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8/6/2019 World Bank - Intergovernmental Transfers
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Anwar Shah, OEDCR 1
Intergovernmental Transfers
Anwar Shah, World Bank
8/6/2019 World Bank - Intergovernmental Transfers
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Anwar Shah, OEDCR 2
Relevance
Dominant source of subnational
revenues in many countries.
Design matters for efficiency and equity.
Grant design must be consistent with
grant objectives.
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Importance of transfers
Dominant source of revenue for subnational
governments in some countries:
South Africa 85%
Indonesia 72%Provinces 72%
Local 85%
Nigeria 67% to 95%
Mexico 70% to 90% (poorer states)
Pakistan 82% to 99%
Design of transfers matter for efficiency and equity
and fiscal discipline.
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Grant types
Non-matching transfers: Selective (conditional)
General (unconditional)
Selective matching transfers Open-ended
Closed-ended
Conceptual impacts General non-matching higher welfare
Selective matching open-ended
higher expend. stimulation
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Grants in LDCs vs DCs
LDCs
Passing the buck
transfers (Brazil, India,
South African revenue
sharing)
Pork barrel transfers
(Brazil and Pakistan)
Asking for more trouble(deficit grants and
bailouts)
DCs
Conditional transfers
Equalization transfers
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Criteria for design of transfers
Autonomy
Revenue adequacy
Equity Predictability
Efficiency
Simplicity
Incentive
Safeguard of grantors objectives
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Economic rationale ofintergovernmental transfers
Objective
To bridge fiscal gap
To reduce regional fiscaldisparities
Setting national minimum
standards
Influencing local priorities
To compensate for benefit
spillover
Regional stabilization
Design
Reassignment, tax
abatement, tax base sharing
Fiscal capacity equalization
Conditional block transfers
Open-ended matching
transfers
Open-ended matching
transfers
Capital grants with upkeep
requirement
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Transfers: Lessons
Grant design must conform to
objectives.
Main Arguments and Grant Design
Fiscal Gap: Structural imbalance as a
result of a mismatch between revenuemeans and expenditure needs.
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...Fiscal gap
Reasons:
Inappropriate assign: Reassign
Limited tax bases: Allow joint occupancy or
tax decentralization.
Tax competition: Federal collection and
general (not on a tax-by-tax basis) revenuesharing.
Tax room lacking: Tax abatement and tax
base sharing (Canada and Brazil).
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To bridge fiscal gap
Design: (a) Reassign (b) tax abatement
(c) tax base sharing.
etter practices: Tax abatement in Canada;
tax base sharing in Brazil, Canada, and
Pakistan.
Practices to avoid: deficit grants; tax by tax
sharing.
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Special issues in state-localtransfers
Principal-agent relationship
Pass-thru of federal transfers from states desirable
due to better access to data.
Considerations in unconditional grant design: Classification by population size, municipality type, and
urban/rural
Equal per municipality component
Equal per capita component Service area component
Fiscal capacity component
Considerations in conditional transfers
Simple objectively verifiable indicators of need
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Indonesia -- General PurposeTransfers
1. Provincial Development Grant
Equal per province (85%)
Area (15%)2. District Development Grant
Per capita with a floor
3. Village Development Grant
Equal per village
4. Less Development Village Grant
Per capita
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Setting national minimumstandards
Design: conditional non-matching block
transfers with conditions on standards of
service and access. etter practices: Indonesia roads and
primary education grants; Colombia and Chile
education transfers; Canada health and post-
secondary education transfers.
Practices to avoid: Conditional transfers with
conditions on spending; ad hoc grants.
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Education grant
Allocation basis: Population aged 5-17
Distribution: Equal per pupil to both public
and private schools
Conditions: Universal access to primary and
secondary education
Penalties: Public censure, reduction of
grants funds
Incentives: Retention of savings
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Health grant
Allocation basis: Weighted population by
age class with higher weights for ages 0-5
and 65+
Distribution: Patient use
Conditions: Minimum standards of services
and access to health care
Penalties: Reduction of grant funds
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Indonesia - Specific PurposeTransfers to Provinces
P1. SDO - Subsidy forAutonomous Regions
Public sector wages
P2. Provincial Road Improvement Grant
Length of road
Condition of road
Unit cost of construction and maintenance
P3. Reforestation and Regreening
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Indonesia - Specific PurposeTransfers to Local Governments
L1. SDO - Subsidy forAutonomous Regions
Public sector wages
L2. District/Town Road Improvement Grant
Length of roads
Condition
DensityUnit cost
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...Transfers to Local Governments
L3.Primary School Grant
School age children (ages 7-12)
Needs for facilities
L4. Health Grant
Need for medicine, health centres, and
personnel
L5. Reforestation Grant
Project review
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Federal financing and healthcare in Canada
Per capita transfers tied to rate of growth of GDP
Conditions:
(1) Universality
(2) Portability
(3) Public insurance but public/private provision
(4) Opting in and out
(5) No extra billing
Penalties:
Threat of discontinuation for breach of 1-4.
Dollar for dollar reduction for 5.
Sunset clause: Parliamentary review every 5 years.
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Influencing local priorities
Design: Open-ended matching transfers
(with matching rate to vary inversely with
fiscal capacity).
Better practices: Matching transfers for
social assistance in Canada.
Practices to avoid: Ad hoc grants.
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To compensate for benefitspillovers
Design: Open-ended matching transfers with
matching rate consistent with spillout of
benefits.
Better practices: RSA grant for teaching
hospitals.
Practices to avoid: Closed-ended matching
transfers.
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Regional stabilization
Design: Capital grants provided
maintenance possible.
Better practices: Limit use of capital grants
and encourage private sector participation by
providing political and policy risk guarantee.
Practices to avoid: Stabilization grants with
no future upkeep requirements.
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Capital grants
Special issues in the use of capital transfers to
finance infrastructure investments.
Merits:
Finance large infrastructure projects
Visible
No long-term commitment by donors
Demerits: Capital bias
Fungibility
Distort local priorities
Undermine local autonomy
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Improving capital grants
Limit their use
Require maintenance plan and user charge policy
Matching rate inversely related to fiscal capacity Selection of recipients based on need and capacity
factors and project evaluation
Technical assistance
Monitoring, inspections, audit, and evaluations Require survey of condition of existing network for
assessment of future needs
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To reduce regional fiscaldisparities
Design: General non-matching fiscal
capacity equalization transfers.
Better practices: Fiscal equalization
programs of Australia, Canada, and
Germany.
Practices to avoid: General revenue
sharing with multiple factors.
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Fiscal equalization transfers
REGIONALFISCALINEQUITY AND
NATIONALFISCALINEFFICIENCY
ARGUMENT
DIFFERENCES IN NET FISCALBENEFITS ACROSS
STATES (NFBS)
Reasons:
a. Differences in access to source-based taxes such asresource revenues and CIT.
b. Per capita incomes differs
differential access to PIT and sales tax.
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c. Fiscal needs different: Proportion of old, young,
incidence of disease, terrain factors, etc.
Total Income = Private Income + NFBs
Individuals with identical incomes in two states:
Rich Poor
Private income 10,000 10,000
Tax paid 5,000 5,000
Per capita exp. 10,000 5,000NFB 5,000 0
Total income 15,000 10,000
Fiscally induced migration to RICH state.
Inefficient and inequitable resource allocation.
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Grants rationale
Solution:
Fiscal equalization transfers to eliminate
NFBs
Allow replication of financial structure of an
unitary state while having decentralized
decision making.
Equity and efficiency considerations coincide.Design ofFETs:
Must be inframarginal, i.e., no incentive to
change fiscal effort to exploit the system.