world bank - intergovernmental transfers

8/6/2019 World Bank - Intergovernmental Transfers

1/28

Anwar Shah, OEDCR 1

Intergovernmental Transfers

Anwar Shah, World Bank


2/28

Anwar Shah, OEDCR 2

Relevance

Dominant source of subnational

revenues in many countries.

Design matters for efficiency and equity.

Grant design must be consistent with

grant objectives.


3/28

Anwar Shah, OEDCR 3

Importance of transfers

Dominant source of revenue for subnational

governments in some countries:

South Africa 85%

Indonesia 72%Provinces 72%

Local 85%

Nigeria 67% to 95%

Mexico 70% to 90% (poorer states)

Pakistan 82% to 99%

Design of transfers matter for efficiency and equity

and fiscal discipline.


4/28

Anwar Shah, OEDCR 4

Grant types

Non-matching transfers: Selective (conditional)

General (unconditional)

Selective matching transfers Open-ended

Closed-ended

Conceptual impacts General non-matching higher welfare

Selective matching open-ended

higher expend. stimulation


5/28

Anwar Shah, OEDCR 5

Grants in LDCs vs DCs

LDCs

Passing the buck

transfers (Brazil, India,

South African revenue

sharing)

Pork barrel transfers

(Brazil and Pakistan)

Asking for more trouble(deficit grants and

bailouts)

DCs

Conditional transfers

Equalization transfers


6/28

Anwar Shah, OEDCR 6

Criteria for design of transfers

Autonomy

Revenue adequacy

Equity Predictability

Efficiency

Simplicity

Incentive

Safeguard of grantors objectives


7/28

Anwar Shah, OEDCR 7

Economic rationale ofintergovernmental transfers

Objective

To bridge fiscal gap

To reduce regional fiscaldisparities

Setting national minimum

standards

Influencing local priorities

To compensate for benefit

spillover

Regional stabilization

Design

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


8/28

Anwar Shah, OEDCR 8

Transfers: Lessons

Grant design must conform to

objectives.

Main Arguments and Grant Design

Fiscal Gap: Structural imbalance as a

result of a mismatch between revenuemeans and expenditure needs.


9/28

Anwar Shah, OEDCR 9

...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) revenuesharing.

Tax room lacking: Tax abatement and tax

base sharing (Canada and Brazil).


10/28

Anwar Shah, OEDCR 10

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.

Practices to avoid: deficit grants; tax by tax

sharing.


11/28


Special issues in state-localtransfers

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


12/28


Indonesia -- General PurposeTransfers

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


13/28


Setting national minimumstandards

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 post-

secondary education transfers.

Practices to avoid: Conditional transfers with

conditions on spending; ad hoc grants.


14/28


Education grant

Allocation basis: Population aged 5-17

Distribution: Equal per pupil to both public

and private schools

Conditions: Universal access to primary and

secondary education

Penalties: Public censure, reduction of

grants funds

Incentives: Retention of savings


15/28


Health grant

Allocation basis: Weighted population by

age class with higher weights for ages 0-5

and 65+

Distribution: Patient use

Conditions: Minimum standards of services

and access to health care

Penalties: Reduction of grant funds


16/28


Indonesia - Specific PurposeTransfers to Provinces

P1. SDO - Subsidy forAutonomous 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


17/28


Indonesia - Specific PurposeTransfers to Local Governments

L1. SDO - Subsidy forAutonomous Regions

Public sector wages

L2. District/Town Road Improvement Grant

Length of roads

Condition

DensityUnit cost


18/28


...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 review


19/28


Federal financing and healthcare 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.


20/28


Influencing local priorities

Design: Open-ended matching transfers

(with matching rate to vary inversely with

fiscal capacity).

Better practices: Matching transfers for

social assistance in Canada.

Practices to avoid: Ad hoc grants.


21/28


To compensate for benefitspillovers

Design: Open-ended matching transfers with

matching rate consistent with spillout of

benefits.

Better practices: RSA grant for teaching

hospitals.

Practices to avoid: Closed-ended matching

transfers.


22/28


Regional stabilization

Design: Capital grants provided

maintenance possible.

Better practices: Limit use of capital grants

and encourage private sector participation by

providing political and policy risk guarantee.

Practices to avoid: Stabilization grants with

no future upkeep requirements.


23/28


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

Demerits: Capital bias

Fungibility

Distort local priorities

Undermine local autonomy


24/28


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


25/28


To reduce regional fiscaldisparities

Design: General non-matching fiscal

capacity equalization transfers.

Better practices: Fiscal equalization

programs of Australia, Canada, and

Germany.

Practices to avoid: General revenue

sharing with multiple factors.


26/28


Fiscal equalization transfers

REGIONALFISCALINEQUITY AND

NATIONALFISCALINEFFICIENCY

ARGUMENT

DIFFERENCES IN NET FISCALBENEFITS ACROSS

STATES (NFBS)

Reasons:

a. Differences in access to source-based taxes such asresource revenues and CIT.

b. Per capita incomes differs

differential access to PIT and sales tax.


27/28


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 10,000 10,000

Tax paid 5,000 5,000

Per capita exp. 10,000 5,000NFB 5,000 0

Total income 15,000 10,000

Fiscally induced migration to RICH state.

Inefficient and inequitable resource allocation.


28/28


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 ofFETs:

Must be inframarginal, i.e., no incentive to

change fiscal effort to exploit the system.

world bank - intergovernmental transfers

Documents