COURSE WORK ASSIGNMENT NO.

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SCHOOL OF ARTS AND SOCIAL SOCIENCES

UNIT 2 DESIGNING DECENTRALISATION IN THE THIRD WORLD COUNTRIES

 This unit examines the design of decentralisation third world countries and fiscal
decentralisation in particular. It discusses the intergovernmental fiscal relations,
revenue assignment, intergovernmental grants, the mechanisms for assessing
capital markets, service reform, technical and managerial capacity, accountability,
transparency and corruption.

2.1 INTERGOVERNMENTAL FISCAL RELATIONS

Most countries have several tiers of government. In addition to the national level, many
countries have two sub -national levels; i.e. provincial (or regional) and local governments.
Furthermore, local authorities are often divided into sub -levels such as ward and village
councils. In many countries the lower levels of government undertake important fiscal functions,
both on the expenditure side and with respect to revenues (Boadway et al., 2000). In such
federal systems various forms of fiscal arrangements between the national and lower levels
determine the way in which taxes are allocated and shared among the various levels of
government, and how funds are transferred from one level to another. Thus, intergovernmental
relations, both vertical (between levels of government) and horizontal (within levels) are
important for the development and operation of an efficient and effective public sector.
According to Bird (1990:281), it is the ‘workings of the myriad of intergovernmental relations
that constitute the essence of the public sector in all countries’.
(https://www.cmi.no/publications/file/871-intergovernmental-fiscal-relations-in-developing.pdf)

Fiscal decentralisation can take many forms, including a) self-financing or cost recovery through user
charges, b) co-financing or co-production arrangements through which the users participate in
providing services and infrastructure through monetary or labour contributions; c) expansion of local
revenues through property or sales taxes, or indirect charges; d) intergovernmental transfers that shift
general revenues from taxes collected by the central government to local governments for general or
specific uses; and e) authorisation of municipal borrowing and the mobilisation of either national or
local government resources through loan guarantees. In many developing countries local governments
or administrative units possess the legal authority to impose taxes, but the tax base is so weak and the
dependence on central government subsidies so ingrained that no attempt is made to exercise that
authority.

ASSIGNING EXPENDITURE RESPONSIBILITIES

Both theory and experience indicate that it is important to state expenditure responsibilities as clearly
as possible in order to enhance accountability and reduce unproductive overlap, duplication of
authority, and legal challenges. In theory, decisionmaking should occur at the lowest level of

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government consistent with allocative efficiency (for example, the geographic area that internalizes the
benefits and costs of decisionmaking for a particular public service). Thus the optimal size of
jurisdiction for each service and service component would likely differ, although in practice economies
of administration and transactions costs would presumably lead to the grouping of roughly congruent
services at the local (street lighting, refuse removal), regional (rural-urban roads, refuse disposal),and
national (intercity highways, environmental policy) levels.Decentralized decisionmaking enlarges
possibilities for local participation in development. However, accountability is often best promoted by
establishing a clear and close link between the costs and benefits of public services, so that the overall
amount of expenditure responsibility assigned to a level of government ideally will correspond to the
amount of revenues that level has at its potential command.Some national allocative objectives can be
carried out either directly by the central government or indirectly by local governments responding to
incentives created by national grants and regulations (as well as interlocal or interregional agreements).
Moreover,national governments have obvious roles in formulating stabilization and distribution
policies, and attention must be paid to possible local conflicts with these policies. In many instances it
seems appropriate for some functions to be shared in the sense that higher levels of government may
exercise a regulatory or policy role, while lower levels of government are responsible for delivering
services.
(Rethinking Decentralization in Developing Countries – The World Bank Washington D.C Jennie
Litvack, Junaid Ahmad, Richard Bird)

2.2 REVENUE ASSIGNMENT

Governments rely on a wide variety of tax instruments available for their revenue needs, such as direct,
indirect, general, specific, business and individual taxes. The question addressed here is which types of
taxes are most suitable for use by each level of government.
PRINCIPLES OF TAX ASSIGNMENT
The assignment of taxes by jurisdiction depends partly on the mix of various taxes used in the country
overall. In public finance theory, the issue of the ideal tax mix even in the unitary state has not been
widely developed. Governments almost universally employ balanced tax systems which have the
feature that different taxes apply to basically the same bases. Furthermore, by using a mix of taxes,
taxpayers who would otherwise be able to avoid taxation of one type are caught in the net of another,
making the tax system fairer. The importance of the various taxes in the overall mix remains, however,
a matter of judgment rather than something that can be deduced from the principles.
These same general considerations apply in the case of assigning taxes in a federal government system.
Efficiency and equity arguments have to be tempered by administrative considerations, and the exact
assignment depends upon informed judgment. We can, however, outline the economic principles that
come into play in deciding which taxes to assign to lower levels of government. These among others
include the following:

Efficiency of the Internal Common Market: The internal common market will be functioning
efficiently if all resources such as labour, capital, goods, and services are free to move from one region
to another without impediments or distortions imposed by policy. Decentralised tax systems can
interfere with the efficiency of the economic union in two ways. The uncoordinated setting of taxes is
likely to lead to distortions in markets for resources which are mobile across states, especially capital
and tradable goods. This problem will be lessened considerably if state governments recognise that
resources are mobile. However, if they do recognise that, they may engage in socially wasteful beggar-
thy-neighbour policies to attract resources to their own states. If all jurisdictions engage in such
policies, the end result will simply be inefficiently low taxes or high subsidies on mobile factors.

