Supervisor: Armin Sir~o, Senior Portfolio Manager,...

Supervisor: Armin Sir~o, Senior Portfolio Manager, UNDP

Lead Consultant: Katalin Pallai

General Editor: Richard Marshall, Economist, UNDP

Authors and Reuf Bajrovi}, Ivan Barbali}, Sabina Ba{i},

consultants Zlatan Burzi}, Ermin Cero, Daria Duilovi},

(in alphabetical Dina Durakovi}, Maida Fetahagi}, Esma Kreso,

order): Davorin Paveli} , Ne{ad [eremet, Paul von Kittlitz

Translator: Sabina Berberovi}

Technical Editor: D`enan Kapetanovi}, Programme Assistant

Proof-reading: English text Richard Marshall; BiH text Ivona Zeki}

Design: Tamara Koren

Special acknowledgments to:

Mr. Stefan Priesner, Deputy Resident Representative of UNDP in Bosnia and

Herzegovina

The views expressed herein are those of the authors and do not necessarily reflect

the views of the United Nations Development Programme.

Chapter OOne: IIntroduction aand ccontext ............................... 11Post-war political context........................................................................................................ 16

Chapter TTwo: HHuman DDevelopment in BBosnia aand HHerzegovina ttoday......................................... 23

Overall Trends ........................................................................................................................ 25Regional and local disparities .................................................................................................. 35Summary and conclusions ...................................................................................................... 39

Chapter TThree: BBuilding aa rresponsive aand accountable llocal ggovernance ssystem ................................... 41

Legal and administrative framework........................................................................................ 44The Intergovernmental Fiscal System ..................................................................................... 49Democratic accountability and participation ............................................................................ 61Summary and conclusions ...................................................................................................... 70

Chapter FFour: QQuality aand aaccess iin llocal ppublic sservices.... 73Education and basic schooling ................................................................................................ 75Access to basic health services............................................................................................... 84Access to social services......................................................................................................... 91Public utilities ......................................................................................................................... 97Summary and Conclusions...................................................................................................... 107

Chapter FFive: MMaking iit hhappen - eenabling aand mmanaging ... 109Sustainable environmental management ................................................................................ 111Local economic development ................................................................................................. 116Local Government Management ............................................................................................. 125Summary and conclusions ...................................................................................................... 132

Chapter SSix: TTowards aa nnew llocal ggovernance...................... 133Building a better local governance system.............................................................................. 135Service sectors, enabling functions and management............................................................. 136Charting a way forward ........................................................................................................... 140Technical Annexes .................................................................................................................. 141Bibliography ........................................................................................................................... 163

3

Contents

Charts aand FFiguresChart 1.1; Bosnia and Herzegovina, the Republika Srpska and the Federation ......................... 17Chart 1.2; The FBiH's ten cantons .......................................................................................... 18Chart 2.1; Output (GDP) post 1997 versus the pre-war level................................................... 29Chart 2.2; Growth and inflation ............................................................................................... 29Chart 2.3; Average Voter Turnout Rates.................................................................................. 34Chart 2.4; Cantonal and RS HDIs............................................................................................. 37Chart 3.1; Revenue Sources for FBiH Municipalities (excluding Sarajevo)................................ 52Chart 3.2; Revenue Sources for FBiH Municipalities (including Sarajevo) ................................ 53Chart 3.3; Estimated Revenue Source Shares for RS Municipalities ........................................ 57Chart 4.1; Comparative Spending on Education....................................................................... 78Chart 5.1; Composition of Daily Waste Generation in BiH (1999).............................................. 115

TablesTable 2.1; HDI components 2000 to 2002............................................................................... 26Table 2.2; HDI in Eastern Europe 2004 ................................................................................... 27Table 2.3; Summary Macroeconomic Indicators...................................................................... 30Table 2.4; HPI Figures for BiH 2002 ........................................................................................ 32Table 2.5; GDI, HDI and Annual Change .................................................................................. 33Table 2.6; Inter-Entity Comparisons........................................................................................ 36Table 2.7; Sample Based HDI and HPI Analysis ....................................................................... 38Table 3.1; Definition of local government competencies in FBiH.............................................. 45Table 3.2; Definition of local government competencies in the RS.......................................... 47Table 3.3; Distribution of FBiH Revenue Sources .................................................................... 52Table 3.4; Summary of Cantonal Tax Sharing Arrangements ................................................... 54Table 3.5; Tax assignments in the RS...................................................................................... 56Table 4.1; School and Pupil Numbers ..................................................................................... 78Table 4.2; Resourcing levels in FBIH Cantons ......................................................................... 79Table 4.3; Social Protection Beneficiaries................................................................................ 94Table 4.4; Average Water and Wastewater Tariffs.................................................................... 102Table 6.1; Summary of key sector challenges ......................................................................... 138

4

This is the fifth National Human Development Report produced for Bosnia and Herzegovina, and the sec-ond to take a distinct sectoral theme - that of local governance reform. It breaks new ground in a numberof respects; by offering for the first time, BiH estimates for the Human Poverty Index and the GenderEmpowerment Measure: by tracking developmental performance at the sub-national level: by engagingdirectly with practical policymaking: and through making use of new national thinkers as its contributingauthors.

The more sophisticated picture of human development we are able to offer this year, yields somewhatconflicting messages. It is pleasing that in aggregate terms BiH continues to make progress: the HumanDevelopment Index has improved by some 5.1% on the previous year: the HPI at 14% of the population,suggests capability poverty (educational and health deprivation) is less severe than income poverty; andthe gender measures show a relative equity between men and women. Yet inter-country comparisons sug-gest that BiH continues to be out-performed by its neighbours. More troublingly, the sub-national pictureis disquieting, with entity, cantonal and municipal disaggregations revealing stark inequities in socio-eco-nomic and public service performance. This confirms anecdotal and qualitative evidence pointing to theemergence of a divide between wealthier areas of the country, particularly Sarajevo, and more peripheralregions.

This pattern provides both a critique of the failings of the current system of local governance and a ration-ale for their urgent reform. The capacity of many local governments within in BiH, and especially those out-side the major cities, remains weak and hamstrung by the system within which they operate. But in turn,local administrations are necessarily closer to the people and therefore inherently better suited to address-ing performance failures in key services like schooling and healthcare. The authors of the report go furtherstill - arguing that the local level, where decision making is more immediate, and where nationalistic grand-standing counts for less, offers a means of changing the entire nature of politics in BiH.

Sadly, both local governance and the public services in BiH have a long way to go before this potentialcan be realized. Radical and brave reforms are required to secure the devolution of power, real accounta-bility and the rights of all citizens to access services and articulate concerns.

This report makes strong recommendations for systemic and sectoral reforms. These include among oth-ers, the full implementation of the local self governance statutes developed by the Entity governments, theadoption of a functional fiscal equalization system, the devolution of schools and healthcare provision tothe local level, and the rationalization of local public utilities. This is a demanding agenda and one which thisreport argues must be addressed if BiH is to enhance human development, and take its rightful placeamong the European Family of nations.

Jens Toyberg-FrandzenResident Representative 5

Foreword: BBetter LLocal GGovernance iin BBiH

Local government is a natural choice for this year's national human development report. Thisis not merely because local services have the ability to directly affect the life choices and oppor-tunities of citizens, but because municipalities have an enormous potential for affecting morefundamental change. In the following we argue that this potential extends well beyond theparameters of the locality, presenting possibilities for driving long lasting social and politicalrenewal at all levels.

Human DDevelopment iin BBiHLike past years' NHDRs, this report provides an up to date analysis of the state of human devel-

opment in BiH today. This shows that BiH's Human Development Index (HDI), a combined meas-ure reflecting longevity, educational performance and material living standards, has improved bysome 5.4% on the previous year to a figure of 0.784. This change is driven by an improvementin educational performance and higher per capita incomes. Were this value to be applied global-ly, it would place BiH at the upper end of the medium human development band, and 64thamong 171 reporting nations. The Gender development Index (GDI) which adjusts the figures inthe light of inequity between men and women shows a similar improvement of 5.5%.

For the first time results are also presented for the Human Poverty Index (HPI) and the GenderEmpowerment Measure (GEM), and most innovatively the level of human development withinBiH's regions. The HPI and GDI reveal a similar developmental situation to the HDI, with some14% of the population suffering from capability poverty and a GEM which is in the mid range ofvalues.

Overall, what we can take from these values is a country which has made strong progress sincethe war, but has still not fully recovered the near-western European standards of human devel-opment it once enjoyed. Moreover, in recent years the rate of improvement has slowed and BiHis now being out-performed by many of its neighbours.

The regional disaggregation exercise undertaken by this study reveals considerable inequitiesbetween different parts of BiH. The pattern of variation is confirmed by a number of methodolo-gies, and shows that the Greater Sarajevo and Herzegovina areas are outstripping others. This isdriven predominantly by economic conditions but health and educational outcomes do playsome role. Notably, these analyses also show that, in contrast to conventional wisdom, theRepublika Srpska is not necessarily less developed than parts of the Federation. Developmentalinequity is therefore a nuanced phenomenon in modern BiH.

7

Chapter 0ne: Introduction and context

NHDR 2005;

EXECUTIVE SUMMARY

8

The SState oof LLocal GGovernment The report finds much wrong with local governance - both at the systemic level and in terms

of performance on the ground. Bosnia's complex and often sclerotic administrative structurescome in for much criticism, serving to cement the difficult legacy of the conflict which continuesto blight the emergence of a productive and cooperative political culture. Local governments areimprisoned by a constitutional framework which tends to favour Entity and Cantonal govern-ments and limits local competences and capabilities. Equally, the current system of fiscal rela-tions deprives many municipalities of the necessary funds to meet local needs and expandopportunities. Under such conditions duplication, waste and non-transparency thrive, promotingpoor performance and permitting the abuse of power. Most disturbingly, there are cases wherethe latter has been often severe enough to constitute the outright denial of basic rights. The vari-ation in resources between different areas is equally disturbing - with some analyses suggestingthe funding differential could be as high as a factor of five to one.

But it is important not to be overly pessimistic. Legal reform is underway and the acceptanceof the Law on Local Self Governance in the Republika Srpska and progress towards a similar lawin the FBiH marks a particular milestone. Equally, there are vestiges of a fiscal equalization sys-tem in both Entities which might be further developed.

We argue that if local government is to realize its full potential these reforms must be acceler-ated. The outcome at minimum must be; a new legal basis which guarantees and promotes localautonomy; an effective fiscal system which empowers and compensates for variations in needsand resources; and a scheme of ongoing decentralization, whereby local governments secure alarger responsibility for the services which shape the well-being of communities.

Delivering aand EEnabling The picture within the service domains also gives grounds for concern. Major local public serv-

ices, including schooling and healthcare, are unresponsive to users and antithetical to social andeconomic progress. In turn, public utilities are desperately inefficient and suffer both from a lackof investment and weak management. Significant improvement will require a sea change in finan-cial and management practices and workplace culture.

In relation to the human services, this report argues foremost for giving local governments agreater say in their administration coupled with a redefinition of the role of the public sector.Attention should be given to clarifying the responsibilities between different tiers of govern-

ment, and how differential needs might be compensated for. It is disquieting that locally deliv-ered services, and especially schooling, are dominated by higher level governments, driven bydivisive political agendas. Decentralization will contribute towards refocusing attention on thereal public service objectives. To be fully successful this should be accompanied by transparen-cy guarantees and the replacement of inputs-based funding arrangements with rational systemsof output-led resourcing.

Turning to local public utilities, where BiH local governments already hold considerable serv-ice responsibilities, the report highlights a similar catalogue of failures. Yet in addition to politicalinterference and managerial weaknesses, there is a chronic lack of investment and deficientmaintenance. The report concludes reforms must address the fundamental question of the rela-tionship between provider and consumer. Furthermore, that local utilities must adopt a distinct-ly commercial approach, rationalizing charges to reflect consumption and clearly defining theroles of politicians vis à vis managers. This route not merely offers benefits to public enterpris-es and their municipal owners, but will also motivate rational and more productive behavioursamong consumers.

The report also considers the more contemporary concept of 'enabling' and community lead-ership as core municipal responsibilities. Enabling refers not to direct service delivery but activi-ties which shape and motivate the behaviours of others - be they citizens, entrepreneurs or con-sumers. Taking the two key areas of economic development and environmental protection, wefind that there is considerable scope for BiH municipalities to play a more proactive role in enrich-ing community life, through both promoting a better business climate alongside heightenedenvironmental awareness. The report recognizes there are strong connections between theseareas and local government regulatory functions, it concludes the two need not be mutuallyantagonistic, and with imagination, can be supportive of each other.

Managing aand CConsultingThe report closes by examining the quality of managerial practices at the strategic level within

local governments. Like enabling functions this is an indirect area of activity, but one which is piv-otal to success in all other domains. Effective planning and oversight is fundamental to effectiveimplementation. Yet sadly, as the report reveals, little attention is given to these questions with-in most municipal administrations in BiH. All too often, corporate plans are incidental to the realdecision making processes at work and have little 'traction' on budget allocations and serviceactivities. Worse still, apparently consultative planning processes are merely window-dressing

9


exercises, orchestrated for public consumption or to satisfy international donors. Few local gov-ernments engage in genuine consultation and as a result decision making is both ineffective andlacks legitimacy.

Yet it is important to recognize that there are positive signs of renewal and innovation.Traditional forms of local consultation, such as Mjesne Zajednice (community councils), are nowbeing actively promoted. Similarly, some progressive local governments have engaged in effec-tive strategic planning exercises. The report commends these efforts and argues for the cross-fertilization of these ideas across the span of local government in BiH.

Unlocking LLatent PPotentialWhilst this report charts much that is wrong with municipal government in BiH and the system

within which it operates, it remains positive about its future. The local level, where politics is nec-essarily more real, offers a spring board for lasting and substantial change. What is required is amixture of systemic and downstream reforms which mutually reinforce each other.

We acknowledge that decentralization is a fundamentally political question as it involves there-distribution of power and resources, and we are realistic about the extent of the difficultiesand challenges faced. But change can be initiated at both the local and national level, throughstep-by-step measures. Of the two, change from within communities offers the most powerfuldriver for progress. This report purposefully seeks both to support local politicians and opinionformers as much as it does those at higher levels. We believe firmly that a local renaissancewhich drags politics closer to genuine public concerns - the substance of human development inBiH - has the potential in time, to bring about a new dawn for Bosnia and Herzegovina.

10

CHAPTER 0NE

INTRODUCTION AND CONTEXT

13

Chapter 00ne: IIntroduction aand ccontext

Human development is about expanding thechoices open to people to lead full and valuablelives. First articulated in the 1980s, the approachprovides a means of understanding and trackingeconomic and social progress which is rooted in thereal-world experiences of ordinary people. Humandevelopment concerns itself with furthering individ-uals' capacities (their 'capabilities') to access thosestates of being (or 'functionings') that define thequality of life. These include; being able to secure adecent education, being in good health, having theeconomic wherewithal to participate in the econo-my, and articulating a political voice by which out-comes can be affected.

The approach grew out of 'Basic Needs' thinkingwhich re-defined development objectives awayfrom a small number of macroeconomic indicators,chiefly growth in per capita incomes, and brought innotions of securing entitlements, such as nourish-ment, warmth and shelter. Human developmentgoes conceptually further, not by merely identify-ing a wider and more sophisticated set of needs,but expressing well-being in terms of securing thefreedom to make positive choices, and so enableindividuals to realize their full potential.

Both the global Human Development Reports(HDRs) and those produced at the national level(NHDRs) by UNDP Country Offices working withdomestic authors, seek to examine substantivewell-being and the sustainability of the develop-ment process. They set out in practical terms, whatcan be done locally to improve conditions within agiven field of public policy making.

The ccondition oof hhuman development iin BBosniaand HHerzegovina ((BiH)

The state of human development in BiH todaygives grounds for concern. Per capita incomesremain low, health indicators are at best static andeducational performance shows only weakimprovement. Most problematic of all, BiH citizensstill face a raft of discriminatory practices which cir-cumscribe access to basic services and weaken thewider democratic process. Year by year BiH is fallingbehind others in Eastern Europe.

But to be clear, what we observe is a relativedecline and a failure to progress. Much has beenachieved since the end of the war and what BiHfaces today is more of a failure to realize its veryconsiderable potential than a socio-economic crisis.Broad measures of health and educational out-comes are high by global standards and economicgrowth remains positive.

We also have to bear in mind that objective datasources are hard to come by, and a large informalsector has developed. Anecdotal and some qualita-tive evidence, lends support to widely-sharedviews that official economic data paints a mislead-ingly negative picture. However, other parts of thecountry, especially those settlements which suf-fered during the war, endure severe deprivation.This apparent paradox is indicative of growinginequality in the distribution of income, wealth andopportunities.

Still more worrying is the routine disregard andpatchy application of the rule of law. Citizens aredeprived of legal certainty and equal treatment inthe enforcement of regulations and administrativedecisions. Portions of the population are denied

decent educational and employment opportunities1

and access to a variety of other entitlements isoften limited. This situation both threatens toundermine BiH's human development inheritance,and the political settlement upon which peace wassecured in 1995.

Running alongside this, an increasing number ofnon-poor BiH citizens perceive themselves being atrisk of deprivation.2 As institutions fail to mediatethreats and create opportunities, people have losttheir trust in government, and are losing hope forthe future as well.3 This process is troubling andmay lead to an exodus of the BiH's capable youngergeneration and threatens to feed a vicious cycle.

The post-war reconstruction efforts and the tech-nical support provided by the international commu-nity enabled considerable initial progress to bemade. Nevertheless, it seems that the political andadministrative framework created by the DaytonPeace Agreement has in time, failed to bring effec-tive solutions in many domains. BiH is still a frag-mented country split along ethnic lines and bur-dened with a huge and ineffective public adminis-tration system. Equally, the political space isdominated by dogmatically nationalistic politicalinterests.

Wide international experience shows that thebasic modus operandi of a market economy is morequickly established than the rules which underpineffective and functional public institutions.Moreover, in time the latter will circumscribe theprogress of the former.4 During the last one andhalf decades we have witnessed this progression inpost-socialist Europe. After the initial political tran-sition, it was easier to create the right economicconditions than it was functioning democracies, and

in turn, the freedoms and choices which character-ize sustainable human development. This is espe-cially true for countries where the transitionprocess was directed from above and by an incum-bent leadership whose culture was shaped underthe tutelage of the past autocratic regimes.5

These phenomena should not be surprising. Newinstitutions rarely take real shape in internationaltreaties or on the initiative of the incumbent leader-ships, but in the constructive tension of citizens,intellectual elites and civil society. Substantialsocial and political change requires locally-drivendemands based on mass participation. The generalpolitical apathy of citizens and the dominance ofethnically-based politics unfortunately haveallowed the status quo and the unproductive feudalnature of public life to prevail (for an example of thissee Box 1 on 'Language').6

The key challenge facing BiH citizens today is thereconstruction of the social fabric. Better opportu-nities for people can only be created through thereform of formal and informal institutions and theestablishment of a constructive public life thateffectively reforms, and then checks, thosereshaped institutions. Our key objective in thisreport is to explain how local governance might beutilized and revitalized so as to contribute to thispressing task.

Local ggovernance aand hhumandevelopment

We see local governance as a primary means forsecuring higher levels of human development. Theactivities of municipalities can improve both publicservice delivery and the quality of democracy. Localgovernments, being closer to inhabitants, are in the

Better LocalGovernance

in BiH

14 1 World Bank/ UNDP Living Standards Measurement Survey (2003)2 HDR 20023UNDP Bosnia and Herzegovina, Early Warning System 2002 onward

4 Fukuyama; State-building; Governance and World Order in he 21st Century,Cornell UP, 2004

5 Presentation by Ivan Szelenyi on 'Transition Models' at the Institute forPolitical Science of the Hungarian Academy of Science, Budapest, 2004

6 ESI (European Stability Initiative); Governance and Democracy in BiH; Post-Industrialist Society and the Authoritarian Temptation, 2004

15


best position to assess local processes, problems,demands, expectations and potentials. They canmobilize local stakeholders to develop sharedgoals and to envision adequate strategies to setcommunity development on a positive trajectory.

Equally, government failures are less likely indecentralized systems. Localities better match taxa-tion levels with spending decisions, the democraticpressures are stronger and their inherently moreattuned local knowledge helps to exploit revenuesources and identify needs more effectively. As aresult, public services are delivered more efficient-ly and the policy process is more accountable. Fieldknowledge is key to extending access to services.The smaller government is, the more directly con-nected it is to communities, and able to reach out tothe vulnerable and excluded. Indeed, for the mostvulnerable, the mere availability of public provisionalone does not necessarily guarantee take-up.Delivering public services to all citizens is a majorcomponent of building a more inclusive society andfurthering human development.

By the same token, local governments can makea particular contribution to strengthening thoselocal services (education, health and communalservices) that are central to the human develop-ment agenda. Ordinary citizens are best placed toformulate opinions on the quality of delivery - and ifdecision makers are close and accessible, citizenspossess incentives to actively represent their opin-ions and interests. Under the right conditions oftransparency and openness, local government hasthe potential to become an instrument of communi-cation and change. Moreover, as municipalities arethe first line of the public administration system,their reform directly initiates learning and dialogue,

and it has the potential in BiH to initiate a process ofre-building trust in all public institutions.

Our oobjectivesThe primary purpose of this report is to give an

unbiased assessment of the condition of local gov-ernance in BiH, to suggest new roles for municipal-ities and how they might be empowered to workbetter. The central question is how can local gov-ernments become effective agents in improving thecapabilities and opportunities of citizens?

Since the establishment of the post-war publicadministration system there has been no systemat-ic attempt to analyse the conditions and perform-ance of local administrations. Our report is a firstattempt that includes both a horizontal analysis ofthe governance system and a vertical analysis of thevarious local services and 'enabling' duties munici-palities undertake. One of our objectives is to assistsupporters of democratic change by developing awider understanding of the issues, offering priority-based analysis of the problems and makes propos-als for improvement. Reliable analysis can assistpolicy champions to build clear arguments, andenable them to become more effective managers ofthe reform process. In addition to shaping thereform agenda, we seek also to inform the design offuture UNDP interventions.

Structure oof tthis rreportThis report includes five further chapters.

However, a full understanding of the nature of thechallenges faced within BiH requires an apprecia-tion of its political geography and the complex con-stitutional arrangements currently in place.Therefore in the second part of this introductory

chapter we provide the necessary backgroundmaterial. Those who are familiar with these issuesmay choose to skip this section - for others it willprove essential preparation.

The second chapter assesses the conditions ofHuman Development in BiH, identifying the mainthreats and the key national and local policy chal-lenges. The third chapter offers an analysis of thegovernance system at the strategic level, identify-ing the areas for reform. The fourth and fifth chap-ters provide a detailed analysis of the activitiesundertaken out by local governments. These arereviewed in terms of key services delivered, fol-lowed by the wider enabling functions and manage-ment competencies held. These three chaptersrepresent the mainstay of our work and includeproposals both to improve local service deliveryand the overarching intergovernmental framework.

The sixth and closing chapter recaptures earlierconclusions and recommendations and highlightsunifying themes.

Working aarrangementsIt was decided early on in the preparation of this

report that it should be researched and complied bya group of young professionals to bring new ideasand fresh contributions to this debate. This decisioncan be taken as symbolic. It signals trust in changeand we have purposefully aimed to empower futureagents through exposure to serious policy work.This choice of UNDP underlines a deep belief in theimportance of the process, and the vitality of BiH'semerging new thinkers. It is crucial that BiH nur-tures the fresh ideas of motivated young intellectu-als. In time new thinking should spawn genuine pol-icy formulation circles, both inside government and

the independent sector, with the potential tobecome a major resource for a locally-driven reformprocesses.

The llimits oof aanalysisWe emphasize at the outset that this report is a

first attempt to systematically analyze BiH local gov-ernance in depth. Our report is both strong andweak. We have tried to bring new insights, creativeideas and build sound arguments. We sought to getaway from emotions, activism and biased percep-tions, and offer an objective commentary. Howeverthe often non-availability of reliable data and infor-mation presented serious obstacles to thisapproach, and we have been forced to deploy vari-ous methods to fill any information gaps. Yet never-theless, we are confident that our analysis is muchmore than merely proximate. Most of the time wewere able fill the gaps entirely satisfactorily, wherenot we have been obliged rely on supportive casesand qualitative material. We are aware of the dan-gers of this, and where evidence is particularly lim-ited we have moderated our conclusions, and cau-tioned readers.

PPoosstt-wwaarr ppoolliittiiccaall ccoonntteexxtt It is impossible to properly understand the condi-

tion of local governance in Bosnia and Herzegovinaand the challenges faced without a familiarity withthe current constitutional and administrative frame-work. Modern BiH is a confederal state of two parts;the Republika Srpska (RS) and the Federation ofBosnia and Herzegovina (FBiH). This arrangement isfurther complicated by the presence of ten cantonsin the Federation, with wide competences and con-stitutional recognition. These arrangements, which


in BiH

16

stem from the Dayton Peace Accords (DPA), seek tomediate ethno-political differences (see map inChart 1.1).

Chart 1.1; Bosnia and Herzegovina, the RepublikaSrpska and the Federation

The DDayton PPeace AAccords(DPA)

The General Framework for Peace, by which theDPA is also known, created the framework of theBiH nation state. DPA is essentially a peace treaty,whose main aim was to end the conflict and thusresulted from protracted negotiations aimed atmeeting the mostly conflicting political agendas ofthe principal parties. The Accords defined BiH as astate of three constituent peoples - Bosniaks(Muslims), Serbs and Croats. Two ethnically-basedEntities were established - Republika Spska in thenorth with a serb majority, and the Federation(FBiH) in the South shared between the Croats andBosniaks. Following further arbitration, the District

of Brcko was created under international supervi-sion, as a single administrative unit of local self-gov-ernment existing under the sovereignty of BiH. TheEntities divide the country almost in half holding49% and 51% of the territory respectively.

Many belive this territorial division codified theresults of war gains and widespread ethnic cleans-ing, particularly as the new boundaries did not cor-respond to any pre-war historic or ethnic divisions.The main rationale behind the protection of nationalor 'ethnic' interests, through entrenching collectiverights, was an attempt to establish the principle ofequal representations at all levels of government.

The importance of establishing mechanisms toprotect and preserve cultural identities should notbe underestimated in post-war BiH (for example,see Box 1 on Language). However, the codificationof collective rights has effectively resulted in split-ting the country into three separate political spaces,one for each of the three constituent peoples.

The DPA comprises a total of eleven annexes, andmandated various international agencies to take thelead in aspects of the agreement. Annex 10 estab-lished the new position of High Representative asthe final authority regarding interpretation of theDPA on the civilian implementation of the peace set-tlement, supported by the Office of the HighRepresentative (OHR) - which is effectively a secre-tariat. Implementation of the peace agreementbecame the overall responsibility of the 52 nationsand organizations who attended the LancasterHouse Conference when the Peace Accords weresigned, known as the Peace ImplementationCouncil (PIC). A PIC Steering Board chaired by theHigh Representative was also set up, composed ofrepresentatives of Canada, France, Germany, Italy,

17


Japan, Russia, the United Kingdom, the UnitedStates, the Presidency of the European Union, theEuropean Commission. Its task was defined as pro-viding political guidance and support in the peaceimplementation process. Two years later, at a PICmeeting in Bonn, in the face of political obstruction,the powers of the High Representative wereextended to include the ability to dismiss or sus-pend officials for 'Anti-Dayton activities', andimpose legislation. These became known as the'Bonn Powers'.

Over the past two years, in line with the require-ments for entry into the EU Stabilization andAssociation Agreement (SAA), some modificationshave been made within the Dayton Structure,notably the creation of additional State-level min-istries. In addition, a State-level police agency (SIPA)and intelligence agency (OSA) have been set up.

ConstitutionsThe constitution of BiH is set out in Annex 4 of

the DPA. This has a highly complex and decentral-ized structure, establishing in effect, two separatepolitical and territorial entities. The RS has a cen-tralized structure with a central government and 64municipalities, whereas FBiH has ten cantons and82 municipal governments (see Chart 1.2). Thisfragmented arrangement is further burdened bythe fact that competencies of the State-level gov-ernment as outlined in the Constitutions are limit-ed. Both Entities have their own constitutions. Inthe Federation, competencies are further devolvedand this operates under a cascading principle; anypower not granted to the federal government restswith the ten cantons. Consequently, in the RS it isthe Entity government, and in the Federation it is

the Cantons, that have the strongest potential forpower accumulation. The constitutional settlementhas thus created a system that establishes gover-nance by multiple sub-national authorities.

Chart 1.2; The FBiH's ten cantons

The Entity constitutions each determine theestablishment of local governments within their ter-ritories.7 Their regulation is further specified bylocal government laws passed by the Entities andthe cantons in BiH. This functionally separate regu-lation inevitably produces considerable differencein local competence and capabilities.

Governance sstructureOn the State-level, there is a bicameral parlia-

ment and a Council of Ministers. At the Entity level,there are parliaments (RS National Assembly andFBiH Parliament) and their respective governments.Within the FBiH, there are in addition, ten bicameralcantonal parliaments and cantonal governments. Atmunicipal level in both Entities there are assembliesand mayors. Finally, Brcko District has an assembly,a government and a mayor. Thus, there are min-


in BiH

18 7 In this report the term 'local government' is used to mean municipal andcity governments. Entities and cantons are not local governments, as theyfunction as superior levels of government in BiH.

19


istries established on State, Entity and cantonallevel - and as a result, in most cases 13 separateministries, regulate each and every sector ofresponsibility. In all, the weak Bosnian economyand its people of less than 4 million, have to sup-port 14 governments, 150 ministries, 200 ministersand 146 local governments. This administrativestructure results in a high level of complexity and ahuge redundant bureaucracy. Complexity leads toorganizational and functional failures and highadministrative costs. The impact is to cloudaccountability, confuse citizens and 'crowd-out'non-administrative expenditures.

The rresulting cconditions

The aadministrative ssystemBiH has one of the highest numbers of adminis-

trative workers per capita in the region, yet at thesame time the public sector does not provide a suf-ficient or effective service to citizens. Indeed quitethe opposite - citizens finance an extremely largebureaucracy for low quality services. The complexi-ty of the system limits the ability of the averagevoter to properly appraise political performance,whilst the inherent lack of transparency, presents ahuge barrier to effective democratization.

The size and complexity of the public administra-tion system also creates internal incoherencies. Theweak central state is unable to create a regulatoryframework that is capable of implementing consis-tency or harmonizing operational policies anddownstream processes. The laws and regulationsproduced by various sub-national units with strong-ly differing interests, increase the inherent disjunc-tures and the complexity of planning and imple-

mentation. This is a heavy burden that citizens andthe economy, confront on a daily basis.

In principle such a complex system could stillfunction if it were underlain by wide agreement ongoals, a sophisticated web of intergovernmentalrelations and a sound democratic culture.Unfortunately, aside from the shared imperative ofaccession to the European Union (EU), none ofthese conditions can be assumed in BiH. The lack ofdata and technical capacity limits policy develop-ment. Discretionary administrative culture is anobstacle to predictable intergovernmental relationsand citizen apathy permits the situation to persist.

Weakness oof tthe nnation sstateThe weak and ineffective central state is not capa-

ble of fulfilling its necessary functions. It cannotestablish universal standards, nor access to basicservices, and a minimum level of social protection.This limits the freedom of movement of citizens andleads to all manner of inequities. The weak statealso fails to establish unified regulatory and com-mon practices that might bring together the dis-parate economic, administrative and politicalspaces. The real and perceived ineffectiveness ofinstitutions provide a fertile ground for the survivalof outmoded ideologies and manipulative politics(see Box 1 on Language).

The weaknesses at the state level are also a hugeobstacle to decentralization. In a decentralizedadministrative structure, the central state has afunction that cannot be neglected. It must regulateand harmonize, creating incentives that coordinateand rationalize the activities of the parts of thewhole. As Prud'homme puts it, (decentralization) 'is

like polyphonic music that must be concerted anddirected'.8

Territorial ffragmentation and tthe eeconomy

The division of territorial units on the basis of eth-nic lines has created functionally unnatural bound-aries. Cities and regions that were logically connect-ed economically and geographically have ceased tocooperate. In the long term, this can only result innegative economic and societal performances. Inspite of much activity and some genuine progressby a number of agents, including the OHR, BiH'seconomy still can only partly be said to function asa 'single economic space'.9

Ethnic ddominanceBiH is atypical amongst multi-national states, as

territorial units were ethnically mixed before theconflict. The war has completely altered the ethnicdemography of the country. As none of the ethnicgroups could achieve hegemony at the state-level,they have established a restricted dominance at aterritorial level. Sadly, the fragmented governancesystem offers ample scope for such endeavours.

The two BiH Entities, established on the basis ofethnic principles, have entrenched the ethnic-based institutional structure of the country. TheRS, the Serb Entity, and the FBiH, as the Entity ofthe Croats and Bosniaks and ten, again ethnically-based, cantons, have proved to be bastions of pro-tection for so-called 'national interests' of theirrespective majority peoples. They remain for themost part, mutually antagonistic and socially andpolitically distant. In spite of a landmark ruling bythe BiH Constitutional Court which confirmed theconstitutionality of all three peoples in the whole of

the territory of BiH (a ruling which dividedConstitutional court on ethnic lines), the situationdid not improve significantly. Entity institutions stillremain strongly marked by ethnic politics and areperceived as institutions of one of the respectivepeoples.

Rights and entitlements at the lower levels ofpublic administration - the ones that relate to thedaily life of average citizens - are even more vulner-able. Local consociational derogations give ampleroom for ethnic domination and the attendant neg-ative consequences (including discrimination, lossof diversity, ideological leadership, and ineffectivedecision making). Indeed, most territorial units aresplit along ethnic lines. Members of minority ethnic-ities are still reported to be subject to human rightsviolations and be denied access to the same eco-nomic and social opportunities enjoyed by mem-bers of the dominant group.

As long as the constitutional and legal arrange-ments allow space for the exploitation of ethnicidentities for dominant political control, the loss ofethnic diversity will continue. This tendency alsoreinforces the various divides by creating rationalpersonal interests to declare belonging to a specif-ic ethnic group and ensures choices are dictated byethnic considerations in place of merit and rational-ity. Ethnic fault lines thus also limit the creation ofefficient systems of service delivery and local man-agement.

After this gloomy evaluation of the legal andadministrative structure of BiH the reader mustraise the logical question; why has this situation notchanged for the better in the post Dayton period?The most generally given answer is that stakehold-ers in the process have diverging interests and have


in BiH

20 8 Prud' homme, R., On the Dangers of Decentralisation, World BankInfrastructure and Urban Development Department, 1992

9 An early goal of the Interntional Community; whilst a single currency andcommon monetry policy operate the free movement of capital and labourbetween the Entities, the hallmark of an intergtaed economy, are still limited.

21


as yet been unable to find a consensus. Part of theproblem is rooted in the DPA and the supervisionarrangements that it has spawned, but the underly-ing causes are rooted in the nature of the politicalarena. Incumbent political forces are motivated, andhave developed, strategies to preserve this steady-state. Changing these dynamics carries very consid-

erable risks and has few certain payoffs - and evenfewer political actors are prepared to contemplatesuch change. As long as citizen apathy paralyzesvoters and civil society in pushing for change, thesituation is unlikely to change substantially.

Box 11: LLanguage One of the most manipulated issues in BiH has been the articulation of separate local languages. This

process began in Croatia, took hold in Serbia and has continued throughout the former Yugoslavia.Before the war, the main official language was Serbo-Croatian, the only real differences being that Serbtraditions held to writing the language in Cyrillic.

After secession, politics intervened heavily. As a part of the Croatian nation building process, Croatsproclaimed their language as distinct and embarked on a process of distinguishing the Croatian lexicon.This effort involved large numbers of linguists and rested on codifying regional differences in bothvocabulary and grammatical forms. In BiH's, multi-ethnic but monolingual community, this process hasassumed a level of absurdity since Croats, Serbs and Bosniaks had lived together using the same lan-guage for centuries. Following the Croat and Serb efforts, Bosniaks also felt obliged to define a Bosnianlanguage that is again some combination of rarefied differences between Serbian and Croatian.Nevertheless, obviously all three ethnic groups perfectly understand each other, and irrespective ofthese efforts, their languages are difficult to differentiate.

The language issue has had a detrimental impact on various facets of everyday life in BiH and espe-cially so on the quality of political discourse. At the Dayton talks, representatives of the three peoplesargued strongly that each had the right to use their own language, so this too became a defining prin-ciple enshrined within the accords. The International Community has been obliged to accept the exis-tence of three different languages, and large sums of money are expended on translating from one toanother in all manner of public documents and correspondence. Serb politicians have begun to adoptthe Ekavica (traditional) pronunciation used in Serbia, but never in BiH. Equally, Croatian officials makeincredible efforts to learn the new vocabulary advocated by nationalist interests in Zagreb.

This issue is far from trivial and minor differences in a common language are being exploited for thepurpose of differentiation in the education system, in the arts and society at large. As with other dis-putes rooted in nationalistic politics, this debate remains highly politicized and divisive.

CHAPTER TWO

HUMAN DEVELOPMENT IN BOSNIA

AND HERZEGOVINA TODAY

25

Human DDevelopment iin

Bosnia aand HHerzegovina ttoday

"People are the real wealth of a nation. The basicobjective of development is to create an enablingenvironment for people to enjoy long, healthy andcreative lives. This may appear a simple truth, but itis often forgotten in the immediate concern with theaccumulation of commodities and financial wealth."

Global Human Development Report (1990)

The objective of this chapter of the report is toappraise the conditions of human developmentprevailing in Bosnia and Herzegovina today and inparticular to highlight those aspects where localgovernance reform might make a positive contribu-tion. First, we look at the national level picture. Ourreview includes commentary on; the overall trends,health and education outcomes, economic condi-tions, poverty and employment, gender dimen-sions, and the quality of political participation. Wealso present the latest standard human develop-ment indices for BiH. Second, we examine regionaland local disparities, presenting for the first time,disaggregated human development for the Entitiesand regions. We conclude by summarising the keyhuman development challenges to be addressedby local governance reform.

Overall TTrends Like other European transitional nations, BiH

enjoys high levels of human development relativeto its economic standing. The former Yugoslaviawas one of the most economically advanced nationsof Eastern Europe, and pre-war BiH represented asophisticated post-industrial society. Its inheritancetherefore included educational and health out-comes approaching or equivalent to, first-worldstandards.

The conflict and its protracted fallout served firstto severely retrench, and then retard performance.Yet human development is a stock rather than aflow, and capacities are established over long termperiods. Educational and health standards in partic-ular, held up well, and have since recovered to theirpre-war levels. Yet, the rest of the world and espe-cially the emergent democracies of Eastern Europe,have powered ahead in that time. In addition, BiH'sinitially strong progress has stalled in recent years -economic conditions, although markedly betterthan the mid-1990s, remain fragile. This inevitablyalso has implications for the incidence of povertyand the standard of livelihoods.

Charting these changes empirically is difficult,since the quality of the data and measurementmethodologies have varied over the post-waryears. Table 2.1 reports the results for the HumanDevelopment Index for BiH, and the four data serieswhich drive the index for the consecutive yearsfrom 2000. According to our calculations, BiH hasan HDI of 0.78410, giving it a global ranking of 64thout of 17111 countries . This figure places it at theupper bound of the medium human developmentcategory, and only marginally below the 'highhuman development' threshold (a value of 0.800).BiH is thus doing well in global terms but problem-atically, it is not doing well relative to its potential,and its performance across-the-board is disappoint-ing when compared against others in the region.

10 Using stanadrd conventions this is based on 2002 data.11 This is arrived at by substituting locally calculated data into the 2004 (glob-

al) Human Development Report Method.

Table 2.1; HDI components 2000 to 2002Year Life Expectancy Combined Adult Literacy PPP GDP per HDI

in years Enrolment Rate (change on (change on (change on(change on (change on previous year) previous year) previous year)

previous year) previous year)

2000 73.3 (n/a) 64.1 (n/a) 85.9 (n/a) 2,857 (n/a) 0.718 (n/a)

2001 73.8 (+0.6%) 67.3 (5.1%) 88.9 (+3.5%) 3,949 (+38.2%) 0.744 (+3.6%)

2002 74.0 (+0.2%) 67.3 (0.0%) 94.3 (+6.0%) 5,970 (+51.2%) 0.784 (+5.4%)Source; NHDR team estimates (see Annex 1)


in BiH

26 12 Working out a credible figure for the per capita level of income in BiH is farmore difficult than might be imagined. First, within BiH we face the prob-lem of not knowing exactly how large the population is. (See Box 2 onCensus) Second, for HDI purposes we adjust crude GDP to reflect itsPurchasing Power Parity (PPP). Calculating this factor accurately is difficult,and particularly so in a post-conflict economy with a large informal sector.The PPP factor for BiH has grown substantially and now stands at a 440%uplift on US prices.

The picture below the surface is still more inter-esting. The most striking facet of the results aboveis the dramatic improvement in per capita GDP andliteracy rates in recent years, whilst the other com-ponents have seen much weaker growth.Problematically, very serious questions can beasked about the validity of these improvements,and there are convincing methodological explana-tions which suggest the level of change is spurious.First, BiH's apparent economic strength owes muchto ongoing revisions in the purchasing power parityestimation methodology used to adjust the crudefigures. The 51% growth in the per capita incomefigure in 2002 compares to a mere 3.5% change inunadjusted GDP per capita12. Second the ongoingimprovements in literacy can more than partly beascribed to a new means of measurement ratherthan genuine change. Indeed, as a variable, adultliteracy typically shows very small incrementalchanges.

The poor relative performance is exposed whencomparisons are made against other nations. Asshown in Table 2.2 below, BiH ranks as one of theweaker performers within South and EasternEurope, with an HDI some 14% lower than Slovenia,the most advanced former Yugoslavian Republic,

and 6% lower than Croatia, a country also severelyaffected by the Balkan conflict. The underlying fig-ures show the key problem areas remain; a weakeconomy, with BiH's adjusted GDP per capita beingclose to bottom to the league (and remember thistends to overplay the strength of the economicposition); and poor educational enrolment, withBiH's combined rate in line with Albania's andaround thirteen percentage points belowMacedonia's.

The underlying pattern remains a weakly improv-ing economy on a very low baseline, with high butalmost static health outcomes, and relatively lowbut marginally improving educational ones. Such aposition is troubling. Economic indicators typicallyreact quickly to changing circumstances, whilstsocio-economic variables, which although they bet-ter reflect the state of human development, have aninertial quality and take time to reflect changing cir-cumstances. But the two are connected and causa-tion runs in both directions. Over the longer run, aweak economy will ultimately undermine socialprogress. Equally, low educational enrolment willretard economic performance. What we face is not acollapse of human development in BiH, but anongoing failure to capitalize on potential.

27

Chapter two: Human Development in Bosnia and Herzegovina today

Table 2.2; HDI in Eastern Europe 2004Central and Eastern Life Combined Adult GDP HDI HDIEuropean Nations Expectancy Education literacy per capita Rank13

(Alphabetical order) (years) Enrolment Rate (%) (PPP US$)

Rates (%)

Albania 73.6 69 98.7 4,830 0.781 6614

Bulgaria 70.9 76 98.6 7,130 0.796 56

Bosnia and Herzegovina 74.0 67 94.3 5,970 0.784 6415

Croatia 74.1 73 98.1 10,240 0.830 48

Czech Republic 75.3 78 99.9 15,780 0.868 32

Slovakia 73.6 74 99.7 12,840 0.842 42

Hungary 71.7 86 99.3 13,400 0.848 38

Macedonia (FYROM) 73.5 70 96.0 6,470 0.793 60

Poland 73.8 90 99.7 10,560 0.850 37

Romania 70.5 68 97.3 6,560 0.778 69

Slovenia 76.2 90 99.7 18,540 0.895 27

CEE& CIS Average 69.5 79 99.3 7,192 0.796 -

Medium HD Average 67.2 64 80.4 4,269 0.695 -Source; UNDP Global HDR (2004) with adjusted BiH Data.

13 Ranking is not as recorded in UNDP Global HDR (2004) as the BiH valuehas been revised upward

14 Ditto15 Ditto

Underlying these problems is the legacy of theconflict. This has had two very distinct effects onthe level of human development in BiH. First, therewas inevitably an initial severe impact associatedwith the destruction of a variety of capacities, rang-ing from the physical - infrastructure, public provi-sioning and so forth, to the quality of individual andcommunity relations - what we might call 'socialcapital'. The second and perhaps more pervasive, isan ongoing failure to make more vigorous progress,and this is defined by a series of interlocking prob-lems ranging from governance weaknesses, aheavy international presence and difficult local com-

munity relations. The result is a path of economicunderperformance, stagnation of public servicesand poor governance.

