Localizing the SDGs requires effective fiscal transfers from central governments to local governments. However, current transfer systems in many Asian countries face four main coherence issues: (1) inadequacy of transfer amounts to fully fund local SDG mandates, (2) inequities in transfer amounts between localities, (3) perverse incentives in transfer designs that undermine sound local budgeting and service quality, and (4) underutilization of opportunities for performance-based transfers to incentivize positive local actions. Addressing these issues through reforms like stabilizing transfer pools, improving allocation formulas, simplifying conditions, and expanding performance-based grants could help maximize the contribution of fiscal transfers to achieving the SDGs at the local level

1. Localising the SDGs:
the Role of Fiscal Transfers
4 Coherence Issues Arising
Manila, 3rd October 2017
Roger Shotton

2. LOCAL PUBLIC ACTION FOR THE SDG AGENDA
RATIONALE - ‘LOCAL PUBLIC GOODS’:
 BETTER INFORMATION TO SHAPE LOCAL PLANS & BUDGETS TO
WIDELY VARYING LOCAL NEEDS & PRIORITIES
 EASIER TO INTEGRATE & COORDINATE
 EASIER TO GAIN CITIZEN INPUT
 CLOSER OVERSIGHT, ACCOUNTABILITY & EASIER FEEDBACK
 LIMITS & CAVEATS
TYPICAL LOCAL GOVERNMENT SERVICE DELIVERY MANDATES
IN ASIA
 WATER/SANITATION
 LOCAL ROADS
 WASTE DISPOSAL
 EARLY CHILDHOOD CARE
 BASIC HEALTH
 BASIC EDUCATION
 AGRICULTURE
 ENVIRONMENT
 SOCIAL WELFARE
 SOCIAL PROTECTION
= MAJOR SUB-
SET OF THE
SDG AGENDA
COHERENCE ISSUES
FOR FINANCING &
BUDGETING?

3. CENTRAL
GOVERNMENT
SUB-
NATIONAL
TIER 1
SUB-NATIONAL
TIER 2
???
???
WHY TRANSFERS? THE BASIC FISCAL IMBALANCE
??
?
?
REVENUES
EXPENDITURES
FISCAL
TRANSFERS
FISCAL
TRANSFERS
FISCAL TRANSFERS = 50%-95% LOCAL BUDGETS

4. SUB-NATIONAL GOVERNMENTS
FISCAL TRANSFER INSTRUMENTS: MAIN TYPES & OBJECTIVES
BY FORMULA
(NOW USUALLY)
BY NORMS, FORMULA,
PRECEDENT
% BY LOCALITY OF
ORIGIN
UNTIED
GRANTS
SHARED
REVENUES
TIED
GRANTS
SUB-NATIONAL GOVERNMENTSSUB-NATIONAL GOVERNMENT
Each Tier
SHARED REVENUES UNTIED GRANTS TIED GRANTS
ADDRESS VERTICAL
GAP + MEEET LOCAL
POLITICAL CLAIMS +
COVER
EXTERNALTIES
LOCAL BUDGET SUPPORT TO
ALLOW FLEXIBLE FINANCING
OF GENERAL MANDATE +
EQUALISATION +
PARTICIPATION
PROMOTE SPENDING ON
CENTRAL PRIORITIES +
ENSURE CENTRAL
STANDARDS + ADDRESS
EXTERNALITIES
CENTRAL GOVERNMENT

5. FISCAL TRANSFERS FOR THE LOCAL SDG AGENDA:
GENERAL ISSUES ACROSS ASIA
 NATIONAL TRANSFER ‘POOLS’ OFTEN INADEQUATE &
UNSTABLE YEAR-BY-YEAR
 OFTEN PROFUSION MULTIPLE TRANSFERS, MULTIPLE
OBJECTIVES, OFTEN NOT COORDINATED
 ‘MICRO’ POLICY OFTEN OUT OF STEP WITH ‘MACRO’ POLICY
 OFTEN UNINTENDED PERVERSE EFFECTS:
 ON EQUITY OUTCOMES
 ON INCENTIVES FOR SOUND BUDGETING
 INSUFFICIENT USE OF POSITIVE INCENTIVE OPPORTUNITIES

6. COHERENCE ISSUE # 1: INADEQUACY
OF TRANSFERS: ‘MIND THE GAP’
LOCAL
EXPENDITURES
NEEDED TO
FULLY ADDRESS
LOCAL SDG-
RELATED
MANDATES
[OFTEN AN
UNCLEAR
QUANTUM]
SHORTFALL IN
TRANSFERS !!
ACTUAL FISCAL
TRANSFERS
INADEQUATE &
UNPREDICTABLE
LOCAL
REVENUES
YES, CENTRAL GOVERNMENT
BUDGET CONSTRAINTS BUT
ALSO:
 LACK GUIDANCE ON SERVICE
STANDARDS & COST
IMPLICATIONS AS BASIS FOR
DETERMINING POOL SIZES.
 LOCAL MANDATES OFTEN
UNCLEAR OR LEGAL &
REGULATORY FRAMEWORKS
INCONSISTENT
 FUNCTIONAL REASSIGNMENT
V DIFFICULT EXERCISE -
SECTOR MINISTRIES RESIST
TRANSFER FUNCTIONS &
RESOURCES!

