5 Budget executionThe budget in Tajikistan is executed on the lowest level of economic classification with a high level of rigid input and resource control by the Treasury. Budget documents from Oblasts and

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Rayons of republican subordination are presented to the MOF in a similar level of detail (although the actual budget appropriations on the local Majlisi level are very aggregate, such as total spending by function e.g. education). At some point it should be also discussed in what detail the SNGs present their budgets to the central Government. Also with implementation of some more output based funding schemes the strict input control should be reconsidered and focus more on performance and priorities (initially for some pilot programmes).

3.6 Other findingsLocal Development programmes currently designed as the basis for socio-economic planning and budget decisions are not aligned with budget planning as the MTEF has a rolling approach (each budget planning cycle one more planning year is added to the medium term fiscal framework), but the Development plans do not have a rolling basis (a fixed term, such as Development programme for 2010-2012, then programme for 2012-2015). To be effective and have synergy, it is recommended that Development programmes are fully aligned with the MTEF methodology;

Additionally, due to the current weaknesses in the revenue basis discussed before, the linkage of Development plans with the budget is weak or non-existent (beyond the annual planning period);

Although the Law on Local Self-Governments in Towns and Villages has been drafted recently with the support of TA projects deeply involved in the decentralisation reform, it does not contain clear division of the functional responsibilities in the new law - even for Jamoats that again depend on delegation of functions from the higher levels.

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4. Conclusions and RecommendationsBelow are summarised key conclusions and recommendations of this report relevant to the further reform of fiscal decentralisation. Recommendations are provided in sequence of suggested timing (ones being higher priority in the short to medium term come first). The timing of the implementation o f each recommendation should be under the discretion of the MOF and the Government and harmonised/integrated fully into existing strategies and plans.

As an overall approach it is not suggested to move into an urgent and high intensity fiscal decentralisation reform agenda, but rather to have an informed and staged approach to the reform. The coordination of the reform activities needs to be better managed. In the short to medium term the three key issues in the overall decentralisation reform that should be addressed are:

sound division of functions between various Government levels;

stable revenue / funding basis for local budgets;

and equalisation mechanism to offset for regional socio-economic development inequalities (such as lack of revenues to ensure minimum service standards to population in the local administration).

If these issues are addressed properly and resolved then the further reform might be implemented much more smoothly as many of the current ongoing activities relate to dealing with these issues.

Recommendation 1: Review functions and funding mechanismsAccording to the international best practice, FD reforms have to be staged deliberately and be guided by the “finance-follows-function” rule. The recent World Bank report on fiscal decentralisation reforms around the world emphasizes that Government must settle on the assignment of expenditure responsibilities to local governments, before it can choose an efficient mix of taxes. Despite all this good a priori reasoning, most countries begin intergovernmental reform on the revenue side”36.

Activities under this recommendation include review of the functions to be allocated to all levels of government and develop feasible proposals to allocate these. This should include considering the relationship of functions to capability and potential funding with a view to allocating functions to the level where they can be best performed and where they can be appropriately funded through the range of mechanisms being considered. This review of functions must go hand in hand with a review of financing including taxes, transfers, equalisation etc.

36 Roy Bahl and Jorge Martinez-Vazquez “Sequencing Fiscal Decentralization”, World Bank Policy Research Working Paper 3914, May 2006.

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Recommendation 2: Using the results of the Functional review, draft a Concept paper for Fiscal Decentralisation with a comprehensive framework for functions and funding of sub-national administrationsAs noted earlier in the report, there are strategies and plans with different activities and timelines. These documents need to be replaced with a coherent approach to decentralisation that can be debated, approved and used to design the legal changes.

The concept paper should firstly address the key question of whether Tajikistan should aim for higher fiscal decentralisation or the same or even lower intensity fiscal decentralisation37, but with proper division of functions, funding base that excludes administrative waste and increases motivation at local levels. It is still an extensive discussion from a scientific point of view whether higher decentralisation implies also higher economic growth38 and reducing poverty, as proposed originally by the theory of decentralisation. Some studies have even suggested that that sometimes fiscal decentralisation is associated with slower economic growth39 and does not alleviate poverty problems. There is wide evidence across the world, that decentralisation does not necessarily reduce poverty as considered by the theory, but ‘in some of the poorest countries characterised by weak institutions and political conflicts, decentralisation could actually make matters worse’40.

