1j.j ,4s1i X $11els!*lt#tiWt 'irl t l m :!$!t; l 91,,1jtt !* S hg W t SS iW -t B! sitdez A m A!b 1iilIiltIi113SB;|1101111RARIMM|/saIRalIUMINXRSr --=XE= §S% iiiiiii i ii iii ii;]i iiiR t lsrtAi ; 1 ;;1tiil_9_ibEsS _ lfi 1 1 - _ :-:- = s rR 1m I, lrWUlgl:Xtt;gtsjplSn5s.-- ............. Ew r--W-_ w ......._Z _. = 2 -_ i95 ; D -F j-'nl9 E !i--55! j =31't1 ilBl '' :. j "jjj -i-='i_ S ii ----t ''----- -- _ | R _ - 1 | i 1 i i 1 5 i l t . - - _ _ '~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~!- = _ _ _ _ _ i nKwS s; scASur ;ur M i ~I r............................. ....---5- ~-Y i _ i!l.3il,li!l,!ir! i ii Si li ii 15ii [ -i ;-j_ -ij jj j rl - - 5 i ~~~~~ i jj 5 j j j jj jjj j jj j jj ;;;;; ---- --------- ~= L-- :. -: -:;::;; ;;. ; .c ;; : ; 4 4 ; 4;;;;;;;;;c n,;; - ; r ; ;c. -a =_ __ = _e ____ _ce, w>[|Xp -,,R«iM t ! _lR llI 'e!l'ti!exDI! sl llXl!!! P!!!W4" t il!llA X'e"R Tti- ----------------------------------------- lffitufih - |w":litlllzl11D91|1~~~~~ Jl11D1=.'%lAl!l!l^fil o IWill*iM 15t' e '"e UNDP/UNCHS/World Bank Urban Management Programme Urban Management and Municipal Finance 16 Decentralization and its Implications for Service Delivery W lliam Dillinger Published for the Urban Management Programme by The World Bank, Washington, D.C. : .,~~ This document has been prepared under the auspies of the United Nations Development Programme/United Nations Center for Human Settlements (Habitat)/World Bank-sponsored Urban Management Programme. The findings, interpretations, and conclusionsexpressed hereare those of the authorsand do not necessarily represent the views of the United Nations Development Programme, uNciHS the World Bank, or any of their affiliated organizations. Deputy Director Chief Chief Division for Global Technical Co-operation Urban Development Division and Interregional Programmes Division Transport, Water, and Urban United Nations Development United Nations Center Development Department Programme for Human Settlements Environmentally Sustainable (Habitat) Development The World Bank Copyright © 1994 The Intemational Bank for Reconstruction and Development/HE WORLD DANK 1818 H Street, N.W. Washington, D.C. 20433, USA All rights reserved Manufachured in the United States of America First printing May 1994 The Urban Management Programme (uw) represents a major approachby the United Nations family of organizations, ogedt with external support agencies (ESAs), to strengthen the contnbution that cities and towns in developing countries make toward economic growth, social development, and tie alleviation of poverty. The program seeks to develop and promote appropriate policies and tools for municipal finance and administration, land management, infrastruchtue management, and environmental management. Through a capacity building component, the UMP plans to establish an effective partnership with national, regional, and global networks and ESAs in applied research, dissemination of information, and experiences of best practices and promising options. The findings, interpretations, and cnclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Diets or the countries tiey represent The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. Some sources cited in tiis paper maybe informal documents thatarenotreadily available Theboundaries, colors, denoniinations, and other information shown on any map in this volume do not imply on the part of the World Bank Group anyjudgment on the legal status of any territory or the endorsement or acceptance of suth boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages disserination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, USA ISSN: 1020-0215 libray of Congress Cataloging-in-Publication Data Dillinger, William R., 1951- Decentralization and its implications for urban service delivery / William Dillinger. p. cn. - (Urban management progranmne, ISSN 1020-0215- Urban management and municipal finance; 16) Indudes bibliographical reerenet ISBN 0-8213-2792-5 1. Municipal services-Developing countries 2. Decentralization in government-Developing countries. 3. Intergovernmental fiscal relations-Developing countries. L Title. IL Series. HD4431.D55 1994 363'09172'4-dc2O 94-5013 C? CONTENTS EXECUTIVE SUMMARY I L INTRODUCTION 5 The Context 5 The Management Problem 7 II. A FRAMEWORK FOR ANALYSIS 11 Defining the Problem 11 Defining the Instruments 13 A Typology of Intergovernmental Relations 16 IIL DIRECTIONS FOR REFORM 24 Linking Services to Levels of Government 24 Linking Revenues to Expenditures 26 Balancing Regulation with Political Accountability 33 Synchronizing the Elements of Reform 37 REFERENCES 38 BOXE Box 1. A typology of decentralization 7 Box 2. Contrasting approaches to capital allocation 23 Box 3. Choosing among local benefit taxes 29 Box 4. Improving the performace of MCIs 34 TABLES Table 1. Trends in world urbanization 5 Table 2. Sectoral composition of economic growth 5 Table 3. Structure of political accountability in major LDC cities 18 Table 4. Sources of tax revenue in major LDC cities 19 Table S. Municipal lending organizations 33 FIGURE Figure 1. Local share of public expenditure 17 FOREWORD This paper has been prepared for the Municipal Finance component of the joint UNDP/ UNCHS/World Bank-Urban Management Progrnmme (UMP). The UMP represents a major approach by the United Nations family of organizations, together with external support agencies (ESAs), to strengthen the contribution that cities and towns in developing countries make towards economic growth, social development, and the alleviation of poverty. The program seeks to develop and promote appropriate policies and tools for municipal finance and administration, land manage- ment, infrastrmcture management, environmental management, and poverty alleviation. Through a capacity building component, the UMP plans to establi.h an effective partnership with national, regional, and global networks and ESAs in applied research, dissemination of infornation, and experiences of best practices and promising options. This paper is one in a series of discussion papers and management tools to be produced by the UMP municipal finance component. As a whole the municipal finance component is intended to address three cuestions: 1) how to mobilize resources to finance the delivery of urban services; 2) how to improve the financial management of those resources; and 3) how to organize municipal institutions to promote greater efficiency and responsiveness in urban service delivery. Work during the initial phase of the Urban Management Programme has focused on the first of these questions- focusing specifically on local tax reform, intergovernmental transfers, and local access to long-term crediL Case studies and background papers on the latter questions-documenting issues in local financial management and the organization of municipal government-have also been prepared, and will provide the basis for publications to be issued under this series in the future. Phase 2 of the UMP (1992-96) is concerned with capacity building at both the country and regional levels and with facilitating national and municipal dialogues on policy and program options. It emphasizes a participatory structure that draws on the strengths of developing country experts and expedites the dissemination of that expertise at the local, national, regional, and global levels. Through its regional offices in Africa, the Arab States, Asia and the Pacific, and Latin America and the Caribbean, the UMP seeks to strengthen urban management by hamessing the skills and strategies of regional experts, communities, and organizations in the private sector. Regional coordinators use these networks to address the five program themes in two ways: City and country consultations The UMP brings together national and local authorities, private-sector networks, community representatives, and other actors to discuss specific problems within the UMP's subject areas and to propose reasoned solutions. Consultations are held at the request of a country or city, and often provide a forum for discussion of a cross-section of issues. vi Technical cooperation. To sustain follow-up to the consultations, the UMP uses its regional networks of expertise to provide technical advice and cooperadon. Through its nucleus team in Nairobi and Washington, D.C., the UMP supports its regional program and networks by synthesizing lessons leamed, conducting state-of-the-art research, and supporting dissemination of program related materials. MarkHildebrand Louis Y. Pouliquen Chief Director Technical Cooperation Division Transportation, Water, and United Nations Centre for UrbanDevelopmentDepartment Human Setdements (HABITAT) ABSTRACT This paperreviews efforts to improve theefficiency and responsivenessof urban service delivery indeveloping countries. Itargues thatfailures in urban servicedelivery are notmerely the result of a lack of technical knowledge on the part of local government staff, but also reflect constraints and perverse incentives confronting local personnel and theirpolitical leadership, and that these, in turn, are often the inadvertent result of problems in the relationship between central and local government. In this respect, the report views the spread of decentralization as a potentially fortuitous phenomenon. As apolitical phenomenon, decentralization is widespread. Out of the 75 developing and transitional countrieswith populations greater than 5 million, all but 12 claim to be embarked on some form oftransferofpolitical powertolocal units ofgovernment. But theobjectives ofdecentralization- as it is observed in practice-appear only tangentially related to administrative performance. The decentralizationnow occurring isnot acarefully designed sequenceofreforms aimed atimproving the efficiency of public service delivery; it appears to be a reluctant and disorderly series of concessions by central governments attempting to maintain political stability. Nevertheless, itpresents reformers-both domestic and in the donorcommunity-with an opportunity to promote the kinds of fundamental reforms that have proven frustrating in the past. Because decentralizationhasintroducedahighdegreeoffluidityintothestructureofintergovernmental relations, it has brought flexibility into what had appeared to be an immutable system of governance. The stakes are high. Decentralization affects not only urban services, but also social sectors, non-urban infrastructure, and-conceivably-the stability of national economiies and the effectiveness of poverty-alleviation efforts. As the present degree of fluidity in intergovernmental relations is presumably transitory, it is an opportunity that should be seized. ACKNOWLEDGMENTS In preparing this paper, the author has greatly benefited from the advice of Arturo Israel and Richard Bird and on the assistance of his colleagues within the Urban Development division: Victor Vergara, Rita Hilton, Fitz Ford, andJim Hicks. The paper further benefited from the comments of the following external reviewers: Ken Davey (The University of Birmingham) and Fernando Rojas (ILSA, Colombia). The work was carried out under the direction of L.Y. Pouliquen, P. Annez, and M. Cohen. All errors and omissions remain the responsibility of the author. Thispaperbuilds upon two decades of workby World Bankstaffin the fieldofmunicipal development. It has drawn extensively on the work on urban public finance by Johannes Linn and Roy Bahl, the work on institutional development by Arturo Israel, Samuel Paul, and Elinor Ostrom and on the more recent studies on decentralization and intergovemmental fiscal relations by Jerry Silverman, Tim Campbell, Don Winkler, and Anna Haines. A major source of information-both on past practice and on current innovations-has been project officers directly involved in urban lending operations. EXECUTIVE SUMMARY Introduction i. Thispaperreviewsefforts to improvethe efficiencyand responsiveness of urban service delivery in developing countries. It argues that failures in urban service delivery are not merely the result of a lack of technical knowledge on the part of local government staff, but also reflect constraints and perverse incentives confronting local personnel and theirpolitical leadership, and that these, in tum, are often the inadvertent resultof problems in the relationship between central and local government. ii. In this respect, the report views the spread of decentralization as a potentially fortuitous phenomenon. As a political phenomenon, decentralization is widespread. Out of the 75 developing and transitional countries with populations greater than 5 million, all but 12 claim to be embarked on some form of transfer of political power to local units of government. But the objectives of decentralization-as it is observed in practice-appear only tangentially related to administrative performance. The decentralization now occurring is not a carefully designed sequence of reforms aimed atimproving theefficiency ofpublic service delivery; itappears to be areluctantand disorderly series of concessions by centmr governments attempting to maintain political stability. Mi. Nevertheless, itpresents refonner-both domestic and in the donorcommunity-with an opportunity to promote the kinds of fundamental reforms that have proven frustrating in the past. Because decentralization has introduced a high degree of fluidity into the structure of intergovern- mental relations, it has brought flexibility into what had appeared to be an immutable system of governance. iv. The stakes are high. Decentralization affects not only urban services, but also social sectors, non-urban infrastructure, and-conceivably-the stability of national economies and the effectiveness of poverty-alleviation efforts. As the present degree of fluidity in intergovemmental relations is presumably transitory, it is an opportunity that should be seized. Directions for Reform v. The basis for mkidng recommendations on the structure of urban service delivery is necessarily polyglot. The academic literature provides a useful conceptual fiamework. The public economics literature, for example, provides a basic prescription for expenditure and revenue assignment, arguing that responsibility for discrete public services should be assigned to the level of government whose boundaries incorporate the affected beneficiaries-along with a corresponding revenue source with which to ascertain demand. The institutional analysis literature contributes a more extensive list of policy handles, a view that the performance of organizations is not only detennined by their nominal powers and responsibilities, but by the motivations of the people who work within them. This directs attention to such issues as whether the mayor is appointed or elected (and what sort of career trajectory confronts a successful mayor), and the mechanisms by which interest groups can make their wishes known. 2 vi. The mostpersuasive basis forrecommendationsisempirical evidence, but the empirical evidence that exists is not decisive. Evidence from developed countries-which might be presumed to provide models-provides some common sense of direction but is characterized by considerable variety and frequentexperimentation. The past experience from developing countries appears largely to be a source of negative lessons. The most relevant body of evidence is emerging from the countries that are now in the process of decentralization. But these reforns are still in their initial stages. There are no before-and-after cases of LDC decentralization on which to base nornative advice. vii. The evidence nevertheless suggests that there are three elements to reform in the structure of urban service delivery: (a) the clarification of functional responsibilities between levels of govemment; (b) the authorization of revenue sources corresponding to functional responsibilities, and (c) the institution of a system of accountability that encompasses both regulation by central government and incentives for responsiveness to local constituents. Linking services to government viii. Clarity in the division of functional responsibilities between levels of government would appear to be an essential condition of any reform in the structure of urban service delivery. A clear linkage between a unit of government and a specific service seems to be essential to enable constituents to hold local governments accountable for specific functions and to eliminate the soft budget constraint implied by the otherwise open-ended nature of central government participation. Such clarity requires, interalia, asystem of revenue assignmentand budgetary discretion that permits local governments to perform the roles that have been assigned to them. But it may first require govemments to legislate more geographic specificity into their municipal organic laws. Revenue reform ix. Reform in revenue assignments is needed if a clear division of functional responsibilities isto be workable.The particularstructure of local revenuese mix ofusercharges, taxes, transfers, and loans-that is appropriate in a given oontext depends, first and foremost, on the functions that have been assigned to local governmenL Where the benefits of a service are largely confined to individual consumers, user charges are an attractive means of financing municipal services. Local taxes, in principle, are an appropriate means of financing services whose benefits cannot be confined to individual consumers, but nevertheless do not extend beyond the municipal boundaries. x. Any attempttoreform the structure of urban servicedelivery,however, mustaddress the largest source of local revenue: intergovemmental transfers. Transfers can serve several important positive roles in the financing of municipal services, permitting central govemments to induce local governments to undertake sectoral expenditures thatare of national-ratherthan