Poverty Reduction Strategies in Decentralized Contexts: Comparative Lessons in Local Planning and Fiscal Dimensions

Transcription

1 Poverty Reduction Strategies in Decentralized Contexts: Comparative Lessons in Local Planning and Fiscal Dimensions June 2004

2 A Draft Source Book A Synthesis of Four Reports commissioned under a research program funded by a World Bank-Netherlands Partnership Program (BNPP) Trust Fund World Bank Task Team: Tamar Manuelyan Atinc, Sector Manager Stephen Ndegwa, co-task Manager Robert Taliercio, co-task Manager Tilla Sewe MacAntony, Consultant Taranaki Mailei, ACS The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s); they do not necessarily represent the views of the World Bank Group, its Executive Directors, or the countries they represent and should not be attributed to them.

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4 Abbreviations AIP Annual Investment Plans APBD Regional Budget ASEAN Association of Southeast Asian Nations BCW Budget Consultative Workshop BFP Budget Framework Paper CALABARZON Cavite, Laguna, Batangas, Rizal and Quezon CAR Cordillera Autonomous Region CBG Capacity Building Grant CDF Comprehensive Development Framework CDIP City Development Investment Program CDP City Development Plan CHD Center for Health Development CI Congressional Initiatives CIDSS Comprehensive and Integrated Delivery of Social Services CLUPs Comprehensive Land Use Plans CSO Civil Society Organization DAK Special Allocation Fund DAU General Allocation Fund DBCC Development Budget Coordination Committee DBM Department of Budget and Management DDP District Development Plan DILG Department of Interior and Local Government DIP Central Government Deconcentrated Development Expenditure DS Decentralization Secretariat DSC District Service Commission DSWD Department of Social Welfare and Development DTB Development Transfer Budget DTS Development Transfer System EFMP Economic and Financial Management Project FAPs Foreign Assisted Projects FDS Fiscal Decentralization Strategy FY Financial Year GAA General Appropriations Act GBHN National Policy Guidelines

5 GoU Government of Uganda HIPC Highly Indebted Poor Countries HIV/AIDS Human Immuno-deficiency Virus/Acquired Immune Deficiency Syndrome HPIC Highly Indebted Poor Countries HUCs Highly Urbanized Cities ICC Investment Coordination Committee ICC Investment Coordination Committee IDA International Development Agency IGG Inspector General of Government IHPS Integrated Health Planning System ILHZ Integrated Local Health Zones INPRES Presidential Instruction IPRSP Interim Poverty Reduction Strategy Paper JOSIE Barangay Joint Organization and Systems in the Improvement of the Economy in the Barangay JOSIE Joint Organization and Systems in the Improvement of Education KALAHI Kapit-Bisig Laban sa Kahirapan KEPPRES Presidential Decree KRAs Key Result Areas LCE Local Chief Executive LCs Local Councils LDC Local Development Council LDG Local Development Grant LFC Local Finance Committee LFPs Locally-Funded Projects LGA Local Government Act LGBC Local Government Budgets Committee LGBFP Local Government Budget Framework Paper LGC Local Government Code LGDP Local Government Development Program LGFC Local Government Finance Commission LGUs Local Government Units M&E Monitoring and Evaluation MBN Minimum Basic Needs MFPED Ministry of Finance, Planning and Economic Development MoHa Ministry of Home Affairs MoLG Ministry of Local Government MPR Consultative Assembly MPU Municipal Planning Units

6 MTEF Medium-Term Expenditure Framework MTPDP Medium-Term Philippine Development Plan MTPIP Medium-Term Public Investment Program MUSBANGDES Village Development Meeting MUSBANGDUS Sub-Village Development Meeting MWLE Ministry of Water, Lands and Environment NAPC National Anti-Poverty Commission NEDA National Economic and Development Authority NGAs National Government Agencies NGOs Non-Governmental Organizations NKCG National KALAHI Convergence Group NLGPA National Local Government Performance Assessments NPFP National Physical Framework Plan NROs NEDA Regional Offices OAG Office of the Auditor General ODA Official Development Assistance OOB Outcome Oriented Budgeting OPIF Organizational Performance Indicators Framework PAF Poverty Action Fund PAPs Programs, Projects and Activities PCLUP Provincial Comprehensive Land Use Plan PCs Planning Committees PDIP Provincial Development Investment Program (or CDIP) PDP Provincial Development Plan (or CDP) PEAP Poverty Eradication Action Plan PEM Public Expenditure Management PEMS Public Expenditure Management System PEPFMR Public Expenditure Procurement and Financial Management PMES Poverty Monitoring and Evaluation Survey PMS Performance Management System PMU Project Monitoring Unit POLDA Basic Policies of Regional Development POs Private Organizations PPA Participatory Poverty Assessment PPB Planning, Programming, Budgeting PPDO Provincial Planning Development Office PPFP Provincial Physical Framework Plan PROPEDA Regional Development Program PROPENAS National Five-Year Development Program PRS Poverty Reduction Strategies

