STRATEGIC INITIATIVES ON DECENTRALIZATION

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STRATEGIC INITIATIVES ON DECENTRALIZATION

• EAP, May 2005

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OVERVIEW

• Regional realities
• Impacts on the Bank
• Framing the challenge
• Strategic framework
• Strategic initiatives
• Results framework

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REGIONAL REALITIES

• EAP has decentralized improvements in
  service-delivery and governance now depend on
  sub-national governments, which
• control large proportions of public expenditure
  (from 10 in Thailand to 70 in China)
• are responsible for those sectors where the Bank
  concentrates its investment (health, education,
  local/regional infrastructure)
• Intergovernmental frameworks in EAP are v.
  diverse successful decentralization strategies
  will be highly country-specific

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REGIONAL REALITIES

• Nonetheless, three cross-cutting reform
  challenges emerge from the Flagship
• Strengthen institutional structures, e.g.
  clarifying the functional mandates of SNGs, and
  coordinating planning and investment activities
• Improve fiscal and financial systems, e.g.
  improving own-source revenues
• Build the functional systems - the plumbing
  of the overall structure e.g. local financial
  management
• BUT, the region is in an institutional
  interregnum
• While top-down, centralized delivery systems have
  eroded, bottom-up incentives and capacity for
  local delivery are weak
• In many countries, the reform process is highly
  conflicted and has become stuck
• A costly low-level equilibrium threatens

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IMPACTS ON THE BANK

• A very high proportion of EAP investment
  operations fund sub-national governments,
  functions, or CDD (data exclude China)

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IMPACTS ON THE BANK

• Of this decentralization lending, direct
  funding of SNGs now exceeds 50 (600m)

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IMPACTS ON THE BANK

• By contrast, expenditure on decentralization
  AAA has decreased to below 20

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IMPACTS ON THE BANK

• Significant expenditure on decentralization
  capacity-building has yielded ???

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IMPACTS ON THE BANK

• And the disbursement ratio on decentralized
  projects is consistently worse than average for
  EAP investment portfolio

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IMPACTS ON THE BANK

• The Bank has started to come to terms with
  regional realities, e.g.
• Three CAS now have Local Platforms/Pillars
• Intensive analytic and operational focus in
  Indonesia increasing focus in other countries
• EAP Decentralization Flagship
• Sub-national investment and decentralization has
  also become a priority for most donors in the
  region
• Key donors in this area include ADB, UNDP, DFID,
  GTZ
• The Banks relationships with these organizations
  are both competitive and co-operative, and vary
  widely between countries
• In most cases, donors are working increasingly
  closely together
• In some cases donor co-operation has been
  responsible for innovative product development
  (e.g. TB and Basic Education projects in China)

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FRAMING THE CHALLENGES

• Challenges are framed by four key disconnects
• 1. The EAP portfolio is trending sub-national
  (80 of investment ops), BUT our sub-national
  operations tend to be problem prone
• 2. Bank projects rely on weak intergovernmental
  systems and sub-national governments, BUT our
  substantial capacity building investment
  (120m/annum) is not working well enough
• 3. We offer policy guidance BUT impact is limited
  and key issues remain un/under-addressed (partic.
  on sub-national borrowing)
• 4. Working at the sub-national level requires new
  ways of operating, BUT we are just beginning to
  experiment with these

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STRATEGIC FRAMEWORK
EX T E R N A L I N T E R N A L
INTERVENTION AREA
STRATEGIC GOAL
ADVANCE ANALYTIC AND POLICY DEBATE
IMPROVE INTERGOVERNMENTAL REGULATORY AND
INSTITUTIONAL ENVIRONMENT
STRENGTHEN LOCAL AND INTERGOVERNMENTAL SYSTEMS
STRENGTHEN LOCAL GOVERNMENTS AND GOVERNANCE
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STRATEGIC INITIATIVES

