Part I: Fiscal decentralisation

De- concentration Delegation Devolution

Political

Administrative

Fiscal

Building blocks of fiscal decentralisation

• Expenditure Assignments

• Revenue Assignments

• Intergovernmental fiscal transfers

• Sub national borrowing

Public sector economics, public goods, private goods and club goods - Musgrave, Subsidiarity, Pareto optimum

Expenditure Assignments

• Assignment of functions and mandates– Subsidiarity principle

– Regulatory roles and delivery roles

– Devolved

– Delegated or Agency

– De-concentrated management

• Assignment of expenditure modalities– Recurrent

– Investment

Expenditure Assignments (2)

• General mandate– Devolved

– Unfunded

– Used or underutilised general mandate?

• Specific (or categorical) mandates– Delegated or Agency

– De-concentrated management

– Own specific mandates - unfunded

Revenue Assignments

• Taxes– Tax sharing

– Retained (local) taxes

– Types of tax (property tax, individual tax)

– Cost of assessment

• Fees– Specific fees

– General fees

– Rents

Intergovernmental fiscal transfers and grants

• Conditional

• Discretionary

• Equalisation

• Tax sharing (downwards)

• Formula based

• Matching

Sub national borrowing

• Borrowing from government

• Loans from the private sector

• IFIs and sub sovereign lending

• Municipal bonds

• Links to revenue streams

Public Private Partnerships

• Contracting out / outsourcing

• Private finance initiative

• Non recourse private financing

• Credit enhancements

Types of local expenditure planning and budget process

• Recurrent– Salaries

– Goods and services

• Non recurrent – Investment / project / development / capital

• Parallel– Off budget project

Links to plans…

Pulling streams of finance together

• Follow the budget approval…– Allocation in national budget (approved by parliament or assembly)

– Sector

– Local government

– Parallel (development partner)

– Parallel (private finance)

• Expenditure tracking by budget codes– Territorial, functional, institutional, economic

Hierarchy of priorities

• Be proactive

• Essential / do your best

• Compliance / minimum work necessary

• Do nothing

• Efficiency vs accountability arguments for local government

– Links to (technical) functional and expenditure assignments.

– Links to elected mandates

– Different local priorities

The local government / sector interface

• Strategic choices (be proactive or do nothing)

• Matching funds and discretionary grants

• Governance and accountability issues

• Regulatory responsibility

• Efficiency argument vs accountability argument

Part II: UNCDF

Development challenge for LDFP

Many developing countries are amongst the worlds fastest growing economies whilst others remain mired in conflict. Globally there is steady progress towards the Millennium Development Goals and many countries have met some of their targets. Yet, this overall picture hides significant disparities and risks. Over 2 billion people continue to live on less than a dollar a day and whilst absolute levels of poverty are falling, inequalities are increasing. Additionally, natural disasters, changing weather patterns and globalized economic relationships threaten the resilience of communities to external shocks.

The result is a more uncertain and differentiated world in which many localities are not sharing the benefits of growth. How can resources be reinvested locally to build resilience and reduce inequalities?

Definition(s) of local development

• The outcome of LDFP interventions is sustainable and equitable local development. This means:

– Leveraging and using local resources– Providing benefits, employment and services to local

people– In economic terms, promoting forward and backward

linkages and positive pecuniary externalities– Strengthening and using local institutions– Strengthening local democracy and local accountability (Asia UNCDF retreat 2011)

What is Local Development?