Due to the wide economic development disparities across regions in Tajikistan, a ‘big-bang’ decentralisation approach might lead to even larger discrepancies between the regions41, an increase in poverty and an amplification of problems of llimited access to social services by the poor if not driven carefully. It is also questionable if traditional Fiscal decentralisation theory with full revenue-expenditure autonomy is well suited for a small developing country with high level of poverty and regional imbalances. Coupled with low local capacity and substantial corruption levels further intensive FD agenda might be risky and turn out to be counterproductive.

It is also true that in the countries with quite obvious regional socio-economic disparities of territories, especially in the cases of developing countries where base funding levels are much lower than in developed countries, the Central Government should play much larger role in equalisation and ensuring minimum standards of service delivery. Taking into account these arguments it is recommended to have a deliberate and staged decentralisation approach rather than moving to an intensive fiscal decentralisation in a short term - if intergovernmental fiscal mechanisms are not set up well this could end up in more inequality and horizontal imbalance as now. It is also possible – as it could be observed from most of the OECD country examples – that revenue collection is increasingly being centralised while service delivery and expenditure decentralised (SNGs receive much of their funds from the CG).

37 As the share of sub-national level / Local budget spending from total Government spending.38 See John Thornton, Fiscal decentralization and economic growth Reconsidered, Fiscal Affairs Department, International Monetary Fund, 2006.

39 Robert D. Ebel and Serdar Yilmaz, Concept of Fiscal Decentralisation and Worldwide Overview, World bank Institute.40 Jutting J., E.Corsi and A.Stockmayer, Decentralisation and Poverty Reduction, CeFIMS ‘Decentralisation & Local Governance’, Unit 8, p. 9.41This is evidenced also by Bahl R. In his Intergovernmental Transfers in Developing countries, April, 2000, p.3.

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Theoretically a country could even run quite a centralised revenue collection system, but transfer via intergovernmental transfer substantial part of the Government revenues back to local authorities – thus centralizating revenue/expenditure side but decentralizing service delivery. Also the Republican (central) Government might relinquish other functions and related funding where central coordination is not needed (as opposed to education or health care) and decentralised implementation does not imply lower cost effectiveness.

The concept paper could establish more realistic and coordinated timeframe for the overall reform for example until year 2018 when reform of fiscal decentralisation is suggested to be finalised. However it would be crucial that the concept paper is not drafted before the Functional Review of all sub-national levels has been carried out (recommendation 1).

Suggested outline for the Concept paper have been set out in annex 3.

Recommendation 3: After considering the functional review, the Concept paper and other relevant material make an informed decisions on the functional responsibilities of the all levels of SNGsClear division of functions between the Central Government, Oblast, Rayon administrations as well as Jamoats is one of the cornerstones in achieving improvements both under the current administrative arrangements or the advanced new system. Functions might be amended either in the current legal framework or the in the new “Law on Administrative and territorial division” that has been envisaged by the PFM Action plan. New administrative setup on local level has been also requested by the PAR strategy which has called for clear criteria of administrative-territorial division in the future.

Recommendation 4: Take a decision on the stable revenue base for sub-national authorities excluding revenue (tax) sharing model as far as possible

As mentioned, in developing countries role of the Central Government - especially in the initial development phases – tends to be much larger (than in advanced/ developed countries) to ensure basic social services are delivered and important infrastructure is being developed (such as energy, communications infractructure, social infrastructure, like schools). This tendency tends to prefer revenue centralisation in early development phases especially in relatively small unitary countries. Apart from this, there are several arguments why revenue collection for most tax types is more efficient at the central level – the IMF has mentioned three key ones42. Firstly, Governments usually aim to achieve some economic and social objectives with taxation such as income redistribution, macroeconomic stability and economic development. From this point of view progressive income tax and corporate income tax should be left to the CG. Second consideration is mobility of tax base – e.g. “if a tax base can 42 Tanzi V., Fiscal Federalism and Decentralisation: A review of some efficiency and macroeconomic aspects, World Bank, 1996, p.312-313.