7 PRSC Poverty Reduction Support Credit PRSP Poverty Reduction Strategy Paper PSR Poverty Status Report RAKORBANG Development Coordination Meeting RAPDB Regional Annual Budget Proposal RBAS Regional Budget Allocation Scheme RCs Resistance Councils RDC Resident District Commissioner RDCs Regional Development Councils. RDIPs Regional Development Investment Programs RDPs Regional Development Plans RDPs Regional Development Plans RENSTRA Strategic Plan of Central Government Agencies REPELITA National Five-Year Development Plan REPETA Annual Development Plan REPETADA Regional Annual Development Plan RHUs Regional Health Units RKCG Regional KALAHI Convergence Group RMDC Regional Management Development Conferences RPFPs Regional Physical Framework Plans RPMES Regional Project Monitoring and Evaluation System RTB Recurrent Transfer Budget RTS Recurrent Transfer System SBL Sector Budget Line SDG Sector Development Grant SEER Sectoral Efficiency and Effectiveness Review SEF Special Education Fund SONA State of the Nation Address SRB Sector Recurrent Budget SWAps Sector-wide Approaches SWGs Sector Working Groups TPC Technical Planning Committee UDHS Uganda Demographic and Health Survey UNCDF United Nations Capital Development Fund UNDP United Nations Development Program UNHS Uganda National Household Survey UPE Universal Primary Education UPPAP Uganda Participatory Poverty Assessment Project

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9 Contents Poverty Reduction Strategies in Decentralized Contexts: Comparative Lessons in Local Planning and Fiscal Dimensions...i Abbreviations...iv Contents...ix Chapter 1: Introduction... 1 Decentralization Lessons from the case-studies... 3 Conclusion... 4 Chapter 2: Literature Review and Comparative Practices from Developed Economies... 6 Introduction... 6 A Brief on Decentralization... 7 Presumed Benefits of Decentralization... 8 Accountability Technical / cost efficiency Service Delivery Needs of the poor... 9 Emerging Lessons on Planning in Decentralized Settings (1) Complexity and Conflict (2) Coordination of Multiple Institutions and Actors (3) General Principles for Effectiveness (4) An Integrated Conceptual Approach: Institutional Pluralism (1) Coordination Through Incentives, Norms and Regulation (2) Representation of National Interests (3) Coordination, Consultation and Collaboration Developed Planning Systems: Comparative Experiences The European Planning Experience Divergent and Shifting Models Coercion versus Cooperation in Planning Coordination (1) Florida as a coercive model (2) New Zealand and the Cooperative Approach Constraints and Dilemmas Conditions for Relative Efficacy Linkage Between National and Subnational Budgets Budget Management (1) Fiscal Discipline: Revenue Responsibility and Hard Budget Constraints (2) Budgetary Institutions, Procedures and Rules (3) Technical Capacity... 23

10 (4) Fiscal Structure (5) Monitoring and Evaluation (6) Accountability Requires Balanced Local Discretion (7) The Appropriate Range of Central Control (8) Control Based on Performance Instruments for coordination (1) Critical Role of Transfers (2) Intergovernmental Revenue Assignment and Transfers (3) Shared Revenues (4) Local Revenue Instruments (5) Equalizing Transfers (6) Minimum / Priority and Efficiency Transfers Conclusions Chapter 3: Philippines Local Planning and Fiscal Dimensions Decentralization Experience The Processes Used to Integrate Planning and Budgeting Lessons from the Philippines Experience Conclusion Chapter 4: Indonesia Local Planning and Fiscal Dimensions Under Rapid Decentralization Reform Decentralization Experience The Processes Used to Integrate Planning and Budgeting Lessons from the Indonesia Experience Conclusion Chapter 5: Uganda Local Planning and Fiscal Dimensions Under a Reformist State The Processes Used to Integrate Planning and Budgeting Lessons from the Uganda Experience Conclusion Chapter 6 - Lessons and Suggested Policy and Institutional Responses Lessons from Case Studies On Planning On Monitoring References... 57

