Lessons from International Practices of Intergovernmental Fiscal Transfers

Transcription

1 Lessons from International Practices of Intergovernmental Fiscal Transfers Anwar Shah* July 2004 Language: English Prepared for the program on: Fiscal Management For Better Governance: Learning from Each Other A Joint Program of the Ministry of Finance, China, the Canadian Agency for International Development and the World Bank Institute Web: * The author is a Lead Economist and Program Leader on Public Sector Finance of World Bank Institute. This presentation was made at the International Seminar on Intergovernmental Finance System, held in Chongqing, China, July 4-9, The seminar is one of series of events organized under the program, Fiscal Management for Better Governance. The program is directed by Dr. Anwar Shah (ashah@worldbank.org), Lead Economist and Program Leader on Public Sector Governance, Anwar World Shah, Bank World Institute, Bank 1818 H Street, NW, Washington, DC 20433, USA. For further information, please contact Chunli Shen (cshen1@worldbank.org). Lessons from International Practices of Intergovernmental Fiscal Transfers International Seminar on Intergovernmental Finance Chongqing, China, July 4-10, 2004 Outline A taxonomy of grant instruments A stylized view of intergovernmental finance in developing countries Grant objectives and design considerations Grants to deal with fiscal gap National minimum standards grants Fiscal equalization grants Institutions of IGFR Lessons Imperatives in Sub-national Finance Growing demand for services and seriously deficient infrastructure and some regions being left behind Greater potential for expenditure decentralization than for tax decentralization Access to inadequate tax bases Limited potential for user charges for education, health and social services Access to credit is curtailed. Intergovernmental finance is the dominant source of revenue (60% in LDCs and 33% in OECD) and its design has implications for efficiency and equity in public service provision.

2 Instruments of intergovernmental finance Unconditional vs conditional transfers Unconditional: preserving local autonomy and enhancing interjurisdictional equity Conditional: providing incentives to undertake specific activities Conditional Transfers matching vs non-matching open-ended vs. closed-ended matching Input based conditionality vs output based conditionality Input based conditionality often intrusive and unproductive. Output based conditionality can advance grantor s objectives while preserving local autonomy Perceptions on intergovernmental finance are generally negative Federal/Central View: Giving money and power to sub-national governments is like giving whiskey and car keys to teenagers. Provincial and Local View: We need more grant monies to demonstrate that money does not buy anything. Citizens: The magical art of passing money from one government to another and seeing it vanish in thin air. Ironically these perceptions are well grounded in reality in LDCs Primary focus on dividing the spoils Passing the buck transfers revenue sharing with multiple factors (Brazil, Argentina, India, RSA, Philippines and more) Asking for more trouble grants deficit grants (Hungary, India, and more) Pork barrel transfers or political bribes (Brazil, India, Pakistan, USA) Command and control transfers (most countries) Overall: Intergovernmental finance is the dominant source of revenue but creates perverse incentives for fiscal management and accountability No need to despair. As properly designed fiscal transfers can be part of the solution rather than part of the problem.

3 Governance Structure: 20th Versus 21st Century Unitary Centralized Center manages Bureaucratic Focused on inputs Command and control Internally dependent Closed and slow Intolerance of risk Federal / confederal Globalized & localized Center leads Participatory Results matter Responsive and Accountable Competitive Open and quick Freedom to fail/ succeed From Dividing the Spoils to Creating An Enabling Environment for Responsive and Accountable Local Governance Tax Decentralization Output based fiscal transfers operating capital Fiscal equalization transfers Responsible borrowing Considerations in the Design of Fiscal Transfers Consistency of design with a single objective Simple and transparent allocation criteria Create incentives for competitive service delivery and support citizen-centered governance Provide incentives for fiscal prudence Ensure flexibility in use but accountability for results Stable and predictable Equitable ( entitlements vary inversely with fiscal capacity and directly with fiscal needs) One size does not fit all urban vs. rural, large vs. small Sunset clauses to ensure periodic review and assessment Objective Fiscal Gap Regional fiscal disparities Setting national minimum standard Benefit spillovers Influencing local priorities Stabilization Grant Design Reassign, tax base sharing Fiscal capacity equalization Block transfers, conditions on service standards Matching grant Open-ended matching Better Practices Canada Australia, Canada, Germany, Denmark, ECA Ex-Indo. roads and education, Chile, Brazil S. Africa teaching hospitals Canada social assistance Capital grant with Political and upkeep policy risk requirements guarantee Practices to Avoid Deficit grants, tax by tax sharing General revenue sharing with multiple factors Conditions on spending Ad hoc grants Stabilization without upkeep

