PERs for Multi-tiered Governments Public Expenditure Analysis and Management Seminar World Bank, May 24, 2001 Anwar Shah, World Bank

Why look at intergovernmental fiscal relations in a PER? PER as an expenditure numbers game PER as a guide to service delivery performance Economic services Social services PER as a guide to the incidence of poverty PER as a guide to regional equity PER as a guide to fiscal health PER as a scorecard on public sector governance World Bank fiduciary concerns Gosplan bureaucrats advising QAG Investment spending – majority at subnational level Social spending – In Argentina nearly 95% at subnational level On the average country is doing great – but it is coming apart at seams Ability to shift deficits downwards Institutions Anwar Shah, World Bank

What should we look at ? Values Perceptions Beliefs Aspirations Authorizing Environment Institutions Rules and restraints Operational Capacity Organizations Culture Skills Anwar Shah, World Bank

Fiscal federalism dimensions of the authorizing environment Division of powers Spending Taxing Transfers Borrowing Budgeting, planning, audit and accounts Institutions of coordination and conflict resolution Anwar Shah, World Bank

Why public sector is “the coldest of cold monsters” in LDCs? Values, Mission, Goals Authorizing Environment Operational Capacity Outputs, Results, Outcomes Anwar Shah, World Bank

Division of Powers “There are nine and sixty way to build fiscal tiers and every single one is right” – Kipling Who does (de-jure and de-facto) what (4 Ds), how and how they interact and why? How much they spend and what do they deliver? Overlapping/ shared responsibilities – not an issue. But concern with, among whom and how? Define deconcentration, delegation, decentralization and devolution Anwar Shah, World Bank

Decentralization: Basic Concepts Terminology: Deconcentration Delegation Decentralization: The quest for right balance in taxing/borrowing, spending, and regulatory responsibilities among multi-centered governments. Devolution: People empowerment Anwar Shah, World Bank

…..Division of Powers National Objectives and Fend-For-Yourself Federalism Stabilization and coordination Fiscal discipline Internal Common Market National Minimum Standards Regional Equity Anwar Shah, World Bank

………..Division of Powers Have trust and faith in your big brother If there is money, it must be central If it is broken, it must be local Shifting deficits downwards Unfunded mandates Power to the people/ Citizens charter Anwar Shah, World Bank

Expenditure Assignment: Conclusions Decentralize unless a convincing case for centralization. National objectives through conditional block grants and regulations Federal/National Government:external relations; national public goods; internal common market; redistribution; transfers to persons; regulations affecting factors and commerce Anwar Shah, World Bank

…….Expenditure Assignment Provinces/States: health; education; social welfare; inter-municipal roads; environment; fiscal equity among municipalities; local government oversight. Local Governments: All local public services to municipal and regional governments and special purpose bodies who create an enabling environment and/or decide on public and private partnerships and/or delivery systems. Anwar Shah, World Bank

…..Expenditure Assignment Lack of institutional capacity should not be an excuse for centralization. Apply asymmetric decentralization based on objective criteria such as population, service area and fiscal capacity. Anwar Shah, World Bank

Evaluating Tax Assignment: Fundamental Considerations efficiency of the internal common market national equity efficiency in tax administration fiscal need Anwar Shah, World Bank

More Taxing than Taxes Mismatch in revenue means and expenditure needs Lack of access to more productive bases Uncertain revenues Perverse incentives for collection Unreasonable collection charges Uncoordinated but overlapping tax roles Transition economies: lack of interest in sharing the proceeds; free services vs taxes Anwar Shah, World Bank

Tax Assignment: Lessons For sub-national autonomy and accountability, match revenue means as closely as possible to expenditure needs. Customs, CIT and resource rent taxes not suitable for sub-national assignment. VAT? Provincial taxes: residence based taxes, sin taxes and benefit charges. Local taxes: Taxes on immobile factors and cost recovery and benefit charges Anwar Shah, World Bank

……Tax Lessons Encourage tax base sharing: Allow sub-national governments to levy supplementary rates on federal income tax base. Revenue sharing on a tax by tax basis not desirable Establish revenue stabilization pool for widely fluctuating revenues. Anwar Shah, World Bank

Grants in LDCs vs DCs LDCs DCs Passing the buck transfers (Brazil, India, South African revenue sharing) Pork barrel transfers (Brazil and Pakistan) Asking for more trouble (deficit grants and bailouts) DCs Conditional transfers Equalization transfers Anwar Shah, World Bank

Criteria for evaluating transfers Autonomy Revenue adequacy Equity Predictability Efficiency Simplicity Incentive Safeguard of grantor’s objectives Anwar Shah, World Bank

Economic rationale of intergovernmental transfers Objective To bridge fiscal gap To reduce regional fiscal disparities Setting national minimum standards Influencing local priorities To compensate for benefit spillover Regional stabilization Design Reassignment, tax abatement, tax base sharing Fiscal capacity equalization Conditional block transfers Open-ended matching transfers Open-ended matching transfers Capital grants with upkeep requirement Anwar Shah, World Bank

Transfers to encourage competition and innovation- school transfer Allocation basis to districts: per capita based upon population aged 5-14 Distribution to providers: Equal per pupil (each female student to be counted as 1.5 pupil) to all schools (public, non-profit and private) Conditions: Universal access to primary and secondary education, private school to admit children on merit and tuition waiver for those that lack the ability to pay Penalties: public censure, reduction of grant funds Incentives: retention of savings Anwar Shah, World Bank

Borrowing: Conclusions Access to credit vital for responsive and accountable governance Direct controls on sub-national borrowing neither desirable nor enforceable Focus on authorizing environment to expand responsible access to credit. Anwar Shah, World Bank

Credit market access remains an unmet challenge in LDCs but... tax decentralization central bank independence fiscal rules: EU, Brazil golden Rules: Canada, USA, Germany, Switzerland fiscal incentives: USA Popular referenda: Swiss Intergovernmental Cooperation: Australia, Denmark Anwar Shah, World Bank

…industrial countries have shown the way. Municipal rating agencies Financial market reforms: arms length relations among governments and commercial banks. No bailouts Information with standardized auditing and accounting Private provision of public services Municipal bond banks Municipal finance corporations Anwar Shah, World Bank

Institutions of Intergovernmental Relations Legislative bodies Constitutional courts Executive Committees/ Councils Fiscal Commissions Anwar Shah, World Bank