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12 Chapter 1: Introduction The World Bank has completed a comprehensive literature review and country case studies examining the theoretical discussions and on-the-ground practices of planning and budgeting in decentralized contexts in Indonesia, Philippines, and Uganda. As Poverty Reduction Strategy Papers become central planning documents in an increasing number of countries, several of which are decentralized or decentralizing, the integration of local and national planning and budgeting has emerged as an important consideration. This project explored four areas: (1) the linkages in planning processes across levels of government; (2) the relationship between budgeting and planning processes both at the national and local levels; (3) the use of fiscal instruments and policies for aligning national and local development goals; and (4) the monitoring and evaluation practices related to planning and budgeting in the three countries. This source book integrates the literature review and country reports, and highlights common lessons, issues, and gaps in decentralized planning. The draft sourcebook is organized as follows: Chapter 1 is a brief introduction and summary of the main themes from the literature review and key findings from the country reports. It also highlights the overall emerging themes and gaps on decentralized planning and budgeting. Subsequent chapters provide summaries and highlight lessons from the research reports commissioned under the project and which are available as separate annexes to this sourcebook. Chapter 2 covers the literature review and clarifies theoretical propositions and good practices on planning and budgeting concerns within the context of decentralized governance in developed economies. Chapters 3, 4 and 5 summarize key findings and lessons obtained from an examination of the planning and budgeting processes in Indonesia, the Philippines, and Uganda. The implications of these findings for planning and budgeting as well as policy suggestions for decentralized polities are covered in Chapter 6. Based on the lessons from the case studies and main themes in the literature review, this chapter articulates a number of good practices in local planning and supporting fiscal instrumentation, including recommendations from World Bank staff and Bank clients on poverty reduction planning and budgeting in decentralized polities. The final part of the source book is comprised of annexes and a bibliography, as well as suggested resources including publications and websites with good practices in the area of planning and budgeting in decentralization contexts. Decentralization One of the more important public sector reforms adopted by many developing countries in recent years is decentralization, which has the potential to improve the delivery of poverty-related services to the community. Decentralization, however, has

13 given rise to changes in planning and budgeting processes at the national and subnational levels, making it necessary to study how poverty strategies can be better integrated into these processes. The presence of widespread poverty in countries with reasonable rates of economic growth highlights the importance of good governance and public sector reforms in the fight against poverty. Public sector reforms that encourage decentralization, greater citizen participation and administrative efficiency promote good governance principles of accountability, transparency, predictability and continuity and participation (Brillantes and Cuachon 2002). These factors, in turn, are critical in ensuring more effective implementation of poverty reduction programs, particularly those geared towards the poorest communities. The following are the highlights of themes which emerged in the literature reviewed: First, the decentralization process is complex and engenders conflict. It requires significant adjustments in the form of vertical administrative control, development of extensive coordinating and consultative mechanisms, and linkage between managerial and political accountability. Preexisting conditions are important regarding intergovernmental trust, participatory governance institutions and local technical / managerial capacities and must be attended to accordingly. Second, effective decentralization requires an increased role of central and regional governments. New capacities and responsibilities are required to manage multitiered systems and promote the development of local jurisdictions as effective governance institutions. Establishing mechanisms for coordinating the roles of multiple central, regional and local government agencies and actors is critical. This also suggests the need for role clarity, both within and between levels of government. Third, incentives, norms and regulation all have roles in effective coordination. Vertical regulation is necessary to assure adherence to national policy objectives; however, its form in a decentralized context is significantly altered. Appropriate local incentives, conveyed in the structure of the intergovernmental fiscal system and via fiscal inducement, are often critical. Representation of national interests at the local level is important and occurs via deconcentrated administration of national agencies and to a lesser extent through prefect systems. Both formal and informal means of communication and consultation across an array of dimensions is necessary to assure appropriate vertical and horizontal coordination. Fourth, frameworks for coordinating budgetary processes and the establishment of uniform budgetary principles are essential. This requires central leadership in establishing the administrative and legal framework for accounting structures, budget comprehensiveness, budget classifications, auditing and execution reporting. Fifth, fiscal discipline is required for proper expenditure management. Increased local revenue responsibility, hard budget constraints, sound and effective budgetary institutions, procedures and rules, and requisite technical capacity promote it. Critical aspects of technical capacity include personnel management, procurement and data processing. Sixth, monitoring and evaluation of results in a decentralized context is an essential function of accountability. Accountability is itself a function of design. It requires balanced local discretion, with local officials accountable to central and regional institutions, as well as local institutions and 2

