i 
 

An-Najah National University 

Faculty of Graduate Studies 
 

 

 

 

 

Municipal Bonds as a Tool for 

Financing Capital Investment in  

Local Government Units, Palestine 
 

 

 
 

 

 

By 

Yaqin Abdullah Omar Awad 
 

 

 

 

 

 

 

Supervisor  

Dr. Ghassan Daas 
 

Co-Supervisor  

Dr. Khaled Zeidan 

 
 

 
 

 

 

This Thesis is Submitted in Partial Fulfillment of the 

Requirements of the Degree of Master in Accounting, Faculty 

of Graduate Studies, An-Najah National University, Nablus, 

Palestine.  

2018 

 





iii 
 

Dedication 

This dissertation is dedicated to my family and my parents for their 

endless love. I deeply appreciate their boundless support, particularly 

through the darkest times. I am sincerely proud of my lovely mother, 

whose love and passion have lifted me up when I were down. I am greatly 

indebted to my great father, Dr. Abdallah Hamdan Awad, who has always 

been a constant source of encouragement and inspiration. Gratitude is also 

extended to my sisters and to my brother Zaid for the help they had given 

me without waiting for any return.  

For my husband, Osama Shaheen, whose love is unconditional; he 

has constantly encouraged me to fulfill my dreams and to pursue my higher 

studies, and for my sweet little girl, Eileen, may Allah bless her. Special 

thanks are extended to Dr. Hafez Shaheen, my father in law, and to my 

mother in law who have always supported me endlessly. 

 For all my friends who have had appreciated my capabilities in the 

times of doubt. Thanks for nurturing me through the months of writing.  

I am truly grateful for having all of you in my life! 



iv 
 

Acknowledgments 

First and foremost, I am truly indebted and thankful to my supervisor 

Dr. Ghassan Daas for his precious ideas and time he granted me in writing 

this thesis. I would like to express my gratitude to Dr. Khaled Zedan who 

has guided me through the process of writing. This thesis could not have 

seen the light without my supervisors‟ suggestions and remarks. 

Immense gratitude is also due to An Najah National University for 

this great master program in accounting which has made this work 

possible. 

I would like to extend my thanks to my workplace at Nablus 

Municipality and to all my great colleagues at work. 

 

 

 

 

 

 

 

 





vi 
 

Table of Contents 

Subject Page 

Dedication iii 

Acknowledgment iv 

Declaration  v 

Table of Contents vi 

List of Tables vii 

List of Appendices  viii 

Abbreviations ix 

Abstract x 

Chapter One: General Framework of the Study 1 

1.1 Introduction 1 

1.2 Statement of the Problem 4 

1.3 Objectives 6 

1.4 Research Questions 6 

1.5 Hypothesis 7 

1.6 Legal Framework 7 

Chapter Two: Theoretical Framework 13 

2.1 Municipal Bonds 13 

2.2 Methods of the Sale of Municipal Bonds 22 

2.3 Corporate versus Municipal Bonds, Financial Markets, 

Borrowing, Grants, and Ranking 

24 

2.4 Municipality Financial Status in Palestine 41 

2.5 Municipal Bonds around the world 57 

Chapter Three: Application of Methodology 64 

3.1 Sample Population and Participants 64 

3.2 Data collection 65 

3.3 Research Model 67 

3.4 Research Variables 68 

3.4.1 Macroeconomic variable 68 

3.4.2 Status variables 79 

3.4.3 Municipal bonds issuance variables 91 

Chapter Four: Empirical Findings and Analysis 96 

Chapter Five: Conclusions and Recommendations 131 

5.1 Conclusion 131 

5.2 Recommendations 134 

References 138 

Appendices  150 

 ب الملخص



vii 
 

List of Tables 

Table No. Title Page 

Table 1.1 Palestinian Licensed Companies in 2018 12 

Table 2.3.1 Corporate bonds in Palestine 27 

Table 2.3.2 MDLF KPIs 33 

Table 2.3.3 Comparison of previous sample rankings 41 

Table 2.4.1 Percent of accounts receivables allowance 44 

Table 2.4.2 Analysis of intergovernmental revenues in an amount 54 

Table 2.4.3 Analysis of intergovernmental revenues in percent 55 

Table 3.4.1 Unemployment in Palestine by Governorate 70 

Table 3.4.2 International investment position in Palestine 74 

Table 3.4.3 Comparison of Palestinian national budget 76 

Table 3.4.4 Historical interest rates in Palestine 78 

Table 3.4.5 Sample results of WSRC ratios 82 

Table 4.1 Revenues and expenditures analysis 99 

Table 4.2 Ratios benchmark of LGUs in Palestine 101 

Table 4.3 Highest ratios and lowest values 101 

Table 4.4 Net income from the financial statements 104 

Table 4.5 Results of budgets 2016 105 

Table 4.6 Results of budgets 2017 106 

Table 4.7 Analysis of profitable budgets results 107 

Table 4.8 Disclosure of cash receipts and payments statement 108 

Table 4.9 Disclosure of the financial statements 110 

Table 4.10 Disclosure index of sample municipalities 111 

Table 4.11 Avg Revenue Per Capita 112 

Table 4.12 Avg expenditure Per Capita 113 

Table 4.13 Unemployment 2017 114 

Table 4.14 Cost of labour percent from total revenues 115 

Table 4.15 Vertical analysis of land rate from total assets  116 

Table 4.16 Mandatory avg Surplus of Operating Budget  117 

Table 4.17 Financial reporting quality  118 

Table 4.18 Avg change in net assets  119 

Table 4.19 Debt to assets  120 

Table 4.20 Return on Assets  121 

Table 4.21 Current ratio 122 

Table 4.22 Net lending 123 

Table 4.23 Net working capital 124 

Table 4.24   Avg change of net income 125 

Table 4.25   Avg total revenues /total expenditures  126 

Table 4.26  Hypothesis test 127 



viii 
 

List of Appendices  

Appendix No. Title Page 

Appendix 1 Interviews Summary 149 

Appendix 2 Analysis Tables 162 

Appendix 3 Strategic Development and Investment Plans 181 



ix 
 

Abbreviations 

Avg Average  

IFMIS Integrated Financial Management System 

IPSAS International Public Sector Accounting Standards 

KPIs Key Performance Indicators 

LGPA Local Government Performance Assessment by the World 

Bank 

LGUs Local Government Units 

MDLF Municipal Development and Lending Fund 

MoFP Ministry of Finance and Planning 

MoLG Ministry of Local Governments 

MSRB Municipal Securities Rulemaking Board 

PCBS Palestinian Central Bureau of Statistics 

PCMA Palestinian Capital Market Authority 

Pex Palestinian Exchange 

PIPA Palestinian Investment Promotion Agency 

PNA Palestinian National Authority 

PMA Palestinian Monetary Authority 

ROA Return on Assets 

SDIP Strategic Development and Investment Plan 

SEC Securities and Exchange Commission 

VAT Value Added Tax  

WSRC Water Sector Regulatory Council 

 

  



x 
 

Municipal Bonds as a Tool for 

Financing Capital Investment in 

Local Government Units, Palestine 

By 

Yaqin Awad 

Supervised by 

Dr. Ghassan Daas 

Dr. Khaled Zeidan 

Abstract 

Municipalities are the public institutions that are responsible for 

providing services to citizens. Capital development projects are on the top 

priorities of municipalities. Such a priority is very demanding and critical 

due to the investment required, this is in addition to the scarcity of revenue 

sources in conjunction with the increased population. In Palestine, the trend 

of revenue per capita is decreasing in 73% of the sample municipalities. 

Thus, employing new ways of financing can be the solution. The 

percentage of employing debts at the Palestinian local authorities is very 

few. Accordingly, there is a room for using debts in certain circumstances 

as a new financial instrument with a debt limit according to the legislations 

and regulations. Municipal bonds have been used worldwide to finance 

capital investments at the local government units. This research 

concentrates on the determinants of municipal bond issuance, types of 

bonds, bond sale methods, debt maturity, par value, and risk-return 

relationship. 

The purpose of this research is to develop and to find methods for 

assessing creditworthiness that are suitable and applicable to local 

government units in Palestine. The sample was composed of 11 

municipalities in the West Bank. 



xi 
 

  Various variables such as macroeconomic and municipal status 

variables are identified to measure the effect of issuing municipal bonds on 

financing capital investment projects for the local government units in 

Palestine. 

The study of the Palestinian economy has taken into consideration 

the following factors: historical interest rates, international financial 

position, external debt and general budget structure. Moreover, 

macroeconomic variables have been measured by revenues and 

expenditures per capita, cost of labour and unemployment rate. Municipal 

status variables have the following subgroup variables: municipality size, 

financial reporting quality, outstanding debt, and financial distress. Various 

financial ratios are used. Furthermore, comparative and cross-sectional 

analysis has been conducted besides horizontal and vertical analysis; the 

analysis for these ratios has been carried out to determine the municipal 

status variables. 

The research concludes that macroeconomic variables and 

municipality status affect the issuance of "municipal revenue bonds." Based 

on testing the methodology, three municipalities are recommended to issue 

revenue municipal bonds. 

Keywords: Municipal bonds, Issuance, Palestine, Municipalities, 

Revenues, Transfers, Grants, Debt, Budget, Deficit, Financial status, 

Creditworthiness, IPSAS, Disclosure, Strategic plans. 



1 
 

Chapter One 

General Framework of the Study 

1.1 Introduction 

Municipalities are the main Local Government Units (LGUs) in 

Palestine. The abundance of financial resources affects the sustainable 

development of the local units; therefore, attention should be given to 

supporting the municipal development projects. Budget deficit that results 

from the lack of financing is the primary obstacle that hinders the 

implementation of Strategic Development and Investment Plans (SDIP), 

and the improvements of local government units and municipalities.  

Revenues of municipalities are classified into three resources: 

operating activities, government transfers and grants or loans. Operating 

activities are assigned to municipalities by law. Whereas, central 

government transfers include transportation fees, property, and 

occupational license taxes. While the third resource comes from grants or 

loans.  

The municipal revenue sources come from external sources except 

for self-financing sources that come from the internal activities of 

municipalities. The internal sources of revenues are generated from taxes, 

licensing fees of buildings, water tariff, connection fees, rent of owned 

properties, electricity, and other special fees from libraries, parks, zoos, and 

cultural centres. 



2 
 

Municipalities budgets vary from one to another since some of the 

Palestinian municipalities own and operate electric and water services, 

while others do not. Water and electricity provide cash to the municipalities 

and exaggerate their budgets.  

One of the reasons for the recent economic decline is that LGUs 

cannot depend on the availability of assets grants and borrowing to finance 

their infrastructure needs (Vazquez, 2015). Thus, reform of the local 

government finance system is a precondition for the success of 

municipalities in Palestine (The World Bank, 2017). The Lack of the 

financial securities in Palestine threatens most of the LGUs. Financial 

securities are the most effective methods for funding development projects 

and improving the quality of the municipal services. Among the various 

types of securities are municipal bonds which contribute significantly to 

optimize revenues of municipalities (Ramazanov & Grigorian, 2015). 

