1. Anwar Shah, OEDCR1 Intergovernmental Transfers Anwar Shah, World Bank

2. Anwar Shah, OEDCR2 Relevance u Dominant source of subnational revenues in many countries. u Design matters for efficiency and equity. u Grant design must be consistent with grant objectives.

3. Anwar Shah, OEDCR3 Importance of transfers u Dominant source of revenue for subnational governments in some countries: South Africa85% Indonesia72% Provinces 72% Local85% Nigeria67% to 95% Mexico70% to 90% (poorer states) Pakistan82% to 99% u Design of transfers matter for efficiency and equity and fiscal discipline.

4. Anwar Shah, OEDCR4 Grant types Non-matching transfers: u Selective (conditional) u General (unconditional) Selective matching transfers u Open-ended u Closed-ended Conceptual impacts u General non-matching  higher welfare u Selective matching open-ended  higher expend. stimulation

5. Anwar Shah, OEDCR5 Grants in LDCs vs DCs LDCs u Passing the buck transfers (Brazil, India, South African revenue sharing) u Pork barrel transfers (Brazil and Pakistan) u Asking for more trouble (deficit grants and bailouts) DCs u Conditional transfers u Equalization transfers

6. Anwar Shah, OEDCR6 Criteria for design of transfers u Autonomy u Revenue adequacy u Equity u Predictability u Efficiency u Simplicity u Incentive u Safeguard of grantor’s objectives

7. Anwar Shah, OEDCR7 Economic rationale of intergovernmental transfers Objective u To bridge fiscal gap u To reduce regional fiscal disparities u Setting national minimum standards u Influencing local priorities u To compensate for benefit spillover u Regional stabilization Design u Reassignment, tax abatement, tax base sharing u Fiscal capacity equalization u Conditional block transfers u Open-ended matching transfers u Capital grants with upkeep requirement

8. Anwar Shah, OEDCR8 Transfers: Lessons u Grant design must conform to objectives. Main Arguments and Grant Design u Fiscal Gap: Structural imbalance as a result of a mismatch between revenue means and expenditure needs.

9. Anwar Shah, OEDCR9...Fiscal gap Reasons: Inappropriate assign: Reassign Limited tax bases: Allow joint occupancy or tax decentralization. Tax competition: Federal collection and general (not on a tax-by-tax basis) revenue sharing. Tax room lacking: Tax abatement and tax base sharing (Canada and Brazil).

10. Anwar Shah, OEDCR10 To bridge fiscal gap u Design: (a) Reassign (b) tax abatement (c) tax base sharing. u Better practices: Tax abatement in Canada; tax base sharing in Brazil, Canada, and Pakistan. u Practices to avoid: deficit grants; tax by tax sharing.

11. Anwar Shah, OEDCR11 Special issues in state-local transfers u Principal-agent relationship u Pass-thru of federal transfers from states desirable due to better access to data. u Considerations in unconditional grant design: »Classification by population size, municipality type, and urban/rural »Equal per municipality component »Equal per capita component »Service area component »Fiscal capacity component u Considerations in conditional transfers »Simple objectively verifiable indicators of need

12. Anwar Shah, OEDCR12 Indonesia -- General Purpose Transfers 1. Provincial Development Grant »Equal per province (85%) »Area (15%) 2. District Development Grant »Per capita with a floor 3. Village Development Grant »Equal per village 4. Less Development Village Grant »Per capita

13. Anwar Shah, OEDCR13 Setting national minimum standards u Design: conditional non-matching block transfers with conditions on standards of service and access. u Better practices: Indonesia roads and primary education grants; Colombia and Chile education transfers; Canada health and post- secondary education transfers. u Practices to avoid: Conditional transfers with conditions on spending; ad hoc grants.

