Relevance of the Implementation Rules for Fiscal Decentralization

[Glen Wright]

Roy Bahl provided a set of implementation rules for fiscal decentralization in 1999. These rules provided some basis for examining and designing a set of policies for implementing fiscal decentralization.  Over the past decade there has been ample opportunity to determine how realistic, relevant and useful these implementation rules are in practice.  I think it would be interesting to get some feedback from practitioners of fiscal decentralization as to how these have been applied in actual practice.  In case you don't know these implementation rules they are provided here:
No 1:  Fiscal Decentralization Should be Viewed as a Comprehensive System
No. 2:  Finance Follows Function
No. 3:  There must be a strong central ability to monitor and evaluate decentralization
No. 4:  One intergovernmental system does not fit the urban and the rural sector
No. 5:  Fiscal Decentralization Requires Significant Local Government taxing power
No. 6:  Central Government must keep the fiscal decentralization rules they make
No. 7:  Keep it simple
No. 8:  The design of the Intergovernmental transfer should match the objectives of the decentralization reform
No. 9:  Fiscal decentralization should consider all three levels of government
No. 10:  Impose a hard budget constraint
No. 11:  Recognize that intergovernmental system is always in transition and plan for this
No. 12:  There must be a champion of fiscal decentralization

[John Short]

Some recent reports to test the rules:

The Commission on Devolution in Wales was launched by Welsh Secretary Cheryl Gillan on 11 October 2011.  The Commission, chaired by Paul Silk, had eight unpaid members drawn from Welsh business, academia, the four main political parties and civic society.
 
The independent Commission was established to review the present financial and constitutional arrangements in Wales. It carried out its work in two parts.
 
The Commission published its report (and Executive Summary) on Part I, which looked at fiscal powers, on Monday 19th November 2012.
 
On 3 March 2014, the Commission published its report (and Executive Summary) on Part II of its remit on the wider powers of the National Assembly for Wales.
 
Subject to availability, Commission members can be available to address interested organisations or groups on the Commission’s work and reports.
http://commissionondevolutioninwales.independent.gov.uk/

[Glen Wright]

John:  Thanks for this.  I read through parts of it and was trying to track the Implementation Rules to aspects of this report.  It seems rather clear that it meets Nos 1 and 5 of the implementation rules.  It seems to focus particularly on the strengthening of the taxing powers.

I am wondering how it meets requirements of a Champion of Decentralization.  Who would this be?  How will these proposals move forward to implementation?

[FitzFord]

Glen,

I just spent much of the past weekend with a bunch of fellow academics and operatives - some of some repute as either or both practitioners and academics. In one session, there was one of the liveliest discussion that is pertinent to your question. My interpretation of much of the presentations and discussion is that despite the lists of rules that are often cited (see for example, Roy Bahl's) is this: Every decentralization system, although it may usefully examine suggested rules, has to be specifically designed to fit the circumstances of that country and the legitimate objectives that their leadership agree on. I will confess that I am strongly of this view, as well. As a result, my suggestion is, to first set out the (legitimate) objectives, the relevant actors (including the local peoples - note the plural), emphasis on transparency, timely feedback on decisions and implementation and mechanisms for correction without rancor, and reward/recognition for extended outstanding performance. Details would necessarily discriminate between different groups for logical reasons on which there is consensus.

This can/should be elaborated in the specific context, of course.

Parenthetically, that set of requirements is why I enjoy working on decentralization.

Fitz.

[FitzFord]

I forgot to mention a very important - indeed, crucial - consideration> Special attention and protection needs to be built in for situations where the political system is controlled by Parties whose National Parliament representatives control the careers of their local government colleagues (a la South Africa). It does not take much thought to imagine the consequences. Citizen participation and oversight outside of the political parties becomes extremely important under these circumstances.

[Glen Wright]

Fitz:  Thanks for your input on this topic.  In your estimation of the program you attended, how do you think  those attending would vote on the Implementation Rules.  I quite agree that the decentralization has to be developed to fit the circumstances in the details.  I am trying to determine if there are some overarching practices or rules that should guide this development.  I think those formulated by Bahl provide some starting point for this but for my part maybe you can apply half of them in the best of situations.  I am working now in a small Balkan country that has never undertaken any decentralization over the past decade and I can't match any of the implementation rules to what they are doing.  There is much expression of the necessity of the decentralization, everyone is in agreement, but when we get to the details the whole thing breaks down along political lines, disagreements among the international experts who produce reports conflicting with each other, and the locals are left in dilemma as to what to do. The safe route is to continue to hold conferences, workshops and go no further.

[FitzFord]

Glen: the following suggestions are not necessarily what you are expecting or asking for, but they reflect how I think about building success in the real world. It is not the complete answer, especially from a technical perspective, but I think it is a good place to start in the "Real World". Create a set of levels with positive labels (so no one is insulted!) and assign responsibility that is manageable at the level to which it is assigned, so that responsibility is meaningful. Some will be upset because they will see this as underestimating them; however, if the path upward is clear and the rules are open, (and there should be a credible system for this)  it can be promoted as a challenge, so it can stimulate these levels to go for the challenge. And they should get help to truly succeed because that is the all round best outcome. So there would be categories of local governments associated with sets of authority and responsibility. If this cannot be done the preconditions for success are unlikely to exist. Next, performance should be meaningful. If a unit performs consistently well, it would be eligible (and  should get, at the time of review results are confirmed) for promotion in terms of authority and responsibility. To avoid favoritism or its converse, all results would be public and verifiable (if this can't be done, forget the whole thing; there is not enough trust across the system for it to work). If performance is consistently poor, demotion should be possible; for this, there must be a trusted authority and transparent results that are difficult to refute. Nevertheless, this will be most difficult element to be accepted, for obvious reasons; a review and support system that helps the unit improve, is the desirable option. A good strategy is to be conservative and assign potentially weaker performers to a lower, or preliminary, category so that the likelihood is their exceeding expectations and thus, gain promotion. In general, you want to make success (real success!) more likely, so positive results build confidence in the subnational gov't and with the system as a whole.
Fitz.