local-interest, and to use local governments as agents of national income redistribution policies. But reform is required both to increase the effectiveness of transfers in achieving these sectoral and distributional objectives and to reduce the adverse side effects of badly targeted or badly administered transfers. xi. Perhaps the most important measure developing countries can take is to reduce the unnecessary adverse side effects of existing transfer programs-to reduce the uncertainty and 3 bargaining that now accompanies intergovernmental financial flows and remove incentives for strategic behavior. But countries also need to expand transfer programs to adequately finance the expenditures they have assigned to local government-particularly if these include primary educa- tion and preventive health car-and to target them more effectively. xii. Reform is also needed in the arrangements by which municipal govemments obtain access to financing for capital investment. To an extent, improvements in allocation can be achieved by improving the targeting of grant programs-particularly where the preconditions for allocation by lending do not exist. But there is also a case for replacing grant financing with loan financing. Municipal credit institutions (MCls) are an increasingly popular means of administering such programs. The perfonnance of these organizations is mixed, however, and while some legal and organizational steps may enhance their viability, experience suggests that what matters most is the government's commitment to the MCI's independence and its willingness to provide a supportive financial environment. Balancing regulation and electoral accowntabiliy xiii. How much a system of urban service delivery should rely on accountability upward to central government-through regulation-or downward to constituents-through political partici- pation-is not an issue that lends itself to universal prescription. Neither extreme is advisable. xiv. Some degree of accountability to central government through a national regulatory framework appears to be appropriate to any structure of urban service delivery. Central regulation is clearly appropriate where local government behavior can affect national monetary, trade, or fiscal policy. It is also clearly appropriate where local governments are carrying out functions on behalf of central government. But where impact of local government behavior is largely localized, and regulation requires detailed knowledge of local conditions and priorities, the case for central regulation is more difficult to justify. xv. The counterpart to central regulation is local political accountability-Ahe reliance on voters to regulate the behavior of their political leaders. The view that local elections perform impeccably in this role does not stand up well to scrutiny. The validity of elections after long periods of authoritarian rule appears particularly questionable.The advent of local democracy, while increasingly common, is therefore no panacea. There is nevertheless some evidence that specific changes in election rules can influence the degree to which local elections function as referenda on local government performance. And there are altemative, and supplementary, means of holding local municipal leaders accountable. Synchronization xvi. While there is clearly no one way to organize the delivery of urban services, what does appear evident is that the various pieces of the intergovernmental relationship have to fit together. This has become increasingly evident in countries that are undergoing political decentralization. The political impetus behind decentralization has prompted central governments to make political concessions hastily. But granting local elections is a step that can be taken quickly. What is slow and 4 difficult is thieworkingthroughof newregulatory relationshipsbetweencentralgovemmentand local government; the conversion of what had been annual budgetary transfers within a central govemment into intergovernmenlal transfers that arc transparcnt and predictablc, and the developmcnt of credible local political systems. Many of the problems associated with the current wave of decentralization arisc from the failure tomatch Lhe pace of political decentralization to the pace ofregulatory and other organizational reforms. L INTRODUCTION The Context 1.1 I Over the past 25 years, the developing world has been transformed from a world of rural villages to a world of cities and towns. In 1965, less than one quarter of the population of low- and middle-income countries was urban. By 1990, that proportion had increased to roughly half. The urbanization of the developing world is a global phenomenon. As shown in Table 1, all the major regions of the world have experienced dramatic increases in their degree of urbanization in the last = quarter century. By the year 2025, it is estimated that more than two thirds of the population of X developing countries will be urban. Table 1. Trends in world urbanizaflom Region % ubun 1965 % urban 1990 Sub-Saharan Africa 14% 29% East Asia 19 50 South Asia 18 26 Europe 40 60 MENA 35 51 Latin America 53 71 Source: 1992 World Development Report i.2 National economies are also increasingly urban. Although figures on the geographic origin of GDP are difficult to obtain, sectoral data is indicative of the importance of cities in national economies. In 1990, more than 80 percent of the GDP of the low- and middle-income countries was produced in the nonagricultural sectors-largely in manufcuring and services. And data on the sectoral composition of economic growth suggests that the urban sector is a principal engine of development As shown in Table 2, growth ratsin manufacuring and services consistently exceeded those in agriculture in virtually all regions 6tfie world during the last decade. Even in regions undergoing severe adjustment during the 1980s, growth rates in manufacturing and services far exceeded those in agricultre. Table 2. Sectoral compoion of economic growth (Averge annual GDP growth, 198-90) Region Agriculture Manufacturing Services Sub-Saharan Africa 2.1% 3.1%. 2.5% East Asia 4.$ 12.4 8.0 South Asia 3.0 6.8 6.3 Europe 1.0 2.7 MENA 4.3 3.4 1.9 Latin America 1.0 1.7 1.7 Source: 1992 World Development Report 6 1.3 The demographic growth of cities and their contribution to national economies suggest that cities work. Urban population growth is fueled by the prospects forjobs and higher incomes. The available evidence suggests that these expectations have largely been met. The personal income of rural-to-urban migrants is consistently higher in the place of destination than in the place of origin. Higher incomes in cities in turn reflect the greater productivity of labor in cities: studies of labor productivity suggest that urban-rural wage differentials largely reflect spatial variations in labor productivity. 1.4 Yet citido not deliver on the promise of a better quality of life to the extent that they could. Despite the relatively high incomes of urban populations, thequality of services inmajorcities is poor. At least 170 million people in urban areas lack a source of potable water near their homes, and in many cases, the water that is supplied to those who have access is polluted ( World Bank 1992). Nearly 350 million people in urban areas lack access to basic sanitation (a figure that is believed to have increased in absolute terms over the last decade (World Bank 1992)). In many large cities in developing countries, less than 70 percent of municipal solid wastes are collected and only 50 percent of households served (Bartone, Bernstein, and Wright 1990). In Mexico City, it is estimated that the average time required for a journey to work is between 2.5 and 3.5 hours (Legorreta 1989). While data on the coverage of education and health services in urban areas are not available, the aggregate statistics for Third World countries are disturbing: in half of low-income countries, fewer than half of school age children are enrolled in primary schools (World Bank 1990a). 1.5 These service failures have wider economic and distributional implications. Christine Kessides' discussion paper notes that a lack of access to, or unreliability of, infrastructure services can have adverse effects on growth, forcing firms to seek higher cost altematives, which may in turn have unfavorable impacts on profits and levels of production and consequently on investment and job growth (Kessides 1993). A 1988 study of manufacturing establishments in Nigeria found that costs of private substitutes for public infrastructure services (generators, boreholes, vehicles for personnel and freight transport, and radio communications equipment) constituted 15 percent of the total machinery and equipment costs of small firms, and 15 percent of those costs in large firns. 1.6 Service failures also have distributional implications. The economic benefits of urban- ization have not been uniformly distributed- As countries have urbanized, poverty has urbanized as well. It is estimated that by the end of this century, 90 percent of the absolute poor in Latin America will be living in cities, as will about 40 percent of the poorest in Africa and 45 percent of thosein Asia -- (Rondinelli 1990). Where the formal system of services delivery fails to reach the poor, these households must resort to alternatives that ofLen imply not only lower quality but higher costs. In the absence of piped water supply systems, for example, households are forced to rely on purchases from water vendors. A survey of water vending in 16 LDC cities demonstrated that the unit cost of water sold by vendors is, on average, 12 times higher than that of piped water systems (World Bank 1992). 7 The Management Problem 1.7 Failures in the coverage and quality of services reflect, in part, aggregate resource constraints. The ability of an economy to provide convenient, reliable urban services is constrained by the demands of other fundamental needs-food, clothing, basic shelter, security-in extremely poor countries. But the available evidence suggests that the constraint on improved service delivery is not merely one of resources. The level of resources already devoted to urban service delivery is substantial. There is evidence, for example, that in the absence of conventional service delivery systems, households commonly resort to more expensive altemative sources. In Jakarta, Indonesia, 800,000 households have installed septic tanks, at a cost equal to three times the amount that would have been required to provide connections to piped sewerage systems. Moreover, there is evidence that governments-particularly central govemments-already spend a significant amount on urban services. While statistics on the sectoral and geographical pattern of government expenditure are scarce (panticularty--ih developing countries), estimates of the annual level of central government expenditure on urban services' in the developing and transitional economies range from $100 to $200 billion-approximately 2.5 percent to 5 percent of GDP. 1.8 The deficiencies in urban services in the cities of developing countries are therefore not merely a reflection of absolute resource constraints, but also of problems of management Defining management in a policy-relevant manner is difficult. Management analysis is an evolving field in which even the definition of the relevant variables continues to expand. While the traditional focus of management has been the application of good technique-accounting, organization planning, financial analysis-recent frustration with this approach2 has prompted a change in strategy; a shift in the focus of analysis from internal procedural issues to the incentive structure; to the various rewards and penalties confronting the individuals involved in the delivery of urban services. In part this represents ashift in the wayinternal operations of an organization are addressed, achangein focus from administative procedures to the factors motivating individuals within the organization. But it has also directed attention to the role played by individuals outside t-he organization: to the consumer interest groups, unions, and central government regulators whose behwa.ior also influences the performance of service delivery systems ( Ostrom, Schroeder, and Wynne 1993)?3 While this Box 1. A typology of decentralization D. Rondinelli's classic typology identifies four different categories of decentralization. All represent transfers of power from centrl government administration. The typology distinguishes types of decentralization on the basis of the organization to which power is transferred: Deconcentration is defined as a transfer of power to local administrative offices of the central government; Deleganon as the transfer of power to parastatals; Devolution as the transfer of power to subnational political entities; and Privauization as the transfer of power (and responsibility) to private entities. 1. Defined as water supply, sewerage, intn-city roads, drainage, subsides to urban mass transit, primary education and health. 2. The inability of the traditional analytic framework to yield effecdve normative conclusions is summarized in Alsrael's Institutional Development. 3. While not denying the importance of administrative procedures, this view would argue that procedural reforms are only effective if the incentive structure is supportive; that what matters in the first instance, for example, is not accounting system, but the motivation of the staff to use iL 8 approach seems to promise a more robust model of organizational behavior, it makes for a complicated analysis. It argues that to understand organizational results, one must understand the motivations of the myriad of individuals who play some role in the provision of urban services. 1.9 One product of this perspective is the view that problems in service delivery in part arise from the perverse relationships between political leaders at the central and local levels and their constituents. Critics of thepresent,often centralized, structureofgovernment indeveloping countries argue that such structures are inherently incapable of responsive administration. Because the concerns of central govemment become increasingly predominant as the locus of decisionrmaking moves away from beneficiaries, because the costs of influence become increasing high as decisions are centralized, and because the quality of information about local conditions becomes increasingly distorted as it moves from field officers to central administration, centralized political systems are (according to this line of reasoning) inherently unresponsive. Rondinelli, for example, argues that "rarely do incentives exist for central government ministries to perceive citizens as their clientele"(Rondinelli 1990). 1.10 Whatever the merits of these arguments, they were largely of academic interest until the mid 1980s. The internal political structures of most developing countries were stable. Centralized, often authoritarian regirres, prevailed. Whatever the merits of decentralization, existing intergovem- mental relationships appeared to be immutable. But during the 1980s, the situation began to change. Political decentralization is now, in fact, a very widespread phenomenon. Out of the 75 developing and transitional countries with populations greaterthan 5 million (WorldBank 1992). all but 12claim to be embarked on some form of transfer of political power to local units of goverment. The form and extent of decentralization varies. In parts of Africa, national govemments are creating local political entities in territories chat were formerly solely under the administration of central govern- ment. In Eastern Europe, what were formerly local administrative units of the central government have been transformed into separate political entities, with leadership chosen by local election rather than by appointment through the party structure. In Latin America, decentralization has meant a shift from centrally appointed mayors to mayors chosen by election. (in some Latin American and African countres, the most significant aspect of decentralization is central governments' tolerance of local victories by opposition parties.) In some countries, particularly in Latin America, political decentrali- zation has been accompanied by increases in revenue sharing or by nominal changes in the legal definition of local functional responsibilities. 1.11 The motivations for decentralization-as it is observed in practice-appear only tangentially related to administrative reform. Political analysts have, in fact, suggested that decentralization stems from a more fundamental cause: the need of national political leaders to accommodate or deflect increasingly strident demands for power sharing by groups that have traditionally been excluded from it. Prud'homme, for example (referring to the Third World in general), has characterized decentralization as "a political strategy by ruling elites to retain most of their power by relinquishing some of it" (Prud'homme 1992). Davey, referring to Africa, has characterized decentralization as an attempt by bankrupt central governments to create anew target for political dissatisfacion (again without relinquishing real power). In Eastern Europe, where the concessions came too late, decentralization was (again in Prud'homn,e's words) "a hasty effort by newly victorious political forces to consolidate their positions" (Prud'homme 1993). Various analysts have speculated on the underlying causes of this rise in the stridency of political opposition. 