The better performance of comparable, thoughinitially weaker, nations suggests this second effecthas become the more significant. Structures, insti-tutions and modes of conduct are in effect 'dead-weights' on the economy and society at large. Thisis a difficult challenge which must be resolved, andone which accords special prominence to the needfor comprehensive governance reform. We arguethat local decentralization is an essential part ofthis.

Education aand HHealthOutcomes

Living a long, healthy and creative life is the verysubstance of human development. Yet securingsound educational and health outcomes is also theinstrument through which the wider developmentagenda - economic to environmental - can besecured. Extensive discussions are devoted to thesematters in the following chapters. Below we summa-rize current conditions in BiH, and how they affectthe choices and capabilities of ordinary citizens.

In line with our broad assessment, educationalperformance is weak historically and regionally. Thepost-war improvement in several key areas hasslowed. Enrolment in secondary and tertiary educa-tion remains disappointing; too few Bosnian youngpeople stay on and there is evidence of a growingsocial stratification at the tertiary level. Moreover,the admittedly high, literacy test results tell us littlein a European context. The tests and definitions ofreading and writing ability are very basic, and con-trast from the far stiffer functional literacy testemployed by OECD nations. There is now a body ofanecdotal evidence that education in BiH is failing tomeet the demands of the new market economy,and it would be catastrophic if a skills gap thwartedmuch needed economic progress.

The education chapter documents the issues infar greater detail. But chiefly, the authors point toan educational system being stifled by a managerialand structural sclerosis, where institutions andeducation bureaucracies are inefficient and ineffective.Schooling is only weakly informed by the demandsand needs of pupils, parents and employers.

The situation in relation to health outcomes isstill less encouraging with little change in life

expectancy recorded at the State level in recentyears and growing levels of morbidity coupled witha post-war history of physical disabilities and psy-chiatric conditions. Added to this must be the usuallitany of lifestyle diseases of modern times - includ-ing carcinomas and heart disease. Like otherEuropeans, BiH citizens smoke too much, fail totake enough exercise and have unbalanced diets -yet unlike other European nations, positive changesin lifestyles have been slow to emerge.

Both authoritative studies and anecdotal evi-dence point to a maladapted and unresponsivehealth care sector as being a key contributory fac-tor. As in the case of education, its rehabilitation islimited as much by the inefficiencies and inadequa-cies of current governance structures (includinginadequate and confused local decentralization), asthe weak economic and fiscal position of the BiHGovernments. These issues are also returned to inthe later chapter on local service delivery.

In all, the above paints a disquieting picture.However, it is important to keep a sense of perspec-tive. BiH enjoys a strong social inheritance from theformer Yugoslavia and moreover, its relative weak-ness is at least partly a function of slower econom-ic progress. Given the ferocity of the conflict andthe levels of dislocation, BiH has indeed mademuch progress and is far from the desperate situa-tion in which it found itself in the mid 1990s.

Livelihoods aand EEconomicConditions

BiH's immediate post-war economy was in ruinsand its three constituent peoples emerged desti-tute from the conflict. Moreover, a series of furtherchallenges had to be faced, ranging from the


in BiH

28

destruction of vital infrastructure to huge popula-tion dislocations, which affected up to half of BiH'scitizens. The economic position today and the liveli-hoods of ordinary people is vastly improved but aswe noted above, the recovery is far from completeand progress has slowed. GDP per capita in 2002stood in nominal terms at a mere US$1,362, whilstas is noted the purchasing power figure, whichreflects global variations in the cost of living, is nowa healthier US$ 5,970. Economic growth remainspositive but the level of income is still low byEuropean standards.

BiH's post-war growth trajectory was character-ized by an initial rapid recovery followed by asteady-state performance. Problematically, theeconomy has settled back into this position wellbefore reaching pre-war output levels. Followingthe cessation of hostilities in late 1995, the econo-my made enormous strides with annual growthaveraging 25%. Yet as Charts 2.1 and 2.2 illustrate,growth has tailed off to around 5% per annum, andthe current level of GDP is estimated to be in realterms roughly 60% of what it was in 1991. Withouta considerable improvement, the pre-war bench-mark will not be surpassed for some years.

Chart 2.1; Output (GDP) post 1997 versus thepre-war level

Source; Bulletin 1, 2004, Central Bank of Bosnia and

Herzegovina (2004)

Chart 2.2; Growth and inflation

Competing explanations for the retrenchment ineconomic performance are offered by two distinctand increasingly partisan groups of commentators.The controversy lies between those who cite gover-nance and institutional policy failures of nationalpoliticians, and those who lay the blame at the doorof internationally-driven macroeconomic policychoices.16

Despite the failure to reach pre-war levels ofprosperity, it is clear that economic recovery hascontinued to take place and this has fed positivedynamics within BiH bringing optimism to a varietyof political and social processes. Securing greaterlevels of growth must be a prime policy objective.Moreover, as Chart 2.2 underlines, the economyexhibits a remarkable degree of price stability withinflation now running at less than 1%. The control ofinflation is a key economic policy success and isattributed to the operation of a currency boardarrangement by the Central Bank of Bosnia andHerzegovina (CBBiH), and the maintenance ofstrong monetary discipline. Whether policy remains

2916 Mainstream (and typically international) commentators posit the lack of aseries of pro-market reforms and poor governance as being at the heart ofthe failure to translate stability into prosperity, these include further liber-alization and privatization. Opposing this, national and heterodox thinkersblame an over-emphasis on macroeconomic stability and the lack of stateintervention. Commonly, their analyses emphasize the lack of productiveinvestment and the unavailability of credit as the key limiting factors.


too tight some eight years after the conflict is a mat-ter of conjecture. Inflation figures and other sum-mary macro data are given in Table 2.3 below.However, it is important to emphasise here, thatofficial figures are necessarily compromised by thepervasiveness of informal sector activity within BiH.Various authoritative sources offer contrasting esti-mates of the size of the grey economy, but themost reliable17 suggest it accounts for figure ofaround 25% of GDP18.

Table 2.3 also shows that BiH's external positionis unambiguously disquieting. The balance of pay-ments statistics present evidence of chronic imbal-ances, which point to deep structural problems.Moreover, despite of reductions in official assis-tance targeted on reconstruction in the early post-war period and a slowing trade deficit, the overallcurrent account deficit appears to be growing. BiHcontinues to suck in imports without developingcompensating export capacities.


in BiH

30 17 The Central Bank estimates GDP including the Non-Observed Sector (NOE)to be some 32% higher than offical data suggests (CBBiH, 2004)

18 The presence of such a substantial under-reporting of GDP is problematicin a number of respects ranging from the inadequacy of all GDP denomi-nated figures to measures of economic participation and poverty. Further,we cannot assume that informal sector activity is evenly distributed.

Table 2.3; Summary Macroeconomic IndicatorsYear Index Real GDP Inflation Trade Balance Current Account ODA

1991=100 Change (CPI) (% of GDP) ( % of GDP) (% of GDP)

1999 46.0 10.0% 3.7% -67.3 -22.4 17.1

2000 48.6 5.5% 4.8% -55.4 -18.6 13.7

2001 50.8 4.5% 3.1% -59.0 -24.3 12.4

2002 53.5 5.4% 0.4% -59.2 -30.9 8.9

2003 55.4 3.5% 0.6% -55.7 -29.6 5.0

2004 Est. 58.2 5.1% 0.9% n/a n/a n/a

Source; CBBiH Bulletin 1 for 2004, (CBBiH, 2004)

Equally, whilst it would be wrong to argue thatthere has been no change in the structure of theeconomy, the rate of change is much slower than inother post-socialist European countries and newactivity is unevenly distributed. Without the rehabil-itation of the pre-war industrial base, or the creationof new value-added activities, the prospects foraccelerated growth and external balance in themedium term seem bleak.

The presence of considerable regional variationsin economic performance adds more complexity tothe mix and the level of variation suggests consid-

erable internal segmentation. GDP per capita ismarkedly lower in the Republika Srpska, but thereare even more considerable variations in economicperformance within the Entities themselves.Underpinning growing regional inequality is thenature of the re-orientation of the economy. Manyof the large ex-socialist production facilities, partic-ularly those delivering the highest value manufac-tures, are in a state of severe dilapidation. There isevidence that the post-war and post-industrialprosperity is chiefly associated with the informalsector, which is clustered around trading activities

and agricultural outputs. Opportunities for growthcentre on those areas along the frontiers whereparalegal trading activity is possible, at major inter-changes and in the cities which provide a substan-tial domestic marketplace and benefit from thelarge international presence. In some other places,pockets of extreme deprivation remain and theseare associated with ethnic and political frictions inspecific locations. In areas like Srebrenica, problem-atic political and community relations continue tofurther blight economic and social renewal.19

The fundamental problem these inequities pro-duce is that the impact on livelihoods from theongoing growth is likely to be very unevenly distrib-uted, and without structural change, will favour par-ticular areas and high-earner groups. Politicalentrenchment and a lack of effective decentraliza-tion will tend to cement these inequities.

Poverty aand UUnemployment Poverty and unemployment data for BiH paints an

equally complex picture. The most comprehensivepoverty survey yet carried out for BiH, the jointly-funded UNDP and World Bank, Living StandardsMeasurement Survey (LSMS, 2003), found that thepoverty headcount measure20 was significant butnot catastrophic at 19.5% of the overall population.The survey also concluded that only a negligible(and therefore non-measurable) percentage wasliving in extreme deprivation. The figures for thedepth and severity indicators were mild by regionaland international standards, reflecting both a clus-tering of consumption levels around the povertyline and homogeneity amongst the poor.

Official unemployment statistics give moregrounds for concern with data reported by the

Entity employment bureaux showing jobless ratesas high as 40% of the working population. More rig-orous analysis based on ILO definitions producesfigures which are considerably lower, at around16%, yet even this lower result is difficult to squarewith the marked absence of severe poverty as givenby the LSMS. A factor which is crucial in explainingthis apparent contradiction is again the size of theinformal sector. Anecdotal evidence and data fromLSMS suggest that grey-economy participationamounts to significantly more than subsistenceactivities, and extends into trading, self-employ-ment and paralegal commercial undertakings.

Yet as elsewhere in the transitional world, pover-ty is a nuanced social phenomenon that cannot ade-quately be captured by aggregate measures.Indeed, it is defined by comparisons with past andproximate consumption levels (especially againstthose enjoyed in the former Yugoslavia) and by pre-vailing societal perceptions. It is telling therefore,that data from the UNDP's Early Warning System(EWS, 2004) still shows a very much more substan-tial proportion of the population define themselvesas poor. Moreover, there is a clear cross-communi-ty difference with Serbs seeing themselves as sig-nificantly more impoverished than their Bosniak andCroat neighbours. It is also an interesting phenom-enon that perceived levels of poverty are strikinglystable regardless of the overall improvements ineconomic conditions. Indeed, further qualitativedata available from successive waves of the EWSsurvey show that economic perceptions are gener-ally worse than the empirical data.

More importantly, it has to be recognized thatdefining poverty wholly in reference to income isinadequate and we require wider evidence of wel-

3119 Sadly very little regional economic data is available to test these intuitivepoints. However it is useful to note the generally supportive picture pro-vided by value added data for the cantons within the Federation and theRS at entity level. These data unambiguously underline the growing levelof regional inequality, with Sarajevo and the southern Herzegovinian can-tons standing out as the best performers.

20 The P0 measure reflects the percentge of the population below thepoverty line


fare levels. The human development approach hasmuch to offer here. Indeed, we can speak of pover-ty as a form of capability-deprivation, where to bepoor means to be denied the attributes of well-being - good health, education and opportunities.The approach also provides us with a ready-mademetric, the Human Poverty Index (HPI) whichrecords the proportion of the population living incapability-poverty based on the average of four

capability poverty 'hurdles' (see Table 2.4 )21. This isthe first year in which it has been possible to providereliable estimates for BiH's HPI and we make use ofa variant of the HPI2 specification, which is the for-mat appropriate for industrialized nations. However,we are forced to offer two different versions owingthe discrepancy between official unemploymentdata and the LSMS figures. Version A, based on theLSMS data, is the more reliable of the two.


in BiH

32 21 These effectively serve as poverty lines delineating those deprived of ade-quate capabilities; life expectancy, literacy, income and employmentopportunities.

22 This refers to functional illteracy and represents a higher benchmark thanthat used in the HDI.

Table 2.4; HPI Figures for BiH 2002HPI and components Version A Version B

Based on LSMS Based on officialunemployment data unemployment data

Probability of not surviving beyond age 60 (% of population) 13.7 13.7

Adult functional illiteracy rate, (% of population)22 5.7 5.7

People living below the income poverty line (% of the population) 19.5 19.5

Long Term Unemployment (% of the workforce) 9.5 23.1

HPI 14.0% 17.8%Source; NHDR team calculations see Annex 1

The results show a significant minority (between14.0 and 17.8%) of the population are living in con-ditions of capability deprivation. It is interesting tonote that both methods yield poverty proportionsbelow the income poverty figure given by the LSMS(19.5 %). Thus, regardless of the debate over whichmeasure of unemployment should be chosen, it isapparent that income poverty is considerably worsethan the main capability components of the HPI.This again points to an imbalance between the eco-

nomic standing of BiH citizens and their relativelyhigh human development inheritance.

Unfortunately regional comparisons are not pos-sible, as only the most advanced OECD nations cur-rently make available reliable HPI data. However, itis possible to make a useful comparison on certainsubcomponents, notably the probability of notreaching age 60 and this is better in BiH than othercomparable countries including those with higherHDI scores such as Croatia. It is also worth nothingthat BiH's HPI suggests a certain level of equality

amongst the population, even though the aggre-gate level of income is not high. This is backed upby estimates of the Gini coefficient for BiH, whichsuggest that income inequality is low in BiH. Onenegative and one positive implication follows fromthis; First, it indicates a large proportion of the pop-ulation are clustered around the poverty line andare thus vulnerable to deprivation; but second itimplies that the poverty-reducing effect of econom-ic growth is likely to be substantial23.

The qquality oof ggender rrelationsOur analytical framework offers two indices which

track equity between men and women and the qual-ity of gender relations - the Gender-relatedDevelopment Index (GDI) and the GenderEmpowerment Measure (GEM). The results for BiHare provided in Table 2.5 below.

The GDI represents a gender-adjusted version ofHDI. It is calculated by splitting the data set thenseparately calculating the sub-indices for gender,and standardising the overall result. Thus GDIvaries against HDI where there is gender bias,whereas if gender equity exists the result closelymatches the HDI figure. BiH's GDI is less than 1%below national HDI - which is very favourable. GDIscores for ex-socialist societies are generally highand can reflect an enforced equity, which tends toevaporate as the transition progresses. It is gratify-ing for BiH therefore, that the results show a dis-tinct improvement on 2001, driven primarily bymore equal sub-indices for educational perform-ance and incomes.

Table 2.5; GDI, HDI and Annual ChangeIndex/Component 2002 2001 Change

GDI 0.777 0.731 +5.5%

HDI 0.784 0.744 n/a

GDI variation

against HDI -0.9% -1.7% n/aSource; NHDR team calculations see Annex for details.

The GEM in contrast, focuses on the empower-ment of women and has been designed as a stand-alone index of women's political economic andsocial emancipation. The data requirements of theindex are substantial and until this year it has notbeen available for BiH. The overall result for BiH isgiven as 0.471, which were it included in the globalrankings, would yield a mid-range placement of54th within 79 reporting nations. A review of thecomponents reveals that a particular area of con-cern is the ratio of male to female earnings, andinequality in the representation of women in execu-tive and public positions. This highlights thatdespite a high level of equity on the more genericGDI index, women lack power in the economic andpolitical spheres. Like elsewhere in the world, gen-der is a complex issue in BiH and something whichwe return to in the section below on regional andother disparities.

Participation Without access to the democratic process, citi-

zens are denied the ability to exercise the mostbasic capability of all, that of free expression.Voicing political concerns and exercising effectivecontrol over the public domain is inherent to humandevelopment approaches. In latter day BiH this keycapability is circumscribed in many ways. This is

3323 Income inequality (as given by the Gini) is the primary factor in determin-ing the extent to which economic growth will be pro-poor.


chiefly through the failures and idiosyncrasies ofthe political system, but also the dominance of eth-nically-based politics, and its often naked expres-sion within areas of community stress.

Almost ten years after the Dayton Accords, themain political discourse is still ethnically-driven.Voters are sidetracked from real-world concernsand this has greatly limited the democratisation andreform process. The outcome is an absence of dem-ocratic pressures that would effectively controlpolitical performance, and an ongoing democraticdeficit. The complexities of the system and its unre-sponsiveness are part and parcel of this. It is diffi-cult to measure the extent or quality of participa-tion, political or otherwise, in latter day BiH, butthere are worrying indications of a high and growinglevel of apathy and alienation. One potential indica-tor is the turnout rates at elections and as Chart 2.3illustrates these have been declining.

Chart 2.3; Average Voter Turnout Rates

Source; IDEA and OSCE BiH. Figures for 2004 are for local elections only

The immediate post-war 1996 elections con-firmed the ethnic division of the country, and thepolitical control of parties that governed during thewar. There were logical reasons for holding demo-

cratic elections right after peace had been estab-lished. Nevertheless, there is a debate within BiH asto whether these elections were held too soon, andthat the latter-day division of the political space wascemented at that time. It is clear that democratiza-tion was in its infancy at then, it was the beginningof the process, and hard to expect that voterswould recognize any other political allegiance. Thehighest ranking politicians were mostly wartimeleaders who had little in the way of shared vision.Governance in the early years was uncoordinatedand obstructive.

In this somewhat unique political environment,the OHR and international interests (notably theEuropean Union) have felt obliged intervene fre-quently, and the High Representative now assumesa strong political presence in BiH. Whilst there aresome very positive impacts of these interventionsthere is still a clear need for reforms to be followedthrough, and OHR runs the risk of alienating citizensand supplying excuses for ineffective local politicalelites. It is also unlikely that genuine politicalchange will emerge and become self-sustainingunder the current level of supervision. OHR hashowever, played an important role in strengtheningstate level institutions and in transferring responsi-bilities to BiH central government, and has encour-aged often antagonistic parties into relatively stablecoalitions. These efforts have resulted in some uni-fying tendencies, yet it is still difficult to recognizeone single political space in BiH.

The political arena at the municipal level is alsounfortunately ethnically-based. Most people con-sider municipalities as governing units of the rulingethnic group. But positive change is evident heretoo. Indeed, in 2004, the first local election to be


in BiH

34

35


wholly organized by national agencies, there was anew emphasis on local real-world politics, and amove away from the 'big-picture' agenda whichconcerns itself with demands for high level andoften irreconcilable political and constitutionalchanges. This is a welcome development. The locallevel, where the politics is necessarily more relatedto every life concerns, offers a genuine opportunityfor building a new political consensus and modusoperandi.

Democratisation represents a challengingprocess, where it is necessary to work on improvingthe framework for governance, and at the sametime create the conditions that would stimulatepublic awareness and the mobilization of a vibrantcivil society. Local governance can play a leadingrole acting as a catalyst for the learning of a newpolitical culture and practices.

Regional aand llocal ddisparities A key objective of this section of the report is to

provide meaningful analysis and comment at thesub-national level. The following attempts to disag-gregate human development outcomes and theindices, and through this, investigate the nature oflocal disparities. At the outset however, a note ofcaution is necessary. BiH is a territory beset by dis-juncture and all manner of boundaries, and varia-tions are often only perceptible through qualitativeand discursive evaluation. Moreover, data sourcesare necessarily weak, thus apparently 'scientific'results need necessarily to be viewed with caution.

As a result of the data limitations, a comprehen-sive disaggregation is not possible, and insteadthree partial analyses are provided;

First, Entity-level figures; these are the mostrobust and complete estimates possible. All themain indices quoted are given and it has beenpossible to vary almost all the subcomponents.Second, a split based on the Federation Cantonsplus the RS as a single region. This can only bedone for the HDI, and somewhat partially at that,as we are only able to fully vary the GDP sub-index.Third, a sampled HDI and HPI 'snap-shot' for 13municipalities. This is perhaps the most problem-atic estimation available, and we present theresults in ordinal form only. However, this doesprovide considerable insights, and permits a fullerdisaggregation of the various subcomponents24.

The EEntitiesThe division between the two Dayton-created

Entities marks a profound boundary within BiH.Each is effectively sovereign in the field of socialpolicy and both have considerable scope to influ-ence economic performance through their regula-tory and institutional frameworks. As Table 2.6 illus-trates, the variation in human development indicesis striking, with the RS performing substantiallyworse on the HDI and HPI headline indicators andthe various component datasets. This should per-haps not be surprising given the level of autonomyand the varying resource and competitive advan-tages. But it is also telling that on the two socialcomponents, are far less substantial and the differ-ence is most acute in relation to the economy - withadjusted incomes estimated to be some 34% high-er in the FBiH.

Various reasons can be advanced for the weakereconomic performance of the RS. Unsurprisinglythere is a debate over these matters with two polar-

24 This draws on analysis carried out by Sarajevo Economics Institute whichgrouped a sample to form regional clusters, but in the light of peerreviews, we present individual municipalities' results, see Annex 2 fordetails.

ized explanations. The first holds that the RS hassimply not enjoyed the external support andresources directed at the FBiH. This ranges fromlower levels of infrastructure rehabilitation to thelocal multiplier effect enjoyed by the GreaterSarajevo region as a result of the heavy internation-al presence. Other perspectives cite governanceand institutional failures in the economic sphere asa drag on prosperity, along with weak policymaking.

Actors like the International Financial Institutions(IFIs)25 directly criticize the RS Government for run-ning shy of reforms and necessary liberalizationmeasures, such as privatization and the removal ofmarket distorting subsidies and supply restrictions.There are also a complimentary set of argumentsthat point to the more favourable trading conditionsenjoyed by the Federation and its better integrationinto regional and international markets.


in BiH

36 25 Meaning the World Bank and IMF26 Life Expectancy data is not available separately for the FBiH and therefore

the above is based on a figure interpolated from RS and state-level data.27 Based on Method A (LSMS sourced data)

Table 2.6; Inter-Entity Comparisons

Indicator FBiH RS RS Variation on FBiH*

HDI 0.796 0.758 - 4.8%

Life expectancy26 74.4 years 73.4 years -1.3%

Combined education

enrolment rates 99.1 % 98.4% -0.7%

Adult literacy rates 94.9% 93.3% -1.7%

GDP per capita (PPP$) $6,719 $4,430 -34.1%

HPI27 17.4 % 19.0 % - 13.8%

GDI 0.786 0.756 - 3.8%

GDI variation on HDI 1.1% 0.5% n/a

GEM 0.509 0.517 + 1.6%Source; NHDR Team for calculation details see Annex 2

'-' means worse than FBIH, '+'means better than FBiH

Which of these positions has the greater explana-tory power is a matter for speculation, and it seemslikely that both have some substance. However, asis outlined below, further evidence suggests thelevel of variation is equally strong within andbetween the regions of the two Entities, somewhatdebunking the common assumption of the FBiH'shigher level of development.

The results for the gender indices also makeinteresting reading. Here, in contrast to the previ-

ous pattern, the Federation performs somewhatworse than the RS. Although the FBiH records ahigher GDI, the variation against its HDI is greater,pointing to the presence of larger inequitiesbetween women and men. Equally, the GEM for theFederation is lower, indicating weaker levels ofempowerment. Yet this should be kept in perspec-tive - the variations are small and may be incidental.

Cantonal DDisparities wwithin the FFBiH

Chart 2.4 illustrates the results of our first region-al HDI disaggregation option, which retains theEntity level data for the RS and breaks the FBiH datadown into the ten constituent cantons. This optionmakes use of fully disaggregated economic databut only partially varied health and education meas-ures28. The resulting level of variation in the HDI issizeable, and a distinct regional pattern emerges,the variation is over 5% either side of the nationalvalue.

Chart 2.4; Cantonal and RS HDIs

Source; NHDR team calculations (see Annex 2 for details).

Several interesting insights can be made whichare also be supported by qualitative evidence;

First, it is apparent that genuine regional varia-tions exist within the Federation, and that theseare substantial enough to challenge the pre-sumption that the FBiH is wealthier and enjoyshigher across-the-board human developmentoutcomes than the RS. Indeed, if we were totreat the RS as a single region (albeit an unreal-istic assumption) it would rank in the middle ofthe distribution.

Some individual results are particularly impres-sive with three cantons scoring within the highhuman development category (scores of 0.800and above). Whilst the performance of Sarajevois likely to be a capital city effect, it is importantto note that the Herzegovina cantons alsorecord HDI scores within this category.

Inevitably given the methodology, the main fac-tor driving the figures are the economic disparitiesbetween the Cantons, and thus the quality of theresults might be questioned on grounds of com-pleteness. Yet it is worth noting that other evidencesuggests that social components vary far less dra-matically across BiH, thus even if perfect data wereavailable, regional variations may well be found tobe economic in nature.

A BBiH-wwide DDisaggregationThe third option prepared for this report aimed to

provide a more thorough-going disaggregationenabling both the education and the GDP index tobe fully flexed. To do this, it drew on unpublishedresearch carried out by the Economics Institute inSarajevo, which developed a database for 13 sam-pled localities to calculate a municipal-level HDI anda modified HPI29. Sadly, this exercise was necessar-ily partial and the data coverage is far from compre-hensive. The results can therefore only claim to beillustrative rather than scientifically representative.Given this, the indices themselves are not provided,but rather the ordering of the municipalities,according to their HDI and HPI scores. To providefurther insight, Table 2.7 separately includes theratio between the individual HDI scores and thehighest value (for Vitez).

3728 The Education and Life Expectancy components are only variable betweenEntities.

29 In its original form this approach specified 6 regional clusters of municipali-ties. As the representativeness of the selection and clustering is debatablewe present the municipal data only.


Table 2.7; Sample Based HDI and HPI Analysis

HDI Municipality Region HDI as % HPIRank of highest Rank

1 Vitez Central Bosnia, FBiH 100.0% 5

2 [.Brijeg West Herzegovina, FBiH 99.7% 12

3 Travnik Central Bosnia, FBiH 96.3% 6

4 Zenica Zenica Doboj, FBiH 95.7% 1

5 Ljubu{ki West Herzegovina, FBiH 94.3% 10

6 Trebinje Trebinje, RS 93.5% 2

7 Te{anj Zenica Doboj, FBiH 93.0% 13

8 Bosanski Novi Banja Luka, RS 92.8% 3

9 Posu{je West Herzegovina, FBiH 92.5% 11

10 Prijedor Banja Luka, RS 92.0% 8

11 Klju~ Una Sana, FBiH 91.8% 7

12 Sanski Most Una Sana, FBiH 89.7% 9

13 Gacko Trebinje, RS 89.3% 4Source; Sarajevo Economics Institute (unpublished), again see Annex 2


in BiH

38 30 On the grounds that Sarajevo is a statistical outlier.31 Central Bosnia; Vitez, Travnik and West Herzegovina; [.Brijeg, Ljubu{ki and

Posu{je

The HDI results reveal a pattern of still more intri-cate regional variations, but the magnitude of thedisparities is greatly reduced on the first disaggre-gation option. This is likely to be a result of exclud-ing Sarajevo from the exercise30. Equally, by permit-ting a greater variation in the Education sub-index,the wealthier areas' 'premium' declines consider-ably. Indeed, the level of countervailing variationbetween the two sub-indices is surprisingly high.As a result, it is difficult to identify a distinct pattern,although the central and southern cantons in theFBiH appear to perform better31. The RS municipali-ties reveal a perplexing picture, providing few gen-uine insights into the level of variation between

them. By any measure the Federation municipalitiesin the Una Sana Canton score poorly.

A review of the component indices (see Annex 2)reveals that two different dynamics are at work insecuring higher values for the central and southernregions. The central municipalities score well on edu-cation and the Herzegovina areas on the economy.

The results for the municipal level HPI and its lackof correspondence with the HDI also make for inter-esting reading. Indeed there is evidence of a count-er-intuitive relationship between better humandevelopment and worse poverty, and this is partic-ularly the case for the Herzegovina municipalities.This implies that where development is taking placeit is not necessarily benefiting all inhabitants equi-

3932 The HPI specification used effectively falls somewhere in between theHPI1 (developing) and HP2 (developed world) methods - and for exampleincludes access to safe water as a lead indicator.


tably. It must be noted however, that the data usedsuffers from statistical weaknesses and theresearchers were forced to use a substantially mod-ified specification of the index32. It is apparent thatthe key factor driving this variation is the poor stateof water supply in the wealthier Herzegovinanmunicipalities and correspondingly better provisionin the comparatively poorer areas.

Summary aand cconclusionsForemost, it is important to recognize that in

human development terms BiH has made enor-mous strides since the end of the conflict - and thisapplies to a variety of capabilities. GDP has partial-ly recovered, and educational and health care facili-ties are functioning at close to pre-war levels.Moreover, in aggregate BiH has an HDI of 0.784which demonstrates a consolidation on previousyears. Equally, the HPI, which suggests that 14% ofthe population is living in material deprivation, is farfrom catastrophic, and highlights that BiH enjoysconsiderable social equity. Similarly, the genderindices, and especially the GDI and GEM paint a rel-atively favourable picture of gender relations andthe position of women.

However, four issues must be borne in mindalongside these conclusions;

First that the data sources which underpinthese findings are evidentially weak, and as hasbeen explained, much of the improvement inHDI in recent years owes to much methodolog-ical changes. It should always be borne in mindthat the indices are only a guide to the level ofhuman development. Second, although there has undoubtedly beenrecovery and progress in the post-war period,BiH now lags behind its former Yugoslavian

partners, and the rate of improvement has lev-elled off in many dimensions. This is particular-ly pertinent in examining the education andhealth sub-indices. There is always a naturaldrift upwards in health measures, givenimproving technology and living conditions.The same is true in education, as literacy isweakest amongst the elderly population. Yet inspite of these upward pressures it seems thatthere is some form of 'deadweight' which con-tinues to act as a drag on economic and socialprogress. Third, that below the state level there are grow-ing disparities, between and within the twoEntities. Moreover, these do not necessarilyfollow BiH's political fractures. The evidenceincreasingly points a pattern of inequity beingrooted in other dynamics, including economicand specific locational factors (such as inade-quate infrastructure, remoteness, sparsity andlack of natural resource endowments).Fourth, it is also important to have regard forthe civil and human rights dimension of humandevelopment which cannot be directly reflect-ed in the standard indices. In spite of progres-sively less fractious ethnic politics, BiH's polityand the public space is still compromised byethnically-driven parties with disparate agen-das. This acts to thwart political voice andempowerment.

In this context, local governance reform has a realprimacy, since it has a very clear contribution tomake. The benefits of more decentralized adminis-tration and decision making in terms of economy,efficiency and effectiveness are well-trailed in pub-lic administration theory, but are all the more evi-dent in the empirical environment given by latter

day BiH. Most of all the discussion above under-lines the fact that the real-world developmentissues - the quality of education, the standard ofhealthcare provision and the unresponsiveness ofpublic decision making process - do not follow thepolitical fractures. Rather, they affect and limit thepotentials of each of the three constituent peoplesof BiH. In a sense, decentralization offers the possi-bility of addressing the developmental agenda bysidestepping the dysfunctional national politicalspace. Local empowerment may also serve to rekin-dle and build trust in public institutions, whichmight in time positively affect high-level structures.

Yet the past and politics do matter. The conflicthas served to poison many things, perhaps mostnotably a willingness to share and balance burdens,a principle which runs to the heart of modern sys-tems of local governance. Moreover, it would benaïve to think that the ethnic dimension or alle-giances can be wished away or abolished by edict.Indeed, to do so would itself contradict with theright to cultural diversity which is also central tohuman development thinking. These issues mustbe resolved through the building of respect and arights-based system of governance. Independentand strong local authority, regulated by appropriateconstitutional guarantees, lies at the centre of sucha system. Local governments are not merely moreefficient and effective in service delivery but, theworld, over serve a key function in representing andmediating difference.


in BiH

40

CHAPTER THREE

BUILDING A RESPONSIVE AND ACCOUNTABLE

LOCAL GOVERNANCE SYSTEM

43

Chapter TThree: BBuilding aa rresponsive and aaccountable llocal ggovernance ssystem

The drive towards decentralization has become aworld-wide phenomenon in recent decades. Thisprocess has been led by the conviction that repre-sentative government works better the closer it isto the people it serves. Effective decentralizationrests on three pillars; the localization of servicedelivery responsibilities, local determination ofresources (both spending and revenue rising), andthe devolution of wider decision-making powers.

Decentralization is fundamentally different to de-concentration. The latter refers only to the deliveryof functions via smaller units, with policies and deci-sions still made by central authorities. In contrast,decentralization requires the allocation of powersamong the various tiers, based on guaranteed localfreedoms. For decentralization to work as means ofstrengthening democracy and improving the qualityof life enjoyed by citizens, some basic conditionshave to be established. Local governments musthave an adequate set of competencies and capaci-ties that allow them to shape civic life in their com-munities. Furthermore, the framework should sup-ply the right sort of incentives for local leaders,focussing their attention on goals and longer timehorizons. Sadly, the system in BiH today is far frommeeting such expectations.

The core problems in BiH have a systemic charac-ter. Both the state level and local governments areweak. The former has only residual power and can-not fulfil its necessary regulatory and distributivefunctions, whilst municipalities operate in a com-plex and often hideous web of intergovernmentalrelations. In most cases they are merely the imple-menting agents of upper-level governments, and it isthey who make the important decisions. Municipalitieslack resources, professional capacity and are often

'captured' by local elites. There can be no doubtingthat BiH is in need of administrative reform.

Some leading opinion makers in BiH have arguedthat decentralization can only follow centralization -that localization incurs risks and strengthening thestate level is a pre-requisite. Yet we see no reasonto delay decentralization. Strengthening the stateand local levels are not conflicting goals. Thereshould be no political and administrative reformenvisioned first, and then decentralized after. Thepublic administration reform process itself shouldbe a genuinely decentralizing movement.

As Amartya Sen, the Nobel laureate and 'father'of human development thinking commented;

"In earlier times, there were lengthy discus-sions on whether one country or anotherwas yet 'fit for democracy', for example, theBritish discussed it regularly in denyingIndia independence. That changed onlyquite recently, with the recognition that thequestion itself was wrong-headed; a coun-try does not have to be judged to be fit fordemocracy: rather it has to become fitthrough democracy." 33

We believe these sentiments are as pertinent tolocal democracy; power must be decentralized sothat local leaders and local governments becomeimportant engines of democratization, renewal anddevelopment. In this chapter we identify the majorsystemic obstacles within the current frameworkand set out plans for change.

We will focus on the potential of stronger localdemocracy for supplying better opportunities forcommunities. Our proposals are not limited by cur-rent local capacities, and we make recommenda-

33 Excerpt from a presentation by Sen on Democracy and Social Justice,delivered at the Democracy, Market Economy and DevelopmentConference, Seoul, Korea, February 1999.

tions to create the system BiH requires if perform-ance and the quality of democracy are to beimproved. First, we will describe the administrativeand legal system in which local governments oper-ate, then we look at the fiscal framework. This is fol-lowed by an appraisal of the quality of democracy.In the closing section we summarize the main chal-lenges confronting the local government systemand set out possible remedies.

Legal aand aadministrative framework

This section picks up where our general discus-sion, in the Introduction, on the BiH constitutionleft off. Here we provide an overview of the defini-tion of local competencies, the distribution ofpower and the quality of independent self-gover-nance. We begin by discussing the current situationin each of the Entities, this is followed by proposalsfor reform.

Legal fframework iin tthe FFederation oofBiH

In the Federation there are entity and cantonalregulatory frameworks.34 At the entity level, the

key statue is the law on local self-government dat-ing from 1995, which provides a very general frame-work for intergovernmental relations; the cantonallaws are the more significant in regulating thenature of local self-government. The FBiH law pro-vides general principles, defining the main compe-tencies of municipalities, their financing, and theforms of direct participation in decision-making.Elections are also regulated through laws made atentity level. In the FBiH both parties and individualscan compete for elected positions. Up until 2004,Mayors were elected by assemblies of representa-tives, they are now directly elected.

A review of the competencies enumerated in thefederal law reveals a sizeable level of duplicationbetween the competencies of local and cantonalgovernments (see Table 2.1 below). As demonstrat-ed in the analysis of the various local services andactivities in Chapters 3 and 4, this overlap is morethan merely wasteful but counterproductive. Iteffectively ensures that many of the services whichlocalities are permitted to perform represent mere-ly de-concentrated, agency-type functions in thekey service areas.


in BiH

44 34 Cantonal laws on local government further elaborate Entity laws and speci-fy; the competencies assigned to municipalities; methods of direct partici-pation in decision-making processes (local assemblies, citizens' initiativesand referendums); procedural arrangements; and rules for establishingMjesne Zajednice (MZs)

45

Chapter Three: Building a responsive and accountable local governance system

35 Statement of the Commission on local self-government of the FBiHParliament

Table 3.1; Definition of local government competencies in FBiH

In general the legislative practice of cantonal gov-ernments does not give due recognition to the sta-tus of local government, and local autonomy isextremely limited. It is also apparent that the feder-al authorities exercise little power in protectinglocalities from the cantonal governments, and littleharmonization takes place. Thus the quality andstandards of local self-governance vary greatlythroughout the FBiH.

This lack of recognition of local governance andthe vague and overlapping definitions of compe-tences is felt through serious management andservice delivery failures. Cantonal governments

regularly interfere in municipal competencies, vio-lating their property rights, failing to provide ade-quate financing for the implementation of publicservices, and effectively undermining the function-ing of municipalities in the Federation.35 In addition,federal law does not provide for any legal mecha-nism to enable local governments to assert theirrights or arbitrate decisions of the parent govern-ments. There is a prima facie case not only foramending the existing laws, but for changing thewhole approach to the regulation of local self-gov-ernance. This is pertinent to securing better coordi-nation between local governments, their effective

ENTITY CONSTITUTION LAW ON LOCAL GOVERNMENT

Stipulates that local self-government is to beimplemented in municipalities, which willhave statutes in accordance with the FBiHconstitution, cantonal constitutions and laws.

Defines municipal administration, by outliningthe main competencies of municipal assem-blies, mayors and municipal courts.

(Article 2 (VI) of the FBiH Constitution)

Protects human rights and fundamental free-doms:

Duty to satisfy local needs of citizens in thefields of child care, education, work andemployment, social care, culture, physicalculture and sports, etc.:

Conduct urban and housing policy relevantfor the municipality:

Manage municipal property: Perform communal and other service activi-

ties, and those of local infrastructure: Take care of tourist resources of the munici-

pality: Ensure utilisation and management of the

local construction land: Ensure public peace and order, etc.

(Article 8 of the FBiH Law on bases of localself-government).

independence, and as we will see, their financialsustainability.36

BiH's accession to the Council of Europe (CoE)has had an important influence on the developmentof law in this area. A post-accession requirementwas the reform of relevant legislation to comply withthe European Charter on local government. The FBiHParliament is currently making amendments toestablish a better definition of local self-governance.Yet according to an assessment published by theCoE, the draft law still remains too open to discre-tion on the part of the Cantons and thus lacks proce-dures for ensuring harmonization.37

More specifically, the CoE raised questions aboutthe legal distinction between the three types oflocal authorities (cities, municipalities and city-municipalities), territorial organization, scope andprocedures of administrative supervision, local gov-ernment resources and finances, and the status oflocal elected representatives and staff.38 Given thenature of these objections and their essentially neg-ative appraisal, it was decided that the statutewould not be further developed. Instead, a work-ing group consisting of relevant experts and local

government representatives has been tasked withpreparing a new version. This development signalsa significant delay. It also has to be rememberedthat legal reform in the FBiH requires not only theadoption of an adequate framework on the federallevel, but also subsequent harmonization of all can-tonal provisions.

Legal fframework iin RRepublika SSrpskaIn the RS, regulation of local self-government

rests with the Entity government. The law allowslocal representatives to be elected both as individ-uals and from party lists, and for mayors to bedirectly elected. The current law was adopted inNovember 2004 and has been in effect since thebeginning of 2005. Representatives from local gov-ernment have participated in the drafting of the law,alongside experts from the CoE, with the aim ofensuring complete compliance with the EuropeanCharter. In contrast to the FBiH findings, assess-ments from the CoE are generally positive39. Theinnovations arising from the newly adopted law aregiven in Table 3.2, alongside those granted underthe constitution and the pre-existing legislation.


in BiH

46 36 The FBiH Constitution, as well as the constitutions of some cantons, oblig-es cantons to transfer certain competencies, which relate to education,culture, tourism, local business, humanitarian activities, TV and radio to amunicipality within its territory, in cases when the majority of population inthat municipality is of another nationality than the canton as a whole.Although there are two areas where this has been proposed (Drvar and@ep~e), implementation has not taken place.

37 Legal Appraisal - Law of the FBiH on local Self-government and amend-ments (CoE, CDLR, Programmes Democratic Stability) March 2004, pp.1.

38 Ibid. p. 239 For example, the suggestion by the CoE that the local authorities should

have the right to set the rates of revenues was accepted for local taxesand fees (Article 6 of the Draft law on local self-government).

4740 CoE, Appraisal of the Draft Law of the RS on Local Self-government,Strasbourg, 2003.

Compared with the FBiH legislation, the RS legis-lation is more elaborate. It sets out in detail thecompetencies of municipalities and cities; 17 arti-cles are devoted to competencies of municipalities,it lists six different types of local revenues and sixmethods of citizens' participation. In addition, the

authorities are currently undertaking major reformsin sectoral legislation, which once completed willaffect the division of competencies and is likely toadd to local government functions.40

It is worth spelling out some of the key changesin the RS law;

Table 3.2; Definition of local government competencies in the RS

Design of local developmentprogrammes:

Adoption of the urban planand budget:

Regulation and implementa-tion of communal services:

Regulation of municipal landand construction:

Maintenance and use of localroads, streets and publicbuildings:

Satisfaction of citizens' needsin areas of culture, education,health, social protection,sport, information, andtourism:

Protection of the environ-ment and other areas:

Establishment of municipalpublic institutions, organiza-tions and services.

(Article 102 of the RS Consti-tution).

Adoption of a developmentprogramme:

Adoption of development,urban and implementationplans:

Managing and ensuring thebest use of construction landand business premises:

Organization of communalpolice and other inspectionbodies:

Organization of delivery ofutility services:

Construction, maintenanceand use of local roads, streets,and other public buildings:

Satisfying the local needs ofcitizens in culture, education,sports, health and social pro-tection, information, tourism:Undertaking measures forthe protection of the envi-ronment.

(Article 5 of the pre-existing RSLaw on Local Self-government)

Regulatory actions andmunicipal administration(including adoption of munic-ipality development pro-grammes, urban plans, issu-ing permits, establishment ofcommunal police and otherinspection authorities,inspections):

Service provision (specificfunctions in the area of cul-ture, education, sports,health, social care, civil pro-tection, information, tourism,environmental protection:organization and perform-ance of utility services):

Legal services: Public information: Protection of citizens and

material goods from naturaldisasters.

(Articles 12-28 of the newlyadopted RS Law on LocalSelf-government)


ENTITY PAST LOCAL GOVERNMENT INNOVATIONS FROM NEWCONSTITUTION LEGAL PROVISIONS LOCAL GOVERNMENT LAW

The new provisions define local self-govern-ment as "the right of citizens to participatedirectly and through their freely and demo-cratically-elected representatives in theachievement of the common interests of… thelocal community, as well as the right and abil-ity of local self-government authorities to reg-ulate and manage, within the limits of the law,public affairs under their responsibility, in theinterest of local citizens."41

The law now makes a clear distinctionbetween municipality and city governments42

and their respective competencies. The legislation provides an adequately elabo-

rated list of responsibilities and makes a dis-tinction between different local governmentunits in assigning competencies.43

Municipalities will henceforth only beassigned additional responsibilities followingconsultations with local governments, inaccordance with criteria, and in parallel to theallocation of adequate resources44.

The municipal authorities are given a generalcompetence to deal with matters that havenot been awarded to another body (or exclud-ed from the area of their responsibility).

Although revenue sharing remains deriva-tion based, the law does specify that the cat-egorization of development status, whichgoverns the level of redistribution, will bebased on objective, transparent and verifi-able criteria45.

