Financing Capital Governments in Transitional Countries: the case of Chisinau

Mihai Roscovan and Doina Melnic

1. Introduction
Historical Background Chisinau is the political, economic, scientific, cultural and educational centre of the Republic of Moldova. With its 18.3% share in the total population of the country, its contribution to the GDP is close to 50%. Unemployment rates in the capital are lower, while average monthly wages and pensions are higher that in the country. As it concentrates considerable shares of countrys potential and economic development leviers, Chisinau plays the role of a strategic urban centre of this country. Therefore, it has a particular importance in setting up higher business efficiency and regional economic development standards as well as regional and global integration of the country. Table 1 - The Role of Chisinau in Republic of Moldova (2005) Indicator R. Chisina Shar Moldova u e Population,Thousand 3936 718 18% Territory, Sq.km 33846 572 2% Density, Ths hab/Sq.km 116 1256 10.8 GDP nominal, Mil Euro 2401 1051 44% GDP per capita, Euro 710 1464 2.1 FDI, Mil Euro 163 104 64% FDI per capita, Euro 48 145 3.0 SMEs, Ths 30.0 20.8 69% Budget revenues, Mil 575 83 14% Euro
Source: Statistical Yearbook of the Republic of Moldova 2006, Statistical Yearbook: Chisinau in figures, 2006 Note: The economic figures for Republic of Moldova are presented without the Transnistrian

regions

The city has developed over the last six centuries mainly due to external geographic and political factors. Internal economic relations have had in our opinion insignificant impacts on its evolution. The location of Chisinau between East and West has influenced its vocation, status, goals, and spatial organization, and architectural design, social, political, cultural and business environments. The genesis of Chisinau as a city was determined by an external political act the annexation of Bessarabia by Russia in 1812. The following 100 years have meant for Chisinau a development from a 5,000 inhabitant rural and peripheral commune to one of the largest urban centers in Eastern Europe. By the end of the XXth century Chisinau population reached and exceeded the historical capital of Moldova (Iasi), as well as several important European cities (Bratislava, Zagreb, Ljubljana) and became the fifth largest city in Russia.

After World Was II, as Bessarabia was annexed for a second time to the Soviet Union, Chisinau became the capital of the newly formed Soviet Socialist Republic of Moldova. Between 60ies and 80ies Chisinau has evolved a high speed and became an important Soviet-type industrial city. It was strongly integrated in the Soviet space and at the same time isolated from Europe, both in terms of economy and infrastructure. Chisinau status of Soviet republican capital had a positive impact on its dynamic and scale development. However, many of these were rather unrelated, unsynchronized and uncorrelated to the development of the Moldovan province. As a result, the Republic of Moldova had a mega-capital polarizing in absolute terms the national territory. Chisinau has concentrated progressively the largest share of national resources and transition outcomes have widened the gap between the capital and the province. After the declaration of independence in 1991 and the adoption of the Constitution in 1994, Chisinau city has been awarded the status of municipality. Thus 34 localities are included in the municipality now. They cover an area of 175 square km and a population of over 60 thousand inhabitants. Figure 1 - City and sub-city population dynamics, 1990-2005
900 800 700 600 500 400 300 200 100 0 Sub-sity City 1990 22.6 729 1995 79.1 661.5 2000 117.3 663.4 2005 124.1 593.8

The city of Chisinau is in the beginning of the XXI century a European regional city performing the functions of a small South-Eastern European state capital, located in a area of maximum geo-political, financial, economic, cultural and communication convergence between Euro-Atlantic and Euro-Asian spaces. Regionally, the city of Chisinau has limited international influence, a vast deficit of metropolitan services and underdeveloped international functions. The most important regional transportation, financial and informational flows avoid Chisinau as they pass through Bucharest (West), Odessa (South), Lviv (North).

From the prospective of Republic of Moldovas integration into the European Union, Chisinau might become a regional centre of influence and benefit from new cooperation opportunities with similar regional metropolis. Demographic, economic and social processes Demographic and migrational trends. At the beginning of 2006, the city of Chisinau had a population of 717.9 thousand people. Of these, 90.4% live in urban areas and the rest in rural communities. The urban population of Chisinau stands for 49.2% of the total urban population in Moldova.

Before 1990 the population of Moldova has significantly increased and tripled over 30 years. Key reasons included industry boost on one side and migration processes encouraged in the Soviet period. Between 1990 and 2005 the number of inhabitants has not changed and increased by only 0.03%. Between 1990 and 2000 the number of population continued to grow, although growth rhythm has decreased (0.39% per year). After that, due to several factors and especially overseas migration 1 the increase was negative at 0.88% per year. Figure 2 - Population dynamics, 1900-2005
800 700 600

ths habitants

500 400 300 200 100 0

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2005 Year

However, the dynamics and the structure showed noticeable changes, in terms of residence areas, age and gender. Thus, the dynamics of the rural population was the highest and grew by a yearly average of approximately 11.5% while urban
1

According to the study Migration and remmittances in the Republic of Moldova, produced by CBC AxA, over 57,000 inhabitants of Chisinau have been or are currently working abroad.

population of the city grew by 1.1%. The most important decrease of population took place in the town of Chisinau with an average of approximately 0.64% per year. As a result of the area growth and rural population increase, between 1990 and 2006 the share of urban inhabitants decreased from 97% to 90.4%. Figure 3 - Rural and urban population, 1990-2005
740 720 Urban habitants 700 680 660 640 620 600 1996 1998 2000 2002 1990 1992 1994 2004 2005 Urban Rural 80 70 60 50 40 30 20 10 0 Years Rural Habitants

Gender structure could be qualified as unbalanced, with male inhabitants standing for 46.6%. The difference between gender shares is significant at 6.9%. When combining gender and age criteria, the difference is even more striking. The general the share of male population was 87.6 men per 100 women in 2005. This disproportion grows wider with age. However the most important gap is in economically active age groups. Most probably, mens higher mobility is the key reason for this. Currently the age structure of Chisinau population is favorable, with a significant share of economically active people and therefore the demographic burden indicators are still low compared to the rest of the country. At the same time, the transition period led to loss of jobs and an increase in unemployment rates. As a result, over one quarter of Chisinau active population is believed to have migrated abroad in search of jobs. The reduced birth rate in the 90ies led to a considerable decrease in 10 years old children group ages. Although an increase birth rate is expected in the immediate future, Chisinau internal demographic resources seem exhausted. This is a threat on the long term, as the share of economically active population would be diminishing.