Municipal bonds are issued by LGUs to fund activities that aim to fulfill 

civic duties and public goods.  

According to the Palestinian Capital Market Authority (PCMA), 

corporate bonds have been issued four times before the year 2018; these 

issuances are to be explained in details. Also, bonds are included in the law 

of financial securities. According to the instructions for issuing securities, 

municipalities are authorized as the issuers of securities (PCMA, 2008). 

Moreover, bond issuers are delegated to issue bonds based on these 



3 
 

instructions. However, municipal bonds are not mentioned in the financial 

regulation system for the local government units in Palestine.  

Although bonds, in general, are not realized as a common culture for 

both issuers and investors, the researcher is looking forward to achieving a 

Palestinian bond market since the increased financing to local government 

units by issuing bonds would be beneficial regarding portfolio 

diversification and financial market revival (Bajo & Primorac, 2010). 

Municipal bond markets are considered as an essential source for financing 

the operating lease, maintenance, construction of capital investments, and 

providing cash flow for services of pivotal public projects (Adelino, Cunha 

& Ferreira, 2017).  

According to Horizon for Sustainable Development, a 

recommendation has been given to investigate the viability of issuing 

municipal bonds for capital investment projects in Palestine (Horizon, 

2009). Using municipal bonds requires analysing the conditions before 

their issuance, this is in addition to analysing their effects on future 

investments for the LGUs in Palestine. This study concentrates on the 

specific requirements and procedures that have to be taken into 

consideration when issuing municipal bonds. By conducting financial 

analysis, the researcher examines employing municipal bonds as a tool for 

economic development projects of LGUs in Palestine.   



4 
 

1.2 Statement of the Problem 

Municipality‟s development projects are diminishing due to the lack 

of revenue sources. For instance, operating activities lead mostly to cash 

deficits. Also, central government transfers account for 15% of the total 

revenues (ARIJ, 2009). The problem of government fund transfers is 

consistency, for example, in 2015 the percentage was 15.5% of total 

revenues and reached to 17% for the years 2016 and 2017. Loans can be 

used under many conditions; they are usually used for the short-term 

borrowing. On the other hand, revenues from grants are stable, but the 

population is increasing and so their needs. The average of grants for the 

years 2015, 2016 and 2017 was 5% of total revenues and 4% of total 

expenditures (MDLF, 2017). According to Sawafta (2011), revenues for 

municipal projects should progress by the passage of time. 

Borrowing from commercial banks or issuing bonds might be better 

options for local governments. Bonds are beneficial because local 

governments receive the required funds directly instead of the gradual and 

the usual disbursement procedure of banks. Furthermore, financing by 

bonds is better in terms of time and interest by the average of two or three 

percentage points (Farvacque-Vitkovic & Kopanyi, 2014). Thus, the 

researcher suggests using municipal bonds as a way of financing since they 

can finance long-term capital projects which are chosen through feasibility 

studies. Municipalities are the suppliers of bonds, but individuals and 

financial institutions (investment funds, insurance companies, social 



5 
 

security funds, and commercial banks) purchase those bonds depending on 

supply and demand.  

According to Bajo and Primorac (2010), the issuance of municipal 

bonds is the easiest way to avoid taking loans from banks, and thus to 

attract a large group of investors. By issuing bonds, LGUs get an 

immediate access to the private capital market. Among the conditions for 

issuing municipal bonds is the analysis of the project‟s financial 

sustainability (Farvacque-Vitkovic & Kopanyi, 2014). Sustainability of the 

project is the revenue generating ability. This ability depends on municipal 

sustainability plan which intends to maintain the same infrastructure 

service levels without any impact on tax rates or the service itself (BMA, 

2017). The goal of the public entities is to provide adequate economic 

services for inhabitants (Kablana, 2013). Palestinian people live under 

Israeli occupation; Palestinian National Authority (PNA) has full civil and 

security control over 18 percent of the West Bank (Area A), whereas areas 

B and C have other restrictions for development (The World Bank, 2017). 

 The legal framework of the Palestinian economy is still under 

development. The research sheds the light on the determinants of the 

Palestinian municipality‟s bond issuing since bonds are needed to achieve a 

strategic growth in the coming decades. Thus, this study questions the 

creditworthiness of municipalities and it sheds the light on the applicable 

measures in Palestinian local government units.  



6 
 

1.3 Objectives 

Much research has been done on Municipal bonds issuance. The 

topic has been tackled generally and broadly. Thus, this research 

concentrates on features of issuing municipal bonds based on key 

performance indicators (KPIs) of LGUs, particularly in Palestine. 

Furthermore, it reviews the municipal bond tactics so as to determine the 

suitable characteristics of bond issuance for the Palestinian capital market. 

Municipal bonds are introduced by using the most relevant variables and 

their ratio level of measurement to achieve the main goal of financing 

capital investments for municipalities. Thus, this research encourages 

spreading the culture of municipal bonds based on the financial analysis 

and scientific methods. Also, it emphasizes the additional requirements of 

the legal framework.  

1.4 Research Questions 

Municipal bonds have diverse elements. Accordingly, this study 

makes a connection between local governments investment needs and 

municipal bonds issuances. The researcher raises the following key 

questions: 

❖ Can municipal bonds solve the financing obstacle for development 

projects of the local government units in Palestine? 

❖ What are the most suitable characteristics of bonds for the 

Palestinian environment? 



7 
 

❖ Do macroeconomic variables affect the issuance of municipal bonds 

that are measured by revenues, expenditures per capita and the cost 

of labor, and unemployment? 

❖ Do municipal status variables affect the issuance of municipal bonds 

which have subgroup variables as municipality size, financial 

reporting quality, outstanding debt, and financial distress? 

1.5 Hypothesis 

Neither macroeconomic variables nor municipality status affect the 

issuance of "municipal revenue bonds" which are targeted to finance capital 

investments of local government units in Palestine. 

1.6 Legal Framework 

Defining the determinants of municipal bonds issuance in Palestine 

is not an easy task; it requires a study that should be conducted to examine 

the legal environment that includes all related laws and instructions. The 

results of this study show that there are no special instructions for 

municipal bonds. However, municipal bonds are considered as financial 

securities, their issuance can be guided by the instructions of issuing 

financial securities. Policymakers may make special instructions and debt 

controls for municipal bonds issuance. It is the Ministry of Local 

Governments‟ (MoLG) responsibility to define the ways of permissible 

finance for LGUs; a designated instruction for the issuance of municipal 



8 
 

bonds can be publicized from the MoLG. New instructions may be coming 

after the year 2018. 

Following is a summary of the laws in Palestine that are related to 

the topic of the research: 

1. Law of LGUs in 1997: This law manages and determines 

municipalities‟ functions. It allows loans as it is stated in article (21): 

“LGUs can borrow funds from any financial institution after getting 

the approval of the minister of LGUs. If the loan requires the custody 

of the Palestinian National Authority, the approval of the board of 

ministers is required” (LGUs‟ Law, 1997).  

2. Elections for local Authorities, 1996 Law: This law manages the 

elections of mayors and council members; LGUs mayors should be 

elected every four years. Accordingly, the mayor can be nominated 

for two elected periods. In other words, the maximum legal elected 

period will reach up to eight years.  

3. Financial Law of LGUs: Since 1999, this law has organized the 

financial system of managing the Palestinian local government (Jaber 

& Sabri, 2007). Municipal bonds are not mentioned in the previous 

editions. This financial system has a new draft that is edited in 2017 

and it has not been publicized yet. 

4. Companies law in 1964: It defines bonds in general as it is stated in 

chapter 6, and in article (88); it also clarifies the certain approvals 



9 
 

needed for the issuance of bonds. Moreover, the forming of 

bondholders‟ committee which aims to defend the rights of the 

bondholder with the issuer is explained in article (96). 

5. Palestinian Monetary Authority (PMA) Law in 1997 No. (2). 

According to article (6) of this law, PMA has the responsibility of 

bonds issuance and management. In article (7), PMA can buy or sell 

bonds to banks, individuals or to other entities in order to achieve the 

desired monetary policy. In article (35), PMA works for PNA as a 

financial agent in marketing, managing and transferring bonds and 

debt securities issued by the PNA and the public institutions. 

6. The Securities Law No. (12) in 2004: it defines bonds as the 

securities issued either by a public shareholding company or by 

government agencies or public enterprises. 

Article (71) of this law discusses bonds guaranteed or secured by a 

movable or an immovable property. If the bonds are secured by 

either the movable or the immovable property, or by other in-kind 

property, or by others types of collateral, guarantees or mortgages, 

that property and funds shall be placed as a security for the bonds, 

properly documented prior to the completion of subscription and 

prior to the deposit of the subscription proceeds pursuant to 

applicable legislation. 



10 
 

In Article (32), the law explains the conditions of the private 

placement. 

7. Securities Issuance Instructions: issued in 2008 by the Palestinian 

Capital Market Authority (PCMA), and it was done pursuant to the 

Securities Law No. (12) in 2004 which has been explained before. In 

2008 instructions, article (2) stated that government institutions and 

municipalities were authorized as issuers of securities (PCMA, 2008).  

Article (31) explains some steps that the issuer of securities should 

follow to obtain private issuance. Article (32) listed the private issuance 

attachments required with the prospectus. The prospectus is the written 

document approved by the PCMA. 

The prospectus is kept with PCMA. It includes complete disclosure 

of the information that allows the investor to make investment decisions 

(PCMA, 2008). The issuer should have details on investing issuance 

returns according to the strategic plans. Furthermore, projects could be 

evaluated by capital budgeting methods such as: internal rate of return, net 

present value and payback period. 

Securities Issuance Instructions and other laws define the related 

functions terminology as follows: 

"Issuance Agent: Any person licensed by PCMA to sell securities on 

behalf of the issuer. 



11 
 

The Custodian: The legal person who provides custody services in 

securities. 

Underwriter: Any juridical person licensed by PCMA to purchase 

the issuer‟s securities for the purpose of reselling them. 

Issuance Manager: Any juridical person licensed by PCMA to 

practise functions of securities issuance management and marketing 

on behalf of the issuer.  

The Trustee: The body corporate licensed by PCMA, and it is 

responsible for the proper preservation of securities. 

The Public Institutions: The public enterprises that the government 

owns in whole or in part or it exercises control over them. 

