Local Governments in ChileLeonardo Letelier S.

Instituto de Asuntos Públicos

Universidad de Chile

Measurements of FD

1. Expenditures (revenues) being made (being collected) by sub national governments.

a. IMF (GFS)

b. OECD

c. Other Sources

2. Range of functions being performed by sub national governments.

a. OECD

b. Other Sources

Unitarios Federales

RR EE EDUC SALUD VIV. SS & B RR EE EDUC SALUD VIV. SS & B

Industrializados 18,1 27,6 41,2 32,9 69,5 18,2 30,6 42,9 88,5 53,1 64,9 28,5

Latinoamericanos 9,1 15,1 25,8 27,2 30,4 5,1 31,2 45,1 78,4 81,9 62,1 8,7

Europa del Este (1) 19,8 24,5 54,9 35,6 78,1 6,4 37,1 39,4 87,6 87,6 93,3 10,1

Asiáticos (2) 6,8 11,6 12,3 9,6 14,8 4,1 43,2 61,9 82,0 86,7 72,3 93,6

Africanos 6,3 14,8 16,3 14,8 36,3 ND

Chile 7,8 8,5 18,9 2,3 ND ND

Expenditure (Revenue) measurements of FD

• Source: IMF (GFS).

(1) It only includes China as a Federal Country. (2) It includes India and China as federal countries.

How much more decentralized should be ?

Taking a sample of 64 countries, Letelier (2005) concludes that:

1. The model explains between 92-97% of FD. Chile should have about 12% of its general government’s expenditures being made by sub national governments.

2. Since Chile has only 8.7 %, it follows that more decentralization is needed. More specifically, at least 3.3% more of the general government’s expenditures should be decentralized. That means between US$ (Mill) 450-500 more should be in the hands of regions and municipalities.

3. But even if we control by a wide range of observable variables, between 2 and 7% of the variance in FD is not explained by a well defined set of variables. So that on top of the above mentioned resources, the central government has an important leeway in proposing new decentralizing initiatives.

Government’s decentralized funds in Chile

REGIONCENTRAL

GOVERNMENT MUNICIPALITY BENEFICIARIES

FCM

School level Education and Primary Health

Investment

Social Programs

Investment

School level Education

Decentralized Public Funds

(Mill. of 2002 US$ dollars) 1999 2000 2001 2002 2003

I) Net of Grants Municipal revenues. 1,252.1 1,269.3 1,287.8 1,338.8 N. A.

Operation Revenues 52.5 56.3 57.4 60.7 N. A.

Tax Revenues 929.1 957.1 1,005.7 1,049.5 N. A.

Other Revenues 270.5 256.0 224.8 228.6 N. A.

II) Grants. 2,719.3 2,915.7 3,097.3 3,459.6 3,635.3

Delegated functions 1,669.4 1,804.7 1,904.8 2,174.3 2,268.5

Social Aid and Local development 479.0 489.8 503.2 513.2 509.4

Decentralized Public Investment Funds 570.9 621.2 689.3 772.1 857.4

III) Total Decentralized Funds (TDF: I+II) 3,971.4 4,185.0 4,385.1 4,798.4 N.A.

% of Grants on TDFs 68.5 69.7 70.6 72.1 N.A

% of TDFs on the General Government’s rev. 29.0 27.8 28.1 30.6 N.A

% of Municipal rev. on the General Government’s rev. 9.1 8.3 8.2 8.4 N.A

Decentralized Public Investment Funds Primary Distributive Criteria

Primary Distribution

National Fund of Regional Development and Provisions (FNRD)

Allocation made by the Undersecretary of Regional Development:

90% is assigned on the basis of a set of socioeconomic and territorial indicators. 10% covers emergency situations and it stimulates the efficiency in the use of the assigned regional budget.

Specific Sector Regionally Allocated Investment (ISAR)

It is defined by the donor ministry.

Locally Allocated Regional Investment (IRAL) It is defined by the donor ministry.

Programmatic Agreements It is defined by the donor ministry.

Regionally Decided Public Investment Funds(Mill. US$ 2002)

1999 2000 2001 2002 2003

FNDR 256.3 249.7 295.6 355.1 449.3

ISAR 139.0 134.0 141.9 150.6 90.4

IRAL 37.8 52.6 53.7 47.0 40.0

Prog. Agreements 137.8 184.9 198.1 219.4 277.8

TOTAL 590.7 621.2 689.3 772.1 857.4

Share of National Public Investment 36.9 44.4 46.3 47.3 50.2

Sub national governments´ autonomy on the allocation of investment grants.

• The only unconditional fund is the FNDR which represents 52.5% (2003) of all decentralized investment funds.

2. However, in 2003 almost 55% of the same fund was made in the form of “provisions”, which in practice impose a conditionality on the type of investment being made. Thefore, no more than 28% of all decentralized public investment funds is genuily unconditional.