Economic development. The municipality of Chisinau is the largest economic centre of Moldova, contributing to more than 45% of the GDP. In absolute terms, GDP per capita in Chisinau is twice the value in the regions. In several main areas of economic activity, such as trade, industry, services and investments, the share of Chisinau is over 50%. Figure 4 - GDP per capita: Chisinau vs. Moldova

1400 1200 1000 800 600 400 200 0 2000 2001 2002 2003 2004 769 834 455 485 485 580 998 1058 1153

1346

652

383

Chisinau 2005 Moldova

Chisinau business area comprises approximately 22 thousand companies employing over 300,000 people (Table 1). The number of profitable enterprises in 2005 reached 37.6% of the total and was slightly lower than in previous years. At the same time, the total volume of profits has significantly increased over the last two years, 31% and 46% respectively. Small businesses stand for 96% of all business entities submitting statistical data and for 25% of net sales, 38% of total employees and 14% of gross profit. Table 2 - Economic potential and structure of Chisinau, 2005 Nr. Labour Sales Companies (in (in mil. thousands EURO) ) Total SMEs Total SME Total SMEs s Agriculture 211 196 5.3 1.5 19 8 Industry 2619 2444 73 22.6 721 133 Energy 32 21 8.6 0.1 492 4 Construction 1328 1264 19.6 9.8 229 102 Trade 9125 8872 62.3 37.4 2054 658 Transport and 1524 1459 50 8.4 588 92 communication Other 6798 6554 81.1 33.5 356 118

TOTAL

21637

2081 0

299. 9

113. 3

445 9

1115

The tertiary sector, mainly commerce, transportation and communications, stand for the major share in citys economy with over 60% of gross sales and profit (Figure 3). Processing industry represents 16.2% of sales and 17.8% of profit.

Figure 5 - Share of sectors in Chisinau economy

Other 5% Finance 3% Industry 16%

Transportation, comunication 13%

Energy 11% Trade 47% Construction 5%

Some of the main economic and social issues would include: (i) (ii) (iii) the multitude of industrial zones with reduced activity in the city, including in central areas; excessive concentrations of economic activities in the city centre; unbalanced labour force demand and offer, especially between urban and rural areas.

The share of Chisinau city in foreign trade is significant at 58% of exports and 83% of imports. In 2004 over half of all exports were for eastern markets and two-thirds of total exports were in spirits, textiles and vegetable products. The excessive concentration of exports in instable CIS markets and on a very narrow product range is jeopardizing the stability of Moldovas economic growth and makes it vulnerable to external shocks. As a result of economic pressures, such as Russias wine and vegetable products ban in 2005 and 2006, CIS countries tend to decrease their share in Moldova experts while EU and ECE increase theirs. Between 2001 and 2005 direct investment increased 2.8 times. The main source for investments is the private sector with approximately 83%, including 23% foreign investments. State and local budgets share is approximately 8% and the rest is represented by the population and bank loans. Over 60% of the investments made were in manufacture; second and third largest were trade and infrastructure.

Property deals stand for 23% of investments, transportation and communications stand for 22%; processing industry for 19% and trade for 15%. The Republic of Moldova is not yet an attractive destination for investments. FDI was a difficult task with uneven results. In 2005 FDI per inhabitant in Chisinau reached USD 180 or about three times the level of FDI per capita around the country. Taking into account the role and the functions of the capital city in this country, as well as FDI per capita figures in other towns in the region (e.g. in Odessa, FDI per capital in 2006 was USD 360), one can figure out that investment opportunities are still unexplored. Figure 6 - Foreign Direct Investment (2005) USD per capita

Iasi Kiiv Chisinau Odessa Moscow Vilnus Tallinn 0

120 150 180 360 2400 8400 9200 5000 10000

Social changes. Potential labor force in Chisinau municipality represents 529.4 thousand or approximately 74% of the total population. Economically active population comprises 258.6 thousand people, of which 250.9 thousand are employed (19% of the total per country) and 7.7 thousand registered unemployed. The rest, 270 thousand people represent those who are employed in the grey sector, non-registered unemployed, migrant workers living abroad and other people temporarily incapable to work or changing jobs. Between 2001 and 2005 the number of employees increased by 14% while the total labour force market per country has decreased. In 2006 unemployment in Chisinau reached 8.3% or 0.9% above the average per country. 2 Several categories directly affected by unemployment can be identified: young people from socially vulnerable categories, women re-joining the labour market after temporary absence for parenting reasons, physically and mentally handicapped individuals, people lacking permanent residences, individuals freed from penitentiaries and other social rehabilitation institutions.
2

In 2006 National Bureau of Statistics has computed the unemployment rate for the first time according to ILO methodology.

Labour force emigration is one of the major factors influencing economic, social and political development in Moldova. This is proven by the fact that almost 20% of the able work force is said to be currently abroad and remittances in 2005 reached the level of 30% of the GDP. Internal migration has one destination Chisinau and the trend is dominant among young people, as the majority of young people is moving to Chisinau if not abroad. The sector distribution of the 250 thousand employees shows a dominance of the processing industry, education, commerce, transportation/telecommunications health protection and property transactions and local governments. The above proves a relatively good distribution of work force use. These seven sectors cover about 75.6% of total jobs. Average monthly earnings in 2005 were EUR 113 representing a threefold increase compared to 2001. The real increase in average earnings represented about 60%. The lowest wages are in agriculture, education and health protection, usually twice or three times lower than in the financial sector. Figure 7 - Average income discrepancy in Moldova, 2000-2005, EURO/month
120 100 80 70 60 40 20 0 2000 2001 2002 2003 2004 2005 54 35 26 47 41 77 54 42 79 57 40 44 98 84 72 57 113

Ave rage m onthly s alary in Chis inau Subs is tance m inim um pe r pe rs on

Ave r age m onthly s alar y in Moldova

Living standards are higher in Chisinau than in other areas of the country and still lower than in other comparable European cities. According to the official statistics, between 2001 and 2005, absolute poverty level incidence decreased from 30% to 5.9% and extreme poverty level from 17.2% to 2.3%. However the earning of the majority of the population covers only 80% of the minimum subsistence. Still, the largest share of expenses is food and housing bills, so that any increase in utilities tariffs has significant consequences on living quality. Figure 8 - Average monthly wage by sector, 2000-2005, Eur

300 250 200 150 100 50 Public administration Construction Commerce 0 Transport Finance Manufacturing industry Education Health Hotel and restaurant 123 144 108 244 151 90 81 81 76 30

Average m onthly salary/pension Average m onthly salary in Chisinau

The only real prospect for rural inhabitants living standards is gradual increase in personal income, on the basis of modernization and economic growth, as well as a qualified and better paid work force. There are factors influencing the low quality of living in Chisinau. Although there are several recreation areas, the lack of relatively simple facilities, such as passages for walkers and cyclists paths is still important. Residential buildings in Chisinau, with approximately 270 thousand flats and 15.3 million sq. m. are relatively new compared to other towns in the region, but is not enough to meet the requirements of all inhabitants. In average, about 90% of the families in the capital city have flats, with about 19.6 sq. meters per person and the average flat size of 56 sq. meters. At the same time, over 60,000 families are registered to be in need of an apartment or home improvement. The residential sector is over-populated, as statistics shows 1.6 persons per one bedroom and 15% of the flats being shared by 2 or 3 families. Thousands of families composed of two or three generations share common property because they cannot afford separate spaces. At the same time a significant number of people own two, three or more flats. Over 90% of the students are renting property. Utilities in the housing sector needs improvement. Only 62% of the total housing areas have access to water supply and canalization, 55% have a bathroom and 54% have hot water /14/. Residential buildings are developed relatively quickly and in high proportions, with around 200 developers and 6.5 thousand flats with 860 thousand sq. meters built in the last 5 years. At the same time, because of high prices, the access to property is

