1. MANAGING THE INSTITUTIONAL AND POLITICAL DYNAMICS OF DECENTRALIZATION IMPLEMENTATION

2. 2 OUTLINE A. Introduction B. Challenges of Fiscal Decentralization C. Managing Fiscal Decentralization D. Selected Cases

3. 3 A.INTRODUCTION INTERGOVERNMENTAL FISCAL SYSTEM TYPICAL ELEMENTS Enabling framework Functional Assignments Revenue Assignments Intergovernmental Transfers Subnational Government Borrowing Alternative Mechanisms

4. 4 A Normative Approach to Implementing Fiscal Decentralization (Bahl/Martinez-Vazquez) The Platform: Deconcentration, Rule of Law, etc. Step 1: Carry out a National Debate on the Issues Related to Decentralization Policy Step 2: Do the Policy Design and Develop a White Paper Step 3: Pass the Decentralization Law Step 4: Develop the Implementing Regulations Step 5: Implement the Decentralization Program Step 6: Monitor, Evaluate, and Retrofit

5. 5 Elements (“Prerequisites”) of Fiscal Decentralization Broad Enabling Framework “Political Will” Adequate Local Political System Adequate Fiscal System Institutional/Managerial System Implementation Capacity

6. 6 B. CHALLENGES Origins of Decentralization Originated in response to crisis: rapid decision with inadequate political consensus Imposed/influenced by international donors Often too derivative of textbook solutions based on social science approaches, particularly the local finance/fiscal federalism literature Some elements borrowed from other countries without adaptation

7. 7 Different Meaning in Different Contexts Reinventing/strengthening elected sub- national governments where they exist but have not been functioning well Transforming local administrative units into elected levels of sub-national government Creating sub-national units of administration and governance where they have not previously existed

8. 8 Integration Necessary but Complex Fiscal decentralization without administrative and political: resources without institutional and governance capacity Administrative decentralization without fiscal and political: local responsibilities/autonomy without resources and governance structures Political decentralization without administrative and fiscal: decision making structures without institutional and fiscal structures

9. 9 Institutional Challenges Decentralization involves many central actors: –Agencies with broad functions: Ministry of Finance (MOF)/Planning (MOP), Civil Service Commission –Agencies the “oversee” local government: Ministry of Local Government (MLG), Home Affairs or Interior –Agencies with sectoral functions: agriculture, education, health, water, etc. These various central actors may resist decentralizing because they lose power. They may pursue inconsistent decentralization policies simultaneously, potentially undermining the development of a coherent, well functioning LG system

10. 10 Institutional Challenges II Sectoral ministries may have decentralization programs that use procedures not consistent with MOF regulations MOF and MLG may issue inconsistent LG guidelines MOF may use one mechanism for recurrent transfers while the MOP/ sectoral ministries use incompatible mechanisms for development transfers In short: complex, fragmented, hierarchical central bureaucracies with little incentive to decentralize or coordinate; in addition: Undeveloped/inappropriate procedures/incentives Lack of technical and managerial capacity at all levels Weak transparency/accountability to local constituencies

11. 11 Scope and Structure of Decentralization Reforms Two broadly problematic reform types: unworkably comprehensive or limited (often technical)/uncoordinated with broader agenda Often coordinated by single lead ministries perceived as rivals by other key players Typically unbalanced focus on either supply or demand side Typically treat all sub-national governments or classes (cities, municipalities, towns, etc.) as if they have similar capacity

12. 12 Scope and Structure II: Relationships Beyond the Center Relationships among different levels and forms of subnational government Relationships among sub-national units at the same level Horizontal local relationships between elected officials and staff Sub-national government-community group relations Private partner relationships for service delivery and management functions

13. 13 Role of International Donors Not always strong incentives to support genuine decentralization, which is complex and delays projects and moving funds Self-coordination of donors and sectors also slows progress and diffuses the credit for achievements Often fundamental donor mistrust of even central capacity

14. 14 Role of International Donors II Decentralization/coordination complexities and client capacity concerns influence decentralization design and outcomes In some cases, different international donors support individual ministries for inconsistent reforms, reinforcing competitive behavior of central agencies In some cases, special units or funds, institutionalize systems and procedures that are inconsistent with the emerging formal local government system

15. 15 C. MANAGING DECENTRALIZATION Basics Clear division of supervisory, regulatory, and technical assistance functions among the central government agencies involved Process for building national consensus on decentralization goals and systems Coordination mechanism so that agencies develop consistent systems/procedures Implementation strategy to ensure that the capacities of local governments are not too quickly overwhelmed and the existing powers of central agencies are not dramatically challenged

