Decentralization and Decentralization and Subnational Management Subnational Management

in LAC: in LAC: Lessons from experienceLessons from experience

Overseas Development Institute Seminar:Overseas Development Institute Seminar:Strengthening Sub-National Governance Strengthening Sub-National Governance for Poverty Reduction: Innovations and for Poverty Reduction: Innovations and

ImpactImpact

Kathrin A. PlangemannKathrin A. PlangemannThe World BankThe World Bank

September 11, 2008September 11, 2008London, UKLondon, UK

Decentralization in LAC: Decentralization in LAC: The BasicsThe Basics

Decentralization: Transfer of authority and Decentralization: Transfer of authority and responsibility for governance and public service responsibility for governance and public service delivery from a higher to a lower level of government delivery from a higher to a lower level of government • DeconcentrationDeconcentration• DelegationDelegation• DevolutionDevolution• PrivatizationPrivatization

Rationale and Stages: Rationale and Stages: • Political: Political: Creation of new levels of government/elections of Creation of new levels of government/elections of

local authorities as part of regional democratization processlocal authorities as part of regional democratization process• Fiscal: Fiscal: Decentralization of revenue/expenditure management; Decentralization of revenue/expenditure management;

intergovernmental transfers, debtintergovernmental transfers, debt• Service delivery: Service delivery: Enhancing service outcomes across sectorsEnhancing service outcomes across sectors• Private sector development: Private sector development: Subnational investment climate Subnational investment climate

Why decentralize?Why decentralize?

BenefitsBenefits Greater responsiveness to citizens’ needsGreater responsiveness to citizens’ needs Allocative efficiency Allocative efficiency Increased transparency through civil society participation and Increased transparency through civil society participation and

clearly defined constituenciesclearly defined constituencies Creation of public goods (additional mobilization of public and Creation of public goods (additional mobilization of public and

private resources).private resources).

Potential costs and risksPotential costs and risks Loss of economies of scale and control over scarce financial Loss of economies of scale and control over scarce financial

resources by the central government, resulting in increasing fiscal resources by the central government, resulting in increasing fiscal pressurepressure

Higher difficulty for coordination of national policies.Higher difficulty for coordination of national policies. Unequal distribution of resources/horizontal imbalances Unequal distribution of resources/horizontal imbalances Weak administrative/ technical capacity adversely affecting service Weak administrative/ technical capacity adversely affecting service

deliverydelivery Risk of additional fiscal pressure or over-indebtedness of Risk of additional fiscal pressure or over-indebtedness of

subnational governments subnational governments Capture by local elites (Patronage, CorruptionCapture by local elites (Patronage, Corruption))

Variations across LAC: Variations across LAC: Who’s got the money?Who’s got the money?

Further variations due Further variations due to:to:

Vertical and Vertical and horizontal horizontal imbalancesimbalances

Discretionality in Discretionality in allocation of allocation of resources (e.g. resources (e.g. earmarking)earmarking)

Sectoral variationsSectoral variations

Subnational expenditure share in total

(Source: IMF GFS)

46% 45%35%

25% 23%

8%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Argentina(2001)

Brazil(1998)

Bolivia(2001)

Peru(2001)

Mexico(2000)

Chile(2001)

From Fiscal Decentralization to From Fiscal Decentralization to Subnational Public Subnational Public

Management Management From the design of fiscal From the design of fiscal federalism to greater support federalism to greater support to Subnational Public to Subnational Public Management:Management:• Public expenditure management Public expenditure management

(FM, PBB, Procurement, Public (FM, PBB, Procurement, Public investment, tax administration); investment, tax administration);

• Civil service;Civil service;• e-Government;e-Government;• JusticeJustice• M&EM&E• Broader GAC agenda Broader GAC agenda

Fiscal Decentralization

Inte

rgovern

menta

l Tra

nsf

ers

Sub

nati

onal D

eb

t

Revenue M

anagem

en

t

Expendit

ure

Man

agem

ent

Decentralization and Decentralization and Subnational Management Subnational Management

Support in LACSupport in LAC Development Policy Lending on Decentralization:Development Policy Lending on Decentralization:

• Peru, Bolivia; Colombia, Nicaragua (decentralization Peru, Bolivia; Colombia, Nicaragua (decentralization components)components)

Development Policy Lending to subnational levels:Development Policy Lending to subnational levels:• Mexico, Argentina (Cordoba, Santa Fe, Catamarca)Mexico, Argentina (Cordoba, Santa Fe, Catamarca)

Investment lending:Investment lending:• Chile, Brazil, Peru, ArgentinaChile, Brazil, Peru, Argentina

