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Fiscal federalism has been an important topic among public finance theorists in the last four decades. There is a series of arguments that decentralization of governments enhances growth by improving allocation efficiency. However, the empirical studies have shown mixed results for industrialized and developing countries and some of them have demonstrated that there might be a threshold level of economic development below which decentralization is not effective. Developing and transition countries have developed a variety of forms of fiscal decentralization as a possible strategy to achieve effective and efficient governmental structures. A generalized principle of decentralization due to the country specific circumstances does not exist. Therefore, decentralization has taken place in different forms in various countries at different times, and even exactly the same extent of decentralization may have had different impacts under different conditions. The purpose of this study is to investigate the current state of the fiscal decentralization in Mongolia and to develop policy recommendations for the efficient and effective intergovernmental fiscal relations system for Mongolia. Within this perspective the analysis concentrates on the scope and structure of the public sector, the expenditure and revenue assignment as well as on the design of the intergovernmental transfer and sub-national borrowing. The study is based on data for twenty-one provinces and the capital city of Mongolia for the period from 2000 to 2009. As a former socialist country Mongolia has had a highly centralized governmental sector. The result of the analysis below revealed that the Mongolia has introduced a number of decentralization measures, which followed a top down approach and were slowly implemented without any integrated decentralization strategy in the last decade. As a result Mongolia became de-concentrated state with fiscal centralization. The revenue assignment is lacking a very important element, for instance significant revenue autonomy given to sub-national governments, which is vital for the efficient service delivery at the local level. According to the current assignments of the expenditure and revenue responsibilities most of the provinces are unable to provide a certain national standard of public goods supply. Hence, intergovernmental transfers from the central jurisdiction to the sub-national jurisdictions play an important role for the equalization of the vertical and horizontal imbalances in Mongolia. The critical problem associated with intergovernmental transfers is that there is not a stable, predictable and transparent system of transfer allocation. The amount of transfers to sub-national governments is determined largely by political decisions on ad hoc basis and disregards local differences in needs and fiscal capacity. Thus a fiscal equalization system based on the fiscal needs of the provinces should be implemented. The equalization transfers will at least partly offset the regional disparities in revenues and enable the sub-national governments to provide a national minimum standard of local public goods. ; Der Fiskalische Föderalismus ist in den letzten vier Dekaden eines der wichtigsten Themen der finanzwissenschaftlichen Theorie. Dabei wird häufig argumentiert, dass eine Dezentralisierung der öffentlichen Aufgaben nicht nur die Wachstumschancen eines Landes erhöhen kann, sondern darüber hinaus auch der Allokationseffizienz förderlich ist. Allerdings zeigen empirische Untersuchungen