Yemen:Choosing a model of fiscal decentralisation

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Yemen:Choosing a model of fiscal decentralisation

  1. 1. CHOOSING A MODEL OF FISCAL DECENTRALISATION Jean-Marc Lepain EU PFM Reform Advisor jlepain@yahoo.fr www.slideshare.net/JeanMarcLepain/ National Dialogue Conference Sana’a, Yemen, June 30th 2013
  2. 2. CONTENT • 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
  3. 3. PART I Introducing fiscal decentralization concepts
  4. 4. 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.
  5. 5. THE FOUR DIMENSIONS OF DECENTRALIZATION Political Administrative Fiscal Economic
  6. 6. 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 decentralisation;
  7. 7. 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.
  8. 8. WHAT DOES FISCAL DECENTRALISATION IMPLIES?  Each level of government is closely identified;  Each budget entity has a precise mission and responsibilities;  Each budget entity has sufficient resources to finance its mission;  Upper budget entities take responsibility for lower entities funding gaps
  9. 9. PART II Models of Fiscal Decentralisation
  10. 10. THERE ARE FOUR MODELS OF FISCAL DECENTRALISATION  The Deconcentration Model  The Delegation Model  The Devolution Model  Mixed Models
  11. 11. 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 decentralized.  Line-ministries allocate budgets to their regional offices  Local governments have only an advisory and coordination role  Line-ministries sub-national offices are responsible for reporting provincial expenditures
  12. 12. 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 central government.  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 sectors.
  13. 13. THE DEVOLUTION MODEL  Sub-governments have full authority for collecting revenues which they share with the central government.  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.
  14. 14. WHY MIXED MODELS ARE POPULAR? Each economic sector has its own decentralisation requirements.  Education performs very well under a deconcentration model;  Health thrives under a delegation model;  Agriculture usually requires to be highly decentralised (devolution model)
  15. 15. Governorates Districts Municipalities Sector 1 Sector 2 Sector 3 Horizontal and Vertical Lines of Responsibilities
  16. 16. PART III The Components of a Decentralized System
  17. 17. 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 (civil service)
  18. 18. EXPENDITURE ASSIGNMENT  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 service?
  19. 19. REVENUE ASSIGNMENT • What scope of public services regional and local governments are responsible for ? • Are their fiscal resources commensurate with their responsibilities? • 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 charges?
  20. 20. REVENUE SHARING  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.
  21. 21. INTERGOVERNMENTAL TRANSFERS  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.
  22. 22. Health Agriculture Public Works Gen. Adm. Provincial Administration Provincial Fiscal Envelope Intergovernmental Transfer System Expenditure Assignment based on Budget Norms Revenue Assignment Local Rev. Shared Revenue Equalization Transfer Ad hoc Grants Education Unconditional Grants Conditional Grants
  23. 23. PART IV How to Choose a Model of Fiscal Decentralisation
  24. 24. REQUIREMENTS Implementing a system of fiscal decentralisation requires several pre-conditions which are not met yet in Yemen:  Macroeconomic stability  Fiscal sustainability  Budget credibility  A well performing PFM system  Clarity in revenue and expenditure assignment  A well designed system of inter-governmental transfers  Political consensus
  25. 25. (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 PFM system  The human cost constraints
  26. 26. 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 supply.  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.
  27. 27. 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 future.  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 development.  Budget deficit is structural and will require long term donor assistance.
  28. 28. 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 programmes;  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.,
  29. 29. (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 years.  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.
  30. 30. (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 Governments,  Economical use of human resources.
  31. 31. (4) CHOOSE A MODEL THAT IS AFFORDABLE  Each model comes with a price tag. Not all models are affordable, considering scarcity of human and financial resources;  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;
  32. 32. 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 are made. 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.

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