"Clearly, it is not just development that happens locally (as all development ultimately does), but rather development thatleverages the comparative and competitive advantages of localities and mobilizes their specific physical, economic, cultural, social and political resources. Said differently, in the expression local development the adjective local does not refer to the where, but to the who and the how of development promotion. It refers to the actors that promote it and the resources they bring to bear on it. Development is local if it is endogenous, open and incremental, that is: if it makes use of locality-specific resources, combines them with national/global resources and brings them to bear on the national development effort as additional benefit in a positive sum game."(Romeo, The Imperative of Good Local Governance, Chapter 3: 2013)

Four Local Development Finance investment instruments (1)

1) Local Development Fund, capitalisation of public financial management systems with fungible capital and investment resources that enables proof of concept of innovative local development finance (e.g. decentralisation, local procurement, local revenue, local public financial management, service provision, infrastructure)

2) Municipal Credit, support to those local governments and other local public institutions (e.g. utility companies) in accessing greater financial resources through new instruments such as municipal debt, public private partnerships, bonds, etc.

Four Local Development Finance investment instruments (2)

3) Local Finance Initiative, structured project finance that provides advice, technical assistance, seed capital and credit enhancement for private (or PPP) infrastructure investments enabling them to secure sustainable finance from (preferably) local capital.

4) G2P, piloting and testing micro fiscal grants (social payments, scholarships, compensation etc) in ways that promote local development and complement other investment instruments (linkage with FIPA)

LDF Phase 1

CG

LG

LDF funds

MoU

Separate account but applying government procedures

Myanmar?Post crisisOriginal Uganda, Mozambique etc

CDF support to Local planning, budgeting and procurement process

LDF Phase 2

CG

LG

LDF funds

MoU

May be mainstream government account or separate account but applying government procedures

Lao PDRSolomon Islands

Tra

nsfe

r acco

rdin

g

to te

rms o

f MoU

CDF support to Local planning, budgeting and procurement process

LDF Phase 4

CG

LG

CDF support to Local planning, budgeting and procurement process

MoU ?

Mainstream government fiscal transfer system

Others ?

New pilot system

BangladeshNepalBhutan

Tra

nsfe

r acco

rdin

g

to te

rms o

f MoU

LDF Phase 4

CG

LG

CDF support to Local planning, budgeting and procurement process

MoU ?

Mainstream government fiscal transfer system

Others ?

New pilot system

BangladeshNepalBhutan

Tra

nsfe

r acco

rdin

g

to te

rms o

f MoU

What is Capital?

1) A factor of production in classical economic theory as defined by Marx, Smith and Ricardo2) An accounting term in Public Finance theory and practice as defined by Premchand et al.3) Cash or goods used to generate income as defined in many English language dictionaries4) Large scale fiscal and financial flows as defined in national financial and banking legislation5) A particularly useful and expendable resource endowment – e.g. human capital, political capital6) The political or administrative centre of a territorial jurisdiction

The UN’s Capital Development Fund works with the first five definitions… All these five are applicable in the diagram

On or Off

• On budget in a parallel way (some SWAPs)

• On budget approved by parliament

• On treasury, or on ministry special account

• On plan, or on thematic plan

• On procurement? With what regulations

• Efficiency argument vs accountability argument

Performance grants

• Process related (v important point)

• Size of grant is crucial

• Assessment process must be sustainable

Country context Key points of the context Priority Goals for UNCDF Role of local investments Countries

Post conflit / Fragile phase

Weakness in basic services Weak role of government in financing LD,

reliance on non-government service delivery

Absent, weak or ineffective institutional frame for fiscal decentralization

Emerging of a fiscal decentralization process

Absence/ lack of social confidence

Ongoing pilot experiences to raise awareness on fiscal decentralization

Support the emergence of a fiscal decentralization policy

Build viable and stable local institutions with the view to stabilize the political situation through a bottom-up process

Explore the ways of mobilizing private finance for basic service delivery and LD

• Build a participatory/ inclusive process (pre-mu)

• Define local-based investments• Develop Basic Tools for Local

Development

Guinea-B.Sierra-L.Liberia, Yemen, South Sudan, SomaliaDRC

Emerging phase: Decentralization start up

• Basic institutional and regulatory framework for fiscal decentralization is in place

• LGs have developed an initial capacity to deliver basic services

• Slowness in the fiscal decentralization process nevertheless debates on creation of a national policy and mechanisms