für die Industrie- und Entwicklungsländern keine einheitlichen Ergebnisse; es wird aber deutlich, dass es einen Schwellenwert in Bezug auf den Entwicklungsstand gibt, unterhalb dessen eine Dezentralisierung erst wirksam wird. So haben einige Entwicklungs- und Schwellenländer eine Vielzahl von Formen der steuerlichen Dezentralisierung als eine mögliche Strategie gewählt, um wirksame und effiziente dezentrale staatliche Strukturen zu entwickeln, wobei es einen allgemeinen Lösungsansatz hinsichtlich der Dezentralisierung allerdings nicht gibt. Vielmehr sind die besonderen kulturellen, wirtschaftlichen und geografischen Bedingungen des einzelnen Landes in angemessener Weise zu berücksichtigen. Die gefundenen Lösungen weisen daher eine relativ große Variationsbreite auf. Ziel dieser Studie ist es, den aktuellen Stand der steuerlichen Dezentralisierung in der Mongolei zu untersuchen und Empfehlungen für ein effizientes und effektives System der zwischenstaatlichen Finanzbeziehungen in der Mongolei zu entwickeln. Dabei konzentriert sich die Analyse auf Umfang und Struktur des öffentlichen Sektors, also die Aufgaben und Ausgaben sowie die öffentlichen Einnahmen. Außerdem wird auf die Zuordnung von Aufgaben und Einnahmen sowie auf die Gestaltung der zwischenstaatlichen Transfer und die subnationale Kreditaufnahme eingegangen. Die Studie basiert auf Daten der zwanzig Provinzen und der Hauptstadt der Mongolei für den Zeitraum 2000 bis 2009. Als ehemals sozialistisches Land verfügt die Mongolei über einen stark zentralisierten staatlichen Sektor. Aus der detaillierten Analyse folgt, dass die Mongolei eine Reihe von Maßnahmen zur Neustrukturierung der gebietskörperschaftlichen Ebenen ohne eine klare Dezentralisierungsstrategie durchgesetzt hat, die einen Top-Down-Ansatz verfolgten. Im Ergebnis wurde die Mongolei zu einem Staat mit einer starken Konzentration des Steueraufkommens auf der zentralstaatlichen Ebene. Dabei fehlt der Einnahmenzuordnung vor allem ein sehr wichtiges Element, nämlich eine Einnahmenautonomie auf der Ebene der untergeordneten Gebietskörperschaften, welche zum einen die Aufkommenssituation der lokalen und regionalen Gebietskörperschaften verbessert und ihnen damit erst eine eigenständige Aufgabenerfüllung ermöglicht. Bei der derzeitigen Aufgaben- und Steuerverteilung sind die meisten Provinzen nicht in der Lage, einen bestimmten nationalen Mindeststandard an öffentlichen Güter und Dienstleistungen bereitzustellen. Die Staatstätigkeit auf den untergeordneten Ebenen folgt überwiegend der Auftragsverwaltung und wird folglich im Wesentlichen über Finanzhilfen des Zentralstaats finanziert. Das entscheidende Problem der zwischenstaatlichen Transfers liegt darin begründet, dass es für die zentralstaatlichen Finanzhilfen an die untergeordneten Gebietskörperschaften kein stabiles, berechenbares und transparentes System der Steuerverteilung gibt. Die Höhe der Transferzahlungen an die sub-nationalen Regierungen ist weitgehend von politischen ad hoc Entscheidungen abhängig, welche in der Regel die lokalen und regionalen Finanzbedarfe missachten. Damit werden die Unterschiede zwischen Finanzbedarf und Finanzkraft auf der Ebene der untergeordneten Gebietskörperschaften nicht angemessen ausgeglichen. Es wird daher eine formelbasierte Steuerverteilung vorgeschlagen, welche die starken Schwankungen der Transferhöhe im Zeitverlauf vermeidet und die es den untergeordneten Gebietskörperschaften ermöglicht, einen vorgegebenen Mindeststandard an öffentlichen Gütern und Dienstleistungen ihren Bürgerinnen und Bürgern auch anbieten zu können.

