THE BUDAPEST MODEL. A liberal urban policy experiment. Edited by. Katalin Pallai. Consultants. János Atkári, László Láng, Sándor Tóth. - PDF

THE BUDAPEST MODEL A liberal urban policy experiment Edited by Katalin Pallai Consultants János Atkári, László Láng, Sándor Tóth Cover photos Gábor Demszky Budapest, 2003 First edition published by Open

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THE BUDAPEST MODEL A liberal urban policy experiment Edited by Katalin Pallai Consultants János Atkári, László Láng, Sándor Tóth Cover photos Gábor Demszky Budapest, 2003 First edition published by Open Society Institute Budapest / Local Government and Public Service Reform Initiative (OSI/LGI) Nádor utca 11., Budapest, Hungary; Telephone: (+36 1) The publication was sponsored by World Bank, World Bank Institute, DEXIA Open Society Institute Budapest / Local Government and Public Service Reform Initiative (OSI/LGI) Copy editor Martin Tisne Translators Iván Sellei, Tibor Szendrei Individual papers World Bank, World Bank Institute The whole book Open Society Institute Budapest The views expressed by the contributors to this book do not necessarily reflect the views of the publisher, sponsors or the editor of the book, but are the sole responsibility of the authors. The findings, interpretations and conclusions expressed here are those of the authors and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank cannot guarantee the accuracy of the data included in this work. All rights reserved. No part of this publication may be produced, stored in a retrieval system or translated in any form or by any means without the permission of the Publisher. ISBN CONTENTS Introduction 5 Contributors 8 URBAN POLITICS AND POLICY 11 LIBERALISM IN PRACTICE Gábor Demszky 13 Credo I 14 Credo II 24 Today s Problem 31 STRATEGIC PLANNING AND MANAGEMENT REFORM Katalin Pallai 35 Values and Goals 36 The Context 38 Strategic Planning 49 Elements of the Budapest Model In Strategic Planning 51 Urban Policy in Budapest 55 Evaluation and Further Comments 71 BUDGETARY POLICY 79 FINANCIAL MANAGEMENT REFORM Katalin Pallai 81 Underlying Concepts 82 The Context Intergovernmental Relations 90 Initial Conditions of Local Financial Management 104 Objectives and Strategy 106 The Architecture of the Reform Process 114 Evaluation and Lessons 137 Results 149 ELEMENTS OF THE FINANCIAL REFORM Katalin Pallai 155 Financial Planning 155 Reforming the Operating Budget 162 Capital Investment Planning 176 Borrowing Policy 183 EXTRA-BUDGETARY UTILITIES 195 INFRASTRUCTURE POLICIES Katalin Pallai 197 The Legacy 197 The Challenge 199 Strategy 202 The Content of the Studies in the Present Chapter 220 Evaluation and Lessons 222 USER CHARGE POLICY FOR PUBLIC UTILITIES Pál Valentiny 235 Characteristics of Market-based Public Utilities 236 Types of Price Regulation 237 Service Obligation, Fairness 239 Price Regulation at the Municipality of Budapest 242 Price Regulation and Subsidy Systems 248 3 PUBLIC UTILITY ALLOWANCES IN BUDAPEST Péter Gyôri 253 Background 253 Introducing the BLT 256 Lessons and Results 259 DISTRICT HEATING A NON-PRIVATIZED UTILITY Péter Vince 261 Peculiarities of District Heating in Budapest 261 Evolution of the Capital City s Functions 262 The Municipal Government as an Owner 263 Changes in the Determination of the Rates 266 Economic Stability and Social Responsibility 270 Closing Remarks 271 THE TRANSFORMATION OF THE BUDAPEST PUBLIC TRANSPORT COMPANY Éva Voszka 273 Stock Corporation in Hybrid Markets 273 Organizational and Operational Reforms 277 Financial Status, Financing 284 New Experiments and Breakthroughs 289 Whither Now? 294 UTILITY PRIVATIZATION Ferenc Szûcs 301 Initial Steps 301 Privatization in the Field of Water and Wastewater Management 310 Practical Experiences Concerning the Operation of the Privatization Model 322 INFRASTRUCTURE DEVELOPMENT Katalin Pallai 327 Introductory Thoughts 327 The Heritage and the Challenge 328 The Transformation of the Infrastructure Policies 335 Concluding Thoughts 354 GENERAL CONTEXT OF THE HUNGARIAN LOCAL GOVERNMENT SYSTEM 357 GENERAL CONDITIONS OF A DECADE S OPERATION Tamás M. Horváth Gábor Péteri 359 Municipal Policies of State Governments in an International Setting 360 Economic and Urbanization Conditions 371 Regulatory Changes in Budapest s Local Government System 385 Fiscal Scope for Action 394 Conclusions 402 APPENDIX 407 SOURCES AND LITERATURE 409 TABLES 1. Revenues of the Municipality of Budapest, Definition of revenue title items Expenditure of the Municipality of Budapest, Borrowing Transactions of the Municipality of Budapest, Revenues of Utility Companies, Expenditures on Utility Services, Arrears of User Charges, DETAILED TABLE OF CONTENTS 435 4 INTRODUCTION Running a city is an extremely complex affair. Day in, day out, the politician who undertakes this task has to make difficult choices between options that do not lend themselves to comparison. He or she has to decide whether to give priority to sewage treatment, traffic regulation, educational development or welfare