Poverty Reduction Strategies in Decentralized Contexts: Comparative Lessons in Local Planning and Fiscal Dimensions

June 2004

A Draft Source Book A Synthesis of Four Reports commissioned under a research program funded by a World Bank-Netherlands Partnership Program (BNPP) Trust Fund

The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s); they do not necessarily represent the views of the World Bank Group, its Executive Directors, or the countries they represent and should not be attributed to them.

World Bank Task Team:

Tamar Manuelyan Atinc, Sector Manager Stephen Ndegwa, co-Task Manager Robert Taliercio, co-Task Manager Tilla Sewe MacAntony, Consultant Taranaki Mailei, ACS

Abbreviations

AIP Annual Investment Plans APBD Regional Budget ASEAN Association of Southeast Asian Nations BCW Budget Consultative Workshop BFP Budget Framework Paper CALABARZON Cavite, Laguna, Batangas, Rizal and Quezon CAR Cordillera Autonomous Region CBG Capacity Building Grant CDF Comprehensive Development Framework CDIP City Development Investment Program CDP City Development Plan CHD Center for Health Development CI Congressional Initiatives CIDSS Comprehensive and Integrated Delivery of Social Services CLUPs Comprehensive Land Use Plans CSO Civil Society Organization DAK Special Allocation Fund DAU General Allocation Fund DBCC Development Budget Coordination Committee DBM Department of Budget and Management DDP District Development Plan DILG Department of Interior and Local Government DIP Central Government Deconcentrated Development Expenditure DS Decentralization Secretariat DSC District Service Commission DSWD Department of Social Welfare and Development DTB Development Transfer Budget DTS Development Transfer System EFMP Economic and Financial Management Project FAPs Foreign Assisted Projects FDS Fiscal Decentralization Strategy FY Financial Year GAA General Appropriations Act GBHN National Policy Guidelines

GoU Government of Uganda HIPC Highly Indebted Poor Countries HIV/AIDS Human Immuno-deficiency Virus/Acquired Immune Deficiency

Syndrome HPIC Highly Indebted Poor Countries HUCs Highly Urbanized Cities ICC Investment Coordination Committee ICC Investment Coordination Committee IDA International Development Agency IGG Inspector General of Government

IHPS Integrated Health Planning System ILHZ Integrated Local Health Zones INPRES Presidential Instruction IPRSP Interim Poverty Reduction Strategy Paper JOSIE Barangay Joint Organization and Systems in the Improvement of the Economy

in the Barangay JOSIE Joint Organization and Systems in the Improvement of Education

KALAHI Kapit-Bisig Laban sa Kahirapan KEPPRES Presidential Decree KRAs Key Result Areas LCE Local Chief Executive LCs Local Councils LDC Local Development Council LDG Local Development Grant LFC Local Finance Committee LFPs Locally-Funded Projects LGA Local Government Act LGBC Local Government Budgets’ Committee LGBFP Local Government Budget Framework Paper LGC Local Government Code LGDP Local Government Development Program LGFC Local Government Finance Commission LGUs Local Government Units M&E Monitoring and Evaluation MBN Minimum Basic Needs MFPED Ministry of Finance, Planning and Economic Development MoHa Ministry of Home Affairs MoLG Ministry of Local Government MPR Consultative Assembly MPU Municipal Planning Units

MTEF Medium-Term Expenditure Framework MTPDP Medium-Term Philippine Development Plan MTPIP Medium-Term Public Investment Program MUSBANGDES Village Development Meeting MUSBANGDUS Sub-Village Development Meeting MWLE Ministry of Water, Lands and Environment NAPC National Anti-Poverty Commission NEDA National Economic and Development Authority NGAs National Government Agencies NGOs Non-Governmental Organizations NKCG National KALAHI Convergence Group NLGPA National Local Government Performance Assessments NPFP National Physical Framework Plan NROs NEDA Regional Offices OAG Office of the Auditor General ODA Official Development Assistance OOB Outcome Oriented Budgeting OPIF Organizational Performance Indicators Framework PAF Poverty Action Fund PAPs Programs, Projects and Activities PCLUP Provincial Comprehensive Land Use Plan PCs Planning Committees PDIP Provincial Development Investment Program (or CDIP) PDP Provincial Development Plan (or CDP) PEAP Poverty Eradication Action Plan PEM Public Expenditure Management PEMS Public Expenditure Management System PEPFMR Public Expenditure Procurement and Financial Management PMES Poverty Monitoring and Evaluation Survey PMS Performance Management System PMU Project Monitoring Unit POLDA Basic Policies of Regional Development POs Private Organizations PPA Participatory Poverty Assessment PPB Planning, Programming, Budgeting PPDO Provincial Planning Development Office PPFP Provincial Physical Framework Plan PROPEDA Regional Development Program PROPENAS National Five-Year Development Program PRS Poverty Reduction Strategies

PRSC Poverty Reduction Support Credit PRSP Poverty Reduction Strategy Paper PSR Poverty Status Report RAKORBANG Development Coordination Meeting RAPDB Regional Annual Budget Proposal RBAS Regional Budget Allocation Scheme RCs Resistance Councils RDC Resident District Commissioner RDCs Regional Development Councils. RDIPs Regional Development Investment Programs RDPs Regional Development Plans RDPs Regional Development Plans RENSTRA Strategic Plan of Central Government Agencies REPELITA National Five-Year Development Plan REPETA Annual Development Plan REPETADA Regional Annual Development Plan RHUs Regional Health Units RKCG Regional KALAHI Convergence Group RMDC Regional Management Development Conferences RPFPs Regional Physical Framework Plans RPMES Regional Project Monitoring and Evaluation System RTB Recurrent Transfer Budget RTS Recurrent Transfer System SBL Sector Budget Line SDG Sector Development Grant SEER Sectoral Efficiency and Effectiveness Review SEF Special Education Fund SONA State of the Nation Address SRB Sector Recurrent Budget SWAps Sector-wide Approaches SWGs Sector Working Groups TPC Technical Planning Committee UDHS Uganda Demographic and Health Survey UNCDF United Nations Capital Development Fund UNDP United Nations Development Program UNHS Uganda National Household Survey UPE Universal Primary Education UPPAP Uganda Participatory Poverty Assessment Project

Contents

Poverty Reduction Strategies in Decentralized Contexts: Comparative Lessons in Local Planning and Fiscal Dimensions ...................................................................................................... i Abbreviations ......................................................................................................................................iv Contents ................................................................................................................................................ ix Chapter 1: Introduction....................................................................................................................... 1

Decentralization .............................................................................................................................. 12 Lessons from the case-studies ......................................................................................................... 3

Conclusion............................................................................................................................................. 4 Chapter 2: Literature Review and Comparative Practices from Developed Economies ........ 6

Introduction ....................................................................................................................................... 6 A Brief on Decentralization ............................................................................................................. 7 Presumed Benefits of Decentralization.......................................................................................... 8

Accountability. .............................................................................................................................. 8 Technical / cost efficiency. ........................................................................................................... 8 Service Delivery. ........................................................................................................................... 8 Needs of the poor.......................................................................................................................... 9

Emerging Lessons on Planning in Decentralized Settings........................................................ 10 (1) Complexity and Conflict. ....................................................................................................... 10 (2) Coordination of Multiple Institutions and Actors. ............................................................... 10 (3) General Principles for Effectiveness. ..................................................................................... 11 (4) An Integrated Conceptual Approach: Institutional Pluralism ............................................ 11

(1) Coordination Through Incentives, Norms and Regulation. ..................................... 12 (2) Representation of National Interests............................................................................ 12 (3) Coordination, Consultation and Collaboration. ......................................................... 13

Developed Planning Systems: Comparative Experiences ......................................................... 13 The European Planning Experience – Divergent and Shifting Models .................................. 14

Coercion versus Cooperation in Planning Coordination........................................................... 17 (1) Florida as a coercive model. ................................................................................................... 18 (2) New Zealand and the Cooperative Approach ........................................................................ 19 Constraints and Dilemmas ............................................................................................................ 20 Conditions for Relative Efficacy ................................................................................................... 21

Linkage Between National and Subnational Budgets................................................................ 22 Budget Management ......................................................................................................................... 22

(1) Fiscal Discipline: Revenue Responsibility and Hard Budget Constraints.............. 22 (2) Budgetary Institutions, Procedures and Rules ........................................................... 22 (3) Technical Capacity .......................................................................................................... 23

(4) Fiscal Structure ................................................................................................................ 23 (5) Monitoring and Evaluation ........................................................................................... 23 (6) Accountability Requires Balanced Local Discretion .................................................. 24 (7) The Appropriate Range of Central Control ................................................................ 24 (8) Control Based on Performance ..................................................................................... 24

Instruments for coordination........................................................................................................... 25 (1) Critical Role of Transfers ....................................................................................................... 25 (2) Intergovernmental Revenue Assignment and Transfers....................................................... 25 (3) Shared Revenues .................................................................................................................... 26 (4) Local Revenue Instruments ................................................................................................... 27 (5) Equalizing Transfers.............................................................................................................. 27 (6) Minimum / Priority and Efficiency Transfers....................................................................... 28

Conclusions......................................................................................................................................... 29 Chapter 3: Philippines – Local Planning and Fiscal Dimensions............................................. 30

Decentralization Experience.......................................................................................................... 30 The Processes Used to Integrate Planning and Budgeting ....................................................... 31

Lessons from the Philippines Experience ..................................................................................... 38 Conclusion........................................................................................................................................... 38 Chapter 4: Indonesia – Local Planning and Fiscal Dimensions Under Rapid Decentralization Reform .................................................................................................................. 39

Decentralization Experience.......................................................................................................... 39 The Processes Used to Integrate Planning and Budgeting ....................................................... 40

Lessons from the Indonesia Experience ........................................................................................ 45 Conclusion........................................................................................................................................... 44 Chapter 5: Uganda – Local Planning and Fiscal Dimensions Under a Reformist State....... 46

The Processes Used to Integrate Planning and Budgeting ....................................................... 47 Lessons from the Uganda Experience ............................................................................................ 60 Conclusion........................................................................................................................................... 50 Chapter 6 - Lessons and Suggested Policy and Institutional Responses................................ 52 Lessons from Case Studies............................................................................................................... 53

On Planning ..................................................................................................................................... 53 On Monitoring ................................................................................................................................. 56

References............................................................................................................................................ 57

Chapter 1: Introduction

The World Bank has completed a comprehensive literature review and country case studies examining the theoretical discussions and on-the-ground practices of planning and budgeting in decentralized contexts in Indonesia, Philippines, and Uganda. As Poverty Reduction Strategy Papers become central planning documents in an increasing number of countries, several of which are decentralized or decentralizing, the integration of local and national planning and budgeting has emerged as an important consideration. This project explored four areas: (1) the linkages in planning processes across levels of government; (2) the relationship between budgeting and planning processes both at the national and local levels; (3) the use of fiscal instruments and policies for aligning national and local development goals; and (4) the monitoring and evaluation practices related to planning and budgeting in the three countries. This source book integrates the literature review and country reports, and highlights common lessons, issues, and gaps in decentralized planning.

The draft sourcebook is organized as

follows: Chapter 1 is a brief introduction and summary of the main themes from the literature review and key findings from the country reports. It also highlights the overall emerging themes and gaps on decentralized planning and budgeting. Subsequent chapters provide summaries and highlight lessons from the research reports commissioned under the project and which are available as separate annexes to this sourcebook. Chapter 2 covers the literature review and clarifies theoretical propositions and good practices on planning and budgeting concerns within the context of decentralized governance in developed economies. Chapters 3, 4 and 5 summarize key findings and lessons obtained from an examination of the planning and budgeting processes in Indonesia, the Philippines, and Uganda. The implications of these findings for planning and budgeting as well as policy suggestions for decentralized polities are covered in Chapter 6. Based on the lessons

from the case studies and main themes in the literature review, this chapter articulates a number of good practices in local planning and supporting fiscal instrumentation, including recommendations from World Bank staff and Bank clients on poverty reduction planning and budgeting in decentralized polities. The final part of the source book is comprised of annexes and a bibliography, as well as suggested resources including publications and websites with “good practices” in the area of planning and budgeting in decentralization contexts.

Decentralization

One of the more important public sector reforms adopted by many developing countries in recent years is decentralization, which has the potential to improve the delivery of poverty-related services to the community. Decentralization, however, has

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given rise to changes in planning and budgeting processes at the national and subnational levels, making it necessary to study how poverty strategies can be better integrated into these processes. The presence of widespread poverty in countries with reasonable rates of economic growth highlights the importance of good governance and public sector reforms in the fight against poverty. Public sector reforms that encourage decentralization, greater citizen participation and administrative efficiency promote good governance principles of accountability, transparency, predictability and continuity and participation (Brillantes and Cuachon 2002). These factors, in turn, are critical in ensuring more effective implementation of poverty reduction programs, particularly those geared towards the poorest communities. The following are the highlights of themes which emerged in the literature reviewed:

First, the decentralization process is complex and engenders conflict. It requires significant adjustments in the form of vertical administrative control, development of extensive coordinating and consultative mechanisms, and linkage between managerial and political accountability. Preexisting conditions are important regarding intergovernmental trust, participatory governance institutions and local technical / managerial capacities and must be attended to accordingly.

Second, effective decentralization requires an increased role of central and regional governments. New capacities and responsibilities are required to manage multi-tiered systems and promote the development of local jurisdictions as effective governance institutions. Establishing mechanisms for coordinating the roles of multiple central, regional and local government agencies and actors is critical. This also suggests the need for

role clarity, both within and between levels of government.

Third, incentives, norms and regulation all have roles in effective coordination. Vertical regulation is necessary to assure adherence to national policy objectives; however, its form in a decentralized context is significantly altered. Appropriate local incentives, conveyed in the structure of the intergovernmental fiscal system and via fiscal inducement, are often critical. Representation of national interests at the local level is important and occurs via deconcentrated administration of national agencies and to a lesser extent through prefect systems. Both formal and informal means of communication and consultation across an array of dimensions is necessary to assure appropriate vertical and horizontal coordination.

Fourth, frameworks for coordinating budgetary processes and the establishment of uniform budgetary principles are essential. This requires central leadership in establishing the administrative and legal framework for accounting structures, budget comprehensiveness, budget classifications, auditing and execution reporting.

Fifth, fiscal discipline is required for proper expenditure management. Increased local revenue responsibility, hard budget constraints, sound and effective budgetary institutions, procedures and rules, and requisite technical capacity promote it. Critical aspects of technical capacity include personnel management, procurement and data processing.

Sixth, monitoring and evaluation of results in a decentralized context is an essential function of accountability. Accountability is itself a function of design. It requires balanced local discretion, with local officials accountable to central and regional institutions, as well as local institutions and

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citizens. This requires limitations on discretion and a simultaneous ability to hold local officials accountable to citizens, markets and superior level jurisdictions for exercising the discretion they command.

These themes indicate that there are policy implications in terms of planning and budgeting that need to be considered by those polities considering decentralizing or those that have already decentralized and are embarking on large-scale planning exercises such as the PRSP.

Lessons from the Case Studies

Both Indonesia and the Philippines have had a long tradition in preparing development plans, though mostly at the national government levels. Prior to decentralization, both countries had highly centralized governments that necessitated planning processes that combined top-down and bottom-up approaches. Both countries, however, pursued two different decentralization tracks considering their political and economic situations. Indonesia adopted the “Big Bang” approach to decentralization, devolving the services of 11 sectors, in contrast to the more gradual approach of the Philippines, which devolved selected services. Indonesia is still in the “infancy” stage of implementing decentralization, having started only in 2001, as opposed to the Philippines, which adopted the policy in 1991. The difference extends as well to the coverage of the policy, the formula used in allocating fiscal transfers among government units as well as the implementation mechanisms adopted by the two countries during the transition stage.

One of the major reform processes associated with PRS is the introduction of

participatory poverty planning. While the Philippines is not preparing a PRS, it can be considered a model in espousing participatory planning starting 1986 after the popular “people power” revolt, which ushered in a drastically different perspective about the government’s role in society and encouraged a more open, transparent and participatory form of governance.

In the Philippines, plans are usually prepared at the national, regional and local levels, i.e., provincial, city, municipal and village levels. The passage of the Local Government Code of 1991 (henceforth referred to as the Code) affirmed the importance of preparing local level plans as part of the process of decentralization. Development plans in the Philippines usually have two components: policies and strategies section and the programs and projects. The experience during the last three administrations highlights the bureaucratic tendency to introduce new poverty programs with every change in administration rather than building on the successes of poverty programs of previous administrations. As a result, programs are changed even before they can be fully implemented and their effectiveness assessed.

