Basic Approaches to Decentralization
• Revenue sharing model
– Grants
– Shared taxes
– “Minor” local taxes
• Revenue assignment model
– Grants
– Shared taxes
– Significant local taxes (autonomy)
– Loans
– User charges
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
Closing the “Fiscal Gap”
Cause of “Fiscal Gap”
Means to Close the Gap
Greater expenditures assigned Change the revenue or
to local governments than
expenditure mix among
revenues or too few revenues levels of government
Local governments are
spending beyond their means
Introduce controls or
restraints on local
governments
Local governments are not
making use of the revenue
sources available to them
Enhance local fiscal effort
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”
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
How Can Intergovernmental Grants
Promote Decentralization?
• Revenue adequacy
• Certainty
• Unconditional
Alternative Forms of Intergovernmental
Grant Programs
Method of determining total, distributable pool
Method of allocating
pool among eligible
units
Specified share of
national or state
gov’t tax
Ad hoc
decision
Reimbursement
of approved
expenditures
Origin of collection of
the tax
A
----
---
Formula
B
F
---
Total/partial cost
reimbursement
C
G
K
Ad hoc
D
H
---
Appropriateness of Various Grant Types
Objective
Of national government
 Maintain control over local finances
 Stimulate expenditures for a
particular function/overall tax effort
 Equalize services and fiscal
capabilities among localities
 Increase local tax effort
Of local government
 Maintain control over local finances
 Plan efficient budget
 Increase adequacy of local revenues
Joint
Minimize administrative costs
Grant Type
A B C D F G H K
- - - ? + + + +
? ? + ? ? + ? +
-
+ ? + + ? + ?
? ? + + ? + ? +
+ + ? ? - + + ? ? - + + + ? - -
- - - +
+ ? - ? ? - ? -
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
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?
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