Right Of Iraqi Local Units In The Resort To Public Borrowing

The Constitutional basis of the right of the Governorates in the public borrowing

The Iraqi constitutional legislator in the 2005 constitution of the Republic of Iraq adopted a mechanism for the distribution of powers between the central government, governorates and regions. This mechanism relied on the determined the jurisdictions of the federal authority exclusively. While the other powers remained for the federal provinces and governorates not organized in the province. Hence, the Iraqi constitution expanded the powers of the regions and provinces as opposed to the central authority. The Constitution also mentioned a new type of powers under the name of joint powers, which are exercised in coordination and cooperation between the federal authority and the governments of regions and provinces (Articles110, 115, Iraqi Constitution of 2005). On the other hand, it made the laws of governments of the regions and provinces prevail over the laws of the federal authority when there is conflict on these powers (Article114, Iraqi Constitution of 2005).

From the above analysis, it is clear that the Iraqi constitution expanded the powers of regions and governorates in exchange for limited powers of the central authority. It is also noted that the Iraqi constitutional legislator mentioned, on several occasions, the equality of powers between the federal regions on one hand and the provinces on the other. Therefore, it can be said that the provinces in the Iraqi legal system look more than a decentralized administrative body. In other words, it is much closer to the powers of the province in the federal state.

Thus, the question that underlies the study of whether the constitution allows the provinces to resort to public borrowing can be reached by the examination the constitutional texts. The consideration of the provisions of the Iraqi constitution, especially the text of Article (110) that definition of exclusive powers of the central authority shows that borrowing policies should be developed by the central authority through its various financial institutions, specifically the Ministry of Finance and the Central Bank of Iraq. But what is understood from this text is that the authority of the federal authority is limited to setting a policy of resorting to borrow by state institutions as one of the ways of financing expenditures in the general budget. This does not grant the federal authority the power to deprive the Governorates of resorting to public borrowing to finance domestic revenues. However, this regulation should be through the enactment of a law that sets the rules for public borrowing by the provinces (Constitution of the Republic of Iraq, 2005).

The analysis and discussion of the above-mentioned case can be supported by two points:

• Article (122 / II) of the Iraqi Constitution of 2005 provided that the “Governorates that are not incorporated in a federal region shall be granted broad administrative and financial authorities to enable them to manage their affairs in accordance with the principle of decentralized administration”. This text itself allows the Governorates to claim their right to public borrowing because they have the financial power that the constitution has described as having to be broad.

• One of the most important principles that the central authority should respect to achieve the democracy of the administration is the principle of free administration of the local administrative units. This principle would grant Governorates the freedom to manage their administrative and financial affairs in such a way as to facilitate the achievement of their objectives. This means that the legislator's authority can be restricted to regulate the functions of the administrative units, especially their financial freedom, in a manner that enables them to manage their affairs according to the principle of administrative decentralization. In other words, per this principle, the governorates have a constitutional right to access sufficient financial resources and sufficient freedom to choose their own means of spending (Osman Mohammed, 2015).

From analysing the above data, it can be said that the Iraqi constitutional legislator limited the authority to set borrowing policies by the central government, while it not preventing the governorates from this right. However, this requires that the law regulating the borrowing process should give the governorates the right to public borrowing. This is justified by the need of respect the principle of free administration, especially in the financial field. In addition, this view is supported by Iraqi legislator who adopted the right of the governorates to loans in the Financial Management and Public Debt Law No. 94 of 2004, as will be explained.

The Legal basis of the right of the Governorates in the public borrowing

Under the Iraqi repealed Law of Governorates No. 159 of 1969, there was a provision that the Council of Administrative Unit (Governorate, districts and sub-district) to decide to take a loan for disbursement on the required to carry out its functions that entrusted to them (Article 110, Iraqi Governorates Law, 1969). By contrast, the Law of Governorates that are not incorporated in a Region No. 21 of 2008 (amended) mentioned the financial resources that comprise the governorate's resources, but it was not including the public loan. Therefore, this text shows at first glance that the governorates do not have the mandate to hold public loans (Article 7, Iraqi Governorates Law, 2008).

