How Do We Finance Shared Functions Without Automatic Centralization?

Start with the function and the type of good

Start with the function: what are we actually financing? Financing is not technically or morally identical across all goods. A personal internet subscription can be billed directly to its user. Street lighting, flood protection or fire readiness create benefits that are harder to assign to one payer. Before choosing a revenue source, describe the function, users, spillovers, fixed costs and consequences of non-payment.

Private, club and public goods are not the same Where users can be excluded and each use creates a meaningful additional cost, user charging is often workable. A pure public good is non-excludable and non-rival, so the free-rider problem appears: a person may receive the benefit without contributing voluntarily. The IMF therefore notes that public goods tend to be undersupplied under purely voluntary incentives.

Voluntary contributions, dues, and user charges

Voluntary contributions are excellent — where the function can truly rely on them Donations and voluntary contributions have a major moral advantage: the contributor chooses. They can work well for projects with strong trust, identity and visible results. Their instability becomes a problem for functions that must remain ready even when enthusiasm is low — a backup pump, bridge maintenance or emergency readiness.

Membership dues work when membership is genuinely clear An association, cooperative, mutual network or neighbourhood club can cover costs through dues. The advantage is a direct link between membership, rules and control. The weakness appears when benefits systematically spill over to non-members, or when exit is nominally voluntary but losing membership means losing access to an essential life function.

User charges are powerful where use can be measured Water, parking, some waste services, transport or facility use can often be charged according to use. OECD and World Bank work shows that user fees can strengthen cost discipline and help finance infrastructure. But charging can also block access to essentials, so design must test minimum access, social tariffs, fixed costs and metering costs.

Mutual pools, cooperative capital, and debt

Insurance and mutual pools finance risk, not every infrastructure asset R67 showed that pooling is suited to uncertain future losses. That is different from financing a road, library or sewer network. Insurance contributions make sense when we pay for shared risk coverage; durable infrastructure needs a stable flow for investment, maintenance and renewal.

Cooperative capital is useful when users are also owners Where people need shared energy, housing, communications or productive infrastructure, part of the capital can come from member equity. This links financing to governance. Yet high upfront costs, unequal member wealth and reserve needs mean cooperative capital often still requires debt or wider partnerships.

Debt spreads cost across time — and creates a future obligation For infrastructure that serves several generations, it can be reasonable not to load the entire cost onto today’s users. Debt can spread the investment through time. But future revenues are then partly pre-committed. It must be clear who authorises borrowing, who repays it, what secures it and what happens if revenues or costs are misestimated.

Local taxes, autonomy, and transfers

A local tax links shared cost to a territory — but coercion remains a moral question Taxes have a practical advantage where non-payers cannot reliably be excluded or where individual billing would defeat the purpose of the service. Yet payment is mandatory. Prebujenje provides an important sharp warning here: legality by itself does not prove moral legitimacy. THY-REALITY therefore neither declares all taxation theft nor treats it as self-justifying; it demands a specific justification of scope, purpose, procedure, accountability and limits on coercion.

Tax autonomy is not the same as a label saying “local revenue” OECD work warns that revenue statistically attributed to a local level is not necessarily revenue that local communities truly control. If a higher level fixes the base, rate or sharing rule, fiscal autonomy may be weaker than the accounting label suggests. The important question is who can actually change the rule.

Own-source revenue strengthens accountability; transfers can correct inequality When a community finances a larger share of its own decisions from its own revenues, the link among decision, cost and local control is generally clearer. But territories differ in tax bases and expenditure needs. OECD and IMF work therefore uses fiscal equalisation to reduce disparities in the ability to provide comparable services.

A transfer is not automatically centralisation — but it can create dependency An inter-community or higher-level transfer can finance spillovers, reduce large fiscal-capacity gaps or support a project that crosses one territory. The danger arises when funding is unpredictable, politically conditional or so dominant that the local level formally decides while practically waiting for permission from the funder.

A formula is often safer than discretion Where a wider pool distributes money among communities, it matters whether rules are known in advance. OECD work finds value in predictable, rule-based transfer systems that reduce arbitrary dependence. Discretionary funding can instead give the funder power to reward loyalty and punish dissent.