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National Equity: The tax-transfer system is one of the main instruments for achieving redistributive
equity. The argument for making equity a federal objective is simply that all persons ought to enter into
society’s ‘social welfare function’ on an equal basis, and presumably the federal government is the only
level that can ensure that residents in different regions are treated equitably. This may be tempered if
states have different tastes for redistribution, or if centralised decision making is not guided by
normative criteria. To the extent that equity is viewed as being a federal policy objective, decentralised
taxes can interfere with the achievement of those objectives.

Administrative Costs: The decentralisation of revenue raising can also serve to increase the costs of
collection and compliance, both for the public sector and for the private sector. There are fixed costs
associated with collecting any tax which will have to be borne for each tax type that is used by the
states. Taxpayers will also have to incur costs of compliance for all taxes levied. The possibilities for
evasion and avoidance will increase with decentralisation for some types of taxes. This will be true
where the tax base is mobile, or where the tax base straddles more than one jurisdiction. In the latter
case, there will need to be rules for allocating tax revenues among jurisdiction; in their absence, some
tax bases may face either double taxation or not taxation at all. Auditing procedures may also be
distorted for those tax bases which involve transactions across state boundaries.

Fiscal Need: To ensure accountability, revenue means should be matched as closely as possible to
revenue needs. Thus tax instruments intended to further specific policy objectives should be assigned to
the level of government having the responsibility for such a service. Thus progressive redistributive
taxes, stabilisation instruments, and resource rent taxes would be suitable for assignment to the national
government; while tolls on intermunicipal roads are suitably assigned to state governments. In
countries with a federal level VAT, it may be too cumbersome to have sub-national sales taxes. In such
circumstances, the fiscal need criterion would suggest allowing subnational governments access to
taxes which are traditionally regarded as more suitable for national administration, such as personal
income taxes.However, the main problem with the tax assignment that emerges from the preceding
prescriptions is that it generally does not provide sufficient revenues for lower-tier governments. Local
and especially intermediate-level governments in many countries levy a variety of specific (excise)
taxes on gambling, motor vehicles, and so on.

Resolving the Problem: The first way is to supplement local revenues by intergovernmental fiscal
transfers without undesirably reducing local efforts to collect their own taxes.
The second option is to permit subnational governments to levy their own broad-based taxes as long as
they burden local beneficiaries only.
Whether with respect to such a surtax, a local property tax, or local taxes in general, the critical
elements required to ensure local accountability without efficiency costs are (1) to restrict local
governments as much as possible from exporting taxes and (2) to permit them to set their own tax rates.
For efficiency, it may be desirable to assess the base of a tax centrally and even to have it collected by
the central government; but for accountability it is critical that the local authorities are responsible
perhaps within limits for setting the tax rate.

THE TRANSITION ECONOMIES: REDEFINING LOCAL POWERS

A special situation exists in a few transitional countries, including those of China and Vietnam, where
local governments have traditionally had a larger role in administering national tax bases. In these
transition economies the central government may not have full control over its tax bases due to local