9 It has been attributed to the conspicuous economic failure of the centralized state (in the ex-Eastern bloc, but also in Africa) (Hall 1993), to the relative absence of war and civil unrest (with the consequent decline in acceptance of strong authoritarian government) (Potter 1993), and to the emergence ofeducatedurban middle classes-and the consequentdecline of traditional patron-client relationships between the govemment and governed (Fukuyama 1992). Whatever the underlying cause, it is clear that the decentralization now occurring is not a carefully designed sequence of reforms aimed at improving public sector performance. It more often takes the form of a reluctant and disorderly seriesofconcessions bycentral governmentsattemptingtomaintain political stability. 1.12 As a result, while decentralization has brought change in the structure of urban service delivery, it has not necessarily brought improvement. Unfortunate administrative consequences of decentralization are evident in a variety of contexts: * In Hungary, the concession of local political autonomy preceded the separation of local budgets from the central govemmentbudgeting system. As aresult, local govemments lack a financially sustainable revenue base and have been forced to sell assets to cover recurrent costs (raising the prospect that the social safety net-for which local governments bear major responsibility-will run out of funds in the near future). * In Brazil, where decentralization was reportedly motivated by the political repudiation of two decades of military rule, decentralization has taken the form of a substantial increase in revenue sharing and in the taxing powers of local government. It was not, however, accompanied by a corresponding delineation of local expenditure responsibilities. Thus, although local governments have more money to spend, they are no more accountable for the quality of their services than they were before the reforms. - In Ghana, decentralization appears to be merely the attempt of a beleaguered central-govremment topush the political (and financial) costs ofgovernmentonto altemative levels of govemment, widtout actually relinquishing power (inter- view with Ken Davey). Political decentralization has not, so far, been accompa- nied by a commensurate decentralization of authority: the creation of locally elected legislative bodies has not been accompanied by a transfer of significant decisionmaking authority to local government. The Ghanaian government continues to appoint the municipal executive and the heads of municipal departments and effectively control local spending decisions. 1.13 Despite its political dimensions, decentralization still presents reformers-both domes- tic and in the donor community-with an opportunity to promote administrative reform. Political pressure for decentralization has resulted in a high degree of fluidity in the structure of the public sector. With govemrments forced to make fundamental changes in the structure of the public sector, it presents an opportunity to promote the kinds of fundamental changes in intergovemmental relations that have tended to be frustrated in the past. This opportunity is presumably a transitory one, and one that the should be grasped.- 1.14 The potential impacts of such reforms may extend beyond sectors that are considered urban. Changes in the allocation of power between levels of govermnent have implications for national efforts to reduce poverty and manage the macro economy (particularly to the extent they 10 reduce central control over the instruments of fiscal policy (Prud' homme 1993)). Decentralization also affects the delivery of social services-primary education and health-as well as nonurban infrastructure. Decentralization is in fact already the subject of World Bank sector work in education, transport, and health. 1.15 There is no road map here. The world now consists of more than 200 ongoing experiments. Of the countries that have embarked on decentralization, none yet has the length of history that would permit an expost evaluation. The developed, Western economies-which might be assumed to offer models-have themselves adopted different approaches to the organization of their subnational governments and several are in a constant state of experimentation. The objective of this paper is therefore modest to document past approaches to the development of (urban) local governments, to derive lessons from that experience, to assess the implications of decentralization for these efforts, and to propose an approach (derived from both theory and such experience as exists) that might be used in the future. IL A FRAMEWORK FOR ANALYSIS Defining the Problem The problem iS not municipal government 2.1 Much of the early work on urban service delivery systems-particularly by the donor community-focused on the internal administration of municipal government. Urban service failures were defined as a problem of internal administration-specifically a problem of poor tax administration, poor accounting, and poor capital investment budgeting. As described in a recent survey of institutional development components in World Bank urban projects (Haines 1992), approximately two thirds of the identifiable targets of World Bank municipal development projects during this period were aimed at local taxation, accounting, or capital budgeting. This pattern was characteristic of other multilateral aid organizations and bilateral donors. 2.2 In retrospect, this now appears to be too narrow a definition of the problem. First, in many developing countries, municipal governments did notexist in the sense that was often assumed. While units of local administration existed, these were not distinct political bodies, drawing their legitimacy from local-rather than national-political constituencies, and possessing significant autonomy. As a result, the assumption that local political leaders had either the motivation or the authority to respond to their constituents in the same manner as their counterparts in industrial democracies was often misplaced. 2.3 Moreover, the assumption that municipal governments in developing countries had clearly defined responsibilities-and that these were the functions typically assigned to local governments in the industrial world-was also often erroneous. Despite the provisions of national constitutions, the sectoral responsibilities of municipal govemment were very limited and reflected the ad hoc accretion of past practices and political accommodations. Central governments (in federal countries, large states) would control major capital investnent decisions in water supply, sewerage, road construction, or public education and health, leaving the municipal government responsible for operations and maintenance of these services. In some countries, local govemment functions were largely limited to the maintenance of public order and the cleaning of public streets. In Juarez, Mexico, for example, "strengthening local government" would be largely tantamrount to expanding the municipal police force.' 2.4 The assumption that financthe lack of resources-was a key constraint was also misplaced. Although municipal governments were poor-both in terms of absolute revenues per capita and in terms of the share of total public expenditures (relative to their counterparts in industrial countries), local government functional responsibilities were correspondingly limited. Moreover, given the absence of clearly defined local responsibilities, little assurance existed that increases in local revenues would be devoted to functions that (in the view of donors) represented high priorities. 1. In 1988, nearly half cf Juarez' budget (excluding transfers to the municipally-owned water parastatal) was, directly or indirectly, devoted to the policc. 12 2.5 Finally, the assumption that problems in internal administration could be addressed through the transfer of technical knowledge was also misplaced. Donors tended to operate as if the constraints on administrative improvement were constraints of knowledge. Thus technical advice on property valuation techniques were prescribed as the solution to low property tax yields; technical advisory services were similarly prescribed as the solution to problems in accounting and capital budgeting. Subsequent evaluation reports and sector work, however, suggest that technical advisors were often marginalized and their advice ignored; and that problems in internal administration were not due to a lack of knowledge but instead reflected rational responses to firmly established, if perverse, institutional incentives. The problem is the system of urban service delivery 2.6 The conclusion that emerges from this experience is clear. Urban service delivery appears to be a problem that cannot be addressed by taking the organizational context as a given and attempting to change the behavior of one organization-municipal government-within it. Instead, it appears to be a problem of the public sector as a whole, and one that must be addressed by looking at the variety of factors that influence the performance of the public sector and those factors' implications for urban service delivery. Constraints on urban service delivery are not only the level of the property tax or the sophistication of the accounting system, but also the broader set of perverse incentives embedded in the relationship between central and local governments. In failing to address the incentive structure, reform efforts not only undermine the prospects for achieving administrative targets; they also appear, in retrospect, to be the most significant constraints on the performance of urban service delivery systems (World Bank 1993a)3' 2.7 Efficiency and responsiveness. In a sense, the problem of urban service delivery is best defined in terms of characteristics of the delivery system, rather than the problems of a discrete organization. The objective ofreform is not "strong local government" but an efficient and responsive system of urban service delivery. Efficient in a technical sense-in the application of production technology so as to produce the maximum amount of output from a fixed quantity of inputs-and efficient (or responsive) in an economic sense-in its terms of its effectiveness in producing the mix of products that corresponds to the varying preferences of consumers.3 The performance of a service delivery system can thus be evaluated both in terms of its efficiency in the transformation of inputs into products and of its efficiency in producing the mix of products that matches the effective demand of consumers. 2.8 Equity and economicstability. Efficiency isnotthesolecriterion by whichamunicipal service delivery system should be evaluated. While technical efficiency and responsiveness may be the paramount objectives, municipal service delivery cannot be isolated from other objectives of the 2I These conclusions are based on a 100 percent survey of all OED project audits and PCRs on urban development projects through December 31, 1992. (Sce table in Annex). It should nevertheless be noted that (I) OED audits cover a early period in Bank interventions; and therefore do not reflect the impact of changes in the Bank's approach, if any; and (2) tlat the tiine frame covered by the audit (the disbursement period) is often too short to permit an assessment of the susmainability of a intervention's impact 3. In the decentralization literature, the two categories are variously referred to as "production efficiency and demand efricieicy" (Campbell, Peterson); or efficiency and efTectiveness (Rondinelli, Ostrom). 13 public sector. Decisions on the level and financing of municipal services have important distribu- tional implications: expenditures on education and health, forexample, are often thc mostsignificant forms of income transfers in developing countries. Moreover, to the extent that central governments effectively concede control over fiscal policy to local governments, certain financing arrangements can have adverse implications for the stability of the macroeconomy. The implications of a given structure of service delivery for poverty reduction and macroeconomic stability are therefore also important considerations. Defining the Instruments Public economics perspecdve 2.9 What are the means by which these objectives are to be achieved? Several academic traditions contribute different parts of the answer to this question. The public economics literature provides a useful organizing framework. Public economics sees this as an assignment issue: a question of dividing functional responsibilities between levels of government, and allocating corresponding revenue sources. In the classic formulation (Musgrave and Musgrave 1984) the public economics literature assigns three roles to the public sector as a whole: (a) macro stabilization-the provision of a stable economic environment for the private sector, (b) income redistribution-the reduction of poverty, and (c) resource allocation-influencing the allocation of resources where markets fail to do so efficiently. The public economics model conventionally assigns the first two of these roles to central government. Central government has responsibility for stabilization policy, largely on the grounds that local economies are too open to permit countercyclical measures to be implemented effectively. Income redistribution policy, similarly, is considered to be the prerogative of central government, on the grounds that local attempts to address income disparities are likely to induce inefficient migration. Subnational governments enter the picture only with respect to the third role of government-resource allocation. Noting that tastes and preferences for public services vary among populations, this framework argues that if the benefits of particular services are largely confined to local jurisdictions, welfare gains can be achieved by permitting the level and mix of such services to vary accordingly. If local consumers are confronted with the costs of alternative levels of service (according to this viewpoint), constituents can be forced to reveal their preferences (through voting for rival political candidates, voting on tax initiatives, or similar means). In this respect, local politics can approximate the efficiencies of a market in the allocation of these local public services; L4pricing" municipal services and relying upon the local political process to clear the market. 2.10 The organizational implications of the public economics framework are straighnfor- ward. Responsibility for discrete public services should be assigned to the level of government whose boundaries incorporate the affected beneficiaries. That level of govenment should then be assigned a conrespondingpricing instrument-ataxwithacorresponding inciderce-with which to ascertain demand. Institudonal analysis perspective 2.11 Although useful as a starting point, the public economics framework is not an agenda for action. In effect, it assumes away certain behavioral and technical factors that appear to be 14 important. It assumes that local politicians and the people who work for them are solely interested in serving the interests of their constituents, and that constituents have both the means and the incentives to make their interests known. The public economics framework also assumes away certain practical considerations. It ignores the high administrative costs that would be associated with assigning each function of the public sector to a distinct unit of government with its own field administration. And it ignores economiesofscale in serviceproduction and thus the potential conflict between an organizational solution that would be most responsive, and one that would be most efficient in a technical sense. 2.12 The behavioral implications of alternative organizational arrangements are addressed in what has been called the institutional analysis perspective. This is a framework that explains the behavior of politicians not as altruism, but as the rational pursuit of self-interest-the behaviors required for advancement in a political career-and where the behavior of bureaucrats is similarly explained as a rational, self-interested response to the working rules that allocate rewards and costs within the organization. As Ostromargues,"individuals-politicians andbureaucrats-re boundedly rational and make choices according to their preferences. Individuals are not assumed a priori to be encapsulated by their organizations, nor to find organizationally rational behavior necessarily consistent with individually rational behavior" (Ostrom, Schroeder, Wynne 1992). 2.13 Proceeding from this framework, the institutional economics literature argues that the way to change the performance of an organization is to change the incentives of the people who work in it. One of the normative conclusions arising from this field is its advocacy of organizational rules that would render service providers more vulnerable to client groups. This is elegantly summarized in Hirshman's phrase "exit and voice," in which he argues for organizational arrangements that will offer consumers the option of either taking their business elsewhere (exit), or increasing their influence overproviders through "voice"-enhancing the lines of communication between providers and constituents-through fonnal electoral processes and alternative means of articulating prefer- ences, including the use of local taxes and charges as a means of testing beneficiaries' willingness to pay.4 2.14 Other contributors to this field have noted the preconditions that affect the articulation of voice. Israel has contributed the term "specificity" to this glossary, noting that constituents have greater success articulating voice when the entity to which they are addressing thnmselves has a clearly defined output for which it is responsible (lsrael 1987). Ostrom has emphasized the importance of minimizing transaction costs in the articulation of voice, noting dtat constituents are unlikely to participate unless they perceive the expected benefits to exceed the costs (Ostrom et. al 1992). 