Nalas EU Logo

Cost Estimation of Municipal Services in South East Europe

Decentralization is a process of transfer of services and powers from a state to its municipalities. The provision of new services requires adequate financial resources. The shift from hierarchical subordination of municipalities to equal relations with the state implies that the quantity of such resources should be agreed at the negotiation table. In order to uphold local interests, the representatives of municipalities should be equipped with knowledge and tools so as to come up with the actual (full) costs for rendering decentralized services. Some of the cost elements are often hidden in other functions (e.g. administrative costs) or they are simply omitted in the negotiation process. The lack of such information and knowledge has adverse impact on the state transfer system and frequently leads to unfunded services at local level.

The new powers create conditions for differences in administrative effectiveness and this affects the distinctions in the financial status of municipalities. They increase in a situation of decentralization. This requires that central governments should use increasingly complex mechanisms for financial equalization. Their negotiations with local government representatives imply that the latter should be aware of the cost of the services and of the existing objective differences among municipalities resulting from their specific conditions of service production and delivery. The greater powers of the local governments go along with greater responsibilities to the voters and tax-payers. An increasingly popular practice is to discuss local issues with the community, to report performance to broader audiences, to undertake obligations to provide new services. The enhanced dialogue with the population and the transparency of the overall activities of the municipalities require that the budgeting process should be based on an estimate of the total cost of services.

A greater autonomy of municipalities implies possibilities for local decision-making on the way of providing individual services. It is the obligation of the municipality to ensure their provision: either directly or via another body. Depending on circumstances, it is often more effective for a service to be outsourced (i.e. rendered by an external provider). This practice has been more common in the utility sector and recently in the provision of community social services as well. The protection of the public interest in the process of outsourcing a certain service presumes knowledge of the total expenditures for its production and provision.

As a result of the awareness of these needs brought about by the altered conditions of local authority operation the Task Force on Fiscal Decentralisation (TF FD) of the Network of Associations of Local Authorities in South Eastern Europe (NALAS) suggested the development of a model of cost estimation of mainstream municipal services. The idea was discussed during the NALAS TF FD workshop held in Skopje on 14 June 2007. In the course of the workshop the Task Force members rallied around the view that the methods of cost estimation of municipal services should include operational (investment) costs, that they should be as simple as possible and relatively easy to apply, while allowing country-specific adjustments.