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

2. 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

3. Closing the “Fiscal Gap”

4. 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”

5. 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

6. How Can Intergovernmental Grants Promote Decentralization?
Revenue adequacy
Certainty
Unconditional

7. Alternative Forms of Intergovernmental Grant Programs

8. Appropriateness of Various Grant Types

9. 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

10. 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?

11. 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