The law is much more precise with regard tolocally raised revenues. It specifies seven dif-ferent sources and provides that local gov-

ernments alone have the power to set localtax rates and service fees46

In cases of dispute between the RS govern-ment and local governments related to thelevel of resources for additional competen-cies, a mechanism of arbitration will beapplied. Arbitration will comprise an equalnumber of representatives of local authoritiesand the RS government. If it fails, the disputewill be resolved by the higher courts.

Unlike the former RS law47, the current provi-sions also allow for a court procedure forcases of violation of the rights of local govern-ments.48

Recommended nnext sstepsThis short analysis shows that the RS local gov-

ernment law is now much more advanced than theproposals which still remain at the developmentstage in the FBiH. The main benefits are a newframework and regulatory standards.

However, it has to be appreciated that the lawalone cannot create local autonomy. Reform of fiscaland functional decentralization must also advance,with the devolution of further resources and compe-tencies, in order to create effective local servicedelivery. We consider the law provides an adequateskeleton, which must be added to by the devolutionof various functions and the necessary resourcesalong with adequate means of supervision.

The innovations in RS law noted above shouldalso be incorporated into the law still to be elabo-rated within the Federation. However, the challengeof reshaping FBiH legislation is much more signifi-cant, as the regulation of local government isessentially in the hands of the cantonal govern-


in BiH

48 41 Article 2 of the RS Law on Local Self-government - Unofficial translation42 The following definitions are given; A municipality is a fundamental territo-

rial unit of local self-government, established for a part of inhabited area,for one inhabited area or more than one inhabited area. A city may beestablished for urban areas, that represent a coherent geographical,social, economic, historical and territorial unit, with an appropriate level ofdevelopment.

43 More clarity does not necessarily mean a rational division of roles amonglevels - see discussion in Chapter 4.

44 Ibid. Article 28.45 Ibid. Article 67.46 Ibid. Article 66.47 It devotes five articles to the relationship between local government units

and entity institutions, in a way that it prescribes their cooperation andprocedures in cases of non-cooperation.

48 Articles 96 and 97 of the RS Law on Local Self-government

49


ments. Change can only be implemented through amore complex procedure, which requires moretime, resources and not least, the collective politi-cal will of both entity and cantonal legislators.

The logical end-game for the local governmentlegislative framework in BiH would be the harmo-nization of RS and FBiH legislation to the greatestextent possible. This should ensure that the samestandards and possibilities of development areafforded throughout the country. Ideally, thisshould be carried out at the same time or soon afterthe adoption of the new law in the FBiH.

However, the adoption of revised legal arrange-ments is only part of the challenge faced in both theRS and FBiH. For the system to function properly,many other measures will also have to be imple-mented. Reform of the fiscal system (the topic ofthe next section) is of the utmost importance.Moreover, sectoral reforms will be discussed inChapters four and five. These proposals will haveimportant implications for specific local responsibil-ities, and thus will also result in changes in the mainlocal government statutes. Some of these reformswill most likely take place in parallel and in an adhoc manner. The adoption of a proper frameworklaw in both entities will accelerate progress on all ofthese matters. Throughout the process there willbe a need to phase and regulate change, ensuringresources and capacities are paced appropriately.

The IIntergovernmental Fiscal SSystem

The weakness of BiH's inter-governmental fiscalframework lies at the heart of many of the issuesand challenges raised by this report. A lack of

resources and their maldistribution both severelyconstrains the scope for improvements in servicedelivery and limits the revitalization of local gover-nance. An effective system of fiscal decentralisa-tion, by which we mean the transparent and fairassignment of spending competences alongsideresources and local discretion, is an absolute pre-requisite for lasting change.

This section therefore examines the quality ofinter-governmental fiscal relations in BiH. We beginby discussing the considerations which mark outeffective decentralisation systems, we then reviewthe arrangements currently in place in BiH, and weend by offering analysis alongside proposals forreform.

Principles oof FFiscal DDecentralizationSub-national public finance systems typically

reflect constitutional structures and are thusextremely varied in character. The more progres-sive, however, explicitly recognize the value of localgovernments both in providing local services and inpromoting a healthy democracy. Two issues stand-out when describing the quality of central-local fis-cal relations in a given country: the division ofspending responsibilities and their sources of fund-ing between different tiers: and the amount of deci-sion-making discretion permitted to localities.

Best practice the world over provides us withthree mutually supporting principles; First, it is argued that accountabilities are

strengthened where spending competenciesand tax raising powers held by the varioustiers of government are commensurate. Thisis termed the correspondence principle.

Second, there is the subsidiarity principlewhich we have already referred to. This is thepresumption that decisions are best exer-cised as close as possible to the people, andit calls for the general devolution of powers tothe lowest appropriate level of government.

Third, the equity principle demands that fiscalarrangements address sub-national variationsin needs as well as revenue sources. Thisrequires that fiscal transfers or allowancesshould be made between the centre and thelocality, and between individual localitiesthemselves.

Modern fiscal decentralization systems canaccommodate the three principles simultaneouslyby empowering local governments, allowing themto raise their own revenues and by maintainingequalization mechanisms through tax sharingarrangements or central grants. The matching ofresources to needs is referred to as equalization.This takes two forms; vertical equalization - the allo-cation of resources to different tiers of governmentto meet spending responsibilities: and horizontalequalization - the compensation of variations inneeds between similar units of local government.

Vertical equalization implies local governmentsshould be given sufficient revenue raising powersto cover the costs of their own competences. Thiscan be achieved either by way of a dedicated shareof a national or regional tax or by granting sufficientdirect tax raising powers. The more challengingquestion of horizontal equalization requires thedesign of a needs versus resources determinationmechanism. This is generally made up of a fundingformula and a system of grants. The more complexof these arrangements include allowances for all

manner of expenditures incurred by local govern-ments and the socio-economic characteristics oftheir areas, whereas the simplest rely on per capitaallocations supported by weightings for specialneeds.

Equalization is rarely uncontroversial in even themost mature of democracies, since such arrange-ments require the differential treatment of areas,and inevitably the reassignment of taxes raised inone area for the benefit of another. Indeed, this notonly raises issues of competing claims, but alsosystemic and managerial questions. Fiscal transfersbetween one group (the payers) and another (therecipients), potentially weaken and distort incen-tives - and 'cloud' tax and spending accountabili-ties. Mechanisms need to be found, which compen-sate whilst also holding local decision makers andmanagers responsible for their actions. Equalizationtransfers should be transparent, rules-based andself-limiting.

A further dimension of fiscal decentralization isthe ability of local governments to borrow.Borrowing powers are vital if localities are to takethe lead in financing capital investment. Yet theexercise of such powers is generally regulated bythe centre, as it incurs national macroeconomicrisks.

Thus the challenge for any nation is to achieveinternal equity through matching diverse needswith resources, whilst also ensuring systemssecure efficiency and accountability. Being suc-cessful in these endeavours is no small achieve-ment and the policy options available are plaguedwith debate, but the potential 'pay-offs' far exceedthe pitfalls.


in BiH

50

The BBiH CContextThe sub-national fiscal framework in BiH reflects

the complexities of the Dayton constitutionalarrangements. With separate systems operatingwithin the RS, each of the ten Cantons in theFederation and Brcko District49, BiH effectively has13 distinct fiscal frameworks. This is unprecedentedin a nation of less than four million people.

Practically all taxes are set and raised by theEntity and Canton governments leaving only minortaxes50 and fees levied by the State (for items suchas national passports) and municipalities (propertytaxes and fees for local licences). By and large,municipalities function with very limited fiscalautonomy throughout BiH; in both the RS and theFederation they have no substantive revenue rais-ing powers of their own, and receive the greatershare of their resources by way of tax sharing andtransfer arrangements with their respective 'parent'governments. The shares received are for the mostpart within 'the gift' of these higher level govern-ments, and they can be varied at will and arbitrarily.

Moreover, the aggregate level of public expendi-ture disbursed at the local level (i.e. after applica-tion of the tax sharing arrangements) is strikinglylow, at only 7.9% of total public spending in theFBiH and 8.1% in the RS51. This represents approxi-mately 5% of Entity and national GDP. In spite ofthis, much service delivery does take place at thelocal level, but is resourced via direct Canton andEntity monies funnelled to institutions and otherservice delivery units via extra-budgetary fundswhich never formally touch municipal budgets.

The tax shares received by municipalities in boththe RS and in the FBiH are calculated on a deriva-tion basis (i.e. they are a fixed share of revenues

collected within their respective boundaries) andthe level of resources available to individual localgovernments varies hugely. As a result there is ahigh level of inequity, particularly within theFederation. A proper examination requires we ana-lyze the position at the sub-national level.

National VValue AAdded TTax ((VAT)However, before this, it is important to note that

the proposed introduction of a state-level VAT andthe abolition of Entity and cantonal sales taxes willradically reshape the fiscal landscape. Beyondbroad agreement on the Entity-level shares, theprecise means of allocating VAT revenues to sub-national and local governments have not yet beenresolved. Moreover, the very nature of VAT, with itsmulti-stage incidence and collection, makes it a dif-ficult tax to apply the current derivation-based shar-ing arrangements to. The national VAT system isplanned to come on stream in January 2006, andthis provides a further and urgent impetus forreform.

The FFederation The ten cantons of the Federation each have an

operationally separate fiscal decentralization sys-tem. The FBiH constitution operates via a 'cascadingprinciple' by which all powers and competences notgranted to the Federation accrue to the cantonalgovernments and all remaining powers to themunicipalities. Although superficially decentralizing,this principle favours the Cantons. These administra-tions effectively determine the fiscal environmentwithin which local governments operate.

As is apparent from Table 3.3, which summarizesthe distribution of the main revenue raising powers,the only revenues set and raised locally are fees

5149 As the District of Br~ko is a specific case, in the following sections wefocus on the two Entities.

50 The only exceptions are customs taxes which are set at the state-level butaccrue to the Entities

51 See World Bank (2002)


Federation BiH Canton Municipal

and charges and a number of de minimis taxes del-egated by the Cantonal authorities. The most signif-icant of these is the property tax, but several

Cantons appear even to set the property tax rateand merely delegate 100% of the proceeds to local-ities.


in BiH

52 52 These are ad hoc and made intermittently to 4 to 5 'weak' municipalities;the total level of support in 2003 was less than 1 million KM (FederalFinance Ministry).

53 In 2003 cantonal grants were 44 million KM in total, but of this 23 millionrelated to the Sarajevo central grants, which operate in place of tax sharing.

54 16 representative municipalities within the FBiH; Cazin, Bihac, Grada~ac,Tuzla, Klju~, @ep~e, Zivinice, Kladanj, Visoko, Ilid`a, Novi Grad Sarajevo,Pale FBiH, [iroki, Brijeg, Fo~a FBiH, Neum, Stolac

Profit taxes (large enter-prises)

Custom duties Excises Federation administrative

fees Federation courts' fees Fines under federation

regulations Revenues from natural

resources

Other revenues toFederation

Enterprises' profit tax(SMEs)

Payroll tax Fines under cantonal regu-

lations Sales taxes Ad hoc fees and charges

Fees and Charges forlicences, utilities & soforth

Delegated taxes (usuallylocal property tax)

Table 3.3; Distribution of FBiH Revenue Sources

The balance of funding generally favours the cen-tre. Around half of municipal monies come fromhigher level governments (either as shared taxes ordirect transfers from the Federation52 or Cantons53);a further 15% or so is raised from property taxes(which can be either determined locally or set bythe Cantons); thus only around 30% is genuinelylocally generated (predominantly fees andcharges). Charts 1 and 2, depict the funding break-down for 2003. The first illustrates the shares with-out the data for Sarajevo, which has no formal taxsharing arrangement and supports its municipalitieswith a large cantonal grant. A sample of FBiHmunicipalities for 2003 confirmed these shares, butalso revealed a considerable variance amongstrespondents54.

Chart 3.1; Revenue Sources for FBiHMunicipalities (excluding Sarajevo)

Chart 3.2; Revenue Sources for FBiHMunicipalities (including Sarajevo)

Of the taxes shared with the Cantons the mostsignificant is the sales tax, which in 2003 was esti-mated to have accounted for 45% of municipalspending.55 This underlines the relevance of theintroduction of VAT, which will replace sales taxes.The other principal shared taxes (income or salarytaxes and taxes on profits) accounted for the bulkof the remaining transfers. These revenue propor-tions are not unusual in the European context, andsuperficially at least, appear fairly healthy.However, the allocation system and process is farfrom ideal, and various weaknesses serve to limitlocal competence over the budget and contributeto some fairly severe inequities.

Two particular issues stand out. The first is thederivation-basis of the system coupled with thepower of the cantonal governments to vary taxshares, without the agreement of municipalities orany external check. This is exemplified by the vari-ety and complexity of sharing arrangements inplace. A summary of the different provisions is pro-vided in Table 3.4 below. Although allocations dovary between cantons, they generally do not vary

between municipalities within a canton. But thereare even exceptions to this; Most significantly, as noted, Sarajevo

Canton's municipalities receive subjectivelydetermined grants.

In Tuzla Canton, different percentages areapplied to municipalities. Most receive a stan-dard share but five (Klandj, Celic, Doboj-East,Sapana, and Teocak) are allowed to retain aconsiderably higher share. It is not clear whatunderpins this.

Similar arrangements are in place in NeretvaCanton for the Mostar city municipalitieswhich receive lower shares. The apparentrationale is their higher taxable capacity.

Finally, in the Zenica-Doboj Canton, Zepcemunicipality receives a further transfer equiv-alent to a 10% addition to the averagereceived by the other municipalities. This isthe result of an OHR imposition associatedwith the unification of the municipality.

5355 Per sampled data and based on the OSCE municipal database.


Canton Tax % of principal taxes Delegated Notes/ Sharing Taxes? Exceptions

1. Una Sana Yes Sales 20%, Profits 50% Partial None2. Posavina Yes Sales 20%, Profits 30%, No Even property tax is

Salaries 20% subject to sharing3. Tuzla Yes Large range Limited Highly complex system;

affords five municipalities considerably greater shares

4. Zenica Yes One municipality Yes Transfer shares are based onDoboj receives more a temporary order. Zepce

municipality receives a further 10%. Delegation scheme allows for municipal tax setting.

5. Podrina Yes Sales 10-20%, Profits 50%, Partial Not clear whether Salaries 20% delegation allows for local

determination of 100% delegated taxes

6. Central Yes Sales 25%, Payroll 25% Yes Full discretion allowed for Bosnia residence tax

7. Neretva Yes Mostar excluded Partial Complex and non-transparent arrangements applied to Mostar City Municipalities and the Mostar City authority.

8. West Yes Sales 20%, Salaries 50%, Yes Most comprehensiveHerzegovina profits 20-50% segregation of tax competen

cies within the Cantons - the tax code specifies the taxes accruing to each level.

9. Sarajevo No Not applicable None Possesses no sharing arrangements, municipalitiesare funded by cantonal

grants. 10. Herceg- Yes Sales 25%, Salaries 40%, Limited Operates highly complex

Bosna profits 20% system. Has the most comprehensive set of specified tax shares - even prescribingproperty taxes to be shared.

54 56 Sourced from a review of cantonal tax assignment statues

Table 3.4; Summary of Cantonal Tax Sharing Arrangements56


in BiH

The second issue is the lack of any systematicattention to meeting individual spending needs byway of fiscal transfers from the centre (i.e. theFederal Budget) or between the municipalitiesthemselves. There is some variation in the taxshares applied within cantons and several ad hocfederal and cantonal grants, but the basis of thesearrangements is non-transparent, and they have noclear compensatory rationale. Indeed, most appearto be made to cover budgetary deficits and arenegotiated on an individual basis with the recipients.

In the language of fiscal decentralisation, there isno effective horizontal equalization. The systemboth perpetuates and tolerates inequities. An analy-sis undertaken by the World Bank suggests that percapita municipal expenditures vary by a factor ofthree to one. The sample of municipalities taken tosupport this survey indicates that the variation iseven larger, reaching a factor of five to one57. This isa very sizeable variance given the homogeneity ofsocio-economic conditions outside the capital city(both the World Bank and our sample specificallyexclude municipalities in Sarajevo Canton).

Running in parallel with the complex fiscalarrangements is a considerable level of concurrentservice provision, particularly in the social sector.The most significant functions are education andhealth services, where the Canton typically meetsthe salary and some operating costs of bothschools and local health centres, whilst the munici-pality meets capital costs (buildings and equip-ment) and basic running expenses (maintenance,heating and lighting).

The precise picture is difficult to discern and issubject to many exceptions but the formal manage-ment of these facilities hangs on who is considered

the founder of the institution. In the main this isconsidered to be the municipality, and yet regard-less, cantonal resources rarely come under theexecutive control of municipal managements, anddo not enter the municipal budget58. For the mostpart staffs are paid directly by the cantonal budgetand other monies are expended by the institutionconcerned as a cost centre within the cantonalbudget. These arrangements, like the tax sharingmechanisms described above, are completelyopaque and vary between areas. As a result the sys-tem serves to compromise political accountabilities.Moreover, they circumscribe incentives to containcosts and secure service improvements.

Finally, it is worth noting that the borrowing pow-ers of municipalities are also constrained and poor-ly matched to needs. Under FBiH law, local govern-ments are prohibited from borrowing commerciallyand this is enforced via banking regulations59.Municipalities can therefore only borrow from offi-cial sources (Federation, canton, other municipali-ties and accredited international institutions). Theycan borrow for both current and capital purposesbut at any one time the outstanding debt cannotexceed 20% of the revenue budget. The majority ofcredits are granted by the federal and cantonalauthorities, likewise borrowing from internationalinstitutions has also to be agreed by the federalauthorities - whilst other municipalities generallyonly lend-on monies to meet short term cashneeds.

Thus capital expenditure, and hence investment,is hemmed in by two considerations - the size of thelocal revenue budgets (itself a product of inequity)and the willingness of higher level governments togrant credits. This raises further equity questions

5557 The World Bank's sample (see PEIR 2002) included 11 municipalities; oursurvey based on OSCE data contained 16 municipalities.

58 There are exceptions to this, depending on the canton, in which casethese further transfers would be counted as 'other' revenue sources.

59 Effectively, any such loan would be illegal and therefore non-recoverableby the lending bank.


RS Revenues RS Shared Revenues Municipal revenues

and limits the room for manoeuvre enjoyed bypoorer municipalities; the borrowing control regimein essence cements the unfairness inherent in thedistribution of revenue expenditure.

Republika SSrpskaAlthough many of the inadequacies observed in

Federation also apply in the RS, the position has adifferent character, being more favourable in someareas and less so in others.

On the positive side, it is firstly clear that trans-parency is improved by the relative simplicity of RS

government structures. Entity-level tax sharingarrangements apply and local governments areassigned certain taxes by right. Second, the taxsharing percentages are varied on the basis of a sys-tematic method rooted in an assessment of needs.Details of the allocation and assignment of individ-ual taxes within the RS are given in Table 3.5. Againthis is a partial listing - the Entity government alsocollects many minor taxes.


in BiH

56

Customs duties Excises (except for oil deriva-

tives) Company Profit taxes Income taxes (on non-salary

income - royalties, patentsand technical improvements,

Capital Gains Tax Tax on movable property Special tax on railway traffic Taxes on gaming Fees, duties, charges, and

fines Revenues from confiscated

property and profits (courtsrevenue - entity level jurisdic-tion)

Other revenues to RS

Sales tax on goods and servic-es

Excise on oil derivatives Road fees Income tax (on salaries, per-

sonal self-employment) Charges for use of farming

land Charges for extraction of min-

eral raw materials Confiscated property and pro-

ceeds obtained by sale ofconfiscated objects, (fallingunder jurisdiction of the entitymarket inspection).

Property tax Income tax (agriculture and

forestry) Fines imposed in minor

offence procedures foroffences regulated by munici-pal enactments

Municipal administrative fees Utility fees Municipal fees for use of nat-

ural and other resources ofgeneral interest

Tax on income from lotterygames

Other municipal revenues

Table 3.5; Tax assignments in the RS

RS Revenues RS Shared Revenues Municipal revenues

Whilst the RS also maintains the derivation basis,unlike the Federation local percentage shares of theprincipal tax revenues60 (the sales tax and the localincome tax) are varied according to the municipal'development status'. This is appraised andassigned by the RS government every three yearsand is reported to take account of local taxablecapacity and quality of the built infrastructure. Thevarious categories and associated shares are61; Fully developed municipalities (70% central,

30% local) Medium-development (60%, 40%) Underdeveloped (50%, 50%) Exceptionally underdeveloped (40%, 60%)

Clearly, this is a very positive development andrepresents an embryonic form of vertical equaliza-tion, which recognises the need for poorer munici-palities to retain more of their own revenues. Thenumber of categories specified and the variations inthe shares ensures the scheme is fairly progressive.

However, on the negative side, it remains thecase that the assignment of municipalities to a par-ticular category lies wholly within the prerogative ofthe RS government, decisions are subjective andthe criteria undisclosed. Thus accountability andtransparency are enhanced but remain far fromguaranteed. It is also reported that the RSAssembly has arbitrarily varied the percentagesreceived in-year62.

More importantly within the RS the share ofexpenditure directly raised by local governments isvery much lower than the Federation - and thissomewhat offsets the impact of the clearer assign-ment basis used. Indeed, as Chart 3 (which is basedon World Bank data) illustrates, tax sharing arrange-ments account for almost 75% of revenues63. In

addition, as a further sample drawn for this studyshows, there is a considerable degree of inequalitybetween individual local government respondents,but this is less pronounced compared with the FBiH.

Chart 3.3; Estimated Revenue Source Shares forRS Municipalities

Like the Federation, the RS also suffers from thesame complex concurrent service delivery arrange-ments in the education and health sectors.Additionally, RS municipalities face a similarly unfairand restrictive allocation of borrowing compe-tences. Given the lower levels of income and theweaker availability of donor aid, the pressures oncapital expenditure within poorer localities are like-ly to be still more severe.

Commentary aand pproposalsIt is clear from our appraisal that the current

decentralization system across BiH is weak, andthat it both breaches principles of equity and com-promises the efficient delivery of local services.

Most serious is the inherently low level of fiscalfreedom given to municipalities throughout BiH. Itmust be recognised that both the RS and theFederation represent essentially centralized gover-

57


60 The remaining shared revenues are allocated without regard to localdevelopment status.

61 Note; Between the Entity and the Banja Luka city authority, these taxes areshared in the ratio 65 to 35.

62 As reported by the Srebrenica Office of UNDP.63 9 RS areas sampled; Derventa, Modri~a, B.Luka, Ugljevik, Vlasenica, Novo

Sarajevo, Pale, Nevesinje, Bile}a


in BiH

58

nance structures. Within the RS this position isnakedly clear, whereas within the Federation, it isdisguised by the presence of the Cantons.Nevertheless, local spending barely represents 5%of GDP in either Entity, and is a mere 8% of totalpublic spending.

A close second is the alarming level of variation inresourcing levels between local governments ofsimilar sizes and socio-economic conditions. It is ofparticular concern, that within the Federation, therehas been no substantive progress in addressingthese imbalances. Local government accountabili-ties are compromised and transparency is weak.Furthermore, as we will see from analysis of sec-toral financing mechanisms in chapter four, the fis-cal system provides few incentives for managersand politicians to contain costs.

Two particular factors lie at the heart of the equal-ization problem; the derivation basis of the tax shar-ing schemes, which preclude revenue reapportion-ments from other areas, and BiH's disparate gover-nance structures, which limit the scope of furtherfiscal adjustments. Both are problematic and arerooted in politics. The derivation principle is far fromunusual in Eastern Europe, where transfersbetween areas were achieved through non-trans-parent ad hoc arrangements made within bureau-cracies. Indeed, their 'uncloaking' contributed tothe controversy and instabilities which consumedthe former Yugoslavia. The subsequent conflict hasserved to limit both the public's and politicians'appetite for fiscal solidarity. The Dayton structures,and particularly the cantonal structure withinFederation, further compromise the position byconfining the resource sharing potential to smalland often economically homogenous areas. It is

unsurprising therefore that the embryonic equaliza-tion arrangements adopted in the RS are moreadvanced.

Resolving these issues will require a politicalresponse and the building of a new consensus. Thiswill not be easy, but the developmental payoffs,not least the economic ones, are likely to be size-able. The gains to be had from genuine devolution- the granting of revenue-raising powers and theestablishment of cross-municipality, cross-cantonand in time and with consent, cross-entity equaliza-tion, need to be strongly advocated.

Two unrelated developments may assist thisprocess. The first is the introduction of a health sol-idarity fund within the Federation that equalizesprovision between cantonal health insurance funds,which provides a template for action. The second isthe growing prominence of state level reforms, andin particular the introduction of the state-level VAT.Indeed, paradoxically, the central BiH state hasmuch to offer the debate over central-local rela-tions: it could act as the facilitator of change and aneutral arbiter in the process of reassigning greaterrevenues to, and between, municipalities. Theintroduction of VAT will necessarily require theredesign of the current tax sharing arrangements,and thus provides an opportunity for wholesalereform. It is recognised however, that the develop-ment of a fully fledged equalization system willhave to be built progressively and with the consentof the three constituent peoples. Moreover,reforms will have to be accompanied by an ade-quate means of regulation and the building ofmunicipal financial and managerial capacities.

There are four immediate steps which can betaken to begin this progress and deal with the con-

59


fused accountabilities and inefficiencies which arecurrently evident; Both Entity governments should give atten-

tion to the very low share of resources spentand raised locally, examine the scope for fullydevolving taxes to municipalities and enablethem to more effectively exploit their existingrevenue-raising competences. The obviouscandidate for full devolution is the local prop-erty tax. Within the FBiH cantonal govern-ments should be encouraged to replicate theapproach adopted by the RS in setting system-atic tax sharing percentages, which benefiteconomically weaker and poorer areas. The RSshould, at the same time, rationalize and pub-lish the criteria by which the categorisationscheme operates and justify where deviationshave occurred. In addition, it should institu-tionalize procedures for consultation withmunicipalities, permit appeals and operatedamping arrangements for changes in status.

Higher level governments and donor organi-zations should be encouraged to conductreviews of the current distribution of func-tions and revenues and link improved service-delivery with the realignment of revenuecompetences. In keeping with recommenda-tions made elsewhere in this report, thisshould be on the basis of expanding local pro-vision (for example in health and educationsectors), ensuring that funding keeps pacewith changes.

Third, high level attention should be given tothe capital expenditure needs of local govern-ments and how this might be accomplished inline with good managerial practice and within

macroeconomic limits. A review sponsored bythe International Financial Institutions and aleading state agency may be the best vehiclefor this.

Fourth, statistical resources should bedeployed to support a future equalizationmechanism and debate initiated on possiblemodels. Implementation of a fully functionalsystem will most likely require demographicdata which can only be established from apopulation census (see Box 2). Equally, amunicipal recording system will be requiredto map budget allocations and the key costdrivers. This requires a mammoth effort, notmerely on the part of statistical agencies, butalso to improve the quality of administrativedata collected by line ministries.

The preparations described above can beginnow. With adequate sequencing and management,there are no reasons why these reforms, whichunderpin a myriad of other issues, should not besuccessful.


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60

Box 22: CCensusThe war in BiH produced large movements of people and resulted in significant changes in the distri-

bution of the three constituent peoples. Yet almost a decade after the war there is no reliable estimateof BiH's population. The last census took place before the war, and today there remain only broad esti-mates ranging between 3.4 and 3.9 million people. Without basic data, accurate measurement of devel-opment performance or the implementation of planning and distribution mechanisms (for example a fis-cal equalization system) are utterly compromised. Return of refugees and displaced persons has all butpractically been completed. However, external and internal political forces are still hesitant to carry outa full census.

Last ccensus iin 11991The 1991 census presented BiH as a multi-ethnic society, with only few territories where a single

majority predominated. It also showed a growing number of people that declared their ethnic belong-ing as 'Yugoslavian', rather than one of the three national groups. The pre-war census also has a polit-ical primacy, as it remains the basis for deciding the proportionality enshrined in the Dayton Accords.Thus any new census threatens to unravel the political settlement.

War ggains aand ppopulation eestimatesThe Dayton Accords obliged each side to permit and facilitate the full return of refuges to their pre-

war homes. The key component, the return of property, was for the most part obstructed by local lead-erships, and was implemented only when the International Community took control. However, theobstruction was long enough to discourage large numbers from returning. They instead sold their prop-erties on, often at financial loss, and moved elsewhere. After these changes, without objective meas-urement, it is difficult to estimate the ethnic structure of different localities. This situation gives ampleroom for the use conflicting estimates to serve political interests.

Political ddimensionsDiscussion over the need for a new census is attracting growing national attention and has been

debated at the state level. The International Community is reticent but supportive of a census takingplace during the next international round which begins in 2010. There remains concern that the resultsmight hinder national consolidation. Equally though, the lack of a census muddies the waters on thesuccess of many initiatives, especially the returns process.

The motivations of political forces remain somewhat in conflict. The 1991 results serve a variety ofofficial purposes - notably for voters' lists and the calculation of proportional representation shares. Yetthese percentages likely bear little correspondence with reality. Serb political parties are arguing hardfor a census as they predict Serbs represent a greater majority in the RS. Bosniak parties are cautious,

61


fearing the results might legitimize ethnic cleansing. Croats have similar doubts and fear the effect ofmigration. It is thus difficult to envisage how a consensus might emerge.

Potential sstepsBiH faces a difficult dilemma; the results of a new census might endanger stability, but it is impossible

to plan and implement reform without reliable information. The solution might be to make the process astechnical as possible and avoid the direct measurement of the ethnicity. Yet this is potentially neither acost effective nor technically adequate solution. Measurement of ethnic belonging will have to take placesooner or later, and residence will practically confirm BiH's ethnic composition. It seems genuine politicalcompromise and leadership is required. Growing European integration offers the most promising motivat-ing force, since a census will prove a near essential statistical asset for EU accession.

Democratic aaccountability and pparticipation

Having examined the legal framework and inter-governmental fiscal relations, it is logical to take acloser look at the local political environment. Thepolitical context and culture of the localities in BiHvery strongly affect what can be achieved. Here wecomment on the local political stakeholders andthen the quality of democracy. Sketching the web ofinterests and relations will also help to understandlocal government performance in later chapters.

First, however, we have to make a major proviso.It is inevitably difficult to support statements in thisdomain with hard facts and precise data. Little positiveresearch has been made into this subject in BiH. TheRights Based Municipal Assessment Project (RMAP)programme of UNDP has provided a wide array ofmunicipal case studies that can be used to supportour review, but this research is far from a systematicanalysis. As cases are only of illustrative strength, welist them within the footnotes and strongly suggestreaders also review these in order to obtain a deeperunderstanding of the issues at stake.

Stakeholders iin tthe llocal political aarena

There can be no doubting that even at the locallevel BiH's atypical political situation calls for spe-cialized administrative structures. It is highly ques-tionable however whether the current arrange-ments are up to the job.

Political ppartiesDuring and after the war, the three nationalistic

parties controlled the majority of municipalities inBiH and by and large, governed in the interests ofthe respective dominant majorities. In many munic-ipalities distant from larger centres, local leader-ships have not changed since the end of the war,and ethnic power-groups often gathered aroundprivate economic interests, established completecontrol over municipal affairs. In larger centres, dis-crimination and the misuse of power was lessmarked. This was due to a higher InternationalCommunity presence, a stronger civil society andmedia scrutiny. Moreover, in those areas wheremulti-ethnic parties (essentially the SDP) were ableto take power, they often purposefully appointed


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mayors that were from minority ethnic groups with-in the given municipalities. These decisions sentimportant messages regarding the possibility ofpolitical influence and participation regardless ofethnic identity. Sadly, it is unlikely this practice willcontinue under the current system of directly elect-ed mayors as the majority of BiH voters still tend tovote on ethnic lines64.

Single-party domination of local politics has adetrimental effect on local policy making. First andforemost this makes politics non-rival - decision-makers no longer need the support of grass-rootsvoters, as they are effectively guaranteed power bytheir 'party machines'. Within political party hierar-chies, divergent opinions and initiatives are not wel-come. Within the hierarchies themselves, smallinterest groups are formed by sub-elites furtherdistributing power in a non-transparent manner.Even though opposition parties can present somethreat to this system, in reality these challenges aremore often than not, clashes of competing power-groups than evidence-based. These processes arefar from those which build democracy.

New political forces and strengthened politicalcompetition is necessary to break up this structure.The possibilities for breaking with the past are fargreater at the local level where entry is less costly.Change within localities, can make an importantcontribution to the wider democratization processand this would be supported by open candidatelists and direct elections.

Local lleaders aand rrepresentativesThere is a clear local accountability problem in

BiH. Most local politicians are elected through thelists of the dominant nationalistic parties.Consequently, they owe their allegiance to party

headquarters rather than to their constituencies.Electoral law reform might offer opportunities toother political forces as well. Candidates who runindependently, or are supported by coalition of lesspowerful parties, or issue-motivated NGOs, can bekey drivers for change and the emergence of a moretransparent political competition based on concreteand locally-relevant programmes. These candidatesare generally more inclined to take account of thelocal arena and can provide a higher level of com-munity participation in politics. However, thesealternatives65 have a far harder time succeeding inelections - they have less money and fewer mediacontacts. Political visibility and voter motivation isdifficult. In order to afford better chances to non-affiliated candidates and open up political competi-tion, new instruments of support and campaign reg-ulations should be adopted.

Another condition that impacts negatively onlocal decision making is the absence of municipalassembly members representing geographicwards66. Assembly members reporting to con-stituencies are more likely to communicate withtheir electorates better. This includes channellinginformation to key groups, increasing local commu-nities' understanding of municipal policy choices,and the assembly's understanding of local priori-ties. This is the heart of the community representa-tion function, and a cornerstone of a functioninglocal democracy.

From 2004, mayors in both Entities have beendirectly elected. This development, although it hassome potential to solidify nationalistic identities, isin general to be welcomed. It represents an attemptto reduce the influence of dogmatic political partiesand to curb some the power of local strongmen

64 This statement can be supported by analysis of party candidates for 2004elections. The current mayor of the Centar Sarajevo, Ljubisa Markovic, aSerb, decided not to run. In spite of impressive results, it is unrealistic toexpect that the majority would vote for a candidate of a minority group.

65 It is a promising that 180 independent candidates registered for the localelections this year. Some municipalities, such as Biha}, have more than 5independent candidates.

66 Previously MZ delegates were present at assembly meetings bringing inthe perspective of local communities.

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who accumulated influence during and since thewar.67 Whatever the context, direct mayoral elec-tions increase accountability. However, two impor-tant factors can still limit their power. One is exter-nal: under current conditions decisions made athigher levels of government can strongly limit thescope for local action. The other is internal: theresponsibilities of the mayor and his/ her relationswith the municipal council are often regulated bymunicipal statutes.68 These statutes can create both'strong' and 'weak' mayoral positions. In municipal-ities captured by interest groups, the mayor'spower can be limited in order to maintain the statusof the ruling group. It is legitimate to surmise that inparty strongholds, the 'weak' mayoral position islikely to emerge. It is likely that in such situations, astronger position might only be secured by legallimitation of local statutes.

Local bbureaucracyThe civil service laws in place in both Entities cre-

ate very weak incentives for local governments toapply merit-based human resource managementpractices. Indeed, within particular localities theopposite is often true - political and economicforces create an environment supportive of mal-practice, favouritism, nepotism and outright corrup-tion. As a result civil servants do not necessarilyhave adequate professional or personal qualifica-tions. Moreover, the political environment alsoplaces pressure on local leaders to utilize the nom-inations process and public resources to strength-en political and ethnic alliances. Dependence onparty, nationalist, ethnic and personal links divertsthe attention of those responsible for public servic-es away from performance. The same sorts of bias-es are evident in decision making on the allocation

of subsidies. The result is a very low level of trust inlocal governments and civil servants generally. Tobreak this tradition, oversight and professional edu-cation of local public servants and political reformsshould be evolved in parallel.

CitizensThe average citizen in BiH perceives local govern-

ments as weak and unable to solve their problems.To an extent this is true, but a supply-side markedout by poor performance is only part of the prob-lem. On the demand side, citizens simply do notunderstand the competencies or for that matter, thepotential of municipalities. In turn civic leaders fail tocommunicate effectively with citizens, and this leadsto them being blamed for problems where the solu-tion lies with other levels of government or in theprivate domain. In practice both legitimate and mis-judged claims feed citizen dissatisfaction.

In cases where municipalities are dominated byparticular ethnic groups, the selection of leadersand staff through discriminatory practices alsostoke the frustrations and disaffection of nationalminorities. But equally, majority citizens suffer fromthe same low quality of service delivered by ethno-politicized local governments. Moreover, in manyBiH municipalities, a pervasive perception, real orfalse, of corruption on the part of local officials addsto a general disillusionment.

Whilst the level of public dissatisfaction is palpa-ble, there is a general reluctance to make use of theavailable mechanisms for complaint and represen-tation. Part of the explanation for this is citizens'apathy and a disbelief in the effectiveness of officialchannels of redress. The problem is especially per-tinent in smaller municipalities where the municipaladministration is a major source of employment,

67 Smaller municipalities are most susceptible to the stranglehold of localstrongmen. In Milici municipality, for example, opposition voices wererepressed by all means necessary (RMAP reports on human rights).

68 The RS Local Self-government law provides that a mayor holds executivepower while the municipal council serves as the legislative body. In theFBiH this is left solely to cantonal legislation, and in turn cantons largelydevolve this to municipal statutes. This will have to be amended given

recent amendments to the FBiH Constitution and adoption of the law ondirect election of mayors.



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and is usually closely connected to other public andprivate employers. Since citizens are afraid of beingsingled out as 'troublemakers' they hesitate tomake official complaints. The perceived repercus-sions include forms of victimization ranging fromdiscrimination in employment, to denial of basicservices.

BusinessesThe political behaviour of the business sector is

similar to that of citizens. Unfortunately personalconnections and relations are still often safer andmore effective solutions for achieving commercialgoals than following the rules. The old culture ofmutual favours between businesses and bureau-cracies has built strong local alliances and worksagainst the emergence of a democratic culture oftransparency and inclusion. Moreover, casesreported from the field often indicate that smallbusiness owners are hesitant in representing theiropinions and interests because of the fear of a back-lash from local 'strongmen'. Businesses are in mostcases only contacted by municipal officials for finan-cial contributions, and they are rarely consulted, orinvolved in community affairs. Nevertheless, thereare also some promising cases studies which showthat the setting up of inclusive goal setting process-

es can be an important step in breaking down thealliances between vested interests and thus reduc-ing the room for bias and corruption69.

Mjesne ZZajednice ((MZs)MZs are a form of community governance which

might play a positive future role in building partici-pation and grass-roots local democracy. MZs aresemi-official community associations establishedon a voluntary basis. They are a less formal variantof the French Communes or British Parish Councils.MZs have their roots in the former Yugoslavia andthe majority of municipalities in BiH have decided topreserve these arrangements and use MZs as a toolfor citizens' participation. (See Box 3 on MZs).

Their most important role is in rural areas wherecommunities recognize and respect the MZ modelas a means of solving problems. The MZs generallywork with local government support but they alsofunction where none is available, and tend to devel-op a sense of self-reliance. As MZs have provedthemselves as effective in mobilizing citizens totake part in decision making and joint activities,many commentators believe they might provide asource of democratic pressure for change. Wereturn again to their use in the section on local gov-ernment management in Chapter 5.70

69 Drvar Municipality has engaged a good number of SMEs in drafting eco-nomic development plans.

70 Sevarlije MZ represents Bosniaks in Doboj municipality. The MZ existedprior to 1992. During the war the representatives kept in contact while inexile. After returning to their destroyed village all reconstruction effortswere directed by the MZ.

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NGOsAfter the war many NGOs were established

through donor programmes. Unfortunately mosthave remained weak. The ones that have survivedand prospered are those that are issue-based, likeOstanak (Stay in place)71, or Majke Srebrenice(Mothers of Srebrenica)72. The key attribute whichmakes these groups stand out is their commitmentto their communities and causes. Yet even theseNGOs are at risk. Their dependence on declininginternational donor funds leaves them at the mercyof local governments. Often, municipalities do nothave the funds or the political will to support thevoluntary sector. Clearly, a more balanced 'palette'of NGOs would not only assist local service deliv-

ery, but might also result in balancing problematicpolitical influences. Fair and transparent proceduresfor the allocation of funds along local strategieswould reduce their exploitation by special interests.

The qquality oof llocal ddemocracyCapture of local governments by parties and local

interest groups, distorted accountabilities, profes-sionally weak leaderships and bureaucracies, citizenand business apathy, clearly wont provide the foun-dations for a promising environment for political par-ticipation. The first minimal step towards stakeholderparticipation in community affairs should be securingimprovements in the transparency of the public poli-cymaking and management processes.

71 Ostanak (the remainders) is the biggest NGO in BiH and representsBosnian Serbs who wish to remain in the municipalities from which theywere displaced.

72 Majke Serbrenice is an NGO representing women who lost family mem-bers in the genocide.

Box 33: MMjesne ZZajednice ((MZs)Before the war in Bosnia and Herzegovina, Mjesne Zajednice were a traditional means of community

governance. Established on a territorial basis and focused on local issues, MZs were represented withindecision making processes and crucially helped plan and implement local infrastructure projects (particu-larly local roads and water supplies). MZ representatives served as an intermediary between citizens andmunicipal administrations and were especially important in rural areas, where they represented the maintool for communicating and addressing citizens' needs. They had their heyday in the 1970s, rapidly devel-oping throughout the former Yugoslavia.

During the period after the war MZs were neglected both by local leaders and donor programmes. Mostof the efforts to foster local democracy which were led by the international community, focused on thedevelopment of new non-governmental organizations (NGOs). Two years ago, donors turned their inter-est towards local governance, and MZs presented themselves as a possible mechanism for increasing cit-izen participation. The current legal framework is permissive in both the FBiH and RS, but does not pur-posefully encourage their formation. The new self-local governance laws assign the regulation of MZ activ-ities to local statutes. In post-war BiH, MZs by and large, do not have legal personality and have not main-tained the importance they once had. In addition, a large number of rural areas were abandoned and eco-nomically devastated - this is one of the major reasons for a lack of 'bottom-up' pressure to reinstate theMZ as an mechanism of grass-roots governance.

Nevertheless, a large number of municipalities in BiH have decided to revive and build on the MZ tradi-tion, using them as forums for citizens' participation.



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Yet as long as accountabilities are not directedtowards constituents there is no clear motivationfor local leaders to provide greater transparency,since this would inevitably reveal the biases and theexploitation of public resources for special inter-ests. Equally, citizens too, do not play their part inpromoting open and effective government. Forinstance, in spite of the fact that BiH has a law onaccess to public information, citizens are oftenunaware of its existence, or are hesitant to use it.Yet equally, when individual citizens or groups ofcitizens have asked for public information, officialsoften obstructed their requests.73 There are howev-er, a few cases as well when pro-active citizens havesuccessfully fought for their rights. This underlinesthe importance of a vigorous and motivated civilsociety and local public space.74

Unfortunately the media is not yet an effectiveforce in pushing for democratic minimum stan-dards. It does not play an active role in fact finding,exposing failures, nor in presenting arguments forchange. It cannot currently claim to be an advocate,let alone a watchdog, for democracy. Since the endof the war, a large amount of donor assistance hasbeen allocated to the development of an independ-ent media. These programmes have included bothsupport to organizations as well as the education ofjournalists. At the same time, the strong controlexercised by the political parties over parts of themedia, and its inherent partisanship, has remainedunchallenged. In this context, it is a difficult task todevelop quality, independent print and electronicmedia. In BiH today, there are very few non-alignedand investigative media outlets. The most effectiveare entity-based magazines and newspapers localequivalents simply do not exist.

Although transparency and communication withcitizens are neither part of the traditional culture ofbureaucracies, nor part of the motivations drivingthe major political forces in BiH, it is possible toenvisage how participatory practices might infiltratethe body politic. Existing and upcoming laws giveample room for municipalities to improve participa-tion. Moreover, some positive examples of suc-cessful municipal efforts and involvement havealready emerged. Certain local governments havemade important steps in sharing information withcitizens. Some have established information cen-tres (Prijedor and Bugojno), some publish guidesfor citizens (Sanski Most), and in others citizens areencouraged to attend and given speaking rights atmunicipal assembly meetings (e.g. Trebinje).75

Besides these examples, larger municipal govern-ments are taking positive steps using PR tech-niques to communicate with local populations.76

Still more positive examples of local action areprovided by those municipalities participating in theRights Based Municipal Assessment and PlanningProject (RMAP). This is a joint intervention betweenUN agencies, the Ministry of Human Rights andRefugees and selected local authorities (See Box4). The project's primary objective is to secureadherence to human rights standards and princi-ples throughout governance and administrativepractices. Importantly, the project has designedparticipatory processes that seek to avoid captureof local decision making by a single party and spe-cial interest groups. This includes the setting up ofMunicipal Partnership Groups which act as consul-tative forums between municipal staffs, the generalpopulation, the business community, leading NGOsand vulnerable groups.