The Indonesian government has been pursuing an extensive reform program (reformasi) contained in the Broad Guidelines of State Policy covering the economic, social and political sectors. Poverty reduction has been at the center of the reform process, as shown by several initiatives undertaken by the government: (1) presentation of the Poverty Reduction Strategy for Indonesia (PRSP) during Consultative Group Meeting in 2000; (2) organization of a committee in 2001 to implement a participatory approach for developing a strategy at the same time that poverty reduction secretariat was formed to

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liaise with civil society and local governments; (3) formation of a Cabinet-level Poverty Reduction Committee after the assumption of Megawati Sukarnoputri as President, with BAPPENAS providing the analytical support. By early 2003, an interim PRSP was finalized by the government, containing four principal measures for reducing poverty: (1) creating opportunity; (2) community empowerment; (3) capacity building; and (4) social protection. The preparation of the full blown PRSP is being coordinated by the Poverty Reduction Committee at the national level where a Team Inti, composed of core ministries, was organized to oversee the process. Four task forces were also created under the committee to cover the four substantive themes in the IPRSP.

In both Indonesia and the Philippines, oversight responsibilities over planning are divided between two agencies: the planning agency and the department in charge of internal affairs, sometimes resulting in inaction on planning problems at the local level. Hence, while both countries still follow a top-down approach to planning, with broad policies and guidelines set at the central or national government for subnational governments to use in preparing regional and local plans, lower-level government plans are no longer integrated at the central levels, partly for practical purposes given the number of local governments and the usefulness for policy-

making of a highly integrated plan in the context of decentralization.

Uganda’s Poverty Eradication Action Plan was developed in 1997. One year later, in the context of the medium-term expenditure framework, the Government of Uganda introduced a Poverty Action Fund (PAF). In 2000, following Uganda’s qualification for debt relief under the Highly Indebted Poor Country (HIPC) initiative, the PEAP was re-formulated into a Poverty Reduction Strategy Paper. There are at least three instruments currently being utilized in the national and subnational planning process in Uganda—the Budget Framework Paper, the Medium Term Expenditure Framework, and the District Development Plan.

Analysis of the context in which local planning takes place in Uganda shows that Uganda’s efforts at integrating poverty reduction into local planning and budgeting processes have been impressive. By instituting reforms in intergovernmental relations, the country has largely overcome its legacy of vertical and horizontal imbalances. However, other challenges still lie ahead. Despite these improvements, significant challenges remain in aligning local targets and outcomes with national priorities, and in building local capacity desperately needed to handle greater responsibilities of managing public service in a decentralized context.

Conclusion

The decentralization experiences of the Philippines, Indonesia, and Uganda confirm its potential for enhancing basic service delivery to the communities. Decentralization,

however, involves complex political and administrative changes that will be met with a lot of resistance along the way. There is really no uniform kit to address the challenges of

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decentralization. Every country with its own political structures and culture will have its unique way of dealing with these challenges. The experience of the Philippines, Indonesia, and Uganda are options among many possibilities.

As the Ugandan case shows, priorities set out in the PRSP play an overarching strategic role of guiding planning at the subnational level. There is evidence that setting the PRSP as the overarching strategic framework serves as a useful role in integrating local and central government planning efforts. Uganda’s experience shows that the PRSP can build on and improve already existing frameworks for poverty reduction. This provides a “good practice” to inform countries in other regions where the link between the PRSP process and pre-existing planning documents are relatively poor.

From the experience of Indonesia, Philippines, and Uganda, it is useful, given the capacity limitations of local governments in most developing countries, to draw a fiscal decentralization strategy prior to implementation. The effectiveness of the MTEF depends on broad based public expenditure reforms targeting strengthening capacities for planning, budgeting, financial management

and auditing at both the central and the local government level. Lack of a MTEF in some countries is a major constraint to the prioritization of the budget around poverty reduction goals.

Additionally, capacity building on planning techniques should be approached in a holistic manner where the training program not only prepares a plan, but continues with helping communities/local officials with the identification of projects and funding sources, financial support, and monitoring and evaluation techniques..

Requiring local governments to prepare plans should take into account (1) the objectives of the plan, particularly its use in relation to other public administrative functions (e.g. budgeting, ODA allocation); (2) the capabilities of the officials who will be required to follow the plan; (3) the local conditions. Some of the more important implementation details which are usually left out in relation to these factors include: (a) synchronization of plan preparation with the budgeting cycle; (b) sophisticated requirements of plan preparation which may be too complicated given capabilities of local officials; (c) availability of data or presence of private sector/civil society organizations for monitoring performance.

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Chapter 2: Literature Review and Comparative Practices from Developed Economies

Introduction

This chapter highlights the various options discussed in the decentralization literature and the range of practices for planning and budgeting evident in the experiences of several developed economies. The objective is to draw lessons for planning in the context of PRSPs for World Bank client countries that are decentralized or decentralizing. Specifically, the chapter assesses: (1) the linkages in planning processes across levels of government; (2) the relationship between budgeting and planning processes both at the national and local levels; (3) the use of fiscal instruments and policies for aligning national and local development goals; and (4) the monitoring and evaluation practices related to planning and budgeting in the two countries.

Poverty reduction strategies have primarily been developed within the context of centralized, national planning processes. For centralized governance systems, the informal nature of the participation of subnational governments in this process may be sufficient. However, in decentralized systems, direct and formal involvement of governments at the subnational level is more critical to both the establishment of an effective strategy and its implementation. Some have suggested that decentralization is itself a poverty reduction strategy, with the implication that the form decentralization takes may be critical in determining the ultimate success. Certainly, with the increased local political,

administrative and fiscal autonomy accompanying decentralization, the role and ability of local governments to directly formulate both explicit and implicit public sector responses to poverty and its reduction is greatly enhanced. Likewise, the ability of the national (or central) government to impose a national policy response is curtailed. To formulate and implement policy in a context of devolved responsibility and authority likely requires a different approach to policy development and coordination, and different mechanisms to assure successful implementation of policies consistent with both national and local needs and priorities.

An important element of the promise of decentralization is the ability to tailor local public sector policy and service delivery to the needs of local populations, while at the same time providing incentives for an effective, efficient and locally accountable public sector. The conferring of local discretion in planning, budgeting and revenue mobilization, however, hampers the formulation of national responses. In decentralized contexts, mechanisms must be established to effectively link national and subnational planning processes to assure that national priorities are appropriately reflected in regional and local policies. Both strategies and the mechanisms employed must be adjusted consistent with the distribution of existing governance authority.

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A Brief on Decentralization

Many have observed a "world-wide" trend toward decentralization. While decentralization is often associated with and even attributed to democratization, Dethier points out that decentralization and democracy are not synonymous. "Decentralization has been carried out by democratic and authoritarian regimes from the left and right...." and often out of a desire of these regimes to retain control (2000:3; Escobar-Lemmon 2001). Lindaman and Thurmaier (2002) identify three waves of decentralization, each with different motivations and desired outcomes. The first wave (1950s - 1960s) was a political vehicle for increasing the popular support of the state, individual politicians and ministers. Its focus was on decentralizing and deconcentrating administrative structures. The second wave (mid 1970s into the 1980s) was based on the presumed effectiveness of decentralized planning for implementing development programs. It included the rhetoric (if not the reality) of devolution of responsibilities. The third and current wave is argued to be ideologically driven by a preference for a "market-oriented" state. A large part of its focus is fiscal.

A uniform taxonomy of decentralization does not exist. Dethier identifies three distinct forms: fiscal decentralization, political devolution and administrative deconcentration. Treisman identifies five basic forms of what he terms “political decentralization:”

(1) structural decentralization, (2) decision decentralization, (3) resource decentralization, (4) electoral decentralization, and

(5) institutional decentralization (2000: 2-3).

A consensus seems to be emerging around three general forms of decentralization:

(1) political decentralization, (2) administrative decentralization (3) fiscal decentralization (Gurger and

Shah 2000; Braun and Grote 2000; Rondinelli 1999; Tanzi 1995).1

Political decentralization provides “...citizens and their elected representatives more power in public decision making. .... [It] often requires constitutional or statutory reforms, development of pluralistic political parties, strengthening of legislatures, creation of local political units, and encouragement of effective public interest groups.” Administrative decentralization redistributes authority and responsibility for public services among levels of government. In its weaker form, deconcentration shifts administrative responsibilities to subordinate units in regions, districts, field offices or local administrations under supervision of the central government ministries. Delegation transfers functions and decision making to semi-autonomous organizations accountable to, but not controlled by, the central government. Devolution transfers decision-making, finance and management authority, usually to local units with elected executives and legislative bodies with independent fiscal authority (Rondinelli). Fiscal decentralization entails access for subnational jurisdictions to revenue mechanisms necessary to exercise decentralized authority. This includes subnational taxes, fees and charges, 1 A fourth form of decentralization is referred to as "economic or market decentralization" (Rondinelli). It entails a shift of responsibility from the public sector to the private sector via privatization of services or deregulation of private sector activities.

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intergovernmental transfers and debt. In a fiscally decentralized setting, local jurisdictions have the ability to alter tax rates (and possibility bases) and charge structures to manage revenue availability consistent with expenditure responsibilities.

Presumed Benefits of Decentralization

The case for decentralization suggests positive effects for poverty reduction through public involvement in governance and the provision of more efficient and effective public services targeted at the needs of local populations with less waste and more effectively supporting private economic activities and development, democratization and nation building.

Accountability. In an organizational context,

decentralization both empowers local officials and makes them accountable to local constituencies. This empowerment fosters a new responsibility for local public service outcomes and is expected to provide incentive for improved performance (Tanzi 1995). Accountability takes the form of accountability of bureaucratic actors to public officials via supervision and public officials to citizens through electoral processes, party systems, press and participatory forums (Blair 1999). Improved accountability is expected to reduce corruption. The closer proximity of subnational jurisdictions to the population and their greater stake in the outcome of local public policies is expected to increase both the capacity and desire for public monitoring of their actions. Exit through mobility provides an additional informal enforcement mechanism.

Technical / cost efficiency. Related to the above, under correct

circumstances, decentralization is also expected to provide a public good corollary to the competitive market for private goods. If citizen-consumers are mobile and there are a variety of alternative jurisdictions within which to locate, they will move to jurisdictions producing the most effective and lowest cost mix of public services, forcing efficiency-inducing competition between governments (Tiebout 1956; Tanzi 1995). Similarly, this is expected to stimulate experimentation in public service delivery and beneficial technology transfer between subnational jurisdictions based on that experimentation. A demand responsive public sector enhances both public support and willingness to pay for public services. Under this competitive corollary, the mobility (or threat of mobility) of capital and populations produces performance incentives, as does the simple existence of alternative jurisdictions as a comparative standard.

Service Delivery. The 1994 World Bank Infrastructure for

Development report (World Development Report) identifies numerous examples of "the potential for improving service delivery by decentralizing government authority to independent subnational governments" (74). Decentralization of water and sanitation was found to also produce improved maintenance and performance. "...[P]er capita water production costs are four times higher in centralized than fully decentralized systems and are lowest when decentralization is combined with central coordination. Decentralization could help alleviate some of these problems, however, as it has been pursued it is often not effectively designed for these tasks. In misaligned systems, perverse incentives in service delivery create technical

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inefficiency, allocative inefficiency, and inequity.”

Participation is also recognized as a key contributor to effective service delivery. In reviewing the five to ten year history of 25 agriculture and rural development projects, the participation of "beneficiaries and grass-roots institutions" was found to be critical in long term success. A review of 121 rural water supply projects found that those with "... high participation in project selection and design were much more likely to have the water supply maintained in good condition...." (World Development Report 1994, p. 76) The three keys to effective participation are: (1) directly involving beneficiaries; (2) developing early project consensus; and (3) acquiring beneficiary in-kind or cash contributions.

Needs of the poor. Decentralization can be linked to

aggregate positive outcomes. Casual observation reveals that countries scoring low on the UNPD Human Development Index tend to be politically centralized. Cross-sectional regression of the UNDP index on measures of expenditure and revenue decentralization has also shown a relationship between fiscal decentralization and satisfaction of basic needs (Lindaman and Thurmaier 2002). Von Braun and Grote consider the effects of decentralization on inequality and income distribution across several countries. They find that political decentralization often benefits the poor due to the involvement of civil society. A minimum threshold of subnational expenditure responsibility appears to be a precondition for poverty reduction, but the reduction appears to plateau, such that high subnational shares are not associated with high levels of poverty reduction.

Evidence of the importance of representation in determining the distribution of policy outcomes also exists. India's

mandated representation of women in leadership positions at the local level is associated with increased female public participation and increased investment in infrastructure (such as water, fuel and roads), which provides for rural women's needs (Chattopadhyay and Duflo 2001; see Bardhan 2002). Similarly, Foster and Rosenzweig (2001) find that fiscal decentralization and democratization increase the political representation of landless households (see Bardhan 2002).

Decentralization offers potential for improved governance and service delivery at the location where it is most effective and in a manner which advances both development and the needs of dependent populations. However, these outcomes are not assured. To be effective, it must coordinate and channel input and facilitate the appropriate participation of each filament. Decentralization is a multi-faceted, heterogeneous construct, as are the environments within which it is introduced. It must be adapted to each environment and cannot be encapsulated as a standardized model of governance reform. While the term implies a “simple” devolution of authority and responsibility, its most defining features are likely the added complexity of resulting relationships, and the need for cooperation, coordination and flexibility for successful outcomes. These needs compel the development of new levels of intergovernmental and public competency and require institutions to evolve beyond the rule-based, definitively structured and hierarchical operating parameters of the centralized system. While standardized application is elusive, cross-country experiences do provide markers to point toward required or favorable institutional and structural components.

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The results achieved appear to be determined by a combination of pre-existing conditions, the form and mode of decentralization undertaken, and the level of supporting institutional and fiscal frameworks and capacities, such as local administrative and civil service reforms and political participation. Accountability and responsiveness, both vertically and horizontally, appear to be key features. Without vertical accountability, decentralization risks the diminution of national goals and objectives. The

development of participatory processes, democratic institutions of local governance, and formal and informal modes of civil input and communication aide in achieving bureaucratic accountability and reducing elite capture. In this context, planning and budgeting systems are critical to the stated outcomes of decentralized governance. Conversely, the utility of nationally oriented planning instruments such as the PRSP may ultimately depend on how well their goals and outcomes are reflected and pursued in local plans and expenditures.

Emerging Lessons on Planning in Decentralized Settings

(1) Complexity and Conflict.

Altered central-regional-local arrangements are not just phenomena of the developing world. In an extensive review of intergovernmental management in OECD nations, intergovernmental transition appears to be the norm (OECD 1997). The result is greater complexity in intergovernmental relationships. Subnational jurisdictions are becoming more important partners and within this shift the center is struggling “... to retain some overall control of expenditures and revenues, while local resistance mounts and calls for greater freedom of action grow stronger.” Experience across 26 OECD countries highlights a variety of tensions in intergovernmental relations. These tensions entail establishing an appropriate balance between: (1) increased local autonomy, while maintaining overall direction; (2) providing for local differentiation and flexibility, while assuring “some minimum degree of uniformity,” and (3) promoting greater

responsiveness to local desires, while maintaining economy and efficiency in service delivery.

These conflicts are often accentuated through suspicion and a lack of confidence between levels of government. While these general issues appear uniformly across nations and across the developed / developing world, there is no one best way for dealing with them. Unique economic, cultural, political and capacity issues determine what is possible and desirable. Still, improved transparency and communication in intergovernmental relations appear as universally desirable features. (2) Coordination of Multiple Institutions and

Actors. Because decentralization necessarily

involves the devolution of fiscal and sectoral responsibilities, a wide range of central government agencies and officials are implicitly involved. Effective decentralization, while possibly coordinated by a local government, planning or finance ministry,

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must include sectoral ministries to assure harmonization of policies across levels of government. Beyond this, non-governmental organizations, civic groups and private organizations should be effectively involved. With such a broad array of actors, coordination becomes a special challenge. The benefits of decentralization emerge through local adaptation, but require more elaborate (and sometimes, informal) means of coordination. It is possible for a single agency to effectively function in a coordinative role, however, the fact that usually several agencies are involved with different aspects of decentralization requires that a neutral or higher level entity (such as the office of the president or prime minister) take charge to formalize responsibilities, and monitor and ensure individual entities fulfill their responsibilities (Smoke 2000), (3) General Principles for Effectiveness.

In reviewing the effectiveness of fiscal decentralization in transitional settings of Russia, Ukraine and Kazakhstan, Norris, Martinez-Vazquez and Norregaard (2001) offer three basic principles to guide decentralization in establishing incentive mechanisms to ensure the overall objective of "accountability and transparency at all levels of government." These principles are:

The need for clarity of roles between levels of government. Roles should be stable and transparent. Overlapping responsibilities often lead to expenditure dumping or unfunded mandates.