After defining the related parties, this research proposes that the 

licensed companies in 2018 to conduct financial activities in Palestine; they 

could help significantly in issuing municipal bonds, each with its special 

purpose license (PCMA, 2018): 



12 
 

Table 1.1: Palestinian Licensed Companies in 2018  

# Company name License 

1 Lotus Financial Investment Co. Issuing Agent 

2 
Al Wasata Securities Co. 

Issuance Trustee 

Issuance Manager 

3 
Al Arabi Investment Group Co. 

Issuance Trustee 

Issuance Manager 

4 Sahem Trading & Investments Co. Issuance Manager 

5 Abu –Ghazaleh Consulting  Issuance Manager 

6 Ithmar Invest  Issuance Manager 

7 Bank of Jordan  Custodian 

8 Arab Bank  Custodian 

9 Bank of Palestine  Custodian 

10 National Bank  Custodian 

11 
Cairo Amman Bank  

Custodian 

Issuance Trusteeship 
Source: PCMA, 2018, https://www.pcma.ps/portal/english/Securities/ Licensees_ 

sec/comp_2018_sec_eng.pdf 

  



13 
 

Chapter Two 

Theoretical Framework 

Strengthening municipalities is vital. Thus, various policy choices 

that take into consideration the local needs and preferences can be very 

effective when they are taken at a local level (ARIJ, 2009).  

The implementation of service delivery is left to the local level 

authorities because they have more experience in this aspect. LGUs consist 

of municipalities, village councils, and joint service councils. The primary 

purpose of LGUs is the provision of services, while the purpose of 

companies in the private sector is profit maximization (Kablana, 2013). 

Municipalities‟ major concern is not achieving profits, thus; the percentage 

of profits cannot be used as a "criterion for determining the success of a 

public government's management" (Eren, 2009, p. 3). What matters is to 

ensure that revenues and expenditures are used in the most effective way. 

The effective use can guarantee the healthy functioning of the budget, 

proper accounting, and efficient financial control system (Kablana, 2013). 

Consequenly, the management of expenditures efficiently leads to the 

elimination of any unproductive expenditures and to a better understanding 

of managing  the scarcity of public resources (The World Bank, 2017).  

2.1 Municipal Bonds 

Municipal bonds are debt obligations issued by LGUs (Maverick, 

2015). A municipal bond is an obligation of a local government unit to 



14 
 

repay the specified debt on a specific maturity date including the stated or 

the formula-based interest rate (Dirie, 2005). In a municipal bond, the 

investor loans money to the bond‟s issuer in return for an agreed number of 

interest payments over the period that may take years (SEC Bulletin, 2012). 

The end of this debt period is the bond‟s maturity date in which the issuer 

of the bond repays the principal. Municipalities occupy an expensive 

function which is the capital infrastructure projects. The outcomes of 

municipal bonds lead to a fair distribution of costs over the project useful 

life due to use of the installment method in repaying the debt (Vazquez, 

2015). 

Debt ratios measure the efficiency and the size of the short and long-

term debts. According to the level of service provided, the explanation of 

the results of the analysis differ. For instance, a municipality is in a good 

financial position when it has a low debt service ratio. In other words, a 

municipality can finance most of its projects internally. However, there is a 

controversial catastrophic reason of the low debt ratio is that the 

municipality delays the development of its capital projects and 

infrastructure.  

Bonds are divided according to maturity dates into the following: 

short, medium and long-term bonds. Short-term bonds take one to three 

years to mature. While long-term bonds need ten years for maturity and the 

medium term bonds from four to seven years. Some countries consider one 



15 
 

to five year period as short-term bonds, and the ones which take more than 

ten years as long term bonds.  

The interest on municipal bonds is exempt from the income tax as a 

general feature (Maverick, 2015). In Palestine, the tax exemption will be 

disposed of the first issue of municipal bonds. According to the tax 

benefits, the interest rate for municipal bonds is usually lower than the 

interest for taxable fixed-income securities of the corporate bonds. 

Reducing the cost of the interest requires applying the aggressive 

repayment strategies (BMA, 2007). There are cases in which the interest is 

paid in advance; it is subtracted from the loan occasionally so that the 

issuer receives fewer funds than the demand (Gitman, 2004). 

According to the Securities and Exchange Commission, municipal 

bonds are classified to the following types:  

❖ General obligation bonds are backed by the government‟s taxing 

power. The government has the authority to tax residents in order to 

pay bondholders, that is; the issuer's "full faith and credit" (SEC, 

2010). A municipality's response to its economic environment is 

more important in assessing the riskiness of its general obligation 

bonds than the independent consideration of the accounting ratios 

(Wescott, 1984). 

❖ Revenue bonds are supported by revenues from capital investments 

such as rental or lease payments, user charges or toll fees (SEC, 



16 
 

2010). Bonds are repaid by revenues that come from projects upon 

completion. Revenue bonds are designed to finance specific, 

designated public projects that generate discrete streams of income, 

such as toll roads, bridges, tunnels, airports, parks, ports, water, and 

sewer systems (Joel, Ronald & Larry, 2010). In Palestine, the most 

applicable projects are the ones that take advantage of the existing 

land. Municipalities assets possess the lands available for parking 

lots, museums, highways, water and sewer systems, parks including 

playgrounds, cycling tracks, in addition to parks of new modern 

types such as aqua parks, zoos, and flower parks.  

These bonds are paid solely from the income generated by the 

particular capital project (Joel, et al, 2010). This income generally covers 

the cost of the bond which consists of the principal and the interest. 

Revenue bonds often have protective covenants written in indentures. 

These usually demand establishing sinking funds, in other words; 

bondholders have recourse to the physical assets negotiations in case of 

default. Accordingly, revenues are treated as mandatory payments that 

must be made to 'sinking funds' or pools of money set aside from taxes or 

other revenue sources to repay debt obligations. Debt management strikes a 

balance between the sinking fund at maturity to equal full principle and the 

last payment of interest. Some revenue bonds are “non-recourse.” In other 

words, if the revenue ends, the bondholders do not have a claim on the 

underlying revenue source.  



17 
 

Revenue bonds are all about recovering funds from the executed 

projects. Such projects will not be approved without conducting feasibility 

studies that demonstrate the viability of the projects. The flow of funds is 

of a critical importance; when assessing revenue bonds, pledged revenue 

could be on gross revenue or net revenue, and after expenses, which is a 

promise that net revenues will be used for payment of debt service.  

In revenue bonds, investors often require special covenants and 

pledges. For example, when bonds are issued to finance a series of projects 

undertaken by the same revenue stream, current revenues should be 

adequate to cover a specified percentage of both current debt service and 

future maximum annual service for both the outstanding bonds and the new 

bonds. These are preconditioned terms; none of these sorts of revenue 

covenants may be modified or abandoned by the bond issuer (Joel, et al, 

2010). The following shows other examples of covenants that are included 

in revenue bonds:   

- A rate covenant could specify user charges. 

- An insurance covenant helps to determine how both the physical 

asset and its cash flows are to be repaid. 

- A maintenance covenant helps to conclude that an asset should be 

kept in state of good repair. 

- A non-discrimination covenant helps to specify that all users of the 

facility must pay user fees except in times of emergency.  



18 
 

Other security features of revenue bonds include requirements for 

financial reports, outside audits and restrictions on the issuance of 

additional bonds like project completion to protect the rights of the current 

bondholders. 

Issuing bonds is a complex procedure; it requires preparing good 

data, disclosing the issuer‟s financial and economic information, and 

having information about the market to certify that the issue is placed at 

favorable terms (Farvacque-Vitkovic & Kopanyi, 2014). Many parties 

could take the responsibility of issuing municipal bonds; the assignment of 

responsibility between the various parties requires a decision by the 

municipality. Thus, financial managers, internal auditors and the manager 

of projects at the municipality are all responsible for the issuance of 

revenue bonds. To conclude, the elected municipal council does not interfer 

in the issuance of revenue bonds due to the fact that the elected members 

may be changed before repaying the debt, so it is not preferred to delegate 

them the responsibility of issuing the municipal bonds. For instance, if the 

municipal council issued revenue bonds for ten years, and the council won 

twice, it would leave the municipality before the maturity of these bonds, 

then the principal and interest might be lost without any control. It is 

probably favourable to start with conservative restrictions and reduce them 

by the time (Vazquez, 2015). This study concentrates on the most 

conservative ways to initiate issuing municipal bonds in Palestine, taking 

into consideration the prior experience and the best practices employed 

around the world to prevent defaults. 



19 
 

The main borrowing criterion for LGUs is that the operating revenue 

should not exceed the operating expenditure (Bajo & Primorac, 2010). 

Accordingly, issuing municipal bonds has become a popular method for 

financing the deficit of local budgets. The issuance of bonds has not been 

targeted to generate revenues but to replenish the local budget (Ramazanov 

& Grigorian, 2015). As a preventive factor, bonds should be issued to 

initiate an investment project (Samonikov, Veselinova, Fotov & Gruevski, 

2016).  

Ramazanov and Grigorian (2015) state that the use of market 

instruments for municipalities should be associated with the decision made 

on issues related to the local value of the fund raised, construction, 

apartments' purchase, housing for the poor, municipal service vehicles, and 

infrastructure utilities. Objectives included in SDIP should be linked with 

the budget preparation to ensure that the prioritized projects are not just as 

a shopping list, but they are realistic like the availability of the financial 

resources, time frame, institutional qualifications, and legal and human 

capabilities (Horizon, 2009). 

For investors, municipal bonds remain one of the most and the least-

risky investment. Bonds do not tend to offer extraordinarily high returns, so 

a bond's purchaser usually seeks a fixed stream of income payments in 

comparison to stock investors. Municipal bonds help investors to do 

diversification in portfolio management which aims to reduce the risk. 



20 
 

Even in tough times, municipal bonds have a low rate of default. 

When the default occurs, it usually results from bonds that fund hospitals or 

housing projects. Municipalities in Palestine are more concerned with 

infrastructures such as streets, tunnels, sewer networks, solid waste 

disposal, slaughterhouse, water supplies, transportation, fruits, vegetable 

markets, and parking taxi complex rather than housing projects 

(Rubenstein, Willoughby & Lipar, 1999). 

The assessment of risk is based on the economic and financial 

conditions of the local government, past fiscal indicators, structure of debt, 

pending payments and future factors that may affect the creditworthiness of 

the local governments (Farvacque-Vitkovic & Kopanyi, 2014).  

Investors of municipal bonds face some risks. Litvack and Rizzo 

(1999), demonstrate that unique characteristics of municipal assets and 

unpredictable political processes have made municipal bonds never risk-

free.  Borrowing at the local level can be risky since local managers can 

overspend and attempt to shift the repayment of debts to future 

governments and taxpayers (Vazquez, 2015). However, municipalities are 

required to use their resources in the most efficient way (Kablana, 2013).  

SEC (2012), explained the risks of municipal bonds as the following: 

❖ Interest rate risk: The bond‟s market price has an inverse relationship 

with the interest rates, while one moves down, the other rises. So that 

the market value of the bond may be more or less than the par value. 

Investors who hold a low fixed-rate municipal bond and want to sell 



21 
 

it earlier than maturity could lose money due to the lower market 

value of the bond. 

❖ Call risk: refers to the possibility of an issuer to repay a bond before 

its maturity date. The issuer may take such a decision if the interest 

rates decline. Bond calls are less likely when interest rates are stable 

or moving higher.  

