PERs for Multi-tiered Governments

1. PERs for Multi-tiered Governments Public Expenditure Analysis and Management Seminar World Bank, May 24, 2001 Anwar Shah, World Bank

2. Why look at intergovernmental fiscal relations in a PER? • PER as an expenditure numbers game • PER as a guide to service delivery performance • Economic services • Social services • PER as a guide to the incidence of poverty • PER as a guide to regional equity • PER as a guide to fiscal health • PER as a scorecard on public sector governance • World Bank fiduciary concerns Anwar Shah, World Bank

3. What should we look at ? • Values • Perceptions • Beliefs • Aspirations • Authorizing Environment • Institutions • Rules and restraints • Operational Capacity • Organizations • Culture • Skills Anwar Shah, World Bank

4. Fiscal federalism dimensions of the authorizing environment • Division of powers • Spending • Taxing • Transfers • Borrowing • Budgeting, planning, audit and accounts • Institutions of coordination and conflict resolution Anwar Shah, World Bank

5. Why public sector is “the coldest of cold monsters” in LDCs? Values, Mission, Goals Authorizing Environment Operational Capacity Outputs, Results, Outcomes Anwar Shah, World Bank

6. Division of Powers • “There are nine and sixty way to build fiscal tiers and every single one is right” – Kipling • Who does (de-jure and de-facto) • what (4 Ds), • how and how they interact • and why? • How much they spend and what do they deliver? • Overlapping/ shared responsibilities – not an issue. But concern with, among whom and how? Anwar Shah, World Bank

7. Decentralization: Basic Concepts Terminology: • Deconcentration • Delegation • Decentralization: The quest for right balance in taxing/borrowing, spending, and regulatory responsibilities among multi-centered governments. • Devolution: People empowerment Anwar Shah, World Bank

8. …..Division of Powers • National Objectives and Fend-For-Yourself Federalism • Stabilization and coordination • Fiscal discipline • Internal Common Market • National Minimum Standards • Regional Equity Anwar Shah, World Bank

9. ………..Division of Powers • Have trust and faith in your big brother • If there is money, it must be central • If it is broken, it must be local • Shifting deficits downwards • Unfunded mandates • Power to the people/ Citizens charter Anwar Shah, World Bank

10. Expenditure Assignment: Conclusions Decentralize unless a convincing case for centralization. National objectives through conditional block grants and regulations • Federal/National Government:external relations; national public goods; internal common market; redistribution; transfers to persons; regulations affecting factors and commerce Anwar Shah, World Bank

11. …….Expenditure Assignment • Provinces/States: health; education; social welfare; inter-municipal roads; environment; fiscal equity among municipalities; local government oversight. • Local Governments: All local public services to municipal and regional governments and special purpose bodies who create an enabling environment and/or decide on public and private partnerships and/or delivery systems. Anwar Shah, World Bank

12. …..Expenditure Assignment • Lack of institutional capacity should not be an excuse for centralization. Apply asymmetric decentralization based on objective criteria such as population, service area and fiscal capacity. Anwar Shah, World Bank

13. Evaluating Tax Assignment: Fundamental Considerations • efficiency of the internal common market • national equity • efficiency in tax administration • fiscal need Anwar Shah, World Bank

14. More Taxing than Taxes • Mismatch in revenue means and expenditure needs • Lack of access to more productive bases • Uncertain revenues • Perverse incentives for collection • Unreasonable collection charges • Uncoordinated but overlapping tax roles • Transition economies: lack of interest in sharing the proceeds; free services vs taxes Anwar Shah, World Bank

15. Tax Assignment: Lessons • For sub-national autonomy and accountability, match revenue means as closely as possible to expenditure needs. • Customs, CIT and resource rent taxes not suitable for sub-national assignment. VAT? • Provincial taxes: residence based taxes, sin taxes and benefit charges. • Local taxes: Taxes on immobile factors and cost recovery and benefit charges Anwar Shah, World Bank

16. ……Tax Lessons • Encourage tax base sharing: Allow sub-national governments to levy supplementary rates on federal income tax base. • Revenue sharing on a tax by tax basis not desirable • Establish revenue stabilization pool for widely fluctuating revenues. Anwar Shah, World Bank

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

18. Criteria for evaluating transfers • Autonomy • Revenue adequacy • Equity • Predictability • Efficiency • Simplicity • Incentive • Safeguard of grantor’s objectives Anwar Shah, World Bank

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

20. Transfers to encourage competition and innovation- school transfer • Allocation basis to districts: per capita based upon population aged 5-14 • Distribution to providers: Equal per pupil (each female student to be counted as 1.5 pupil) to all schools (public, non-profit and private) • Conditions: Universal access to primary and secondary education, private school to admit children on merit and tuition waiver for those that lack the ability to pay • Penalties: public censure, reduction of grant funds • Incentives: retention of savings Anwar Shah, World Bank

21. Borrowing: Conclusions • Access to credit vital for responsive and accountable governance • Direct controls on sub-national borrowing neither desirable nor enforceable • Focus on authorizing environment to expand responsible access to credit. Anwar Shah, World Bank

22. Credit market access remains an unmet challenge in LDCs but... • tax decentralization • central bank independence • fiscal rules: EU, Brazil • golden Rules: Canada, USA, Germany, Switzerland • fiscal incentives: USA • Popular referenda: Swiss • Intergovernmental Cooperation: Australia, Denmark Anwar Shah, World Bank

23. …industrial countries have shown the way. • Municipal rating agencies • Financial market reforms: arms length relations among governments and commercial banks. • No bailouts • Information with standardized auditing and accounting • Private provision of public services • Municipal bond banks • Municipal finance corporations Anwar Shah, World Bank

24. Institutions of Intergovernmental Relations • Legislative bodies • Constitutional courts • Executive Committees/ Councils • Fiscal Commissions Anwar Shah, World Bank