Decentralization in LAC

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Decentralization in LAC

• Overview of operations and lessons from
  experience
• Kathrin A. Plangemann
• May 8, 2006
• With inputs from LCSPS F. Rojas, J. Frank, M.
  Mercado-Diaz, M. Junowicz

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Decentralization in Latin America and the
Caribbean

• Decentralization, Deconcentration and Devolution
• LAC one of most decentralized regions
• Subnational expenditures one fourth of total
  public spending (from gt 48 in AR to lt 5 in
  Central America)
• Debate on pros and cons and the how tos still
  very much open

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Decentralization in Latin America and the
Caribbean

• Motivation mainly political based on
  considerations of democracy, efficiency and
  service-delivery
• Four main stages/Focus areas
• Political/administrative decentralization
• Fiscal decentralization framework
• Service-delivery focus
• Subnational competitiveness (LED/TED)

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Bank Support to Decentralization in LAC

• Some Examples of Bank Support in LAC
• Adjustment/DPL
• Peru (DECSAL)
• Bolivia (PSAC)
• Colombia (FIAL)
• Mexico (Decentralization SAL)
• Investment Loans (SILs)
• Provincial Development Programs (AR)
• Municipal Development Projects (AR)
• Municipal Development (CL)
• Subnational Governments Public Sector
  Modernization (AR)
• Investment Loans (TALs)
• Governance 21 (AR)
• Public Sector Modernization (HN)
• Subnational lending
• Adjustment (AR, MX, BR-SWAP)
• Investment (BR, AR, CO)

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Bank Support to Decentralization in LAC

• Some Examples of ESW
• Regional Flagships
• Beyond the center
• Decentralization in other flagships (e.g. Beyond
  the city)
• IGRs
• Peru
• Bolivia
• Argentina
• Fees for Services
• Chile
• Other Analytical Work
• Ecuador
• Dominican Republic
• Argentina

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DECSAL (Peru)

• Objectives
• Protect fiscal sustainability during Peru's
  transition to a more decentralized state
• Strengthen institutional management and fiscal
  capacity at regional and local levels for their
  progressive assumption of service
  responsibilities
• Support the creation of a better regulatory and
  investment environment for upgrading Peru's
  regional competitiveness.
• Key Areas of Action
• Decentralization and Fiscal Sustainability Tax
  Policy, Fiscal Transfers Subnational Borrowing
  and Financial Management.
• Institutional Development for Decentralization
  Accreditation of subnational governments,
  Participatory Budgeting Civil Service Reform.
• Competitiveness and Economic Growth National
  Competitiveness Plan Logistic Cost and
  Infrastructure Development Investment Climate
  Trade Facilitation Technology Absorption and
  Innovation Quality Management

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Decentralization SAL(MX)

• Objectives/Components
• Imposing hard budget constraints on federal
  resources provided to states and municipalities
• Reducing moral hazard in subnational borrowing
• Increasing the transparency and public
  accountability of subnational fiscal and
  financial management and of the overall
  decentralization process
• Setting up initial pilot mechanisms to enhance
  efficiency of decentralized expenditures.
• Main Impact on decentralization
• The 2000 and 2001 federal budgets provided
  funding for the states with allocations
  determined by a transparent formula, and with
  detailed allocations clearly specified in
  legislation including federal transfers to
  states
• Transfers to states and municipalities that were
  at the discretion of the federal executive were
  eliminated from the federal budget
• Sec. de Hacienda discontinued its policy of
  accepting mandatos to collateralize subnational
  debt with revenue-sharing transfers
• Twenty-five of Mexico's 32 states, and seven
  municipalities, have had creditworthiness
  assessments published by credit rating agencies,
  and more are currently in the process of doing
  so
• Sec. de Hacienda developed a plan jointly with
  subnational entities to improve their accounting,
  auditing, budgeting, revenue and debt management
  and reporting procedures.