❖ Liquidity risk: the risk in the municipal bonds occurs when there is 

no much trading in the secondary market. The liquidity risk is 

represented in the difficulty in selling the bond (Afshar, 2013). Thus, 

investors will not find an active market for the municipal bonds 

(SEC, 2012). There is a probability to prevent investors from trading 

bonds when they want a particular price for them because secondary 

bond‟s markets are thinner than stocks‟. 

❖ Credit risk: this refers to the risk that the bond issuers may face 

financial difficulties that make it impossible for them to pay interest 

and principal in full (the failure to pay interest or principal is referred 

to as “default”). The reason for municipalities‟ financial distress may 

be the financial commitments of citizens who do not pay periodically 

and consistently. 

❖ Inflation risk: refers to the upward movement in prices. Inflation 

reduces the purchasing power. Such a thing constitutes a risk for 

investors who receive a fixed rate of interest over the long run. 



22 
 

However, it can also lead to higher interest rates and, in turn, lower 

market value for existing bonds (Lioudis, 2018). 

❖ Political risk: Palestine is under occupation, and thus any political 

change is beyond control. The political risk could be managed and 

reduced by particular agencies that offer political risk insurance for 

long-term debts and equity investments such as Overseas Private 

Investment Corporation, and Multilateral Investment Guarantee 

Agency (PIPA, 2016). 

2.2 Methods of the Sale of Municipal Bonds 

In order to issue municipal bonds, the concerned party chooses 

between a competitive or a negotiated offering (Schultz, 2012). In a 

competitive sale, possible underwriters submit sealed bids of the bond 

offering with identified characteristics. If the offering is small, individual 

underwriters may handle the entire issues on their own. Syndicates of the 

underwriters will bid for more substantial offerings that promise to issue 

the bonds at the highest price or the lowest yield. Usually, LGUs sell their 

debts using the method of sale that achieves the lowest cost of borrowing 

(Johansen, 2014).  

In a negotiated offering, the costs and characteristics of the bond will 

be agreed upon by the negotiation of the municipality with the underwriters 

or a group of them (Schultz, 2012). Underwriters can raise the interest rate 

on the bond. However, they do not act as fiduciaries which minimize risk.  



23 
 

Bond sale method takes into consideration various factors, including 

but not limited to rating, security and structure. The following are factors 

indicating a competitive sale (Johansen, 2014): 

 Rating of the proposed bonds is expected to be in the better category.  

 Municipal bonds come in two varieties: general obligation and 

revenue bonds. General obligation bonds are backed by the full faith 

and credit. Whereas, revenue obligation bonds are secured by a 

reliable, known, and long-standing revenue stream (e.g., water, 

sewer, and electricity). 

 The bond structure is not expected to include “exotic” products that 

require extensive explanation to the market.  

The majority of municipalities enjoy the characteristics listed above. 

Yet, about 80% of the bonds are still sold through negotiation (Johansen, 

2014). The following are factors indicating a negotiated sale:  

 Rating of the proposed bonds is expected to be in the lower category.  

 Bond insurance or other credit enhancement is not available or it is 

not cost-effective.  

 The bond structure has features such as pooled borrowers, variable 

rate debt, deferred interest bonds. Thus, bonds require an extensive 

communication with the market.  



24 
 

 The issuer desires to target specific participants such as 

disadvantaged business enterprises, retail investors or local firms. 

Marlowe (2009) points out that a negotiated sale allows the 

underwriter to develop more intimate knowledge of the bonds in question, 

and to use this knowledge to advertise the bonds to the potential investors. 

He uses data on several million municipal bond transactions to test whether 

that negotiated sales are advantageous or not. The results suggest that under 

certain circumstances, negotiated sales are an effective tactic to reduce the 

information asymmetry. However, the reduced asymmetry does not 

necessarily indicate lower actual borrowing costs for most issuers. 

If municipal bonds were issued for the general public benefit, many 

social goals would be achieved in accordance with citizen‟s satisfaction. In 

other words, there will be participation in decision making concerning 

which project to finance by the designated municipal bonds. LGUs are 

sensitive institutions in the public sector because they touch people needs 

directly. People are very close to the LGUs and participate in setting SDIP 

and the budgets. 

2.3 Corporate versus Municipal Bonds, Financial Markets, Borrowing, 

Grants, and Ranking 

Several features differentiate the municipal bond market from the 

corporate bond market. First, asymmetry of information is likely to be 

greater in the municipal market (Marquette & Wilson, 1992). Individual 



25 
 

investors constitute the greater part of the municipal market (Daniels & 

Vijayakumar, 2007). The individual investor‟s ability to analyse security is 

not as well developed as those of institutional investors. But among all 

financial markets, the municipal securities market has the greatest 

requirements of information (Feldstein & Fabozzi, 2008). Second, all 

trading in the secondary market occurs over the counter market. There are 

no organized exchanges for municipal securities as it is the case for 

corporate securities (Daniels & Vijayakumar, 2007). Unlike the corporate 

securities market, the underwriting process for the municipal bond market 

is regionally segmented. In some regions, regional firms still dominate the 

municipal market (Lamb & Rappaport, 1987). 

The municipal bond market is considered less risky than corporate 

securities market (Marquette & Wilson, 1992). However, the default risk in 

the municipal bond market has been increased.  For example, Detroit 

bankruptcy represents the most significant default in the municipal bond 

markets since the Great Depression (Schwert, 2015) . Based on these 

considerations, the poor condition of the local government balance sheets is 

the primary motivation for studying default risk in the municipal bond 

market. However, historically speaking, municipalities issued by traditional 

tax-supported governments have opted for low-risk investments (Garner & 

Paul, 2014). 

In Palestine, PADICO's Holing has had two issuances of commercial 

bonds. PADICO‟s issuances are the biggest in amount. For example, in 



26 
 

2016 it issued commercial bonds with total value of (USD 120 million) 

(PADICO, 2016). These proceeds were used to repay its previous bonds 

issuance (USD 85 million), pay short-term loans to banks (USD 35 

million), and to finance many other investments. These investments are 

considered long-term projects which take time before making any cash 

returns such as Jericho Gate, Power Generation, and Nakheel Project. 

Comparison between various companies in Palestine regarding the 

corporate bonds has been carried out and explained in details in Table 

2.3.1: 

 

 



27 
 

Table 2.3.1: Corporate bonds in Palestine  

Source: (PADICO, 2012) (PADICO, 2016) (PADICO's Holding website).

 

Name of the 

company 

Year of 

issuance 
Maturity 

The amount 

in USD 

Par value 

in USD 

Guarantee 

percentage of 

assets or stocks 

Interest 

1 PADICO 2011 five years 85,000,000 10,000 125% 

first 30 months= fixed interest of 5% 

annually 

30 months lasted= LIBOR+ 2,5% semi-

annually 

with a floor not less than 5% annually 

2 APIC 2012 five years 20,000,000 10,000 125% 

first 30 months= fixed interest of 5,5% 

annually 

30 months lasted= LIBOR+ 2,5% semi-

annually 

with a floor not less than 5,5% annually 

3 PADICO 2016 five years 120,000,000 500,000 130% 

first 36 months= fixed interest of 5% 

annually 

24 months lasted= LIBOR+3% semi-

annually 

with a floor not less than 5% annually 

4 APIC 2017 five years 35,000,000 10,000 110% 

first 30 months= fixed interest of 5% 

annually 

30 months lasted= LIBOR+ 2,5% semi-

annually 

with a floor not less than 5% annually 



28 
 

One of the financial securities that is worth mentioning is Sakk, or 

Sukuk (the plural form of Sakk). Sakk is referred to as ‟Islamic bond‟ 

(Afshar, 2013). It is used as a way of funding, and raising capital in the 

Islamic capital market (Alam, Hassan & Haque, 2013). Moreover, it 

contributes approximately to 14.3% of the global Islamic finance assets. 

Attention has now turned towards applying Islamic principles in equity 

markets (Naughton & Naughton, 2000). Thus, Sukuk are verified to have a 

positive effect on the Islamic capital market. 

The major concern of a financing system is to find reasonable 

solutions for the existing problems (Afshar, 2013). There are great religious 

differences between Sukuk and bonds, but there are no financial 

differences. Under Islamic Law, riba or interest is not allowed in the 

financial system (Naughton & Naughton, 2000). One of Islamic principles 

is profit sharing and considering money not as an asset. Money is regarded 

merely as a medium of exchange, and it is viewed as a measuring unit of 

value (Afshar, 2013). Holders of Sukuks own part of the principal assets 

(Alam, et al, 2013). The nature of the conventional bonds does not allow 

such type of ownership since the instruments are considered as debt 

obligations. Bonds are based on debt security while the Sakk is based on 

the equity method (Afshar, 2013). 

There are many benefits of municipal bonds over borrowing from a 

commercial bank. Comparison of bonds and bank lending have been 

indicated by the following: 



29 
 

 Most commercial banks concentrate on short-term borrowing, which 

is appropriate for incremental financing but not for long-term 

financing (Peterson, 2003). Generally, a bond is meant to finance 

long-term investments, whereas a bank loan is more suitable for 

short-term needs. 

 Local banks satisfy liquidity needs and provide a set of banking 

services on a daily basis.  Bank's loans are available for most 

municipalities.  Regarding the market accessibility, the bond market 

is very expensive for the aspiring local governments. 

 LGUs usually lack creditworthiness. In other words, they do not 

have enough financial abilities to repay the obligations to banks over 

time, and they lack technical capacities to manage the debts. 

Therefore, LGUs‟ borrowing capacity declines (Vazquez, 2015). In 

brief, creditworthiness of LGUs can be improved through more 

transparent budgeting and accounting, this is in addition to the 

development of self-sufficient sources of the local government 

revenues. A municipal bond market relies on the public disclosure of 

the financial information in addition to other types of information by 

the municipalities. Bond markets rely on credit rating agencies which 

employ extensive methodologies to assess the creditworthiness of 

issuers (Asher & Sheikh, 2012). Loan departments at banks are 

required to possess proprietary information, and to develop 

techniques to ascertain the creditworthiness. 



30 
 

 Banks must establish a „relationship banking‟ scenario; however, 

purchasers of bonds are not obligated to have a long-term 

relationship with the issuer (Asher & Sheikh, 2012). Eventually, 

banks engage in a long association with municipalities whenever the 

need for capital arises. This relationship between the bank and the 

local government provides flexibility regarding loan conditions. 

Borrowers can pay off the loan partly or totally, at any time, with 

little or no warning. One of the shortcomings is that lenders can 

change the terms of the deal; however, borrowers can theoretically 

move their accounts elsewhere, assuming that another lender is 

available. In any case, banks are entitled to manipulate the lending 

terms. 

