Decentralization in LAC

1. Decentralization in LAC Overview of operations and lessons from experience Kathrin A. Plangemann May 8, 2006 With inputs from LCSPS: F. Rojas, J. Frank, M. Mercado-Diaz, M. Junowicz

2. Decentralization in Latin America and the Caribbean • Decentralization, Deconcentration and Devolution • LAC one of most decentralized regions Subnational expenditures one fourth of total public spending (from > 48% in AR to < 5% in Central America) • Debate on pros and cons and the how to’s still very much open

3. Decentralization in Latin America and the Caribbean • Motivation mainly political based on considerations of democracy, efficiency and service-delivery • Four main stages/Focus areas: • Political/administrative decentralization • Fiscal decentralization framework • Service-delivery focus • Subnational competitiveness (LED/TED)

4. Bank Support to Decentralization in LAC • Some Examples of Bank Support in LAC: • Adjustment/DPL: • Peru (DECSAL) • Bolivia (PSAC) • Colombia (FIAL) • Mexico (Decentralization SAL) • Investment Loans (SILs) • Provincial Development Programs (AR) • Municipal Development Projects (AR) • Municipal Development (CL) • Subnational Governments Public Sector Modernization (AR) • Investment Loans (TALs): • Governance 21 (AR) • Public Sector Modernization (HN) • Subnational lending: • Adjustment (AR, MX, BR-SWAP) • Investment (BR, AR, CO)

5. Bank Support to Decentralization in LAC • Some Examples of ESW: • Regional Flagships: • Beyond the center • Decentralization in other flagships (e.g. Beyond the city) • IGRs: • Peru • Bolivia • Argentina • Fees for Services: • Chile • Other Analytical Work: • Ecuador • Dominican Republic • Argentina

6. DECSAL (Peru) • Objectives: • Protect fiscal sustainability during Peru's transition to a more decentralized state; • Strengthen institutional management and fiscal capacity at regional and local levels for their progressive assumption of service responsibilities; • Support the creation of a better regulatory and investment environment for upgrading Peru's regional competitiveness. • Key Areas of Action: • Decentralization and Fiscal Sustainability: Tax Policy, Fiscal Transfers Subnational Borrowing and Financial Management. • Institutional Development for Decentralization: Accreditation of subnational governments, Participatory Budgeting; Civil Service Reform. • Competitiveness and Economic Growth:National Competitiveness Plan; Logistic Cost and Infrastructure Development; Investment Climate; Trade Facilitation; Technology Absorption and Innovation; Quality Management

7. Decentralization SAL(MX) • Objectives/Components: • Imposing hard budget constraints on federal resources provided to states and municipalities; • Reducing moral hazard in subnational borrowing; • Increasing the transparency and public accountability of subnational fiscal and financial management and of the overall decentralization process; • Setting up initial pilot mechanisms to enhance efficiency of decentralized expenditures. • Main Impact on decentralization • The 2000 and 2001 federal budgets provided funding for the states with allocations determined by a transparent formula, and with detailed allocations clearly specified in legislation; including federal transfers to states • Transfers to states and municipalities that were at the discretion of the federal executive were eliminated from the federal budget; • Sec. de Hacienda discontinued its policy of accepting mandatos to collateralize subnational debt with revenue-sharing transfers; • Twenty-five of Mexico's 32 states, and seven municipalities, have had creditworthiness assessments published by credit rating agencies, and more are currently in the process of doing so; • Sec. de Hacienda developed a plan jointly with subnational entities to improve their accounting, auditing, budgeting, revenue and debt management and reporting procedures.