Fiscal federalism has been an important topic among public finance theorists in the last four decades. There is a series of arguments that decentralization of governments enhances growth by improving allocation efficiency. However, the empirical studies have shown mixed results for industrialized and developing countries and some of them have demonstrated that there might be a threshold level of economic development below which decentralization is not effective. Developing and transition countries have developed a variety of forms of fiscal decentralization as a possible strategy to achieve effective and efficient governmental structures. A generalized principle of decentralization due to the country specific circumstances does not exist. Therefore, decentralization has taken place in different forms in various countries at different times, and even exactly the same extent of decentralization may have had different impacts under different conditions. The purpose of this study is to investigate the current state of the fiscal decentralization in Mongolia and to develop policy recommendations for the efficient and effective intergovernmental fiscal relations system for Mongolia. Within this perspective the analysis concentrates on the scope and structure of the public sector, the expenditure and revenue assignment as well as on the design of the intergovernmental transfer and sub-national borrowing. The study is based on data for twenty-one provinces and the capital city of Mongolia for the period from 2000 to 2009. As a former socialist country Mongolia has had a highly centralized governmental sector. The result of the analysis below revealed that the Mongolia has introduced a number of decentralization measures, which followed a top down approach and were slowly implemented without any integrated decentralization strategy in the last decade. As a result Mongolia became de-concentrated state with fiscal centralization. The revenue assignment is lacking a very important element, for instance significant revenue autonomy given to sub-national governments, which is vital for the efficient service delivery at the local level. According to the current assignments of the expenditure and revenue responsibilities most of the provinces are unable to provide a certain national standard of public goods supply. Hence, intergovernmental transfers from the central jurisdiction to the sub-national jurisdictions play an important role for the equalization of the vertical and horizontal imbalances in Mongolia. The critical problem associated with intergovernmental transfers is that there is not a stable, predictable and transparent system of transfer allocation. The amount of transfers to sub-national governments is determined largely by political decisions on ad hoc basis and disregards local differences in needs and fiscal capacity. Thus a fiscal equalization system based on the fiscal needs of the provinces should be implemented. The equalization transfers will at least partly offset the regional disparities in revenues and enable the sub-national governments to provide a national minimum standard of local public goods. ; Der Fiskalische Föderalismus ist in den letzten vier Dekaden eines der wichtigsten Themen der finanzwissenschaftlichen Theorie. Dabei wird häufig argumentiert, dass eine Dezentralisierung der öffentlichen Aufgaben nicht nur die Wachstumschancen eines Landes erhöhen kann, sondern darüber hinaus auch der Allokationseffizienz förderlich ist. Allerdings zeigen empirische Untersuchungen für die Industrie- und Entwicklungsländern keine einheitlichen Ergebnisse; es wird aber deutlich, dass es einen Schwellenwert in Bezug auf den Entwicklungsstand gibt, unterhalb dessen eine Dezentralisierung erst wirksam wird. So haben einige Entwicklungs- und Schwellenländer eine Vielzahl von Formen der steuerlichen Dezentralisierung als eine mögliche Strategie gewählt, um wirksame und effiziente dezentrale staatliche Strukturen zu entwickeln, wobei es einen allgemeinen Lösungsansatz hinsichtlich der Dezentralisierung allerdings nicht gibt. Vielmehr sind die besonderen kulturellen, wirtschaftlichen und geografischen Bedingungen des einzelnen Landes in angemessener Weise zu berücksichtigen. Die gefundenen Lösungen weisen daher eine relativ große Variationsbreite auf. Ziel dieser Studie ist es, den aktuellen Stand der steuerlichen Dezentralisierung in der Mongolei zu untersuchen und Empfehlungen für ein effizientes und effektives System der zwischenstaatlichen Finanzbeziehungen in der Mongolei zu entwickeln. Dabei konzentriert sich die Analyse auf Umfang und Struktur des öffentlichen Sektors, also die Aufgaben und Ausgaben sowie die öffentlichen Einnahmen. Außerdem wird auf die Zuordnung von Aufgaben und Einnahmen sowie auf die Gestaltung der zwischenstaatlichen Transfer und die subnationale Kreditaufnahme eingegangen. Die Studie basiert auf Daten der zwanzig Provinzen und der Hauptstadt der Mongolei für den Zeitraum 2000 bis 2009. Als