73 For example, in Drvar citizens were not given information on the privatiza-tion of shops, or the amount of taxes collected at the municipal level. InDoboj, and Derventa large allocations of privately owned land were madefor housing displaced persons without properly informing citizens.

74 For example, citizens in Kotorsko, where massive land allocations weremade, have petitioned the district court and managed to halt constructionon the disputed land.

75 The Trebinje Citizens Guide explains that the public can be excluded fromthe sessions of the local assembly when important issues are on the agen-da and councillors are obliged to keep the discussions secret.

76 Centar Sarajevo publishes a newsletter for all citizens and a web-site.

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Commentary aandrecommendations

The overall picture of players in the local policyenvironment is not a positive one. As is outlined inthe Introduction, like the national political arena,the local governance system does not adequatelykeep in check tendencies for ethnic domination,and the prioritization of special interests to thedetriment of community goals. Furthermore, theanalysis above has shown that transparency andparticipation are directly opposed by such groupinterests, and that party dominance has a detrimen-tal impact both on the motivation of local leadersand the quality of local bureaucrats. In many locali-ties, stakeholder apathy permits the status quo toreassert itself, whilst the poor performance ofmunicipalities only serves to reinforce civic inactivi-

ty. In addition, there is more than a passing connec-tion between the political environment and the qual-ity of municipal management and service delivery.We return to these issues in the next two chapters.

Experience in BiH municipalities is far from whollynegative however, and our review has presentedsome promising case studies, new initiatives andsome significant opportunities for new political lead-ers. Nevertheless, these positive signs do notchange the fact that the current context and the sys-tem do not produce fair competition and adequateincentives for local leaders. The challenge facing pro-reform, democratic forces in BiH is to break the polit-ical capture of local governments. This is a difficulttask because the incumbents are powerful. Yet thereare several avenues through which participationmight be enhanced and these are addressed below.

Box 44: TThe RRights-BBased MMunicipal AAssessment PProject ((RMAP)RMAP began as a pilot project between UNDP and the UNOHCHR to examine whether basic human

rights were being respected within local governance and administrative practices. Following the initialassessment phase the project moved to support the adoption of rights-based methodologies within localplanning and decision making.

Following a comprehensive rights assessment at local level, RMAP teams are presently assisting withthe production of municipal development plans. Local ownership, capacity building, awareness raising andinclusion of marginalized groups form essential components of their work. A parallel aim is to empowerlocal civil society to critically and independently contribute to the planning process. The current challengeis to institutionalize the approach within local statutes and operational practices. The following prioritieswill be addressed in coming years; Further refinement and improvement in the coverage of rights-based methodologies: Encouragement of linkages to existing planning and budgeting processes in order to avoid duplica-

tion and to facilitate access for the identified priorities to other funding opportunities: Awareness raising and capacity building of national, entity and municipal staffs: Strengthening of citizens and civil society organisations participation: Identification of a legal means of anchoring rights-based processes.



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Building oon rrights-bbased aapproachesMuch has been gained from the RMAP initiative in

promoting participation and developing a rights-based orientation within the participating local gov-ernments. Efforts are now being made to institu-tionalize the approach within local legal frameworksand to secure a range of funding opportunities forrights-based activities.

Another demanding challenge is the dissemina-tion of these methodologies to other municipalitiesand wider local government practices. RMAP hasprovided a useful model, particularly as a means ofcarrying-out a dispassionate assessment of condi-tions and the creation of standing consultative frame-works for constructively dealing with shortcomings.The sharing of these activities might be achievedthrough example and advocacy or ultimately via reg-ulation by higher levels of government.

Access tto IInformationPublic communications strategies are essential.

As the analysis of stakeholders showed, citizens'

apathy and a lack of understanding of local gover-nance are also part of the problem. Citizen informa-tion and education on local governance, on thetasks, duties and services of municipalities couldmake an important contribution enabling stake-holders to make informed choices. In practice mostmunicipalities provide some information about theiractivities through a municipality gazette or via thelocal media. Some also organize public debatesabout important issues. Besides these, certain may-ors hold surgeries, where citizens can meet andpetition them directly.

However, there are also many municipalitieswhere even minimal efforts to provide citizens withuseful information are absent. There are manycases where existing official procedures completelyneglect existing regulations on access to publicinformation. (See Box 5; Access to public informa-tion). These basic requirements need strengthen-ing and enforcing.

Box 55: AAccess tto ppublic iinformation Between 2000 and 2002, BiH enacted comprehensive legal reforms on public access to information at

both the State and Entity levels. Underpinning these laws is the recognition that officially-held information isa public good - and that access promotes transparency, increases accountability and strengthens democrat-ic practices. The law grants individuals the right to freely obtain information, and places an obligation on pub-lic institutions to provide access on request. The law also requires the publication of certain information ona regular basis. The State and Entity Ombudsmen's offices are tasked with monitoring implementation.

Initial assessments of the laws have been very positive. They are in line with European standards, andprovide for clear and well-defined procedures. Nevertheless, some critics have argued that their useful-ness and real impact is questionable - given BiH's weakly developed political culture, the poor quality ofpublic administration and the inadequacies of public law. Indeed, the potential re-interpretation of legalprovisions and the extent of exceptions which might be granted by the courts have attracted particular

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Consultations wwith MMZs aand NNGOsAs a form of community governance with tradi-

tional roots, MZs offer an ideal vehicle for gaining cit-izens' participation. Several localities have moved toexploit this potential, two innovative examples are; In Brcko District, MZs have been registered as

NGOs, giving them legal personality andhence, the ability to implement projects, andown property.

In Novi Grad Sarajevo, formal consultations areundertaken between municipal officials MZson budgetary planning and implementation.

These encouraging pilot arrangements have beenassisted by a fairly permissive legal framework.However, some local experiments have encoun-tered financial and organizational impediments77. Itwould be advantageous if the legal arrangementsfor municipal-MZ relations were formally codified.

Similarly, formal consultation mechanisms withNGOs could offer real pay-offs. Sadly as we havenoted, the NGO sector is heavily dependent ondiminishing international donor funding and citizensoften view NGOs as 'quasi-businesses'. There arehowever, some promising case studies of NGObased consultation and joint working; The NGO Forum in Derventa successfully lob-

bied the municipal administration to adopt a

transparent set of criteria for the allocation offunds to the independent sector.

Novi Grad Sarajevo municipality provides sup-port for NGOs and is keen to coordinate com-mon objectives. They commissioned a localNGO to develop better communication linkswith citizens and to support volunteerism.78

Fair and transparent procedures for allocatingmunicipal grants to NGOs, according to the recipi-ents' contributions to public goals are crucial.These serve to ensure NGOs ongoing involvementin the local public space is maintained, and preventthe exploitation of funds for particular interests.The planning and decision making process wouldbe enhanced by direct consultation with groupsaffected by a particular decision or action. Thismight extend to regulating for consultations withkey groups such as business interests and labourunions.

Promoting vvolunteerism Volunteerism is an expression of commitment on

the part of individuals, and a refection at communi-ty level of social solidarity and reciprocity.Volunteering to serve in local services or the munic-ipal administration offers a means of boosting par-ticipation and stimulating interest in local gover-nance within the wider community. Rooted in trust,

77 For Example, the NGO approach used in Brcko, is not without problems.The law requires that three or more physical or legal persons found anNGO. On the one hand this ensures the involvement of designated citi-zens in the MZ, whereas on the other, it leaves open to question how oth-ers (i.e. non-founders), might be involved.

78 NGOs are obliged to prepare reports on relevant activities for Municipalauthorities. Novi Grad municipality also provides NGOs with lists of citizensto be included within their programmes.

criticism. As with other administrative reforms, the force of freedom of information legislation lies in itseffective implementation.

In addition to supply-side issues there is also a demand-side challenge. Citizens and civil society haveremained generally passive and have as yet, failed to fully exercise the access to information rights theyhave been granted. Two factors may underpin this. Firstly, they have not been adequately informed aboutthese rights, and secondly, they are not confident about the official response to such requests. Both ofthese issues need to be addressed, if the full potential of these kinds of reforms is to be realized.



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voluntary action can connect local governments tocommunity networks and offer a pool of untappedskills. As volunteers are often drawn from key clientgroups, responsiveness and accountability areenhanced.

Active promotion of volunteerism therefore con-tributes to the quality of local services and buildspublic participation. But harnessing this potentialalso requires management and commitment on thepart of municipalities themselves. The most usefuldevice for this is developing a scheme partnershipwith national NGOs or established volunteersorganizations. Within BiH, United NationsVolunteers (UNV) works with selected local govern-ments to support and resource volunteers in a widerange of placements. With a distinct focus on youngadults, UNV BIH also works alongside NGOs to pro-mote broad community development. This involve-ment extends to decision making processes. Anoteworthy activity has been the organization ofevents to mediate between youth branches of thedisparate political parties.

Summary aand cconclusionsIn this closing section, we first provide a summa-

ry of the key points of the chapter, set out thepotential mission of local governments and list therequired reforms.

Key ppoints ffrom tthe ddiscussion The first section made clear that BiH local govern-

ments sit within a massive and often dysfunctionaladministrative system that is highly politicized andweakly coordinated. This leads to the paradoxicalsituation that citizens finance an extremely largeadministration in return for low quality services.Moreover, this complex web of institutions, loaded

with overlapping functions, is non-transparent anddisorientates citizens. For the average voter it isimpossible to understand what can be expectedand from which component of the 'melange' of gov-ernments and institutions. Under such conditions itis near impossible to judge specific professionaland political performances. Nevertheless, the wide-ly shared perception remains that the overall per-formance is very poor. This compounds citizen apa-thy, providing a further obstacle to democratizationof the country.

The system of public administration is clearly inneed of reform. Whilst this statement is accepted inprinciple by all of the societal and political forces,their interests are in conflict. In any reform scenariotwo components must be necessarily included.One is the consolidation of the system by extendingthe regulatory and distributive functions of thestate level, the other is the shift towards a morerules-based system through clear definitions oftasks, rights and allocation rules and transparentand strong enforcement. Unfortunately both ofthese goals are perceived by most of the actors inpower as undesirable. The nationalist parties whichdearly guard all means of control over their respec-tive territorial units feel threatened by suchchanges. In the short term, the party interest will beagainst such changes. Only popular pressure is like-ly to result in change. Without an active civil societyit remains unclear how in-country ownership can bebuilt behind the reforms.

Our analysis of the conditions and performanceof local governments provided a clear operationalrationale for decentralization reform in BiH. At pres-ent the definition of local governments' rights andresponsibilities are so fluid as to allow too wide a

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discretion to higher level governments. This resultsin unpredictability and a loss of accountability. Theenvironment is strongly politicized with administra-tions being captured by political and other interestgroups. As a consequence of this political intrusion,municipal governments cannot be expected tomake rational choices in the interests of the citi-zens. Employment decisions, project selection andfinancial allocations can easily become prey tothese distortions. Local leaderships are effectivelybeholden to ruling political interests rather thantheir constituents. Thus the basic building blocks ofgood governance - fiduciary responsibility, trans-parency, participation, equal treatment of citizens -are often completely neglected.

Reform is needed at all levels of government.Sadly, it seems that the most committed party tothis task is the international community. A recentstudy of governance in BiH arrived at the conclusionthat "the most striking feature of government inBiH is its passivity in the face of a growing social andeconomic crisis".79 Yet international leadership isfundamentally at odds with the sustainability ofreforms.

The iimportance oof llocal governance rreform

Experience from elsewhere in the world, showsthat genuine change in political culture can takeplace at the local level much more rapidly. Thepolitical messages face less inertia as local servicesare visible to each and every citizen, and directlyconnected to the quality of everyday life.Deficiencies are difficult to cover-up with ideologiesand falsehoods. If recent and future changes in therules that govern local elections can liberate localpoliticians from their political ties, their accountabil-

ities can be refocused on constituents and concretelocal issues. Changes in the political arena mightalso give rise to changes in existing political prac-tices, opening-up the possibility of issue-basedcoalitions, and bringing in non-political organiza-tions. Such a process would allow additional spacefor the participation of civil society, since securingpopular support will assume a higher importance.An issue-based political agenda would be funda-mentally more accountable and productive.

International experience also tells us that in addi-tion to accelerated change, local innovation can alsoinitiate wider reform. Our explicit rationale in exam-ining local governance in this year's NHDR is pre-cisely to unleash change capable of infiltrating alllevels of governance in BiH. As is already seen insome parts of the country, committed local leadershave succeeded in building citizen commitment andcustomer-oriented local services. These reformshave frequently transformed the political space,and offer a vision of BiH's potential for developingdomestically-owned and directed governancereform.

Key ppractical rreformsLocal politicians can be important 'agents of

change' but they also need to be supported by aset of systemic changes enacted from above. Thesuccess of local leaders is necessarily dependenton the creation of a permissive framework. Thisrequires the establishment of the key componentsof the decentralization system and our findings canbe condensed into four key goals;

79 ESI (European Stability Initiative); Governance and Democracy in BiH; Post-Industrialist Society and the Authoritarian Temptation, 2004


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One: IImprove ccoordination aand ffiscalequalization

Decentralization reform presupposes a nationalcoordination mechanism that can set standards andrules that unite the administrative space of thecountry. This relates to both strategic coordinationand the intergovernmental fiscal system. Resourcepooling must secure appropriate compensation forthose municipalities with weaker revenue basesand greater needs. Equalization is inseparable fromthe decentralization of revenue sources. BiH shouldstrive over time to establish a state-level systemthat systemically compensates for variations andinequities. However, it is recognized that the admin-istrative and political context of BiH precludes this,but as outlined above, a series of practical innova-tions can be made within the existing framework.

Two: IImprove aaccountabilities aand tthecorrespondence oof ffunctions aandfinances

Decentralization reforms must lead to a morepredictable and stable management environmentfor local governments. This means not merely clear-er definitions of tasks and financial allocation rules,to help local governments plan their activities, butalso a different division of responsibilities that limitsduplication. Responsibility and resources for indi-vidual functions should be grouped at one specificgovernmental level, so that specific administrationscan be held accountable for their given serviceresponsibilities.

Three: SSecure aa pprofessional aand nneu-tral llocal ccivil sservice

The professionalism of civil servants is a neces-sary condition for more effective service delivery.The development of a strong technocracy wouldnot only improve service delivery, but would alsosupport the reform process. It would be the task ofthe national framework to establish civil serviceeducation and training, so that local officials couldgain modern public managements skills in an organ-ized manner. This must necessarily include theestablishment of a strong public service ethic thatemphasises neutrality and respect for basic humanrights.

Four: SStrengthen llocal aaccountability,rights-bbased aapproaches aand ppartici-pation

Last but not least, good local governance needsstrong accountability guarantees. The systemshould produce the very rational incentives thatmake those who govern exclusively accountable totheir local constituencies. These incentives shouldbe embedded in the system of local politics. Thisshould be regulated via; local election rules andregulations; a fair system of campaign support:prior definitions of legislative and executive rela-tions: an institutionalized guarantee of basic rights:freedom of information statues; and effective con-sultation with civil society actors and communitygovernments.

QUALITY AND ACCESS

IN LOCAL PUBLIC SERVICES

CHAPTER FOUR

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Chapter FFour:

Quality aand aaccess iin llocal ppublic sservices

From this point onward the report embarks on ananalysis of the services and activities undertaken bylocal governments. This chapter reviews the publicservices provided by municipalities, whilst the follow-ing chapter focuses on 'enabling' or indirect functions.

Here we are concerned with operational matters,and we investigate in detail those local serviceswhich have the greatest impact on the quality ofpeople's lives, and hence human development out-comes. We cover in turn; education and schooling,primary health care, social services, and lastly, thepublic utilities. The questions raised include; howcan better access and improved quality be secured;and how might services be delivered more efficient-ly? Throughout the analysis the reference pointsare the goals of human development; choice, equi-ty and opportunity. As elsewhere in the report,each section includes positive recommendationsfor change. Given the weak level of decentralizationin BiH, we have drawn our scope of enquiry widely,bringing into consideration all local public services,not merely those where local governments alreadyhave important roles. Indeed, our agenda is in part,to advocate for municipalities to play a defining rolein each of the domains reviewed.

Education aand bbasic sschoolingThere is probably no other area of human life and

activity that connects and influences so many oth-ers as education. It is through education that wecreate and reproduce our culture, values, habits,attitudes, knowledge and skills and pass them onfrom one generation to another. Today educationrepresents one of the most important factors insecuring well being. Often quoted as a 'silver bul-let' for a variety of socio-economic ills, educational

programmes can help address all manner of dispar-ities and inequities. It is also via education that wedirectly shape the conditions of the cultural andeconomic strength of the country. Educational per-formance, unsurprisingly, has a centrality withinhuman development thinking.

International experience shows that educationsystems work best when all government levels makeappropriate contributions. State institutions are inthe best position to broker a country-wide agree-ment on core goals and values to be embedded andpromoted by schools and colleges. State-level regu-lation and support (financial and technical/ profes-sional) create the necessary conditions for universalaccess to quality services and their coordination. Atthe same time, lower level governments are betterplaced to adjust the nature and level of provision tomeet the needs and demands of citizens.

Recent policy pronouncements in BiH signal thatauthorities and stakeholders have now arrived at aconsensus on basic principles. The white paper “AShared Modernization Strategy on Primary andGeneral Secondary Education in Bosnia andHerzegovina,” adopted in 2003, sets this agree-ment out, covering the substantive issues to beaddressed by all actors, extending well beyond syn-chronising state and entity level activities, into therealm of schooling and learning curricula.

Our inquiry will make a complementary contribu-tion to the emerging reform agenda. We will reviewthis strategy from the perspective of local govern-ments and how their greater involvement might fur-ther the process of change. After a short outline ofthe current condition of the education service andthe white paper, we will discuss the potentialmunicipal involvement offers and how this might


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best be implemented. In this chapter, our analysisis concerned with traditional local functions, specif-ically pre-school and primary education80. InChapter Five we refer to vocational training in thecontext of local economic development.

Current cconditionsEducational hheritage aand rrecentchanges

BiH's pre-war educational indicators were aboveaverage for the region, and its education systemwas inclusive and strong. Virtually all children com-pleted eight years of primary schooling, most com-pleted four years of secondary schooling and manywent on to study at university. Whilst primaryschool enrolment has declined in the initial post-war period, it has recovered in recent years and is sat-isfactory at about 94% of the eligible population.81

Yet for a modern European country even this highwatermark is disappointing. Moreover, there is dis-pute about the correct rate of enrolment; significant-ly more pessimistic figures published by the Ministryof Civil Affairs suggest the effective enrolment ratecould be as low as 85%82. Differences between urbanand rural schools and between the access enjoyedby different populations are evident in statisticalreturns83. (See Box 4; Ethnic-based education).

It has been argued by many commentators thatthe quality of education has declined in recentyears.84 A key part of the case made concerns teachertraining; specifically that teachers receive pre-servicetraining which has not been updated in over tenyears. Courses remain theoretical and neglect theprofessional skills that make for a good teacher.Teaching in BiH for the most part focuses on the

transmission of factual information instead of learn-ing outcomes.85 Moreover, many qualified teachershave left the profession, and on average 20% ofthe teaching staff do not hold basic qualifications.

At the same time, the level of in-service trainingsupport is inadequate.86 In the FBiH only one of theten cantons87 makes such provision, and whilst thesituation is slightly better in the RS, where thePedagogical Institute offers mandatory in-serviceprogrammes, coverage is not wholly comprehensive.

Second, in contrast with the tradition of generaleducation in BiH, the pre-primary sector has neverreally been developed. Whilst in other socialistcountries pre-schooling was widely available, in BiHlittle less than 10 % of children were enrolled in asuch institutions before the war.88 Enrolment todayhas dropped to a depressing 4% of those eligible,and this underlines the effective non-availability ofthis service. This has a particular impact on lifechances and capabilities of children within poor andvulnerable families. Studies show that early school-ing both helps socialize children with difficult familycircumstances, and enables their adult carers (prin-cipally parents) to participate in the labour market,so helping secure their families' livelihoods.

Governance aand mmanagementAs elsewhere within BiH public services, manage-

ment of the education sector is asymmetric andsclerotic. Education is regulated by Entity law in theRS and directed by the RS Ministry of Education andCulture, and at the cantonal level in the FBiH. TheFederation Ministry of Education has only a coordi-nating role. Thus in BiH there are 14 responsibleministries, with over forty regulatory statutes, plus

80 Primary schooling in BiH ran from age 6 to 14, reforms then extended thisto 9 years.

81 Variations occur as data on net enrolment rates, which would be a betterindicator, are unavailable. The gross rates may contain large numbers ofrepeaters.

82 Education Development in BiH, National Report, Ministry of Civil Affairs ofBiH, August, 2004

83 Refer to analyis supporting regional HDI calculations in Chapter 2 andAnnex 2.

84 Very few quantity indicators are available and there has not been adequatequality monitoring.

85 Teaching methods, pedagogy, classroom control, didactic education andteaching practice amount to only about 10 % of the pre-service teachertraining, compared to about 50% in EU countries (WB/ CoE report).

86 Excluding programmes offered by different NGOs and the IC.87 Tuzla Canton is the only exception to this.88 In another part of the FYR (Vojvodina) enrolment was approximately 90 %.

77

Chapter Four: Quality and access in local public services

a raft of secondary legal instruments which alsoapply to education institutions.89

Whilst fragmentation has increased, in the indi-vidual units, management practices have notchanged since the socialist times. The RS, the tencantons within FBiH and the District of Brcko, alloperate highly centralized systems within theirrespective boundaries. Each ministry has fullresponsibility for passing legislation, controlling cur-

riculum content and resource allocations. This givesrise to enormous variations in outputs and dramaticinequities in access. Little has genuinely beendecentralized to municipalities. Save for pre-schoolprovision, the RS Entity and FBiH cantons are entire-ly responsible for education policy and delivery.However, some cantons are gradually involvingmunicipalities in the running of ancillary services,albeit often to decrease their own expenditures.

89 In cantons with a Bosniak majority and sizable Croat minorities, there is aparallel Croat structure of institutions further increasing fragmentation andinefficiency.

Box 44: EEthnic bbias iin eeducation Since the collapse of the FYR, education has been used for propagating and sustaining separate ethnic

spaces, including three separate religions, histories, languages and cultures - indeed everything but a toolfor the development of a common BiH identity. In the absence of a state-level curriculum, nationalistgroups and their political factions have invested heavily in creating separate educational canons.

The regulation of education is devolved to the Entity level in the RS and (largely) to the cantons in theFBiH. This division of responsibilities has tended to reinforce the ethno-nationalistic agenda in schooling.Most telling has been the importation of teaching materials from abroad. Croat politicians have argued forbooks and learning kits to be brought in from Croatia, similarly the practice in the RS has been to importfrom Serbia. In some contexts the use of imported educational materials can be a logical choice to keepcosts down, but in BiH the rationale has been entirely different. In this over-politicized environment,imported educational materials serve to further differentiate the already fragmented educational system,strengthening the ethnic divide and discrimination whilst also increasing the cost of the system.

The introduction of a core curriculum in 2004 is an important element in the re-unification of an ethni-cally divided school system. The curriculum aims to counteract discrimination and segregation in schoolsand ensure the mobility of students and teachers throughout the country. It especially seeks to addressthe so called 'national' groups of subjects (history, languages and literature and even geography), whichhave largely been appropriated by nationalist forces in the post-war period.

Clearly, it is not merely the curriculum which can and has been used to promote the exclusive values ofdominant groups. The presence of national and religious symbols in school buildings is still a custom.Extra curricular religious education in most cases is offered only for children of the dominant religiousgroup. Moreover, action to prevent obviously discriminative practices by the International Community andothers has been met with opposing arguments which cite the right to be educated in mother-tongue lan-guages and national cultural norms.

This is a highly problematic issue in latter day BiH. Schooling and wider education has the potential tobe either a brake on reform or a means for its acceleration. Yet regardless of these agendas, the right ofall to a quality education cannot be compromised.


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1996 1997 1998 1999 2000 2001

Institutional sstructureThroughout BiH the average size of schools and

classes are small. Moreover, as Table 4.1 showsschools in the RS are smaller still. It seems absurd

that while schools have serious material90 and finan-cial problems they have very rich teacher-pupilratios. This also attests to a poor rationalized andweakly managed pattern of provision.

90 As a consequence of limited useable space students learn in two or threeshifts in some places.

91 "Public Expenditure and Institutions Review in BiH", The World Bank,Sarajevo, 2002

92 The complex formula reflects standardized inputs and dates to socialisttimes.

93 A primary school teacher in Sarajevo (FBiH, Canton Sarajevo) earns almosttwice as much as a colleague in Srpsko Sarajevo (RS) (300 versus 150Euro/ per month) whilst they might work only one street away.

94 The proportion of the budget spent on wages and salaries varies fromabout 75% in Sarajevo to 93% in Una-Sana. "Education in Bosnia andHerzegovina; Governance, Finance and Administration", CoE/WB report,1999

Table 4.1; School and Pupil Numbers

ResourcingPublic spending on education stands at around

7% of GDP91. This is a relatively high proportioncompared to other transitional or EU countries(illustrated in chart 3.1). However, due to BiH's lowGDP, the cash sum expended is low.

Chart 4.1; Comparative Spending on Education

In addition, the financing mechanisms employedare ineffective and inequitable. Funding is deriva-

tion based and so limited by the local tax take with-in either the respective Entity or canton. This iscompounded by the use of input-based methods(past staffing levels and so forth) for allocatingmonies to individual schools92. The funding arrange-ments have two principle negative effects. First,they serve to 'lock-in' inequities with the poorestregions receiving the lowest schools funding.Second, they produce extremely weak incentivesfor school management and teaching staff to oper-ate either efficiently or effectively93 as the inputs-based systems motivate rational managements toaggrandize their budget and neglect the quality ofoutputs.

The fragmented education system in BiH isexpensive, inefficient in translating inputs into out-puts, and ineffective in delivering quality improve-ments. The high administrative expenses also serveto 'crowd-out' resources94 from teaching activities.

Federataion Pupils (1000s) 252 260 268 277 276 259Schools 898 973 976 1,103 1,029 1,086Pupils per Sch 281 267 275 251 268 238

RS Pupils (1000s) 126 131 128 126 na 124Schools 657 734 737 750 na naPupils per Sch 192 178 174 168 na na

Total Pupils(1000s) 379 390 396 403 na 383Schools 1,555 1,677 1,713 1,763 na naPupils per Sch 244 233 231 229 na na

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Expenditure on salaries and wages takes the domi-nant part of the resources leaving very little formaterial expenses, maintenance and the develop-ment of facilities95. Nevertheless, by regional stan-dards teaching salaries remain low, arrears oftenbuild up, and teachers' working conditions havedeteriorated. This can only lead in the long run, tothe breakdown of the system. Recent industrialunrest, including teaching staff strikes, is an alarm-ing indication of the pressures which exist.

Policies aand ddecisionsThe system faces both old and new poor prac-

tices. On the one hand, in the regulatory and financ-

ing spheres, command economy methods havesurvived. This is apparent from the maintenance ofrigid equalized pay scales and the control exercisedby ministerial bureaucracies. On the other hand, thepost-war fragmentation of BiH plays itself out byembedding resource variations and a variety ofunfairnesses. Practically all strategic decisions onresources are concentrated at the Entity and can-tonal levels and very little room is left for municipal-ities and schools who are in daily contact with par-ents and students.

95 Over 95% of reconstruction and new schools were financed through inter-national donations.

96 Shared Modernization Strategy on Primary and General SecondaryEducation in Bosnia and Herzegovina adopted in 2003.

Table 4.2; Resourcing levels in FBIH Cantons

Canton Total Edn. Expend. Expend. Expend.Expend. per capita as a % of as % of KM mln KM GDP Budget

Sarajevo 107 285 6.0 21West Herzegovina 18 226 7.2 31Herzegovina- Neretva 39 183 5.6 25Central Bosnia 38 165 7.7 28Una-Sava 49 165 11.3 33Tuzla 87 163 9.5 26Posavina 7 155 8.5 22Zenica-Doboj 60 155 9.3 26West Bosnia 11 134 8.2 24Gorazde 3 99 6.5 16

Recent ddevelopmentsIn the complicated constitutional framework of

BiH it is very difficult to advance serious systemicchange. Yet education stands out as an area wherereform, and the desire for reform, is evident;

In November 2002, education was identifiedas a national priority area alongside the econ-omy and the judicial system;

A wide consultation process was initiated toestablish shared principles and goals and tobuild a consensus on reform strategies96;


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State level coordination functions were estab-lished when the Ministry of Civil Affairs wasgiven an oversight role97;

A new state-level framework law98 was adopt-ed for primary and secondary education;

A similar law for pre-school education is alsoin preparation.

The white paper itself gives an excellent summa-ry of the agreements that should be taken-up fol-lowing its adoption; Goals and duties should be based on the

implementation of human rights, and shouldlead to compliance with European education-al standards.

The new system should offer equal opportu-nities to mandatory primary education, basedon principles of decentralization, democrati-zation and de-politicization.

Teaching should focus on learning outcomesrelated to knowledge, competences, andskills as regulated by the core curricula99.Amongst these outcomes, respect for humanrights and social values, critical thinking, com-munication skills and national history areequally pertinent as IT skills, languages, andmathematics.

New methods of objective testing of studentsand external quality control of teaching.

Establishment of a new system of profession-al training for teachers and school manage-ments to support modernization and devel-opment of education.

Finally, with reference to financing, the WhitePaper advocates the rationalization of budget-ary methods (including the introduction ofper student funding and rolling budgeting),

fairer public finance allocations and the dele-gation of financial authority to schools.

The document sets out a framework for a modern,European-style education system, based on a unifiedstructure with a single core curriculum. This will requirethe standardization of awards, joint issuing of certificatesand allowing teachers and students to move freelybetween institutions. A key strategic goal will be theestablishment of new financing methods. A supportingdevelopment is the newly drafted BiH FederationConstitution which, if enacted, will grant responsibilityfor the 'est ablishment and functioning of pre-school andprimary education institutions' to the municipal level100.

Proposals ffor cchange

Connecting aadministrative cchanges ttofinancing rreform

In spite of the fragmentation and inefficienciesthere are some positive developments. The impor-tance of the state-level ministry assuming a coordi-nation role cannot be overemphasized as a firststep to modernization. However, this achievementmust be followed up by real systemic changeswhich reinforce the implementation process,including both new financial mechanisms andincreased accountability. Thus far, few advanceshave been made in these two complementaryareas. Without effective and fair resource allocationrules, accountability will not be improved.

Rationalizing eexpendituresAs a starting point we have to recognize that the

public resources available for education are likely toincrease at a level well-below the growth rate of theoverall economy101. Therefore, minds should befocused on how to manage resources better and

97 The role of the MoCA in the area of education does not extend beyondcoordination and cooperation. This can be instrumental in areas such asdevelopment and adoption of state-level legislation, but the Ministry hasneither the authority nor personnel to deal with other much neededreforms.

98 Framework Law on Primary and Secondary education in Bosnia andHerzegovina, 2003

99 Curriculum regulation means that a common core curriculum is defined foreach subject taught in schools. The share of obligatory elements varies from70 % in so called 'national' subjects to 90 % in 'non-national' subjects.

100 Also in the working version of the FBiH law on local self-governance101 The PRSP strategy goes further and commits BIH to freeze education

expenditure as a % of GDP

81


get more from the same. One obvious answer is toreduce fragmentation and increase school sizes, andso gain economies of scale. However, the currentinput-based financing system produces few realincentives for rationalization. Indeed, the system pro-vides perverse incentives - schools are effectivelyrewarded for the more staff they employ and themore resources they use. A financing scheme thatadjusts allocations according to the teaching servicesprovided and/or the number of students taught inthe school would create a very different set of incen-tives. It would allow and motivate managements tobetter organize their affairs and make cost-savings.The introduction of open-enrolment would also giveincentives for schools to compete for students, thusspurring improvements in teaching quality.

Efficient management would necessitate rational-ization and upfront investment. It must be recog-nized that this would have short-term resource con-sequences, which might also give rise to conflict. Itis likely that the availability of funds would, in addi-tion, mitigate the extent of opposition encountered.Yet within the current system, which barely reim-burses schools for necessary daily expenses, thereis no means of finding resources for investment.Supplementary grants made available to schoolsthat demonstrate a commitment to rationalize,would strongly facilitate the process of reform.

Gaining control of salaries and wages expenditurewill inevitably require that difficult decisions betaken. Yet succeeding here presents managers witha double-edged challenge, since poor teachingsalaries also stand in the way of quality improve-ment. These objectives are not easily reconciled,but there is evidence to suggest that better man-agement may release resources which might be

used to reward, retain and attract staff. Studies ofschools' cost structures show that savings mightbe made from the huge share of the budget devot-ed to part-time teachers102 and the excessive expen-diture on non-teaching staff. Moreover, the sys-tems in place in both the FBiH and the RS, payteachers according to a strict pay scale that takesonly their work experience and work-load into con-sideration. Little discretion is allowed for schools tocreate their own incentives. This effectively func-tions against rationalization of staff, rewarding thebest performers or encouraging new applicants.

Increasing llocal ddiscretion and aaccountability

Within the current system only ministry bureau-crats, who sit far from the field and know little ofactual conditions, are able to exercise real manage-rial authority. Municipalities and school managers,who have intricate knowledge of the context, havelittle decision-making power. The new draft consti-tution of the FBiH is an important step in devolvingpower to local governments but this must beaccompanied by the provision of financial incentivesand the right accountability mechanisms. Morefinancial discretion at the local level and output-based financing schemes would supply betterincentives not merely to managers, but also toencourage policymakers to incur the necessarypolitical costs in affecting full decentralisation.

Unit-based funding is crucial because it wouldenable high-level policy makers to disengage fromthe managerial process, leaving this for operationalmanagers.

In the RS, pre-school and primary education arealready effectively deconcentrated functions. Insome senses this is a more advanced position than

102 WB PEIR, 2001


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that observed in the Federation, but RS schools andlocal governments still lack effective managerialpower. Here the next step must be full administrativedecentralization running in parallel to the financialreforms discussed above. It is logical that a reformedfinancing scheme for schools be coupled with theharmonization of local rights and responsibilities.

Equalization oof rresourcesA related challenge is the introduction of an

equalization scheme tailored to the needs of BiHschools. There are huge differences in the level ofeducation expenditure amongst administrativeunits (Cantons and the RS). These differences workagainst the uniform application of human rights andthe modernization agenda. Equalization is unavoid-able if BiH wants, as is claimed in the EducationReform Strategy, to address equity in the access toeducation. The preferred method would be a fund-ing scheme at state level, but it is recognized thatthe prospects for this are limited. Therefore, in linewith the reform strategy, we recommend a solidari-ty fund be set up for the compensation of extremedisparities. Such a solution is far from perfect andits establishment is also dependent on the contri-bution and allocation formulae being accepted byall financing authorities within BiH. Reaching agree-ment will most likely entail a long struggle, as soli-darity and willingness to redistribute amongstnationalistic governments is minimal. Yet realizing afunctional solidarity fund is still far more achievablein the medium term, than a full equalization system.

Maintenance aand iinvestment in sschool ffacilities

Whilst the strategy given in the White Paperincludes many positive proposals in relation to

strategic issues, it says little about renewing andmaintaining the educational capital stock - other thanidentifying investment as a policy objective. Whatremains in school budgets after wages and salariesare paid, can often cover only minimal supplies andutility costs. As a result capital investment financedfrom domestic sources is virtually non-existent. Over95% of the construction of new schools and renewalof existing provision, in the post-war period has beenfinanced by international donors. To date, donor aidhas contributed to the rehabilitation of over 60% ofBiH's schools. Yet the focus of development assis-tance is increasingly being shifted away from physicalrehabilitation towards institution-building. Few gov-ernmental actors, central, entity or local havestepped in to fill this void. Moreover, the dilapidationof the building stock and equipment is one of the fewabsolutely universal problems facing the BiH educa-tional system. The ongoing deferral of investmentcannot go on for long without serious risks to thealready problematic quality of education, let alonethe danger of structural failure.

In order to facilitate capital investment, someform of intergovernmental support mechanism willhave to be established. These costs cannot beafforded at the local level and it would also beunjust as the severity of the condition of facilitiesvaries greatly. The most favoured system would bea centrally administered capital grants frameworkbut regulated borrowing (as discussed in Chapter3) for institutions in good financial health shouldnot be precluded. Capital investment grants exist incountries with less dilapidated infrastructure andlarger local spending capacities. Such a capital grantregime should be functionally separate from therevenue financing arrangements proposed above.

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Coordinating eeducation aand ddecentral-ization rreform

An overarching issue must also be addressed.Education sector reforms (strengthening of thestate-level and the unification of standards andaccess) have unfolded parallel to the debates ondecentralization. Some stakeholders in the educa-tion sector have argued that the specific decentral-ization of the education service should only takeplace once other education reforms have beencompleted, and the consistency of the system ade-quately secured. They assert that otherwise thelocalization of the service would simply bring moreentropy into the system.

Two important counter-arguments can be made.The first is systemic - education is part of the publicadministration system of BiH. The country has nowan historic opportunity for public administrationreform. Centralizing then decentralizing as separatestages in two consecutive rounds has little chanceof success. The second argument is political.Reforms are costly: intellectual and political effortsand are burdensome both for bureaucracies andpoliticians. After a long reform process of centraliz-ing services and creating a workable system, itwould be practically impossible to build sufficientsupport for a second round of reforms for decen-tralization. Moreover, if a centralized system wereto be created it would inevitably strengthen a State(or worse a new Entity) level power structure thatwould resist further change.

The ccontribution of llocal ggovernments

Whilst the formulation and coordination of educa-tion policy rests at the higher levels of government,

municipalities remain the most appropriate vehiclefor field decision making and delivery. As we haveargued, localities have informational advantagesand are more directly accountable to local citizens.In principle, such an arrangement contributes toservices being adjusted to customer needs and theimprovement of effectiveness, whilst also helpingto secure national goals.

BiH's dense population structure means that theefficient catchment areas of pre-school and primaryeducation are small, operationally favouring thedecentralization of these services. Moreover thesetwo levels of education have the strongest socialwelfare dimension, proving a further rationale forlocating responsibility for them as close to their con-sumers as possible. For larger municipalities withsufficient human, financial and institutional capaci-ties, consideration should also be given to their tak-ing on responsibilities for secondary schools andpotentially, tertiary education institutions.

The priority placed on social inclusion withinnational planning frameworks, notably the PRSP,adds yet a further argument in favour. BiH has setitself a basic goal of including all children in primaryeducation by 2007. Securing access does not nec-essarily secure inclusion. Addressing the needs ofthe vulnerable and excluded requires that thesecommunities actively be sought out. Local govern-ments are best placed to do this - especially giventhe specific conditions of post-war BiH and the var-ied challenges presented by returnees, minoritiesand the poor. The solutions to this require a matrixof social policies be deployed in order to bring allchildren into the school system. Municipalities arethe only agencies within BiH able to orchestrate thenecessary response.


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Access tto bbasic hhealth sservicesAs was argued in the chapter on the state of

human development, at the macro-level there hasbeen little improvement in material health condi-tions during recent years. Life expectancy rates haveremained static and morbidity is growing. Moreover,public opinion polls consistently show that accessto basic health care is a key issue. We can summari-ly conclude therefore that there are serious prob-lems with the supply of healthcare, and the respon-siveness of the responsible agencies. People com-plain about the quality of equipment, the compe-tence of medical staff and basic accessibility. Indeed,a variety of obstacles, geographical and administra-tive, restrict service provision. According to a recentWorld Bank study, only 28% of the rural populationhas access to basic health care.103

It is important however, to retain a sense of per-spective. Huge advances have also been madesince the end of the war, a large proportion ofhealth sector institutions, facilities and equipmenthave been rehabilitated and reform programmesare underway. Notably, important steps have beenmade in rationalizing finance and improving access.Health sector reform is a work in progress, and inmany respects, is ahead of other areas.

Our focus in this section is the contribution of localgovernments to health care and the potential toenhance health outcomes as a key dimension ofhuman development. To understand the role playedby municipalities, we will first give a short review of thestructure and financing of the system and its quality andaccessibility. Second, we discuss the current dutiesassigned to local governments. Finally, we examinewhat local governments can do to improve the situa-tion and positively influence the well-being of citizens.

Overview oof tthe ssystemHealth cconditions

Inevitably, the war had a very negative impact onthe health conditions of the population. The legacyof ill-health, felt both directly and indirectly, contin-ues to shape priorities. Hundreds of thousandswere wounded, and according to estimates, some25,000 people were left with permanent physicaldisabilities. Psychological traumas are difficult toquantify but present an ongoing challenge. Theirlatter day indications within BiH include a high inci-dence of suicide and all manner of addictions,domestic violence and family-stress. In addition,both environmental problems and unhealthylifestyles have contributed to health risks and gen-erally deteriorating conditions.104

The llegal aand aadministrativeframework

Before the war BiH had a centralized health systembased on compulsory insurance and risk sharing at theYugoslavian republic level. After the war the system wassplit in two parts, and within the FBiH, further decentral-ized to cantonal level. Brcko District has also establishedits own health sub-system. Today in BiH the state levelhas no mandate for health policy, heath care provisionor financing and 13 ministries of health make these deci-sions in a geographically small country containing (atmost) four million people. But it is worth noting admin-istrative duplication is strongest in the Federationwhere, in addition to the cantonal authorities, theFederal Ministry also exercises a coordinating role.

Each of the subsystems operates a binary provi-sion and financing structure; care is delivered byhealthcare institutions largely under the control ofthe Ministries whilst financing is carried out by 13

103 A social assessment of BiH WB, 1999 104 LSMS, WB

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parallel Health Insurance Funds (HIFs). The Fundsare nominally independent but are effectivelyorgans of the host jurisdiction and they often haveto be supplemented by cash transfers from therespective Entity or cantonal budget.

System oof sservice ddelivery The system retains an extensive network of

providers resting on two main pillars; communityhealth institutions established for primary care, andvarious types of hospitals and institutes supplyingsecondary and tertiary care. During the war 30% offacilities were destroyed or heavily damaged and anestimated 30% of health professionals were killedor left BiH. Post-war reconstruction rehabilitatedhealth institutions, but of course the unified systemhas subsequently been split into 13 componentparts. This has seriously fragmented service delivery.Entities and individual cantons have become opera-tionally separate, governed by different statues andoverseen by different authorities. Yet in spite of this,little innovation has emerged, and practices and pro-cedures rely on the pre-existing Yugoslavian model.Each authority has effectively established a 'carboncopy' of the former system, and as a result thebureaucratic management practices of the past havecontinued and been duplicated.

The types and roles of service delivery institu-tions have not changed either. In both entities pri-mary care is supplied by community health centres(Domovi Zdravlje - referred to as CHCs) and smalleroutreach health stations (Ambulante - referred to asHSs). CHCs are out-patient clinics providing basiccare and some specialized services. Their role is toprovide first contact care, preventive services anddirect patients to specialists if needed. The CHCs aremainly staffed by general practitioners (GPs) and

nurses, but some specialists are on hand, alongsidedentists, and sometimes, optometrists. The HSbranches are localized out-patient clinics. Secondaryand tertiary care is a more heterogeneous rangingfrom general hospitals to specialized clinics. Privateproviders present the only new component of thesystem. They are largely profit making bodies andreceive very little government support.

Financing oof sservicesPublic expenditure on healthcare amounts to

7.6% of BiH's GDP, while private health sector andout-of-pocket payments make-up an additional4.7%105. In total, expenditure in BiH approximates to12.3 % of GDP, which is very high in relative terms.HIFs are responsible for financing health care serv-ices. They collect revenues from obligatory employ-ees' and employers' contributions and, in theory,from government for the coverage of certain vul-nerable and other groups unable to contribute(those serving in the armed forces and the unem-ployed for example). Contributions are between 15to 18% of salaries in both entities. Yet in spite ofthese high contribution rates, the Funds are finan-cially weak as a result of serious collection prob-lems. Low collection results only partly from citi-zens' inability to pay. The larger problem lies in aninability to enforce collection106 and governmentagencies (notably the armed forces) failing to meettheir contributions.

