Sponsoring a Race to the Top: The Case for Results-Based Intergovernmental Finance

Anwar Shah, World Bankashah@worldbank.org

Ministry of Finance, Copenhagen, Denmark, September 17, 2009

Outline

• The state of the intergovernmental finance• Taxonomy of Grants: Are unconditional grants

really unconditional? • Introduction to Results Based Intergovernmental

Finance• The Practice: RBIF in Broader Reform• The Practice: RBIF in Education • The Practice: RBIF in Health• The Practice: RBIF in other services • Conclusions

Perceptions on intergovernmental finance are generally negative

• Federal/Central View: Giving money and power to sub-national governments is like giving whiskey and car keys to teenagers.

• Provincial and Local View: We need more grant monies to demonstrate that “money does not buy anything”.

• Citizens: The magical art of passing money from one government to another and seeing it vanish in thin air.

Perceptions about intergovernmental finance: Perspectives of The Australian Premiers’

Conference

Ironically these perceptions are well grounded in reality in both industrial and developing countries

• Primary focus on dividing the pie - devoid of fiscal and political accountability. Two dominant forms:

• Manna from Heaven or Passing the buck transfers – formula based unconditional transfers –mostly revenue sharing using multiple factors that work at cross puposes

• Conditional transfers that are either pork barrel transfers variety ( political bribes/ favors) (Germany, India, Mexico, Pakistan, USA 2008 e.g. $200m “bridge to nowhere” in Alaska ) Or simply command and control transfers – input based conditional transfers (most countries)

• Overall: Intergovernmental finance is an important if not dominant source of revenue but creates perverse incentives for fiscal management and accountability.

Conditional transfers with conditions on spending are unpopular with recipients as they impair recipient’s

autonomy and may also not further grantor’s objectives

In practice even the manna from heaven may not be so sweet after all

• No local input on total pool• No relation to growth in demand for local

services• Tax effort provisions• Differential sharing of various revenues • Requirements for a development plan, technical

planning committee, internal audit requirements – Uganda and Tanzania

• Submission of budget estimates – Kenya and Nepal.

• Equal per jurisdiction component - Brazil

What manna from heaven transfers buy?

Why governments do not deliver?

Mandate

Authorizing Environment

Outputs, reach, outcomes

Operational capacity

Goals of results based IGF

Taxonomy of grants and their impacts

Increase in Spending Results Accountability Local Autonomy/ Welfare

Cond. open-ended matching

High Low/None Low

Cond. Close-ended matching BC

Medium Low/None Low

Cond. Close-ended

Matching NBC

Low Low/None Medium

Cond. Non-matching

Low Low/None Medium

Cond. Output-based

Low High High

Unconditional Low Low/None High

Traditional conditional grants versus Output-based grants

Criteron Traditional conditional grant

Output-based grant

Objective Spending levels Quality and access to public services

Design Complex Simple and transparent

Eligibility Government Service providers (govt. and beyond government)

Conditions Inputs Outputs

Allocation Project proposal Service population

Compliance Inspections and audits Client feedback.Comparison with base year.

Penalties Audit observations Public censure, voice and exit

Managerial flexibility

None Absolute

LG Autonomy Little High

Transparency Little High

Focus Internal External

Accountability Top down input based Bottom up, results based

Output-based transfers: Results Chain Application in Education

Program objectives Inputs Intermediate inputs

Improve quantity, quality, and access to education services

Educational spending by age, sex, urban/rural; spending by level; teachers, staff, facilities, tools, books

Enrollments, student-teacher ratio, class size

Outputs Outcomes Impact Reach

Achievement scores, graduation rates, drop-out rates

Literacy rates, supply of skilled professionals

Informed citizenry, civic engagement, enhanced international competitiveness

Winners and losers from government programs

An example : An Output based ( performance oriented) education grant to set national minimum standards

and encourage competition and innovation and citizen empowerment

• Allocation basis among local governments: school age children (ages 6-17)

• Distribution to providers: equal per pupil to both government and private schools

• Conditions: Universal access to all, private school admissions on merit regardless of parents’ income, improvements in school achievement scores, graduation and drop out rates, no condition on spending

• Penalties: public censure, reduction of grant funds• Incentives for cost efficiency: retention of savings• Built-in bottom up results based accountability:

competition with voice and exit options as parental choice of school determines school grant.