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Municipal Development (CL)

• Objectives
• Developing innovative methodologies and
  strategies in local accountability, especially in
  the development and implementation of management
  information systems and budget and asset
  management
• Contributing to a permanent system of training
  and technical assistance to the municipalities,
  incorporating diverse institutional actors,
  including the regional governments and
• Strengthening and improving local management,
  especially in terms of finances, human resources
  and municipal services, as well as harmonizing
  and equalizing local management capabilities with
  respect to the legal and institutional reforms
  being pursued by the central government.
• Components
• National Institutional Strengthening Design and
  implementation of the National Municipal
  Information System (SINIM) and a Municipal
  Budgeting System (GPM) the streamlining of
  social programs at the municipal level the
  dissemination of best practices and lessons
  learned as well as a project monitoring and
  evaluation system.
• Municipal Strengthening Basic Module (i)
  Community Development Plan, (ii) Municipal
  Strategic Plan, (iii) Organizational Development
  and Human Resource Management, and (iii)
  Municipal Management Information System
  Complementary Module (i) streamlining of
  business procedures, (ii) improving customer
  service, (iii) cadastre systems (iv) social
  development and protection of vulnerable groups,
  and (v) development of local economies. Flexible
  Module ( i) innovative sub-projects, and (ii)
  municipal associations.

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II Provincial Development Program (AR)

• Objectives
• Assist the provinces in implementing appropriate
  financial management reforms to
• generate current account surpluses (own-revenue
  enhancement and expenditure control) that
  together with prudent borrowing may finance
  investment programs and
• strengthen their capacity to plan, program,
  finance, execute, and monitor investment programs
  that are economically efficient, financially
  sustainable, institutionally manageable, and
  environmentally sound.
• Provide financing for institutional development
  and physical investments that will promote
  provincial economic development.
• Components
• Institutional development tax administration,
  cadastre, financial management, and human
  resources reforms.
• Physical investments Service delivery
  improvements maintenance and rehabilitation of
  existing works, completion of unfinished works,
  and the construction of new public infrastructure
  and facilities (education, health, and roads,
  drainage, water supply, and other services.

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II Municipal Development Project (AR)

• Objectives
• Mobilize external and internal resources in a
  non-deficit, non-inflationary way to finance
  municipal investmentsparticularly those
  contributing to productive activities
• Strengthen municipalities capacity to plan,
  finance, and execute cost-effective capital
  investment programs, thus assisting them to
  develop the capacity to eventually finance their
  investment needs through the private capital
  markets
• Strengthen the institutional capacity of
  municipalities and provinces to manage their
  resources more effectively and to increase the
  efficiency of their systems for delivery of
  services.
• Components
• Municipal Infrastructure Construction and
  rehabilitation of public infrastructure (e.g.,
  road paving and related works, public lighting
  and sanitation), community facilities (e.g.,
  markets, and bus terminals), and equipment for
  other municipal services (e.g., for road
  maintenance, refuse collection and disposal).
• Institutional Strengthening financial
  management, information systems, accounting
  procedures, cadastres, maintenance procedures,
  and analyses to identify key policy issues and
  make recommendations for improving the assignment
  of revenues and responsibilities between the
  provincial and municipal levels of government,
  Municipalities of the Third Millennium (M3M)
  pilot program.

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Subnational Governments Public Sector
Modernization (AR)

• Objectives
• Support the integrated development and adoption
  of basic management tools that are conducive to
  the efficient and transparent management of
  provincial and municipal resources
• Strengthen provincial governments in such key
  areas as those related to land tax and tax
  administration, human resources management,
  judicial services, civil registries, control
  entities, and public safety functions
• Support the strengthening of municipal
  governments through activities designed to
  demonstrate the benefits of integrated
  modernization efforts
• Components
• Basic Module Provincial Management Tools
  (cadastre systems, property registries, tax
  administration systems, financial administration
  systems, HRM systems and public safety) and
  Municipal Management tools.
• Advanced Module Provincial Strengthening
  (e-procurement, judicial modernization, advanced
  HRM, control and auditing agencies, civil
  registries) and Municipal Management Tools
  (municipal budgeting, capital investment
  planning, project evaluation)

