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Basic Approaches to Decentralization

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”

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Basic Approaches to Decentralization

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  1. 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

  2. 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

  3. Closing the “Fiscal Gap”

  4. 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”

  5. 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

  6. How Can Intergovernmental Grants Promote Decentralization? • Revenue adequacy • Certainty • Unconditional

  7. Alternative Forms of Intergovernmental Grant Programs

  8. Appropriateness of Various GrantTypes

  9. 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

  10. 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?

  11. 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

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