Pensioners

10

still limited. Prices have a continuously increasing trend of about 30-35% per year since 2000. In the central part of the city prices per sq. meter reach EUR 1,000. Specialists estimate that on the short term prices will still increase by approximately 20% per year. Figure 9 - Residential property development in Chisinau, Ths sq.m
450 400 350 300 250 200 150 100 50 0 1990 1995 2000 2001 2002 2003 2004 2005

Apartaments

Individual houses

Residential buildings are still affordable for about 2% high income earners. The situation on the market is not improving as there is limited competition. Different sources how that about 20% of the remittances are used for property transactions, of which 30% are profit-making deals. Residential property demand and supply is not balanced. Between 2001 and 2005 most of the residential buildings were private houses. Their total area was 2.5 times larger than the one in apartment buildings. Although only ten percent of the population require higher comfort apartments, around fifty percent of the apartments build were three-bedroom ones. Figure 10 - Demand and Supply on Property Market in Chisinau

10% 40% 35% 15%

47%

7% 1 6%

31 %

Confort

Average

Social

Under average
1room 2 room s 3 room s 4 room s

A. Demand structure for apartments apartments

B. Supply structure of

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Roads are in a poor state. Only 15% of the repair needs are being implemented. Streets are used very often as parking areas and this reduces by 30% the traffic capacity. The number of cars per capita has increased over the last years and reached 163 cars per 1,000 people, so that the burden on Chisinau streets has doubled. The quality of transportation services is poor.

2. Legal environment: the structure of municipal government

Laws governing capital city Local government in Moldova is a two-tier structure, of which tier 1 includes public local authorities in villages (communes) and towns (municipalities) and tier 2 rayon authorities and Chisinau municipality. The legal framework includes a variety of legal acts as indicated in Annex 1. The legal documents listed below are the key ones: 1) Constitution of the Republic of Moldova, passed in 1994, chapter III, article 109 (3), stipulating that The status of the Capital City of Chisinau is determined by an organic law 2) The Law on the Status of Chisinau Municipality, passed in 1995, regulating the organization and functioning of local public authorities in Chisinau municipality, functions of the municipal council, mayor and mayoralty, heads and administration of municipality sub-units, public services, municipal economy and finance 3) The Law on local government, passed in 2006, chapter VII article 57-59, stipulating and regulating the organization and functioning of local public authorities of Chisinau municipality. Main legal differences in relation to the general law governing municipalities. One should note that this variety of legal acts does not fully cover the regulation of a modern and well organized system. With some exceptions, the legal framework for the capital is similar to general municipalities regulations. There are several contradictions of legal provisions for similar competencies and responsibilities. Treasury relationship between the state and municipalities is not clearly defined in these legal acts. The functions of the capital as a political, administrative, cultural and educational centre are not appropriately defined. Also, the distribution of responsibilities between non-concentrated structures and functions delegation mechanism are not defined. There are cases of excessive intervention of central public authorities in municipal activities against local interests. Although some central government involvements, mainly financial ones, have a positive impact on the habitat in the municipality, these initiatives are mainly targeted at achieving political aims.

12

In this context one can notice that the regulatory framework related to local government functions needs essential changes, both in terms of clarifying the relations with the central government and in terms of organizing a modern and efficient municipal administration. Municipal administrative structure The countrys administrative and territorial structure consists of rayons and Chisinau municipality. Chisinau municipality comprises the following territorial units (Annex 2): City of Chisinau with 5 sectors; 6 towns and 2 rural localities; 26 communes included in 12 local government units.

The 18 territorial units of the municipality, except the 5 sectors, enjoy autonomy as per the legal acts and benefit from a separate patrimony and financial autonomy. Several gaps in the legislation, however, cause a series of misunderstandings. There is no separate notion of Chisinau town. The 5 sectors subordinated to the municipal Council, both administratively and territorially, have in their subordination other units, that are, in their turn, autonomous structures. These misunderstandings create impediments to a clear definition of the urban areas from the other parts of the municipality. The current structure is the result of the administrative and territorial reforms started in 1998, aimed at creating a new system adjusted to current European needs of local governance. Municipal local administration consists of autonomous public bodies: municipal, town and communes councils as deliberative bodies general mayor of Chisinau, mayors of towns, communes and subunits administrations as executive bodies local and municipal public services decentralized state administration consisting of: territorial administrative control units of the Ministry of Local Government that are now being restructured and will take over the functions of Central Government territorial units and decentralized services of ministries and departments.

13

Figure 11 Chisinau Local Government Structure

Direct election Appointment Legality control National Government Sector Pretor General Mayor Municipal Council Teritorial Government Office LPA Mayor LPA Council

V O

T E R S

Municipal council The municipal council is the deliberative authority of municipal public administration and functions according to the legislation and its internal regulations. It comprises 51 members of the Council, elected by the population from party lists, electoral blocks and independent candidates on a four year term basis. The most recent elections took place on 03 June 2007 and the structure of the Council is presented in table below: Table 3 - Political structure of the CMC Elects No of Share, % mandates 1 Communists Party 16 31.4 2 Liberal Party 11 21.6 3 Our Moldova Alliance 7 13.7 4 Peoples Christian Democratic 4 7.8 Party 5 Democratic Party 4 7.8 6 Social Democracy Party 3 5.9 7 Social Democratic Party 2 3.9 8 Umanitarian Party 2 3.9 9 National Liberal Party 1 2 10 Ravnopravie-Patria-Rodina 1 2 Source: www.alegeri.md

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Chisinau Municipal Council sits in ordinary meetings once in three months and in extraordinary meetings as needed and convoked by the Chairperson or upon he initiative of at least one-third of the Council members. The meetings of the Council are chaired by the Chairperson elected among the members of the Council throughout the duration of the mandate. Decisions are made by the simple majority of the total number of Council members. The Council seats in quarterly ordinary and other extraordinary meetings. Extraordinary meetings may be called by the general mayor or at least one third of the counselors. Meetings are moderated by one Chairman elected for each session. Decisions are made with simply majority votes by all counselors. The functions of the Council could be classified as follows: internal organization local interest decisions initiation and adoption mayors office structure local interest services, public institutions and business entities social and economic development of the city environment and human rights protection cooperation with other municipalities internal control local finances and patrimony administration

The Council does not have its own managing body. Its activity is coordinated by the Chairperson, its Secretary and Mayors Office staff 3. The Secretary of the Council and the staff of the Mayors office manage the activity of the Council. The Secretary is selected on a basis of an open competition. He/she prepares the materials for Councils sessions, participates in the meetings, notifies regarding the draft decision and is responsible for their legal character and coordinates the appropriate department in the Mayors office. The Council comprises eight specialized committees, with non-remunerated membership, formed for the entire duration of the council and subordinated to it. Each committee has a chairperson and a secretary chosen during the meetings. Their decisions have a recommendations character. Municipal administration Municipal Council creates and approves for the duration of its mandate the municipal administration that includes several executive sub-divisions and deals with public operations managements.