2.15 The normative prescriptions arising from this framework are compatible with the framework p.oposed by public economics. (Ostrom in fact incorporates the public econompic framework into her nornative model of "polycentric institutional arrangements".) What the 4. The literature on "exit" has been extensively covered elsewher- and will not be further examined here 15 institutional analysis literature contributes is a more extensive list of policy handles: a view that the performance of organizations is not only determined by their nominal powers and responsibilities, but by the motivations of the people who work within them. This directs attention to such issues as whether the mayor is appointed or elected (and what sort of career trajectory confronts a successful- or unsuccessful mayor), and the mechanisms by which interest groups can make their wishes known to local governments and exert pressure to have them fulfilled. Administrative distinctions 2.16 A third strain in the literature addresses-or at least provides a framework for addressing-the technical problems raised but not addressed in the public economics framework. The literature has long recognized a distinction between the "provision" and "production" aspects of service delivery-a distinction between the role of deciding how much is to be produced and the role of producing it (Musgrave and Musgrave 1984). This distinction is useful in addressing the apparent conflict between the demand-responsiveness of decentralized decisionmaling and the presumed economies of scale of centralized production. As Silverman, among others, has recently noted, production can be organizationally separated fromprovision; theentity thatdecides how much to produce need notbe the entity that undertakes the production (Silverman 1992). Such a separation allows the responsiveness benefits of local decisionmaking to be captured by assigning the provision role to local government, while allowing economies of scale to be captured by permitting larger entities of govermment (or private firms) to be responsible for production. 2.17 A parallel distinction is useful in addressing the high administrative costs that would resultfrom assigning each function of governmentto aseparatepublic entity.AsCampbell has noted, a single tier of government can act in muldple capacities. The local government can act as both the provider of local public services-clearing the market in local public goods in response to local expressions of demand-and as an administrative agent of higher levels of government (Campbell 1992). In this respect, a single level of government can assume functional responsibility for multiple services, thus reducing the aggregate administrative costs of the public sector. 2.18 Evidence from the industrial countries suggests that these distinctions are not merely academic. The industrial countries (which may be assumed to be relatively successful in this regard) all have complex structures of service delivery in which these distinctions play arole. The separation of provision from production is commonly observed in the G5 countries, particularly in the execu-uon of capital wo:*s. Although local governments play a large role in the delivery of infrastructure services in the G5 countries, little construction is done by municipal employees. Major offPsite capital works are typically constructed by private contracting firms. Residential infrastructure in developed countries is almost entirely produced by private-sector developers (prodded by local development regulations.) The production of such services as water supply (in the case of France and the United Kingdom), solid waste management (in the U.S.) and bus transit is also assigned to private firms in the G5. Similarly, the use of local governments in an agency role is widespread in the G5 countries. In the U.S., for example, the federal government relies on local government to implement some of its major income-distribution policies, including the administration of AFDC (Aid to Families with Dependent Children) and food stamps. 16 2.19 Overall, the conclusion of this literature is that there is no single institutional arrange- ment that can be universally prescribed for the delivery of urban services, that what is important are not the organizational labels, but rather the relationships-the rules that govem the transactions between national government political leaders, local govemment leaders, staff, and consumers. A "good" arrangement is likely to be a very complicated one and one that is not defined merely by the designation of municipal responsibilities and revenue sources. It is one in which the interests of national political bodies and local interest groups are incorporated in different ways, with municipal governments performing as agents of central govemment in some capacities, and as independent decisionmaking bodies in others. But while the system can be organized in a variety of ways so as to yield a relatively efficient, responsive structure of governance, not all such arrangements work equally well. Evidence from developing countries illustrates a variety of suboptimal arrangements, as discussed below. A Typology of Intergovernmental Relations 2.20 The intergovernmental relations of a country are difficult to know. The official rules- the legal framework-are at best only an indicator of the actual locus of decisionmaking power and the influences that bear on decisionmakers. It is useful nevertheless to attempt to articulate common patterns in intergovernmental relations, to illustrate the variety of circumstances that exist. 2.21 Three patterns are discemable. The first might be called the overcontrolled local sector, where subnational governments are in effect merely administrative arms of the central government. Its obverse is the undercontrolled local sector, in which each tierof subnational governmentis almost sovereign and competes with other levels of government. The tiird minght be called the perversely regulated local sector, where local governments have some degree of political autonomy but where the relationship with central political leadership is characterized by perverse incentives. The overcontroUed local sector 222 This is historically the classic pattern in developing countries. It has two typical characteristics. First, avery high proportion of total public expenditure is made directly by the central government (or in federal countries, by large states). Second, local government, even within its circumscribed expenditure role, functions largely as an administrative arn of the central government, with the central government appointing the municipal executive, and dictating virtually all expen- diture and revenue decisions. 2.23 Central government's dominance of total public sector expenditure is the common pattern in developing countries. As shown in Figure 1, the local share of total public sector expenditure in developing countries-even large countries like Mexico-is well below 10 percent. This is in contrast to the G5 countries, where the local share ranges from 17 percent (France) to 33 percent (Japan).5 5. These statistics, based on the IMF Government Finance Statistics Yearbook, are at best crude indicators of the degree of centralization in these countries. As noted later in the text, they do not, for example, rellect the degree to which local expenditures arc controlled by central governmenL Certain statistical conventions and data constraints in the IMF data 17 Figure 1. Local share of public expenditure Japan U.K. U.S. -- - Germany _ _ _ _ _ France * i - Czech i n Hungary 1 Romania =nhm KoreaU Colombia Chile UIEISu Philippines Thailand Turkey Brazil Jordan Tunisia Mexico a 5 10 15 20 25 30 35 40 2.24 Local govemments in these countries, moreover, bear no resemblance to autonomous political entities envisioned in the public finance literature. To begin with, central governments, rather than local voters, choose the municipal political executive. (Elected councils are often pernmitted, but function in a purelv advisory role.) As shown in Table 3, direct appointment of municipal executives is still the pattern in many large LDC cities. Elsewhere, central control over local political outcomes is discretionary but is widely used. In India, for example, state govemments possess the legal authority to dismiss mayors whose performance they find unsatisfactory. Since independence, at any given time, 40-50 percent of the local authorities have been under state supersession. Bombay's current mayor is, for example, a state appointee.6 also tend to understate the degree of public service decentralization in the G5 countries, and the consequent contrast between 05 and developing country patterns. First, the IMF data do not include the self-financed expenditures of public utilities (recording instead only tax-financed subsidies to parastatals). To the extent local public utilities in industrial countries are largely self financing (and those in developing countries are not) this convention would tend to understate the difference between the two groups of countries. Second, IMF data do not pennit the disaggregation of government expenditure by function (except for the industrial countries and a small number of developing countries.) As a result. it is not possible to identify the proportion of central government expenditure in urban service delivery. It can be surmised that such a comparison would indicate that the local share of urban service expenditure in industrial countries is much higher than in developing countries. IMF statistics do indicate, for example, that in the industrial countries, local govemments account for the 40-60 percent of public expenditure on capital investment, which anecdotal evidence would suggest is not the case in developing countries. In the 05 countries, central government expenditures are dominated by direct transfers to individuals-essentially social safety net expenditures-whereas in developing countries (judging from a small sample), a larger proportion of central govemment expenditure is devoted to capital works. If data on the aggregate expenditure on urban services (including self-financed utilities) were available for both developing and developed countries, it can be surmised that the contrast in this indicator of decentralization would be greater than is shown by the available statistics. 6. Recent legislation has restricted, but not eliminated, states' power to supersede local elected officials. 18 Table 3. Structure of poliilcal accountability In major LDC cities City Mayor Council Bonmbiay appolnied b)y state teonpomrily dissolved Jakarta appointed by govemment directly eleccld, no legi9lative ptower Mcxico D.F. appointed by government directly clecied, no legislative power Sao Paulo directly elected directly ciccied at large, legislativc power Seoul appointed by government directly elected, no lcgislativc power Budapcst directly clected ciectced, 114 directly by district, 3/4 aT large by party list Lagos dircctly clectcd clected Shanghai clected by council ciceted from one-party slate 2.25 Central governments alsodirectly control the allocation of municipal expenditure in this group of countries. Personnel is typically the largest single item of local government expenditure, and the ability of local govemment to recruit, retain, and motivate staff is critical to its ability to provide municipal services efficiently. In many developing countries, control over local personnel manage- ment decisions rests with central government. Central governments often control the number of positions local governments are allowed to maintain at each grade, the starting salaries and pay differentials between grades; the level of cost of living increases; and the appeals process for dismissal. In Turkey, forexample, the staff list of each municipality isfixed by the government, along with the corresponding salary scale. Any amendments to the staff list have to be approved by the central government in a laborious process involving the Ministry of Interior, the State Personnel Organization, and the Council of Ministers. In some countries, central governments are directly involved in individual recruitment and promotion decisions. In Ghana, for example, local govern- ment staff are directly recruited, promoted, and paid by sectoral ministries of the central government. In the Philippines, municipal treasurers and tax assessors (until recent reforms) were directly recruited, supervised, and paid by the central government ministry of finance. In Indonesia, all full- time staffing positions are subject to central government recruitment and promotion and are paid directly by central govremment. 2.26 Central governments also control the sectoral composition and size of local govemment budgets. In Morocco, for example, each municipality's budget must be approved by the Ministiy of Interior before the funds can be disbursed against it-an approval process that includes a verification that all centrally mandated expenditures are in the budget and a verification that personnel expenditure aggregates agree with the Loi de Cadres for each year, the payroll of authorized grades and positions and with the Treasury allocation for municipal personnel expenditures. In Senegal, 19 similarly, the annual budget review process includes a line-by-line negotiation of the expenditure estimatesofeach local authority. In the Philippines (also until recentreforms),theoverall sizeof each local govemnment's budget was determined by the local representative of the finance ministry. In ad-ition, central budget regulations required that municipalities allocate 20 percent of their revenue sharing for development projects approved by the government, 18 percent of their general fund for the national police, and 5 percent for aid to hospitals within the province; and thatmunicipalities limit the proportion of the budget spent on personnel to 45 percent. (One study estimated that an average of 46 percent of all local expenditures in the Philippines weremade undercentral govemmentmandate.) 2.27 Municipal revenue levels are also regulated. In five of the eightLDCcities listed in Table 4, forexample, local governments have no discretion overtherate of theirprincipal tax. Governments use this control to keep the rates of local taxes extremely low. In Jakarta, for example, the government of Indonesia limits the property tax rate to 0.1 percent of assessed value. Even where local governments have snme nominal discretion over the rate, central governments control the factors that determine how much these sources yield. In the Philippines, municipal governments are permitted to impose a rate on the property tax between 0.5 percent and 2 percent of assessed value-but the regulations governing assessments are such that the maximum effective rate is less than 0.1 percent of market value. In India, the combination of state-imposed rent control and Supreme Court interpretations of property tax legislation have resulted in the virtual exemption of all but the city's most recently constructed housing stock. In Mexico-in an environment in which annual inflation has ranged as high as 150 percent-local governments are forbidden to adjust assessments for inflation unless they obtain the simultaneous concurrence of the mayor, the council, the governor, and the state legislature. Table 4. Sources of tax revenue in major LDC cities City Largest Local Tax Other Major Tax % of tax % of tax Name Rate control revenue Name revenue Bombay octroi local 66% property 13% Budapest income central 95 Jakarta automobile (1) Lentral 72 property II Lagos property local 90+ Mexico D.F. payroll central 58 property 21 Sao Paulo services local 80 property 17 Seoul property central 25 tobacco 21 Shanghai business profit (2) central 50 industry 30 (1) includes separate taxes on purchase and ownership (2) amount of tax to be shared with central is negotiated 2.28 The performance of the overcontrolled system cannot be evaluated or fau!ted on empirical grounds. Some students of organization have in fact argued that the centralized, vertically integrated bureaucracy is in fact the most efficient form of organization2 But it can be argued that a system that concentrates such a large proportion of expenditure decisions in the hands of ministers 7. Max Wcber, a pioneer of modem management science, was an advocate of this point of view. 20 whose constituencies are national, and pernits so few channels of demand expression through influence over local political leadership, would have difficulty responding to its constituents- particularly where the central government revenue structure is also centralized (with heavy reliance on indirect taxes and little use of user charges) and thus cut off from price-related indicators of demand. 2.29 Anecdotal evidence from political observers also tends to cast doubts on the centralized system. As one observer of the local political scene has noted, "the practice of appointing municipal executives has often resulted in the mayor's position being held by individuals with only short-term interests in municipal affairs. Where careers are dependent on the fortunes of political sponsors, officials aremorelikelytoadheretonationalpoliciesattheexpenseoflocaldccumsaes"(Lowder 1986). 