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easily escape taxation at the local level to moving to another jurisdiction, that base is not a good candidate or local taxation43” (mostly in case when SNGs have authority to set different tax rates). Thirdly, economies of scale suggests some taxes are less costly to administer on central level especially where technical requirements are high – according to the IMF study therefore VAT and global income tax should be nationally collected taxes. According to the IMF study and other best practice, as most appropriate local taxes are mentioned taxes on land and real property (most immobile tax base), local excise taxes, automobile tax, local licenses and user charges44 and sometimes retail sales tax.

Ideally in the future Tajikistan should arrive at such a funding mechanism of local authorities which involves as little revenue sharing as possible (as this is not a stable basis for planning and reduces autonomy delegated as well) – which means that there should be an exclusive list of local taxes that remain fully for the use of the local budgets. For instance, recently the Kazakhstan government has adopted a new intergovernmental system which sets intergovernmental transfers for three years (although not formula based) and the principle of ‘one tax for one budget’ (excluding revenue sharing)45.

Exclusive Local taxes might be the Local taxes already existing (real estate tax, retail sales tax and motor vehicle tax) but some other tax options for SNGs might be assessed during the review46.

Tax collection of shared taxes at SNG level should be reconsidered as well as generally it is considered that the Central Government tax collection is more effective and less costly especially in developing countries. It should be also assessed if the current collection of shared taxes at local level is more efficient than central revenue collection might be.

If tax sharing practice is continued then ideally tax rates for Republican budget and Local budget should be set in the Tax code or in the Budget law for three years and do not change substantially over years. The problem of the currently rather opaque intergovernmental tax and transfer system is that both tax sharing and subventions tend to address vertical and horizontal imbalances without clear rules. To change this it would be possible either to abolish tax sharing at all and collect the currently shared taxes centrally or set strict tax sharing rates and carry out equalisation only with intergovernmental transfers (such as subventions). For example, all SNGs might be grouped in three categories that have their separate tax sharing rates for three years (or longer) – for example, group 1: Dushanbe, group 2: Oblasts and rayons of republican subordination and group 3: all other rayons. Another option would be to group rayons in specific groups based on their economic development level and based on that apply tax sharing rates for longer periods.

Presumably, the task involves quite sophisticated modelling of various tax collection options and implies changes in the tax policy and collection methods. Given the scope of this recommendation it is

43 Tanzi V., Fiscal Federalism and Decentralisation: A review of some efficiency and macroeconomic aspects, World Bank, 1996, p.312.44 Bahl R. In his Intergovernmental Transfers in Developing countries, April, 2000, p.4.45 Leschenko N., Troschke M. Fiscal Decentralisation in Centralised states: The case of Central Asia, April, 2006, p.10.46 Also it is in line with intentions of the GoT to draft the new Tax Code shortly.

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suggested to start this task as early as possible (as soon as the Functional review of sub-national authorities is finalised).

Recommendation 5: Establish an effective mechanism for revenue equalisation to offset regional socio-economic differences

To have an effective intergovernmental transfer system it is also important that minimum service level standards are developed in the key sectors – so that CG might precisely establish amount of funds necessary to address the vertical imbalances (revenue gap for the assigned expenditure responsibilities) of specific territories.

It has been emphasized already that a system of fiscal decentralisation, especially in developing countries, cannot function effectively without some type of equalisation mechanism to offset for regional socio-economic development inequalities to ensure minimum service standards are observed in all territory. There are several methods for addressing horizontal imbalances or equalisation objective – the most transparent and rule-based being formula grants. There are several approaches how a formula based intergovernmental transfer approach could be designing, such as:

Grants should allocate funds so as to reflect regional differences in expenditure needs (such as population density, population demographic structure, mountainous areas, etc.);

Second, is income or fiscal capacity equalisation – in this approach formula grants attempts to provide more funding to jurisdictions that have weaker revenue base;

A third approach is to include tax effort provision – with the goal to increase overall level of revenue collection - directly in the formula in order to increase incentives for revenue collection;

And the fourth approach is to reflect the balance between revenue raising and expenditure needs (defining desired level of service (minimum level service standards is first step towards this model)).

