Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers.
Art. 9(1) of the Charter provides that local authorities must have adequate financial resources of their own, of which they may dispose freely within the framework of their powers. Financial autonomy is an essential component of the principle of local self-government and for the exercise of a wide range of responsibilities in the field of local public affairs. These elements are cumulative and not alternative, which means that all conditions laid down in this provision of the Charter are mandatory.
Another basic principle requires that local authorities must have sufficient financial resources in proportion to the responsibilities assigned to them by law. However, this requirement seems to be more or less met in Azerbaijan, but only because municipalities have only extremely limited functions.
As all evidence shows, municipalities have only minimal financial resources, which is the main obstacle to their becoming properly involved in local administration in Azerbaijan. In the absence of sufficient revenues, they are not able to play a more significant role in local democracy. It is inconsistent to say, as the delegation was told during the visit that, on the one hand, municipalities are unable to perform more tasks and functions than those that they carry out today and to claim, on the other hand, that they do not need more revenues because they perform only a few tasks.
Parallel to the proposed decentralisation of tasks and functions, the state budget should contribute to their costs to a much greater extent than is currently the case. As large a proportion of these transfers as possible should be allocated as block grants, thus providing freedom for municipalities to spend them as they wish. It is also an explicit preference of the Charter that the provision of grants should not remove the basic freedom of local authorities to exercise policy discretion within their own jurisdiction. This does not mean that special subsidies allocated for specific purposes cannot have any place in local government finance. Special grants should be earmarked for projects, concrete tasks or public services that the central government wants to support in this targeted way.
Both block and special grants should be distributed in a transparent and predictable way on the basis of clear and unambiguous criteria. The mechanisms for the allocation of state grants and subsidies should be established in co-operation with the national municipal associations in order to take the interests and opinions of local governments into consideration.
The Charter also requires that a proportion of local revenues should come from local taxes, and local governments must be able to determine the rate applicable. Although the latter condition is met in Azerbaijan to the extent that local governments may decide what municipal taxes they impose and what tax rates to apply, the local tax revenues provide such a low income that this right is only formal and insignificant in practice. That said, the fact that local governments can determine the rate of some taxes is not consistent with the Charter if they are not able simultaneously to collect taxes in an appropriate manner.
As mentioned above, tax-collection mechanisms should be improved at municipal level. This requires not only better and more precise legislation but also makes it necessary to provide municipalities with qualified staff and facilities (buildings, information technology, etc.) in order to ensure an efficient tax collection procedure.
As the Charter states, “the protection of financially weaker local authorities calls for the institution of financial equalisation procedures or equivalent measures which are designed to correct the effects of the unequal distribution of potential sources of finance and of the financial burden they must support.” As there is no standardised financial equalisation mechanism for local governments in Azerbaijan, the poorest municipalities are in a detrimental financial situation without any predictable central government budget support. Under these circumstances, they might be in an extremely vulnerable economic position and this could undermine any plausible system of local self-government. Moreover, in the absence of an effective financial equalisation system regional discrepancies cannot be reduced or mitigated in a transparent way.
Accordingly, in order to comply with this provision of the Charter, the Azerbaijani authorities should immediately begin to establish an effective and well-designed financial equalisation system. This should be based on the principle of solidarity and apply objective criteria for assigning central budget subsidies to the municipalities in need. It is also important that the procedures and measures applied to financial equalisation must not diminish the discretion that municipalities may exercise with regard to their own powers. Even if the revenues from the equalisation fund can be regarded as extraordinary or special subsidies, this characteristic of the local resources must not justify any central government interference with the freedom of municipalities to deal with local public matters, unless a municipality is in financial difficulties of its own making.
As far as additional revenues are concerned, local governments should be given assistance to raise loans as their weak financial potential means they can hardly borrow money on the financial markets. Nonetheless, there are in Council of Europe member states many good practices with regard to the provision of central government support for the financial position of local governments in such a situation, for instance encouraging or setting up municipal development funds or savings banks to provide loans for municipalities.
According to the Charter, local governments must be consulted, in an appropriate manner, on the way in which redistributed resources are to be allocated to them. The Congress delegation concluded that the national associations of municipalities are not involved in the decision-making process relating to local government finance in Azerbaijan, and the Azerbaijani authorities should therefore establish an appropriate procedure for consultation on financial matters as soon as possible.