Fiscal Decentralization Policy Design in a Post-Conflict Country: The Case of Rwanda

Sylvain H. BokoWake Forest University

Presented at the World Bank

Washington, DCJanuary, 24 2007

Vision and Foundation of Decentralization (GoR)

• Community participation

• Local decision making power

• Local autonomy• Efficiency

Sustainable development

Poverty reduction

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UMUTARA

GATSIBO

KAYONZA

KIREHE

KIBUYE

RUTSIRO

BUGESERA

BYUMBA

KIBUNGO

GIKONGORO

NYAMASHEKE

CYANGUGU

NYANZA

NYARUGURU

BURERA

GAKENKE

BUTARE

KAMONYI

GISAGARA

RULINDO

RUHANGO

GITARAMA

NYABIHU

NGORORERO

RWAMAGANA

GASABO

GISENYI

RUHENGERI

KICUKIRO

NYARUGENGE

IMBIBI NSHYA Z'UTURERE TW'U RWANDA

.1:1 000 000

Legend

" Bureau de district

Parc

Limite de la région et la Ville de Kigali

Lac

Limite de district

Table 2.1: New Roles under Decentralised Service delivery

LevelRole

Central Government

Establishment of national policies and strategies for local service delivery, the elaboration of systems and guidelines for local governments, the provision of fiscal transfers to enable services delivery, and the monitoring of and provision of support to local governments in the delivery of services.

Local Government

Delivery of services, within the context of national policies and guidelines, which are responsive to the needs of the local population, and oriented towards the achievement of national policy objectives

MISSION #1 (Nov-Dec 05)

• Drafting a new GoR Fiscal Decentralization Policy

• Review and Update the GoR Revenue Sources Law

• Planning for Implementation of FD Policy

Existing Problems

• Weak institutional capacity at all levels

• Uneven local resource mobilization capacity

• Weak coordination

• Inadequate funding

Key Objectives

• Create an efficient and sustainable resource mobilization base for local communities

• Provide local Districts with an adequate and equitable level of resources and revenue mobilization powers (Finance Follows Function)

• Strengthen planning and management capacity at the local level through a participative approach

• Foster local Districts’ financial autonomy in the long run

Some Strategies

Incremental revenue generation based on local economic growth Diversification of sources of revenue Development and application of equalization formulae for transfers

for Block and Earmarked grants based on local socio-economic needs and performance

Institutionalization of a system of checks-and-balances through the involvement of grassroots organizations in the budgetary process

Institution of a code of conduct at all levels Development of Information Education and Communication (IEC)

mechanisms for an enhanced community participation

Review the Source of Revenue for Districts Law

Empowerment of local Districts• Delegation of new resource mobilization powers • Definition of new sources of revenue (i.e., notary fees) • Broadening of local tax base (% of income tax or VAT

returned to local Districts)• Integrating sectoral decentralization in local and

central fiscal and financial decision making • Clear definition of intergovernmental fiscal and

financial relations• Strengthening of tax collection procedures

(Privatization, if necessary)• Strengthening of fiscal and financial management

code of conduct• Focus on a participatory approach in all phases of FD

decision making and implementation process.

Implementation plan

Activities Year 1 Year 2 Year 3 Year 4

• Updating FD regulatory framework relative to resource mobilization powers and capacity at local level

• Provision of training and capacity to elected local leaders to carry out their responsibilities

• Enhancing technical capacity at the local level

• Definition of clear guidelines governing intergovernmental financial relations

• Design and Implementation of Information, Education and Communication strategies

• Development of a code of conduct for good governance based on ethics, values and best practices

• Enforcement of code of conduct• Monitoring and evaluation based on clear

performance indicators

MISSION #2 (March 06)

• Designing Equalization Formula for Intergovernmental Transfers

Why Transfer Grants?

• Transfer grants are important component government menu of public financing instruments.

• Transfer grants usually form the initial resource base for the decentralized local communities.

• By compensating Districts with smaller fiscal capacity, equalization transfers are used to reduce the horizontal fiscal imbalance, and the regional disparities and inequities that can exist in a country.

• Equalization transfers can be used to diffuse regionalism, separatism, and other political forces.

• Through equalization grants, the GOR can pursue complementary objectives, such as to stimulate fiscal effort for example.

Why is a new Formula Needed?

• Components of the old Equalization Formula:– Population– Area– Poverty (based on disparities in tax revenues)– Performance (based on submission of administrative

reports)

• Disadvantages of the old Formula– Not based on Districts service demands and Not based on Districts service demands and

expenditures needsexpenditures needs

Principles of Equalization Formula

• Vertical balance• Horizontal balance• Stability • Predictability• Fairness• Transparency• Simplicity• Political-neutrality

Elements of the new Equalization Formula

• Based on:– Districts Service Demands and Expenditures Needs,

which include:• Education Services (Pupils per teacher/#of Schools)• Health Services (Patients per Doctor/# of facilities)• Administrative Cost (Area)• Service Pressure (Density)• Number of Sectors

– Fiscal Responsiveness Factor– Common Factor

Challenges

• Language

• Conflicting agendas among “development partners”

• Conflicting agendas among government Ministries

• Representing other stakeholders’ viewpoints

Results

• Policy and laws adopted by the cabinet in October ’05.

DECENTRALIZATION IN POST-CONFLICT COUNTRIES• Decentralization (and generally

democratization) as a means to prevent violent conflicts for secession – Paul Collier (2004) – Ehrke (1994) – Alesina and Spolaore (1997, and 2003) – Panizza (1998)

THANK YOU!