CHOOSING A MODEL OF FISCAL
EU PFM Reform Advisor
National Dialogue Conference
Sana’a, Yemen, June 30th 2013
• Part 1: Introducing fiscal decentralization concepts
• Part 2: Defining fiscal decentralization models
• Part 3 The components of a decentralized PFM system
• Part 4 Advice for choosing a decentralisation model
Introducing fiscal decentralization concepts
WHAT IS DECENTRALISATION?
Decentralization is the devolution of powers
and responsibilities from central Government
to subordinate or quasi-independent
government organizations at the sub-national
level (provinces, districts, municipalities, etc.)
for the delivery of public services.
THE FOUR DIMENSIONS OF
RELATION BETWEEN THE FOUR DIMENSIONS
Political decentralisation is relatively independent
from other dimensions of decentralisation;
Federalism is a model of political decentralisation but
not a model of fiscal decentralisation;
Fiscal decentralisation should be aligned with
administrative decentralisation but is relatively
independent from political and economic
WHAT IS FISCAL DECENTRALISATION ?
Fiscal decentralisation is a system of public
finance management in which human and
financial resources of administrative / budget
entities matches precisely the definition of
their missions and responsibilities and is
aligned with administrative decentralisation.
WHAT DOES FISCAL DECENTRALISATION
Each level of government is closely identified;
Each budget entity has a precise mission and
Each budget entity has sufficient resources to
finance its mission;
Upper budget entities take responsibility for
lower entities funding gaps
THERE ARE FOUR MODELS OF FISCAL
The Deconcentration Model
The Delegation Model
The Devolution Model
THE DECONCENTRATION MODEL
The highest degree of fiscal centralization
Sub-governments, with the exception of
municipalities, have little or no independent revenue
Policy making is centralized, only policy execution is
Line-ministries allocate budgets to their regional
Local governments have only an advisory and
Line-ministries sub-national offices are responsible
for reporting provincial expenditures
THE DELEGATION MODEL
The centre provide the fiscal frameworks as well
as rules and norms for allocating resources.
Sub-governments collect only local/regional taxes
in a limited amount.
Sub-governments receive block-grants from the
Line-ministries and sub-governments have joint
authority for allocating fiscal resources to projects.
Sub-governments have a certain amount of
authority for reallocating resources across different
THE DEVOLUTION MODEL
Sub-governments have full authority for
collecting revenues which they share with the
The central government provide orientations
through national policies
Sub-government have legal authority to prepare
their own budget and to allocate resources
across the different sectors.
The role of line-ministries is to implement local
policies decided by sub-governments.
WHY MIXED MODELS ARE POPULAR?
Each economic sector has its own
Education performs very well under a
Health thrives under a delegation model;
Agriculture usually requires to be highly
decentralised (devolution model)
Sector 1 Sector 2 Sector 3
Vertical Lines of
The Components of a Decentralized
THE FIVE MAIN COMPONENTS OF A
DECENTRALISED PFM SYSTEM
An expenditure assignment
A revenue sharing system
A revenue assignment
A system of intergovernmental transfers
A decentralized system of human resources management
Who is responsible for delivering service and what
is the system of delegation of authority?
Who is responsible for administering the service
(resource allocation and managerial decision)?
Who is responsible for financing the services?
Who is responsible for setting standard,
regulations or policies guiding the provision of
• What scope of public services regional and
local governments are responsible for ?
• Are their fiscal resources commensurate with
• What is the autonomy of regional and local
governments in making fiscal decisions and
in allocating human and financial resources
to individual services?
• Can regional and local governments
determine the rate of their taxes and user
Types of taxes: local, provincial, central
Taxes are shared on the basis of formulae
Taxes can be shared locally or pulled
together centrally to be redistributed.
The objective of the system of intergovernmental
transfers is to ensure that each level of government
receives funding in proportion with its responsibilities.
Intergovernmental transfers should correct disparities
in the revenue base of each sub-national government.
