Thursday May 23, 2024 07:25 pm

A Failure to Strengthen Fiscal Powers of City & Municipal Corporations will Undermine BD Aspirations

🕐 2024-03-19 12:18:29

A Failure to Strengthen Fiscal Powers of City & Municipal Corporations will Undermine BD Aspirations

John Dalton, Global Citizen

was previously the Director of the Office of Local Government for the State of Massachusetts. Following this, he was an advisor to numerous cities, towns and State agencies in the USA on corporate governance principles, institutional change, and public finance and management. He was a consultant for both KPMG and PwC in Boston and Washington and has extensive experience with public financial management (PFM), public integrity, and project monitoring. For USAID, the World Bank, and the ADB he has led decentralization and PFM projects in the Philippines, Sri Lanka, Egypt, Burundi, Pakistan, Ethiopia, Indonesia, and DRC.

If the national goal for the year 2041 is to be a middle-income country, why has the Government not developed a plan and strategy to expand and strengthen the powers, duties, responsibilities, and actual performance of city corporations and municipal corporations which would lead to more effective fiscal governance, revenue generation, and service delivery, thereby relieving the national government of the burdens associated with governing in a post-concessional world?” 
That’s a long question with lots of nuance, so let me try to unpack some of the main themes. The objective of this paper is to encourage greater levels of decentralization, delegation, and devolution of authority from central government to all city corporations and a few select municipal corporations, not just to strengthen subnational revenue mobilization as a worthy goal but also to create fiscal space for the central government to deal with economic, fiscal and financial pressures. 
With a new Government taking office in 2024, the time for bold initiatives has arrived. Among the most pressing concerns is increasing fiscal space to fund national priorities (or even to pay the piper for costs incurred or obligations neglected) by authorizing other public entities that currently are a drain on the treasury to pay a greater percentage of their costs through increasing “own-source-revenues.” Unlike State Owned Enterprises (SOE), City and Municipal Corporations offer a promising, and probably successful, avenue for creating fiscal space. The untapped revenue from economic activity in each corporation is significant. Allowing these corporations to take purposeful steps to assess, collect and spend their own revenues is a double-win: less obligation on accounts of the national government and better self-financed, citizen-determined priorities among a cohort of subnational governments that represent about 25% of the total national population. 
Without greater decentralization and fiscal autonomy, how will it be possible to serve the projected entire national population of about 200 million in 2040 (okay 196,526,123, but you get the point)? Will all wisdom, knowledge, and money remain centralized in Dhaka?  Or will Dhaka City meet the 2041 goal while the rest of the country remains in a low-income trap? I am certain the Government wants the best for all the people, wherever they live and work, but the policy paralysis on the matter of empowerment through devolution of powers and responsibilities seems to defy common sense. My political economist tendency is to follow the money, so let me take a crack at some of the apparent constraints, from whatever source, that are holding back the logical political and practical solution: adopt fiscal and administrative decentralization. 

Lessons Learned
I want to share some learned experiences that apply to Bangladesh and other developing countries.
Decentralization for all local governments through a single constitutional or legal act is not possible in Bangladesh since the Government is likely to experience increasing fiscal stress during the next half-decade or longer. Bangladesh could not afford, nor are all subnational local government units (especially unions) even ready to accept, a universal grant of administrative and fiscal autonomy. The preferred strategy would be to select a sample consisting of the twelve (12) city corporations and the eleven (11) municipal corporations and allow/incentivize them to mobilize increased revenue and improve service delivery. Unincorporated areas in Bangladesh – municipalities and unions - would continue to be under the tutelage of the State. 
Many countries have tried to bring about universal decentralization, which for simplicity and understanding of the main points of this paper, is defined as the specific transfer by law and policy of powers, duties, and responsibilities from the central government to subnational administrative units. Enumerated functions are identified as either shared or autonomous powers in the constitution or law. The enumerated functions identified in these constitutional or universal laws are often well beyond the administrative competence and fiscal capacity of many subnational units to implement, as evident by the recent Constitutional Amendment in Nepal. That same reality also would apply to most subnational units in Bangladesh. They – especially the 4700 union parashads (UP) -  are not ready, neither fiscally nor administratively, to be self-sustaining. However, Local Government Law (City Corporations) 209/2014 is a very useful reference to determine “what are we doing wrong, why have opportunities been missed?” That level of required in-depth research is beyond the interest or purpose of this article and I did not try to do it in the past two weeks. Rather I provide recommendations that may increase fiscal space at national levels through more effective decentralization and delegation for the specific and limited purpose of fiscal autonomy for city corporations and municipal corporations.
By focusing on the key, the sine qua non, to all other potential capacity development areas, there will be a possible chance for success. Other laundry lists of recommendations for City Corporations are demonstrations of what the experts believe they know rather than what is reasonable and possible for corporations to implement.  
Only city corporations (12) and several municipal corporations (elusive numbers in the research and on Government websites, let’s say between 10 and 40) are ready to assume the role of “full-service local governments” in the current hierarchy of subnational entities. Therefore, an expanded decentralization policy and more fiscal autonomy should be developed to enable the corporations to support national aspirations.
Corporations are meant to be solvent. While the history of SOEs in Bangladesh and elsewhere may belie the notion of fiscal integrity, the principle remains: “To whom much is given, much is expected.” In Bangladesh, city corporations and municipal corporations have been given “much” and therefore it should be expected by their citizen/consumers that the corporations will give “much” where much is defined as service levels that meet or exceed the citizen charter standards. Quality services by qualified corporations should be the goal, not later than 2028-29 – five whole years to improve performance.
Focusing exclusively on the fiscal “much’es” that have been accorded to these corporations, these entities have the means to become self-sufficient but are trapped in the bad habits of the past where subsidies and giveaways were expected.  
The islands of potential corporate excellence include:

From the twin towers of the 10,000,000 “counted” population (an imperfect art to be sure) of Dhaka megalopolises to the seven (7) sub-million-sized cities spread out from north to south, city corporations play a vital role in service delivery, either directly or in coordination with deconcentrated agencies of central government, egos notwithstanding.    
The specific fiscal powers of corporate cities include:
Property tax (stamp duty, registration fees and gain tax)
Holding tax
Land Transfer tax
Miscellaneous taxes and fees (5)
Emergency management fees
Block grants and special grants from the central government are not included in the powers reserved to city corporations since the amounts shared are largely beyond their control. Nevertheless, these funds are a significant but declining source of funding for local operations and a drain on the national treasury. With inflation at 9% the increase of 6.75% in shared revenue for this fiscal year, is statistically less than for the previous fiscal year in terms of purchasing power. 

Municipal Corporations
The data for this category of “fiscally empowered” municipal corporations is not as straight-forward as data related to city corporations. Here is the AI-sourced list (which is a cautionary tale in and of itself)

There are a total of 339 municipalities (pourshavas) in Bangladesh but most of them could not assume the more expansive revenue mobilization efforts suggested in this paper. In fact, any attempt to make them all equal would result in chaos, intentional or otherwise. Only a select few municipal corporations are considered as likely candidates for enhanced fiscal powers. 
Fiscalization is imperative for corporate cities and municipalities to self-finance a portion of their operational budget. As a bonus, fiscalization will reduce the perception and reality of corruption. 
XCV2, do you know what that means? How about XVM9? Still stumped?
These are examples of the prices marked by a Sharpie pen on 90% of the pills and potions; syrups and salves sold in pharmacies throughout the country. Although some drug manufacturers (e.g., SQUARE) print the standard, fixed price on the box containing their medicines, the majority of pharmacy-related transactions are not conducted based on price transparency. This is corruption, plain and simple, and tax evasion to boot. And when consumers agree to pay based on this shady transaction, they are enabling further corruption – and they know it. 
Compounding this scam is the complete absence of accountability, as most of these businesses do not record the transaction through a cash register or equivalent electronic fiscal device which would allow the Government to collect its fair share of taxes. A drawer full of money serves as the means of paying in and paying out. The owners and employees are all part of the scam, and consumers, as well, and it would seem that NBR is not up to the task of enforcing regulations or collecting the necessary taxes. 
On Valentine’s Day, I purchased some flowers for a friend who has been a Bangla-English translator for me. The flower shop was on Kamal Attaturk directly across from the Political Zone Thana. Ironically, a senior police officer (judging by the entourage) was also buying flowers at the same time, at the same place. When the employee told me and the owner/cash-drawer-guy the cost of my planned purchase, I responded a bit loudly, ”Where’s the cash register? Does NBR know about this?” He gave me that hang-dog look of a kid caught with his hand in the cookie jar. “I want a challan”, I demanded. The cash-drawer-guy wrote out a receipt on an order form (no copy) and gave me a twenty taka discount. I was in a corrupt transaction. I was fostering corruption. Call RAB! Multiply my transaction by millions and you can see the loss to the Government but, the potential to support city corporation operations 
I am convinced that if City Corporations and Municipal Corporations got to keep 50% of the VAT/SD assessed on transactions recorded on all newly-installed electronic fiscal devices/cash registers they would make the effort to see that the system was working properly. They – the corporations - would have  a direct and material interest in maximizing revenues. Might some shysters try to rig the system? Of course, you don’t get to the bottom of the barrel on the Corruption Perception Index by being angels. But when city corporations and municipal corporations own a part of the solution they are more likely to have an interest in addressing the problem. 

