Intergovernmental Fiscal Transfers in Developing Countries: Case Studies from the Commonwealth(5 Commonwealth Secretariat Local Government Reform Series)

Despite growing fiscal devolution, efficient and effective intergovernmental transfers – the transfer of money from central to lower levels of government – remain a vital sub-national government financing in developing countries. This research study examines different approaches to intergovernmental transfers (ICTs) in developing countries in the Commonwealth, and assesses their relative strengths and weaknesses. It includes detailed case studies of India and Kenya, lessons learned from IGT systems in Australia and the United Kingdom.

Table of Contents:
Foreword Preface List of tables List of figures List of boxes Abbreviations and acronyms 1. Introduction References 2. Overview of Intergovernmental Transfers 2.1 Vertical balance 2.1.1 Equalisation 2.1.2 Externalities 2.1.3 Administrative justifications 2.1.4 Earmarked and non-earmarked funds 2.1.5 Mandatory and discretionary grants 2.1.6 Matching and non-matching grants 2.1.7 General-purpose and block grants 2.1.8 Applying the typology in practice 2.2 Commonwealth countries 2.2.1 Responsibility for designing the system 2.2.2 Legal and regulatory frameworks 2.2.3 Determining the transfer pool 2.2.4 Features of a distributive formula 2.2.5 Size of the contribution to municipal revenues 2.2.6 Level of autonomy in setting priorities 2.2.7 Accountability of outputs 2.2.8 Subnational access to market-based finance 2.2.9 Use of IGTs 2.3 Trends in developing versus OECD countries References 3. Approach to Intergovernmental Transfers in India 3.1 Historic approach 3.2 Current approach 3.2.1 Centre–state fiscal decentralisation framework 3.2.2 State–local government fiscal decentralisation framework 3.3 Assessment of the IGT framework in India 3.3.1 Strengths 3.3.2 Key issues 3.4 Conclusions References 4. Approach to Intergovernmental Transfers in Kenya 4.1 Historical approach 4.2 Current decentralisation framework 4.2.1 Relevant legislation and local government structure 4.2.2 Functions of local authorities 4.2.3 Municipal finance 4.2.4 IGTs and their design 4.2.5 Subnational borrowing 4.3 Assessment of the IGT framework in Kenya 4.3.1 Strengths 4.3.2 Key issues 4.4 Conclusions References 5. Lessons from OECD Countries – Case Study on IGTS in UK 5.1 Transfers to Scotland, Northern Ireland and Wales 5.1.1 Barnett formula 5.1.2 Other sources of financing 5.2 Transfers to local government bodies 5.2.1 Overview of local government finances 5.2.2 Central government grants to local governments 5.2.3 Local government expenditure 5.3 Lessons from the UK model 5.3.1 High level of centralisation 5.3.2 Clearly defined formulae for allocating grants 5.3.3 Accountability 5.3.4 Horizontal fiscal equalisation 5.3.5 Specific grants are in line with the objectives of central government 5.3.6 High priority to social services 5.4 Conclusion References 6. Lessons from OECD Countries – Case Study on IGTs in Australia 6.1 Introduction 6.2 Level of decentralisation 6.2.1 Transfer from the federal government to the states 6.2.2 National specific-purpose payments 6.2.3 National partnership payments 6.2.4 General revenue assistance 6.3 Level of funding 6.4 Transfers to local government bodies 6.5 Lessons from the Australian model 6.5.1 Accountability 6.5.2 Efficiency 6.5.3 Flexibility 6.5.4 Simplicity 6.5.5 Co-ordination 6.5.6 Intergovernmental collaboration 6.5.7 Adequate funding 6.6 Conclusions References 7. Key Conclusions and Lessons 7.1 Overcoming horizontal and vertical fiscal imbalances 7.2 Simplicity and co-ordination 7.3 Types of grants 7.4 Incentives and accountability 7.5 Predictability 7.6 Political interference Annex 1 Additional Information on IGTs in India Annex 2 Additional Information on IGTs in Kenya Annex 3 Additional Information on IGTs in the UK Annex 4 Additional Information on IGTs in Australia Annex 5 Approach and Methodology