2.30 There is also evidence that the administrative demands of this tight system of regulation overloads the administrative abilities of the public sector in some developing countries. Central governments thus find they lack the infonnation required to exercise this control intelligently. In Turkey, for example, governors are permitted one week to approve or modify a budget once it has beenpassed by themunicipal council. Approval isthereforevirtually automatic. The factthatrevenue estimates have been inflated unrealistically to satisfy the central budgetary regulations goes unexamined. In Kenya, similarly, the Ministry ofLocal Governmentisrequired to approve ormodify all local budi'ets before the commencement of the fiscal year, but lacks the basic information (such as data on actual income and expenditures of any previous year) on which to base its approvals. Under these conditions, the overcentraized system is perhaps the worst of both worlds, in the sense that there isneither aclearbur-aucraticchain of commandnoraclearlydefined scopt,oflocal discretion.Under these conditions, central regulation merely obfuscates responsibility. The undercontrolled local sector 2.31 The obverse case is the undercontroiled local sector, in whichi there are multiple levels of govemment, each with political autonomy and autonomy over expenditure and revenue, but without any clearly defined functional responsibility. Brazil is per)haps the extreme example of this pattern. Brazilian mwzicipios have historically enjoyed complete political autonomy-with councils and mayors chosen through competitive local elections (exceitduring a short interruption during the military regime of the 1960s). They have complete expenditure autonomy and freedom over the rates of the taxes that have been assigned to them. When the extremely productive value-added tax was introduced (at the state level) in Brazil, the mwicipios were assigned a fixed 20 percent share of the proceeds, without restrictions on its use. No attempt is made, however, to define the functional responsibilities of each tier of government in Brazil. Brazilian legislation, while designating an extensive list of functions in which municipal government may choose to act, assigns the same functions concurrently to state government. (Only one function-natural gas-is exclusively assigned to the state level, and only one-urban transport-is assigned to municipalities.) As a result, both state and municipal governments may operate primary schools, health services, road construc- tion and maintenance programs, or any other public service simultaneously within the same jurisdiction. In Brazil, the defacto division of labor between levels of government reflects a pattern of historical bargains and ongoing negotiations. 21 2.32 Again, the impact of this arrangement on the efficiency and responsiveness of urban service delivery has never been tested empirically. It would seem, nevertheless, to set up two kinds of perverse incentives. First, itwould seem to obscuretheaccountability of local governmentsto their constituents. Without clearly defined functional responsibilities, local government could not easily be held responsible forthe outcomes of any particular service by their constituents. Second, itwould seem to set up a perverse set of relationships between local government politicians and their counterparts at the state (and central government) level. Without a clear distinction between the functions of each tier-in effect without a hard budget constraint on the extent of state participation in functions that a mayor is under pressure to provide-the extent of state participation is likely to be determined through bargaining. Where state governmentresourcesare allocatedon this basis, they are unlikely to reflect either the priorities of local consumers, nor those of the state government, but rather the lobbying skills of local politicians. The perversely regulated local sector 2.33 While Brazil is an extreme example, it provides the polar case for the set of internediate cases that constitute the more prevalent pattem; countries in which there is some degree (defacto if not dejure) of local political autonomy, and where there is some (de jure) assignment of functional responsibilities, but.there is a built-in vertical gap-a lack of correspondence between the revenue authority of local government and its expenditure responsibilitieshat is addressed in undesirable ways. 2.34 There are two undesirable ways in which the vertical gap is closed. Perhaps the most common is through direct, but ad hoc, expenditures by central government ministries. The practice of direct intervention by central ministries is often the legacy of past crises. As Lowder describes it, central intervention is often provoked by disasters-outbreaks of communicable disease, for example-and the perceived failure of local government to respond. "In response to these crises, specialized technical agencies are introduced to manage utilities such as potable water, electricity, housing for the poor...these are usually autonomous or responsible directly to a minister, and empowered to ovenride both the spheres of action and the territorial jurisdiction of other authorities" (Lowder 1986). In South Asia, the government's intervention tends to be permanent. Central (or in India, state) public works ministries and developmentauthorities takeonresponsibilityformunicipal capital works, leaving only the task of operations and maintenance to local government. In Latin America, the participation is more ad hoc. In Venezuela, for example, although municipal govern- ments have the legal responsibility to provide water supply, sewerage, urban roads, and power distribution, agencies of the central government intervene in the provision of these services at will (and in fact account for the vast majority of public sector expenditure on these services). 2.35 The pattern of open-ended participation by central government ministries would appear to set up the same perverse incentives as prevail in the under-controlled (Brazil ian) model: a structure in which constituents would have difficulty holding local governments accountable for any specific function, and where the mayorwould be encouragedto act as a lobbyistbefore the central govermment ministries, rather than as an individual ultimately responsible for specific functions. The more stable South Asian approach contributes an additional nuance. With responsibility for capital investment 22 assigned to state agencies, but operations and maintenance left to the municipal level, disputes over debt liabilities and refusals to assume maintenance obligations on new assets are common. Given the revenue advantage that states have over local governments, overinvestment in capital (relative to operation and maintenance) is also characteristic of South Asia. 2.36 Countries also fill the vertical gap through intergovemmental transfers. As described in Chapter II1, transfers have an important role in virtually any system of multitiered govemment finance. The problem is not transfers, but the terms and conditions on which transfers are provided. Intergovernmental transfers take various undesirable forms. First, in some countries, the level of transfers is itself unpredictable or largely determined by negotiation. In Kenya, for example, the central government is legally obligated to make an annual payment to local government in lieu of property taxes owed on govemment-owned property. It has often failed to do so, a failure that has set off a cycle of mutual default, such that local governments no longer service their debt to the government loans authority, the government hospitals fail to pay their bills to the municipal water authorities, and the water authorities refuse to pay their income taxes to the government. 2.37 Even where recurrent transfers are distributed according to formula, transfers may have perverse incentives effects. Dearness allowances in some Indian states and the SDO grants in Indonesia both fund part or all of local personnel costs, for example. This encourages local governments to lobby for more positions, regardless of need. Transfers based on the size of revenue gaps similarly encourage municipal governments to exaggerate expenditures or reduce local tax effort. In Morocco, for example, the size of a municipality's transfer is based on the gap between its estimated revenues and expenditures. Although both revenue and expenditure estimates must be approved by govermment-limiting the scope for local strategic behavior-debt service is automati- cally included as an element in approved expenditure. Even unconditional transfers, such as Brazil's, may embody arbitrary interjurisdictional subsidies. Brazil's largest transfer, for example, is distrib- uted on the basis of the "origin" of value-added tax collections. But the value-added tax is collected atthe point of production-from major manufacturing enterprises-not at the point of consumption where much of the incidence presumably falls. The result is a cross subsidy from consumers throughout Brazil to the residents of industrial enclaves-a transfer that, for example, enables the mwnicipio of Sao Bemardo (the site of Volkswagen do Brasil) to operate a municipal symphony, courtesy of Volkswagen buyers throughout the country. 2.38 In developing countries, transfers are also used to fmance capital investment. And again, while this may be an appropriate roifor central government (particularly where long-term capital markets are not well developed), the allocation mechanism for capital financing is one that tends to be more responsive to the political interests of central govemment rather than local expressions of effective demand. 2.39 Capital allocation systems vary considerably among countries. In Pakistan, forexample, the official system of capital allocation (described in Box 2) is one that in principle pennits every project to be evaluated on both technical and economic grounds, in the lightof the nation's investment priorities and the availability of financing. It nevertheless results in project selections being made by people far removed from beneficiaries, with little information about projects and less idea of beneficiary priorities. The Mexican PRONASOL program, in contrast, is said to institutionalize a high degree of beneficiary involvement but tends to bypass the capital budgeting process of sectoral 23 Box 2. Contrasting approaches to capital allocation ADP: Pak-istan's Annual Developmcnt Plan (ADP) process typifies a highly centralized system that permiiLs every project to be cvaluated in the light of thc nation's investment priorities and the availability of financing-but results in project selections being madc by people rar removed from the bencficiarics, with little infonnation about projects, and less idca of beneficiary prioritics. Thc ADP process begins with a 'municipality's submission of a project proposal to the provincial government, wherc it is subjected to technical rcview. If tcchnically approved, it is then included in a larger pool of projects eligible for financing. Financing decisions are made annually, and begin with an estimate of overall resource availability by the central govemment's Ministry of Finance. Once an overall division of funds between government and provinces is madc, the provincial govemment makes a tentative match of resources with projects; it then forwards its recommcndations to the central govemmcnt's annual plan coordinating committee which approves sizc and sectoral allocation of the ovcrall package, and then submits it to a national economic council, presided over by the presidenL This lengthy process succeeds in climninating technically unsound projccts, and matches resources to projects, but incorporates no mechanism for weighing the degree of local commitment to investment projects. PRONASOL: Mexico's National Solidarity Program (PRONASOL) represents only the current stage in Mexico's gradual process of decentralizing its projectallocation system (starting from a system in which 94 percent of public sector capital investnent decisions were made by sectoral ministries at the federal level). The program is funded from an eannarked share of the national budget (carved out of what used to be sectoral ministry budgets). Allocations are distributed among states by fonnula, with a fixed proportion earmarked for allocation by mayors. Allocations of the municipal share among a state's municipalities are based in part on political considerations. But within a given recipient municipio, the allocation of funds among projects draws on-a well developed system of negotiation between the mayor and community groups, in which PRONASOL funding is made conditional on the community's willingness to provide counterpart contributions in cash or in kind. While mayors have the latitude to vary the tems of each project agreement, the matching requirement is universal. While PRONASOL, as a grant proram, still cmbodies inter-jurisdictional subsidies, ihe explicit inclusion of mayors in the allocation process, and the progranm's use of counterpart matching contribution as a rationing device are, for Mexico, significant reforms. ministries at the central and state level. In Turkey, the central govermnent's public works agency, Iller Bank, is responsible for both financing and construction of municipal public works. Its investment choices, similarly, are said to reflect the technical preferences of its engineers, and the political interests of the central government. III. DIRECTIONS FOR REFORM 3.1 The basis for making recommendations on the reform of intergovernmental relations is not strong. While the academic literature is useful conceptually, it is notspecifically prescriptive. The approach of the developed countries-which might be presumed to demonstrate successful mod- els-provides some common sense of direction, but is still one of considerable variety and frequent experimentation. The past experience from developing countries appears largely to be a source of negative lessons. The most relevant body of evidence is emerging from the countries that are now in the process of decentralization. Butthese reforms are still in theirinitial stages. There areno before- and-after cases of LDC decentralization on which to base normative advice. The conclusions prcsented in this chapter are therefore subject to these limitations. They convey more confidence in what to avoid than what to pursue, but serve to provide an overall sense of the direction for reform. 3.2 The evidence, such as it is, suggests that there are three elements to reform in the structure of municipal service delivery: (a) the clarification of functional responsibilities between levels of government; (b) the authorization of revenue sources corresponding to functional respon- sibilities, and (c) the institution of a system of accountability that encompasses both reguiation by central govermnent, and incentives for responsiveness to local constituents. Linking Services to Levels of Government 3.3 Clarity in the division of functional responsibilities between levels of government is an essential condition of any reform in the structure of urban service delivery. Judging from the institutional development literature and the anecdotal evidence from developing countries, a clear linkage between a unit of government and a specific service seems to be critical, in enabling constituents to hold local governments accountable for specific functions, and in eliminating the soft budget constraint that encourages mayors to act as a lobbyists before the central govemment ministries, rather than as individuals ultimately responsible for the perfornance of specific services. 3.4 Where this clarity does not exist, it would appear to be the first priority for reform, an essential precondition for progress on the other two elements of reform. There can be no correspon- dence between revenue and expenditure assignments unless expenditure responsibilities are known. And any attempt to improve accountability through regulation and constituent access is undermined if the function for which the entity is responsible is undefined. 3.5 Clarity is not achieved by a mere act of legislation or a constitutional demarcation of functions between tiers of government. The developing world is full of such documents, and they are routinely ignored or violated. Clarity, above all, requires the central government to refrain from ad hoc interventions in responsibilities that have been nominally assigned to local government-to observe the hard budget constraint with respect to local functions, no matter how disagreeable the outcomes. And this, in tum, requires a structure of subnational governent that renders such ad hoc interventions unnecessary; that obviates the crises that provoke cental government intervention.' - There is no definitive prescription setting out ihe functions that should be assigned to local government, or any standard practice, even among the developed, industrial countries. This is not surprising, given the variety of forms of 25 Geographical specificity 3.6 Such an arrangementrequires, interalia, a system of revenue assignmentand budgetary discretion that permits local governments to perform the roles that have been assigned to them. But it may first require governments to legislate more geographic specificity into their municipal organic laws. One of the traditional justifications for the lack of any rigid division of functions between govemment levels is the great variety of circumstances in which local government operates: the concern that a rigid division of functions-a hard budget constraint applied to all situations- would work to the detriment of poor, weak, or otherwise exceptional, jurisdictions. 3.7 In some countries, the organic laws governing local government are a cause rather than a solution to this situation. The organic laws of many developing countries fail to legally recognize the different circumstances of different jurisdictions, making no distinction between urban or rural municipalities orbetween urban municipalities of differentsizes. In Brazil, forexample, therules that apply to Sao Paulo (population 11.2 million) apply equally to Pirapora de Bom Jesus (population 4,585). Similarly, Mexico, Colombia, and Chile all make no distinctions between urban and rural areas or between urban areas of different sizes in the formal structure of local government. (The one- size-fits-all approach is also used in some Anglophone African countries, such as Nigeria and Ghana.) Under these conditions, functional specificity is difficult. The functions-such as secondary education-that could be comfortably assigned to the municipal governments of large metropolitan areas-cannot be because they cannot also be performed by the governments of tiny villages. 