FINANCIAL VIABILITY OF LOCAL GOVERNMENTS IN TURKEY

1
FINANCIAL VIABILITY OF LOCAL GOVERNMENTS IN
TURKEY

• Ayse Güner, Marmara University, Faculty of
  Economic and Administrative Sciences, Department
  of Public Finance
• Strengthening Fiscal Framework for Local
  Government Reform-Policy Design
• Istanbul, 8-10 September, 2003

2
BRIEF INFORMATION ON LOCAL GOVERNMENTS IN TURKEY

• The Republic of Turkey is a unitary state
  governed by a multiparty parliamentary system.
  Article 123 of the 1982 Constitution stipulates
  that the administration forms a whole with
  regard to its structure and functions, and shall
  be regulated by law. The same article also
  states that the organization and functions of
  the administration are based on the principles of
  centralization and decentralization. Thus, there
  is a central government and local governments.
• The central administration is composed of two
  branches central administrative organizations
  in the capital, Ankara, and provincial
  administrations.
• The provicial administration, comprised of
  provinces and within them districts, are
  established to take and implement decisions on
  behalf of the center (working on the principle of
  deconcentration). These units are headed by
  provincial governors and district governors
  (sub-governors) and are appointed by the central
  government.
• Article 127 of the Constitution puts down the
  main features of local governments in Turkey.

3
Article 127 of the Constitution stipulates that

• Local administrative bodies are public corporate
  entities established to meet the common local
  needs of the inhabitants of provinces, municipal
  districts and villages, whose decision-making
  organs are elected, and whose principles of
  structure are also determined by law.
• The formation, duties and powers of the local
  administration shall be regulated by law in
  accordance with the principle of local
  administration.
• The elections for local administration shall be
  held every 5 years.
• The procedures dealing with objections to the
  acquisition by elected organs of local government
  or their status as an organ, and their loss of
  such status, shall be resolved by the judiciary.
  However, as a provisional measure, the Minister
  of Internal Affairs may remove from office those
  organs of local administration or their members
  against whom investigation or prosecution has
  been initiated on the grounds of offences related
  to their duties, pending judgement.

4
Article 127 (cont.)

• Special administrative arrangements may be
  introduced by law for larger urban centers.
• The central government has the power of
  administrative tutelage over the local
  governments in the framework of principles and
  procedures set forth by law with the objective of
  (i) ensuring the functioning of local services in
  conformity with the principle of the integral
  unity of the administration, (ii) securing
  uniform public service, (iii) safeguarding the
  public interest and (iv) meeting local needs, in
  an appropriate manner.
• The formation of local administrative bodies into
  a union with the permission of the Council of
  Ministers for the purpose of performing specific
  public services and the functions, powers,
  financial and security arrangements of these
  unions, and their reciprocal ties and relations
  with the central administration, shall be
  regulated by law.
• These administrative bodies shall be allocated
  financial resources in proportion to their
  functions.

5
(No Transcript)
6
SPECIAL PROVINCIAL ADMINISTRATIONS (SPAs)

• The reference law of SPAs dates back to a
  temporary law dated 1913 and has taken its
  current name (SPA Law) by important amendments
  made in 1987 (Law no.3360).
• There is no separate law covering the
  establisment of SPAs. When a province, which is
  the field branch of the central administration
  working on the principle of deconcentration, is
  established, automatically SPAs are founded.
• According to the law of 1913, SPAs had overtaken
  many services ranging from social aid, health,
  education, agriculture to establishing chambers
  and stock exchanges. However, after the
  foundation of the Republic these duties were
  gradually undertaken by several ministries and
  general directorates of the central government.
  Today, they act as an agent/intermediate to the
  services carried out by the central government.
• Organs
• - Provincial Council
• - Provincial Executive Committee
• - Governor

7
MUNICIPALITIES

• The reference law of the municipalities is the
  Municipality Law of 1580 (1930).
• They are established in settlements that have
  more than 2,000 inhabitants and in provincial and
  district centers regardless of their population.
• The Municipality Law lists the duties of
  municipalities the services given by these local
  governments may be termed as classic municipal
  services (fire, street cleaning and lightning,
  cemetry, transportation, sewery services etc.).
• Organs
• - Municipal Council
• - Municipal Executive Committe
• - Mayor

8
GREATER CITY MUNICIPALITIES (METROPOLITAN
MUNICIPALITIES)

• In 1984 a two-tier local government system has
  been introduced with Law no. 3030. According to
  this law, a greater city municipality is a
  municipality which has more than one district or
  lower tier municipality within its boundaries.
• The duties of metropolitan municipalities is
  listed in law no. 3030. The district and lower
  tier municipalities within the territorial
  borders of the metropolitan municipality perform
  the tasks given to them by the Municipality Law
  but which do not coincide with those of the
  metropolitan municipality.
• Organs
• - Metropolitan Municipal Council
• - Metropolitan Executive Committe
• - Metropolitan Mayor

