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Sunday, October 25, 2009

Local government financing and effective decentralisation

Mahfuz Kabir

Local government is one of most important but sensitive items in the policy and budget making arena in Bangladesh. Quite surprisingly, it has not been regarded as a core or building block for national development plans even though local development and service delivery are critically dependent on efficient and effective local government. As the local government institutions (LGI) remain at arm's length from the citizens, decentralised development planning and building administrative capacity of LGIs are essential not only for delivering services to the grassroots but also for improving effectiveness of the central government and ability of local administrative units.
In Bangladesh, it is widely believed that all the tiers of LGI have been suffering from resource deficiency to provide quality services despite immense potential of enabling them to be financially solvent. Currently, there is no scientific formula for financing all LGIs, but considerations like backwardness and population are used to allocate funds for some LGIs.
Keeping this in mind, some very important initiatives were taken by the government in the last six years. The most important ones were to introduce and modify the laws of critical LGIs to make them democratic in composition and function, and to specify the areas of revenue generation including financial support by the government to emerge as financially viable institutions. While the laws are now generally good with some scope for further improvement, the major issue is proper implementation of the law including the financial aspects.
In general, financing of LGIs has not had any particular pattern in recent years and for the foreseeable future projected by the Medium-Term Budget Framework (MTBF). There are oscillations in direct transfer of funds in all the LGIs in terms of both amount and rate of change. Rural LGIs are seen to experience more oscillation than the other types of LGIs. The aggregate direct allocation to the LGIs also shows frequent fluctuation of provisional and realised fund transfers. In the last fiscal year (2013-14) the share of central transfer to LGIs was only 1.52% of budget and 0.42% of GDP, which were 3.1% and 0.62%, respectively in 2010-11.
Undeniably, LGIs are heavily dependent on direct grants from the central government and shared tax revenue with the land department. The major sources of revenue are concentrated in quite a few sources. However, there is no general and predictable pattern of fund flow from the government, except for Union Parishads. The projections of allocation in the MTBF continue to witness significant change. For instance, the last fiscal year's MTBF (2013-14 to 2017-18) projected a growth of allocation for City Corporation by 233% and for Paurasabha by 495%. However, the realised allocation for the both the councils witnessed significant reduction and indeed negative growth in 2014-15 compared to 2013-14 as per the MTBF document of the current fiscal year (MTBF 2014-15 to 2016-17). It clearly contradicts one of the core premises of the MTBF that the realisation of projected allocation would not change significantly for the first year of projection but would start deviating afterwards.
This fact provides two strong messages for the policy makers and other actors in local government sector. First, the budgetary projections for LGIs in the MTBF are ineffective to a great extent. In other words, it indicates that there is no need for MTBF projection of budgetary allocation for LGIs if it turns out to be futile in the next year. Second, indication for financing LGIs is absent in the process of medium-term national development planning. Without specific and tangible commitment for allocation in the overarching national document like the outgoing Sixth Five-Year Plan (2011-2015), the MTBF documents cannot translate it into financial allocation and projections for the medium term. Indeed, there is no financial indication or directives for LGIs in the Sixth Five-Year plan. Therefore, it is necessary for comprehensive understanding of financial requirement of the LGIs for the Seventh Five-Year Plan (2016-2020). Then MTBF will convert it into the specific project-based and operational fund requirement for each of the LG tiers and conduct projection for the medium term.
Currently, there is no financial distribution policy for the LGIs in Bangladesh. This results in 'special' and discretionary allocation. Coupled with uneven distribution of shared immovable property transfer tax it again results in acute horizontal inequality of financing local government bodies. An index-based funding mechanism should be introduced for distributing fund among the LGIs as a scientific foundation for developing financial distribution policy.
The practices of index-based and discretionary funding coexist and work together harmoniously in India. Indeed, theories of fiscal federalism reveal that determining LGI funding transfers based on the political incentives leads to inefficient allocation of resources, distributive injustice and inequality across geographic regions. In order to overcome the negative consequences of political bias in LG funding, some countries established independent agencies (e.g., Central and State Finance Commissions of India) in distributing national resources.
The government can introduce an index-based financing distribution mechanism for reducing political bias. The index could be either simple or composite, but the sub-indices must have the indicators of financial performance, service delivery as per the law, and fund requirement depending on quantitative analysis of resource gap to provide desired services to the citizens.
The above-mentioned issues are some of the most critical aspects of financing and development of LGIs, which should be reflected in the upcoming Seventh Five-Year Plan. Effective decentralisation through inclusive and sensitive inter-governmental transfers as well as sensible resource sharing is a key to strengthening democratic LGIs and promoting services to the citizens, which has always been a challenging task for the central government. Therefore, tangible commitment is required in the Plan document so that it can be readily translated into predictable financial allocation for the next five years to help achieve the overarching national 'Vision 2021.'  
 The writer is an Economist and Senior Research Fellow at Bangladesh Institute of International and Strategic Studies (BIISS).

The Daily Star, 01 February 2015