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administration of these.
Further, in a country with conflict among levels of government, subnational administration of national
taxes is not advisable since the subnational entity can refuse to submit national taxes if it becomes
disgruntled e.g. Tatarstan in Russia. China has recently strengthened its central tax administration to
collect revenues from central and shared taxes. Second, problems are also caused by overlapping,
uncoordinated administration, especially for sales and excise taxes.
THE BALANCE BETWEEN ENOUGH AND TOO MUCH
Decentralisation has the potential to reduce accountability by breaking the links between the levels of
taxation and expenditure. Major expenditure responsibilities are being transferred to local governments
in an effort to improve service delivery, but there are few high-revenue taxes which can be assigned to
local governments without creating national economic distortions. Efficiency in tax administration
suggests that local governments should levy taxes on immobile factors e.g. property taxes, frontage
taxes, tolls on local roads and poll taxes. These tax revenues are unlikely to be sufficient in many
localities, and thus, intergovernmental transfers are required to mitigate this imbalance. While taxation
increases can create constituent pressure for good local performance, some grant designs can create
central government pressure for local performance.
2.3 INTERGOVERNMENTAL TRANSFERS/GRANTS DESIGN
Intergovernmental transfers are the dominant source of revenues for subnational governments in most
developing countries. The design of these transfers is of critical importance for efficiency and equity of
local service provision and fiscal health of subnational governments.
TAXONOMY OF GRANTS
For the purpose of economic analysis, grants can be broadly classified into two categories: non-
matching and selective matching:
Nonmatchng transferers: Non-matching transfers may be either selective (conditional) or general
(unconditional). Selective non-matching transfers offer a given amount of funds without local
matching, provided they are spent for a particular purpose. If the non-matching grant is unconditional
or general, no constraints are put on how it is spent and unlike conditional grants, no minimum
expenditure in any area is expected. Since the grant can be spent on any combination of public goods or
services or to provide tax relief to residents, general non-matching assistance does not modify relative
prices and is the least simulative of local spending.
Selective (Conditional) Matching Transfers: Selective matching grants or cost-sharing programs
require that funds be spent for specific purposes and that the recipient match the funds to some degree.
Such a subsidy/transfer has two effects: (a) income effect – the subsidy gives the community more
resources, some of which may go to acquire more of the assisted service; (b) price or substitution
effect: since the subsidy reduces the relative price of assisted service, the community acquires more for
a given budget. Hence both effects stimulate expenditures on the assisted category. Such transfers can
be open-ended (no limit on matching funds) or closed-ended. Matching transfers may distort local
priorities and be considered inequitable in that richer jurisdictions can raise matching funds more
easily.

REVENUE SHARING
Many countries attempt to achieve various of the objectives ascribed above to transfers through
systems variously described as "tax sharing" or "revenue sharing." While there are a wide variety of
such systems, most of them - perhaps most markedly in the transitional countries - suffer from several
common problems. First, if they are partial, that is, do not apply to all national taxes but only to a
subset of such taxes, they may bias national tax policy. Second, as is often the case they share the
revenues from origin-based production taxes to the jurisdictions from which the revenues are collected,

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they break the desirable link between benefits and costs at the local level and hence reduce
accountability and the efficiency of decentralisation. Third, since in such systems tax rates are
invariably set by the central government, and in addition since the sharing rate is often applied
uniformly throughout the country, once again the accountability link is broken and subnational
governments have no incentive to ensure that the amount and pattern of their spending is efficient.
2.4 SHOULD BORROWING BY THE PUBLIC SECTOR BE DECENTRALISED?
The debt crisis of subnational governments in Brazil, the inflationary impact of subnational financing
in Argentina, and city-level bankruptcies in the United States have often been used to illustrate the
possible macroeconomic implications of decentralising borrowing powers. The moral hazard problem
the proposition that access to financial markets by subnational governments may create unplanned
fiscal liabilities for central government is the core of the argument.
2.5 WHY IS ACCESS TO FINANCIAL MARKETS IMPORTANT?
There are three primary reasons why access to financial markets is considered important for
subnational governments:
Financing capital expenditure: Subnational governments often have responsibility for public
investments that are lumpy in nature. Financing such capital investment through increases in current
taxes would be inefficient. In addition, because the benefits of such public investments often last
several decades, equity considerations would suggest that future generations participate in the
financing. Capital markets provide this intertemporal link.
Matching expenditure and tax flows: Within a particular fiscal year, expenditures incurred and tax
intake may not be fully in synchrony. Access to financial markets offers an opportunity to smooth out
such mismatches.
Fostering political accountability: The pricing of capital by markets may provide an independent
mechanism for fostering political accountability. Markets may signal the poor performance of
subnational governments through increases in interest rates or simply by blocking access.
WHAT ARE THE MECHANISMS FOR ACCESSING CAPITAL MARKETS BY
SUBNATIONAL TIERS?
At least four channels exist for access to capital markets by subnational governments:
 Direct borrowing by central government and on-lending to subnational tiers
 Through a public intermediary, a state-owned financial institution
 Direct borrowing from capital markets
 Through market decentralisation of public services, where possible

In ascertaining the relative merits of each channel, policymakers will need to consider several factors.
The channel selected should minimise or eliminate the inefficient political allocation of credit. Any
implicit liability by an upper-tier government should be explicitly recognised and reduced or
eliminated. And selection should be made with a view toward strengthening capital markets.
Additional complications may occur when multiple channels are used. For example, in South Africa,
government has created a public infrastructure bank that operates alongside a well developed private
capital market. In this case, the regulatory framework will need to address the extent to which a
complementary relationship can be established between the public and private financial systems,
whether competition between the two is necessary and whether fair competition can be enabled, and the
extent to which one channel displaces the other.