• I. POLICY AND ANALYTIC WORK
• A. The Flagship provides an analytic framework
  focused on
• Strengthening and clarifying the IG institutional
  structure
• Building IG fiscal and financial systems
• Deepening accountability and building functional
  systems of government
• It will be launched at five country events in
  June, with local partner organizations employing
  a number of using a number of innovative
  techniques
• B. Country annexes and subsequent work provide
  initial inputs to the development of
  country-specific strategies in Indonesia,
  Philippines, Cambodia, China, Vietnam, Thailand

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STRATEGIC INITIATIVES

• II. SUB-NATIONAL INVESTMENT OPERATIONS
• A. Pilot and expand new, innovative sub-national
  investment operations Intersectoral Sub-National
  Operations (ISOs) - e.g. Indonesia (ILGR)
  Cambodia China (?)
• Performance oriented SNG access to investment
  funding is tied to progress on institutional
  strengthening
• Locally empowering, through increasing the
  discretion of SNGs to determine local investments
  across and within sectors
• Programmatic with budget support features
  funding usages not all pre-determined prior to
  project effectiveness SNG systems (for
  procurement, FM etc.) are strengthened and used
• Integrated with IG fiscal systems, i.e. support
  IG transfer systems rather than funding specific
• Provide capacity-building resources in response
  to demand
• B. Begin to deal more frontally with the
  CDD-local government interface Aceh as lead
  opportunity
• As decentralization deepens, and formal local and
  intergovernmental systems strengthen, the context
  for CDD modalities begins to change
• As the Bank channels increasing amounts of
  funding directly to local governments, the
  relationship of these lending modalities to CDD
  modalities will need to be confronted
• The post-disaster reconstruction process in Aceh
  provides a unique opportunity for the region to
  pilot this sort of effort over the next 2-3 years

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STRATEGIC INITIATIVES

• III. SUB-NATIONAL BORROWING
• A. Make a concentrated push to improve SN
  borrowing frameworks, partic. in Philippines,
  Indonesia, Vietnam, China
• At the country level, work through a specific
  entry point (ANN C) to expand into a wider
  dialogue on strengthening broader SN borrowing
  frameworks
• B. Work with IFC or SNDSF on a significant non
  sovereign-guaranteed transaction in one or two
  countries (e.g. Thailand Indonesia)
• Policy reform and transactional activities tend
  to be dialectically related
• C. Focus on public sector financial
  intermediaries Philippines, Vietnam, China
• Develop a more common approach (within EAP) to
  when, and how, such institutions should be
  supported
• Identify specific guidelines and practices which
  are likely to avoid the difficulties which have
  characterised such entities in other regions
• Pursue a targeted number of opportunities to
  pilot these approaches

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STRATEGIC INITIATIVES

• IV. COUNTRY TEAMS ANALYTIC PRODUCTS
• A. Organize CTs to promote consistency, capacity
  and coherence in SN operations and policy
  dialogue
• Ambitious multi-donor Platform approaches in
  Indonesia
• More limited Core Decentralization Groups
  (Cambodia?)
• B. Analytic products
• Systematically review IG fiscal systems
• SN PERs
• Develop standard tools for SN fiduciary
  assessments

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RESULTS FRAMEWORK
ACTIVITY RESPONSIBILITY RESULT
Flagship PREM/EXT Impact on decentralization debate
Sub-national investment ops ISOs CDD interface CMUs/Sectors SD/Sectors Trend towards ISOs in region Ops which integrate CDD and LG delivery mechanisms
Sub-national borrowing Policy frameworks Transactions Financial intermediaries PREM/INF INF/PREM/IFC/SNDF INF/PREM Improved SN borr. environments Direct lending transactions Joint EAP approach Support for Fis
Internal organization AAA Organization of CTs Adaptation and development of analytic and fiduciary products CMUs PREM/COSU Formation of LSPs or CDGs PERs covering IG issues Standard SN fiduciary diagnostics