[John Short]

A lot of interesting and relevant historical material on this subject can be found on
http://mcconaghy.jimdo.com

[Glen Wright]

Thanks Fitz for this comment.  I am assuming you are referring to determining the levels of responsibilities based on some capacity assessments and then as the capacity is increased the local governments would assume more high level responsibilities.  This would seem to be a performance based approach to determining the level of decentralization.  Performance based grants have been used in a number of countries and part of that grant is capacity building.  I don't recall that there were levels in which a local government when up or down the classification, although that might be the case in The Philippines.  I don't remember for certain on that, but they had a very developed system of performance indicators.  Is this essentially what you are referring to and do you have some examples of where this has been applied.

[FitzFord]

Glen,

The Philippines has some interesting systems with some interesting problems. Both Serdar Yilmaz and I have written separately about different aspects of their circumstances. We could discuss the related topics if you think that would be helpful.
You have generally identified the principles I have in mind. There is, of course, no perfect system in operation, but some of the general principles appear in Indonesia, although the motivation is primarily political. Nevertheless, given that it is a complex country, it is worth looking at (but not copying wholesale). Because I think that the design of successful systems have to be tailored to the circumstances, I suspect that you may want to discuss country specifics that are under current consideration, offline. If so, let me know.

Fitz.

[Glen Wright]

Fitz:  I think the Philippines is an interesting experience from a number of perspectives and you are more familiar with it than I am.  During my experience there on ADB project I worked with number of LGUs to improve budget process and local asset management.  The Local Government Code was well drafted and provided a clear indication of the LGUs authorities and the classifications.  What I found in the field was much less clear.  The financial reporting was very suspect and in some cases clearly inaccurate.  The other point was the extent to which the LGUs had used their authorities to really be business enterprises for both good and bad purposes.  The local government enterprises were highly used, but some of their activities were clearly not benefiting the local population and actually had a high level of debt associated with them that the local government would be responsible.  Also, the idea that decentralization can have some impact on poverty reduction and conflict resolution has not been demonstrated in Philippines where it would have been of significant.  Maybe you have a different perspective.

[FitzFord]

Glen,
You are spot on. These were the issues we identified in our own (separate) work.  I specifically outlined how the system was twisted by the character and operations of the underlying systems. It is these types of systems and circumstances that require circumstances- based designs rather than a general set of rules designed for all systems.
Fitz.

[Napodano]

I think the following link can further support this interesting discussion
 
'50+ videos to answer your most burning questions regarding Decentralisation and Local Governance - See more at: http://capacity4dev.ec.europa.eu/public-pub.sector-reform-decentralisation/minisite/50-videos-answer-your-most-burning-questions-regarding-decentralisation-and-local-governance'

[Glen Wright]

Fitz:  There was one unusual aspect of the Philippines that I have not found in other countries, but to me was very significant in the whole context.  That was the feudal power structure of the family dominated provinces.  I went to one province that had been dominated by one family for nearly a 100 years.  The provincial governor, the mayor of the province capital, and the budget/finance person for the province were brothers.  Most issues of the province would be settled at a family dinner.  I wondered how this came about and learned from reading a recent biography of William Howard Taft, who first administered the Philippines once the US took them, that it was decided in this period that a ruling party elite made from these families would have the political power.  This seems to still be in place.

I don't know if this situation is replicated to any great extent in other countries, but it seemed rather strange to me and had great impact on how the local governments were administered as extension of family owned businesses. 

I went to a meeting in the province headquarters and I was entering the conference room there was a sign on the door that said:  "Please leave your weapons outside" which made me think there must be some interesting meetings in these rooms. 

[Glen Wright]

Mauro:  Thanks for this input.  I did look at some of these and found the one by Paul Smoke on the Cambodia experience interesting.  I did the evaluation of the UNDP/UNCDF project a few years ago and did find that at the local level it did achieve good results in promoting decentralization of decision making for local investments and service delivery.  The video and transcript does support the idea that you have to tailor the decentralization process to the local circumstances.  One of the interesting findings I had from the evaluation was that actually the Ministry of Finance was a very good supporter of fiscal decentralization, while the Ministry for Local Government was actually an obstacle to this.  The reason that the UNDP/UNCDF project could not be scaled up to national level was that the Ministry of Local Government failed to draft a proper legal framework that would have supported this decentralization, while the MinFin was a big supporter of this. 

[FitzFord]

Glen, Your concerns are well founded. Filipinos have been struggling with this situation for, perhaps, a century, so it is not an easy one to resolve. Much of the talent goes overseas (not only basic skills as is sometimes portrayed), as a result. The rest of the world does benefit as a result, and the Philippines does benefit from remittances. It is an interesting study.

Fitz.