1. Grant Financing of Metropolitan Areas: A Review of Principles and Practices Anwar Shah, SWUFE, China and Brookings Institution (shah.anwar@gmail.com)shah.anwar@gmail.com WBI Webinar 28 May 2012

2. Metro Areas – basic characteristics At the core of prosperity of nations Great expectations critically linked to fiscal health and thereby to fiscal regimes. e.g. St.Louis. MO Compact areas with high population and population densities Varied governance structures and tiers – From uni-city to fragmented governance Large and dynamic tax bases but metropolitan government access restrained. Existing bases overtaxed in OECD. Unfunded mandates Grant design critical for responsive, responsible, fair and accountable metropolitan governance and local economic development

3. 3 Allocation basis among local governments: school age children (ages 6-17) Distribution to providers: equal per pupil to both government and private schools Conditions: Universal access to all, private school admissions on merit regardless of parents’ income, improvements in school achievement scores, graduation and drop out rates, no condition on spending Penalties: public censure, reduction of grant funds Incentives for cost efficiency: retention of savings Built-in bottom up results based accountability: competition with voice and exit options as parental choice of school determines school grant. The Practice of Intergovernmental Fiscal Transfers An example: An Output based (performance oriented) education grant to set national minimum standards and encourage competition and innovation and citizen empowerment

4. Metro services that are strong candidate for grant finance Primary and secondary, education and public health Welfare assistance Arterial road and regional public transit National heritage museums and Olympic parks

8. Additional considerations in developing a grant strategy for metro areas Autonomous public agencies for service delivery. Not relevant for grant design. Functional, overlapping and competing jurisdictions. Output based grants a suitable tool. Fragmentation of metro by single purpose jurisdictions. Revenue inadequacy relevant for grant design. Contracting out metropolitan services. Output based grants to assure services to the poor.

9. Grants and own source revenues in uni- city metro areas

11. Grant and own source financing by horizontally coordinated or fragmented metro areas

13. Metro dependency on central transfers by type of metro governance

14. Metro areas with major dependency on central transfers

15. Examples of better practices are hard to find. One size does not fit all. Prague as the only exception. Grant to promote competition among local jurisdiction. Examples Albania and Russia. Output based transfers for school finance. Examples: Thailand, Brazil, Canada, Chile, Australia. Solidarity principle for inter and intra metro equalization. Examples: Denmark, Finland Tax rebates by origin of collection. Shanghai, Beijing

16. Notable Points of Departure of Practice from Principles One size does fit all approaches. No recognition of metro governance structure, responsibilities, unique role in global and national connectivity. Nature of metro services not considered. School financing from property taxes and input control grants in USA, UK rather than from PIT and output based grants. Complex criteria with lack of focus on objectives No sunset clauses or review provisions

17. Departure of practice from principles (2) Self-financing highly constrained with only a handful of exceptions Tax by tax sharing and revenue sharing widely practiced. General purpose transfers –one size fits all approach- discriminates against metro areas. Spillout of benefits rarely compensated. Project based specific purpose transfers with input conditionality and unfunded mandates in vogue –undermine local autonomy and accountability –examples Bangkok and Jakarta

18. Notable points of departure of practice from principles (3) Need greater tax autonomy through tax decentralization and tax base sharing Greater access to capital finance Results based grant financing (output based grants) of social and infrastructure services to encourage competition, innovation and citizen based accountability. Tournament based grant financing to encourage benchmarking. Certificate based grant financing to incentivize management reforms

19. Lessons from International Practice Metro areas have high dependency on central transfers. Metro areas unfairly treated in grant design. Require separate program. Metro areas need greater tax autonomy and access to more productive tax bases e.g. income, sales and environmental taxes.