Cash management reform in the Czech Republic.

• Author: Kiley, Jack

The Republic of Czechoslovakia emerged in 1918 with a democratic constitution and able leadership that allowed the republic to thrive, economically and culturally. Czechoslovakia became one of the most industrially advanced countries in Europe, with one of the highest incomes, per capita, in the world.

This prosperity ended abruptly in 1938: Nazi troops occupied Czech lands, and Czechoslovakia ceased to exist. The country was restored at the end of World War II, but fell prey to the communist coup of 1948 and the installation of a Stalinist state.

Not until 1989, with Soviet communism finally falling apart, would Czechoslovakia free itself of a 40-year communist rule. The United States acted quickly to support Czechoslovak independence, and Congress passed the Support for Eastern European Democracy (SEED) Act in 1989 to promise assistance to the Czechs and the other countries in the region also struggling to establish open societies and market economies. The cornerstone of America's renewed partnership with the Czech Republic (CR), SEED emphasized economic reform and support to democratic institutions during the critical early stages of their development.

The United States Agency for International Development (USAID) began to implement SEED assistance to the region in early 1990 and opened an office in Prague in 1991. The Czechs set the agenda in the partnership, and America responded with a vast panoply of resources. Since that time USAID's assistance program in the Czech Republic has represented an investment of almost $135 million in grant assistance and $34 million in loan guarantees. The gamut of activities and strategies entered into between USAID and the Czech Republic focus on two major areas: privatization and municipal infrastructure finance.(1) Since 1989 the Czech Republic has transferred 80 percent of the national government's assets into private hands.

USAID-sponsored support for private sector growth required financial and management expertise to work side-by-side with new Czech entrepreneurs and managers to assure market-based incentives for growth. Financial-sector assistance aims to help the Czech National Bank with such issues as banking supervision, government debt, and tax issues, and to improve operations of three major full-service banks. Quality of life issues are addressed to support Czech organizations devoted to meeting the health and social needs of the disadvantaged, an area long neglected.

Under-investment, the painful legacy of central planning, was never so evident as in the infrastructure of Czech towns and cities. By 1993, municipalities received control of their revenues and took responsibility for capital planning and development. Concurrently, the Czech government asked USAID to help change the country's municipal infrastructure finance system and to aid in establishing a sustainable, market-oriented system of lending to local governments.

Municipal Financial Management in the CR

As the Czechs believed that it was critical at the outset of the assistance program to learn about capital budgeting and borrowing, USAID arranged for technical assistance to help Czech municipal managers learn about capital budgeting and Czech bankers learn about municipal lending. By the beginning of 1997, more than 18 municipal bonds had been issued, with two issued internationally.

Development of the country's municipal finance system was hastened by the formulation of the Czech Union of Towns and Communities (UTC). Founded shortly after the 1989 "Velvet Revolution," the UTC has grown in importance and now its member cities represent the vast majority of the country's urban population. Delegations of Czech municipal officials attended the 1995 and 1996 annual conferences of the Government Finance Officers Association (GFOA). The UTC held the First National Conference on Financial Management and Development of Municipalities in the Czech Republic in Prague in September 1996; it attracted more than 500 participants from the 130 largest Czech cities, as well as ministry and bank officials. A major highlight of the conference was the dissemination of a credit analysis model to all participants. The president and executive director of GFOA were invited as speakers; they shared their perspective of how invaluable these kinds of work sessions had become to the U.S. municipal community.

City of Ostrava

The first municipality to complete an international borrowing was the city of Ostrava (population 330,000), a metallurgy center and the third largest city in the CR. The city's effort to gain access to...