 Flexibility and information encourage most local governments to use 

a bank credit. Standardization strengthens the ability to reach a wider 

range of investors, and it helps to reduce search costs. In addition, it 

is acknowledged that liquidity, and bond proceeds are immediately 

available to the borrower without any conditions and regardless of 

the timeline of project implementation.  

 LGUs need to build up their reputation. Thus, the issuance of bonds 

protects them from the unilateral change in conditions since bonds 

issuance involves standardized terms and conditions; it depends on 

the terms from which the capital is borrowed.  

Grant and debt financing mechanisms are essential for LGUs to 

support development. Debt financing has advantages over grants; debt 



31 
 

financing imposes an obligation of repayment (Asher & Sheikh, 2012). The 

revenue project is designed and executed to repay the obligation. 

Moreover, it is based on obtaining adequate revenues, minimizing 

operation and maintenance costs, and generating a surplus over these costs, 

which is considered the motivation over the lifetime to the asset created 

(GoI, 2011). On the other hand, grants tend to soften budget constraints, 

and they lead to wasteful expenditures. Moreover, the consistency problem 

dominates the donor funds. 

Grants for the Palestinian municipalities come mainly from the 

Municipal Development and Lending Fund (MDLF) to support the 

implementation of all strategies for the local government sector. MDLF is 

the primary source of development-linked assistance to municipalities since 

it has been established in 2005. MDLF has implemented hundreds of 

projects with a value that has exceeded USD 400 Million (MDLF, 2017). 

The lending function is not yet fully developed at MDLF (Appendix 1, 

Interview 4). Moreover, it has not implemented an overarching policy 

strategy on municipal lending, including the identification of a sustainable 

revenue source for this funding (Horizon, 2009). 

The grant allocation mechanism is the most important element of 

grants (MDLF, 2015). The performance-based formula determines the 

amount of the infrastructure grants to each municipality in Palestine. The 

allocation formula is 50% on performance, 20% for needs and 30% for the 

population. The Scale Ladder consists of 10 levels from bottom-up: (D, C, 

C+, C++, B, B+, B++, A, A+, A++). Within each ranking level, KPIs were 



32 
 

recognized to reflect the municipal performance in the target areas 

including financial management, planning, social accountability, and 

municipal services provision. The allocation of funds depends usually on 

ranks. In other words, municipalities with a good ranking deserve better 

funding than those with a poor ranking. A major benefit from the MDLF 

ranking could be used to extract municipalities‟ creditworthiness of bond 

issuance. Accordingly, MDLF might be considered as a bond trustee or 

custodian in the process of issuing bonds. 

MDLF helps LGUs to improve their performance indicators; 

however, till the end of 2017, no municipality had reached A++ which is 

the highest ranking. In order to reach this highest rank, municipalities 

should achieve all 23 of KPIs -explained in Table 2.3.2. There has been a 

significant improvement since 2014 ranking, when no municipality had 

passed the B rank; all municipalities missed at least one performance 

indicator of the B rank. This incompleteness in the rank has led to a certain 

emphasis on not choosing the general obligation bonds since the 

foreseeable credit rating for municipalities will be lower than MDLF 

performance rank; if a municipality achieved the highest ranking of MDLF, 

it could be tested to assess the creditworthiness of the general obligation 

bond. Generally speaking, there are conditions on municipalities to be 

financed via municipal bonds. They should have the highest rank of MDLF 

performance; their ranking should be level A and above (Salfeet, Al- Bireh 

and Ramallah), this is in addition to the further examination of 

creditworthiness that shall be tested.  



33 
 

Table 2.3.2: MDLF KPIs 

Ranking KPIs 
A 

Rank 

 

1. A plan for roads and public construction in a place according 

to a computerized system. 

2. Salaries and wages expenses are less than 45% of total 

operational and capital expenses. 

3.  The existence of a cost accounting system to provide tariffs. 

4. Using an Integrated Financial Management System (IFMIS), 

and providing reports accordingly. 

5. Substantial operation and enterprise account surplus (More 

than 15%). 

6. Offering public green spaces and parks more than .5 m2 per 

capita. 

7. Effective complaint systems working under the instructions of 

MoLG. 

B 

Rank 

 

 

1. Actual maintenance of expenditures not less than 10% taken 

from the operational expenditures. 

2. Surplus in operational budget of 2016 (without enterprises 

budget). 

3. Keep the net lending without any increase (water and 

electricity debts). 

4. Unqualified external auditor opinion of 2016. 

5. Performing 70% of the operational budgeting, actual 

operation revenues >= 70% of the budgeted operational 

revenues, actual operational expenditure <= budgeted 

operational expenditure. 

6. Public disclosure of the external audit report of 2016. 

C 

Rank 

 

1. Increase in the collection of revenues from operations or 

revenues per capita above 50 shekels from revenue from 

services and licenses revenues. 

2. Separate accounting for municipalities‟ business enterprises, 

revenues and expenses including bank reconciliation. 

3. The actual statements of operations and sending them to the 

MoLG. 

4. Fixed assets are registered and updated annually. 

5. Public disclosure of municipal budget execution and strategic 

development execution. 

6. Announcing a complaint system for the public. 

D 

Rank 

 

1. A separate bank account of water and electricity service. 

2. Financial accounting policies and procedures. 

3. Public disclosure of budgets, SDIP, and ranking. 
Source: MDLF ranking, 2017 



34 
 

In 2016 ranking, all 11 sample municipalities reached B rank and 

above, so they achieved the low ranks implicitly in order to get the B rank. 

Disclosure of the financial statements is a must to get the B rank. Thus, 

several municipalities started disclosing publicly their financial statements.  

The researcher has conducted a lot of search to find out the 

municipalities that have shown full disclosure on their websites. 

Unfortunately, the researcher has found that not all the municipalities have 

disclosed their information publicly. The strategic plans have not been 

disclosed even, despite the fact that this action is the minimum requirement 

to get the low ranking of D. It has been noticed that most of the 

municipalities publicly published their financial statements of 2013 and 

2016 in order to conform with the minimum requirements of the MDLF 

ranking.  But they did not publish the financial statements for the years in 

between since their goal was to answer the questionnaire by the surveyed 

municipalities. Disclosing financial information to the public yearly is a 

matter of the credibility and integrity. Among the sampled municipalities, 

only Bethlehem municipalty has disclosed all the financial statements, in 

addition to its budget for the last five years on its website. Other 

municipalities disclosed their financial statements without the notes. The 

statements of the years required by MDLF ranking have been 2014 and 

2017. Thus, if MDLF required the years in between 2016 and 2013, this 

would give positive results to the users of financial statements. Thanks to 

MDLF ranking that pushed 3 out of 23 performance indicators, KPIs that 



35 
 

were concerned about publishing and disclosures to the public are 

demonstrated in Table 2.3.2 with the rest of MDLF ranking indicators.  

Rankings are considered as financial incentives that indicate a better 

performance. MDLF ranking asked for a complaint system to help 

municipalities get a better ranking. In Palestine, the overall satisfaction rate 

about the responsiveness of LGUs is low; it is less than one-third of the 

households agree that LGUs are very responsive to citizen concerns and 

complaints (The World Bank, 2017). For example, in Tubas, only 1 in 10 

households agrees that their LGUs is very responsive. Whereas, in Tulkarm 

and Qalqilya almost half of the families agreed that their LGUs are very 

responsive (The World Bank, 2017). Local Government Performance 

Assessment by the World Bank (LGPA) suggests one shortcut for LGUs to 

collect more revenues from user fees, to increase responsiveness to 

citizens‟ needs. Per capita revenues are strongly associated with higher 

LGU performance. This statement affected one macroeconomic variable of 

revenue per capita. 

The percentage of the disclosed financial items of the LGUs is 

approximately 56% for financial data and budgets, and 60% of LGUs 

disclose their performance rank (This Week in Palestine, 2011). Financial 

audits from external auditors increase the confidence in LGUS and their 

financial management. The auditor's reports and opinions afford a high 

level of accountability and credibility (Farvacque-Vitkovic & Kopanyi, 

2014). Management attitude and corruption can be measured by applying 



36 
 

municipal administration financial expense ratios that result from 

transportation, travels, telephone calls, and hospitality expenses. These 

unproductive expenses should be decreased to the minimum. Thus, 

employing performance indicators in the public sector helps in evaluating 

the efficient performance which minimizes input for the given output. 

Public sector entities are accountable to those who provide them with 

resources, and to those who depend on them to use those resources to 

deliver services during the reporting period and over the longer term 

(IPSASB, 2016a; Woldehawariat, 2017). In addition to financial and 

disclosure indicators, transparency and governance took place in the KPIs.  

Transparency of a government is defined as the extent to which its 

information is available to the public. Transparency is essential to improve 

public confidence. Transparency quality of the reporting made by public 

entities is very crucial for public accountability. Disclosure ensures 

accountability of the public officials to report on the use of public resources 

and obligations, and thus to meet the performance targets which have been 

set (Bovens, 2007; Adi et al., 2016). Transparency affects the credibility of 

LGUs. Credibility supports the trust levels of financial securities among 

investors. Robbins and Austin (1986) point out that there is a significant 

relationship between the levels of financial independence and the 

disclosure of information. 

The usual financial statements that are provided under the accrual 

basis of accounting include: financial position, financial performance, 



37 
 

statement of changes in net assets/equity, cash flows and notes to the 

financial statements, or annex (IPSAS 1). Whereas, for cash basis 

accounting the primary financial statements that are provided are: cash 

receipts and payments (IPSASB, 2016a; Woldehawariat, 2017).  

Municipalities control significant resources. IPSASB encourages the 

disclosure of information about assets and liabilities to enhance 

accountability (IPSASB, 2017b). Noncash assets and liabilities will not be 

reported on the face of the statement of cash receipts and payments under 

the cash basis of accounting. However, municipalities maintain records, 

monitor their debt, and manage their liabilities, and assets. IPSAS for cash 

basis mentioned disclosure about restrictions on cash balances with their 

nature and amount. Available and restricted cash balances can affect 

entities access to borrowing.  

According to Jaber & Sabri (2007), the percentage of employing 

cash-based accounting by municipalities is approximately 85%. Cash basis 

financial statements lack comprehensive information about LGUs. 

Furthermore,  they do not demand allowance for doubtful accounts which 

gives the reason for municipalities not to chase their debts. The scope of 

the cash basis accounting system is narrow (Kablana, 2013). It does not 

show the underground and ground investments that are the critical function 

of the municipality. The fact is that the increase in fixed assets is higher 

than the increase in current assets which is considered to be normal for the 

public sector. Municipalities are part of the economic developments. 



38 
 

Therefore, they cannot be held far from the performance, customer 

satisfaction, cost, quality, efficiency and productivity criteria in the private 

sector. 

IPSASB encourages governments to achieve a progress in the 

accrual basis of accounting (IPSASB, 2017 b). IPSASB has promoted for 

this type of accounting to be employed by local governments by publishing 

studies and articles.  