Subnational SWAP (Sector Wide Approach):Subnational SWAP (Sector Wide Approach):• Brazil (Ceará, Minas Gerais)Brazil (Ceará, Minas Gerais)• Argentina (San Juan, others in preparation)Argentina (San Juan, others in preparation)

AAA (Analytical and Advisory Activity):AAA (Analytical and Advisory Activity):• Bolivia, Ecuador, Dominican Republic, Chile, Argentina, PeruBolivia, Ecuador, Dominican Republic, Chile, Argentina, Peru• Increasingly direct support to subnational governments Increasingly direct support to subnational governments • (e.g. FFS Mexico, Argentina, others)(e.g. FFS Mexico, Argentina, others)

Increased LAC lending for Increased LAC lending for subnational public subnational public

managementmanagementWB LAC Sub-national Government Administration - Public

Sector Governance projects

110 119 30 60

486

348

858

616

190

2466

0

500

1000

1500

2000

2500

3000

Approval Year

Co

mm

itte

d A

mo

un

t

(in

mil

lio

n$)

0

1

2

3

4

5

6

7

8

9

Nu

mb

er

of P

roje

cts

Amount Number

* Until August 2008

(WB Projects with Sub-national government administration as major sector AND Public Sector Governance as major theme)

What worked, what didn’tWhat worked, what didn’t

Evaluation of effectiveness of Bank support to Evaluation of effectiveness of Bank support to decentralization in 20 countries between decentralization in 20 countries between 1990 and 2007 showed: 1990 and 2007 showed:

Bank support most effective: Bank support most effective: • design of intergovernmental legal framework design of intergovernmental legal framework

and transfer system, and transfer system, • subnational public expenditure managementsubnational public expenditure management

Bank support less effective: Bank support less effective: • clarification of roles and responsibilities of clarification of roles and responsibilities of

different levels of governments, different levels of governments, • Improvements of own-source revenue Improvements of own-source revenue

mobilizationmobilization

IEG: RecommendationsIEG: Recommendations

Invest in timely analytical work prior to lendingInvest in timely analytical work prior to lending Seek more realistic and pragmatic loan design, Seek more realistic and pragmatic loan design,

after an assessment of the political economyafter an assessment of the political economy Improve coordination of sectoral decentralization Improve coordination of sectoral decentralization Combine policy-level support with TA for Combine policy-level support with TA for

subnational capacity-strengthening subnational capacity-strengthening Encourage a more results-based approach to Encourage a more results-based approach to

decentralization with greater M&E decentralization with greater M&E N.B.: Impact of Bank support higher when: N.B.: Impact of Bank support higher when:

• Prior consensus given on decentralization reforms Prior consensus given on decentralization reforms • Greater incentives for subnational institutional reformGreater incentives for subnational institutional reform• Improved donor coordination Improved donor coordination

Emerging issuesEmerging issues From a focus on the overall fiscal decentralization From a focus on the overall fiscal decentralization

framework to a greater focus on service-delivery framework to a greater focus on service-delivery across sectors, including on federal level non-across sectors, including on federal level non-priority issuespriority issues

Towards a greater subnational M&E culture: Towards a greater subnational M&E culture: results-based management and budgetingresults-based management and budgeting

Greater focus on spatial issues (e.g. upcoming Greater focus on spatial issues (e.g. upcoming WDR) to unbundle territorial development issuesWDR) to unbundle territorial development issues

Private Sector Development / Investment climate, Private Sector Development / Investment climate, particularly in MICparticularly in MIC

Addressing the different needs of increasingly Addressing the different needs of increasingly confident and innovative subnational governments confident and innovative subnational governments through new custom-made mechanisms: FFS through new custom-made mechanisms: FFS

Accountability and Capacity Accountability and Capacity for Service Deliveryfor Service Delivery

National Policy makers

Local Policy Makers

Public / Private Providers Clients / Citizens

VOICE

COMPACT / MANAGEMENT

CLIENT POWER

From World Bank (2004) World Development Report: Making Service Delivery Work for Poor People

“Demand Side”

“Supply Side”

Framework for Monitoring Local Government Framework for Monitoring Local Government PerformancePerformance

Inputs

Fiscal revenue and spending patterns

Intermediates/Process

Public Financial Management Outcomes

Governance (Voice/Client Power)

Outcomes

Service Delivery Perceptions/

Outcomes

Citizens/Firms

Is spending adequate or pro-poor?

Is access and quality being achieved, e.g., at some minimum standard?

Are intermediate processes consistent with local good

governance?

