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December 1st, 2008
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Towns struggle to repay loans

Bankrupt municipalities merge to access funding

By Claire Compton
Staff Writer, The Prague Post
September 3rd, 2008 issue

VLADIMÍR WEISS/THE PRAGUE POST
Hrabal's town of Klánovice asked Prague City Hall for funds to finish its new school.
When the mayor of Dobrná, a small municipality in north Bohemia, hid invoices of the small town’s rising debts from unpaid services and projects, the problem escalated until the offices of the local authorities found themselves without electricity in winter and not even enough money to pay wages.
“There was nowhere to file an application, nowhere to look for information, no place to register a change of residence, nowhere they could authenticate documents,” said Libuše Šrámková, who has been in charge of the village since Mayor Martin Forró was ousted in 2006. “The municipality was unable to carry out the functions of a municipality.”
Now, Dobrná is plagued by a debt totaling more than 6.3 million Kč ($378,151). Local assembly members and residents are financially supporting their kindergarten, the costs of the primary school are financed by a neighboring municipality, and, although electricity is back in the offices, there is no phone or Internet and the town does not have a Web site.
Dobrná’s issues are not unusual. Fourteen percent of Czech municipalities struggle with above-average debt, limiting citizens’ access to public services and placing a strain on the national budget.
Nine-hundred municipalities have “extremely” high debts and 27 face bankruptcy, according to data from the Czech Credit Bureau, a local credit analyst firm that works directly with local governments, benchmarking their credit scores and analyzing budgets. Debts of another 48 municipalities amount to half of their annual revenues.  
Of the country’s 6,244 municipalities, 3,242 have debts. In total, towns and villages currently record debts of about 112 billion Kč ($6.7 billion).
Loans are most often taken out from private financial institutions for wastewater treatment plants, sewer systems, public transport and schools, according to the Finance Ministry.
Interest-free loans are also available from government ministries, notably the State Environmental Fund for environmental protection and cleanup projects and the Housing Development Fund.
While the 2007–13 European Union budget gives towns access to money for developmental projects such as wastewater treatment plants, many municipalities are shut out because they are not able to provide the required funds to supplement the subsidy.
“If they’re successful in the application, they usually have to provide co-financing, and municipalities often say ‘Look, we just can’t find the money to co-finance projects,’” said Phil Hemmings of the Organization for Economic Cooperation and Development (OECD).
In 2006, Hemmings led an OECD economic survey of the Czech Republic that took a close look at municipalities’ finances, and found problems not necessarily with the amounts or prevalence of debts, but the lack of funding structure to support them.
Because the federal government distributes funding based on population, a vast majority of municipalities are often too small to undertake larger projects: Nearly 5,000 of the municipalities have populations under 1,500.
As a result, many of these smaller municipalities have turned to cooperation with neighbors when tackling larger public projects to enable shared use, and because most institutions won’t lend to such small municipalities.
“The obvious big structural weakness of the system, about which not much can be done, is that so many of the municipalities are very small, making it hard for local governments to work efficiently,” he said. “Our research found that they often find ways around this problem by [merging] with other municipalities, [sharing] services and cooperating on investment projects.”
The central government has tried to encourage mergers between smaller municipalities for this very reason, but with little success, Hemmings added.
“They get very attached to local governments and they’ve got quite strong constitutional [independence], so the central government can’t unilaterally tell them to merge. It has to be of their own volition.”
Mission incomplete
Indebtedness is not a problem exclusive to remote rural areas. In Klánovice, a municipality on the outskirts of Prague, Mayor Ladislav Hrabal is struggling to allocate funds for public projects after an extension to the local elementary school climbed well past the original budget.
The total construction cost of the multicolored, circular school buildings — originally estimated at 20 million Kč ($1.2 million) — nearly doubled due to unexpected technical hurdles and new regulations that kicked in after construction started.
As a part of a Prague district, Klánovice was able to ask City Hall for the additional 18 million Kč ($1.1 million) needed to complete the school, but other projects have fallen by the wayside due to budgetary constraints. 
Between his office and the school, a road that has been reduced to gravel during reconstruction has remained unfinished for more than a year, Hrabal said, because Prague officials declined to allocate the necessary funding. Now, gullies collect large pools of standing water whenever it rains, and trucks from the fire station next door must drive slowly when they leave on runs.
On June 19, Hrabal requested funding for the project for a third time, and was rejected.
“[Prague Mayor Pavel Bém’s] argument was that other municipalities have similar issues, so [there is] no reason we should [get money and they shouldn’t],” he said.

Claire Compton can be reached at ccompton@praguepost.com


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