STRATEGIC INITIATIVES ON DECENTRALIZATION EAP, May 2005

2 OVERVIEW Regional realities Impacts on the Bank Framing the challenge Strategic framework Strategic initiatives Results framework

3 REGIONAL REALITIES EAP has decentralized: improvements in service- delivery and governance now depend on sub- national governments, which control large proportions of public expenditure (from 10% in Thailand to 70% in China) are responsible for those sectors where the Bank concentrates its investment (health, education, local/regional infrastructure) Intergovernmental frameworks in EAP are v. diverse: successful decentralization strategies will be highly country-specific

4 REGIONAL REALITIES Nonetheless, three cross-cutting reform challenges emerge from the Flagship Strengthen institutional structures, e.g. clarifying the functional mandates of SNGs, and coordinating planning and investment activities Improve fiscal and financial systems, e.g. improving own-source revenues Build the functional systems - the “plumbing” – of the overall structure e.g. local financial management BUT, the region is in an “institutional interregnum” While top-down, centralized delivery systems have eroded, bottom-up incentives and capacity for local delivery are weak In many countries, the reform process is highly conflicted and has become stuck A costly low-level equilibrium threatens

5 IMPACTS ON THE BANK A very high proportion of EAP investment operations fund sub-national governments, functions, or CDD (data exclude China)

6 IMPACTS ON THE BANK Of this “decentralization lending,” direct funding of SNGs now exceeds 50% ($600m)

7 IMPACTS ON THE BANK By contrast, expenditure on decentralization AAA has decreased to below 20%

8 IMPACTS ON THE BANK Significant expenditure on decentralization capacity-building has yielded ???

9 IMPACTS ON THE BANK And the disbursement ratio on decentralized projects is consistently worse than average for EAP investment portfolio

10 IMPACTS ON THE BANK The Bank has started to come to terms with regional realities, e.g. Three CAS’ now have “Local Platforms/Pillars” Intensive analytic and operational focus in Indonesia; increasing focus in other countries EAP Decentralization Flagship Sub-national investment and decentralization has also become a priority for most donors in the region Key donors in this area include ADB, UNDP, DFID, GTZ The Bank’s relationships with these organizations are both competitive and co- operative, and vary widely between countries In most cases, donors are working increasingly closely together In some cases donor co-operation has been responsible for innovative product development (e.g. TB and Basic Education projects in China)

11 FRAMING THE CHALLENGES Challenges are framed by four key disconnects 1.The EAP portfolio is trending sub-national (80% of investment ops), BUT our sub-national operations tend to be problem prone 2.Bank projects rely on weak intergovernmental systems and sub- national governments, BUT our substantial capacity building investment ($120m/annum) is not working well enough 3.We offer policy guidance BUT impact is limited and key issues remain un/under-addressed (partic. on sub-national borrowing) 4.Working at the sub-national level requires new ways of operating, BUT we are just beginning to experiment with these

12 STRATEGIC FRAMEWORK INTERVENTION AREA STRATEGIC GOAL EXTERNALINTERNALEXTERNALINTERNAL ADVANCE ANALYTIC AND POLICY DEBATE IMPROVE INTERGOVERNMENTAL REGULATORY AND INSTITUTIONAL ENVIRONMENT STRENGTHEN LOCAL GOVERNMENTS AND GOVERNANCE STRENGTHEN LOCAL AND INTERGOVERNMENTAL SYSTEMS SPECIFIC INITIATIVES DECENTRALIZATION FLAGSHIP AND COUNTRY STRATEGIES SUB-NATIONAL INVESTMENT OPERATIONS TO INCENTIVIZE INSTITUTIONAL STRENGTHENING SUB-NATIONAL BORROWING (POLICY AND LENDING) INTERVENTIONS ORGANIZATION OF COUNTRY TEAMS & DEVELOPMENT OF SUB-NATIONAL ANALYTIC/STRATEGIC PRODUCTS

13 STRATEGIC INITIATIVES I.POLICY AND ANALYTIC WORK A. The Flagship provides an analytic framework focused on Strengthening and clarifying the IG institutional structure Building IG fiscal and financial systems Deepening accountability and building functional systems of government It will be launched at five country events in June, with local partner organizations employing a number of using a number of innovative techniques B. Country annexes and subsequent work provide initial inputs to the development of country-specific strategies in Indonesia, Philippines, Cambodia, China, Vietnam, Thailand

14 STRATEGIC INITIATIVES II. SUB-NATIONAL INVESTMENT OPERATIONS A. Pilot and expand new, innovative sub-national investment operations “Intersectoral Sub-National Operations (ISOs)” - e.g. Indonesia (ILGR); Cambodia; China (?) Performance oriented – SNG access to investment funding is tied to progress on institutional strengthening Locally empowering, through increasing the discretion of SNGs to determine local investments across and within sectors Programmatic with budget support features: funding usages not all pre-determined prior to project effectiveness; SNG systems (for procurement, FM etc.) are strengthened and used Integrated with IG fiscal systems, i.e. support IG transfer systems rather than funding specific Provide capacity-building resources in response to demand B. Begin to deal more frontally with the CDD-local government interface – Aceh as lead opportunity As decentralization deepens, and formal local and intergovernmental systems strengthen, the context for CDD modalities begins to change As the Bank channels increasing amounts of funding directly to local governments, the relationship of these lending modalities to CDD modalities will need to be confronted The post-disaster reconstruction process in Aceh provides a unique opportunity for the region to pilot this sort of effort over the next 2-3 years

15 STRATEGIC INITIATIVES III. SUB-NATIONAL BORROWING A. Make a concentrated push to improve SN borrowing frameworks, partic. in Philippines, Indonesia, Vietnam, China At the country level, work through a specific entry point (ANN C) to expand into a wider dialogue on strengthening broader SN borrowing frameworks B. Work with IFC or SNDSF on a significant non sovereign- guaranteed transaction in one or two countries (e.g. Thailand; Indonesia) Policy reform and transactional activities tend to be dialectically related C. Focus on public sector financial intermediaries – Philippines, Vietnam, China Develop a more common approach (within EAP) to when, and how, such institutions should be supported Identify specific guidelines and practices which are likely to avoid the difficulties which have characterised such entities in other regions Pursue a targeted number of opportunities to pilot these approaches

16 STRATEGIC INITIATIVES IV.COUNTRY TEAMS & ANALYTIC PRODUCTS A. Organize CTs to promote consistency, capacity and coherence in SN operations and policy dialogue Ambitious multi-donor “Platform” approaches in Indonesia More limited Core Decentralization Groups (Cambodia?) B. Analytic products Systematically review IG fiscal systems SN PERs Develop standard tools for SN fiduciary assessments

17 RESULTS FRAMEWORK ACTIVITYRESPONSIBILITYRESULT Flagship PREM/EXTImpact on decentralization debate Sub-national investment ops  ISOs  CDD interface CMUs/Sectors SD/Sectors Trend towards ISOs in region Ops which integrate CDD and LG delivery mechanisms Sub-national borrowing  Policy frameworks  Transactions  Financial intermediaries PREM/INF INF/PREM/IFC/SNDF INF/PREM Improved SN borr. environments Direct lending transactions Joint EAP approach Support for Fis Internal organization & AAA  Organization of CTs  Adaptation and development of analytic and fiduciary products CMUs PREM/COSU Formation of “LSPs” or CDGs PERs covering IG issues Standard SN fiduciary diagnostics