8. Municipal Development (CL) • Objectives: • Developing innovative methodologies and strategies in local accountability, especially in the development and implementation of management information systems and budget and asset management; • Contributing to a permanent system of training and technical assistance to the municipalities, incorporating diverse institutional actors, including the regional governments; and • Strengthening and improving local management, especially in terms of finances, human resources and municipal services, as well as harmonizing and equalizing local management capabilities with respect to the legal and institutional reforms being pursued by the central government. • Components: • National Institutional Strengthening: Design and implementationof the National Municipal Information System (SINIM) and a Municipal Budgeting System (GPM); the streamlining of social programs at the municipal level; the dissemination of best practices and lessons learned; as well as a project monitoring and evaluation system. • Municipal Strengthening: Basic Module: (i) Community Development Plan, (ii) Municipal Strategic Plan, (iii) Organizational Development and Human Resource Management, and (iii) Municipal Management Information System; Complementary Module: (i) streamlining of business procedures, (ii) improving customer service, (iii) cadastre systems; (iv) social development and protection of vulnerable groups, and (v) development of local economies. Flexible Module: ( i) innovative sub-projects, and (ii) municipal associations.

9. II Provincial Development Program (AR) • Objectives: • Assist the provinces in implementing appropriate financial management reforms to: • generate current account surpluses (own-revenue enhancement and expenditure control) that together with prudent borrowing may finance investment programs; and • strengthen their capacity to plan, program, finance, execute, and monitor investment programs that are economically efficient, financially sustainable, institutionally manageable, and environmentally sound. • Provide financing for institutional development and physical investments that will promote provincial economic development. • Components: • Institutional development: tax administration, cadastre, financial management, and human resources reforms. • Physical investments: Service delivery improvements: maintenance and rehabilitation of existing works, completion of unfinished works, and the construction of new public infrastructure and facilities (education, health, and roads, drainage, water supply, and other services.

10. II Municipal Development Project (AR) • Objectives: • Mobilize external and internal resources in a non-deficit, non-inflationary way to finance municipal investments—particularly those contributing to productive activities; • Strengthen municipalities’ capacity to plan, finance, and execute cost-effective capital investment programs, thus assisting them to develop the capacity to eventually finance their investment needs through the private capital markets; • Strengthen the institutional capacity of municipalities and provinces to manage their resources more effectively and to increase the efficiency of their systems for delivery of services. • Components: • Municipal Infrastructure: Construction and rehabilitation of public infrastructure (e.g., road paving and related works, public lighting and sanitation), community facilities (e.g., markets, and bus terminals), and equipment for other municipal services (e.g., for road maintenance, refuse collection and disposal). • Institutional Strengthening: financial management, information systems, accounting procedures, cadastres, maintenance procedures, and analyses to identify key policy issues and make recommendations for improving the assignment of revenues and responsibilities between the provincial and municipal levels of government, Municipalities of the Third Millennium (M3M) pilot program.

11. Subnational Governments Public Sector Modernization (AR) • Objectives: • Support the integrated development and adoption of basic management tools that are conducive to the efficient and transparent management of provincial and municipal resources; • Strengthen provincial governments in such key areas as those related to land tax and tax administration, human resources management, judicial services, civil registries, control entities, and public safety functions; • Support the strengthening of municipal governments through activities designed to demonstrate the benefits of integrated modernization efforts • Components: • Basic Module: Provincial Management Tools (cadastre systems, property registries, tax administration systems, financial administration systems, HRM systems and public safety) and Municipal Management tools. • Advanced Module: Provincial Strengthening (e-procurement, judicial modernization, advanced HRM, control and auditing agencies, civil registries) and Municipal Management Tools (municipal budgeting, capital investment planning, project evaluation)