The public has access to different types of media, one of them is 

websites which are used to provide public financial information. One of the 

advantages of using websites is flexibility of time as the public can access a 

website anywhere, so it supports the interaction between the public and 

LGUs (Sprecher, 2000). Several studies have been conducted about the use 

of websites for the disclosure of financial information (Laswad, Fisher, & 

Oyelere, 2005; Adi et al., 2016). Some researchers analysed the level of 

disclosure over the websites. Adi et al (2016) researched the quality of the 

content published on the websites to citizens. As a result, the variable of 

financial reporting quality has been developed to measure the disclosure of 

financial statements on websites. 

The World Bank measured the performance of municipalities with 

many KPIs (The World Bank, 2017). The analysis focused on the drivers of 

local service delivery performance, starting from the size of LGUs 

(economies of scale), the level of income (GDP per capita), fiscal strength 

(revenues per capita, total revenues, expenditure per capita and total 



39 
 

expenditure), institutional capacity (planning and financial management, 

etc.), governance arrangements (transparency, accountability, and 

participation),  and modes of service delivery with the enabling 

environment and institutional framework such as revenue and expenditure 

assignments, sector policy and strategies, and service standards. The 

emphasis was on the core services, (a) piped water supply, (b) wastewater 

management, (c) solid waste collection and (d) local roads (The World 

Bank, 2017). 

In addition to the employment of fiscal strength to measure 

municipalities‟ performance the role of fiscal sustainability, proxied by 

indicators for satisfactory collection efficiency, and a necessary surplus in 

both operational and enterprise budgets, by holding both population size 

and geographical attributes fixed. On average, municipalities with 

satisfactory collection efficiency and own revenue sources, have a 5.6 

higher performance score. On the other hand, municipalities with a surplus 

in operational and enterprise budgets achieve 5.4 points higher. According 

to data analysis from 2011 to 2014, total revenues per capita of 

municipalities that provide electricity services are four times higher than 

others who do not offer such servics (The World Bank, 2017). Where a 1 

percent increase in per capita revenues is associated with an on average 

6.5-point higher performance score. Some municipalities justify the reason 

for this higher ranking to electricity providing service. As Salfeet 

municipality serve the small population and still keep the cash revenues 

from electricity. Salfeet municipality kept additional reserves while using 



40 
 

fund accounting. Fair comparison between LGUs is to divide the sector to 

cost centers according to service provision. In the year 2017, 55% out of 

Salfeet Municipality revenues are from electricity. It is not fair to compare 

total municipality revenues while they are not providing the same services. 

In 2012, per capita operating revenues were NIS165 for municipalities  

Highly populated municipalities are recognized to have a declining 

cost of infrastructure than others, a one percent increase in population 

density resulted in 3 points higher performance score (The World Bank, 

2017). Global evidence suggests that there is a strong correlation between 

increased density and expenditure efficiency, which has been confirmed by 

LGPA (ibid, 2017).  Per capita cost of service delivery increases with 

declining density, given that the 2 of households served is much lower in 

less densely populated areas. This has a direct impact on the capital and 

operating cost of infrastructure networks and service provisions, such as the 

water and sewage pipe meters, and operating hours for solid waste 

collection trucks that have to cover a large service area with few users. 

  Many ratings have been conducted on Palestinian municipalities. 

MoLG ranking depends on population; all sample municipalities are ranked 

in the first category by MoLG. Nablus and Hebron are considered highly 

populated municipalities; they are minimum two times higher than any 

other municipality from the sample. More will be explained about the 

sample in the research methodology. An analysis of the ranking for the 

center sample municipalities has been conducted in Table 2.3.3:  



41 
 

Table 2.3.3: Comparison of previous sample rankings 

# 
M

u
n

ic
ip

a
li

ty
 

M
o

L
G

 

R
a
n

k
in

g
 

M
D

L
F

 

R
a
n

k
in

g
 2

0
1
4
 

M
D

L
F

 

R
a
n

k
in

g
 2

0
1
7
 

2
0
1
7

 K
P

Is
 o

u
t 

o
f 

2
1
 

w
o
rl

d
 b

a
n

k
 

p
er

fo
rm

a
n

ce
 

sc
o

re
 2

0
1
7
 

w
o
rl

d
 b

a
n

k
 

p
er

fo
rm

a
n

ce
 

R
a
n

k
 o

u
t 

o
f 

3
8
0
 

1 Ramallah A B+ A+ 19 80 6 

2 Nablus A+ B+ B+ 13 73 18 

3 Hebron A+ B+ B++ 15 72 23 

4 Jericho A B+ B++ 15 68 44 

5 Jenin A B+ C++ 9 45 41 

6 Tulkarm A B+ B+ 13 76 12 

7 Qalqilia A B+ B+ 13 79 8 

8 Al- Bireh A B+ A+ 19 80 7 

9 Salfeet A B+ A 17 89 1 

10 Tubas A B+ B++ 15 55 144 

11 Bethlehem A B+ B+ 13 70 30 

Source: (The World Bank, 2017), (MDLF website) 

2.4 Municipality Financial Status in Palestine 

Municipal budgets in Palestine have significantly declined over the 

last decade primarily due to the Israeli occupation. The contraction of the 

economy, high unemployment rate, poor municipal management, and a 

growing culture of non-payment; especially since the second Intifada (This 

Week in Palestine, 2011). The Palestinian financial municipal situation is 

very critical as many municipalities are unable to provide its staff with their 

salaries regularly (ARIJ, 2009). The decline in budget has resulted in 

budget deficits.  

There is a difference between explicit and implicit budget deficits. 

Loans can cover the explicit deficit or by cutting some expenses. This 

would affect the quality of local services because this cut will be from the 



42 
 

operating and maintenance costs although it should be from the 

administrative and salaries expenses. However, the main concern is the 

implicit budget deficit, which forces municipalities to cut investments and 

projects and to decrease their improvements implicitly.  

Palestine has 3% increase in population every year (PCBS, 2017), 

grants were considered stable in amount for the previous years by MDLF, 

so there is no matching between the increase in population and the need for 

municipal financing. The deterioration of municipal finances has led to a 

subsequent decline of service coverage and quality, ultimately negatively 

impacting the quality of life of most Palestinians (This Week in Palestine, 

2011). Various achievements have improved the quality of services 

provided by municipalities. The water and wastewater services have been 

enhanced and developed in the last ten years. Many improvements are still 

in need; new water infrastructure is a top priority to reduce leakage to an 

acceptable level. Palestinians currently face a 90 MCM shortage in water, 

and estimation of meeting a 450 MCM gap by 2020 (PIPA, 2016). Projects 

like Rainwater dams and technologies for conserving agricultural water 

may be placed but need financing (PIPA, 2016). Wastewater is in a high 

need for infrastructure, in Jericho, nearly the half (54%) of roads have 

wastewater infrastructure by the year 2018 (Jericho SDIP, 2018).  

Municipalities are forced to limit service provisions to the basic 

minimum due to the economic crises. The following are some facts on 

service needs in Palestine (This Week in Palestine, 2011): 



43 
 

- 26% of water supply network need maintenance; 

- Municipalities have 82% of classrooms needed; 

- Municipalities have only 46% of the required equipment;  

- 52% of municipal roads are unpaved and require maintenance. 2 out 

of 3 households have access to paved roads (The World Bank, 2017) 

Israeli occupation has led to many restrictions; PNA has full civil 

and security control over only 18 percent of the West Bank (Area A) and 

manages public affairs in around 21 percent of the West Bank (Area B), 

with security under Israeli control (The World Bank, 2017). The remaining 

61 percent of the West Bank is Area C under full Israeli military 

administration. Population in Area C reached 279,000 (The World Bank, 

2017). LGUs in areas classified as B and C face additional challenges, 

obtaining permissions for development as to Oslo Agreement is a hurdle to 

development needs. Construction and maintenance in area C require a 

permit and approval from Israeli occupation; this permit is extremely hard 

to obtain and may take years. They have less access to services and poorer 

quality for those available. They rely on outdated, deteriorated 

infrastructure, and when granted the limited number of additions and 

upgrades are wholly insufficient to address Palestinian‟s needs (The World 

Bank, 2017).  

There is another major issue facing municipalities is the increasing of 

the total debt due to citizens (Horizon, 2009). According to BMA (2007), 



44 
 

on a yearly basis, a certain percentage of the citizens on a yearly basis is 

not able to pay municipal taxes which has caused debts. The increase of 

this percentage over time shall weaken the municipality‟s financial health. 

Moreover, as the uncollected taxes rise, liquidity decreases. Bad debt 

financial indicator calculates the allowance for uncollected taxes divided by 

the total operating revenues, this ratio purpose is to measure how much 

revenue is lost to the bad debt every year. If the allowance account exists, 

the ratio can be used. However, the allowance account does not exist in 

municipalities that use the cash basis, and so they can not determine the 

size of bad debt. Consequently, the use of the growth analysis is justified to 

reach the ratio for the collection rate of accounts receivables. 

Ramallah municipality periodically evaluates the collectability of 

receivables owed to the municipality from citizens according to a specific 

policy set by the management. It takes the necessary provisions to address 

the risks of not collecting accounts receivable aging and to expense them as 

bad debts. The following table demonstrates the percentages of the 

outstanding debt payment in 2016 (Ramallah municipality audited financial 

report of 2016): 

Table 2.4.1: Percent of accounts receivables allowance  

Accounts receivables Percent 

> than one year and < than two years  20 

> than two years and < than three years  40 

> than three years and < than four years  60 

> than four years and < than five years  80 

> than five years   100 
Source: Ramallah municipality audited financial report of 2016. 



45 
 

The debt that results from citizens who do not pay their taxes has 

grown to more than 100% of the annual budgets. This applies to the 

majority of the leading municipalities like Nablus, Hebron, and Gaza. 

Municipalities that have the highest collection rate would exceed 100%; 

100% from years arrears and another 100% for the same years' taxes and 

charges. These two collection rates are mixed in municipalities and have to 

be separated in the future. Debt analysis indicates the component of water 

and electricity debts due to camps which should be transferred from the 

government. The collection rate goal for municipalities could be debts 

minus the camps charges, the amount resulted is the highest targeted 

collection rate, until the central government committed to pay for camps 

charges regularly. Horizon explained the low debt in some municipalities is 

due to the fact that its revenues include only taxes and fees but not charges 

for services because the municipalities do not supply them. 

Citizens who do not pay periodically and consistently will not have 

clearance for their financial commitments unless they make complete 

payment of cash or checks, that is a considerable effort done by 

municipalities to reduce citizens debts (Swafta, 2011). The culture of non-

payment in Palestine is prevalent (Appendix 1, MDLF interview), not only 

for citizens who do not pay their fees and taxes, but also for municipalities 

who do not pay their obligations of water and electricity bills, reaching to 

the higher level of central government which does not pay their rent 

expenses and the collection of property tax and transportation fees 

periodically. 