2.6 EVOLUTION OF LOCAL CAPITAL MARKETS

Of particular interest in assessing the merits of different channels is the linkage between access to

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capital markets by subnational governments and the evolution of local capital markets. In countries
where local capital markets are weak, central government borrowing abroad may be the primary
mechanism through which subnational governments access long-term finance.
Market decentralisation involving the private sector in the financing and delivery of government
services corporatisation, and the unbundling of the delivery of services may also increase access to
financing.
In addition, in relatively more developed capital markets, the use of private credit rating agencies and
bond insurance agencies offers a market-based mechanism to monitor and regulate subnational
borrowing. But these institutions also need to be monitored and regulated by the public sector. Finally,
one lesson from worldwide experiences is clear: subnational public financial institutions are
undesirable. The incentives for sub national governments to abuse their relationship with their own
financial institutions at the expense of macroeconomic stability is too great. Argentina stands out as a
classic example of this situation.
2.7 HOW SHOULD THE REGULATORY FRAMEWORK FOR SUBNATIONAL
GOVERNMENTS BE DESIGNED?
A well-designed regulatory framework is necessary to ensure that the decentralisation of borrowing
does not provide perverse incentives for excessive lending by markets and excessive borrowing by
subnational governments excesses that may eventually end up as liabilities of central authorities.
Such a framework requires transparency, preferably through information systems with standardised
accounting systems for subnational governments and better public information on their liabilities.
However, more public information will not by itself curb moral hazard problems. Penalties would need
to be associated with excessive borrowing. One method is to legislate debt thresholds and penalties for
crossing them and to establish transparent mechanisms for enforcing public bankruptcies. Examples of
the latter include the U.S. type of financial control boards or the New Zealand system of court-
appointed receiverships.
Ensuring that subnational governments have access to funds of their own tax bases and unconditional
grants that can be pledged into the market as collateral is also necessary to reduce moral hazard
tendencies. Without such direct fiscal backing, markets might view any capital market borrowing by
subnational governments as being implicitly backed by the central government. Having their own fiscal
base is therefore an important prerequisite for subnational governments’ access to finance and for
limiting moral hazard problems.
Market decentralisation may also offer an interesting mechanism for reducing the moral hazard
problem. Privatisation of public infrastructure could expose the firms to private sector bankruptcy laws
and allow other private companies to bid for the assets in case of financial difficulties an option
unavailable with public ownership. To implement this option, however, governments will need to
ensure multiple deliverers in any one sector. Private participation also creates options for accessing
financial equity as well as debt, creating an incentive for equity to monitor debt that is not available in
public financing systems. In addition, unbundling services may reduce the size of the entities involved,
thus avoiding the "too big to fail" syndrome that often motivates bailouts.
Ultimately, the combined use of information systems, access to subnational governments’ own fiscal
base, public legislation, bankruptcy laws, and market decentralisation offers an institutional setting,
creates an incentive to stick to a hard budget constraint at all tiers of government, and permits
borrowing to be decentralised.
2.8 SHOULD FOREIGN BORROWING BE ALLOWED?
Direct access to international capital markets by subnational governments is further complicated by
issues of general capital controls, capital account liberalisation, and the nature of the foreign exchange
regime adopted by the government. This overall context of the exchange rate regime should determine

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whether direct borrowing by subnational governments in international markets should be permitted.
Because this decision is further influenced by the depth of local capital markets, a sequencing issue
may arise as well. Sometimes it may be preferable to allow direct access to local capital markets prior
to opening access to international markets. Given the limited consensus on this issue, there seems to be
a bias toward not granting direct access to international markets by subnational governments. In any
case, the issues raised in this note about the regulatory framework for decentralising borrowing apply
equally to local and foreign borrowing.
2.9 DECENTRALISATION AND CIVIL SERVICE REFORM
Civil service reform is usually a supporting strategy for more general decentralisation in government
operations or service delivery. One does not decentralise the civil service as an end in itself but one
does so in order to provide services better, manage resources more efficiently, or support other general
outcome goals. The civil service as a whole can be seen as one of the main instruments with which the
government fulfils its obligations. In the context of decentralisation, this tool must often be reshaped in
order to perform a new set of duties efficiently, equitably, and effectively. Reform of the civil service,
therefore, is the process of modifying rules and incentives to obtain a more efficient, dedicated and
performing government labour-force in newly decentralised environment.

How does Decentralisation affect the Civil Service?

Civil services at all levels of government need a capable, motivated, and efficient staff in order to
deliver quality services to its citizens. When civil service functions and structures are decentralised,
existing bureaucratic patterns must be reorganised as roles and accountability are shifted.
Decentralisation thus intensifies the need for capable staff and increases the importance of capacity-
building programs.
2.10 THE PROCESS OF DECENTRALISATION
Disperses power, both geographically and institutionally: Decentralisation inevitably changes the
location of power and jobs. Movement geographically or across tiers of government is often impeded
by issues related to statute, prestige and poor labour mobility. In the Eastern European transition
economies, for example, de-legitimation of the central state and the emergence of representative
government at local and intermediate levels of government has complicated human resource allocation.
Incentive programs and mechanisms for inter-post mobility, which compound the costs of
decentralisation, may be required in order to introduce flexibility.
Creates new responsibilities for inexperienced actors: Decentralisation creates more opportunities for
local autonomy and responsiveness to more specialised constituencies, but it also gives subnational
governments more room to fail if specific steps are not taken to build local technical and managerial
capacity.
Can disperse scale economies/expertise groups: The need for specialised personnel is related in part to
the size of the territory covered by the entity. Below a certain size, it might be counterproductive or
cost inefficient to have specialists or technical personnel. There are methods which can be used to
address this issue, one of which is to allow in the context of the decentralisation schemes the possibility
of empowering local self-governments units to form associations and pool their resources in order to
cover activities requiring specialised personnel.
Introduces more levels into the state: Decentralisation, especially political decentralisation creates a
class of government workers which, based on the specific information which they receive feedback
from their constituencies may have different preferences than workers at the next higher level. This
divergence in views and convictions can create conflict within the civil service that will require
mechanisms to manage effectively.
Creates a tension between local autonomy and national standards: Decentralisation relaxes national