9
VILLAGES

• According to the Village Law of 1924 (Law
  no.442), villages are settlements with a
  population less than 2,000. The law also states
  that people owning common property such as a
  mosque, school, pasture, grazing ground and woods
  and who live either in grouped or scattered
  houses, together with vineyards, gardens and
  fields, form a village and that the law applies
  to settlements with a total population more than
  150.
• The duties of the village administration are
  listed in the Village Law (compulsory and
  optional duties). The services to be performed by
  the village are too numerous, vast and varied to
  be realized under the current situation. That is
  why most services (such as construction of roads
  and building of water installations) are being
  performed by central government agencies.
• Organs
• - Village Council
• - Council of Elderly
• - Headman

10
GENERAL REMARKS

• The laws of local governments are outdated and
  are unable to respond to changing conditions and
  needs.
• SPAs and villages are not known and considered as
  local governments in the society.
• There is strict administrative tutelage on local
  governments. This supervision of local
  governments by the central administration are
  both administrative and financial in context. The
  reserves Turkey has placed on the European
  Charter of Local Self-Government is a good
  indicator of central government control over
  local governments.

11
LOCAL GOVERNMENT REVENUES ( of GNP)
Year Municipalities SPAs Villages Total
1980 1.51 0.06 0.06 1.63
1990 2.30 0.12 0.06 2.48
2000 4.41 0.29 0.06 4.76

• With new laws enacted in 1981, the share of
  local revenues in GNP has increased
  significantly. Although SPA revenues have grown
  considerably, they still form a small share in
  the total. The biggest increase has occured in
  municipalities, from 1.63 percent to 4.41 percent
  of GNP in 20 years. The share of village
  administrations have remained constant,
  indicating that they are being funded by central
  government agencies and SPAs.

12

• REVENUES OF VILLAGE ADMINISTRATIONS
• Salma a household tax levied by the council of
  elderly (maximum 20 TL!).
• Imece the physical working of the villagers for
  the common needs of the village decision taken
  by the council of elderly.
• Village Money income generated from operations
  and rental of properties of the village, fines
  and donations, fees and charges on issuance of
  official documents, etc.
• Grants Central government ministries, general
  directorates, the Province Bank, SPAs provide aid
  to villages to compensate the inefficiency of
  revenues.
• Today salma, imece and village money, which may
  be named as the genuine revenues of the village,
  are far from being able to meet the expenditures
  of the villages. The main source of revenue is
  grants which are distributed on an ad hoc basis.
  These grants may be in cash, but also (and
  mainly) in-kind.

13
REVENUES OF SPAs

• Share From General Budget Tax Revenues
• With law no. 2380 (1981), a certain percentage
  of general budget collected tax revenues are
  distributed to SPAs, based on the criteria of
  population (according to the latest census).
  Currently, this share is 1,12 percent.
• Own Revenues
• Revenues generated from taxes, duties, fees
  which are authorized by special laws income from
  the yields from investments and activities
  revenues from the renting and selling of
  immovable property etc. In addition, 15 percent
  of the property tax collected by the
  municipalities is transferred to SPAs.
• Grants
• Central government agencies provide aid to SPAs
  in order that they be able to accomplish certain
  services within the boundaries of the province.
  These grants are conditional, that is, to be used
  for the performing of specified services

14
REVENUES OF SPAs (cont.)

• Borrowing
• SPAs have important limitations concerning
  borrowing. Firstly, they are only permitted to
  borrow for education, health and construction
  services. Secondly, there is a limit on the
  amount of borrowing (i) the provincial council
  may take the decision to borrow if the amount
  does not exceed one third of its budget revenues,
  (ii) when this amount is exceeded, the decision
  of the Council of Ministers and the approval of
  the President is necessary, (iii) if the amount
  to be borrowed is over its budget revenues, then
  a special law is to be issued.
• Unfortunately own revenues is the least
  important item in the total revenues of SPAs. It
  is possible to generalize that the most important
  type of revenue is, first of all, grants from the
  central government, and secondly, the share
  distributed from general budget tax revenues.
  These two items add up to 85 percent of total
  revenues on average

15
REVENUES OF MUNICIPALITIES

• Share From General Budget Tax Revenues
• A certain percentage of the collected general
  budget tax revenues is distributed to
  municipalities on the basis of population.
  Recently this share has been reduced from 6 to 5
  percent.
• Own Revenues
• The own revenues of municipalities (except for
  the Property Tax which has its own law) are
  covered in the Municipality Revenue Law No. 2464
  (1981). This law may be divided to 3 parts (i)
  municipal taxes, (ii) municipal fees and (iii)
  contributions to municipal expenditures.
• This law also states that municipalities, with
  the decision of the municipal council, may set
  tariffs for municipal services that have not been
  subject to the above revenue types.