14 citizens. This requires limitations on discretion and a simultaneous ability to hold local officials accountable to citizens, markets and superior level jurisdictions for exercising the discretion they command. These themes indicate that there are policy implications in terms of planning and budgeting that need to be considered by those polities considering decentralizing or those that have already decentralized and are embarking on large-scale planning exercises such as the PRSP. Lessons from the Case Studies Both Indonesia and the Philippines have had a long tradition in preparing development plans, though mostly at the national government levels. Prior to decentralization, both countries had highly centralized governments that necessitated planning processes that combined top-down and bottom-up approaches. Both countries, however, pursued two different decentralization tracks considering their political and economic situations. Indonesia adopted the Big Bang approach to decentralization, devolving the services of 11 sectors, in contrast to the more gradual approach of the Philippines, which devolved selected services. Indonesia is still in the infancy stage of implementing decentralization, having started only in 2001, as opposed to the Philippines, which adopted the policy in The difference extends as well to the coverage of the policy, the formula used in allocating fiscal transfers among government units as well as the implementation mechanisms adopted by the two countries during the transition stage. One of the major reform processes associated with PRS is the introduction of participatory poverty planning. While the Philippines is not preparing a PRS, it can be considered a model in espousing participatory planning starting 1986 after the popular people power revolt, which ushered in a drastically different perspective about the government s role in society and encouraged a more open, transparent and participatory form of governance. In the Philippines, plans are usually prepared at the national, regional and local levels, i.e., provincial, city, municipal and village levels. The passage of the Local Government Code of 1991 (henceforth referred to as the Code) affirmed the importance of preparing local level plans as part of the process of decentralization. Development plans in the Philippines usually have two components: policies and strategies section and the programs and projects. The experience during the last three administrations highlights the bureaucratic tendency to introduce new poverty programs with every change in administration rather than building on the successes of poverty programs of previous administrations. As a result, programs are changed even before they can be fully implemented and their effectiveness assessed. The Indonesian government has been pursuing an extensive reform program (reformasi) contained in the Broad Guidelines of State Policy covering the economic, social and political sectors. Poverty reduction has been at the center of the reform process, as shown by several initiatives undertaken by the government: (1) presentation of the Poverty Reduction Strategy for Indonesia (PRSP) during Consultative Group Meeting in 2000; (2) organization of a committee in 2001 to implement a participatory approach for developing a strategy at the same time that poverty reduction secretariat was formed to 3

15 liaise with civil society and local governments; (3) formation of a Cabinet-level Poverty Reduction Committee after the assumption of Megawati Sukarnoputri as President, with BAPPENAS providing the analytical support. By early 2003, an interim PRSP was finalized by the government, containing four principal measures for reducing poverty: (1) creating opportunity; (2) community empowerment; (3) capacity building; and (4) social protection. The preparation of the full blown PRSP is being coordinated by the Poverty Reduction Committee at the national level where a Team Inti, composed of core ministries, was organized to oversee the process. Four task forces were also created under the committee to cover the four substantive themes in the IPRSP. In both Indonesia and the Philippines, oversight responsibilities over planning are divided between two agencies: the planning agency and the department in charge of internal affairs, sometimes resulting in inaction on planning problems at the local level. Hence, while both countries still follow a top-down approach to planning, with broad policies and guidelines set at the central or national government for subnational governments to use in preparing regional and local plans, lower-level government plans are no longer integrated at the central levels, partly for practical purposes given the number of local governments and the usefulness for policymaking of a highly integrated plan in the context of decentralization. Uganda s Poverty Eradication Action Plan was developed in One year later, in the context of the medium-term expenditure framework, the Government of Uganda introduced a Poverty Action Fund (PAF). In 2000, following Uganda s qualification for debt relief under the Highly Indebted Poor Country (HIPC) initiative, the PEAP was re-formulated into a Poverty Reduction Strategy Paper. There are at least three instruments currently being utilized in the national and subnational planning process in Uganda the Budget Framework Paper, the Medium Term Expenditure Framework, and the District Development Plan. Analysis of the context in which local planning takes place in Uganda shows that Uganda s efforts at integrating poverty reduction into local planning and budgeting processes have been impressive. By instituting reforms in intergovernmental relations, the country has largely overcome its legacy of vertical and horizontal imbalances. However, other challenges still lie ahead. Despite these improvements, significant challenges remain in aligning local targets and outcomes with national priorities, and in building local capacity desperately needed to handle greater responsibilities of managing public service in a decentralized context. Conclusion The decentralization experiences of the Philippines, Indonesia, and Uganda confirm its potential for enhancing basic service delivery to the communities. Decentralization, however, involves complex political and administrative changes that will be met with a lot of resistance along the way. There is really no uniform kit to address the challenges of 4

16 decentralization. Every country with its own political structures and culture will have its unique way of dealing with these challenges. The experience of the Philippines, Indonesia, and Uganda are options among many possibilities. As the Ugandan case shows, priorities set out in the PRSP play an overarching strategic role of guiding planning at the subnational level. There is evidence that setting the PRSP as the overarching strategic framework serves as a useful role in integrating local and central government planning efforts. Uganda s experience shows that the PRSP can build on and improve already existing frameworks for poverty reduction. This provides a good practice to inform countries in other regions where the link between the PRSP process and preexisting planning documents are relatively poor. From the experience of Indonesia, Philippines, and Uganda, it is useful, given the capacity limitations of local governments in most developing countries, to draw a fiscal decentralization strategy prior to implementation. The effectiveness of the MTEF depends on broad based public expenditure reforms targeting strengthening capacities for planning, budgeting, financial management and auditing at both the central and the local government level. Lack of a MTEF in some countries is a major constraint to the prioritization of the budget around poverty reduction goals. Additionally, capacity building on planning techniques should be approached in a holistic manner where the training program not only prepares a plan, but continues with helping communities/local officials with the identification of projects and funding sources, financial support, and monitoring and evaluation techniques.. Requiring local governments to prepare plans should take into account (1) the objectives of the plan, particularly its use in relation to other public administrative functions (e.g. budgeting, ODA allocation); (2) the capabilities of the officials who will be required to follow the plan; (3) the local conditions. Some of the more important implementation details which are usually left out in relation to these factors include: (a) synchronization of plan preparation with the budgeting cycle; (b) sophisticated requirements of plan preparation which may be too complicated given capabilities of local officials; (c) availability of data or presence of private sector/civil society organizations for monitoring performance. 5