I believe that once city corporations and municipal corporations have a vested interest in increasing revenue mobilization for improved service delivery they will  require fiscalization across the board: pharmacies, flower shops, market vendors, food stalls…every fixed location would be required to be licensed (additional income for the corporation) and to have a cash register that records all sales and the associated VAT. 
Optimist that I am, therefore, I am advocating for a tax sharing agreement between the Government and City Corporations/Municipal Corporations for all new establishments equipped with the technology. This practice would yield significant new revenue, reduce corruption in the bureaucracy, improve aggregate social integrity, and create fiscal space for the Government.
Wealth is the vast untapped potential in Bangladesh for funding government operations in all City Corporations and a select few Municipal Corporations. Land and buildings are the best example of under-taxed wealth, of course, but luxury goods (automobiles, jewelry) also are subject to taxation., 
We speak of the three-legged stool of taxation: income, consumption, and wealth. You can pretty much assign all tax heads to one of those categories and the best tax regimes strive for a balance, not an even distribution, but a balance so that taxation is fair and equitable. If that is the universal standard (it is!) then the central government has performed very poorly. Income taxes are not properly assessed or collected; only about 10% of taxpayers pony up. Consumption taxes using VAT, SD, and onerous duties on imports and exports are regressive. Disproportionately, the less-than-rich are impacted by these consumption-based taxes and duties. The Government acknowledges that fact annually in its Budget Statement but, as noted above, it fails to require many commercial establishments to install the technology needed to record sales or collect VAT on them. Wealth, represented by an individual’s aggregate equity in land, buildings, intangible assets, luxury goods, and similar glitter, are hugely undertaxed and subject to fiddles on valuation, assessment, transfers, and actual payment of tax.
The solution cannot emerge from the problem, when the problem is protected by a combination of powerful interests. The real estate and property sector is more protected than RMG. How do we know it is a syndicated segment of the economy? When the Government decided to rinse laundered money, it didn’t require the tax cheats and money launderers to build schools, support widows, feed the orphans or invest their repatriated money in some other social good… No… the offer was to stick the money where the anti-corruption sun don’t shine… in real estate… because it was a safe, opaque, no follow-the-money parking place. 
Therefore, let’s decentralize authority for wealth taxation – in all forms and at all stages of the tax regime cycle - away from central government and assign the rights and responsibilities to city corporations and municipal corporations with much higher collection targets negotiated and agreed in advance. These corporations already have nominal control through property taxes (a fiddle), holding taxes (a violin), and land transfer taxes (a cello), but they all have strings attached. My recommendation, therefore, flips the switch. Using hard ceilings for both revenue and expenditure estimates, city corporations and municipal corporations must first approve a revenue budget that requires 60% of total estimated revenue to come from wealth taxes and further that the estimated expenditure budget may not exceed estimated revenues. Currently “own-source-revenues” from city corporations amount to only 38% of their aggregate budgets. Moving from 38 to 60, with the cap on expenditures will require several – but not more than four – years to accomplish. Is moaning a sign of affirmation an acceptance? I hear lots of moaning. But those steps are needed to both provide fiscal space for the Government while also empowering both the “local government” corporations and taxpayers (paying property taxes buys you a seat at the policy making table). 
To provide additional decentralized revenue mobilization tools intended to empower city corporations and municipal corporations, the following additional “property” taxes are suggested:
VACANT LAND TAX – undeveloped (and certain underdeveloped) land will be assessed and taxed at its highest and best use. A vacant lot in the center of say, Barishol, will have an assessed value subject to taxation equal to comparable developed plots within a 500-metre radius.
SPECIAL ASSESSMENTS -  INCREMENTAL VALUE CREATED - The imputed incremental value to property due to the impact of public infrastructure such as roads, piped water, and electrical lines. It is a documented fact that serviced land is more valuable than un-serviced land. This type of assessment will capture a portion of that added value through a special assessment that recovers the cost of infrastructure investment.
FOOT FRONTAGE TAXES – increased value from public infrastructure (especially sidewalks and sewerage) along the “line of improvement”. Taxes are assessed only based on frontage not, as above, on the total incremental value. ONLY the owners of property along the improved service line are assessed – the fair share rule. 
FULL ASSESSMENT RULE – building permits are issued for a specific time period, say three years, during which time property and holding taxes typically are not assessed. Many construction projects go on and on and on, preventing the city corporation or municipal corporation from realizing revenue.  Under the full assessment rule, property tax is assessed AS IF the building has been completed and is ready for occupancy according to the permit.
These tools will greatly increase tax collections in many city corporations and municipal corporations while increasing the equity value for property owners. As I suggested, the justification for decentralization of some taxation functions and empowering a more just and effective system of tax assessment and collection is four-fold: 
Creating fiscal space for central government by reducing the dependency payments to city corporations and municipal corporations;
Empowering city corporations and city corporations to become solvent and self-sustaining over time;
Reducing fraud and corruption at the POS of goods and commodities; and,
Improving the quality of life of urban residents through better services.