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Basic Municipal Services (AR)

• Objectives
• Improve the coverage, quality and efficiency of
  water supply and sanitation services in
  participating municipalities
• Enhance access to urban drainage infrastructure
  in participating municipalities
• Increase access to paved roads and reduce
  logistics costs through investments in the
  pavement of urban and productive roads and
• Improve the operational and commercial
  performance of municipal basic services through
  demand-driven technical assistance for
  medium-term investment planning, subproject
  preparation, technical supervision, operations
  and maintenance and improved commercial
  management.
• Components
• Municipal Infrastructure Basic Water and
  Sanitation, Urban Drainage and Small Retention
  Works and, Urban and Productive Roads.
• Institutional Strengthening of Municipalities and
  Service Providers Demand-Driven Instruments
  including Capacity building for the technical,
  economic, financial, social and environmental
  preparation and assessment of subprojects,
  multi-year strategic investment planning and
  budgeting, updating and improving cadastre of
  users, improvements in billing, collection and
  commercial management, technical exchanges,
  twinning and outreach activities, information,
  communications and education campaigns in key
  service sectors, poverty targeting and monitoring
  mechanisms as part of investment planning,
  preparation of territorial sector development and
  urban development plans and, business and
  operational planning for service providers.

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Governance 21 (AR)

• Objectives/Components
• Strengthen Management Capacity for Territorial
  Economic Development Knowledge building,
  territorial planning, administrative
  simplification and territorial investment program
  coordination.
• Expected results
• The government has broadened its knowledge on
  territorial economic development, identifying the
  main territorial constraints
• Subnational governments execute their budget in
  accordance with objectives and priorities defined
  through consultative and participatory strategic
  planning processes
• Subnational government have reduced barriers to
  investment imposed by administrative procedures
• Territorial programs within the Ministrys
  Economic Policy Secretariat have been reoriented
  to respond more effectively to subnational and
  private sector demands.
• Strengthening Results-oriented Public Investment
  Institutional Strengthening of the National
  Directorate for Public Investment Subnational
  Public Investment Systems transparency and
  accountability of public investment.
• Strengthening Results-oriented Financial
  Management Technological Upgrade and expansion
  of Financial Management Information Systems,
  Institutional Strengthening of the National
  Public Administration for Results-oriented
  Budgeting and Management, Strengthening Financial
  Management Capacities and the Transparency of
  Public Expenditure Management, Outreach.
• Project and Change Management Change Management,
  Transparency and Participation, Institutional
  Strengthening of selected processes.

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Banks Support to Subnational Governments in
Argentina
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Overall trends in LAC

• Need for decentralization reforms high and
  demands for support continue to be strong.
• Decentralization often part of a broader PS
  reform, stand-alone operations on fiscal
  decentralization rare.
• Increasing focus on complementary areas of
  support to subnational governments
• from a public sector reform, and
• private sector development perspective.
• Cross-cutting issues of particular importance in
  LAC include
• Role of the Social Funds (Central America, PE, BO
  etc.).
• Citizens Participation (BR, PE, AR, CO, Central
  America).
• Inequality debate/Lagging regions (BR, AR, CL)
• Role of Champions alliances of reform.
• Greater need to focus on demand-side and
  supply-side incentives.

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Starting a decentralization operation Key
design questions

• Role of the Bank towards Decentralization
• Neutrality Supporting the demands of government,
  bringing in international experience and in some
  cases, damage control.
• Honest Broker Balancing opposed interests in the
  country at the vertical and horizontal levels and
  helping focus the dialogue on key technical
  questions, often of a more long-term nature.
• Selection of a Counterpart
• Opposing legal mandates and decentralization
  objectives of the Ministries of Finance, sectoral
  ministries, Primer Ministers Offices, Planning
  Ministries, State Modernization Commissions and
  Decentralization Councils.
• In most cases, MOF counterpart as guardian of
  fiscal discipline, particular in operations with
  focus on fiscal decentralization.
• Increasingly work directly or indirectly with
  subnational governments.