16
REVENUES OF MUNICIPALITIES (CONT.)

• Municipal Taxes
• Property Tax (specific and ad valorem)
• Fire Insurance Tax (ad valorem)
• Entertainment Tax (fixed value and ad valorem)
• Electricity and Gas Tax (ad valorem)
• Communication Tax (ad valorem)
• Announcement and Advertisement Tax (specific)
• Environmental Cleanliness Tax (specific and ad
  valorem)

17
REVENUES OF MUNICIPALTIES (CONT.)

• Municipal Fees
• Occupation Fee
• Weekend Business Fee
• Natural Water Fee
• Brokers Fee
• Slaughter Fee
• Construction Fee
• Business Opening Fee
• Regisratation Fee
• Health Certificate Fee
• Property Development Fees
• Fee for Inspection of Measurement and Weighing
  Instruments
• Fee for Inspection of License
• All these fees, except for the brokers fee,
  have a fixed tariff which has last been updated
  in 1992. Keeping in mind the high rate of
  inflation from since then, today, the collection
  costs of these fees have become higher than the
  revenues received.

18
REVENUES OF MUNICIPALITIES (CONT.)

• Contributions to Municipal Expenditures
• Contributions may only be collected in three
  cases sewage, water and road construction or
  improvement services. The municipality sets the
  amount to be contributed from the property owners
  who benefit from the service. But there is a
  ceiling, such that the amount cannot exceed 2
  percent of property tax values.
• Borrowing
• According to the Municipality Law there are no
  restrictions on borrowing. But due to their poor
  credit history, the Provice Bank was almost the
  only source of borrowing for municipalities until
  mid-1980s. Since then external debt has become an
  important source of revenue, especially for
  metropolitan municipalities. The Law on
  Regulating Public Finance and Debt Management
  that passed on March 2002, aiming to control
  public borrowing in line with overall
  macroeconomic policies, has restricted the
  foreign borrowing of local governments, such that
  they have to receive the opinion of the State
  Planning Organization with the approval of the
  Treasury.

19
MUNICIPALITY REVENUES ()
1991 1992 1993 1994 1995 1996 1997 1998
Total Revenues 100 100 100 100 100 100 100 100
Tax Revenues 65 60.7 53 61.2 61.6 60.8 56.9 61.9
General Budget 53.7 50.7 44.9 44.5 47.4 50.1 48.1 48.8
Municipality Taxes 8.7 6.6 4,8 13,9 10,8 7,9 6,3 10,9
Property Tax 4 2,8 1,6 6,9 3,8 2,3 12 6
Municipality Fees 3.5 3,4 3,4 2,8 3,4 2,8 2,5 2,2
Contribution 1,6 1,4 2,1 1,1 1,4 1,4 1 1,1
Internal Borrowing 1,9 1,7 3,1
External Borrowing 6,7 7,2 5,7
20
MUNICIPALITY REVENUES
MUNICIPALITY REVENUES ()
21
MUNICIPALITY TAXES
22
REVENUES OF GREATER CITY MUNICIPALITIES

• A certain percentage of the general budget taxes
  collected within the boundaries of their
  provinces (derivation principle). The Council of
  Ministers has the authority to determine this
  share between 3-6 percent. 60 percent of this
  amount is placed in a pool, from there it is
  again disrtibuted to the Greater City
  Municipalities but on a population basis.
• 35 percent of each municipality (within the
  metropolitan municipality) share of general
  budget tax revenues.
• 50 percent of the Electricity and Gas Tax.
• Contribution to expenditures.
• 20 percent of the Property Tax collected by the
  municipalities within their boundaries. Recently
  the Property Tax has been increased by 100
  percent in municipalities within the boundaries
  of the Greater City Municipalities, this share
  also being transferred to the metropolitan
  municipalities.
• Grants from other public administrations,
  external and internal borrowing, bond issuing,
  revenues from the selling and renting of
  immovables, use charges, etc.

