1. Intergovernmental Transfers: Theory and Practice
Roy Bahl
Dean, Andrew Young School of Policy Studies
Georgia State University
The World Bank
May 8-10, 2006
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Intergovernmental Transfers

2. Basic Approaches To Decentralization
Revenue-Sharing Model (Weak Decentralization)
Grants
Shared Taxes
“Minor” Local Taxes
Revenue Assignment Model (Strong Decentralization)
Significant Local Taxes (Autonomy)
Loans
User Charges
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3. Intergovernmental Transfers
Rule’s (Cont’d)
8. Grants and shared taxes must play an important role in almost any decentralized fiscal system in a developing or transition country. Transfers may be designed as more centralized or more decentralized.
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Intergovernmental Transfers

4. How Can Intergovernmental Transfers be Decentralizing?
Revenue Adequacy
Certainty
Unconditional
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5. How Can Intergovernmental Transfers be Centralizing
No transparency in vertical sharing
Ad hoc distributions
Uncertainty and year-to-year changes
Strict Conditions
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6. Justifications for Intergovernmental Transfers
Close the “fiscal gap”
Equalize fiscal capacity and need
Adjust for spillovers
Political reasons
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Intergovernmental Transfers

7. Equalizing Fiscal Capacity What Do We Equalize?
Revenue Capacity
Expenditure Needs
Needs-Capacity Gap
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8. Calculating a Needs-Resource Gap: The Needs
Needs-resources gap (G) might be defined more precisely as
(1)
where
where = the amount of expenditure needed to provide a minimum
acceptable level of (assigned) services in local government i.
=the revenue that would be raised from own sources at “normal” effort in local government i.
The vertical share (VS) is equal to
VS = (2)
Where α is the percent of the needs-resources gap that the central government proposes to cover with the transfer, and CR is the total amount of revenue (or tax revenue) raised by the central (or state) government.
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9. Adjusting for Spillovers
Importance of spillovers
Alternatives to transfers
Getting public sector “prices” right
Varying price with capacity
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10. How To Design A Grant System
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11. How Should The Grant System Be Structured?
Alternative Form of Intergovernmental Grant Programs
Method of determining the total divisible pool
Method of allocating
The divisible pool
Among eligible units
Specified share of National or state Government tax
Ad Hoc Decision
Reimbursement Approved Expenditures
Origin of collection of tax A NA
Formula B F
Total or partial reimbursement of costs C G K
Ad Hoc D H
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12. Natural Resource Revenue Sharing: The Case for More Centralization
The Stability Argument
The Disparities Argument
The Local Capacity Argument
The National Treasure Argument
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13. Natural Resource Revenue Sharing: The Case for More Decentralization
The Cost Reimbursement Argument
The Heritage Argument
The Conflict Resolution Argument
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14. Intergovernmental Grants: How Not To Do It!
Deficit Grants
Complicated Formulae
No Transparency
No Continuity
Base It On The Amount Spent
No Evaluation
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15. Intergovernmental Grant Lessons
Desired outcomes should drive design
One grant/transfer instrument cannot accomplish multiple objectives.
Expect changes in formula over time
Is “distributable pool” a discretionary element in the central budget or an entitlement of local government?
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