14. Anwar Shah, OEDCR14 Education grant u Allocation basis: Population aged 5-17 u Distribution: Equal per pupil to both public and private schools u Conditions: Universal access to primary and secondary education u Penalties: Public censure, reduction of grants funds u Incentives: Retention of savings

15. Anwar Shah, OEDCR15 Health grant u Allocation basis: Weighted population by age class with higher weights for ages 0-5 and 65+ u Distribution: Patient use u Conditions: Minimum standards of services and access to health care u Penalties: Reduction of grant funds

16. Anwar Shah, OEDCR16 Indonesia - Specific Purpose Transfers to Provinces P1. SDO - Subsidy for Autonomous Regions  Public sector wages P2. Provincial Road Improvement Grant  Length of road  Condition of road  Unit cost of construction and maintenance P3. Reforestation and Regreening

17. Anwar Shah, OEDCR17 Indonesia - Specific Purpose Transfers to Local Governments L1. SDO - Subsidy for Autonomous Regions  Public sector wages L2. District/Town Road Improvement Grant  Length of roads  Condition  Density  Unit cost

18. Anwar Shah, OEDCR18... Transfers to Local Governments L3. Primary School Grant  School age children (ages 7-12)  Needs for facilities L4. Health Grant  Need for medicine, health centres, and personnel L5. Reforestation Grant  Project review

19. Anwar Shah, OEDCR19 Federal financing and health care in Canada Per capita transfers tied to rate of growth of GDP Conditions: (1) Universality (2) Portability (3) Public insurance but public/private provision (4) Opting in and out (5) No extra billing Penalties: Threat of discontinuation for breach of 1-4. Dollar for dollar reduction for 5. Sunset clause: Parliamentary review every 5 years.

20. Anwar Shah, OEDCR20 Influencing local priorities u Design: Open-ended matching transfers (with matching rate to vary inversely with fiscal capacity). u Better practices: Matching transfers for social assistance in Canada. u Practices to avoid: Ad hoc grants.

21. Anwar Shah, OEDCR21 To compensate for benefit spillovers u Design: Open-ended matching transfers with matching rate consistent with spillout of benefits. u Better practices: RSA grant for teaching hospitals. u Practices to avoid: Closed-ended matching transfers.

22. Anwar Shah, OEDCR22 Regional stabilization u Design: Capital grants provided maintenance possible. u Better practices: Limit use of capital grants and encourage private sector participation by providing political and policy risk guarantee. u Practices to avoid: Stabilization grants with no future upkeep requirements.

23. Anwar Shah, OEDCR23 Capital grants Special issues in the use of capital transfers to finance infrastructure investments. Merits: u Finance large infrastructure projects u Visible u No long-term commitment by donors Demerits: u Capital bias u Fungibility u Distort local priorities u Undermine local autonomy

24. Anwar Shah, OEDCR24 Improving capital grants u Limit their use u Require maintenance plan and user charge policy u Matching rate inversely related to fiscal capacity u Selection of recipients based on need and capacity factors and project evaluation u Technical assistance u Monitoring, inspections, audit, and evaluations u Require survey of condition of existing network for assessment of future needs

25. Anwar Shah, OEDCR25 To reduce regional fiscal disparities u Design: General non-matching fiscal capacity equalization transfers. u Better practices: Fiscal equalization programs of Australia, Canada, and Germany. u Practices to avoid: General revenue sharing with multiple factors.

26. Anwar Shah, OEDCR26 Fiscal equalization transfers REGIONAL FISCAL INEQUITY AND NATIONAL FISCAL INEFFICIENCY ARGUMENT DIFFERENCES IN NET FISCAL BENEFITS ACROSS STATES (NFBS) Reasons: a. Differences in access to source-based taxes such as resource revenues and CIT. b. Per capita incomes differs differential access to PIT and sales tax.

27. Anwar Shah, OEDCR27 c. Fiscal needs different: Proportion of old, young, incidence of disease, terrain factors, etc. Total Income = Private Income + NFBs Individuals with identical incomes in two states: RichPoor Private income10,00010,000 Tax paid 5,000 5,000 Per capita exp.10,000 5,000 NFB 5,000 0 Total income15,00010,000 ï Fiscally induced migration to RICH state. ï Inefficient and inequitable resource allocation.

28. Anwar Shah, OEDCR28 Grants rationale Solution: u Fiscal equalization transfers to eliminate NFBs u Allow replication of financial structure of an unitary state while having decentralized decision making. u Equity and efficiency considerations coincide. Design of FETs: u Must be inframarginal, i.e., no incentive to change fiscal effort to exploit the system.