WB 2007: Actionable Governance Indicators: Decentralization

Monitoring Subnational Monitoring Subnational Public Management - Public Management -

PEFA PEFA Widely used monitoring framework among different Widely used monitoring framework among different

donorsdonors Indicators allow diagnostics of areas of public Indicators allow diagnostics of areas of public

expenditure and financial accountabilityexpenditure and financial accountability 28 Performance Indicators + 3 for donors, including 28 Performance Indicators + 3 for donors, including

on issues such as intergovernmental transferson issues such as intergovernmental transfers Used for measuring subnational governments PEM Used for measuring subnational governments PEM

performanceperformance Allows benchmarking between subnationalsAllows benchmarking between subnationals

Territorial Territorial development/investment development/investment climate: What is new? climate: What is new?

Especially in MIC, move away from specific support Especially in MIC, move away from specific support mechanisms towards one level of government and towards mechanisms towards one level of government and towards an integrated territorial/spatial supportan integrated territorial/spatial support

Increasing demands to provide support to subnational Increasing demands to provide support to subnational economic development, and reduction of horizontal economic development, and reduction of horizontal inequalitiesinequalities

Need to integrate public sector strengthening with private Need to integrate public sector strengthening with private sector development and subnational investment climate sector development and subnational investment climate strengthening for greater subnational competitiveness, strengthening for greater subnational competitiveness, subnational ICAs, DB etc.subnational ICAs, DB etc.

Innovative practices in Mexico (Guerrero), Brazil (Sao Paulo), Innovative practices in Mexico (Guerrero), Brazil (Sao Paulo), and Argentina (Corrientes)and Argentina (Corrientes)

The new kids on the blockThe new kids on the block

Increasingly sophisticated subnational governments, in some Increasingly sophisticated subnational governments, in some cases with high natural endowments are increasingly cases with high natural endowments are increasingly confident and eager to access markets and Bank financingconfident and eager to access markets and Bank financing

Innovative and reform-minded subnational government Innovative and reform-minded subnational government create demonstration effects for public sector management create demonstration effects for public sector management to be taken up and replicated at the central level (Argentina, to be taken up and replicated at the central level (Argentina, Brazil)Brazil)

Greater demand for demand-driven, customized, advisory Greater demand for demand-driven, customized, advisory services, with donors as just in time service-providers (e.g. services, with donors as just in time service-providers (e.g. FFS on subnational issues, e.g. Mexico, Chile)FFS on subnational issues, e.g. Mexico, Chile)

Stronger pressures for donors for selectivity in addressing Stronger pressures for donors for selectivity in addressing subnational needs: Supporting richer, reform-minded subnational needs: Supporting richer, reform-minded subnational governments vs. poorer, less-reform-minded subnational governments vs. poorer, less-reform-minded governments? governments?

DFID support for DFID support for innovation through MGPRinnovation through MGPRDFID’s Markets and Governance for DFID’s Markets and Governance for

Poverty Reduction Trust FundPoverty Reduction Trust Fund Governed by tripartite Coordination Group (DFID, Governed by tripartite Coordination Group (DFID,

WB, IADB) and in LAC, by cross-sectoral group WB, IADB) and in LAC, by cross-sectoral group Since 2006, Grants approved for US$6,873,900 Since 2006, Grants approved for US$6,873,900 7 tranches, covering 47 proposals7 tranches, covering 47 proposals Overarching Goals: Overarching Goals:

• Reduce poverty and inequality and promote social Reduce poverty and inequality and promote social inclusion; andinclusion; and

• Develop good practices based on lessons learned.Develop good practices based on lessons learned.

DFID support for DFID support for innovation through MGPRinnovation through MGPR

DFID’s Markets and Governance for Poverty Reduction DFID’s Markets and Governance for Poverty Reduction Trust FundTrust Fund

Two programs:Two programs:• Latin American Markets and International Trade (e.g. Latin American Markets and International Trade (e.g.

Regional Municipal Scorecard Program on regulatory Regional Municipal Scorecard Program on regulatory environment)environment)

• Public Sector Management and Political Systems (e.g. Public Sector Management and Political Systems (e.g. Strengthening of Statistical capacity, HD governance)Strengthening of Statistical capacity, HD governance)

Objectives PSMPS: Objectives PSMPS: • Expand the use of political analysis and practical Expand the use of political analysis and practical

approaches, such as demand-side work with civil approaches, such as demand-side work with civil society, including unions, political parties, etc., to build society, including unions, political parties, etc., to build constituencies for reform; and constituencies for reform; and

• Reinforce subnational governance, e.g. strengthening of Reinforce subnational governance, e.g. strengthening of political economy analysis to inform operations.political economy analysis to inform operations.

