72514 CITY FINANCES OF ULAANBAATAR MONGOLIA Meskerem Brhane Hernando Garzón Ariunaa Lkhagvadorj Sustainable Development Department | East Asia and Pacific Region CITY FINANCES OF ULAANBAATAR MONGOLIA Report No. 72514-MN Sustainable Development Department | East Asia and Pacific Region Copyright © 2013 The International Bank for Reconstruction and Development The World Bank Group 1818 H Street, NW Washington, DC 20433, USA All rights reserved This document is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this report are entirely those of the authors and should not be attributed in any manner to the World Bank, or its affiliated organizations, or to members of its board of executive directors or the countries they represent.The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorse- ment or acceptance of such boundaries. Photo credits: World Bank. ii | Mongolia: City Finances of Ulaanbaatar Contents Foreword.......................................................................................................................... vi Acknowledgements . ........................................................................................................ vii Abbreviations and Acronyms ........................................................................................... viii Executive Summary .......................................................................................................... ix Chapter 1. Introduction . .................................................................................................... 1 1.1. Background . ............................................................................................................................................................ 1 1.2. Objectives ................................................................................................................................................................ 1 1.3. Rationale . ................................................................................................................................................................ 2 1.4. Government Strategy .............................................................................................................................................. 2 Scope of this Study and Main Research Questions . .............................................................................................. 2 1.5.  Data Sources and Methodology .............................................................................................................................. 3 1.6.  Chapter 2. Budget Cycle and Budget Structure .................................................................... 5 Legal Framework: Relevant Laws ........................................................................................................................... 5 2.1.  The Budget Cycle: Authorities and Responsibilities .............................................................................................. 6 2.2.  Key Budgetary Norms and Procedures ................................................................................................................... 6 2.3.  2.4. Brief Assessment of Key Budgetary Norms and Procedures . ................................................................................ 8 Chapter 3. Revenues ........................................................................................................ 11 Overview of Assignment of Revenue Sources to the UB Government and Districts .......................................... 11 3.1.  Brief Assessment of Own Revenue Sources ......................................................................................................... 13 3.2.  Revenue Trend Analysis: Empirical Findings ....................................................................................................... 16 3.3.  3.4. Revenue Sources in Practice . ............................................................................................................................... 17 Current and Capital Revenue Budgets . ................................................................................................................ 19 3.5.  Revenue Mobilization at the District Level .......................................................................................................... 21 3.6.  3.7. International Comparisons ................................................................................................................................... 24 3.8. Conclusion ............................................................................................................................................................. 24 Chapter 4. Expenditures .................................................................................................. 27 iii Expenditure Functions of UB and its Districts and the Adequacy of Revenue Assignments ............................. 27 4.1.  Expenditure Trend Analysis: Empirical Findings ................................................................................................. 32 4.2.  Current and Capital Expenditure Structure . ........................................................................................................ 32 4.3.  UB’s Current Expenditure Budget ......................................................................................................................... 33 4.4.  Capital Budget: Expenditures ............................................................................................................................... 37 4.5.  Balance between Total Revenues and Expenditures ........................................................................................... 38 4.6.  4.7. Conclusion ............................................................................................................................................................. 41 Chapter 5. Recommendations for a Future Research Agenda ..............................................43 Priority Research Agenda and Technical Assistance for the Short Term ............................................................ 43 5.1.  Medium-Term Research Agenda . .......................................................................................................................... 44 5.2.  World Bank Support to the UB City ...................................................................................................................... 46 5.3.  Annexes .......................................................................................................................... 47 1. Revenue and Expenditure Budgets Reclassified for this Study .............................................................................. 49 2. Actual Budget Formats of UB and District Revenue and Expenditures .................................................................. 60 References ......................................................................................................................68 Maps City of Ulaanbaatar............................................................................................................................................................. 66 City of Ulaanbaatar Reflecting District Boundaries........................................................................................................... 67 Boxes 2.1. Local Responsibilities.................................................................................................................................................... 9 Figures 3.1. Transfer and Current Revenue of Ulaanbaatar and the Districts, Fiscal 2003–11................................................... 13 ...................... 15 3.2. Trend of Current Revenue Budget of the UB Government and Districts in Nominal and Real Terms. 3.3. Comparison of Current and Capital Revenue for the Consolidated Revenue of UB and Districts............................ 16 3.4. UB and Districts Current and Capital Revenue Per Capita by Major Sources........................................................... 17 ..................................................................................... 18 3.5. UB and Districts: A comparison of Major Current Revenues. UB and Districts: Current and Capital Revenue by Composition, 2009–11............................................................. 19 3.6.  UB and Districts Current Revenue, Fiscal 2011......................................................................................................... 19 3.7.  The UB Government Current Revenue, Fiscal 2011................................................................................................... 19 3.8.  3.9. Percentage of Revenue Sources in Total Capital Revenue in UB and its Nine Districts, 2003–11.......................... 20 .................................................................................................................. 21 3.10. Bayangol District Revenue, Fiscal 2011. 3.11. Nalaikh District Revenue, Fiscal 2011..................................................................................................................... 22 3.12. Bayangol District Current and Capital Revenue per Capita, Fiscal 2011, in MNT.................................................. 23 3.13. Nalaikh District Current and Capital Revenue per Capita, Fiscal 2011, in MNT.................................................... 23 4.1. Current Expenditure Trends in the UB Government in Nominal and Real Terms...................................................... 31 4.2. Trends in UB’s Per Capita Revenues and Expenditures.............................................................................................. 32 4.3. The UB Government Current and Capital Expenditures, 2008–11........................................................................... 33 4.4. The UB Government Current Expenditure, 2008....................................................................................................... 34 iv 4.5. The UB Government Current Expenditures, 2011...................................................................................................... 34 4.6. Current Expenditures Bayanzurkh, 2008................................................................................................................... 36 4.7. Current Expenditures Bayanzurkh, 2011................................................................................................................... 36 The UB Government Capital Budget, Fiscal 2008...................................................................................................... 37 4.8.  The UB Government Capital Budget, Fiscal 2011...................................................................................................... 38 4.9.  4.10. The UB Government Trend in Revenues, Expenditures, and Total Surplus............................................................. 39 4.11. UB and Districts: Consolidated Yearly Surplus, Total Budgets................................................................................ 41 Tables 2.1. Summary of Main Legal Framework.............................................................................................................................. 5 2.2. Mongolia’s Budget Cycle Applicable to Ulaanbaatar.................................................................................................... 7 3.1. Revenue Assignment According to the Budget Law of 2011..................................................................................... 12 3.2. Legislative Controls over Subnational Own Revenues, 2011.................................................................................... 14 3.3. Classification of Current and Capital Revenue Sources............................................................................................. 17 3.4. Structures of Local Revenues for Selected Countries, 2006..................................................................................... 25 4.1. Summary of Legal Expenditure Functions.................................................................................................................. 27 4.2. Current Expenditure Assignment Functions for Local Governments in Mongolia..................................................... 30 4.3. Yearly Surpluses in the UB Government’s Operations............................................................................................... 40 A1.1. UB and Districts Revenue, 2003–11........................................................................................................................ 49 A1.2. Percentage Change in the UB and Districts Revenue, 2003–11............................................................................. 51 A1.3. Composition of Total Revenue for UB and Districts, 2003–11............................................................................... 53 A1.4. Composition of Total Revenue for UB Government, 2009–11................................................................................ 55 A1.5. Composition of Total Revenue for Two Selected Districts, 2009–11 .................................................................... 56 A1.6. Transfer from the UB Government to the Central Government, 2003–11.............................................................. 57 A1.7. UB and Districts per Capita Revenue by Sources, 2003–11................................................................................... 57 A1.8. Comparison of Per Capita Revenue across Districts................................................................................................ 59 A2.1. Actual Format of UB and District Revenue and Expenditure Budgets..................................................................... 60 ..................................................................... 62 A2.2. UB Government Budget Expenditure Format and Percent Execution. A2.3. UB Government’s Actual Budget Revenue Format................................................................................................... 65 v Foreword Today, 1.2 million people live in Ulaanbaatar, a city that This study is a first step in contributing to this endeavor. was planned for half a million. This rapid urbanization is Drawing on information reported in the city budget, the straining the city’s ability to provide services, especially study describes how Ulaanbaatar’s finance system works infrastructure. Nearly 60 percent of the population lives by assessing the current assignment of expenditure func- in unplanned settlements—or ger areas—that spread tions and revenue sources. It appears that Ulaanbaatar over 90 percent of the city’s administrative area. Most faces systemic challenges in its financial management and lack access to basic services such as central heating, water this may be compromising an efficient and equitable allo- supply, sewerage, and paved roads, and the low density cation of financial resources. and extremely cold climate make the provision of these services costly. As a result, the city must carefully aim to Despite the pressing need for services, the city has improve services within the affordability limits of public had annual budget surpluses. This suggests that a more finance and people’s own resources. In the difficult task sound investment planning system is needed for a more of prioritizing services, the City intends to base its deci- effective and efficient use of available fiscal resources. sions on the transparent and effective management of its Moreover, the budget reporting system lacks clarity finances and preferences of its citizens. and specificity, making it difficult for citizens and the city council to have a clear understanding of how–and Building on a strong democratic tradition, Mongolia is for what purpose- resources were invested or revenues increasingly focusing on establishing systems for more generated. active citizen participation, including participatory bud- geting as presented in the 2011 Budget Law. Political lead- This study is the first part of a program of research and ers of Ulaanbaatar have voiced their commitment to technical support initiated at the request of Ulaanbaatar involve their fellow citizens in the decision-making pro- City to help it improve its finances. cess more systematically. They also want to provide them with useful and reliable budget information on which they can base their views and hold the Municipality accountable. Mark R. Lundell Coralie Gevers Sector Manager for China and Mongolia Resident Representative and Country Manager Sustainable Development Department World Bank Office in Ulaanbaatar World Bank Office in Beijing vi Acknowledgements This study is the result of a scoping exercise that iden- Jingyi Zhang (Junior Professional Associate, EASIN). The tifies a longer-term agenda for research and technical peer reviewers were Jan Hansen (Senior Financial Sector assistance for strengthening the city finance system for Specialist at ADB, Mongolia Resident Mission), Stephen Ulaanbaatar. As such, it is based on a series of discussions Karam (Lead Urban Economist, ECSS6), Francois Boulanger with UB City and district leaders, especially representa- (Senior Urban Economist, MNSUR), Uri Raich (Senior tives of the city parliament as well as Mongolia’s Ministry Urban Specialist, AFTUW), and Hiroaki Suzuki (Lead Urban of Finance. In particular, Mr. N. Bataa, Vice Mayor and Specialist, FEUUR). The study benefited from the close Mrs. E. Gankhuu, Head of Finance and Treasury Division guidance of Klaus Rohland (Country Director, Mongolia), and her team (Mrs. S. Solongoo, Mr. J. Enkhtur, Mrs. J. Mark R. Lundell (Sector Manager, EASCS), Coralie Gevers Erdenechimeg and Mrs. B. Norjlkham) provided valuable (Country Manager, Mongolia), and Paul Kriss (Sector guidance. Coordinator, EASCS). The study team consisted of Meskerem Brhane (Senior Vice President Axel van Trotsenburg Urban Specialist, EASIN and Task Team Leader), Hernando Country Director Klaus Rohland Garzón (Public Finance Economist, International Country Manager Coralie Gevers Consultant), Ariunaa Lkhagvadorj (Local Finance Specialist Sector Director John Roome Consultant), Erdene-Ochir Badarch (Operations Officer, Sector Manager Mark R. Lundell EASCS), Toyoko Kodama (Operations Officer, EASIN) and Task Team Leader Meskerem Brhane vii Abbreviations and Acronyms Bank World Bank MoF Ministry of Finance BL Budget Law of December 2011 O&M operations and maintenance CCLSL Capital City Legal Status Law PIT Personal income tax CG central government PSMFL Public Sector Management GDP gross domestic product and Finance Law GTC General Tax Code SDP strategic development plan LDF local development fund UB Ulaanbaatar LTAU Law on Territorial and Administrative UB City Ulaanbaatar City Units of Mongolia VAT value added tax CURRENCY EQUIVALENTS (As of June 2012) Currency Unit = Mongolian Tugrik MNT 1 = US$0.00076 US$1 = MNT 1318.4 viii Executive Summary OBJECTIVE on UB’s finances, it proposes a multiyear research agenda to guide the government in bringing about needed fiscal Ulaanbaatar’s (UB) population has swollen from half reforms. This note is intended to advise the incoming gov- a million in 2001 to approximately 1.2 million in 2011, ernment following the elections of June 2012, especially accounting for over 40 percent of the country’s popula- the new UB leadership, in areas that need its attention tion. This trend is likely to continue as economic growth is and focus. It is meant to be used as a tool for launching increasingly concentrated in UB.1 With its growing popula- a policy dialogue to develop more in-depth analysis and tion and concerns with rising inequality, the city is facing policy options as part of programmatic Economic and increasing pressure to maintain and expand service pro- Sector Work beginning in fiscal year 2013. vision (especially infrastructure). The local tax on wages2 is expected to continue to provide substantial revenues to the UB government, which will assist the growing KEY FINDINGS demand for services. Additionally, a new “capital city tax” This report consists of three main parts. Chapters 1 and is expected to come into effect in 2013. The decision of 2 provide the background of the report, its scope and the central government (CG) to pursue further decentral- methodology, and a description of the prevailing bud- ization gives greater leadership to the UB government and getary norms and procedures. The main findings of the its districts. It also provides local broader decision-making report are presented in chapter 3, which offers a detailed authority as well as opportunity for citizens’ participation analysis of the revenue assignment, revenue sources, and and for the improvement of governance and transpar- revenue trend; and chapter 4, which examines expen- ency. Therefore, a key challenge for UB and its districts is diture functions and budget structures, and provides a ensuring that the local fiscal system is sound and ready to comparison of revenue and expenditure trends. Finally, handle a greater volume of revenues to achieve sustain- chapter 5 identifies gaps in current knowledge and pro- able and inclusive growth. The city also needs to develop poses a prioritized agenda for technical assistance and a robust and transparent fiscal management system if it is research that will guide the next phase of the World to make an effective use of new revenue sources. Bank’s engagement in this area. Below is a summary of the main findings with regard to revenues and expenditures The main objective of this study is to understand the and recommendations for future work. inner workings of the city finance system in Ulaanbaatar and its districts. It empirically analyzes the city’s reve- Revenues nue sources, expenditures in service provision, the legal The UB government and its districts have several sources framework governing them, and the budget reporting of revenue to finance their budgets, including own- system. It identifies systemic issues that are compromis- sources, shared-revenues, and intergovernmental fiscal ing an efficient and equitable allocation of financial and transfers.3 However, at present, UB has limited revenue fiscal resources for the provision of municipal services authority primarily because Mongolia is a unitary state and urban infrastructure. Given the paucity of research 3. However, in practice, UB generates fiscal transfers to the CG, because 1. The term UB City or UB refers to the UB government and its nine UB (in contrast to most aimags) has relatively high revenues, and there- districts. fore MoF makes annual requests to UB for transfers to the CG. In this 2. The wage tax was reassigned to the UB government and the aimags respect, some districts receive transfers from the CG and some of them in 2009. also provide transfers to UB government. ix where legislative and administrative authority (including Expenditures taxes) are centrally established, approved, and overseen. In the last three years, expenditures for capital invest- First, UB does not have the authority to introduce new ments and current operations have rapidly increased, taxes, although it can set rates for a few taxes and user keeping up with revenue trends. Current expenditures fees as determined by the parliament. However, many of more than doubled, between 2008 and 2011, increasing these taxes are a small portion of its budget. For exam- from 23.4 to 48.8 billion Tugriks (equivalent to US$17.7–37 ple, property and vehicle taxes only account for approxi- million), while capital expenditures increased sixfold, from mately 4 percent of total revenues, while other user fees nearly 17.8 billion to over 118.5 billion Tugriks (equivalent generate less than 1 percent.4 Second, the UB government to US$13.6–$89.9 million). The typical services covered and its districts have little incentive to improve collection by these expenditures include street lighting, solid waste efficiency over its existing sources because the Ministry collection, social assistance, and prevention of infectious of Finance (MoF) ensures that any increase in revenues diseases. However, there is little information on the over the approved amount for each revenue source is quality and coverage of city services, an issue that mer- equalized with one-to-one reductions in either tax-shar- its further study in order to guide city leaders in decision ing or transfers. Thirdly, the MoF uses discretion in deter- making. mining fiscal transfers from the UB government to the CG, and this vertical fiscal management creates uncer- As revenues increase, the city also needs to improve tainty and unpredictability for UB and its districts. In sum, investment planning and absorptive capacity. Despite the current rules in revenue management and collection the city’s significant need for infrastructure investment do not encourage the city of UB to generate additional and services, 53.8 billion Tugriks (US$40 million), amount- own revenue. ing to 29 percent of planned expenditures, were unspent in 2011. There were surpluses in prior years as well. The With the passage of the Budget Law of 2011 (BL), empirical evidence suggests that these surpluses are this situation is poised to change because the law more not the result of fiscal discipline but instead the result clearly defines the criteria for revenue sharing and intro- of limitations in local investment planning and execution duces new tax revenue sources, including the capital city capacity. For example, expenditures for “environmen- tax and inheritance and gift taxes. For the city to make tal protection” and “services provided on behalf of the use of these new sources, however, a regulatory frame- government” comprised only 46 percent and 59 percent work must be put in place. of projected amounts, suggesting that planning for and delivery of services remains weak.5 Limited absorption The city’s revenues are increasing significantly. capacity would suggest that city leaders must study this Between 2009 and 2011, UB’s total revenue more than issue more carefully before considering future borrow- doubled compared to the period between 2003 and ing that has recently been authorized under the Budget 2008, when revenues were stagnant. In 2011, UB generated Law. US$164 million (216 billion Tugriks) in revenues, exceeding the approved budget by US$14 million (18.7 billion Tugriks). An overlap in the assignment of expenditure This improvement was primarily due to an increase in rev- responsibilities between the UB government and its enues from the wage tax that was reassigned to UB City districts—especially for capital investments and opera- (and the aimags) in 2009. tions and maintenance (O&M), creates duplication. This overlap may compromise economic efficiency and inter-jurisdictional equity in service provision as well as 5. According to UB government’s comments to this study, the revised executed expenditures for “environmental protection” (46%) and 4. The above percentages are averages for the last three years for the “works and services provided on behalf of the government” (59%) are: consolidated of UB City (see table A1.3). The figures for the UB govern- 77.6 and 64.7 percent, respectively; which suggests that expenditure ment only are approximately 5 percent and less than 1 percent, respec- performance for these expenditures, along with very few other items, tively (see table A1.4). was not as low (for fiscal 2011) as originally indicated. x | Mongolia: City Finances of Ulaanbaatar accountability in general and financial accountability in requires that these services be managed under a separate particular. The UB government and its districts use an ad accounting, budgeting, and financial reporting system. hoc and negotiated approach to address the lack of clar- Therefore, there is no consolidated budget report for ity in their functional responsibilities. In order to address the city as a whole that identifies operational budgets the current redundancies in the legal framework, these by departments or services. This makes it difficult for informal intergovernmental fiscal relationships could, city leaders and the public to have an overall view and among other things, be adequately regulated. Current assessment of UB functions and service responsibilities. measures to deepen decentralization should also clarify Hence, the budgeting system needs to be made more roles and responsibilities. transparent, classified in accordance with international best practices, and consolidated so that city leaders can The budget classification system and format of UB make an accurate assessment of the city’s financial situ- and its districts lack transparency, making it difficult for ation and make informed decisions. city leaders and taxpayers to understand the actual use of funds. The UB government’s main concern with regard NEXT STEPS to budget reporting is to show the use of funds from different sources rather than reporting on services pro- The last chapter of this report outlines a future agenda vided with the funds. The actual use of significant por- for research and technical assistance, which will inform tions of the operating and the capital budgets are not the World Bank’s engagement in the coming two years, disclosed in the budget document. For example, in 2011, during fiscal years 2013 and 2014, and will complement the because almost 93 percent of the capital budget was preliminary findings of this report. labeled “Investments Financed by Own Revenue Budget,” it is impossible to determine (from the executed bud- There are three key areas that need to be urgently get) on what public works and services the funds were addressed: spent. Another significant expenditure item was labeled “Services Required under the Name of the Government,” • Improving the current budgeting and accounting sys- again making it impossible for decision makers and citi- tems to enhance transparency in service provision zens to know what services were actually provided. through technical assistance; Furthermore, the budget classifications and reporting of • Analyzing in greater depth the system of intergov- some specific6 current and capital revenue sources are ernmental fiscal relations between UB and its nine not fully consistent with what has been established by districts and determining how these relations can be law. A number of inconsistencies in budget classification improved to enhance economic efficiency, inter-juris- distort the availability of funds in favor of UB’s operat- dictional equity, and financial performance; and ing expenditure budget and against its capital budget. • Assessing the efficiency of UB and its districts in both This situation may lead to a negative impact on capital revenue administration and collection performance as investment planning and, ultimately, to lower coverage well as in expenditure execution. and quality of investments in services and infrastructure. In the medium term, four key research questions need The city’s budgetary operations are highly frag- to be addressed: mented. The current budgeting system of UB and its dis- tricts does not report on the social services it provides • How sustainable are the services7 provided by UB and on behalf of the central government because the law its districts? • Is the provision of any local service supplied by either 6. While revenues from the vehicle tax and the road user fee are meant the UB government or any of its districts substantially for the financing of the capital budget, in practice such revenue sourc- es are reported as current revenue, not as capital revenue as it should be. Of course, this misclassification overestimates the current revenue budget and underestimates the capital revenue budget, providing (in 7. This analysis would include both revenue-generating and nonreve- today’s numbers) a small distortion in UB’s financial situation. nue-generating services. Executive Summary | xi more cost-effective to the extent that it could be The World Bank will support the UB government used as a model or benchmark for service provision? through a programmatic research agenda to address the • What is the actual coverage in district service provi- urgent priorities in fiscal 2013. It will especially focus on sion and how efficient is the current fiscal system in enhancing budget transparency. In fiscal 2014, it will focus funding local public investment programs? on issues relating to quality and coverage of municipal • How is the current budget process actually affecting services. local investment planning and execution in UB and its districts? For example, how much of the Strategic Business Plans and district’s action plans are actually being implemented? xii | Mongolia: City Finances of Ulaanbaatar Chapter 1. Introduction 1.1. BACKGROUND approximately half a million in 2001 to approximately 1.2 million in 2011, accounting for over 40 percent of the Over the past two decades, Mongolia has made good country’s population. UB is the political, industrial, and progress in navigating a simultaneous political and eco- economic center of the country, generating 65 percent nomic transition. Since the beginning of this transition of the country’s GDP, 85 percent of its power genera- in 1990, the government has undertaken fundamental tion, and 50 percent of its investments. With a growing economic reforms in the areas of price liberalization, population and concerns about rising inequality, the city privatization, trade, and foreign investment. Mongolia is facing increasing pressure to maintain and expand its has also reformed its political system to a parliamentary provision of services (especially infrastructure). UB and democracy. With gross domestic product (GDP) growth district leadership anticipate that mining revenue will at over 15 percent, it is one of East Asia’s fastest growing also translate into increased revenue for the city through economies. This rapid economic growth is expected to intergovernmental fiscal transfers, which will enable it continue due to revenues generated by the mining indus- to meet the growing demand for services. The national try, which now account for 20 percent of GDP (twice the decision to decentralize core services gives UB City lead- rate of a decade ago). In recent years, the mining sector ership greater decision-making authority and creates an has contributed approximately one-third of total govern- opportunity for citizen participation and the improve- ment receipts through royalty payments and direct and ment of governance and transparency. Therefore, a key indirect taxes. By 2016, the mining sector is expected to challenge for the country is ensuring that its intergovern- contribute to over half of the GDP. mental fiscal systems are sound and ready to handle the greater volume needed to achieve sustainable and inclu- Economic growth has helped in almost halving the sive growth. Likewise, UB and the districts must develop national poverty line between 2002 and 2008. Back in robust and transparent fiscal management systems in 2008, the poverty line stood at 35 percent. Despite the order to effectively use anticipated revenues. At present, unprecedented growth of the past decade, job creation little is understood of how UB’s overall municipal finance only increased by 11 percent, mainly because the mining system works, especially with respect to expenditure and industry is not labor-intensive. Inequality in both oppor- revenue management. tunities and outcomes will likely rise as the economy relies more and more on the mining sector. As measured by the Gini coefficient, inequality in household per capita 1.2. OBJECTIVES consumption increased from 32.9 in 2003 to 35.8 in 2008. The main objective of this study is to understand how the municipal finance system in UB works by empirically Population and economic growth has become analyzing the expenditures in the provision of services increasingly concentrated in Ulaanbaatar (UB), the capi- as well as the city’s revenue sources. The study identi- tal city. Due to lack of employment opportunities and fies structural and systemic issues that could compromise severe winters that have decimated livestock, people the efficient and equitable allocation of financial and fis- from rural areas continue to migrate to the capital at cal resources for the provision of municipal services and high rates. Ulaanbaatar’s population has swollen from urban infrastructure. Following the elections of June 2012, 1 this study is also intended to advise the incoming govern- which is the newly-approved budget law (BL); other laws ment, especially the new UB leadership, on what areas remain under review. Some of the key provisions of the need its attention and focus. Ideally, the study will be BL include clarification of the budget process, delegating used to help launch a policy dialogue with more in-depth key functions to local governments, giving them author- analysis to develop policy options as part of program- ity over revenue collection and borrowing, setting tech- matic economic and sector work beginning in 2013. nical criteria for intergovernmental fiscal transfers, and establishing a formula-based local development fund. 1.3. RATIONALE The BL also recognizes the importance of transparency and citizen participation. A new draft law on the legal Over the past decade, the World Bank (Bank) has had status of UB as well as a draft law on UB taxation have several urban development operations in UB primarily recently been submitted to the parliament,. Although it focused on infrastructure service improvement; these is not yet known when these laws will be passed, they projects have enabled the building of a strong partnership are expected to promote transparency and minimize the with the UB government. The city parliament requested political influence that comes with discretionary prac- the Bank’s technical assistance to enable them to better tices embedded in the current budget process. These understand the current municipal finance system in place laws are expected to free the UB government and its so that they can carry out their oversight responsibilities districts from the yearly political negotiations that limit more effectively. The city parliament has been signifi- effective and strategic decision making. cantly constrained by their limited authority under the current system, particularly in relation to UB City’s invest- The UB government is making concerted efforts to ment decision-making and revenue management. improve its service delivery and planning systems by developing a new master plan. UB is making significant The Bank also needs to better understand the city’s investments to upgrade infrastructure, especially its road municipal finance system to ensure that the city has the network, using its own revenues, although these efforts ability to operate and maintain its infrastructure for the are constrained by an inadequate capital investment future sustainability of current investments. Furthermore, budget. The BL authorizes local governments to borrow the Bank brings global knowledge with regard to best from the market and issue bonds—although rules and practices in municipal finance systems and has specific procedures are yet to be defined—that should provide experience advising transition economies, such as those additional resources in the future. In addition, to improve in Eastern Europe that share similar institutional chal- living conditions in the city’s unplanned and poorest (ger) lenges inherited from the Soviet system. areas the government has adopted a policy of incremen- tally improving basic services—water supply, sewerage, 1.4. GOVERNMENT STRATEGY drainage, roads, and solid waste management. SCOPE OF THIS STUDY AND 1.5.  The government strategy in transitioning to a market MAIN RESEARCH QUESTIONS economy has been to increase the delegation of service delivery from the central to the local governments. Much of this effort can be characterized as deconcentrating The focus of this study is to gain a greater understand- central government functions rather than decentralizing ing of how municipal finance works in Ulaanbaatar. Given authority to local governments. More recently, the gov- this general objective, the scope of this study will cover ernment has been working toward more effective decen- the overall fiscal situation of UB and its districts and tralization by clarifying functional responsibilities across will examine in more detail their main revenue sources different levels of government through legal measures. A and expenditure responsibilities as well as the balance number of laws have been passed, the most important of between revenues and expenditures, including an analysis 2 | Mongolia: City Finances of Ulaanbaatar of their historical trends. As part of this effort, the study DATA SOURCES AND 1.6.  addresses the following main questions: METHODOLOGY • What are de facto the main revenue sources8 The research focuses on three key areas to provide a for UB, including its nine districts, and how do they clear understanding of the finances of UB and the dis- compare with those established by the current appli- tricts: (1) the budgeting system; (2) expenditures; and (3) cable laws? revenues. Subsequently, a comparison of revenues and • What are the main constraints preventing growth in expenditures must be carried out in order to provide: UB government revenues, including those of its nine (1) information to UB’s leadership on the main issues and districts? constraints in the current system’s operations; (2) relevant • What are de facto the major municipal expenditure data enabling the city’s administration to make informed responsibilities in the UB government, including its decisions regarding the costs of service provision and nine districts, and how do such responsibilities com- the need for future revenue mobilization efforts; and (3) pare to those specified in the current legal framework? guidance on how to increase the transparency of budget- • What are the main constraints obstructing the ing and accounting systems. improvement of municipal expenditure efficiency for UB and its districts? An understanding of the current system will contrib- • What is the balance between revenues and expen- ute to the development of regulations for the BL that ditures? For what purpose are surpluses supposed to establishes a local development fund for capital invest- be allocated? In case of deficits, how are said deficits ments by local governments with the participation of generally financed? communities in decision making. • Which areas of UB finances merit further research? For the purposes of this study, the data for analy- sis is primarily drawn from the approved and exe- cuted budgets obtained from the UB government and its nine districts. Data for UB cover the aggregated9 revenues and expenditures from 2003 through 2011 and the approved budget for 2012. Regarding disaggregated budgetary data for UB and its nine districts, the data cov- ers revenues from 2003 through 2011, and expenditures from 2008 through 2011. 8. “Main revenue sources” refers to both local revenue collections and central government transfers from local taxes collected on their behalf 9. “Aggregated” data for revenue and expenditure is the sum of UB gov- as well as discretionary or emergency transfers and capital grants. ernment’s and its nine districts revenue and expenditure budgets. Chapter 1. Introduction | 3 4 Chapter 2. Budget Cycle and Budget Structure LEGAL FRAMEWORK: 2.1.  into soums) and the capital city (subdivided into districts), RELEVANT LAWS and recognizes that these are economic, social, and juris- dictional subjects with their own functions and rights of The responsibilities and powers regarding the finances self-governance. This evolution in the legal framework has and financial management of the UB government and its successfully assigned typical municipal services to local districts are governed through a gradually evolving legal governments and allows line ministries to delegate10 the framework resulting from Mongolia’s transition out of provision of specific social11 services to subnational levels a centrally-planned economy. Mongolia’s constitution, of government at their own discretion. The laws most rel- adopted in 1992, provides the legal foundation for the cur- evant to this study are summarized in table 2.1. rent government structure, including basic principles on the role of local governments. The constitution divides the 10. In the near future, current delegation could evolve toward actual Mongolian government into aimags (further subdivided devolution. 11. These services include, as examples, health and education. Table 2.1. Summary of Main Legal Framework LAWS RELEVANT ASPECTS Consolidated Budget Law This law sets out the general budget composition, classification, and financing scope. Date: November 20, 2002 Public Sector Management and This law establishes the authorities and responsibilities of the main actors in the Finance Law (PSMFL) budget cycle and budget process at all levels of government. It defines nine services as Date: January 1, 2003 core local responsibilities. Law on Territorial and Administrative This law establishes the administrative system, structure, and authorities of different Units of Mongolia (LTAU) levels of assemblies and governors. Article 31 states that districts and soums have Date: December 15, 2006 the authority to provide water supply, garbage collection, streetlights, and park maintenance. Capital City Legal Status Law The capital city must carry out those functions requested by the State Great Khural or (CCLSL)—Old Law of 1994 the state general budget governors (i.e., the line ministries). CCLSL states (in Article Date: Revised draft was submitted to 4.9.3) that UB shall “participate in establishing and developing integrated networks, the parliament in 2010 but has not including electricity distribution, roads/transportation, and communication and yet been approved. information technology networks.” The Budget Law (BL) It establishes principles, systems, composition, and a classification of the budget, all Date: December 23, 2011 used to implement special fiscal requirements. It also defines both the authority of Also known as the Integrated Budget the LGs and the responsibilities of budgetary bodies that participate in the budget Law process. In addition, it regulates relations that arise in connection with budget preparation, approval, spending, accounting, reporting, and auditing. General Tax Code (GTC) GTC defines the authorities of the central government (CG), UB City, and Aimag Date: May 20, 2008 regarding the setting of tax rates. It also establishes tax administration responsibilities. 5 Overall, the net effect of the evolution in the legal • “Portfolio minister” refers to the highest official with framework has been a gradual strengthening of subna- authority over the institution’s budget (e.g., the capi- tional levels of government. The current legal framework tal city governor, district governor, or head of the includes norms and procedures for the entire public sec- presidium). tor. It covers the national and subnational levels of gov- KEY BUDGETARY NORMS 2.3.  ernment, including UB and its nine districts. It is important to acknowledge that the effort to AND PROCEDURES decentralize roles and responsibilities across different To guide budget preparation and implementation, sev- levels of government is still incomplete and that addi- eral norms and procedures are in place, covering all lev- tional regulations are needed to more efficiently imple- els of government. The key guidelines, as they apply to ment these laws. This note addresses specific issues in the capital city and its districts as well as to their actual the relevant chapters. For example, as will be discussed in implementation are summarized below: chapter 4, the UB government and its districts have legal authority over the same set of services; therefore, their Strategic development plans (SDPs). Public institu- specific roles and responsibilities would benefit from fur- tions are required to prepare SDPs covering three fiscal ther regulation. The next section will focus on the budget years; these plans are the basis upon which local budgets cycle. It highlights some of the cycle’s main features and are prepared and approved. SDPs must include strategic the roles and responsibilities of key actors in the budget objectives and outputs to be delivered during the next process. financial year, specifying category, quantity, quality (i.e., standards and specifications), and costs. The cost of out- THE BUDGET CYCLE: 2.2.  puts must be determined on the basis of a full accrual AUTHORITIES AND cost of production, including management, overhead, RESPONSIBILITIES and capital charges. In UB City, this document is referred to as the “budget framework document.” It is prepared The main phases of the budget cycle are consistent with by the strategy and policy planning unit of the finance international standards and are comprised of: (1) prepa- and treasury department, and it guides the annual budget ration; (2) submission and review; (3) approval; (4) execu- proposal that is approved by the city council. Although tion and reporting; and (5) monitoring and assessment of the guidelines require the use of accrual cost accounting, performance agreements. Before describing the phases budget reporting is done annually on a cash-flow basis. of the budget cycle (table 2.2), it is important to note the When works require more than one year to complete, meaning of following four terms frequently used when unspent funds may be carried over and expenditures are referring to some of the main actors in the budget cycle. reported in the year that they occurred. • “State” refers to the central government (CG) and Budgetary savings. Savings from either the capital should not be confused with the same term used by budget or operating budget of state and local budget- some federal systems to refer to a subnational level of ary bodies may be used for training and performance government; incentives or for strengthening operations.12 These “sav- • “Local government” refers to all types of subnational ings” cannot be used as a basis for budget cuts during governments (i.e., Aimag, the capital city, soums, and the appropriations process. This means that UB and its district); districts may use any budgetary savings for operating • “Budgetary body” refers to the national or local-level and/or capital expenditures during the following year.13 institution that manages a budget (e.g., the capital city, districts, or assemblies); 12. See Article 13.7 of the PSMFL—January 1, 2003. 13. See Article 45 of the BL (December 23, 2011) for a definition of “bud- get savings.” 