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Fiscal decentralization in LAC

• Principles and practice
• Principles generally well-defined (e.g. BR, CO,
  PE Fiscal Responsibility Laws however, also
  AR).
• Implementation lagging behind.
• Need to combine ex ante rules with ex post rules,
  e.g. on subnational debt to enhance credibility
  (market incentives accompanied with
  administrative control).
• Fiscal neutrality of decentralization myth.
• Important to create stronger partnerships around
  need to create fiscal sustainability of
  decentralization framework.

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Key pillars of fiscal decentralization

• Fiscal decentralization framework
• Revenue management
• Changes in legal framework difficult given
  limited political will (e.g. introduction of new
  taxes, changes in tax base/rate, some work on
  revenue-sharing arrangements).
• Institutional strengthening of tax administration
  at central and subnational levels (AR, GT, EC,
  BO).
• Expenditure management
• Changes in legal framework at outset of
  decentralization process sometimes possible,
  particularly regarding new responsibilities for
  subnational governments.
• Sectoral design and sequencing (big bang vs.
  gradualism).
• Clear intergovernmental functional assignment of
  responsibilities.
• Intergovernmental transfers
• Political demand for changes often low (e.g. AR).
• Matching grants
• Block transfers to municipalities as of GDP
  independent of capacity, sectoral
  responsibilities.
• Subnational debt
• Put on agenda (Peru study on municipal debt).

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Demand-driven packaging of fiscal
decentralization support

• Fiscal decentralization and complementary areas
  of institutional support/entry points
• Fundamental importance of combining fiscal
  decentralization with institutional reform e.g.
  Peru DECSAL itself, plus the accompanying TAL.
• Given the limited will to reform the fiscal
  decentralization framework, instead of looking at
  ex ante allocation of expenditure, focus on ex
  post quality of expenditure.
• Rather than addressing who gets what portion out
  of total public sector spending, such proposals
  emphasize transparency and co-financing -between
  levels of government and between the private and
  the public sector - as well as incentives for
  demand-driven intergovernmental program
  coordination.
• Focus areas at central and subnational levels
• Public investment strengthening
• Financial management and broader PEM
• Civil service reform
• Anti-corruption
• Greater move to sectoral decentralization and
  sector-specific Bank products

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Linkages with subnational competitiveness

• Subnational competitiveness and LED/TED
• Motivation for decentralization/decentralization
  reform is and increasing focus on
  competitiveness, at the national and subnational
  level
• Projects bringing together fiscal
  decentralization and competitiveness aspects
  (e.g. Peru DECSAL)
• Particular focus on subnational competitiveness
  questions (e.g. CL, AR)
• Intergovernmental cooperation
• Intergovernmental investment program coordination
  (e.g. CL)
• PSD at the subnational level (administrative
  simplification, strategic planning, productive
  development, PPPs) e.g. AR

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Moving forward

• From a focus on whether to decentralize, to a
  focus on how to
• From a focus from fiscal decentralization to
  complementary action in public sector
  strengthening and PSD
• Complementing Bank support with public-sector
  focused interventions to those focused at helping
  develop subnational competitiveness
• Priorization and sequencing of reform,
  selectivity of interventions
• Greater emphasis on analysis of political economy
  of reform, partnerships with stakeholders, change
  management
• Increasing shift to design of sectoral
  decentralization
• More emphasis on ME at central and subnational
  level (e.g. CO, AR) and measuring overall impact
  of decentralization
• Direct assistance to subnational governments,
  both at regional and municipal level (with or
  without guarantee)
• Greater need for prior or accompanying analytical
  work
• Need for greater cross-sectoral collaboration

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Thank You!Questions?kplangemann_at_worldbank.org
Extension 30301