3.8 Geographical distinctions are already made in some parts of the world. The enabling laws of subnational governments in most of the Magrheb and South Asia, for example, make legal distinctions between urban and rural government and provide for varying degrees of autonomy for cities of different sizes. (In India, however, the graduation process appears to lag behind the rate of urban growth: places that were villages at the time of their initial designation are now cities, but retain the limitations of their former status). Geographical distinctions are also characteristic of the industrial countries. The British structure of local government distinguishes between metropolitan areas-where the full line of municipal services is assigned to district governments-and nonmetropolitan areas, where services that are needed in both urban and rural areas (education, personal social services, police and fire protection) are provided by county government-and those local govemment that exist All the G5 countries, for example, recognize more than one level of local govemment In France, Germany, and Japan, the two levels represent increasingly small subdivisions of the national tenitory as a whole. (French departments are divided into communes; Gernan Landkreis into Gemeinden, Japanese prefectures into municipalitics.) In the U.K. and U.S. (except Virginia), urban govemments are 'islands" in a county -sea", with rural areas having only one tier of govemment-the county. All the G5 countries also permit the creation of sector specific entities of local government for the provision of education, water supply, parks, or similar services. In the U.S., 43,169 of the 82,341 units of local government are sector-specificspecial districts. The public economics framework would argue that local government should be assigned responsibility for services whose impacts are confined to their jurisdictions. This would suggest that urban local governments should be assigned responsibility for residential infrastructwue and secondary distribution systems (water supply, sewerage, secondary and tertiary road networks, and associated drainage. regulation of mass transit, parks, public lighting, solid waste management) although as noted earlier, this is not a prescription for municipal production of any of these services, but only for their provision. But as noted earlier, local govemments may also function as agents of central government, and in this role may perform virtually any functional responsibility that is appropriate to the public sector. 26 thatare specifically urban (housing, public transport, refuse collection) are assigned to separate urban (district) governments. The German structure of local government, similarly, provides for a two-tier system of local government in non-metropolitan areas, with combined responsibilities in large cities. Linking Revenues to Expenditures 3.9 Refonn in revenue assignments isneeded if acleardivisionoffunctional responsibilides is to be workable. Local governments need the revenue authority to perform the responsibilities that have been assigned to them, without appeals for direct expenditure -to central government. While revenue reform does not imply a severance of intergovernmental transfers, it does imply the replacement of ad hoc grants with transfers based on clearly defined rules. Finance folows function 3.10 Theparticular structure of local revenues-the mix of usercharges, taxes, transfers, and loans-that is appropriate in a given context depends, first and foremost, on the functions that have been assigned to local government. Different kinds of revenue have different impacts on behavior and different patterns of incidence: user charges impose costs on individuals and can thereby ration consumption by price; benefit taxes can impose costs more broadly on the taxpayers within a jurisdiction, but can only ration through the local political prazess. Transfersmake itpossible to move money across jurisdictions, enabling central government to influence the behavior of local govern- ment and to redistribute income between constituents of different local jurisdictions. The choice of instruments depends on the objectives, and the objectives vary according to the function that is being financed. User charges 3.11 Where the benefits of a service are largely confined to individual consumers, and where there are no major adverse distributional consequences (and where it is administratively feasible), user charges are an attractive means of financing municipal services. In effect, user charges are a means of rationing consumption according to willingness to pay: to extract information about consumer preferences directly, by moving the consumption decision beyond the local govemment, directly to the consumer. To the extent that price can be varied with quantity, user charges can function as a pricing mechanism, confronting beneficiaries with a choice of different levels at appropriate prices, and allowing individual consumers to decide the quantity of a given service based on their own tastes and preferences. 3.12 Piped water, bus transit, and toll roads for example, are all services for which user charges are appropriate. Fees for refuse collection and sewerage are also appropriate. Urban govemments in developing countries in fact already impose such charges, but the level of charges is far below the financial costs of providing the service. (As a result, in the Federal District of Mexico, 2. Strictly speaking, fees for solid waste and sewerage should not be treated as user charges. There are public health externalities associated with these services; therefore, it is not desirable to allow individual consumers to choose.the level of these services they wish to consume, based on their individual evaluation of benefits- Because such fees can be clearly associated with the services they are financing, however, they have some of the benefit-equity attributes of user charges. 27 for example, subsidies to the municipal bus line consume about 22 percent of the District's recurrent budget.) The constraint on the present use of user charges is partly regulatory. Central governments restrict the level of usercharges, ostensibly on distributional grounds. Thisjustification does not hold up to scrutiny. Subsidies for water supply or bus transit are a particularly ineffective means of pursuing poverty-reduction goals because they inadvertently subsidize nonpoor consumers and are inefficient because they reward over-consumption. Analysts of both water utilities and bus compa- nies also note the adverse management implications of such subsidies. As governments rarely provide compensation to the providers for the full costs of these subsidies, their costs take the fonn of deferred maintenance and reluctance to extend service into low-income areas. 3.13 Governments can therefore encourage user charges through deregulation. But the evidence from developing countries suggests that municipal governments will not exploit this revenue source, even where they have the legal authority todo so-as long as less politically sensitive revenue sources are available. As discussed below, user charge reforn must therefore be synchro- nized with reform in the other sources of municipal revenue. Benefit taxes 3.14 Local taxes are in principle an appropriate means of financing services whose benefits are localized but cannot be confined to individual consumers, but nevertheless do not extend beyond the municipal boundaries. In a sense, local taxes are the collective analogue of user charges. Where user charges are the means by which individuals can express theirdemand forservices whose benefits are largelyprivate, local taxes are the means by which taxpayerswithin aconmmunity canexpress their demand for services that are consumed collectively. Benefit taxes also provide a degree of geographical equity to the financing of municipal services, imposing the costs of municipal services on the people who benefit from them. 3.15 Virtually all countries already assign some forn of local tax to their local governments (as shown earlier in Table 4). Reform therefore consists in part of overcoming the regulatory and administrative constraints on the use of these taxes. As noted earlier, local taxation is often highly regulated, with central government controlling rates, exemption policies, and any other factors that affect the level of tax liabilities. Like the controls on user charges, this degree of regulation does not appeartobejustified (at least on distributional or fiscal grounds). Although governments arejustified in restricting the kind of taxes municipal government may impose (to prevent local governments from exporting their tax burdens onto neighboringjurisdictions)3, there does not appear to be ajustification for a central government preventing a municipal jurisdiction from imposing a price on itself. 3. Thus there is a case for maintaining constraints on the use of certain taxes that are assigned to local govemment In many LDCs, the highest yielding local taxes are those imposed on business activity. The specific form of such taxes varies some are imposed on single sector (such as the service tax in Brazil) or types of transactions (such as the octroi in Pakistan); otbers extend more broadly to all industrial and commecial activity. In socialist economies, broad taxes (or profits) from public enterprises are the principle source of municipal revenue. Shanghai's profits tax and industrial and commercial taxes are, for example, largely imposed on firms owned by various levels of the public sector. Some business taxes have rudimentary assessment methods, taking the form of flat fees, to be paid by each business according to its particular sector, others employ more sophisticated methods of assessment, reflecting gross turnover or profits. Business taxes are high yielding because they are indirect-their incidence can be hidden in the form of higher prices (or lower wages and returns to capital). But because they are indirect, they function poorly as benefit taxes: in shifting the burden forward onto consumers or backward onto labor, they also shift the burden across jurisdictional boundaries. Governments should therefore discourage the use of these takes. Such taxes need not be abolished entirely however, provided some limitation is placed on their use. In Chile, the maximum level of the business iax on any individual firm is limited to 100,000 pesos. In France, local governments are pernitted to impose a business tax, but the rate is limited to a percentage of the property tax rate they are willing to impose. 28 3.16 Local tax deregulation can involve Lhe removal of explicit controls on tax rates. It can also include the removal of more subtle restrictions on tax yields. In countries with high levels of inflation, one of the major constraints on the yields of the property tax is the stipulation that properties may not be revalued without a physical inspection. Indexation is the solution to this problem. (Some states in Mexico, for example, now permit automatic adjustments in property valuations based on a cost of living index.) 3.17 Reform may also require a change in the mix of benefit taxes that local governments are pernitted to impose, toencourage the use of moreeasily administered, less politically sensitive taxes. As described in Box 2, there are no perfect local taxes. The factors that make for a good benefit tax- a broad base with direct incidence-also make for difficult administration. Countries exacerbate the administrative problem by assigning too many benefit taxes to their local governments (each with its own separate administrative overhead). The number should be reduced. As a country's economy modernizes, with an increasing proportion of income earned through formal sector employment, there may also be a case for increasing reliance on personal income taxes (following the model of the northern European countries and Japan.) But (as noted in Box 2), until those preconditions are met, municipal governments in developing countries are left with a choice of unattractive alternatives. Transfer reform 3.18 Any attempt to reform the structure of urban service delivery must address the largest source of local revenue: intergovemmental transfers. Transfers can serve several important positive mles in the financing of municipal services. First, they pernit central governments to influence the sectoral pattern of local expenditure; to use the power of the purse to induce local governments to undertake expenditures that are of national, ratherthan local interest, compensating local government for the costs of services that the central government is expecting them to provide. Left to their own devices, local governments would be expected to base their budget decisions only on the benefits captured by their constituents; transfers can induce local government to take wider, national benefits into account. 3.19 Second, transfers permit central governments to use local governments as agents of national income redistribution policies. Local governments themselves are badly positioned to pursue distributional objectives from their own tax bases. Poverty is not uniformly distributed in geographic terms: mayors in poor jurisdictions cannot redistribute income from high-income populations elsewhere. Central governments, with their ability to raise taxes from the high-income populations regardless of residence, can use intergovernmental transfers as a tool of national income distribution policy.4 4. Transfers can provide local government access to central govemment taxes with lower administrative costs. Because central governments are unconstrained by the need to tie the geographical incidence of their taxes to the location of their expenditures, they can-and do-rely to a great extent orn indirect taxes; these are more cost effective than the taxes typically assigned to local govemment. It is not clear, however, that on the margin, the administrative costs of local benefit taxes are higher than those of central taxes. 29 Box 3 Choosing among local benefit taxes Property taxes. Thc property tax is the most universally assigned local tax, but rarcly stands alone. Among the cight major LDC citics listed in Table 3, for cxampic, the property tax is assigned to six, but is the principal revenue source in only two. As a local incidence tax, the property tax performs well: the incidence of the tax (at least its rcsidential component) is gcographically confined and its covcrage is broad cnough to reach the majority of beneficiaries. The property lax is. howevcr, difficult to administcr successfully. In part, the reasons are tcchnical: the number of tax paying units is large. Assessmcnts arc inherently controvcrsial becausc values must bc inputed, rather than observed from actual transactions, and the base must be revalued annually to maintain its buoyancy. (Conditions in LDCs make the property tax particularly diflicult to administer-the basic market data on which the property asscssments are based is inaccessible or unreliable.) Therc are, howevcr, particular political costs associated with the property tax: as a direct tax, its burden is particularly visible; and as a tax on wcalth, its burden falls disproportionately on groups wit]: great political influencc. Income and payroll taxes. Local inco'ne and payroll taxes are not uncommon in developing countries. (Of the eight cities in Tabic 3, two-Budapest and Mexico-derive income from this source.) Various fonns of local income taxes arc also imposed in countries as disparate as Kcnya and Sweden. Personal income taxes have the geographically defined incidence sought in a benefit tax, and where imposed in conjunction with a national income tax (as in Budapest) are cheap to administer. The constraint on income taxes functioning as prices is their narrow coverage. In low income countries, income taxes that are confined to formal sector employment fall on too small a proportion of the population to serve effectively as benefit taxes: they impose costs on too small a proportion of beneficiaries. In Kcnya, for example, the local payroll tax is, in effect, a tax on public school teachers salaries, except in Nairobi. less developed countries employ more rudimentary fonns of income taxation, including flat -por' taxes and taxes based on imputed income. But income taxes that attempt to reach incomes in the informal sector are often not cost effective to administer. (In Onitsha, Nigeria, the costs of administering the poll tax exceed the entire revenucs of the tax.) Income and payroll taxes are therefore more suited to higher income countries where coverage is broader. Utility taxes. Taxes imposed in connection with utility bills-particularly with electricity bills-e also not uncommon in developing countries. Shanghai derives a significant share of its tax revenue from a surcharge on electricity bills. In Jordan, a flat fee (earmarked for garbage collection) is imposed as part of the tesidential electricity bill. In principlc, such taxcs have localized incidence and-given the ubiquity of electric service even in illegal settlements-reasonably broad coverage. Costs of administration are low, as the tax can be imposed jointly with electricity bills. The extent to which an electricity surcharge can be relied on exclusively is limited, however, by the basis of assessment if the tax is imposed ad valorem (as in Shanghai), it distorts the price of powver. If it is imposed as a flat fee (as in Jordan) it fails to capture variations in ability to pay (and is therefore limited by the tax paying ability of the poorest electricity consumers). Taxes on automobiles. Local automobile taxes-both recurrent taxes on automobile ownership, and one-time taxes on purchase-are also significant auxiliary sources of revenue. Automobile taxes are the primary tax source in Jakarta, where two separate taxes-one on purchase, the other on sales-contribute 22 percent and 14 percent of municipal tax revenues respectively. Except in multi-jurisdictional metropolitan areas, the incidence of such taxes is easy to confine; such taxes are relatively easy to administer, and enforce. 