6 | Mongolia: City Finances of Ulaanbaatar Table 2.2. Mongolia’s Budget Cycle Applicable to Ulaanbaatar (Fiscal Year: January 1–December 31) SCHEDULE ACTIVITY AND RESPONSIBLE INSTITUTION LEGAL BASIS Budget Preparation January–June Subnational levels of government (i.e., aimags and the capital city as well as districts PSMFL of and soums) under the leadership of their governors prepare strategic development plans January 1, 2003 (SDPs) and action plans prior to formulating their corresponding budgets. By May 1 The central government’s Ministry of Finance (MoF) submits the fiscal framework PSMFL of statement for the following year to the State Great Hural. January 1, 2003 By July 1 The state budgetary body submits a draft of the SDP to the portfolio minister, districts, PSMFL of UB government, and line ministries. Districts submit action plans to the UB government. January 1, 2003 By August 15 A portfolio minister (such as the line minister) submits the SDP to the state central PSMFL of administrative body responsible for finance and budget. The UB government submits January 1, 2003 SDPs and district-level action plans to MoF. Budget Submission By December 1 The governor submits a budget proposal to the corresponding level assembly that PSMFL of includes: (1) short- and medium-term strategic objectives of the local government; (2) January 1, 2003 classes of outputs to be purchased, entities that will deliver outputs, and purchasing costs; (3) an investment plan; (4) a maintenance of physical assets plan; (5) an explanation of the consistency of the classes of outputs with strategic objectives; and (6) a comparison of budgeted, estimated, and actual figures for the previous period. Budget Debate and Approval By December 31 UB and district assemblies debate the budget proposals submitted by their governors. PSMFL of January 1, 2003 Budget Execution and Reporting Within one week UB and district budgets submitted to the state central administrative body responsible PSMFL of after approval for finance and budget. January 1, 2003 Semi-annual and State budgetary bodies prepare financial statements and output delivery reports on a PSMFL of annual reports semi-annual and annual basis. Each category of outputs reflects quantity, quality, costs, January 1, 2003 and timeliness. Within 20 days (1) Governors report on the execution of local budgets; and (2) governors and chief PSMFL of after end of fiscal accountants of local budgets sign financial statements and performance reports January 1, 2003 year certifying their accuracy. Within 1 week The governor submits: (1) annual financial statements along with an audit opinion PSMFL of from audit issued by local audit body to the relevant level assembly; and (2) financial statements January 1, 2003 opinion submitted to the state central administrative body responsible for finance and budget. Budget Monitoring and Evaluation Ongoing The capital city and district governors monitor the delivery of outputs and financial PSMFL of activity during performance of local budgetary bodies based on: (1) budgets, action plans, and strategic January 1, 2003 fiscal year of development plans; and (2) agreements on delivery of outputs to be financed by the implementation state budget, including quantity, costs, criteria, and procedures for the evaluation of the performance of these agreements. Source: Elaborated for this report based on the relevant legislation. Chapter 2. Budget Cycle and Budget Structure | 7 UB City differentiates between savings and surpluses. A responsible for finance and budget or by the office of surplus occurs when the city spends less or raises higher finance and treasury of the local government. Consistent revenues than planned. In some cases, it appears that rev- with this norm, when UB City is contracted to provide a enue surpluses are transferred to the Ministry of Finance service for a line ministry, it maintains a subaccount to (MoF). How budget surpluses are treated in practice mer- which expenses are charged, ensuring that funds are used its further research. for intended purposes. Budgetary outputs. The UB government and its dis- The current practice in UB is to contract works tricts are defined as local budgetary bodies when spe- through competitive bidding organized by its invest- cific state functions are delegated to them and financed ment department that, in coordination with the relevant through the state. The UB government and the districts sectoral departments, is also responsible for monitoring are responsible for the delivery of core local outputs that performance. The UB treasury authorizes transfers based must be funded by local budgets. on performance evaluations as reported by the invest- ment department. The same procedures apply to works Output purchase agreements and output perfor- financed with CG funds but implemented by the city. mance. Capital city governors are authorized to sign agreements with line ministries for the delivery of out- Budgetary prohibitions. The Public Sector Manage- puts to be funded by the state budget. District governors ment and Finance Law (PSMFL) prohibits the capital city have the responsibility to deliver outputs (i.e., education, and its districts from exceeding the limits of budget health, and other services) on the basis of output pur- appropriations and from using revenues of asset sales to chase agreements made with the capital city governor. finance operating expenditures. Local and state budgets. When managing funds, Assignment of local expenditure responsibilities. local governments must differentiate between expendi- Although the assignment of expenditure responsibilities tures financed using their own revenues with those will be addressed in chapter 4, it is important to highlight financed by the CG. UB City and its nine districts have that the PSMFL assigns the same responsibilities to the their own treasury accounts14 that enable them to man- capital city governor and the district governors. These age their revenues. responsibilities are described in box 2.1. Fiscal transfers. Local expenditures financed by the 2.4. BRIEF ASSESSMENT OF state budget are funded by CG fiscal transfers from the KEY BUDGETARY NORMS AND corresponding line ministries. These types of CG transfers PROCEDURES are generally earmarked for specific services, such as edu- cation, health, culture, and/or social welfare. In principle, planning ahead for at least three years is a sound norm; however, its potential benefit depends on Separate accounts for state-financed works and ser- whether or not financial planning, particularly for invest- vices. All cash flows relating to revenues, expenses, assets, ments, can be established with some certainty over the or liabilities incurred from works and services on behalf three-year planning period. The current capital financing of the state are to be maintained in a separate subac- system does not allow UB and its districts to forecast count managed by the state central administrative body future capital resources because the system is primarily based on negotiations—as opposed to formula-based 14. The roles of the treasury accounts of aimags, the capital city, soums, capital transfers. This will be further discussed in later and the districts are properly established in Article 36 of the Budget Law (December 23, 2011). The treasury accounts of UB City and the dis- chapters of this report. Due to this lack of predict- tricts are managed independently of the treasury single account admin- ability, the potential benefits of three-year plans are istered by the MoF. UB and the districts treasury accounts are under the oversight of the elected city or district councils. compromised. 8 | Mongolia: City Finances of Ulaanbaatar Box 2.1. Local Responsibilities Core local services: (1) public hygiene, waste removal, treatment, and disposal; (2) local environmental conservation and protection, gardening, renewal, and maintenance; (3) pest eradication and control; (4) local road maintenance; (5) provision of normal water operations, sewerage, and drainage systems; (6) flood prevention and soil protection; (7) fire prevention, protection, and mitigation; (8) outputs associated with local public infrastructure facilities; and (9) measures on fighting and prevention of infectious livestock and animal diseases including those transferable from livestock to humans. With the exception of waste collection and disposal, the remaining services must be financed through local taxes. The capital city governor is responsible for: (1) delivering services financed through locally-mobilized taxes and nontax revenues as well as through transfers from the state budget; and (2) delivering key services to the central gov- ernment delegated outputs to be financed from the central budget (such as education, health care, culture, labor, social welfare, and social security, among others) through a contractual agreement. District governors are responsible for: (1) delivering services through locally-mobilized tax and nontax revenues as well as through transfers from the capital city; and (2) delivering services to be purchased by the central government (i.e., education and health) on the basis of output purchase agreements with the capital city governor. Source: PSMFL, Articles 52 and 53. There are several benefits associated with having between the UB government and the corresponding separate accounts for state services financed by the line ministry are based on negotiations, not on technical state budget and implemented by UB and/or its districts. criteria. As such, the current allocation of state financial Separate accounts facilitate monitoring and evaluation resources for the provision of social services (such as edu- by the corresponding line ministries and contributes to cation and health) may be biased in favor of regions with financial transparency of the services provided, enhanc- greater negotiating power rather than being decided by ing state oversight in general. However, the proliferation objective criteria. Determining whether or not this is the of separate vertical financial and accounting systems outcome of current rules regarding the allocation of fis- without a horizontal consolidation of services provided cal resources falls beyond the scope of this report. A next by the city creates budgetary fragmentation, making it step to the current legal framework is to adopt a formula- almost impossible to get a comprehensive view of all the based fiscal transfers system for basic social services. services that UB delivers through contractual agreements and their associated budgetary costs. The prohibitions against exceeding the limits of bud- get appropriations and using proceeds from the sales of In principle, the financing of selected social services fixed assets for current spending reflect sound rules for through contractual agreements and other local services capital financing and are consistent with international through locally-generated revenues is an economically standards of fiscal discipline. Similarly, the option to keep sound approach. This occurs because the supply of social the surpluses15 and savings in operations may act as an services tends to be more economically efficient when incentive to revenue collection performance as well as financed by the state budget instead of by local revenue expenditure efficiency. Conversely, if such savings are sources alone. Public goods like social services that gener- due to poor performance in budgetary execution, they ate national benefits (i.e., through strong positive exter- nalities) should be financed by the central government’s 15. According to Article 56.2 of the BL, the “Portion of the basic budget surplus of lower level budgets equal to base expenditures shall be re- budget. However, current output purchase agreements tained and the residual shall be mobilized to upper level budget.” Chapter 2. Budget Cycle and Budget Structure | 9 may be an indicator of poor planning and service-delivery governor and the district governor, district budgets can capacity. be approved only by their respective assemblies. The capital city governor has both ultimate authority and the Based on preliminary information, the overlap or majority of required fiscal resources to deliver the ser- duplication in functions between the capital city and vices. Therefore, the district budget formulation process the districts may only be a matter of appearance. Once may serve as a forum for clarifying the division of respon- an agreement has been reached between the city sibilities between the districts and the UB government. 10 | Mongolia: City Finances of Ulaanbaatar Chapter 3. Revenues OVERVIEW OF ASSIGNMENT OF 3.1.  the VAT has been exclusively a CG revenue source. And REVENUE SOURCES TO THE UB until the BL of December 2011, 25 percent of domestic GOVERNMENT AND DISTRICTS VAT was allocated to the local government through the local development fund (LDF). Furthermore, it should be The UB government and its districts have several sources noted that the royalty was shared at provisional rates of revenue to finance its budget, including its own rev- among the CG and the provinces (including UB City), and enue, shared revenue with the central government (CG), license fees for mining and mining exploration were CG and intergovernmental fiscal transfers. In addition, it revenue until 2008. The minerals tax-sharing was formal- benefits from financing from international organizations ized in 2006. Mineral royalty revenues are shared at a ratio and donations from citizens and enterprises. However, of 70:20:10, and license fees for mining and mining explo- these proceeds are not included in the budget because ration are shared at a ratio of 50:25:25 among the CG, the they are provided16 in kind, rather than in cash. Tax, non- UB government, and the districts, respectively. However, tax, and capital revenues constitute its principal sources the allocation principles for revenue-sharing among of own-revenue financing. Taxes are comprised of per- these three levels of government lacked transparency. sonal income taxes (PIT) that includes wage tax, unidenti- The UB and districts have historically had limited revenue fied income tax, self-employment tax, and livestock tax, autonomy and have depended substantially on the CG and other taxes including property tax, vehicle tax, land for capital investment. With the formulation of new laws, payment, and fees.17 Nontax revenues include proceeds especially the Budget Law of December 2011 (BL),18 this of dividends, rent, interest, and fines, and budget enti- situation is poised to change because revenue sources for ties’ own revenues. Capital revenues consist of proceeds central and local governments are more clearly defined from privatization and property sales taxes. Value added and transparent criteria are set for revenue-sharing (i.e., tax (VAT) royalties and license fees for mining and mineral for the LDF, which is financed by the revenue-sharing sys- prospecting are shared with the CG. Intergovernmental tem and will be allocated by formula). Table 3.1 indicates fiscal transfers are made on an ad hoc basis to fill verti- the revenue sources for each level of government (cen- cal fiscal gaps; therefore, these amounts are largely deter- tral, UB, and districts) per the new budget law of 2011. mined by political considerations. The BL redefines the revenue assignment for shared Given Mongolia’s legacy of a centrally-planned econ- taxes as well as state and subnational taxes. Under the omy, existing legislation assigns the most important new BL, the royalty on minerals is shared by a ratio of sources of tax revenue to the central government, leav- 95:5, and domestic VAT by a ratio of 75:25 between the ing relatively less significant taxes and fees to local gov- central and local governments, respectively. Five percent ernments. Even so, the 2002 Consolidated Budget Law of the mineral royalty revenues and 25 percent of domes- granted local governments a share in the largest revenue tic VAT will go into the general local development fund sources: royalty on minerals and license fees for mining managed by the CG. Using a formula based on criteria and mining exploration. VAT was shared among CG and like the local development index, population, popula- the local government from 2000–09 only. From 2009–12 tion density, remoteness, territorial size, and local tax 16. Though these projects are financed by external sources, UB collabo- 18. The government of Mongolia developed and passed a new Budget rates directly or indirectly in their implementation. Law on 23 December 2011 by integrating the Budget Law of 2002 and 17. According to the budget Law of 2002 and PSMFL. PSMFL. The law will be fully enforced starting in 2013. 11 Table 3.1. Revenue Assignment According to the Budget Law of 2011a SHARED TAXES CENTRAL GOVERNMENT UB GOVERNMENT TAXES DISTRICT TAXES (SOUMS) TAXES (AIMAGS) Royalty on minerals (95:5) • CIT • Capital city taxa • PIT other than 8.1.1 of the Domestic VAT (75:25) • VAT of imported goods and • Land payment PIT law services • Immovable property tax • Gun tax • Excise taxes • Vehicle tax • Stamp duties other than • Custom duties • User fee for water on 11.2 of the stamp duty law • Gasoline tax production • User fee for hunting • License fees for mining • Wage taxc (8.1.1 of PIT • User fee for natural and exploration of mineral law) resources other than resources • Inheritance and gift taxb minerals • Air pollution fee • Stamp duties other than • User fee for herbs • Stamp duty (11.2 of the 11.2 of the stamp duty law • User fee for timber stamp duty law) • User fee for common minerals • User fee for drinking water and springs • Self-employment tax • Dog taxb Source: Budget Law of 2011. a. The general tax code (GTC) and the tax laws establish the tax bases and defines central and local taxes, including ceilings for tax rates and regulations for tax administration. The parliament defines tax bases and rates for customs duties and for direct and indirect taxes. b. These taxes are not yet regulated. c. Article 8.1 of the PIT law defines all types of personal income on which taxes are levied, including wage income; operational income; property income; property sale income; income from book writing, innovation, sport activity, and concert organization; awards on sports and concerts; income from lottery and games; and indirect income. incentive, a minimum of 60 percent of the general local administration system. The employees of the national tax development fund will go into the local development office at UB and the districts are under dual subordina- fund for expenditures at the district and Soum levels. tion, reporting to the locality’s governor and the MoF. These tax offices in UB and the districts collect all taxes The new BL upholds taxes legislated under previous and disburse/incorporate the corresponding revenue laws and practices, such as taxes on wages, property, and into UB and district budgets (i.e., through their treasury vehicles, as well as user fees for water production and accounts) according to their monthly and quarterly rev- land use, but also introduces new taxes like the capital enue schedule approved by the MoF19. It should be noted city tax and inheritance and gift taxes. Likewise, districts that, as part of the overall fiscal system, annual transfers may continue generating revenues from PIT, unidenti- are made from the UB government to the CG on a discre- fied income taxes, gun taxes, license fees, and so on (see tionary basis in amounts determined by the MoF. There table 3.1), and may collect on the newly-created “dog tax.” are, however, no clear criteria for determining the mag- However, the regulatory framework for implementing nitude of these transfers. They are established, as noted the new taxes (the capital city tax, the dog tax, and the above, at the discretion of the MoF and are based on inheritance and gift taxes) is not yet in place. the fiscal needs of the central government. Given its higher revenues, UB government transfers are relatively Although some taxes are assigned to local govern- large compared to those of other jurisdictions. This is a ments, collection is carried out by the Ministry of Finance disincentive for local revenue collection. The amount of (MoF) on their behalf through the local department of its national tax office because of Mongolia’s vertical fiscal 19. On the basis of the respective tax revenue proposals submitted to MoF by UB and the districts. 12 | Mongolia: City Finances of Ulaanbaatar Figure 3.1. Transfer and Current Revenue of Ulaanbaatar and the Districts, Fiscal 2003–11 (in millions MNT) 250,000 Current revenue—Transfer 200,000 Transfer amount 150,000 100,000 50,000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: UB City Budget Book 2012, p. 22. locally-collected revenue that is transferred to the central in the medium-term fiscal framework; although the law government varies annually, as illustrated in figure 3.1. For does not require the local council’s budget approval to example, in 2003, UB City transferred 49.6 percent of its be identical to it, this is what generally occurs as a result total current revenue. In 2007, it transferred 3.3 percent, of the vertical planning and administrative systems. With and in 2011, 9 percent. The blue column represents the net regard to the budget process, the municipal council current revenues of UB and the districts, not including appears to be reduced to a rubber-stamping role. The funds transferred to the CG; the red column represents city council also approves the three-year action plan and transfers made to the CG. one-year socioeconomic guidelines upon which the bud- get is based. In a similarly ad hoc manner, the UB City government BRIEF ASSESSMENT OF 3.2.  determines the amount of revenues that are to be trans- OWN REVENUE SOURCES ferred to and from districts, although the collection itself is done by the MoF as described above. For example, as reported in UB’s 2012 Budget Book, Baganuur, Bagakhangai, Own revenues play an important role in UB and the dis- Nalaikh, and Songinokhairkhan districts received transfers tricts’ finances, accounting for 74 percent of the total from the UB government while Bayangol, Bayanzurkh, municipal current revenues in the years 2009–11. UB and Khan-Uul, Sukhbaatra, and Chingeltei districts provided the districts have limited control over the taxes and fees transfers to the UB government. The lack of revenue it has the authority to levy, as illustrated in table 3.2. predictability makes any investment planning process a major challenge for UB and the districts. As a result, Taxes. The UB government generates revenue from investment plans tend to be formulated by line minis- wage tax, property tax, and vehicle tax, while districts tries, approved by the parliament, and implemented by collect revenues from gun tax, taxes on property sales,20 the UB City government. The city and district councils “approve” the municipal 20. According to the budget format, UB City reports the property sale budgets once they have the approval of the parliament tax as capital revenue but, in practice, UB uses these proceeds for cur- rent expenditures. Chapter 3. Revenues | 13 Table 3.2. Legislative Controls over Subnational Own Revenues, 2011 TAXES LEGISLATIVE LEVEL LEGISLATIVE LEVEL DETERMINING TAX REVENUE DETERMINING TAX BASE TAX RATE RECEIVING ENTITIES Personal Income tax Parliament Parliament 8.1.1 of PIT law (wage tax) UB government Other than 8.1.1 of PIT law District Unidentified income tax a Parliament Parliament District Immovable property tax Parliament UB government within limit UB government Gun tax Parliament Parliament District Vehicle tax Parliament UB government within limit UB government Capital city tax Parliament UB government within limit UB government Inheritance and gift tax Parliament Parliament UB government Dog tax Parliament Parliament District Stamp duties Parliament For 6.2 of stamp duty law CG within limit CG For 6.3 of stamp duty law UB government within limit UB government and districts License fee for natural resources Parliament Parliament District other than mineral User fee for land Parliament Parliament UB government User fee for waterb Parliament Central government within limit For production use UB government For household use District User fee for springs Parliament UB government within limit District User fee for timber Parliament Parliament District User fee for herb Parliament UB government within limit District User fee for common mineral Parliament Parliament District License fee for hunting Parliament Parliament District Source: Based on the GTC and Budget Law of 2011. a. Unidentified income taxes are generated from the informal economy. b. The UB government does not receive user fees for sewage, waste collection, or electricity because these services are provided by UB’s independent companies. and various PITs, including the unidentified income tax21 the parliament. The 2010 and 2011 amendments to the and the self-employment tax. The base and rates of per- GTC authorize the city council to determine the rates sonal income taxes (i.e., wage taxes, unidentified income for licenses, permits, user fees, and certain taxes—such taxes, self-employment taxes, and so on) are defined by 21. The “Unidentified Income Tax Law for Self Employment Activities” establishes lump-sum tax amounts by specific activity. 