anwar shah, oedcr1 intergovernmental transfers anwar shah, world bank

Anwar Shah, OEDCR 1

Intergovernmental Transfers

Anwar Shah, World Bank

Anwar Shah, OEDCR 2

Relevance

Dominant source of subnational revenues in many countries.

Design matters for efficiency and equity.

Grant design must be consistent with grant objectives.

Anwar Shah, OEDCR 3

Importance of transfers Dominant source of revenue for subnational

governments in some countries:

South Africa 85%

Indonesia 72% Provinces 72% Local 85%

Nigeria 67% to 95%

Mexico 70% to 90% (poorer states)

Pakistan 82% to 99% Design of transfers matter for efficiency and equity

and fiscal discipline.

Anwar Shah, OEDCR 4

Grant typesNon-matching transfers: Selective (conditional) General (unconditional)

Selective matching transfers Open-ended Closed-ended

Conceptual impacts General non-matching

higher welfare Selective matching open-ended

higher expend. stimulation

Anwar Shah, OEDCR 5

Grants in LDCs vs DCs

LDCs 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, OEDCR 6

Criteria for design of transfers

Autonomy Revenue adequacy Equity Predictability Efficiency Simplicity Incentive Safeguard of grantor’s objectives

Anwar Shah, OEDCR 7

Economic rationale of intergovernmental

transfersObjective 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

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Transfers: Lessons

Grant design must conform to objectives.

Main Arguments and Grant Design

Fiscal Gap: Structural imbalance as a result of a mismatch between revenue means and expenditure needs.

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...Fiscal gap

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 and Brazil).

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To bridge fiscal gap

Design: (a) Reassign (b) tax abatement(c) tax base sharing.

Better practices: Tax abatement in Canada; tax base sharing in Brazil, Canada, and Pakistan.

Practices to avoid: deficit grants; tax by tax sharing.


Special issues in state-local transfers

Principal-agent relationship Pass-thru of federal transfers from states desirable

due to better access to data. Considerations in unconditional grant design:

» Classification by population size, municipality type, and urban/rural

» Equal per municipality component

» Equal per capita component

» Service area component

» Fiscal capacity component Considerations in conditional transfers

» Simple objectively verifiable indicators of need


Indonesia -- General Purpose Transfers

1. Provincial Development Grant» Equal per province (85%)» Area (15%)

2. District Development Grant» Per capita with a floor

3. Village Development Grant» Equal per village

4. Less Development Village Grant» Per capita


Setting national minimum standards

Design: conditional non-matching block transfers with conditions on standards of service and access.

Better practices: Indonesia roads and primary education grants; Colombia and Chile education transfers; Canada health and post-secondary education transfers.

Practices to avoid: Conditional transfers with conditions on spending; ad hoc grants.


Education grant

Allocation basis: Population aged 5-17

Distribution: Equal per pupil to both public and private schools

Conditions: Universal access to primary and secondary education

Penalties: Public censure, reduction of grants funds

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


Indonesia - Specific Purpose Transfers to Provinces

P1. SDO - Subsidy for Autonomous RegionsPublic sector wages

P2. Provincial Road Improvement GrantLength of roadCondition of roadUnit cost of construction and maintenance

P3. Reforestation and Regreening


Indonesia - Specific Purpose Transfers to Local Governments

L1. SDO - Subsidy for Autonomous RegionsPublic sector wages

L2. District/Town Road Improvement GrantLength of roadsConditionDensityUnit cost


...Transfers to Local Governments

L3. Primary School GrantSchool age children (ages 7-12)Needs for facilities

L4. Health GrantNeed for medicine, health centres, and

personnel

L5. Reforestation GrantProject review


Federal financing and health care in Canada

Per capita transfers tied to rate of growth of GDP

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 1-4.

Dollar for dollar reduction for 5.

Sunset clause: Parliamentary review every 5 years.


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.


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


To reduce regional fiscal disparities

Design: General non-matching fiscal capacity equalization transfers.

Better practices: Fiscal equalization programs of Australia, Canada, and Germany.

Practices to avoid: General revenue sharing with multiple factors.


Fiscal equalization transfers

REGIONAL FISCAL INEQUITY AND NATIONAL FISCAL INEFFICIENCY

ARGUMENT

DIFFERENCES IN NET FISCAL BENEFITS ACROSS STATES (NFBS)

Reasons:

a. Differences in access to source-based taxes such as resource revenues and CIT.

b. Per capita incomes differs differential access to PIT and sales tax.


c. Fiscal needs different: Proportion of old, young, incidence of disease, terrain factors, etc.

Total Income = Private Income + NFBs

Individuals with identical incomes in two states:

Rich Poor

Private income 10,000 10,000Tax paid 5,000 5,000Per capita exp. 10,000 5,000NFB 5,000 0Total income 15,000 10,000 Fiscally induced migration to RICH state.

Inefficient and inequitable resource allocation.


Grants rationale

Solution: Fiscal equalization transfers to eliminate

NFBs Allow replication of financial structure of an

unitary state while having decentralized decision making.

Equity and efficiency considerations coincide.

Design of FETs: Must be inframarginal, i.e., no incentive to

change fiscal effort to exploit the system.

anwar shah, oedcr1 intergovernmental transfers anwar shah, world bank

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