The 13 HIFs have considerably different revenuebases and financing remains mostly derivationbased.107 This results in the usual resourceinequities and is most acute in the Federation as aresult of the cantonal system. Moves have beenmade to form a Solidarity Fund to compensate forvariations and boost inter-jurisdiction cooperation.108

105 "BiH; Poverty Reduction Strategy Paper", IMF Country Report No. 04/114,April 2004, page 165.

106 Private sector contribution to the HIF is only around 3 %. Health resourceaccounts, BiH. Know How Fund and Health and Life Partnership, 1999

107 Allocations to institutions strongly depend on the amount collected agiven area.

108 This fund is not yet fully operational, as political pressures have continuedto block its progress.


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Cantonal HIFs are required to contribute 8% of theirannual revenues and the Federal Governmentmakes a matching transfer, for reallocation amongstthe weaker Funds. The importance of the establish-ment of this arrangement should be recognized notonly for the functional improvement it has brought,but also because it marks a political milestone in thedevelopment of wider solidarity and risk sharing.

As in the education sector, the financing of insti-tutions themselves is largely based on input basedcriteria109 calculating transfers on the basis of num-ber and qualification of employees, equipment andrunning costs. This system again does not motivatemanagers to make savings or improve services asfunds received are not dependent on efficiency orperformance. Instead, the system supplies incen-tives for the employment of more staff and paddingof budgets.

To mitigate this incentive problem in the RS animportant reform has been initiated in the form of afee-for-service payment system. Yet this interven-tion was poorly crafted without standard cost limitsand almost succeeded in bankrupting the entiresystem. Subsequently, a price list was defined andinstitutions are contracted by the RS HIF on thebasis of this list. The important paradigm-shift isreflected not only in the pricing logic but also in thefact that the rules allow provider to sue the Fund ifnot reimbursed for services provided. The systemhas imperfections and is potentially subject toabuse, yet these teething problems should notdownplay its importance.

As in the education sector, the salaries scales ofthe medical staff working in the public sector areflat. They are driven by formal educational qualifica-tions and practice years, and are unrelated to per-

formance. Salary-for-service payments are usedonly in private facilities. The best rewarded employ-ees are specialists, but even their salaries do notstand out within the generally truncated pay scales.

Citizens' aaccess tto sservicesFormally access is governed by HIF payment sta-

tus; employed and self-employed citizens haveaccess to public health care if their health insurancecontributions are paid. In both Entities the unem-ployed, children and people aged over 65 are enti-tled to free health care. The FBiH regulations speci-fy that all family members of the insured are enti-tled to coverage. The RS also affords free care topregnant women. Emergency services are availablefor all citizens from and in both entities. This is oneof the only secure cross-boundary entitlements, anissue which is returned to below.

The health insurance coverage of the populationvaries significantly across cantons and regions, andthese variations are even more drastic across munic-ipalities.110 It is estimated that about 26 percent ofthe entire population living in BiH (17% in FBiH and35% in RS)111 is not covered by any health insurance.112

The situation is mostly caused by the fact thatemployers, and especially informal sector employ-ers (and employees) fail to contribute to the HIFs.

Yet in spite of this, the law requires that allinsured citizens are entitled to access a BasicBenefit Package (BBP) of services, irrespective ofthe funds available in the HIFs. In RS the BBP wasadopted in 2000, and here politicians faced a diffi-cult trade off - the universally covered servicescomprise a smaller package than that which wasoffered previously but the most that could beafforded. This was the price of extending a moreviable set of services to a greater number of benefi-

109 There is little difference between the formulas used in the Entities; the RSuses a simple input basis, while the FBiH has an input-related historicalformula (a combination of two out-dated approaches from socialist times).

110 For example in Teslic, the estimated number of uninsured individuals is20,000 people. No more than 50% of the population in Milici has healthinsurance, the rest have to pay full fees. Source; RMAP, 2004.

111 Social Insurance Technical Assistance Project (SITAP), Report No. 25672,World Bank, May 12, 2003, p. 11.

112 According to estimates around 20% of the population in BiH is not cov-ered by any health insurance scheme. Health Insurance and ReinsuranceFund FBiH, 2004

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ciaries. Nevertheless, low collection rates (especial-ly compared to entitlements) still leads to implicitrationing that limits access to legally guaranteedservice levels.

For services not covered by the BBP citizensmust pay contributions. There are three types ofout-of-pocket payments; statutory contributionsfor public health services, fees for private servicesand informal 'under-the-table' payments. The FBiHcantons and the RS decide on the level of legal co-payment for services delivered in public healthinstitutions. Prices are dependent on socio-eco-nomic status and available resources. Whenpatients turn to private doctors the fees are clearlymarket-based. In both cases, access to services islimited by the ability to pay. For this reason out-of-pocket payments are criticized, although they are alogical consequence of limited health budgets. Yeta viable BBP, coupled with transparent legally-defined out-of-pocket payments for additional serv-ices (i.e. ending practice of illicit payments), seemsto be an acceptable compromise.

In addition to the financial constraint, accesspresents a major problem. This is largely rooted inadministrative failures. As the network is split intoparts, often the hospitals of other health careproviders are much closer than citizens 'own' hos-pitals.113 In spite of claimed inter-entity and cantonalagreements, entitlements are practically not validoutside the jurisdiction of residence. Often the clos-est institutions are accessible for citizens only on afull payment basis.114 The problematic politicalgeography of BIH also hinders access to basic care.According to estimates only 28% of the rural popu-lation has access to CHCs or their subsidiary healthstations. Accessibility is thus exceptionally difficult

for disabled persons as transport to medical cen-tres is often not available115. If portability of insur-ance could be ensured, travel constraints would beeased considerably.

Although access problems appear severe on firstanalysis, it is apparent that a considerable level of'informal solidarity' takes place. Whilst it is clear thatlarge segments of the population would be excludeddue to non-payment, cases of absolute denial are veryrare. In reality, providers simply do not enforce theentitlement rules strictly116. This allows doctors andinstitutions to admit the non-eligible who are in realneed - a fairly typical occurrence in transitional coun-tries whereby the weaknesses of formal mechanismsallow professionals to mitigate systemic failures.

Major wweaknesses and ccommentary

The fact that the health care system in BiH hasbeen split into many parts should not be an insur-mountable obstacle for effective service delivery.The fragmentation failures are a product of two fac-tors - a lack of political will to cooperate and limitedcapacity to coordinate. Perhaps the most glaringexample of lack of political will is the poor function-ing of the Inter-Entity Health Agreement. Cross-bor-der referrals are a rarity and instead of finding a res-olution, politicians and bureaucrats engage in endlessdebates about compensation mechanisms117. The non-portability of entitlements is also an issue between theFBiH cantonal funds. Uncooperative politics has alsohad an impact on professional practices. Fragmentedtraining, licensing and recruitment practices limit theirability to find the best opportunities for learning andworking. Moreover, weak equalization amongst territo-rial units creates huge differences in salaries.

113 For example the nearest hospital for residents of Sanski Most is Prijedor,only 30 km away, and Banja Luka, about 50 km away, while the CantonalHospital in Bihac is 130 km distance.

114 If patients from Sanski Most (FBiH) wish to receive medical treatment inPrijedor (RS), they are required to pay the full price and wait for reim-bursement from the Federation HIF. Similarly returnees to Sanski Mostwithout FBiH health care entitlements are required to pay for medicalservices from the local CHC..

115 For example transport problems in Ora�je affect the rural elderly popula-tion and disabled people in particular. Few can afford to make the long-distance tris to the nearest medical facilities (RMAP, 2004).

116 Interview with Ms Snjezana Bodnaruk, Assistant Minister of Health (FBiH),October, 2004.

117 Specific HIFs have different price lists and dispute cost estimates. TheFBiH has offered a price list that is roughly 60% of the rates chargedbetween cantonal funds, but the RS fund considers prices too high.


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Turning to the key problem of weak coordination,managing a decentralized system requires very dif-ferent rules and skills than directing a centralizednetwork. Abrupt decentralization in BiH withoutdevelopment and reorganization of the networkshas created incentives for duplication and intro-duced dis-economies of scale.

A very expensive and ineffective system hasdeveloped with problems of equity, access andfinance. Equally, the new solidarity mechanismsonly address part of the problem. Real improve-ments in delivery and assess can only be expectedif risk pooling and regulation is established at thestate level thereby harmonizing entitlements.Efficiency and effectiveness within institutions willonly be secured through well-executed decentral-ization.

The ccurrent rrole of llocal ggovernments

CompetenciesAt present, local governments within both

Entities have established CHCs and their branchclinics - although within the FBiH it is an option,whereas in the RS it is an obligation. Municipalitiesacross BiH are also permitted to set up home careservices, rehabilitation centres and even some spe-cialized hospitals.

In the Federation local governments typicallyelect to establish CHCs including ancillary services,like pharmacies and dentists, but also local spas oreven small hospitals. Where the municipality is the'founder', it owns the buildings and equipment,and appoints the board and the director of the cen-tre in consultation with the cantonal authorities. Aswe will discuss later the CHC receives a revenue

budget allocation from the relevant HIF for opera-tional costs (salaries and expenses).

In the RS the system functions in much the sameway, except that; The Entity level ministry is the relevant over-

seeing authority; The mandatory nature of the function affords

local governments a stronger position, CHCsare autonomous and the ministry has nodirect managerial control. The municipalityalone appoints the governing council, thedirector and staff;

Following a recent innovation, consultativeforums have also been established at thelocal level. Local Health Councils now bringpractitioners and stakeholders together toguide health service decisions.

Financing aarrangementsThe running costs of CHCs (including salaries) are

financed by the respective HIF. Municipalities con-tribute by funding the facility costs and some of theequipment. In addition, a large portion of capitaloutlays are met with capital grants from cantonaland the Federation budgets. The traditional financ-ing method, as noted, is input-based and thereforeneither provides the right managerial incentives,nor reflects service delivery needs.

Reform of the primary care financing arrange-ments is a long term objective and is strongly sup-ported by the international community118.Alternatives include use of population data (i.e. acapitation method), GP lists or health indicators. Ingeneral, reform strategies opt for a capitation fund-ing as it provides the most transparent and rationalsystem. In time these might be developed to aneeds-based allocation formula. It is worth noting

118 This is top of the WHO's agenda, it is being targeted by the World Bank'sBHP (Basic Healthcare Project) and SITAP (Social Insurance TechnicalAssistance Project).

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that the RS has already begun to move in this direc-tion, with the use of a patient numbers based allo-cation system for secondary care. For now, howev-er in both Entities, budget allocations from HIFs toCHCs largely reflect the staffing structures of eachcentre. The commissioning system is also similar.The HIFs effectively sign contracts (a form of block-service level agreement) with local providers on thebasis of the established running-cost allocations.119

This modality has some benefits but is non-trans-parent, and allocations are largely the product of a'bargaining' process.

The lack of clarity and inequity is heightened inthe Federation, as this process is non-uniformacross the ten jurisdictions. Yet as the Federal min-istry has already prepared a list of prices for medicalvisits and specific treatments for the purpose ofinter-entity payments, these could also easily beused for fee based payments. They are already usedfor financing services provided by private providers.The few private sector contracts made by HIFs are asa result, market-based and more rigorous.

Service ddeliveryIn the FBiH 70% of CHCs are operated by munici-

palities. CHCs cover an average population of 30-50thousand whilst HSs are located in smaller districtsof 2-10 thousand people. The CHC employs generalpractitioners, nurses and some specialized doctorsto provide basic services. Some CHCs have alsodeveloped some specialized services. The geograph-ical distribution of the existing institutional network issub-optimal. As municipalities make decisions on theestablishment of CHCs and branches, in theory theycould improve their distribution. However, in prac-tice, the size of the necessary investment wouldmake the restructuring of supply a long process.

Recent ddevelopments rregarding local pprimary ccare

Some recent donor interventions have had signif-icant implications for local service delivery. One isthe World Bank-funded Second Public FinanceStructural Adjustment Credit. This included a condi-tion that Health Fund allocations for primary careshould reach 40% of total health spending, and thishas largely been met.

The World Bank financed Basic HealthProgramme has also brought about support forpositive changes. This programme gives support tothe establishment of an effective family care sys-tem. The service is based on family care teamsdelivering comprehensive services for families - notonly treatment but also education, preventive,detection and rehabilitation services. It is intendedthese family health teams (based in CHCs) shouldserve as 'gatekeepers' to the rest of the system. Inthe new RS Law on Health Care and HealthInsurance, these sorts of reforms are also envis-aged, and in practice such a system is already oper-ational in Banja Luka and Doboj. The Basic HealthProgramme will establish a wider base for suchpractices at other pilot sites throughout BiH. Inaddition, it includes systemic reforms coveringmanagement training, capacity building, accredita-tion, performance standards evaluation and financ-ing schemes. The project's use of a BiH-wideapproach is also supportive of unifying healthcareprovision.

Incentives aand ddecisions aat tthe llocallevel

A key failing of the current system is a lack oflocal ownership and hence local leadership.Healthcare issues are amongst the top priority con-

119 Contracts are made mainly with CHCs but also for some private provision.


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cerns of citizens, yet municipalities simply do notsee health as an important part of their work. Thereare various factors contributing to this. The mostsignificant is the financial constraint - CHCs have tocompete with other and more powerful budgetarypressures. Another factor relates to the fundingsystem - so long as operating support is wireddirectly from HIFs, municipal contributions to capi-tal costs can and will be deferred. Equally, withinthe current arrangements there is very little roomfor local innovation, since these go completelyunrewarded. As we have argued, input-basedfinancing produces only one incentive - generally toaggrandize the budget without necessarily servingmore clients or extending access. Whilst there is anobvious need for institutional reform, this is onlylikely to be secured when municipalities assumecontrol within their own budgets.

The salary structures also feed perverse incen-tives. Instead of sound performance, climbing theofficial ladder is rewarded, and this not necessarilyachieved by being productive. As long as salariesare not objectively based there is little incentive forstaff to work more efficiently. Moreover, whilesalaries remain low and career opportunities arelimited, doctors are motivated to take specialistpositions and leave the primary care sector.

Recommendations ffor cchangeHealthcare reform strategies the world over, pri-

oritize the primary care sector. This is rightly so,since reform in this area has the highest health, andhence human development pay-offs. Modernapproaches also emphasize prevention and detec-tion in a wider sense, sparing the population from

painful and debilitating conditions and relieving themainstream health budget of expensive treatments.

As we have argued, motivated and empoweredlocal government involvement in primary servicescan make a big difference to this agenda. Localauthorities are able to better match services to localneeds, and possess inherent informational advan-tages. These make for more effective and cost effi-cient treatments. Locally-driven systems of care aremore fitted to where populations live. In addition,access, especially for excluded groups, isenhanced. Yet municipal involvement cannot solvethe basic coordination problems ubiquitous in BiH.Issues like standards and financial transfer mecha-nisms are clearly the role of upper level govern-ments. Therefore our first set of recommendationsis directed at higher level authorities; The portability of care requires considerable

improvement. Some movement has alreadytaken place, but more is required. Thisincludes the resolution of the problems asso-ciated with the inter-entity agreement, andmore effective transferability of entitlementswithin the FBiH:

Co-ordination to improve quality is alsorequired; this includes standards of care,training, inspection and certification:

As in other sectors, resource equalizationquestions and inequities must be addressed.The establishment of a solidarity fund in theFBiH shows that reform is possible and thisprocess is underway. We believe thesearrangements should be expanded:

Finally, the allocation system which governsthe sums directed to individual CHC areasshould be reformed to reflect outputs and

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needs. This is probably best achieved by mov-ing first to per capita based financing of healthservices, perhaps with appropriateallowances for specific needs.

We turn now to local delivery. The reformsmapped out in the Basic Healthcare Programmechart a credible way forward, and local administra-tion of the primary care system sits well with this.Thus we argue for more devolution than allowedunder the current de-concentrated arrangements.Municipalities should assume greater responsibility,but they themselves also need to exercise moreownership of the service. It is not clear what under-pins their timidity, but the current financing methodsprobably play a role, and output-based allocationsshould offer some resolution for this. Municipalitiesshould also be encouraged to innovate.

The clearest value that municipal service deliverycan add is that local governments are better atmatching needs and preferences. As restructuringof the delivery network is a challenge that liesahead of BiH, the informational advantage of localgovernments can hardly be underestimated. Itmust be recognized though, that restructuring ofthe institutional network will be costly, and accessto capital, possibly via intergovernmental capitalgrants, will also be required.

The second substantial benefit lies in municipali-ties' ability to more effectively promote access.Whilst insurance entailments grant recipients theright to access health services, this is no guaranteeof take-up. As we have shown, there are largegroups within BiH who simply do not exploit theseentitlements. This is especially true for vulnerablegroups who require a tailored and integrated socialand health service for improving their quality of life.

A customer oriented approach to service delivery, isvital to reducing the 'disconnect' between the vul-nerable and service provision. This is sometimesbest organized on a small scale at community level.

Moreover, municipalities are also in a position tocreate specialized care packages for specific groupsfacing particular health challenges. The social exclu-sion agenda is particularly pertinent here - andoften social and health assistance are best com-bined with educational services to meet the needsof the ultra-poor and excluded minorities. The out-reach capacity of ministries to these groups is mini-mal and higher government levels can only create apermissive framework for such activities. The effec-tiveness of assistance is highly dependent on theawareness and communication skills of local healthand social workers. This in turn, can only be shapedthrough the institutional connections at the level oflocal CHCs and, as we discuss in the following sec-tion, the Centres for Social Work.

Access tto ssocial sservicesBiH undoubtedly has very serious social prob-

lems. Less than a decade has passed since the warand the economy although growing, remains weak.The dramatic initial decline in GDP, due to econom-ic devastation and the slow recovery, has led tosome serious, and often highly localized, problemsof poverty and unemployment. A sizeable minorityof the population and some key minority groupsfeel, and are, deprived and excluded.

At the same time the most authoritative researchrecently conducted on poverty120 suggests that thebiggest problem is not severe poverty, but that alarge proportion of the population subsists justabove the general poverty line and therefore a size-

120 LSMS, conducted in 2001 by Statistical Institutes in BiH, with supportfrom UNDP, WB and DFID


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able proportion of the population is constantly at risk.These people need active policy measures, like betteremployment training and a raft of other labour marketmeasures. Long term prosperity, however, can onlybe based on increased competitiveness and the asso-ciated employment stability and higher wages.

The focus of the next section is social assistance- the direct application of assistance to the poor andneedy and the role to be played by local govern-ments. In the following we first provide a shortoverview of the system of social protection in BiH,we then analyze the current and potential functionof local governments, and conclude with recom-mendations for change.

Social wwelfare ppoliciesAccording to the Living Standard Measurement

Survey (LSMS) published in 2003, which remainsthe reliable analysis of poverty in BiH, a consider-able proportion, 19.5%, of the population findsitself below the poverty line121. According to theUNDP-supported EWS series, close to 30% of thetotal population regard themselves poor andaround 45% see themselves as being below theaverage.122 In addition, official BiH statistics suggestthat the unemployment rate is as high as 40%.These facts have led some experts to argue thattwo-thirds of BiH's population require some form ofsocial protection and that the number is growing.Yet to any informed observer, it is clear that secur-ing social support for two-thirds of the populationby the better-off one third is an impossible mission.This problem has to be framed differently.

Contrary to official figures, research by localauthors and estimates published by internationalorganizations, suggest that the real rate of unem-

ployment123 is probably below 20%, but clearlythere are large regional variations and some seriouspockets of unemployment. Analysts also say thatthe key problem is rather the emergence of a 'newpoverty' than an extreme deprivation of the widerpopulation. As a result of the relatively high level ofentitlements guaranteed under the former SFRY, cit-izens tend to perceive poverty as being more dramat-ic than it actually is. From this we can restate theproblem - as the UNDP's MDG Update Report puts it;

"The point is not that poverty does notexist, but rather the situation is more com-plex and nuanced than is often suggested.BiH faces less a severe deprivation of thefew and more a vulnerability of the many".124

Mitigating the risks of those at the margin offalling into poverty necessitates a complex set ofdevelopmental policies. The Poverty ReductionStrategy Programme (PRSP)125, agreed in mid-2004sets out to achieve this by creating the conditions forsustainable and balanced economic developmentand accelerated EU integration. These policies have awide application, social protection policies in con-trast, must focus on the neediest. Direct cash bene-fits and access to social services should be targetedat the socially excluded and the most vulnerable.

Without such targeting social assistance loses itseffectiveness. Yet in BiH the old welfare system,with its wide entitlements offered to a large part ofsociety, survives intact. Veterans’ benefits for exam-ple are given independently of social need and takehuge amounts of the available resources126.Additionally, a weak definition of rules permits 'dou-ble dipping' (drawing a double benefit) and pro-vides scope for abuse. The shrewd, the savvy andoften the least disadvantaged, can easily crowd-out

121 LSMS, conducted in 2001 by Statistical Institutes in BiH, with supportfrom UNDP, WB and DFID

122 EWS, 2003123 As in the rate conforming to ILO definitions.

124 MDG Update Report, UNDP, 2004125 The PRSP seeks to; raise employment levels by strengthening the private

sector, establish a sustainable social security system, and secure EUmembership.

126 In FBiH the budget spent on veterans is 13 times larger than the SWCPexpenditure; in the RS it is twice as big. PEIR, WB, 2002, p. 78.

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the weakest. Moreover, the fragmented financingsystem, again derivation based, allocates money inan inverse proportion to need.

Decision makers must face the problem of adjust-ing objectives to potentially available resources sothat the impacts can become effective. There arethree key challenges for social protection; a redefi-nition of the beneficiaries, revision of entitlements,and the pooling of resources to larger areas - possi-bly the entire country.

Overview oof tthe ssystem

Legal aand aadministrative fframeworkThere is no unified system of social welfare and

child protection (later SWCP) in BiH. Social assis-tance and care is the responsibility of Entities, yetthe relevant ministries in both have very extensiveportfolios127 which dilute their capacity and create aseries of perverse incentives.

The Federation's cantonal structure complicatesmatters by sharing responsibilities three ways. Thefederal level sets the legislative framework, whilstimplementation and financing remains largely withthe Cantons128, but most cantonal authorities opt todevolve delivery to the local level.129 In practice, allmunicipalities supply both general social and childprotection services through their CHCs or localCentres for Social Welfare130 (CSWs). Financing of

child protection is a local duty everywhere, whilstother social services are financed by Cantons usinga variety of mechanisms. In the RS, SWCP is sharedbetween Entity and local governments. For bothchild and social protection, the Entity government isresponsible for policy while financing and imple-mentation are decentralized. However, child sup-port is financed from a separate free-standing fund.

Neither of the arrangements adopted at entity-level functions effectively, and a confused set ofmandates and misdirection of resources is appar-ent. It is instructive to note the comments of theWorld Bank on the system; "In general, the presentSWCP structure, whereby policies are set at a gov-ernment level that is different from the level whichfinances and implements them, combined withpoor co-ordination amongst governments, hasresulted in the creation of significant un-fundedmandates for many local authorities."131

BeneficiariesBeneficiaries are generally classified into two

basic age groups (minors and adults) although with-in this there are further subgroups. The total num-ber of social protection beneficiaries in for BIH over-all was just over 240,000 people in 2002. The tablebelow provides a summary disaggregated by Entityand age. It is worth noting that these figures include23,252 refugees and disabled persons, who repre-sent the neediest sub-groups.

127 In the FBiH social/ child protection and the benefits of civil war victims arethe responsibility of the Ministry of Social Affairs, Displaced Persons andRefugees yet there is also an Office of Social and Child Protection at Entitylevel. In the RS, the Ministry of Health and Social Protection is responsiblefor social protection and child care, and the Ministry of Veterans, WarCasualties and Labour is responsible for the civil victims of war.

128 There are Cantons that have not adopted the necessary legislation pro-posed by the Entity Law.

129 Law on Social Welfare Protection of Civilian War Victims and Families withChildren, Official Gazette of FBiH No. 36, (1999)

130 Different terms are used in different municipalities. Not all municipalitieshave CSWs (RMAP 2004).

131 Public Expenditure and Institutional review, WB, 2002 p.80


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Table 4.3; Social Protection BeneficiariesRecipients Children Child/ Entity % Adults Child/ Entity % Total

Adult % Adult %

Federation of BiH 12,794 13% 68% 84,157 87% 38% 96,961

Republika Srpska 5,990 4% 32% 138,266 96% 62% 144,256

Total BiH 18,784 8% 100% 222,423 92% 100% 241,217

132 Figures should be treated with caution due to double counting andreporting weaknesses. PEIR, WB, 2002

133 The list is not exhaustive only indicative of the wide range of activities.

134 PEIR, WB, 2002, p.83135 Ibid p.85136 Ibid pp.81-84

Social assistance recipients make up roughly 2%of the total population, but as the Table makesclear, the adult incidence rate is far higher in the RS.In addition, beneficiaries are highly geographicallyclustered with a small number of municipalitiesaccounting for 20% of the total. Given that cashresources are largely constrained by the derivationbasis of financing, services and cash benefits areinevitably rationed. The number of potential benefi-ciaries and the value of claims132 are much higherthan the number which can be covered. As theframework laws do not define the criteria forrationing, ample room exists for misdirection andabuse.

System oof sservice ddelivery There are two pillars of the delivery system - the

CSWs, whose support activities include both theprovision of cash benefits and social services, anddifferent forms of institutionalized care.

CSWs are responsible for implementing thesocial and child protection programmes and providevarious services under one roof. These include; theprovision of permanent and temporary cash bene-fits for rehabilitation: counselling and temporaryassistance to families under stress: provision of var-ious retraining programmes for adults: and even,summer vacations for children.133 The CSWs arethemselves responsible for identifying beneficiar-

ies, and services are largely provided free at thepoint of use.

In addition to the CSWs, BiH has a complex patch-work of social care facilities. Various levels of gov-ernment have continued to maintain these pre-warinstitutions and donor programmes have filled anumber of gaps. Estimating the total supply of insti-tutional care, resources or their efficiency is practi-cally impossible due to the various uncoordinatedchannels and the lack of data.

Financing oof sservicesSpending on social services is low - in 2000 it was

0.3% percent of GDP, and roughly 0.6% of publicspending134. Again, the sources and application offunds is derivation based. This along with variousregulations within administrative units, results inhuge disparities in per capita spending and consid-erable variations of effective coverage. While theexpenditure of cantons on social welfare variesbetween 0.2 and 1.2 % of total expenditure (1999),in the RS it accounted for 1.7% of the consolidatedbudget and 5.1 % of municipal spending in thesame year135. There are also weaknesses in the localuse of resources. The share of administrative costswithin the total spending of CSWs is very high;according to 1999 figures in FBiH it varies between37 and 87 % and in the RS between 37 and 90%136.

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Major wweaknesses aand ccommentaryThe fragmented social welfare system limits the

county's capacity to restore the social safety net, todevelop an integrated social policy, and to set up anequitable allocation mechanism for social benefits.The current regulations establish entitlements that aredisproportionate to financing capacities. In addition,the system whereby one government level makes pol-icy, whilst another level provides the finances, leads toirresponsible decisions. Invariably, political leader-ships are unwilling to incur the political cost to cut enti-tlements which result in implicit rationing and often,the crowding-out of the most vulnerable. The thorni-est issue remains the remuneration of veterans.

The lack of reliable data also limits policy devel-opment. A redefinition of entitlements and restruc-turing schemes to match financing, would be nearimpossible without consolidated and reliable esti-mates of real need. Neither the CSWs nor otherinstitutions undertake systematic collection ofinformation on potential beneficiaries, and both lackbasic information technology137. Entitlements arenot only impossibly wide but also vaguely defined.The absence of clear criteria for the selection ofbeneficiaries138 can easily be exploited for subjectivedecision making. Some municipalities have exhibit-ed a tendency to direct money according to politicalbenefits or with an ethnic bias.139

ConclusionsThe resolution of the key problems in this area is

well beyond the scope of our enquiries and cannotbe achieved solely through improved decentraliza-tion. Nevertheless, our concern is with the contri-bution that local governments can make, andbelow, we review what can be done within the cur-

rent system and present some ideas about thewider range of potential contributions and the con-ditions necessary to support them.

Local sservice ddeliveryCSWs are the basic institutions undertaking social

services provision in BiH. Those in the RS are inlarge part financed from municipal budgets, along-side minimal donations by domestic donors or for-eign charity organizations. In most of the FBiHCantons, the running costs and salaries of CSWs'employees are mainly covered by the municipalbudgets, whilst social assistance disbursementsare provided from cantonal budgets140. Apart fromaid distribution, the employees of CSWs providepractical and psychological help such as supportivecounselling and home visits. However, the CSWsusually lack professional staff, such as social work-ers and psychologists, skilled in dealing with theproblems that arise. As a result, most service deliv-ery is effectively bought in.

Besides the CSWs there are other types of institu-tions involved in the delivery of social services.People with serious trauma-related problems andmental disorders who need specialized treatment aredirected to the Community Mental Health Centres(CMHC). These aim to provide clinical services forthe mentally-ill, and psychosocial rehabilitation.CMHCs are usually staffed by a psychiatrist, a psy-chologist and social workers. Sadly, there is evidenceof CMHCs refusing to accept clients referred by par-ticular CSWs, because of past unpaid debts.According to data from 2002, there are also 11 cen-tres for the daily care of mentally retarded persons inthe FBiH and 25 other social protection institutions.

In the RS, besides the CSWs, there are 10 institu-tions that provide care for elderly and for children.

137 RMAP 2004; examples could be found within all municipalities reported.138 RMAP research cites many such cases e.g. the CSW Odzak has no criteria

for the selection of beneficiaries. 139 RMAP 2004, see Derventa Report

140 Bugojno municipality allocates resources for the local CSW's runningcosts and some limited resources for vulnerable groups, including med-ication. All other costs are covered from cantonal funds (RMAP, 2004).


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Roughly 1,600 persons live in these institutions141.However, CSWs often cannot afford to pay forplaces in these homes and lack the ability to treatthose needing care themselves. In areas where thisis the case, people are left to be looked after bytheir families or to fend for themselves142.

In addition to these public institutions there aremany NGOs, domestic and foreign, engaged in pro-viding social services for vulnerable groups. Theyare considered to be valuable partners especiallywhere CSWs are unable meet local needs143. TheRed Cross, for example, distributes aid and pro-vides homecare to returnees and others144.

Demand aand ssupply oof aassistance at tthe llocal llevel

As municipal institutions disburse social assis-tance, citizens perceive that municipalities areresponsible for social protection. However, in reali-ty, the Entity in the RS and the Cantons in the FBiHdetermine policy. The RS Law on Social Welfare reg-ulates the standards of service and the level of dis-bursements, whilst municipalities are obliged toprovide the funds for covering entitlements. Yetmunicipalities often do not have sufficient resourcesto meet the benefits of eligible persons on a regularbasis. In the FBiH, various cantonal laws regulateforms of assistance. Under-funding and resourcerationing is commonplace in both jurisdictions.

Moreover, there seems little political or institu-tional willingness to pool the resources available forsocial protection or to create any kind of equaliza-tion mechanism. The situation is exacerbated by theclustering of exceptional needs in areas where rev-enues are the weakest. This creates huge differ-ences in allocations and service provision. Moredetailed statements about the consequences are

difficult to support with data for various reasons.But it is clear that some social benefits and servicesprescribed by the Entity laws are simply not provid-ed in a number of localities.

Two conclusions can however be drawn withoutany risk. Firstly, that the social care offered by munic-ipalities generally does not meet the population'sneeds, neither in terms of quantity nor quality.Secondly, that local governments are restricted intheir competence and financial capacities - thus, theyare not currently able to offer any real added-value.

Recommendations ffor cchangeLocal governments play an important function in

social services delivery in many other countries andthere are good reasons for BiH to adhere to a simi-lar model. It is abundantly clear, however, that thecurrent system which includes a high level of func-tional decentralization is dysfunctional. This ischiefly because the system pushes almost thewhole burden of implementing and funding socialassistance onto local governments without sup-port. This is at odds with both the correspondenceand the subsidiarity principles.

Cash benefits should clearly be regulated andfinanced at the state level and social services budg-ets should be strongly equalized. Only under suchconditions can local governments play a more con-structive role in social services, as the main provideror commissioning agent of care. Models of deliveryvary - under a minimalist approach, local govern-ments could be assigned extended agency func-tions, under which they could act as an interlocutorbetween higher level governments and citizens.They could also be charged with monitoring andcollecting data on social status and needs.

141 Federal Ministry of Work and Social Welfare, Ministry of Health and SocialPolicies of the RS

142 Due to the large debts that the Prijedor CSW accumulated individuals whohad been hospitalized in various institutions throughout BiH are nowbeing sent back to the municipality (RMAP, 2004)

143 Owing to a lack of resources, Una-Sana Canton did not set aside anymoney for the CSW in Sanski Most for 5 years. The Centre was able to

begin distributing funds in 2003. In Trebinje, the municipal budget coversonly 60% of the needs of social welfare sector (RMAP reports, 2004).

144 In Milici Municipality cooperation takes place with the local branch of theRed Cross, the "Zora" Women's Association, and the "Zivot je lijep"youth organization.

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With a more developed role, localities couldeffectively share information about opportunitieswith citizens and seek to reach out to the most iso-lated members of society enabling access andsocial re-integration. Under this more courageousmodel a larger degree of discretion could bedevolved to local governments (within a margindetermined by law) to adjust benefits and services.Obviously such discretion can only work if coupledwith locally- disbursed finance. The current range oflocal services provision is clearly a de-concentratedagency function (and not a decentralized service),but the system is still far from the minimalistapproach mentioned above. Many CSWs are forcedto fight for their daily survival.

Few Centres even have the capacity to dissemi-nate relevant information to potential beneficiar-ies145. This is an important systems failure, sinceordinary people are not aware of their rights and arenot familiar with the eligibility criteria for socialassistance. As a consequence, there is a large por-tion of the vulnerable who are left outside the localsocial support network146. Particular additionalefforts must be made in order to reach rural popu-lations that live in distant areas. In the case ofgroups where information alone is not enough,active social work is needed to enable them to usethe available opportunities.

The network would work better if it werefinanced differently. If per capita allocations couldbe determined for certain types of beneficiaries,these allocations could be drawn from centralizedbudgets by the institution treating clients. If moneyfollowed the client, beneficiaries would be lessdependent on local financing capacities and lessoften excluded from care. Such arrangements

would also supply incentives for institutions to per-form better and be more customer-oriented.

An integrated database on actual and potentialbeneficiaries would be needed regardless of theparticular delivery model adopted. A reliable andregularly updated database is necessary both forscaling national policies and for adequate imple-mentation at local level.

Clearly, there is ample room for improvementseven within the current de-concentrated system. Atthe same time, it is also apparent that local govern-ments could usefully do a lot more within a decen-tralized framework, if some policy making role werealso devolved to them. They could define the ade-quate 'mix' of client services and share ofresources. They are also in better position to estab-lish and run 'third-way' services that could keep oldand disabled people in their own homes, instead ofinstitutions, through the better coordination of thework of NGOs, volunteers and private providers. Asnoted previously, if freedom of manoeuvre is givento them, municipalities are best-placed to build pur-poseful linkages between social care, health, edu-cation and other local services.

Public uutilities The management and delivery of local utility serv-

ices (water supply, waste disposal, heating andenergy) is one of the key functions in which localgovernments in BiH already play a very substantialrole. This is in contrast to their limited competenciesin other areas. In spite of their rather prosaic nature,these services are vital for well-being and humandevelopment. Gaps and weaknesses in supplyundermine living conditions, public health, environ-mental protection, and seriously impede local eco-

145 For example, in spite of legal commitments to the visually impaired, andabsence of clients, Od�ak CSW has no plans to inform citizens about thisentitlement (RMAP reports, 2004)

146 The vast majority of returnees who live in the rural areas of Milici munici-pality do not register with the local CSW (RMAP reports, 2004).


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nomic development. Without sound utility servicesneither environmental nor social sustainability canbe secured.

The war caused overwhelming devastation toBiH's physical infrastructure. In the post-war periodmost of the essential services have been restoredwith the support of the international community147.Nevertheless, a tremendous need remains formaintenance and the provision of new infrastruc-ture. It is estimated that over 50 % of BiH citizensare deprived of the right to access a safe and securewater supply, sanitation and solid waste disposal.This is far from a phenomenon of remotenessalone; the infrastructure in some major urban areasremains underdeveloped. There is huge need forinvestment, and the financing gap was estimated,by a World Bank team in 2003 to be around US$ 1.2billion.148

Locally run utilities also suffer from poor manage-ment. Pricing schemes and collection practices areoutdated, and thus collection rates are very lowwhile company management and working culturehas not changed since socialist times. Nor are sec-tor strategies or urban development plans in placewhich might be used to guide service renewal.

Improved provision can play a key role in improv-ing the living standards and promoting economicgrowth. In contrast with other sectors, these chal-lenges can be addressed now by municipalitieswithin their existing competences. As in previoussections, we begin with a short overview of the gen-eral conditions of service delivery. Then we analyzesolutions before making final conclusions and rec-ommendations.

General ccontext aand condition oof sservices

Legal fframework and llocal ccompetencies

The legal and administrative framework govern-ing utility services in BiH is as complex as the regu-lation of the social functions we have alreadyreviewed. Territorial planning of utilities, and theirfinancing and organization are undertaken at entityand cantonal level creating, again, 12 different deliv-ery regimes. Whilst the relevant body of law is vast,there are also important gaps in the current regula-tions especially those covering basic quality andsafety standards.

In both Entities local governments are responsi-ble for water supply and sanitation149, solid wastemanagement and district heating.150 In principle151

municipalities own the assets, determine servicedevelopment priorities and have the right to setcharges. In addition, they are allowed to contract-out the services, and in some cases to award con-cessions. Yet full privatization requires the approvalof higher level governments.152

Environmental sstandards There is currently a lack of state level authority

for the protection of natural resources and the environ-ment. An Inter-Entity Environmental SteeringCommittee was established in 1998, but its mandate isrestricted to the coordination of policy and harmoniza-tion of environment laws. The presence of multipleministries at various levels still results in a fragmentedsystem and often conflicting rules. In addition, all levelsof government suffer from a lack of adequate institu-tional infrastructure (monitoring and regulatory agen-cies, research and planning institutes, and so forth).

147 Projects financed by WB; Mostar water supply and sanitation project; BHSanitation and solid waste urgent works project. Other relevant donorsare providing technical assistance projects.

148 Infrastructure and Energy Business Plan, World Bank, 2003149 The only exception is the City of Sarajevo where the Canton is responsible

for these services.

150 By communal services we mean public hygiene and cleanliness, publiclightening, etc.

151 In both the RS and FBiH duties are not clearly defined and therefore allowfor different interpretations.

152 For utility asset privatization, local authorities need to seek approval fromthe relevant Privatization Agency. Local authorities can award concessionsfor solid waste, but not for water sector related services.

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Management ppracticesServices are mostly delivered by public enterpris-

es, which are owned by municipalities153. Enter-prises operate as autonomous entities having inde-pendent management teams, but their revenuecapacity is dependent on municipal decisions ontariffs and subsidies. Private partners have beeninvolved in utility companies, but they do not holdcontrolling interests. There is also some, althoughlimited, involvement by the private sector, largelyas subcontractors. Typically, local authorities lackresources, knowledge and competences to prepareand implement effective Urban Development Plans,which is a precondition for improved utility servicecoverage and quality enhancement. In the absenceof such strategies, ad hoc measures define thecourse of infrastructure decisions, resulting in lowinvestment efficiency and limited effectiveness.

There is little transparency or predictability inmunicipal-company relations. Pricing formulas arepractically not used; both rate setting and subsidydecisions are made in most cases by highly subjec-tive decisions. Utilities are still often treated moreas social services than financially self-sustainablepublic enterprises, and municipalities try to avoidprice increases. As a result most utility companiesare perpetually in deficit. The financial difficultiesare also a result of low collection rates (between40% and 60%154) and huge arrears. There are fewincentives to pay amongst private users, but thelargest defaulters often are other public institutionsand companies. There are no adequate legal mech-anisms in place against defaulters and many con-sumers rationally chose to 'free-ride'. If subsidiesdo not cover outlays, utility companies often bal-ance the losses by withholding payments due to

private or governmental creditors.155 These prac-tices result in a complex web of debts, which worksto further thwart efforts to resolve them.

Access aand qquality oof sservicesLack of investment resources, absence of strate-

gy and outdated company management practicesserve to worsen the infrastructure failures inheritedfrom the war. In spite of rehabilitation efforts, thecurrent condition of urban infrastructure is general-ly poor. There is no reliable data regarding servicecoverage. However, it is estimated that only 53% ofthe total population has access to the mains publicwater supply and only 45 % have continuous serv-ice. Water rationing is common, especially in sum-mer. About 40% of the population is connected tosewerage system, but only 10% of the collectedwaste water is treated.156 The situation is worse inthe solid waste management sector, where, accord-ing to estimates, less than 40% of the population iscovered by organized collection and only five land-fill sites are properly engineered. In addition to gen-erally low standards, there are also huge differ-ences between regions, and in some municipalities,there are serious supply failures157. Rural-urban dis-parities are particularly evident. Access to the pub-lic water supply in rural areas is as low as 32%,whilst access to the public sewerage system runs at24.5%158 of households. Rural and remote areas ofthe country rarely have access to public waste col-lection services, and where the service is available,it is of extremely low quality.

There are also serious problems with servicequality. The piped network is in a terrible conditionand 50-80% of pipes need replacement159 and evenmore need rehabilitation. The gaps in waste waterservices and unprotected dumping sites result in

153 There are various groupings of services in companies. In larger placesoften water and waste water services are provided by one company, heat-ing services by another, while solid waste management and other commu-nal services are supplied by a third company. In smaller municipalities oneor two public enterprises handle all three.

154 Project Appraisal Document for an Urban Infrastructure and ServiceDelivery Project, WB, 2004

155 Ibid

156 Study on water supply provision within FBIH Sarajevo, BIH157 At the extremes there are municipalities like Zivinice, Tuzla Canton FBiH,

with about 51.6 thousands inhabitants out of which only 4 thousands(9.5%) have access sewerage system

158 Living Standard Measurement Survey in BH (LSMS), 2003159 Water sector institutional strengthening project in RS and FBH, Phare

1999


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permanent environmental damage. The lack of pro-tection of water sources compromises water quali-ty, whilst water loss is a big problem across the net-work, and amounts to 50 to 70% of the waterretrieved at source. A large part of the losses stemfrom leakages, but in addition a large portion of ille-gal consumption is taking place which remainsunrecorded.160 These conditions are not supportiveof environmental sustainability, and more signifi-cantly, present serious health risks.

Unsurprisingly, citizens perceive that utility serv-ices have deteriorated since the war. Opinion sur-veys overwhelming register their dissatisfaction;36.1% consider water supply and sewage systemsto be of very low quality.161

Commentary aand recommendations bby ssub-ssector

Water aand wwastewater ssub-ssectorDrinking water supply services cover only 56% of

FBiH and 48% of RS inhabitants, compared withover 90% in Europe. Households consume 75% ofthe water produced. As most laboratories weredevastated during the conflict, water quality andquality control varies enormously between settle-ments. Water supply is also very costly in manyparts of BiH. A major reason is the topography: in alarge number of localities water needs to be pipeduphill to reservoirs before it is distributed. Theother is a maladapted system, which is a legacy ofsocialist planning practices. The third and mostimportant reason is the devastation visited on thenetwork during the conflict. Inefficient companymanagement is the final ingredient.

Sewage service provision covers only about 40%of the population and this proportion has fallen

from about 70% during the pre-war period. Only70% of households in urban areas and larger settle-ments are connected, whilst in smaller settlementsthis percentage does not exceed 10%. Due to thelack of wastewater treatment plants162, 90% of thewastewater is released into the watercourses caus-ing serious contamination of both natural waters andsoil. Such a dismal condition of water servicesimposes a serious threat to public health conditions. 163

Improving access and the quality of water servicesmust be an absolute priority in the future in BiH.

Limited financial resources mean that municipali-ties are forced to trade-off priorities against oneanother. In most cases they decide in favour ofrehabilitation of the existing network and pushservice expansion aside. Through this strategysome municipalities have been able to invest andplan steady maintenance, but others have had tolimit their activities to emergency interventions, likethe repair of major leakages. Municipalities alonewill not be capable of meeting the dual challengesof improving both quality and access.