14 | Mongolia: City Finances of Ulaanbaatar Figure 3.2. Trend of Current Revenue Budget of the UB Government and Districts in Nominal and Real Terms (in billions MNT) 250 Nominal revenues Real revenue 200 150 100 50 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: UB’s executed revenue, as reported in table A1.1. as property, vehicle, and capital city taxes.22 Districts do to determine rates for licenses and user fees, such as on not have the authority to determine the rates of taxes, tobacco sales, ground water extraction, and the keeping fees, and licenses. of wild animals. Districts do not have this same authority. Revenues of stamp duties are assigned to UB City gov- Licenses and user fees. The UB government gener- ernment and district levels, although the law does not ates revenue from user fees on the productive utilization clearly differentiate the revenue assignment between the of land and water, while districts generate revenue from UB government and its districts. license fees for use of natural resources, with the excep- tion of mineral licenses and hunting; household water User charges. User charges are meant for the pay- consumption; and user fees for springs, timber, herbs, and ment of public services like electricity, water, heating, and common minerals.23 User fees that generate higher reve- garbage collection based on prices set by the central gov- nues are assigned to the UB government; those that gen- ernment. These services are provided by publicly-owned erate lower revenues are generally assigned to districts. companies; therefore, the revenues generated from these Amendments to the GTC in 2010 and 2011 authorize UB services are not applied to the municipal budget. 22. Licenses and permits cover the following economic activities: man- Loans and credits. The BL allows the UB government, ufacturing with emission, tobacco sale, digging or drilling groundwater, but not the districts, to borrow—upon the approval of use of water in constructions, holding wild animal, use of extinct animal (species) for scientific purpose, sale of resources from herb and animals, the MoF—up to 15 percent of its base revenue for the hunting for manufacturing purpose, bringing stocks to the city for sale, previous fiscal year. UB may also borrow from the CG and use extinct herb species for scientific purpose, use of common herb in production, use of forest resources, veterinary services and medicines, incur debts for up to 4 years. The law also authorizes it use of springs and bottle water, sale and serve of alcoholic beverages, to issue bonds. manufacturing of alcoholic beverages, and timber use. 23. It is important to note that the license fee set by law for mineral exploration is an absolute amount. Therefore, this fee is not buoyant, meaning that revenue from this fee does not increase with a boom in the mineral industry. Chapter 3. Revenues | 15 REVENUE TREND ANALYSIS: 3.3.  has been contracting. Nevertheless, the growth in rev- EMPIRICAL FINDINGS enues has increased the total amount of resources avail- able to UB and the districts, allowing them to gradually Over the last three fiscal years (2009–11), the UB govern- address much-needed infrastructure and to improve ment’s total current revenue has been growing, not only municipal services. Specifically, while in 2003, current rev- in nominal, but also in real terms. This is a sharp contrast enues accounted for 86.6 percent of the consolidated to the period between 2003 and 2008; during that time budgets (i.e., UB and districts combined), and capital revenues were stagnant (see figure 3.2). The nominal rev- revenues were only at 13.4 percent, in 2011, the current enue growth rate of the last three years was substantially revenue share of the budget rose to 96 percent, and the greater than the inflation rate (which actually declined), capital revenue share decreased to 4 percent (figure 3.3). yielding a strong positive real growth rate in UB’s revenue budget. This suggests that the UB government’s financial With the growth of UB’s population, per capita tax situation has improved over the last few years, owing to revenues have increased from approximately US$4.2 in an increase in revenues from the wage tax. 2003 to US$103.7 in 2011, based on a review of the con- solidated budget of UB and its districts. (See figure 3.4 The revenue growth trend has contributed over time and table A1.7). This improvement is due to the increase to an increase in the share of current revenues in total in per capita tax revenues, especially wage taxes, the self- revenue, while the share in own-source24 capital revenue employment tax, and the property tax, particularly during the last three years; the improvement is also attributable to the improvement in own-source capital revenues (e.g., 24. However, external sources of capital revenue from line ministries (which UB government reports in a separate budget) actually increased vehicle taxes, although the spike in 2011 is due to revenues from 13 to 49 percent in the period 2003–11. This example, among oth- generated from privatizing municipal assets). There were ers, suggests the importance of developing an integrated budget in or- der to have a comprehensive view of UB City finances. no significant changes demonstrated in other revenue sources. Figure 3.3. Comparison of Current and Capital Revenue for the Consolidated Revenue of UB and Districts 2003 2011 Capital revenue, Capital revenue, 13.4% 4.0% Current revenue, Current revenue, 86.6% 96.0% Source: Data from UB treasury department (table A2.2). 16 | Mongolia: City Finances of Ulaanbaatar Figure 3.4. UB and Districts Current and Capital Revenue Per Capita by Major Sources (in MNT for 2011) 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Taxes Own source CG Licenses, Stamp capital capital fees, and duties revenue transfer permits Note: Own-source capital revenues consist of privatization revenues, vehicle taxes, and road fees. Source: Elaborated for this study based on data from UB Treasury for 2011. 3.4. REVENUE SOURCES IN PRACTICE Current revenues. The absolute amount of current revenues increased at an annual rate of 20 percent from There is a wider array of sources available for the current 2004 to 2008, sharply rising by 120 percent in 2009, pri- revenue budget than there is for the capital revenue bud- marily due to the assignment of wage tax revenues to get (table 3.3), but the UB government has the discretion- UB,25 which accounted for approximately 37 percent ary powers to allocate resources between the two types of revenue sources. 25. In this report the terms “UB” and “UB government” are used inter- changeably. Table 3.3. Classification of Current and Capital Revenue Sources CURRENT REVENUE SOURCES CAPITAL REVENUE SOURCES Licenses, fees, and permits CG capital transfers User charges Capital transfers from development fund Rents Privatization revenues Fines and penalties Vehicle tax and road fees (i.e., Road Fund)a Other (dividends of state-owned enterprises, own-revenues of Property sale tax municipal companies) Revenue-sharing in CG taxes VAT and CG grants Local Taxes a. According to UB government the proceeds from the Road Fund, along with other revenue sources are capital revenue—as illustrated in the “sources for invest- ments” in page 26 of the Budget Book of 2012. The Road Fund is comprised by the vehicle tax and the road user fee. Therefore, these two taxes have been classified as capital revenue, even though in practice UB reports them as current revenue. Source: Elaborated for this report based on current legislation. Chapter 3. Revenues | 17 Figure 3.5. UB and Districts: A comparison of Major Current Revenues 2003 2011 Total CG Other own transfers for Rents revenues current budget Stamp 1% 3% 16% duties Taxes 10% 21% Licenses, fees, and permits Other own 10% revenues 17% Licenses, fees, and permits 19% Stamp Fees and Taxes Rents duties penalties 76% 4% 4% 19% Source: Based on data from UB Treasury Department, 2003 and 2011. of capital and current revenues combined. An increase approximately 73 percent of the current revenue between in tax revenues is likely due to the country’s improv- 2009–11, in contrast to 21 percent in 2003 (see table A1.1 for ing economy, which in turn is contributing toward an details). Furthermore, between 2009–11, the total amount increase in personal income. Due to the significantly of proceeds from taxes and capital revenues—especially higher rate of revenue flows resulting from the assign- own-source capital revenue—increased substantially ment of the wage tax to UB, the relative share of pro- compared to licenses, fees, and permits and other rev- ceeds from licenses and fees declined from 19 percent in enues, which have roughly stayed the same. The absolute 2003 to 10.2 percent in 2011. Figure 3.5 illustrates the main amounts of these revenue sources are shown in figure 3.6. changes in the revenue structure between fiscal 2003 and fiscal 2011. Taxes increased from 21 to 76 percent, primar- The consolidated budget of UB and the districts are ily because of the new wage tax. Other revenue sources not that different from the UB government’s budget include stamp duties, which increased from 4 to 10 per- alone, as illustrated in figures 3.7 and 3.8. In both cases, cent; other sources, such as fines and penalties and other, taxes account for the biggest share, followed by licenses smaller own revenues have declined in importance. and fees. This suggests that the current revenue struc- tures of UB and the districts are rather similar, and that From 2009–11, the main sources of the current revenue the impact of the districts on the structure as a whole were wage taxes—approximately 58 percent;26 user fees is fairly marginal. The brief case study of two districts for land—approximately 12 percent; and property tax— presented below (in Section 3.6) provides an example of approximately 5 percent. Tax revenues, of which wage district revenue structures. taxes are the largest source, collectively accounted for 26. These percentages are based on averages for the period 2009–11. 18 | Mongolia: City Finances of Ulaanbaatar UB and Districts: Current and Figure 3.6.  UB and Districts Current Revenue, Figure 3.7.  Capital Revenue by Composition, Fiscal 2011 2009–11 (in thousands MNT) Fines and Other own 450,000,000 penalties revenues Other Stamp 0% 3% duties Own source capital revenue 9% 400,000,000 Licenses, fees, and CG capital revenue permits 350,000,000 10% Licenses, fees, and permits 300,000,000 Taxes 360,000,000 200,000,000 Taxes 150,000,000 76% Source: Elaborated for this report based on UB treasury data. 100,000,000 50,000,000 The UB Government Current Revenue, Figure 3.8.  Fiscal 2011 0 2009 2010 2011 Other own Fines and Rents revenues Source: Data from UB Treasury 2009–11. “Other” mainly includes user charges, penalties 1% rents, fines, and penalties. 4% 3% Licenses, fees, and permits CURRENT AND CAPITAL 3.5.  12% REVENUE BUDGETS Capital Revenues. Following transfers from the central government, the development fund, and the surplus in current revenue from 2008 onward, the share of capi- tal revenue to total revenue in UB and the districts has increased from an average of approximately 12 percent during 2003–07, to 43 percent in 2008 (see table A1.3). There is no substantial change in the amount of own- source capital revenue (e.g., vehicle tax, road fees, and Taxes privatization revenue) mobilized from 2003–10. However, 81% Source: Elaborated for this report based on UB treasury data. Chapter 3. Revenues | 19 Figure 3.9. Percentage of Revenue Sources in Total Capital Revenue in UB and its Nine Districts, 2003–11 25 Central government capital transfers 20 Capital transfer from development fund Privatization revenue 15 Vehicle tax and road fee for capital budget Own source allocations to capital budget 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Executed data for 2003 through 2011. See table A1.1 for details. in 2011, proceeds from privatization increased by 524 It should be highlighted that the UB revenue budget percent and proceeds from vehicle taxes and road fees format does not report the capital revenue from CG increased by 229 percent compared to previous years. transfers from line ministries because they are reported (See annual increases by revenue source in table A1.2 for in a separate budget. Considering that the actual budget details). format is not comprehensive, and lacks transparency this report has developed a broader classification of a rev- There is an increasing trend toward financing the enue budget (included in table A1.1). For example, in fis- capital budget using own-source allocations and CG cal 2011, under the actual revenue format, UB City reports capital grants, with a corresponding decrease in rev- 245.8 billions of MNT, while under a consolidated rev- enues from privatization and vehicle taxes. Between enue budget report the total revenue of the city would 2003–11, the relative weight of privatization and vehicle be about 424.9 billion MNT. This comprehensive budget taxes both decreased—from approximately 5 to 2 per- format shows that the revenues are 58 percent greater. In cent, and 8 to 5 percent, respectively. By contrast, allo- other words, UB’s “direct” revenue budget is equivalent cations to the capital budget from own-source revenue to about 42 percent of the consolidated UB City revenue. and CG capital transfers both rose—from approximately 7 to 21 percent, and from approximately 15 to 22 percent, The road fund consists of proceeds from vehicle taxes respectively. These findings are illustrated in figure 3.9. It and road fees for the financing of capital expenditures. should be noted that in the past, the UB government only However, UB and districts report these sources in the benefited twice from development fund resources—in current revenue budget per the actual budget format. 2008 and 2009 (figure 9). Moreover, according to the budget format, and the law, 20 | Mongolia: City Finances of Ulaanbaatar revenues from privatization of municipal assets are to be REVENUE MOBILIZATION AT 3.6.  included in the capital revenue accounts; and in practice, THE DISTRICT LEVEL these are properly reported under the capital revenue budget. In order for UB finances to be consistent with the UB City has six urban districts with populations ranging law and accurate, “current revenues” should be reported from 100,000–300,000: Bayangol, Sukhbaatar, Khan-Uul, in the current revenue budget, and all “capital revenues” Bayanzurkh, Chingeltei, and Songinokhairkhan (see maps in should be reported in the capital revenue budget. The annex 3. UB City’s remaining three districts—Bagakhangai, lack of consistency in the budgeting of specific revenue Nalaikh, and Baganuur—are rural, with populations rang- sources distorts the actual availability of budget funds. ing from 3,000–35,000. A comparison of urban and rural Given the current magnitudes of these sources these districts illustrates the revenue generation capacity at the distortions are relatively small, but it overestimates the local level, using Bayangol (urban) and Nalaikh (rural) as revenues for operations and maintenance (O&M)—that case studies. Figures 3.10 and 3.11 illustrate the nominal rev- is the current budget—and underestimates the avail- enue by source and share of the total revenue for 2011. ability of funds for capital investments (i.e., the capital budget). Therefore, planning with a smaller capital bud- Like all remaining five urban districts, Bayangol get could potentially affect UB’s investment program for only manages a current revenue budget and does not better local services. Finally, the budget surplus of the have capital revenues (see figure 3.10). Its main revenue previous fiscal year is not reported in the revenue budget sources are income taxes (38 percent), comprised of the format of UB and the districts, but part of it is recorded unidentified income tax (6 percent), self-employment tax in the expenditure budget as a financing source for capi- (10 percent) and other income taxes (22 percent). Taxes tal investment. The current budget formats, as they are, on property are 36.62 percent; fines and penalties, 16.6 do not allow for a direct calculation of the balance percent; and stamp duties, 8 percent. Collectively, these between revenues and expenditures for the current and sources accounted for 98 percent of total revenues in 2011. the capital budgets or for an accurate determination of surpluses or deficits. Figure 3.10. Bayangol District Revenue, Fiscal 2011 Finally, it is important to note that the city indi- Unidentified rectly benefits from donor financing, grants, and loans. income For example, the UB government has benefited from 43 Fines and tax investment projects, with a total value of US$631.4 mil- penalties 6% Self-employment 17% tax lion, comprised of US$176.6 million in grants and US$454.7 10% million in loans from international organizations and for- eign countries.27 The proceeds of foreign aid, grants, and Stamp loans are decided and allocations are disbursed by the duties MoF. Because these investments benefit UB City, they 8% should be reported as an annex to the budget. Other income tax 22% Tax on property sale 37% 27. Data obtained from an interview with the head of foreign loan and Source: Elaborated for this report based on data from UB Treasury Department. donations unit with the development and planning department at the governor’s office in the UB government. Chapter 3. Revenues | 21 The remaining revenue sources were insignificant, gener- shared VAT revenues with districts, although this was ter- ating less than 2 percent of the total revenue. Bayangol, minated by law in 2009. In practice, rural districts (Nalaikh, much like the UB government, draws a significant share Baganuur, Bagakhangai) have one revenue source that of its revenues from local taxes (e.g., 75 percent in 2011). urban districts do not, which is the vehicle taxes that is classified as current revenue but could be allocated to In contrast, in 2011, the rural Nalaikh district managed capital revenue for roads rehabilitation. In practice and both a capital revenue budget (13 percent—derived according to the law, UB collects vehicle taxes in the from the vehicle tax) and current revenues (87 percent). urban districts and has the authority to spend the rev- Income taxes are the main source of current revenue, enues generated. accounting for approximately 37 percent (consisting of the unidentified income tax and the self-employment A comparison of per capita revenues in these two tax); followed by property sales taxes, 18 percent; fines districts illustrates the revenue efforts and fiscal capacity and penalties, 18 percent; stamp duties, 6 percent; and of one urban and one rural district (See figures 3.12 and user fees, 2 percent (see figure 3.11). 3.13). Between 2009 and 2011, per capita total revenues for Bayangol were almost twice as high as those of rural In summary, the main revenue sources at the district Nalaikh. The only exception is the gun tax, which was level (urban and rural) are PIT and property sales taxes, the same in both districts (approximately 30 Tugriks per followed by fines and penalties, which generate more gun). As expected, this finding confirms that an urban tax than 70 percent of total revenue. The contribution of base usually has a greater revenue potential than a rural the remaining taxes and user fees is fairly small and has one. Future research will need to be conducted compar- high administrative costs. Between 2003 and 2008, UB ing all urban and rural districts in order to determine the Figure 3.11. Nalaikh District Revenue, Fiscal 2011 Vehicle tax[1] Other nonclassified own revenues 13% 1% Own revenue of budget entities Unidentified 2% income tax 35% Fines and penalties 18% Stamp duties 6% Self-employment tax 2% User fee for water and springs 2% Livestock tax License fee for mineral Mineral Tax on Other income tax exploration royalty property sale Gun tax 1% 2% 18% 0% Source: Elaborated for this report based on data from UB treasury department. 22 | Mongolia: City Finances of Ulaanbaatar differences in tax effort and to examine whether these capita revenue sources have no user fees and consist differences are inversely related to the budget support primarily of taxes and stamp duties. In contrast, Nalaikh they receive through fiscal transfers. district collects revenue from user fees, such as mineral royalties, license fees for mineral exploration, and user The revenue structure of rural districts seems to be fees for water supply and springs. Similar patterns can be more diverse than that of urban districts. Bayangol’s per observed in other urban and rural districts. This finding Figure 3.12. Bayangol District Current and Capital Revenue per Capita, Fiscal 2011, in MNT 12,000 10,000 8,000 6,000 4,000 2,000 0 Unidentified Self- Other Gun tax Taxes on Stamp Fines and Own income tax employment income property duties penalties revenue tax tax from budget Source: Elaborated for this report based on data from UB Treasury Department. Figure 3.13. Nalaikh District Current and Capital Revenue per Capita, Fiscal 2011, in MNT 6,000 5,000 4,000 3,000 2,000 1,000 0 gs s ies ies e lty al x ax x x ty tie ta ta ta nu er rin er tt ya tit alt du in e e n ve op en sp ro m m Gu en en m re pr p co co m al nd p e et am n oy er fe in in on d ow ra dg an in St pl se d er te bu s M ie m ied xe th en es wa tif f-e e Ta O Fin Lic sif nu en e l Se las fe id ve Un nc er re No Us wn O Source: Elaborated for this report based on data from UB treasury department. Chapter 3. Revenues | 23 explains the limited fiscal potential of rural districts, which activities are fairly modest in UB (e.g., Stamp duties were rely more on user fees that generate smaller revenues. equivalent to only 4.8 percent of total revenues in fiscal 2011). In contrast, the reason the property tax is negligible Empirical results reveal that per capita revenue only is due in part to the fact that formal housing is exempt increased slightly in Nalaikh, the rural district with a popu- from property taxes. The property tax in UB is levied only lation of 32,500; the per capita revenue of the urban dis- on businesses. In best international practices, local taxes trict Bayangol grew significantly from 2009–11 (see table on industrial and commercial activities are a fairly impor- A1.8 for details). This sharp increase was due to a rise in tant revenue source, and so are property taxes on formal taxes on property sales and may also be explained by housing, which suggests a direction for future tax policy Mongolia’s robust economic growth since 2010 and its reforms in UB. rapid urbanization since 2000. High economic growth 3.8. CONCLUSION and urbanization are characterized by greater urban productivity, which is reflected in high personal income or greater purchasing power for both private and pub- Because Mongolia is a unitary state where legislative lic goods. The differences in per capita revenue among and administrative authority are concentrated at the urban and rural districts may also lie in the economic central level, authority is only partially delegated to UB abilities of their residents. City. Since almost all taxes are legislated by the central government, UB City has no authority to introduce new 3.7. INTERNATIONAL COMPARISONS taxes. International experience suggests that subnational governments should have considerable power over their When compared to international standards, the relative own revenues because they are best suited to under- importance of the property tax in UB ranks among the stand their specific needs and make appropriate adjust- lowest, especially considering that UB represents the ments. According to current legislation, UB City can set largest and most valuable urban tax base in Mongolia. the rates for a few taxes and for user fees within limits set By contrast, local income taxes rank among the highest by the parliament. However, some of these taxes gener- when compared with that of other nations. More than ate comparatively low revenues. For example, property one third (36 percent) of UB’s total revenue comes from taxes and vehicle taxes only account for 4 percent of income taxes, as illustrated in table 3.4. This makes the total revenues, and other user fees generate less than 1 relative importance of local taxes in UB’s revenue struc- percent. ture greater than it is in more advanced economies. Due to the centralized tax administration system, there It is also worth noting that UB’s own revenue sources is little incentive at the local level to generate revenues represent close to 80 percent of UB’s total revenue. higher than the approved amounts because any increase Capital grants from the CG were equivalent to 21 percent. is equalized by one-to-one reductions in tax-sharing or In contrast, among southeastern European countries, the transfers. Vertical fiscal management creates uncertainty average ratio of own-source revenue is approximately and unpredictability for the municipal government as the 34 percent,28 illustrating that local governments in these MoF determines fiscal transfers from the UB government countries are more dependent on CG transfers than on to the CG in a discretionary manner. In addition, because their own local tax sources. of the cost of the administration of local taxes, collecting central taxes is in the best interest of the municipal gov- It is important to highlight that business licenses ernment. The current rules in revenue collection do not and local business taxes on industrial and commercial encourage municipal governments to generate additional own revenue. 28. Network of Associations of Local Authorities of South East Europe (NALAS): Report on Fiscal Decentralization Indicators for South-East Europe. NALAS (March 2012); p. 24. 