provision. The politician might consider all these tasks to be important, yet is constrained by limited resources that are not sufficient to address them simultaneously. The city s leader has to weigh the various goals against each other and devise strategies whereby noble objectives can be transformed from dreams into reality. Budapest is a multi-dimensional and exciting city rich in traditions and values, that at the same time displays serious deficiencies and causes for concern. It is a major challenge to manage it effectively. This was especially true in the years immediately following the Socialist era when the city and its local government, discarding its old way of functioning, had to devise a strategy to meet the demands of an emerging democracy and free market economy. The city s leaders had to replace the Socialist-type approach to local politics (which maximized central subsidies and depended heavily on the will of the central authorities) with a new approach that aimed to adapt to the new political context by optimizing the resource allocations of the autonomous local governments. Simultaneously, they had to restructure and streamline the executive organs and decision procedures on the local level. All these they had to accomplish in the wake of the change of the political system, when the public sphere still lacked a clear set of democratic principles and the economic resources of the developed market economies were not yet present in Hungary. The term Budapest model is used to comprehensively identify the approach and the set of urban management methods and solutions which the key figures of the municipal leadership have devised over the past twelve years. The Budapest model is the product of the period when the Municipality of Budapest adapted to post-socialist conditions. In those years the transformation of the city s financial management was inevitable. It served to enable the benefits and potentials of the local governments new-found independence to arise, and ensured responsible management and balanced operation. The course of Budapest s urban management policies was based on the careful assessment of the potential for change of the economic, financial and political contexts, rather than being pronouncedly vision-driven. The adaptation process was centered around financial reform, and within that, on the reform of planning. The present volume focuses on the city s financial management. The studies all refer to the financial context when discussing the transformation of the general urban management policies and practices of the city. The same applies to the articles on strategic planning. We do obviously not consider financial management to be a technical issue. Instead, we prefer 5 to define it as an activity that enables the city s leaders to translate their principles and objectives into practice and to implement their most important political decisions. The decision of whether Budapest has been managed effectively or poorly during the past dozen years falls beyond the competence of those who have been actively involved in the shaping of the city s urban policies. Despite all the tensions, conflicts and grievances, since the change of the political system the citizens of Budapest have cast their votes for practically the same group of people to lead the city. It is no exaggeration to say that the majority of Budapest s inhabitants approve of the city s leaders performance. If only for this, it is worthwhile to take a closer look at their approach. The history of the past twelve years, complete with the city leaders actions, successes and failures, deserves a comprehensive analysis. This is what the present volume attempts to do. We introduce the reforms in their immediate context. The first study focuses on the broader political environment, while the second offers a detailed analysis of the local government s operating conditions and its comprehensive policies during the transition period. These two studies lay the foundations for the ensuing discussion of the financial management reform process. The reform of the budget management processes is discussed separately from the public utility policies pursued by independent, extra-budgetary companies. The individual reforms and decisions are tackled following the logic of political decision making: first we look at the starting conditions and assess the potential approaches based on the city leaders liberal thinking, and then we provide an analysis of the actual steps taken and results achieved. This volume assesses the reform of Budapest s urban management policies over the past twelve years. The chapters of this study look into the individual areas and aspects of the process. In order for us to provide our readers with the appropriate contextual background, we had at certain points to reiterate the guiding values of the city s leaders, the key elements of the broader political environment or the fundamental tools of urban management. We hope that this redundancy will enable readers to consult the chapters and studies herein