Decentralization and Subnational Management in LAC: Lessons from experience

1. Decentralization and Subnational Management in LAC: Lessons from experience Overseas Development Institute Seminar: Strengthening Sub-National Governance for Poverty Reduction: Innovations and Impact Kathrin A. Plangemann The World Bank September 11, 2008 London, UK

2. Decentralization in LAC: The Basics • Decentralization: Transfer of authority and responsibility for governance and public service delivery from a higher to a lower level of government • Deconcentration • Delegation • Devolution • Privatization • Rationale and Stages: • Political: Creation of new levels of government/elections of local authorities as part of regional democratization process • Fiscal: Decentralization of revenue/expenditure management; intergovernmental transfers, debt • Service delivery: Enhancing service outcomes across sectors • Private sector development: Subnational investment climate

3. Benefits Greater responsiveness to citizens’ needs Allocative efficiency Increased transparency through civil society participation and clearly defined constituencies Creation of public goods (additional mobilization of public and private resources). Potential costs and risks Loss of economies of scale and control over scarce financial resources by the central government, resulting in increasing fiscal pressure Higher difficulty for coordination of national policies. Unequal distribution of resources/horizontal imbalances Weak administrative/ technical capacity adversely affecting service delivery Risk of additional fiscal pressure or over-indebtedness of subnational governments Capture by local elites (Patronage, Corruption) Why decentralize?

4. Variations across LAC: Who’s got the money? Further variations due to: • Vertical and horizontal imbalances • Discretionality in allocation of resources (e.g. earmarking) • Sectoral variations

5. From Fiscal Decentralization to Subnational Public Management From the design of fiscal federalism to greater support to Subnational Public Management: • Public expenditure management (FM, PBB, Procurement, Public investment, tax administration); • Civil service; • e-Government; • Justice • M&E • Broader GAC agenda Fiscal Decentralization Revenue Management Expenditure Management Intergovernmental Transfers Subnational Debt

6. Decentralization and Subnational Management Support in LAC • Development Policy Lending on Decentralization: • Peru, Bolivia; Colombia, Nicaragua (decentralization components) • Development Policy Lending to subnational levels: • Mexico, Argentina (Cordoba, Santa Fe, Catamarca) • Investment lending: • Chile, Brazil, Peru, Argentina • Subnational SWAP (Sector Wide Approach): • Brazil (Ceará, Minas Gerais) • Argentina (San Juan, others in preparation) • AAA (Analytical and Advisory Activity): • Bolivia, Ecuador, Dominican Republic, Chile, Argentina, Peru • Increasingly direct support to subnational governments • (e.g. FFS Mexico, Argentina, others)

7. Increased LAC lending for subnational public management * Until August 2008 (WB Projects with Sub-national government administration as major sector AND Public Sector Governance as major theme)

8. What worked, what didn’t Evaluation of effectiveness of Bank support to decentralization in 20 countries between 1990 and 2007 showed: • Bank support most effective: • design of intergovernmental legal framework and transfer system, • subnational public expenditure management • Bank support less effective: • clarification of roles and responsibilities of different levels of governments, • Improvements of own-source revenue mobilization

9. IEG: Recommendations • Invest in timely analytical work prior to lending • Seek more realistic and pragmatic loan design, after an assessment of the political economy • Improve coordination of sectoral decentralization • Combine policy-level support with TA for subnational capacity-strengthening • Encourage a more results-based approach to decentralization with greater M&E • N.B.: Impact of Bank support higher when: • Prior consensus given on decentralization reforms • Greater incentives for subnational institutional reform • Improved donor coordination

10. Emerging issues • From a focus on the overall fiscal decentralization framework to a greater focus on service-delivery across sectors, including on federal level non-priority issues • Towards a greater subnational M&E culture: results-based management and budgeting • Greater focus on spatial issues (e.g. upcoming WDR) to unbundle territorial development issues • Private Sector Development / Investment climate, particularly in MIC • Addressing the different needs of increasingly confident and innovative subnational governments through new custom-made mechanisms: FFS

11. Accountability and Capacity for Service Delivery “Supply Side” “Demand Side” From World Bank (2004) World Development Report: Making Service Delivery Work for Poor People

12. Framework for Monitoring Local Government Performance Are intermediate processes consistent with local good governance? Intermediates/Process Public Financial Management Outcomes Governance (Voice/Client Power) Outcomes Service Delivery Perceptions/Outcomes Citizens/Firms Inputs Fiscal revenue and spending patterns Is spending adequate or pro-poor? Is access and quality being achieved, e.g., at some minimum standard? WB 2007: Actionable Governance Indicators: Decentralization