ehemals sozialistisches Land verfügt die Mongolei über einen stark zentralisierten staatlichen Sektor. Aus der detaillierten Analyse folgt, dass die Mongolei eine Reihe von Maßnahmen zur Neustrukturierung der gebietskörperschaftlichen Ebenen ohne eine klare Dezentralisierungsstrategie durchgesetzt hat, die einen Top-Down-Ansatz verfolgten. Im Ergebnis wurde die Mongolei zu einem Staat mit einer starken Konzentration des Steueraufkommens auf der zentralstaatlichen Ebene. Dabei fehlt der Einnahmenzuordnung vor allem ein sehr wichtiges Element, nämlich eine Einnahmenautonomie auf der Ebene der untergeordneten Gebietskörperschaften, welche zum einen die Aufkommenssituation der lokalen und regionalen Gebietskörperschaften verbessert und ihnen damit erst eine eigenständige Aufgabenerfüllung ermöglicht. Bei der derzeitigen Aufgaben- und Steuerverteilung sind die meisten Provinzen nicht in der Lage, einen bestimmten nationalen Mindeststandard an öffentlichen Güter und Dienstleistungen bereitzustellen. Die Staatstätigkeit auf den untergeordneten Ebenen folgt überwiegend der Auftragsverwaltung und wird folglich im Wesentlichen über Finanzhilfen des Zentralstaats finanziert. Das entscheidende Problem der zwischenstaatlichen Transfers liegt darin begründet, dass es für die zentralstaatlichen Finanzhilfen an die untergeordneten Gebietskörperschaften kein stabiles, berechenbares und transparentes System der Steuerverteilung gibt. Die Höhe der Transferzahlungen an die sub-nationalen Regierungen ist weitgehend von politischen ad hoc Entscheidungen abhängig, welche in der Regel die lokalen und regionalen Finanzbedarfe missachten. Damit werden die Unterschiede zwischen Finanzbedarf und Finanzkraft auf der Ebene der untergeordneten Gebietskörperschaften nicht angemessen ausgeglichen. Es wird daher eine formelbasierte Steuerverteilung vorgeschlagen, welche die starken Schwankungen der Transferhöhe im Zeitverlauf vermeidet und die es den untergeordneten Gebietskörperschaften ermöglicht, einen vorgegebenen Mindeststandard an öffentlichen Gütern und Dienstleistungen ihren Bürgerinnen und Bürgern auch anbieten zu können.

This paper gives a review on the theoretical foundation for fiscal decentralisation and a status quo analysis of the intergovernmental relations in Mongolia. It consists of two parts. Part I briefly reviews the theories of fiscal decentralisation and its impact on the nations' welfare considering the major challenges for a transition economy. Part II of the paper describes the general structure and scope of the government and examines the current fiscal autonomy in Mongolia focusing on the four main areas of intergovernmental relations. This paper concludes that local governments in Mongolia are still far away from having the political, administrative and fiscal autonomy. New approaches for the assignments of expenditures and revenues in Mongolia are urgently needed.

In the last decade, Mongolia has undergone parallel processes of institutionalising River Basin Organisations (RBOs) and of fiscal decentralisation. River basin management calls for managing water resources at the river basin level in order to promote a sustainable resource use. However, often RBOs remain underfunded. Fiscal decentralisation involves shifting certain fiscal responsibilities to lower levels of government. Against this background, the paper asks whether fiscal decentralisation supports or counteracts river basin management in the Mongolian case. The paper finds that at the sub-national level, a high number of actors are involved in water governance. Despite a broad division of labour, a high level of overlap exists in terms of data management; monitoring water resources, water uses and law implementation; law enforcement; and to a certain degree the implementation of measures among these actors. In terms of financing water governance, River Basin Authorities (RBAs) are primarily financed through the national budget and Aimag (province-level) Environmental Authorities (AEAs) through sub-national province budgets. However, uncertainties exist regarding the allocation of water-use fees. In practice, available funds to RBAs only cover fixed costs. AEAs have somewhat higher budgets, but do not necessarily use these funds for water-related projects or earmark water-use fees. Inconsistent legal provisions on water-use fees have led to competition between AEAs and RBAs, but also to first collaborative arrangements. We conclude that in Mongolia, fiscal decentralisation and river basin management are, so far, hardly mutually supportive and recommend a number of legal and financial adjustments. Key words: River basin management, fiscal decentralisation, funding water governance, water use fees, Mongolia

