1. In the Name of God Original Slides based on Thomas Bossert, Ph.D. Harvard School of Public Health

2. Challenge Design mechanisms for financing and expenditure allocation that allow both achievement of national objectives and allow for innovation, local priorities, and democratic accountability at local levels Design mechanisms for financing and expenditure allocation that allow both achievement of national objectives and allow for innovation, local priorities, and democratic accountability at local levels This is a Principal-agent problem This is a Principal-agent problem

3. Basic Tools of Fiscal and Expenditure Control Controls on the amount of revenue from central and local sources Controls on the amount of revenue from central and local sources Controls on the use of revenues Controls on the use of revenues Incentives to affect the use of revenues Incentives to affect the use of revenues

4. Decisions about Financial Mechanisms Intergovernmental transfers to devolved governments Intergovernmental transfers to devolved governments Budgetary allocation rules to deconcentrated offices Budgetary allocation rules to deconcentrated offices Assignment of local “own source” funds Assignment of local “own source” funds Horizontal Equity Funds Horizontal Equity Funds Matching Grants Matching Grants

5. Intergovernmental Transfers Size of allocations from central budgets Size of allocations from central budgets Equity of allocations to decentralized governments/offices Equity of allocations to decentralized governments/offices

6. Intergovernmental or Budgetary Transfers: Needs-based Formula Needs-based Formula –Population size and density –Demographic composition –Burden of disease –Socio-economic status –Private sector access –Alternative insurance coverage –Efficiency of specialty services

7. Formula Problems and Processes Produces “winners” and “losers” Produces “winners” and “losers” Need to align resources with responsibilities and capabilities Need to align resources with responsibilities and capabilities Pace change to capacity to absorb budget increases or decreases Pace change to capacity to absorb budget increases or decreases

8. Local “Own Source” Revenue Local authority to tax and charge fees Local authority to tax and charge fees –is it wide or narrow? –over what types of activities? –how equal are local tax capacities?

9. Incentives for “Fiscal Laziness” Intergovernmental transfers as “substitute” for local resources Intergovernmental transfers as “substitute” for local resources Historical expectations that central authorities will provide for health Historical expectations that central authorities will provide for health Difficult to impose tax on own population Difficult to impose tax on own population “Drive to the bottom” -- competition among local governments to be lowest tax area “Drive to the bottom” -- competition among local governments to be lowest tax area

10. Equity Implications of Decentralization Rich communities have more resources and therefore can spend more in health than poor communities can Rich communities have more resources and therefore can spend more in health than poor communities can

11. Expenditure Gap in Chile

12. Mechanisms for Reducing Inequities Formula based on population Formula based on population “Forced” earmarks “Forced” earmarks Horizontal equity funds Horizontal equity funds Matching Grants Matching Grants

13. Expenditure Gap in Colombia: Formula Driven Equity

14. Earmarking Required assignment of intergovernmental transfers to specific activities (conditional grants) Required assignment of intergovernmental transfers to specific activities (conditional grants) Local own source funds (e.g. liquor or % of other sources) earmarked for health or for specific programs Local own source funds (e.g. liquor or % of other sources) earmarked for health or for specific programs Requirements to pay for specific uses over which local governments have no control (e.g. pay salaries without authority to hire, fire, or set salary levels) Requirements to pay for specific uses over which local governments have no control (e.g. pay salaries without authority to hire, fire, or set salary levels)

15. Equity Funds Means for horizontal redistribution of funds from local own source revenues Means for horizontal redistribution of funds from local own source revenues Hard to impose in democratic systems if wealth local governments have power in national politics Hard to impose in democratic systems if wealth local governments have power in national politics

16. Horizontal Equity Fund in Chile Wealthy municipalities put in up to 60% of own source revenues into a horizontal equity fund (Municipal Common Fund = MCF) Wealthy municipalities put in up to 60% of own source revenues into a horizontal equity fund (Municipal Common Fund = MCF) Fund redistributes funds to municipalities based on a formula of population and municipal ability to collect own source revenues Fund redistributes funds to municipalities based on a formula of population and municipal ability to collect own source revenues

17. Chilean Equalization Fund

18. Matching Grants “Incentive” for “agent” “Incentive” for “agent” Central funds contingent on local own source counterpart funding and compliance with central required programs and norms Central funds contingent on local own source counterpart funding and compliance with central required programs and norms Mechanism for reducing “fiscal laziness” Mechanism for reducing “fiscal laziness” Equity mechanism to allow poorer localities to put up less in counterpart funding Equity mechanism to allow poorer localities to put up less in counterpart funding

19. Conclusions There exist a variety of financial mechanisms to improve the equity and effectiveness of decentralization: There exist a variety of financial mechanisms to improve the equity and effectiveness of decentralization: –Transfers based on a formula weighted by population –Forced earmarking –Horizontal Equity Funds –Matching grants