Progress on Fiscal Decentralization

1. Progress on Fiscal Decentralization World Bank Presentation to the Sudan Consortium Vivek Srivastava & Bill Battaile Khartoum, March 19 2007

2. Overview • Objective: to present the facts (with a focus on current status of wealth sharing), highlight the major challenges and priorities of the reform agenda, and outline key risks to moving forward • Outline: • Background • Current Facts • Major Challenges • Priority reform areas • Risks

3. Background

4. Objectives of Decentralization • Economic: Need for responsiveness to local level demand - “Allocative Efficiency” • Service provided by the lowest sphere of government capable of efficiently providing these: Principle of Subsidiarity • Political: Support INC/CPA vision of poverty reduction and economic growth and deliver near term peace dividend and sub-national autonomy

5. International good practice • Adequate share of resources transferred from center to sub-national levels to implement assigned responsibilities, given sub-national own-revenue capacities • Equitable (not equal) horizontal share of resources across states and to local governments to ensure service delivery standards • Clear assignments of expenditure and revenue • Simple and transparent allocation criteria, with grants determined by independent body on objective basis • Stable and predictable resource transfers with room for flexibility • Sub-national budget autonomy within national budgetary framework • Credible budgets at all levels with sound fiscal management practices • Incentives for local revenue mobilization and efficiency in performance

6. Sudan’s legal framework for fiscal decentralization • Creation of Federal State, 1992 • Law establishing the National State Support Fund, 1996 • Local Government Act, 2003 • Power and Wealth Sharing Protocols, 2004 • Comprehensive Peace Agreement, 2005 • Interim National Constitution, 2005 • Creation of GOSS, 2005 • State Constitutions (on-going) • Darfur Peace Agreement, 2006 • Eastern Sudan Peace Agreement, 2006 • Decree establishing FFAMC, 2006 • State Local Government Acts (ongoing)

7. The need for grants in Sudan • There are vertical imbalances due to differences between: • The large number or responsibilities and associated costs that have been devolved to the states under the INC; and • The relatively low own revenue potential of states and large revenue sources (oil, income tax) with the federal government. • There are horizontal (inter-state) imbalances due to: • Differing ability to raise own revenues; • Differing needs due to differences in the level of development, population, etc.; and • Differing costs of delivering services due to local conditions.

8. Current Facts

9. Revenue/expenditure assignments • Expenditure responsibility for basic services (primary health, basic education, water) shifted to state and local levels – a large component of pro-poor allocations • Unclear assignments of functional responsibilities between national and state and, more important, between state and local • Mismatch between sub-national revenue and expenditure assignments: Need for grants • Most state governments have not yet enacted new legislation governing local government powers and responsibilities

10. Growing dependence on center for state revenues Share of federal transfers in state revenues

11. GNU getting more money to sub-national level… Total GNU transfers to GOSS and Northern states Source: MOFNE Budget Directorate.

12. …but less than planned 2006: budget reallocations away from Northern transfers

13. Competing institutional arrangements How are the grants determined? • Until 2006 by the MFNE, NSSF • FFAMC established in November 2005 (revised decree in November 2006), started functioning in mid-2006 • Role of FFAMC (defined in CPA, INC and DPA) • To ensure transparency in allocation; • To propose allocation criteria; • To monitor allocations. • NSSF continues to exist and perform its functions as before.

14. Inequalities continue 2006 NSSF transfers to Northern states Source: NSSF 2006 Annual Report and Bank staff estimates.

15. Major Challenges

16. Key challenges include… • Legal framework • Intergovernmental transfer system • Planning, allocating, and monitoring sub-national spending • Fiscal sustainability

17. Challenges I. Inadequate legal framework • State and local government responsibilities and powers not yet properly clarified through legislation. • Institutional arrangements for grant allocation and monitoring to be clarified.

18. Challenges (cont’d) II. Intergovernmental transfer system • Institutional arrangements: The respective roles of the MoFNE, the FFAMC and the NSSF in the intergovernmental fiscal framework need to be better clarified. • Grants in 2007: Differences between recommendation of FFAMC, actual allocations and modality of transfers should reconciled. • Persisting inequity • Composition of transfers • Block vs. earmarked transfers • Low execution on development transfers • Limited decision making authority of states and localities

19. Challenges (cont’d) III. Planning and fiscal management weaknesses • Efficiency - resource planning/use at state level (including federal-state coordination story from state case studies) • Accountability - fiscal management and accountability at both national and sub-national level

20. Challenges (cont’d) IV. GNU fiscal sustainability concerns • 2007 budget promises jump in pro-poor allocations to 6.9 percent of GDP, mostly through higher transfers to Northern states • Historical execution problems and overall fiscal deterioration underscore uncertainties

21. Priority Reform Areas

22. Priority areas for reform • Fill gaps in the legal framework and clarify institutional responsibility for determination of the vertical pool and the horizontal allocations • Make intergovernmental transfers more transparent, predictable, efficient and equitable • Build state and local capacity for: • Increasing state’s own-revenue and • Build capacity for sub-national financial management, including consistent functional reporting • Improve planning and monitoring of decentralized spending (particularly development) - federal/state/locality coordination in context of NSP and PRSP • Focus on improving service delivery

23. Risks • Political commitment to follow through (e.g., to clarify legal framework for localities, to clarify FFAMC vs. NSSF, etc.) • Not having independent and objective criteria for allocation to states • Low capacity at sub-national level to handle the major increases in resources and deliver services