Grant Financing of Metropolitan Areas: A Review

of Principles and Practices

Anwar Shah, SWUFE, China and Brookings Institution (

shah.anwar@gmail.com)WBI Webinar 28 May 2012

Metro Areas – basic characteristicsMetro Areas – basic characteristics• At the core of prosperity of nations• Great expectations critically linked to fiscal health and

thereby to fiscal regimes. e.g. St.Louis. MO • Compact areas with high population and population

densities • Varied governance structures and tiers – From uni-city to

fragmented governance • Large and dynamic tax bases but metropolitan government

access restrained. Existing bases overtaxed in OECD. Unfunded mandates

• Grant design critical for responsive, responsible, fair and accountable metropolitan governance and local economic development

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• Allocation basis among local governments: school age children (ages 6-17)

• Distribution to providers: equal per pupil to both government and private schools

• Conditions: Universal access to all, private school admissions on merit regardless of parents’ income, improvements in school achievement scores, graduation and drop out rates, no condition on spending

• Penalties: public censure, reduction of grant funds

• Incentives for cost efficiency: retention of savings

• Built-in bottom up results based accountability: competition with voice and exit options as parental choice of school determines school grant.

The Practice of Intergovernmental Fiscal Transfers

An example: An Output based (performance oriented) education grant to set national minimum standards and encourage competition

and innovation and citizen empowerment

Metro services that are strong candidate for grant finance

Metro services that are strong candidate for grant finance

• Primary and secondary, education and public health

• Welfare assistance• Arterial road and regional public transit• National heritage museums and Olympic parks

Additional considerations in developing a grant strategy for metro areas

Additional considerations in developing a grant strategy for metro areas

• Autonomous public agencies for service delivery. Not relevant for grant design.

• Functional, overlapping and competing jurisdictions. Output based grants a suitable tool.

• Fragmentation of metro by single purpose jurisdictions. Revenue inadequacy relevant for grant design.

• Contracting out metropolitan services. Output based grants to assure services to the poor.

Grants and own source revenues in uni-city metro areas

Grants and own source revenues in uni-city metro areas

Grant and own source financing by horizontally coordinated or fragmented metro areas

Grant and own source financing by horizontally coordinated or fragmented metro areas

Metro dependency on central transfers by type of metro governance

Metro dependency on central transfers by type of metro governance

Metro areas with major dependency on central transfers

Metro areas with major dependency on central transfers

Examples of better practices are hard to find.

Examples of better practices are hard to find.

• One size does not fit all. Prague as the only exception.

• Grant to promote competition among local jurisdiction. Examples Albania and Russia.

• Output based transfers for school finance. Examples: Thailand, Brazil, Canada, Chile, Australia.

• Solidarity principle for inter and intra metro equalization. Examples: Denmark, Finland

• Tax rebates by origin of collection. Shanghai, Beijing

Notable Points of Departure of Practice from Principles

Notable Points of Departure of Practice from Principles

• One size does fit all approaches. No recognition of metro governance structure, responsibilities, unique role in global and national connectivity.

• Nature of metro services not considered. School financing from property taxes and input control grants in USA, UK rather than from PIT and output based grants.

• Complex criteria with lack of focus on objectives• No sunset clauses or review provisions

Departure of practice from principles (2)Departure of practice from principles (2)

• Self-financing highly constrained with only a handful of exceptions

• Tax by tax sharing and revenue sharing widely practiced.

• General purpose transfers –one size fits all approach- discriminates against metro areas.

• Spillout of benefits rarely compensated.• Project based specific purpose transfers with

input conditionality and unfunded mandates in vogue –undermine local autonomy and accountability –examples Bangkok and Jakarta

Notable points of departure of practice from principles (3)

Notable points of departure of practice from principles (3)

• Need greater tax autonomy through tax decentralization and tax base sharing

• Greater access to capital finance• Results based grant financing (output based

grants) of social and infrastructure services to encourage competition, innovation and citizen based accountability.

• Tournament based grant financing to encourage benchmarking.

• Certificate based grant financing to incentivize management reforms

Lessons from International PracticeLessons from International Practice

• Metro areas have high dependency on central transfers.

• Metro areas unfairly treated in grant design. Require separate program.

• Metro areas need greater tax autonomy and access to more productive tax bases e.g. income, sales and environmental taxes.