The World Bank 1 Roles and Expenditures across Levels of Government Presentation for: Public Expenditure Analysis and Management Course Monday, May 21st, :00 pm Presented by: Kai Kaiser, Economist Public Sector Group Poverty Reduction and Economic Management Network (PRMPS)

The World Bank 2 Overview A. Intergovernmental Fiscal Systems –Levels of Government –Roles & Responsibilities B. Sub-National Expenditure Assignments –Principles & Issues –Empirical Evidence C. Doing PERs in Decentralized/Sub-National Contexts –Diverse Approaches –Public Expenditure Management versus Sectoral Lenses –Special Issues to Consider D. Intergovernmental Transfer Systems –Vertical Imbalances and Own Source Revenue Mobilization E. Assessing Fiscal Decentralization Design, Implementation, Diagnosis Top-down versus Bottom Up Accountabilities

The World Bank 3 Decentralization A World-Wide Phenomenon Underway in over 85 countries –Often evolving process Political and economic rationales Varieties –Deconcentration –Delegation –Devolution –Privatization Spans political/legal, fiscal, administrative…

The World Bank 4 Expenditures Revenues Intergovernmental transfers Subnational borrowing/debt Four Pillars of Intergovernmental Fiscal System

The World Bank 5 Expenditure Assignments Macroeconomic stability Public Service Delivery –Effectiveness/Efficiency –Public Management Innovation Poverty Reduction –Responsiveness –Equalization

The World Bank 6 State Architectures Federal versus Unitary –Legal/Constitutional Status of Sub-Nationals? Tiers of Government –# Levels –Scale Devolved versus Deconcentrated Structures –Territorial Organization –Functional Agencies

The World Bank 7 Expenditure Assignment Issues Design –Public goods, externalities, economies of scale, public sector competition –Ideally, services should be provided at lowest level of government where benefits lie (subsidiarity) –Revenue & Expenditure Assignment Design Will Differ Practice –Ultimately, no single best assignment Provision “Technologies” May Change Over Time Preferences/Needs May Evolve –Clarity in expenditure assignment often lacking dejure versus defacto –Significant expenditure responsibility needed for autonomy –Public provision doesn’t imply public production Contracting Out

The World Bank 8 Macroeconomic Stability Key factor is “hard budget constraint” –Hierarchical versus Market Based Creates incentives for subnational fiscal discipline Limits risk of central government Can be “softened” through several channels (intergovernmental fiscal system, financial system, SOEs, borrowing, etc.)

The World Bank 9 Allocative Efficiency (Subsidiarity) Matching local needs and preferences with local public expenditure patterns Assumes –Substantial fiscal autonomy/budgeting –Political decentralization Are elections held? How are candidates selected? Intra-party hierarchical control mechanisms? What do elections mean? “Bottom-up” Accountability

The World Bank 10 Decentralized Assignments Amount: Which Level of Government Decides Amount? Structure: Which Level of Government Defines Structure? Recurrent/Capital? Execution: Which Level of Government Executes the Expenditure? Supervision: Which Level of Government Supervises and Sets Standards? Country and Sectoral Contexts Provide for Significant Diversity in Arrangements

The World Bank 11 Subnational Expenditure Shares Subnational Tax Shares Developing Countries 1970s13.0% (48)10.4% (43) 1980s13.2% (43)7.7% (35) 1990s13.8% (54)9.3% (28) Transition Countries 1990s26.1% (23)16.6% (14) OECD Countries 1970s33.8% (22)18.7% (22) 1980s32.3% (23)18.7% (22) 1990s32.4% (23)19.1% (23) Decentralization Trends Source: International Monetary Fund. Government Finance Statistics Year Book, various years, Country Tables

The World Bank 12 Differences Across Regions Subnational Share of Expenditures Subnational Share of Revenues Note: Simple average of most recent observations in available countries. Numbers in parenthesis indicate number of countries represented. Figure do not typically include deconcentrated spending. Source: International Monetary Fund. Government Finance Statistics Year Book 1998, Country Tables.

The World Bank 13 International Diversity

The World Bank 14 Decentralized Social Sector Expenditures Source: IMF GFS

The World Bank 15 Unbundling Expenditure Assignments Policy MakingWho sets the main policy guidelines for a service (e.g., free primary education as a national policy)? Standards Setting Who sets the standards (e.g., national tests versus local building standards)? Administration/contractingWho is the primary government authority that administers services on a day to day basis? FinancingWho provides the financing for services? Capital investments, wages, O&M? Service delivery Who actually produces/delivers the service (e.g., this can often be private)? Regulation Who regulates a service (e.g., professional accreditation in health)? Monitoring & Evaluation Who monitors and evaluate a service (e.g., how can local citizens provide feedback)?