There are various instruments how to achieve equalisation, but most common are either equalisation grants from the central Government’s revenues or receipts from the Local Government’s Equalisation fund. In the second option (redistribution between SN authorities), all local authorities that have a better economic performance and higher revenues pay some part of their revenues to the Equalisation fund – from which the poorer local self-governments then receive funding to cover gap in their expenditures. In both cases, system should be transparent and based on transparent and objective

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formula to achieve stability in budget planning and execution. If the second model is chosen, the current Stabilisation fund (to which surplus revenues are paid) could be used for paying out equalisation grants to regions lagging behind. Apart from equalisation grant, there can remain also some other types of intergovernmental grants – such as conditional grant, etc.

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Annex 1. Relevant chapters from the Public Administration Strategy of Tajikistan to the Fiscal decentralisation reform

«Стратегия реформирования системы государственного управления Республики Таджикистан»

Ключевым вопросом реализации реформы системы государственного управления являются упорядочение административно-территориального деления и четкое распределение функций и полномочий между центральным уровнем управления, местных органов государственной властью и местным самоуправлением. Для упорядочения административно-территориального деления будут выработаны и внедрены критерии определения административно-территориального деления. Для распределения же функций и полномочий будут проведены функциональные обзоры на центральном и местном уровнях управления. На основе проведенных функциональных обзоров будут приняты меры по ограничению вмешательства государства в хозяйственную деятельность и по определению функций местного самоуправления. Следующий шаг – реорганизация структуры предоставления услуг населению для обеспечения доступа к эффективным качественным услугам.

В краткосрочной и среднесрочной перспективе на уровне местного самоуправления будут приняты меры по развитию функциональной и финансовой автономии Джамоатов и одновременно, будет реализована программа развития потенциала Джамоатов в управлении вопросами местного значения в условиях самоуправления.

Успешное завершение краткосрочной и среднесрочной фаз реформы системы государственного управления на центральном и местных уровнях позволит приступить к реализации мер, ориентированных на долгосрочную перспективу. В ходе осуществления этой фазы будет проведено упорядочение административно-территориального деления, определены взаимоотношения между уровнями государственного управления и местного самоуправления, рассмотрены Стратегии развития регионального управления. В долгосрочной перспективе будут также осуществлены меры, направленные на развитие и закрепление результатов первой фазы реформ как на центральном, так и на местных уровнях управления. Относительно развития местного самоуправления в долгосрочной перспективе будут определены новые функции местного самоуправления наряду с проведением секторальных реформ.

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Annex 2. Overview of donor agencies’ major projects relevant to the area of Fiscal decentralisation

PROJECT TITLE: Central Asian Republics’ Local Government Initiatives Phase II

Funding authority USAIDProject duration Closed

Scope of work Central GovernmentLocal Governments

Key outputs and activities47 Development of an appropriate legal framework including drafting of the law “On Local Self Government in Towns and Villages” which created a structured legal framework for the JamoatsSupport to methodological and training functions of the city and rural district governmentsReport on “Sub-national Government Assessment” (May, 2009)

PROJECT TITLE: Local Government Initiative Phase III

Funding authority USAIDProject duration Ongoing (continuation of the Local Government’s Initiative Phase II)

Scope of work Local Governments with strong focus on JamoatsKey outputs and activities Focus on the assessment and development of the national level

legislation in the area of administrative and fiscal decentralisationWork on assessment and elaboration of a more structured and transparent system of intergovernmental transfers in Tajikistan

PROJECT TITLE: Development of capacity for drafting and monitoring Local and Sub-national Development programmes and

budgetingFunding authority UNDPProject duration 2008-April, 2011

It is expected that Technical assistance would be continued within a new project with the funding of UNDP further from 2011 (tender to be launched shortly)

Scope of work Rayons / JamoatsKey outputs and activities Elaboration of Local Development Programmes in 15 rayons,

from various parts of the country, both at the level of Oblast and direct Republican subordinationDesign and implementation of the system for the monitoring and evaluation of the Local Development Programmes on Rayon and Oblast levels Establishment of statistical databases in the Rayons and

47Key outputs and activities as relates to the area of this report.

