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Sponsoring a Race to the Top: The Case for Results-Based Intergovernmental Finance
Anwar Shah, World [email protected]
Ministry of Finance, Copenhagen, Denmark, September 17, 2009
Outline
• The state of the intergovernmental finance• Taxonomy of Grants: Are unconditional grants
really unconditional? • Introduction to Results Based Intergovernmental
Finance• The Practice: RBIF in Broader Reform• The Practice: RBIF in Education • The Practice: RBIF in Health• The Practice: RBIF in other services • Conclusions
Perceptions on intergovernmental finance are generally negative
• Federal/Central View: Giving money and power to sub-national governments is like giving whiskey and car keys to teenagers.
• Provincial and Local View: We need more grant monies to demonstrate that “money does not buy anything”.
• Citizens: The magical art of passing money from one government to another and seeing it vanish in thin air.
Ironically these perceptions are well grounded in reality in both industrial and developing countries
• Primary focus on dividing the pie - devoid of fiscal and political accountability. Two dominant forms:
• Manna from Heaven or Passing the buck transfers – formula based unconditional transfers –mostly revenue sharing using multiple factors that work at cross puposes
• Conditional transfers that are either pork barrel transfers variety ( political bribes/ favors) (Germany, India, Mexico, Pakistan, USA 2008 e.g. $200m “bridge to nowhere” in Alaska ) Or simply command and control transfers – input based conditional transfers (most countries)
• Overall: Intergovernmental finance is an important if not dominant source of revenue but creates perverse incentives for fiscal management and accountability.
Conditional transfers with conditions on spending are unpopular with recipients as they impair recipient’s
autonomy and may also not further grantor’s objectives
In practice even the manna from heaven may not be so sweet after all
• No local input on total pool• No relation to growth in demand for local
services• Tax effort provisions• Differential sharing of various revenues • Requirements for a development plan, technical
planning committee, internal audit requirements – Uganda and Tanzania
• Submission of budget estimates – Kenya and Nepal.
• Equal per jurisdiction component - Brazil
Why governments do not deliver?
Mandate
Authorizing Environment
Outputs, reach, outcomes
Operational capacity
Taxonomy of grants and their impacts
Increase in Spending Results Accountability Local Autonomy/ Welfare
Cond. open-ended matching
High Low/None Low
Cond. Close-ended matching BC
Medium Low/None Low
Cond. Close-ended
Matching NBC
Low Low/None Medium
Cond. Non-matching
Low Low/None Medium
Cond. Output-based
Low High High
Unconditional Low Low/None High
Traditional conditional grants versus Output-based grants
Criteron Traditional conditional grant
Output-based grant
Objective Spending levels Quality and access to public services
Design Complex Simple and transparent
Eligibility Government Service providers (govt. and beyond government)
Conditions Inputs Outputs
Allocation Project proposal Service population
Compliance Inspections and audits Client feedback.Comparison with base year.
Penalties Audit observations Public censure, voice and exit
Managerial flexibility
None Absolute
LG Autonomy Little High
Transparency Little High
Focus Internal External
Accountability Top down input based Bottom up, results based
Output-based transfers: Results Chain Application in Education
Program objectives Inputs Intermediate inputs
Improve quantity, quality, and access to education services
Educational spending by age, sex, urban/rural; spending by level; teachers, staff, facilities, tools, books
Enrollments, student-teacher ratio, class size
Outputs Outcomes Impact Reach
Achievement scores, graduation rates, drop-out rates
Literacy rates, supply of skilled professionals
Informed citizenry, civic engagement, enhanced international competitiveness
Winners and losers from government programs
An example : An Output based ( performance oriented) education grant to set national minimum standards
and encourage competition and innovation and citizen empowerment
• Allocation basis among local governments: school age children (ages 6-17)
• Distribution to providers: equal per pupil to both government and private schools
• Conditions: Universal access to all, private school admissions on merit regardless of parents’ income, improvements in school achievement scores, graduation and drop out rates, no condition on spending
• Penalties: public censure, reduction of grant funds• Incentives for cost efficiency: retention of savings• Built-in bottom up results based accountability:
competition with voice and exit options as parental choice of school determines school grant.
Citizens as
Clients
National Government
GovernmentProviders
LocalGovernment
StateGovernment
Long Route to Accountability Inputs Control Grants
Citizens as
governors
National Government
Competitive Provision
LocalGovernment
StateGovernment
Govt Non Govt
Short Route to AccountabilityOutput-Based Grants
Is there a case for results based IG finance in industrial countries?
• Politicians and bureaucrats with high ethical standards and strong culture of citizen based accountability
• But competition may improve performance Examples: school finance in USA – Metro DC government and non-government spending. Two contrasting models of school finance – USA vs Canada
RBIF for Furthering Broader Reform Objectives
• Australia National Partnership Payments, 2009 – to create internal common market and to improve service delivery
• Performance Reserve Fund of the EU – 4% to achieve public administration reforms
• Russia Regional Fiscal Reform Fund – 2007• Uganda – Local Development Fund – improving
development planning and implementation capacity
RBIF of education
• Australia. National school Specific Purpose Payments, 2009. Raising year 12 attainment rate to 90%
• USA. Race to the Top Competitive Grant Program, 2009. Internationally benchmarked K-12 standards.
• USA. No Child Left Behind Act of 2001• Higher Education Finance in Canada, Denmark,
Finland, Netherlands, South Carolina, USA• School finance in Brazil, Chile and Indonesia
(now defunct).
USA – Race to the Top, 2009
• Raising internationally benchmarked standards
• Closing the data gap on achievement scores
• Improving the quality of teachers
• Turning around low performing schools
USA – NO CHILD LEFT BEHIND 2000 -
• Student testing in reading , math and science• Monitor yearly progress towards the goal of
proficiency by 2014• Equity in access regardless of race, color and
ethnicity• All schools brought to minimum average
standards• Higher financing for high poverty school districts• Special grants for “good school finance” states
(equitable allocation and improvement in access to the poor)
RBIF of Healthcare
• Canada. Canadian Health Transfer Program (CHT)
• Brazil. Unified Health System (SUS)
Anwar Shah, World Bank
Federal financing of health care and Social Services in Canada – Canada Health Transfer
(CHT) and Social Services Transfer (CST)
Equal Per capita cash transfers (plus transfer of tax points - for health and social services and post secondary education in 1977,13.5% points of PIT and 1% point of CIT)
Conditions for health care transfer (CHT): (1) Universality (2) Portability (3) Public insurance but public/private provision (4) Opting in and out (5) No extra billingConditions for CST: All Canadians treated alike for welfare
programs.Penalties:Threat of discontinuation for breach of the conditions (1)- (4)
above.Dollar for dollar reduction for breach of the condition (5).Sunset clause: Parliamentary review every 5 years.
Anwar Shah, World Bank
Indonesia - Specific Purpose Transfers to Local Governments (now defunct)
L2. District/Town Road Improvement GrantLength of roadsConditionDensityUnit cost
L3. Primary School GrantSchool age children (ages 7-12)Needs for facilities
From Dividing the Pie to Creating An Enabling Environment for Responsive
and Accountable State-Local Governance• Tax Decentralization and Tax Base
Sharing
• Output based fiscal transfers – operating– capital
• Fiscal capacity equalization transfers
• Responsible borrowing
Conclusion
• RBIF empowers citizens as governors
• Weakens opportunism and pork barrel politics
• Exposes corruption, inefficiency and waste
• Opens public sector to competitive pressures within and beyond
• An important direction of reform for both industrial and developing countries.