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control and creates the potential for more regional variation in civil service conditions. Some room for
variation allows regions the flexibility to hire a civil service that matches a community’s needs and
budget constraints. National salary, eligibility, and performance standards can ensure consistent quality,
but they can also lead to personnel expenditures especially for locally administered education and
health sectors beyond some local capacities; grant transfer systems will need to take different financing
capacities into account in these and other types of mandated expenditures. The Philippines, Indonesia,
and Pakistan are examples of decentralised states with essentially uniform terms and conditions of
service for government employees in different regions.
Can increase administrative costs: Creating additional layers of government is an expensive
proposition, and while the central government - in the best of cases- might reduce its role and shed
personnel in the context of decentralisation, empirical evidence suggests that these workers are often
reabsorbed by local governments. There is thus no net change in public sector employment. In the
worst of cases, central government employment remains unchanged, while local government
employment grows.
Civil Service Reform to Support Decentralisation
The twin tasks of building local capacity and adjusting to the changes in intergovernmental
coordination needs can be daunting even when budgets allow comprehensive training and all stake-
holders support the reforms. The more frequent realities of budget constraints and mixed support,
however, practically ensure that large-scale civil service reform will be a long drawn-out, expensive
process that does not keep up with the pace of service or sector decentralisation.
Building Local Capacity
Local (or at least sub-national) capacity is one of the most important factors creating a well-functioning
decentralised civil service. In countries where local institutions already exist, the challenge will be to
reinforce them institutionally and legally as well as to strengthen their personnel management
capacities. In places where local government institutions are embryonic or exist only at an informal
level, the institutional and legal framework will have to be created before any type of reform of the
administration is undertaken.

The degree of local capacity determines the kind of human-resource management strategies that will be
feasible and desirable. Decentralisation of human resource management is more likely to succeed in
cases where lower-level authorities have the financial and managerial ability to set competitive
compensation packages and salary levels that will attract local talent. In these cases, the flexibility
advantages of allowing local governments the to set hiring levels might outweigh the risk of increasing
inter-regional inequalities. Where talent and skills are lacking at the local level, a unitary hiring system
might be preferred to ensure that the necessary skills are present locally in all regions. In these cases
where the centre retains more control over human resources, caution should be paid to ensure that the
management options of local stakeholders are not curtailed.
2.11 ADJUSTING TO DECENTRALISATION: GENERAL GUIDELINES FOR COUNTRY-
SPECIFIC STRATEGIES

The legal framework should clearly define responsibilities and standards. The creation of a strong
legal framework- to address issues related to financing and reporting, to determine the type of control
mechanisms (especially financial) that are necessary and who is accountable for them, to evaluate
hiring practices and compensation schemes as well as address issues related to the procurement of
public works - must be a priority in any reform effort to ensure sound utilisation of public resources
and minimise corruption.

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Consistency and transparency gain support. On matters of staffing, compensation or oversight of local
administration, and most importantly in the delivery of services, it is very important to ensure that there
is transparency and that changes in the administration (and therefore the civil service) are not seen as
an instrument to disenfranchise some groups or favour another.

Reporting mechanisms need to be clear and precise. Clear reporting procedures will need to be put in
place vis-à-vis higher levels of government i.e. central government, in the case of regional
administrations, and horizontally, vis-à-vis other government agencies at the same level. In the medium
and longer-term, audit courts can be a useful regulatory mechanism. Transitions from the existing
system to new systems have to be carefully planned to avoid conflict between new reporting
arrangements and enduring mechanisms.

Channels for citizen-civil servant communication need to be created. By including more citizens in
the process of monitoring civil service performance, decentralisation creates more opportunities for
friction between civil servants and citizens. Harassment by private interest groups can prevent honest
and dedicated civil servants from performing their duties, while civil servants can use their positions to
threaten citizens. These tensions can be avoided by relatively quick and inexpensive methods and
structures for redressing grievances, whether these come from civil servants or from the citizens.

