Transcript Lectures on Selected Topics in Public Finance

Grant Financing of
Metropolitan Areas: A Review
of Principles and Practices
Anwar Shah, SWUFE, China and
Brookings Institution
([email protected])
WBI Webinar 28 May 2012
Metro Areas – basic characteristics
• At the core of prosperity of nations
• Great expectations critically linked to fiscal health and
thereby to fiscal regimes. e.g. St.Louis. MO
• Compact areas with high population and population
densities
• Varied governance structures and tiers – From uni-city to
fragmented governance
• Large and dynamic tax bases but metropolitan government
access restrained. Existing bases overtaxed in OECD.
Unfunded mandates
• Grant design critical for responsive, responsible, fair and
accountable metropolitan governance and local economic
development
An example: An Output based (performance oriented) education
grant to set national minimum standards and encourage competition
and innovation and citizen empowerment
• Allocation basis among local governments: school age children (ages
6-17)
• Distribution to providers: equal per pupil to both government and
private schools
• Conditions: Universal access to all, private school admissions on merit
regardless of parents’ income, improvements in school achievement
scores, graduation and drop out rates, no condition on spending
• Penalties: public censure, reduction of grant funds
• Incentives for cost efficiency: retention of savings
• Built-in bottom up results based accountability: competition with
voice and exit options as parental choice of school determines school
grant.
The Practice of Intergovernmental Fiscal Transfers
3
Metro services that are strong candidate
for grant finance
• Primary and secondary, education and public
health
• Welfare assistance
• Arterial road and regional public transit
• National heritage museums and Olympic parks
Additional considerations in developing
a grant strategy for metro areas
• Autonomous public agencies for service
delivery. Not relevant for grant design.
• Functional, overlapping and competing
jurisdictions. Output based grants a suitable
tool.
• Fragmentation of metro by single purpose
jurisdictions. Revenue inadequacy relevant for
grant design.
• Contracting out metropolitan services. Output
based grants to assure services to the poor.
Grants and own source revenues in unicity metro areas
Grant and own source financing by horizontally
coordinated or fragmented metro areas
Metro dependency on central transfers
by type of metro governance
Metro areas with major dependency on
central transfers
Examples of better practices are hard to
find.
• One size does not fit all. Prague as the only
exception.
• Grant to promote competition among local
jurisdiction. Examples Albania and Russia.
• Output based transfers for school finance. Examples:
Thailand, Brazil, Canada, Chile, Australia.
• Solidarity principle for inter and intra metro
equalization. Examples: Denmark, Finland
• Tax rebates by origin of collection. Shanghai, Beijing
Notable Points of Departure of Practice
from Principles
• One size does fit all approaches. No recognition of
metro governance structure, responsibilities, unique
role in global and national connectivity.
• Nature of metro services not considered. School
financing from property taxes and input control
grants in USA, UK rather than from PIT and output
based grants.
• Complex criteria with lack of focus on objectives
• No sunset clauses or review provisions
Departure of practice from principles (2)
• Self-financing highly constrained with only a
handful of exceptions
• Tax by tax sharing and revenue sharing widely
practiced.
• General purpose transfers –one size fits all
approach- discriminates against metro areas.
• Spillout of benefits rarely compensated.
• Project based specific purpose transfers with
input conditionality and unfunded mandates in
vogue –undermine local autonomy and
accountability –examples Bangkok and Jakarta
Notable points of departure of practice
from principles (3)
• Need greater tax autonomy through tax
decentralization and tax base sharing
• Greater access to capital finance
• Results based grant financing (output based
grants) of social and infrastructure services to
encourage competition, innovation and citizen
based accountability.
• Tournament based grant financing to encourage
benchmarking.
• Certificate based grant financing to incentivize
management reforms
Lessons from International Practice
• Metro areas have high dependency on central
transfers.
• Metro areas unfairly treated in grant design.
Require separate program.
• Metro areas need greater tax autonomy and
access to more productive tax bases e.g.
income, sales and environmental taxes.