A measure of autonomy for subnational governments on both the revenue and expenditure side is crucial. This entails flexibility to establish and budget for priorities, desired service levels and production modes. On the revenue side it entails access to meaningful revenue

sources accompanied with the ability to establish tax rates and / or base.

Institution building. Sufficient administrative capacity is necessary to fulfill decentralized responsibilities. This requires adequate staffing, materials and equipment. Beyond this, democratic institutions and participation, appropriate budget processes and procedures, and institutions to assure cooperation and coordination between levels of government are required.

(4) An Integrated Conceptual Approach: Institutional Pluralism

Cohen and Peterson (1997) focus on an administrative framework they refer to as "institutional pluralism" as a vehicle for strengthening local governance through pluralist rather than monopolistic administrative design. Under this framework, planning is shared and participation maximized. Objectives and goals are organized around the public sector roles of stabilization (solvency, openness and competitiveness), distribution (side-payments, political support, economic growth and equity) and allocation (adequate human, fiscal and political resources). In carrying out administrative reform, national leadership is essential, including strong political commitment. It is important that a defined strategy regarding preferred outcomes be centrally defined and that the process be regulated. Oversight should typically be shared, as should financing. Planning should also be a shared function, with initial overall strategies developed centrally and centrally sponsored transition to greater local involvement and capacity development.

The brokerage role (of using the market and civil society for the provision of collective services) is also a properly centrally / locally shared function, with market and civil

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development both local and central functions in spawning private sector roles in service delivery. Effective administrative decentralization requires a strong center to provide an effective enabling environment for role decentralization and decentralized service delivery.

Anwar Shah (1998) offers a general prescription for successful fiscal decentralization. It is rather comprehensive in its view of decentralization and highlights the need for an environment conducive to citizen participation, appropriate societal norms, threshold administrative capacities, the value of asymmetric decentralization, and proper revenue, spending and fiscal structures (see panel 3). The following factors are inherently important in ensuring successful fiscal decentralization: (1) Coordination Through Incentives, Norms and

Regulation. In their review of fiscal federalism in

industrial countries, Boadway, Roberts and Shaw (1994) conclude that decentralization is not incompatible with the fulfillment of national objectives. However, it requires the establishment of mechanisms of coordination, regulation and fiscal inducement to be successful. Also required are hierarchical accountability structures. Regulatory models are varied. In some OECD countries, regulatory responsibilities are shared across levels of government (at each level involving multiple bodies). In others, authority is centralized. The trend is toward a middle position “... as decentralized countries attempt to reduce duplication and regulatory costs by creating national standards, and centralized countries move towards power-sharing arrangements and a shift of responsibility away from the central government” (OECD 1997: 48).

(2) Representation of National Interests. The root of coordinating plans and

priorities is information exchange and mutual understanding of the relative purview and legitimate interests of each level of government in a multi-tiered governance system. Two basic models of demarcating responsibilities exist and can be summarized as one based on “legal tradition” and the other based on a “managerial culture” rooted in a search for efficiency (see OECD 1997: 28). Irrespective of the foundation, integration is highly dependent on the representation of national policy and priorities at local levels in a manner which maintains higher-level “steering capacity” to assure that national objectives are not hopelessly compromised by lower level actions. This occurs in all nations through structures of central representation at subnational levels. Again, two main forms exist: (1) “deconcentrated administrations” and (2) “prefect systems.”

All twenty-six OECD nations studied employ deconcentrated administration and most also have a prefect system. The first represents central policies through a deconcentrated placement of central government agencies at the subnational level. These agencies are subject to central directives, even though working at the local level. The range of responsibility, local impact and discretion of these field offices varies considerably. Federal countries (such as Germany, Australia, Canada, United States and Ireland) also employ significant representation of regional levels locally. Unitary nations, (particularly those without central representatives at the local level, such as the United Kingdom and New Zealand) rely heavily on the legal status of central agencies. The local discretion of agencies has been on the rise.

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Under the prefect system, an official representative of the central government is charged with representing its interests at the subnational level. Central representatives usually have two principle responsibilities: (1) oversight or administrative supervision of subnational governments, and (2) acting as an intermediary between levels. These structures are typified by the “Napoleonic” model first employed by the unitary states of continental Europe. (They are foreign to the United Kingdom, Ireland, New Zealand, Canada, Australia, and the United States.) Prefect systems have been retained even within moves for greater decentralization. Administrative supervision involves oversight of the legality and advisability of local actions and policies. Sometimes the role is constrained to activities involving joint projects in areas of shared responsibility. While in most countries the prefect system has been retained, in many systems it has lost its coercive powers. In any regard, the prefect acts as a communication conduit between levels. (3) Coordination, Consultation and Collaboration.

In either structure, coordination rather than vertical direction is the intended result. Coordination requires consultation and entails both vertical and horizontal collaboration. Subnational perspectives must be considered to produce responsiveness and relevance, but

coordination is necessary to (1) clarify national policy goals, (2) establish agreement (if not consensus) regarding the contribution of individual programs and levels, and (3) communicate and learn from local experiences and progress toward objectives. Coordination and consultation have the added benefits of allowing the identification and elimination of overlapping, duplicating or competing program activities.

Several OECD nations have attempted to augment consultation through both formal and informal mechanisms. However, consultation can have negative effects on the speed of decision-making and may provide greater access for self-interested parties, possibly detracting from the general interest. Not all models are highly collaborative. Consultation ranges from the “cooperative” to the “adversarial.” Cooperative approaches seek consensus and collaboration (such as Japan), while the adversarial approach, associated with bipartisan politics, favors more decisive decision-making, sometimes in a manner which sacrifices consultation and involves legal procedures. These mechanisms are not as well attuned to the growing complexity of intergovernmental arrangements.

Developed Planning Systems: Comparative Experiences

Planning systems should entail an

elaboration of regional (and or state and national) goals as a foundation for meaningful local plans. Local adherence to broader

frameworks should be assured through “mechanisms to prompt, attract, bribe and if necessary force local governments to devise and implement local plans that reflect the state goals” (Cullingworth 1994: 166). For example,

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Alberta Canada's Planning Act requires that local actions conform to the regional plan. It attempts to foster local autonomy over development and land use within “a broad regional framework and authority within which independently determined objectives can be achieved.” The state of Oregon uses a joint legislative committee, the Land Conservation and Development Commission and the Land Use Board of Appeals, to monitor local compliance with state legislative planning mandates. The State of Florida attempts to establish conformity by segregating issues between state and local governments. Areas of critical state concern are reserved for the State. In these areas, the State develops planning and implementation procedures. All cities and counties are required to develop and adopt comprehensive plans whose form and content must then must be reviewed by several agencies and approved by the state Department of Community Affairs.

The European Planning Experience – Divergent and Shifting Models

Germany as an Example of a Rationalized

Structure. Compared to the United States, European planning systems have a tradition of significant centralization. This tradition has required more purposefully engineered national, regional and local components. Typical of a rationalized multi-level spatial planning process is that of Hanover Germany. In this context, five planning layers exist. The broadest is that of the European Union European Commission which provides a European spatial development perspective. This is followed by the Federal Republic of Germany's federal guidelines for regional planning, the Lower Saxony State

Government's spatial state development program, the Hanover region's strategic regional market coordination and, then, 21 local government development and planning zones. Hanover's planning process presides over one of the 21 local zones. Each tier establishes development goals, implementation methods, and spatial land-use. “This is done in a complex system of time-consuming, top-down and bottom-up procedures, following well established principles within legitimized parliamentary decision making processes at the federal and state levels, but with little public involvement beyond the representative democratic system” (Albrechts et al. 2003: 116). Political and civil servant support for a regional approach has resulted in the translation of strategic concepts into regional land-use plans, but “it has been more the search for territory-based policy integration and ways to strengthen regional identity that motivated politicians and planners” (118-119). A strong institutional planning inheritance and local professionalism (i.e. capacity) is instrumental to the fulfillment of the local role.

Ireland and Empowering Local Jurisdictions. Significant local discretion is not, however, guaranteed in multi-tiered structures. Informal political and power dynamics, as well as the vertical assignment of responsibilities may be critical to determining influence and authority across tiers. The experiences of Dublin Ireland suggest properly “networked” local governance is important in empowering local jurisdictions in planning and engaging in a manner which meaningfully shapes policies to the needs of local populations. Local governments are often depicted as being enfeebled relative to the market and established development-driving policies and resources of the central government and private capital. Changes in

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modes of governance, however, produce instability in established power networks and offer opportunities to local governments to build new associations by capitalizing on the need for resource sharing in both public and private outcomes. Local jurisdictions require resource independence and an ability to independently mobilize these resources to promote outcomes to gain meaningful access to and roles in policy networks. Resources relevant for local mobilization include legal and regulatory purview, professional expertise, investment, local knowledge of social and economic conditions, and legitimacy in political representation (McGuirk 2000).

British Central Control. The British system of planning is highly unitary and coordination has hierarchical characteristics. Legislation mandates nationwide prescriptions and central government agencies are charged with ensuring conformity of local governments to national planning and land-use policies. Law requires local submission of proposals and development plans to central government agencies for approval. Central review of local actions extends also to local fiscal issues such as the issuance of debt and tax levies. (For example, Home Office approval is even required to ban dogs from parks.) (Cullingworth 1994) British planning expresses policies in broad terms intended to promote the public interest with local operationalization approved for consistency in the details from above. Concern for individual property rights is overridden by concern for public pursuits. Appeals of usage restrictions are made directly to the central government.

Scottish Regional Reports and the Enabling of Effective Decentralization? Planning structures can be support systems for effective decentralization. In the early 1970s Scottish local government was considered “... a fragmented and disorganized arrangement of

authorities characterized by their lack of direction, effectiveness and ambition” (Lloyd 1997: 731). This structure was remolded into a two-tiered system of regional and district councils. Responsibilities were divided between “... strategic planning and development functions such as ... water and sewerage, roads and structure planning, and the local functions of housing, local planning, development controls and licensing.” Simultaneously, a new planning instrument, the “regional report,” was instituted to facilitate local government reform and promote strategic planning.

“[R]egional reports were intended to assess the available resources and competing priorities of the regional authorities and thereby provide a strategic context to decision making and investment planning by the district councils ....” They were established parallel to National Planning Guidelines and submitted to the Secretary of State. As implemented, regional reports entailed an economic focus and dealt with issues such as unemployment and the needs of the socially disadvantaged and publicly identified strategic concerns as a guide to district council land-use and structure plans. In aggregate, they provided a somewhat de facto national plan. They often highlighted insufficient regional / local fiscal resources as a major barrier to fulfilling the policy agenda.

While lacking in direct public participation, district councils were involved in regional report development, creating a regional political consensus on the resulting policy agenda. It provided for the identification and prioritization of problem areas in individual regional jurisdictions and relatively rapid policy responses, and improved central-local government relations. In a 1994-96 reform, the regional authority was fragmented and the two-tiered structure was

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replaced with thirty-two single-tier, unitary Councils which “... combine strategic and local functions, including structure planning, local planning and development control, and social services.” Concerns exist for the potential loss of regional coherence and strategic capacity through an emphasis on decentralization and a new vehicle has been sought to reinvigorate a corollary to the regional report in this restructured setting.

Coordination, Barcelona Style. Multi-tiered systems, as suggested above, require significant attention to the need for coordinated initiatives and responsibilities. Formal and informal dynamics of coordination are both critical. Barcelona, Spain has been lauded for its attempts at regional coordination. However, even in the face of concerted efforts, meaningful coordination of local land-use and strategic elements of planning have proven difficult. Institutional, market, participatory and power difficulties have mitigated effects. While strategic planning claims a foundation based on inclusiveness, the actual process has been largely conducted within a specific elite alliance. Pursuit of social and environmental goals has become constrained by a reliance on private funding for project implementation. Projects reliant on public funding are, however, more likely to realize these goals. Regional planning, on the other hand, is largely disregarded because of the absence of institutions to deal with metropolitan scale issues and implementation, and real differences in interests (Marshall 2000).

In Barcelona, fragmentation in planning is somewhat reduced by political leadership. The degree that planning actually becomes consensual or collaborative in this context is a function of the concentration of authority in an elite process. Without effective participatory institutions for strategic,

infrastructure and regional planning, public / democratic control of environment, development, and infrastructure is limited (Marshall 2000). In the context of elite politics, however, fragmentation in planning may be desirable. It may increase popular voice in local land-use planning, where “real” localized development and service impacts may be possible by channeling elite dominance to strategic and infrastructure planning elements. In this case, “a dislocated process ... [may] protect weaker social interests” (317). Coherence may then only be desirable when linked “... to some form of powerful progressive politics.” Context is important and caution is warranted. It is the dynamic of power relationships between broader society and politics and within dominates institutions and planning instruments, not planning method or style, which outcomes.

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Coercion versus Cooperation in Planning Coordination

Paramount in the above discussions has been the search for coordination while maintaining local initiatives and appropriate levels of local discretion. Pursuit of intergovernmental coordination “ ... entails the imposition of procedural and/or substantive requirements by a higher-level government on subnational (state or local) governments, either as conditions for assistance or as direct orders”

(May 1998). This coordination can take either “coercive” or “cooperative” forms (see panel 1). Coercive frameworks treat local jurisdictions as “regulatory agents” charged with following standards and procedures and enforcing prescriptions of higher-level governments to achieve policy goals. Cooperative models attempt to stimulate local interest, support and capacities to facilitate the

Lessons from European Regional Planning Experiences While they may look similar, planning initiatives are context specific. Forms are dependent upon

modes of governance and objectives and roles. Local responses are of critical importance to the efficacy of outcomes. Effective and lasting innovation and transformation tend to be locally driven in response to challenges and opportunities. Local innovation should be encouraged, not discouraged.

Strategic planning initiatives (while holding the potential for facilitating innovation) can reinforce the “status quo.” It is necessary to build institutional alliances across power centers and contexts to facilitate acceptance across actors and empower the process to frame investment and regulation.

The spatial element requires more than technical analysis. Spatial identity requires the establishment of a persuasive logic or argument (and metaphors) linking geography and people to a common objective or strategy. This is often the motivator behind success; this linkage can carry “persuasive power in complex political contexts.”

The creation of “institutional arenas” for developing regional initiatives is critical. Inherited regional or subregional institutional relationships are often a vehicles for mobilizing regional planning initiatives. However, this institutional inheritance can also be a liability if it becomes an obstacle to innovation. Effective regional planning often requires establishing a new governance culture. New practices and strategies must be “connected to accountable political levels of government and to formal legal requirements that affect both regulatory and investment practices” in a manner which creates “pieces of 'hard' institutional infrastructure.”

An established, strong state role and consciousness of local place identity are important to planning initiatives. In essence the effectiveness of spatial strategies lies in the ability to frame concepts and images, the establishment of policy discourse, availability of statutory tools and procedures, the establishment of “expert policy communities” and the ability to shift governance culture toward open and collaborative practices (Albrechts et al. 2003).

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achievement of “higher-level policy goals.” Monitoring focuses on levels of substantive achievement and building local capacity to conduct assigned roles. (1) Florida as a coercive model.

Over the past three decades in the United States, planning responsibilities previously the purview of local jurisdictions have been increasing assumed by States, with States mandating local compliance on environmental, regional growth, land use and social issues (Berke et al. 1996; Dalton and Burby 1994). Mandates have taken two forms: (1) “direct regulation and state mandates of local regulation of matters of particular state concern,” and (2) attempts to foster general planning and coordination, with an emphasis on policy consistency “horizontally across state agencies and units of local government, vertically among state, regional and local governments, and functionally between land use and public infrastructure” (Dalton and Burby 1994).

Reviews of planning mandates in several states reveal that “... mandates can influence the content of local plans and that stronger mandates, backed by statutory authority to review local plans and sanction communities for noncompliance, are associated with higher quality plans” (Deyle and Smith 1998: 457; also Dalton and Burby 1994). Overall quality is dependent on the content and character of the mandate. Mandates which include local capacity and commitment-building provisions contribute more to desired results. State mandates can also substitute for the absence of local physical, economic and political factors conducive to planning and produce greater consistency across jurisdictions on a variety of “environmental, economic and social problems” (Berke et al. 1996).