7. COHERENCE ISSUE #2: EQUITY BETWEEN LOCALITIES [SDG 10]
 EQUITY ACROSS LOCALITIES DOES NOT MEAN EQUAL PUBLIC RESOURCES PER
CAPITA
 BUT VARIANCE SHOULD BE WITHIN REASONABLE LIMITS – OFTEN NOT:
WHY? EXTREME VARIANCE USUALLY DUE TO COMBINATION OF::
 LARGE REVENUE-SHARING TRANSFERS – ESP. EXTRACTIVE INDUSTRY – WITH
UNCLEAR OBJECTIVES
 GRANT TRANSFER POOLS: SIZE INADEQUATE TO EQUALISE + PERVERSE
FORMULA
 AND POLITICAL ECONOMY FACTORS …
TRANSFERS PER CAPITA (USD):
VARIANCE
COUNTRY MEAN MAX. MIN. MAX:MIN RATIO
MYANMAR
TO STATES/REGIONS FY
2016/17
25 202 14 15:1
MONGOLIA
TO SOUMS FY 2016
33 910 0.4 2,275:1
!

8. Thousands
MNT
MNT
FISCAL TRANSFERS: EQUITY ISSUES
MONGOLIA MYANMARFigure 13 State and region revenues per capita by source - FY 2016/17
What all this means is that there is a very wide variance of total public expenditure levels per ca
betweenstates/regions,andwhichappearsnottobejustifi ed byanycorrespondingvarianceinrela
need.31
Figure 14 locates the 14 states/regions against the two main “need” indicators: total st
region population (horizontal axis) and the number of people in each state/region below the pov
line (vertical axis).32
The level of public expenditures is indicated by the size of the bubble for e
state/region.
31
Of course Union budget expenditures per capita will vary across states/regions, but these are, in principle, a differents
-
-
50,000
100,000
150,000
200,000
250,000
300,000
Revenuepercapita-MMK
Grant transfer
Shared revenue
Own revenue
 DANGERS IN REVENUE-SHARING AGREEMENTS – ESP.EXTRACTIVE SECTORS >
INEQUITIES V DIFFICULT TO REVERSE OR COMPENSATE > MAJOR INEQUITIES
 ESP. WHEN RATIONALE FOR SHARING UNCLEAR
 BOOM/BUST CYCLE PROBLEMS
 GRANT FORMULAS ALSO NEED CARE: COMPUTATION + MANIPULATION ISSUES

9. COHERENCE ISSUE #3:
PERVERSE INCENTIVES AFFECT LOCAL BUDGETING & SERVICE QUALITY
SUB-NATIONAL
GOVERNMENT
A
SUB-NATIONAL
GOVERNMENT
B
SUB-NATIONAL
GOVERNMENT
C
LOCAL PFM ‘BLACK BOX’
PERVERSE INCENTIVES IN TRANSFERS OFTEN UNDERMINE:
 FLEXIBILITY IN TAILORING & COORDINATING ACTIVITIES TO
ADDRESS SPECIFIC LOCAL SDG CHALLENGES
 GENERAL EFFECTIVENESS & EFFICIENCY OF PLANNING,
BUDGETING & DELIVERY PROCEDURES FOR LOCAL PUBLIC
GOODS & SERVICES
$ $$$$$$$$$$$$$
SDG-RELATED SERVICE DELIVERY QUALITY UNDERMINED DUE
TO PERVERSE INCENTIVES

10. 5 TRANSFER
FEATURES
PERVERSE INCENTIVE EFFECTS POSSIBLE SOLUTIONS
CONDITIONALITIES  RESTRICTS SCOPE LOCAL CHOICE &
SDG TAILORING TO CONTEXT
 PARALLEL PLANNING PROCESSES
 REDUCED INCENTIVE TO PARTICIPATE
 RELAX AS FAR AS
POSSIBLE;
 DEVELOP EFFECTIVE EX
POST MONITORING &
INCENTIVES
ANNUAL NATIONAL
TRANSFER POOL
 EXTREME ANNUAL VARIABILITY
UNDERMINES LOCAL BUDGETING
 BOOM/BUST – WASTE/PENURY
 STABILISE AS % NAT.
REVENUES – MTFF LINK
ALLOCATION
ACROSS LOCALITIES
 ‘GAP FILLING’ UNDERMINES BUDGET
PRIORITISN. & FISCAL EFFORT
 INCLUSION TAX REVENUE IN
FORMULA MAY DETER LOCAL EFFORT
 SECTOR GRANT ALLOCATION BY
‘FACILITIES’ MAY BIAS TO SAME
 FORMULA-BASED – BUT
WITH CARE
 USE ‘TAX CAPACITY’ NOT
ACTUAL REVENUES
 SECTOR GRANTS BASED
ON OUTPUTS/OUTCOMES
TIMING OF
ALLOCATIONS
 LATE ANNOUNCEMENT UNDERMINES
LOCAL BUDGET PRIORITY-SETTING
 ANNOUNCE IN TIME
BEFORE LOCAL BUDGET
FINALISED
RELEASE TO LOCAL
LEVEL
 DELAYED RELEASE UNDERMINES
LOCAL BUDGET PRIORITY-SETTING
 SIMPLIFY EX ANTE
CONTROLS, REPORTING &
TREASURY

