Tackling the Problem of Inadequate Financing for Local Development: The Case of Croatia

Abstract

This paper explores the role of local level of government in financing local development projects in Croatia. The first section gives a general background for analysis of those issues. In order to achieve this, the present model of financing of the local self-government units ; basic composition of local government revenues and expenditures and an assessment of the strengths and weaknesses of local governments’ system of finances will be presented. The second part of the paper consists of a detailed explanation of potential sources for financing local development projects. The sources are the following: local budget ; local borrowing for capital purposes through loans from financial institutions and other credit institutions or through capital market (issuing of securities and municipal bonds) ; public-private partnerships ; external support and aid ; extrabudgetary resources ; transfers from the state budget for the implementation of sate policy to promote local development and national and regional programs and projects and other sources. The third part of the paper gives explanations of limitations at local level of government in financing local development projects. There are several factors that are recognized as major obstacles to local development financing. Most local authorities are unprepared or unable to take on increased responsibilities for fund raising for economic development. In order to borrow responsibily, municipalities and cities must have the skills and information to budget for the current year and future years ; the ability to understand the impact of borrowing for infrastructure both annual debt service and annual operational and maintenance expenditures ; and ability to identify, prioritize and plan capital investment. Municipalities and cities must be able to identify and analyze technical and financial options and show investors that they have adequate and reliable revenues to meet their debt service obligations. One major problem is a lack of investment capital. The problem is structure of expenditures in local government budgets. The last section summarizes our analysis and offers several recommendations that will lead to improvement of financing local development.