Decentralization in LACDecentralization in LAC

Overview of operations and Overview of operations and lessons from experiencelessons from experience

Kathrin A. PlangemannKathrin A. PlangemannMay 8, 2006May 8, 2006

With inputs from LCSPS: F. Rojas, J. Frank, M. With inputs from LCSPS: F. Rojas, J. Frank, M. Mercado-Diaz, M. Junowicz Mercado-Diaz, M. Junowicz

Decentralization, Deconcentration and Decentralization, Deconcentration and

Devolution Devolution

LAC one of most decentralized regions LAC one of most decentralized regions

Subnational expenditures one fourth of total public Subnational expenditures one fourth of total public

spending (from > 48% in AR to < 5% in Central America) spending (from > 48% in AR to < 5% in Central America)

Debate on pros and cons and the how to’s Debate on pros and cons and the how to’s

still very much open still very much open

Decentralization in Latin Decentralization in Latin America and the America and the

CaribbeanCaribbean

Motivation mainly political based on Motivation mainly political based on

considerations of democracy, efficiency and considerations of democracy, efficiency and

service-deliveryservice-delivery

Four main stages/Focus areas:Four main stages/Focus areas:

• Political/administrative decentralizationPolitical/administrative decentralization

• Fiscal decentralization frameworkFiscal decentralization framework

• Service-delivery focusService-delivery focus

• Subnational competitiveness (LED/TED)Subnational competitiveness (LED/TED)

Decentralization in Latin Decentralization in Latin America and the America and the

CaribbeanCaribbean

Bank Support to Bank Support to Decentralization in LACDecentralization in LAC

Some Examples of Bank Support in LACSome Examples of Bank Support in LAC::• Adjustment/DPL:Adjustment/DPL:

Peru (DECSAL) Peru (DECSAL) Bolivia (PSAC)Bolivia (PSAC) Colombia (FIAL) Colombia (FIAL) Mexico (Decentralization SAL)Mexico (Decentralization SAL)

• Investment Loans (SILs)Investment Loans (SILs) Provincial Development Programs (AR)Provincial Development Programs (AR) Municipal Development Projects (AR)Municipal Development Projects (AR) Municipal Development (CL)Municipal Development (CL) Subnational Governments Public Sector Modernization Subnational Governments Public Sector Modernization

(AR)(AR)• Investment Loans (TALs): Investment Loans (TALs):

Governance 21 (AR)Governance 21 (AR) Public Sector Modernization (HN)Public Sector Modernization (HN)

• Subnational lending:Subnational lending: Adjustment (AR, MX, BR-SWAP)Adjustment (AR, MX, BR-SWAP) Investment (BR, AR, CO) Investment (BR, AR, CO)

Bank Support to Bank Support to Decentralization in LACDecentralization in LAC

Some Examples of ESWSome Examples of ESW::• Regional Flagships:Regional Flagships:

Beyond the centerBeyond the center Decentralization in other flagships (e.g. Beyond Decentralization in other flagships (e.g. Beyond

the city)the city)• IGRs:IGRs:

Peru Peru Bolivia Bolivia Argentina Argentina

• Fees for Services:Fees for Services: ChileChile

• Other Analytical Work:Other Analytical Work: EcuadorEcuador Dominican RepublicDominican Republic ArgentinaArgentina

DECSAL (Peru)DECSAL (Peru) Objectives: Objectives:

1. Protect fiscal sustainability during Peru's transition to a more decentralized state;

2. Strengthen institutional management and fiscal capacity at regional and local levels for their progressive assumption of service responsibilities;

3. Support the creation of a better regulatory and investment environment for upgrading Peru's regional competitiveness.

Key Areas of Action:Key Areas of Action:• Decentralization and Fiscal SustainabilityDecentralization and Fiscal Sustainability: : Tax Policy, Fiscal

Transfers Subnational Borrowing and Financial Management.• Institutional Development for DecentralizationInstitutional Development for Decentralization: Accreditation : Accreditation

of subnational governments, of subnational governments, Participatory Budgeting; Civil Service Reform.

• Competitiveness and Economic Growth:Competitiveness and Economic Growth: National Competitiveness Plan; Logistic Cost and Infrastructure Development; Investment Climate; Trade Facilitation; Technology Absorption and Innovation; Quality Management

Decentralization Decentralization SAL(MX)SAL(MX)

Objectives/Components:Objectives/Components:1. Imposing hard budget constraints on federal resources provided to states and

municipalities;2. Reducing moral hazard in subnational borrowing;3. Increasing the transparency and public accountability of subnational fiscal and

financial management and of the overall decentralization process;4. Setting up initial pilot mechanisms to enhance efficiency of decentralized

expenditures.

Main Impact on decentralizationMain 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.

Municipal Municipal Development (CL)Development (CL)

Objectives: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:Components:• National Institutional StrengtheningNational Institutional Strengthening: : Design and implementationDesign 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 StrengtheningMunicipal 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.