11. VERTICAL COHERENCE ISSUE #4:
PERFORMANCE-BASED GRANT TRANSFERS (PBGs):
AN OPPORTUNITY TO TRANSMIT POSITIVE INCENTIVES
 MANY BASED ON UNCDF/UNDP PILOTING + WORLD BANK
REPLICATION
 ASSOCIATED WITH UNTIED/UNCONDITIONAL GRANTS
 CREATING POSITIVE INCENTIVES FOR BETTER PLANNING,
BUDGETING & MANAGEMENT OF GENERAL LOCAL SERVICE
DELIVERY MANDATE – EXAMPLES IN ASIA:
 NEPAL
 BANGLADESH
 PHILIPPINES
 INDONESIA
 SOLOMON ISLANDS
 MONGOLIA
 INDIA: WEST BENGAL INITIALLY BUT NOW NATION-WIDE (FOLLOWING 14TH
CFC RECOMMENDATIONS)
.

12. EXAMPLE: PERFORMANCE-BASED GRANTS IN BANGLADESH
 4,554 UNION PARISHADS: WIDE RANGE SDG-RELATED MANDATES
 ANNUALLY PERFORMANCE ASSESSMENT IN 6 AREAS:
 PLANNING & BUDGETING
 PROCUREMENT, REPORTING & PFM
 LOCAL REVENUE MOBILISATION
 MONITORING & OVERSIGHT
 TARGETING
 DEMOCRATIC GOVERNANCE
 41 INDICATORS
 MINIMUM
COMPLIANCE
 SCORING
 TOP-UP GRANTS FOR
HIGHEST SCORERS
 OVER 3 YEARS, TREND IMPROVEMENT IN SCORES FOR 37 OF 41 INDICATORS:
 MDG-FOCUSSED PLANNING +62%
 ANNUAL PLANNING + 17%
 APPROVAL OF MORE STRATEGIC PROJECTS BENEFITTING >1 WARD + 24%
 ESTABLISHMENT OF LOCAL MONITORING COMMITTEES + 19%
 TAX ASSESSMENT & REVENUE COLLECTION + 27%
 ALSO IMPROVEMENTS AS COMPARED TO “CONTROL” AREAS UNDER THE NATIONAL
PROGRAMME.

13. OTHER PERFORMANCE-BASED GRANT EXPERIENCE
IN SPECIFIC SDG-RELATED AREAS
 CLIMATE-CHANGE ADAPTATION GRANTS: CAMBODIA, BANGLADESH,
BHUTAN, VANUATU [LoCAL – UNCDF, UNDP]
 PROTECTING FRAGILE ECO-AREAS GRANTS: BRAZIL, PORTUGAL, FRANCE,
INDONESIA ?
 HEALTH GRANTS: ARGENTINA, BRAZIL, UGANDA
WAY FORWARD ON PERFORMANCE-BASED FUNDING
HOLDS GREAT PROMISE BUT NEEDS:
• BETTER UNDERSTANDING WHICH INCENTIVES WORK BEST IN WHICH SDG
AREA
• SIMPLIFY ASSESSMENT PROCEDURES
• EXPLORE SCOPE TO MEASURE LESS COMPLIANCE & MORE DELIVERY QUALITY
PERFORMANCE
• EXPLORE BEST WAYS OF INSTITUTIONALISING WITHIN EACH COUNTRY
SYSTEM

14. TO RECAP THE MAIN POINTS
 Inevitable ‘fiscal gap’ for local SDG public service
delivery agenda – hence fiscal transfers from central
government essential
 But perverse incentives often embedded
 Often unintended negative impact on (1) equity
between localities and (2) local incentives for local
budgeting & priority-setting
 But also major opportunities to use performance-
based transfer financing to create positive incentives
for SDG-related local public action

15. 68.2 68
299
58.1 57
20.3
51.1
39.9
0
50
100
150
200
250
300
350
Kayin Shan Thaninthary
MMKBILLIONS
1ST PROPOSAL
2ND PROPOSAL
3RD PROPOSAL
APPROVED
SOUMS PROPOSED APPROVED
IN BUDGET
SHIVEGOBI 129 14
SUMBER 207 17
DALANJARGALAN 93 7
MONGOLIAN SOUMS: LOCAL
DEVELOPMENT INVESTMENTS
MYANMAR STATES/REGIONS:
LOCAL ROAD INVESTMENTS
POST-SCRIPT: BUDGET APPRAISAL & PRIORITISATION TOOLS NEEDED
+ TIME IN THE BUDGET CALENDAR !

16. THANK YOU