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Jamoats assistedAssessment of the existing legal framework and recommendations on its improvement

PROJECT TITLE: MTEF Social Sectors, Tajikistan

Funding authority EUProject duration 2008-2011Scope of work MOF and Social sectorsKey outputs and activities Implementation of a multi-annual approach to budget

preparation that is based on policy in three social sectors: ‘education’, ‘social protection’ and ‘health care’ Improvement of budget preparation at large in the Government of TajikistanReport “Intergovernmental fiscal relations in Tajikistan: suggestions for improvement from budgetary perspective” (2010)

PROJECT TITLE: Rural Growth programme (RGP)

Funding authority DFID, GTZ, UNDPProject duration 2010-2012Scope of work Local Governments in Sogd oblastKey outputs and activities The general goal of the RGP is to enhance more inclusive economic

development in rural areas of Tajikistan in support of the National Development Strategy and the Poverty Reduction Strategy. This project includes improving the local environment for economic growth, income generation and employment creation in Sogd region.

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Annex 3. Suggested outline for the Concept paper for Fiscal decentralisation

Outline for Concept paper for Fiscal DecentralisationFiscal decentralisation or deconcentration reform?

The concept paper shall answer whether Tajikistan should aim for higher fiscal decentralisation or the same or even lower intensity fiscal decentralisation, but with proper division of functions, funding base that excludes administrative waste and increase motivation at local levels.

Objectives of the Fiscal Decentralisation Reform

The concept paper shall also address the key objectives of the FD reform (such as to increase or not discretionary powers of the SNGs, in what timeframe) and set benchmarks of achievement in the reform.

Timeline for the reform, identify stakeholders and responsible authorities

The concept paper shall establish realistic and coordinated timeframe for the overall reform until year 2018 when reform of fiscal decentralisation is suggested to be finalised (however the timeline for the full FD could be reconsidered - it could be finalised earlier or later).

Functions of each level of SNGs The concept paper shall provide basis for clear division of functional responsibilities of all tiers of SNGs system and form basis for changes in legislation.

List of Local taxes, rates and administration of tax collection

The concept paper shall make a proposal / provide options for the Government for a reconsidered local budget tax base. Ideally in the future Tajikistan should arrive at such a funding mechanism of local authorities which involves as little revenue sharing as possible. This part of the concept paper should also include overview of any changes in tax collection and administration.

Intergovernmental transfer system The concept paper shall make a proposal streamlined intergovernmental transfer system in line with new functional responsibilities of each level.

Use of Unconditional Grants The concept paper shall describe meaning of unconditional grants, mechanism and criteria for use.

Use of Conditional Grants The concept paper shall describe meaning of conditional grants, mechanism and criteria for use.

Equalisation fund and Equalisation Grants The concept paper shall describe meaning of equalisation grants, mechanism and criteria for use.

Budget planning and execution cycle: Medium and Annual budget elements

The concept paper shall show how the medium term budget planning system integrates with redesigned SNGs government system, how Republican budget and institutions interact with local administrations.

Changes in budget execution, accounting and reporting

The concept paper shall provide overview of changes in budget execution, accounting and reporting due to the decentralisation reform.

Annex 4. SNGs’ revenue autonomy (own source revenues)

Type of revenue 2007* 2008** 2009***Retail Sales tax 48,21 68,37 85,47

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Real estate tax 29,5 43,35 57,53Motor vehicle tax 23,02 34,86 45,03SNGs' autonomous taxes (local taxes) 100,73 146,58 188,03SNGs' total non-tax revenue 29,53 42,99 85,41Total SNGs' autonomous revenue 130,26 189,57 273,44Total LB revenue 888,25 1235,35 1668,89Total SNGs' autonomous revenue (in %) 15% 15% 16%Total LB expenditure 888,25 1235,48 1445,15Own source LB revenues as share of total LB expenditure (%) 15% 15% 19%Transfers from the CG (subvention) 261,8Total SNGs' revenue from shared taxes 523,33 758,18 897,88(in million TJS)  *MOF ‘Red book’ (2007) **MOF ‘Red book’ (2008) ***Budget performance report, 2009 (budget execution data)

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Annex 5. Distribution of the Regulated Taxes for 2006-2010 (from the report by the EC funded project MTEF: Social sectors of Tajikistan)