Florida’s process is considered one of the most coercive in the United States. State agencies administering mandates can impose significant fiscal sanctions for noncompliance. Discretion exists, however, in the level of enforcement actually undertaken. Factors found to affect the level of agency enforcement of these planning mandates include both political and administrative issues (Deyle and Smith 1998: 462; May 1998). Complaints by communities of excessively thorough review have prompted pressure for more flexibility. Shifts in gubernatorial leadership were also associated with a reduction in the level of enforcement. Political forces have required enforcement agencies to modify their approach to incorporate more negotiation and selective enforcement or face the possibility of legislative revision or even rescinding their mandate. Administrative limitations on the ability of state agencies to review and comment on hundreds of plans and several hundred specific directives and mandates (in addition to political pressure) prompted a prioritizing of issues at the state level. Only “major issues” were given detailed scrutiny. The result was greater local compliance on these salient issues and lessened attention to non-priorities. In the mandate environment, local conditions are also influential. Beyond the fact that mandating agencies also tend to provide technical support to plan development, local factors such as predisposition toward issues, professionalism and capacity, economic and fiscal conditions are also expected to affect compliance.

Based on the U.S. Experience, evidence suggests that planning mandates does produce compliance in the development of local plans. However, compliance varies with the vigor of oversight, how well defined the issues are, and the level of enforcement mechanisms (Deyle and Smith 1998: 466). Mandates appear to

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significantly influence issues addressed by local plans, but, questions of implementation of plan content remain. To be effective, the

“plan” must influence local decision making. This requires local commitment to policies beyond their inclusion in the plan.

Panel 1: Coercive and Cooperative Intergovernmental Policy Designs

Comparison of Policy Features Features Coercive Policy Design Cooperative Policy Design

Role of Lower-Level Governments (State, Regional, or Local)

Regulatory Agents: Enforce rules or regulations prescribed by higher-level governments.

Regulatory Trustees: Develop and apply rules that are consistent with higher-level goals.

Emphasis of Intergovernmental Mandate

Prescribe regulatory actions and process. Specify regulatory actions and conditions, along with required process or plans.

Prescribe process and goals. Specify planning components and considerations, along with performance goals.

Control of Lower-Level Governments

Monitoring for procedural compliance. Enforcement and sanctions for failing to meet deadlines, for not adhering to prescribed process, or for not enforcing prescribed rules.

Monitoring for substantive compliance with more limited monitoring for procedural compliance. Monitoring systems for assessing outcomes and progress toward them.

Assumptions about Intergovernmental Implementation

Compliance is a potential problem. Need for uniformity in application of policies.

Compliance is not a problem. Need for local discretion in policy development.

Source of Policy Innovation

Higher-level governments Lower-level governments

Implementation Emphasis

Inducing adherence to policy prescriptions and regulatory standards. Building "calculated" commitment as a primary means of inducing compliance.

Building capacity of subordinates to reach policy goals. Enhancing "normative" commitment as a primary means of inducing compliance.

Source: May (1998), table 1.

(2) New Zealand and the Cooperative Approach New Zealand and New South Wales,

Australia use cooperative approaches (May 1998). The New Zealand approach most embodies this model in the establishment of its Resource Management Act (1991) replacing approximately 60 pieces of individual

legislation. This act was adopted within the context of significant reforms to local government structure begun in 1989 intending to devolve power to local jurisdictions. Previously, New Zealand used a prescriptive (coercive) planning approach under the Town

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and Country Planning Act of 1977. The new act was to provide a mechanism “to sustainably manage physical and natural resources within a planning system with a focus on environmental outcomes” (Dixon et al. 1997). The national government’s role is to establish national guidelines and policies and prescribe processes for the development of regional plans and policy statements and monitor local plan development. Rather than a reliance on sanctions, “persuasion” is used to encourage compliance. The intent is to foster increased local capacity, provide information sharing, grants for plan development, review and comment on regional policies and local plans, and establish a focus on effects or outcomes.

Preliminary evaluations suggest that implementation of this cooperative approach can be credited with greater local innovation; however, it has not been without difficulties. The translation of broad policy objectives into practice has been inconsistent and national policy guidance in general was slow to materialize. Inconsistencies have created confusion and “mistrust on the part of local governments” (May 1998). Principal agencies did not provide expected levels of facilitation, guidance or technical support to local councils and, as a result, reviews of plans and policy statements were more “directive.” Local councils have also not coordinated well in conducting mandated responsibilities. Tension has also emerged between flexibility and certainty, as certainty for resource users has been somewhat reduced.

Vertical and horizontal planning integration is encouraged in New Zealand through a “hierarchy of policies and plans” (Dixon et al. 1997). “[T]he central government establishes national goals and policy statements; regional governments develop regional policy statements, plans and

environmental regulations; and local governments prepare district land use plans and development rules” (May 1998). Regional and local governments are able to develop their own approaches so long as the outcomes specified in the Act are achieved and the specified processes are followed. Procedural requirements specify consultation among parties and consistency in policies between levels of government. The commitment of local governments to national policies is encouraged through grants, public education, and thorough review and commentary.

Procedural compliance has been mixed. Four fifths of local plans and all regional policy statements were developed on time, but only one-third of policy statements were operative. Substantive compliance was similarly mixed. Plan quality varied, but there were instances of innovation and evidence of “attention” to policy goals. Local decision making showed greater flexibility and willingness to negotiate development issues; however, local backlash over the cost of plan preparation and resource consents was not an insignificant issue.

Constraints and Dilemmas

Each form of coordination suffers from its own constraints and “dilemmas.” The coercive regime may discourage and sacrifice local initiatives in the pursuit of state-initiated innovations. Procedural compliance may be emphasized over substantive compliance, as straight-jacketed local jurisdictions are expected to employ cookie-cutter approaches. “Prescriptive and coercive provisions” likely inhibit local officials. This result is likely reinforced by the legal environment and local jurisdictions’ concern for sanctions, should they stray too far from directives. Over the

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longer-term, there is considerable risk of undermining coercive mechanisms through a backlash by local officials. Coercive models require constant monitoring and compliance may erode if monitoring or enforcement agencies become complacent or if local predisposition to compliance changes.

The cooperative regime's more “flexible” approach attempts to capitalize on local innovation. However, while cooperative regimes attempt to foster local ownership of broader policy objectives, they may also experience procedural and policy compliance gaps because of local government reluctance to follow policy and process prescriptions and the possibility of capture by more parochial local interests. Gaps result in ”spotty compliance” and the absence of sanctions creates difficulties in motivating resisting jurisdictions. Instead, incentive systems are relied upon to bring the reluctant parties in to the fold. Flexibility may also result in policy divergence based on local adaptation. Coercive models appear better able to secure procedural compliance, however; cooperative models may produce greater substantive compliance in situations where local and higher policy interests and incentives are aligned. Cooperative systems may also degrade if divergence takes place between policy interests and priorities across levels (May 1998).

Conditions for Relative Efficacy In cooperative approaches, capture

is likely a greater issue in instances of heterogeneity regarding policy positions and when local input into decision making is inequitable, such that relevant stakeholders are unrepresented. Additional failures in cooperative compliance exist when broader

policy desires conflict with general local interests. In these circumstances, coercive means may be the only tenable way of assuring compliance. In both coercive and cooperative models, open, participatory planning may serve a useful role. In cooperative models, participation likely results in policies which are more responsive to local needs. If participation is broad, it can work to limit capture, but can also generate conflict. In coercive models, participation can mobilize community groups behind policy objectives and increase the commitment of local officials to higher-level policy goals.

The overall efficacy of coercive versus cooperative models hinges on a number of factors. Essentially, cooperative approaches require that policy objectives be shared. “When there is fundamental disagreement over policy objectives or the allowable means for meeting them, the cooperative nature of the intergovernmental partnership will be doomed ...” (May 1998). Cooperative approaches are also more likely to be effective if precision can be avoided in defining policy or methods without necessarily impairing the satisfaction of policy goals. For a cooperative model to have meaning, real responsibility devolution to local jurisdictions is a requisite. On the other hand, local devolution impedes the coercive model. Coercive approaches “ ... require higher-level authority to carry out monitoring of compliance by lower-level governments and the power of enforcement ....” Cooperative models require strong commitment and capacity of implementing agencies to facilitate local performance. However, when local policy commitment exists, substantive results at least rival that of coercive mechanisms, and over the long-term the likelihood of sustained local commitment may be increased (May and Burby 1998).

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Linkage Between National and Subnational Budgets

The extreme of linkage between national and subnational budgets occurs in centralized governance systems in which subnational units function as administrative divisions of the central government. In such structures, central ministries set priorities and often actual subnational budgets are confirmed centrally. In decentralized structures, the United States’ complete absence of formal coordination and Germany’s establishment of an integrated budgetary framework reflect the reasonable range of coordination across levels. In the United States, while the national government does use fiscal incentives (in the amount of

approximately $300 billion annually) to entice states and localities into policy conformance and while constitutional guarantees and national legislation provide additional bounding of budgetary purview, mechanisms of direct budgetary coordination are absent. Multi-tiered budget coordination requires more than a comprehensive presentation of the use of current resources. Also important is an ability to identify accrued liabilities and assets, intergenerational implications of present policies, monitor efficiency and effectiveness of service performance, and identify net asset position of individual governments at all levels (World Bank Institute 2001).

Budget Management

(1) Fiscal Discipline: Revenue Responsibility and Hard Budget Constraints

A benefit of decentralization is an ability to locally develop more cost effective methods of delivering public services and calibrating service levels to the needs of local populations. It is often argued that this will lead to a reduction in the cost of providing a package of benefits to local populations. However, lack of fiscal discipline (often typified by a soft budget constraint) is a serious inhibitor of effective expenditure management. When local or regional officials must shoulder the burden of financing benefits conferred from local revenue sources, the calculation equating marginal local benefit to marginal local cost is altered toward one, which promotes restraint.

(2) Budgetary Institutions, Procedures and Rules Budgetary institutions and procedures

are also deemed important to fiscal discipline. While much of the writing is devoted to national budgeting, it is also applicable at the subnational level. Hierarchical and centralized procedures, which heighten the authority of the executive and fiscal institutions, promote fiscal discipline and a greater linkage between planning and execution. More legislative influence emphasizes democratic control, checks and balances and collegial relationships, but less discipline. Within the process, open rules invite a more equitable distribution of outcomes (and likely less capture), at the expense of possible delay and expansion of spending. Closed rules limit spending prerogatives, and when they provide

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ceilings for expenditures or floors for revenues, or restriction on amendments, favor executive authority. However, political actors often oppose transparency on budgetary matters to obscure difficult decisions, often in favor of fiscal illusion. Fiscal illusion may be promoted through use of optimistic revenue and expenditure (cost) projections, off-budget accounts and multi-year budgets, which postpone difficult choices. Legal requirements for balance may foster quicker responses to fiscal shocks and promote fiscal responsibility, although they may ultimately work against transparency. Hierarchical procedures may enhance discipline, but reduce democratic access. Still, requiring budget balance at the subnational level promotes discipline. Hierarchical procedures are preferred when faced with the prospects of several years of fiscal austerity. Transparency should also be heightened. The executive should present a single, comprehensive budget document and the budget adopted should be inclusive of all activities. The role of multi-year plans should be limited and discussion should focus on current actions and forecasts and projections should be verified. (3) Technical Capacity

“The increasing complexity of decentralized programs may raise the potential of improved delivery, but it also increases the chances for misallocation of funds at different nodes of the system” (Dethier 2000). Capacity shortcomings also suggest the possibility of inefficiencies and ineffectiveness, however well-intentioned local activity may be. Proper absorption of “... personnel management, data processing, procurement, and contracting” are critical to success and require time for complete absorption (World Bank 2000: 42) .

(4) Fiscal Structure Fiscal issues appear to permeate each

category of lessons and in them forms a basic element of appropriate decentralization design. In reviewing the Latin American experience, Peterson (1997) offers several prescriptions for fiscal structure. The first is recognition that compromise is necessary. He cautions that decentralization also encompasses the greatest fiscal risks in situations of significant windfall gains and losses created through unbalanced financing. The role of a benefit based financing structure is highlighted as a vehicle for stimulating technical efficiency and accountability. The intergovernmental fiscal framework is particularly important in establishing appropriate incentives.

Overall, an objective (non-negotiated) and stable transfer structure, absent of any provisions for ad hoc gap filling, was found to be important in Latin America. Recommended elements include categorical/specific grants for financing nationally important devolved functions, and matching grants for capital projects with spillover benefits. Similar general recommendations are made by others (Shah 1998; Bird, Freund and Wallich 1994; Bahl 1999 & 2000). Issues of tax coordination may also be important, particularly related to concurrent taxation of the same base by multiple levels of government and the existence of vertical tax externalities (Keen 1998). (5) Monitoring and Evaluation

The monitoring and evaluation process is a function of (and not meaningful without) accountability. Effective government is monitored for results by and accountable to citizens, markets, and superior level jurisdictions (Peterson 1997). This requires establishing missions and goals, and developing and publishing measures of service

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quality (Chile/Columbia). Shah (1998) suggests that evaluation and accountability should be “... embedded in the public sector organizational culture .... by building institutional capacity for evaluation.” This is viewed as critical to citizen participation and vertical oversight and requires “... a simple and reasonably objective evaluation methodology and ... mechanisms in place for self, higher-level and independent evaluation” (17). A change in incentive structures is required. Performance should be linked to budgeting and citizens should be educated on their rights. For accountable and responsive service delivery, central planning needs to be relaxed to allow local innovation and adaptation. At the same time, control functions such as audit and inspection should be strengthened to assure, as Peterson suggests, “freedom and responsibility within boundaries”(19). (6) Accountability Requires Balanced Local

Discretion Accountability is a function of design.

Adequate fiscal resources are a necessary component of meaningful local accountability. Without control over resources, it is difficult to hold local officials accountable for outcomes. Resource inadequacy and forced fiscal dependency on the central government promotes central control and regulation, limiting local autonomy and local accountability (World Bank 2000). Central regulation, minimum service standards and conditional transfers are vehicles often used to maintain and promote these broader objectives in decentralized contexts (see annex D). It has been suggested that the key to true local accountability is local capacity and discretion, and political systems for holding local officials electorally responsible for outcomes. When non-local officials have responsibility for decisions affecting local service delivery, the

linkage between citizen and relevant public official is severed (Edmiston 2000). (7) The Appropriate Range of Central Control

Still, central monitoring is required. To effectively gauge fulfillment of public objectives and maintain control over aggregate public sector expenditures, new reporting and steering systems are required. “This challenge to redesign the information and accountability systems is the key factor in contemporary inter-governmental management ....” (OECD 1997: 54). A range of central “control” is still required and its establishment is dependent upon the ability to monitor and evaluate performance.

Two basic forms of control exist: (1) “performance-based,” and (2) “administration- or rule-based.” Traditional forms of control are based on institutional oversight mechanisms emphasizing the legality, regularity and appropriateness of subnational actions. These institutions involve: (1) establishment of action frameworks and investigative authority of parliaments, (2) central oversight administrative bodies, such as ministries of finance or interior, (3) and a variety of “independent bodies charged with jurisdictional control” (OECD 1997:59). Modes of administrative control, or “vertical monitoring,” have ranged from an independent local Audit Commissions in the United Kingdom (establishing financial integrity and value-for-money) to prefect style forms of guardianship in Spain and Belgium. The evolution is toward a broader policy orientation and away from “detailed interference in local affairs” (OECD 1997: 59). (8) Control Based on Performance

Performance-based controls are increasing in usage. Their focus is on process and outputs/outcomes. These structures are often based on benchmarking and

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consultation, but require clear lines of accountability for performance to be effective. Significant movements in this direction have occurred in Australia, Canada, Ireland, Denmark, the Netherlands, Norway, Finland, Iceland, Italy, Sweden, the United Kingdom and the United States. Distinctions should also be made between “... the public accountability of elected officials and that of managers who are hierarchically accountable for results” (Oecd 1997: 66). Accountability for managerial

performance is salient to intergovernmental relationships. Decentralization has implications for monitoring resource usage. Two differing models are used. For example, in Australia and the United States, states establish their own audit requirements and have their own auditors. In France, decentralization reforms included the establishment of regional chambers of accounts to verify local finances and report to the national Court of Accounts.

Instruments for coordination

(1) Critical Role of Transfers Because of the absence of mature

subnational fiscal instruments and due to tremendous variations in regional fiscal capacity, intergovernmental transfers (see panel 3) must play a critical role in the decentralization process. Generally, transfers are needed to perform one of four basic functions (Bahl 2000).

The first, vertical balance, requires a shift of fiscal resources between levels (national to subnational) to correspond with increased subnational expenditure responsibilities. The second function is equalization, to compensate for the inter-regional/inter-local differences in the capacity to raise resources locally and match resource need to availability by transferring resources among jurisdictions. Third, intergovernmental transfers can promote allocative efficiency by providing a mechanism for internalizing service externalities. The fourth justification is administrative. It suggests that the superior tax administration ability of the central government lends to that level’s role as a collection entity, with transfers used to distribute proceeds to subnational levels.