independently from one other. The studies were written by experts who were directly and actively involved in the reform process. They rely on facts and evidence in their accounts, and describe the way the city s leaders assess their own achievements and failures. The authors draw on first-hand experience, and seek to present the reality that lay behind the documents and the motives behind the decisions that were made. They shed light on facts and considerations often unknown to the external observer, and thus contribute greatly to future research. Although the authors were actively involved in the reform process, all authors have done their best to provide objective, critical and wherever possible neutral accounts of the developments. The last study of the volume is an exception: the concluding analysis of the broader context of the reform process and of the 12-year history of Hungary s local governments was written by experts who had no direct involvement in the municipality s reform process. 6 During the past 12 years, Budapest has been led by liberal politicians. The liberal Mayor was in minority in the first four-year term, and since then has been working in coalition with the reformed Communist party. It is also important to note that the national political scene went through quite radical changes over the period at issue (with liberalism playing a key role only during the change of the political system). In their analyses of the Budapest model, the authors evaluate the policies of the Budapest Municipal Government against the constantly changing (and often contradictory) national political context. The track record of the leaders of Budapest provides an example for the practical implementation of liberal principles, and reveals the potentials these principles have to adjust to a fundamentally nonliberal broader environment. It is an uplifting and invigorating experience to be in charge of a large city. In the case of Budapest a city so very rich in traditions, controversies and problems the challenge is particularly great. The achievements and failures of Budapest s leaders will certainly be of interest to those who follow the transition process in Eastern Europe or have a vested professional interest in this sphere. The studies in the present volume may also provide lessons to the mayors and citizens of other post-socialist countries who tread the same thorny path. LECTORI SALUTEM! Katalin Pallai 7 CONTRIBUTORS ATKÁRI, JÁNOS politician. Before the political changes he was an editor of a monthly review, then the deputy editor- in - chief of an economic daily. He translated several books and studies on economy and economic philosophy into Hungarian. He has been working for the Municipality of Budapest since 1991, first as press secretary, later as the head of the Cabinet of the Mayor. He was elected a member of the General Assembly with the support of the liberal Alliance of Free Democrats in 1994 and has been the deputy mayor responsible for financial matters since then. DEMSZKY, GÁBOR politician, the Mayor of Budapest since By education he is a lawyer and sociologist. Before the political changes he was an editor of a monthly review of social sciences and took part in research programs of sociology. He was one of the leading figures of the opposition movement in Hungary and the founder of the AB underground publishing house. He is also one of the founders of the liberal Alliance of Free Democrats and a member of the party s leading body. All reforms and policies constituting the so called Budapest Model and included in this book have been drafted and implemented during his terms in office. GYÔRI, PÉTER economist, sociologist. He is a Ph.D. in sociology and a university lecturer. He conducted research projects in urban sociology, focusing on the status of the poor in Budapest and published studies on the housing situation, lifestyle and indebtedness of the low income families in the 1980s and 1990s. He was a member of the General Assembly between 1990 and 2002, and the chairman of the Welfare Policy and Housing Committee. He played a leading role in drafting and implementing the Budapest homeless aid system, the system of public utility allowances and also the program for the rehabilitation of the capital city s backward districts. HORVÁTH, TAMÁS M. specialist in public administration. He is a professor at the Faculty of Political and Legal Sciences of the University of Debrecen, deputy general director of the Hungarian Institute of Public Administration, has a Ph.D. and a post-doctoral degree in political and legal sciences. He published books and papers on public administration, on local government affairs and on public service management. Policy proposals on local government legislation have been done in different countries. LÁNG, LÁSZLÓ specialist in local government administration and finance. He has been a member of the expert team of the Mayor in his Secretariat since 1992 in different positions; at present chief co-ordinator of planning. He has been a participant in the drafting and implementation of the economic and urban policy reforms in Budapest. Before the political changes he was a teacher, translator, later editor of books and economic reviews, editor of an economic daily. PALLAI, KATALIN specialist in urban policies and finance. Since 1991, as a freelance expert, she has been working directly for the Mayor and for his expert team. She was a participant in the drafting and implementation of the economic and urban policy reforms in Budapest. Several times she led expert teams drafting various comprehensive urban policy documents. She is also involved in training activities and consulting in various countries of the post socialist region on the commissions of major international institutions and firms. 