24 | Mongolia: City Finances of Ulaanbaatar Table 3.4. Structures of Local Revenues for Selected Countries, 2006 (in percent) PROPERTY INCOME TOTAL GRANTS OTHER OWN TOTAL TAXES TAXES TAXES REVENUES REVENUES Australia 39 31 43 14 83 100 Belgium 0.1 38 54 46 100 Botswana 8 10 83 17 100 Brazil 4 13 65 35 100 Canada 38 44 39 42 54 100 Denmark 3 47 39 57 100 Finland 2 7 39 29 72 100 France 34 46 29 65 100 Malaya 26 74 100 Thailand 8 55 31 69 100 Bulgaria 20 20 30 50 70 100 Croatia 3 46 61 12 27 88 100 Russia 8 0.1 31 58 11 89 100 Ukraine 2 23 42 48 10 90 100 China 38 39 42 19 81 100 Kenya 16 21 33 46 54 100 Mauritius 12 26 67 7 93 100 South Africa 17 7 20 25 55 45 100 Uganda 3 1 5 92 3 100 Bolivia 19 8 72 18 10 100 Cities: 100 Cape Town 25 25 25 9 25 100 Toronto 42 42 21 16 22 100 Madrid 12 31 39 14 16 100 Mumbai 19 65 4 8 23 100 Ulaanbaatar a 2.8 36 43.9 21.4 34.7 78.6 100 Source: E. Slack 2009—UNHABITAT. a. Ulaanbaatar was added to this table by this study. The analysis of the current and capital revenue the revenue from the property sales tax (apparently structure shows that the budget format of UB and the meant for the financing of the current revenue budget), districts is not in accordance with international best prac- is reported in the capital revenue budget. The UB gov- tices and some specific current and capital revenues are ernment should consider improving the budget classifica- not reported in accordance with their intended purpose. tion format for more clarity and transparency and greater For example, the vehicle tax, a source of capital revenue, accuracy in its financial situation. It would contribute is reported on the current revenue budget. Conversely, towards the achievement of international standards. Chapter 3. Revenues | 25 26 Chapter 4. Expenditures EXPENDITURE FUNCTIONS 4.1.  Despite the considerable legal efforts made to OF UB AND ITS DISTRICTS resolve ambiguities in functional responsibilities, there AND THE ADEQUACY OF continues to be substantial overlap across different lev- REVENUE ASSIGNMENTS els of the government. The Public Sector Management and Finance Law (PSMFL) attempted to clarify assign- Since transition, political and administrative reforms have ments of functions by distinguishing between those made a gradual attempt to shift spending responsibilities functions that are the sole responsibility of local gov- and decision making from the central government (CG) to ernments and those that are delegated by the CG to local governments, as summarized in table 4.1. local governments. The functions associated with local economic development and local infrastructure are the Table 4.1. Summary of Legal Expenditure Functions LAW EXPENDITURE FUNCTIONS Public Sector Financial Management • Sanitation (Public hygiene; waste removal, treatment and disposal) Law (PSMFL) was approved by the • Environment protection and conservation; gardening renewal and maintenance parliament in 2002 and became • Pest eradication and control effective on January 1, 2003. In Art. • Local road maintenance 52.2 it assigned nine core functions to • Normal operations of water, sewerage, and drainage systems subnational levels of government for • Flood barriers and soil protection the provision of basic local services • Fire protection, prevention, and mitigation • Local public infrastructure facilities • Fight and prevention of infectious livestock and animal diseases Law on Territorial and Administrative • Public safety Units (LTAU of 2006) added three • Disaster protection local responsibilities to aimags and the • Public order capital city (Article 29) LTAU (2006) assigns districts and • Water supply soums four additional services (Article • Garbage collection 31) • Street lights • Park maintenance LTAU (2006) expands local government • Road planning functions (Article 31) • Communication lines • Land management Capital City Legal Status Law (CCLSL), • UB can “participate” in establishing and developing integrated networks revised in 2010 and still subject to final • Power networks approval, establishes special functions • Road networks for the capital city and its districts. • Transportation networks (Article 4.9.3) • Communication and information technology networks (continued) 27 Table 4.1. Summary of Legal Expenditure Functions (continued) The budget law was approved by the • Capital city management parliament on December 23, 2011. • Urban planning, construction, and building new infrastructure • Maintenance of the capital city’s constructions and buildings, establishing new It is also referred to as the Integrated property, and making investments Budget Law. It consolidates functions • Social care and welfare services already established by previous laws • Implementing programs and measures to support employment and alleviate (as listed above), makes explicit old poverty expenditure responsibilities, and • Development of small and medium-sized enterprises assigns new functions. • Pasture management • Building water supply, sewerage, and drainage systems Article 58.1 of the BL established • Housing and public utility services seventeen expenditure functions for the • Flood protection capital city—as listed on the right hand • Public transportation services side column of this table. • Fight of infectious livestock and animal diseases; pest eradication and control • Disaster prevention • Environmental protection and rehabilitation • Building large-scale roads; bridges and their lighting; traffic lights and other related construction • Utility services for public areas, landscaping, public hygiene, street lighting, cleaning, and waste removal • Operations and maintenance (O&M) of high voltage and electricity lines and substations and other service-related activities • Other functions specified in law The BL establishes seven main • District management functions for UB districts are listed in • Social care and welfare services provided subsequent to the decision of district Article 58.3 of the BL. governors • Utility services for public areas, public hygiene, street lighting, cleaning, and waste removal • Promotion of intensified raising of livestock • Protection of nature and the environment • Recurrent maintenance of lighting of public areas • District landscaping, and development and maintenance of sidewalks, recreational areas, and children’s playgrounds • Other functions as defined in law Source: Elaborated for this report based on respective legislation. a. This function includes, among other responsibilities, land distribution and conflict resolution on land ownership issues. mandate of local governments and must be financed of local governments by emphasizing that upper levels through local revenue sources. Solid waste collection, of government are not to interfere in services that are water supply, and sewerage systems are typical house- the mandate of local governments. However, the division hold services generally financed with user fees. Services of responsibilities remains unclear. For example, in the such as fire and flood protection, street lighting, and park Budget Law of 2011 (BL), most of the functions assigned maintenance are local services that should be financed to the nine UB districts are also assigned to the UB gov- through local taxes. The 2006 Law on Territorial and ernment as a whole, as illustrated in table 4.1. Administrative Units (LTAU)29 established the autonomy 29. As established in articles 29, 30, and 31. 28 | Mongolia: City Finances of Ulaanbaatar Another key challenge for local governments—partic- culture and sports, social security, sanitation, and public ularly the UB government—is to ensure that this gradual order and safety. increase30 in the assignment of expenditure responsi- bilities is supported by adequate revenue sources and Infrastructure that supports economic develop- institutional capacity to administer the effective imple- ment (i.e., road networks, power distribution, transpor- mentation of these functions. For the most part, the tation and communications, public safety) also benefits current expenditure assignment to subnational gov- other jurisdictions and the country at large. Therefore, ernments meets basic economic efficiency criteria and the financing of such services should not be the sole fundamental public finance principles. Based on the financial responsibility of the UB government and its benefit principle of public finance, residents of local juris- districts. For a more economically-efficient provision of dictions, through their taxes and user fees, are generally such services, financing should be a shared responsibil- financially responsible for the expenditures that primar- ity between central and local governments, subject to ily benefit them. Therefore, those who contribute to the specific and objective indicators of need and local fis- financing of local services are primarily those who ben- cal capacity. Therefore, UB City has proposed a revised efit from them. However, services intended primarily for Capital City Legal Status Law (CCLSL).31 This revision of income redistribution or one that are of a social nature, the law was submitted to the parliament in 2011 and is such as “social care and welfare services” or “employment pending approval. Its key feature, from a service provision and poverty alleviation,” would benefit from central-gov- and an expenditure point of view, is that it authorizes ernment financing to meet national goals, even though the UB government to participate in the establishment local governments might be better at the operation of of network infrastructure (for power, roads, transporta- such services. To a large extent, the local assignment tion, communication, and information and technology) of expenditure functions appears consistent with the and to generate revenues from new sources. The current subsidiarity principle—that is, a public service ought to and newly-proposed assignment of expenditures under be handled by the smallest, lowest, or least-centralized the draft CCLSL is consistent with best international authority capable of effectively addressing the service. practices. The financing of other social services—those that Most recently, as noted above, the BL of 2011 estab- may be characterized by their spillover effects (or posi- lished the most comprehensive set of expenditure func- tive externalities)—have been assigned to the central tions for the capital city and its districts—as well as for government. The PSMF in 2002 assigned the provision of the aimags and the soums. However, there is still substan- key social services (education, health care, culture, labor, tial duplication of functions between those assigned to social welfare, and social security) to the CG but stressed UB City and the districts. The BL still leaves part of the that some of these could be delegated to local govern- financing of several “local” government functions open ments with financing from the state budget. These spe- to negotiations between the CG and the UB governor cific assignments of expenditure responsibilities enhance and the UB governor with district governors. This legal economic efficiency and interjurisdictional equity. These feature weakens the fiscal and political accountability delegated responsibilities are implemented through con- of subnational governments with respect to adequate tractual agreements between local governments and line service provision. ministries. Furthermore, the LTAU in 2006 explicitly states that local governments share authority with the CG in Table 4.2 summarizes core services provided by dif- functions such as finance, planning, tax collection, local ferent levels of government, differentiating between property administration, agriculture, mineral resource and assigning, financing, and service-delivery authorities. It land use, construction, parks, transportation, road build- also illustrates those functions for which there is an over- ing, communication, energy supply, education, health, lap in financing responsibility between the central and 30. Such as those most recently assigned functions—as established in the BL of 2011. 31. The original law was approved by the parliament on July 5, 1994. Chapter 4. Expenditures | 29 Table 4.2. Current Expenditure Assignment Functions for Local Governments in Mongolia ROLE OF DIFFERENT GOVERNMENTAL LEVELS OF AUTHORITY EXPENDITURE SERVICE-DELIVERY EXPENDITURE FUNCTION ASSIGNING AUTHORITY FINANCING AUTHORITY AUTHORITYa Education Kindergarten Central Central Localb Primary School Central Central Local Secondary School Central Central Local Universities Central Central Central/local Health Hospitals Central Central Local Health Centers Central Central Local Epidemiology Central Central Local Social Welfare Social Protection Central Central Central/local Social Assistance Central Central Central/local Housing and Services Housing Central/local Central/local Central/local Sanitation and Disposal Central Local Local Water Supply Central Central/local Central/local Sewage Central Central/local Central/local Recreation and Culture Recreation Central Central Local Sports and Culture Central Central Local Economic Sectors Fuel and Energy Central Central Central/local Road Construction Central Central/local Central/local Transportation Central Central/local Central/local Environmental Protection Central/local Central/local Central/local Public Order and Safety Central Central Local Source: A comprehensive summary of functions may be seen in Ariunaa (2010). a. As part of the CCLSL, UB may be required to deliver (subject to a contract) some of the social services currently provided by the CG through the line ministries. b. The legal term “local” is inclusive of UB and/or its districts. local governments.32 For example, there is dual financing government has financing responsibility but, in practice, authority for public housing, water supply, road construc- UB and its districts play an important role in service deliv- tion, transportation, and environmental protection. In ery (e.g., social assistance and protection, health, educa- contrast, there are some services for which the central tion, and public safety). 32. The law does not distinguish between the UB government and its districts. 30 | Mongolia: City Finances of Ulaanbaatar Figure 4.1. Current Expenditure Trends in the UB Government in Nominal and Real Terms (in millions MNT) 180,000 Nominal expenditure 160,000 Real expenditure 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Elaborated for this report based on executed budgets 2003–11. Because of the mobility of human resources, services vary depending on the specific characteristics of each such as education, health, social welfare, and recreation/ sector and revenue source but may include a range of for- sports and culture may be characterized by having ben- mula-based grants comprised of conditional, matching, efits that spread over the nation as a whole. As such, in or block grants. The UB government would benefit from best international practices, these services are typically a technical assignment of alternative options for fund- financed by the CG, as is the case in Mongolia. By con- ing roads. UB City has been relatively neglected by state trast, most of the remaining services may be character- investments in favor of rural areas. This relative neglect ized as having benefits that are both local and national. is visible in increased traffic congestion. For example, it Therefore, in principle, their financing should be shared. was determined that the “average recorded traffic speed in the city has declined from 25 km/h in 1998 to only 14 In areas where there is an overlap in expenditure km/h in 2008.”33 responsibilities across different levels of government, there is a corresponding lack of clarity on how to share There is a corresponding lack of clarity in service pro- financial responsibilities. This is most often done through vision functions between the UB government and its dis- a process of negotiations. For example, the central gov- tricts. For example, the PSMFL assigns nine functions on ernment may finance new investments, while local gov- local service provision to the UB’s governor, while these ernments finance operations and maintenance (O&M). To same responsibilities are also assigned to the district gov- ensure fiscal and political accountability, in best interna- ernors (Article 53).34 Current laws, including the BL would tional practices, a clear distinction is made for financing benefit from regulations that clarify these overlapping O&M and capital costs. While investment costs—such authorities and responsibilities. as for roads—might usually be financed by CG grants, a functional distinction can be made regarding a typol- 33. World Bank; Mongolia: Improving Public Expenditures (2012); page ogy of roads for the purposes of assigning expenditure 14. responsibilities. The best intergovernmental fiscal designs 34. See articles 52 and 53. Chapter 4. Expenditures | 31 Figure 4.2. Trends in UB’s Per Capita Revenues and Expenditures (in thousands MNT) 200 Per capita real expenditure Per capita real revenue 150 100 50 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Elaborated for this report based on executed budgets for fiscal 2003–11 and population data. EXPENDITURE TREND ANALYSIS: 4.2.  situation. However, further analysis is required to assess EMPIRICAL FINDINGS service coverage and quality standards associated with current expenditure levels. This section reviews trends in the UB government’s cur- rent (operating) expenditure budget in order to identify functions where expenditure performance could be CURRENT AND CAPITAL 4.3.  strengthened for more effective and efficient municipal EXPENDITURE STRUCTURE service provision. Nominal current expenditure has gen- This section examines the UB government’s expenditures, erated annual savings, not deficits, in operations. In real differentiating between current expenditures in O&M terms, and consistent with the revenue trend presented and capital investments for development. The empirical in chapter 3, expenditures were stagnant between 2003– findings35 indicate that UB is increasing its capital expen- 08. In the last three years, however, UB’s nominal and real ditures, expanding public services, and developing local expenditures have rapidly increased, keeping up with rev- economic infrastructure. UB’s total expenditures for the enue trends. This is illustrated in figure 4.1. current and capital budget increased from 39 billion Tugrik (US$29 million) in 2008 to approximately 141 billion Tugrik UB officials have expressed concern that the city may (US$107 million) in 2011. While in 2008, expenditures for not be able to cope with the service provision needs of capital investments accounted for 40 percent of the bud- the growing population that has increased from approxi- get, by 2011, this figure had reached 65 percent. Similarly, mately 890,000 in 2003 to approximately 1.2 million in the proportion of funds spent on O&M dropped from 2011, despite growing revenues. When measured in per 60 percent in 2008 to 35 percent in 2011, as illustrated in capita terms, real revenues and expenditures have also figure 4.3. This trend in the relative weights of current been growing steadily during the last three years, as illustrated in figure 4.2. 35. For comparison purposes, this section has specifically selected the data for the most recent executed fiscal year (2011) and compares those empirical results with the corresponding figures for fiscal 2008 because In short, empirical evidence suggests that population this is the earliest year for which there are disaggregated figures avail- growth has not had a net negative effect on UB’s financial able. In this way, it is possible to see how the expenditure structure has evolved during the last four years. 32 | Mongolia: City Finances of Ulaanbaatar Figure 4.3. The UB Government Current and Capital Expenditures, 2008–11 2008 2011 Investments (capital budget) Current 40% expenditures Investments (O&M budget) (capital budget) 35% 65% Current expenditures (O&M budget) 60% Source: Elaborated for this report based on UB’s executed budgets for fiscal 2008 and fiscal 2011. and capital expenditures is consistent with the expected public transportation for students and the elderly (11.3 bil- changes in the expenditure structure of rapidly-growing lion Tugriks, equivalent to US$8.6 million). This level of cities. subsidy is unusual by international standards but some- what common in countries with a heritage of centrally- In absolute terms, current expenditures more than planned economies where public transportation is heavily doubled between 2008–11, increasing from 23.4 to 48.8 subsidized. billion Tugrik (equivalent to US$17.7 million to US$37 mil- lion), while capital expenditures increased sixfold, from The second most important expenditure (25 percent) nearly 17.8 billion to over 118.5 billion Tugrik (equivalent relates to the UB government’s general administration to US$13.6 million to US$89.9 million). UB investment is (comprised of 9 percent in salaries and human resources equivalent to 1 percent of gross domestic product (GDP), payments and 16 percent in goods and services to support which ranks36 on the low side when compared to south- general administration and operations). The rest of UB’s eastern European nations, the highest being Slovenia (2.9 current expenditures were allocated to five local services: percent). This is, however, a rough indicator of perfor- street lighting and cleaning, the prevention of infectious mance because it only includes the UB government. diseases, land use management37 (e.g., conversion of pub- lic lands to private use, land use zoning, conflict resolu- UB’S CURRENT EXPENDITURE 4.4.  tion associated with land, and so forth), and public safety. BUDGET “Other activities and programs” (e.g., cultural activities) is equivalent to approximately 5 percent of the budget. A In 2008 (the first year for which disaggregated numbers summary of the budget structures for 2008 and 2011 are are available), the highest level of current expenditures illustrated in figures 4.4 and 4.5, respectively. (49 percent) was spent on subsidies to cover the cost of 36. NALAS. 