Municipal Council Chairpersons responsibilities shall be presented in the new draft of the Law on Chisinau Municipality. The draft law is not yet passed by the Parliament. A new structure is also planned: Chisinau Municipality Bureau, a permanent body with paid staff.

15

The main attributions of the municipal administration can be classified in several categories: organizing and coordinating the activities of the divisions, sections, and services of the mayoralty; elaborating and coordinating economic and social development activities; regulating land and residential property regime in the municipality; setting the emergency regime and coordinating emergency consequences liquidating; and civil and social protection of the population and public order.

As of October 2007, Chisinau Municipal Council Executive Body employs over 800 people, including 500 civil servants and 300 sub-contracted staff. Staff selection is competition based. The General Mayor is the executive authority elected by the population through direct vote. In exercising their functions the Mayor uses both qualities of (1) municipality representative in exercising the function of public area administration executive body and (2) state representative in exercising the functions expressly set up by local public administration law. Mayors attributions can be classified in this way: Organizing and implementing Municipal Councils decisions; Initiative in setting up local regulations on public administration area; Organizing and implementing control on the subordinated subunits; Local public administration bodies; and Maintaining public order.

The Mayor is supported by 4 advisers and 4 deputy mayors. Deputy Mayors are proposed by the Mayor and appointed through a decision of the Municipal Council as civil servants. They coordinate the activity of different sub-units, e.g. the deputy mayor responsible for economic and financial development of Chisinau municipality is responsible for reasonable utilization of the municipal treasury, budgeting and implementation of budget, providing services, trade and public catering as well as city markets. There are thirteen municipal departments responsible for public interest services 4. These departments draft and implement development programs in their areas and consult and coordinate local councils and mayors offices. Municipal public services are entitled to a certain degree of independence and execute decisions adopted by central specialized bodies and municipal public administration authorities. Chisinau city is divided into five sectors, where municipal government is represented by pretors and preturas. Sector preturas are executive local government authorities, legal entities that are part of the Mayors office. Unlike
4

The List of all services is included in Annex 3.

16

other similar structures of other European capitals, preturas in Chisinau do not have elected deliberative bodies. A pretura is usually formed from a pretor, a deputy pretor, 3-5 m embers and one secretary. Preturas have the following functions: Implementing of the relevant laws and municipal decisions in their territories; Organizing, controlling and coordinating public sector activities in their territories; Managing the treasury as transferred from the municipality; Managing social and economic institutions; and Managing construction and utilities works in their territories.

Preturas members sit in weekly operative meetings. Also, preturas are convoked by the pretor in working sessions, as many times as necessary and at least monthly. The pretor is an executive municipal public administration authority and an official with administrative functions, appointed by the General Mayor as a representative in the sector. Figure 12 - Relationship elective-executive bodies in Municipality of Chisinau The Council of the Municipality
CMC Committees

Mayor

of Chisinau

Secretary CMC

Vicemayor (4)

Sectorial Directors (5)

Subdivisions financed from the budget

Subdivisions Subdivisions financed from with auto finance special sources Sectors

Sub-city local administration Towns and communes (villages) in the suburbs of the municipality are managed by local councils and mayors offices. Local councils are deliberative bodies elected by the population. They act on the basis of the laws and their internal regulations. As of October 2007, there are 285 members in all local councils, representing 11 political

17

parties and independent candidates. Each council has 3-7 commissions in each area of activity with recommendation-making rights. Local councils do not have their own management body and are coordinated by council secretaries. Council secretaries are appointed by the councils, upon proposals from Mayors and a result of competitions. Council secretaries are also mayors office secretaries. Mayors are local council executive authorities. Their functions are regulated by legal provisions and are similar to those of the General Mayor. Deputy Mayors are appointed by Local Council decisions and their mandates expire together with the mandate of the mayors. Deputy Mayors functions are set up in the internal regulations of the mayors offices. In villages with a population under 7,000 inhabitants, deputy mayors are not remunerated. Local public services are organized by local councils as proposed by mayors, according to local needs and available resources. The mayor determines the needs and submits proposals to the council. Depending on the dimensions of the locality, public services may be organized in land regulations, construction, utilities, fiscal relations etc. Local mayors offices have between five and 12 technical staff. Central government representation Territorial Government Office (TGO) is a representative structure of the Government in Chisinau Municipality and is an institution that implements the principle of territorial decentralization. The institutions tasks include municipal interest services administration without intervention in autonomous public administration, except for checking the conformity and legality of the documents issued by the latter. TGO representatives are invited and participate in all Municipal Councils meetings. TGO has the right to appeal local public authorities decisions that violate the law. Because not all public services have been decentralized the provision of certain services to the population has been transferred ministries and departments 5. At the same time, it is not clear which services have control functions in these areas and that achieve the state interest in these areas.

3. Financing capital cities

The role of the city in intergovernmental structure The relationship between local government levels regarding public service provision is regulated by the following legal acts: a) The law on administrative de-centralization b) The law on local government
5

V. Bulat. Evaluating legal malfunctions in Chisinau Mayoralty activity (Evaluation report), 2006

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c) The law on local public finance The Law on administrative de-centralization sets up several types of local government activities: mandatory and optional; and delegated and shared.

The Law on public local finance sets up ways of financing these duties and responsibilities. Mandatory and optional services are funded from local government own revenue streams. Delegated activities are funded from special Central Government transfers. Shared activities are funded base don cooperation contracts between/among local government units and/or Central Government. In Annex 4 are present the distribution of responsibilities between local and central government. The flowing three conclusions we could make: 1. Municipal government responsibilities cover a wide range of areas; 2. The Central Government controls several activities pertaining to local responsibility, especially urban planning, economic development, social housing, cadastre etc. 3. There is variety of responsibilities that are overlapping. Central Government provides services through de-concentrated structures (Annex 5). Formally, these structures are subordinated twice but financed from Central Government budget only and have cooperation relations with local government. Public services that are not subordinated to the municipal authorities include, but are not limited to: cadastre registration, district heating. The cadastre is fully controlled by the Central Government. District heating supply services are provided by Termocom JSC, 80% owned by the municipality of Chisinau. This company is under reorganization because of its poor financial status. This company is currently subordinated to the council of creditors. Companies fully or partly owned by city authorities. Chisinau municipality has invested in 69 municipal companies. At end 2005, the value of these investments was MDL 516.7 million. Chisinau municipality is the major shareholder in 12 companies. The major challenge in this area is the poor financial situation of the municipally owned companies. For instance, due to central government involvement and pressure, Chisinau Municipal Council was not able to increase tariffs according to the schedules established jointly with creditors (International Financial Institutions) for Water Supply Company. Therefore Water Supply Company was not able to repay debts in due time and was declared in default several times. On the other side, a scheme of targeted compensation of tariffs has been adopted by the Central Government and the Municipality has to cover those from their budget but has no additional resources available from the Central Government.