Intergovernmental transfers systems should be
formula-based to ensure predictability of resources
and to equalize resources across directorate.
Conditional grants can be used for special projects.
Provincial Fiscal Envelope
Intergovernmental Transfer System
Expenditure Assignment based on Budget Norms
Unconditional Grants Conditional
How to Choose a Model of Fiscal
Implementing a system of fiscal decentralisation
requires several pre-conditions which are not met
yet in Yemen:
A well performing PFM system
Clarity in revenue and expenditure assignment
A well designed system of inter-governmental
(1) UNDERSTAND THE CONSTRAINS
The political constraints (see cultural and social
differences between north and south Yemen)
The macroeconomic constraints
The fiscal constraints and weaknesses in the
The human cost constraints
THE MACROECONOMIC CONSTRAINS
Population grows at a rate close to 3% per year,
implying a doubling every 23 years.
Weakness of the education system create a
mismatch on the job market between demand and
Oil resources will reach complete depletion by
2012 with no direct substitute.
Commercial balance is structurally in deficit due to
the weakness of agriculture.
Water resources are dangerously depleted due to
uncontrolled used for qat production.
THE FISCAL CONSTRAINTS
Oil produces 70% of the current budget revenue
Oil subsidies absorb one third of the state budget
The state collect 21% of GDP in revenue but the budget
remain in deficit; Civil Service remains highly inefficient and
the number of state employees will be unsustainable in the
The fiscal base is unequally shared between governorates;
Horizontal imbalance in sector revenue allocation needs to be
corrected at a certain cost;
Current level of investment is insufficient to ensure
development of infrastructure and sustainable economic
Budget deficit is structural and will require long term donor
WEAKNESSES IN THE PFM SYSTEM
MOF does not have a fiscal policy department
There is a misalignment between national priority,
economic planning and budget formulation;
Budgeting is not done on the basis of
MOF does not have a treasury resulting in
confusion in budget execution;
Due to shortage of resources and cash rationing
budget execution has become unpredictable;
Traceability of funds is not ensured;
Etc., etc., etc.,
(2) CONCIDER A LONG TERM PERSPECTIVE
The choice of a system of fiscal decentralisation should be
based on the state of the country now but also in 20 or 30
The oil revenue sharing is a minor problem if we consider that
there will no significant oil revenue in 8 years.
Population growth, population migration and urban
development should be taken into consideration;
Decentralisation should be based on a viable economic
development strategy that implies sharing revenues and
infrastructures such as roads, ports, Internet and
telecommunication network, payments systems, etc.
(3) CHOOSE A MODEL THAT CAN BE RUN
EFFICIENTLY AND EASILY
The efficiency of a fiscal decentralisation
system depends on several factors:
Integration with other PFM systems (budget
execution, payments transfers, etc.);
Simplicity of design, absence of redundancy
and clarity of role of the different levels of
Economical use of human resources.
(4) CHOOSE A MODEL THAT IS AFFORDABLE
Each model comes with a price tag. Not all models
are affordable, considering scarcity of human and
The choice of model should be based on fiscal
and budgetary priority, knowing that improvement
in public service delivery can only be gradual.
Cost of operation is direct and indirect. Direct cost
is mainly salaries.
Indirect costs include inefficiency cost, leakages,
burden on the private sector;
THE KEY MESSAGES
1. Yemen is running out of time because of economic and fiscal
constraints and developing the PFM system should proceed
as fast as possible to re-established fiscal sustainability.
2. Fiscal Decentralisation is relatively independent from
political decentralisation. Implementing fiscal
decentralisation can starts before constitutional decisions
3. Each model of decentralisation has a cost that limits the
range of choices that Yemen can make. Yemen must choose
a system that is financially sustainable in the long run.
4. A well performing system of fiscal decentralisation requires a
well performing PFM system;
5. Building a decentralised system can only be made over
several years and will need to be done in several phases;
6. Fiscal decentralisation requires a stable macro-economic
environment, fiscal sustainability and budget credibility.