8 PÉTERI, GÁBOR Economist, PhD, research director of the Local Government and Public Service Reform Initiative (LGI), affiliated with Open Society Institute-Budapest. Consultant for local governments. After a decade at the Hungarian Institute of Public Administration he worked as a freelance consultant on several projects in Hungary with the British Know How Fund, US AID and the World Bank. In 1996/97 he was actively involved in launching the Council of Local Government Associations, an umbrella organization of municipal associations. Published extensively in local finance, financial management, municipal policy formulation, finances of public education. SZÛCS, FERENC economist. At Finance Research Co., he is the executive responsible for businesses, directing the business activity and consulting branch of the company since Since 1991, he has been doing consulting for local governments (Budapest and other big cities) in reorganizing their public utility companies and preparing them for privatization, in organizing privatization transactions, in working out investment constructions and other special accounting constructions. TÓTH, SÁNDOR specialist in local government administration and finance. Following the political changes he was a representative in a district local government and a deputy district mayor. He worked for the municipal Expo-office between He has been the head of the financial deputy mayor s office since He is a participant in the drafting and implementation of the economic and urban policy reforms in Budapest. VALENTINY, PÁL economist. A Ph.D., senior research fellow in the Research Institute of Economics at the Hungarian Accademy of Sciences. His main fields of research are the theory of regulated markets and questions related to the regulation and privatization of networked infrastructure. As an expert, he took part in the creation of the conditions for the privatization process in Hungary. Between , he was a member of the Board of Directors of the Hungarian Electric Works. Requested by the Municipality of Budapest he has made analyses on the privatization and deregulation of public utilities in Western Europe. He was a member of the Advisory Board on Privatization of the Municipality of Budapest and of the team working out the privatization concept for the Budapest Water Works. Since 1993 he has been a member of the Board of Directors of the Budapest Gas Works. VINCE, PÉTER economist. He is a senior research fellow at the Research Institute of Economics at the Hungarian Academy of Sciences. His main fields of research are behavior of firms, different organizational and adjustment patterns of firms; innovation and entrepreneurship; transformation and decentralization of monopolized industrial organizational structure; energy policy; privatization and regulation of public utilities; corporate governance in transforming economies. Between 1993 and 2003 he was a member of the Board of Directors of the Budapest District Heating Company and since 2003 he has been a member of the Financial Control Committee of the Assembly of the Municipality of Budapest. VOSZKA, ÉVA economist, working at the Finance Research Co. During the last years she has published several books and articles on the transformation and privatization of large en- 9 URBAN POLITICS AND POLICY LIBERALISM IN PRACTICE GÁBOR DEMSZKY I assume that our readers and especially those who live outside Hungary are interested in our efforts and achievements for fundamentally different reasons, depending on whether they are more used to living in a Western or an Eastern economic culture. The success of Budapest s municipal leaders in keeping this Eastern European city afloat during transition to a market economy and multi-party democracy may interest Western readers wishing to learn more about the city s financial management system (also known as the Budapest model ). Budapest is capable of holding its own ground, and for all the difficulties it has encountered, the city is able to manage its own life. The question is: How does it succeed in doing that? Our readers from the East, who most likely include local government officials and municipal leaders, may have first-hand experience of what it means to have scarce resources. They s
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