DFID Support for Subnational DFID Support for Subnational Management in PeruManagement in Peru

DFID support for fiscal decentralization in Peru: DFID support for fiscal decentralization in Peru: Municipal mining royalties management (US$ 155k):Municipal mining royalties management (US$ 155k):

ObjectiveObjective: Increase the social accountability of municipal : Increase the social accountability of municipal governments and improve their responsiveness to the governments and improve their responsiveness to the demands of the local population to enhance the quality and demands of the local population to enhance the quality and sustainability of municipal investments financed with the sustainability of municipal investments financed with the mining royalties.mining royalties.

DFID funds allowedDFID funds allowed::• Monitoring of royalty flows and municipal investmentMonitoring of royalty flows and municipal investment• Dissemination of information through civil society groups Dissemination of information through civil society groups • Promotion of discussion of use of public fundsPromotion of discussion of use of public funds• Greater competition among municipal governments Greater competition among municipal governments

encouraged by close media monitoringencouraged by close media monitoring• New accountability mechanisms, including feedback to New accountability mechanisms, including feedback to

mayors on public investment managementmayors on public investment management

DFID Support for Subnational DFID Support for Subnational Management in BrazilManagement in Brazil

DFID support for Bank on subnational GovernanceDFID support for Bank on subnational Governance

related activities (US$ 200k annually):related activities (US$ 200k annually): Analytical work: contribution to Good Governance Analytical work: contribution to Good Governance

AAA and governance “drill-downs” in social sectors;AAA and governance “drill-downs” in social sectors; Strengthening FM, auditing and carrying out PEFA Strengthening FM, auditing and carrying out PEFA

assessments in four states;assessments in four states; High-level dialogue on public expenditures:High-level dialogue on public expenditures:

Major PSM conference on cutting-edge reforms in Brazil Major PSM conference on cutting-edge reforms in Brazil on OECD experiences with on OECD experiences with Finance, Planning and all Finance, Planning and all state governmentsstate governments

Conference by Budget Secretariat on Budgeting for Conference by Budget Secretariat on Budgeting for Subnational Governments and support to RBBSubnational Governments and support to RBB

Impact of DFID-financing: Impact of DFID-financing: The case of BrazilThe case of Brazil

Brazil:Brazil:• Sharing good practices and building communities of Sharing good practices and building communities of

practitioners across subnational governments,practitioners across subnational governments,• Strengthening demand for PSM reform, e.g. RBM/RBBStrengthening demand for PSM reform, e.g. RBM/RBB• Greater use of M&E, e.g. PEFA assessments.Greater use of M&E, e.g. PEFA assessments.

Bank:Bank:• High-level dialogue: Access to key policy-makers, allowing High-level dialogue: Access to key policy-makers, allowing

Bank positioning as key institution on PSM, Bank positioning as key institution on PSM, resulting in more resulting in more subnational requests for PS supportsubnational requests for PS support

• Agenda-setting: quality of expenditure at center of dialogueAgenda-setting: quality of expenditure at center of dialogue• Increased flexibility (e.g. short-term availability of Increased flexibility (e.g. short-term availability of

consultants), consultants), • Increased responsiveness to client needs (products/process)Increased responsiveness to client needs (products/process)

DFID-Bank Collaboration:DFID-Bank Collaboration:Achievements and OpportunitiesAchievements and Opportunities

• Fostering innovation, piloting new approaches and scaling Fostering innovation, piloting new approaches and scaling up interventions, including in areas that are traditionally not up interventions, including in areas that are traditionally not supported by the Bank (e.g. entry-points into more supported by the Bank (e.g. entry-points into more “political” areas) “political” areas)

• Tapping into OECD experiences, particularly for MICTapping into OECD experiences, particularly for MIC• Shift in Bank role from providing traditional development Shift in Bank role from providing traditional development

solutions to more partner and service-provider on a solutions to more partner and service-provider on a demand-driven basis, offering more tailor-made products demand-driven basis, offering more tailor-made products

• Putting governance higher on the agenda, including support Putting governance higher on the agenda, including support to greater transparency and accountability through to greater transparency and accountability through improved participation and consultations improved participation and consultations

• Leveraging the role of the Bank as a catalyst and convening Leveraging the role of the Bank as a catalyst and convening power to bring together public and private stakeholders, power to bring together public and private stakeholders, including strengthening of the South-South Dialogueincluding strengthening of the South-South Dialogue

• Promoting donor coordination by harmonizing procedures Promoting donor coordination by harmonizing procedures mobilizing additional support for follow-up projectsmobilizing additional support for follow-up projects

Thanks!Thanks!

Questions? Questions?

kplangemann@worldbank.orgkplangemann@worldbank.org