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Issues in Program Design

Contributor: World Bank
Author: Decentralization Thematic Team
Contact: Jennie Litvack

Constitutional, Legal & Regulatory Framework

Constitution, laws and regulations codify the formal rules of the game by which a decentralized system is supposed to function. Structurally, the desirable architecture of these rules is quite straightforward:

  • the constitutions should be used to enshrine the broad principles on which decentralization is to operate, including the rights and responsibilities of all levels of government; the description and role of key institutions at central and local levels; and, the basis on which detailed rules may be established or changed.
  • one or more laws should define the specifics parameters of the intergovernmental fiscal system and the institutional details of the local government structure, including, key structures, procedures (including elections), accountabilities and remedies; and,
  • a series of regulations associated with each law should interpret and describe in detail the practices and measures by which the related law will operate. Laws that deal with tasks that are shared between national and subnational governments should include sections on intergovernmental relations.
Substantially greater detail and specificity is provided in moving down this three platform architecture from the Constitution to Regulations. Conversely, greater difficulty and a higher degree of authority (e.g., Minister, Parliament and Constitutional Assembly) is required to change the provisions when moving up from Regulations to the Constitution.

These aspects of degree of difficulty and locus of authority to effect changes are important factors in determining where in the architecture particular aspects of the decentralization system are defined and the relative specificity of those definitions. The rigidities and flexibility established in this structure have important implications for the management of a decentralized system.

The placement of an item may be the result of a consensus, but often is the outcome of sometimes difficult negotiations between competing interests. Those concerned with macro stability, for example, may wish to have intergovernmental fiscal rules be a matter for regulation under the Minister of Finance, so as to give that ministry maximum flexibility in public expenditure management. Local government advocates, in contrast, may argue (as they did, successfully, in Brazil) for these fiscal distributional rules to be enshrined in the Constitution. In Uganda, the purposes and mechanisms for transfers are specified in the Constitution along with a formula for determining the minimum size of the pool from which block grants are to be distributed; the details of the distributional formulae are the subject of regulations.

As decentralization is a complex social experiment a good case may be made for there to be more flexibility in the ability to change the specificity of implementation instruments, while enshrining the political and philosophical principles in the Constitution and the operating structures in the laws.

In addition to "substantive" law mentioned above, a country’s "procedural" laws can have profound impacts on the success of decentralization efforts. For example, when local expenditures must be "pre-audited" by a central authority, rigidities are introduced which make the benefits of decentralization more difficult to achieve. When reviewing the legal framework for decentralization, it is not sufficient to examine decentralization specific laws -- other laws which mandate aspects of service delivery, civil service, budgeting and so one must also be considered to ensure a consistent approach.

Treatment of key issues in the legal and regulatory framework will be shaped by the whether the governmental system is unitary or federal. Under some federal systems, for example, India and Canada, local governments are completely under the authority of the State/Provincial level governments. The Federal government is thereby limited in the relationships it may establish with the local level and must seek to affect local behavior and outcomes through the states/provinces. A decentralization policy such as India is trying to establish is significantly complicated by this factor.

Some unitary systems may exercise extremely centralized control over local governments. In Indonesia, the Ministry of Home Affairs has had the authority to appoint (and remove) mayors and even village heads. The structural impediments in designing a decentralized system in this context are few, but that does not mean that the process of instituting such a system is without critical hurdles. Indonesia has had decentralization legislation on its books since 1974; the process there remains far from completion.

As with other key aspects of decentralization, the legal and regulatory framework will be tailored to country circumstances. Nevertheless, there are a set of issues this framework may be expected to address. Those of particular interest to the work of the Bank include potentially, the classification of local governments within the tiers established under the Constitution; the broad organizational structures and their roles and responsibilities; terms of office, operating powers, procedures and limitations of the political leadership, distinct from the civil service; the degree of autonomy of personnel policies and administration of local governments; the taxing and fiscal administration authority of local governments; the borrowing authority and capacities of local authorities; the budgeting, expenditure management, accounting, auditing and reporting requirements; service provision and delivery authority; and, the mechanisms for citizen participation and voice.