23
THE POPULATION OF GREATER CITY MUNICIPALITIES
Greater City Municipalities Population (2000)
Istanbul 8,831,805
Ankara 3,203,362
Izmir 2,250,149
Bursa 1,184,144
Adana 1,133,028
Gaziantep 862,033
Konya 761,145
Antalya 606,447
Diyarbakir 551,046
Mersin 544,318
Kayseri 524,818
Eskisehir 482,793
Erzurum 366,962
Samsun 362,756
Adapazari 340,953
Izmit 195,193
24
Years Metropolitan Municipality Revenues/Municipality Revenues ()
1991 37,8
1992 37,5
1993 37,9
1994 43,4
1995 40,7
1996 40,6
1997 42,2
1998 38,8
Average 39,8
The share of metropolitan municipality revenues
in total revenues of municipalities is around 40
percent on average.
25
GENERAL BUDGET TAX REVENUES/TOTAL REVENUES ()
Years Adana Ankara Antalya Bursa Diyarbakir Erzurum Eskisehir G.antep Istanbul Izmir Izmit Kayseri Konya Mersin Samsun
1994 74,6 35,2 53,2 77 63,7 50,5 58,6 32,8 67,7 29,6 25,8 49,1 57,6 51,5 -
1995 80,2 48 15,6 62,1 59,2 49,1 55,1 40 75,4 54,3 29,4 37,3 59,6 61,6 64,3
1996 77,3 64,8 40,6 68,9 63 50,6 66,1 40,1 79 42,5 15,2 40,8 47,6 77,7 66,8
1997 31 62,5 33,8 69 55,2 62,4 68,4 57,6 67,2 30,9 25,7 47,7 38,4 71,9 57,3
1998 55,4 78,8 44,3 44,4 43,5 65,7 60,2 48,6 73,2 33,5 25,7 42,9 42,9 80,1 49,1
1999 28,9 80,1 39 53 52,1 52,1 59,6 53,8 68,9 39,7 48,5 43,6 38,3 74 58,2
2000 16,2 84,9 53,5 31,9 61,6 47,5 60,5 58,1 75,5 67,7 64,9 48 32,5 75,1 51,9
26
BORROWING/TOTAL REVENUES()
Years Adana Ankara Antalya Bursa Diyarbakir Erzurum Eskisehir G.antep Istanbul Izmir Izmit Kayseri Konya Mersin Samsun
1994 0 55,8 0 0 1,6 14,5 0 12,1 15,5 60,4 71,7 0 0 22 -
1995 0 40,5 63,3 6,5 18,4 18,5 0 0,4 1,1 28,2 63,4 0 0 0 0
1996 0 25,8 26,7 3,7 0 0,7 0 0 0 36,8 81,7 0 0 0,6 0
1997 60,2 11,3 27 1,8 0 0 0 0 4,6 53,5 40,5 0 0 0 0
1998 28,9 5,5 0,8 37,7 0 0 0 0 1,9 52,9 49,7 0 0 0 6,3
1999 59,6 0,5 11,6 19,8 4,1 0 0 1,7 7,2 17,1 16 0 0 0 8,7
2000 74,2 0 5,8 44,5 0 0 0 0 7,2 7,2 2,2 0 0 0 7
27
CONCLUDING REMARKS

• Central control of local governments is causing
  inefficiencies, delaying the decisions and acts
  of these administrations, thus leading to cost
  increases. Local governments should have more
  administrative and fiscal autonomy.
• New accounting systems and budget classifications
  are necessary in order to be able to view the
  real revenue and expenditure structure of local
  governments.
• The transfer system, based on population
  criteria, is simple and objective, providing
  stability and predictability in local government
  revenues. But the population criteria alone is
  not efficient other criteria such as lenght of
  roads within local governments, ratio of
  day/night population, average of summer and
  winter population etc. should be considered. In
  order to accomplish this distribution a detailed
  data bank is necessary.
• Article 73 of the Constitution stipulates that
  taxes, duties, and other such financial
  impositions shall be imposed, amended, or
  revolved by law which means that only the
  Turkish Grand National Assembly has this power.
  As a result local governments are not empowered
  to set and adjust local tax bases and rates. This
  article has to be changed in order to enable them
  to set and/or adjust their own rates and thus
  obtain a buoyant revenue structure meeting their
  service needs.

28

• Local government reforms aim to meet the revenue
  demands of local governments through increased
  allocations from the central government budget.
  But, for the moment, this does not seem possible
  because of macroeconomic fiscal pressures.
  Besides, this structure does not stimulate local
  govenments efforts to raise their own revenues.
  Central funding should be replaced by locally
  controlled taxes, fees and user charges. This
  will strenghten the link between taxation and
  spending, leading to accountability and more
  participation by local residents.
• There are a wide variety of local taxes an fees.
  Some of these are costly to administer and
  generate small amounts of revenue. These types of
  revenues should be eliminated. On the other hand,
  new mass productive taxes that strengthen the
  revenue structure of local governments should be
  introduced (e.g. a tourist tax, a share of the
  motor vehicle tax). In addition, the fixed
  amounts of taxes and fees should be updated, and
  a rate of revaluation should be applied annually
  on these amounts.
• Paralel to these reforms, the financial
  management system of local governments should be
  strengthened.