12. Basic Municipal Services (AR) • Objectives: • Improve the coverage, quality and efficiency of water supply and sanitation services in participating municipalities; • Enhance access to urban drainage infrastructure in participating municipalities; • Increase access to paved roads and reduce logistics costs through investments in the pavement of urban and productive roads; and • Improve the operational and commercial performance of municipal basic services through demand-driven technical assistance for medium-term investment planning, subproject preparation, technical supervision, operations and maintenance and improved commercial management. • Components: • Municipal Infrastructure: BasicWater and Sanitation, Urban Drainage and Small Retention Works and, Urban and Productive Roads. • Institutional Strengthening of Municipalities and Service Providers: Demand-Driven Instruments including: Capacity building for the technical, economic, financial, social and environmental preparation and assessment of subprojects, multi-year strategic investment planning and budgeting, updating and improving cadastre of users, improvements in billing, collection and commercial management, technical exchanges, twinning and outreach activities, information, communications and education campaigns in key service sectors, poverty targeting and monitoring mechanisms as part of investment planning, preparation of territorial sector development and urban development plans and, business and operational planning for service providers.

13. Governance 21 (AR) • Objectives/Components: • Strengthen Management Capacity for Territorial Economic Development: Knowledge building, territorial planning, administrative simplification and territorial investment program coordination. • Expected results: • The government has broadened its knowledge on territorial economic development, identifying the main territorial constraints; • Subnational governments execute their budget in accordance with objectives and priorities defined through consultative and participatory strategic planning processes; • Subnational government have reduced barriers to investment imposed by administrative procedures; • Territorial programs within the Ministry’s Economic Policy Secretariat have been reoriented to respond more effectively to subnational and private sector demands. • Strengthening Results-oriented Public Investment: Institutional Strengthening of the National Directorate for Public Investment; Subnational Public Investment Systems; transparency and accountability of public investment. • Strengthening Results-oriented Financial Management: Technological Upgrade and expansion of Financial Management Information Systems, Institutional Strengthening of the National Public Administration for Results-oriented Budgeting and Management, Strengthening Financial Management Capacities and the Transparency of Public Expenditure Management, Outreach. • Project and Change Management: Change Management, Transparency and Participation, Institutional Strengthening of selected processes.

14. Bank’s Support to Subnational Governments in Argentina Objective Objective : Improve public expenditure : Improve public expenditure management and service delivery for growth management and service delivery for growth Subnational Subnational Government Governance 21 Governance 21 Basic Municipal Services Basic Municipal Services Modernization Modernization Key Areas Key Areas KeyAreas • • Strategic planning Strategic planning • • Water and Sanitation Services Water and Sanitation Services • • Cadastre Systems Cadastre Systems • • Administrative simplification Administrative simplification • • Urban Drainage. Urban Drainage. Supervision: Joint missions, Joint ISR. Supervision: Joint missions, Joint ISR. Preparation: Joint missions, Joint PCN, meetings. Preparation: Joint missions, Joint PCN, meetings. • • Property Registries Property Registries • • Intergovernmental program Intergovernmental program • • Urban Transport Urban Transport • • Tax Administration Systems TaxAdministrationSystems coordination coordination • • Municipal institutional Municipal institutional • • HumanResourceManagement Human Resource Management • • Public Investment Public Investment development development • • Financial Administration Financial Administration Strengthening Strengthening • • Financial Administration Financial Administration Systems Systems • • Public Safety Pilot Public Safety Pilot Ministerial Coordination: Coordination Committee Ministerial Coordination: Coordination Committee Bank Coordination: Steering Committee Bank Coordination: Steering Committee

15. Overall trends in LAC • Need for decentralization reforms high – and demands for support continue to be strong. • Decentralization often part of a broader PS reform, stand-alone operations on fiscal decentralization rare. • Increasing focus on complementary areas of support to subnational governments: • from a public sector reform, and • private sector development perspective. • Cross-cutting issues of particular importance in LAC include: • Role of the Social Funds (Central America, PE, BO etc.). • Citizens Participation (BR, PE, AR, CO, Central America). • Inequality debate/Lagging regions (BR, AR, CL) • Role of Champions – alliances of reform. • Greater need to focus on demand-side and supply-side incentives.