16. 16 Design/Coordination An effective coordination body should involve all key stakeholders to an appropriate extent May be separate coordination bodies for policy and implementation (often under officials at different levels) but there must then be coordination between them The coordination body needs to be credible, which means seen by relevant stakeholders as: –Neutral (not competing for decentralization resources) –High level (in a coordinating ministry, special commission, or president/prime minister’s office rather than peer line ministry)

17. 17 Design/Coordination II International experience suggests that the coordination body also needs to have: –Capacity to monitor and adjust as appropriate the implementation of decentralization activities –Sufficient authority and capacity to enforce decentralization activities that various reluctant central actors are supposed to undertake

18. 18 Implementation Strategy Clearly defined starting point consistent with capacity/performance of local government (may be asymmetric if appropriate) Starting point may be at least partially negotiated, placing some responsibility for reform steps on local governments Reform aspects should be integrated (administrative, fiscal, political) at each step to the extent feasible--even if initially at a very basic level

19. 19 Implementation Strategy II Further steps towards full set of desired responsibilities should build progressively on earlier steps Strong positive and negative incentives for local governments (and staff) to achieve desired goals are an important part of overall strategy Coordinating body should oversee and manage implementation strategy to ensure that all parties at all levels of government are meeting their assigned responsibilities

20. 20 Capacity Building Mechanisms Two main types: –Technical: training local governments to meet their functional responsibilities –Governance: training citizens, elected officials and LG staff to work with each other Two main approaches: –Supply driven: designed and provided by central agencies –Demand driven: LGs request what they need

21. 21 Capacity Building II Some lessons on LG capacity building: –Central government will remain an important supplier, but an element of demand should emerge if incentive structure is right –Should focus on specific priority functions and procedures rather than comprehensive/broad –Capacity building should be directly related to the steps in implementation strategy –Follow-up is important: capacity building is not just classroom training; mobile TA teams

22. 22 D. EXAMPLES OF KEY INSTITUTIONS AND PROCESSES There is no single “best practice” country in terms of successful decentralization coordination, strong implementation strategy and effective capacity building Several countries, however, have elements of good practice in the various institutional mechanisms and strategies they have adopted for decentralization

23. 23 Coordination Bodies Regional Autonomy Review Board (former Indonesia) The Decentralization Secretariat (Uganda) National Decentralization Committee (Thailand) Decentralization Implementation Authority (proposed Cambodia)

24. 24 Implementation Strategy Some countries have elements of a strategy: –South Africa and Vietnam to some extent use asymmetry in service assignment –Cambodia started decentralization very modestly, giving small resources and few responsibilities with a focus on building political credibility –Thailand has a highly developed and extremely detailed decentralization implementation strategy, but limited progress has been made to date –Indonesia is working out decentralization of services on a sectoral and local government basis

25. 25 Capacity Building Mechanisms Some recent innovations: –Uganda and Bangladesh require LGs to meet prerequisites to receive development transfers, with capacity building grants available to LGs below the threshhold –Kenya piloted a program for developing capacity in which a package of reforms were negotiated with the MLG, which provided mobile technical assistance to train and follow up on LG skill implementation

26. 26 E. SELECTED CASES Cambodia: a very poor post-conflict country in early decentralization Positive Features: elements of a reform strategy; pro-poor transfers; local elections; substantial efforts to develop pro-poor governance mechanisms (participatory planning, etc.); strong donor support for consolidated local funding Negative Features: weak local revenue system; generally low capacity; some evidence of local elite capture in certain areas; poor donor coordination of governance technical assistance

27. 27 Indonesia: a large country with areas of wealth/capacity that rapidly decentralized Positive Features: redistributive transfers; strong alternative pro-poor finance mechanisms (CDD) and emerging nongovernmental partnerships; competitive local elections; capacity significant and debt potential in wealthier areas Negative Features: decentralization rapid/non- strategic; weak local revenues; low local government/CDD coordination; modest efforts to develop transparency and citizen engagement; donor coordination remains inadequate

28. 28 Kenya: long history of local government that declined and is being reformed Positive Features: intergovernmental fiscal system reform relatively coordinated; strong local revenues; transfers linked to adoption of reforms, including participatory planning; competitive local elections; solid capacity in some areas Negative Features: local government reform efforts slow and fragmented; poor coordination between districts and local governments; subnational lending mechanism dysfunctional

29. 29 Uganda: strong post-conflict consensus for local governance/poverty reduction Positive Features: strong pro-poor focus and support for local government; development transfers create strong incentives; local elections; participatory planning and review mechanisms improving; donor support increasingly coordinated Negative Features: weak and poorly structured local revenues; recurrent transfers may have become too conditional; lack of clarity regarding roles of central actors in decentralization remains