46 
 

The municipal financial data indicate that some municipalities which 

operate water and electricity services impose profits on the condition that 

they collect fees of the services from citizens. However, in other 

municipalities utility service provision is not cost-effective, and some 

utility services do not even cover their variable costs. Most Palestinian 

municipalities do not provide the electricity service, as it is delegated to 

distributing companies after providing assets and staff from municipalities. 

However, municipalities still have control over electricity in different 

forms; municipalities are now shareholders in those companies, continuing 

to receive cash dividends from electricity (The World Bank, 2017). The 

philosophy of the electricity income tax is to be argued. If the municipality 

is still producing electricity service, then the income generated is free from 

income tax, in contrast when municipalities transfer electricity to the 

distribution companies, the income is taxed before paying cash dividends to 

municipalities. These decreased revenues of municipalities and the 

increased expenses are for the benefit of the Palestinian National Tax 

Department. Additionally, electricity bills for municipalities include the 

Value Added Tax (VAT), at least electricity bills of municipalities should 

have zero VAT.  

LGUs do not have effective instruments to encourage or nudge 

unwilling citizens to pay. Very few LGUs apply pro-poor payment 

modalities through payment plans or allow vulnerable citizens to pay 

reduced amounts. The lack of support from local councils to increase the 

willingness of citizens to pay, hinders efforts to increase citizen 



47 
 

commitments to pay for services (e.g., support enforcement or courts). 

Notably, not only individual users but also governmental institutions, do 

not pay for the services they receive from LGUs (The World Bank, 2017) . 

The Qunaiby study reached to a positive conclusion: Palestinian 

municipalities who have high adherence to the municipal rules, laws, and 

regulations (Qunaiby, 2009). Most municipalities actually disclose their 

budgets to MoLG. The ministry applies a unified chart of accounts for 

revenues and expenditures since 2014 and it is obliged by the municipality 

to approve the municipalities budgets. According to our research, 82% of 

our sample approved their 2017 budget. Almost 64% of municipalities 

adopted the chart of accounts in their accounting systems for both actual 

and budgeted amounts (Jaber & Sabri, 2007). The next step is to use a 

unified chart of accounts and coding system for all accounts by all 

municipalities, for both budgeting and accounting systems. 

Furthermore, most municipalities have applied new unified payroll 

system for the municipal employees. This unified payroll includes some 

financial commitments and unified organizational chart to stop the staff 

who works without a clear description of their job titles. Although 

amendments to this law were made, further work is highly needed to 

achieve justice. It is not clear why the municipal employees do not follow 

the same payroll system for the MoLG and the rest for the government. 

Application of the system is a precondition for approving the budget from 

MoLG. Some municipalities, especially with high numbers of staff, have 



48 
 

had problems in the application due to the difficulty in reducing premium 

allocated to the salary of the employees, in addition to the amendments to 

the instructions of the calculation. This new system was issued in 2009 

with modifications across years. Such a thing has made it difficult for 

municipalities to commit; modifications have given some jobs premiums 

according to the nature of work and to the field specialty like engineering, 

in contrast, a reduction in existing premiums according to the scientific 

qualification like accounting. From our sample, Nablus and Hebron did not 

approve their budget of 2017, and Tulkarm did not send financial data. 

According to the World Bank (2017), the collected local taxes and 

fees are supposed to be the main source of revenues for municipalities. It 

was estimated to be only 22% of the local government revenues for the 

period from 1995 to 2004 (Rubin, 1997). This led to a growing reliance on 

alternative revenue sources, such as user charges. User fees may be more 

reasonable to taxpayers since their costs are directly related to benefits 

received. In most cases, citizens can avoid the charges by choosing not to 

receive specific services. The main sources of revenue for LGUs are locally 

collected revenues that are comprised of: (a) user fees, such as payments 

for electricity, water, solid waste collection, and fees for public markets 

and slaughterhouses; (b) local fees, such as building permits and fees for 

signs; and (c) taxes (The World Bank, 2017). 

LGUs depend heavily on user fees to finance operating expenditures, 

not to mention critical capital investments. On average, charges and service 



49 
 

fees account for 50–70% of total revenues, mostly from public utility 

services such as electricity and water, but also from charges for building 

permits, solid waste collection, signboards, and cemetery fees. 

The property tax is the leading local tax, which forms about 18% of 

the total regular revenues of the Palestinian municipalities (Jabr & Sabri, 

2007), in 2009 ARIJ result about the property tax was as an assertion by 

consisting 15% of total revenues. The property tax provides a distinct 

advantage as a revenue source by its stability in economic downturns and 

exportability through taxation of non-residential property (Monk, 1990; 

Bland, 1989). Gaza municipalities collect property taxes and professions 

license directly keeping 90% of their revenue and transfer the remaining 

10% to the national government as expenses. In West Bank, the proportions 

of revenue distribution are the same, but the central government collects 

property taxes instead of the municipalities and later transfer their 90% that 

may stick a couple of years with MoFP (ARIJ, 2009; Swafta, 2011).  

The sources of shared revenues which is centrally collected and then 

split between LGUs include property tax, occupational license tax, and the 

transportation fee (Swafta, 2011). The Ministry of Transportation collects 

the transportation fee, MoLG have control on 50 percent of the total 

revenue collected and then allocate to the LGUs on per capita basis. 

However, in practice, the Ministry of Finance and Planning (MoFP) 

intercepts the majority of the 50 percent share to compensate for the 

arrears, these arrears are usually related to electricity or less often to water 



50 
 

charges and referred to as “net lending,”. The net lending, includes 

“transfers to local government to cover clearances revenue deductions by 

Israel for water, electricity, and health and Ministry of Agriculture 

services” (Ministry of Finance, 2007). Net lending formed about 11% of 

the total current expenditures for 2000-2012 (Rizeq, 2015).  

  Property tax has traditionally been collected only in around 30 

municipalities, although this number has been expanding more recently and 

has now reached 70 municipalities in total. Revenue-sharing mechanism of 

the transportation fee is underway to make it more transparent, predictable, 

and regular.  In parallel, MoFP has improved transparency in reporting the 

annual amounts of property tax transferred to local governments, but 

further communication is still in need. 

The lack of intergovernmental transfers characterizes the current 

architecture in Palestine. No regular fiscal transfer exists to supplement the 

shortage in own-source revenues (The World Bank, 2017). No predictable 

intergovernmental fiscal transfer exists to fund essential capital 

investments. The benefits of decentralization depend on the 

intergovernmental system to be equitable and efficient regarding the 

mechanism of horizontal transfers. Otherwise decentralization will fail to 

materialize (Bhujbal, 2010). Establishing a fiscal transfer mechanism 

requires the highest attention from both MoLG and MoFP. Political factors 

are crucial in defining the intergovernmental transfers allocation, which 

was indicated in an empirical study (Bhujbal, 2010). Establishing a fiscal 



51 
 

transfer mechanism that effectively addresses imbalances is long overdue. 

Transfers from central government need equalization to reduce the existing 

inequalities between transfers to LGUs. Addressing vertical and horizontal 

fiscal imbalances is critical to improve local service delivery performance 

(The World Bank, 2017). LGUs are supposed to receive revenue from 

property taxes, occupational license taxes, and transportation fees, but the 

revenue base varies dramatically across LGUs, leading to significant 

horizontal imbalances. Local revenues are insufficient to cover the 

operational expenditure required of LGUs, leading to a vertical imbalance 

which is the gap between generating sufficient revenues to match the 

expenditure needs.  

Palestinian local government unit's system is part and extension of 

the central government (Horizon, 2009). The Local Government Act 

assigns 27 functional responsibilities to LGUs (Appendix 3), in Article (15) 

(ARIJ, 2009; Swafta, 2011; The World Bank, 2017). But those functional 

assignments are not matched with appropriate revenue sources. Although 

the act assigns 16 revenue sources to municipalities, the Local Government 

Act of 1997 does not distinguish between delegated responsibilities and 

own responsibilities. In the case of delegated responsibilities, the PNA 

would ultimately be responsible for the regulation and financing of those 

functions, but LGUs would implement them. However, for own 

responsibilities, LGUs would generally be responsible for the services, 

including the raising of sufficient revenues (The World Bank, 2017). 



52 
 

However, the current revenue assignments are not even enough to deliver 

on core services. 

As a critical step, the Ministry of Local Government must review 

and revise LGU revenue and expenditure assignments. These are 

significant shortcomings that need to be considered by the Ministry of 

Finance and Planning (MoFP). Although Palestinian municipalities and 

village councils are responsible for providing critical public services, they 

have not been assigned sufficient revenue sources. Changing the financial 

incentive structure for service provision will need to be at the core of the 

reform agenda. Due to chronic underfunding, LGUs have developed a 

practice of diverting revenues from service fees to meet their expenditures 

needs (The World Bank, 2017). 

Roads on the one hand are the responsibility of LGUs, they have full 

authority over local roads, development, planning, and maintenance of the 

network. On the other hand, the Ministry of Public Works and Housing is 

responsible for regional roads outside the municipal master plans. Fewer 

than 2 in 3 Palestinian households have access to paved roads (The World 

Bank, 2017). Because LGUs have no direct income source to cover road 

rehabilitation and maintenance cost. Postponing the tackle of these needs 

shall negatively impact the cost to a multiple expense. It can take three to 

four times as expensive to repair a road with late examining than one that is 

inspected more often. Given the limited resources that are available from 

transfers and shared taxes, LGUs have to rely mostly on own-source 



53 
 

revenues which have significant variations across LGUs (The World Bank, 

2017). 

PNA needs to introduce a system of conditional grants beyond the 

donor-funded Municipal Development Program to fund delegated 

responsibilities and provide an incentive for LGUs to complement and 

implement PNA´s sectoral objectives at the local level. These conditional 

grants are to be allocated by the MoLG as it is the monitor on the LGUs, 

that receives and requires data on all municipalities in Palestine. 

Due to the delay in remitting the municipal transfers and the acute 

need of the funds collected, rose the idea of municipalities collect the tax 

themselves, at least to ensure the daily cash liquidity at the right time 

(Sawafta, 2011). As to conduct its business properly, to characterize the 

relationship between the ministry and local entities to transparency and 

clarity and to achieve greater financial decentralization which is the 

lifeblood of the municipalities. 90% of municipalities surveyed had the 

ability to collect property tax, and they refuse the current collection method 

due to the low collection rate of the tax and delay of transferring collected 

taxes, 81% requested the transition of property tax to their offices instead 

of the tax department. 

Intergovernmental transfers are analyzed in Table 2.4.2, with the 

variance percent between the actual and the budgeted intergovernmental 

revenues. Al- Bireh and Ramallah municipalities have the highest percent 

of intergovernmental revenues percent to total revenues in Table 2.4.3.  