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An overview of these companies follows below: 1. District heating - SA Termocom. This joint stock company is under a reorganization procedure and undergoes bankruptcy procedure since November 2001. It is now being managed by a special administrator. Historical debt is periodically refinanced. In the beginning of year 2007, a Decision was passed, according to which 50 percent of the tariff is covered through targeted compensations that have to be paid from the municipal budget. 2. Road maintenance SA Edilitate. This company appears to be among the very few profitable municipal enterprise. 3. Water supply service - SA Apa Canal Chisinau. This company is in a poor financial situation, with losses being made because of the low tariffs maintained for political reasons by the previous council and central government pressure. Current tariff structure does cover operational costs; the municipal council increased its capital over 2006 and in early 2007 approved a slight increase in tariffs first since 2001. Debt is repaid from refinancing. 4. Public transportation IM Regia Transport Electric and IM "Parcul Urban de Autobuze. The poor financial situation is due to the same issue: low tariffs that do not fully cover operational expenses. The municipality directs from time to time some inflows for capital expenditures, such new buses and trolleybuses. 5. Solid waste management SA Regia Autosalubritate. This is a profitable company. Privatization has not been considered. 6. Utilities for apartment buildings - 23 enterprises. This is a reminiscence of state owned buildings that have not been adjusted to private owners structures yet. Most of them are basically insolvent. 7. There are a series of other companies fully or partly owned by municipality, in areas such as fashion design, public catering, food production. Of these, some could provide public services. For instance, Business incubator Alfa could be a good basis for local economic development activities. 8. There are six municipal companies in culture and health protection sectors, entirely supported by subsidies. Overlapping and real control over local public services, In some cases central government imposes to the local government responsibilities related to nation-wide activities. Thus, upon organizing a national event - the wine festival Chisinau cleaning services are mobilized and bear additional costs that are not cover from additional funds. Another example is in cases of international events held in the capital city (CIS Summit or GUUAM meetings) the municipality is requested to make additional outside design improvement works generating un-planned expenditures.

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There were cases where the Government requested property transfer from municipalitys balance sheet to central government subordinated bodies. Thus, in 2004 Chisinau city administration was forced to transfer the municipal emergency service to the central government. Although this issue was discussed in several municipal council meetings and never reported a sufficient number of votes, this service was transferred to the balance sheet of the ministry of health protection. Other cases included land plots, non-residential buildings and unfinished constructions. Areas of cooperation between central government and city authorities. In certain cases the Central Government provides funds for specific projects implemented by Chisinau municipality. These projects are most often initiated and targeted by the central Government and have political connotations, e.g. take place in a pre-electoral period. Thus, in 2005-2006 the Central Government made special transfers targeted at residential blocks design improvement, buses and trolleybuses purchase, soviet monuments, road refurbishment, and leisure areas rehabilitation. Because most of these projects have not been planned in the municipal budget, several sources of funding were utilized: (1) extra-income accumulated by the municipality; (2) special transfers from the Central Government budget; and (3) change of budget line use. Thus, funding increase ten times compared to previous years and it is clear that it was due to the coming 2007 local elections. As a rule, such projects are characterized by opaque and corrupt practices. Economic development of the city. Although the dominant role of the capital city in countrys economy is obvious, it is not the result of the municipal administration. The economic and financial potential of Chisinau is due, to a great extent to the status of capital. The development of this potential is not followed by economic efficiency growth and is not a result of municipal administration policies. It seems that Chisinau is making use of the centre-periphery gap inherited from the Soviet system and widened during transition. Municipal administration did not have or promote a clear economic development strategy. The activity of the administration in this area is rather limiting business, not stimulating it. In many cases, projects are launched in an ad-hoc and nontransparent manner, under the pressure of the Central Government and implemented by companies related to the government. Issues in relations between central and city authorities. Key issues in the relations between city and central authorities include: Imperfect legal framework both regarding local government and capital city status. Although the legislation on public local government was recently improved, it did not lead to a real local autonomy. The Law on de-centralization provides for a general framework of responsibilities delimitation, but it does contain any provisions regarding actual implementation. The law on public finance has not been

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significantly changed, however previous amendments to the legislation show that Central Government is willing to delegate as many competencies as possible to local governments, but without sufficient funding. The law on capital city is outdated and does not correspond to the requirements of the current local government legislation. Unclear delimitation of municipal and central government property Although there is a multitude of regulations pertaining central and local government property, central vs. local and public vs. private ownership is not yet clearly defined. This opens up opportunities for interpretations that break local autonomy rules and allows central authorities to pass abusive legal documents that are not in favour of the municipality. The dispersion of local property reduces local resources efficiency and encourages dysfunctions in capitals development. Limited local economic development empowerment and delegation to local authorities. The municipality of Chisinau, as other local public authorities, has limited leviers to stimulate economic development. Most of taxes with high collection rates are transferred to the central government budget while local taxes have low fiscal profitability. Local taxes and fees cap is set up by the Parliament and thus reduces the range of economic development leviers to be used by local administration. On the other side, exemptions and unjustified facilities granted by the Central Government leads to fiscal basis reduction and diminish municipalities revenue. Excessive intervention of the Central Government in local administration. The involvement of central authorities in local administration current activities leads to an inefficient utilization of financial resources. In many cases interventions such as land plot allocation, property transfer, project funding target special interest groups. Excessive political pressure on local authorities. Local elections on 3 June 2007 created a situation where the municipality and government are on opposite political sides. This creates tensions and lack of confidence between the two. This in its 2008 budget, the Central Government did not provide for municipality investment financing, nor did it provide for additional costs on projects previously launched by the Central Government authorities.

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City budget analysis Municipal finances a general overview. The budgetary and financial processes in Chisinau are governed by the set of laws regarding public and local public finances. The legal regulatory framework includes provisions regarding local governments organization and local finances operation. 6 The legal regulatory framework governing Chisinau operations is not yet fully completed and includes several provisions that are determining overlapping of Chisinau responsibilities with its subordinated LGUs ones (i.e. the laws fail to provide enough description of Chisinau functions related to its political, economic, cultural and its particular role as the country capital). The legal framework does not clearly define the statute of Chisinau municipality, the boundaries with other LGUs and the local versus municipal patrimony. Additionally the local council has to undertake too many responsibilities and the municipal budget is constantly under-funded. 7 Currently, the Parliament is reviewing a new redaction of the law regarding the local public finances. It is expected that Chisinau municipality activity will improve as the draft law will be adopted as well as the whole system of local finances. Chisinau municipality budget is part of the public finances system regulated by the law regarding budgetary system and process. The state budget and the local budgets are integral part of the consolidated budget. Chisinau municipality budget is annually drafted and the fiscal year is the same as the calendar one. 8 Chisinau municipal budget has a special statute and combines the features of first and second level LGUs, consisting of9: a) municipal (city) budget, including the revenues and expenditures required for the compliance with the legal functions of the municipal administration as well as the additional responsibilities transferred from the central government; and b) local budgets the budgets of the communes and towns, which are part of the Chisinau municipality. The municipal budget is elaborated and executed based on a unitary classification system.10 The municipal budget is drafted according to the provisions of law on local finances and the methodological norms issued by the Ministry of Finances. Each year, the budgetary process is initiated by the Ministry of Finance by the issuance of the state policies regarding public revenues and expenditures The municipal revenues and expenditures predictions are based on a set of economic indicators issued by the state government including macroeconomic
6 7

i.e.: chapter VII of Law on public administration. PUG Chisinau paper; March, 2007 8 Budget rectification is a current practice and takes place several times over a fiscal year . 9 Law on local public finances, article 2. 10 The law on budgetary system and the Parliament decision regarding budgetary classification include a detailed description of each revenue and expenditures items.