2012. Fiscal Decentralization Indicators for southeast Eu- 37. Expenditures on “land use management” should not be confused rope, p. 31, chart 14. with rent payments on land (“land rent”). Chapter 4. Expenditures | 33 Figure 4.4. The UB Government Current Expenditure, 2008 Salaries, wages, bonuses, and social security 9% Goods and services for general administration 16% Subsidy public transportation 49% Other activities and programs 5% Street lighting and cleaning 13% Crime prevention Prevention of infectious diseases 1% 4% Land use management 3% Source: Elaborated for this report using 2008 executed budget data. Figure 4.5. The UB Government Current Expenditures, 2011 Other subsidies Social assistance 3% 1% Subsidy public transportation Salaries, wages, 10% bonuses, and social Crime prevention security 2% 16% Land rent 4% Environmental protection 3% Goods and services for Local reserved fund general administration 4% 15% Government services Other activities and programs 19% 11% Prevention of infectious diseases Street lighting and cleaning 5% 7% Source: Elaborated for this report using 2011 executed budget data. 34 | Mongolia: City Finances of Ulaanbaatar Comparing spending in 2008 with spending in 2011, the those working in service provision, making it impossible main conclusions are as follows: to determine the budgetary cost of these services. Third, fiscal transfers to other levels of government (i.e., central • On the whole, in 2011, the city maintained the services government and districts) are not covered in the budget it provided in 2008; increased revenues enabled it to but they should be. Fourth, the budgeting system does add some new ones, including environmental services not indicate which of the nine districts specifically ben- and social protection. efit from expenditures in the services financed and/or • Following a policy decision to significantly curtail the provided by the UB government. public transportation subsidy, it dropped precipi- tously from 49 percent of the total current budget in The Case of Bayanzurkh District 2008, to only 10 percent in 2011. To better understand the functions of districts, com- • The proportion of spending on salaries and general pared below are the current expenditures of Bayanzurkh, administration increased from 25 percent in 2008 to 31 an urban district with the largest budget for the period percent in 2011. of 2008–11. The lack of transparency in some expenditure classi- Bayanzurkh current expenditure budget. In 2008, fications significantly increased. The purpose of spend- Bayanzurkh allocated approximately two-thirds of its ing on over 30 percent of the current budget cannot be budget (67 percent) to general administration (staff costs), determined by reviewing the budget documents alone. while only one-third was used for financing services (fig- For example, expenditures classified as “payments for ure 4.6). The high level of spending on general adminis- services required by the government” (at 19 percent of tration is not surprising because international experience the budget) or “other activities and programs” (at 11 per- has shown that the smaller a local government, the larger cent) are unspecified, and as such are unknown. Equally the relative weight of these expenditures. The most obfuscating are expenditure entries that refer to financ- important services provided by Bayanzurkh are street ing sources (for example, “surplus from the previous fiscal lighting and cleaning (10 percent) and social assistance (4 year” or “local reserve fund”). percent). As the budget format follows that of the UB government, all key challenges with regard to adequate The UB government’s current expenditure format reporting formats also apply to districts. For example, 13 deviates from best practices in several ways, making it percent of expenditures are only entered as a line item difficult to use the current budget as a tool for deci- for “other programs;” like the UB government’s budget, sion making. First, as already indicated, it is not always there are also entries described solely based on the origin possible to determine the use of funds. Under best prac- of sources (e.g., “surplus spending,” accounting for 4 per- tices, expenditures in O&M associated with the provision cent of the budget and derived from unspent funds from of local public services are reported on separately from the previous year’s budget). those related to the general administration; this clarifies the budgetary cost of providing specific services. The UB In 2011, as in 2008, the lion’s share of expenditures in government’s primary role is to ensure the provision of Bayanzurkh went to operations and general administra- services, either directly or indirectly, through local service tion (72 percent). Services accounted for slightly less than companies (water supply, solid waste, an so on). When one third of expenditures (approximately 27 percent) these services are provided by enterprises, the expendi- and explicitly included (1) street lighting and cleaning (13 tures should be reported in an annex to the municipal percent) and (2) social assistance (2 percent). Presumably, budget to assist with decision making. City leaders need expenditures for “other programs” (6 percent) and those to know how much is being spent on a municipal service, made through the local reserve fund (6 percent) were also regardless of who is delivering it. Second, no distinction for service delivery, though the budget format does not is made between human resource-related expenditures indicate the purposes for which these funds were used made for those working in general administration and (figure 4.7). Chapter 4. Expenditures | 35 Figure 4.6. Current Expenditures Bayanzurkh, 2008 Social assistance 4% Other programs 13% Prevention of infectious diseases 1% Disasters reconstruction 1% Salaries, wages, bonuses, and social security Surplus spending 40% 4% Street lighting and cleaning 10% Utilities, supplies, and other 27% Source: Elaborated for this report based on data from Bayanzurkh’s 2008 executed budget. As can be seen in the expenditure budgets, there is assignment of expenditure responsibilities between an overlap in the services provided by the UB govern- UB and its districts. There are no clear rules on how to ment (i.e., “social assistance”) and services offered by address the apparent duplication in responsibilities across districts. It is not clear, however, which specific districts these two different levels of subnational governments. benefited from the UB government’s support. As previ- Additionally, it remains unclear how responsibilities are ously discussed, the PSMF law creates an overlap in the being shared or distributed in actual practice. Figure 4.7. Current Expenditures Bayanzurkh, 2011 Local reserve fund Social assistance 6% 2% Other programs 6% Salaries, wages, bonuses, and social security Surplus spending 21% 1% Street lighting and cleaning 13% Other O&M expenditures 51% Source: Based on data from Bayanzurkh’s 2011 executed budget. 36 | Mongolia: City Finances of Ulaanbaatar CAPITAL BUDGET: 4.5.  The UB Government Capital Budget, Figure 4.8.  EXPENDITURES Fiscal 2008 According to UB government’s executed budgets38 own Construction Equipment and machinery 1% 1% capital expenditures increased sevenfold, from 17.8 bil- lion Tugrik (US$13.6 million) in 2008 to 118 billion (US$89.9 Food and clothing 15% million) in 2011. Because only the sources of capital financ- ing are reported, by only reviewing the executed bud- Financed by get formats it is practically impossible to determine the local sources spending purposes of over 80 percent of capital expendi- 46% Financed by tures. About half (46 percent) of such expenditures were local road fund entered under the line item “financed by local sources,” 37% and more than one third (37 percent) were entered as “financed by the road fund” (see figure 4.8). The main pur- pose of financial reporting is to show what investments in local services have been provided with the available Source: Elaborated for this study based on data from UB’s 2008 executed funds from different financial sources. Presumably, the budget. reference to the road fund suggests that expenditures went toward road construction and rehabilitation, but this is not stated explicitly. The road fund consists of pro- financed through a recurrent cash flow instead of as a ceeds from the vehicle tax, and road fees collected by one-time investment (as would be the case for a fixed the UB government, which are intended for the financing asset). of capital expenditures (i.e., for both new construction and rehabilitation). 39 As already discussed in chapter 3, A review of the UB government’s reporting system however, the revenue from these sources is budgeted as indicates that its 2011 executed capital budget is even current rather than as capital revenue. These inconsisten- less transparent than that of 2008. About 93 percent cies are not easily detected because the budget does not (86 billion Tugrik or US$65 million) of the investment is adequately disaggregate between revenues from capital reported under the line item, “investments financed by sources and revenues from current sources. own budget” (see figure 4.9). The rest of the “investment” was for purchase of “food products.” Since this is a con- The third largest item under capital expenditures (15 sumption item, not an investment, it should be reported percent) finances “food and clothing” (see figure 4.8). under current expenditures. Because this expenditure item refers to consumption, it should have been included in the current expendi- Finally, the 2011 results suggest a degree of instability in ture budget, perhaps as part of a safety net program. the UB government’s capital budget. Its revenue sources Because this expenditure is not an investment, it should seem to vary from year to year. The 2008 budget reports not be included under the capital budget. In other words, funds from the “local road fund” and funds “financed by from an accounting perspective, “food and clothing” are local sources.” Neither of these funds appears in the 2011 budget report. In order to forecast capital revenues for 38. This report covers capital expenditures financed by UB’s own rev- effective investment planning, it is important to have sta- enue sources and by CG transfers through the local development fund only (referred as the “Direct” Budget). It does not include capital ex- bility in both the capital revenue sources and the report- penditures financed by the CG through its line ministries, or other CG ing system. sources; since these other capital revenue sources are not reported in UB’s government budget and there is not a consolidated budget for UB City, as a whole, that illustrates on all other revenue sources and their UB’s current budget practices stand in sharp contrast actual use. to current legislation, which places heavy emphasis on 39. The purpose could be, for example, new construction for expan- sion of economic and social infrastructure or rehabilitations, equip- outputs over inputs. It is not possible to assess which of ment, and so forth. Chapter 4. Expenditures | 37 The UB Government Capital Budget, Figure 4.9.  sources, including tax and nontax sources), fiscal transfers Fiscal 2011 from the central government (e.g., grants, national tax revenue-sharing, royalties), capital revenue from contri- Food products/ butions (e.g., private sector and/or international donors), meet reservces and capital revenue from loans and credits. Similarly, on 7% the expenditure side, the city’s capital budget would detail all the investments in every one of the services it is legally mandated to provide. Lastly, a capital budget for- mat must illustrate the balance between capital revenues and expenditures (i.e, surplus or deficits). A comprehen- sive capital budget must be directly linked to a multiyear local development plan. UB and its districts must gradu- ally move in this direction. A clear and transparent budgeting system is a deci- sion-making tool for city leaders and a way to report the management of resources to taxpayers, the central government, and other stakeholders. A current budget (operating revenues and expenditures) and a capital bud- get (revenues and investments in development) should be managed and reported in two different budget for- Investment financed by mats in order to determine the balance in the operating own budget (current) budget and in the investments (capital) budget. 93% In contrast, under the UB government’s budgeting sys- tem, all revenues (current and capital) are reported in one Source: Based on data from UB’s fiscal 2011 executed budget. budget, while all expenditures (current and capital) are reported in a separate document. the 20 services under UB’s mandate have actually ben- efitted from the 2011 investment budget. A more trans- Consequently, the UB government is unable to report parent budgeting system would facilitate the monitoring on the balance in its current and capital budgets, a critical of these specific outputs. A budget classification based piece of information reflected in best practices of com- on those services and functions mandated by law would prehensive (integrated) budget reports. In other words, also facilitate the task of determining where and in what under the current budget format there is no budgetary UB is investing its capital funds; this would substantially line entry for reporting the corresponding surplus or defi- enhance the transparency, accountability, and accu- cit in operations and/or investments. racy of the budgeting system. These benefits could be achieved without compromising the current accounting system, in regard to keeping track of the origin and use BALANCE BETWEEN TOTAL 4.6.  of fund-sources for the financing of the different invest- REVENUES AND EXPENDITURES ments. Undoubtedly, the potential benefits to upgrading The objective of this section is to compare UB’s total rev- the budgeting reporting system to meet international enues and expenditures over time in order to determine standards are substantial. what its financial situation has been in the past, how it has been in recent years, and how it is expected to be in In best international practices, a capital budget clearly the near future. A key indicator of UB’s financial situation illustrates all capital revenue sources (i.e., own revenue 38 | Mongolia: City Finances of Ulaanbaatar Figure 4.10. The UB Government Trend in Revenues, Expenditures, and Total Surplus (in billions of Tugrik) 250 Total revenues Total expenditures Surplus 200 150 100 50 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Table 4.3. is whether UB has been able to operate with an annually be consistent with the PSMFL, which states that “budget- balanced budget. ary bodies may deposit surplus of financial resources in the centralized cash management system.” “Any savings Fiscal balance in the total budget over time. The in the capital charge expense and operating expenses budgetary data for the last nine years indicate fairly large of the state budgetary body may be used for training, surpluses in the operations of the UB government. Such performance incentives, and providing secure operations. surpluses have been as high as 59 percent in 2009 and as However, this shall not become a basis for cuts in approv- low as 13.39 percent in 2007, as illustrated in figure 4.10 ing the following year’s budget for the budgetary body and table 4.3. concerned.”40 These findings indicate that, for several years, the UB It is no less important to determine the cause of these government has had a fairly solid financial situation in its surpluses. First, it should be highlighted that the PSMFL operating budget; and this situation is expected to con- of June 27/02 in Article 5.2.3 requires that “annual operat- tinue in the near future. The question then, is what UB ing cash flow should be in surplus” (this applies to bud- should do with these fairly significant surpluses in opera- getary bodies such as UB and its districts), meaning that tions. As has been shown in this study, part of the sur- they should close their yearly operations with revenues pluses in operations has been allocated to the financing exceeding expenditures. The purpose of this legal man- of the recurrent expenditures as well as to local invest- date is to avoid potential issues of deficit financing, which ments. However, more research is needed in this area to would ultimately need to be resolved by the Ministry of ascertain a comprehensive view of the actual use of these resources. Nevertheless, the use of these funds seems to 40. As established in Article 13.7 of the PSMFL, and stipulated in Article 54.1 for the “Management of Local Budgets.” Chapter 4. Expenditures | 39 Table 4.3. Yearly Surpluses in the UB Government’s Operations (in billions of Tugrik) 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total revenues 21.2 26.0 30.8 34.6 41.1 53.6 115.1 130.8 194.7 Total expenditures 8.4 16.2 16.1 19.0 35.6 39.3 46.7 81.6 140.8 Surplus 12.8 9.8 14.7 15.6 5.5 14.3 68.5 49.1 53.9 Surplus (%) 60.21 37.83 47.70 45.09 13.39 26.65 59.48 37.58 27.67 Consolidated Yearly Surpluses: The UB Government and the Districts (in billions of Tugrik) Total revenue 26.4 32.3 38.2 43.8 52.5 65.6 133.4 164.3 245.9 Total expenditure 12.5 21.8 22.0 27.5 47.2 53.6 61.3 103.5 180.9 Surplus 13.9 10.5 16.2 16.3 5.3 11.9 72.1 60.8 64.9 Surplus (%) 111.5 48.3 73.9 59.4 11.2 22.3 117.5 58.7 35.9  Source: Data provided by UB Treasury based on executed budgets for the corresponding years and calculations for this report. Finance (MoF). As such, and in principle, this legal require- In short, the surplus is primarily due to a combination ment seems sound from the perspective of fiscal dis- of low expenditure execution and unexpected higher cipline, specifically with respect to no overspending. revenues. However, it should be highlighted that the main However, in practice this principle cannot in and of itself determinant was poor performance on the expenditure justify all surpluses, irrespective of their magnitudes. side of the budget, which may be expected to negatively affect service delivery. In fact, it was found, for example, Given the magnitude of some of these yearly sur- that in fiscal 2011, expenditure execution on “environmen- pluses and the fact that approved budgets at the begin- tal protection” was only 46 percent of its target, and the ning of the fiscal year are balanced, it is logical to question execution of those “services required under the name how such large surpluses come about. This report has of the government” was also quite low (58.9 percent). examined this question for the most recently-executed Therefore, even though the surplus in fiscal 2011 contrib- fiscal year (2011). The estimated surplus for fiscal 2011 was uted to fiscal discipline (in terms of no overspending), it approximately 53.9 billion Tugriks, equivalent to more than was of such magnitude on the expenditure side that it one quarter (27.67 percent) of UB’s total revenue budget. negatively impacted the delivery of specific services that Empirical findings indicate that, for fiscal 2011, execution the UB government is expected to provide. in UB’s total expenditure budget was approximately 76.6 percent of the approved expenditures for the year. This Considering UB’s financial situation, particularly over suggests that a significant part of the surplus from the the last three years, it may be argued that the UB govern- expenditure side of the budget was due to a low execu- ment has been and continues to be solvent in its annual tion of approximately 23.4 percent below the budgeted operations. This empirical evidence may also be an indi- expenditure target. In absolute terms, this is equivalent cator of some level of fiscal discipline41 in UB’s financial to approximately 32.9 billion Tugrik (or US$25 million dol- management, as noted above, and to some extent of lars). Subsequently, from the revenue side, the executed its potential creditworthiness. However, the magnitude total revenue budget for this same year was 108.3 per- of the surpluses also suggests that UB’s apparent weak cent of the approved revenue budget. This unexpected increment amounts to 18.7 billion Tugrik (or US$14 million 41. It should be noted that state budgetary bodies are legally prohib- dollars). ited from “spend[ing] above the appropriation limits” (PSMFL, Article 14.1.5). Also, Article 52.3 states that the “Capital City Governor is prohib- ited from exceeding budget and appropriation limits [through], allow- ing the bank account to be in overdraft.” 40 | Mongolia: City Finances of Ulaanbaatar expenditure execution, which may be due in principle42 to The financial situation regarding significant yearly sur- limited revenue absorption capacity in both O&M as well pluses in operations remains fairly similar when the total as in capital investments, would need to be addressed budgets (for revenues and expenditures) of the nine dis- before considering an additional revenue source from tricts and UB’s are all consolidated, as illustrated in figure credit. 4.11. This is particularly the case considering that the UB government’s figures constitute the largest proportion in Therefore, given this relatively strong financial situ- the consolidated of fiscal data. For example, the UB gov- ation and low expenditure execution, it seems that UB ernment’s revenues for fiscal 2011 are equivalent to 79.2 should give some consideration to the option of whether percent of the total revenues of UB City as a whole; and part of these surpluses could be used to upgrade its exe- similarly, UB’s total expenditures are equivalent approxi- cution capacity, to leverage capital for financing expan- mately 78.2 percent of the consolidated total expendi- sion of economic infrastructure, and to offer greater tures of UB and its districts (table 4.3). access to basic local services. At UB’s discretion, some of these surpluses could potentially help increase UB’s rating 4.7. CONCLUSION to creditworthiness within certain debt limits consistent with UB’s current fiscal capacity. Legal framework and assignment of expenditure responsibilities. For the most part, the current expen- 42. Another factor could be the discretionary inclusion of projects by diture assignment to subnational levels of government the central government, which are not part of UB City’s yearly invest- meets basic economic efficiency criteria and funda- ment plan and, therefore, the necessary project preparation for their mental principles of public finance. However, there are implementation could not be ready in a timely manner. Figure 4.11. UB and Districts: Consolidated Yearly Surplus, Total Budgets (in millions MNT) 250,000 Total revenues Total expenditures 200,000 150,000 100,000 50,000 0 2003 2004 2005 2006 2007 2008 2009 2010 Source: Executed revenues and expenditures, as reported in table 4.3 Chapter 4. Expenditures | 41 redundancies in the assignment of responsibilities to UB reporting system. This fragmentation through separate and its districts. This overlap may compromise economic vertical financial and accounting systems, without a efficiency and interjurisdictional equity in service pro- proper horizontal consolidation of these services, does vision as well as accountability in general and financial not allow for a comprehensive view of all the services accountability in particular. provided by the UB government and therefore makes UB’s finances nontransparent. Overlap in expenditure responsibilities. The PSMFL creates an overlap in the assignment of expen- The budgeting system. There is room to substan- diture responsibilities between UB and its districts. tially upgrade the transparency in UB and district financial Unfortunately, there are no clear rules on how to address reports regarding the actual budgetary allocation to each this duplication. In practice, responsibilities seem to be of the services provided. This is the case for operating shared and/or distributed on an ad hoc basis through a expenditures, including maintenance, as well as for spe- negotiated process supported by agreements between cific investments in service expansions. The actual use the capital city governor and the district governors. of significant portions of the operating budget and the A next step for the current legal framework is to ade- capital budget are not disclosed in the budget docu- quately regulate these informal intergovernmental fiscal ment. Considering that the budget classification for the relationships. nine districts is the same as that of the UB, districts face these same shortcomings in their budgeting systems. Actual practice in service provision. Meaningful The UB government’s main concern in budget reporting spending in service provision by the UB government and is to show the use of funds from the different revenue districts is limited to a few legal responsibilities, although sources rather than reporting on the local services actu- there is a gradual trend toward the provision of more ser- ally provided with the funds. vices. About half of the 23 services established by law may have some meaningful level of spending. Typical Trend in UB expenditures. Empirical results indicate services include street lighting, solid waste collection, that real expenditures, when measured in per capita social assistance, and prevention of infectious diseases. terms, have also been growing steadily during the last However, the quality and coverage of current services three years. In other words, there is no evidence of a still needs to be examined. net negative effect of urban population growth on UB’s financial situation; on the contrary, analysis has shown Fragmentation of the budgeting system. The UB gov- that increase in population size has expanded its reve- ernment’s current budgeting system does not report on nue base. However, further analysis is required to deter- the social services it provides on behalf of the CG. This mine service coverage and quality standards in municipal is because the law requires UB to manage these services services. under a separate accounting, budgeting, and financial 42 | Mongolia: City Finances of Ulaanbaatar Chapter 5. Recommendations for a Future Research Agenda This study has identified key gaps in knowledge that need Shortcomings in UB’s Current Budgeting System to be addressed in order to strengthen UB’s finances, mak- The current design of the budget formats and financial ing it more transparent for more efficient service delivery. reporting system of UB and its districts must be sub- This chapter lays out an agenda for future research and stantially improved. The budget should more transpar- technical assistance, building on the preliminary find- ently identify the actual services provided. Appropriate ings of this study. These topics have been grouped by improvements could significantly enhance accountability research priority toward which the Bank will contribute in the provision of municipal services. Also, the account- in a programmatic manner over a span of two fiscal years: ing and reporting of revenues and expenditures could be 2013 and 2014. However, this suggested priority, especially made more accurate and therefore more conducive to during the second year, could shift due to the dynamic relevant economic and financial analysis of actual perfor- development context, deepening dialogue, and emerging mance in operations, including local investments in socio- knowledge. economic development. The numerous shortcomings and deficiencies that currently exist in the budgeting and PRIORITY RESEARCH AGENDA 5.1.  accounting systems could be easily overcome through AND TECHNICAL ASSISTANCE specific reforms in the budget and accounting formats FOR THE SHORT TERM and procedures, adequately supported by a technical assistance and training program designed for this specific The preceding chapters have highlighted the shortcom- purpose. ings in UB City’s budgeting system. There are three key areas that need to be urgently addressed: Intergovernmental Fiscal Relations Intergovernmental fiscal relations between the UB gov- (1) improving the current budgeting and accounting sys- ernment and its districts. Considering the overlap in tems to enhance transparency in service provision expenditure responsibilities between the UB government through technical assistance; and its districts, it is critical to determine how this over- (2) analyzing in greater depth the system of intergov- lap is being addressed in actual practice. The questions ernmental fiscal relations between UB and its nine that need to be answered include: how is the current districts and determining how these relations can be legal arrangement in assignment of functions affecting improved to enhance economic efficiency, interjuris- efficiency and equity in service provision across districts dictional equity, and financial performance; and and what type of norms and regulations are needed to (3) assessing the efficiency of UB and its districts in both improve the current situation in both service provision revenue administration and collection performance as and fiscal management in the UB government and its well as in expenditure execution. districts? 