Policy paper CEED_ENG

POLICY PAPER

Decentralization in Montenegro: local self-governments and financing of education

Kralja Nikole 27a/4 Business Center “Čelebić“ 81000 Podgorica Montenegro CENTER FOR ENTREPRENEURSHIP AND ECONOMIC DEVELOPMENT (CEED)

Tel: +382 (0) 20 633 855 Fax: +382 (0) 20 620 611 E-mail: ceed@t-com.me Web site: www.visit-ceed.org.me

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Introduction Local self-government reform is one of the biggest challenges centralized government and local governments face in the process of transition and one of the most comprehensive reforms to be undertaken towards EU membership. The overall public administration reform in Montenegro is characterized with loosening a high degree of centralization by extending the mandates of local units and changing the sources of financing public functions. The Constitution created the prerequisites for further strengthening the process of decentralization. By adhering to the principles of the European Charter on Local Self- Government, adopting the Law on Local SelfGovernment and other laws, the institutional and legal framework has been put into place for further strengthening local self-government. In addition, the Strategy for Public Administration Reform in Montenegro 2011-2016 stipulates the need to further extend decentralization.

However, Montenegro’s decentralization process is considered to be at an early stage as initial steps have not been followed by additional measures of adequate fiscal decentralization, and consequently its level has remained broadly unchanged. The Constitution provides for the autonomy of local self-government, but municipalities face a general problem of taking over new administrative and financial responsibilities from the central government. Therefore, it is necessary to find adequate ways to involve them into the decentralization process.

1. Financial decentralization in the education system According to the Law on Self-Government, besides their own affairs, municipalities may perform delegated affairs that fall under the competence of the state administration. The main purpose of transferring certain competences to local governments is their more economic, efficient and high-quality performance. The Law stipulates a transfer of competence, among others, in the following areas: education, primary health care, social and child protection, employment.

For the purpose of this paper, the possible transfer of competences to local selfgovernments in the area of education financing will be examined. During this year, the Ministry of Education and Sports proposed to transfer funds dedicated to the financing of education to the schools’ level. This proposal would just be an ‘interim solution’ until the economic situation allows the involvement of local self-governments in the financing of certain segments of education. In the long run, obligations related to material costs, capital investments, the insurance of facilities, the transport of students, taxes, etc*. would be transferred to the local self-government level.

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The proposed interim solution may prompt local self-governments to stay out of the education process in this phase of decentralization. Therefore, the question remains if there is any additional option that would enable local self-governments to get involved in the decentralization of education from the beginning.

2. Why have local self-governments not been able to participate in the financing of education?

When it comes to funding, the education system in Montenegro is highly centralized. The overall system is financed by the central level. The Ministry for Education and Science covers all education-related costs, including salaries, current expenses, energy costs, maintenance costs, capital expenditures, etc. The transfer of part of the competencies for education financing to the local self-government level has not yet been put in place and the law does not prescribe the financing of the education system as obligatory, either.

For this reason, the overall competence remains at the central level.

In order to determine if local self-governments are capable of being involved in the financial decentralization of education, we analyzed if local self-governments can take over the financing of material costs** of primary and secondary education, which are the lowest in total education costs.

Total material costs significantly differ by local self-governments, depending on the number of pupils and schools. To determine to what extent they would constitute a burden to the budgets of local self-governments, we observed the percentage of total material costs against the budget of local self-governments in 2010.

The analysis showed that the share of material costs of education in the budgets of local self-governments ranges between 0.17% and 12.77%, with an average share of 3.86%.

There are 12 local self-governments that are below this average.

If only this criterion is taken into account, material costs would not be a heavy burden to the local self-governments’ budgets, especially for local self-governments with a share of material costs between 0.17% and 0.35% (see Graph 1).*** * Ministry of Education and Science, 2012, ’Decentralization of Education Financing and Methodology for determination of expenditure per student by model per capita’. ** Material costs include heating, water, electricity supply and other utilities; maintenance of school facilities and courts, telephone, postage; books, paper, equipment, software, transport from home to school. *** Ministry of Education and Science, 2012, ’Decentralization of Education Financing and Methodology for determination of expenditure per student by model per capita’, annex.

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Graph 1. Percentage of material costs against local self-governments’ budgets (2010) 12,77

6,83

Žabljak

Tivat

Rožaje

Pljevlja

Plav

Nikšić

Kotor

Mojkovac

Kolašin

Danilovgrad

Herceg Novi

Budva

2,64 0,97 0,97

0,17

Cetinje

Bijelo Polje

Bar

Berane

0,35

Andrijevica

3,55 2,09

1,77

1,66

Ulcinj

4,87 3,48

Šavnik

2,35

6,25

5,49

Podgorica

3,49

3,86

5,86

5,09 4,10

Plužine

6,34

However, the transfer of the financing of material costs to the local self-government level would require an increase in revenues of local self-governments, which is not possible in the current economic situation. Despite increasing communal taxes and levies****, local self-governments are still unable to finance their expenditures and provide regular servicing of legal obligations towards their employees, the state and suppliers. During the last few years, local self-governments have recorded a fall of total revenues (from 6.16% of GDP in 2009 to 4.76% of GDP in 2011), a decrease of capital expenses (from €112.34 million in 2009 to €51.47 million in 2011) and an increase of outstanding obligations (on December 31, 2011 they amounted to €116.69 million or 3.56% of estimated GDP for 2011). In order to overcome the present situation, seven local self-governments signed an agreement on financial restructuring with the Ministry of Finance, while several others also expressed their willingness to conclude restructuring agreements.