• Consolidate and scaling up pilot experiences in order to build up the national institutional and regulatory system

• Build the institutional framework at local and national level

• Develop innovations in local development (scale/ nature of nat / local regulations)

GuineaMauritaniaNiger, Malawi, Ethiopia, Mozambique

Consolidation phase: On-going decentralization,

• Political and institutional stability• LGs have developed an intermediate

capacity to deliver basic services and increasingly engage non-state actors

• Regulatory framework for decentralization in place and operational –technical and financial system supported by donors

• Strong policy dialog

• Help LGs address new local development challenges (Gender, Food security)

• Put in place systems for LED and private sector finance mobilization

• Develop and strengthen the national system

• Innovate with original LDF windows• Unlock domestic capital for LD

Benin, Senegal, Mali, B Faso, Rwanda, Uganda, Tanzania

Maturity Phase or new approach?Added Value of a regional program

• Stronger emphasis on better integration and coordination between LGs for development and service delivery

• Regional integration as a new topic for local development

• Help for security and stability, especially in rural, landloocked and cross border areas

• Harmonize the fiscal decentralization process• Develop funding mechanism and tools for

coordination at the regional level• Place LD in the context of regionalization and

globalization, including access to regional/international financial markets

• Build regional integration through local development

• Connect local investments to global processes and opportunities

LOBIACTA

UNCDF Intervention Approach in Local Development Finance

Country context Why? How ?

Channel of Investment

Level of investment

Inputs Outputs

Post conflit / Fragile states

• Build a participatory/ inclusive process (pre-mu)

• Define local-

based

investments

• Develop Basic

Tools for Local

Development

• Direct payment ot suppliers

• and/or to LGs by

UNCDF

• Simple and clear

• 1.5 to 3

USD/Capita or

lump sum

• Fiduciary Risk Assesment

• Developing the

contractual process

• Build procurement

procedures

Define contracts content

• Procurement guides or Guidelines

• National code of

procurement for local

contracting

• Planning tools

• Investment Tools

• Institutionnal

participatory

framework

Consolidation phase

• Build the institutional framework at local and national level

• Develop

innovations in

local

development

(scale/ nature of

invt / local

regulations)

• Use national mechanism for local investment (including Treasury mechanism - PEM)

• Direct payment to

LGs bank account

• Simple and clear

• Based on past

exp. (20% more)

• Sthrenghening the contractual process

• Budget support to LGs,

• LG Assesment

• Performance Grant System

• Municipal code on

procurement

• Local Governements

Code

• National

Decentralization

Policy

Maturity phase •Make the national system strongest

• Innovate with

original LDF

windows

• Theasury mechanism

• Basket fund

• Funding agency

• Allocation mechanism for local investment and/or thematics

• LG Assesment

• PEM Assesment

• National Decentralization Policy for thematics (FS, LED, CC)

• Performance Grant

more sophisticated

The Core Approach : How do we use our Investment Mandate ?

Example: LoCALHow to finance climate

adaptationCapital Non - Capital

Recurrent (normally

incremental changes in resource envelope)

Some air conditioners

Teachers’ Salaries

Project (fluctuation in

resource envelope, specific approval process, activities of finite

duration)

A new school building

A road maintenance

programme or staff training consultancy

Will Climate Proofing come from Recurrent

or Project?

Draft for discussion: DJ 03/2010

Some personal inspirationsGreater London Plan, 1947, Abercrombie, London County

Council

Strategic Planning in Local Government, 1997, Leach and Collinge

Good Government in the Tropics, 1997, Judith Tendler

Development, Geography, and Economic Theory, 1997, Krugman

Spaces of Global Capitalism: A Theory of Uneven Geographical Development, 2006, Harvey

Imagined Communities: Reflections on the Origin and Spread of Nationalism, 2006, Anderson

Notes on the Difficulty of Studying the State, 1977, Abrams

Participation: The New Tyranny, 2001, Cooke and Kothari