MACEDONIA: DECENTRALIZATION MOVING FORWARD

UNCLAS SECTION 01 OF 02 SKOPJE 000226

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EUR/SCE

E.O. 12958: N/A
TAGS: KDEM PGOV ECON USAID MK
SUBJECT: MACEDONIA: DECENTRALIZATION MOVING FORWARD

REF: 07 SKOPJE 259

Summary
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1. (SBU) The GOM has successfully decentralized responsibility for
a number of government activities to municipal governments,
including such key functions as education and social policy.
Decentralization of those government activities was a key
requirement of the 2001 Ohrid Framework Agreement. The first phase
of decentralization began in July 2005, with the second phase
beginning in July 2007. With significant support from USAID and
other donors, the GOM and the majority of municipalities are meeting
the administrative and political challenges of implementing
decentralization. End Summary.

Local Governments Assume More Responsibilities
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2. (U) Under the 2001 Ohrid Framework Agreement, the GOM committed
itself to decentralize a number of responsibilities to local
municipalities (reftel). Under the first phase of decentralization,
which began in July 2005, municipal authorities gained some
responsibilities for education, culture, social protection, and
child protection services. In addition, they assumed responsibility
for public utilities such as water and street lights, as well as
publicly owned companies in their territory. To finance these added
responsibilities, the GOM has transferred funds to the
municipalities, and the municipal governments have gained new
authority to levy property taxes and collect administrative fees.


3. (U) The planned second phase of decentralization began in July

2007. Under phase two, the municipalities gained additional
administrative authority over education, culture, and social
protection. Initially, 42 municipalities started phase two in July

2007. Additional municipalities have been added as they have met
the criteria. At the beginning of March, the city of Skopje and six
other municipalities were added to the list, bringing the total
number of municipalities in phase two to 57 out of a total of 84.

Process Non-Partisan, Criteria Based
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4. (SBU) The GOM used objective criteria to select those
municipalities ready to assume the additional administrative
responsibilities under phase two. The criteria included, for
example, a prerequisite that a municipality employ sufficient staff
to handle financial administration tasks. In addition, the GOM
commission that assesses municipalities' readiness to move to phase
two includes the president and vice president of the Association of
Municipalities (ZELS). While the GOM's selection criteria were not
particularly sophisticated, they apparently were applied fairly
across the board to all municipalities. Andrej Petrov, the
president of ZELS and a mayor from an opposition party, told us
there was no apparent connection between those municipalities that
qualified for phase two and the political affiliation of their
mayors or municipal council members.


5. (SBU) The State Secretary of the Ministry of Local Self
Government, Irfan Odai, told us recently that the remaining
municipalities that are not yet included in phase two either have
serious financial challenges, including large unpaid arrears or
blocked financial accounts due to disputes with debtors, or are too
small to hire the requisite number of staff. Odai said that the GOM
is working with the remaining municipalities to find ways for them
to enter phase two. For example, if the smallest municipalities
sign an agreement to cooperate on decentralization tasks with a
larger neighboring municipality, they would not be required to hire
more staff. The GOM is also considering ways that those
municipalities with outstanding debts could still enter phase two as
long as they demonstrate they are resolving their financial
problems.

Mayors' Concern: Raising Revenue, Attracting Investors
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6. (U) The main concern of the mayors we have talked to, regardless
of whether they are members of the GOM coalition parties or
opposition parties, is generating sufficient revenue to meet the new
needs of their municipalities. The mayors claim that the funds
transferred from the national budget to the municipalities are
insufficient, and that they are not able to raise enough additional
funding through local taxes and fees.


7. (U) In addition, all the mayors we have talked to complain that
the GOM's bureaucratic barriers make it difficult for them to offer
government-owned land to potential private investors. The central
government maintains control of government owned land, and the
mayors tell us the process for sale or lease of the land is
excessively slow and bureaucratic. Mayors, and members of the USAID
decentralization project, see this bureaucratic hurdle as a major

SKOPJE 00000226 002 OF 002


impediment to economic growth at the local level.


8. (U) A few mayors from the more successful municipalities are
exploring the possibility of private financing for longer-term
investment projects, either by taking out loans or issuing bonds.
However, these mayors say that the process for receiving approval
from the Ministry of Finance for such financing is too restrictive.
USAID is taking the lead on facilitating responsible borrowing by
those municipalities that have sufficient financial and
administrative capacity to do so.

Comment: Decentralization Is Working
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9. (SBU) Since July 2005, the central government has moved forward
on decentralization and continues to assign increased responsibility
to the municipalities. In turn, most of the municipalities have
performed surprisingly well, with the strong support of USAID and
other donors. It remains unclear when the municipalities that have
not yet entered the second phase of decentralization will be
included, but there appears to be the political will to help the
remaining municipalities meet the criteria. The longer-term issues
of increasing municipalities' financial resources and their ability
to generate greater economic activity and growth still need to be
resolved.

Milovanovic