Progress on Fiscal Decentralization

1
Progress on Fiscal Decentralization

• World Bank Presentation to the
• Sudan Consortium
• Vivek Srivastava Bill Battaile
• Khartoum, March 19 2007

2
Overview

• Objective to present the facts (with a focus on
  current status of wealth sharing), highlight the
  major challenges and priorities of the reform
  agenda, and outline key risks to moving forward
• Outline
• Background
• Current Facts
• Major Challenges
• Priority reform areas
• Risks

3
Background
4
Objectives of Decentralization

• Economic Need for responsiveness to local level
  demand - Allocative Efficiency
• Service provided by the lowest sphere of
  government capable of efficiently providing
  these Principle of Subsidiarity
• Political Support INC/CPA vision of poverty
  reduction and economic growth and deliver near
  term peace dividend and sub-national autonomy

5
International good practice

• Adequate share of resources transferred from
  center to sub-national levels to implement
  assigned responsibilities, given sub-national
  own-revenue capacities
• Equitable (not equal) horizontal share of
  resources across states and to local governments
  to ensure service delivery standards
• Clear assignments of expenditure and revenue
• Simple and transparent allocation criteria, with
  grants determined by independent body on
  objective basis
• Stable and predictable resource transfers with
  room for flexibility
• Sub-national budget autonomy within national
  budgetary framework
• Credible budgets at all levels with sound fiscal
  management practices
• Incentives for local revenue mobilization and
  efficiency in performance

6
Sudans legal framework for fiscal
decentralization

• Creation of Federal State, 1992
• Law establishing the National State Support Fund,
  1996
• Local Government Act, 2003
• Power and Wealth Sharing Protocols, 2004
• Comprehensive Peace Agreement, 2005
• Interim National Constitution, 2005
• Creation of GOSS, 2005
• State Constitutions (on-going)
• Darfur Peace Agreement, 2006
• Eastern Sudan Peace Agreement, 2006
• Decree establishing FFAMC, 2006
• State Local Government Acts (ongoing)

7
The need for grants in Sudan

• There are vertical imbalances due to differences
  between
• The large number or responsibilities and
  associated costs that have been devolved to the
  states under the INC and
• The relatively low own revenue potential of
  states and large revenue sources (oil, income
  tax) with the federal government.
• There are horizontal (inter-state) imbalances due
  to
• Differing ability to raise own revenues
• Differing needs due to differences in the level
  of development, population, etc. and
• Differing costs of delivering services due to
  local conditions.

8
Current Facts
9
Revenue/expenditure assignments

• Expenditure responsibility for basic services
  (primary health, basic education, water) shifted
  to state and local levels a large component of
  pro-poor allocations
• Unclear assignments of functional
  responsibilities between national and state and,
  more important, between state and local
• Mismatch between sub-national revenue and
  expenditure assignments Need for grants
• Most state governments have not yet enacted new
  legislation governing local government powers and
  responsibilities

10
Growing dependence on center for state revenues
Share of federal transfers in state revenues
11
GNU getting more money to sub-national level
Total GNU transfers to GOSS and Northern states
Source MOFNE Budget Directorate.
12
but less than planned
2006 budget reallocations away from Northern
transfers
13
Competing institutional arrangements

• How are the grants determined?
• Until 2006 by the MFNE, NSSF
• FFAMC established in November 2005 (revised
  decree in November 2006), started functioning in
  mid-2006
• Role of FFAMC (defined in CPA, INC and DPA)
• To ensure transparency in allocation
• To propose allocation criteria
• To monitor allocations.
• NSSF continues to exist and perform its functions
  as before.

14
Inequalities continue
2006 NSSF transfers to Northern states
Source NSSF 2006 Annual Report and Bank staff
estimates.
15
Major Challenges
16
Key challenges include

• Legal framework
• Intergovernmental transfer system
• Planning, allocating, and monitoring sub-national
  spending
• Fiscal sustainability

17
Challenges

• I. Inadequate legal framework
• State and local government responsibilities and
  powers not yet properly clarified through
  legislation.
• Institutional arrangements for grant allocation
  and monitoring to be clarified.

18
Challenges (contd)

• II. Intergovernmental transfer system
• Institutional arrangements The respective roles
  of the MoFNE, the FFAMC and the NSSF in the
  intergovernmental fiscal framework need to be
  better clarified.
• Grants in 2007 Differences between
  recommendation of FFAMC, actual allocations and
  modality of transfers should reconciled.
• Persisting inequity
• Composition of transfers
• Block vs. earmarked transfers
• Low execution on development transfers
• Limited decision making authority of states and
  localities

19
Challenges (contd)

• III. Planning and fiscal management weaknesses
• Efficiency - resource planning/use at state level
  (including federal-state coordination story from
  state case studies)
• Accountability - fiscal management and
  accountability at both national and sub-national
  level

20
Challenges (contd)

• IV. GNU fiscal sustainability concerns
• 2007 budget promises jump in pro-poor allocations
  to 6.9 percent of GDP, mostly through higher
  transfers to Northern states
• Historical execution problems and overall fiscal
  deterioration underscore uncertainties

21
Priority Reform Areas
22
Priority areas for reform

• Fill gaps in the legal framework and clarify
  institutional responsibility for determination of
  the vertical pool and the horizontal allocations
• Make intergovernmental transfers more
  transparent, predictable, efficient and equitable
• Build state and local capacity for
• Increasing states own-revenue and
• Build capacity for sub-national financial
  management, including consistent functional
  reporting
• Improve planning and monitoring of decentralized
  spending (particularly development) -
  federal/state/locality coordination in context of
  NSP and PRSP
• Focus on improving service delivery

23
Risks

• Political commitment to follow through (e.g., to
  clarify legal framework for localities, to
  clarify FFAMC vs. NSSF, etc.)
• Not having independent and objective criteria for
  allocation to states
• Low capacity at sub-national level to handle the
  major increases in resources and deliver services