WB Work on Decentralization in ECA 72 active projects, studies involving decentralization, local government, urban, rural, or community development 57 multisectoral DPLs since 2000, many of which have IGR components PEIRs also address decentralization, intergovernmental issues

Project lending focuses on the grass roots or specific municipalities PROJECT NAME COUNTRY Rural Investment Project (AZRIP) Azerbaijan Rural Development Project Georgia Rural Investment & Services Project (APL #2) Moldova Post-Accession Rural Support Project Poland Rural Development Project (APL #1) Romania Rural Infrastructure Rehabilitation Project Tajikistan Community Works 2 Project Albania Community Development Project Bosnia and Herzegovina COMMUNITY DEV SUPPLMT Community Development Fund 2 Project Kosovo Municipal Development & Decentralization 2 Project Municipal Services Project Turkey Municipal Water and Wastewater Project Armenia Urban Infrastructure & Service Delivery Project Municipal Environmental Infrastructure Project Croatia MUNICIPAL SERVICES PROJECT Municipal Infrastructure Development Project Fiscal Decentralization IDF Grant Local Government Capacity Building Grant to Implement Intergovernmental Fiscal Reforms Kyrgyz Republic

Correspondence: finance follows function Major Issues in IGR in ECA Countries • Correspondence: finance follows function Transparency and predictability Equity Macroeconomic control Incentives for efficiency

Before Reform Local governments had broad responsibilities: public utilities, education, health No political autonomy Resources based on norms, negotiations

The Transition (1) Local governments became legally independent Existing organizational structure maintained or even further fragmented

The Transition (2) Multi-party elections held Some countries centralize social sectors But most leave existing local functions intact and Search for new ways to finance them

The New Revenue Structure Very little local taxing power Most revenues from shares of national taxes, intergovernmental transfers

Intergovernmental Transfers New systems distinguish ‘local’ from ‘delegated’ functions, with separate funding for each Local functions: water supply, sewerage, SWM, roads, planning, land use Delegated functions: education, health, social assistance

Local Functions Financed from shares of PIT, non-earmarked transfers Shares of PIT vary

Criteria for Equalization Revenues per capita Expenditure needs Land area Road length School aged children Hungarianism

Financing Education Declines in enrollment in rural schools prompt shift in financing Old system: based on facilities, teachers New system: based on enrollment Equitable: equalizes spending per pupil Encourages efficiency: Cuts spending in under enrolled schools Gives school directors budget autonomy

But… Controversial, because schools closed, teachers dismissed Governments respond by: Adjusting formula to reduce immediate impacts Improving surviving schools

Health High costs, inefficiency in health care prompt changes in financing Governments respond by: Dividing primary form secondary health care Introducing capitation financing for primary care

But.. Attempts to introduce performance criteria into primary care financing not successful Performance criteria for secondary health care even less so

Are reforms successful? objective status correspondence Ongoing debate over adequacy of transfers transparency Yes, but some more than others equity Yes, but some more than other macro control Yes, although threat of arrears, borrowing efficiency Yes in education; less so in health