43 The UB government’s allocation of surpluses and Particular attention should be given to those revenue support to capital budgets of districts. As part of the sources that constitute, in their entirety, local own rev- intergovernmental fiscal relations, further research is enue, and to those for which collections above specific needed on the role of the UB government in financ- levels (such as approved budget ceilings) are meant to be ing capital investments at the district level, particularly transferred to the CG. It is also important to determine considering its surpluses in operations and the type of how current annual revenue collection ceilings are estab- capital revenue sources currently assigned to the UB lished for local governments and how this policy affects government (such as the vehicle tax). It is also important the incentives for revenue collection efficiency and local to address questions such as: What criteria does the UB tax effort. For example, do own revenues perform better government follow to decide the allocation of capital than shared revenues? Do UB and the nine districts apply financial resources across districts? For example, which higher tax rates on nonshared taxes than on shared taxes? districts have benefited in recent years from UB’s capital The answers to these questions would help policymakers expenditures in local services and why? What alternative identify revenue assignment issues and ways to encour- criteria could be used to improve the current allocation age local revenue mobilization, both of which could of UB’s capital funds across districts? Could UB surpluses result in better collection efficiency rates and greater and better expenditure execution contribute to better local tax effort. service provision across all districts and if so, how? It is important to determine how well the districts MEDIUM-TERM RESEARCH 5.2.  perform in terms of executing their own expenditure AGENDA budgets. To this end, a detailed comparison of approved In the medium term, there are four key areas for research and executed revenues and expenditures for UB and its that need to be addressed. districts must be conducted. The results of this analysis would help determine some of the potential reasons (1) How sustainable are the services43 provided by UB and behind the current pattern of systematic surpluses as its districts? well as what actions are necessary to improve budget (2) Is the provision of any local service supplied by either execution. Performance in budget execution could ulti- the UB government or any of its districts substantially mately contribute to the better provisioning of public more cost efficient to the extent that it could be used goods and services. as a model or benchmark for service provision? (3) What is the actual coverage in district service provi- The Financial Situation of UB’s Districts sion and how efficient is the current fiscal system in The analysis of the financial situation of UB’s nine districts funding local public investment programs? merits more in-depth research. A comprehensive analy- (4) How is the current budget process actually affecting sis of their financial situation (in both the operating and local investment planning and execution in UB and capital budgets) must be carried out for each of the nine its districts? For example, how much of the strategic districts in order to determine the main factors affecting business plans and district’s action plans actually gets their performance in terms of financial management and implemented? services provided. Efficiency in Service Provision Revenue Administration and Collection UB’s constraints and opportunities in service expen- Performance diture efficiency. Considering that, as a whole, the city Local revenue collection performance and transfers to of UB includes nine districts, it should be possible to the central government (CG). More research is needed on revenue administration in general and on UB’s and district’s performance in revenue collection efficiency. 43. This analysis would include both revenue-generating and nonreve- nue-generating services. 44 | Mongolia: City Finances of Ulaanbaatar develop unit cost44 comparisons for main services. Does Sustainability in Revenue-Generating Services UB or any of its districts provide specific services in such The analysis would compare current O&M costs for a cost-efficient manner that it could be used as a model selected services with the actual revenue collected to for other districts or for UB City as a whole? This analy- determine the collection efficiency of user charges and sis should cover both revenue- and nonrevenue-gener- financial sustainability of the services provided. This anal- ating services. Ideally, a differentiation should be made ysis would also help determine whether or not service between costs in operations and maintenance (O&M) by providers have adequate accounting records document- service and general administration costs. Furthermore, ing the costs of service provision. It must be noted that the analysis should identify the main constraints (e.g., lack the Public Sector Management and Finance Law (PSMFL) of economies-of-scale due to fragmentation) and oppor- requires local governments to account for the costs of tunities (e.g., economies-of-scale due to integration) in service provision. Article 26 states that the cost of out- order to enhance expenditure efficiency across those puts shall be determined on the basis of full accrual cost services benefiting each district and the UB metropolitan of production, including management overheads and area. The main challenge in this research would be deter- capital charges. mining estimates of O&M expenditures for selected ser- vices. At the very least, proxy indicators of such unit costs Sustainability in Nonrevenue-Generating based on current expenditures could be used to deter- Services mine optimal (i.e., the most cost-efficient) performance. Particular attention must be paid to those services that are nonrevenue-generating, especially because most ser- An analysis of fiscal relations between the service vices provided by UB and its districts could fall into this providers and the UB government and district admin- category. Analysis must be carried out comparing the istrations. Some of the main questions that should be current and O&M costs and their sources of financing. considered include the following: What is the financial Determining the actual costs of provision, the current situation of the main companies providing municipal ser- and potential sources of financing, and how to mobi- vices? How does that situation affect the finances of UB lize the needed revenue sources is challenging because and its districts? For example, are transportation and solid these services are usually financed through a combina- waste companies self-sustaining, or are they dependent tion of local taxes and grants from central governments. on UB and district subsidies? Are there interjurisdictional For example, prevention of infectious diseases, public fiscal imbalances due to greater expenditure responsi- safety, environmental protection, and social assistance bilities in some districts (e.g., due to traffic congestion are services that are typically supported by both local and/or air-pollution) that, if corrected through a better taxes and CG sources through intergovernmental fis- assignment of revenue sources, could benefit the entire cal grants, tax revenue-sharing, and so forth. O&M costs metropolitan area/region? What incentives, if any, are in of services, such as street lighting, could potentially be place to encourage cost efficiency in service provision? recovered through specific surcharges on the electricity bill. However, developing these types of inter-institu- 44. A distinction should be made between the “unit cost” of providing tional arrangements could also be challenging. Overall, a service, subject to certain standards, and the “actual expenditures” this analysis is expected to contribute to the identifica- in the provision of the corresponding service. The challenge is that tion of financial and administrative issues in the provision many local governments and/or service providers generally have nei- ther explicitly-established standards with corresponding unit costs for of nonrevenue-generating services along with the means each particular service nor cost accounting systems to determine the and ways to enforce the financing of these services. actual costs of service provision. Therefore, this research must rely on the available budgetary and accounting data regarding the provision of each relevant service. At the very least, it is expected that the actual ex- Actual Coverage of Municipal Services penditures per unit of service being provided, at the ongoing standards Quality and coverage of municipal services. In order to of quality, would be possible to determine. This information could be used as a proxy for expenditure-efficiency analysis, subject to verifica- determine the coverage and quality of the key munici- tion of the actual standards. pal services, a representative survey must be carried out Chapter 5. Recommendations for a Future Research Agenda | 45 on actual access needs. The survey would focus on both revisions by line ministries, the Ministry of Finance, the revenue-generating and nonrevenue-generating services, cabinet, and the parliament. Considering the fact that the focusing on such questions as extent and quality of cov- allocation of resources appears to be fairly discretionary, erage by geographic area to determine equity in service the uncertainty in annual financing is high. Empirical evi- delivery. The results of the survey would serve as a base- dence on the local investments planned and their actual line for future improvements in services and enable UB execution must be examined. It is worth reviewing dif- City leaders make informed decisions in their investment ferent policy options in order to provide certainty on at planning and more equitable, efficient, and effective least a minimum availability of capital funds for UB and public investments. Likewise, the results of this survey its districts. would assist medium-term CG fiscal policy in the capital financing of local governments. Considering the vertical (top-down) capital budget management and approval process under the current Local Investment Planning and the Capital budget cycle, local governments have little control in cap- Budget Process ital budget planning and investment financing. How then Local investment planning and the budget cycle. It does this budget process actually affect local investment is important to examine how the investment planning planning and budget execution in UB and its districts? For of UB and the district is being affected by the current example, how much of UB City’s strategic business plans budget process. Some investments are financed by local and district’s action plans are actually implemented? sources, but the majority is financed by the state bud- WORLD BANK SUPPORT TO 5.3.  get. However, greater clarity is needed on the type of THE UB CITY investments supported by the state budget and their investment ceilings. As part of the local investment plan- ning process, districts prepare annual action plans, while World Bank support to the UB City during the Bank’s fis- the UB government manages rolling three-year strategic cal 2013 will focus on the priority agenda of improving the development plans. Nevertheless, it appears that there current budgeting and accounting systems to enhance is no certainty in the financing of such plans, nor is there transparency in service provision through technical assis- an estimate in the minimum of future capital funds per tance. In fiscal 2014, work might focus on service coverage district needed to support them. Capital budget financ- and quality, although this could change based on the UB ing must go through the budget cycle, which includes government’s request. 46 | Mongolia: City Finances of Ulaanbaatar Annexes This section includes two annexes: annex 1 presents a The actual classification of capital revenues does not revised and reclassified budget format prepared for this report on all of UB’s capital revenue sources and it does study, using budget information already available. Annex not differentiate between “own” and “external” capital 2 presents the actual budget format that UB City and its revenue sources. For example, the capital revenue budget districts use to report their annual revenues and expendi- (table A.2.3) does not report sources such as: “CG capital tures. A comparison of these two annexes illustrates that transfers” and “CG capital transfers from the develop- a more structured reclassification of the budgeºt would ment fund” and “own source capital revenues,” such as provide greater and more transparent information for a the vehicle tax and the road fee. table A1.1 (in contrast to more accurate analysis of UB City finances. table A2.3) reports all these revenue sources under the capital budget so as to determine the real financial situa- The main differences and the specific benefits of tion of UB City in capital financing. improving budget reporting in both revenues and expen- ditures are summarized below. The above arguments also apply to budget reporting done by UB districts. Additionally, districts do not differ- REVENUES entiate between tax and nontax revenues sources. This makes district’s budget reporting even less transparent— Actual reporting on the revenue budget does not always as illustrated in table A1.5. accurately differentiate between current and capital rev- EXPENDITURES enues. For example, while revenues from the real estate transfer tax and the vehicle tax should finance the capital budget, they are reported as current revenue. The capi- Based on the budget format currently applied by UB City tal revenue format (as can be seen in table A2.3) includes (included in table A2.2), it is evident that some efforts “sales of property” and “privatization revenue” as the have been made over the years to gradually improve only capital revenue sources. This classification overesti- financial reporting. However, there are still substantial mates UB’s current revenue budget and underestimates improvements that could be made to UB’s current expen- the actual availability of funds in its capital revenue bud- diture budget reporting format, as illustrated below. get, which together provide a somewhat distorted view of UB’s financial situation. UB’s budget reporting is done on cash-flow basis; however, part of the current efforts to improve financial The actual classification of current revenues does not reporting in the expenditure budget includes some basic adequately differentiate between “own revenue sources” elements of a balance sheet (i.e., assets and liabilities). and “external revenue sources.” For example, revenues For example, table A2.2 illustrates how assets (such as from CG fiscal transfers, such as “revenue sharing,” for cash and receivables) and liabilities (such as payables) are transparency reasons, should not be combined with “own reported together with the fiscal 2011 expenditure budget revenues” so that budget reporting could offer a more that, in principle, should only refer to cash flows. accurate view of UB City finances (as illustrated in table A1.1). 47 Present reporting on current expenditures is a list of human resources in general administration and expendi- insufficiently-structured expenditure items with limited tures in service provision, making it impossible to deter- classification. For example, no reporting is done on total mine the budgetary cost of these services. Consequently, expenditures on general administration and for services the expenditure budget, as it is, cannot be used as a provided by UB City to its residents. The current budget decision-making tool to decide, monitor, or control cost- is a mix of a list of purchases of inputs together with a list efficiency and effectiveness. of several expenses for the delivery of specific outputs/ services. Furthermore, some categories are too general. Fiscal transfers across levels of government (i.e., CG, For example, expenditures classified as “payments for UB City, and districts) are not always explicitly covered in services required by the government” or “other activities the budget as they should be. For example, the budget- and programs” simply do not report what the budget was ing system neither reports UB transfers to the CG nor any spent on. Equally inadequate are the expenditure entries explicit transfers from UB to any of its nine districts. that refer to the financing sources rather than to the spe- cific services provided with such funds (for example, “sur- The budget format on capital expenditures is even plus from the previous fiscal year” or “local reserve fund”). more limited in transparency than the operating budget These budgetary entries may be seen in table A2.2. (table A2.2). It reports very little on what services or sec- tors benefited from the public investment executed and/ Furthermore, as shown in annex 2, the budget format or funded by UB City. For example, the capital budget in of current expenditures does not identify how much was fiscal 2011 simply reports the total amount of investments spent on operations and maintenance (O&M) for each of made by UB City that were “funded by its own budget.” It the main services provided by UB City. Furthermore, the does not specify what local services or local public infra- budget makes no distinction between expenditures in structure benefited from such investments. 48 | Annexes Annex 1. Revenue and Expenditure Budgets Reclassified for this Study Table A1.1. UB and Districts Revenue, 2003–11 (in millions MNT) 2003 2004 2005 2006 2007 2008 2009 2010 2011 Own revenue sources 1. Taxes 1.1 Wage tax 68,844.3 90,084.7 135,527.8 1.2 Unidentified income tax 705.8 1,395.7 1,625.5 829.5 798.7 952.1 1,038.3 1,226.1 1,616.1 1.3 Self-employment tax 931.2 1,453.6 1,503.2 1,583.7 3,636.6 3,745.6 4,189.7 5,437.7 7,340.2 1.4 Livestock tax 4.9 7.7 8.9 9.8 14.8 24.0 14.2 1.5 0.244 1.5 Other income tax 1,790.5 3,236.6 6,378.0 1,443.2 3,117.5 6,029.0 5,343.8 8,784.7 1.6 Property tax 2,818.3 3,343.8 3,864.9 4,088.2 4,912.4 5,710.8 6,733.5 8,653.2 10,371.5 1.7 Gun tax 16.2 16.5 17.0 19.6 22.3 25.7 30.5 28.7 33.8 1.8 Tax on property sale 334.6 359.2 655.8 892.7 1,491.5 1,741.4 1,281.8 3,862.3 1,570.7 Subtotal taxes 4,811.2 8,367.2 10,912.1 13,801.8 12,320.0 15,317.5 88,161.6 114,638.4 165,245.4 2. Licenses, fees and permits 2.1 License fee for mineral exploration 22.0 28.8 37.3 31.6 2.2 Mineral royalty 739.7 579.4 843.0 874.4 335.8 359.8 424.0 628.5 624.8 2.3 User fee for common minerals 50.0 27.6 37.2 47.1 73.8 83.7 50.0 60.6 68.5 2.4 User fee for land 3,509.9 3,729.4 5,705.3 6,904.5 11,290.8 15,847.8 17,742.8 18,348.7 20,580.0 2.5 User fee for water and springs 31.2 29.2 187.9 217.0 213.3 266.4 252.6 577.8 721.3 2.6 User fee for timber 13.5 10.8 13.5 18.5 18.4 18.1 12.1 39.7 74.9 Subtotal licenses, fees, and permits 4,344.4 4,376.6 6,787.0 8,061.7 11,932.2 16,598.0 18,510.6 19,692.9 22,101.3 3. User charges 3.1 Stamp duties 871.4 3,339.8 4,018.1 3,902.2 5,232.9 6,537.7 6,685.3 6,654.0 20,496.8 Subtotal user charges 871.4 3,339.8 4,018.1 3,902.2 5,232.9 6,537.7 6,685.3 6,654.0 20,496.8 4. Rents 1,020.0 703.1 522.0 682.0 752.0 811.3 759.3 772.1 1,034.7 5. Fines and penalties 4,243.9 4,395.8 4,966.9 4,856.7 8,722.9 4,511.0 6,910.6 8,625.8 527.1 6. Other own revenue (continued) Annex 1. Revenue and Expenditure Budgets Reclassified for this Study | 49 Table A1.1. UB and Districts Revenue, 2003–11 (in millions MNT) (continued) 2003 2004 2005 2006 2007 2008 2009 2010 2011 6.1 Dividend of state-owned enterprises 95.4 67.4 51.7 81.8 132.0 145.1 166.8 111.6 112.9 6.2 Own revenue of budget entities 1,376.3 1,634.5 1,443.3 1,098.5 1,540.0 1,628.9 4,898.1 5,337.2 5,997.5 50 | Annexes 6.3 other non classified own revenues 2,481.7 1,284.0 360.7 181.7 399.0 711.6 856.4 651.3 761.6 Subtotal other own revenues 3,953.6 2,986.0 1,855.7 1,362.1 2,071.1 2,485.7 5,921.4 6,100.1 6,872.0 7.1 Revenue sharing CG taxes 3,594.5 3,366.0 4,253.2 5,996.2 5,103.3 11,389.9 0.00 0.00 0.00 7.2 Grants from CG for current budget Subtotal CG transfers current budget 3,594.5 3,366.0 4,253.2 5,996.2 5,103.3 11,389.9 0.00 0.00 0.00 Total current revenue 22,839.2 27,534.8 33,315.3 38,662.9 46,134.7 57,651.2 126,948.9 156,483.6 216,277.6 8. Central government (CG) capital transfers 15,093.2 15,446.7 41,140.6 90,820.0 9. Capital transfer from development fund 13,325.2 14,461.0 Subtotal CG capital revenue 0.00 0.00 0.00 0.00 0.00 28,418.4 29,907.7 41,140.6 90,820.0 10. Own source revenue for capital budget 10.1 Privatization revenue 1,260.0 1,901.4 1,807.0 1,851.0 2,274.0 3,172.0 375.1 1,332.8 8,316.5 10.2 Vehicle tax and road fee 2,285.7 2,873.5 3,073.4 3,251.4 4,051.0 4,744.7 6,056.9 6,458.0 21,261.2 10.3 Other own revenue source(s) for capital 6,852.4 12,449.2 21,525.9 88,229.4 budget (from UB budget) Subtotal own source capital revenue 3,545.7 4,774.9 4,880.4 5,102.4 6,325.0 14,769.1 18,881.2 29,316.7 117,807.2 Total capital revenue 3,545.7 4,774.9 4,880.4 5,102.4 6,325.0 43,187.5 48,788.9 70,457.3 208,627.2 Total revenue 26,385.0 32,309.7 38,195.7 43,765.4 52,459.8 100,838.8 175,737.9 226,940.9 424,904.9  Source: Calculated for this report based on the UB Treasury Department Data (2003–11). Table A1.2. Percentage Change in the UB and Districts Revenue, 2003–11 2004 2005 2006 2007 2008 2009 2010 2011 Revenue Own revenue sources 1. Taxes 1.1 Wage tax 0.0 0.0 0.0 0.0 0.0 0.0 30.9 50.4 1.2 Unidentified income tax 97.8 16.5 -49.0 -3.7 19.2 9.1 18.1 31.8 1.3 Self-employment tax 56.1 3.4 5.4 129.6 3.0 11.9 29.8 35.0 1.4 Livestock tax 54.8 15.5 10.3 51.7 61.6 -40.7 -88.9 -84.5 1.5 Other income tax 0.0 80.8 97.1 -77.4 116.0 93.4 -11.4 64.4 1.6 Property tax 18.6 15.6 5.8 20.2 16.3 17.9 28.5 19.9 1.7 Gun tax 1.7 2.7 15.4 14.0 15.1 18.7 -5.9 17.7 1.8 Tax on property sale 7.3 82.6 36.1 67.1 16.8 -26.4 201.3 -59.3 Subtotal taxes 73.9 30.4 26.5 -10.7 24.3 475.6 30.0 44.1 2. Licenses, fees, and permits 2.1 License fee for mineral exploration 0.0 0.0 0.0 0.0 0.0 30.9 29.5 -15.4 2.2 Mineral royalty -21.7 45.5 3.7 -61.6 7.1 17.9 48.2 -0.6 2.3 User fee for common minerals -44.8 34.8 26.6 56.7 13.4 -40.3 21.3 13,1 2.4 User fee for land 6.3 53.0 21.0 63.5 40.4 12.0 3.4 12.2 2.5 User fee for water and springs -6.2 542.0 15.5 -1.7 24.9 -5.2 128.8 24.8 2.6 User fee for timber -20.0 24.1 37.6 -0.7 -1.8 -32.7 226.2 88.5 Subtotal licenses, fees, and permits 0.7 55.1 18.8 48.0 39.1 11.5 6.4 12.2 3. User charges 3.1 Stamp duties 283.2 20.3 -2.9 34.1 24.9 2.3 -0.5 208.0 Subtotal user charges 283.2 20.3 -2.9 34.1 24.9 2.3 -0.5 208.0 4. Rents -31.1 -25.8 30.7 10.3 7.9 -6.4 1.7 34.0 5. Fines and penalties 3.6 13.0 -2.2 79.6 -48.3 53.2 24.8 -93.9 (continued) Annex 1. Revenue and Expenditure Budgets Reclassified for this Study | 51 Table A1.2. Percentage Change in the UB and Districts Revenue, 2003–11 (continued) 2004 2005 2006 2007 2008 2009 2010 2011 6. Other own revenue 6.1 Dividend of state-owned enterprises -29.4 -23.3 58.3 61.3 9.9 15.0 -33.1 1.2 52 | Annexes 6.2 Own revenue of budget entities 18.8 -11.7 -23.9 40.2 5.8 200.7 9.0 12.4 6.3 Other nonclassified own revenues -48.3 -71.9 -49.6 119.5 78.3 20.4 -23.9 16.9 Subtotal other own revenues -24.5 -37.9 -26.6 52.0 20.0 138.2 3.0 12.7 7.1 revenue sharing in CG taxes for current budget -6.4 26.4 41.0 -14.9 123.2 -100.0 0.0 0.0 7.2 Grants from CG for current budget 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Subtotal CG transfers for current budget -6.4 26.4 41.0 -14.9 123.2 -100.0 0.0 0.0 Total current revenue 20.6 21.0 16.1 19.3 25.0 120.2 23.3 38.2 8. CG capital transfers 0.0 0.0 0.0 0.0 0.0 2.3 166.3 120.8 9. Capital transfer from development fund 0.0 0.0 0.0 0.0 0.0 8.5 -100.0 0 Subtotal CG capital revenue 0.0 0.0 0.0 0.0 0.0 5.2 37.6 120.8 10. Own source revenue for capital budget 10.1 Privatization revenue 50.9 -5.0 2.4 22.9 39.5 -88.2 255.3 524.0 10.2 Vehicle tax and road fee for capital budget 25.7 7.0 5.8 24.6 17.1 27.7 6.6 229.2 10.3 Other own revenue source(s) for capital budget 0.0 0.0 0.0 0.0 0.0 81.7 72.9 309.9 (from UB budget) Subtotal own source capital revenue 34.7 2.2 4.6 24.0 133.5 27.8 55.3 301.8 Total capital revenue 34.7 2.2 4.6 24.0 582.8 13.0 44.4 196.1 Total revenue 22.5 18.2 14.6 19.9 92.2 74.3 29.1 87.2 Source: Table A1.1. Table A1.3. Composition of Total Revenue for UB and Districts, 2003–11 (percentage) 2003 2004 2005 2006 2007 2008 2009 2010 2011 Own revenue sources 1. Taxes 1.1 Wage tax 0.00 0.00 0.00 0.00 0.00 0.00 39.17 39.70 31.90 1.2 Unidentified income tax 2.68 4.32 4.26 1.90 1.52 0.94 0.59 0.54 0.38 1.3 Self-employment tax 3.53 4.50 3.94 3.62 6.93 3.71 2.38 2.40 1.73 1.4 Livestock tax 0.02 0.02 0.02 0.02 0.03 0.02 0.01 0.00 0.00 1.5 Other income tax 0.00 5.54 8.47 14.57 2.75 3.09 3.43 2.35 