DRAFT
Towards a New Framework for
Urban Infrastructure Finance
and Utility Management in Serbia
Tony Levitas
February 4th 2009
Belgrade
STRUCTURE OF PRESENTATION
• Definition of the Problem
• Origins and Consequences of the
Existing Situation
• Towards a Better System of
Infrastructure Finance
DEFINITION OF THE PROBLEM
• Huge backlog of investment needs in
urban infrastructure.
• 3-5 bln Euros in environmental
infrastructure (water, sewage, solid
waste)
• As much in roads, schools, and other
public facilities.
Must be financed from a combination of
four sources:
• User fees and charges
• Local Government General Revenues
• Local Government and utility
borrowing
• Central Government (and EU) Grants
and Transfers
Does the existing regulatory system
encourage an effective mix of these
different revenues for the financing
of Serbia’s municipal investment
needs?
The short answer is: No.
ORIGINS AND CONSEQUENCES OF
EXISTING SYSTEM
• User fees should be “social prices”
• Municipal investment needs should be
financed primarily by land development
and use fees.
• Land Directorates should collect these
fees and plan and manage all municipal
investments.
• Utility fees are VERY low, (and kept so by
central government price controls.)
• Utilities do not see themselves as
responsible for their own development.
• Deferred maintenance has made it difficult
to separate investment and maintenance
costs, creating further confusion about
who is responsible for what.
• Utilities are not creditworthy cannot use
debt.
• Land Directorates are “states within states”
and fragment municipal governance.
• Land Development Fees are very high,
encouraging illegal construction and taxing
new investment.
• The costs of financing of all urban
infrastructure has been pushed entirely onto
municipal budgets.
• Existing system is like a bad hydraulic pump.
• The under-use of utility fees puts pressure on
municipal budgets for investment funds.
• Municipalities pass this pressure on to
businesses in the form of higher taxes (e.g.
land development fee, firmarina).
• And onto the central government in the form
of demands for more grants and transfers
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TOWARDS A BETTER SYSTEM OF
INFRASTRUCTURE FINANCE
A new system cannot be created overnight
Elements of this system are already in
place. Some are still missing.
Requires coordinated policy on 3 fronts
Reform of utility finance and management.
Reform of land use and development fees
Reform of the property tax.
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Property Tax Devolution
Continue to facilitate the ability of local
governments to tax citizens for the real
value of their property.
Clarify local government’s ability to force
taxpayers to register their property
Clarify their ability to set the base square
meter rate used to value properties
Improve enforcement.
Land Use and Development Fees
• Phase-out the land use fee for physical persons
and replace it with property tax.
• Improve valuation of commercial properties for
property tax purposes. Eventually, eliminate the
land use fee for legal persons.
• Eliminate land development fee for green-field
investment where it just depresses lease prices.
• Introduce a land conversion tax so local
governments can capture some of the value of
re-zoned, privately-held land.
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Utility Finance and Management
Most difficult area that requires the most
coordinated action.
At the moment, fragmentation of
responsibility at the local level is mimicked
by fragmentation at the national level
The restructuring and (partial) privatization
of multi-funtional, cross-subsidizing utilities
is part of the solution.
But privatization is not a panacea.
Utility Finance and Management
• Free utility prices but maintain, at least in the short
term, caps on total wage bill.
• Forbid, in line with EU norms, price discrimination
by types of users.
• Create a Local Utility or Water Standards
Commission to define accounting, reporting, and
service contract standards for local utilities.
• Use projects (KfW/EBRD) as knowledge base.
• Clearly define responsibility for utility reform within
the national government
Concluding Thoughts
• Serbia’s urban investment needs cannot be met
without placing more of the investment costs on
citizens, either in the form of higher utility prices,
or higher local taxes on physical persons.
• This cannot be done overnight and will obviously
not be popular.
• But it will also significantly increase the pressure
on local politicians to be accountable to their
electorates, and thus help ensure that
decentralization in Serbia fulfills it promise.
Thank You For Your Attention!
Acknowledgements
This work would not have been possible without
the funding and cooperation of:
NALED, The Local Government Initiative of the
Open Society Foundation; The Standing
Conference, GTZ, MiSP, and of course USAID.
I would also like to thank the municipalities of:
Subotica, Sremska Mitrovica, Uzice, Nis,
Prijepolje, and Novi Pazar