17 Chapter 2: Literature Review and Comparative Practices from Developed Economies Introduction This chapter highlights the various options discussed in the decentralization literature and the range of practices for planning and budgeting evident in the experiences of several developed economies. The objective is to draw lessons for planning in the context of PRSPs for World Bank client countries that are decentralized or decentralizing. Specifically, the chapter assesses: (1) the linkages in planning processes across levels of government; (2) the relationship between budgeting and planning processes both at the national and local levels; (3) the use of fiscal instruments and policies for aligning national and local development goals; and (4) the monitoring and evaluation practices related to planning and budgeting in the two countries. Poverty reduction strategies have primarily been developed within the context of centralized, national planning processes. For centralized governance systems, the informal nature of the participation of subnational governments in this process may be sufficient. However, in decentralized systems, direct and formal involvement of governments at the subnational level is more critical to both the establishment of an effective strategy and its implementation. Some have suggested that decentralization is itself a poverty reduction strategy, with the implication that the form decentralization takes may be critical in determining the ultimate success. Certainly, with the increased local political, administrative and fiscal autonomy accompanying decentralization, the role and ability of local governments to directly formulate both explicit and implicit public sector responses to poverty and its reduction is greatly enhanced. Likewise, the ability of the national (or central) government to impose a national policy response is curtailed. To formulate and implement policy in a context of devolved responsibility and authority likely requires a different approach to policy development and coordination, and different mechanisms to assure successful implementation of policies consistent with both national and local needs and priorities. An important element of the promise of decentralization is the ability to tailor local public sector policy and service delivery to the needs of local populations, while at the same time providing incentives for an effective, efficient and locally accountable public sector. The conferring of local discretion in planning, budgeting and revenue mobilization, however, hampers the formulation of national responses. In decentralized contexts, mechanisms must be established to effectively link national and subnational planning processes to assure that national priorities are appropriately reflected in regional and local policies. Both strategies and the mechanisms employed must be adjusted consistent with the distribution of existing governance authority. 6

18 A Brief on Decentralization Many have observed a "world-wide" trend toward decentralization. While decentralization is often associated with and even attributed to democratization, Dethier points out that decentralization and democracy are not synonymous. "Decentralization has been carried out by democratic and authoritarian regimes from the left and right..." and often out of a desire of these regimes to retain control (2000:3; Escobar-Lemmon 2001). Lindaman and Thurmaier (2002) identify three waves of decentralization, each with different motivations and desired outcomes. The first wave (1950s s) was a political vehicle for increasing the popular support of the state, individual politicians and ministers. Its focus was on decentralizing and deconcentrating administrative structures. The second wave (mid 1970s into the 1980s) was based on the presumed effectiveness of decentralized planning for implementing development programs. It included the rhetoric (if not the reality) of devolution of responsibilities. The third and current wave is argued to be ideologically driven by a preference for a "market-oriented" state. A large part of its focus is fiscal. A uniform taxonomy of decentralization does not exist. Dethier identifies three distinct forms: fiscal decentralization, political devolution and administrative deconcentration. Treisman identifies five basic forms of what he terms political decentralization: (1) structural decentralization, (2) decision decentralization, (3) resource decentralization, (4) electoral decentralization, and (5) institutional decentralization (2000: 2-3). A consensus seems to be emerging around three general forms of decentralization: (1) political decentralization, (2) administrative decentralization (3) fiscal decentralization (Gurger and Shah 2000; Braun and Grote 2000; Rondinelli 1999; Tanzi 1995). 1 Political decentralization provides...citizens and their elected representatives more power in public decision making.... [It] often requires constitutional or statutory reforms, development of pluralistic political parties, strengthening of legislatures, creation of local political units, and encouragement of effective public interest groups. Administrative decentralization redistributes authority and responsibility for public services among levels of government. In its weaker form, deconcentration shifts administrative responsibilities to subordinate units in regions, districts, field offices or local administrations under supervision of the central government ministries. Delegation transfers functions and decision making to semi-autonomous organizations accountable to, but not controlled by, the central government. Devolution transfers decision-making, finance and management authority, usually to local units with elected executives and legislative bodies with independent fiscal authority (Rondinelli). Fiscal decentralization entails access for subnational jurisdictions to revenue mechanisms necessary to exercise decentralized authority. This includes subnational taxes, fees and charges, 1 A fourth form of decentralization is referred to as "economic or market decentralization" (Rondinelli). It entails a shift of responsibility from the public sector to the private sector via privatization of services or deregulation of private sector activities. 7