54 
 

Table 2.4.2: Analysis of intergovernmental revenues in an amount 

Municipality Year Property Tax Transportation Fees Occupational License Tax Intergovernmental Revenues Variance Percent 

Tubas 

2015 843,100 454,677 - 1,297,777 76% 

2016 376,287 - - 376,287 18% 

2017 1,332,999 554,548 - 1,887,547 69% 

Jericho 

2015 3,238,756 451,824 247,007 3,937,587 105% 

2016 4,391,832 551,141 399,348 5,342,321 108% 

2017 4,584,561 560,370 311,335 5,456,266 N/A 

Al- Bireh 

2015 22,545,080 948,793 935,434 24,429,307 130% 

2016 12,758,491 1,452,195 845,838 15,056,524 79% 

2017 16,053,339 1,157,959 250,014 17,461,312 97% 

Hebron 2015 11,736,131 - 1,746,518 13,482,649 43% 

Jenin 
2015 3,500,000 1,161,058 - 4,661,058 31% 

2016 - 500,000 - 500,000 11% 

Bethlehem 2016 2,589,141 755,634 933,522 4,278,297 63% 

2017 3,766,553 754,605 551,337 5,072,495 81% 

Ramallah 2016 21,304,493 831,946 1,358,868 23,495,307 85% 

2017 18,910,240 1,081,530 1,262,452 21,254,222 78% 

Salfeet 

2015 655,396 - 81,509 736,905 78% 

2016 1,211,553 - 141,481 1,353,034 138% 

2017 937,935 - 91,393 1,029,328 80% 

Qalqilia 

2015 1,740,725 4,453,928 249,621 6,444,274 162% 

2016 2,188,422 - 328,658 2,517,080 N/A 

2017 2,368,573 1,112,678 320,924 3,802,175 96% 

Nablus 

2015 - 5,000,000 4,259,333 9,259,333 18% 

2016 7,369,157 8,235,516 1,881,898 17,486,571 N/A 

2017 22,034,678 3,091,881 1,265,877 26,392,436 N/A 

Total/ NIS  166,437,442 33,110,283 17,462,367 217,010,092  

 



55 
 

Table 2.4.3: Analysis of intergovernmental revenues in percent 

Municipality Year 
Total 

Revenues 

Percent of Intergovernmental 

Revenues from Total Revenues 
Property Tax 

Transportation 

Fees 

occupational 

License Tax 

Tubas 

2015 6,142,069 21.1% 14% 7% 0% 

2016 5,103,837 7.4% 7% 0% 0% 

2017 6,956,008 27.1% 19% 8% 0% 

Tulkarm 

2015 73,288,131 0.0% 0% 0% 0% 

2016 69,833,428 0.0% 0% 0% 0% 

2017 82,368,002 0.0% 0% 0% 0% 

Jericho 

2015 27,671,104 14.2% 12% 2% 1% 

2016 20,689,282 25.8% 21% 3% 2% 

2017 21,932,086 24.9% 21% 3% 1% 

Al- Bireh 

2015 45,979,268 53.1% 49% 2% 2% 

2016 39,107,291 38.5% 33% 4% 2% 

2017 33,989,618 51.4% 47% 3% 1% 

Hebron 
2015 77,075,813 17.5% 15% 0% 2% 

2016 74,252,031 0.0% 0% 0% 0% 

Jenin 
2015 21,175,905 22.0% 17% 5% 0% 

2016 17,783,973 2.8% 0% 3% 0% 

Bethlehem 2016 17,048,242 25.1% 15% 4% 5% 

2017 20,721,097 24.5% 18% 4% 3% 

Ramallah 2016 61,245,669 38.4% 35% 1% 2% 

2017 72,554,235 29.3% 26% 1% 2% 

Salfeet 

2015 15,672,065 4.7% 4% 0% 1% 

2016 17,102,780 7.9% 7% 0% 1% 

2017 19,367,249 5.3% 5% 0% 0% 

Qalqilia 

2015 68,378,617 9.4% 3% 7% 0% 

2016 68,636,455 3.7% 3% 0% 0% 

2017 79,923,548 4.8% 3% 1% 0% 



56 
 

Municipality Year 
Total 

Revenues 
Percent of Intergovernmental 

Revenues from Total Revenues 
Property Tax Transportation Fees 

Occupational 

License Tax 

Nablus 

2015 128,031,661 7.2% 0% 4% 3% 

2016 98,750,417 17.7% 7% 8% 2% 

2017 108,101,417 24.4% 20% 3% 1% 

Total/ NIS  1,398,881,298 15.5% 12% 2% 1% 

 

 



57 
 

2.5 Municipal Bonds around the world  

Municipal bonds would help many commercially minded LGUs 

spread their wings and be less reliant on central government, this has been 

concluded by the United Kingdom Municipal Bonds Agency (UKMBA, 

2015). Local governments in North America depend mostly on municipal 

bonds, specific purpose revenue bonds primarily financed municipal 

investment in North America which also called project financing 

(Farvacque-Vitkovic & Kopanyi, 2014).  

Issuance of municipal bonds as a way to fund civic services was 

applied in some Indian municipalities (Asher & Sheikh, 2012). Many other 

countries adopted the issuance of municipal bonds. Swedish and Danish 

municipal bonds agencies both have a very successful record in issuing 

municipal bonds (UKMBA, 2015). 

The size of municipal bonds market in the United States and Canada 

is larger than the market for corporate bonds (Farvacque-Vitkovic & 

Kopanyi, 2014). USA has certain rules are issued by Municipal Securities 

Rulemaking Board (MSRB), these rules explain procedures of municipal 

bonds in details. The US Federal Reserve data from municipal bonds 

website indicates that the total outstanding municipal debt went from USD 

1.60 trillion in 2001 to the peak amount of USD 3.74 trillion in 2011; a 

133.8% increase. Therefore, how big the municipal bond market around the 

world is out of the question because it is large. The U.S. Municipal bond 

market grew with the average maturity increasing from 7.14 to 9.45 years. 



58 
 

In contrast, some researchers debated that "local government borrowing is 

too low" compared to their expenditure responsibilities for infrastructure 

and by the cause of "the low levels and high needs for capital 

infrastructure" (Vazquez, 2015, p.26). Thus, in some countries, there is a 

need to study how to operate a "subnational credit market." The necessary 

levels of subnational borrowing may not take place because of market 

failure on the supply side. 

Bonds are very common in Jordan; the neighbor country of 

Palestine. Different types of financial instruments are issued including 

corporate bonds, treasury bonds, treasury bills, and Islamic Sukuk. Bonds 

for water authority are marked in Amman Securities Exchange. In 2017, 

there was new issues of a total value of 250 million Jordanian Dinars 

(SDC, 2017). In 2016, the total value registered of treasury bonds for the 

whole Jordanian government is JD 5701 million. From our interviews, 

Khraim explained that the Jordanian government-initiated bonds by private 

placement to the financial institution contending higher interest rates and 

complicated terms, later bonds were targeted to the public (Appendix 1, 

PEX Interview). 

Jordan Securities Commission plays a role in supervising and 

regulating the issuance besides dealing in securities. Also, Securities 

Depository Center has been created by the private sector in Jordan to 

ensure safe custody of ownership of securities, registering and transferring 



59 
 

ownership of securities traded on Amman Securities Exchange, and settling 

the prices of securities among brokers. 

PMA was able to take the first step to improve Palestine‟s 

socioeconomic status. PMA tried to encourage lending and borrowing by 

suspending credit rating to make financial instruments more accessible for 

people (Awartani, 2016). Thus, the PMA has launched a financial inclusion 

strategy “that bodes well for efforts to enhance access to credit on more 

affordable terms to a wider share of the population, including all 

Palestinians sectors” (Awartani, 2016). 

In Croatia, LGUs used all possible debt instruments, including 

municipal bonds, loans and even getting into debt with contractors (for 

works) from 1997 to 2009 (Bajo & Primorac, 2010). South Africa is the 

only African country that issues municipal bonds (Farvacque-Vitkovic & 

Kopanyi, 2014). In 2004 the city of Johannesburg issued USD 53 million, 

11.9 percent bond, mature in 12 years, and purchased a partial bond 

guarantee about 40% of the bond‟s proceeds. Even though in Western 

Europe municipal banks have been formed to support local governments, 

Western Europe leveraged the historical preferential access to long-term 

saving deposits and government contributions to create municipal banks 

and financial institutions. Examples of some countries having municipal 

banks include Netherlands, Belgium, France, and Spain (Farvacque-

Vitkovic & Kopanyi, 2014). Some countries prohibit municipal borrowing 

such as Pakistan, China, and Chile (Farvacque-Vitkovic & Kopanyi, 2014). 



60 
 

In Brazil, borrowing is forbidden from the central bank and upper levels of 

government. 

To borrow means cost money. The strong financial position is aimed. 

Ongoing monitoring of borrowed funds should be completed frequently or 

annually which depends on the risk and basic analysis. Ongoing monitoring 

and expanded analysis should be documented. 

Credit ratings and creditworthiness analysis are treasured methods to 

prove that the municipality has the capacity to repay a loan or bond on 

time. Credit rating system can detect omissions in managing municipal 

operations, and detect failures (Bajo & Primorac, 2010). Better credit rating 

allows borrowing at lower interest rates; this theory corresponds with a 

history of positive credit rating implications on debt repayment. Emerging 

economies that have local government ratings include Romania, Ukraine, 

Morocco, Brazil, India, Poland, South Africa, Argentina, Kazakhstan, 

Turkey, Mexico, Bulgaria, the Russian Federation, and Malaysia. Mexico 

has been particularly active in promoting the preparation of credit ratings 

for local governments as a base for both bank credit and bond issue. 

Ratings are mandatory for local governments in India when the maturity of 

the issue is more than 18 months (Farvacque-Vitkovic & Kopanyi, 2014). 

Rating agencies use mathematical ratios to compare an issuer with others. 

Different agencies use methodologies to determine their rating opinions 

and different quantitative and qualitative criteria (MSRB, 2008). However, 



61 
 

a rating is not a scientific evaluation. But the subjective judgment plays a 

fundamental role in the rating assigned . 

Bond issuing is expensive. LGUs (issuers) need to pay fees to the 

rating agency, fees to the bank that sells the bonds to the public 

(underwriter), fees for the operations in the capital market, and the cost of 

marketing and publicity (Farvacque-Vitkovic & Kopanyi, 2014). The bond 

rating process is a complex one (Palumbo, Shick & Zaporowski, 2006). For 

instance, Fitch Rating‟s payment can reach up to USD 750,000 per issue 

(Farvacque-Vitkovic & Kopanyi, 2014). The cost depends on the time and 

effort it takes to evaluate the bond issuer. Given the lack of data on small 

municipalities, the rating can be expensive. Small or medium 

municipalities can rarely issue bonds because of the high cost and because 

potential investors are not very interested in minor issues. According to this 

research, the sample consists of the largest municipalities in Palestine. 

Rating agencies appeared in 1909, and ever since they have played 

an important role in emerging and established markets (Farvacque-Vitkovic 

& Kopanyi, 2014). Rating agencies play a crucial role in providing the 

market with information on the c