Training should contribute to the formation of new working relationships. In addition to building
local capacity, training can be a tool for creating personal networks among various levels of
government, regions, or types of government workers. One recommendation, for example, might be to
train career civil servants and local politicians together to insure that they better understand what is
expected of them and what they can expect from each other.

All levels of government should be encouraged to define and plan for the types of workers they will
need in order to carry out new responsibilities. In the short term, these sorts of rough plans substitute
for the computerised establishment management capacity and human resource management staff that so
many countries lack and can help eliminate duplicate workers, unnecessary hires, and other expensive
mistakes. At the very least, they can be an exercise in longer-term planning and role definition.

Decentralisation can be a way of improving access to services, tailoring government actions to private
needs, and increasing the opportunities for state-society interactions. Subnational governments,
however, will only be effective when they have access to the necessary human and financial resources
to undertake the services they have been conferred.

Civil service reform is both capacity building and adjusting to decentralisation-- addresses the first of
these requirements. There is fairly widespread agreement that capacity-building at all government
levels is an essential component of decentralisation. The sequencing and priority levels of training is
whether to train local or central governments first. This depends on the country itself, although the
subnational governments have generally been the first to be trained to accept their new responsibilities.

2.12 DECENTRALISATION, INFORMATION AND MONITORING

Accountability is a prerequisite for improved public sector performance, and information is the key to
accountability. The systematic collection, analysis, and reporting of information are critical elements of
decentralisation programs because that information can be used to verify compliance with policy goals,
to analyse alternative outcomes, and to guide future decisions. Information on financial flows i.e.,

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budgeting and expenditure reporting as well as on other inputs, outputs and, where possible, outcomes.
Such information is essential to inform local constituents and to encourage public participation in the
political process and at the central level to monitor and supervise local activities funded at least
partially by central sources.

Many decentralising countries have weak or inadequate mechanisms for citizens and higher levels of
government to monitor, evaluate and support decentralisation. However, this does not prevent
decentralisation from achieving some of its goals, but it does limit its ability to create large efficiency
gains. The task of monitoring and assessing subnational finances can be strengthened considerably
through improvements in financial accounting and reporting, and the establishment of analytical
capabilities for monitoring and evaluation.
To improve financial accounting and reporting, detailed fiscal data should be regularly collected and
reported for subnational governments. Ideally these data would be derived from uniform financial and
reporting systems. At a minimum, these data should be collected and processed on a regular and timely
basis. The data should exhibit the following characteristics:

- breadth of coverage: information should be broadly representative, both across units of

subnational government and across financial classifications (e.g., revenues, expenditures, debt)
- consistency: minimal reporting and classification errors
- comparability: the same types of activities should be reflected across units of government
- clarity: actual activities should be reported rather than budgeted activities, and ideally, data
should be audited

The development and implementation of financial reporting and information systems often requires
substantial technical assistance, training, time and resources. Implementation of these systems may also
require that central institutions be established to develop and maintain the reporting systems, to train
and support local officials, and to monitor and analyze developments in subnational finance.

2.13 DECENTRALISATION AND LOCAL TECHNICAL AND MANAGERIAL CAPACITY

While one of the common rationales for decentralisation proposes that local governments’ proximity to
their constituents will force them to be better than central governments at managing resources and
matching their constituents preferences, it is not at all clear that local governments and communities
have the capacity to translate this information advantage into a efficiency advantage. Inexperienced,
small local governments may not have the technical capacity to implement and maintain projects and
they may not have the training to effectively manage larger budgets.
"Local government" is taken to mean the level of government where some degree of everyday face-to-
face interaction between citizens/beneficiaries and government is possible.

Assessing Local Capacity

Decentralisation planners have used the general guideline that central agencies should focus on creating
and sustaining the enabling environment and overall strategic issues, while local organisations should
concentrate on tailoring the specific mechanisms of service delivery and public expenditure packages
to fit local needs and circumstances. In reality, however, varying degrees of local capacity both local
government and civil society/the private sector obviously affect decisions about which levels of
government can best perform which tasks. In most cases, decentralisation of basic services does not
mean the wholesale transfer to local agencies of all tasks associated with those services. An assessment
of local capacity is an integral part of designing decentralisation.

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What is "Capacity?"
Measuring local capacity can be difficult and the debate over quantifying it has often been motivated
by political concerns as well as technical considerations about the local government’s ability to provide
services. (Widner, 1994). Central governments have used "lack of capacity" excuse for refusing to
transfer their authority, financial resources, and the accompanying privileges to local units. For
example, Fiszbein (1997) found in Colombia that "what was being characterised by national agencies
as poor planning in municipios was in fact a genuine disagreement between local and national
priorities." The municipios were actually demonstrating considerable local capacity by turning down
conditional matching grants from central agencies and borrowing funds locally at market rates in order
implement their own priorities.
For this reason, it is useful to set out some of the relevant issues in objectively measuring local
capacity. The fact that a community and its government exist indicates the presence of some skills. The
challenge for development agencies and their partners is to identify the latent capacity in the local
government, civil society, and private sector, and bring it into the development programs.