The legal and regulatory framework should also be designed to recognize differences in management capacity. Assignment of functional responsibilities – for example provincial capital, designated growth center, etc. often implicitly recognizes varying capabilities of municipalities, but a more dynamic framework which recognized "capacity" based on performance over time would be more desirable in the long run. Matching degree of autonomy and privileges to a set of performance indicators – which might include total expenditure, degree of self-sufficiency (i.e., proportion of own revenues to total), budget management performance (i.e., absence of deficits), and service delivery performance (i.e., client surveys) – would allow the legal and regulatory framework to adjust for changes in local capacity. The appropriate time period for reassessments and indicators would need to be linked to country circumstances as well as the specific details of the decentralization framework.

Among these several issues, five warning flags (selected from a potentially long list on the basis of downside risks) may deserve special attention. First, in many countries, local governments at the same nominal level may vary considerably in their capacities.West Bank and Gaza, for example, has municipalities which vary in population size from about 10,000 to over 1 million, with management capacities to match. Differences in fiscal capacity may be recognized in the equity component of the intergovernmental fiscal system, however, the fact that management and administrative capacities also may vary substantially is rarely accounted for. It is useful to have the legal/regulatory system recognize significant difference in management capacities by a classification of local government within levels. Policies and strategies to address these differences may then be coherently considered.

Second, local governments should have the ability to borrow when they have the capacity to repay. However, for moral hazard reasons discussed in greater detail in the borrowing subsection of the KMS every effort must be made to promote the perspective that local government loans are internal obligations of local governments and not of higher levels of government unless specifically stated otherwise. The importance as well as the difficulties of doing this is well illustrated by the circumstances of subnational debt in Brazil. The legal and regulatory framework can support this message by specifying the conditions under which local governments may borrow, the limits of those borrowings, the reporting requirements for debt and debt service and the penalties for violating the rules.

Third, local government laws have not always anticipated the options, including private participation and managed competition, that may be pursued in the delivery of local public services. As a consequence legal barriers may inappropriately restrain the ability of local authorities to select the most desirable options for the delivery of decentralized services. China’s cities have been imaginative in innovating and delivering some services not anticipated in the legal and regulatory framework in which they operate; nevertheless, even under these circumstances rationalization is desirable. Inappropriate barriers and constraints should be avoided or corrected in the design and detailing of the legal and regulatory framework for decentralization.

Fourth, voting democracy is often considered as satisfying the conditions for citizen participation and voice in the design of decentralized systems, but in practice this may not be sufficient. Meaningful participation requires that citizens be informed and that their voices have impact where consequences are immediate. The legal/regulatory system needs to provide for, at minimum, full, timely and easily accessible public disclosure of resource allocation decisions - in budgets, in procurements, and in expenditure programs. An output/ outcome orientation to expenditure management would be even more desirable. Uganda is preparing to design and publish readily accessible budgets for all levels of government as part of an expenditure management reform program which emphasizes output/outcome orientation. In addition, there must be reliable, secure access by citizens to the means to enforce appropriate penalties for violations of rules.

Fifth, terms of office for local political leaders is closely related to issues of authority and accountability. Mayors need incentives to focus on at least the medium-term, rather the solely the short-term. This requires a long enough term or potential terms to be able to be seen to be accomplishing meaningful objectives.Mexico’s three-year, non-renewable mayoral terms, for example, have been associated with a very short-term focus in local officials’ governance strategies. In practice, where multiple terms are allowed, three to four year terms are desirable. Where only single terms are permitted, then 5-6 years would be appropriate. The detailed design of authority, powers, accountability systems and procedures must be related to local circumstances, including issues which may range from cultural traditions to the state of accounting and auditing systems. Considerations also include the balance to be struck between preference for room for aggressive leadership versus protecting the community from excesses - this latter choice is a matter of political taste, which is often a consequence of historical experience.

The disconnect between the formal rules and actual practice regularly observed in many countries is itself cautionary about the design and implementation of legal and regulatory systems. Ambiguity and complexity create openings for conflicting interpretation and resulting confusion. One agreed source of interpretation is essential. Particular efforts to prepare and disseminate popularized versions of the legal and regulatory system, as has been done in Uganda, must be a key part of the decentralization strategy. Complexity is often unavoidable especially at the level of instruments for implementation, however, it helps if one instrument is not asked to do too much. This facilitates communication and implementation of the policy that the instrument is intended to support as well as monitoring of the effectiveness of the instrument in that role. Adjustment to the instrument and/or the policy also may be facilitated.