Intergovernmental Transfers
Anwar Shah, World Bank
Anwar Shah, OEDCR
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Relevance
Dominant
source of subnational revenues in many countries. matters for efficiency and equity.
Design Grant
design must be consistent with grant objectives.
Anwar Shah, OEDCR
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Importance of transfers
Dominant source of revenue for subnational governments in some countries:
South Africa Indonesia Provinces Local Nigeria Mexico Pakistan 85% 72% 72% 85% 67% to 95% 70% to 90% (poorer states) 82% to 99%
Design of transfers matter for efficiency and equity and fiscal discipline.
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Anwar Shah, OEDCR
Grant types
Non-matching transfers:
Selective (conditional) General (unconditional) Open-ended Closed-ended General non-matching higher welfare Selective matching open-ended higher expend. stimulation
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Selective matching transfers
Conceptual impacts
Anwar Shah, OEDCR
Grants in LDCs vs DCs
LDCs
DCs
Passing the buck transfers (Brazil, India, South African revenue sharing) Pork barrel transfers (Brazil and Pakistan) Asking for more trouble (deficit grants and bailouts)
Conditional transfers Equalization transfers
Anwar Shah, OEDCR
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Criteria for design of transfers
Autonomy Revenue Equity Predictability Efficiency Simplicity Incentive Safeguard
adequacy
of grantor¶s objectives
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Anwar Shah, OEDCR
Economic rationale of intergovernmental transfers
Objective
Design
To bridge fiscal gap To reduce regional fiscal disparities Setting national minimum standards Influencing local priorities To compensate for benefit spillover Regional stabilization
Reassignment, tax abatement, tax base sharing Fiscal capacity equalization Conditional block transfers Open-ended matching transfers Open-ended matching transfers Capital grants with upkeep requirement
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Anwar Shah, OEDCR
Transfers: Lessons
Grant design must conform to objectives. Main Arguments and Grant Design
Fiscal Gap: Structural imbalance as a result of a mismatch between revenue means and expenditure needs.
Anwar Shah, OEDCR
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...Fiscal gap
Reasons:
Inappropriate assign: Reassign Limited tax bases: Allow joint occupancy or tax decentralization. Tax competition: Federal collection and general (not on a tax-by-tax basis) revenue sharing. Tax room lacking: Tax abatement and tax base sharing (Canada and Brazil).
Anwar Shah, OEDCR 9
To bridge fiscal gap
Design:
(a) Reassign (b) tax abatement (c) tax base sharing. etter practices: Tax abatement in Canada; tax base sharing in Brazil, Canada, and Pakistan. to avoid: deficit grants; tax by tax sharing.
Practices
Anwar Shah, OEDCR
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Special issues in state-local transfers
Principal-agent relationship Pass-thru of federal transfers from states desirable due to better access to data. Considerations in unconditional grant design:
» Classification by population size, municipality type, and urban/rural » Equal per municipality component » Equal per capita component » Service area component » Fiscal capacity component
Considerations in conditional transfers
» Simple objectively verifiable indicators of need
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Anwar Shah, OEDCR
Indonesia -- General Purpose Transfers
1. Provincial Development Grant » Equal per province (85%) » Area (15%) 2. District Development Grant » Per capita with a floor 3. Village Development Grant » Equal per village 4. Less Development Village Grant » Per capita
Anwar Shah, OEDCR 12
Setting national minimum standards
Design:
conditional non-matching block transfers with conditions on standards of service and access. etter practices: Indonesia roads and primary education grants; Colombia and Chile education transfers; Canada health and postsecondary education transfers. to avoid: Conditional transfers with conditions on spending; ad hoc grants.