16. Starting a decentralization operation: Key design questions • Role of the Bank towards Decentralization: • Neutrality: Supporting the demands of government, bringing in international experience and in some cases, damage control. • Honest Broker: Balancing opposed interests in the country at the vertical and horizontal levels and helping focus the dialogue on key technical questions, often of a more long-term nature. • Selection of a Counterpart: • Opposing legal mandates and decentralization objectives of the Ministries of Finance, sectoral ministries, Primer Minister’s Offices, Planning Ministries, State Modernization Commissions and Decentralization Councils. • In most cases, MOF counterpart as guardian of fiscal discipline, particular in operations with focus on fiscal decentralization. • Increasingly work directly or indirectly with subnational governments.

17. Fiscal decentralization in LAC • Principles and practice • Principles generally well-defined (e.g. BR, CO, PE Fiscal Responsibility Laws – however, also AR). • Implementation lagging behind. • Need to combine ex ante rules with ex post rules, e.g. on subnational debt to enhance credibility (market incentives accompanied with administrative control). • Fiscal neutrality of decentralization myth. • Important to create stronger partnerships around need to create fiscal sustainability of decentralization framework.

18. Key pillars of fiscal decentralization Fiscal decentralization framework: • Revenue management: • Changes in legal framework difficult given limited political will (e.g. introduction of new taxes, changes in tax base/rate, some work on revenue-sharing arrangements). • Institutional strengthening of tax administration at central and subnational levels (AR, GT, EC, BO). • Expenditure management: • Changes in legal framework at outset of decentralization process sometimes possible, particularly regarding new responsibilities for subnational governments. • Sectoral design and sequencing (big bang vs. gradualism). • Clear intergovernmental functional assignment of responsibilities. • Intergovernmental transfers: • Political demand for changes often low (e.g. AR). • Matching grants • Block transfers to municipalities as % of GDP – independent of capacity, sectoral responsibilities. • Subnational debt: • Put on agenda (Peru –study on municipal debt).

19. Demand-driven packaging of fiscal decentralization support • Fiscal decentralization and complementary areas of institutional support/entry points: • Fundamental importance of combining fiscal decentralization with institutional reform – e.g. Peru DECSAL itself, plus the accompanying TAL. • Given the limited will to reform the fiscal decentralization framework, instead of looking at ex ante allocation of expenditure, focus on ex post quality of expenditure. • Rather than addressing who gets what portion out of total public sector spending, such proposals emphasize transparency and co-financing -between levels of government and between the private and the public sector - as well as incentives for demand-driven intergovernmental program coordination. • Focus areas at central and subnational levels: • Public investment strengthening • Financial management and broader PEM • Civil service reform • Anti-corruption • Greater move to sectoral decentralization and sector-specific Bank products

20. Linkages with subnational competitiveness • Subnational competitiveness and LED/TED: • Motivation for decentralization/decentralization reform is and increasing focus on competitiveness, at the national and subnational level • Projects bringing together fiscal decentralization and competitiveness aspects (e.g. Peru DECSAL) • Particular focus on subnational competitiveness questions (e.g. CL, AR) • Intergovernmental cooperation • Intergovernmental investment program coordination (e.g. CL) • PSD at the subnational level (administrative simplification, strategic planning, productive development, PPPs) e.g. AR

21. Moving forward • From a focus on whether to decentralize, to a focus on how to • From a focus from fiscal decentralization to complementary action in public sector strengthening and PSD • Complementing Bank support with public-sector focused interventions to those focused at helping develop subnational competitiveness • Priorization and sequencing of reform, selectivity of interventions • Greater emphasis on analysis of political economy of reform, partnerships with stakeholders, change management • Increasing shift to design of sectoral decentralization • More emphasis on M&E at central and subnational level (e.g. CO, AR) and measuring overall impact of decentralization • Direct assistance to subnational governments, both at regional and municipal level (with or without guarantee) • Greater need for prior or accompanying analytical work • Need for greater cross-sectoral collaboration

22. Thank You!Questions?kplangemann@worldbank.org Extension: 30301