Basic Approaches to Decentralization

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 Grant Types
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., OM) 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