Citizens as

Clients

National Government

GovernmentProviders

LocalGovernment

StateGovernment

Long Route to Accountability Inputs Control Grants

Citizens as

governors

National Government

Competitive Provision

LocalGovernment

StateGovernment

Govt Non Govt

Short Route to AccountabilityOutput-Based Grants

Is there a case for results based IG finance in industrial countries?

• Politicians and bureaucrats with high ethical standards and strong culture of citizen based accountability

• But competition may improve performance Examples: school finance in USA – Metro DC government and non-government spending. Two contrasting models of school finance – USA vs Canada

The Practice of Results Based

Intergovernmental Finance

RBIF for Furthering Broader Reform Objectives

• Australia National Partnership Payments, 2009 – to create internal common market and to improve service delivery

• Performance Reserve Fund of the EU – 4% to achieve public administration reforms

• Russia Regional Fiscal Reform Fund – 2007• Uganda – Local Development Fund – improving

development planning and implementation capacity

RBIF to finance merit goods

RBIF of education

• Australia. National school Specific Purpose Payments, 2009. Raising year 12 attainment rate to 90%

• USA. Race to the Top Competitive Grant Program, 2009. Internationally benchmarked K-12 standards.

• USA. No Child Left Behind Act of 2001• Higher Education Finance in Canada, Denmark,

Finland, Netherlands, South Carolina, USA• School finance in Brazil, Chile and Indonesia

(now defunct).

USA – Race to the Top, 2009

• Raising internationally benchmarked standards

• Closing the data gap on achievement scores

• Improving the quality of teachers

• Turning around low performing schools

USA – NO CHILD LEFT BEHIND 2000 -

• Student testing in reading , math and science• Monitor yearly progress towards the goal of

proficiency by 2014• Equity in access regardless of race, color and

ethnicity• All schools brought to minimum average

standards• Higher financing for high poverty school districts• Special grants for “good school finance” states

(equitable allocation and improvement in access to the poor)

RBIF of Healthcare

• Canada. Canadian Health Transfer Program (CHT)

• Brazil. Unified Health System (SUS)

Anwar Shah, World Bank

Federal financing of health care and Social Services in Canada – Canada Health Transfer

(CHT) and Social Services Transfer (CST)

Equal Per capita cash transfers (plus transfer of tax points - for health and social services and post secondary education in 1977,13.5% points of PIT and 1% point of CIT)

Conditions for health care transfer (CHT): (1) Universality (2) Portability (3) Public insurance but public/private provision (4) Opting in and out (5) No extra billingConditions for CST: All Canadians treated alike for welfare

programs.Penalties:Threat of discontinuation for breach of the conditions (1)- (4)

above.Dollar for dollar reduction for breach of the condition (5).Sunset clause: Parliamentary review every 5 years.

Anwar Shah, World Bank

Anwar Shah, World Bank

Indonesia - Specific Purpose Transfers to Local Governments (now defunct)

L2. District/Town Road Improvement GrantLength of roadsConditionDensityUnit cost

L3. Primary School GrantSchool age children (ages 7-12)Needs for facilities

From Dividing the Pie to Creating An Enabling Environment for Responsive

and Accountable State-Local Governance• Tax Decentralization and Tax Base

Sharing

• Output based fiscal transfers – operating– capital

• Fiscal capacity equalization transfers

• Responsible borrowing

Conclusion

• RBIF empowers citizens as governors

• Weakens opportunism and pork barrel politics

• Exposes corruption, inefficiency and waste

• Opens public sector to competitive pressures within and beyond

• An important direction of reform for both industrial and developing countries.

References

• Boadway , Robin and Anwar Shah, editors (2007). Intergovernmental Fiscal Transfers: Principles and Practice. Washington, DC: World Bank

• Boadway, Robin and Anwar Shah ( 2009), Fiscal Federalism. London and New York : Cambridge University Press.