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Practices
Anwar Shah, OEDCR
Education grant
Allocation
basis: Population aged 5-17
Distribution:
Equal per pupil to both public and private schools Universal access to primary and secondary education Public censure, reduction of grants funds Retention of savings
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Conditions:
Penalties:
Incentives:
Anwar Shah, OEDCR
Health grant
Allocation
basis: Weighted population by age class with higher weights for ages 0-5 and 65+ Patient use
Distribution: Conditions:
Minimum standards of services and access to health care Reduction of grant funds
Penalties:
Anwar Shah, OEDCR
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Indonesia - Specific Purpose Transfers to Provinces
P1. SDO - Subsidy for Autonomous Regions Public sector wages P2. Provincial Road Improvement Grant
Length
of road Condition of road Unit cost of construction and maintenance
P3. Reforestation and Regreening
Anwar Shah, OEDCR 16
Indonesia - Specific Purpose Transfers to Local Governments
L1. SDO - Subsidy for Autonomous Regions
Public
sector wages
L2. District/Town Road Improvement Grant
Length
of roads Condition Density Unit cost
Anwar Shah, OEDCR
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...Transfers to Local Governments
L3. Primary School Grant
School
age children (ages 7-12) Needs for facilities
L4. Health Grant
Need
for medicine, health centres, and personnel
L5. Reforestation Grant
Project
Anwar Shah, OEDCR
review
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Federal financing and health care in Canada
Per capita transfers tied to rate of growth of GDP Conditions: (1) Universality (2) Portability (3) Public insurance but public/private provision (4) Opting in and out (5) No extra billing Penalties: Threat of discontinuation for breach of 1-4. Dollar for dollar reduction for 5. Sunset clause: Parliamentary review every 5 years.
Anwar Shah, OEDCR 19
Influencing local priorities
Design:
Open-ended matching transfers (with matching rate to vary inversely with fiscal capacity). practices: Matching transfers for social assistance in Canada. to avoid: Ad hoc grants.
Better
Practices
Anwar Shah, OEDCR
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To compensate for benefit spillovers
Design:
Open-ended matching transfers with matching rate consistent with spillout of benefits. practices: RSA grant for teaching hospitals. to avoid: Closed-ended matching transfers.
Better
Practices
Anwar Shah, OEDCR
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Regional stabilization
Design:
Capital grants provided maintenance possible. practices: Limit use of capital grants and encourage private sector participation by providing political and policy risk guarantee. to avoid: Stabilization grants with no future upkeep requirements.
Better
Practices
Anwar Shah, OEDCR
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Capital grants
Special issues in the use of capital transfers to finance infrastructure investments. Merits:
Finance large infrastructure projects Visible No long-term commitment by donors Capital bias Fungibility Distort local priorities Undermine local autonomy
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Demerits:
Anwar Shah, OEDCR
Improving capital grants
Limit their use Require maintenance plan and user charge policy Matching rate inversely related to fiscal capacity Selection of recipients based on need and capacity factors and project evaluation Technical assistance Monitoring, inspections, audit, and evaluations Require survey of condition of existing network for assessment of future needs
Anwar Shah, OEDCR
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To reduce regional fiscal disparities
Design:
General non-matching fiscal capacity equalization transfers. practices: Fiscal equalization programs of Australia, Canada, and Germany. to avoid: General revenue sharing with multiple factors.
Better
Practices
Anwar Shah, OEDCR
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Fiscal equalization transfers
REGIONAL FISCAL INEQUITY AND NATIONAL FISCAL INEFFICIENCY ARGUMENT
DIFFERENCES IN NET FISCAL BENEFITS ACROSS STATES (NFBS) Reasons: a. Differences in access to source-based taxes such as resource revenues and CIT. b. Per capita incomes differs differential access to PIT and sales tax.
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c. Fiscal needs different: Proportion of old, young, incidence of disease, terrain factors, etc. Total Income = Private Income + NFBs Individuals with identical incomes in two states: Rich Poor
Private income Tax paid Per capita exp. NFB Total income 10,000 5,000 10,000 5,000 15,000 10,000 5,000 5,000 0 10,000
Fiscally induced migration to RICH state. Inefficient and inequitable resource allocation.
Anwar Shah, OEDCR 27
Grants rationale
Solution: Fiscal equalization transfers to eliminate NFBs Allow replication of financial structure of an unitary state while having decentralized decision making. Equity and efficiency considerations coincide. Design of FETs: Must be inframarginal, i.e., no incentive to change fiscal effort to exploit the system.
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