1 Institutional Arrangements & Sub National Finance in OECD Countries Visit of Mexican Legislators On Fiscal Policy and Public Finance OECD Headquarters, Paris 26 March 2007 Claire Charbit and Lee Mizell Regional Competitiveness and Governance Division

2 Fiscal Federalism Issues and Institutional Concerns Local Public Services are absolutely required for social and economic development –Who provide them and with what type of budget? Providing basic services more effectively allow for available funds for economic development support –What strategies are used by OECD countries for improving effectiveness of local public services delivery? Place based approaches require the participation of different levels of government –What are the mechanisms used by OECD countries for governing regional development policy?

3 Fiscal Autonomy and Fiscal Decentralisation Sub national governments' share in general government revenues and expenditure; per cent (2003) Expenditures Revenues

4 Effectiveness of Sub Central Public Spending Funding arrangements and budget rules –Types of grants (earmarked vs. general purpose) –Multi-year budgeting Competition and other market-based mechanisms –On Supply side (less monopolistic behaviours thanks to competitive tendering for public procurement), and –on Demand side (more user fees) The relevant size for organising local public service provision –Mergers vs. cooperation –Central government incentives –Urban and rural considerations Indicators to measure performance –Evaluation –Incentives

5 Governance of Regional Development Policy In all national case studied, RDP is a shared responsibility …often employing contractual mechanisms for dealing with co- ordination needs (examples of France, Italy, Spain, Canada, Germany, etc.) A contract between levels of government is any arrangement reorganising, beside the constitution, the rights and duties of governments –Contracts among levels of government are unavoidable (vertical interdependencies + assignment of responsibilities) –Contracts allow a customized management of interdependencies, useful in either unitary or federal contexts –Contracts are tools for dialog, for clarifying responsibilities, for learning –Bilateral commitments must be as « verifiable » as possible Coherence of Regional Policy is needed for improving public spending.

6 Effective place-based spending rests on three important pillars Coherent institutional arrangements Strong sub-national finances Effective administrative capacity … at all levels of government

7 CHALLENGE 1: Developing coherence by enhancing institutional arrangements SEDESOL SAGARPA SCT SENER SEMARNAT SECONOMIA SHCP Inter-ministerial commission (proposed) (Comisión Interinstitucional para el Desarrollo Nacional y Regional) “gatekeeper” + resources + authority Sub-secretariat (e.g. Italy before) ; Single ministry (e.g. Italy present) Agency model (e.g. Canada)

8 CHALLENGE 2: Strengthening finances for place-based policies 3 categories of challenges 1. Funding at the national level 2. Co-financing for regional development -EU Structural Funds 3. Fiscal relations among levels of government –Low own-source revenue Set aside unique funding Prioritize multi-year expenditures Increase incentives to raise sub- national revenue Strengthen accountability for earmarked grants Enhance use Requires sub-national own-source revenue

9 Professional workforce –Extend LSPC to all public servants –Continue extension of similar reforms at sub-national levels Management of diverse stakeholders –Assess and strengthen existing mechanisms Monitoring and evaluation –Build sub-national capacities for monitoring and evaluation –Extend evaluation to mechanisms of co-ordination Diffuse good practice –Proposed regional development agencies could provide forum Accountability –Strengthening capacities – including sub-national finance – improves accountability CHALLENGE 3: Strengthening sub-national capacities

10 Sub-national tax revenue in Mexico accounts for ~3% of total tax revenue Distribution of total tax revenue by sub-sector of government, 2004 Source: OECD (2006), Revenue Statistics Note: (1) VAT is collected by the federal government and all receipts are appropriated to States and territories