2.07 1.6 Property tax 10.68 10.35 10.12 9.34 9.36 5.66 3.83 3.81 2.44 1.7 Gun tax 0.06 0.05 0.04 0.04 0.04 0.03 0.02 0.01 0.01 1.8 Tax on property sale 1.27 1.11 1.72 2.04 2.84 1.73 0.73 1.70 0.37 Subtotal taxes 18.23 25.90 28.57 31.54 23.48 15.19 50.17 50.51 38.89 2. Licenses, fees, and permits 2.1 License fee for mineral exploration 0.00 0.00 0.00 0.00 0.00 0.02 0.02 0.02 0.01 2.2 Mineral royalty 2.80 1.79 2.21 2.00 0.64 0.36 0.24 0.28 0.15 2.3 User fee for common minerals 0.19 0.09 0.10 0.11 0.14 0.08 0.03 0.03 0.02 2.4 User fee for land 13.30 11.54 14.94 15.78 21.52 15.72 10.10 8.09 4.84 2.5 User fee for water and springs 0.12 0.09 0.49 0.50 0.41 0.26 0.14 0.25 0.17 2.6 User fee for timber 0.05 0.03 0.04 0.04 0.04 0.02 0.01 0.02 0.02 Subtotal licenses, fees, and permits 16.47 13.55 17.77 18.42 22.75 16.46 10.53 8.68 5.20 3.1 Stamp duties 3.30 10.34 10.52 8.92 9.98 6.48 3.80 2.93 4.82 4. Rents 3.87 2.18 1.37 1.56 1.43 0.80 0.43 0.34 0.24 5. Fines and penalties 16.08 13.61 13.00 11.10 16.63 4.47 3.93 3.80 0.12 (continued) Annex 1. Revenue and Expenditure Budgets Reclassified for this Study | 53 Table A1.1. UB and Districts Revenue, 2003–11 (in millions MNT) (continued) 2003 2004 2005 2006 2007 2008 2009 2010 2011 6. Other own revenue 6.1 Dividend of state-owned enterprises 0.36 0.21 0.14 0.19 0.25 0.14 0.09 0.05 0.03 54 | Annexes 6.2 Own revenue of budget entities 5.22 5.06 3.78 2.51 2.94 1.62 2.79 2.35 1.41 6.3 Other nonclassified own revenues 9.41 3.97 0.94 0.42 0.76 0.71 0.49 0.29 0.18 Subtotal other own revenues 14.98 9.24 4.86 3.11 3.95 2.47 3.37 2.69 1.62 7.1 Revenue sharing in CG taxes for current 13.62 10.42 11.14 13.70 9.73 11.30 0.00 0.00 0.00 budget 7.2 Grants from CG for current budget 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Subtotal CG transfers for current budget 13.62 10.42 11.14 13.70 9.73 11.30 0.00 0.00 0.00 Total current revenue 86.56 85.22 87.22 88.34 87.94 57.17 72.24 68.95 50.90 8. CG capital transfers 0.00 0.00 0.00 0.00 0.00 14.97 8.79 18.13 21.37 9. Capital transfer from development fund 0.00 0.00 0.00 0.00 0.00 13.21 8.23 0.00 0.00 Subtotal CG capital transfer 0.00 0.00 0.00 0.00 0.00 28.18 17.02 18.13 21.37 10. Own source revenue for capital budget 10.1 Privatization revenue 4.78 5.88 4.73 4.23 4.33 3.15 0.21 0.59 1.96 10.2 Vehicle tax and road fee for capital 8.66 8.89 8.05 7.43 7.72 4.71 3.45 2.85 5.00 budget 10.3 Other own revenue source(s) for capital 0.00 0.00 0.00 0.00 0.00 6.80 7.08 9.49 20.76 budget (from UB budget) Subtotal own source capital revenue 13.44 14.78 12.78 11.66 12.06 14.65 10.74 12.92 27.73 Total capital revenue 13.44 14.78 12.78 11.66 12.06 42.83 27.76 31.05 49.10 Total revenue 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Source: Table A1.1. Table A1.4. Composition of Total Revenue for UB Government, 2009–11 2009 2010 2011 2009 2010 2011 REVENUE SOURCE (thousands MNT) (thousands MNT) (thousands MNT) (%) (%) (%) Own revenue sources 1. Taxes 1.1 Wage tax 70,273,109.80 92,717,446.10 140,410,685.70 61.04 66.84 72.12 1.2 Deductions -1,428,763.20 -2,632,686.90 -4,882,818.40 1.3 Other income tax 743,493.30 830,553.90 1,441,056.10 0.65 0.60 0.74 1.4 Property tax 6,733,511.00 8,653,207.70 10,371,518.20 5.85 6.24 5.33 1.5 Gun tax 1,204.10 Subtotal taxes 76,322,555.00 99,568,520.80 147,340,441.60 66.29 71.78 75.68 2. Licenses, fees, and permits 2.1 License fee for mineral exploration 7,906.70 18,679.20 16,244.10 0.01 0.01 0.01 2.2 Mineral royalty 266,936.80 381,924.10 390,059.20 0.23 0.28 0.20 2.3 User fee for common minerals 50,000.00 60,650.00 64,000.00 0.04 0.04 0.03 2.4 User fee for land 17,742,885.80 18,348,734.60 20,580,066.50 15.41 13.23 10.57 2.5 User fee for water and springs 227,030.10 458,425.30 540,922.30 0.20 0.33 0.28 2.6 User fee for timber 12,189.10 39,759.10 74,937.50 0.01 0.03 0.04 Subtotal licenses, fees, and permits 18,306,948.50 19,308,172.30 21,666,229.60 15.90 13.92 11.13 3. User charges 3.1 Stamp duties 3,935,678.50 1,399,631.30 47,909.60 3.42 1.01 0.02 Subtotal user charges 3,935,678.50 1,399,631.30 47,909.60 3.42 1.01 0.02 4. Rents 759,300.00 772,169.30 1,034,781.90 0.66 0.56 0.53 5. Fines and penalties 3,931,815.20 4,304,946.90 5,209,421.20 3.42 3.10 2.68 6. Other own revenue 6.1 Dividend of state-owned enterprises 166,862.40 111,613.70 112,911.50 0.14 0.08 0.06 6.2 Own revenue of budget entities 4,705,249.90 5,109,231.20 5,798,818.60 4.09 3.68 2.98 6.3 Other nonclassified own revenues 724,695.00 518,429.40 626,963.10 0.63 0.37 0.32 Subtotal other own revenues 5,596,807.30 5,739,274.30 6,538,693.20 4.86 4.14 3.36 Subtotal current revenue 108,853,104.50 131,092,714.90 181,837,477.10 94.55 94.51 93.40 Own source revenue for capital budget Privatization revenue 375,100.00 1,332,803.60 1,570,768.90 0.33 0.96 0.81 10.1 Vehicle tax for capital budget 5,408,098.10 5,771,665.90 10,751,335.80 4.70 4.16 5.52 10.1 Road fee for capital budget 496,892.90 510,572.20 527,132.00 0.43 0.37 0.27 Subtotal own source revenue 6,280,091.00 7,615,041.70 12,849,236.70 5.45 5.49 6.60 for capital Subtotal capital revenue 6,280,091.00 7,615,041.70 12,849,236.70 5.45 5.49 6.60  Source: Elaborated for this report based on data from UB Treasury Department (2009–11). Annex 1. Revenue and Expenditure Budgets Reclassified for this Study | 55 Table A1.5. Composition of Total Revenue for Two Selected Districts, 2009–11 2009 2010 2011 2009 2010 2011 REVENUE SOURCE (thousands MNT) (thousands MNT) (thousands MNT) (%) (%) (%) Bayangol District Taxes 1,701,852.00 2,480,222.70 4,394,630.80 60.40 70.69 74.83 Unidentified income tax 197,992.80 181,890.20 325,042.90 7.03 5.18 5.53 Self-employment tax 462,857.90 652,065.20 594,948.30 16.43 18.58 10.13 Other income tax 723,710.30 685,501.40 1,316,971.40 25.69 19.54 22.43 Gun tax 5,782.20 6,085.00 7,168.90 0.21 0.17 0.12 Tax on property sale 311,508.80 954,680.90 2,150,499.30 11.06 27.21 36.62 Stamp duties 659,540.60 347,580.60 490,752.20 23.41 9.91 8.36 Fines and penalties 419,958.90 671,801.20 979,490.90 14.91 19.15 16.68 Own revenue of budget entities 7,257.40 7,174.40 7,773.80 0.26 0.20 0.13 Other non classified own revenues 28,868.70 1,884.60 1.02 0.05 0.00 Subtotal current revenue 2,817,477.60 3,508,663.50 5,872,647.70 100.00 100.00 100.00 Capital revenue 0 0 0 0.00 0.00 0.00 Total Revenue 2,817,477.60 3,508,663.50 5,872,647.70 100.00 100.00 100.00 Nalaikh District Taxes 154,420.00 192,081.80 255,461.40 47.74 48.72 55.31 Unidentified income tax 12,316.10 162,859.90 3.81 0.00 35.26 Self-employment tax 18,906.50 164,184.30 9,736.10 5.84 41.65 2.11 Livestock tax 6,634.50 737.70 31.20 2.05 0.19 0.01 Other income tax 107,204.60 1,461.30 510.40 33.14 0.37 0.11 Gun tax 918.00 1,011.00 1,044.40 0.28 0.26 0.23 Tax on property sale 8,440.30 24,687.50 81,279.40 2.61 6.26 17.60 Mineral royalty 11,053.50 8,653.00 10,160.60 3.42 2.19 2.20 License fee for mineral exploration 4,000.00 2,900.90 5,225.00 1.24 0.74 1.13 User fee for water and springs 10,283.70 9,982.70 10,437.10 3.18 2.53 2.26 Stamp duties 11,784.50 11,660.00 29,686.10 3.64 2.96 6.43 Fines and penalties 51,327.00 56,399.10 81,942.50 15.87 14.31 17.74 Own revenue of budget entities 2,285.60 26,766.10 6,603.00 0.71 6.79 1.43 Other non classified own revenues 3,269.90 1,118.30 4,796.30 1.01 0.28 1.04 Subtotal current revenue 248,424.20 309,561.90 404,312.00 76.80 78.52 87.54 Capital revenue Vehicle taxa 75,048.70 84,667.10 57,540.20 23.20 21.48 12.46 Subtotal capital revenue 75,048.70 84,667.10 57,540.20 23.20 21.48 12.46 Total revenue 323,472.90 394,229.00 461,852.20 100.00 100.00 100.00 a. According to 2009–11 budget data, there is no capital revenue for all six urban districts. Source: Elaborated for this report based on data from UB Treasury Department (2009–11). 56 | Annexes Table A1.6. Transfer from the UB Government to the Central Government, 2003–11 (in millions MNT) 2003 2004 2005 2006 2007 2008 2009 2010 2011 Transfer amount 11,259.1 9,963.3 14,803.8 14,177.0 1,539.9 9,132.2 62,751.2 56,159.0 20,898.1 Total current revenue of UB 22,839.3 27,534.9 33,315.3 38,663.0 46,134.7 77,063.9 126,949.0 156,483.7 232,948.8 Share of transfer in total current revenue (%) 49.6 36.4 44.4 36.7 3.3 11.8 49.4 35.9 9.0 Source: UB City Budget Book 2012: 22. Table A1.7. UB and Districts per Capita Revenue by Sources, 2003–11 (in thousands MNT) 2003 2004 2005 2006 2007 2008 2009 2010 2011 1. Taxes 1.1 Wage tax 0.000 0.000 0.000 0.000 0.000 0.000 62.093 77.406 112.134 1.2 Unidentified income tax 0.811 1.525 1.707 0.840 0.779 0.890 0.937 1.054 1.337 1.3 Self-employment tax 1.070 1.588 1.578 1.603 3.547 3.502 3.779 4.672 6.073 1.4 Livestock tax 0.006 0.008 0.009 0.010 0.015 0.023 0.013 0.001 0.000 1.5 Other income tax 0.000 1.956 3.398 6.457 1.408 2.915 5.438 4.592 7.268 1.6 Property tax 3.240 3.652 4.058 4.139 4.792 5.340 6.073 7.435 8.581 1.7 Gun tax 0.019 0.018 0.018 0.020 0.022 0.024 0.028 0.025 0.028 1.8 Tax on property sale 0.385 0.392 0.689 0.904 1.455 1.628 1.156 3.319 1.300 Subtotal taxes 5.531 9.140 11.458 13.972 12.018 14.322 79.516 98.504 136.722 2. Licenses, fees, and permits 2.1 License fee for mineral exploration 0.000 0.000 0.000 0.000 0.000 0.021 0.026 0.032 0.026 2.2 Mineral royalty 0.850 0.633 0.885 0.885 0.328 0.336 0.382 0.540 0.517 2.3 User fee for common minerals 0.057 0.030 0.039 0.048 0.072 0.078 0.045 0.052 0.057 2.4 User fee for land 4.035 4.074 5.990 6.990 11.014 14.818 16.003 15.766 17.028 2.5 User fee for water and springs 0.036 0.032 0.197 0.220 0.208 0.249 0.228 0.497 0.597 2.6 User fee for timber 0.016 0.012 0.014 0.019 0.018 0.017 0.011 0.034 0.062 Subtotal licenses, fees, and permits 4.994 4.781 7.126 8.161 11.639 15.520 16.695 16.921 18.286 (continued) Annex 1. Revenue and Expenditure Budgets Reclassified for this Study | 57 Table A1.7. UB and Districts per Capita Revenue by Sources, 2003–11 (in thousands MNT) (continued) 3. User charges 3.1 Stamp duties 1.002 3.648 4.219 3.950 5.104 6.113 6.030 5.718 16.959 58 | Annexes Subtotal user charges 1.002 3.648 4.219 3.950 5.104 6.113 6.030 5.718 16.959 4. Rents 1.173 0.768 0.548 0.690 0.734 0.759 0.685 0.663 0.856 5. Fines and penalties 4.879 4.802 5.215 4.917 8.509 4.218 6.233 7.412 0.436 6. Other own revenue 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 6.1 Dividend of state-owned enterprises 0.110 0.074 0.054 0.083 0.129 0.136 0.150 0.096 0.093 6.2 Own revenue of budget entities 1.582 1.785 1.515 1.112 1.502 1.523 4.418 4.586 4.962 6.3 Other nonclassified own revenues 2.853 1.403 0.379 0.184 0.389 0.665 0.772 0.560 0.630 Subtotal other own revenues 4.545 3.262 1.949 1.379 2.020 2.324 5.341 5.242 5.686 7.1 Revenue sharing in CG taxes for current budget 4.132 3.677 4.466 6.070 4.978 10.650 0.000 0.000 0.000 7.2 Grants from CG for current budget 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Subtotal CG transfers for current budget 4.132 3.677 4.466 6.070 4.978 10.650 0.000 0.000 0.000 Total current revenue 26.255 30.076 34.980 39.139 45.002 53.906 114.500 134.460 178.946 8. CG capital transfers 0.000 0.000 0.000 0.000 0.000 14.113 13.932 35.350 75.143 9. Capital transfer from development fund 0.000 0.000 0.000 0.000 0.000 12.460 13.043 0.000 0.000 Subtotal CG capital transfer 0.000 0.000 0.000 0.000 0.000 26.572 26.975 35.350 75.143 10. Own source revenue for capital budget 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 10.1 Privatization revenue 1.448 2.077 1.897 1.874 2.218 2.966 0.338 1.145 6.881 10.2 Vehicle tax and road fee for capital budget 2.628 3.139 3.227 3.292 3.952 4.437 5.463 5.549 17.591 10.3 Other own revenue source(s) for capital 0.000 0.000 0.000 0.000 0.000 6.407 11.228 18.496 73.000 budget (from UB budget) Subtotal own source capital revenue 4.076 5.216 5.124 5.165 6.170 13.810 17.030 25.191 97.472 Total capital revenue 4.076 5.216 5.124 5.165 6.170 40.382 44.004 60.541 172.616 Total revenue 30.331 35.292 40.105 44.305 51.172 94.288 158.504 195.001 351.562 Source: Elaborated for this report based on data from UB Treasury Department (2003–11). Table A1.8. Comparison of Per Capita Revenue across Districts REVENUE SOURCES 2009 2010 2011 Bayangol District Taxes 9.733 13.399 22.875 Unidentified income tax 1.132 0.983 1.692 Self-employment tax 2.647 3.523 3.097 Other income tax 4.139 3.703 6.855 Gun tax 0.033 0.033 0.037 Tax on property sale 1.782 5.158 11.194 Stamp duties 3.772 1.878 2.555 Fines and penalties 2.402 3.629 5.099 Own revenue of budget entities 0.042 0.039 0.040 Other non classified own revenues 0.165 0.010 0.000 Subtotal current revenue 16.114 18.955 30.569 Capital revenue 0.000 0.000 0.000 Total Revenue 16.114 18.955 30.569 Nalaikh District Taxes 5.1107 6.1060 7.8572 Unidentified income tax 0.4076 0.0000 5.0091 Self-employment tax 0.6257 5.2192 0.2995 Livestock tax 0.2196 0.0235 0.0010 Other income tax 3.5481 0.0465 0.0157 Gun tax 0.0304 0.0321 0.0321 Tax on property sale 0.2793 0.7848 2.4999 Mineral royalty 0.3658 0.2751 0.3125 License fee for mineral exploration 0.1324 0.0922 0.1607 User fee for water and springs 0.3404 0.3173 0.3210 Stamp duties 0.3900 0.3707 0.9131 Fines and penalties 1.6987 1.7928 2.5203 Own revenue of budget entities 0.0756 0.8509 0.2031 Other non classified own revenues 0.1082 0.0355 0.1475 Subtotal current revenue 8.2219 9.8405 12.4354 Capital revenue 0.0000 0.0000 0.0000 Vehicle tax 2.4838 2.6914 1.7698 Subtotal capital revenue 2.4838 2.6914 1.7698 Total revenue 10.7057 12.5319 14.2052 Source: Elaborated for this report based on data from UB Treasury Department (2009–11). Annex 1. Revenue and Expenditure Budgets Reclassified for this Study | 59 Annex 2. Actual Budget Formats of UB and District Revenue and Expenditures Table A2.1. Actual Format of UB and District Revenue and Expenditure Budgets (in millions MNT) ITEMS 2003 2004 2005 2006 2007 2008 2009 2010 2011 60 | Annexes Total budget revenue 26,385.0 32,309.8 38,195.8 43,765.5 52,459.8 65,568.0 13,3381.0 164,274.5 245,855.6 Tax revenue collected by districts and UB City 0.0 0.0 23,073.0 27,850.3 26,933.2 38,292.6 10,1112.5 128,483.8 0.0 Tax revenue 15,572.9 21,964.1 28,173.2 33,927.8 36,824.7 52,500.8 11,7635.8 143,070.5 153,269.3 Personal income tax (PIT) 1,642.0 4,647.6 6,374.3 8,801.2 5,893.6 7,839.4 80,115.7 102,094.1 153,269.3 Wage tax 0.0 0.0 0.0 0.0 0.0 0.0 70,273.1 92,717.4 140,410.7 Deduction from wage tax 0.0 0.0 0.0 0.0 0.0 0.0 -1,428.8 -2,632.7 -4,882.8 Unidentified income tax 705.8 1,395.7 1,625.5 829.6 798.8 952.1 1,038.3 1,226.1 1,616.2 Self-employment tax 931.2 1,453.6 1,503.2 1,583.8 3,636.7 3,745.7 4,189.8 5,437.8 7,340.3 Livestock tax 5.0 7.7 8.9 9.8 14.9 24.1 14.3 1.6 0.2 Other PIT 0.0 1,790.6 3,236.6 6,378.0 1,443.3 3,117.6 6,029.0 5,343.9 8,784.8 Property tax 2,834.6 3,360.4 3,882.0 4,107.8 4,934.9 5,736.6 6,764.1 8,682.0 10,405.4 Immovable property tax 2,818.3 3,343.8 3,865.0 4,088.2 4,912.5 5,710.9 6,733.5 8,653.2 10,371.5 Gun tax 16.3 16.6 17.0 19.6 22.4 25.8 30.6 28.8 33.9 Consumption tax 5,880.3 6,239.6 7,111.7 9,054.7 8,831.0 15,789.0 5,560.1 5,947.4 10,808.9 Value added tax 3,594.5 3,366.1 4,253.2 5,996.2 5,103.4 11,389.9 0.0 0.0 0.0 Excise tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Vehicle tax 2,285.8 2,873.6 2,858.4 3,058.5 3,727.6 4,399.1 5,560.1 5,947.4 10,808.9 Other taxes 5,216.0 7,716.4 10,805.2 11,964.0 17,165.2 23,135.7 25,195.9 26,347.0 42,598.2 Stamp duties 871.5 3,339.8 4,018.2 3,902.3 5,232.9 6,537.7 6,685.3 6,654.1 20,496.9 License fee for mineral exploration 0.0 0.0 0.0 0.0 0.0 22.0 28.8 37.4 31.6 Land payment 3,509.9 3,729.4 5,705.3 6,904.6 11,290.8 15,847.9 17,742.9 18,348.7 20,580.1 User fee for water 31.2 29.3 188.0 217.1 213.4 266.5 252.6 577.9 721.4 User fee for timber 13.6 10.9 13.5 18.6 18.4 18.1 12.2 39.8 74.9 Mineral royalty 739.7 579.4 843.0 874.4 335.8 359.8 424.1 628.6 624.8 User fee for common minerals 50.0 27.6 37.2 47.1 73.8 83.7 50.0 60.7 68.6 (continued) Table A2.1. Actual Format of UB and District Revenue and Expenditure Budgets (in millions MNT) (continued) ITEMS 2003 2004 2005 2006 2007 2008 2009 2010 2011 Nontax revenue 9,217.5 8,085.1 7,559.7 7,093.9 11,869.6 8,153.7 14,088.3 16,008.7 18,886.4 Dividends of state-owned enterprises 95.5 67.4 51.7 81.9 132.1 145.2 166.9 111.6 112.9 Rent of state assets 1,020.0 703.2 522.0 682.0 752.0 811.3 759.3 772.2 1,034.8 Own revenue of budget entities (schools, 1,376.4 1,634.6 1,443.3 1,098.5 1,540.0 1,629.0 4,898.1 5,337.2 5,997.5 universities, hospitals) Interest and fines (penalties) 4,243.9 4,395.9 4,966.9 4,856.7 8,723.0 4,511.0 6,910.7 8,625.8 527.1 User fees for roads (entrance tolls) 0.0 0.0 215.0 193.0 323.5 345.7 496.9 510.6 10,452.4 Other unclassified revenues 2,481.8 1,284.1 360.7 181.8 399.0 711.6 856.5 651.4 761.6 Capital revenue 1,594.6 2,260.6 2,462.8 2,743.8 3,765.6 4,913.5 1,656.9 5,195.2 9,887.4 Privatization revenue 1,260.0 1,901.4 1,807.0 1,851.0 2,274.0 3,172.0 375.1 1,332.8 8,316.6 Tax of property sale 334.6 359.2 655.8 892.8 1,491.6 1,741.5 1,281.8 3,862.4 1,570.8 Source: UB Treasury Department. Data for 2003–11. 61 Table A2.2. UB Government Budget Expenditure Format and Percent Execution (in thousands) EXECUTED DESCRIPTION PLANNED 2011 EXECUTED 2011 EXECUTION (%) RELATIVE WEIGHT UB 183,816,195.40 140,833,637.00 77 Cash beginning balance - 1,127,287.00 ` Bank beginning balance - 1,127,275.60 Beginning balance of receivables from other - 64,252.50 organizations and persons Beginning balance of payables to other organizations - 41,376.10 and persons Total income 183,816,195.40 142,479,196.10 78 Investment financed by state budget 107,957,000.00 71,413,331.80 66 Financed by road fund 11,255,000.00 20,489,686.60 182 Financed by own revenue from basic activities 3,020,895.00 4,256,057.70 141 Financed by additional/supplementary activities 1,024,513.20 1,542,760.90 151 Financed by beginning balance 8,996,649.60 - Financed by state budget 51,562,137.60 43,804,088.70 85 Other income - 973,270.40 Total expenditure and net borrowing 183,816,195.40 140,833,637.00 77 100.00 Recurrent or current expenditures 58,382,995.40 48,817,639.40 84 34.66 Expenditure in goods and services 51,687,585.10 42,150,381.00 82 29.93 Basic salary and bonuses 7,095,323.10 6,863,636.30 97 4.87 Basic salary 5,321,047.30 5,233,399.70 98 3.72 Bonuses 838,141.60 770,073.60 92 0.55 Contract worker’s salary 223,189.90 213,482.00 96 0.15 Allowances: transportation and food 712,944.30 646,681.00 91 0.46 Social insurance fees paid by employer 801,301.10 737,920.20 92 0.52 Pension and assistance insurance fees 659,751.30 606,187.80 92 0.43 Pension insurance fees 509,895.00 456,831.00 90 0.32 Assistance insurance fees 35,390.00 52,508.40 148 0.04 Insurance fee: Sickness and accidents in the job 79,079.50 64,593.60 82 0.05 Unemployment insurance fee 35,386.80 32,254.80 91 0.02 Health insurance fee 141,549.80 131,732.40 93 0.09 Health insurance fee paid by employer 141,549.80 131,732.40 93 0.09 Expenditure on other goods and services 43,790,960.90 34,548,824.50 79 24.53 Stationary 207,439.60 193,515.30 93 0.14 Electricity 861,848.40 742,682.40 86 0.53 Heating 552,355.30 417,960.50 76 0.30 Transportation and gasoline 519,851.70 507,669.00 98 0.36 Communication and postage 258,317.40 242,119.40 94 0.17 (continued) 62 | Annexes UB Government Budget Expenditure Format and Percent Execution (in thousands) Table A2.2.  (continued) EXECUTED DESCRIPTION PLANNED 2011 EXECUTED 2011 EXECUTION (%) RELATIVE WEIGHT Drinking and service water 139,823.90 96,831.90 69 0.07 Domestic subsistence expenditure 33,150.00 29,889.20 90 0.02 Foreign subsistence expenditure 1,000,000.00 847,205.20 85 0.60 Books, newspapers, journals 19,000.00 18,303.00 96 0.01 Training and internships 72,460.00 59,697.40 82 0.04 Purchase of small items 357,099.50 431,288.10 121 0.31 Equipment purchase 70,000.00 62,327.60 89 0.04 Furniture cost 234,591.00 320,164.60 136 0.23 Less priced, fast depreciated items 52,508.50 48,795.90 93 0.03 Soft items and uniforms 62,850.00 59,507.50 95 0.04 Food 117,720.00 117,694.40 100 0.08 Drugs 2,962.00 2,962.00 100 0.00 Routine maintenance 239,050.00 223,069.40 93 0.16 Expenditure on art work 21,018.80 19,934.90 95 0.01 Small taxes, user fees and other expenditure 1,606,391.20 1,524,939.80 95 1.08 Expenditure on foreign guests 300,000.00 331,895.80 111 0.24 Organizing sports activities 49,856.30 49,856.30 100 0.04 Rent 232,795.20 229,517.60 99 0.16 Not allocated local expenditure 581,394.80 555,796.80 96 0.39 Printing matter 256,395.00 225,078.20 88 0.16 Festival expenditure 300,000.00 305,823.50 102 0.22 Unallocated spending 24,999.80 24,895.10 100 0.02 Current spending on activities and programs 64,000.00 18,946.40 30 0.01 Activities related to crime prevention 850,000.00 846,974.20 100 0.60 Environmental protection and recovery 2,680,450.10 1,235,827.40 46 0.88 Street lighting and cleaning 3,336,931.70 3,461,208.90 104 2.46 Site security cost 60,939.80 59,640.00 98 0.04 Local reserve fund 2,632,000.00 2,038,471.60 77 1.45 Financial support to the parties in the parliament 45,000.00 45,000.00 100 0.03 Veterinary medicine cost 170,293.00 170,293.00 100 0.12 Services received from others 15,614,302.60 9,203,989.60 59 6.54 Payments for services provided on behalf of the CG 15,614,302.60 9,203,989.60 59 6.54 government Advertisement and information cost 49,300.10 38,520.90 78 0.03 Land rent 2,142,441.40 1,809,082.30 84 1.28 (continued) Annex 2. Actual Budget Formats of UB and District Revenue and Expenditures | 63 UB Government Budget Expenditure Format and Percent Execution (in thousands) Table A2.2.  (continued) EXECUTED DESCRIPTION PLANNED 2011 EXECUTED 2011 EXECUTION (%) RELATIVE WEIGHT Surplus from previous year 8,909,918.10 8,918,534.30 100 6.33 Subsidies and recurrent transfer 6,695,410.30 6,667,258.40 100 4.73 Subsidies 6,195,454.30 6,194,767.60 100 4.40 To electricity producer/electricity and heating loss 260,000.00 260,000.00 100 0.18 To public transportation 4,990,454.30 4,990,454.30 100 3.54 Other subsidies and transfer 295,000.00 295,000.00 100 0.21 International organization member tax 650,000.00 649,313.30 100 0.46 Transfer to families 499,956.00 472,490.80 95 0.34 One time assistance and reward 488,956.00 461,490.80 94 0.33 Compensation 11,000.00 11,000.00 100 0.01 Capital expenditures 125,433,200.00 92,015,997.60 73 65.34 Investment financed own revenue budget 119,433,200.00 86,016,239.60 72 61.08 Food products/meat reserves 6,000,000.00 5,999,758.00 100 4.26 Cash ending balance - 2,772,846.10 Bank ending balance - 2,772,845.40 Ending balance of receivables from other organizations - 61,455.70 and persons Ending balance of payables to other organizations and - 39,748.00 persons  Source: UB Treasury Department. Computations of percentages for fiscal 2011 were done for this report. 64 | Annexes Table A2.3. UB Government’s Actual Budget Revenue Format (in millions MNT) NO REVENUE SOURCES 2009 2010 2011 Total revenue and transfers 115,133.2 138,707.8 194,686.7 A Current revenue 114,758.1 137,375.0 193,115.9 I Tax revenue 103,973.3 126,048.0 179,805.9 1 Income tax 69,587.8 90,915.3 136,968.9 1.1 Personal income tax (PIT) 69,587.8 90,915.3 136,968.9 1.1.1 Wage tax 70,273.1 92,717.4 140,410.7 1.1.2 Deduction of PIT -1,428.8 -2,632.7 -4,882.8 1.1.3 Unidentified income tax 0.0 0.0 1.1.4 Self-employment tax 0.0 0.0 1.1.5 Livestock tax 0.0 0.0 1.1.6 Other income taxes 743.5 830.6 1,441.1 2 Property tax 6,734.7 8,653.2 10,371.5 2.1 Immovable property tax 6,733.5 8,653.2 10,371.5 2.2 Gun tax 1.2 0.0 0.0 3 Tax on goods and services 5,725.0 6,214.2 11,205.4 3.1 Tax related to license fee on special purpose manufacturing 5,408.1 5,771.7 10,751.3 3.1.1 Vehicle tax 5,408.1 5,771.7 10,751.3 3.1.2 License fee for the exploration of resources other than 0.0 0.0 minerals 3.2 Other taxes and fees on goods and services 316.9 442.6 454.1 3.2.1 Royalty on mining 266.9 381.9 390.1 3.2.2 User fee for common mineral resources 50.0 60.7 64.0 4 Other taxes 21,925.7 20,265.2 21,260.1 4.1 Stamp duties 3,935.7 1,399.6 47.9 4.2 License user fee for mineral resources 7.9 18.7 16.2 4.3 Land payment 17,742.9 18,348.7 20,580.1 4.4 User fee for water and springs 227.0 458.4 540.9 4.5 User fee for timber 12.2 39.8 74.9 4.6 Other taxes and fees 0.0 0.0 II Nontax revenue 10,784.8 11,327.0 13,310.0 1 Dividends 166.9 111.6 112.9 2 Revenue from state property renting 759.3 772.2 1,034.8 3 Own revenue of budget entities 4,705.2 5,109.2 5,798.8 4 User fee for roads 496.9 510.6 527.1 5 Revenue from fines and interests 3,931.8 4,304.9 5,209.4 6 Other revenues 724.7 518.4 627.0 B Capital revenue 375.1 1,332.8 1,570.8 1 Revenue from property sale 0.0 0.0 2 Privatization revenue 375.1 1,332.8 1,570.8  Source: UB Treasury Department. Computations of percentages for fiscal 2011 were done for this report. Annex 2. Actual Budget Formats of UB and District Revenue and Expenditures | 65 City of Ulaanbaatar 66 | Maps City of Ulaanbaatar Reflecting District Boundaries Maps | 67 References Lkhagvadorj, Ariunaa. 2010. Fiscal Federalism and World Bank. 2005 (draft). Fiscal Decentralization and Local Decentralization in Mongolia. Postdam University. MPRA: Public Finance in Mongolia. Center of Mongol Management. Postdam. World Bank Washington DC. NALAS (Network of Associations of Local Authorities of ———. 2012. Mongolia: Improving Public Expenditures to Meet South East Europe). 2012. Report on Fiscal Decentralization the Challenge of Scaling Up Infrastructure, Washington, Indicators for South-East Europe. NALAS: Skopje 2012. DC: World Bank. 68 Infrastructure Unit Sustainable Development Department East Asia and Pacific Region 1818 H Street NW Washington DC Tel: +1(202)458-2472 Fax: +1(202) 522-1787 email: mbrhane@worldbank.org