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indicators and the normatives regarding the shared state budget revenues. Such information is submitted by the Ministry of Finance local branches to the municipality of Chisinau that is also submitting the set of indicators to its subordinated LGUs. Every year Chisinau Municipal Council approves the budget of the municipality, including the city and local budgets for LGUs. Table 5 - National and municipal finance dynamics, 2003-2005/ 11 2003 200 2005 200 4 6
State budget revenues Total collected revenues in municipality City budget revenues State budget expenditures City budget expenditures Share city budget revenues in total collected revenues in municipality Share city budget revenues in state budget revenues Share city budget expenditures in state budget expenditures Share city budget expenditures in state budget expenditures per capita Eur Mil Eur Mil Eur Mil Eur Mil Eur Mil % 421 134 64 442 59 48.0 428 172 65 492 64 37.6 575 189 79 582 77 41.6 674 235 104 680 106 44.1

% % %

15.3 13.4 73

15.1 13.0 79

13.7 13.2 76

15.4 15.6 80

From the table above, it is clear that (a) over 50% of the taxes collected in the municipality are transferred to the central budget (except 2006); (b) the both share of city budget revenues and expenditures in the general state budget is decreasing; and (c) the share of expenditures per capita have been raising but it is on 20% less than national level. Municipal budget revenues. Over the period 2001-2005, Chisinau budgets revenues calculated in the nominal terms was doubled (see diagram 1 below). At the same time, the analysis of local income dynamics in real terms (2001 prices) shows that in 2004 and 2005 there were strong decreasing trends. As the following analysis shall demonstrate, this revenues trend is mostly due to the modest level of financial autonomy in Moldavian local governments. Figure 13. City budget revenues dynamics, Mil Eur
11

All data presented in this chapter is based on the information provided by the municipal finance department and NBS

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100 75 50 25 0 2001 2002 2003 2004 2005 55 64 56 65 79

100

2006

City budget revenues

Adjusted revenues

The Law on local finances defines the Chisinau municipalitys revenues, as follows: (1) local taxes and fees, (2) shared general government taxes, (3) transfers from state budget, (4) special sources, and (5) special funds. Local taxes and fees, capital revenues and special sources composed the own municipal source revenues. The shared taxes and transfers are regulated by the state budget. The analysis of municipal budget income for major income chapters proves that between 2003 and 2006 essential changes in their structure took place. Table 6 - City budget revenues structure 2003 2006 2003 2004 2005 2006 Eur Mil % Eur % Eur Mil % Eur % Mil Mil 40 62% 46 71% 49 63% 56 56% 21 3 64 32% 5% 100 % 17 2 65 26% 4% 100 % 18 11 79 23% 14% 100 % 24 20 100 24% 20% 100 %

Own sources Shared taxes Transfers Total

The own source revenues are most important revenues and represent 62 71% of total budgets revenues. The Fiscal Code 12 defines the types of local taxes and fees that local governments may set and collect: taxes on buildings, land, fees on release of certificates, approvals and authorizations, advertising on public buildings, show fee, fees on hotel room occupancy, and other local taxes. For the local property taxes and other local taxes and fees the law establishes certain ceilings that have to be observed by local governments while adopting such taxes. For this reason, the amount and share of these taxes and payments are low and have a strong growth potential.
12

Law nr. 1163-XIII/24.04.97

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Local taxes and fees are a rather stable source of revenues and represent 83-90% of own source revenues and 50-62% of total revenues. The municipal government has little discretion in setting local taxes and fees. The law provides maximum level of all taxes and fees that have to be observed by municipalities adopting them; however, it appears that the CMC is making use of all potential provided by the law in this regard. In terms of collection the municipality has neither responsibility nor legal instrument to enforce the law over the delinquent taxpayer; all these responsibilities are held by State Fiscal Inspectorate. Capital revenues consist about 5-7% of own source revenues. However, there appears to be improper asset management within the city of Chisinau; there is neither complete inventory of municipal assets nor any re-evaluation of such assets (most of them being registered at historical values). Until this process will be finalized it is not advisable or desirable to continue the selling of municipal property. The assets re-evaluation shall have a positive impact under the circumstances the municipality decide to sell some of its privately owned assets and if the municipality has to mortgage lease or lien assets to secure municipal debt. The shared taxes have had a downward trend over the analyzed period and stabilized to 25% of total revenues at the last three years. Shared taxes have a significant contribution to the overall composition of municipal revenues. The decreasing trend is explained by the elimination of the VAT shared taxes from the composition of this revenue item (as of 2004). It is expected that this source of revenues will be decreased on 30-40% as the 0% corporate income tax on reinvested profit becomes active on 01 January 2008. The central budget transfers include the following items: (a) State budget transfers for current activities, (b) Allocations between local budgets at different levels, (c) State budget allocations for current expenditures, (d) State budget allocations for capital expenditures, and (e) Transfers between various state budget chapters and the LGUs. Transfers used to have a low contribution to the municipal revenue base but in 2005 appear to have registered an important increase from 5% in 2003 to 14% in 2006; this is mostly due to a sharp increase in transfers granted for the municipalitys current activities. These revenue items appear to be the less predictable ones. The historical trend shows large variations from one year to another: in 2004 there was recorded a decrease by 1/3 compared to 2003 followed by an impressive increase more the 3 times in 2005 and almost twice in 2006. This reflects the back-and-forth process of public services decentralization taking place in Republic of Moldova. Since 2004, responsibilities related to health have been moved to the Health Insurance House and this implied the reduction of state allocations to Chisinau municipality - the VAT shared amounts have been cancelled. On the other hand, year 2005 and 2006 were a pre-electoral period and the Central Government allocated additional resources for municipal current and capital expenses funding.