Fiscal transfers form a pivotal role in coordinating activities across levels of government. Central governments are able to leverage their policy authority at the local level through subnational fiscal dependence and conditions of aid. These conditions can serve to promote adherence to central government policies and regulations, even in circumstances in which the national government has no direct authority over a local service or policy space. (2) Intergovernmental Revenue Assignment and

Transfers Primary considerations of

intergovernmental finance systems include the degree to which the structure adequately deals with two universal intergovernmental problems: (1) vertical balance, the degree to which the revenue and transfer system provides resources adequate for the basic expenditure obligations of the subnational and subregional levels of government; and (2) horizontal balance, the degree to which the system accommodates or adjusts for differences in revenue capacity across individual units of government (see panel 2 and 3).

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Panel 2: Requirements of Horizontal & Vertical Balance

Vertical Balance. Decisions regarding the appropriate revenue assignment between levels of government are largely decisions of vertical balance. Basic considerations in revenue assignment between levels revolve around resource adequacy relative to service responsibilities. The policy goal is to provide basic resource assignment consistent with these responsibilities, producing a resource distribution adequate to meet the basic expenditure obligations of local governments (providing vertical balance in revenue assignment between levels of government relative to expenditure responsibilities).

Horizontal Balance. Revenue capacity disparities between jurisdictions are generally of such magnitude that mitigation is required to assure that individual units have sufficient minimum resource capacity available to meet basic (or minimum) expenditure responsibilities. The determination of what constitutes this minimum is a policy choice that, while informed by analysis, cannot be objectively determined. As a general rule, horizontal imbalances are addressed through (equalizing) grant systems, not through revenue assignment. However, the mix of revenues assigned to different tiers of government influences the requirements of the grant structure. Revenue assignments can make the balancing task for the grant system more difficult. Nevertheless, a structure to accommodate and adjust for differences in revenue capacity (relative to expenditure needs) across individual local units (achieving a horizontal balance across local governments) is required.

In addition to these issues,

intergovernmental finance structures need to promote the realization of regional and national priorities and promote socially desirable expenditures on services for which the benefit streams can not be contained within the confines of a single municipal formation (or region). Such a structure requires grants designed to promote specific functional purposes (e.g., education or health), in addition to those designed to redistribute resources to relieve disparities (producing horizontal balance) or provide basic capacity (vertical balance).

Stability and predictability of revenues, an ability to determine the overall budget envelope on the margin, and accountability to the population for the level and quality of services provided are vitally required if the pathologies of the current intergovernmental system in the developing context are to be

eliminated. On the revenue side, attention to three structural elements is usually warranted: (1) regional/local revenue assignment; (2) stable regional tax sharing; and (3) a rational system of regional intergovernmental transfers. The first two of these address the issue of “vertical balance” and are intended to provide basic resource capacity. The third deals with both issues of equity (“horizontal balance”) and allocative efficiency. Both are vitally important components of revenue assignment. (3) Shared Revenues

Vertical sharing of tax collections is a mechanism often used to provide basic local fiscal capacity. It has the advantage of using the existing (higher yield) regional and national revenue instruments as a foundation for subnational finance. The relative shares across levels should be based on relative

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expenditure responsibilities. Local government shares of regional tax collections and regional government shares of national tax collections should be clearly defined and stable.2 Law should define (1) taxes to be shared, and (2) establish fixed sharing rate amenable only legislatively. This stability will allow the shared tax sources to be used as a predictable base level of funding for all local jurisdictions and will prevent the arbitrary manipulation of sharing rates which can produce serious disincentives for revenue collection. Ideally, sharing rates should be set at uniform levels across all jurisdictions; however, it is the expenditure assignment which is controlling and if asymmetric expenditure responsibility exists within a level, then sharing should also be asymmetric. Local revenues and a supplemental (and objectively determined) transfer system should be relied upon for equalization purposes and to provide unmet resource capacity. (4) Local Revenue Instruments

To establish the appropriate economic incentives and promote responsible subnational budgeting, local governments need to rely on local revenue sources for funding the marginal expenditures within their budgets. To provide proper price signals, local jurisdictions should be provided discretion in the usage of and tax rates applied to these local instruments. Municipal formations need to be provided the appropriate incentives to generate revenue. The typical transfer system in the developing context is negotiated and allows revenue efforts in one year to be siphoned away from local jurisdictions in the following year

2 Local share is ideally based on derivation (or origin). That is, the local allocation is based on a fixed share (percent) of the resources from a national revenue instrument or instruments collected from its base within the jurisdictional boundaries of the recipient unit.

through a reduction in subsidy levels or manipulation of tax sharing rates. The result is a negative incentive for revenue collection, for local or shared sources. These are damaging incentives that can only be eliminated by a stable revenue assignment and the elimination of ad hoc subsidies in favor of a stable and objective transfer system.

Broader based revenue instruments should be made available to local jurisdictions. Adoption of a particular instrument and the selection of an approved rate structure should be at the discretion of the local government and the revenue generated should be available for general local expenditures. Without adequate revenue control, local autonomy is an empty vessel. (5) Equalizing Transfers

To provide budgetary stability and certainty, formula-based transfers should be made to equalize the ability to provide basic services. Transfers to local jurisdictions can come from the national level directly and/or from the regional units. Direct national transfers aid in focusing attention on national equalizing objectives. The formula should include measures of both (1) revenue raising capacity (not actual collections), and (2) basic expenditure need in its construction. This foundation formula should be used to allocate a predefined pool of revenues to regional and municipal formations in the form of per capita transfers in direct inverse proportion to the jurisdiction’s local revenue raising capacity and in direct proportion to its relative expenditure needs. Once established, this formula should be fixed and stable. These transfers will augment the resources available to the local jurisdictions through shared and local revenue systems and should be used for general local government expenditures.

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(6) Minimum / Priority and Efficiency Transfers An additional set of grants is also

required to finance services of national or regional priority, which are appropriately administered at the local level. This includes both specific “categorical” lump-sum grants for services of primarily national/regional benefit or design/specification, and matching grants for services, which produce inter-jurisdictional externalities and are susceptible to efficiency inducing price effects. While not their basic intention, these grants also contribute to both horizontal balance and basic capacity objectives. An efficient grant structure would entail a separate “lump-sum” categorical grant mechanism for each service area for which the national (or regional) government wished to establish a minimum. Funds should be distributed between local units on the basis of a formula, which equates revenues provided with the expenditures required to meet minimum service levels per service recipient. These service standards, and the financing of them, are intended to provide a floor below which resources allocated per recipient (and, presumably, service level) will not fall. These amounts should be set annually in order to adjust for price changes in the delivery of services; however, the substantive level of service provided should remain relatively constant from one year to the next.

In addition to fixed (lump-sum) minimum expenditure grants, efficiency enhancing “incentive” grants can also be used to encourage local expenditure on services for which benefits accrue to populations beyond the boundaries of the local jurisdiction or for those services simply felt desirable by the national or regional government. In many cases the priority of the service is not such that

a lump-sum transfer (in the form of a minimum service level grant) is warranted. The central government can stimulate additional spending in such areas with minimal levels of outlays by providing service price reductions to local jurisdictions in the form of a matching grant and allowing them to select expenditures accordingly. Additionally, incentive grants can be used to stimulate local spending above the minimum defined by a lump-sum grant.

Transfer systems should avoid ad hoc distributions of resources to lower level governments. This withstanding, there are purposes for which a national or regional government would appropriately share the burden of financing capital projects with local jurisdictions. This can be done through a system of capital project grants. These grants would be allocated based on applications made by local governments for assistance in areas defined by the granting jurisdiction. They may be lump-sum or matching in their funding characteristics. It is important, however, that the eligible projects for such a grant be well defined and that the criteria for allocation be objective.

As a final mechanism to solidify the restructured intergovernmental finance system (and the efficiency incentives it entails), all existing ad hoc or negotiated gap filling budget subsidies should be eliminated. Hard local budget constraints are essential to establishing appropriate fiscal incentives. Local and regional governments should be held accountable for executing their budget within the boundaries of the revenue available through the formalized sharing and intergovernmental grant systems, and revenues available from local sources.

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Conclusion

Incentives, norms and regulation all have roles in effective coordination. Vertical regulation is necessary to assure adherence to national policy objectives; however, its form in a decentralized context is significantly altered. Appropriate local incentives, conveyed in the structure of the intergovernmental fiscal system and via fiscal inducement, are often critical. Representation of national interests at the local level is important and occurs via deconcentrated administration of national agencies and to a lesser extent, through prefect systems. Both formal and informal means of communication and consultation across an array of dimensions are necessary to assure appropriate vertical and horizontal coordination. Informal communication is heavily reliant on social capital, civil society and the development of participatory institutions.

Frameworks for coordinating budgetary processes and the establishment of uniform budgetary principles are required. This requires central leadership in establishing the administrative and legal framework for accounting structures, budget comprehensiveness, budget classifications, auditing and execution reporting. An appropriate fiscal structure is critical and provides the subtext underlying much of decentralization reform. It requires adequacy regarding total local resources and significant autonomy in the generation of resources from local sources. Often the most critical and central element is the intergovernmental

nature of this fiscal framework and the incentives it conveys. This structure is often the most technically influential in determining the overall outcome of decentralization.

The importance of an appropriately structured transfer system can not be underestimated. It provides basic revenue capacity, conveys national expectations and priorities, establishes minimum service guarantees, establishes operative incentives for fiscal discipline and efficiency, is often critical for infrastructure financing, and provides for equity and equalization. Monitoring and evaluation of results in a decentralized context is an essential function of accountability. Accountability is itself a function of design. It requires balanced local discretion, with local officials accountable to central and regional institutions, as well as local institutions and citizens. This requires limitations on discretion and a simultaneous ability to hold local officials accountable to citizens, markets and superior level jurisdictions for exercising the discretion they command. The challenge is to transform accountability mechanisms to those based upon performance, rather than administrative rule. True local public accountability is based on local capacity and discretion and systems for holding officials responsible for outcomes. This requires active citizen and civil society involvement and adequate performance and financial information dissemination, including third party assessments.

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Chapter 3: Philippines – Local Planning and Fiscal Dimensions

Decentralization Experience

This chapter focuses on the planning and budgeting processes in Philippines, with the objective of drawing lessons for how PRS can be formulated in decentralized or decentralizing countries. Specifically, the chapter will highlight: (1) the linkages in planning processes across levels of government; (2) the relationship between budgeting and planning processes both at the national and local levels; (3) the use of fiscal instruments and policies for aligning national and local development goals; and (4) the monitoring and evaluation practices related to planning and budgeting in the Philippines. Although, Philippines is not classified as highly indebted poor country (HPIC) and is therefore not required to prepare PRS, it still suffer from serious poverty problems. The country’s long history of national-level planning and subsequent roll out of planning processes as it decentralized in the early 1990s provides a number of lessons for countries undergoing similar transformations.

Formal planning in the Philippines started in 1935, with the creation of the National Economic Council under the Commonwealth Act No. 2 (Alburo et al., 1995). Since then, planning bodies (e.g. Presidential Management Staff) and processes have evolved within the government. A major planning reform was, however, instituted by the government in 1972 when the responsibility for coordinating the preparation of national plans was lodged with one institution – the National Economic and Development Authority (NEDA) - which today remains the central planning agency

tasked with the oversight responsibility for plan preparation at the national level. In the Philippines, oversight responsibilities over planning are divided between two agencies – the planning agency and the department in charge of internal affairs (DILG), sometimes resulting in inaction on planning problems at the local level. Greater coordination is needed between these agencies, particularly with respect to improving planning capabilities at all government levels as well as planning linkages among LGUs and between NG agencies and LGUs.

In 1991, the Philippine government opted for a gradual approach to decentralization that devolved selected services and regulatory responsibilities. The Philippines devolved ten services formerly being delivered by eight departments and eight regulatory powers. In this gradual approach, national or central level agencies continue to play a role in the delivery of basic services, which means that planning and budgeting responsibilities for these services have been divided between central agencies and local government units. The decentralization mode adopted by the Philippines resulted in a two-track delivery system, where both national government agencies (NGAs) and LGUs implement devolved activities.

The division of responsibility for service delivery between the national/central and the local government units (LGUs) following the adoption of decentralization in 1991 paved the way for revising the planning and budgeting processes followed at different government levels. (Local government units (LGUs) in the case of the Philippines refer to

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provinces, cities, municipalities and baranggay [village] levels.) The Philippines has a long tradition of preparing development plans, though mostly at the national government level. Plans are usually prepared at the national, regional and local levels, i.e., provincial, city, municipal and village. The passage of the Local Government Code of 1991 (henceforth referred to as the Code) affirmed the importance of preparing local level plans as part of the process of decentralization. In terms of coverage, decentralization in the Philippines reorganized the whole local government bureaucracy affecting the provinces, cities, municipalities down to the village or barangay levels.

The framework for inter-governmental transfers as well as the revenue-generating powers granted to local government units was specified in the laws decentralizing, covering revenue sharing arrangements and general and specific purpose grants. The Philippines followed a much simpler formula for sharing the internal revenue allotment among LGUs, with the share of each province, city and municipality being based on three variables - population (50%), land area (25%) and equal sharing (25%). As part of the transition period in the Philippines, an Oversight Committee was organized to formulate and issue the appropriate rules and regulations necessary for the implementation of the Code within two months. The membership of the Committee, which was chaired by the President’s Executive Secretary, was drawn from the legislature (6), the Cabinet (3) and the different regional leagues (4).

The Processes Used to Integrate Planning and Budgeting

The Philippine government prepared the following major plans: (1) a national plan

more popularly know as the Medium-Term Philippine Development Plan (MTPDP) covering the six-year term of the President; (2) regional plans; (3) sector plans which are not mandated by law; and (4) the local plans. Described below are the processes followed in preparing the national, regional and local plans. There is no prescribed process for preparing sector plans; hence the paper did not include any discussion on sector plan preparation process. The division of responsibility for service delivery between the national/central and the local government units (LGUs) following the adoption of decentralization in 1991 paved the way for revising the planning and budgeting processes followed at different government levels.

The degree of decision-making autonomy provided to decentralized levels of government, the extent of fiscal decentralization and the hierarchical relationship among different government levels partly influenced the changes in planning, budgeting and monitoring processes after decentralization. Institutionally, oversight planning responsibilities are lodged in two agencies – the National Economic and Development Authority (NEDA) and the Department of Interior and Local Government (DILG). Since 1972, the responsibility of coordinating the preparation of national and regional plans is lodged with the NEDA while oversight responsibility for local government planning rests with the DILG as stipulated in the Code. This diffused institutional arrangement has made the coordination of planning activities between the national/regional levels and the local levels as well as the checking of plan consistency difficult.

Planning at the sub-national levels is done at the regional and local government levels. The Regional Development Council

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(RDC) in each region, which is backstopped by the NEDA Regional Offices (NROs), takes responsibility over the preparation of the regional plans. At the local level, this function has been given to the Local Development Councils, which are chaired by the Local Chief Executives, namely the provincial governors, municipal and city mayors. Oversight responsibility over regional planning implicitly lies with the NEDA which supervises all NROs while this function rests with the DILG for local planning per the Code. The major plan documents prepared at the national level are the Medium-Term Philippine Development Plan (MTPDP), and the Medium-Term Public Investment Program (MTPIP). Though not required, sector plans are also prepared, often with funding assistance by the donor community.

The MTPDP contains the broad development vision/goals and targets of the government as well as the policies and strategies, which must be put in place to attain these goals. The MTPDP in the last two decades had been sector-focused, providing a comprehensive coverage and analysis of the major sectors in the economy. Each sector chapter contained a discussion of past sector performances and challenges, the sector’s medium-term development goals and targets, policies and strategies, legislative agenda and broad listing of programs and projects. However, the Plan process usually stopped short of prioritizing sector policies and strategies. The preparation of annual implementation plans for the different sectors which could be tied up with the budgeting process was also not required. Based on the last three planning cycles starting in 1992 that coincided with the political administrations during the period 1992-2004, the MTPDP process essentially followed a top-down approach wherein the national plan provided

the strategic framework for the preparation of medium-term plans by other government instrumentalities. The national plan was intentionally formulated to be a direction-setting document rather than a detailed compilation or aggregation of sector, regional, and local government plans. The tight schedule for national plan preparation usually prevented the aggregation of the different plans into the national plan. At the time of plan preparation, sector, regional and local plans would still not be available in most instances. Plan aggregation was last done in 1986, and took about nine months to finish. The MTPIP was originally intended to be a companion document to the MTPDP, containing listings of local and foreign projects for implementation in the next six-years. Since the MTPIP process sequentially followed the MTPDP process, it was always released after the printing of the MTPDP. Since 1992, there had been conscious efforts on the part of NEDA and the DBM to make the MTPIP more relevant to the budgeting process, particularly integrating the MTPIP process as part of the Medium-Term Expenditure Framework (MTEF) being promoted by the DBM. Major changes in the MTPIP process have been proposed not only to conform to the requirements of the MTEF but also to strengthen the linkage between the MTPDP and the MTPIP.