3.20 Intergovernmental transfers are therefore appropriate wherever the central govenmment expects local governments to perform an expenditure on its behalf, on either sectoral or distributional grounds (where the local government lacks the leverage to mandate the expenditure through regulation). But transfer reform is required both to increase their effectiveness in achieving their sectoral and distributional objectives and to reduce the adverse side effects of badly targeted or badly administered transfers. 3.21 Perhaps the most important measure developing countries can take is to reduce the 30 unnecessary adverse side effects ofexisting transfer programs-to reduce the uncertainty and bargain- ing that now accompanies intergovernmental financial flows and remove incentives for strategic behavior. Ecuador,forexample, has recentlyreplaced its system of adhocannual grants with aformula- basedtransfersystem. Countriescan also revise transferformulas to remove moresubtle unintentional inducementstoperversebehavior: Morocco,forexample, isin the processofreplacing itsdeficit-filling grant distribution formula with one based largely on population. Countries can also revise transfer formulas to reduce the extent of the arbitrary interjurisdictional transfers that are imbedded in some transfer formulas. Brazil, for example, has recently moved to reduce the mandated "origin" content in its value-added transfer formula, allowing states to increase the weight attached to factors such as population. 3.22 But countries also need to expand transfer programs to adequately finance the expen- ditures they have assigned to local government. Large, recurrent transfer systems are likely to be appropriate wherever services with major distributional or benefit spillovers are assigned to local government Primary education, for example, is an appropriate object of intergovernmental finance. The case for education transfers is most easily made on distributional grounds: primary education is arguably the largest transfer in kind to low-income populations that the public sector makes, and it is reasonably cost-effective, as wealthy people do not send their children to public schools (Haddad and others 1990).There is a similarcase for transferfinancingcertain aspects ofhealth care. Although there are few benefit spillovers from curative health care, there are clearly positive benefit spillovers in preventive health-the control of communicable diseases (health inspection, vector abatement, vaccinations for communicable diseases) whose impacts spill acrossjurisdictional boundaries (Over 1991). And (as with education) there are distributional arguments for transfer financing both preventive and curative health care, on the grounds that publicly provided health care constitutes a reasonably cost-effective transfer-in-kind to low-income populations. In most of the G-5 countries, local government expenditures on primary education and primary health care are largely financed through intergoverrnental transfers (originating at the national level in France and the U.K., and at the state/prefecture level in Japan and Germany). There is also clearly a case for intergovemmental transfers to finance direct payments by local governments to the indigent. (Practices vary in the G5 countries, with central governments making direct payments to indigent households in some cases and using local governments as agents in others. Both approaches are used in the U.S.) 3.23 The effectiveness of transfers in achieving these objectives can in principle be increased through changes in design: in changing the method used to determine the amount to be transferred, the criteria used to distribute the distributable pool, and the conditions attached to the use of the transfer. Where the intent of a transfer is to encourage increased expenditure on education, for example, there is a case for eannarking the transfer for this function (and for imposing a matching condition, to ensure that recipient local governments do not reduce the expenditure that they would otherwise have made on this function, substituting the transfer). Similarly, where the intent is to provide direct aid to low-income households, there is cause for greater use of earmarking and matching. 5. While the U.S. lags in this respect, the costs of primary education are increasingly being financed through state government transfers to local school districts. 31 3.24 Earmarking and matching areused in the GS countries, although more widely in the United States than in EuropeorJapan. (Although transferformulas in the U.K. andJapanarebasedoncomplex calculations ofexpenditurenieeds-local schoolenrollments andnumbers of indigent households-no explicit conditionality is imposed requiring transferred funds to be spent accordingly.) The ability of LDC governments to use similar techniques to improve the targeting of transfers depends on whether they alsopossesasimilarqualityof infonmationonlocalrevenucandexpenditureand asimnlarcapacity to monitor transfer use. Toensure thatmoney is spent on functions of national interest, a government must have the capacity to ascertain and monitor local expenditures. To determine the level of subsidy required to achieve a desired level of expenditure, it must have data on relative strengths of local tax bases. G-5 countries posses this information. Central governmentsindevelopingcountriesdonot. (In Nigeria, forexample,even dataon the population of individual local governments were not available for many years; and few local governments can present an accurate statement of income and expenditure.)Inconsequence,countriesmay havetoconsiderwhetherthedirectprovisionofeducation orhealth services throughcentral governmentministries would be more costeffective than attempts to manipulate the desired level of expenditure on these functions by local officials. Access to capital 3.25 Reform is also needed in the arrangements by which municipal governments obtain access to financing for capital investment, to reduce arbitrariness in capital allocation, improve targeting, and (in South Asia) to address the problems arising from the organizational separation of capital expenditure responsibility from operations and maintenance responsibility. 3.26 To an extent, improvements in allocation can be achieved by improving the targeting of grant programs. Grant reform is particularly appropriate in places where the preconditions for allocation by lending do not exist-where the local revenue base is too precarious, where the local political time horizon is too short, or where the object of the capital work is one thatreflects national, rather than local, interest. Thus there is a case for concentrating on grant reform in Mozambique or Nepal (both countries without a history of viable local government); a case (historically) in Mexico, where the combination of the short tenure of mayors (mayors are restricted to a single, three-year term) and the high staff turnoverthat typically accompanies changes in administration, limits the time horizon of political leaders. There is also a case for concentrating on grant reform where the works to be financed are of national interest, such as schools or health posts, where local government is, in effect, acting as an agent of national sector or distributional policy. 3.27 Where the benefits ofacapital workarelargely local, aprincipal focus of reform has been on reforming the allocation process by changing the terms on which funding is provided; replacing grant financing with loan financing. In principle, loan financing has several desirable attributes. Providing funds on a loan basis rather than a grant basis would be a means of improving targeting and depoliticizing the allocating process. By allocating funds on the basis of beneficiaries' willingness to incur debt, lending would force potential beneficiaries to reveal their degree of commitment to spccific projects. Lending would presumably help depoliticize the allocation process by placing a price on finance, rather than requiring the government to attempt to ration a free good. 3.28 While governments already administer such loan programs, their effectiveness in doing sohasbeenquestioned. Theexperienceofgovermnent-administeredmunicipalinfrastructurelending programs has been mixed. With the taxpayers ultimately bearing the financial risks of bad loans, the 32 pressureon governments to usC accesstocreditforpolitical purposes-toallocatc rcsoUrceS to polilically favoredjurisdictions and to ease upon debt serviceenforcement in favoredjurisdictions-is diflicult to resisL 3.29 As a result, there is increasing interest-particularly among donors-in privatizing this role-in tuming responsibility for the mobilization and allocation of long-term savings over to the private capital market. Such an arrangement would, in effect, force municipal governments to seck funding on the same footing as any private-sector borrower. The private-sector model has much to recommend it. With their own capital at risk, private lenders would be less likely to make unsound loans and more likely to insist on repayment. But in most developing countries, the private market has been given the opportunity to lend to local government and has declined. Long histories of macroeconomic instability have caused private savers to view long-term financial commitments of any kind as extremely risky, and government controls on the returns to savings have ensured that the risk is not compensated by the prospect of commensurate reward (Levy 1991). As political entities lacking readily marketable collateral, local governments are viewed as particularly unattractive to private capital. Thus, even in countries where local governments have the legal authority to borrow, the market has cleared at zero. 3.30 With the private capital market unwilling to lend, and governments unwilling to insist on repayment, the focus of reform has turned to organizational hybrids-attempts to combine the commercial incentives of private lenders with the financial backing of central governments. Under the general rubric of MCIs, these organizations represent an attempt to put an arm's length between the government and the lending process, thus isolating lending and loan administration in an entity that enjoys some legal and bureaucratic separation from the government budgeting process and establishing clearer allocation and recovery rules to defend the organization from political interfer- ence-while still ultimately carrying the financial backing of the government. 3.31 MCIs also have a mixed track record, as shown in Table 5. And while various administrative and managerial measures can increase the likelihood of their success (as described in Box 4), two overall conclusions emerge from the experience of MCIs in developing countries. First, although organizing a lending program as an MCI may provide some protection against government political interference, it cannot prevent it. A determined government can interfere in the lending decisions of any bank that it owns, regardless of the bank's legal structure. Thus, what matters most is not the organizational fonn, but rather the government's conLitment to the financial integrity of the MCI's operations. Second, the viability of any lending program depends on the health of its borrowers. MCIs are unlikely to thrive where local governmnents are not creditworthy, or where economic conditions ar unstable. Government attempts to establish MCi.. must therefore be accompanied by measures to support the financial health of municipal govenmments and the stability of the economy as a whole. 3.32 Ultimately, the existence of creditworthy local govermnents and a stable economic envirownent should provide the conditions forprivate lenders toenter this market, obviating the need for a government-backed municipal credit institution. MCIs should therefore No seen as an interim solution, a way station on the road to more direct relationships between municipal governments and private capital markets. 33 Table 5. MunicIpal lending organizations Share of Total Portfolio Capital Organization Form Source of Funds Results Collatcral *insfer Brazil managed by unit IBRD, and state; good withholding large only in PRAM of state planning capitalized to from transfers small towns secrctariat; state revolve bank acts as financial agent Colombia loans originated compulsory bonds good borrow small FINDETER by pvt banks; sold to S&L pledges rediscounted by transfers, funds adminis- specific source tered by Board Morocco ,department in bonds floated by good indirectly small FEC - CDG-govemment CDG, donors, financed -- - - bank (now being government capital through convered to govemment indepcndent tansfers board, chaired by the PM who will appoint MOI) Indonesia bonds floated by Govt loans poor none small RZDA CDG, donors, government capital Jordan legally compulsory LA poor withholding large, but LGs CVDB independent deposits, central from transfers have few board, chaired by bank loans, donors functions Minister donor on-lending Kenya legally independent poor none large in small LGLA board, chaired by LGs Minister Sources: Project PCRs, interviews with project officers BalancngRegulationwithPoliticalAccountability 3.33 How much a system of municipal service delivery should rely on accountability upward to central government-through regulation-or downward to constituents-through political par- ticipation-is not an issue that lends itself to universal prescription. Whether central govenunent bureaucrats or local politicians are better stewards of public interest is not an issue that this paper will resolve- Neither extreme appears to be desirable. 34 Box 4. Improving the perrormance of MCIs MCls have a long and successful record in Europc, both as funds (the British Public Works Loans Board, for examplc), or as banks (Credit Local dc France). But their record in developing countrics is uneven. As shown in Tabic 5, the repayment record of municipal borrowers into MCIs is generally poor exccpt wherc thc institution is permitted to deduct debt service from intergovemmental recurrent transfers. Even where MCI portfolios arc performing rcasonably well, their long term financial prospects arc qucstionable: none charge the level of interest rates that would cnable them to mobilize funds from private long term capital mark-ets without heavy govemment subsidies. Despitc this expericnce, MCIs have to be considered reasonable interim alternatives. Abandoning an MCI approach could mcan, on the onc hand, relying cntirely on central government budget allocations to finance municipal projects, an approach that provides no institutional safeguards against inappropriate political influence. At the opposite cxtreme, it could mean forcing municipal govcrnments to rely cntirely on private capital markets- a solution that, under cl.rrent conditions, is equivalent to cutting ofr all access to long term credit. Experience suggests sevcral organizational charactcristics that increase the likelihlood of an MCI's viability. First, the cnabling legislation of an MCI should lcave the MCI free to make lcnding decisions solely on financial criteria, clearly segregating the government's sectoral or developmental intcrests in project selection from the financial role that the institution is intended to perform. Funding for the MCI should bc provided en bloc, rather than on an individual project basis, with governments holding MCIs accountable for their ovcrall financial perfornance, monitoring the performance of their portfolios, and conditioning further financial backing on satisfactory financial rcturns, but refraining from interfering with individual project decisions. (Govemment's sectoral interests can, nevertheless, be inposed at a prior stage in project evaluation. In Jordan, for example, project proposals must be approved by the Ministry of Local Govcrnment before the Jordanian MCI ever sees them.) Second, government's commitment to the financial integrity of the MCI should be reflected in the composition of its board. The representation of the Ministry of Finance, for example, is a useful counterbalance to the influence of a Minister of Local Government Third, in order to reduce political pressure on technical staff, appraisal regulations should clearly detine the terms and conditions under which loans will be approved; employing readily verifiable criteria (such as debt service coverage ratios) to assess the credit-worthiness of potential borrowers; and explicitly forbidding new loan commitments to jurisdictions that are currently in default Goven. ments must also manipulate the environment in which the MCI is operating. MCIs are often instigated at the behest of donors. With few exceptions, the terms and conditions imposed by donors have not been carried over into other channels of funding for municipal capital investmnenL Through a variety of grants and competing donor programs, govemments undernine the market for MCI lending. MCIs then either fail to disburse or become financial enclaves, with no impact on the system of municipal infrastructure as a whole. Govemments should refrain from this practice. They should coordinate the terms on which funding is provided, and reduce grant or soft loan prograns that directly compete with the markets the MCI is designed to serve. Finally, govemments should takc the steps necessary to permit local governments to become good credit risks-assigning revenue sources appropriate to local functional responsibilities, allowing greater autonomy over tax rates and expenditure decisions. As noted in the text, the existence of credit-wordty local govemments, combined with an economic environment that fosters the development of a private capital market, can, in the long run, obviate the need for an MCI, and allow the private capital market to assume this role. Centrai regulation 3.34 Some degree of accountability to central govemment through a national regulatory framework appears to be appropriate to any structure of municipal service delivery. In no country are local governments entirely sovereign. In all the G5 countries, as well as in developing countries, local governments function within a legal framework established in national (or in the US. and Germany, 35 state) law. There is, nevertlheless, a case for restraining the scope of central regulation in developing countries, to issues where the behavior of local government has adverse consequences outside its jurisdiction and where the central governmenthas the administrative capacity to regulate effectively. 