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City expenditures. Annual expenditures may be committed only if the financial resources are available (except if a loan is contracted); local expenditures are made based on revenues allocation in the budget. Allocations for servicing debt contracted with the state budget are compulsory and are determined by the contractual provisions. Chisinau municipality has the following mandated responsibilities: 1) 2) 3) 4) Urban and territorial planning; Roads, streets and bridges construction and maintenance; Building public objectives of municipal interest; Water and sewerage supply system, waste-water treatment plant and municipal sanitation/solid waste management construction, maintenance and operating; Social assistance; Housing; Education; Libraries, museums, culture and sport ; Public order, firefight units;

5) 6) 7) 8) 9)

City budget expenditure chapters include, but are not limited to: public authorities, municipal police, education, health, social assistance, urban planning, culture, art and sports. Expenditures are projected based on same principles as in the case of revenues and, in addition based on normative established by the central government for the various expenditures chapter of municipal budget. These normative are determined by the number of service users and the number of employees. The normatives are not reflecting the specific feature of Chisinau as the capital city leading to an inadequate coverage of the municipal needs. The Ministry of Finance has the right to modify the normatives over the fiscal year. Expenditures have been almost flat during 2003-2004 (in constant terms, 2003 prices); there has been a slight reduction in 2004 (of 4%) followed by a more substantial increase in 2005 and 2006. This is mostly due to a significant increase in capital expenditures for transport units acquisition and roads renovation, local public husbandry and housing as well as the increase in public sector salaries. Figure 14 - Total budget expenditures, Mil Eur

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100 75 50 25 0 2003 2004 2005 59 64 77 57 61

106 74 Nominal budget expenditures Adjusted budget expenditures 2006

The next table shows the budget expenditures structure (according the economic classification), over the period 2003-2005, percentages of each type of expenditures within the total expenditures. Table 7 - Types of expenditures (%) Local budget 2003 2004 expenditures Personnel expenditures 30% 21% Material expenditures 29% 20% Capital expenditures 20% 29% Transfers and subsidies 20% 30% Interest payment 0.8% 0.2% 2005 21% 19% 27% 32% 0.5%

The analysis shows that city government has a relatively rigid structure of expenditures. The most rigid expenditures, personnel expenditures and subsidies represent more then 50% of total expenditures. Personnel expenditures, subsidies and transfers and interest payments represent a significant portion of the total expenditures as well. This level of rigidity mean that, in the event of an economic downturn, local elected officials would feel excessive pressure from citizens to supply essential services as well as pressure from creditors to back out of debt service obligations. This is obviously a difficult mission. The analysis of cities control over the various categories of expenditures is following upon the functional classification of LGUs expenditures. The expenditure of LGUs are grouped into the following main categories: Public authorities local budgets undertake all material, capital and personnel expenditures: however, local governments do not have full control over these expenditures as the salaries of public servants are set by national laws and regulations regarding civil servants and the number of employees is also established (as a maximum number) by the central government, depending on the type and the size of the local authority (county, city, town or commune); Education local budgets are responsible for all personnel, material expenditures of primary and secondary state schools; also, local budgets provide

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funding for capital expenditures. Education represents one of the most important expenditure items in local budgets; Health Local budgets are responsible for material and capital expenditures. Culture cultural institutes (excluding those that are national or regional) are funded through local budgets (all types of expenditures). The same national laws and regulations regarding civil servants regulate staff salaries. Public services (material, capital and personnel expenditures; if the service is organized as a commercial company, the local budget has no legal responsibility to fund any type of expenditure; such companies should cover their expenditures by their own revenues). The exception is the public transportation company receiving municipal budget transfers to cover the tariff difference between the actual price of the ticket and individual benefiting of free transportation (i.e. retired persons). For other local public services that are under the municipal competency (i.e. street repairs), the local budget is funding all expenses. Housing financed by LGUs (for social housing);

The data on Table 8 shows that in the period 2003-2006 (Table 8) the dynamics on types of expenditure was different and the expenditures structure changed dramatically. Thus social expenses (social assistance, public safety, health, education and culture) grew by 15%, and their share in total expenses decreased from 66% to 42%. At the same time, economic development expenses increased thrice, and the share of expenses on public husbandry and housing, infrastructure, energy increased from 30% to 47%. Financing of capital expenditure. The sources available for capital expenditures are:

Operating budget surpluses; Domestic loans from banks and capital markets Transfers Special funds Short term loans from state budget and banks.

Over the analyzed period, local budgets registered operating surpluses in each year: 2004 (29% of total operating expenditures), 2005 (7% of total operating expenditures). Such surpluses are used to finance capital expenditures and, most importantly to cover the interest payments and other related cost of outstanding debt. In Chisinau, the capital expenditures are annually approved as an annex to the local budget. Currently capital investments are not determined by a general development strategy and are not based on economic/financial feasibility analysis. Capital investment priorities are usually selected based on political decisions; public consultations are absent reflecting the lack of transparency in the local governing actions.

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Capital expenditures vary considerably from one year to another. As of end 2003, the capital expenditures represented about 20%, in 2004 about 29% and in 2005 about 27% of total city budget. The financing sources of the capital expenditures are derived from the state budget. The result is that the municipal capital investment plans are often not implemented. According to the PUG concept paper, the municipal budget has limited resources and cannot financially support he investment need of the Chisinau municipality. Given the current development status of Chisinau, the investment needs appear to be very high. In the March 2007 the Master Plan (PUG) of city was approved by CMC. The PUG has determined the investment needs for the period 2007-2025 at a level of USD 7.3 billion of which about USD 2 billion for infrastructure, USD 1.5 billion for housing and USD 2.6 billion for economic development. Over the period 2007-2010, the estimated value is USD 1.8 billion 13. The PUG also include an evaluation of the financing capacity of Chisinau municipality to support the capital investment program until 2025 (Eur 6 billion) and 2010 (Eur 1.5 billion). Should the municipality allocate each year about 22% of the budget for capital investment, only a portion of 3.6% would be covered until 2010 and 7.8% until 2020. Therefore the municipal budget cannot support by own sources the needs for municipal development and additional resource need to be mobilized. City debt. City public debt is, according to the finance department of the municipality, of Lei 145 million (about Eur 9.2 million) as of January 2007. The aggregated debt service of Chisinau increased from 2.6% of total revenues in 2004 to 8.8% in 2006. It is still well below the 20% limit imposed by the law that demonstrates on one hand the prudent manner Chisinau understood to undertake in tapping the credit market as well as the limitations imposed by the financial community itself. The municipal debt portfolio includes domestic loans contracted by Chisinau from commercial banks (without sovereign guarantee) and very few loans from the state budget. By 01 January 2007 municipal receivables increased considerable to MDL 249 million as a result of poor debt collection by SA Termocom, for district heating services provided to the population. Thus the aggregated debt reached 15% of total income and this is a constant limit to the borrowing capacity and access to debt markets. According to the law on local finance there are following debt limitations: (1) Loans may only be guaranteed by the LGUs with all budget revenues; (2) Short-term loans
13

Chisnau:Planul Urbanistic General. UrbanProiect, Business Consulting Institute, Chisnau 2007