These procedural reforms, which are better known as the Sector Effectiveness and Efficiency Review (SEER) process under the MTEF, consist of the following activities: (1) the linking of sector outputs of government departments/agencies with agreed-upon desired sector objectives which can be translated to societal outcomes; (2) reviewing and prioritizing all ongoing and proposed projects using the output-outcome framework in (1); and (3) reconciling the annual budget

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requirements of priority programs and projects with sector expenditure ceilings and department baseline ceilings. However, the limited budget since 2001 prevented the full implementation of the SEER and the formulation of an MTPIP to accompany the current MTPDP.

Similar to national planning, regional planning has a programming component. The Regional Development Investment Program (RDIP) consists of three sets of projects: (1) the projects of regional offices of national government agencies; (2) the projects submitted by the provinces for national government funding; (3) devolved activities/ projects which are jointly funded by the province and the national government. The RDIP formulation necessarily follows a “limited” bottom-up approach from (1) the provincial governments which need funding support from the national government; and (2) the regional projects of national agencies. The process is “limited” since there is no formal mechanism for ensuring that the project listing of the provinces for the RDIPs followed a process of integration from the village level. Funding for the RDIP would, in most instances, depend on the national government agencies and eventually the Department of the Budget and Management.

Much of the planning at the local level is, however, done at the provincial and municipal/city levels, both of which have made considerable progress in setting long-term directions and preparing development plans, though planning proficiencies vary across LGUs (Abad 2002). It is at the barangay level where strategic, comprehensive and area-based planning is not usually implemented, which is unfortunate because poverty interventions are targeted at the barangay level. Based on the LGUs interviewed, what is submitted as the barangay development plan is

just a listing of projects. If funding is available, consultants from the academe are usually hired to do local plans.

The different MTPDPs in the last two decades adopted poverty reduction as a major development goal. The plan of the Aquino administration in 1986 included poverty reduction targets for the first time, with the concept of poverty mainly based on income deprivation. Subsequently, the plan of the Ramos administration for the period 1993-98 placed poverty within the human development context, a strategy followed in the MTPDP formulated during the term of then President Estrada, who was elected on a poverty reduction platform. President Arroyo, based on various speeches, treated the MTPDP formulated under her administration as the government’s poverty plan, which, for the first time, recognized that certain groups in society are vulnerable to falling in and out of poverty due to natural or economic crises.

Aside from having poverty reduction as the overall objective framing the MTPDP, the last three political administrations prepared separate Anti-Poverty Strategies or Plans at the national level.3 The clamor for a separate poverty plan was pushed by the bodies created to specifically coordinate poverty matters (i.e. the Social Reform Council in 1993 and later the National Anti-Poverty Commission (NAPC).

The experience during the last three administrations highlights the bureaucratic tendency to introduce brand new poverty programs with every change in administration 3 In the Philippines, other plans may be formulated outside the MTPDP. These are usually sub-sector or common concern plans such as the Medium-Term Agriculture Development Plan and the Anti-Poverty Strategy, respectively. These plans may be considered Agency Plans as they were formulated by concerned NGAs usually following a Presidential directive and with the assistance of NEDA.

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rather than building on the successes of the poverty programs introduced by previous administrations. At the department level, every change of leadership mid-way in the term of a President also leads to refocusing of programs “creating a feeling of unending transitions rather than stability and institutionalization” (Abad 2003). Programs are often changed even before they can be fully implemented and their effectiveness assessed.

Since program intervention for poverty is increasingly being focused at the community level, there is a conscious effort to “localize” poverty programs, with the ultimate objective of ensuring the convergence of services to the poor at the local level. The NAPC, which is coordinating the President’s poverty program, is adopting a two–pronged approach in its localization efforts: (1) improving coordination among national agencies in implementing poverty-related programs through the National KALAHI Convergence Groups (NKCG); and (2) strengthening poverty planning at the LGU level.

The institutionalization of non-government involvement in the planning process has enriched the substance of the plan. For instance, allowing the representation of the National Commission on the Role of Filipino Women in the planning committees ensured that gender concerns are clearly articulated in plan statements. The environment sector also benefited from the strong lobby of environmental NGOs for the inclusion of sustainable development as a major plan objective. This arrangement also enabled the government to confirm the macroeconomic framework of the plan with the academic institutions as well as private research groups.

The decentralization mode adopted by the Philippines resulted in a two-track delivery system, where both national government agencies (NGAs) and LGUs implement

devolved activities. Because many central government agencies whose functions have been devolved are still made accountable for the overall outcome in their respective areas/sectors, they tend to make full use of the Code provision on augmentation to be able to direct LGU behavior in support of national objectives (Loehr and Manasan 1999). For instance, DOH is accountable for the overall health status of the country in the same way that the DENR is accountable for overall environmental and natural resource management results.

At the regional and local levels, the practice of participatory planning has been institutionalized with the permanent inclusion of private sector/civil society representation in the various committees at both the RDC and the LGUs. The Code, for instance, requires that at least 25 percent of the full membership of the LGU committees (e.g. Local Development Council) be composed of non-governmental organizations. Considering that many civil society groups work closely with local communities, their membership in LGU committees is an opportunity to initiate projects that would benefit the communities. Related to this requirement is the authority given to the local legislature to accredit NGOs, a safeguard measure to ensure that only legitimate NGOs will be chosen.

The budgeting process at the national level in the Philippines is coordinated mainly by the Department of Budget and Management with the Development Budget Coordination Committee (DBCC), a NEDA Board Committee, setting the budget parameters and levels for Cabinet approval and eventual endorsement to the Philippine Congress. The Public Expenditure, Procurement and Financial Management Review (PEPFMR), prepared jointly by the Philippine government, the World Bank and

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the Asian Development Bank, noted the disconnect between planning and budgeting and cited the following reasons for this: (1) the lack of cost estimates for the policies and strategies in the MTPDP; (2) no sense of prioritization among the policies and strategies in the MTPDP; and (3) the lack of indicative resource constraints in drawing up the MTPIP listing which at first glance appears like a wish list of projects (WB 2003).

The second major reason for the weak planning and budgeting links at the national level relates to the nature of the MTPIP, which ideally should be the connection between the MTPDP and the expenditure program. First, the coverage of the MTPIP is limited to major national projects, which account for only a part of the annual expenditure program. To be useful to the annual budgeting process, the MTPIP should also include the smaller investment projects of the line agencies, which at present are reviewed separately by the DBM.

The desire to close the gap between planning and budgeting gave rise to the public expenditure reform program presently being implemented by the DBM, which focuses on the medium-term expenditure framework (MTEF). However, to this day, the MTEF faces operational challenges attributed to transition adjustments in NEDA and DBM, which are still in the preliminary stages of operationalizing the SEER and OPIF processes. Among the challenges facing the SEER prioritization exercise are (1) methodological constraints in determining intra- and inter-sectoral investment priorities; (2) financial constraints in funding newly-proposed and even continuing high priority programs and projects in view of the government’s austerity program to contain the budget deficit; and (3) integrity of SEER priorities arising from the combined effects of financial and

methodological constraints. Similarly, OPIF implementation is facing operational bottlenecks: (1) methodological difficulties attributing outcomes fully controllable by national government agencies and other instrumentalities; (2) technical capacity of NGAs to measure outcomes; (3) organizational resources for DBM to monitor agency performance on top of its regular expenditure reviews; and (4) integrity of agency performance reports due to information asymmetry between NGAs and DBM.

As a result of decentralization, some degree of fiscal autonomy has been granted to LGUs, which allowed them to undertake budgeting activities quite separate from national government processes and with minimal supervision, by central/national government agencies. The national and sub-national governments follow similar budgeting phases but different processes and schedules, which are not integrated. The perceived disconnect between planning and budgeting in the Philippines has been a long standing issue since the late 80s. Then, timing was the main problem, since the preparation of the plan was not synchronized with the budgeting calendar. This was resolved through the installation of the synchronized planning, programming and budgeting system (SPPBS), which led to changes in the timetable and processes for preparing the plan and the annual budget starting the late 80s.

However, the weak link is perceived to exist even today though the problem is less on the logistical side but more on the substantive side of planning and budgeting activities. The budgeting process at the national level in the Philippines is coordinated mainly by the Department of Budget and Management with the Development Budget Coordination Committee (DBCC), a NEDA Board Committee, setting the budget parameters and

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levels for Cabinet approval and eventual endorsement to the Philippine Congress.

The Public Expenditure, Procurement and Financial Management Review (PEPFMR), prepared jointly by the Philippine government, the World Bank and the Asian Development Bank, noted the disconnect between planning and budgeting and cited the following reasons for this: (1) the lack of cost estimates for the policies and strategies in the MTPDP; (2) no sense of prioritization among the policies and strategies in the MTPDP; and (3) the lack of indicative resource constraints in drawing up the MTPIP listing which at first glance appears like a wish list of projects (WB 2003). The proposed solution in the PEPFMR is to improve the MTPDP through (1) a more substantive discussion of the composition of expenditures in the medium-term; and (2) clear linkages between expenditures and the strategies and targets in the sector chapters of the MTPDP (WB 2003).

In practice, the link between planning and budgeting at the local level has been weak. First, planning proficiencies differ across LGUs, because of which some LGUs do not have development plans to start with. Second, many LGUs find it difficult to translate the plan into operational terms (Abad 2003). Third, while the prescribed budgeting process may be followed by the LGUs, the local chief executive is still able to exert the most

influence in setting budget expenditures, considering that local department heads are his appointees. Local plans are therefore not used as the framework for the AIPS and the annual budget at the local level.

In general, plan and project monitoring are done separately, following different sets of procedures both at the national and local levels. With the MTEF, monitoring systems at the national level, which is fairly well established, is in the process of being reviewed and improved as part of the OPIF. At the LGU level, project and budget monitoring is generally in place due to the need to prepare annual budgets, but the importance of monitoring the plan is generally not well appreciated. In general, capacity constraints hamper LGUs in institutionalizing their own M&E processes at the local level. Local M&E is usually associated with on-site inspection, reportorial listing of accomplishments and/or cash flow and expenditure reports, de-linked from the local objectives and targets indicated in the LDPs. There is little appreciation by LGUs linking PPB processes with M&E outputs.

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Lessons from the Philippines Experience

While the preparation of development plans have been useful for ensuring the most efficient use of resources, the requirement to prepare plans at certain government levels should be based on (1) the objectives of the plan, particularly its use in relation to other public administrative functions (e.g. budgeting, ODA allocation); (2) the capability of the officials who will be required to do the plan; (3) the local conditions. Some of the more important implementation details which are left out in relation to these factors include: (a) synchronization of plan preparation with the budgeting cycle; (b) sophisticated requirements of plan preparation which may be too complicated given capabilities of local officials; and (c) availability of data or presence of private sector/civil society organizations for monitoring performance.

A fully integrated vertical planning process at the national level following both top-down and bottom-up approaches is only possible if the planning timetable will be extended to allow lower level government units to finish their plans, which can be incorporated into the national plan. However, whether a vertically integrated process will produce a better plan is not assured given: (1) the different plan proficiency levels at LGUs; (2) the sheer volume of plans to be aggregated. Furthermore, the usefulness of a fully integrated plan at the national level is also not very clear in a decentralized context, where LGUs already have the autonomy to provide services and manage resources. The tedious process of aggregating plans may not be commensurate with the potential advantages it seeks to bring.

The national plan provides the overall direction in the economy, which becomes the basis or framework for the plans of all the government instrumentalities. In a decentralized environment, vertical bottom-up integration of plans would be relevant up to the provincial level (from the village or barangay level), but not up to the national level.

Since the different agencies play an important role in the budgeting process, the link between planning and budgeting can be improved by requiring agencies to prepare medium-term and annual sector plans, which can be the basis of the sector investment and expenditure programs.

In the partial devolution of authorities like in the Philippines, delivery of services in affected sectors becomes the joint responsibility of the national government agencies and the local government units. Since convergence of services in poor areas has been announced as a policy objective, this can only be implemented if coordination between national government agencies and local government officials can be improved. Coordination is needed for the following reasons: (1) local government departments are informed of prospective national projects being initiated at the national level for local level implementation even at the conceptual stage and their inputs considered; or (2) national government agency representatives participate in the local sector planning programming deliberations at the relevant local councils. On the project side, closer coordination between national government agencies (NGAs) with LGUs and their local departments is also important to ensure (1) better implementation of nationally-initiated projects at the local levels; and (2) that critical local needs which cannot be locally funded are considered and eventually incorporated in the national government agency budgeted provided these are not completely devolved functions. But for very poor communities, closer coordination with NGAs might result in affirmative action even for devolved functions in these areas considering their difficult situations (e.g. Mindanao).

The Medium-Term Expenditure Framework is a major reform that has the potential of improving the link between planning and budgeting. However, there are important implementation problems, which should be addressed, especially those dealing with the translation of outputs to outcomes, setting inter-sector priorities and setting medium-term fiscal forecasts. These issues need to be addressed prior to full implementation. The scheme should also be pilot-tested at selected LGUs with progressive Local Chief Executives.

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Conclusion

This case shows that division of responsibility for service delivery between the national/central and the local government units (LGUs) following the adoption of decentralization in 1991 paved the way for revising the planning and budgeting processes followed at different government levels. Additionally, the case shows that the degree of decision-making autonomy provided to decentralized levels of government, the extent of fiscal

decentralization and the hierarchical relationship among different government levels partly influenced the changes in planning, budgeting and monitoring processes after decentralization. Finally, the case shows that monitoring systems are important for informed decision-making at the planning stage of LGUs, but oversight agencies at the national level are also required to set up their own monitoring systems for assessing LGU performance.

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Chapter 4: Indonesia – Local Planning and Fiscal Dimensions Under Rapid Decentralization Reform

Decentralization Experience

This chapter highlights the planning and budgeting processes in Indonesia, a country that recently launched a rapid decentralization process. Specifically, the chapter will highlight: (1) the linkages in planning processes across levels of government; (2) the relationship between budgeting and planning processes both at the national and local levels; (3) the use of fiscal instruments and policies for aligning national and local development goals; and (4) the monitoring and evaluation practices related to planning and budgeting in Indonesia.

Although Indonesia is not classified as heavily indebted poor country (HIPC) and is therefore not required to prepare PRS, the government opted to prepare one and, to date, has finalized an interim Poverty Reduction Strategy Paper (I-PRSP). The implementation of decentralization in Indonesia is in its infancy stage, having started only in 2001. Government institutions in Indonesia, both in the central and regional levels, are therefore in a transition stage, where implementing mechanisms, including those for planning and budgeting, are still being worked out. It is likely that present processes will be changed in the next two years, especially after the Presidential elections in 2004, making it difficult to pinpoint planning and budgeting responsibilities among agencies at this time. During this transition, planning and budgeting processes are being aligned with the objectives of decentralization.

On the positive side, being in transition may be seen as an opportunity to introduce planning and budgeting reforms at all levels of

government (though too many changes might lead to confusion and reform-fatigue, making adjustments more painful and take longer to institutionalize). In the transition period, Indonesia created an Advisory Board to the President, consisting of representatives from the associations of the heads of regencies, cities and provinces and the ministers of Home Affairs, Finance and State Administrative Reforms, whose tasks were to (1) recommend whether a region can hand back a function to the province; (2) advise the President on the formula for the distribution of the grant; and (3) approve requests for new regions which are to be established by law (WB 2003).

Indonesia has had a long tradition in preparing development plans. Prior to decentralization, the country had a highly centralized government that necessitated planning processes that combined the top-down and bottom-up approaches. Whereas bottom-up integration of plans was important in a centralized system of government where authorities emanated from the center, the new powers and resources provided to subnational governments required giving them more independence in planning their activities. Hence, while Indonesia still follows a top-down approach in planning with broad policies and guidelines set at the central or national government for subnational governments to use in preparing regional and local plans, lower-level government plans are no longer integrated at the central levels, partly for practical purposes given the number of local governments and the usefulness for policy-making of a highly integrated plan in the context of decentralization.

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The structure of the local governments in Indonesia is divided into (1) autonomous provinces; (2) districts which are located in rural areas; (3) municipalities/cities, which are in urban areas; (4) subdistricts within districts and municipalities; and (5) villages in rural areas and urban areas. The 30 provinces in Indonesia have a dual status – as autonomous regions and as representatives of the central government in the regions.

