Financial incentives for IMC

From Municipal Cooperation

Promoting IMC
The need for IMC in Central and Eastern Europe
Obstacles to IMC in Central and Eastern Europe
The need for a national policy to promote IMC
IMC legislation
Financial incentives for IMC
Capacity building and expert assistance
Information and knowledge management

Financial incentives from central government or from the regions are often decisive in prompting the establishment of IMC. Financial incentives for the establishment of IMC vary considerably between the different Western European countries.

In France, a 1992 law allowed certain IMC entities to have the exclusivity of local business tax, the communes in this perimeter keeping the property tax. In 1999 this became compulsory for all metropolitan IMC entities (Communautés urbaines and communautés d’agglomération, see box 4 p. 16). Business tax is the most productive local tax. An exclusive business tax for the IMC entity has major advantages: it is a way for unifying the tax rate in the wider area of IMC instead of having different rates in each commune, for creating fiscal solidarity wherever enterprises are located, for an harmonious development policy without competition between communes to attract all enterprises on their territory for fiscal reasons. In 1999, the French legislator took a more radical step by introducing a permanent subsidy from the state budget for the operation of IMC entities, the ("dotation de fonctionnement intercommunale ")(subsidy for inter-municipal operations). The law envisages a mechanism whereby the more services and projects an IMC entity manages, the higher the subsidy. This made IMC operations very attractive and was successful in stimulating IMC development, but it was very costly for the state.

Hungary is an example of a post-socialist country that has established a system of financial incentives to promote IMC. Here, the central government provides small subsidies to support the operations of joint IMC administrative offices; the size of the subsidies varies according to the number of municipalities involved. In 2004, Hungary passed legislation on multi-purpose public law municipal associations for IMC. The legislation envisaged the provision of small subsidies both for the establishment of the associations and their operations.

In the most of Italian regions a coherent system of subsidies for IMC whose principles broadly reflect the practices of most Western European countries have developed. Table 4 summarizes the objects of the subsidies and their distribution criteria. Subsidies are provided at the feasibility, establishment and operations phases of the IMC life cycle. The size of subsidies varies depending on the service area, the form of IMC and/or the number of municipalities involved. It must be noted that in Italy, the subsidies for the operations of IMC are always temporary in order to avoid the creation of structures that cannot sustain themselves.

Table 4: The system of incentives to promote IMC used by some of the Italian regions

Financial incentive
Distribution criteria
Feasibility study stage
Subsidy for the preparation of IMC feasibility studies
  • The percentage of the cost of preparation of the feasibility studies covered by the subsidy is proportional to the number of municipalities involved
  • The subsidy is conditional on a minimum size of the IMC
Establishment stage
Start up grant
  • The size of the grant depends on:
    • The areas of IMC and the legal form of IMC
    • The financial capacity of the municipalities
    • Population affected by IMC
    • The number of municipalities involved
  • The grant is conditional on joint management being operational for minimum number of years
  • Priority is given to municipalities below a certain size
Operations stage
Subsidy for the management of IMC
  • The size of the subsidy depends on:
    • Whether the IMC services are on the promoter’s priority list (priority given to certain services)
    • The IMC legal form (priority given to certain legal forms)
    • Population density
    • The number of municipalities involved
    • Presence of insolvent partner municipalities
  • The subsidy is for a limited number of years (five- to ten-years) with decreasing contribution overtime
  • Priority is given to municipalities below a certain size
Source: Adapted from Elena Zuffada and Eugenio Caperchione (2003)

The other major mechanism used in Western Europe to promote IMC is the provision of subsidies for investment projects of IMC entities in service areas considered of priority importance by the central government. In Hungary, for instance, investments by IMC entities in water supply and the establishment of water treatment plants are priority areas. Common capital investment schemes could receive an extra 10 per cent of matching grants compared similar investments by a single municipality (state subsidies can reach up to 50 percent of the total investment depending on population size and water consumption thresholds).

Grant schemes with incentives for cooperation are also common. The requirement for cooperation among municipalities may be explicit in the eligibility criteria of the grant scheme (e.g. joint application is a formal condition for availability of the grant) or it may be implicit (e.g. the minimal size of the targeted population is high and requires cooperation among several municipalities). The EU pre-accession funds and the EU structural funds operate precisely in this way. EU grants supporting municipal landfill construction for instance are only allocated to regional projects of optimal size. EU directives also support IMC. In the water sector for instance, single system management by river basin is promoted. Natural catchment areas by natural geographical and hydrological units instead of administrative units should be the basis for water provision and waste water treatment.

There is a general consensus that subsidies and grants for inter-municipal projects have been a major factor contributing to the development of IMC. Some argue that in some countries, subsidies and grants have “distorted” the voluntary character of IMC.