The World Bank 16 Comparative Assignments

The World Bank 17 Designing PERs in Contexts with Significant Sub-Nationals National PERs to Get at Consolidated Fiscal Picture –How large is sub-national sector? Estimates of Own source revenues PERs Focusing on Sub-National Diversity –Decentralizing Indonesia (2003) –Nigeria State Finances Study (2003) State-Level PERs –E.g., South Asia: India & Pakistan Local Government Finance/PFM Assessments –India Fiscal Decentralization to Rural Governments (2004) –Uganda Integrated Fiduciary Assessments (2005)

The World Bank 18 Public Expenditure Management Lens Clarity in expenditure assignment? Adequacy of resources? Formula-based transfer system? Hard budget constraint? Budgeting and reporting systems –Uniformity vs. flexibility –Carrots vs. sticks Procurement –E.g., Contracting Out Sub-National Fiscal/PFM Diagnostics –Adopting the PEFA Framework to Special Context of Sub-Nationals –Diversity Across Sub-Nationals –Data and Effort Challenges!

The World Bank 19 Service Delivery Lens Decentralization –Allocative efficiency effects –Intergovernmental fiscal framework –Sufficient capacity “Technology” –School autonomy/community participation –Purchaser/provider split in health –Incentives for service providers Institutional structures –Civil service, budgeting and financial management processes, performance incentives –Resources reach front-line service providers (PETs)? Accountability

The World Bank 20 Rationales for Intergovernmental Transfers Vertical imbalances Horizontal imbalances Inter-jurisdictional spillovers (externalities) Enhancing national objectives at the subnational level Paying for national programs implemented by subnational governments

The World Bank 21 Local Revenue Issues Own resources typically inadequate to carry out assigned functions –Striking variations in size and capacity – one size doesn’t fit all –Local revenues often inelastic, and not adequately responsive to changing needs Local revenue mobilization strengthens accountability –Link taxes with benefits derived from local government services Simplest and most effective form of tax autonomy: discretion to set tax rates

The World Bank 22 A “Good” Transfer System Transfers should be transparent and predictable (formula- based) Equalization transfers should include –A measure of “need” –A measure of “capacity” –Adequate sub-national revenue autonomy –Stable but flexible financing Avoid a proliferation of conditional grants

The World Bank 23 Equity Extent of fiscal equalization –Expenditure Needs –Fiscal Capacity Ways and means for targeting poor places and poor people

The World Bank 24 Decentralization Challenges Balance responsibilities with resources, capacity and accountability –Subsidiarity –Finance follows function –Responsibility with capacity (learn by doing) –Accountability through political channels, own source revenues, participation and transparency Create incentives for implementation to match formal arrangements

The World Bank 25 Positive or Negative Outcomes? If designed well, decentralization can –Move decision making closer to people (subsidiarity principle) –Enhance efficiency and responsiveness of service delivery –Enhance State Legitimacy/Accountability –Improve economic growth –Potentially alleviate poverty

The World Bank 26 But, good design is complicated Decentralization spans Political/Legal Fiscal Administrative policies and institutions…

The World Bank 27 Overarching Considerations Strategies –Objectives? –Champions –Early design has long-run implications –Sequencing/Priorities (esp. w/ low starting capacity) –Monitoring & Evaluation / Base-lining Managing Change/Long Run Process –New modes of operating Expectations –Credibility that LGs can deliver services? Capacity, Accountability, & Resources? Post-Conflict Context Phasing

The World Bank 28 Common Dangers Elite capture (by ethnic/racial/social groups) Opaque or arbitrary decision-making –Constituents, villagers, communities unable to hold representatives accountable due to incomplete information Corruption Patronage politics –Excessive discretion to reward friends, punish rivals Central civil servants over-rule local representatives

The World Bank 29 Decentralized Accountability Mechanisms Top Down –Central Supervision –Reporting –“Minimum Standards” Bottom Up Accountabilities –Electoral Insufficient –Proximity versus Scale/Capacity

The World Bank 30 Leveraging Transparency –Spatial Allocation of Public Resources –Sectoral Differences Health versus Education –Public LG meetings, citizen fora –Participatory Budgeting –Publicize voting records –Mobilize own source revenues –Financial disclosure (improved budgeting) E.g., Annual Review Reports –Freedom of Information Acts and/or other public disclosure laws (assets, affiliations) –Monitoring by vigilance committees, NGOs, CBOs, media –Media

The World Bank 31 Q & A + Further Resources Decentralization & Sub-National Economics Thematic Group Website Sign-up for Decentralization & Sub-National Economics TG AskGov