Basic Approaches to Decentralization Revenue sharing model Grants Shared taxes “Minor” local taxes Revenue assignment model Significant local taxes (autonomy) Loans User charges

Justifications for Intergovernmental Transfers Close the “fiscal gap” Equalize fiscal capacity and need Adjust for spillovers Increase effectiveness of central expenditures Political reasons Transfers are merely instruments Policy outcomes are key: what gets done, for whom and at what cost

Closing the “Fiscal Gap”

Equalizing Fiscal Capacity Equalize the position of governments, not people Allocate unconditional grants: give funds to government and let them spend as they choose Allocate conditional grants: allocate funds for specified purpose Avoid “gap filling”

Adjusting for Spillovers Importance of spillovers Alternatives to transfers Getting public sector “prices” right Varying price with capacity “Spillover” grants do not always induce additional local spending

How Can Intergovernmental Grants Promote Decentralization? Revenue adequacy Certainty Unconditional

Alternative Forms of Intergovernmental Grant Programs

Appropriateness of Various Grant Types

Designing & Managing Intergovernmental Grants Determine the “distributable pool” Design transparent and simple formulas that reflect the purpose of the grant tax sharing/general grants for closing the fiscal gap specific, matching (conditional) grants for correcting spillovers general, formula (unconditional) grants for equalizing fiscal capacity Specify terms and conditions Establish financial reporting, program monitoring, evaluation

Intergovernmental Grant Lessons Outcomes should drive design Expect changes in formula over time Is “distributable pool” a discretionary element in the central budget or an entitlement of local government?

Improving Capital Grant Allocations Encourage good practices (e.g., O&M) through eligibility terms and conditions Establish objective, clear and transparent process for project selection Provide adequate technical assistance Implement procedures to monitor and evaluate local activities (e.g., progress reports, field visits) Assess future infrastructure needs through periodic surveys