Indonesia had a highly centralized government until 2001 when it launched a radical devolution program that decentralized the delivery of services in 11 sectors to the regional governments (WB 2002).4 In the big bang approach of Indonesia, the responsibility of service delivery, through time, will mainly rest with subnational units, which then will have to bear the financial cost of these services. In terms of coverage, decentralization in Indonesia focused on the district and municipality levels, generally excluding the provinces. The framework for inter-governmental transfers as well as the revenue-generating powers granted to local government units was specified in the laws decentralizing the two countries, covering revenue sharing arrangements and general and specific purpose grants. In Indonesia’s case, the formula is based on the difference between the local governments’ fiscal capacity and fiscal needs, with the latter being determined by a formula based on population, poverty rate, land area and the construction price index.

4 In Indonesia, regions broadly refer to subnational entities such provinces, cities, regencies, districts, villages and sub-villages.

The Processes Used to Integrate Planning and Budgeting

Two important laws – Law No. 22 /1999 on Regional Governance and Law No. 25/1999 on Financial Balance between the Central and Regional Governments - embody the changes in planning and budgeting processes at the central and regional government levels. Planning in Indonesia broadly refers to the processes that would generate the following two components of a plan: (1) the statement of broad objectives, strategies and policies; and (2) the listing of projects, activities and programs (PAPs).

At the national level, the responsibility of coordinating plan preparation in Indonesia is lodged with the National Development Planning Board or BAPPENAS. There are, at present, four important plan documents produced at the central level: (1) the National Guidelines (GBHS: Garis Besar Haluan Negara) – these are broad guidelines issued by the People’s Consultative Assembly (MPR), Indonesia’s highest constitutional body, to the President during her election; (2) Five-year National Development Plan (Propenas: Program Pembangunan Nasional) -- cross-sectoral and priority policies consistent with the GBHS and which serves as the guide for the ministries and regions in the preparation of their own plans; (3) Strategic Plans of central government agencies (Renstra: Rencana Strategis); and (4) the Annual Development Plan (Repeta: Rencana Pembangunan).

At the national level, the planning process starts with the issuance of the GBHN by the People’s Consultative Assembly, which triggers the preparation of the Propenas by BAPPENAS, containing the priority areas of the government. The BAPPENAS then organizes the Development Coordination Meeting, which is attended by sector

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ministries and provincial and local planning agencies to reconcile central government and regional issues. The finalized Propenas is then submitted to the MPR for approval. The top-down planning process is evident in the Indonesian case where the national and regional five-year plans, which embodies the broad set of objectives in the GBHN, are made on the basis of the lower level plans. The agency and the annual plans are in essence “implementation” plans intended to translate the five-year programs (i.e. Propenas) by agency and by projects which will be annually implemented. There is no attempt to integrate the agency plans and local plans at the national level. There is no review mechanism at present to ensure the bottom-up integration of plans.

At both the national and regional levels, the most important planning document is the annual plan. The preparation of the annual plan goes through an elaborate process of consultation, culminating in the Development Coordination Meetings at the provincial and national levels (Rakorbangpus and Rakorbang). The annual plan is eventually approved by the Legislature. A bottom-up planning process is followed in the formulation of proposals for the annual budget. The formulation process for the repetada involves getting aspirations of the people through meetings organized at the different levels of government (i.e. sub-village, village, district/city) on the one hand, and the activities identified by the regional sectoral ministries. Here, the repetada is theoretically drawn from the desired activities/projects at geographic and sector levels but sifted along the way through a system of prioritization done by the Bappeda, which can differ across local governments.

The preparation of the Propeda, Renstrada and the Repetada is supposed to be

based on the Propenas and the Poldas, which contains the broad objectives of the nation and the region, respectively. Based on the Bandung Renstrada and Repetada, the listing of projects in the Repetada was drawn from the renstrada which implies that, on paper, there seems to be a linkage between regional agency programs and the listing of projects submitted for budgetary purposes. In practice, consultants from the universities are hired to prepare the medium-term plan which is considered a “political” rather than an operational document with no clear tangible output.

The Ministry of Home Affairs (MoHa) exercises oversight responsibilities over the regional governments and usually issues planning guidelines for implementation at the local levels. At the local level, regional governments - the province, the districts (kabupatens) and the cities (Kotas) - are mandated by MoHa to prepare the Propedas, the local version of the Propenas under the supervision of the Bappeda. Based on the Propedas, the local government bureaus are required to prepare three-year strategic plans (the renstra), which actually serve as accountability tools for the regional and bureau heads (WB 2003).

With assistance from donors, the emerging new approach which Bandung Kabupaten is contemplating on involves: (1) shift from sector-focused planning to tackling more strategic and intermediate-term planning; (2) more stakeholder involvement in the process; (3) shift from the top-down relationship with the central government to one of partnership; (5) central planning is viewed as a “blueprint or a manual, from which district planning will be based”; and (6) providing more concern for the environment in the plan.

The case study shows that being in a transition period, this is a good opportunity

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for Indonesia to institute the following changes in its planning processes at the local level, particularly in the light of the government’s present focus on poverty: (1) improving the capability of subnational level officials to prepare the Five-Year Development Plan using a participatory approach even at the lowest unit of government; (2) adopting a holistic approach to planning that not only stops at visioning and preparing mission statements but should include resource generation, monitoring and evaluation; (3) simplifying the planning parameters and processes at each level of government and making this the basis for a uniform set of training modules for the LGUs; (4) incorporating poverty planning in the present or future planning processes to be adopted by the government; and (5) instituting mechanisms to improve the coordination between central level ministries and the local government units, especially the heads of local government bureaus who are responsible for preparing annual budgets.

In the absence of new guidelines for integrating the planning processes across government levels, the regional governments have been experimenting with different participatory planning approaches, depending on the donors providing the technical assistance to the region. There is therefore a tendency for the different regions to adopt different planning techniques, though generally following the principles of participatory planning. There is clearly a need to coordinate donor efforts in planning and budgeting to ensure that planning techniques are standardized across the region.

The budgeting process of Indonesia is still highly centralized with guidelines for local budgeting still being set at the central level through the MoHa. The budgeting activities at both the national and regional

levels are the responsibilities of budget committees which, at the national level, do not include the development planning agency. Institutionally, therefore, the linkage between planning and budgeting has somewhat weakened with this set up, as compared to past years. Given this condition, there is no assurance that the projects that are budgeted are consistent with either the national or regional goals.

There is a need for more transparency in the allocation of budgetary resources in both the national and regional levels, particularly in the prioritization process used for allocating budgetary resources. In the case of Indonesia, Medium-Term Expenditure Framework (MTEF) has not been implemented yet, though the State Financing Law refers to the matter. Adjusting to the new system might be a good option – including pilot testing the MTEF before full implementation.

Prior to 2001, the central government provided support to the regional government through several block grants. Decentralization overhauled the system of inter-governmental transfers, which now consists of (1) a general grant (dana alokasi umum – DAU) based on an allocation formula for the province and for the local governments; (2) a special allocation grant (DAK), which today is channeled to five sectors – forestry, education, health, rural roads and irrigation; (3) shared taxes; and (4) natural resources revenue sharing. As defined by Law 25/99, at least 25 percent of national revenues will comprise the DAU. The transfers account for more than 90 percent of the resources of regional governments.

In 2001, regional governments in general received more than enough transfers to finance the devolved activities during the year (World Bank 2002). The allocation for development spending also increased after decentralization. However, the system is not

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horizontally equalizing, with continued large variations in resources across regions even after the transfers (World Bank 2002). While regions have been given more resources to undertake programs, they remain highly dependent on these transfers and, given the short time, have not shown increased capabilities to raise their own fiscal resources.

Monitoring There are a number of monitoring tools

at the local level. The Accountability Reports of the regional head, which theoretically should be based on the renstrada, are submitted to the regional legislature. The Five-Year Plan, according to interviews, is not monitored since they lack targets, but budget expenditures are monitored on a quarterly basis. Law 25/99 also requires the regions to regularly report financial information to the center (WB 2003). Unlike in Indonesia where civil society groups are fairly well-established,

those engaged in advocacy for planning and budgeting improvements in Indonesia have only been recently established. There is definitely a potentially strong role for civil society in ensuring genuine participatory planning and budgeting at the local level up to the national level through the various Development Coordination Meetings, where community aspirations are gathered.

However, civil society’s role in monitoring and evaluation has not been well established, since there is no existing mechanism at any level of government where participation or opinions on government programs and projects are encouraged. The experience of countries with strong civil society groups indicate that they can play a major role in monitoring corruption in project implementation as well as in assisting the government in the evaluation of existing projects for future planning.

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Conclusion

The Indonesia case highlights the problems confronting planning and budgeting objectives in a situation of rapid institutional reform – the country’s ‘big bang’ decentralization. The experience suggests a number concerns to keep in mind. For instance, requiring local governments to prepare plans should take into account (1) the

objectives of the plan, particularly its use in relation to other public administrative functions (e.g. budgeting, ODA allocation); (2) the capability of the officials who will be required to do the plan; (3) the local conditions.

Lessons from the Indonesia Experience

In the transition from a highly centralized to a decentralized system, the delineation of responsibilities across government ministries and government levels should be clearly identified. In cases where planning and budgeting responsibilities are divided between two agencies, the functions of the concerned agencies should be clear and close coordination should be encouraged.

Decentralization will necessarily bring changes in planning and budgeting procedures. The guidelines to be issued should be based on planning principles consistent with the essence of decentralization. There might be a need to review the bottom-up planning process followed in identifying projects for budgeting purposes in relation to their consistency with decentralization. Given the financial autonomy granted to regional governments together with devolved authorities for service delivery, bottom-up planning and budgeting processes may no longer be necessary. GTZ/Clean Urban Project (2000) recommended, for instance, a more genuine local level planning process administered by the regions.

The planning and budgeting linkages are yet unclear in Indonesia. Ideally, projects for the budget should be identified using the coordination meetings, which have the potential of being a venue for genuine participatory planning. Some of the areas that need to be reexamined include: (1) the process of prioritization at each level; (2) implementation of performance-based budgeting which has been started; and (3) the forthcoming implementation of the medium-expenditure framework. The fiscal reforms are indeed overwhelming, which may prove to be difficult for the implementers at the regional level.

In the transition, some hand-holding by ministries may be necessary to ensure a smooth transition in implementing devolved functions by the regional governments. The planning-budgeting linkages might also be improved with closer oversight given to ministries in their planning and budgeting activities.

The imposition of minimum basic standards for obligatory functions may be one way of influencing the utilization of DAU at the local level. Setting of standards, however, may have to be closely coordinated and responsibilities for monitoring compliance identified before implementation.

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On implementation, attention should be paid to factors such as: (1) synchronization of plan preparation with the budgeting cycle; (2) sophisticated requirements of plan preparation which may be too complicated given capabilities of local officials; (3) availability of data or presence of private sector/civil society organizations for monitoring performance. The Indonesia

experience highlights the fact that capacity building on planning techniques should be approached in a holistic manner where the training program goes beyond plan preparation and includes helping communities/local officials with the identification of projects and funding sources, financial support, and monitoring and evaluation techniques.

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Chapter 5: Uganda – Local Planning and Fiscal Dimensions Under a Reformist State

This chapter highlights the planning and budgeting processes in Uganda, a country whose decentralization began in 1986 and, among the three countries examined, has gone the furthest in institutionalizing decentralized governance. Uganda has also adapted its planning and budgeting systems to reflect a deepening process of decentralized governance and formulated means to integrate planning and budgeting between local and national levels, with the PRSP as integral part of that process. Specifically, the chapter will highlight (1) the linkages in planning processes across levels of government; (2) the relationship between budgeting and planning processes both at the national and local levels; (3) the use of fiscal instruments and policies for aligning national and local development goals; and (4) the monitoring and evaluation practices related to planning and budgeting in Uganda.

Uganda’s efforts at integrating poverty reduction into local planning and budgeting processes have been impressive. By instituting reforms in intergovernmental relations, the country has largely overcome its legacy of vertical and horizontal imbalances. However, despite these improvements, significant challenges remain in aligning local targets and outcomes with national priorities, and in building local capacity desperately needed to handle greater responsibilities of managing public service in a decentralized context.

Decentralization Experience

Soon after coming to power in January 1986, the National Resistance Movement (NRM) embarked on a comprehensive

program for political and economic reconstruction. At the political level, reform measures aimed at increasing the extent of local participation in the policy-making process and strengthening local capacity for resource mobilization have been implemented since the mid 1980s. Power sharing in the provision of public goods and services is also an objective under Uganda’s decentralization. At the start of these governance reforms, popular resistance councils (RCs) were established from the district down to the village level. The 1987 Resistance Councils Statute laid the foundation for the decentralization of authority to the people through their councils. This was promulgated in the 1995 Constitution of the Republic of Uganda and given full effect by the Local Government Act of 1997 (Magyezi, 2002:24). Under the LGA, resistance councils were renamed Local Councils (LCs) and institutional relationships between LCs and central government ministries were streamlined. The decentralization program was revamped in Uganda in 1993/94, substantially shifting service delivery responsibility from central to local government. Given capacity and budget affordability constraints, the issue of capacity building necessitated restructuring at both central and local government levels.

Uganda’s system of local government is enshrined in the Constitution (1995) and the Local Government Act (1997). The framework, within which local governments operate, including the relative participation and weight of different levels of decentralized governments in planning processes, is provided under the country’s laws. There are

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up to five layers of local government in Uganda. The principle unit of local government is the District Council. There are 56 District Councils including the City of Kampala and each district is a “programming region.” Given significant regional disparities between northern and southern districts, the GoU uses the equalization grant as part of its “regional balance” strategy. Equalization Grants are provided for in the Constitution. They are intended to boost the development of those local governments with low levels of services, and those poor districts/municipalities with low revenue potential. However, due to competition for resources (among other reasons), implementing this grant has been a challenge.

Since the Local Government Act (LGA) was revised in 1997, local governments have progressively assumed more planning and

budgeting responsibilities consistent with fiscal decentralization. Initially, the local government planning and budgeting processes were not well integrated. As a result, the Budget Act was passed in 2001 to address weaknesses in public expenditure management at the sub-national level. This was supplemented by the FDS, which operationalizes the systems and processes of transferring resources to local governments. Accordingly, all intergovernmental transfers fall under two systems, the Recurrent Transfer System (RTS) and the Development Transfer System (DTS). By rationalizing procedures, bank accounts and reporting mechanisms, the FDS has relieved much of the pressure previously experienced by districts and municipalities.

The Processes Used to Integrate Planning and Budgeting

Since the 1990s, efforts have been made to link resource allocations strategically with national priorities via the MTEF. At the same time the government has been implementing a number of public expenditure management (PEM) reforms aimed at ensuring efficient and effective use of public resources through increased transparency and accountability; creating enabling conditions for private sector development and improving public expenditure management in general. Prior to instituting these reforms, planning, budgeting, financial management and audit were virtually non-existent at the local level. Though the then Ministry of Planning had district planning field offices, they were greatly under-staffed, under-resourced and merely acted as data collection centers for the line ministry.

With local governments assuming more planning and budgeting responsibilities consistent with fiscal decentralization, there have been costs, given the historical weaknesses in public expenditure management at the subnational level. This was partly mediated through the soft budget constraint between the central and local government; local governments did not have the capacity to discharge their expenditure planning responsibilities. Thus, district plans were poorly formulated and not sufficiently attuned to the resources likely to be available for spending by the district authorities. As a result, disharmony between the local and national budget cycles was evident. More importantly, the local government budget provided little input into the national budget

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and district budgets were difficult to execute, given unrealistic revenue and expenditure projections.

The Budget Act of 2001 was partly designed to deal with these problems. In order to integrate planning and budgeting at the local government level, the process of updating DDP was linked with the preparation of the LGBFP. Both the local government Recurrent Transfer Budget (RTB) and Development Transfer Budget (DTB) processes contribute to such harmonization, which is helping to address the dislocation of the central and local government cycles.

The Ugandan case shows that by expanding the annual medium-term planning process of preparing the national Budget Framework Paper (BFP) to include the preparation of BFPs by all local governments, Uganda is integrating its national and sub-national planning processes. The Medium Term Expenditure Framework (MTEF), District Development Plans (DDPs), and the BFP itself are some of the instruments that account for the process of integrating national and sub-national planning processes and priorities generated by them. Poverty Eradication Action Plan (PEAP) goals are fed into local planning through these instruments.

The Poverty Eradication Action Plan (PEAP), which serves as Uganda’s PRSP, provides the framework within which both local and national planning efforts are conducted. Every two years, the Government of Uganda (GoU) prepares the Poverty Status Report (PSR), which is a progress report on implementation of poverty reduction strategies. The PSR forms the basis for reviewing the PRSP. According to the Ministry of Finance, Planning and Economic Development (MFPED), the PEAP provides a framework within which sectors develop detailed plans. The revision process is highly

consultative and incorporates views of many interest groups and individuals. However, it is not clear how local planning feeds into the PEAP/PRSP process.