II Provincial Development II Provincial Development Program (AR)Program (AR)

Objectives:Objectives:1. Assist the provinces in implementing appropriate financial

management reforms to:1. generate current account surpluses (own-revenue enhancement

and expenditure control) that together with prudent borrowing may finance investment programs; and

2. strengthen their capacity to plan, program, finance, execute, and monitor investment programs that are economically efficient, financially sustainable, institutionally manageable, and environmentally sound.

2. Provide financing for institutional development and physical investments that will promote provincial economic development.

Components:Components:• Institutional developmentInstitutional development: tax administration, cadastre,

financial management, and human resources reforms.• Physical investments: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.

II Municipal Development II Municipal Development Project (AR)Project (AR)

Objectives:Objectives:1. Mobilize external and internal resources in a non-deficit, non-

inflationary way to finance municipal investments—particularly those contributing to productive activities;

2. 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;

3. 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:Components:• Municipal InfrastructureMunicipal Infrastructure: C: 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 StrengtheningInstitutional 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.

Subnational Subnational Governments Public Governments Public

Sector Modernization Sector Modernization (AR)(AR) Objectives:Objectives:

1. Support the integrated development and adoption of basic management tools that are conducive to the efficient and transparent management of provincial and municipal resources;

2. 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;

3. Support the strengthening of municipal governments through activities designed to demonstrate the benefits of integrated modernization efforts

Components:Components:• Basic ModuleBasic Module: : Provincial Management Tools (cadastre systems,

property registries, tax administration systems, financial administration systems, HRM systems and public safety) and Municipal Management tools.

• Advanced ModuleAdvanced 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)

Basic Municipal Services Basic Municipal Services (AR)(AR)

Objectives:Objectives:1. Improve the coverage, quality and efficiency of water supply and

sanitation services in participating municipalities;2. Enhance access to urban drainage infrastructure in participating

municipalities;3. Increase access to paved roads and reduce logistics costs through

investments in the pavement of urban and productive roads; and4. 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:Components:• Municipal InfrastructureMunicipal Infrastructure: : Basic Water and Sanitation, Urban Drainage and

Small Retention Works and, Urban and Productive Roads. • Institutional Strengthening of Municipalities and Service ProvidersInstitutional 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.

Governance 21 (AR)Governance 21 (AR) Objectives/ComponentsObjectives/Components:

• StrengthenStrengthen Management Capacity for Territorial Economic Development 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 Ministry’s Economic Policy Secretariat have been reoriented

to respond more effectively to subnational and private sector demands. Strengthening Results-oriented Public Investment: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 ManagementStrengthening 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 ManagementProject and Change Management: Change Management, Transparency and Participation, Institutional Strengthening of selected processes.

Bank’s Support to Bank’s Support to Subnational Governments in Subnational Governments in

ArgentinaArgentina

Subnational Government

ModernizationGovernance 21 Basic Municipal Services

•Cadastre Systems

•Property Registries

•Tax Administration Systems

•Human Resource Management

•Financial Administration

•Public Safety Pilot

•Strategic planning

•Administrative simplification

•Intergovernmental program

coordination

•Public Investment

Strengthening

•Financial Administration

•Water and Sanitation Services

•Urban Drainage.

•Urban Transport

•Municipal institutional

development

Objective : Improve public expenditure management and service delivery for growth

Ministerial Coordination: Coordination Committee

Bank Coordination: Steering Committee

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Subnational

ModernizationGovernance 21 Basic Municipal Services

Key Areas

•Cadastre Systems

•Property Registries

•Tax Administration Systems

•Human Resource Management

•Financial Administration

Systems

•Public Safety Pilot

Key Areas

•Strategic planning

•Administrative simplification

•Intergovernmental program

coordination

•Public Investment

Strengthening

•Financial Administration

Systems

Key Areas

•Water and Sanitation Services

•Urban Drainage.

•Urban Transport

•Municipal institutional

development

Objective : Improve public expenditure management and service delivery for growth

Ministerial Coordination: Coordination Committee

Bank Coordination: Steering Committee

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Overall trends in LACOverall 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.

Starting a decentralization Starting a decentralization operation: operation:

Key design questionsKey design questions Role of the Bank towards Decentralization: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: Selection of a Counterpart: • Opposing legal mandates and decentralization

objectives of the Ministries of Finance, sectoral ministries, Primer Minister’s 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.

Fiscal Fiscal decentralization in decentralization in

LACLAC Principles and practicePrinciples 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.

Key pillars of fiscal Key pillars of fiscal decentralizationdecentralization

Fiscal decentralization frameworkFiscal decentralization framework:: Revenue managementRevenue 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 managementExpenditure 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 transfersIntergovernmental 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:Subnational debt:

• Put on agenda (Peru –study on municipal debt).

Demand-driven Demand-driven packaging of fiscal packaging of fiscal

decentralization supportdecentralization support Fiscal decentralization and complementary areas of Fiscal decentralization and complementary areas of

institutional support/entry points: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

Linkages with Linkages with subnational subnational

competitiveness competitiveness Subnational competitiveness and LED/TED: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

Moving forwardMoving 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 M&E 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

Thank You!Thank You!

Questions?Questions?

kplangemann@worldbank.org

Extension: 30301Extension: 30301