However, it can be noted that governorates' revenue which stated by the current Law of Governorates that are not incorporated in a region, were not exclusive. Where there are other laws that pointed to the possibility of diversifying the revenues of the governorate, including the public loans. For example, both the Financial Management and Public Debt Law No. (71) of 2004 and the Public Budget Law of 2013, grant the governorates to conclude the public loan contract with the approval of the Minister of Finance and in accordance with certain conditions.

By shedding light on the position of legislation of some countries, it is possible to note that in France, for example, the public loans are an important source of funding for capital projects carried out by decentralized bodies, in the event of insufficient local resources to meet their activities. For regulation, this task, the French legislator established a committee of loans, which includes representatives of the Council of the province, governorates councils and municipalities in the territory. This committee has the task of determining the terms of granting loans and providing advice in the field of granting loans from local authorities within the region. As is the case for borrowing from external sources, which must be approved by the Minister of Finance (Article 36, French Law, 1982). The French legislator has allowed two types of loans to local bodies, they are: (1) Temporary loans to finance urgent revenues until local revenues are available. (2) Loans to cover the expenses of some capital projects that approval for borrowing has been obtained (Al-Zoghbi, 1988; Brier,1996).

In the United Kingdom (UK), the legislature, under the 1972 law, gave local councils the power to conclude loans with domestic and non-foreign parties. These loans require the approval of the central government through the relevant ministry that needs to finance a specific project requires the loan, as well as the approval of the Minister of Local Government (Al- Tahrawy, 1998).

However, the local councils in the UK can borrow without obtaining the central government's approval of the loan contract in two cases. They are (1) temporary loans that necessary to meet urgent expenses until incomes are obtained, and (2) borrowing for the expenses of a project whose loan contract has been approved (Al-Zoghbi, 1988).

In Egypt, the Egyptian legislator, in the Local Administration Law No. 43 of 1979, gave the local authorities (centre, city, village) the right to borrow, while it did not stipulate on the governorate right to borrow explicitly. However, the law had implicitly referred to this right by allowing the governorate to set up a special account to finance housing projects to be funded from various resources, including loans (Article36).

Finally, it can be noted that the Jordanian legislator in the Municipalities Law No. 41 of 2015 granted local councils the right to resort to public loans for covering the expenses of their projects, especially investment, under the approval of the Minister of Municipal Affairs (Article17).

Forms of borrowing

The forms of loans vary depending on the images which the loans come, and which are divided into the following:

• In terms of the entity granting the loans: The loans are divided into internal and external loans. In internal loans, the borrowing is made from the national or local authorities within the local unit, regardless of whether they are government agencies or private sector. For the ease of this type of borrowing most of the legislations tends to internal loans in financing the expenses of administrative units. While external loans are borrowed from external parties, whether they are countries or other financial institutions such as the World Bank.

• In terms of the purpose of borrowing; the loans may be for investment or operational. Investment loans mean the allocation of loan amounts to projects that benefit the future that belongs to the administrative unit through spending on investment projects such as roads, bridges, dams, factories, schools, hospitals and so on. Hence, most countries tend to borrow for investment loans rather than loans for current expenses (i.e., operating loans) because it's considered deferred payments that are burdensome for future generations (Badran, 1991). Therefore, it should be limited to investment projects without the operating projects, which may be a burden on future budgets and do not benefit to local units only in emergency circumstances (Awadah, 1983).

• In terms of duration of loan repayment; Loans can be divided into short-term, medium-term and long-term loans. And each of these types has its reasons and justifications which make the administrative units to resort to it without other forms (Brier,1996).

The impacts of borrowing by administrative units

The issue of the use of public loans by local units raises a range of effects that involve fears and negative consequences. Among these effects are:

• It leads to competition between local councils and the central government in seeking to obtain loans. This may increase the demand for capital in a way that raises interest rates.

• The loans or borrowing generally, if not used correctly may lead to the absorption of the purchasing power of individuals, thereby harming the state's economy (Al-Sheikhli, 2015).

• Local councils' borrowing leads to an increase in debt servicing in the budgets of the coming years. This may make local governments resort to increasing tax amounts on individuals, which increases the financial burden on them. Especially in the case of failure to repay the loan benefits of it, which undermines confidence in the state in general (Al-Sheikli, 2016).

• The local authorities when seeking to fill its budget deficit through public borrowing, it would be caused the increase of its expenditures. This may contribute to double inflation and damage the economic policy of the central government.