The first task is to identify the specific tasks that that local governments and citizens will need to carry
out. The following are just a few of the components of planning, implementing and sustaining basic
services.
 analysing and solving local problems
 determining community needs
 organising local and national political support for programs
 mobilising national resources for programs
 raising tax revenues or collecting user fees
 writing specifications for the technical elements of programs
 maintaining and sustaining the service
 evaluating the impact of the program on the local environment
 providing for those affected adversely by the program
 contracting for services and buying equipment

Uphoff has suggested that there are four fundamental functions that organisations (and systems of
organisations) must be able to do in order to reach their objectives.

These functions are:

- decision-making, which includes planning and evaluation;
- resource mobilisation and management;
- communication and coordination; and,
- conflict resolution.
Thus the question becomes: "Can local communities and their governments organise themselves to
perform the four functions and provide basic services for their residents?"

The second task is to create appropriate, comprehensive measures for local groups’ ability to carry out
the required functions. There are several issues to consider in measuring capacity:

Outputs vs. Outcomes: The effects of government policies are subject to so many uncontrollable
outside influence such as weather that outcomes are usually an unreliable indicator of how well the
government provides services.

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Ability varies between tasks and sectors: One of the most important tasks in planning decentralisation
is to identify the comparative advantage of the local governments in various tasks.

People vs. Institutions: Observers must consider whether "local capacity" consists of individuals who
may or may not continue to play a role in the government or whether there are institutionalised
mechanisms such as competitive pay, prestige, contracting arrangements, or training procedures for
ensuring a continuous supply of technical and managerial expertise. In assessing the community’s
capacity, one would want to look at the depth and history of civil society organisations as well as the
number of private contractors and concentration of skills in this area.

Bureaucratic and Technical Infrastructure: The processes by which information is received,

processed, and stored underlie most local government functions. The existence of appropriate
technology i.e. databases, filing systems, is essential, for example, for the ability to collect taxes or user
fees.

The Role of Civil Society: NGOs can often be a source of trained, experienced personnel and local
construction, accounting, etc. firms can provide services on a case-by-case basis. The local
government’s relationship with the private sector and demonstrated ability to contract out is an
important, often overlooked part of "capacity." In assessing the community’s longer-term capacity, one
would want to look at the depth and history of civil society organisations in this area.

Decentralise or build local capacity? Which comes first?

The traditional approach to decentralisation has been to build capacity before transferring
responsibilities or revenues. This cautious method was fuelled by worries about irresponsible spending,
local corruption, regional inequities, and service collapse as well as many central governments’
reluctance to devolve authority. Some authors such as Bahl and Linn even argued that the lack of local
capacity, among other factors, made decentralisation ineffective and even undesirable in developing
countries.

This traditional approach is changing, however as increasing evidence shows that the capacities of all
levels increases as decentralised service systems mature. There is a growing appreciation that
"management is a performance art" better learned by doing than listening. Rondinelli, et al. (1984)
reports that Indonesia, Morocco, Thailand, and Pakistan’s local government capacity increased slightly
but perceptibly in the years following decentralisation. Devolution in Papua New Guinea has increased
popular participation in government and improved the planning, management, and coordination
capacity of provincial administrators. Faguet’s ongoing research on Bolivia shows that local
governments’ education investments are more rational and more in line with local needs than the
national government’s expenditure. In general, much of the evidence indicates that decentralisation has
increased local participation and hence local government leverage in gaining access to national
resources and encouraged the development of public and private planning and management skill.

Decentralisation in and of itself can be the best way to build local capacity. Central support can be
important to maintain equity in spending across jurisdictions and ensure proper attention to training.
Tendler (1997), for example, points out that effective delivery of local services rests upon partnerships
crossing levels of government and the public, private and civil sectors. Nevertheless, capacity-building
should not be a supply-driven endeavour that provides the same support package to widely varying

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local jurisdictions. It is also not always clear that national capacity is greater than local capacity.
Putnam’s research, for example, shows that Italians rate local government effectiveness higher than
national government capacity.

Demand-driven capacity-building programs. One way enhance local capacity is through training and
practice is to allow local institutions to use a portion of program funds, or their own funds, to contract
for the technical expertise that they feel is appropriate to their specific requirements. This technical
help can often be found locally, and acquired quicker and cheaper than from central or regional sources.
Similarly communities can be given block grants for their own capacity-building training programs.
They can purchase the training they need to fill the gaps which they have identified in their own
management and technical capacity. They can decide whether to buy the training from local, regional or
central institutions. When local sources are used, a local network of technical expertise develops. This
local network can be tapped more efficiently for maintenance of existing and new programs in the
future.

Local participation can be a strong motivator for change: Recent evidence from Colombia and Bolivia
shows that citizen/constituent oversight can be an important impetus for local governments to actively
improve their capacity. Regular, fair, elections and citizen councils can increase the pressure on local
leaders to turn popular demands into outputs.