3.35 Central regulation is clearly appropriate where local government behavior can affect national monetary, trade, or fiscal policy. Thus local governments should not have the authority to print money (a principle that was, in effect, violated by the provincial govremments of Argentina under the previous regime) (World Bank 1990). Central regulation on external borrowing by local government is also appropriate, to permit central control over the balance of payments. Central regulation over the aggregate level of domestic borrowing may also be justified. In the UK, for example, where local governments account for nearly half of public-sector investment, the central government has historically attempted to control the aggregate level of local borrowing as an instrument of fisca] policy. 3.36 Central regulation is also clearly appropriate where local govemments are carrying out functions on behalf of central government. As Winkler has pointed out in the case of education, even in the highly decentralized systems in some of the G5 countries, central (or state) governments maintain control over certain policy decisions-the ages of mandatory attendance, the core curriculum-while relinquishing responsibility for day to day management to local government (Winkler 1991). As noted earlier, earmarking on intergovernmental transfers-a formofexpenditure regulation-is clearly appropriate where the central govemment is using local govemment as an agent, to ensure that funds are spent for the purpose they were intended. 3.37 But where impact of local government behavior is largely localized, and regulation requires detailed knowledge of local conditions and priorities, the case for central regulation is more difficult to justify. In such cases, it is not clear that the regulations posed by central govermnent are a useful restraint, or an inhibition to the responsiveness of local government. Political accountability 3.38 The obvious counterpart to central regulation is local political accountability-the reliance on voters to regulate the behavior of their political leaders. The view that local elections / perform impeccably in this role does not stand up well to scrutiny.6 The validity of elections aftet long periods of authoritarian rule appears-particularly questionable. O'Donnell -and Schmitter note that under these conditions, "voters will have relatively little experience in choosing among 6. As O'Donnell and Schmitterr.ote succinctly "the thery ofliberal democracy wasbased onthe presumption hatactive citizens would elect and hold accountable individual representatives who would, in tum, produce substantively superior decisions. Contemporary theories of democracy place the burden of consent on party elites and professional politicians (sporadically subject to clectoral approval) who agree among themselves that they will compete among themselves in such a way that those who win greater electoral support will exercise their temporary political superiority in such a way as not to impede those who may win greater support in the future from taking office, and those who lose in the present agree to respect the contingent authority of the winners to make binding decisions, in exchange for being allowed to take office and make decisions in the future. (O'Donnell and Schmitter, -Convoking Elections" in Transitions from Authoritarian Rule, 1986). 36 candidates; party identification will be weak... One can therefore expect a good deal of tactical voting-[which may] be quite disconnected from longer term class, sectoral, ethnic or other interests" (O'Donnell, Schmitter, and Whitehead 1986). Campbell, moreover, notes that "in most [Latin American] countries, minimum conditions for electoral choice making-civil liberties and at least quasicompetitive parties do not apply to the selection of local candidates. The long dominance of centr al government and parastatals in service supply has weakened voter identification with local government as an instrument for the expression of demand. In this environment, even where there are local multi-party elections, they tend to become miniaturized battlegrounds for expressing preferences regarding national scale political issues or political ideology" (Campbell 1992). 3.39 The advent of local democracy, while increasingly common,7 is therefore no panacea. There is, nevertheless some evidence that specific changes in election rules can influence the degree to which local elections function as referenda on local government performance. Venezuela has increased the local focus of elections by changing the basis on which candidacies are identified. Until 1988, Venezuela's municipal elections were contested on the basis ofnational party slates, ratherthan as individual candidacies; the winning party was permitted to designate its candidate for mayoral positions after the elections. Candidates now run as individuals, a reform that has reportedly shifted the focus of the campaign to more localized issues. 3.40 There are alternative and supplementary means of holding local municipal leaders accountable. In Korea, for example, mayors have traditionally been appointed by the government, but their career tmjectories (determined by the Ministry of Home Affairs) were clearly based on their success in responding to local constituents. To this end, the city of Seoul operates "citizen complaint reporting centers" and the mayor and top administrative staff make themselves available every Saturday for a"day of dialogue with the citizen." (As noted earlier, Korea has nevertheless introduced direct elections in all municipalities except Seoul.) 3.41 The geographical deconcentration of specific municipal services to submunicipal .-branch offices also appears to be a means of strengthening municipality accountability, by bringing providers into closer geographical proximity to clients. Such an arrangement is fairly common in large metropolitan areas. The Bombay Municipal Corporation is subdivided into four zones and 23 wards, headed by Deputy Municipal Commissioners and ward councilors, respectively, with responsibilityforsolidwasteremoval, roadmaintenance, andwaterand sewerage services. Budapest is made up of 22 districts. Each district is headed by an elect-ed mayor and has specifically assigned service responsibilities, and independent revenue sources. Seoul, similarly, is divided into 22 Gu, each responsible for solid waste collection and street maintenance within its jurisdiction and authorized to charge a corresponding service fee. 7.. Among the countries that have recendy authorized local elections for municipal offices are Colombia (1988), Nigeria (1989), Chile (1990), and Korea (except Seoul) (1991). 37 Synchronizing the Elements of Reform 3.42 There is clearly no one way to organize the delivery of urban services. The extent to which a system of accountability should rely on local politics or central regulation-whether primary education should bedelivered by local government and financed throughearmarked grants, orsimply delivered directly by the field administration of central govemment ministries-are issues for which there are no universal answers. What does appear evident is that the various pieces of the intergovernmental relationship have to fit together. Little is gained by granting local political autonomy if elected officials have no discretion over expenditure or revenue levels. There is little benefit in establishing a credit-based system for infrastructure financing if local governments do not have the means to be creditworthy. 3.43 The importance of synchronizing the various parts of the intergovernmental relationship becomes increasingly evident in countries that are undergoing political decentralization. The political impetus behind decentralization has prompted central governments to make political concessions hastily. But granting local elections is a step that can be taken quickly. What is slow and difficult is the working through of new regulatory relationships between central government and local government, the transfer of central govemment assets (and staff); the conversion of what had been annual budgetary transfers within a central government into intergovernmental transfers that are transparent and predictable. Such data as exist suggest that problems of synchronization are widespread in countries undergoing decentralization. In Eastem Europe, expenditure responsibilities have been transferred to local governments before a workable strcture of revenue assignments was in place. In Latin America, revenues have been decentralized ahead of functional responsibilities. In Africa, political autonomy was granted before either expenditure or revenues were decentralized. 3.44 In a sense the most daunting task for reform lies not in envisioning an ideal future, but in helping governments through the transition process. The fundamental political forces that appear to motivate political decentralization suggest that changes in the political relationships between central and local govemment are inevitable. Reform efforts should concentrate neither on resisting or promoting decentralization, but rather on attempting to influence the process of change so as to reduce the costs of transition, and increase the likelihood of an eventual system of urban service delivery that is efficient and responsive to its constituents. REFERENCES Bartone, C., J. Bernstein, and F. Wright. 1990. Investmnents in Solid Waste Maniagement. Report No. WPS-405. World Bank PRE Working Papers. Washington, D.C. Campbell, T. 1992, Decentralization to Local Government in LAC: National Strategies and Local Response in Planning, Spending, and Managemzent. Washington, D.C.: World Bank. Fukuyama, F. 1992. The End ofHffitory and the Last Man. New York: Free Press. Haines, A. 1992. "Institutional Development Experience: A Review of Bank Urban Projects". Mimeo. Haddad, W; et al. 1990. Education and Development. Washington, D.C.: World Bank. Hall, J. 1993. "Consolidating Democracy." In D. Held, ed. Prospectsfor Democracy. Palo Alto: Standford University Press. Heggie, I. 1991. Improving Management and Charging Policyfor Roads. Washington, D.C.: World Bank. Israel, A. 1987. Institutional Development. Baltimore: Johns Hopkins University Press. Kessides, C. 1993. The Contributions of Infrastructure to Economic Development. World Bank Discussion Paper 212. Washington, D.C. Legorreta, J., and F. Angeles. 1989. Transporte y Contaminacion en la Ciudad de Mexico. Mexico City: Centro de Ecodesarrollo. Levy, F. 1991. "Report of the Task Force on Financial Sector Operations". Mimeo. Lowder, S. 1986. Inside Third World Cities- London: Croom and Helm. O'Donnell, G., P. Schmitter, and L. Whitehead. 1986. Transitionsfrom Authoritarian Rule. Baltimore: Johns Hopkins University Press. Ostrom, E., L. Schroeder, and S. Wynne. 1992. Institutional Incentives and Sustainable Develop- ment. Boulder, C.O.: Westview Press. Over, M. 1991. Economicsfor Health Sector Analysis. Washington, D.C.: World Bank. Musgrave, R., and P. Musgrave. 1984. Public Finance in Theory and Practice. New York: McGraw Hill. 39 Nunberg, B. 1991. Public Sector Management Issues in Structural Adjustment Lending. Wash- ington, D.C.: World Bank. Potter, D. 1993. "Democratization in Asia." In D. Held, ed., Prospectsfor Democracy. Palo Alto: Stanford University Press. Prud'homme, R. 1993. "On the Dangers of Decentralization." Mimeo. Rondinelli, D. 1990. Decentralizing Urban Development Programs: A Frameworkfor Analyzing Policy Options. USAID Office of Housing. Silverman, J. 1992. Public Sector Decentralization: Economic Policy and Sector Investment Programs. Washington, D.C.: World Bank. Winkler, D. 1991. Decentralization in Education: An Economic Perspective. Washington, D.C.: World Bank. World Bank. 1993. Getting Results: the World Bank's Agenda for Improving Development Effectiveness. Washington, D.C.: Author. -.1 993a. World Bank Experience with Urban Development, OED, draft. . 1992.1992 World Development Report. Washington, D.C. . 1990. Argentina: Provincial Government Finances. A World Bank Country Study. Wash- ington, D.C. 1990a. Primary Education: A World Bank Policy Paper. Washington, D.C. *- -. 1990b. Urban Policy and Economic Development An Agenda for the 1990s. Washington, D.C. Current W publications: Ml Property Tax Reform: Guidelines and Recommendations. William Dillinger. Ul 2 Eny EnvironmentU Ltnkags in the Urban Sector. Josef Leitmann. W 3 Aterna Approaches to Pollution Control and Wastc Managemient: Regulatory and Economic ins mntents. Jaris D. BernstirL 11W4 Te andMaret Assssment: A New Toolfor Urban Managmetnt. David F. Dowall. WS Reforning Urban Land Policies and Instfiutions in Developing Coun- tries. Catderine Farvacque, Patridck McAuslan. WI A Review of Enrirormental Hea(th Impacts in Developing Country Cities. David Bradley, Carolyn Stephers, Trudy Harpham, Sandy Cafross If7 A Faneuvrk for Reforming Urban Land Policies in Devdoping Countries. David E. DowalL, Giles Clarke. Conditonsdemiseopacepdessystkmesd'inforrmtfonfonciredans i wila d'Afrique sud-mrienne f ncophne. Alain Durand Lasserve. Efl Irban Applications f Soatelite Remote Sensing nd GIS Analyis. Bengt Pauiwon M I Utl7ity Mpng and Rord ipingforl Isfmscr. David Pickering& Jonathan M Park, David H Bannister. EU Elementsof Urban Mawgement. Kennethj. Davey. WV 1 Land UseConsdtions Urba Environmthl Mmgement.Jaus D. Berstin. ff13 Priate Swtor Partipation in Municipal Solid Waste Services in Devdoping C&nntries: Vol. 1. The Formal Sector. Sandca Cointreau-Levine. f14 Rapid Urban Envrnmental Assesnsent: Vol.1. Mthodology and Preliminary Findings. Josef Leitnann 3115 Rapid Urba Envfronml Assment: Vol.2. Tools and Outputs. Josef Leitmann. W16 Decent ru izton andtsmpikatinfor Urbn Srce Delvery. William Dilhinger. NV Strategic Optionsfor Uba nlfrasructureManagem . William F. Iox. WE TomaE rom Sd EgiesforCtwsPohiyConsWenis for UrbZn EnvmmwtalMnagement in Deoping Count Carl Bartome, Josef Leianaxm, Jais D. Benstein, Jochen Bigen. IRPlbUMqe,I EnvironmnalInnovtion andanagement in Curitiba, Bri. Jonas Rabinovitch,Josef LetmamL Far more information about W materials, contact: UMPCoordiator Technia Cooperation Division United Natons Centre for Human Settlements (Habitat) P.O. Box 30030 Nairobi, Kenya Telphone 254-2-62328 6230 Fasmle: 24-2-6242/624266 h1i Nmagmenl _ rupmme Current if publications: UPil Property rax Reform: Guidelines and Recommendations. William Dillinger. IN2 Energy Environment Litnkages in the Urban Sector. Josef Leitmann. W3 Alternative Approaches to Pollution Controland Waste Management: Regulatory and Economic Instruments. Janis D. Bernstein. H 4 The Land Market Assessment: A New Tool for Urban Management. David E. Dowall. 1115 Reforming Urban Land Policies and Institutions in Developing Coun- tries. Catherine Farvacque, Patrick McAuslan. Mrn A Review of Environmental Hlib impacts in Developing Country Cities. David Bradley, Carolyn Stephens, Trudy Harpham, Sandy Cairncross. UlP 7 A Framework for Reforming Urban Land Policies in Developing Countries. David E. Dowall, Giles Clarke. HS Conditions demise en place des systmes dizformation foncitre dans ks vilkes d'Afrique sud-shariennefroncophone. Alain Durand Lasserve. HIns Urban Applications of Satellite Remote Sensing and GIS Analysfs. Bengt Paulsson.. lIFEl Ut7iity Mapping and Record Keeping forinfrastructure. David PIckering, Jonathan M. Park, David HL Bannister. g 1 Elements of Urban Management. Kenneth J. Davey. 012 Land Use Considerations in Urban EnvironmentalManagement. Jarus D. Bernstein. 113 Private Sector Participation in Municipal Solid Waste Services in Developing Countrfes: Vol. 1. The Formal Sector. Sandra Cointreau-Levine. l14 Rapi Urban Environmental Asssment. Vol.1. Methodology and Preliminary Findings. Josef Leitnarn. HIS Rapid Urban Environmental Assessment Vol. 2. Tools and 0utpts. Josef Leitmann. icP1 Decentralization and Its Implications for Urban Seroice Detivery. William Dilinger. INV Stratec Optionsfor blan InfrstructureManagment. William F. Fox. HE Towar Environental StrategiesforGtia Policy Considerations for Urban Environmental Management in Developing Countries. Carl Bartone, Josef Leihnann Jarus D. Bernstein, Jochen Eige Erflqapelalif EnvironmentallnnoaationandManagement in Curitiba, Brazil Jonas Rabinovitch, Josef Leitmann. For more information about U materials, contact UMP Coordinator Technical Cooperation Division United Nations Centre for Human Settlenents (Habitat) P.O. Box 30030 Nairobi, Kenya Telephone: 254-2-623218/623207 Facsimile 254-2-624264/624266