• The local authorities may use the amounts of loans to finance certain projects that contrary to the economic development pursued by the central government in the field of investment (Al-Banna, 1973).

According to the above analysis, the present study suggests that clear legal mechanisms should be put in place to reduce the negative effects of public loans by local councils. Achieve these requirements can come from the application of certain conditions for borrowing with the regulation of a clear mechanism for the control of public loans held, as will be clarified in the subsequent points.

Conditions for Resorting to Public Borrowing by Local Units

Due to the importance of the public loan to local units on the one hand, and the concerns that may be involved on the other, the legislation of some countries, including Iraq, sets special conditions to be observed by local governments. These conditions can be discussed and clarified in the following points:

The need to use the public loan for investment projects

As explained earlier, the state expenses are divided into two types; the first operational expenses, which include the funds needed by the state for the maintenance of public facilities, like paying employees’ salaries, buying the necessary supplies for the work of the state departments and institutions and so on. While there are investment expenditures related to projects which aim to provide services and meet the needs of individuals, as well as can achieve future development goals. Accordingly, most legislations require that the public borrowing by local units should exclusively to finance investment projects (Brier,1996). The reason for this is that the public loan burdens extend to future generations, which is unfair to be carried it without the benefit of them. Hence, ensuring that these disadvantages and risks are avoided is by requiring that the public loans must allocated to investment projects (e.g., Projects of the hospital, roads, transportation, production factories, etc.), which would continue to benefit and extend for several generations (Awadah, 1983; Al-Banna, 1973).

The amount of the loan should not exceed a certain percentage of the revenues of the local unit

To ensure that local governments are not overwhelmed by debts and their financial benefits to the extent of their inability to meet these debts, many legislations restricts local units that the loan amount does not exceed a certain percentage of their annual income (Al-Sheikli, 2016). For example, the Egyptian legislator stipulates that the indebtedness of local units should not exceed 40% of their revenues. Otherwise, the Prime Minister's approval is required (Article 15). The German legislator also stipulated that the amount of loans should not exceed in any case the amount of expenses required and specified in the budget of the local unit (Al-Shakrawi & Al-Budairi, 2013).

In Iraq, the Iraqi legislator followed the same approach but it did not require a certain percentage of the local unit revenue. On another hand, the law stipulated that the amount of the loan should not exceed the allocations of local units authorized by the Council of Ministers (Article 10/2, Financial Management and Public Debt Act, 2004).

In this regard, it is believed that the position of the Iraqi legislator was successful because the fiscal policy is one of the exclusive powers of the central government. As well as, the borrowing by the local unit should not affect the economic policy of the state. This requires that the public loan must not exceed the rate set by the central authority. However, this must not preclude the requirement that local borrowing should not exceed a certain percentage, such as 30% of the annual revenue of the local unit. The reason for this, the local government is considered ultimately responsible for paying the loan amounts and its benefits. And these loans are one of the exceptional funding sources which must not be expanded of its use. This would ensure that the local unit is not burdened with many of loans that may cause a deficit in its budget for many years.

Local units must be committed to borrowing from specific financial institutions. The local unit’s recourse to public borrowing from financial institutions would affect the interest rate that may rise to the highest levels as a result of the increasing demand for loans. Hence, to avoid these disadvantages, some legislation stipulated that local units should be borrowed from specific financial institutions. In France, for example, local units may borrow only from the National Fund for Estate and Urban Funds, the National Fund for Unions and the Deposit and Insurance Fund. The same situation in the UK, since the legislator obliges local units to borrow only from the loans of Public Works Board and not more than 50% of its needs (Al- Tahrawy, 1998). Otherwise, it is permitted to resort to the capital market to obtaining the necessary funds for its projects. In Egypt, the law did not require from local units to borrow by certain institutions, however, there is a ban on borrowing from foreign parties without the approval of the Prime Minister (Article15, Egyptian Local Government Act, 1979).

In Iraq, the law did not specify which entities could be borrowed to local governments. This could explain that local units can borrow from both government and non-governmental financial institutions a like. However, it can be noted that the failure of the Iraqi legislator to identify the financial institutions that the governorates can borrow from is considering as a legislative defect that needs to be addressed.