Clarity in responsibility assignment is essential. India’s technically and managerially ambitious Small
Farmers’ Development Agency and Sri Lanka’s lack of guidance for the appropriate uses of district
budgets, for example, led to low levels of success. The more successful decentralisation efforts in
Indonesia and Thailand however, had clearer procedures for local budget allocation and
responsibilities.

The prevailing wisdom today can be summed up by the following statement from Working Group 5
(Institutional Capacity ) at the Technical Consultation on Decentralisation and Rural Development,
FAO, Rome, December 1997: "Rather than plan and make large up-front investment in local capacity
building as a prerequisite for devolution of responsibility, there was a broad consensus that it would be
quicker and more cost-effective to begin the process of devolution, to permit learning by doing and to
build up capacity through practice." The evidence increasingly shows that local capacity can be built by
the process of decentralisation, particularly when appropriate programs to increase interaction with the
private sector are included in decentralisation design.
2.14 ACCOUNTABILITY, TRANSPARENCY AND CORRUPTION IN DECENTRALISED
GOVERNANCE
Accountability
In its democratic political aspect, decentralisation as currently conceived and increasingly practiced in
the international development community has two principal components: participation and
accountability. Participation is chiefly concerned with increasing the role of citizens in choosing their
local leaders and in telling those leaders what to do—in other words, providing inputs into local
governance. Accountability constitutes the other side of the process; it is the degree to which local
governments have to explain or justify what they have done or failed to do. Improved information
about local needs and preferences is one of the theoretical advantages of decentralisation, but there is
no guarantee that leaders will actually act on these preferences unless they feel some sort of
accountability to citizens. Local elections are the most common and powerful form of accountability,

13
but other mechanisms such as citizen councils can have limited influence. Accountability can be seen
as the validation of participation, in that the test of whether attempts to increase participation prove
successful is the extent to which people can use participation to hold a local government responsible for
its actions.
TYPES OF ACCOUNTABILITY
Accountability comes in two dimensions i.e. that of government workers to elected officials; and that
of the latter to the citizens who elect them.

Government Workers to Local Officials

The first type can prove difficult to achieve, for civil servants, particularly professionals in such fields
as health, education and agriculture there are very sectors that are most often decentralised and have
considerable incentive to evade control by locally elected officials. Such people generally have
university training and sophisticated life-style practices hard to maintain in small towns and villages,
career ambitions that transcend the local level, and goals for their children’s education that local
schools cannot meet. They may well also fear that quality standards for service delivery will suffer if
provision is localised. Finally, they often find opportunities for corruption greater if they are supervised
by distant managers through long chains of command than if they must report to superiors close at
hand.
Elected Leaders to the Citizenry
The second type of accountability is that of elected officials to the citizenry. Elections provided they are
free and fair provide the most obvious accountability, but this is a rather blunt tool, exercised only at
widespread intervals and offering only the broadest citizen control over government. Voters can retain
or reject their governors, a decision that can certainly have salutary effects on governance, but these
acts are summary judgments, generally not reactions to particular acts or omissions. And when local
elections do revolve around a given issue, such as schools, they necessarily leave everything else out of
the picture. Citizens need more discriminating instruments to enforce accountability. Fortunately, a
number of these are available.
Political parties can be a powerful tool for accountability when they are established and vigorous at the
local level, as in many Latin American countries. They have a built-in incentive to uncover and
publicise wrongdoing by the party in power and to present continuously an alternative set of public
policies to the voters.
Civil society and its precursor social capital enable citizens to articulate their reaction to local
government and to lobby officials to be responsive. These representations generally come through
NGOs, which like political parties, often have parent organisations at the provincial or national level.

If citizens are to hold their government accountable, they must be able to find out what it is doing. At
the immediate neighbourhood level, word of mouth is perhaps sufficient to transmit such information,
but at any higher level some form of media becomes essential. In some countries, print media can
perform this function, but generally their coverage is minimal outside larger population centres. A
feasible substitute in many settings is low-wattage AM radio, which is highly local, cheap to operate,
and can offer news and talk shows addressing local issues.

Public meetings can be an effective mechanism for encouraging citizens to express their views and
obliging public officials to answer them. The cabildos abiertos held in many Latin American countries
are good examples. In some settings, such meetings may be little more than briefing sessions, but in
others they can be effective in getting public officials to defend their actions.
Transparency and Corruption

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In theory these two phenomena should be inversely related, such that more transparency in local
governance should mean less scope for corruption, in that dishonest behaviour would become more
easily detectable, punished and discouraged in future. The history of the industrialised countries
indicates that this tend to be true in the longer term, but recent experience shows that this relationship is
not necessarily true at all in the short run.

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Rethinking Decentralization in Developing Countries – The World Bank Washington D.C Jennie
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 Discussion Paper 5. Kampala: Ministry of Local Government.
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