Utility ccompany-cconsumer rrelationsAs political and not commercial considerations

drive decisions on charges, operating costs andinvestment needs are rarely covered by revenues164.Commercial considerations do not often figure andpolitical pressures ensure that local providers aresupported with non-transparent general subsidiesto meet social objectives165.

Non-rational rate setting processes are a majorsource of company deficits but low collection rates,at between 40 and 70%, are as significant.Municipalities frequently make ad hoc transfers toutility companies to cover for losses incurred, butthis is dependent on the resources available in the

160 For example Sarajevo Canton Water Utility produces 85 million m3 ofwater on a yearly basis, while it registers only 32 million m3 of actualconsumption, implying water loss equivalent to 63%. It is clear that notonly leakage, but illegal water consumption, also contributes to thereported loss.

161 BiH Local level Institutions and Social Capital Study , June 2002, WorldBank, ECSSD, p. 33 - Table2

162 Only seven cities in Bosnia and Herzegovina had treatment systems

before the war. Yet two, Sarajevo and Trnovo are still not functioning dueto war damage. But a treatment plant has been constructed in Srebrenik.

163 Poor water quality resulted in hepatitis outbreak in the Bihac in 2002.164 Cost is estimated on historic basis, aiming to cover energy consumption,

administration, costs of working capital, emergency maintenance butexcluding depreciation costs.

165 The household water tariff in Sarajevo is 0.7 KM/m , in Banja Luka 0.25KM/m3, and in Lukavac 1.11KM/m3.

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municipal budget. Subsidy setting is therefore utter-ly non-transparent. Levels of support have no objec-tive basis and are a product of a bargaining processbetween the municipality and the company. It isoften the case that the effective municipal subsidiesrange between 10% and 20% of utility companies'total reported losses.166 These figures reveal theextent of the bargaining game whereby both partiesconnive to withhold information from each other.167

It is no wonder that the system does not producedata for analysis, let alone policy or managerialreform.

Consumer-company relationships are as irrationalas company-municipality relationships. For themost part, flat average charge rates are used.Where consumer metering does exist it often doesnot measure individual consumption, but theaggregate consumption of blocks of apartments.Neither of the two methods promotes accountabili-ty. The picture is somewhat better in the commer-cial sector where metering of business usage hasprogressed more rapidly. Yet equally, supply is alsoplagued by perverse subsidy schemes which offerfree or discounted supply above a set level of con-sumption. As a result, pricing cannot be used torationalize consumption and nor does it supplyinformation on demand.

While the system is prodigious in granting gener-al subsidies, paradoxically, there are no targetedhousehold subsidies. There are also no effectivelegal means for enforcing payment by defaultingconsumers. Rate setting, collection and subsidypractices are at odds with the principles of both uni-versal access to quality services and supporting asustainable environment.

Clearly, outdated management practices producea very expensive system, and result in huge gaps inaccess, a low quality service and in many places anongoing gradual deterioration of the network. Thepoliticization of management and workplace cultureharks back to the socialist period. However, as wehave seen above, there are technical obstacles aswell, and furthermore, the system does not pro-duce information which could be used to makefuture strategic choices.

Improving ppricing aand subsidy mmechanisms

Pricing reform is a possible solution to this trap. Iflocal governments were to accept the absoluteneed for full cost recovery and move towards effi-cient pricing mechanisms, which are transparent,predictable and affordable, then financial disciplinewould constrain both companies and municipalleaderships. Municipal leaders would be underpressure to cover the costs of supply and reducethe subsidies. Cost recovery-based prices wouldalso close the door to the subsidy bargainingprocess that diverts attention away from reducingwater losses and improving collection performance.The implications of tariff reform would generally bebeneficial. Yet, some conditions must be in place ifthese benefits are to be fully exploited; Municipalities will require technical assistance

to design adequate pricing schemes. Thisincludes expertise that is as yet unavailablewithin the sector:

Legal changes should create a means for com-panies to force users (both private and public)to meet their obligations:

166 Public utilities yearly business reports (2003) for Sarajevo, Banja Luka,Mostar

167 For example Sarajevo's water utility reported a net loss of 23.1 KM million(equivalent to 58.9% of revenues) in 2003, but only 3.6 KM million weretransferred from the cantonal budget to cover priorities.


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Targeted subsidies should be created for theneedy to secure their access to service (wereturn to this below).

New pricing schemes can also have very positive impli-cations for consumer-provider relationships. If costrecovery-based pricing were coupled with individualmetering, the system would initiate a process whichwould work to rationalize consumer behaviour. Moremarket-driven relationships would equally tend toincrease company accountability. However, here again weface a technical problem. Installing meters at each con-sumer's location represents a huge up-front investment,and one that is often crowded out by other urgent expen-diture needs. In a number of countries, giving private con-sumers the option to install meters at their own expense,or offering part-grants, has assisted this process.

Yet we also need to have realistic expectationsabout what tariff reform can achieve. First, it isunlikely to generate sufficient revenues to offset theaccumulated failures of the past, and provide forrehabilitation and extension. Capital grants shouldtherefore also be considered as a policy option formaking good the deferred works, especially withinthose areas with weak revenue capacities.

Second, it must be recognised that new tariffs,however constructed, will not alter the fact that ifrevenues are to rise, then so too must prices. As inother post transition countries, user charges arewell-below cost coverage and considerably lowerthan European levels (see Table 4.4). Estimatesshow that some tariff increases could be as high as100% if BiH's water utilities are to break even.Although clearly, the level of increase will varydepending on local conditions and in particular, theextent of the efficiency gains which can be reapedfrom changed managerial and working practices.

Table 4.4; Average Water and Wastewater Tariffs

Parameter RS FBiH Hungary Estonia EU (KM/m3) average

Water price 0.20 0.40 0.8 0.63 2.0Wastewaterprice 0.09 0.20 0.8 0.81 1.5Total 0.29 0.60 1.6 1.44 3.5

Finally, price rises necessarily impose a politicalchallenge and it is likely that tariffs could only grad-ually be made compliant with cost-recovery princi-ples. Moreover, even mild increases are potentiallyproblematic for the poor, and the appropriate tar-geted subsidy schemes already recommended arevital. The costs and scope of such schemes shouldnot, however, be overestimated, and the financialconsequences of providing targeted support arealmost certainly cheaper than current levels of gen-eral subsidies.

The nneed ffor iinvestment ggrantsPricing reform is only part of the solution as the

backlog of deferred maintenance and developmentcannot be fully charged to users - because theirgeneral capacity to pay is simply inadequate.Moreover, access to borrowing is limited, and in anycase, it would not be equitable to raise investmentneeds wholly from current consumers due to thehuge disparity in initial endowments. Municipalitiesare likely to need a long period of support for net-work development and rehabilitation. Capital grantswould be especially important for those municipali-ties where there are major gaps in infrastructurewhich limit human and economic development.

There is already some investment grant fundingavailable in BiH, but the amount is well below cur-

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rent needs. Furthermore, decisions on allocationsare discretionary and often politically biased.Transparent procedures should be set up for grantallocations which could secure fair competition.Putting such procedures in place would increasethe potential for leveraging in other resources.

The ppotential ccontribution oof pprivati-zation aand rregionalization

International experience shows that the involve-ment of private partners can increase company effi-ciency and bring in additional resources to financeinvestment. At the same time, experience alsoshows that poorly executed privatization hasserved to pass lucrative businesses to private inter-ests and incur huge losses for citizens and cus-tomers. In the field of water and wastewater servic-es most municipalities in BiH are almost certainlynot in a position to embark on full-blown privatiza-tion. They need technical assistance to reform pric-ing, secure adequate levels of transparency forcompany management and finance, and clarify localstrategies before beginning this process.

The regionalization of utility services is anotherissue often raised in BiH. Efficient network planningof both water and wastewater systems is depend-ent on hydrology and topography. Municipalboundaries are often not coterminous with drainagecatchments and therefore are unable to fully exploitthe available economies of scale. In many cases,there is some potential for clusters of cooperatingmunicipalities to establish more cost-effective serv-ices which might better facilitate access. The aggre-gation of water companies would also serve toenhance the network's resilience and reliability.Such regional companies could also better exploitfinancial resources. A similar, regional approach

could be taken for wastewater in cases of smallersettlements. However, savings should not be takenfor granted - costs are context dependent andshould be analyzed thoroughly prior to any deci-sions being taken.

Solid wwaste mmanagement sub-ssector

Sustainable waste management implies provisionof facilities that minimize adverse environmentalimpacts and ensure that the living conditions offuture generations are not compromised. It involvesall levels of authorities but also the broader public.Increased awareness amongst citizens is the keyunderpinning of such sustainable approaches.

Supply aand rrevenue ccollectionAfter the war, waste collection was literally para-

lyzed due to a severe lack of equipment. This situa-tion has abated. But the small number of sanitarylandfills or incineration facilities, coupled with a noneco-friendly culture, has led to a form of municipal-ized fly-tipping168. In rural areas where organizedwaste collection largely does not exist, illegaldumping has become rampant. Waste is oftenthrown in rivers or simply on the roadsides.Inappropriately disposed waste can be carried awayby animals or blown by the wind from open dump-sites. This presents real dangers to public healthand the environmental amenity of the countryside.Infiltration and soil contamination can affect drink-ing water sources, amplifying the potential adverseimpacts. Therefore, improving waste managementhas been recognized as a priority by both local andinternational authorities in BiH. Nevertheless, thereis still no accepted strategy for this sub-sector.

168 It is estimated that there are over 1,200 non-managed landfills in BiH. Aslocal authorities do not receive financial or technical support form higher-level structures, they often resort to operating provisional local dump-sites. Interview with Professor Milasinovic, Faculty of Civil Engineering,Sarajevo, August 2004


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A future strategy has to face two challenges;increase both service coverage and deposition stan-dards. Currently, only approximately 60% of thepopulation is covered by regular waste collection,while the norm outside the cities is below 40%.Where the service exists, it is provided by a localutility company. In most areas, waste is collected in1100-litre bins, which are placed alongside the roadand there are no means of checking who depositswaste in these communal containers.

Rate ssetting aand ccost ccoverageTariff setting is the responsibility of local authori-

ties. Most citizens do not pay the amounts chargedand enforcement is difficult. If sued in court, theprocess is usually lengthy and could cost moremoney than the utility might recoup. The averagecollection rate is low at 25% in the RS and 35% inthe FBiH169 Low collection rates and revenues pres-ent a huge obstacle to service extension and quali-ty improvement.

Rate setting, at least in principle, seeks to esti-mate the costs of collection and deposition on thebasis of projected waste volumes. Unfortunately, inpractice the estimated costs are based on the vol-ume per person, yet charges are made according tofloor area. Moreover, political discretion plays asubstantial role. Rates vary greatly among munici-palities and the ratio between highest and lowest issix to one.170

Most companies complain that tariffs are artificial-ly low, do not cover operating and maintenancecosts and undermine future capital investment.According to some expert estimates tariffs shouldbe raised by an average of 230% to ensure costcoverage. It has also been argued that the cost bur-den is being exacerbated by weak realization of

potential economies of scale. According to (admit-tedly) partial data, annual waste collection and dis-posal costs per person range between 27.4 KM perperson in Banja Luka and 153.5 KM per person inBosansko Grahovo.171 This underlines the very realpotential for cost savings.

Tariffs should therefore be raised gradually overthe medium term, so that the cost burden can beshifted to consumers. As with the water supply sec-tor, reaching full cost coverage is both politicallydifficult but also rewarding for those leaders thatare prepared to embark on such reforms. Althoughthe relative burden on household expenditures ofwaste tariffs is usually the lowest of the utilities,discontent will still be felt. Nevertheless, if costscan be covered by tariffs, then this obstacle to serv-ice expansion can be overcome quickly as entrepre-neurs are likely to then enter the market. Such poli-cies might therefore be 'sold' to the public as theyare capable of producing fairly rapid and visiblechanges. Of course, cost-recovery based prices willstill not be affordable for all. Thus parallel to theincrease in tariffs, properly designed and targetedhousehold subsidies will also have to be intro-duced.

Involvement oof pprivate pprovidersSome municipalities, like Zenica, Doboj and Tuzla,

have already started to contract out172 solid wastecollection and disposal services. Generally, theauthorities are relatively satisfied with the results,as service quality has improved, whilst costs havedecreased as a result of market competition.However, substantial improvements in terms ofservice coverage and frequencies of collection havenot taken place due to lack of funds. As up frontinvestment in collection equipment is not prohibi-

169 Revenue collection by public utilities is extremely low ranging between15% to 80%, FBiH Draft Strategy for Solid Waste Management, CostAssessment, p. 23, Faculty of Civil Engineering, Sarajevo, August, 2000

170 Knezevo 0.1 KM/m2; Banja Luka 0.6 KM/m2; Sarajevo 0.1.KM/m2; Ibid

171 Ibid172 The services are contracted on an annual basis. This solution might exploit

the pressure from frequent competition to discipline providers, yet thisprobably won't provide sufficient rationale for investment.

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tively high, cost-recovering based prices could rap-idly secure service expansion. Contractor competi-tion (if real and well managed) can also help in pricesetting as it breaks through the asymmetric infor-mation problem inherent in company-municipalrelations.

Regional llandfillsWhilst local collection capacity can be expanded

through pricing policy change, the establishment oflandfill or incineration facilities according to modernenvironmental standards would require a sizeableinvestment. Such an investment is beyond thefinancial capacities of most municipalities anddomestic investors in BiH. Moreover, it would notbe economical either to establish and manage manysmall landfills - thus inherent economies of scalecall for cooperation between municipalities. Afterthe initial proposals put by international agencies,local authorities have rapidly recognized the bene-fits of such regional dumpsites. The World Bank hasinvested in five regional landfill locations, each serv-ing 150,000 inhabitants plus.173 One of these, the"DREKA" landfill site, will ultimately include 11municipalities and will solve the long-term problemof waste collection and disposal for about a quarterof BiH's population.174 The respective municipali-ties' have already established an inter-municipalboard responsible for the coordination of technicalwork and cross-entity cooperation. We recommendthat other municipalities examine this model.

District HHeatingDistrict heating is a specialized form of utility pro-

vision that harks back to the centrally plannedeconomy. However, it has also operated very suc-cessfully in several market-based economies

(notably in Scandinavia). The maintenance of thisform of heating supply is central to the well-beingof a large proportion of the population in BiH.Unfortunately, the technology adopted in the for-mer Yugoslavia presents particular challenges.

BiH has about 20 district heating systems, whichare operational in every major settlement includingSarajevo, Doboj, Zenica, Tuzla and Banja Luka.Before the war, these sorts of systems coveredabout half of the nation's inhabitants - today thatnumber has fallen to a little over 32% of the popu-lation.175 After the war only the Sarajevo plant wasfully rehabilitated and others are still in need of con-siderable reconstruction. Neglected maintenanceand chronic underinvestment have caused increas-ing inefficiencies resulting in energy losses averag-ing a staggering 60% of inputs.

Responsibility for providing this service restswith local authorities, yet it is delivered by the pub-lic utility companies. Production is mostly coal-based, although natural gas is used in Sarajevo andpartially in Zvornik and Zenica. The use of low grade'brown' coal is both inefficient and release pollu-tants. Indeed, contemporary thinking has swungaway from the net environmental benefits of districtheating, noting that the inadequacies of the tech-nology more than offset the production gains.

These arguments are particularly pertinent toBiH, where the network design is primitive, doesnot allow for individual consumption metering, norheating volume adjustments. Allowing the house-holds to make choices about whether to access thesystem, adjust heating consumption and the instal-lation of metering would require prohibitively highinvestments. However, without such upgrading it ishard to see how either the quality of service or the

173 More distant settlements and towns would have their own transfer sta-tions, where recyclables would be first separated, and then the rest trans-ferred to the regional landfill at the most efficient time intervals.

174 Especially in Doboj, Magla, Teslic, Tesanj, Zepce, Zavidovici, Orasje,Derventa, Brod, and Tuzla

175 Living Standards Measurement Survey in BiH (LSMS), Agency forStatistics BiH (2003)


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system's efficiency might be improved. In theabsence of individual metering, the tariff has to beset according to estimated square metre costs.Moreover, it is impossible to cut household supplyto reduce the high level of outstanding arrears.Indeed, it estimated that collection rates in Zenicaare as low as 30% of the total amount due.

Cost-recovery pricing under these conditions isprecluded by the very high production costs, weakability to pay and the impossibility of direct enforce-ment, The most that can be achieved in this area isthe containment of deficits and hence of subsidylevels, through all possible means. Reducing lossesthrough technological improvements is the mosturgent intervention required, and this would alsoupgrade the service quality and reduce negativeenvironmental impacts. Practices of other post-socialist cities should be examined, as the problemsassociated with district heating system are commonwithin Eastern Europe. Interventions, althoughcostly, are vital: without them there is a risk thatsystems will suffer major failures.

Other MMunicipal SServicesFinally, within this section we examine two fur-

ther areas of service delivery - local roads and com-munal services.

Local rroadsThe construction and maintenance of local roads

are also municipal responsibilities in both Entities.There are two major problems with the network oflocal roads; Firstly, in some areas there is a degree of

underdevelopment, whereby access to set-tlements is not secured year round:

Secondly, there is a general quality problem.Due to war devastation and a lack of mainte-nance, local roads are invariably in a poor con-dition, and require substantial investment.

World Bank studies have found that 74.1% of thepublic believe that local roads are of low quality,and operational assessments suggest that morethan two-thirds of local roads are in need ofrepair.176 Poor roads are a serious impediment to cit-izens' freedom of movement, their access to otherservices and wider economic growth.

In general, local authorities realize the impor-tance of infrastructure to local development andwhen finances permit, make large efforts toimprove its quality. Those that are better-off havemade continuous investments. Yet others with per-petual financial problems are unable to make anyuseful impact. In some places, for example inTrebinje, cooperation with newly established MZsmight offer some room for improvement.177 Indeed,there is a tradition of infrastructure development inclose collaboration with MZs. In recent years theold practice of capital cost sharing has been revivedand this has lead in particular, to the upgrading andextension of the rural road network.

Recent legal changes are also expected toincrease the resources available for local roads andpositively impact on the size and quality of the net-work over the medium term. The new legal provi-sions allow the introduction of road investmentfees and maintenance payable upon car registra-tion. The estimated revenues to be collected fromthese fees could amount to 20%-35% of total non-tax revenues within local budgets.

176 Sabina Basic (2002), The role of local authorities in promoting private sec-tor growth; Issues &Challenges in BiH (2002). Conference on LocalDevelopment, Faculty of Economics , Charles University

177 Based on interviews with local administrators

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Communal sservicesThese services include the maintenance of public

areas, green spaces and public lightingResponsibility for these activities normally restswith municipalities and services are normally under-taken by local enterprises controlled and financedby the municipalities. Local governments are invari-ably required to meet the costs of provision fromtheir own often restricted budgets and are notallowed to charge fees. Given their relatively lowpolitical priority, the quality of service is verydependent on local fiscal capacity. The general pic-ture of many cities is grim. Opinion surveys showthat 58% of respondents across BiH are generallydissatisfied, and especially with the quality of greenand public spaces.178

The level of resources available is the key prob-lem, but weaknesses in the management of provi-sion should not be overlooked. In many cases onemunicipal company is responsible for a variety ofservices. The company often also holds responsibil-ities for solid waste management, for which it is ablecharge. Communal services are therefore oftenseen as ancillary and unimportant add-ons. It wouldbe more effective if park maintenance, public clean-liness, and so forth, were financed by municipaltransfers made under quasi-contractual terms.Indeed, it may also be worth considering outsourc-ing or subdividing municipal companies along func-tional lines.

In addition to the work carried-out by municipalenterprises, the public's willingness to undertakevolunteer collective activities can also make a bigdifference to the quality of the local environment. Inmany places positive attempts have been made toimprove local living conditions via joint community

efforts, such as collective cleaning and green spaceactions. These can be financially supported bymunicipalities but undertaken by community basedassociations. These initiatives also have a widerexternal role in fostering civic responsibility andcommunity cohesion.

Summary aand CConclusionsWithin this chapter we have discussed the local

services provided, or at least facilitated, by munici-palities in BiH. They are the very substance of localgovernment's mission and major contributors tothe quality of lives and hence, human development.We have made a series of recommendations andalthough many of the problems are dependent onthe characteristics and the context of delivery,there are common themes.

Overall, our appraisal reveals a set of functionalbut highly challenged systems that are failing to liveup to their potential and are in some cases, increas-ingly moribund. Alongside this, and especially with-in the education and social welfare sectors, there isalso evidence of ongoing political biases, ethnicdomination and poor targeting of assistance.

The overall lack of resources and the political sit-uation are important drivers of the sectoral chal-lenges we have reviewed. But management, over-sight and coordination are also pressing con-straints. Moreover, in the medium term resourcesare necessarily limited, and equally political changeis likely to proceed slowly. We believe that effectivedecentralization offers the best hope of squaringthe circle of improving provision both in terms ofaccess and quality within existing financial limits. Aswe have argued repeatedly, local governments arebest placed to match provision with needs and

178 Local level institutions and social capital study, World Bank, 2001, p.33


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bring rationality to the current fragmentation anddislocation which plagues BiH.

However, this cannot be done without supportfrom above and systemic change is required, partic-ularly in financing and coordination mechanisms. Asargued in Chapter 3, equalization of resources has avery high priority. In the health, education andsocial welfare systems, huge inequities are present,and we judge that although welcome, currentmoves towards the establishment of solidarityfunding arrangements will prove inadequate.Indeed, the current unfairness in provision, in somecases, amounts to a denial of basic rights. Allied tothis is a need to rationalize responsibilities ensuringtransparency and accountability. The centre needsalso to step into areas of delivery and policy whichare rightfully its domain. The most striking exampleof this is the provision of social welfare benefits.

Equally, capital financing questions will have tobe addressed if reforms are to be initiated. Acrosseach of these frontline delivery sectors, investmentis required to renew worn out plant (especially theutilities sector) and facilitate change (for examplewith regard to staffing levels and remuneration inthe social sectors). These needs cannot be bornelocally, and various centrally coordinated financingmechanisms will be required.

Additional finance might also be generated inter-nally by managerial changes. Two types of reformare pertinent to this. First, there are huge efficiencygains to be had by addressing poor managementpractices, training and workplace culture: and sec-ondly, via the replacement of existing inputs-basedresource systems. These will serve to improve tar-geting, revealing waste and disciplining the waste-ful and undeserving. The introduction of output oroutcome based funding in the social sector will alsobe a spur to quality improvement. These targetingsystems have a corollary in the utilities sector in theform of pricing reforms. Through cost-based recov-ery charging, behaviours and decision making aremodified. Prices come to assume a signalling func-tion, encouraging consumers to use outputs moreefficiently: and managers to make more productivedecisions: and freeing politicians from involvementin operational matters.

In sum, our recommendations and proposalsamount to a radical modernization agenda. This isone of direct performance improvement thatencompasses better targeting, greater transparen-cy, and necessarily, genuine devolution to the locallevel.

CHAPTER FIVE

MAKING IT HAPPEN -

ENABLING AND MANAGING

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Chapter FFive:

Making iit hhappen - eenabling aand mmanaging

This chapter continues our examination of munic-ipal activities but broadens it beyond service deliv-ery to take in those functions which 'shape' ratherthan directly affect local conditions and communitywell-being. Here we refer in turn to communityleadership 'enabling' duties undertaken by modernlocal governments, and to the quality of local man-agement.

The chapter has three parts. In the first and sec-ond we examine the two primary enabling responsi-bilities - securing environmental sustainability andlocal economic development. In the third, we exam-ine municipal management, both at the corporatelevel and in terms of key support services.

Enabling aas aa ppublic sservice cconcept179

Before we begin however, it is important to beclear about what we mean by 'enabling' as a publicservice concept. In its broadest sense, the termrefers to an approach to meeting public responsibil-ities through shaping conditions and encouragingpublic, private and independent actors to securedesired outcomes. Enabling can be applied to thebroad ambit of local government responsibilities -including service delivery. For example a local gov-ernment might 'enable' various NGOs to provideadvice service through grant-in-aid, rather thanmaintaining its own welfare rights service. Yet theenabling principle is clearest in relation to commu-nity leadership functions which are ill-suited to tra-ditional service delivery approaches.

Sustainable eenvironmentalmanagement

The quality of the natural environment directlyimpacts on the quality of peoples' lives, their healthand their capabilities. Sustainable development

policies therefore lie at the heart of the humandevelopment approach. Neglect, carelessness andgreed can contribute to the pollution of surface andground waters, soil, and air. Through regular andeveryday activities, and especially through the pur-suit of narrow economic gain, communities can puttheir environments at risk. Our challenge here is toexamine what local governments can do to regulatepollution and make behaviours more environmen-tally aware.

A growing body of evidence suggests that cur-rent day BiH is suffering from uncontrolled andexcessive exploitation of its natural resources180 inparallel to a dangerous contamination of its naturalenvironment. Moreover, that the weak economylimits regulatory activity and leads to maladaptedincentives operating on both enterprises and pri-vate individuals.

Although environmental legislation recentlyadopted in BiH conforms to EU standards, enforce-ment is almost non-existent. The accession processwill increase the pressure on local authorities tosolve environmental problems without hinderingeconomic growth. Sadly, these issues, have so far,assumed no real political weight. Attitudes remaincomplacent and ill-informed, and for the most part,BiH's once pristine environment is seen simply as aresource to be exploited.

At the outset however, it has to be recognizedthat most environmental challenges are beyond thescope of local government action alone. Whilst acomplete resolution of these issues lies at the stateand even the supranational level, municipalities canmake a contribution. First, via a variety of local serv-ices - utilities, physical planning and so forth; theycan address the symptoms of environmental degra-

179 Enabling emerged as a public service concept in the 1990s: it refers toindirect governmental actions to promote socially beneficial outcomes,which might be better achieved by means other than direct provision. Itdraws on the social capital framework promoted by Putnam (1995, 2000)and others.

180 It is estimated that due to the construction of housing, industrial andinfrastructure facilities in recent years, BiH has been lost over 20,000hectares of agricultural land & the annual volume of tree felling is around3.7 million m3.


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dation and facilitate more eco-friendly behaviours.Second, local governments can play a role in envi-ronmental monitoring and education, exercise lead-ership to improve awareness and so directly chal-lenge problematic attitudes.

The llegal aand iinstitutional fframeworkAccording to the BiH constitution, environmental

protection is the responsibility of the Entity govern-ments. Each has its own environmental ministriesand legal frameworks. However, the latter weremade more consistent in 2003 and secondary legis-lation is currently being developed181. The majorissue to be tackled remains enforcement. At thestate level, there is no single responsible authority,but instead coordination takes place via theEnvironmental Steering Committee (ESC), whichcomprises representatives of the two ministries andseconded experts. Within this framework a largenumber of responsibilities, especially within thefields of monitoring and enforcement, are delegat-ed to municipalities.

A major challenge arises from the fact that envi-ronmental problems do not respect boundaries,and this is made more difficult by BiH's administra-tive fractures. Indeed, it is telling that the inter-enti-ty boundary and the coterminous areas are subjectto particular environmental damage, including ille-gal deforestation and the disposal of bulky and haz-ardous waste. The need for harmonized legislationand the establishment of a state-level enforcementagency is vital. It is also a basic requirement forBiH's accession to various international andEuropean environmental treaties and conventions.

At the local level also, environmental protectionis rarely the responsibility of a dedicated agency.Typically it is combined with physical planning or

infrastructure related services such as utilities.Moreover, local authorities invariably hold theweakest mandates within the overall framework. Asa result, there is much duplication and inter-agencyconflicts of interest are frequent.

The kkey eenvironmental ppressuresThe main sources of air pollution in BiH are

industrial; they include coal-fired power plantsand outdated heavy industry. As a result of ineffi-cient technologies, pre-war atmospheric emis-sions were very high despite the relatively lowlevel of urbanization. Although the war resulted inthe destruction of many of these industries andhas thus brought about lower environmental pol-lution (now approximately 35% of the pre-warlevel), the earlier contamination and ongoing pres-sures are still evident.

New industrial plants and processes in BiH makeuse of newer, more environmentally friendly tech-nologies imported from overseas. Yet these arefew and far between. Extremely high investmentwas required in order restart production, and forthe most part BiH's industrial plant has not beenrehabilitated. Currently operational plants arelegally required to create a compliance plan tomeet new EU standards by 2008, though itremains an open question whether this will beachieved.

Transportation represents the second largestenvironmental pressure. Pollution results fromboth the increased number of vehicles and the rel-atively high emissions of older vehicles. There arelimited options for substituting road traffic with(electrified) rail transit, as construction costs inBiH's mountainous terrain are prohibitive. It is pos-sible, however, to promote some increase in railway

181 Laws on Environmental Protection, Water, Waste Management, Air andEnvironmental Funds

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Chapter Five: Making it happen - enabling and managing

and inland water transport in accordance with theBiH Transport Master Plan182. Furthermore, it mightalso be possible to reduce these pressures to aminimum by actively working towards Europeanstandards on fuel emissions and limiting (or ban-ning) the movement of vehicles without exhaustcontrol and other environment-friendly devices.This process must of course, be gradual and pacedto ensure there is no detrimental effect on the rela-tively weak economy.

Local rresponsesTwo distinct roles can be identified for local gov-

ernments. The first has to do with adapting localservice provision to environmental outcomes,whilst the second involves a much more difficultchallenge, that of advocacy and community leader-ship to reshape attitudes and behaviours. Each isreviewed in turn.

Environmental iimpact of llocal sservices aand aactivities

Spatial pplanning aand aair qqualityIn the pre-war period, industrial facilities were

poorly located due to the lack of appropriate spatialplanning. Many facilities were sited next to settle-ments, and as a result air quality for heavily populat-ed areas was, and remains, poor. Application of airquality management techniques in BiH is not wellknown. Spatial and urban planners do not use emis-sion cadastres and atmospheric distribution modelsto the extent that is necessary. There is a generalneed to update the methodologies in use for moni-toring and reporting. Although current practicestake into account local specificities (fuel quality and

data collection capabilities) they require sophistica-tion. The introduction of modern methodologies, asprescribed by international organizations shouldalso be accelerated.

Enforcement oof bbuilding ccodesIllegal construction without regard to quality or

planning rules, results in the loss of important agri-cultural land and suboptimal settlement structures.There are two parallel reasons for illegal construc-tion - the lengthy and costly planning permissionsprocedures, and weak enforcement. In both ofthese areas local governments could make animportant contribution.

Water rresources aand wwater ssupplyBiH's territory lies within the catchments of the

Black Sea (76% of the total area) and the Adriatic(24% of the total). Within these, there are sevenriver catchment areas. The annual precipitation ofBiH is high when compared with the European aver-age, but it is unevenly distributed, with a good pro-portion falling in the winter months. Although therivers are characterized by relatively high runoffthere is a great variation in flow. In spite of thisapparent wealth of water resources, the spatial andtime variations result in areas that experience heavyflooding in winter months and suffer from droughtin summer.

Flood protection and irrigation are importantissues which should be handled at the local level bythe municipalities located on each of the majorwatercourses. Successful international practiceshows that these activities need to receive supportfrom the State or Entity authorities as flood defencehas a high capital cost and strategic character, but

182 Japan international Cooperation Agency (JICA); Study for Transport MasterPlan in Bosnia and Herzegovina, Final Report (Executive Summary), March2001


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ought to be locally managed. Delivery modelsmight also include groups of local authorities actingtogether.

According to figures given within the NationalEnvironmental Action Plan (NEAP), drinking watersupply covers only 56% of population in FBiH and48% in the RS, and losses in the water supply net-work are high.183 Moreover, sources for drinkingwater supply are inadequately protected from phys-ical, chemical or biological pollution. This is a partic-ular problem in Karsts (porous limestone-like rock)areas of the country184. Due to the solubility of theserock types sources are interlinked through complexunderground systems, where pollutants can easilyfind their way across long distances. It is absurd thata country with abundant and clean upland drainagefaces a drinking water supply problem.

Wastewater mmanagementPrior to the war, industry generated 80% of

wastewater in BiH. Although, detailed monitoringexercises have not taken place since that time, itcan safely be assumed that household wastewaterdischarges have remained about the same, whilstindustrial releases have fallen-off dramatically. Yetthe average share of household connections to thesewage system is low (at 38%185) and clearly a largeproportion of wastewater is discharged directly tothe ground. Moreover, of the collected discharge,very little is treated and 90% is released into water-courses.186

As noted previously, there are only six wastewatertreatment plants in BiH, and even these operateirregularly due to high operational and maintenancecosts. Industrial concerns are required by the law187

to control their emissions. However, due to weakenforcement, illegal discharges are estimated to be

considerable. As a result of these pressures themajority of the rivers in BiH are heavily polluted, withmany falling into the lowest class of river quality - theBosna and Vrbas rivers being the most polluted188.

Solid wwaste mmanagementThe prevailing attitude towards refuse in BiH is to

dispose of it in any manner possible. As a resultthere are countless fly-tips filled with householdwaste, used cars, construction waste and animalcarcasses. As discussed in the previous chapter,even in settlements and cities with organized wastecollection systems, the final disposal of the waste ismade via municipal dumpsites which are oftenunprotected, allowing run-off to enter the soil andgroundwater, the wind to disperse waste, and dis-ease vectors such as flies and rodents, to thrive atthe disposal site.

In addition to the problems of local communalwaste management, there are regulatory andenforcement weakness. One is the lack of adequateregulation and treatment of hazardous and industri-al waste. There are no specific disposal facilities forsuch wastes. Whilst the most hazardous types,including contaminated medical refuse, are oftensimply sent to landfill. One possible solution isexportation to specialized disposal providers, butthis is a costly and lengthy process, and most likelybeyond BiH's means.

Equally, industrial waste is frequently dumped atthe same sites as regular municipal refuse. Someindustries, including mining and thermal powerplants, have their own disposal facilities. But againregulation of these is weak. The only relevant pro-tocol in development is the Basel Convention,which is still only in the initial phases of application.

183 The average value of water losses is estimated to be between 50% and70%, while the losses due to the poor state of the system amounts to30% of the total water production.

184 Karst geology refers to the presence of soluble rock types (such as lime-stone and dolomite).

185 For settlements with a population of more than 10,000, the extent of cov-erage rises to 72% whilst for smaller settlements it falls to about 10%.

186 Certain rivers such as Bosna or Neretva, the levels of bacteria are high,especially in the summer when the water levels are lowest, and tempera-tures rise. In some rivers, like the Zeljeznica, or parts of Bosna, healthwarnings are issued to discourage bathing during the summer.

187 Law on Environmental Protection and the requirements of the WaterManagement Accord

188 Water resources management basis BH, Institute for Water ResourcesManagement in Sarajevo (1984-88)

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Chart 5.1; Composition of Daily Waste Generationin BiH (1999)

Separate wwaste ccollections and rrecycling

In BiH very little has happened in the field of recy-cling. The absence of industries that could recycle cer-tain types of waste (except for paper) has stifled effortsfor selective collections. Waste which might be recy-cled or reused is discarded. A recycling programmewould not only save landfill space and conserve naturalresources, but could also increase the level of environ-mental awareness within the population. Even thoughsome municipalities, like Sarajevo and Siroki Brijeg189,have organized collections in urban areas, the lack ofrecycling capacity limits these activities. The lack of adomestic market for recyclables (except for paper190)ensures that most of the collected material is exportedthrough the means of intermediary firms.

Equally, segregated collection and recycling isbeyond the capacities of most local governments.Nevertheless, municipalities could conduct publicawareness campaigns to facilitate collections byNGOs and communities. Moreover, as the costs ofrecycling on a small scale basis are prohibitively high,localities should be examining how they might coop-erate on this issue.

Local EEnvironmental AAction PPlansThough local governments cannot exercise com-

plete control over their natural environments, they

need to identify environmental protection prioritieswithin their jurisdictions. This can be done throughLocal Environmental Action Plans (LEAPs) whichbring a strategic focus to their work. The RegionalEnvironmental Centre for South Eastern Europe iscurrently supporting the development of suchplans under the auspices of the SwedishInternational Development Agency (SIDA) with anumber of municipalities191. Each of the participatinglocalities is being assisted by one NGO to organizethe participatory processes necessary for prioritysetting and accessing donor funding.

Monitoring aand cchanging attitudes

Wider environmental management includes plan-ning and monitoring activities, and the re- educationof the local population and key stakeholders.Current practice within BiH at all levels is weak onthese key activities.

Environmental mmonitoringMonitoring activities are rarely conducted, and

even when they are, it is difficult to obtain the rele-vant results. Agencies for statistics, at the national orentity level, do not have this type of data, whilst theagencies that undertake monitoring are typicallypublic enterprises. As quasi-governmental bodiesthey are often reluctant to provide information.Hence, there is a need for a more transparent systemfor informing the public and especially local govern-ments. Dissemination and sharing of data at interna-tional level is also required to meet different conven-tions and obligations. Although the Law on Access toPublic Information is in force and would bind author-ities to share information, specific protocols are alsoneeded to regulate and encourage this process.

189 The EU Cards programme has initiated a Waste Recycling Pilot Project,whilst the large public utility 'Rad' in Sarajevo has started its own recy-cling pilot project that involves separate collection of recyclables in a fewresidential areas such as Luzani in Ilidza and in schools. Some of theother public utility companies, such as Komos in Mostar have conductedsporadic attempts at recycling waste from landfills or disposal sites.There are also a number of smaller entrepreneurs that deal with retail ofrecyclables.

190 Via the Natron Maglaj paper factory191 Doboj, @ivinice, Sanski Most, Prijedor, Maglaj and Novi Grad Sarajevo


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Monitoring and proper environmental manage-ment would facilitate data tracking, identify threatsand priorities and inform the public about keyissues. Monitoring programmes are more effectivewhen conducted by local authorities as they have aconstant presence in a location, rather than moreremote State authorities. However, in order toensure the quality of monitoring programmes, it isnecessary for the local participants to be guided byEntity or state-level organizations. Organization ofthe overarching system has to be the responsibilityof the Entity or State governments.

One of the major shortcomings in BiH generally,and in the environmental protection sector in partic-ular, is the lack of information flows. Different insti-tutions share little information with others, andthere is very little coordination. As a result, redun-dancies and overlaps occur amongst and withinprojects. The use of available resources is far fromoptimal. A clear obligation of the Entity or State gov-ernments should be to create a database, whichwould allow for updates and provide sufficientinformation. The task of the local authorities wouldbe to feed and make use of these systems, eitherindividually or working in concert.

Environmental ppublic aawareness and pparticipation

Traditionally, environmental public awarenesshas assumed a very low priority in BiH. It is, howev-er, encouraging that there is increased interest innature and ecology as evidenced by the number ofcitizens associations and organizations activelyengaged in environmental protection. Yet publicawareness is still hampered by the inconsistent andinadequate amount of information disseminated. Inorder to harness rising public interest, complex

issues need to be expressed in clear understand-able terms and disseminated. Local governmentscan play a key role as an advocate for eco-friendlybehaviours and attitudes.

New environmental legislation, farmed in accor-dance with EU requirements, has assigned a signifi-cant role to public participation. For projects thatrequire environmental permits an EnvironmentalImpact Assessment (EIA) must be carried out anddiscussed in a public forum. In recent months anumber of these have been organized, with signifi-cant participation from the affected stakeholders.The EIA and the already discussed LEAP processesare important steps in strengthening awarenessand participation in BiH.

Local eeconomic ddevelopmentA vibrant private sector is vital for to the prosper-

ity of localities. Local enterprises, large and small,make investments, create employment opportuni-ties and pay the taxes which help fund local servic-es. Thus municipal support for the development ofan effective private sector is central to boostingincomes, offering affordable goods and achievinglasting poverty reduction - objectives which arecentral to the human development agenda.

Unfortunately, the conditions under which busi-nesses operate and public perceptions of the pri-vate sector are not positive in current day BiH.Companies have to cope with poor infrastructure, acomplicated regulatory framework, unpredictableand non-transparent governance practices and weakhuman capital. Moreover, public officials whoseagenda should be the improvement of the regulato-ry environment, often do not understand the impor-tance of private business within the local economy

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and their own role in promoting a more hospitableenvironment. Making the shift from a planning anddirecting function, to an enabling role in the econo-my, is a huge challenge for decision makers andbureaucrats. This is not merely procedural butextends to the culture of government (includingmunicipalities) and the mindset of individuals.

The promotion of local economic development(LED) is a very specialized field of local governmentactivity. It is made up of a set of strategic activitiesaimed at assisting independent economic actors,chiefly business and entrepreneurs, to bring goodsand services to the market place, and in turn,expand local employment and prosperity. Theseactivities are about establishing an environmentwhich nurtures local businesses and attracts in oth-ers, particularly investors, from outside the area.LED is very place dependant, and the context willdetermine needs, whilst activities are diverse, rang-ing from the provision of physical infrastructures tomodifying the behaviour of local officials.

The ccurrent ssituation

ConditionsThe economic situation in the majority of munici-

palities in BiH is characterized by high levels of offi-cial unemployment alongside a more vibrant butvariable informal sector. Indeed, anecdotal evi-dence and theory suggest that the grey economy isfar from evenly dispersed, and is concentratedalong frontiers, transport nodes and urban centres.Although supportive of incomes, the informal sec-tor has few sustainable developmental advantages.The large enterprises which characterized the pat-tern of employment in the SFRY are dilapidated -and even where they continue to operate, are

underutilizing their capacity. Moreover, they areoften propped up by direct subsidies, or indirectlythrough the non-payment of creditors, especiallyutility companies and tax authorities. The crucialSME sector, which might soak up underemployedlabour, remains challenged both by difficult tradingconditions (not least the level of taxation and poorgovernment), but also the preponderance of infor-mal sector competitors. Local economies also sufferenormously from the inefficient, slow and often non-transparent privatization processes, within whichlocal communities have largely been denied a voice.

Disappointingly, many local authorities remain indenial about their local economies, believing thatthe redundant factories will somehow grow back totheir full potential. The reality is very different andcommunities must therefore seek other ways torevitalize their prospects. This perceptual problemis perhaps the gravest challenge to be faced.Officials often lack a basic understanding of theeconomy; they do not see that attracting newinvestors and supporting the development of newactivities are vital for economic transformation andgrowth192. Instead, they nurture fake beliefs thatconditions will improve without any intervention.

Obstacles ffaced bby bbusinessNearly ten years after the war, and despite

progress on a number of fronts, BiH has not suc-ceeded in creating a fully unified economic spacewhich is supportive of business. Procedures forsetting up and running businesses remain compli-cated and time consuming. Equally, the corporatetax burden is among the highest in Europe.193

Weakness in law enforcement and protection ofproperty rights are key operational risks that busi-

192 Small and Medium Enterprises Interventions and Gap Analysis, page 28,USAID, June 2004.

193 "Commission report to the Council regarding BiH's readiness to startnegotiating with the EU about the SAA" (Feasibility Study), Brussels, 18thNovember 2003.


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nesses face. Corruption and an ineffective judiciaryin resolving disputes add yet further dimensions.194

The size of the informal sector (conservativelyestimated to be 25% of GDP)195 is both a reflectionof poor economic governance and an impediment initself. Entrepreneurs often claim that competitionforces firms to move into the informal sector inorder to keep their heads above water.

Further problems are caused by poorly managedunregulated inspection arrangements. As mandatesand standards of inspection196 are not defined,inspectors frequently 'gold-plate' requirementsimposing additional and unnecessary burdens197.There is a general impression that inspectors alsodeliberately target particular companies as a meansof exerting political pressure. Local planning prac-tices and regulations also present obstacles toinvestment. Municipalities either do not have spa-tial and zoning plans in place, or if they do, they arenot adjusted to reflect commercial and LED needs.This makes it almost impossible to plan and deliverland and infrastructure projects. This is especiallytrue when it comes to securing green-field invest-ments, since the time and costs related to landacquisition and obtaining different licenses and per-mits are often unacceptably high and very unpre-dictable.198 General administrative failures andincompetence serve to further discourage manypotential investors.

Obstacles tto rreformAt a basic level, BiH's complex and ineffective

administration presents a fundamental constraint.This alone however, is not a sufficient explanationfor the very piecemeal approach to transition thathas occurred. There is a clear unwillingness on thepart of the ruling political forces to implement the

necessary reforms, as they perceive their interestlies in protecting the status quo.

During the past decade, important steps forwardhave taken place in the field of macroeconomic poli-cies under international pressure, but very little hashappened at the micro and meso levels to attractnew investment and encourage the development ofnew domestic businesses. The need for immediateaction from all levels of government in BiH is veryapparent. These actions should establish an envi-ronment that enables and promotes economicgrowth. To date the performance of BiH govern-ments in shaping polices towards this outcomehave been disappointing199.