The smallest competent scale and cooperation between communities

Finance the function at the smallest scale that can still do the job Recent OECD evidence on economies of scale finds no single optimal size for all services. Small units can face high fixed costs; very large units can lose responsiveness and create coordination costs. R73 therefore applies the same principle used in R62: the smallest competent scale, with finance following the level at which benefits, costs and accountability are actually concentrated.

Inter-community cooperation is a third option The choice is not only “every village does everything” versus “one central system for all”. Communities can jointly finance a treatment plant, specialist service, reserve capacity or transport link while keeping other revenues and decisions local. OECD explicitly identifies intermunicipal cooperation as a way to capture scale benefits without full merger.

Mixed models are often more realistic than ideological purity A water system may combine connection charges, metered use, member or local capital, long-term debt and a wider infrastructure grant. A library may combine general funding, membership for special services and donations. If each flow is visible, a mixed model is not moral inconsistency; it may simply recognise that different costs correspond to different kinds of benefit.

Financing fairness, investment, spillovers, and reserves

The user-pays principle and ability-to-pay principle are different A user charge roughly follows: the user pays. Some shared functions deliberately follow another principle: contributions vary with ability to pay, because a community wants to preserve basic access for people with low incomes. These principles are not the same and should not be swapped silently. If access is subsidised, it should be clear who finances the subsidy, who qualifies and why.

Investment and maintenance need different money A large project has at least three financial phases: upfront investment, ongoing operation and renewal. A donation may build a playground but not keep it safe ten years later. Debt may finance a treatment plant, user charges its operations and a reserve fund replacement pumps. When all costs are forced into one revenue source, the result is often an impressive opening followed by neglected maintenance.

Spillovers reveal when local finance is too narrow If the benefits or harms of a function systematically cross a community boundary, purely local finance has a problem. Upstream water management affects downstream users; regional transport links several municipalities; a hospital or reserve fire capacity serves a wider area. In such cases a wider pool is not necessarily an ideological project of centralisation; it can simply make the financing area better match the real area of benefit and cost.

A reserve is not free money A shared system that spends every collected euro is fragile. Water, energy, transport, buildings and emergency readiness need reserves. Yet a large reserve can also become tempting to redirect. Rules should therefore set the target reserve, permitted reasons for drawing it, emergency procedure and method for rebuilding it.

The budget as an information system and a power check

A budget is an information system, not only a wallet Sound fiscal decentralisation requires people to see the link between a decision and its cost. For each major shared function it should be possible to answer: annual cost, cost per user, shares for investment, maintenance, debt and reserves, which revenues are earmarked, and who can move money between lines. If the financial flow cannot be understood, responsibility is difficult to locate.

Power check: who can close the money valve? Finance is also power over the capacity to act. Do not ask only who collects the contribution. Ask who can stop payment, alter the formula, raise the rate, redirect reserves, approve debt or declare an emergency. Whoever controls the money valve can become the effective superior even without holding a formal title.

A practical matrix and minimum fiscal compact

Start today: shared-function financing matrix v0.1 Choose one concrete local function and write down: annual fixed cost, per-use cost, beneficiaries, who can be excluded, spillovers to neighbours, who cannot afford the service, reserve needs and the largest sensible territory. Then evaluate each cost separately against voluntary contributions, dues, user charges, mutual pools, equity, debt, mandatory local contributions and wider transfers.

Minimum fiscal compact for a community Before a group regularly collects shared money, publish in advance: the fund’s purpose, who pays, exemptions, upper limits, who decides, who keeps the books, reporting rules, independent review, how the rule can change, how surpluses or reserves are treated and how objections are heard. The more mandatory the contribution, the stronger transparency, limits and independent review must become.

The question is not “tax or nothing”

A serious alternative to centralisation does not arise by declaring every shared function voluntarily financeable, nor by answering every problem with a larger budget. It emerges when we decompose the function, choose the best-fit instrument for each cost, keep own-source revenue where possible, pool resources where scale requires it, and clearly label every use of coercion.