The concept of "river basin management" calls for managing water resources at the river basin level in order to promote the sustainable use of water resources. Often the concept of river basin management is associated with the introduction of "river basin organisations" (RBOs) as special purpose organisations. However, in many developing countries, RBOs remain underfunded. Fiscal decentralisation involves shifting certain responsibilities for expenditures or revenues to lower levels of government. It usually involves a reallocation of functions and revenues so that functions are adequately funded. Fiscal decentralisation is supported by the principles of subsidiarity, disentanglement, cooperation, accountability and fiscal equivalence, with the latter asking for a congruence of those who pay for, who decide upon and who benefit from public goods. On the one hand, fiscal decentralisation can support RBOs if sufficient financial resources are allocated to them to fulfil their tasks. However, if RBOs are excluded from resources at the sub-national level, it can also be counterproductive and lead to increased competition with general-purpose jurisdictions at the sub-national level.This discussion paper, therefore, asks the question of whether fiscal decentralisation supports or counteracts the funding of river basin management in the case of Mongolia, which has undergone parallel processes of institutionalising RBOs and of fiscal decentralisation in the last decade. In order to answer the overriding question, the paper analyses i) how competencies for various water governance functions between RBOs and other bodies at the sub-national level are formally allocated; ii) the funding arrangements in place for water-related functions of RBOs and other sub-national bodies; and iii) how RBOs and other sub-national authorities coordinate or compete for water governance funding, and what this implies for sustainable water resource use. The paper compares the responsibilities of national and various sub-national entities and assesses the extent to which the principles of disentanglement, cooperation, subsidiarity and accountability are applied in Mongolian water governance. It also analyses the formal and de facto funding sources and budgeting systems of the sub-national entities responsible for water management, in order to assess to what extent the principle of fiscal equivalence is realised.The discussion paper finds that there is still considerable room for improving the realisation of the principles of disentanglement, cooperation, subsidiarity and accountability in the allocation of competencies in Mongolian water governance. At the sub-national level, a high number of actors are involved in water governance, and the allocation of various water governance functions between river basin authorities (RBAs), river basin councils (RBCs), Aimag environmental agencies (AEAs), and governors and assemblies at the levels of provinces (Aimags), districts (Soums) and communities (Bahgs) remains complex and convoluted. Despite a broad division of labour, a high level of overlap exists in terms of data management; monitoring water resources, water uses and law implementation; law enforcement; and to a certain degree the implementation of measures among these actors.The principle of fiscal equivalence is also not fully realised in Mongolian water resources management. In terms of financing water governance, RBAs are primarily financed through the national budget and AEAs through sub-national province budgets. However, uncertainties exist regarding the allocation of water-use fees due to inconsistent legal provisions. In practice, available funds to RBAs only cover fixed costs. Thus, RBAs are largely assigned unfunded mandates for planning, monitoring and implementing water protection. This considerably limits the effectiveness of the river basin management approach. Overall, AEAs have somewhat higher budgets for environmental protection than RBAs. However, the case study shows, for example, that AEAs sometimes do not allocate any funds for water-related projects at all and do not necessarily earmark 35 per cent of water-use fees for environmental protection.Furthermore, problems of underfinancing exacerbate problems of overlapping responsibilities. The inconsistent legal provisions on water-use fees have led to competition between AEAs and RBAs, which undermines trust between the different agencies and makes it more difficult to perform the tasks that they share as well as to coordinate on those tasks where their responsibilities overlap. Still, in the case analysed, recent first attempts have been undertaken to clarify responsibilities in Memorandums of Understanding. While the effectiveness of these Memorandums of Understanding should be subject to future research, they alone will hardly solve the problem of underfinancing. Therefore, the paper concludes that in Mongolia, fiscal decentralisation and the institutionalisation of river basin management are, so far, hardly mutually supportive, but rather competitive processes. It recommends a number of legal adjustments as well as the financial empowerment of RBAs and RBCs in order to support the sustainable use of water resources.