19 intergovernmental transfers and debt. In a fiscally decentralized setting, local jurisdictions have the ability to alter tax rates (and possibility bases) and charge structures to manage revenue availability consistent with expenditure responsibilities. Presumed Benefits of Decentralization The case for decentralization suggests positive effects for poverty reduction through public involvement in governance and the provision of more efficient and effective public services targeted at the needs of local populations with less waste and more effectively supporting private economic activities and development, democratization and nation building. Accountability. In an organizational context, decentralization both empowers local officials and makes them accountable to local constituencies. This empowerment fosters a new responsibility for local public service outcomes and is expected to provide incentive for improved performance (Tanzi 1995). Accountability takes the form of accountability of bureaucratic actors to public officials via supervision and public officials to citizens through electoral processes, party systems, press and participatory forums (Blair 1999). Improved accountability is expected to reduce corruption. The closer proximity of subnational jurisdictions to the population and their greater stake in the outcome of local public policies is expected to increase both the capacity and desire for public monitoring of their actions. Exit through mobility provides an additional informal enforcement mechanism. Technical / cost efficiency. Related to the above, under correct circumstances, decentralization is also expected to provide a public good corollary to the competitive market for private goods. If citizen-consumers are mobile and there are a variety of alternative jurisdictions within which to locate, they will move to jurisdictions producing the most effective and lowest cost mix of public services, forcing efficiencyinducing competition between governments (Tiebout 1956; Tanzi 1995). Similarly, this is expected to stimulate experimentation in public service delivery and beneficial technology transfer between subnational jurisdictions based on that experimentation. A demand responsive public sector enhances both public support and willingness to pay for public services. Under this competitive corollary, the mobility (or threat of mobility) of capital and populations produces performance incentives, as does the simple existence of alternative jurisdictions as a comparative standard. Service Delivery. The 1994 World Bank Infrastructure for Development report (World Development Report) identifies numerous examples of "the potential for improving service delivery by decentralizing government authority to independent subnational governments" (74). Decentralization of water and sanitation was found to also produce improved maintenance and performance. "...[P]er capita water production costs are four times higher in centralized than fully decentralized systems and are lowest when decentralization is combined with central coordination. Decentralization could help alleviate some of these problems, however, as it has been pursued it is often not effectively designed for these tasks. In misaligned systems, perverse incentives in service delivery create technical 8

20 inefficiency, allocative inefficiency, and inequity. Participation is also recognized as a key contributor to effective service delivery. In reviewing the five to ten year history of 25 agriculture and rural development projects, the participation of "beneficiaries and grassroots institutions" was found to be critical in long term success. A review of 121 rural water supply projects found that those with "... high participation in project selection and design were much more likely to have the water supply maintained in good condition..." (World Development Report 1994, p. 76) The three keys to effective participation are: (1) directly involving beneficiaries; (2) developing early project consensus; and (3) acquiring beneficiary in-kind or cash contributions. Needs of the poor. Decentralization can be linked to aggregate positive outcomes. Casual observation reveals that countries scoring low on the UNPD Human Development Index tend to be politically centralized. Crosssectional regression of the UNDP index on measures of expenditure and revenue decentralization has also shown a relationship between fiscal decentralization and satisfaction of basic needs (Lindaman and Thurmaier 2002). Von Braun and Grote consider the effects of decentralization on inequality and income distribution across several countries. They find that political decentralization often benefits the poor due to the involvement of civil society. A minimum threshold of subnational expenditure responsibility appears to be a precondition for poverty reduction, but the reduction appears to plateau, such that high subnational shares are not associated with high levels of poverty reduction. Evidence of the importance of representation in determining the distribution of policy outcomes also exists. India's mandated representation of women in leadership positions at the local level is associated with increased female public participation and increased investment in infrastructure (such as water, fuel and roads), which provides for rural women's needs (Chattopadhyay and Duflo 2001; see Bardhan 2002). Similarly, Foster and Rosenzweig (2001) find that fiscal decentralization and democratization increase the political representation of landless households (see Bardhan 2002). Decentralization offers potential for improved governance and service delivery at the location where it is most effective and in a manner which advances both development and the needs of dependent populations. However, these outcomes are not assured. To be effective, it must coordinate and channel input and facilitate the appropriate participation of each filament. Decentralization is a multi-faceted, heterogeneous construct, as are the environments within which it is introduced. It must be adapted to each environment and cannot be encapsulated as a standardized model of governance reform. While the term implies a simple devolution of authority and responsibility, its most defining features are likely the added complexity of resulting relationships, and the need for cooperation, coordination and flexibility for successful outcomes. These needs compel the development of new levels of intergovernmental and public competency and require institutions to evolve beyond the rulebased, definitively structured and hierarchical operating parameters of the centralized system. While standardized application is elusive, cross-country experiences do provide markers to point toward required or favorable institutional and structural components. 9