Uganda has also developed a Fiscal Decentralization Strategy (FDS), which is being used to harmonize central and local government planning and budgeting cycles to ensure that local needs and priorities feed back into the national budget. In general, progress has been recorded in areas such as increasing local government autonomy and widening local participation in decision-making. In other areas, however, progress has been slow. While modalities for intergovernmental fiscal transfer are being streamlined through a number of reforms, evidence of increased efficiency and effectiveness in achieving PEAP/PRSP goals within a transparent and accountable framework is scant. However, notable achievements in implementing PEAP include: a) progress in economic growth; b) high enrollment rates of primary school-age children; c) gender parity in primary education; d) continued reduction in HIV/AIDS prevalence; and e) increasing safe water coverage (MFPED, PEAP Revision Guideline, 2003/04).

Analysis of fiscal decentralization mechanisms, the MTEF included, show that most were not well adapted to the decentralized context particularly in the early phases of reforms when typically local governments had limited capacity in financial management and administration, weak bookkeeping skills, resulting in poor financial accountability, little real power over the allocation resources and little involvement in decision making processes. However, in the context of the recent FDS, Uganda is taking steps to ensure the MTEF reflects grassroots priorities and involvement. For example, increasingly sub-national government budgets

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are being organized around PEAP/PRSP goals in line with local priorities.

Instruments for Effecting

Integration Currently, at least three instruments--

unconditional, conditional, and equalization grants-- are used in Uganda to transfer resources from central to local government. While the use of these instruments presents important constraints related to administrative capacity and financial capacity and management, in general their use has been improving over time as these challenges are addressed. Measured in terms of their impact on allocative efficiency, macroeconomic stability and income redistribution, the instruments are judged to be effective. Because of their overall positive impact on several domains, their use in low income countries is justifiable. In a decentralized context, the amount of resources accruing to local governments is often inadequate to keep the administration alive and provide basic public services so badly needed by the majority of people. Under these conditions, intergovernmental transfer is critical for poverty reduction.

Aligning local government targets to local and national outcome indicators is critical for poverty reduction. In the case of Uganda, recent PRSP reports highlight both progress and difficulties in the delivery of services in key sectors. For example, the Uganda Poverty Reduction Strategy Paper Progress Report 2002 (Republic of Uganda, 2002b) highlights difficulties in the delivery of important health services and inefficiency in the water sector, where significantly increased funding has led to modest increases in annual outputs. For all sectors the report emphasizes the continuing challenge of maintaining and even improving

the quality of service provided, and especially in areas serving poorer communities. The report further notes that while health user fees were abolished and access increased, service quality has deteriorated. Similarly, in education, the Universal Primary Education (UPE) reforms have resulted in large class sizes and unfavorable pupil-textbook ratios.

In Uganda, monitoring and evaluation (M&E) systems are established at the local and at the national level. In the context of decentralization, local government capacity for monitoring is stretched, especially given the fact that some of their M&E units were recently established. Central government level M&E is stronger and can (legally) intervene in local government. In general, planning data exist through a number of household surveys conducted by the Central Bureau of Statistics. While dissemination of key outputs such as annual impact reports is increasing, information needs to be used more effectively, to improve the preparation of district plans, in monitoring poverty reduction, and in enhancing decision-making at local level. In Uganda, the annual medium-term planning process of preparing the national Budget Framework Paper (BFP) has been expanded to include the preparation of BFPs by all local governments. This innovation has allowed local governments to identify their resource needs and programs in the context of the overall resource envelope available to the government. Planning and budgeting are currently being integrated in the annual national planning and budgeting cycle. Similarly, local government plans are consolidated into the national plan via a number of instruments discussed below.

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Conclusion

The case study shows that planning and budgeting are currently being integrated

in the annual national planning and budgeting cycle. Since the 1990s, efforts have been made

Lessons from the Uganda Experience

Integrating local and central government planning efforts is a slow process with no quick fixes, even in decentralized polities. Therefore, governments and donors should be prepared for the long haul. As the Ugandan case suggests, embedding decentralization in a country’s laws provides a sound legal and policy framework for poverty reduction strategies (PRS).

Clearly defining responsibilities for each level of government to the lowest possible level, particularly if backed by resources and capacity to implement, has better prospects for improving the effectiveness in linking policies, plans and budgets.

A clear, consistent and visible political commitment at the highest level to decentralization, especially if backed by broad-based reforms, is relatively more likely to have a deeper, sustainable poverty reduction impact than say, a ‘stop-go’ policy. In other words, for decentralization to have positive impact on service delivery and poverty reduction, it must be linked to a number of reform programs, e.g. public service reforms, expenditure management reform, etc, Sustaining such broad-based reforms, let alone securing a critical mass of ‘buy-ins’, requires political commitment and government ownership of decentralization and PRSP processes.

Institutionally linking the PRSP with the annual budget cycle and the MTEF is a good success strategy for poverty reduction.

The number of instruments used in realizing fiscal transfer should be rationalized. Use of too many instruments can overload local government capacity and weaken service delivery and poverty reduction.

Reviewing PRSPs and improving their content is just as important as the process used to develop them. Both process and content should be given equal weight and emphasis.

As the case of Uganda amply shows, it is useful, given the capacity limitations of local governments in most developing countries, to draw a fiscal decentralization strategy prior to implementation.

While still weak and requiring improvement, Uganda’s continuous monitoring and tracking of public expenditure goes a long way to ensure that the MTEF not only look at planning and projecting expenditure, but also at efficient utilization of resources. Uganda’s monitoring of UPE is also transparent; if any resources are released for schools, it is announced . . . and no funding is released until implementation timelines are met. It thus offers a “good practice” example in terms of how it is managed and how it is monitored with the involvement of governments, non-governmental organizations (NGOs), civil society organizations (CSOs), and donors.

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to link resource allocations strategically with national priorities via the MTEF. At the same time the government has been implementing a number of public expenditure management (PEM) reforms aimed at ensuring efficient and effective use of public resources through increased transparency and accountability; creating enabling conditions for private sector development and improving public expenditure management in general.

Overall, Uganda’s efforts at integrating poverty reduction into local planning and budgeting processes have been impressive. By instituting reforms in intergovernmental relations, the country has largely overcome its

legacy of vertical and horizontal imbalances. However, other challenges still lie ahead. Despite these improvements, significant challenges remain in aligning local targets and outcomes with national priorities, and in building local capacity desperately needed to handle greater responsibilities of managing public service in a decentralized context. Aligning local government targets to local and national outcome indicators is critical for poverty reduction. In the case of Uganda, recent PRSP reports highlight both progress and difficulties in the delivery of services in key sectors.

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Chapter 6 - Lessons and Suggested Policy and Institutional Responses

From the decentralization experiences of Indonesia, the Philippines and Uganda, several lessons can be suggested for countries engaged in PRSP processes within the context of decentralized governments or that are undertaking decentralization reforms. The literature review and country reports in the study have identified many organizational and implementation factors which affect the success or efficacy of planning and budgeting.

The benefits of decentralization emerge through local adaptation, but require more elaborate (and sometimes, informal) means of coordination. It is possible for a single agency to effectively function in a coordinative role; however, the fact that usually several agencies are involved with different aspects of decentralization requires that a neutral or higher level entity (such as the office of the president or prime minister) take charge to formalize responsibilities, and monitor and assure individual entities fulfill their responsibilities (Smoke 2000).

An integrated conceptual approach is required in planning. Planning should also be a shared function, with initial overall strategies developed centrally and centrally sponsored transition to greater local involvement and capacity development. The brokerage role (of using the market and civil society for the provision of collective services) is also a properly centrally / locally shared function, with market and civil development both local and central functions in spawning private sector roles in service delivery.

Effective administrative decentralization requires a strong center to provide an effective enabling environment for role decentralization and decentralized service delivery. Obstacles to institutional pluralism include the coordination costs associated with management of task-related roles, imperfections in markets and weakness in private partner institutions and organizations, and inadequate personnel and financial resources to accomplish task-related roles.

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Lessons from Case Studies

On Planning

As the Ugandan case shows, priorities set out in the PEAP/PRSP play an overarching strategic role of guiding planning at the subnational level. There is evidence that setting the PEAP/PRSP as the overarching strategic framework serves as a useful role of integrating local and central government planning efforts.

Uganda’s experience shows that the PRSP can build on and improve already existing frameworks for poverty reduction. This provides a “good practice” to inform countries in other regions where the link between the PRSP process and pre-existing planning documents are relatively poor (DFID, 2003a and 2003b).

Uganda’s decentralization and PRSP processes are highly institutionalized. This contrasts with countries where government opinion of PRSP’s role as a comprehensive national strategy is somewhat open to question (DFID, 2003). Like the case of Bolivia, Uganda’s experience shows that securing ”buy-ins” for broad-based reforms is relatively easy where there is broad agreement and institutional frameworks for supporting PRSP in the context of decentralization.

Developing a fiscal decentralization strategy is important for harmonizing central and local government planning and budgeting cycles.

In the transition from a centralized to a decentralized system during which procedures and systems at lower level governments are being revised/transformed, there is a tendency to replicate the activities/procedures followed at the national/central levels to the local levels. However, capabilities, resources and political realities at the local level differ from those found at the national, often times requiring more innovative procedures. In the area of planning for instance, the format of national plans and the planning processes at the local level are in most instances mirror images of national plans and processes, where perhaps a simpler and a more doable document will be more appropriate. In the case of poverty planning, the set of indicators for assessing performance at the national level may be different from one which will be used at the local level. The PRSP Sourcebook materials on poverty diagnostics, for example, may be relevant for national governments in doing the national PRSs but another set of guidelines may have to be prepared for poverty assessment at the local level taking into account the availability of data/information, among others.

The institutional roles/responsibilities in development planning for the country at different government levels from the national to the local government levels should be clearly defined in decentralized governments. Whereas bottom-up integration of plans may be important in a centralized system of government where authorities emanate from the center., the new authorities and resources provided at the local level would require giving LGUs more independence in planning their activities.

In a decentralized context, the bottom-up integration of development plans may be relevant only up to the level of the government tier that exercises supervision over lower level tiers. In the case of Indonesia, integration of development plans, including development projects, may be

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necessary up to the district/city levels. At the province level, the more meaningful exercise would be to coordinate inter-city or inter-district projects rather than the integration of district/city plans, unless the province has the financial capability to fund projects.

At lower government tiers, i.e. village, district, city, it is important that their projects which they cannot fund themselves can be raised to upper level tiers for possible inclusion in the budget. This can only be done if the planning and budgeting schedules are synchronized at all levels.

The medium-term plans in some instances have been prepared by consultants and not by the government officials, without consultation with the community. To partly address this, required planning documents, which are often designed at the central/national governments need to be simplified taking into account the capabilities and needs of lower level government tiers. In the case of the Indonesia, the “Executive Agenda” prepared by the CIDA-funded Local Government Support Program is an example of a simplified process of preparing a plan at the local level.

Capacity building on planning techniques should be approached in a holistic manner where the training program not only prepares a plan, but continues with helping communities/local officials identify projects and funding sources, financial support, and monitoring and evaluation techniques.

The participatory approach to planning should start with the setting of development vision and not just in the identification of projects.

On Expenditure Programming

Uganda’s experience with using the MTEF to integrating national and sub-national planning processes for improving poverty reduction strategies shows that the use of “hard budget constraints” is necessary to match spending with overall resource availability, greater impact on poverty, and macroeconomic stability.

A fiscal decentralization strategy is necessary to operationalize systems and processes for transferring resources to local governments.

The effectiveness of the MTEF depends on broad-based public expenditure reforms targeting strengthening capacities for planning, budgeting, financial management and audit at both the central and local government level. Lack of a MTEF in some countries is a major constraint to the prioritization of the budget around poverty reduction goals. In Uganda where PEAP/PRSP is considered as the comprehensive development framework, its links to the budget are very clear and PRSP initiatives are mainstreamed in the budget.

Introducing Budget Framework Papers at local government levels can result in better budgets for revenues. It can also lead to congruence between local programs and nationally identified priorities. However, the pace of fiscal decentralization should be balanced with the capacity of the local government during implementation.

If rationalized, fiscal instruments can be effective means of transferring resources from central government to local governments. Conversely, uncoordinated fiscal transfers pile pressure on subnational governments.

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Effectiveness of the MTEF is enhanced when accompanied by public expenditure management (PEM), reforms aimed at ensuring efficient and effective use of public resources through increased transparency and accountability.

Unconditional, conditional, and equalization grants can have positive impact on allocative efficiency, macroeconomic stability and income redistribution.

Part of the disconnect between planning and budgeting is due to institutional factors that can be addressed by better coordination. For instance, BAPPENAS can probably be invited to sit in the Budget Committee. In Indonesia, the NEDA can be invited to participate in budget hearings. The ideal case is to have one agency handle both planning and budgeting.

For the most part however, there is a need to make the planning document more attuned to the budgeting exercise. Note that the Medium-term plans, by their very nature, are really meant to be broad statements of policy. There should be greater attention being made to (1) agency/ministry plans to ensure that their plans are consistent with the broad development objectives of the country; and (2) the listing of programs and projects proposed for inclusion in the expenditure program. On the latter, often, the problem relates to the difficulty of prioritizing expenditures across sectors and in setting budgetary ceilings, both of which are the responsibilities of the budget committee/agency.

The weak linkage between planning and budgeting can also be traced to the difficulty of forecasting revenues which, during times of shortfalls against targets, can lead to cutbacks in expenditures. This, in turn, leads to missed plan targets, which are always blamed on poor planning.

At the local level, the problem at times is less of the weak linkage but more of the lack of plans to start with, partly due to the difficulty of preparing one. Therefore, the annual listing of projects submitted for budgeting purposes is not connected to an overall framework.

The role of the legislature at all levels of government in distorting the plan-budget linkage has sometimes been ignored or swept under the rug. On the positive side, greater coordination with the legislature is needed to solicit support for the projects that are consistent with the development plan. Furthermore, there should be a better mechanism for channeling the resources from pork barrel funds towards developmental projects.

The introduction of fiscal reforms should consider the implications on the planning side. The introduction of the Medium-term Expenditure Framework, for instance, does not only entail producing five-year forecasts of revenues and expenditures but also reforming the mindset of agencies to be more efficient, effective and performance-based.

Unconditional grants like the IRA and DAU should be left to the regional/local governments to allocate with minimal conditions set at the central. For projects which are nationally designed and funded, the national government may give either matching grants for areas which are better off or unconditional grants for very poor areas. Ideally however, devolution encourages the local government to design and fund their own poverty projects. This implies capacitating regional governments to do poverty diagnostics and to look for financing for their projects.

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On Monitoring

Monitoring systems are important for informed planning and budgeting. However, monitoring responsibilities in a decentralized context, similar to planning has to be delineated. For instance, in cases where poverty indicators have been required, data should be aggregated up to what government level?

At the national level, monitoring responsibilities of oversight agencies should differentiate between “controlling” vs. “facilitating” approaches. Part of monitoring is the institution of incentive systems to ensure compliance and sanctions for problematic cases.

At the local level, the importance of monitoring may not be well appreciated except for budget matters. Hence the challenge is to pursue performance monitoring with extensive participation from civil society. Governments however should pave the way for greater civil society participation by ensuring that processes will allow their genuine participation (e.g. requiring a minimum number of civil society representatives in committees, setting up of NGO accreditation system).

The Ugandan experience shows that regular and comprehensive national local government performance assessment is a useful monitoring tool to ensure compliance by local governments of agreed policy priorities and strategies.

The value of monitoring is enriched through participation. Experience from sub-Saharan Africa suggests that civil society participation can add considerable value to PRSP processes and policy processes more generally, and can contribute to more responsive behavior on the part of donors and governments (DFID, 2002).

Implementing poverty reduction in decentralized polities, where civil society is likely to be more vibrant, stands to benefit from broader participation.

Continuous monitoring and tracking of public expenditure goes a long way to ensure that the MTEF processes not only look at planning and projecting expenditure, but also at efficient utilization of the resources.

Overall, the above lessons suggest that for effective planning and budgeting in the context of

decentralization, both broad societal norms and consensus and technocratic streamlining of planning and budgeting systems must begin to emerge in a credible manner and consolidate through reiterated exercise for institutionalization. The lessons for successful fiscal decentralization include an enabling environment, including institutions of citizen participation and accountability. Societal norms and consensus on roles of various levels of government and limits to their authorities are vital for the success of decentralized decision making. Public sector reform to reorient systems toward integrative planning, service delivery and monitoring is critical to the success of a decentralization program.

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