13. Monitoring Subnational Public Management - PEFA • Widely used monitoring framework among different donors • Indicators allow diagnostics of areas of public expenditure and financial accountability • 28 Performance Indicators + 3 for donors, including on issues such as intergovernmental transfers • Used for measuring subnational governments PEM performance • Allows benchmarking between subnationals

14. Territorial development/investment climate: What is new? • Especially in MIC, move away from specific support mechanisms towards one level of government and towards an integrated territorial/spatial support • Increasing demands to provide support to subnational economic development, and reduction of horizontal inequalities • Need to integrate public sector strengthening with private sector development and subnational investment climate strengthening for greater subnational competitiveness, subnational ICAs, DB etc. • Innovative practices in Mexico (Guerrero), Brazil (Sao Paulo), and Argentina (Corrientes)

15. The new kids on the block • Increasingly sophisticated subnational governments, in some cases with high natural endowments are increasingly confident and eager to access markets and Bank financing • Innovative and reform-minded subnational government create demonstration effects for public sector management to be taken up and replicated at the central level (Argentina, Brazil) • Greater demand for demand-driven, customized, advisory services, with donors as just in time service-providers (e.g. FFS on subnational issues, e.g. Mexico, Chile) • Stronger pressures for donors for selectivity in addressing subnational needs: Supporting richer, reform-minded subnational governments vs. poorer, less-reform-minded governments?

16. DFID support for innovation through MGPR DFID’s Markets and Governance for Poverty Reduction Trust Fund • Governed by tripartite Coordination Group (DFID, WB, IADB) and in LAC, by cross-sectoral group • Since 2006, Grants approved for US$6,873,900 • 7 tranches, covering 47 proposals • Overarching Goals: • Reduce poverty and inequality and promote social inclusion; and • Develop good practices based on lessons learned.

17. DFID support for innovation through MGPR DFID’s Markets and Governance for Poverty Reduction Trust Fund • Two programs: • Latin American Markets and International Trade (e.g. Regional Municipal Scorecard Program on regulatory environment) • Public Sector Management and Political Systems (e.g. Strengthening of Statistical capacity, HD governance) • Objectives PSMPS: • Expand the use of political analysis and practical approaches, such as demand-side work with civil society, including unions, political parties, etc., to build constituencies for reform; and • Reinforce subnational governance, e.g. strengthening of political economy analysis to inform operations.

18. DFID Support for Subnational Management in Peru • DFID support for fiscal decentralization in Peru: Municipal mining royalties management (US$ 155k): • Objective: Increase the social accountability of municipal governments and improve their responsiveness to the demands of the local population to enhance the quality and sustainability of municipal investments financed with the mining royalties. • DFID funds allowed: • Monitoring of royalty flows and municipal investment • Dissemination of information through civil society groups • Promotion of discussion of use of public funds • Greater competition among municipal governments encouraged by close media monitoring • New accountability mechanisms, including feedback to mayors on public investment management

19. DFID Support for Subnational Management in Brazil DFID support for Bank on subnational Governance related activities (US$ 200k annually): • Analytical work: contribution to Good Governance AAA and governance “drill-downs” in social sectors; • Strengthening FM, auditing and carrying out PEFA assessments in four states; • High-level dialogue on public expenditures: • Major PSM conference on cutting-edge reforms in Brazil on OECD experiences with Finance, Planning and all state governments • Conference by Budget Secretariat on Budgeting for Subnational Governments and support to RBB

20. Impact of DFID-financing: The case of Brazil • Brazil: • Sharing good practices and building communities of practitioners across subnational governments, • Strengthening demand for PSM reform, e.g. RBM/RBB • Greater use of M&E, e.g. PEFA assessments. • Bank: • High-level dialogue: Access to key policy-makers, allowing Bank positioning as key institution on PSM, resulting in more subnational requests for PS support • Agenda-setting: quality of expenditure at center of dialogue • Increased flexibility (e.g. short-term availability of consultants), • Increased responsiveness to client needs (products/process)

21. DFID-Bank Collaboration:Achievements and Opportunities • Fostering innovation, piloting new approaches and scaling up interventions, including in areas that are traditionally not supported by the Bank (e.g. entry-points into more “political” areas) • Tapping into OECD experiences, particularly for MIC • Shift in Bank role from providing traditional development solutions to more partner and service-provider on a demand-driven basis, offering more tailor-made products • Putting governance higher on the agenda, including support to greater transparency and accountability through improved participation and consultations • Leveraging the role of the Bank as a catalyst and convening power to bring together public and private stakeholders, including strengthening of the South-South Dialogue • Promoting donor coordination by harmonizing procedures mobilizing additional support for follow-up projects

22. Thanks!Questions? kplangemann@worldbank.org