Transcript Presentatie THA

Harmonisation, Decentralisation and Local
Governance
DPWGs Country Specific
Guiding Principles:
Strengthening fiscal decentralisation and local authorities
financing:
“Fiscal decentralisation is a key factor and driver
for successful decentralisation. Support to fiscal
decentralisation should aim at strengthening the
long-term financial development and
sustainability of local governments.”
Session overview
 Understanding the context of fiscal decentralisation
 Assigning expenditure responsibilities
 Instruments for financing local government
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intergovernmental transfers
local taxation and user fees
investment capital
 Budget implementation
 Harmonisation and alignment of support to fiscal
decentralisation
First and second generation fiscal federalisms
Costs and benefits
Revisiting the wall of wonders
Decentralisation - Traditional definition
“Decentralisation is the transfer of authority and
responsibility for public functions from the central
government to subordinate or quasi-independent
organisations or the private sector.”
(Litvack and Seddon 1999)
Observations about fiscal
decentralisation around the world
 It is often history and politics -not economics- that
determines subnational government structure and
drives fiscal decentralisation reforms
 Many fiscal decentralisation reforms shifted the
financial resources to the local government level, but
failed to decentralise the discretion to manage these
resources
New “consensus” on decentralisation
“(Fiscal) decentralisation is the empowerment of people
by the (fiscal) empowerment of their local
governments.”
(Roy Bahl, 2005)
Benefits associated with fiscal
decentralisation?
 More accountability on the part of government
officials
 More willingness on the part of the local population to
pay for services
 Promise of increased revenue mobilisation
 Increases potential for innovation in economic
decision-making
Costs associated with fiscal
decentralisation
 Less macroeconomic control
 National priorities for capital investment do not
conform to local government choices
 Lead to a lower rate of spending on infrastructure,
perhaps jeopardising national growth
 Revenue centralisation gives a greater potential for
equalisation
Linkages with administrative and
political decentralisation
 The system of intergovernmental fiscal relations
should be well-designed in its own right
 The fiscal, political and administrative dimensions of
decentralisation should be properly aligned
 For every element of decentralisation (including fiscal
decentralisation), there is a need to balance discretion
with accountability
Linking fiscal decentralisation to
domestic accountability
 The provision of fiscal discretion to local governments
- whether in the form of expenditure discretion or
discretion over revenues - helps strengthening the
downward accountability by:
 encouraging the citizens to participate in decision-
making process
 encourages them to monitor local government finances
 making sure that local finances are actually used in
accordance with the priorities set forth in the budget
Intergovernmental finance:
Four pillars
Musgrave’s economic roles of government
Finance should follow function
Musgrave’s economic roles of
government
The role of the public sector is to:
 Provide a stable economic environment
 Promote a more equitable distribution of income/resources
 Assure a more efficient allocation of resources (when
markets fail)
But, no-one says that these can all be done best by the
central government!
Finance should follow function
 One cannot establish the required level of subnational
government revenues independent of an estimate of
expenditure needs.
 If finance does not follow function it becomes difficult
to effectively impose a hard budget constraint at the
subnational level if there is an insufficient revenue
assignment.
 The economically efficient assignment of revenues
requires a prior knowledge of expenditure assignment.
“Finance should follow function” (1)
“Finance should follow function” (2)
Revenue assignment
Intergovernmental transfers
The revenue assignment question
(second pillar)
 Which tax sources or non-tax revenue sources
(including fee revenues) will be made available to
subnational governments in order to provide them
with revenue sources?
Why have sub-national taxation?
 Sub-national governments are often more accountable
for controlling spending if they are also responsible for
revenues
 Reduces excessive demand by sub-national
governments for transfers from the centre
 Allows tax policy (tax levels and structure) to be
tailored to the conditions and preferences of subnational governments
Features of an ‘ideal’ local revenue
source
 Taxes that achieve a ‘correspondence’ between the tax
and the benefits from local government services
 Relatively easy to administer
 Should not be easy to give ‘perverse incentives’ to
taxpayers
 Suitable local taxes are: Property taxes; Market fees
and other local user fees; A ‘piggy-back’ personal
income tax; Motor vehicle taxes
Lessons learnt
 Local revenues should be an important part of a well-
functioning intergovernmental fiscal system, both for
economic and accountability reasons
 But, raising more local revenues is only efficient if the
revenues are well-spent, and
 Neither central politicians nor local politicians have a
strong incentive to rely heavily on local government
revenues
 As a result, local revenues are often an underemphasised part of fiscal decentralisation
Reasons
Design
Intergovernmental fiscal transfers (the
third pillar)
 Own source revenues are (almost) never enough to
cover local expenditure responsibilities
 Central (or regional) governments may provide local
governments with additional resources through a
system of intergovernmental fiscal transfers
 In most countries, transfers are (by far) the main
funding source for local government, esp. for social
sector services
Reasons for intergovernmental fiscal
transfers
 Providing incentives for efficient spending and
utilisation of the municipal revenue base
 Guaranteeing sufficient funds for managing local
functions by mitigating vertical imbalances
 Supporting regional equalisation of communities by
mitigating horizontal imbalances
Design
 Determining the distributable pool:
1. as a fixed share of national government revenues;
2. as part of the annual budget decision;
3. as a proportion of approved specific local expenditures
to be reimbursed.