The concept of river basin management calls for managing water resources at the river basin level in order to promote the sustainable use of water resources. Often this goes along with the introduction of river basin organisations (RBOs) as special purpose organisations. However, particularly in developing countries, RBOs often suffer from insufficient funds. Fiscal decentralisation involves shifting certain fiscal responsibilities to lower levels of government. Decentralisation could thus provide a source of funding for RBOs, depending on how tasks and funds are allocated among RBOs and general-purpose jurisdictions. This briefing paper examines administrative and fiscal aspects of river basin management and analyses whether fiscal decentralisation supports or counteracts the funding of river basin management. We present the example of Mongolia, where in recent years the processes of RBO institutionalisation and fiscal decentralisation have occurred in parallel. More specifically, we analyse i) how competencies for various water governance functions between RBOs and other bodies at the sub-national level are formally allocated, ii) which de jure and de facto funding arrangements are in place, and iii) what this implies for the coordination and sustainability of water resource use.We find that despite a broad division of labour among administrative units, a high level of overlap exists, for instance in the areas of data management, water law enforcement and implementation of water protection measures.In terms of financing water governance, River Basin Authorities (RBAs) are primarily financed through the national budget and aimag (province-level) environmental authorities (AEAs) through sub-national province budgets. However, uncertainties exist regarding the allocation of water-use fees. In practice, funds available to RBAs only cover fixed costs. AEAs have somewhat higher budgets, but do not necessarily use these funds for water-related projects nor do they earmark water-use fees. Inconsistent legal provisions on water-use fees have led to competition between AEAs and RBAs, but also to initial collaborative arrangements. We conclude that in Mongolia, fiscal decentralisation and river basin management are, so far, hardly mutually supportive and we recommend a number of legal and financial adjustments. In particular, we recommend thatresponsibilities be distributed more clearly to reduce overlap and uncertainty;legal inconsistencies regarding water-use fees be clarified;funding be arranged according to tasks; andfunding for RBAs be increased and minimum state-funding be provided to river basin councils (RBCs), so they can fulfil their mandates.

The concept of river basin management calls for managing water resources at the river basin level in order to promote the sustainable use of water resources. Often this goes along with the introduction of river basin organisations (RBOs) as special purpose organisations. However, particularly in developing countries, RBOs often suffer from insufficient funds. Fiscal decentralisation involves shifting certain fiscal responsibilities to lower levels of government. Decentralisation could thus provide a source of funding for RBOs, depending on how tasks and funds are allocated among RBOs and general-purpose jurisdictions. This briefing paper examines administrative and fiscal aspects of river basin management and analyses whether fiscal decentralisation supports or counteracts the funding of river basin management. We present the example of Mongolia, where in recent years the processes of RBO institutionalisation and fiscal decentralisation have occurred in parallel. More specifically, we analyse i) how competencies for various water governance functions between RBOs and other bodies at the sub-national level are formally allocated, ii) which de jure and de facto funding arrangements are in place, and iii) what this implies for the coordination and sustainability of water resource use. We find that despite a broad division of labour among administrative units, a high level of overlap exists, for instance in the areas of data management, water law enforcement and implementation of water protection measures. In terms of financing water governance, River Basin Authorities (RBAs) are primarily financed through the national budget and aimag (province-level) environmental authorities (AEAs) through sub-national province budgets. However, uncertainties exist regarding the allocation of water-use fees. In practice, funds available to RBAs only cover fixed costs. AEAs have somewhat higher budgets, but do not necessarily use these funds for water-related projects nor do they earmark water-use fees. Inconsistent legal provisions on water-use fees have led to competition between AEAs and RBAs, but also to initial collaborative arrangements. We conclude that in Mongolia, fiscal decentralisation and river basin management are, so far, hardly mutually supportive and we recommend a number of legal and financial adjustments. In particular, we recommend that responsibilities be distributed more clearly to reduce overlap and uncertainty; legal inconsistencies regarding water-use fees be clarified; funding be arranged according to tasks; and funding for RBAs be increased and minimum state-funding be provided to river basin councils (RBCs), so they can fulfil their mandates.