Tax type / Local authority

2006 2007 2008 2009 2010

Rep. budget Local budget

Rep. budget Local budget

Rep.bget Local budget

Rep. budget

Local budget

Rep. budget

Local budget

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VAT

Sugd Oblast - - 0% 100% 30% 70%

30% 70% 39% 61%

Dushanbe city 70% 30% 70% 30% 70% 30%

67% 33% 60% 40%

Tursunzade city 65% 35% 52% 48% 70% 30%

70% 30% 100% 0%

Hissar District - - - - 30% 70% - -

58% 42%

Rudaki District - - - - - - 26% 74% - -

Other Oblasts 0% 100% 0% 100% 0% 100% 0% 100% 0% 100%

Corporate profit tax/minimal enterprise tax

Dushanbe city 80% 20% 80% 20% 80% 20% 60% 40% 60% 40%

Tursunzade city - - - - 100% 0% 50% 50% 60% 40%

Hissar District - - - - 0% 100% 50% 50% - -

Other Oblasts 0% 100% 0% 100% 0% 100% 0% 100% 0% 100%

Income tax

Dushanbe city 40% 60% 40% 60% 40% 60% 50% 50% 54% 46%

Tursunzade city 60% 40% 40% 60% 40% 60% 40% 60% 40% 60%

Hissar District - - 0% 100% 0 100% 51% 49% - -

Rogun city - - - - - - - - 39% 61%

Other Oblasts 0% 100% 0% 100% 0% 100% 0% 100% 0% 100%

Motor road users' tax

Dushanbe City 30% 70% 30% 70% 33% 67% - - - -

Sugd Oblast - - 0% 100% 0% 100% 21% 79% 20% 80%

Tursunzade city 65% 35% 40% 60% 56% 44% 60% 40% 25% 75%

Hissar District - - - - 53% 47% 0% 100% 50% 50%

Rudaki disctrict - - - - - - - - 14% 86%

Others Oblasts 0% 100% 0% 100% 0% 100% 0% 100% 0% 100%

Excises

Sugd Oblast 48% 52% 0% 100% 34% 66% - - - -

Dushanbe City 50% 50% 69% 31% - - - - - -

Shahrinav District 100% 0 - - - - - - - -

Other Oblasts 0% 100% 0% 100% 0% 100% 0% 100% 0% 100%Source: derived from Republican Budgets 2006-2010

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Revenue sharing in Sugd Oblast among cities and rayons under the Oblast subordination in 2010

City or Rayon

Own revenues

Subventions from the Oblast

Total revenues

Tax sharing rates (% to be retained by city / rayon)

Personal Income Tax

Corporate Tax VAT Excises Land tax

Motor road users’ tax

Simplified tax

Minimal enterprise tax

In thousand Somoni

Isfara 27,337 27,337 100 70 61 80 33 70 100 70

Kairakum 6,931 6,931 20 20 20 50 17 20 10 20

Kanibadam 20,081 20,081 100 65 61 100 100 63 100 65

Khudzhand 31,751 31,751 10 10 10 10 100 10 41 10

Pendzhikent 32,957 32,957 100 100 61 100 96 80 100 100

Istavarshan 26,766 26,766 50 50 36 80 100 60 100 49

Chkalovsk 6,966 6,966 25 20 20 40 100 20 58 20

Taboshar 3,041 1,598 4,639 100 100 61 0 0 80 100 100

Ayni 12,467 5,383 17,850 100 100 61 0 100 80 100 100

Asht 17,290 5,866 23,156 100 100 61 0 100 80 100 100

Ganchi 15,823 6,958 22,781 100 100 61 100 100 80 100 100

Zafarobad 7,481 7,481 100 100 61 0 0 14 100 100

Mastchokh 12,910 12,910 100 100 61 0 100 80 100 100

Spitamen 12,934 12,934 100 100 61 0 100 80 100 100

Rasulov Dz. 12,934 12,934 100 70 61 100 100 36 100 70

Gafurov B. 32,181 32,181 20 20 41 50 100 40 40 20

Shakhristan 5,962 3,852 9,814 100 100 61 0 100 80 100 100

Kukh-Mastchokh 3,888 2,771 6,660 100 0 61 0 0 80 0 100

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