3. Possible solutions for involving local self-governments in the financing of education Given that local self-governments are not able to finance material costs from their own revenues, the Ministry decided to transfer funds for material costs directly to schools and thus get local self-government involved in this phase of decentralization. Since the final goal of decentralization is transferring competences from the central to the local level, already in this phase it is necessary to initiate first steps of decentralisation in certain areas, which could prepare local self-governments for taking on new competences at a later stage. One possible solution is to involve local self-governments in the financing of capital investments. Given that every year the Ministry allocates funds for capital investments in education, a fund could be established for this purpose. **** Part of revenues from taxes and levies ceded to local self-governments by the state (e.g. 12% of revenues from personal income taxes, 80% of revenues from tax on real estate) has increased. Also, local self-governments increased real estate tax rates (from 0.08 to 0.1% to 0.1% to 1% market value) and introducing of their own revenues.

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Resources of the fund would be provided by the Ministry, donors (e.g. EU funds, international organizations, etc.) and the budgets of local self-governments. These resources would be allocated through open calls, where local self-governments could apply for capital projects. The share of local self-governments in financing would be ensured through mandatory co-financing (by providing land and utility equipment, developing technical and planning documentation, etc.).

Example of practice 1

An example of successful cooperation between the Ministry/Government, local selfgovernments and donors in the financing of infrastructure projects is the call ‘Municipal Development Grant for Small Infrastructure Projects’. Through this call, less developed local self-governments which are beneficiaries of the Equalization Fund had the opportunity to finance smaller infrastructure projects. Out of 15 eligible local self-governments 14 submitted their projects, and 7 received a grant.

In the second call, 7 out of 8 local self-governments received funds. This grant proved to be a good practice for local self-governments receiving funds from the Equalization Fund to obtain experience in providing funds through applying for calls.

The funds from this call have been provided through IPA, the National Budget of Montenegro, budgets of local self-governments and their partners. Even though this was the first time less developed local self-governments received funds through a call for proposals, local self-governments expressed great interest to participate.

There are several reasons for involving local self-governments in the financing of capital projects. First and foremost local self-governments are better aware of the state of facilities and school capacities in comparison to the central level. Given that spatial planning falls within their area of competence, they have better knowledge of the needs for construction or conversion as regards school facilities.

Example of practice 2

On the initiative of the Golubovci Township (Capital Podgorica), in the settlement Srpska, the public primary school ‘Gornja Zeta’ was opened in September 2011.

Until then, this settlement only had a district unit with three grades of primary school. Due to the urbanization of this area, the number of inhabitants has increased during the last few years, which resulted in the need to open a ninegrade primary school. The Ministry of Education and Sports participated in the financing of the project and the Capital Podgorica contributed with a compensation for land and utility equipment. The opening of the primary school cut down transportation costs and increased the safety of pupils who used to commute to more distant schools.

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The last 20 years were marked by great migrations, which resulted in a decline of population in certain areas. As a consequence, many schools were closed. The closure of schools was however a weak solution, especially in areas where school represents the only social facility and as such a potential centre of social and economic development. In case of closure, it is necessary to enable regular teaching and better access to bigger schools by providing school buses or vans. The problem of maintenance of school facilities with a small number of pupils should be solved by connecting the functions of education with the cultural and social life in certain rural areas. Previous measures from the central level led to no adequate results in terms of preserving school facilities after their closure. The closure of a school was usually followed by the omission of further investment interventions for the preservation of the facility itself. Some self-governments recognized this problem in their strategic development plans. Local self-governments have expressed their readiness to participate in solving this problem through capital projects. Also, they recognized the need for the preservation of school facilities where teaching is not being performed and defined concrete activities to be undertaken. The implementation of these activities would make it possible to return these facilities to their initial purpose, in case of need.

Example of practice 3

The Strategic Development Plan of the local self-government Šavnik 2012-2016: „School facilities in rural areas are decrepit and they need reconstruction in order to protect them from further dilapidation and restore them in function. The majority of facilities need a replacement of doors and windows and roof repair. The majority of these facilities is out of function, but there is a need to use school space for organizing schools for mountaineers and fans of canyoning during summer months.

Also, these facilities would be useful to the local community for culture events and other purposes.�

Conclusions The financing of education in Montenegro is still highly centralized. For the purpose of launching the implementation of the decentralization process in the area of education, the Ministry of Education and Sports has conducted an analysis, which proposed that financial resources for covering material costs should be transferred directly to schools.

However, it is necessary to find an interim solution or involvement of local selfgovernments in education financing. One possible option is to allocate funds for financing capital investments through applying for projects on open calls for proposals. This model sets a good basis for motivating local self-governments to take part in the financing of education. Competitiveness among local self-governments is enhanced this way and their 6

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capacities for the preparation and implementation of projects are strengthened as well.

The distribution of financial resources in such way will contribute to the change of previous practice where the funds for capital projects used to be provided only from other sources without the participation of local self-governments.

Local self-governments, as creators of local economic and social development, are closer to the local citizens than the central government and thus can more easily recognize needs of the local community. A better knowledge of the current situation of school facilities enables a timely reaction for the construction of new or conversion of existing school facilities. In accordance with the above, it is necessary to get local selfgovernments involved as early as possible in the financing of capital projects. In the long run, certain competences would thus be transferred more easily and defined objectives of the decentralization process would be achieved.

About CEED CEED is a private non-profit organization established in Montenegro in 1993 to support entrepreneurship and economic development. The mission of the CEED is—through its programs, projects, and advocacy activities - to promote and practically implement in Montenegro the ideas of a free market, entrepreneurship, and private ownership in an open, socially responsible and democratic society with the rule of law. In June 2011, CEED was accredited as science-research institution of the Ministry of the Science. For more information please visit: www.visit-ceed.org.me.

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