Sponsoring a Race to the Top: The Case for Results-Based Intergovernmental Finance

1. Sponsoring a Race to the Top: The Case for Results-Based Intergovernmental Finance Anwar Shah, World Bank ashah@worldbank.org Ministry of Finance, Copenhagen, Denmark, September 17, 2009

2. Outline • The state of the intergovernmental finance • Taxonomy of Grants: Are unconditional grants really unconditional? • Introduction to Results Based Intergovernmental Finance • The Practice: RBIF in Broader Reform • The Practice: RBIF in Education • The Practice: RBIF in Health • The Practice: RBIF in other services • Conclusions

3. Perceptions on intergovernmental finance are generally negative Federal/Central View: Giving money and power to sub-national governments is like giving whiskey and car keys to teenagers. Provincial and LocalView: We need more grant monies to demonstrate that “money does not buy anything”. Citizens: The magical art of passing money from one government to another and seeing it vanish in thin air.

4. Perceptions about intergovernmental finance: Perspectives of The Australian Premiers’ Conference

5. Ironically these perceptions are well grounded in reality in both industrial and developing countries Primary focus on dividing the pie - devoid of fiscal and political accountability. Two dominant forms: Manna from Heaven or Passing the buck transfers – formula based unconditional transfers –mostly revenue sharing using multiple factors that work at cross puposes Conditional transfers that are either pork barrel transfers variety ( political bribes/ favors) (Germany, India, Mexico, Pakistan, USA 2008 e.g. $200m “bridge to nowhere” in Alaska ) Or simply command and control transfers – input based conditional transfers (most countries) Overall: Intergovernmental finance is an important if not dominant source of revenue but creates perverse incentives for fiscal management and accountability.

6. Conditional transfers with conditions on spending are unpopular with recipients as they impair recipient’s autonomy and may also not further grantor’s objectives

7. In practice even the manna from heaven may not be so sweet after all • No local input on total pool • No relation to growth in demand for local services • Tax effort provisions • Differential sharing of various revenues • Requirements for a development plan, technical planning committee, internal audit requirements – Uganda and Tanzania • Submission of budget estimates – Kenya and Nepal. • Equal per jurisdiction component - Brazil

8. What manna from heaven transfers buy?

13. Why governments do not deliver? Authorizing Environment Mandate Outputs, reach, outcomes Operational capacity

14. Goals of results based IGF

15. Taxonomy of grants and their impacts

16. Traditional conditional grants versus Output-based grants

17. Output-based transfers: Results Chain Application in Education

18. An example : An Output based ( performance oriented) education grant to set national minimum standards and encourage competition and innovation and citizen empowerment • 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.

19. Long Route to Accountability Inputs Control Grants National Government State Government Citizens as Clients Local Government Government Providers

20. Short Route to Accountability Output-Based Grants National Government State Government Citizens as governors Local Government Competitive Provision Govt Non Govt

21. Is there a case for results based IG finance in industrial countries? • Politicians and bureaucrats with high ethical standards and strong culture of citizen based accountability • But competition may improve performance Examples: school finance in USA – Metro DC government and non-government spending. Two contrasting models of school finance – USA vs Canada

22. The Practice of Results Based Intergovernmental Finance

23. RBIF for Furthering Broader Reform Objectives • Australia National Partnership Payments, 2009 – to create internal common market and to improve service delivery • Performance Reserve Fund of the EU – 4% to achieve public administration reforms • Russia Regional Fiscal Reform Fund – 2007 • Uganda – Local Development Fund – improving development planning and implementation capacity

24. RBIF to finance merit goods

25. RBIF of education • Australia. National school Specific Purpose Payments, 2009. Raising year 12 attainment rate to 90% • USA. Race to the Top Competitive Grant Program, 2009. Internationally benchmarked K-12 standards. • USA. No Child Left Behind Act of 2001 • Higher Education Finance in Canada, Denmark, Finland, Netherlands, South Carolina, USA • School finance in Brazil, Chile and Indonesia (now defunct).

26. USA – Race to the Top, 2009 • Raising internationally benchmarked standards • Closing the data gap on achievement scores • Improving the quality of teachers • Turning around low performing schools

27. USA – NO CHILD LEFT BEHIND 2000 - • Student testing in reading , math and science • Monitor yearly progress towards the goal of proficiency by 2014 • Equity in access regardless of race, color and ethnicity • All schools brought to minimum average standards • Higher financing for high poverty school districts • Special grants for “good school finance” states (equitable allocation and improvement in access to the poor)

28. RBIF of Healthcare • Canada. Canadian Health Transfer Program (CHT) • Brazil. Unified Health System (SUS)

29. Federal financing of health care and Social Services in Canada – Canada Health Transfer (CHT) and Social Services Transfer (CST) Equal Per capita cash transfers (plus transfer of tax points - for health and social services and post secondary education in 1977,13.5% points of PIT and 1% point of CIT) Conditions for health care transfer (CHT): (1) Universality (2) Portability (3) Public insurance but public/private provision (4) Opting in and out (5) No extra billing Conditions for CST: All Canadians treated alike for welfare programs. Penalties: Threat of discontinuation for breach of the conditions (1)- (4) above. Dollar for dollar reduction for breach of the condition (5). Sunset clause: Parliamentary review every 5 years. Anwar Shah, World Bank

30. Anwar Shah, World Bank

31. Indonesia - Specific Purpose Transfers to Local Governments (now defunct) L2. District/Town Road Improvement Grant Length of roads Condition Density Unit cost L3. Primary School Grant School age children (ages 7-12) Needs for facilities Anwar Shah, World Bank

32. From Dividing the Pie to Creating An Enabling Environment for Responsive and Accountable State-Local Governance Tax Decentralization and Tax Base Sharing Output based fiscal transfers operating capital Fiscal capacity equalization transfers Responsible borrowing

33. Conclusion • RBIF empowers citizens as governors • Weakens opportunism and pork barrel politics • Exposes corruption, inefficiency and waste • Opens public sector to competitive pressures within and beyond • An important direction of reform for both industrial and developing countries.

34. References • Boadway , Robin and Anwar Shah, editors (2007). Intergovernmental Fiscal Transfers: Principles and Practice. Washington, DC: World Bank • Boadway, Robin and Anwar Shah ( 2009), Fiscal Federalism. London and New York : Cambridge University Press.