Common Municipal Fund(Mill. of US$ 2002)

FCM Share of FCM on Mun. Exp.

1999 392 31.8

2000 394 30.4

2001 445 34.8

2002 492 37.0

2003 515 36.6 (*)

Figure 3

Municipal contribution to the FCM versus grant

received

Lo BarrenecheaVitacura

Providencia

SantiagoLas Condes

Maipú

La Florida

Puente Alto

0

2

4

6

8

10

12

14

16

18

0 20 40 60 80 100

Contribution to the MCF

MC

F gr

ante

dFigure 4

Share of FCM on Full Municipal Income versus Net of

FCM Municipal Income per Head

Sierra Gorda

SantiagoProvidencia

Vitacura

Camiña

Contulmo

0

20

40

60

80

100

120

0 10 20 30 40 50

Net of MCF Municipal Income per Head in US Dollars

% o

f C

MF

on F

ull

Mu

nici

pal

Inc

ome

Problems of the CMF

1. Since all municipalities are legally committed to contribute. The net effect is that only 58% of the resources being collected by the FCM is strictly redistributed. The remaining 42% is returned to the contributors. (SUBDERE).

2. The CMF assigns some weight (10%) to management performance and catastrophic events. Although this appears to be an important source of revenues for some small municipalities, it is a clear deviation from the general aim of targeting redistribution.

Delegated Functions(Mill. 2002 US$ dollars)

1999 2000 2001 2002 2003

School level Education (SLE) 1,494.0 1,623.0 1,706.3 1,957.8 2,022.6

Subvention to Municipal Schools 815.7 880.0 929.3 980.0 1,071.5

Subvention to Publicly supported Private Schools 499.3 558.2 578.9 701.8 691.6

Special School Programs 179.0 184.8 198.1 276.0 259.6

Primary Health Centers (PHC) 175.4 181.7 198.5 216.5 245.9

TOTAL 1,669.4 1,804.7 1,904.8 2,174.3 2,268.5

Share of SLE on the General Government’s expenditures on Education. 70.5 70.1 70.1 71.9 71.7

Share of PHC on the General Government’s expenditures on Health. 11.2 10.7 10.8 12.4 14.1

Social Programs allocated by the CAS-II Card (Mill. of US$ 2002)

1999 2000 2001 2002 2003

Social Subsidies 475.8 485.1 495.9 506.0 500.2

PASIS 249.2 242.3 241.7 240.9 235.3

Family Subsidies 62.7 63.5 61.4 63.2 61.3

Unemployment Subsidy 2.4 2.3 2.5 2.0 1.8

Drinkable Water Subsidy 26.0 31.0 34.0 34.0 35.0

JUNJI 19.8 21.8 25.2 27.6 26.8

JUNAEB 115.8 124.2 131.1 138.3 139.8

Productive Promotion 3.2 4.7 7.3 7.2 9.2

PRODESAL 3.3 3.3 3.8 4.5 5.6

PROFIM 1.4 3.5 2.7 3.6

TOTAL 479.0 489.8 503.2 513.2 509.4

Proposals

• Basic Assumptions:

1. Chile might improve the allocation of public funds by having a more decentralized general governemnt.

2. If we agree on point 1, it should be recognized that not all regions or all municipalities are the same as far as management capacities are concerned.

What might be done

1. Let municipalities borrow. Chilean municipalities do borrow in practice: leasing and payment postponement. Interesting point: the british law on LGs establishes limits to the leasing contracts.

a. American-Canadian approach.b. Western European approach.

Basic Challanage: Most important problem: Municipalities should have a collateral. This requires well defined property rights over local governments´ assets and more autonomy in the definition of local taxes

(property tax)

2. A higher share of unconditioned Decentralized Investment Funds.

3. A redesign of the CMF:

a. A contribution by the Central Government.b. Definition of an equalization criteria to redistribute municipal resources.

Ej: It might be defined a % of equalization between municipalities. Various unitary countries have this.

US$ 2002 (Mill.) % Mun. Resources

Promedio / Hab

90% of the average 215 16.0

80% of the average 159 11.8

70% of the average 110 8.2

Resources needed to acheive a % of the average municipal income per head without the CMF. (Estimations for 2002)

Conclusions

1. Chile is a relativelly centralised country by international standards.

2. If we compare the Chilean case with other countries with a similar set of characteristics, we conclude that roughly between US$ (Mill.) 450 and 500 more should be transferred from the central government to sub national governments every year.

3. Initiatives for farther decentralization should be based on two premises; i) Chile is below the optimum degree of decentralization ii) Sub national governments differ between each other in their managerial capacities.

4. Proposals: i) Lift the municipal prohibition to borrow, ii) Rise the share of unconditional investments grants to regions. iii) Define (politically) a socially acceptable level of equalization across municipalities, and then grant municipalities below that level with additional funding from the central government.