International development organizations200 havelong recommended the fostering of entrepreneur-ship and SMEs as a recipe for successful transfor-mation and revitalization of the economy. Yet areport on SMEs produced by the Ministry forForeign Trade and Economic Relations (MOFTER)confirms that almost nothing has been done in thisarea201. It argues for the inclusion of entrepreneur-ship within the school curriculum, the training ofentrepreneurs, better access to finance through tai-lored interventions and schemes to affect technol-ogy transfer.

Intervention sstrategiesUnfortunately, it seems that many of these issues

which have a national or entity-level character areunlikely to be addressed as BiH governments takelittle ownership of the challenges faced by busi-ness, leaving the international community as theonly sponsor of pro-private sector policies. This isdisquieting, yet the BiH Medium TermDevelopment Strategy (the PRSP), accepted by

194 Page 25, BiH Enterprise Policy Performance Assessment, OECD,September 2003.

195 BiH PRSP 2004-2007; March 2004196 Municipalities are responsible for three inspections; (i) Markets, (ii)

Construction and (iii) Sanitation. 197 Page 34., Small and Medium Enterprises Interventions and Gap Analysis,

USAID, June 2004, 198 BiH Enterprise Policy Performance Assessment, OECD, September 2003.

199 EBRD (2002) places BiH among those countries that have improved theirbusiness climate, but still must resolve a number of issues before beingconsidered attractive for domestic and foreign investment.

200 BiH Enterprise Policy Performance Assessment, OECD, September 2003;Small and Medium Enterprises Interventions and Gap Analysis, USAID,(June 2004)

201 Report on Implementation of European Charter on SMEs in Bosnia andHerzegovina, Ministry for Foreign Trade and Economic Relations of Bosniaand Herzegovina, (2003).

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BiH, in 2004 signals a change of approach by specif-ically including a chapter on enhancing the businessenvironment and supporting entrepreneurship. Itremains to be seen whether this strategy will be fol-lowed by purposeful actions.

Our primary concern within this report lies withlocal governments and the following examines theirpotential contribution. The state-level governmentalso has an obligation to facilitate local action byclearly assigning responsibilities and signallinggoals and intentions. At present there is practicallyno indication of the LED functions envisaged forlocalities within the PRSP framework. Whilst munic-ipalities can work on their own in supporting privatesector development and engagement, the absenceof higher-level governments' interest in their roleweakens motivations and incentives.

Recommendations ffor tthe rrole of llocal ggovernments

Most municipal level LED activities are still in theirinfancy and generally are initiated through the tech-nical assistance programmes of international devel-opment organizations. The absence of a nationalframework inevitably means that strategies focuson activities that can be implemented within cur-rently limited authorities and resources. In addition,however, they also play some role in motivating keystakeholders to exert pressure on higher-level gov-ernments to dismantle the official constraints onbusiness development.

Potential activities fall into two main categories.Firstly, local interventions to support the develop-ment of a business-friendly environment - especiallyinvestment promotion; and secondly, measures topromote entrepreneurship and SME development.

Building aan eenablingenvironment

The creation of an enabling environment is one ofthe most significant goals to be achieved if a com-munity, region or nation wants to improve thedynamics of its economy and overall competitive-ness. Several standard interventions would sup-port this - these can be summarised three ways; Better infrastructure, economic regulation

and public services to reduce transactioncosts and the risks of doing business. Theseenhance competitiveness and facilitate entryto a wider market place:

Better overall governance to promote predictabil-ity and stability. This creates a level playing fieldand reduces the attractiveness of the informalsector and promotes inward investment:

Targeted actions, such as resolving creditconstraints, to overcome market failures,enabling private sector activity which wouldnot have otherwise taken place.

Improving mmunicipal ooperationsMunicipalities in BiH have only limited regulatory

powers pertinent to their own jurisdictions.Nevertheless, the enforcement of local regulations,the quality of their public services and the transparen-cy of administration plays a significant role in shapingthe costs of doing business and local investmentattractiveness. Municipalities, as we have shown,have much room for improvement. Most of all thisrequires the creation of client-oriented administra-tions. This is a large category but we discuss belowtwo distinct interventions that are especially relevant.

Firstly, the introduction of quality managementsystems, such as those of the International


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Standards Organisation (ISO) can yield huge bene-fits. In BiH several municipalities202 are in theprocess of, or have already completed, the intro-duction of ISO 9001;2000. This standard; Obliges the municipality to introduce clear

internal administrative procedures; ISO estab-lishes transparency, helps businesses under-stand municipal functions and builds trust inlocal decision making.

Provides the basis for efficient managementof resources that can lead to important costsavings, creating room for additional activi-ties.

Reduces business costs (both direct and indi-rect) in the jurisdiction, along with boostingpredictability.

A second innovative approach is the One-Stop-Shop (OSS) concept. This involves the establish-ment of a single contact point for key customergroups (and especially businesses) thus avoidingthe need to visit various parts of the administration toobtain services. There are various types of OSS thatcan be established. In BiH two models have beenpursued - for citizens for general administrative serv-ices (documents, certification and so forth)203 andexclusively for businesses. In such OSSs all services,permits and licenses are provided204.

As yet very few BiH municipalities205 have intro-duced business OSSs. The key element withinthese operations is a competent information serviceproviding business people and prospectiveinvestors with details of possibilities, land availabil-ity and infrastructure; whilst also being able toundertake key administrative procedures (for exam-ple acquisition of land, and issuing different permitsand licenses). Access to information, enhanced pre-

dictability of the process and a new culture of cus-tomer orientation are the key benefits.

As these OSSs are in essence, a kind of front-office for municipal operations affecting business-es, their establishment encourages the rationaliza-tion of organizational structures and administrativeprocedures. For OSSs to supply reliable services,the responsibilities and obligations of municipaldepartments, deadlines and procedures have to beclearly regulated. This places accountabilityrequirements on staff and constrains them to a newculture of work while the greater transparencydecreases the possibilities for corruption.

It is worth recognizing that municipalities canmake many improvements in their wider operationswithout such projects. Dismantling barriers to infor-mation, decreasing transacting time, professional-ization of staff and improvements in public rela-tions, all lead to a more productive operating envi-ronment for business.

Improving lland aand iinfrastructure The availability of development land and the pro-

vision of sound infrastructure are two key condi-tions for attracting investment. In both fields munic-ipal policies play a key role. Municipal spatial plansand local regulations impact greatly on the potentialvalue and the exploitation of local resources andbusiness opportunities. As noted, BiH municipali-ties either do not have spatial and regulatory plansor they are maladapted for economic developmentpurposes. Unclear land property rights represent akey risk factor, and increase the transactions cost ofinvestment.

Providing necessary infrastructure is often amore significant problem as the cost of matchingneeds is far beyond the financial capacity of a

202 Centar Sarajevo, Laktasi, Srebrenik, Derventa, Tesanj203 Financed and supported by USAID. Already 20 OSSs have been estab-

lished and 40 more are being planned.204 Implemented by SEED (the South East Europe Enterprise Development)

and SDC (Swiss Development cooperation).205 Prijedor and Doboj Istok municipalities

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municipality. Moreover, the installation of keymains supplies has a long lead-in time, yet theirabsence acts a major deterrent to the location ofnew industry in disadvantaged areas.

Effective urban planning, provision of infrastruc-ture and land-use regulation consistent with LEDobjectives, all make a contribution to private sectordevelopment. Dedicated industrial zones devel-oped by municipalities offer a means of significantlydecreasing the costs faced by investors and createan environment that is attractive for new business-es. The importance of cost rationalization is crucialsince in BiH, even connection fees represent seri-ous financial burdens for business start-ups.Nevertheless, it must also be added that sponsor-ship of industrial zones are risky investments givencurrent municipal capacities.

Improving aavailable hhuman rresourcesUnemployment data confirms that skilled and

unskilled blue-collar workers represent vulnerablegroups of the workforce accounting for 35% and38% respectively of the unemployed in FBIH, and39% and 29% in the RS.206 Part of the cause of thisphenomenon can be traced to the poor orientationof education and training provision. Reform of voca-tional education has only just started in BiH and hasthus far brought few results. Equally, re-trainingprogrammes are scarce, although admittedly thissituation has improved in recent years. These initia-tives should be supported and expanded, and com-bined with incentive schemes that encourageemployers to give opportunities to the unemployedwho are undergoing retraining.

We recognize however, that vocational trainingand adult education are not currently municipalactivities. But they have such a strong impact on the

local economy that municipalities should seek toestablish relationships with training institutions.Local governments are in a position to supply infor-mation on the need for specific services and theinstitutions to adjust programmes to meet marketneeds. Larger municipalities, or possibly consor-tiums of smaller neighbouring municipalities, couldalso take an active part in developing or sponsoringbadly needed programmes in their areas.

Reducing tthe bbusinesses ccost bburdenThere is a wide range of fees that municipalities in

BiH currently impose on businesses. A general lackof resources has forced municipalities to exploitthis revenue potential more vigorously. Businessesoften rightly complain that municipal fees and rentsare high and that they are often forced to pay forsubstandard or non-delivered services.207 While thecase put by businesses is strong, deciding theappropriate level for fees and charges is a difficultissue. Progressive thinking on business-govern-ment relations does not necessarily advocate theabsolute limitation of charges and definitely not,the cross-subsidization of businesses by other tax-payers. Instead, commentators consider pricing asan important tool to adjust supply and demand, inpursuit of securing value and fairness for all tax andfee payers. Clearly, there is a trade off to be facedby municipal decision makers - increasing revenuescan improve service delivery, but increases can seri-ously damage the competitiveness of local busi-nesses, the level of inward investment, and henceultimately, local livelihoods.

All that can be required of decisions on pricingand service delivery levels is that they are carefullyarrived at, taking account of equity, supply-costsand their contingent effects on the health of the

206 Data according to Country Report on BiH, Economist Intelligence Unit,2003 p.22

207 Frequently businesses pay rents on construction land which is not evenequipped with very basic infrastructures.


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local economy. Equally, the competitiveness oflocal businesses is not a one dimensional question.Enterprises benefit from a low cost environmentbut they also require quality public services.Addressing economy and efficiency within localgovernment must therefore, run in parallel toimproving service delivery.

Enterprise ddevelopmentSupport to local enterprises, particularly nascent

businesses, is another key branch of LED policies.SMEs have an especially important role to play inthe local transition process as they have the poten-tial to become local and domestic champions, sup-plying and supporting newly privatized state-ownedfirms. This process represents the most effectivemeans of soaking up unemployed labour and secur-ing poverty reduction. An especially useful functionis fulfilled by micro enterprises. These often repre-sent start-up firms of new entrepreneurs, and bothreflect and promote growing dynamism and entre-preneurship.

Start-ups and SMEs encounter specific problemsdue to their size and experience; they lack andrequire information, management skills and financ-ing. Banks also tend to overlook and neglect theirneeds because of their relatively small borrowingcapacity, weak collateral and lack of creditworthi-ness. Governments can do much for SME develop-ment by easing some of the barriers that they con-front by offering information on opportunities, tech-nical equipment, access to professional services(especially legal and accounting) and access tofinancing mechanisms. Best practice shows thatSME support is a multi-layered activity wherenational governments set out the overall strategy

and regional and local governments develop theirown action plans adjusted to local conditions.

Entrepreneurs in BiH widely share the opinionthat those in government, at all levels, have a limit-ed understanding of their importance and have inef-fective resources (financial and human) for promot-ing enterprise development.208 Both the institution-al framework and the capacities needed for this areunderdeveloped at all levels209. New structureshave been established at State and Entity level, butthey have thus far proved weak.

Business ssupport oorganizationsSome municipalities have already made attempts

to establish local development agencies and busi-ness development centres but development ofthese institutions has not yet moved beyond provi-sion of work space and employment of a few keysupport staff members. These organizations, espe-cially where they are not supported by internation-al institutions, lack the resources for basic opera-tions and do not have the capacity to develop theservices needed to support SME development.

Excluding large urban centres, there are rarelyany business service providers. The market is gen-erally underdeveloped, and mainly providesaccounting or legal services. Business consultingexists only in the form of individual consultants(mainly university professors). Business services tosupport start-ups are particularly weak.Management and entrepreneur training opportuni-ties, for example, are only provided by internationaldonor organizations. In survey after survey, privatesector respondents express great dissatisfactionwith the work of chambers of commerce and exist-ing business associations. We conclude there iscurrently no association capable of providing effec-

208 Entrepreneurs, when asked to rate local and regional government capaci-ties to promote SME development, rated them between very poor andpoor. BiH Enterprise Policy Performance Assessment, OECD, 2003.

209 The FBiH Ministry for Energy, Mining and Industry created the Departmentfor Entrepreneurship: the RS Ministry for Industry and Technology creat-ed the Department of Private Entrepreneurship: the Council of Ministersadopted proposals for the creation of a Division for Development andEntrepreneurship.

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tive services to enterprises or identifying problemsand lobbying for business interests.

Attempts by international organizations to estab-lish business service providers have in the mainalso failed to come to fruition210. The poor qualityand narrowness of the services these organizationswere able to offer prevented them from developinga sufficient private sector clientele and thus theyfloundered when the support ceased.

Entrepreneurs often expect municipalities tocover this gap and provide them with differenttypes of information and basic business services.There are at least two important reasons whymunicipalities ought to cater for this demand. Thefirst is economies of scale. Many local enterprisesare too small and weak to finance sound profes-sional advice on a permanent basis. Yet they needprofessional inputs if they are to optimize their mar-ket activities. The second more directly relates tothe finances of the municipality. If support organiza-tions are run well, their direct costs will, in the longrun, be many times off-set by the indirect revenuesaccruing to the public sector from the increasedeconomic activities they trigger and the decreasedneed for social expenditures.

The problem is that most municipalities are toosmall to establish these services at a scale and levelthat would make a real difference. It is preferablethat professional support and financial incentivesbe established on a regional basis. This necessi-tates the involvement of higher levels of govern-ment or the creation of consortiums of municipali-ties. Donors might be lobbied to bridge gaps for alimited time, but the BiH governments have to takethe long term responsibility.

Access tto wworking ccapital aand llongterm ffinance

A major barrier to business start-ups is findingthe initial working capital and securing ongoingfinance. Municipalities' ability to address this keyquestion is necessarily limited but there are threeinterventions that might be considered; First, consideration could be given to reduc-

ing local fees, charges and rents to new busi-nesses. This runs somewhat against what isargued above, but start-ups present a specialcase and such subsidies should be self-limit-ing.

Second, municipal business incubators pro-vide an institutionalized and tailored solution.If possible, municipalities should consider theestablishment of incubators providing prem-ises, alongside administrative, technical andadvisory services. These inputs can prove cru-cial in improving their chances of survival oninitial entry to the market. In many cases,municipalities have available unused facilitieswhich could be used for such business cen-tres. At present in BiH only two incubatorsexist - in Gradacac and Mostar.

Third, more innovative solutions might beconsidered for the capital constraints faced bySMEs. The most favoured option would bethe organization and sponsorship of a creditguarantee association. Such an arrangementmight bring together a variety of partners -member enterprises, business associationsand a group of local governments to offermutual guarantees for bank loans. Anotheroption might be arms-length support formicro-finance institutions such as Credit

210 Enterprise Development Agencies (EDAs) were established in BanjaLuka, Livno, Mostar, Brcko and Bihac: along with three RegionalBusiness Development Centres, Agency for Local DevelopmentInitiatives (ALDI), Tuzla Agency for Local Economic Development (TALDI),Central Bosnia Economic Development Agency (CeBeda).


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Unions. However, a note of caution must besounded here. These ventures are risky anddue to an acute lack of resources211 most BiHlocal governments have no capacity to cham-pion such approaches. Only the larger andwealthier should consider cooperation withlocal banks. It would generally be more fruit-ful to establish such schemes at the regionallevel and with the support of donors.

Other aactivities

Linkages wwith wwider aactivitiesIt has been argued by some commentators that

LED initiatives are often too narrowly focused, thatthey do not give enough attention to improvinghuman capital and neglect the potential for har-nessing LED to support social objectives. Linkagesnecessarily need to be drawn with improved educa-tion, social protection, health and other local servic-es212. A useful way of resolving these issues is thedevelopment of holistic LED strategies, whichexplicitly include poverty reduction or other socialobjectives as policy goals.

International organizations have over time shiftedthe focus of their development programmestowards the local level213 and many have assistedmunicipalities to develop such strategies214 throughparticipatory approaches which establish dialoguebetween public and private sectors and civil society.These schemes typically establish a formal team ordepartment exclusively responsible for LED. Thosethat have gone down this path have also ensuredthat adequate financial resources are found fromwithin the local budget. Presently municipalitiesstate that they invest a minimum of 5% of theirexpenditure in LED, and this is surprisingly high.

We conclude therefore that there must be scopefor gaining wider pay-offs from LED activities, andmaking local resources go further. The key to this isstrategic planning. Local planning processes oughtto include analysis of conditions and economicpotentials, alongside the identification of actionsand key partnerships with others, such as educa-tional institutions, and higher level governments.

Communication aand ttrust bbuildingMunicipalities also have to significantly improve their

communication with the private sector. A higher levelof involvement and participation would increase trans-parency and accountability, and make municipalitiesmore responsive to their needs. This would in turn,improve local services and better target actions.Municipalities must make an effort to move from formalcompliance with legal obligations towards a moreactive role as a provider of information and an advocate.

Unfortunately, interaction between the two issporadic or in some cases non-existent. Manymunicipalities avoid contact with the private sectorsince they think they have nothing to offer to them.Equally, the private sector often perceives that thesolution to most of their problems lies with higherlevel governments, and thus they show little inter-est in dialogue. SME owners have responded thatthe only occasion when the municipal authoritiescontact them is to seek financial contributions formunicipal projects. Nevertheless, there are alsocases where municipalities are very active and haveregular meetings with the local private sector215.

Building aalliances bbetween llocal bbusi-nesses aand llocal ggovernments

The low capacity of municipalities to implementdevelopment policies is additionally undermined by

211 Many Municipalities lack financial resources for financing even the opera-tional costs of basic services.

212 Water, sanitation, etc.213 USAID, SIDA, OSCE, UNDP, OSI, etc.214 USAID, UNDP, OSCE.

215 Communication and cooperation between public and private sectors inGradacac and Gracanica are well-known. These two municipalities havevibrant local economies.

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a lack of communication, cooperation and supportfrom higher levels of government. FurthermoreEntity and cantonal authorities rarely have a settleddevelopment policy or sufficient capacity them-selves to implement economic development initia-tives216. Regardless of positive intentions, little canbe achieved at the local level without active involve-ment and support from above. Much good cancome from local governments, businesses andother actors joining forces to lobby for change. Anadditional effort should also be made by the inter-national community to put pressure on higher gov-ernments to provide more support to existing localinitiatives.

Local GGovernment MManagement In Chapter Three of this report we examined in

systemic terms, how decentralization and hencelocal government stewardship might be improved.Our focus was the macro level, charting in severalspheres where action might be taken by higherlevel governments to secure change. Similarly inthe previous chapter which dealt with sectoralissues, we pointed out where systems and prac-tices might be reformed within particular serviceareas. This section in contrast focuses on local gov-ernments themselves in relation to the generalquality of how they conduct and organize theiraffairs. It is a natural concomitant to the enablingfunctions discussed above since it requires locali-ties to shape their internal practices and how theyrelate to their citizens to maximise the value-addedthey deliver.

This area is vast, but we confine ourselves here tocorporate management, the extent of consultationand quality of support services.

Corporate MManagement As in other spheres, strategic planning processes

in BiH are regulated differently in the two Entities.In the RS municipalities are obliged to adopt andimplement a municipal development programmeand to agree the budget and annual financial state-ments217. Obligations in the FBiH are not spelt outthat precisely. The federal law on local self-gover-nance defines general functions whilst detailed reg-ulation is undertaken by the Cantons or is specifiedby the municipal statutes. Yet regardless of theseformal frameworks, municipal planning in practice isorganized around the development and implemen-tation of the annual budget.

All municipalities in BiH, generally prepare threetypes of plan; Mayor's annual plan and programme of work: Annual budget: Capital Investment Programme (CIP), which is

also part of annual budget process.In addition, many municipalities draft development

strategies but the current position of these within thegovernance system is weak. Neither the resourcebase nor internal organization is conducive to theirimplementation. Such strategies are often generaldocuments and are unsupported by financial plansand management arrangements. There is rarely there-fore any formal feedback mechanism or monitoring.

Mayor's AAnnual PPlanPreparation and submission of the Mayor's annu-

al plan and programme of work is defined by themunicipality statutes. This document is typically arather vague, three-page statement, highlightingthe mayor's priorities. In essence it is a list of ongo-ing activities which need to be completed in the com-

216 Economic Development Strategy of Tuzla Canton 217 Local Government in Bosnia and Herzegovina, Charles Jokay


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ing year and the Mayor's general commitments; itmight include aspirations about working with theyoung or fostering better community relations.

Capital IInvestment PProgramme ((CIP) Municipalities spend on average between 10%

and 20% of their annual budgets on investment inlocal infrastructure and facilities. The CIP includesdetails of investments in the development andmaintenance of infrastructure and facilities that arenecessary for the provision of municipal services(e.g. roads, street lighting and other street furni-ture, educational facilities, health facilities). Theprogramme is normally developed by departmentsin charge of spatial planning, reconstruction andutilities.

In the majority of cases the CIP is not a plan at allbut a statement of intent. It does not specify indetail the various planned capital investments,instead it quotes only the overall amounts that arecommitted for various types of works for that spe-cific year (e.g. asphalting of a 10 km local road orconstruction of village water supply systems). TheCIP is prepared on an annual basis and it is an oblig-atory part of the yearly budget cycle. However, theCIP it is not a multi-year plan, nor is it a capital budg-et and does not include forecasts or details of con-tingent costs.

The MMunicipal BBudget This is the most important document that guides

local government operations. Indeed, the entireplanning system is focused and organized aroundthe process of its development. Guidance forpreparation is given by the Entity Laws onBudgeting218 which prescribe the rules for enact-

ment of budgets at all government levels. Thesestatutes specify that the document must contain; A detailed breakdown of all public revenues

and expenditures: Proposals for allocation of the budget surplus

or sources of financing of budget deficit: Functional classification of expenditures (sub-

jective analysis): Revenues and expenditures of each budget

beneficiary in accordance with the accountingclassification (objective analysis).

The budget document must also contain match-ing data from the previous fiscal year, changes inforecasts for the ongoing fiscal year and predictionsfor the next. Budget documents must also containan annual report about the planned investmentswhich last for more then one year and referenced tothe relevant enabling legislation. Once completed,the budget is publicly announced and presented.After expiration of a legally determined period, thedocument is submitted to the municipal assemblyfor adoption. In the FBiH, after the municipal budg-et is adopted, it must also be submitted to therespective cantonal Ministry of Finance.

General ccommentary Well managed municipalities typically prepare219

the capital investment and NGO grant allocationsections in consultation with MZs and other civilsociety stakeholders. Although the budget devel-opment process encompasses these types of con-sultations, this does not necessarily mean that theneeds and projects identified are accepted by themunicipality. The allocation of resources oftenremains a reflection of power balance between themain political interests. These practices need to beimproved upon.

218 RS Budgetary Systems Law (Official Gazette of the RS, No. 63/02) andFBiH Budget Law (Official Gazette of the FBiH No. 20/98)

219 Examples taken from Lukavac and Srebrenik Municipalities

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Municipalities have argued that because of theexisting financing system they are unable to devel-op reliable financial forecasts. Yet we found thatthis is not the case for the annual budgetingprocess. Our research shows in some 15 municipal-ities, implementation of the budget reached over90% of the forecasted figures. However, it has to berecognized that projections are made only for thecoming year and they are prepared after the maindecisions on intergovernmental allocations havebeen taken. Municipalities do not produce multi-year predictions. This is the greatest weakness ofcurrent financial planning procedures. This is atleast partly caused by the lack of predictability ofrevenues which remain within the 'gift' of higherlevel governments. The resolution to this thereforelies in the systemic reforms we recommend inChapter 3.

Yet, defective planning also reflects a basic lackof capability and will within municipalities them-selves. Indeed, the generally inefficient use ofresources and weak coordination is rooted inabsence of management interest underpinned byweak political commitment. It is not unusual to hearfrom municipal staff that a strategic plan was agreedbut it has been misplaced and now cannot befound.

OSCE, in the course of its work with municipali-ties on the improvement of their financial manage-ment systems, has identified the following weak-nesses of local budgeting, and we recommend eachof these be addressed; Budgets are often not adopted within the

legally prescribed timeline: Practices are non-transparent:

Documentation does not include a narrativeexplaining budget lines nor discrepancies:

Outstanding debt levels are not clearly stated: Only paid expenditures are recorded and

committed sums are not: Budget planning and realization are not con-

trolled by the municipal departments.

Strategic pplanningAbove all, our analysis calls for local govern-

ments to devise genuine strategic plans for theirorganizations informed by local priorities and chal-lenges. Encouragingly efforts have been made inthis direction, but there remain serious failures inexecution.

There are in essence two mechanisms by whichmunicipalities in BiH devise strategic plans. The firstis where the municipality commissions a strategyfrom an academic institution or from a single orgroup of university professors. These groups tendto develop strategies without any significantinvolvement from municipal staff or the community;equally they are often forced to rely on limited andunreliable statistical data. Such a process usuallyproduces a long and poorly focussed documentthat is read by hardly anyone including those whocommissioned it.

The second type of approach is given by projectssupported by international development organiza-tions. The processes adopted are radically moreprofessional but unfortunately, again because of alack of cooperation, municipalities often work withtwo or three donor agencies on strategic planning,which unnecessarily stretches scarce humanresources, confuses citizens and results in the pub-lication of several plans that have conflicting goals.


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One distinct advantage of such donor-driven proj-ects is their strong adherence to best practice partic-ipatory approaches. These are new to both municipalstaffs and communities. Making use of the knowl-edge of the local community about needs and prob-lems is a diametrically different approach to expert-based processes. Yet, participatory-based planning isextremely demanding of all stakeholders and BiHmunicipalities often cannot make the commitmentrequired. In turn, international development organi-zations often work to pre-determined project budg-ets and timetables. Limitations can result in plansthat are of inadequate quality, superficial and unreal-istic. Regretfully, as a consequence the strategiesdeveloped with participatory approaches in manycases share the fate of those prepared under the tra-ditional approaches. It is also worth noting insuffi-cient commitment on the part of the Mayor alone canprejudice the outcomes. If a municipality agrees towork on strategic development not because it is con-vinced of the benefits but rather because externalforces (typically donors) offer support, and the local

authority does not want to be perceived as uncoop-erative, there is little chance for success.

International organizations counter this by arguingthat even if implementation fails, much is achievedthrough the process itself, chiefly via the dialoguebetween public and private sectors and civil society.Moreover that such processes increase transparencyand accountability by raising the expectations ofthose citizens who participate. Others paint a morepessimistic picture, arguing that stakeholders aremade more apathetic if they witness a failure to fol-low through, and that this can cement perceptions ofan inefficient and moribund municipal sector.

It is important however not to be too pessimisticand some genuine innovations are taking place with-in BiH local governments. A successful example ofprogressive consultative planning at the local level isgiven by the UNDP managed SUTRA returnee sup-port project. The management arrangements itadopts provide a model for mainstream local govern-ment activities and donor interventions within locali-ties (see Box 6; The SUTRA Model).

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We conclude that the solution to these issues isnot to abandon strategic planning or participatorypractices, but instead to address the operationalproblems. We make the following recommendations: Participation should be maintained for the

implementation period by involving stakehold-ers in follow-up monitoring and evaluation:

Inputs from financial and assets managementstrategies should be also channelled intostrategy development, ensuring that plansare realistic and resource based:

Strategies, once developed, should be opera-tionalized through technical and sectoral plans

which must be developed by respective depart-ments and implementation should be ade-quately backed up with appropriate structures:

Performance indicators and measurementsystems should also be designed during theprocess alongside reporting mechanisms.

Management SSupport SServicesIt is apparent that the public administration sys-

tem in BiH is plagued by a poor workplace cultureand ineffective management systems, which giverise to all manner of biases, perverse incentives andmoral hazards. This is supported by widely held

Box 66: TThe SSUTRA mmodelThe UNDP's SUTRA project aims to facilitate the return of displaced persons to their rightful pre-war

homes, in 12 prioritized municipalities (B. Brod, Doboj, Lukavac, Travnik and Tuzla, B. Krupa, B. Novi,Brcko District, Derventa, Drvar, Jajce, Kljuc, Maglaj, Mostar, Samac, Vares, V. Kladusa. The projects activi-ties are diverse ranging from local economic development to infrastructure and housing reconstruction.But its particular value-added is the way it approaches this task through consultation and empowermentof local communities. SUTRA provides a consultative governance model - central to its work has been theestablishment of a framework for the BiH authorities to engage in longer-term, community-driven devel-opment.

Community needs are to be developed through the participatory mechanisms provided by Local ActionGroups based on the public-private partnership concept, in each of the targeted municipalities. SUTRA isdesigned to support local partners within LAGs, mainly municipal officials, civil society representatives andthe business sector, to promote a wider enabling environment for sustainable community development.

SUTRA demonstrates that municipal development can be a powerful agent of change at the communi-ty level but also that reform is infinitely more effective when placed in a coherent policy framework pro-vided by higher-level institutions. In the returns sector, which is a particularly challenging task, the policyframework is provided by the annual priority-setting process at the MHRR (Ministry for Human Rights andRefugees) and SCRDP (State Commission for Refugees and Displaced Persons). At the local level effortsare also made, in the economic development sphere to tie project activities in with the Regional EconomicDevelopment programmes supported by the EU. These devices provide the means of anchoring the workof the LAGs in the field, who in turn shape and tailor activities to the specific municipal context.


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public opinions. UNDP's governance perceptionsurvey, for example, confirmed that a majority of cit-izens and businesses view public administrationpractices unfavourably220. Management weaknesscan be cited therefore as a key cause of poor per-formance in local government operations. In the fol-lowing we examine three principal areas of manage-ment activity, and make proposals for change.

Financial mmanagementAs outlined above, BiH municipalities rarely look

beyond the annual budget cycle when making deci-sions. Equally, the budget process itself is simplyfocused on questions of how available resources canbe spent. Issues of efficiency, economy and effective-ness are almost entirely neglected within the verynarrow concept of financial management adopted.

In addition to a lack of multi-year planning, annu-al monitoring is very weak. Municipalities rarelymake use of information that is not strictly requiredby budget statues. Nor have they developed ade-quate internal reporting systems which wouldenable finance departments to accurately recordexpenditures, track the flows of municipal fundsand provide adequate corporate information.Although municipal assemblies have budget over-sight committees, they do not meet their obliga-tions. In most cases, local governments functionwithout a financial strategy capable of supportingdecision making. Contingency planning is unusualand if resources fail to materialize due to unforesee-able events, common practice is to simply suspendthe activity. This entails very substantial risks forpublic service providers and their clients.

The lack of fiscal autonomy is a major contribu-tion to these weaknesses. It serves to both limitrevenue sources and the incentives to establish a

decent planning mechanism, which might lead tocost savings. Yet it is also apparent that BiH munic-ipalities themselves do not fully exploit their ownpotentials. Opportunities for increasing their owntax revenues and through better utilization of theirassets and property in most cases remainuntapped. Furthermore, there is a troubling lack offinancial discipline.

Within this environment it is unsurprising thatlarge numbers of municipalities face significantdeficits. Financial sustainability cannot be countedon, and there is an urgent need for wholesalereform. We recommend therefore that; Finance departments are appropriately

staffed and their position be strengthenedwithin organizational structures:

Financial discipline is promoted by better inter-nal regulation and increased transparency:

Municipalities consolidate their revenues byincreased charging, exploiting untapped taxbases (especially local property tax) and dra-matically improve revenue collection anddebt recovery rates:

Financial strategies based on multi-year per-spectives should guide these reform objectives.

Asset mmanagementMunicipalities are wholly responsible for the

management of the assets they legally own or theinstitutions for which they 'founded'221. Most munic-ipal assets are registered and recorded in invento-ries. However, these are often inaccurate and rarelycontain information about status and condition ofassets. This limits municipalities from planning andfinancing maintenance and replacement.

Perhaps predictably, municipal leadership typi-cally blame growing obsolescence on the lack of

220 Governance perception survey in Bosnia and Herzegovina; Citizens, busi-ness and civil servants perception of Governance; UNDP (2003)

221 Founder status (in respect of certain health insitutions) confers partialowenership rights

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financial resources. While the impact of this shouldnot be underestimated, negligence, outdated prac-tices and workplace culture have also played a rolein the level of deferred maintenance that has accu-mulated. We recommend that municipalitiesimprove their asset management systems by; Creating regularly updated asset registers

that accurately record inventories: Ensuring that the present status and condi-

tions of assets be registered and appropriatedepreciation rates be determined:

Integrating asset management with the CIPand the financial management system in orderto ensure more efficient allocation of capitalinvestments.

A further asset management problem is theunder-exploitation of revenue-generation potential.Often municipal assets are used by individuals andorganizations free of charge. Municipalities recog-nize their inefficiency in collecting fees and rents,but have as yet, failed to respond to the incentivesto improve on these practices.

Human RResourcesHuman resource management practices within

BiH local governments are in a parlous condition.Overstaffing, poorly qualified workers and veryweak motivation and morale are commonplace. Atthe heart of these problems are two fundamentallywrong but widely used staffing practices. Firstly,municipal employment is often exploited for socialpolicy reasons; decision makers typically attempt tooffset the lack of employment opportunities else-where in the locality by employing people regard-less of their skills. The second is that staffing is pri-marily driven by political and ethnic criteria, and notmerit.

During interviews with BiH municipality staff,many confirmed that human resource managementsystems are virtually non-existent and moreover,that legal provisions relating to hiring, promotionand remuneration are rarely respected. A large pro-portion of staff are not employed through transpar-ent procedures. Nor do municipalities have HumanResource Departments. There are no career devel-opment plans for employees nor is there any realemployee training.

In municipalities with only very basic manage-ment systems, the evaluation of the staff entirelylays in discretion of departmental heads. This isinevitably done without clear criteria. The majorityof municipal staff interviewed had never beeninformed of any criteria used for the evaluation oftheir performance. Most municipal employees per-ceive that, regardless whether they work or not,whether they perform well or not, their status isgoing to remain the same - they will neither berewarded nor sanctioned. Within the present sys-tem it is almost impossible to fire an employee forpoor performance.

We recommend vigorous local public servicereforms be pursued, enabling local governments toestablish adequate human resources managementand provide better career opportunities. Thisincludes setting-up human resources departmentsand developing personnel policies. Proceduresshould be transparent and clear and define; All key practices, including hiring, firing, rede-

ployment and redundancy policies: Conduct and conflict of interest issues - sexu-

al harassment, grievance processes, use ofpublic property and so forth:


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Remuneration and performance rules settingsalary ranges, criteria for changes in salaries,promotion and demotion:

Benefits policies such as annual leave, sickleave, maternity leave, and holidays:

Training and development practices.

Summary aand cconclusionsThis chapter has addressed areas of activity that

have tended to be neglected within BiH local gov-ernment. Yet it is timely that municipalities addresstheir wider enabling responsibilities and the qualityof their organizational process and cultures.

Municipalities have always engaged with theiroperating environments and sought to lead theircommunities. The major difference in modernapproaches to these questions is simply in thedegree of emphasis. Our discussions on both thenatural environment and local economic develop-ment made clear that being an effective 'enabler'involves traditional service delivery (for example asa pollution regulator or infrastructure provider)alongside becoming a community advocate and lob-byist. The extent of these roles will vary greatlyaccording to area and conditions. The core of suchenabling functions is about resolving market fail-ures, such as a lack of SME finance, business serv-ice providers or the presence of pollution. Thisrequires local governments themselves to shapedelivery as they see fit, but it necessarily also

means local leaderships must come to appreciatetheir responsibilities more widely. Sadly, too manyin local government dismiss these functions asbeyond their remit or simply of little practical use.Yet the local environment and the vibrancy of thelocal economy directly impact on the lives of citi-zens - indeed as much as do the quality of schoolsor public utilities. Better economic and environmen-tal conditions also have a direct feedback on thedemand for local services and the ability of munici-palities to raise revenues. Moreover, meetingenabling responsibilities typically requires very lowresource inputs. One of the most valuable contribu-tions of this report is to emphasize the importanceof these functions to local leaders and their con-stituents.

Finally, the issues raised in the discussion onorganizational management lie at the heart of theagenda to improve the broad span of local govern-ment activities. The quality of strategic choices andthe local bureaucracy shapes the effectiveness ofthe entire municipal sector. Here our messages areclear. Firstly, that genuine strategic thinking andplanning practices have to emerge. Secondly, thatthese are enhanced where real consultation takesplace. Third, that across-the-board performanceimprovement is possible now and without majorresource inputs. What organizational changerequires most of all, is for local leaderships to tack-le vested interests and outdated practices.

CHAPTER SIX

TOWARDS A NEW LOCAL GOVERNANCE

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Chapter SSix:

Towards aa nnew llocal ggovernance

Our first goal in this final chapter is to recapturethe conclusions and recommendations we havepresented and offer a general assessment of thechallenges facing local governance in BiH. Our sec-ond, is to map out a strategic vision of the reformagenda.

This endeavour immediately confronts somefundamental questions. Reform in BiH, as else-where in the world, is embedded in politics, yetour assessment of the potential for politicalchange is pessimistic. The political elite have notshown a commitment to reform and ordinary citi-zens are apathetic and disenfranchised. Civil soci-ety is still weak and BiH lacks a genuine 'civilspace'. Sadly, change continues solely to be driv-en by an increasingly assertive resident interna-tional community.

It is difficult to see therefore how the necessaryreforms can ever come about. Our analysis alsosuggests a still more negative possibility: that theabsence of strategies has not comed about bychance or benign neglect, but is a direct conse-quence of dominant political forces' implicitopposition to change. It is a depressing prospectbut the key obstacle to decentralization may notbe systemic weaknesses, but outright politicalopposition.

Our response to this possibility must be bothpositive and assertive. Reform is never the exclu-sive game of those with power, but a challenge tobe achieved by all stakeholders. Real lastingprogress is rarely revolutionary in character but isinstead made up of a myriad of small and practicalsteps, taken by all manner of groups. This reportseeks to support such a process; its analysis, argu-ments and proposals form ammunition for all those

who are willing to fight for change. We also hold tothe view that decentralization has a greater purposein building the broad consensus that is necessaryfor comprehensive reform in modern day BiH.

Building aa bbetter llocal governance ssystem

The ggovernance fframework aandhuman ddevelopment cconditions

Our analysis of the legal and administrativeframework underlined the difficulties the disjunc-tures of BiH present for the quality of governanceand the level of human development. These serveto effectively limit freedom of movement, access tobasic public services and the provision of unifiedstandards of service. The fragmented structure ofgovernment produces huge inefficiencies, with themiddle tiers effectively 'crowding out' municipali-ties from raising their own revenue and exercisingautonomy. The vague and overlapping definition ofresponsibilities and annually determined fiscal allo-cations result in uncertainty and dependency. Theabsence of any real resource pooling and fiscalequalization creates huge disparities between areasand hence, levels of local service provision. Theoutcomes are poor governance, weak public servic-es and the undermining of local democracy.

Although it is difficult to draw direct connections,our review of the evidence suggests that BiH'sintergovernmental arrangements contribute to itsdisappointing human development performance.The country is far from being in a developmental cri-sis, but the lack of governance reform, serves toretard performance in securing basic entitlements.Incomes are low, while health and educational out-comes have stagnated in recent years. As a result


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BiH's strong human development inheritance and itspotential are under threat. In contrast, other initiallyweaker countries, which have proceeded withreforms, are performing better222. This is disquietingfor a country seeking to join the European Union.

Proposals ffor ssystemic cchangeThe third chapter of this report offered the con-

clusion that decentralization and other reforms canplay a very significant role in democratization andthe public service improvement agenda. Our reviewindicated that actions must, however, be initiated atthe systemic level to support changes in servicesectors and within municipalities. Four specificareas for action were identified; The introduction of coordination and equaliza-

tion mechanisms, to include fiscal arrange-ments to compensate for higher spendingneeds:

Improvements in the definitions and corre-spondence of local functions and finances,within a general devolution of functions tolocalities:

Securing the professionalism of the local civilservice and the de-politicization of the envi-ronment in which they work:

Strengthening local political accountabilitythrough electoral and managerial reforms.

The benefits of decentralized governance aremaximised where local authorities are dynamic andinnovative. This can be secured through a mixtureof empowerment and competitive pressure withinan appropriate framework. For this to prevail in BiHboth the State and the local level must be strength-ened. While the first proposed area requires actionat the higher levels of government, the remaining

three are aimed at directly developing local capacityand capability.

The first series of actions would establish a coun-try-wide framework providing standards, outputsand processes, including a fiscal equalization mech-anism. The implementation of the second set wouldlead to a more predictable and stable operatingenvironment for local governments. Achieving cor-respondence between responsibilities andresources is vital and local governments need cleardefinitions of the tasks and resource allocationrules which they face. This would enable them tobuild multi-year strategies and plan effectively.Accountability is also enhanced by groupingresponsibilities and resources for specific functionsat a single governmental level. The final two areasfor reform are complementary and apply to theoperational dimension. These support theimproved delivery of frontline services and enablingfunctions, through improved management andpolitical oversight.

Service ssectors, eenabling functions aand mmanagement

Cross-ccutting ffindings In the fourth and fifth chapters we reviewed local

governance from a vertical perspective, first lookingat the direct services local governments currentlyprovide and others they should provide, and sec-ond at the enabling functions expected of modernlocal governments. For each we examined the pos-sibilities and incentives which affect service deliv-ery, and the relationship between providers andconsumers, evaluating both access and servicequality. While the services reviewed were diverse,the challenges faced were remarkably similar.

The global NHDR for 2004, palces Albania's and Macedonia's HDI scoreabove that for BiH .

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Chapter SSix: TTowards aa nnew llocal ggovernance

Indeed these cross-cutting similarities reveal someof the most important dimensions of the gover-nance transition challenge facing BiH.

A first and key problem faced is an outdated def-inition of public roles and private entitlements andthe non-affordability of some of those entitlements.The socialist state took on wide responsibilities.Education and health were free and accessible toall, other services like culture and utilities were alsowidely available at essentially 'token prices'. Webelieve BiH needs not so much to make an absolutebreak with this tradition, but to redefine the socialcontract between state and citizens.

Whilst the public sector cannot cease to beresponsible for the provision of public services, itcannot necessarily finance them all. Scarceresources oblige the authorities to make difficultchoices. Certain services, like basic education,should continue to be available for all free at thepoint of use, yet in other areas, there is need forserious reconsideration. In the healthcare sector,for example, governments have already takenpainful decisions to cut entitlements. The definitionof the 'Basic Benefits Package' represented a hugestep, as it allowed the extension of a minimal levelof insurance to the vast majority of citizens. Yet incontrast, within the utilities, local governments arehesitant to cut general subsidies whilst it is obviousthat without such cuts financial sustainability isimpossible.

BiH has made only the first tentative moves inrestructuring and redefining public roles andresponsibilities. However, in so doing, it is impor-tant to recognise that throughout any revision ofentitlements, attention must be paid to protectingthe interests of the poor and vulnerable. This calls

for a radical rethink of how policymakers prioritizeand target support.

The second cross-cutting problem is the hugeinefficiencies in service delivery. This is mostly aconsequence of the input-based financing mecha-nisms surviving from the socialist period. In this sit-uation it is very difficult to judge whether the cur-rently available resources could provide for a satis-factory level of service even if usage were rational-ized. Unfortunately, the information currently pro-duced by the BiH's public management systems isnot sufficient to make such judgments. In each ofour sector contributions we call for the reform ofthese mechanisms. Better prioritization, allocationand stewardship can produce strong incentives formore efficient and effective delivery.

The third and the last of our cross-cutting find-ings is that all sectors witness regional disparitiesthat are due to the lack of resource pooling forredistribution among cantons and Entities. Asresources do not cover minimal standards in manyplaces there is an urgent need for resource equal-ization. This is a basic systemic challenge.Resolution of these problems requires more than asystem of solidarity funds, but an explicit recogni-tion that compensation is needed for both varia-tions in revenues and divergent needs.

