The Reformed Financial Mechanism

Governance and Architecture

Benito Müller, Luis Gomez-Echeverri,

The Reformed Financial Mechanism (RFM) Institutional Architecture

Key Design Principles

UNFCCC Conference of Parties (COP) External Audit COP Authority

RFM Administration

Executive Board Subsidiarity Expert Advisory Panel(s) (as required)

Administrative Services (UNFCCC Secretariat)

Independent Oversight RFM Trustee Thematic Assessment Units (one per disbursement window) Internal Monitoring and Evaluation Secretariat Services

International Level National Level

Climate Change Fund (CCF)

Direct Access

Funded Activities

Legend:

Governance Relation (‘under the authority of’) Contractual Relation (MOU or contract)

The Reformed Financial Mechanism II

Section I. Political Oversight

Benito Müller, Luis Gomez-Echeverri, Saleemul Huq, and Achala Chandani

Scope of Work Package

Part 1. National Case Studies

China India USA Switzerland

Part 2. International Case Studies

The GEF Trust Fund The Montreal Protocol Multilateral Fund The Kyoto Protocol Adaptation Fund The Global Fund The World Bank Climate Investment Funds

National Case Studies: Questions

Two questions

: 1.

2.

What is the relationship between the Legislative and the Executive Branch in the central budgeting process?

How is central funding distributed to sub-national entities?

• • • The US budgeting process begins with the formulation and the presentation of the

President’s financial proposal

to Congress Congress is

under no obligation to adopt all or any of the President's budget

and often makes significant changes.

The only influence of the LB over the budgeting process is though the threat of a

Presidential veto

of Appropriation Bills • • The Federal Council (EB) submits the draft budget to parliament The

Parliament has full rights to amend the draft budget

; the only constraint is the debt containment rule, which sets a ceiling on overall expenditures. The federal budget consists of about a thousand line items and the

parliament can decide on the level of each of it. Parliament is not only able to amend line items but it can also cancel them or introduce new ones.

• • • According to the Indian Constitution, the

Union Finance Minister

is responsible for preparing the

Annual Financial Statement

(the budget), and present it in parliament. The estimates of expenditure from the

Consolidated Fund

included in the Annual Financial Statement and required to be voted by the lower house of parliament (Lok Sabha) are submitted in the form of

Demands for Grants

. On completion of its budget discussions, the Lok Sabha passes the

annual appropriations act

, authorizing the executive to spend money, and the

finance act

, authorizing the executive to impose and collect taxes.

The Lok Sabha cannot increase the request for funds submitted by the executive, nor can it authorize new expenditures

.

• • • • •

‘S TEP ONE UP ’

:

central government agencies

(for example the Ministry of Education/Health) prepare

initial budget proposals

, which are compiled in a bottom-up process from their subordinate spending units and then submitted to the Ministry of Finance.

‘S TEP ONE DOWN ’

: Relevant departments of the

Ministry of Finance

, conduct a

preliminary review of these initial budget proposals

from the line ministries and other central government agencies. The

Budget Department of MOF

reviews the initial budget proposals from a broader perspective, balances competing resource needs and

produces a tentative consolidated budget

for the central government as a whole, which is submitted to the State Council. This is the basis for the

budget ceilings set by the State Council

, which are then communicated by the Ministry of Finance to all the central government agencies in order to begin step two of the process.

‘S TEP TWO UP ’

: The

central government agencies draft a detailed organizational budget

, based on the approved budget ceilings, and submit it to the Ministry of Finance.

‘S TEP TWO DOWN ’

: The

Ministry of Finance consolidates the budgets

submitted by the central government agencies and then prepares a summary budget with aggregate budget lines for submission to the

State Council for review and approval

The budget is then sent to the

National Peoples Congress

(LB)

for review and approval

L Legislative v. Executive Branch : The right to micro-manage the budget E L E

(Re-) Distribution of Central Funds: China & India

CHINA

In 1995, a

transitional transfer payment

system was introduced with the aim to establish an

objective

,

normative

transfer mechanism transferring funds to poor regions. The payments are allocated on the basis of a

transitional transfer formula

, defined with reference to: – – –

the fiscal strength of the locality; the success of the province in revenue collection; political considerations – priority is given to ethnic minority, revolutionary and border regions.

INDIA Finance Commission

The Finance Commission of India provides recommendations on

the distribution of taxes from the Centre to the States

. In its tax sharing formula, the Finance Commission takes into account the factors such as

population, income distance, area, tax effort, fiscal discipline

, and an

index of infrastructure

.

Distribution of Central Assistance for State Plans: The Gadgil Formula

The Annual and Five Year Plans of the States of India are supported by

Central Assistance

. The States are entitled to receive

Normal Central Assistance

from the Union Government. Initially, Central Assistance was allocated without reference to an allocation formula. Responding to a general demand for an

objective

and

transparent

allocation of Central Assistance for State plans, the

'Gadgil formula

' was adopted during the Fourth Five Year plan (1969−74):

Population

in 1971 (60%)

; Per capita income

(25%)

; Performance

Commission.

(7.5%);

Special problems

(7.5%), at discretion of the Planning

(Re-) Distribution of Central Funds: US & Switzerland

Switzerland

Switzerland has a long-standing vertical

fiscal equalization system

(Finanzausgleich), which has recently undergone a fundamental reform. Under the new system, financially weak cantons receive unconditional payments to equalize financial strengths (‘

resource levelling

’) and financial needs (‘

burden compensation

’) between the cantons.

(i) (ii) (iii) taxable income of individual taxpayers

,

earnings from taxable assets of individual taxpayers

,

taxable profit of firms,

Levelling of resources is hence used

solely for the redistribution

and

clearly separated from other allocation objectives

(such a compensation for mountainous terrain) that are covered under the heading of ‘burden compensation’

USA ?