October 2015
Liberate the Municipal Fund from the Grip of Politicians

One of the key demands of the YouStink campaign is that the government return money from the Independent Municipal Fund (IMF) to municipalities so they can assume their responsibility of managing waste. The demand is largely in response to the government’s refusal, since 2002, to transfer money from the Ministry of Telecommunication to municipalities, in addition to using the IMF to pay for exorbitant contracts currently charged by Sukleen and other waste collection companies.
 
As bad as that may sound, the reality of managing the IMF is much worse. Since the early 1990s, successive Lebanese governments have mismanaged the municipal fund. They have reduced the amount that goes into the fund as well as made excessive and illegal payments using IMF money, effectively reducing the amount that should have gone to municipalities. To put things in perspective, the size of the IMF as a share of GDP totals some 0.4% in Lebanon compared to 3% on average in other countries. Additionally, the government altered the distributional formula used to allocate money to municipalities and delayed the disbursement of the fund; in the process obstructing investment planning by municipalities.
 
The IMF officially brings in its revenues via eleven primary taxes and fees collected by the central government on behalf of all municipalities. Since the early 1990s, the government has effectively reduced the amount of money that goes into the fund by changing the tax base—for instance that of the built property tax, income tax, customs tax, and insurances fees—and lowering the tax rate on income and customs fees. These decisions were made without a prior assessment of their impact on municipal finances and without finding alternative sources of revenue. Furthermore, the government has granted the Higher Customs Authority the power to reduce tariffs—an important source of revenue for the fund—without any prior consultation with municipalities. In addition, the government has withheld the transfer of the VAT on mobile phones to municipalities (article 55 of Law 379), hence depriving them of at least $1 billion in revenues over a ten-year period. When comparing the amount that should have been collected versus that which was collected, it is estimated that the fund is $205 million short.
 
The problem does not end here. The government has spent money from the IMF on items which are not authorized by Decree-Law 118/1977 or Distribution Decree 1917 of 1979. For instance, such items include expenses for civil defense, villages without municipalities, public school fees, and CDR-funded projects. In total, the government has spent about $300 million since the early 1990s on such expenses without consulting or informing municipalities, the beneficiaries of the fund, about these withdrawals.
 
Even though Decree 1917 gave the government the prerogative to use some of the fund’s money to benefit all municipalities, it has managed to abuse that as well. The government has violated this decree by spending the money on some, rather than all municipalities. To legalize such action, the government issued Decree 3038 in 2000, which authorizes the Council of Ministers to spend IMF money on works that can benefit some but not all municipalities. Even though this was considered illegal by the Court of Accounts, it paved the way for Budget Law 326, which allowed the government to charge some 255 municipalities benefiting from the solid waste collection services 40% of their IMF share. The total estimated amount paid to Sukleen and other waste collection companies totals some $160 million. In brief, the government’s abuse of the fund has deprived municipalities of $1.2 billion in revenues. Using conservative estimates, at least $460 million in spending by the central government was illegal.
 
In addition to depriving municipalities of their share of the fund, the government has altered the distributional criteria at least four times in the last fifteen years and offered no good rationale for doing so. For instance, the government changed the percentages allocated to municipalities versus municipal unions. It has also altered the weights of the criteria privileging the registered population over locally collected taxes. In some other instances, it decided to allow a fixed amount to all small municipalities, defined as having nine or twelve municipal council members, mistakenly associating small municipalities with being poor. Once all that was decided and issued by a distributional criteria, the government failed to disburse the money nine months into the year as stipulated by law. In fact, apart from 2009 and 2010, the government delayed the disbursement and also chose to transfer the money in installments. All of this has had a negative impact on municipal finances and investment planning.
 
The call for “liberating IMF money” must address these violations by the central government. To this end, we need to call for an honest audit of IMF accounts over the last two decades to determine whether the money that was supposed to be collected found its way into the fund. We also need to determine the amount of all the spending that was incurred from the fund. In order not to fall into the government’s gimmicks, one needs to investigate the pair of IMF accounts to get a full picture of its finances. The failure of the government in managing the fund must prompt CSOs to call for the independence of the fund by creating a new institutional mechanism where it is managed by its beneficiaries, the municipalities, through a proper mechanism. In fact, it is within that spirit that the decentralization draft law, which was released to the public in April 2014, and prepared by a committee that was led by Former Minister of Interior and Municipalities, Mr. Ziyad Baroud, suggested a revamp of the IMF.
 
To put it succinctly, there is more to the IMF than telecommunication revenues and payments to Sukleen. The problem is much bigger.