Sector cconclusionsand rrecommendations

We summarise the specific sector challengesencountered in two ways. First by groups of sectors,and second in matrix form (see Table 6.1) to reflectthat solutions necessarily require concerted actionsfrom both higher and lower level governments.


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Taking the human service sectors first (thehealth, education and social services sectors) whichhave the most direct relationship with humandevelopment outcomes, we concluded that theinstitutional frameworks are wholly inadequate fordelivering the required outcomes. Roles andresponsibilities are confused and the systems arepoorly rationalized. And specifically that; In primary education, the existence of large

numbers of small schools results in a costlyand weak service, and there is scope forrationalization.:

In the health sector an ill-fitted geographicaldistribution of provision due to the largepopulation shifts and Bosnia's problematic

administrative structure presents a hugechallenge:

In social services, poorly coordinated invest-ment has resulted in network inefficiencies.

Part of the solution to these problems lies incoordination and equalization. Yet rendering theinstitutional networks more effective would neces-sitate large investments that are not available at thelocal level and nor would they be directed to thepriority areas within the current system.Intergovernmental grants financed through aid orborrowings are therefore required to supportmunicipalities to restructure and invest in publicservice delivery.

Table 6.1; Summary of key sector challenges

EDUCATION HEALTH SOCIAL UTILITIES LOCAL ENVIRONMENTAL

CARE CARE ECONOMIC MANAGEMENTDEVELOPMENT

Tasks and political costs of upper governmentsRedefinition of Insurance Beneficiary Universal Enabler Enabler andentitlements coverage groups access coordinatorand public roles Benefit according

packages to needNew financing Per student Capitation Money Cost SME andschemes and fee for follows coverage start-up

service the patient and metering supportRestructuring Facility Network Improve Network Active Regulatory support improvement rationalization access and extension and labour change

and network and filling monitoring rehabilitation policyrationalization access gaps implementation

Political cost Restrict Restrict Economic benefits beneficiaries implications

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Chapter SSix: TTowards aa nnew llocal ggovernance

Tasks and political costs of local governmentsLocal public roles Service Service Service Policy Enabler Enabler

provision provision provision Supply SME and and advocateaccess start-upMeans supporttestedsubsidies

Key components Improve and Improve and Reach out to Financial Enabling Regulation andof local strategies rationalize rationalize people in sustainability environment information

delivery and institutional need Extension of SME and disseminationnetwork network access start-up

supportPolitical costs Close school Increase price Economic

and fire staff and collection implications for

business

Second, with regard to utility services, BiH facesa classic transition challenge in reshaping percep-tions, expectations and the mode of service deliv-ery. In short, the utilities must be run on commerciallines; their costs should, as far as possible, berecovered from user charges. Any element of cross-subsidy should be explicit and justified in terms ofthe direct social benefits. Pricing schemes and theperceived entitlements of citizens must be changedto secure sustainability and a rational use of inputs.Utilities must cease to be a kind of direct social sup-port. Charging can create important incentives formore rational behaviours on the part of decisionmakers, providers and consumers. Market-basedincentives and social goals are not necessarily mutu-ally exclusive - cost-recovery charging can assist inpromoting access and universal coverage. Yet it alsoneeds to be recognized that increasing prices anddirecting subsidies to the vulnerable alone, entailspolitical risks for local leaders.

Third, referring to enabling functions, local gov-ernments need to modernize their approach andrecognize they hold implicit duties that extendbeyond mandated responsibilities. These activities,like local economic development and environmen-tal improvement, are not ancillary to their missionsbut central to community development. This neces-sarily means taking these functions seriously andnot shifting responsibility elsewhere. It has to berecognized that finances are necessarily scarce, andthis calls for municipalities to find innovative waysof meeting these challenges though partnershipswith others, higher level governments, neighbour-ing areas and the private sector, and throughexploiting other non-financial resources to securethe desired outcomes.

Finally, in relation to strategic management andplanning, we emphasize that reform is very much amatter of adopting best practice approaches com-mon to complex businesses and public sector

EDUCATION HEALTH SOCIAL UTILITIES LOCAL ENVIRONMENTAL

CARE CARE ECONOMIC MANAGEMENTDEVELOPMENT


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organizations the world over. These span finance,corporate planning and human resources disci-plines, but this process will also require far morethan simply 'cutting and pasting' innovative proce-dures. Developing the right work culture, incen-tives, performance discipline, and above all, mana-gerial ambition will prove challenging. It must berecognized that fundamental change is not securedovernight and requires sustained commitment.

Charting aa wway fforwardDecentralization is an essentially political ques-

tion, since it necessarily involves changing the dis-tribution of power and resources. The systemicreforms that we have identified will therefore rankas the most difficult to realize. Effective progresswill require leadership and a broadly based consen-sus. Moreover, to be sustainable, state-levelchange must have domestic backing strong enoughto overcome vested and immovable interests.

Unilateral international imposition would almostcertainly be self-defeating. But this should not pre-clude international sponsorship of discussions orthe development of policy options. Support andencouragement is a valuable function which mightbe discharged both by donors and by the Daytonpartners.

Equally, the extent of the challenges at the State-level does not mean that sectoral and less problem-atic systemic reforms should be shelved or madecontingent on higher level reforms. Firstly, sectoralreforms themselves have a supportive 'soft' politi-cal role to play in shaping attitudes and thus thepolitical climate. Furthermore, many simply makegood sense in their own right and can be imple-mented now. For example the introduction of a

new pricing regime in the utilities has both a strongtechnical rationale and would directly work to mod-ify incentives and behaviours. We emphasize thatchanges which result from operational interven-tions like this, are not merely limited to the con-sumers of local government services, but directlypromote political room for manoeuvre.

Management of perceptions and expectationswill also be important, and there is a difficult balanc-ing act to be secured between this and maintainingsufficient ambition. Passivity and cynicism arealready features of the political landscape in BiH. Allpartners in the process of change need to beschooled in the need for tenacity and determina-tion. All positive contributions must be welcomed.It is possible and useful to diligently work on smallpractical reforms in various sectors. These incre-mental steps are key to setting the ball rolling. Theyboth curtail the wasting of resources and contributedirectly to quality of citizens' lives. This ultimatelyestablishes a virtuous circle, building trust in publicinstitutions, and breaking citizen apathy and deep-rooted opposition.

We close on both a cautionary and an optimisticnote. It would be foolhardy not to underline thatBosnia and Herzegovina's recent history and politi-cal geography present a challenging environmentfor the programme we advocate. Yet, as we haveargued previously, targeting the local arena, wherethe politics is more real and immediate, can unleashseismic forces capable of overcoming entrenchedopposition and renewing the entire system of gov-ernance. This is precisely why local governmentreform is so central to the human developmentagenda in BiH.

TECHNICAL ANNEXES

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Annex 11:

Human DDevelopment IIndices

This annex provides the calculations to supportthe standard human development indices forBosnia and Herzegovina, which are presented inChapter 2 and referred to throughout the publication.It has two sections. The first provides a brief overviewof the human development approach, the seconddescribes the methods used to compile the indices.

The CConcept oof HHumanDevelopment

The human development approach provides awelfare-based means of thinking about, and track-ing, economic and social progress. At its root,Human Development concerns itself with further-ing individuals' capacities (their 'capabilities') toaccess those states of being (or 'functionings') thatdefine the quality of life. These include being ableto secure a decent education, being in good health,having the economic wherewithal to participate inthe economy, and having a political voice by whichoutcomes can be affected. The approach grew outof Basic Needs thinking which re-defined develop-ment objectives away from a small number ofmacroeconomic indicators, chiefly growth in percapita incomes, and brought in notions of securingbasic entitlements, such as nourishment, warmthand shelter. Human development goes conceptual-ly further by expressing well-being in terms ofsecuring the freedom to make positive choices andso enable individuals to realise their full potential.

In order to give effect to these values UNDP for-mulated a metric through which performance couldbe measured over time and between nation states.The Human Development Index (HDI), was first pub-lished in the global Human Development Report(HDR) in 1990, and has been calculated for each of

the UN member nations on an annual basis eversince. The HDI is a composite index made up ofthree equally weighted parts representing three keycapabilities; life expectancy, educational perform-ance (given by literacy and enrolment rates) and liv-ing standards (given by GDP per capita). While theHDI represents the principal indicator employed,further indices have been added over time and com-pilation methods have been sophisticated; The Human Development Index (HDI), as out-

lined above: The Human Poverty Index (HPI), a capability-

based poverty measure: The Gender Development Index, a stylised

form of HDI which adjusts the HDI compo-nents to reflect gender differences:

The Gender Empowerment Measure (GEM),which explicitly measures the political andeconomic empowerment of women.

Indices ffor BBiHThe rubric and calculations for BiH for each indi-

cator follow below. In general the methods repli-cate those in the global report. However, the calcu-lations do attempt to offer more a comprehensiveand reliable picture by using more up up-to-datedata, and by reporting indices (specifically the HPIand the GEM) which are not yet available interna-tionally. Occasionally this has necessitated depart-ing from the standard methods of compilation andthis is disclosed where relevant. Although theanalysis provided in Chapter 2 makes use of indicesprovided at Entity, and in some cases regional lev-els, the following reports only the national figures.Sub-national data necessarily relies on estimatesand assumptions, and is therefore provisional.


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Details of how the sub-national figures were arrivedat can be found separately in Annex 2.

Human DDevelopment IIndex -HDI

The HDI is summary measure of human develop-ment. It measures average achievement acrossthree basic dimensions; A long and healthy life, as measured by life

expectancy: Knowledge, as measured by the adult literacy

rate (two thirds weight) and the combined pri-mary, secondary and tertiary gross enrolmentratio (one third weight):

A decent standard of living, as measured bythe logarithmic transformation of GDP percapita (in PPP US$).

Before the HDI is compiled an index needs to becreated for each of the dimensions. These indicesare framed by minimum and maximum values,termed 'goal posts'. Performance in each dimen-sion is expressed as a value between 0 and 1 byapplying the formula;

Index = Actual - Minimum Value Maximum - Minimum Value

The minimum and maximum values for the cur-rent year are;

Max MinLife Expectancy 85 25Adult Literacy 100 0Combined enrolment 100 0GDP per capita(PPPUS$) 40,000 100The HDI is then given as a simple average of the

dimension indices. The Box provides details of thecalculations for BiH.

The HHDI ffor BBosnia aand HHerzegovinaThe approach outlined below entirely follows the standard UNDP methodology.

(1) CCalculating tthe LLife EExpectancy IIndexThis index measures the relative achievements of a country in longevity. For BiH with a life

expectancy of 74 years the index is given as;Life Expectancy Index = (74.0- 25) / (85- 25) = 0.817

(2) TThe EEducation iindexThis index measures a country's relative achievement in both adult literacy and com-

bined enrolment. Two subsidiary indices are calculated for each of these part-dimensions,and then combined with differential weights (two versus one third);

Adult Literacy Index = (94.3-0) / (100-0) = 0.943Gross Combined Enrolment Index = (67.3-0) / (100-0) = 0.673Education Index = 2/3 (0.943) + 1/3 (0.673) = 0.853

(3) CCalculating tthe GGDP IIndexThe GDP index is calculated using adjusted GDP per capita (in purchasing power dollars).

Income serves as a surrogate for all dimensions of human development not reflected bylongevity and knowledge. GDP per capita is adjusted using a log transformation becauseachieving a respectable level of human development does not require unlimited income andthe associated welfare benefit declines progressively as more income is received. For BiHwith a GDP per capita of PPPUS$ 5,970 the index is given as;

GDP Index= log(5970)-log (100)/log(40,000)-log(100)= 0.683

(4) CCompiling tthe HHDIOnce the dimension indices have been determined the HDI is the straight forward aver-

age of the three (see diagram also);HDI =1/3(ILE) + 1/3(IE) + 1/3 (IGDP)

= (0.817/3) + (0.853/3) + (0.683/3) = 0.784

Life ExIndex

EdnIndex

GDPIndex

HDI

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Annex 1: Human Development Indices

The HHuman PPoverty IIndex - HHPIWhilst the HDI measures average achievement the

HPI measures deprivation in the basic dimensions ofhuman development. These are represented by theextent to which nations fail to reach specified thresh-olds (akin to human poverty lines). The scale ofinequality within the world means that it is not possi-ble to meaningfully apply a common index to all UNmember nations and thus two variants are provided; HPI1 which is applied to the developing world: HPI2 which is reported for selected OECD

countries, but is equally applicable to the for-mer East European nations (and thus to BiH).

Each measures similar deprivations, but the HPI2adopts higher thresholds and includes an unem-ployment variable to track social exclusion. A sum-mary of each follows.

HPI1 Premature death, measured by the propor-

tion of the population not reaching age 40. Exclusion from knowledge measured by adult illiteracy. Inadequate living standards given by the average

of the proportions of those without access tosafe water, and children who are underweight.

HPI2 Premature death measured by the proportion

of the population not reaching age 60. Exclusion from knowledge measured by the

level of functional literacy skills. Inadequate living standards measured by the

proportion living below the income poverty line. Social exclusion represented by the long term

unemployment rate.Although the HPI2 specification is more relevant

to the BiH context, data limitations have meant it is

not possible to follow the full formulation. Thus ahybrid HPI has been adopted (see box).

The HHPI ffor BBosnia aandHerzegovina

(1) BBiH SSpecificationData limitations have meant that the approach outlined below

deviates somewhat from the HPI2 specification which is relevant to BiH.The two variables we lack are the numbers of adults lacking

functional literacy skills and the numbers below an incomepoverty line (defined as 50% of the median income). In theirplace we have substituted the total adult literacy rate and theconsumption-based poverty measure given in the LivingStandards Measurement Survey (UNDP/ World Bank, 2003).

(2) CCalculating tthe HHPI ffor BBiHThe hybrid formula we have adopted is closest to the HPI2

which fits best with BiH's developmental position;HPI2 = [1/4(P1ª + P2ª + P3ª+P4)]1/a

Where;P1= Probability (at birth) of not surviving to age 60P2= Adult illiteracy RateP3= Population below the consumption poverty lineP4= Long term unemployment (12 months and more)a = 3 (as per standard)Thus the calculation is;

= 3 [1/4(13.73 + 5.73 + 19.53 + 9. 53)] = 1144..00%%

This implies that a standardised 14 % of the popula-tion are living in human poverty.

(3) SStandardization and tthe pparameter ((a)

Note that unlike the HDI each component is expressed as apopulation percentage and therefore no standardisation isrequired prior to calculating the index.

The method of combination makes use of a power (a) whichis currently given as the cubed value of each indicator. Thisensures that the final result is more than proportionately affect-ed by the lowest components. As a result HPI scores can bestimproved by action to address each and every of the depriva-tions measured, and the effect of trade-offs between the vari-ables is muted.


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The GGender-rrelatedDevelopment IIndex - GGDI

The GDI is a stylised form of HDI which adjuststhe calculation to reflect inequities between men andwomen. The index is specified using the samemethodology and dimensions, but yields gender-adjusted measures, termed equally distributed indices(EDIs). These are then averaged to produce the GDI.

There are three stages to the process. First, carry-out the standard HDI calculations but for men andwomen separately. Note this requires the use of gen-der-specific goalposts for life expectancy; with menhaving a minimum and maximum of 82.5 and 22.5years, and women 87.5 and 27.5 years. Second, thegendered-indices are recombined to provide theirequally distributed counterparts. Using the formula;

EDIs = {[Female population share (female index1-e)]+[male population share (male index1-e)]}-1

The parameter (e) represents the level of aver-sion to inequality. As it rises above 1 it places agreater penalty on inequalities within any of thedimensions. Within the current specification (e) isset at 2. Thus the square roots of the two shares aretaken to produce the harmonic mean of the femaleand male indices.

EDIs = {[Female population share (female index-1)]+ [male population share (male index-1)]}-1

Finally the GDI is calculated as a simple average ofthe three EDIs.

As the GDI represents an adjusted HDI it is usefulto compare the result against the headline HDI. Alarge decline is suggestive of gender inequitywhereas a value close to the HDI is indicative ofequity. As the BiH data in box shows, the GDI variesonly marginally, indicating, that at the macro level atleast, gender equity prevails.

The GGDI ffor BBosnia aand HHerzegovinaData sources are sufficiently robust as to allow the standard GDI methodology to be followed.

(1) CCalculating tthe EEqually DDistributed LLifeExpectancy Index FEMALE MALELife expectancy = 77.0 71.0Life expectancy index = 0.825 0.808Population share = 51.6% 48.4%Life Ex. EDI= {[0.516(0.825-1)]+[0.484(0.808-1)]-1 = 0.817

(2) CCalculating tthe EEqually DDistributed EEducationIndex

First indices for the adult literacy rates and the combined gross enrolment ratios are cal-culated separately for men and women;

FEMALE MALEAdult literacy rate = 90.4% 98.4%Adult literacy index = 0.904 0.984Gross enrolment ratio = 70.8% 63.9%Gross enrolment index = 0.708 0.639Second, the education index (two-thirds weight to adult literacy and one-third weight to

the gross enrolment) is computed for each gender; Female = 0.838; Male = 0.869.The gendered indices are combined to create the Education EDI;

{[0.516(0.838-1)]+[0.484(0.869-1)]}-1= 0.853

(3) CCalculating tthe EEqually DDistributed IIncomeIndex

First, estimates are developed for the level of male and female income in PPPUS$. As inthe HDI methodology per capita incomes are adjusted by taking the logarithm of the PPPfigures and the income index is calculated for each gender using the standard formula; (logactual-log minimum / (log maximum- log minimum);

FEMALE MALEPer capita PPPUS$ = 3,749 8,338Logged income = 3.574 3.921Income Index = 0.605 0.738The Income EDI is arrived at by applying the standard treatment;

{[0.516(0.605-1)] + [0.484(0.738-1)]}-1 = 0.663

(4) CCompiling tthe GGDIThe GDI is simply the unweighted average of the three equally distributed dimension indices;GDI = 1/3(Life Exp. EDI) + 1/3(Edn. EDI) + 1/3(Inc. EDI)

= 1/3(0.817) + 1/3(0.853) + 1/3(0.663) = 00..777777

(5) CComparison wwith HHDIThese results show that the GDI is less than 1% lower than the HDI (0.784), suggesting

that gender inequity is not high.

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Annex 1: Human Development Indices

The GGender EEmpowermentMeasure - GGEM

Focusing on women's opportunities rather thantheir capacities, the GEM is calculated on the basisof three key dimensions; Political participation and decision making

measured by women's and men's shares inthe primary legislatures.

Economic participation as measured by twoindicators; the gender shares of decision mak-ing offices (legislators and senior public offi-cials); and the gender share within profes-sional and technical positions.

Power over economic resources, as given by the ratioof men's and women's estimated earned income.

For each of these dimensions, an equally distrib-uted equivalent percentage is calculated (EDEP) asa population weighted average according to the fol-lowing general formula;

EDEP = [{female population share (female index1-e)]+ [male population share (male index1-e)]}-1

The parameter (e) measures aversion to inequali-ty and values higher than 1 more than proportion-ately penalise inequities on individual components.As in the GDI the current UNDP specification sets eat 2, affording a moderate penalty to inequalitybetween the genders. The formula is thus;

EDEP= {{female population share (female index-1)]+ [male population share (male index-1)]}-1

For political and economic participation theEDEPs are further adjusted by dividing by 50. Therationale being that in an equal society theseauthorities should be shared equally.

The income dimension ratio is calculated with ref-erence to the standard HDI goalposts, but theunadjusted PPPUS$ figures are taken in place of thelogarithmic scale.

Caallccuullaattiinngg tthhee GGEEMM ffoorr BBoossnniiaaaanndd HHeerrzzeeggoovviinnaa

Data sources are sufficiently robust to allow the standard UNDPmethodology to be followed.

(1) CCalculate tthe EEDEP ffor pparliamen-tary rrepresentation ((PR)

This measure reflects the relative empowerment of women in thepolitical sphere. The formula is based on the relative shares of seats heldby men and women in the national parliament, versus the population gen-der balance.

FEMALE MALEPopulation share 0.516 0.484Parliamentary share 14.3% 85.7%PR EDEP= {[0.516 (14.3-1)] + [0.484(85.7-1)]}-1 = 23.97Indexed EDEP (divided by 50) = 0.4794

(2) CCalculating tthe EEDEP ffor eeconomicparticipation

This element reflects the representation of women and men in seniorexecutive and decision making positions in the economy, again relative tothe overall population share.

FEMALE MALEShare of legislators/ seniorOfficials & managers (LSOM) 19.57 80.43Share of technical & professional posts (TPP) 48.66 51.34LSOM EDEP={[0.516(19.57-1)]+[0.484(80.43-1)]}-1= 30.88Indexed EDEP (divided by 50) = 0.6177TPP EDEP={[0.516 (48.66-1 )] + [0.484(51.34-1)]}-1= 49.93Indexed EDEP (divided by 50) = 0.9987

(3) CCalculating tthe EEDEP ffor iincomeThe male and female earned income figures used for the GDI are re-

used here, but are not adjusted using the logarithmic scale. The standardEDEP approach is then followed;

FEMALE MALEIncome (PPPUS$) 3,742 8,338Index (x-100)/(40000-100) 0.092 0.207ESDEP for income (average of the 2) = 0.1252

(4) CCalculating tthe GGEMThe final index is given by the simple average of the three components;GEM = (0.479+0.808+0.125)/3 = 0.4709

(5) FFemale aand MMale IIncome SSharesNote that as in the global report the female income share is based on

the ratio of male to female wages scaled by economic participation rates.

For BiH it is assumed average female wage is 75% of the male wage.

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Annex 22:

Regional HHuman DDevelopment IIndices

Chapter 2 of this report provides a regional pic-ture of Human Development in Bosnia andHerzegovina today. Our overall purpose was to bet-ter contextualize the environment in which localgovernments operate, and to show that local actionis vital if material improvements in human develop-ment are to be secured.

Three separate disaggregation models are offered atvarious levels; the FBiH and RS Entities, the FBiH Cantonsplus the RS, and one based on a clustered sample ofmunicipalities across the whole of BiH. All of the optionsoffer a disaggregation of the Human Development Index(HDI). The municipal sample also provides a modifiedHuman Poverty Index (HPI), whilst the Entity-level modelprovides the complete set of indices.

This Annex explains the methodology employedto support these calculations and highlights thechallenges and problems encountered. Whilst dis-

aggregations of this nature would present prob-lems in any context, the position is more problem-atic in BiH, owing to the lack of statistical sources atall levels. Thus, it has to be noted that our esti-mates are at best proximate and provide an indica-tion but not a definitive mapping of regional dispar-ities within BiH.

Entity LLevelThis first approach, which provides measures for

each entity, is the most reliable sub-national disag-gregation offered and permits the calculation of thefull set of indicators (see table A1 below). But withonly two units, it might be argued that it is of ratherlimited value. Indeed, as both anecdotal evidenceand the later approaches show, there are quite con-siderable disparities within each Entity.

Table A1; Entity Level Human Development Indices

Indicator FBiH RS State FBiH RS EntityVariance Variance Variance (RS

against against against FBiH) State State

HDI 0.796 0.758 0.784 +1.5% -3.3% -4.8%

- Life Expectancy Index 0.823 0.807 0.817 +0.7% -1.2% -1.9%

- Education Index 0.854 0.833 0.853 +0.1% -2.3% -2.5%

- Economic Index 0.703 0.633 0.683 +2.9% -7.3% -10.0%

HPI 12.5% 16.9% 14.0% -10.7% -20.7% -35.2%

GDI 0.786 0.757 0.777 1.2% -2.6% -3.7%

GDI change on HDI -1.3% -0.1% -0.9% -44.4% +88.8% +92.3%

GEM 0.509 0.517 0.471 +8.1% +9.8% +1.6%


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The methodology employed was straight for-ward. The data sets used for each of the calcula-tions were gained separately from the respectiveEntity's statistical institutes and where this was notpossible, other official sources were used.Although the compilation rubric was essentially asdescribed in Annex 1, there are two deviations fromthe standard approach; The first concerns the life expectancy (LE)

index used in the HDI and GDI calculations.Owing to the absence of a comprehensivepopulation census, national life expectancydata for BiH has since 1999 been based on UNestimates. At Entity level only the RS Institutehas carried out an estimation exercise.Therefore the indices rely on quoted esti-mates for the State and RS and our own inter-polated figure for the FBiH. The interpolationused was crude and assumed strict propor-tionality according to population size betweenthe two Entities, i.e.

Life Expectancy (LE) FBiH = State LE - (RS LE x RSPopn. Share) ÷ FBiH Popn. Share The second relates to the longevity indicator

used within the HPI. As age specific mortalityrates are not available for the FBiH or RS, theprobability of surviving until age 60 compo-nent (P1), has been held constant for bothentities.

It should also be noted that the HPI results varydramatically according to how the Long TermUnemployment component is specified. Either offi-cial unemployment rates or the LSMS (ILO-based)definition can be used, and both are presented inthe text. Although based on a sample survey andnow rather dated, the LSMS approach remains

more accurate given the weaknesses associatedwith the official jobless count.

FBiH CCantons pplus tthe RRSThis second approach provides a considerably

more disaggregated picture of human developmentconditions across BiH, but does so at the expenseof rigour and completeness.

The results are limited to the HDI alone, and itwas possible to only fully vary the Economic (GDP)component. This is because there are no completeofficial or unofficial secondary sources for sub-enti-ty life expectancy, educational enrolment or litera-cy. In addition, the GDP figures used also have theirlimitations are they are based on research carriedout at Canton Sarajevo in 2000 (on 1999 data) . As aresult; The life expectancy and education indices

were held constant at Entity-level values -respectively; 0.823 and 0.864 for the FBiH;and 0.807 and 0.833 for the RS:

The economic index was derived by re-pricingper capita 1999 estimates taken from CantonSarajevo research, using the published defla-tor series (a factor of 1.0613) . These werethen re-priced to international (US dollar)prices, using an imputed Purchasing PowerParity Factor (4.3833) .

The non-availability of comparable data for any ofthe seven RS regions necessarily also limited theanalysis to the Federation. Therefore we are effec-tively recognizing the RS as a single region. This is aproblematic assumption as conditions within theRS, are likely to vary substantially. However, theanalysis does usefully demonstrate than the RS isnot universally less developed, and its placement

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Annex 2: Regional Human Development Indices

within the middle of the distribution underlines theweakness of such commonly held assumptions.

The results of the exercise are given in Table A2below;

Table A2; HDI for FBiH Cantons and the RS

Canton or RS Economic HDI Variation from Percentage difference(Rank Order) index State level on high HD level (0.800)

1. Sarajevo 0.792 0.824 5.1% 3.2%

2. Neretva 0.718 0.800 2.0% 0.3%

3. West Herzegovina 0.712 0.798 1.8% 0.0%

4. Republika Srpska 0.633 0.761 -2.9% -4.8%

5. Central Bosnia 0.600 0.760 -3.1% -5.0%

6. Tuzla 0.594 0.758 -3.3% -5.3%

7. Zenica Doboj 0.581 0.754 -3.8% -5.5%

8. Podrina 0.569 0.750 -4.3% -6.0%

9. Posavina 0.563 0.748 -4.6% -6.3%

10. Herceg Bosna 0.562 0.748 -4.6% -6.3%

11. Una Sana 0.548 0.743 -5.2% -6.9%

The above show a reasonable level of variationwith the highest value (Sarajevo) being 5.1% abovethe State-level figure and correspondingly the low-est value (Una Sana Canton) being a similar percent-age below the State level. More interesting are therelativities to the High-Human Development inter-val which begins at a value of 0.800. This illustratesa distinct break in the data with three regions(Sarajevo plus the Herzegovina cantons) beingwithin the category, and the others all around 5%below. Indeed, the level of variation outside thehigher-scoring regions is very much reduced.

Sample oof MMunicipalitiesThe third approach relied on a sample of 13

municipalities scattered across BiH for which data

had been collected in 2000 for research undertakenby the Sarajevo Economics Institute. This exerciseaimed to use pairs or groups of three municipalities,to represent the larger regions in which they arelocated and purposefully avoided using outlierssuch as Sarajevo and Banja Luka. The six regionsand the constituent municipalities were; Region 1; Sanski Most, Kliuc Region 2; Bosanski Novi, Prijedor Region 3; Travnik, Vitez Region 4; Zenica, Tesanj Region 5; Siroki Brijeg, Ljubski, Posuje Region 6; Trebinje, Gacko

The data complied for each allowed the calcula-tion of approximate HDIs and HPIs for each munici-pality and region (the aggregate of the two). Owing


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to data source difficulties, significant deviationsfrom the standard methodology were necessary; In the case of HDI; As it was not possible to

vary life expectancy data, this was held con-stant across the sample at the state levelvalue. Educational information was sourcedfrom municipalities themselves, whilst theincome (GDP) data was arrived at via common-ly accepted disaggregation methods (basedon SNA data). Allowance was also made forunrecorded remittances from aboard andinformal sector activity.

In the case of HPI; Lack of adequate datameant the index specification had to be modi-fied to a form somewhere between the HPI1(used for developing countries) and the HPI2(used for industrialized nations). The fourcomponents were as follows (with a descrip-tion of how closely they match the HPI2 spec-ification);

P1 - probability of not reaching age 60 (stan-dard);P2 - total unemployment (non-standard butconceptually closer to HPI2);P3 - wastewater connection rates (non-stan-dard and closer to HPI1);P4 - illiteracy (non-standard measure usedwhich is closer to HPI1).

In order to update this exercise for the relevantbase year (2002), further adjustments were madeto the calculations; The 2001 state-level life expectancy figures

were replaced with the current Entity level fig-ures (see above).

The GDP index data was re-priced to 2002prices using the GDP deflator series (a factor

of 1.0146) . This was followed by applicationof the PPP adjustment specified for 2001.Note that here we made use of the 2001adjustment factor and not the derived 2002adjustment, as the global HDR retained theper capita GDP for BiH at the 2001 value.

Finally also in relation to HPI; as it was impossibleto replicate the data, no updating took place andthe original 2001 estimates were simply rolled for-ward.

Given the limitations described we concludedthat at best, the HPI dataset could only offer anordinal and non-regional reflection of the disparitiesbetween the selected municipalities. This is explic-itly recognised within the text of the report, and theraw data (which is given below in Table A3) is notreproduced.

Table A3; Sampled Municipalities HDI and HPI DataSampled HDI Value HPI ValueMunicipality

Sanski Most 0.707 11.5%

Klju~ 0.723 7.5%

Bosanski Novi 0.731 5.0%

Prijedor 0.725 5.8%

Travnik 0.759 11.2%

Vitez 0.788 7.2%

Zenica 0.754 7.5%

Te{anj 0.733 13.5%

[.Brijeg 0.786 10.5%

Ljubu{ki 0.743 7.9%

Posu{je 0.729 13.8%

Trebinje 0.737 9.0%

Gacko 0.704 15.3%

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Annex 2: Regional Human Development Indices

Several regional constructions of these resultswere reported to NHDR team members. The subse-quent discussions revealed concerns about theselection of the original sample, how representativethe municipalities are for their regions and the indexmodifications made. As a result, the final textdescribes these results as only being an illustrativereflection of likely regional pattern of human devel-opment and poverty. Although both HDI and HPIare presented in ordinal form, the relatively betterquality of the HDI was recognized by expressing theresults as a ratio of the highest figure.

In spite of serious weaknesses, it is apparent thatthe results have some correspondence with anec-dotal evidence and the other more satisfactoryapproaches quoted. They broadly reveal a core-periphery pattern of disparities. It is also interestingto note that there is little relation between the HDIand HPI results at municipality level. Indeed, thereis at least a suggestion of a negative relationshipbetween the two and this is particularly so in theemergent wealthier regions of the Federation.

155

Annex 33: DDonor aactivities

in tthe llocal ggovernance aarena

This annex offers an overview of current andrecent international donor activity in the areas ofdecentralization and local government servicereforms in BiH. It is intended to relate existingdonor projects to the problems and constraintsfaced by local governments, as have been identifiedin this report. For each problematic issue, relevantdonor programmes are grouped under a separatesubheading and commented upon. The annex clos-es with an assessment as to whether specific prob-lems are being tackled, and suggests gaps to be tar-geted by future donor assistance.

Macro-llevel PProblems rrelated ttothe DDPA aand EEntityConstitutions

Legal confusion and competency overlap. Therights and responsibilities of local government inBiH remain ill-defined. Higher authorities have beenable to exploit this by delegating tasks to themunicipal level while withholding the necessaryresources. Subsidiarity is severely wanting in BiH.Municipalities have also suffered badly from nothaving the power to determine their fiscal rev-enues, thus being unable to undertake long-termplanning and budgeting.

To a certain extent, this has been remediedthrough the passage of entity laws on local self-government. The Council of Europe (CoE) has takenthe lead in addressing these issues, by lendinglegal support to lawmakers in both Entities. TheEuropean Charter on Local Self-Governance(ECLSG) has served as the base document; itsimplementation is one of CoE's post-accession cri-teria for BiH. Specifically, CoE has instigated andsupported the following interventions;

Launching a model cantonal law on local self-government (LSG):

Supporting the amendments to the frame-work Law on LSG of the FBiH:

Supporting the drafting amendments to theConstitution of FBiH:

Supporting the drafting of a new Law on LSGfor the RS.

Lack of formal municipal consultation and repre-sentation at canton/ entity/ state level; Althoughassociations of municipalities exist to represent theirinterests at higher government levels, these havebeen ineffective. Strengthening of such associationsvis-à-vis the Cantons and RS government, respec-tively, is crucial if municipalities are to have more sayin public policymaking. An upcoming project by theAssociation of Netherlands Municipalities (VNG) andOSCE will focus on capacity building for both exist-ing local government associations, the Union ofCities and Municipalities in the Federation, and theUnion of Municipalities and Towns in the RS.

Problems aat tthe llocal llevelLack of capacity and capability on the part of may-

ors, lawmakers and senior managers; Internal mis-management of municipalities is in part due to thelack of professional administrative skills of mayorsand civil servants at the local level. In response tothis a number of interventions are underway; OSCE runs a Local Government Programme

with subcomponents on Public Ethics andDissemination of Best Practice. The latter isbased on the UK's 'Beacon Council' scheme,and awards local authorities demonstratingbest practices in specific areas of servicedelivery and performance. It is run in associa-


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tion with CoE and the Local GovernmentInternational Bureau:

Also, an OSCE programme entitled 'strength-ening internal good governance within localauthorities' will provide training to incomingmayors and councillors following the 2004municipal elections.

Transparency and accountability deficiencies,lack of planning and budgeting capacities. Modernadministrative structures, with transparent budgetprioritization and spending, and official accountabil-ity is still the exception in BiH. There have, howev-er, been several donor initiatives in this area; The Friedrich Ebert Foundation assists the

implementation of ISO standards in localadministrations, a project conducive to BiH'sfuture fulfillment of EU accession criteria:

The Konrad-Adenauer-Foundation runs a per-manent project for the general improvementof local self-governance in the city of Mostar:

The OSCE assists municipalities in implement-ing the ECLSG and the Freedom of Access toInformation Acts (at State and Entity levels).While the former provides for efficiency gainsand is a step on the road to EU accession, thelatter improves citizen access to local govern-ment decisions. A related programme entitled"Improving Local Government Outreach inthe Community" assists local governments toimprove communication and consultationwith citizens. This is intended to encouragecitizen participation in decision-making at thelocal level, thereby improving local govern-ment accountability:

OSCE's flagship project on the local level isthe Municipal Infrastructure and Finance

Programme (MIFI), which promotes best prac-tice in budget management and consensusand community-building. Successful munici-palities can 'graduate' from MIFI by fulfillingthe objectives of the programme:

USAID runs a number of projects to improvethe efficiency and democratic credentials ofBiH municipalities. The main tool throughwhich this is achieved is the installation ofone-stop-shops where municipal services areconcentrated for easier citizen access andimproved visibility of the local government:

SIDA (the Swedish International DevelopmentAgency) and USAID will join forces on the'Government Accountability Project', an ambi-tious effort aiming to improve all aspects oflocal government work in 40 municipalities.SIDA has also just finished a project rationaliz-ing municipal administrative procedures byproviding custom-tailored information technol-ogy and training to a number of municipalities:

The World Bank runs a 'Community Develop-ment Project' targeting the poorest munici-palities in the country. This aims to improvelocal governance and responsiveness to citi-zens' needs by forging partnerships and theiruse in investment decisions.

Political apathy of citizensMayors and councillors in BiH are not yet scruti-

nized by their citizenry to the extent expected in amodern, liberal democracy. Thus the electoral sys-tem fails to affect adequate check. Some donorshave sought to remedy this via the active politicaleducation of citizens at the local level; CoE has published a 'Guide for participatory

democracy in Bosnia and Herzegovina and

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Annex 3: Donor activities in the local governance arena

Serbia and Montenegro', which is distributedwidely:

The 'Beacon' scheme by the OSCE and CoEsingles out well-run municipalities, thus put-ting pressure on the under-performers.OSCE's 'Improving Local GovernmentOutreach in the Community' aims to widenthe spectrum of opportunities for citizen par-ticipation in municipal deliberations, such asbudget formulation, strengthening the role ofMZs, and municipal planning priorities:

UNDP's Rights Based Municipal Assessment(RMAP) alerts citizens to the shortcomings oftheir municipalities, and their rights to partici-pation and service provision.

Dilapidated infrastructure;Poorly maintained roads, water and sewage, elec-

tricity, and telecoms impair local communities'prospects for economic development and the qual-ity of life. Many municipalities' infrastructureremains in a desperate state, while funds for repairsand development are lacking. A number of donorshave started to address this issue; USAID is about to launch a project with

Volksbank BiH that will provide municipalloans for infrastructure improvements. USAIDwill give risk guarantees to Volksbank's loans,thus opening the commercial credit market to

municipalities for the first time. This comes ata crucial time, when international assistance isin decline:

The World Bank is similarly working to createof a municipal credit market, connectingmunicipalities to commercial banks throughitsLocal Development Project.

Analysis oof DDonorInterventions

The following schedules provide an analysis ofthe donor programmes noted above and others.These detail the nature of the interventions, theirlocation, their duration and where available theamounts committed.

The purpose of this analysis is to bring some'hard facts' to the discussion above and to informthe commentary which follows in the final section.It should be noted that this information has beengathered from a number of sources including directinterviews, and in some areas is somewhat patchy.


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Table AA4; Donor IInterventions - WWho, WWhere, WWhen, WWhat aand HHow MMuch?

Legal cconfusion aand ccompetency ooverlapDonor Location Duration Objectives and Size of

outputs Project in USD

Council of Europe FBiH 16 months; Launching the drafting Not available (n/a)1-Jan-2004 of a model Cantonalto 30-Apr-2005 law on local self

-governmentCouncil of Europe FBiH 6 months; Supporting the n/a

1-Jan-2004 amendments to theto 30-Jun-2004 framework Law on

LSG of the FBiHCouncil of Europe FBiH 6 months; Supporting the n/a

1-Jan-2004 drafting amendmentsto 30-Jun-2004 to the Constitution

of FBiHCouncil of Europe RS 6 months; Supporting the n/a

1-Jan-2004 drafting of a new Lawto 30-Jun-2004 on LSG for the RS

Lack oof mmunicipal rrepresentation aat ccanton/entity/state llevelDonor Location Duration Objectives and Size of

outputs Project in USDVNG with OSCE RS and FBiH 3 years; Municipal USD 1.25 million

15-Jun-2004 Associationsto 14-Jun-2007 Capacity Improvement

Lack oof sskills oon tthe ppart oof mmayors aand llawmakersDonor Location Duration Objectives and Size of

outputs Project in USDOSCE with CoE and nationwide Open-ended Public Ethics and n/aLocal Government Dissemination of International Bureau Best Practice

159


OSCE nationwide Open-ended Training on the roles n/aand responsibilities of elected officials

InfrastructureDonor Location Duration Objectives and Size of

outputs Project in USDUSAID and Nationwide Start in 2003, Infrastructure loans USD 25 million, ofVolksbank BiH ongoing to municipalities which 1.5 million loan

guarantee from USAIDWorld Bank Nationwide 13-Apr-1999 Assisting development USD 17.8 million

to 31-May-2005 of commercial credit market for municipalities

Transparency aand aaccountability ddeficiencies, llack oof pplanning aand bbudgetingcapacityDonor Location Duration Objectives and Size of

outputs Project in USDFriedrich Ebert 8 months; ISO Standard - n/aFoundation 1-Jan-2004 Modern Management

to 31-Aug-2004 in LSGKonrad Adenauer Mostar Indefinite Permanent project on n/aFoundation improvement of LSG i

n the City of MostarOSCE Nationwide 15 months; Implementation of n/a

1-Oct-2003 Freedom of Access toto 31-Dec-2004 Information Act

OSCE Nationwide 16 months; Implementing the1-Sep-2003 ECLSGto 31-Dec-2004

OSCE Nationwide 6 years; Municipal Infrastructure n/a1-Jan-1998 Finance and to 31-Dec-2004 Implementation-MIFI

56 participating municipalities, of which 20+ have graduated


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USAID Northern 3 years; Installation of one-stop USD 6.5 millionBosnia 1-Oct-2002 -shop service facilities

to 1-Oct-2005 in 12 municipalitiesUSAID Central 3 years; Installation of one-stop USD 6 million

Bosnia 26-Sep-2001 -shop service facilities to 1-Oct-2004 in 14 municipalities

USAID Nationwide 3 years; Reform of USD 3 million1-Jan-2004 Administrative andto 31-Dec-2006 Legal Systems

USAID with SIDA Nationwide 39 months, Governmentstarting summer Accountability Project USD 20.45 million/fall 2004 40 municipalities to

receive aid in setting up one-stop-shops

SIDA Nationwide 1999 to Strengthen municipal USD 2 million30-Jun-2004 financial management

in 40 municipalitiesWorld Bank Nationwide 26-Jun-2001 Improve basic services USD 16.9 million

to 31-Mar-2005 and facilities for low-income and poor areas.

Political AApathy oof CCitizensDonor Location Duration Objectives and Size of

outputs Project in USDCouncil of Europe Citizens' Guide for n/a

Participatory DemocracyOSCE and Nationwide Open-ended 'Beacon' scheme n/aCouncil of Europe OSCE Nationwide Open-ended Improving local n/a

government outreach in the community

UNDP Nationwide 2 1/2 years, Rights-based municipal USD 1.2 millionstarting assessment programme, 21-Oct-2002 16 municipalities

161


CommentaryA review of the tables summarizing donor inter-

ventions above reveals that most if not all of theproblems identified in this report, are at least beingaddressed in one way or another by the internation-al community. However, whether the issues arebeing appropriately prioritized remains open toquestion - and it is clear that some issues attractgreater attention and finance than others. By far thelargest number of projects is aimed at improvingmunicipal management and service delivery. This is,of course, an area where local governments' fail-ures have been particularly evident, and wheretechnical assistance can be most effective.

Two areas where success is more elusive are citi-zen apathy and relations between municipalitiesand higher levels of government. These shouldarguably attract more attention. Citizens' participa-tion in the political process, and scrutiny of theauthorities, are of the utmost importance if BiH is tobecome a European-style liberal democracy, and if

the development process is to respect the needs ofthe different sections of the population.

Legal reforms, as advocated by the Council ofEurope, are an important component in theimprovement of relations between the local andhigher levels of government. Another is attitudesand norms of political behaviour. Respect from allparties for the rule of law and the subsidiarity prin-ciple, the emergence of skilled and professionalmayors, and an active and open court system to set-tle constitutional disputes would help greatly tostrengthen the position of municipalities.

Finally, municipal infrastructure badly needsinvestment. Two projects by the World Bank andUSAID may pave the way for making commercialcredit available to credit-worthy municipalities. Butthis can only be a start. Given what has been saidabout the centrality of municipalities in citizens' per-ceptions of governmental performance, BiH'sprogress in becoming a vibrant democracy may in nosmall part depends greathly on functional local infra-structure.

163

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ERRATA SHEET Table A3: Sampled Municipalities HPI and HDI data (page 152)

Sampled Municipality HDI Value HPI Value

Sanski Most 0.707 24.1 Ključ 0.723 23.2 Bosanski Novi 0.731 17.2 Prijedor 0.725 24.0 Travnik 0.759 22.6 Vitez 0.788 20.8 Zenica 0.754 14.6 Tešanj 0.733 32.0 Š.Brijeg 0.786 30.0 Ljubuški 0.743 25.6 Posušje 0.729 28.7 Trebinje 0.737 16.5 Gacko 0.704 20.5

Note for ranking (used at Table 2.7): Highest rank is the most favouable value, highest HD, lowest HPI.

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