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for cash flow deficit financing shall not exceed five percent (5%) of a locals budgeted revenues, and (3) The annual debts representing the due installments deriving from contracted loans including all interest expenses and other fees and shall not exceed twenty percent (20%) of the total revenues of the local budgets. The Law on local finances sets forth a clear and reasonable procedure for authorizing municipal debt requiring the approval of the members of Municipal Council. Local councils may approve short, medium and long-term internal and external loans for public investment of local interest or for refinancing local public debt. In case of bonds issue, there is no approval procedure in place yet. The Securities is planning to issue a law regarding bonds and the issue procedure for public offering. Currently, on the market there are corporate bonds issued only; such bonds are insured and are issued under private placement. According to the law, local public debt may consist of loans and defines this term as interest bearing financial instruments; this means that LGUs are allowed to issue bonds, contract bank loans and issue other securities. As mentioned above, Chisinau has contracted only loans from commercial banks. LGUs are authorized to issue short - restricted to financing cash deficits, medium and long-term loans - for capital expenditures only. Currently, Chisinau domestic debt is short-term (less than one year) and medium-term (2-3 years) only. Although the provisions of the Law do not expressly authorize debt to bear interest at either a fixed rate or a variable rate, the provisions imply that debt may be issued bearing interest in either manner. During 2003-2006, loans interest rates varied within a range of 20-25% and have been mostly variable interest rates. Chisinau has contracted both short term loan for current activities financing (basically to cover cash deficits) and for infrastructure works (i.e. water supply and sewerage, roads rehabilitation, heating, housing); loans have also been contracted to procure equipment (in 2005 a bank loan was contracted to procure buses). The article 15 of the Law on local finances expressly states that there is not any implied guaranty of the central government of municipal debt and additionally requires language to such effect to be expressly stated in an instrument of municipal debt in order for such instrument to be a valid, enforceable obligation. Financial operations. A series of financial indicators is utilized to compute municipal borrowing capacity as follows: Recurrent revenues such revenues that are received by local budgets in a cyclical way and are considered to have a certain degree of predictability; under the analysis below, this category includes local taxes and fees and the shared taxes; Non-recurrent revenues such revenues that are received by local budgets as an extraordinary revenue source and have a very low level of

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predictability; this category includes transfers, special revenues, capital revenues; Operating expenditures include personnel and material expenditures, subsidies and transfers, interest and fees payments.

Local taxes and fees represented, over 2003-2006, between 62-72% of total recurrent revenues. Shared taxes are providing the difference tough they have registered diminishing trend as a result of the cut off of VAT shared amounts. Non-recurrent revenues had an ascending trend over the analyzed period, from 17% in 2003 to 23% in 2006. Most non-recurrent revenues are derived from transfers and special funds that are mostly used to fund specific current activities and, to a certain extent capital expenditures. This shows that Chisinau is are relatively dependent on non-recurrent revenue sources to balance its operating budget. Chisinau local budgets registered operating surpluses over 2003-2006. Chisinau has not established reserve funds. Table 9 - Budget performance indicators 14, 2003-2006
Indicator Own source revenues /total revenue Local taxes and fees/recurrent revenues/recurrent revenues Shared amounts of state budget taxes/recurrent revenues Transfers/non-recurrent revenues Rigid expenditures/operating expenditures Capital expenditures/total expenditures Operating budget balance /operating expenditures Debt level Value 62 64% 62 72% 28 61% 32 50% 71 73% 20 29% 3-6 % 3 9 %

14

Caluseru G. ass. by Candu L., City Development Strategy for Municipality of Chisinau, Municipal Finances Concept paper, UN-Habitat and World Bank project, Chisinau, 2006

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4. Conclusions
This article reviews the financing of Chisinau municipality and identifies the major factors influencing it, such as: demography and migrational trends, economic changes, social changes. It then explores the relationship between the capital city and the government and reviews the laws governing the capital, the administrative structure of the mayors office as well as the local sub-units organization. As in other NIS capital, the unclear distribution of tasks and responsibilities between different levels of government, combined with lack of experience in public finance is a major root cause for inefficiencies at both municipal and local levels. On the other hand, poor fiscal discipline maintenance and strong interference from the central government consolidate the weaknesses of the municipality. The authors then propose an overview of municipal finances, describing the first and second tier features of Chisinau budget and providing details on the revenues and expenditures. Several factors common to local governments across Moldova will continue to strain the LGUs operating and capital budgets: Operating surplus relies to a large degree on the shared taxes; for this reasons the level of operating surplus has a large variation and it may diminish over the next years; as soon as the VAT was removed from the local budget, the operating surplus diminished dramatically; this is also a consequence of the increase in public sector salaries; therefore it is unclear if this positive situation is sustainable; There is a clear uncertainty regarding the annual amount of central government revenues to cover the increased expenditures (see the very often change in laws); Lack of clear transparent regulations and allocation procedures regarding transfers from central government (while the legal framework might provide detailed allocation procedure, it appears that they are not consistently applied); Continued operating subsidies for community services as a result of deferred maintenance and tariff levels that do not recover operating costs; increased capital outlays for these services for necessary network rehabilitation, efficiency improvements and expansion.

Indeed, one of the major problems confronting the Moldovan LGUs is the relatively rigid expenditure structure because of the high level of transfers to total operating costs. To this one may add the very low degree of fiscal autonomy.

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Another issue confronting Chisinau municipality is the deteriorating infrastructure. The street network, the water, sewer, and heating networks to maintain the current services, not to mention service improvements will all require increased spending. The large number of changes in the institutional framework has created difficulties in drafting local budgets; while capital expenditure represent an important expenditure category, the municipality has not proved to have no effective control over its infrastructure development program; capital expenditure appear to be largely financed based on as the need may arise (first come first served); the spread over each budgetary chapters of capital expenditures shows absence of strategic planning with regard to city development. In authors opinion, Chisinau has a relatively inelastic revenue structure and expenditures are rigid. Overall, a better administrative leadership and especially a better municipal finance management are strongly desirable.

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5. References
1) Bulat V., Munteanu P. Studiu privind functionarea serviciilor publice in mun. Chisinau, Business Consulting Institute, Chisinau, 2006 2) Caluseru G. ass. by Candu L., City Development Strategy for Municipality of Chisinau, Municipal Finances Concept paper, UN-Habitat and World Bank project, Chisinau, 2006 3) Chisinau in figures: Statistical Yearbook. National Bureau of Statistics, Chisinau 2005 4) Chisinau: Planul Urbanistic General. Urban Proiect Institute, Business Consulting Institute. Chisinau 2007 5) Descentralizarea fiscala: provocari pentru Republica Moldova, Chisinau 2006. 6) Fast Track Municipal Fiscal Reform in Central and Eastern Europe and FSU, Edited by George Guess, OSI/LGI, 2007 7) Ionita V, Dinamica finantelor publice locale in conditiile re-centralizarii puterrii de stat. IDIS Viitorul, Chisinau 2004 8) Local Government. Borowing: risks and rewards. Edited by Pawel Swianiewicz, OSI/LGI, 2004 9) Grigoriev V. and others. Conteptia sotialino-economicescogo razvitia g. Kisineva, Chisinau 1989 10) Management si guvernanta urbana, Chisinau 2005 11) Planul de Amenajare Teritoriala a Municipiului Chisinau, HIS Romania, 2007 12) Poverty and Policy Impact Report for 2004. Ministry of Economy and Trade of the Republic of Moldova, Chisinau 2005 13) Roscovan M. and others. Conceptia dezvoltarii urbanisticii in Republica Moldova, Chisnau 1992 14) Social and Economic Development Plan for Chisinau. Urban Proiect Institute. Chisinau 2006 15) Tsenkova S., Dogotaru S. (2005). City Development Strategy for the Municipality of Chisinau. Housing Concept Paper, UN Habitat& World Bank Project, 2006. 16) United Nations Development Programe (2006) Moldova Human Development Report. Chisinau: UNDP.IHS Romania (2007). The Territorial Development Plan for Chisinau Municipality. Chisinau 2007

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