1. PERs for Multi-tiered Governments
Public Expenditure Analysis and Management Seminar
World Bank, May 24, 2001
Anwar Shah, World Bank

2. Why look at intergovernmental fiscal relations in a PER?
PER as an expenditure numbers game
PER as a guide to service delivery performance
Economic services
Social services
PER as a guide to the incidence of poverty
PER as a guide to regional equity
PER as a guide to fiscal health
PER as a scorecard on public sector governance
World Bank fiduciary concerns
Gosplan bureaucrats advising QAG
Investment spending – majority at subnational level
Social spending – In Argentina nearly 95% at subnational level
On the average country is doing great – but it is coming apart at seams
Ability to shift deficits downwards
Institutions
Anwar Shah, World Bank

3. What should we look at ? Values Perceptions Beliefs Aspirations
Authorizing Environment
Institutions
Rules and restraints
Operational Capacity
Organizations
Culture
Skills
Anwar Shah, World Bank

4. Fiscal federalism dimensions of the authorizing environment
Division of powers
Spending
Taxing
Transfers
Borrowing
Budgeting, planning, audit and accounts
Institutions of coordination and conflict resolution
Anwar Shah, World Bank

5. Why public sector is “the coldest of cold monsters” in LDCs?
Values,
Mission,
Goals
Authorizing
Environment
Operational
Capacity
Outputs, Results,
Outcomes
Anwar Shah, World Bank

6. Division of Powers
“There are nine and sixty way to build fiscal tiers and every single one is right” – Kipling
Who does (de-jure and de-facto)
what (4 Ds),
how and how they interact
and why?
How much they spend and what do they deliver?
Overlapping/ shared responsibilities – not an issue. But concern with, among whom and how?
Define deconcentration, delegation, decentralization and devolution
Anwar Shah, World Bank

7. Decentralization: Basic Concepts
Terminology:
Deconcentration
Delegation
Decentralization: The quest for right balance in taxing/borrowing, spending, and regulatory responsibilities among multi-centered governments.
Devolution: People empowerment
Anwar Shah, World Bank

8. …..Division of Powers
National Objectives and Fend-For-Yourself Federalism
Stabilization and coordination
Fiscal discipline
Internal Common Market
National Minimum Standards
Regional Equity
Anwar Shah, World Bank

9. ………..Division of Powers Have trust and faith in your big brother
If there is money, it must be central
If it is broken, it must be local
Shifting deficits downwards
Unfunded mandates
Power to the people/ Citizens charter
Anwar Shah, World Bank

10. Expenditure Assignment: Conclusions
Decentralize unless a convincing case for centralization. National objectives through conditional block grants and regulations
Federal/National Government:external relations; national public goods; internal common market; redistribution; transfers to persons; regulations affecting factors and commerce
Anwar Shah, World Bank

11. …….Expenditure Assignment
Provinces/States: health; education; social welfare; inter-municipal roads; environment; fiscal equity among municipalities; local government oversight.
Local Governments: All local public services to municipal and regional governments and special purpose bodies who create an enabling environment and/or decide on public and private partnerships and/or delivery systems.
Anwar Shah, World Bank

12. …..Expenditure Assignment
Lack of institutional capacity should not be an excuse for centralization. Apply asymmetric decentralization based on objective criteria such as population, service area and fiscal capacity.
Anwar Shah, World Bank

13. Evaluating Tax Assignment: Fundamental Considerations
efficiency of the internal common market
national equity
efficiency in tax administration
fiscal need
Anwar Shah, World Bank

14. More Taxing than Taxes Mismatch in revenue means and expenditure needs
Lack of access to more productive bases
Uncertain revenues
Perverse incentives for collection
Unreasonable collection charges
Uncoordinated but overlapping tax roles
Transition economies: lack of interest in sharing the proceeds; free services vs taxes
Anwar Shah, World Bank

15. Tax Assignment: Lessons
For sub-national autonomy and accountability, match revenue means as closely as possible to expenditure needs.
Customs, CIT and resource rent taxes not suitable for sub-national assignment. VAT?
Provincial taxes: residence based taxes, sin taxes and benefit charges.
Local taxes: Taxes on immobile factors and cost recovery and benefit charges
Anwar Shah, World Bank

16. ……Tax Lessons
Encourage tax base sharing: Allow sub-national governments to levy supplementary rates on federal income tax base.
Revenue sharing on a tax by tax basis not desirable
Establish revenue stabilization pool for widely fluctuating revenues.
Anwar Shah, World Bank

17. Grants in LDCs vs DCs LDCs DCs
Passing the buck transfers (Brazil, India, South African revenue sharing)
Pork barrel transfers (Brazil and Pakistan)
Asking for more trouble (deficit grants and bailouts)
DCs
Conditional transfers
Equalization transfers
Anwar Shah, World Bank

18. Criteria for evaluating transfers
Autonomy
Revenue adequacy
Equity
Predictability
Efficiency
Simplicity
Incentive
Safeguard of grantor’s objectives
Anwar Shah, World Bank

19. Economic rationale of intergovernmental transfers
Objective
To bridge fiscal gap
To reduce regional fiscal disparities
Setting national minimum standards
Influencing local priorities
To compensate for benefit spillover
Regional stabilization
Design
Reassignment, tax abatement, tax base sharing
Fiscal capacity equalization
Conditional block transfers
Open-ended matching transfers
Open-ended matching transfers
Capital grants with upkeep requirement
Anwar Shah, World Bank

20. Transfers to encourage competition and innovation- school transfer
Allocation basis to districts: per capita based upon population aged 5-14
Distribution to providers: Equal per pupil (each female student to be counted as 1.5 pupil) to all schools (public, non-profit and private)
Conditions: Universal access to primary and secondary education, private school to admit children on merit and tuition waiver for those that lack the ability to pay
Penalties: public censure, reduction of grant funds
Incentives: retention of savings
Anwar Shah, World Bank

21. Borrowing: Conclusions
Access to credit vital for responsive and accountable governance
Direct controls on sub-national borrowing neither desirable nor enforceable
Focus on authorizing environment to expand responsible access to credit.
Anwar Shah, World Bank

22. Credit market access remains an unmet challenge in LDCs but...
tax decentralization
central bank independence
fiscal rules: EU, Brazil
golden Rules: Canada, USA, Germany, Switzerland
fiscal incentives: USA
Popular referenda: Swiss
Intergovernmental Cooperation: Australia, Denmark
Anwar Shah, World Bank

23. …industrial countries have shown the way.
Municipal rating agencies
Financial market reforms: arms length relations among governments and commercial banks.
No bailouts
Information with standardized auditing and accounting
Private provision of public services
Municipal bond banks
Municipal finance corporations
Anwar Shah, World Bank

24. Institutions of Intergovernmental Relations
Legislative bodies
Constitutional courts
Executive Committees/ Councils
Fiscal Commissions
Anwar Shah, World Bank