21 The results achieved appear to be determined by a combination of pre-existing conditions, the form and mode of decentralization undertaken, and the level of supporting institutional and fiscal frameworks and capacities, such as local administrative and civil service reforms and political participation. Accountability and responsiveness, both vertically and horizontally, appear to be key features. Without vertical accountability, decentralization risks the diminution of national goals and objectives. The development of participatory processes, democratic institutions of local governance, and formal and informal modes of civil input and communication aide in achieving bureaucratic accountability and reducing elite capture. In this context, planning and budgeting systems are critical to the stated outcomes of decentralized governance. Conversely, the utility of nationally oriented planning instruments such as the PRSP may ultimately depend on how well their goals and outcomes are reflected and pursued in local plans and expenditures. Emerging Lessons on Planning in Decentralized Settings (1) Complexity and Conflict. Altered central-regional-local arrangements are not just phenomena of the developing world. In an extensive review of intergovernmental management in OECD nations, intergovernmental transition appears to be the norm (OECD 1997). The result is greater complexity in intergovernmental relationships. Subnational jurisdictions are becoming more important partners and within this shift the center is struggling... to retain some overall control of expenditures and revenues, while local resistance mounts and calls for greater freedom of action grow stronger. Experience across 26 OECD countries highlights a variety of tensions in intergovernmental relations. These tensions entail establishing an appropriate balance between: (1) increased local autonomy, while maintaining overall direction; (2) providing for local differentiation and flexibility, while assuring some minimum degree of uniformity, and (3) promoting greater responsiveness to local desires, while maintaining economy and efficiency in service delivery. These conflicts are often accentuated through suspicion and a lack of confidence between levels of government. While these general issues appear uniformly across nations and across the developed / developing world, there is no one best way for dealing with them. Unique economic, cultural, political and capacity issues determine what is possible and desirable. Still, improved transparency and communication in intergovernmental relations appear as universally desirable features. (2) Coordination of Multiple Institutions and Actors. Because decentralization necessarily involves the devolution of fiscal and sectoral responsibilities, a wide range of central government agencies and officials are implicitly involved. Effective decentralization, while possibly coordinated by a local government, planning or finance ministry, 10

22 must include sectoral ministries to assure harmonization of policies across levels of government. Beyond this, non-governmental organizations, civic groups and private organizations should be effectively involved. With such a broad array of actors, coordination becomes a special challenge. The benefits of decentralization emerge through local adaptation, but require more elaborate (and sometimes, informal) means of coordination. It is possible for a single agency to effectively function in a coordinative role, however, the fact that usually several agencies are involved with different aspects of decentralization requires that a neutral or higher level entity (such as the office of the president or prime minister) take charge to formalize responsibilities, and monitor and ensure individual entities fulfill their responsibilities (Smoke 2000), (3) General Principles for Effectiveness. In reviewing the effectiveness of fiscal decentralization in transitional settings of Russia, Ukraine and Kazakhstan, Norris, Martinez-Vazquez and Norregaard (2001) offer three basic principles to guide decentralization in establishing incentive mechanisms to ensure the overall objective of "accountability and transparency at all levels of government." These principles are: The need for clarity of roles between levels of government. Roles should be stable and transparent. Overlapping responsibilities often lead to expenditure dumping or unfunded mandates. A measure of autonomy for subnational governments on both the revenue and expenditure side is crucial. This entails flexibility to establish and budget for priorities, desired service levels and production modes. On the revenue side it entails access to meaningful revenue sources accompanied with the ability to establish tax rates and / or base. Institution building. Sufficient administrative capacity is necessary to fulfill decentralized responsibilities. This requires adequate staffing, materials and equipment. Beyond this, democratic institutions and participation, appropriate budget processes and procedures, and institutions to assure cooperation and coordination between levels of government are required. (4) An Integrated Conceptual Approach: Institutional Pluralism Cohen and Peterson (1997) focus on an administrative framework they refer to as "institutional pluralism" as a vehicle for strengthening local governance through pluralist rather than monopolistic administrative design. Under this framework, planning is shared and participation maximized. Objectives and goals are organized around the public sector roles of stabilization (solvency, openness and competitiveness), distribution (side-payments, political support, economic growth and equity) and allocation (adequate human, fiscal and political resources). In carrying out administrative reform, national leadership is essential, including strong political commitment. It is important that a defined strategy regarding preferred outcomes be centrally defined and that the process be regulated. Oversight should typically be shared, as should financing. Planning should also be a shared function, with initial overall strategies developed centrally and centrally sponsored transition to greater local involvement and capacity development. The brokerage role (of using the market and civil society for the provision of collective services) is also a properly centrally / locally shared function, with market and civil 11