4 Transfers to deal with fiscal gap Fiscal Gap: Structural imbalance as a result of a mismatch between revenue means and expenditure needs. Reasons: Inappropriate assign: Reassign Limited tax bases: Allow joint occupancy or tax decentralization. Tax competition: Federal collection and general (not on a tax-by-tax basis) revenue sharing. Tax room lacking: Tax abatement and tax base sharing (Canada ). Practices to avoid: deficit grants; tax by tax sharing. Transfers to set national minimum standards Rationale: National economic union or internal common market Redistributive role of the public sector and the national government Design: conditional non-matching block transfers with conditions on standards of service and access. Better practices: Indonesia roads and primary education grants; Brazil health transfers, Colombia and Chile education transfers; Canada health and post-secondary education transfers. Practices to avoid: Conditional transfers with conditions on spending; ad hoc grants. An Example: Education grant to encourage competition and innovation Allocation basis to state/local governments: Population aged 5-17 Distribution basis to providers: Equal per pupil to both public and private schools Conditions: Universal access to primary and secondary education. Private school access to poor on merit. Improvements in achievement scores and graduation rates. No conditions on the use of funds Penalties: Public censure, reduction of grants funds and termination Incentives: Retention of savings Health grant Allocation basis: Weighted population by age class with higher weights for ages 0-5 and 65+ Distribution: Patient use Conditions: Minimum standards of services and access to health care Penalties: Reduction of grant funds

5 Indonesia - Specific Purpose Transfers to Local Governments (now defunct) L2. District/Town Road Improvement Grant Length of roads Condition Density Unit cost L3. Primary School Grant School age children (ages 7-12) Needs for facilities Federal financing of health care in Canada Per capita transfers tied to rate of growth of GDP (plus transfer of tax points - for health and post secondary education in 1977,13.5% points of PIT and 1% point of CIT) Conditions: (1) Universality (2) Portability (3) Public insurance but public/private provision (4) Opting in and out (5) No extra billing Penalties: Threat of discontinuation for breach of the conditions (1)- (4) above. Dollar for dollar reduction for breach of the condition (5). Sunset clause: Parliamentary review every 5 years. International practices in transfers to reduce regional fiscal disparities Design: General non-matching fiscal capacity equalization transfers. Better practices: Fiscal equalization programs (sources of data: CGC, Finance Canada, Lotz, Shah & Spahn) Paternal: Australia (fiscal capacity plus fiscal needs) and Canada (fiscal capacity only) Solidarity, Fraternal or Robin Hood: Germany (fiscal capacity), Sweden, Denmark Practices to avoid: General revenue sharing with multiple factors e.g. practices in Brazil, India and South Africa. Influencing local priorities Design: Open-ended matching transfers (with matching rate to vary inversely with fiscal capacity). Better practices: Matching transfers for social assistance in Canada. Practices to avoid: Ad hoc grants.

6 To compensate for benefit spillovers Design: Open-ended matching transfers with matching rate consistent with spillout of benefits. Better practices: RSA grant for teaching hospitals. Practices to avoid: Closed-ended matching transfers. Regional stabilization Design: Capital grants provided maintenance possible. Better practices: Limit use of capital grants and encourage private sector participation by providing political and policy risk guarantee. Practices to avoid: Stabilization grants with no future upkeep requirements. Capital grants Special issues in the use of capital transfers to finance infrastructure investments. Merits: Finance large infrastructure projects Visible No long-term commitment by donors Demerits: Capital bias Fungibility Distort local priorities Undermine local autonomy Improving capital grants Limit their use Require maintenance plan and user charge policy Matching rate inversely related to fiscal capacity Selection of recipients based on need and capacity factors and project evaluation Technical assistance Monitoring, inspections, audit, and evaluations Require survey of condition of existing network for assessment of future needs

7 Fiscal Transfers: Negative Lessons or Practices to Avoid General revenue sharing with multiple factors Deficit grants Fiscal Effort Provisions Input or process based or ad hoc grants Capital grants without assurance for upkeep Negotiated or discretionary transfers Fiscal Transfers: Positive Lessons or Practices to Strive For K.I.S. (keep it simple) Focus on single objective Introduce sunset clause Output based conditional transfers with citizens evaluations Fiscal capacity equalization to a defined standard Political consensus on the standard of equalization Institutional arrangements for broad based consultation