 Distribution of the pool among subnational
governments
Gap-filling model
2. Local government respects hard budget constraint
3. Fiscal capacity based methods
1.
Design implications
 Centralised control and the uncertainty associated
with this:
 Can lead to poor budgeting practices
 Undermines the accountability to citizens
 Affects the stability and predictability in local policy
making
 Makes the system more prone to political pressures
 DPWG-LGD underline the need for Development
Partner (DP) dialogue, analytical work and technical
assistance on this issue
Lessons learnt
There is a need for:
 Close dialogue amongst all core stakeholders in the
design work
 Proper buy-in to the introduction of the reforms from
core stakeholders, champions of the reform and clear
institutional framework
 Current follow-up and support to the administration
of the transfer system (particularly regarding
performance-based systems)
 Transparency and accountability in all phases of the
work on transfer systems
Importance
Restrictions to subnational borrowing
Finally, the fourth pillar of subnational
finance: deficits and debt
 In many developed economies, local borrowing is an
appropriate way for local governments to fund capital
infrastructure:
 (i) it corrects the inter-temporal mismatch between
costs and benefits (in terms of efficiency, equity,
timing and practicality)
 (ii) there are numerous mechanisms that can assure
responsible borrowing
Restrictions on borrowing
In many LDCs, the absence of market-based
mechanisms to enforce a ‘hard budget constraint’
requires restricting local borrowing:
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Rules-based restrictions
Permission required
Local government bank / loan fund
No borrowing allowed
Lessons learnt (1)
 Local government borrowing should be backed by a robust
and transparent legal framework and systems and
procedures for where to borrow, for which purposes, and
possible ceilings and monitoring and supervision
frameworks
 Central governments should maintain a hard line against
subnational debt relief.
 Intermediate borrowing institutions need to be carefully
designed to avoid pitfalls
Lessons learnt (2)
 Debt thresholds may be established to ensure that local
governments borrowing is not getting out of hand.
 Strong incentives for local governments to ensure
creditworthiness should be supported
 Local governments are not in a good position to function as
borrowing institutions for others
 In cases where there is no formal regime in place for local
government borrowing, there are examples of severe
informal borrowing.
Purpose
Performance based grant systems
Purpose of local PFM
At their best, these mechanisms balance political and
economic risks, by:
 Providing a reliable account of money spent and received.
 Showing evidence that finance is being used responsibly for the
public good and in compliance with regulations.
 Demonstrating “value for money” and good governance in terms
of economy, efficiency, effectiveness and equity.
 Supporting good decision-making and assisting leaders and
managers to assess the financial consequences of policy choices.
 Serving as a basis for planning for the future, maximising income
sources and aligning these resources with service delivery
objectives.
Performance based grant systems
 Shift from “traditional” ex ante control on budgetary
inputs to accountability ex post on the basis of results.
 In a performance-based system, there is a need to
monitor the quantity and quality of outputs, and to
measure the result of delivering these outputs.
 A key publication in this regard is UNCDFs 2010
publication on Performance Based grant systems.
Example of PFM in the education sector
Lessons learnt
PFM reforms should:
 Be part of the overall support to fiscal decentralisation and
other components of decentralisation in a mutually
strengthening manner
 Focus on incentives in addition to more traditional focus
on technical improvements
 Apply a step-wise approach where there is focus on the
basic issues, while preparing for more advanced reforms
 Support the intergovernmental fiscal transfer system
 Use a learning-by-doing approach whenever appropriate
Good practices in harmonisation and alignment of
support
Small group discussion
Supporting the implementation of FD
in partner countries
 What is the policy objective of decentralisation in my
country?
 What is the current status of (fiscal) decentralisation
in my country?
 What reforms are government and donors already
pursuing to enhance decentralised local governance?
 What more can be done?
Challenges and opportunities for
harmonisation & alignment
 Support to FD reforms has often been fragmented,
scattered and without and overall strategy and action
plan
 But there are several initiatives that show great
potential to improved harmonisation and alignment:
 Performance Based Grant Systems
 Joint Financing Agreements
 Integrated fiscal decentralisation
Key lessons for development partners’
support for FD reforms
 In small-groups, try to come up with a list of around 10
key lessons on support to fiscal decentralisation
reforms
 What are – according to you - the most promising
opportunities for harmonisation and alignment within
the field of fiscal decentralisation reforms?
(20 min)
 Assign one group member to present your findings.