23 development both local and central functions in spawning private sector roles in service delivery. Effective administrative decentralization requires a strong center to provide an effective enabling environment for role decentralization and decentralized service delivery. Anwar Shah (1998) offers a general prescription for successful fiscal decentralization. It is rather comprehensive in its view of decentralization and highlights the need for an environment conducive to citizen participation, appropriate societal norms, threshold administrative capacities, the value of asymmetric decentralization, and proper revenue, spending and fiscal structures (see panel 3). The following factors are inherently important in ensuring successful fiscal decentralization: (1) Coordination Through Incentives, Norms and Regulation. In their review of fiscal federalism in industrial countries, Boadway, Roberts and Shaw (1994) conclude that decentralization is not incompatible with the fulfillment of national objectives. However, it requires the establishment of mechanisms of coordination, regulation and fiscal inducement to be successful. Also required are hierarchical accountability structures. Regulatory models are varied. In some OECD countries, regulatory responsibilities are shared across levels of government (at each level involving multiple bodies). In others, authority is centralized. The trend is toward a middle position... as decentralized countries attempt to reduce duplication and regulatory costs by creating national standards, and centralized countries move towards power-sharing arrangements and a shift of responsibility away from the central government (OECD 1997: 48). (2) Representation of National Interests. The root of coordinating plans and priorities is information exchange and mutual understanding of the relative purview and legitimate interests of each level of government in a multi-tiered governance system. Two basic models of demarcating responsibilities exist and can be summarized as one based on legal tradition and the other based on a managerial culture rooted in a search for efficiency (see OECD 1997: 28). Irrespective of the foundation, integration is highly dependent on the representation of national policy and priorities at local levels in a manner which maintains higher-level steering capacity to assure that national objectives are not hopelessly compromised by lower level actions. This occurs in all nations through structures of central representation at subnational levels. Again, two main forms exist: (1) deconcentrated administrations and (2) prefect systems. All twenty-six OECD nations studied employ deconcentrated administration and most also have a prefect system. The first represents central policies through a deconcentrated placement of central government agencies at the subnational level. These agencies are subject to central directives, even though working at the local level. The range of responsibility, local impact and discretion of these field offices varies considerably. Federal countries (such as Germany, Australia, Canada, United States and Ireland) also employ significant representation of regional levels locally. Unitary nations, (particularly those without central representatives at the local level, such as the United Kingdom and New Zealand) rely heavily on the legal status of central agencies. The local discretion of agencies has been on the rise. 12

24 Under the prefect system, an official representative of the central government is charged with representing its interests at the subnational level. Central representatives usually have two principle responsibilities: (1) oversight or administrative supervision of subnational governments, and (2) acting as an intermediary between levels. These structures are typified by the Napoleonic model first employed by the unitary states of continental Europe. (They are foreign to the United Kingdom, Ireland, New Zealand, Canada, Australia, and the United States.) Prefect systems have been retained even within moves for greater decentralization. Administrative supervision involves oversight of the legality and advisability of local actions and policies. Sometimes the role is constrained to activities involving joint projects in areas of shared responsibility. While in most countries the prefect system has been retained, in many systems it has lost its coercive powers. In any regard, the prefect acts as a communication conduit between levels. (3) Coordination, Consultation and Collaboration. In either structure, coordination rather than vertical direction is the intended result. Coordination requires consultation and entails both vertical and horizontal collaboration. Subnational perspectives must be considered to produce responsiveness and relevance, but coordination is necessary to (1) clarify national policy goals, (2) establish agreement (if not consensus) regarding the contribution of individual programs and levels, and (3) communicate and learn from local experiences and progress toward objectives. Coordination and consultation have the added benefits of allowing the identification and elimination of overlapping, duplicating or competing program activities. Several OECD nations have attempted to augment consultation through both formal and informal mechanisms. However, consultation can have negative effects on the speed of decision-making and may provide greater access for self-interested parties, possibly detracting from the general interest. Not all models are highly collaborative. Consultation ranges from the cooperative to the adversarial. Cooperative approaches seek consensus and collaboration (such as Japan), while the adversarial approach, associated with bipartisan politics, favors more decisive decision-making, sometimes in a manner which sacrifices consultation and involves legal procedures. These mechanisms are not as well attuned to the growing complexity of intergovernmental arrangements. Developed Planning Systems: Comparative Experiences Planning systems should entail an elaboration of regional (and or state and national) goals as a foundation for meaningful local plans. Local adherence to broader frameworks should be assured through mechanisms to prompt, attract, bribe and if necessary force local governments to devise and implement local plans that reflect the state goals (Cullingworth 1994: 166). For example, 13